Financial Services and Markets Bill
Wednesday 7th September 2022
(2 years, 2 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Madam Deputy Speaker (Dame Rosie Winterton)
I inform the House that neither of the reasoned amendments has been selected.
The Economic Secretary to the Treasury (Richard Fuller)
I beg to move, That the Bill be now read a Second time.
The provisions of the Bill create the conditions for the United Kingdom to roll back or reform all European Union legislation for financial services that remains on our statute book. The Government will move at pace to implement a more agile and more internationally competitive set of rules that will harness the potential of UK financial services to stimulate growth across the United Kingdom.
Financial centres in the European Union, in the United States and across Asia are engaged with the United Kingdom in a global competition to attract financial services expertise, and to be the most successful in adopting the benefits of technology-driven change that may radically alter the shape and reach of financial services. The Bill will enable the United Kingdom to assert its leadership, and to drive forward change to capture a greater share of the global market for financial services. As the Prime Minister has said, the financial services sector is the
“jewel in the crown of the UK economy”,
and we are committed to supporting its ability to realise its full potential. An effective, efficient and easily accessible financial services sector is a vital foundation for the ease of daily life and for the national economy. The Government are therefore taking forward an ambitious set of reforms in this landmark Bill.
Caroline Lucas (Brighton, Pavilion) (Green)
The Bill contains a new statutory objective on competitiveness and growth, which ranks those elements above the UK’s legally binding nature and climate targets. Given that a thriving economy depends on a thriving environment, will the Minister look at this again and consider introducing a climate-and-nature-specific statutory objective as well, so that there are two statutory objectives rather than a statutory objective and a regulatory principle, which are not the same thing?
Richard Fuller
The hon. Lady is right to point to the importance of the objectives that are set for the regulators in financial services, but surely she will accept that the most fundamental principle for each of them should be the stability of financial services in the United Kingdom, and we pay regard to that in the Bill. We have added, as she pointed out, some focus on global competition and on achieving growth across the United Kingdom. Those are the fundamental demands that the British people have of the financial services sector. However, it is important that we have regard to the issues that the hon. Lady has mentioned, and I am sure we will discuss them, and the priority that should be attached to them, in more detail in Committee.
Chris Grayling (Epsom and Ewell) (Con)
May I pursue the point about environmental issues? I take my hon. Friend’s point about the need to secure the stability of the sector—that is not in dispute—but one of the things we have not done in this country is to take steps to place a duty on financial institutions not to invest in businesses that support deforestation around the world. Our combat against deforestation has run through a range of policies that the Government have pursued, and it should be continued. I will be asking my hon. Friend, as we go through this process—ahead of, possibly, tabling amendments on Report—to consider placing such a duty on the financial services sector, so that before it invests internationally, it at least asks the question “Will this lead to deforestation?”
Richard Fuller
I am grateful to my right hon. Friend for that addition to the debate. It is clear that there is interest in the House in debating the priority that is given to these particular issues, and I look forward to hearing the contributions of my right hon. Friend—and those of Opposition Members—in Committee, to establish whether we have got these matters right.
Richard Fuller
I will give way one more time, and then I will make a little progress.
Dame Angela Eagle
There is much on the Bill for which I think there will be cross-party support, but there are some elements that worry me, and I wonder whether the Minister can reassure me about them. I refer to the Henry VIII powers, and the fact that a great deal of extra power will be given to the regulators and the Treasury. I worry about a lack of appropriate accountability to the House. Can the Minister give us some reassurances on the Henry VIII powers, and can he give us proper undertakings that he is not creating a system that will leave the House out?
Richard Fuller
Not surprisingly, the hon. Lady has put her finger on one of the most fundamental elements of the debate that we need to have on the Bill, which is the accountability of regulators, as expressed through the House and, if I may say so, through the Government. I can assure the hon. Lady that that will be a fundamental part of our debate throughout the Bill’s progress, and, indeed, I will say more about it later in my speech.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Will the Minister give way? This is further to that point.
Emma Hardy
I think that one of the points made by my hon. Friend the Member for Wallasey (Dame Angela Eagle) was not just about regulation post-Brexit, but about the power grab in the Treasury. Clause 3 deals with the Treasury’s powers during the transition, and it states that the primary legislation in schedule 1 will be bypassed, with powers given directly to the Treasury because of the need to move EU regulations speedily into domestic law. That, I think, is where one of the problems lies. It is a question of how much power is going directly to the Treasury and bypassing Parliament entirely.
Richard Fuller
The hon. Lady has made a useful point. She has identified the fact that there is an extensive amount of change in this Bill. As we repeal EU legislation, there will clearly be some measures on which there is a common view that they can easily be repealed and are unnecessary. It is right that the Treasury, and the Government, should be able to take those actions directly. Equally, there will be measures that will require full consultation by the House through secondary legislation, and I can give a commitment that that will be done apace, but with the ability for parliamentary colleagues to debate those measures fully. It is important that we achieve the primary objective of the Bill, which is to make the United Kingdom a solid global financial service centre.
In fact, the Bill has five objectives. They are to implement the outcomes of the future regulatory framework review, which involves reshaping our regulatory and legislative regime as an independent state outside the EU; to bolster the competitiveness of UK markets and promote the effective use of capital; to promote the UK’s leadership in the trading of global financial services; to harness the opportunities of innovative technologies in financial services; and to promote financial inclusion and consumer protection. I will take each of those in turn.
Let me deal first with the implementation of the outcomes of the FRF review. Clause 1 and schedule 1 repeal retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This will build on the existing model established by the Financial Services and Markets Act 2000, which empowers our independent regulators to set the detailed rules that apply to firms. They do this while operating within the framework and guard rails set by the Government and by Parliament.
Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. While in some cases these rules can simply be deleted, in many areas it is necessary to replace them with the appropriate rules for the UK, in our own domestic regulation. These instruments will therefore cease to have effect when the necessary secondary legislation and regulator rules to replace them have been put in place.
As we have already heard from Members today, giving these measures effect will require a significant programme of secondary legislation to modify and restate retained EU law. I can confirm that in most cases, this will be subject to the affirmative procedure in the House.
Peter Grant (Glenrothes) (SNP)
I welcome the Minister to his new post. Is it not a fact—I mention this partly for the benefit of those watching our proceedings who may be unfamiliar with it—that the House has the choice of taking or leaving each piece of secondary legislation that is presented to it, and Parliament will have no opportunity to amend secondary legislation if it does not think it is good enough?
Richard Fuller
As the hon. Gentleman will know, there will be plenty of opportunities for him to review each of the 200 measures in Committee, should he so wish, and to make recommendations. He will also be aware that the Government have already undertaken significant consultations with industry and others, and that there are ongoing reviews of a number of measures that are in place, some of which are contained in schedule 2. I do not feel that what he fears will actually be the case. There will be a process of consultation on a number of these measures, and there will be ample time for questions to be asked in the House as those consultation proceed.
As I have said, we have already undertaken fundamental reviews in some areas to ensure that we are seizing the opportunities of leaving the European Union, and this Bill delivers their outcomes. Let me touch on these briefly.
The Bill gives the Treasury the powers to implement reforms to Solvency II, the legislation governing prudential regulation for insurance. The Government are carefully considering all responses to their recent consultation and will set out their next steps shortly. The Bill also allows the Government to deliver on the outcomes of the UK’s prospectus regime review, taking forward key recommendations from Lord Hill’s UK listings review. These reforms will ensure that investors receive the best possible information, help to widen participation in the ownership of public companies and simplify the capital raising process for companies on UK markets. This can help to boost the UK as a destination for initial public offerings and optimise its capital raising processes.
The Bill also delivers, through schedule 2, the most urgent reforms to the markets in financial instruments directive—MIFID—framework, as identified through the wholesale markets review. It will do away with poorly designed and burdensome rules, such as the double volume cap and the share trading obligation, which will allow firms to access the most liquid markets and reduce costs for end investors. We intend to bring this into effect shortly after Royal Assent.
In reforming our regulatory framework, it is right to think about the regulators’ objectives so that they reflect the sector’s critical role in supporting the UK economy. For the first time, the Prudential Regulatory Authority and the Financial Conduct Authority will be given new secondary objectives, as set out in clause 24, to facilitate growth and international competitiveness. The FCA and the PRA will do this within an unambiguous hierarchy that does not detract from their existing objectives.
It is critical that these new responsibilities for regulators are balanced with clear accountability both to the Government and to Parliament. This is addressed in clauses 27 to 42, alongside clause 46 and schedule 7. The Bill includes new requirements for the regulators to notify the relevant parliamentary Committee of a consultation and to respond in writing to formal responses to statutory consultations from parliamentary Committees. The regulators are ultimately accountable to Parliament for how they further their statutory objectives, so these measures recognise the importance of the Committee structure for holding the regulators to account. While I welcome the new Treasury Select Committee Sub-Committee, it is ultimately for Parliament to determine the best structure for its ongoing scrutiny of the financial services regulators.
Mark Garnier (Wyre Forest) (Con)
I was on the Treasury Committee a number of years ago when we were looking at the Financial Services Act 2012, when competitiveness was not properly addressed. Is my hon. Friend convinced that the Treasury Committee will be able to instil a sense of urgency in the regulators and convince them that competitiveness is incredibly important? It is one thing to hold the regulators to account, but another to be able to drive them to implement the will of Parliament.
Richard Fuller
My hon. Friend opens up what was an area of particular personal interest to me when I was a Back Bencher, and I therefore feel tempted to stray, during what might be my rather temporary position on the Front Bench—[Hon. Members: “No!”] That was a cheap attempt for a laugh, but if I may just say this without straying too far, I think it is recognised across the House that the role of Parliament in holding regulators to account needs further investigation. The Bill is quite remarkable because we are building on a structure from the year 2000 that put tremendous power in the hands of the regulators. We think that is right. We do not think that we should have the same prescriptive statute-based approach as the European Union, because we feel that is too rigid, does not promote competition and does not help growth. But we must recognise, as we take the Bill through the House, that we have a responsibility carefully to ensure that those structures of parliamentary oversight are appropriate.
Alison Thewliss (Glasgow Central) (SNP)
I very much enjoy serving on the Treasury Committee, but it has an incredibly busy agenda. What the Government are doing here is taking a huge amount of scrutiny of incredibly important structural issues relating to financial services from 650 Members of Parliament and giving it to a Committee of 11 and a perhaps yet smaller Sub-Committee. Does the Minister really think that is adequate?
Richard Fuller
The hon. Lady tempts me to talk beyond what is really the responsibility of the Government. She is raising questions that are correctly and appropriately for the parliamentary authorities to respond to. On her more general point about whether the system is correct to rely on the regulatory framework that was established in 2000, I think the answer is absolutely yes. As I have just mentioned, it provides the ability for an agile, pro-growth, competitive set of financial services regulations, and I believe that Parliament itself is capable of providing that democratic oversight over the regulators. If she is concerned about that, I encourage her to take it up with the parliamentary authorities in the usual way.
So I welcome the Treasury Sub-Committee. I have said that ultimately it is for Parliament to determine the best structure for the ongoing scrutiny of financial services regulators. The Bill also includes a new power for the Treasury to require the regulators to review their rules when that is in the public interest. Following any such review, the final decision on potential action would be for the regulators to make.
Following the repeal of retained EU law, the Government will have no formal mechanism to bring public policy considerations directly into rule-making. It is right for the democratically elected Government of the day to be able to intervene in a matter of financial services regulation where there are matters of significant public interest. The Government’s intention is therefore to bring forward an intervention power that will enable Her Majesty’s Treasury to direct a regulator to make, amend or revoke rules where there are matters of significant public interest. The Chancellor will take a final decision on the precise mechanics of the power and the Government will table an amendment in Committee.
Let me now turn to the Bill’s second objective: bolstering the competitiveness of UK markets and promoting the effective use of capital. I have already spoken about the improvements to the UK’s regulation of secondary markets in this Bill through reforms to the MIFID framework in the wholesale markets review. These changes will lower costs for firms and align our approach with that of other international financial centres such as the United States. To improve the smooth functioning of markets, we will introduce a senior managers and certification regime for key financial market infrastructure firms. We will expand the resolution regime for central counterparties to align with international standards, and enhance the powers to manage insurers in financial distress.
The next objective of the Bill is to strengthen the UK’s position as an open and global financial hub. Outside the EU, the UK is able to negotiate our own international trade agreements, including mutual recognition agreements—MRAs—in the area of financial services. The Government are currently negotiating an ambitious financial services MRA with Switzerland. Clause 23 enables the introduction of any necessary changes through secondary legislation to give effective to this and to any future financial services MRAs. Schedule 2 contains measures that enable the United Kingdom to recognise overseas jurisdictions that have equivalent regulatory systems for securitisations classed as simple, transparent and standardised, allowing UK investors to diversify their portfolio while maintaining the level of protections they currently enjoy.
The Bill takes the UK further forward as a centre for financial markets technology. Clause 21 and schedule 6 extend existing payments legislation to include payments systems and service providers who use digital settlement assets that include forms of crypto-assets used for payments, such as stablecoin, backed by fiat currency. This brings such payments systems within the regulatory remit of the Bank of England and the payments system regulator, allowing for their supervision in relation to financial stability, promoting competition and encouraging innovation.
To foster innovation, clauses 13 to 17 and schedule 4 enable the delivery of a financial markets infrastructure sandbox by next year, allowing firms to test the use of new and potentially transformative technologies and practices that underpin financial markets, such as distributed ledger technology. In parallel, the Bill promotes the finance sector’s resilience by allowing the financial service regulators to oversee the services that critical third parties provide to the sector.
Let me turn to the Bill’s final objective, which I know will have the commendable focus of colleagues throughout the House: the promotion of financial inclusion and consumer protection. The Government will continue to foster an industry that supports everyone so that individuals do not feel left behind by the rapid advancement in financial technology. There is an extensive programme of ongoing work related to consumer protection, especially in the areas that were legislated for in the Financial Services Act 2021, such as buy now, pay later agreements and the FCA’s rules on the consumer duty.
Stella Creasy (Walthamstow) (Lab/Co-op)
The Minister is relatively new to his role, but he cannot help but be aware that it is now almost two years since this House recognised the real threat to our constituents’ bank balances posed by buy now, pay later and its lack of regulation. There is agreement throughout the House that these legal loan sharks must be regulated. The Minister may say that this is a complex policy area, but political will and the cost of living crisis demand fast action. Why is the necessary regulation not in the Bill? It could have been the perfect vehicle, ahead of Christmas, when these companies will profit again, to act to protect our constituents.
Richard Fuller
The hon. Lady is right to talk about the urgency and complexity of the issue. She understands that it is complex and will invigorate us all to move as quickly as possible. I note that even as recently as 19 August the FCA has followed up with the buy now, pay later companies to remind them of the rules that they have to operate under, and that the Government have committed to bring forward the consultation on the draft legislation before the end of the year. I look forward to discussing matters further with the hon. Lady.
The 2021 Act made legislative changes to support the widespread offering of cashback without a purchase by shops and other businesses. Clause 47 and schedule 8 go further and give the FCA the responsibility to ensure reasonable access to cash across the UK. The FCA will have regard to local access issues and a Government policy statement on access more generally. The Treasury will designate banks, building societies and cash co-ordination arrangements to be subject to FCA oversight on this matter.
David Mundell (Dumfriesshire, Clydesdale and Tweeddale) (Con)
I very much welcome the provision in the Bill, because access to cash is an extremely important issue not only for rural communities that I represent but for deprived areas. Will the Minister make sure that when the various reviews and mechanisms are put into place they focus on the specific needs of rural and deprived areas in their determination of cash requirements?
Richard Fuller
My right hon. Friend is absolutely right. He will know that the question of access in urban areas is very different from that in rural areas. I can give him the assurance that he seeks.
Paul Maynard (Blackpool North and Cleveleys) (Con)
I, too, welcome all the provisions, but will the Minister confirm that when he says “access to cash” what he actually means is free access to cash, not paid-for ATMs.
Richard Fuller
When I say “access to cash” I mean access to cash. My hon. Friend raises the question of whether that access should be free; that is a matter to which we will return in Committee, but I cannot give him that assurance at this stage.
As the country faces cost of living pressures, we must ensure that the door to affordable credit is open to all. The credit union sector plays a crucial role in this respect by delivering for its members and providing an alternative to high-cost credit. Clause 63 allows credit unions in Great Britain to offer a wider range of products and services to their members. To improve consumer protection, the Bill will strengthen the rules around financial promotions. Clause 62 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers, for all PSR-regulated payment systems, and places an additional duty on the regulator to mandate reimbursement in relation to the faster payments service specifically.
Clause 48 and schedule 9 give the Bank of England new powers to oversee wholesale cash infrastructure, to ensure its ongoing effectiveness, resilience and sustainability. Clause 47 and schedule 8, on cash access, will ensure that the FCA has regard to local access issues and a Government policy statement on access more generally. The Treasury will designate banks, building societies and cash co-ordination arrangements to be subject to FCA oversight on this matter.
Richard Fuller
I am afraid I am going to conclude.
This is a significant Bill and I look forward to the House considering each measure in detail as it makes its passage through Parliament. The Bill has a single vision: to tailor financial services regulation to the UK’s needs, to promote global competitiveness and innovation, and to contribute growth in our economy. I commend it to the House.
Several hon. Members rose—
Madam Deputy Speaker (Dame Rosie Winterton)
Order. Before I call the shadow Minister, I want to point out what is probably obvious, which is that this debate is very well subscribed. I hope that, in considering their speeches, right hon. and hon. Members will bear that in mind.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
I thank the Minister and his officials for all the information about the measures in the Bill that they have shared in recent weeks and for how they have co-operated with me.
As the Minister said, the Bill implements the outcomes of the future regulatory framework review and attempts to set out a clear direction of travel for the regulation of the City post Brexit. It is important that the UK is able to take advantage of this opportunity to create a more competitive financial services sector and to strengthen our regulatory standards for financial stability and consumer protection outside the UK. After more than a decade of stagnant growth, averaging just 1.8% a year, and with the current dangers that face our economy, enabling the City to thrive will be fundamental to the delivery of the tax receipts we need to fund public services and support people through the cost of living crisis.
We on the Opposition Benches broadly support the Bill as it stands. In particular, we welcome clauses 1 to 7 and 8 to 23, which empower the UK, the FCA and the PRA to tailor regulation to meet our needs outside the EU. The Labour party recognises that the City is now in a place very different from where it was in 2016. The consensus view across the sector now is that the ship has sailed on regulatory equivalence with Europe, but regulatory divergence with the EU has the potential to produce many opportunities for the sector and the wider economy, such as the reform of Solvency II to unlock capital for investment in the green transition.
EU regulation can often be over-restrictive, particularly in respect of financial technologies, as the Minister will know, and we welcome the fact that the Bill enables regulators to take a more outcomes-based approach to areas such as fintech. However, Europe will always remain an important market for our financial services sector. In 2021, exports of financial services to the EU were worth £20.1 billion—that is 33% of all UK financial services exports.
Since 2018, the value of UK financial services exports to the EU have fallen by 19% in cash terms, and there has been little progress in securing trade deals for our financial services around the world. I have to say to the Minister that the sector is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory co-operation, or to negotiate with the EU for the mutual recognition of professional qualifications for our service sectors. I hope that when the Minister sums up he will tell us what impact he believes the Bill will have in securing those important agreements with the EU and boosting financial services exports more generally.
The Minister will know that I like to ask a series of questions when I deal with him, and I am afraid there is more to come. Let me turn to clause 24. We support the principle that there is a role for the FCA and PRA to advance international competitiveness and growth. We on the Opposition Benches are strongly committed to supporting the City to retain its competitiveness on the world stage and to ensuring that the UK remains a global financial centre outside the EU. But it is also right that financial stability and consumer protection remain the priority for regulators. Any compromise on those important objectives would be self-defeating.
Caroline Lucas
I completely accept the hon. Lady’s point about our being a competitive financial centre, but does she agree that there is a real opportunity to be a competitive green financial centre? As that opportunity is time-limited—other countries are moving faster than we are—does she agree that a secondary objective in respect of climate and nature will be essential to ensure that we regulate in a way that allows us to make the most of that potential?
Tulip Siddiq
I thank the hon. Lady for her intervention. I will come on to that issue later in my speech. It felt as though Conservative Members did not agree with her, but I agree with what she said.
Wera Hobhouse (Bath) (LD)
Further to the previous question, does the hon. Lady agree that one does not exclude the other?
Tulip Siddiq
I had to think for a second about what the hon. Lady was referring to, but she is absolutely right. I agree with her on that, and I will address it a bit later in my speech.
The Opposition particularly welcome the inclusion in the new secondary objective of a focus on the medium-term and long-term growth of the UK economy. Financial services are already an important driver of growth in the UK, but much more can be done to support the sector to invest in companies in every sector and every region in the country, to deliver long-term growth and well-paid jobs in the real economy. I understand that clause 26 requires the PRA and FCA to report annually on the new secondary objective, but will the Minister confirm in his closing speech whether that will include being held to account specifically on the advancement of long-term growth in the real economy?
That brings me on to the provisions in clauses 27 to 46, which deal with accountability more broadly. The Bill facilitates an unprecedented transfer of responsibilities from retained EU law to the regulators. We recognise the need for a rethink of how the FCA and PRA are held accountable by democratically elected politicians and Governments. We particularly welcome clause 36, which will formalise and strengthen the role of the Treasury Committee in holding regulators to account. However, as my hon. Friends the Members for Wallasey (Dame Angela Eagle) and for Kingston upon Hull West and Hessle (Emma Hardy) said, we need to be able to scrutinise decisions taken by the Treasury, and I hope the Minister will elaborate on that. Any new powers allowing greater involvement of and policy input from Government in the FCA’s and PRA’s rule making process must be carefully balanced with the need to protect their regulatory independence. We will be scrutinising these provisions closely in the weeks ahead.
The UK’s reputation for regulatory independence is a key driver of our competitiveness on the world stage, as I am sure the Minister will agree. Equally important, however, is ensuring that the City has a clear direction of travel on post-Brexit reform. I was worried about that, because over the summer the now Prime Minister made a series of off-the-cuff policy announcements and people around her were spreading rumours, which left the sector in a state of uncertainty about her Government’s plans for this Bill. The Minister has today confirmed that the intervention powers, or so-called call-in powers, will be included in the Bill through an amendment. I am disappointed that the Government have decided to cause greater uncertainty in the City by introducing a significant change at this stage, and I hope he will reassure me that they will publish the details of these new powers as soon as possible. I would also be grateful if the Minister would confirm in his closing remarks whether the Government have plans to abolish the FCA and PRA. That would seem to undermine many of the provisions in the Bill.
I also wish to discuss the issue of access to cash and banking services, which some Members have spoken about. The Opposition broadly support the Bill, but we are concerned that there are some serious gaps in it as it stands. Of course, we strongly welcome clauses 47 and 48, which will finally, after years and years of Government delay, protect access to cash. The industry, and particularly the major banks, should be applauded for coming together to help protect cash services at the end of last year, in advance of this legislation being put on a statutory footing. But the Bill does nothing to protect essential face-to-face banking services, which the most vulnerable in our society depend on for financial advice and support.
On this Government’s watch almost 6,000 bank branches have closed since 2015, and the “Community Access to Cash Pilots” report found significant overlap between those reliant on cash, estimated at about 10 million people, and those who need in-person banking support. Those without the digital skills to bank online, people in rural areas with poor internet connection and the growing number of people who are unable to afford to pay for data or wi-fi as the cost of living crisis deepens are at risk of being left behind. Banking hubs or other models of community provision, such as banking kiosks, will need to be part of the solution. These are spaces where dedicated staff can provide vital face-to-face support for those who need it, and tackle digital exclusion by teaching people how to bank online.
Siobhain McDonagh (Mitcham and Morden) (Lab)
Does my hon. Friend share my concern that although a great deal is offered by the hubs, they do not deliver? They certainly do not for those of us who live in cities, as people require the bank most days if they are dependent on cash, and they are just expected to get the bus.
Tulip Siddiq
I agree with my hon. Friend, and I have seen examples of that in my constituency, especially the parts where people are from lower socioeconomic backgrounds.
Jim Shannon (Strangford) (DUP)
The hon. Lady is outlining the case on behalf of those who live in rural communities, who comprise about 50% of my constituents. A number of banks have closed in our constituency—I believe there have been 10 or 11. Each of those banks—Danske Bank, Ulster Bank and all the others—has made exorbitant profits. I am not saying that they should not make a profit, because they should, but their profits are so high that they could well keep their branches open to ensure that people who live in a rural area can have access. Does she agree with me on that?
Tulip Siddiq
I agree with the hon. Gentleman’s point, especially as regards constituents in rural areas. I hope the Minister will take on board the comments that are being made.
I was delighted to hear the announcement from the Cash Action Group this week that the sector will be launching additional banking hubs on a voluntary basis, but these services must be protected by legislation. Will the Minister kindly set out in his summing up when the Treasury will be publishing its cash access policy statement, and whether it will ensure that in-person services are protected under the legislation?
It is also disappointing that the Bill fails to address the growing problem of financial fraud. Labour fully supports clause 62, which enhances protection for victims of authorised push payment scams, but the Bill does nothing to strengthen fraud prevention. Under this Government, the amount of money stolen directly from the bank accounts of hard-working people and businesses through scams and frauds has reached an all-time high of £1.3 billion. That would be bad in a normal time, in the best of times, but it is especially bad when we are in the middle of a deepening cost of living crisis. This Government have completely failed to get to grips with modern fraud and scams, such as identify theft and online scams, which have seen people’s lives stolen and their economic stability put at risk.
The former Business Secretary, who is now the Chancellor of our country, was asked about fraud earlier this year. He dismissed it, saying that fraud and scams are not a part of most people’s everyday lives. That is breathtakingly out of touch. Why does he think that? It is shocking. Martin Lewis, the money saving expert, said at the time that
“denigrating the experience that people in this country have with scams, and the lives that have been lost or destroyed because of scams, is an outrage. And he must and needs to apologise if he has any shred of decency in him.”
We still have not received an apology from the Chancellor, but he can put things right by taking immediate action to rectify the amount of fraud and scams that people are facing. I ask the Minister to explain in his closing statement why his Government continue to fail to take fraud seriously and push responsibility solely on to the banks. The Bill ignores the fact that digitally savvy criminals are increasingly exploiting a range of financial institutions, such as payment system operators, electric money institutions and crypto asset firms, to scam the public. In his summing, can he also please explain why the Bill would only provide for the reimbursement of fraud victims who send money using the faster payment system, and why other payment systems have not been included? That seems baffling.
Another area in which I feel the Bill lacks ambition is support for the mutual and co-operative sector. While clause 63 contains some welcome and long-overdue provisions, such as enabling credit unions to offer a wider range of products, the Bill does little to address the outdated regulatory regime faced by credit unions, building societies and co-operative banks. We have seen numerous building societies threatened with demutualisation in recent years, while the number of mutual credit unions has plummeted by more than 20% since 2016. Unlike the USA and many other European countries, the UK is uniquely lacking in mutually or co-operatively owned regional banks. That lack of diversity in the financial services sector has had devastating consequences for financial inclusion and resilience, with many desperate families forced into the arms of unethical lenders. I have seen that first hand in my constituency, especially in Kilburn.
A clear first step in addressing this issue would be to require the Financial Conduct Authority and the Prudential Regulation Authority to have an explicit remit to report on how they have considered specific business models, including credit unions, building societies and mutual and co-operative regional banks, to ensure they are given parity of esteem with other providers. I would be grateful if the Minister addressed that in his closing remarks—I recognise that I have asked many questions that I want him to answer.
Turning briefly to food speculation, Global Justice Now has brought to my attention concerns that the Government’s proposed reform to the position limits regulations under MiFID II have not been adequately assessed for commodity market speculation risks. I ask the Minister to provide some reassurance that these reforms will not adversely impact commodity prices, such as energy and food prices, in the midst of a cost of living crisis, and to explain what role the regulators will play in monitoring this.
Finally, turning to the points that have come from the Opposition Benches, it is striking how little the Bill has to say about green finance. We of course welcome clause 25, which formalises the responsibilities of the FCA and PRA under the Climate Change Act 2008—introduced, I remind the House, by the last Labour Government—but the Government promised much more radical action. Indeed, we were promised that the UK would become the world’s first net zero financial centre, but instead, we are falling behind global competitors.
A recent report from the financial services think tank New Financial revealed that the UK is a long way behind the EU in both share and penetration of green finance in capital markets. It is possible that the Minister has not read that report; I am happy to send him a copy. If he reads it, he will see that it says in black and white that the UK is behind the EU. It found that green finance penetration in the UK was at half the level of the EU, and roughly where the EU was four years ago. When the Minister closes, if he does not agree with me, will he please explain why nothing in this Bill commits the Government to introduce sustainability disclosure requirements, a green taxonomy plan, or a green finance strategy for the sector? If he does not agree with the report I have quoted, could he tell me whether it is wrong?
I look forward to debating and, hopefully, addressing these issues with the Bill when it is in Committee. Once again, I thank the Minister in advance for his closing remarks, which I am sure will give detailed answers to all the points I have raised today.
Rishi Sunak (Richmond (Yorks)) (Con)
It is a pleasure to contribute to this debate—albeit from a few rows further back than I had originally anticipated—and to follow the hon. Member for Hampstead and Kilburn (Tulip Siddiq). I start by paying tribute to my hon. Friend the Member for Salisbury (John Glen) for the fantastic work he did as the longest-serving City Minister to get this Bill into the fantastic shape it is in, where it is now admirably shepherded through Parliament by his very worthy successor, my hon. Friend the Member for North East Bedfordshire (Richard Fuller). I also pay tribute to the fantastic team of officials, led by Gwyneth Nurse, who have spent the best part of the past year preparing what is, I believe, the most radical and significant piece of financial services legislation that this House has seen in years, if not decades.
There is so much in the Bill to comment on that in the interests of time, I will briefly focus on three things. First, the Bill appropriately seizes the opportunities of Brexit to scrap retained EU law and move to an agile system of regulation that is tailor-made for the UK. Secondly, it reforms regulations to make sure that we support economic competitiveness. Lastly, it keeps the UK at the forefront of harnessing innovative technologies and makes sure that we keep pace in a fast-moving sector.
Rishi Sunak
Not for now.
First, on Brexit, with the future regulatory framework, the Bill represents a significant move away from relying on retained EU law as a means of regulating the UK’s financial services sector. Clause 1 provides for a full sweeping away—a full revocation—of essentially all the retained EU law concerning financial services in the UK. This is radical and this is right. Indeed, it is what Brexit was all about and this Bill delivers it.
We will move appropriately to the Financial Services and Markets Act 2020 model where the Government set the overall policy approach and delegate the operational implementation of those regulations to the independent regulators. As my hon. Friend the Minister said this is the internationally respected gold standard for how to do this. I was pleased to hear the Minister comment on the call-in power, and I urge him and the Government to quickly bring forward the means for that power, because both my hon. Friend the Member for Salisbury and I believe it is the right thing to do. We talked about accountability earlier in this debate. It must be right for a democratically elected Government, with the consent of this House, on an exceptional basis, to intervene on financial regulation in the public interest, and I hope that the Government will follow through with those plans.
On what this Bill does to support competitiveness, for the first time, our financial regulators will have a new statutory objective to support international competitiveness and growth, moving us in line with jurisdictions such as Australia, Singapore, Japan and Hong Kong. There will be new statutory panels to give better external scrutiny and challenge on the regulators’ cost benefit analyses. We heard much about the Markets in Financial Instruments Directive over the past several weeks and I am pleased that the Bill brings forward those reforms to MiFID: to remove restrictions such as the double volume cap when trading in wholesale capital markets to improve pricing for investors; to modify the transparency regime in fixed income and derivatives to remove unnecessary burdens; and to modify the commodities position limits so that market activity is not unreasonably restricted.
There are three areas on which I urge the Government to consider going further than I think we heard in the Minister’s opening remarks. First, to improve the efficiency of capital markets raising, there is an opportunity to reform European regulations in the prospectus directive. I hope the Government will bring forward draft statutory instruments for us to consider during the Bill’s passage. Secondly, the European packaged retail and insurance-based investment products directive is ripe for reform. I suggest repealing PRIIPS and replacing it with a tailor-made regime specifically for UK markets. This will eliminate a counterproductive regulation, broaden the range of products available for UK investors and, indeed, increase UK retail participation in our financial markets.
Nick Smith (Blaenau Gwent) (Lab)
Does the right hon. Gentleman think that the Bill sufficiently challenges the Financial Conduct Authority to speak up and support consumers?
Rishi Sunak
Yes, I do: the Minister touched on provisions that increase consumer protection. My hon. Friend the Member for Salisbury spent a lot of time ensuring that consumers would have that protection, particularly with regard to scams, as the Minister outlined in his opening remarks. That is an area that needs attention.
Thirdly, on ringfencing, I suggest that the Government not only accept the recommendations of the independent Skeoch review, but consider going further. I know that this is a Government with a deregulatory zeal for growth, so I suggest two areas in particular: first, to review the threshold limits, which have not been looked at since they were initiated; and secondly, to take a fundamental look at the ringfencing regime in light of the fact that it was established after the financial crisis and that we now have a full stand-alone resolution regime.
It is worth recalling that more than half of Europe’s fintech unicorns are based in the United Kingdom, so it is important that the Bill continues to support innovation. I am pleased that it does so in two specific areas. It builds on our pioneering and world-leading regulatory sandbox to include the opportunity to pilot new sandboxes for distributed ledger technology in financial market infrastructure. That has the potential not only to lower costs and improve efficiency, but to improve financial stability. I am glad that the Government are also proceeding to bring stablecoins into the payments legislation, because that will create the conditions for stablecoins issuers and service providers to operate and grow in the UK.
I ask the Minister and the Government to consider implementing all the fantastic ideas that were contained in the speech by my hon. Friend the Member for Salisbury in April regarding blockchain and crypto, notably proceeding with a sovereign gilt issue using distributed ledger technology, but also enabling the trading of exchange-traded notes on crypto on UK exchanges, where we risk falling behind Europe if we do not act.
Why does all this matter? It matters for three specific reasons. The first is jobs. The industry provides more than 1 million jobs, and not just in London and the south-east; two-thirds of those jobs are in places such as Southampton, Chester, Bournemouth, Glasgow, Belfast, Edinburgh and Leeds. It is incredibly important. Secondly, it is one of the most important industries for our economy in terms of contribution to our GDP and tax revenues, and it is something that we as a country are genuinely world-class at. There are only a handful of industries where a country can say that, and financial services is one of those for us. It deserves the support of hon. Members on both sides of this House to ensure its continued success.
Lastly and most importantly, this Bill serves as a template for what the Government want to do across the rest of their business. It takes advantage of the opportunities of Brexit, radically reforms our regulations to support innovation, growth and investment, and, although I would like the Government to go even further, it has my full support.
Peter Grant (Glenrothes) (SNP)
It gives me pleasure to speak on this Bill on behalf of the Scottish National party. I am going to agree with the former Chancellor, the right hon. Member for Richmond (Yorks) (Rishi Sunak), for the first and probably the last time in either of our careers, in placing on record my thanks to his colleague the former Economic Secretary to the Treasury, the hon. Member for Salisbury (John Glen), for the constructive and courteous way in which he conducted a large number of debates with me during his time in office.
When the SNP decided to table a reasoned amendment asking the House not to give this Bill a Second Reading, we did so with a significant degree of reluctance, because there is a lot in the Bill that we see as not only desirable, but essential and, in some cases, long overdue. It is disappointing that the Government have chosen to package them with other provisions that give us very serious concern, and to package them in such a way that it will probably prove to be impossible to amend the Bill to take out the damaging parts.
For example, we welcome the provisions relating to the regulation of digital settlement assets or cryptocurrencies and on access to cash—we would have welcomed them several years ago, if the Government could have been bothered to bring them in. Our only real concern is that they do not yet go far enough. However, the dangers posed by other more substantial parts of the Bill are so great that they may be too high a price to pay to get those necessary pieces of legislation on the statute book.
In the Queen’s Speech we were promised a Bill that would,
“strengthen the United Kingdom’s financial services industry, ensuring that it continues to act in the interest of all people and communities”.
This Bill does not do that. In fact, the former Chancellor has confirmed what the Minister strongly hinted at: the Government’s main objective here is to force through a damaging, totally unnecessary divergence from our European Union neighbours, for no other reason than that they can.
The very first sentence in clause 1, which the former Chancellor thinks is a great idea, invites us to wipe out well over 200 pieces of legislation with no idea what will replace them. The Bill gives the Treasury the power to decide when and if each of those 200-plus laws is revoked and the Treasury gets the power to decide when, if ever, it will bring forward replacement legislation for them. Despite the Minister’s apparently not understanding our concerns earlier on, if that is done through secondary legislation in delegated legislation Committees, there will be no opportunity for the House to amend it, to make it better or to insist on legislation’s coming forward if the Government do not want to bring it.
The Bill gives the Treasury the power to amend or revoke Acts passed by this whole Parliament, and to revoke laws passed under devolved authority by the elected national Parliaments and Assemblies of three quarters of the supposedly equal partners in this Union. A Treasury whose Ministers were appointed by a Prime Minister who got the first-choice votes of 14% of her own Members of Parliament will be allowed to overrule Parliaments elected on a franchise of more than 8 million citizens. How can that be anything other than an unacceptable power grab? That is because of the Government’s obsession with purging our four nations, even those that wanted to stay in, of anything that they regard as tainted by contact with the European Union.
There has not been any attempt to sift the 200-plus pieces of retained EU law to identify which are helpful and necessary and which are potentially damaging. If it has an EU tag, it has to go. There is even a sweep-up provision in part 5 of schedule 1 that says that if they discover any other EU legislation hiding somewhere that was missed from the schedule, that will automatically go as well. We have literally been asked to agree to revoke legislation that none of us knows is there. Even the people who drafted the Bill do not know what that legislation might say. That would be a gross abdication of our responsibility as Members of Parliament.
I find it comical that barely 24 hours ago the sacked Prime Minister was still spouting nonsense about getting Brexit done. Now we are told that not only are there hundreds of bits of Brexit that have not been done yet—and that is only in financial services and markets—but that no one knows where they all are, how many there are or what they say. Brexit has not been done by a long chalk.
Turning to the specific powers in other parts of the Bill, we generally welcome the new regulatory powers and related matters in part 2, but the Minister will appreciate that we will want to look closely at the detail in the Bill Committee. I am concerned that the Committee will be pushed for time, despite the number of days that it has been allocated. Members will be well aware of concerns I have often raised about the inadequacies of the Financial Conduct Authority’s powers and resourcing, as well as its reluctance to use the powers that it has.
The Labour spokesperson mentioned the lack of effective anti-fraud measures in the Bill, which is a major concern. Financial fraud and scams are becoming a bigger menace every day, and they hit hardest the people who can least afford to be hit. Something I have noticed about a lot of the financial scams I have looked into on behalf of my constituents is that they have features that are not immediately obvious. They often involve company directors effectively soliciting loans from the general public in order to finance their own investments. Rather than put their own money at risk, they put someone else’s money at risk. If the investment goes well, the directors win; if it goes badly the victims lose and the directors walk away Scot free. That was an obvious feature in the Blackmore Bond scandal, but exactly the same thing happened with Safe Hands funeral plans. Safe Hands appeared to be a funeral plan scam, but that was not the case. The company blatantly lied to its customers about how their money would be safeguarded, and it used it to invest in potentially profitable but high-risk offshore investments. Although it appeared at first glance to be a funeral plan, Safe Hands was in fact a good old-fashioned financial services scam.
When Safe Hands was on the way down, regulations were coming into force that meant that funeral plan providers had to be registered with the Financial Conduct Authority, which I warmly welcome. However, we should provide the same degree of regulation and the same protection to customers for other “pay now, collect later” schemes. If a customer gives their money to a company that blows it and they lose their money, it does not matter whether they thought their money would fund at some future date the cost of a funeral, a wedding, their children going to university, or anything else. The risks are the same and the opportunities for fraud are the same, so the protection offered to customers should be the same in all those schemes.
We should not have to go through measures industry by industry picking up where scams take place. The key point is that it is not about the product or service that the company claims to be selling—it is about making sure the customer’s money is kept safely until the time comes for that product or service to be provided. We should legislate to prevent company directors from gambling recklessly with money that belongs to their customers. It is possible to address this with a fairly simple amendment to proposed new section 71K of the existing Act, and I hope to have an opportunity to table that in Committee.
There is more that we could do with a bit of imagination. I like the idea of designated activities as well as regulated activity—that is a positive step. There are ways that we could significantly improve the accountability of companies carrying out designated activities and, importantly, improve enforcement against those that go rogue. We could reduce the exemptions that they have, which many of them abuse to avoid having to produce meaningful financial statements. We could look at extending the circumstances in which directors of high-risk companies can be held personally liable for their faults.
I realise that the disjointed way that the UK regulates businesses means that those things fall under the remit of the Department for Business, Energy and Industrial Strategy rather than the Treasury, so it may not even be competent to introduce them for consideration in Committee, but I ask the Minister and his BEIS colleagues to find a place in the Government’s legislative programme as soon as possible for these things to be considered. Too many directors of dodgy companies carry on with their scams because they think they can get away with it, and far too often they can.
As the Minister knows, because he responded to the debate, I spoke this morning in Westminster Hall about the regulation of cryptocurrencies. Incidentally, that is a good example of the fallacy in one of the arguments that the Minister advanced earlier. When we are talking about businesses, growth and stability are not the same thing. Some cryptocurrencies had almost supersonic growth and then evaporated. They had high growth but no stability whatsoever. Growth and stability may both be desirable—although, as the hon. Member for Brighton, Pavilion (Caroline Lucas) keeps reminding us, there have to be conditions attached to that growth and it has to be sustainable—but to conflate the two is a serious mistake.
The debate on cryptocurrencies is a useful reminder that the way that financial markets operate is changing at an almost bewildering rate. In fact, it is becoming difficult to define exactly what we mean by financial services and financial markets. The Bill makes provision for the Treasury to allow limited testing of new technologies or practices. It is effectively trying to legislate for things that have not been invented yet. I think the approach taken in clauses 13 to 17 is a sensible way forward, but we will be looking very closely at how the use of those powers is scrutinised. For example, Members should be aware, if they are not already, that clause 15 as currently worded will allow the Treasury to amend certain Acts of Parliament on the basis of a pilot test in one of the sandboxes without even waiting for the test to be completed to see what the results are.
Let me move on—briefly, because I am aware of the shortage of time—to some of the other matters covered by the Bill. I am extremely alarmed at the confirmation that the Government want to allow Ministers to call in and potentially overrule decisions by the regulators. Either our regulators are independent or they are not. The regulators must be accountable, but their accountability should be to Parliament. Accountability to a Minister is not the same as accountability to Parliament; it is a very poor substitute.
I share the concerns that have been raised about the lack of emphasis on sustainability, green finance and compliance with our climate change obligations. I also share the concerns that the provisions on access to cash do not go far enough and probably will not lead to action quickly enough. As I mentioned, the anti-fraud measures in the Bill are wholly inadequate.
The Government appear to think that the biggest problem facing financial services regulation is that parts of it were designed and implemented in partnership with our nearest neighbours and trading partners. I think the biggest problem is that, again and again, the regulators fail to act, or act so slowly that it is far too late, and effective enforcement becomes almost impossible. I remind the House that about half of the £46 million lost in the Blackmore Bond scandal was paid by customers to the company after the Financial Conduct Authority had been not only given full details of what the company was up to, but told exactly where and when it could go to witness its illegal activities at first hand. It did nothing for three years.
The Financial Conduct Authority tells us that it does not have sufficient powers to act in the way we would like it to act. It is certainly obvious to all of us that it does not have the resources to properly carry out the responsibilities we ask it to carry out just now, let alone the new ones we intend to give it. At the moment the Bill does not address that.
We will not oppose Second Reading this evening, but that should not be taken as a guarantee that we will allow the Bill to be read the Third time unopposed. If the Minister wants our support in the Bill’s final stages, he has a long way to go to persuade us that it will make things better, rather than worse, for the victims of financial crime.
Madam Deputy Speaker (Dame Eleanor Laing)
I call the Chair of the Treasury Committee, Mel Stride.
Mel Stride (Central Devon) (Con)
I rise to broadly support the Bill. I echo the congratulations of my right hon. Friend the Member for Richmond (Yorks) (Rishi Sunak) to my hon. Friend the Member for Salisbury (John Glen) on all his work, and I thank him for his appearances before the Select Committee in that regard—he probably bears the scars. I also welcome my good friend the Minister to his place and I thank him for setting out the Bill’s provisions with such clarity in his opening remarks.
The Bill occurs because of Brexit—because of the opportunities and the new freedoms that we have as a consequence of leaving the European Union. We have heard much about solvency II in this debate and more widely when we have discussed the new regulatory landscape that we are moving into. My right hon. Friend the Member for Richmond (Yorks) presented us with a rich tapestry of additional ideas about where he believes that the Government can go still further, which makes me feel that we should perhaps have him before the Treasury Committee again to tell us more about that; that might be a recurrent nightmare for him, however, so perhaps we will not inflict it on him at this moment.
With that greater freedom comes the critical issue of scrutiny by Parliament and by Government. When it comes to scrutiny by Parliament, I believe that the Treasury Committee is and should remain right at the centre of that process. We are moving from a bureaucratic, committee-based process within the European Union that literally goes through regulation line by line. It is important that it does that in the context of what were 28 member states, because an element of negotiation is involved at every stage of the scrutiny of those regulations. We are in a different environment now; we can be much more flexible and nimble, but we still need to be effective in that regard, which is why the Treasury Committee should be at the heart of that process.
As has already been mentioned, we have set up a Sub-Committee that will look specifically at regulation as it comes out of the statute book and cascades down to the rulebooks and manuals of the regulators. We believe that we can be selective, nimble and appropriate in the way that we address that. The Sub-Committee will have the same powers as the full Committee to send for persons and to have oral hearings. In fact, we have already had our first hearing into the Prudential Regulation Authority’s work around the strong and simple regime for the lighter-touch regulation of firms that do not come anywhere near the threshold for being potentially systemically important within the sector. In terms of staffing and resources, the Sub-Committee has the ability to, and will, take on additional resource by way of expert assistance, and it has the capacity to gear up and gear down as necessary, depending on the workload that comes its way.
I noted the Minister’s comments about the statutory duty that will come in for the regulators to inform the Select Committee when a review is published, and for the regulators to respond to its various consultations as they occur. I suspect that the Select Committee will look at some possible amendments to that, because we will be particularly interested in making sure that we have the power and authority at the centre of this process to effectively carry out the things that we need to do in that area.
I turn to the Government’s powers of scrutiny in the Bill, which touch on the balance between the independence of the regulators and the importance of holding them to account, particularly in terms of seizing the opportunities of this post-Brexit world. Prior to the Minister’s opening speech, my understanding was that there would be—as there is in the current Bill—a requirement that the regulators could be instructed by the Treasury to review rules on the basis of a public interest test and, in particular, where there had been significant market developments or where the rules were not meeting their requirements or purpose. It was to be used only in exceptional circumstances. At that point, if a review were held, as I understood it, it would not have been incumbent on the regulator to make any particular changes.
I think I heard the Minister say earlier, however, that an amendment will be tabled in Committee to allow the Treasury to have the power to direct the regulators to make changes, which is a significant shift. I know that that was welcomed a moment ago by my right hon. Friend the Member for Richmond (Yorks), and I understand the upsides of this. I think it is important that regulators are held to account, particularly when it comes to our competitiveness and so on. However, the questions arise: what is the threshold for this public interest test and how frequently will it be used? The fear must be there to some degree—this is something the Committee will want to look at very carefully—that this may be an overly overbearing power for the Treasury, which may impinge on the independence of the regulators themselves.
The Bill has the new secondary objectives for the FCA and the PRA, which I broadly welcome. I welcome the fact that they are medium and long-term objectives, not short-term objectives. I think that is very important because it means we are not going to take risks with the potential architecture, as it were, but focus on the medium and longer term when it comes to greater competitiveness. I also welcome the fact that they are secondary objectives and will not therefore interfere directly with the prudential objectives of those organisations.
Finally—I am aware of the time and know that many others want to speak—could I touch on the Bank of England and its mandate? I know that the Bank of England’s remit or mandate does not feature directly in this Bill, but much has been said about it and the importance of its independence, and I want to underscore that importance in this debate. There was a period, going back some weeks and months, when perhaps because, understandably, many Members and those who are now in government may have looked at the Bank of England and said that, because inflation is so far adrift from its target of 2%, it is therefore entirely unfit for purpose. I do not subscribe to that view. I do not believe that the Bank has been perfect, but I think it has faced extraordinary situations that have made its ability to keep inflation down to about 2% really a task that no central banker could have achieved.
It will be vital that the Bank of England maintains its independence, that politicians are kept out of monetary policy and that Chancellors do not determine interest rates if we are going to have a credible approach to monetary policy and all the benefits that brings. As my right hon. Friend the former Chancellor has said at the Government Dispatch Box on occasion in the past, if we take a 20-year view of the Bank of England’s performance, it has actually been spot-on at about 2%. Perhaps I can leave this debate with the thought that we must guard the independence of the Bank of England.
Several hon. Members rose—
Madam Deputy Speaker (Dame Eleanor Laing)
Order. It will be obvious to everyone in the Chamber that a great many Members wish to speak and that we have limited time. However, we do have quite a lot of time, so I will have to put on an official time limit of seven minutes, but not quite yet. After the next speaker, who has had no notice of this, there will be a time limit of seven minutes.
Seema Malhotra (Feltham and Heston) (Lab/Co-op)
Thank you, Madam Deputy Speaker, for the opportunity to speak in this important debate about these very significant issues of structural reform in our financial services, the accountability of our regulatory bodies and consumer protection. I am pleased that we have started to have some debate on the net zero policy and regulatory principle, and I want to endorse all the points made by my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq) in her important opening speech on green finance. Unfortunately, the Bill does fall short of what I believe is needed to protect consumers, and I want to speak about three key areas: first, access to cash; secondly, and briefly, mutuals and co-operatives; and thirdly, action for mortgage prisoners.
First, access to cash is an issue on which I have spoken before and led debates in Westminster Hall. It is right—finally, we can all be very pleased—that the Bill aims to protect people’s access to cash and will introduce a legislative framework to ensure the continued provision of cash withdrawal and deposit facilities. I want to recognise the work that has been done by Access to Cash Action Group members, which have worked very hard on this issue, including Age UK, Toynbee Hall and banks such as HSBC, NatWest and Nationwide. It is a really important network, and it is right that they are taking steps voluntarily, but it is also important that there is an underpinning of legislation to back those steps. Indeed, the failure to act fast enough has cut millions of people off from a range of important vital services.
Last year I presented a petition to Parliament on behalf of constituents in Hounslow West in the light of the closure of the local Santander Bath Road branch. Since then, we have lost two more branches of Barclays in Feltham and Heston, leaving even more of my constituents without access to in-person banking services. I pay tribute to some of our local councillors—Councillors Bandna Chopra, Jagdish Sharma and Hina Mir—for raising this issue in their local wards, but the standard response we received from the banks was just not good enough. Around 6,000 bank branches have closed since 2015, yet the Bill does not seem to do anything to protect essential face-to-face banking services. It also makes no commitment to free access to cash—I was surprised that the Minister did not take the opportunity to confirm his commitment to that. It is important that the definition of the minimum distance between cashpoints is brought forward earlier, and I do not understand why the Minister cannot clarify the Government’s position on that. Surely he must have a point of view.
I am a Labour and Co-operative party MP, and it is staggering that the number of mutual credit unions has plummeted by more than 20% since 2016. If we have learned anything from the pandemic, it is the importance of community and community solutions in our local and public services. Although the Bill contains some welcome and long-overdue provisions, such as enabling credit unions to offer a wider range of products, the Government’s plans for the sector could be far more ambitious, and I wonder whether we could work cross-party on that issue. Labour has demonstrated an ambition to boost the size of the co-operative and mutual sector, and there is demand for that across the country.
I am a member of the Financial Inclusion Commission, and there is a slight frustration—or perhaps a bigger frustration when we consider the issues raised by Members across the House—that the Bill does not seem to prioritise financial inclusion as much as is needed, particularly given the cost of living crisis that we are now facing. In that context, I wish to raise the issue of mortgage prisoners. The Bill provided a vital opportunity for the Government to act to ensure that financial regulators are stronger in their ability to help mortgage prisoners. The UK’s 195,000 mortgage prisoners took out their mortgages prior to the financial crisis, with fully regulated high street banks such as Northern Rock. They were kept trapped on high standard variable rates, before their mortgages were sold by the Government to mortgage loan sharks such as Cerberus, Tulip and Heliodor. They cannot switch to different lenders.
As co-chair of the all-party parliamentary group on mortgage prisoners, I have heard from key workers, many of whom risked their lives to work through the pandemic, about the personal consequences for them and their families of being trapped into paying high mortgage interest rates. Imagine how it must feel to be a nurse who took out a mortgage with a high street bank, only to find that their mortgage was sold on by the Government to a vulture fund that does not have to treat them fairly or offer them a good deal. Those mortgage prisoners are suffering financial devastation from interest rate rises to their already high standard variable rates, and that comes on top of the pressures of rising energy bills and the cost of living crisis.
One of my constituents is a mortgage prisoner whose mortgage was sold to Landmark Mortgages and is ultimately owned by Cerberus. They are stuck paying an SVR, and are not being offered any new deals. They have now seen a rise in the SVR from 4.39% to 5.89%, and they are therefore paying more than £9,000 more a year than they would if they were with an active lender. There is nothing they can do to gain any certainty over their mortgage payments. Many mortgage prisoners are terrified at the prospect of future interest rate rises. Prior to the financial crisis, the gap between the Northern Rock SVR and the base rate was 2.09%. Since 2009 it has been more than 4% above the base rate.
Kevin Hollinrake (Thirsk and Malton) (Con)
The hon. Lady is making interesting and key points about mortgage prisoners. At the time those loan books were sold, UK Asset Resolution made commitments to the Treasury Committee that those people would still be able to access market and fixed-rate deals, but that has not proven to be the case. It is very difficult for the Committee to get those kinds of assurances without having confidence that those assurances would be valid.
Seema Malhotra
I thank the hon. Member for his contribution and for his work for the all-party parliamentary group on mortgage prisoners. He is right, and those commitments need to be taken forward. It is surprising that there has not been more push on that from the Government.
The Government and the FCA have tried to claim that mortgage prisoners are not overpaying but paying similar SVRs to others in the market. However, that comparison is meaningless, because only 10% of customers of active lenders are paying an SVR, and many can typically switch to a new deal quickly. More than three quarters of consumers with active lenders switch to a new deal within six months of moving on to an SVR, but mortgage prisoners have been stuck on high SVRs for more than 10 years.
The all-party parliamentary group on mortgage prisoners has proposed two options that would provide mortgage prisoners with immediate relief by capping the high SVRs that they pay with inactive lenders and ensuring that they are offered fixed rates by their existing lenders. That would provide immediate relief to all 195,000 mortgage prisoners. Martin Lewis has supported a cap on SVRs for mortgage prisoners at inactive lenders, and organisations such as Surviving Economic Abuse also support that action.
The Government say that that would be an unprecedented intervention in the market, but the truth is that there is no market and there is no competition. It is the Government’s fault, because they sold these mortgage prisoners on to vulture funds, who are not treating them fairly. The APPG’s proposals are a targeted intervention and would have no impact on the wider market of active lenders such as the main high street banks who compete to offer new deals to their existing customers.
Although I support much in the Bill, there is much to clarify and improve and there are enormous gaps that need to be addressed. These reforms are important and urgent. I will be happy to meet the Minister to discuss mortgage prisoners with the APPG, should he find that helpful. I will listen closely to his response.
Several hon. Members rose—
Madam Deputy Speaker (Dame Eleanor Laing)
We now have a formal time limit of seven minutes, but that is likely to be reduced later in the day.
Damian Hinds (East Hampshire) (Con)
I welcome this ambitious piece of legislation. It is quite right that for a country and an economy such as ours, in which financial services play such a key role, we should be able to set UK-specific financial services regulation. I very much welcome the reframing of the regulatory objectives around long-term growth and international competitiveness. I want to speak to two specific aspects of the Bill that fall under “other miscellaneous provisions” but are nevertheless incredibly important: credit unions and compensation for the victims of fraud.
I turn first to credit unions, and in particular their role in financial inclusion and providing an alternative to high-cost, sub-prime lenders. Last night, I happened to be flicking through a well-thumbed copy of Hansard and looked at a debate from January 2014—hon. Members will remember it—when we were discussing payday lenders and the problems associated with them. We have come a long way since then. I think it is important sometimes to look back and say, “Where has regulatory change made a big difference?” We have had: the CMA report; the new FCA regime, including on payday affordability checks, roll-overs and restrictions on advertising; the measures on continuous payment authority, which I remember the hon. Member for Walthamstow (Stella Creasy)—no doubt, she would have wanted me to say this—championing so strongly; the cost of credit cap; and, most recently, the new FCA consumer duty.
More broadly, the Government put financial education on the national curriculum and, of course, supported credit unions with a commitment of up to £38 million for their development and further regulatory liberalisation.
Stella Creasy
I acknowledge what the right hon. Gentleman is trying to point out. However, does the evidence not show that it was the intervention of the financial ombudsman service that led to the downfall of companies, such as Wonga and Amigo, that were exploiting our constituents, rather than the intervention of the FCA, which oversaw unaffordable lending on its watch? Does that not show us why we need further FCA reform? It is the opposite of the point that he is making.
Damian Hinds
The hon. Lady makes an important point. It would be wrong—I am sure she did not mean to say it, even though it is what she just said—to say there was a single cause for those things. In fact, it is about changing the entire framework. In other parts of the market, for example home credit, there is a different set of reasons again why there has been a decline. We know the sub-prime segment shapeshifts the whole time, and we have also seen the recent growth of buy now, pay later. At a time of heightened financial stress, it is inevitable that new risks and new vulnerabilities manifest.
Wise heads always remind us that in seeking to curb the parts of the high-cost lending market that we do not like, there is always a danger that we instead push some part of that customer base into the arms of a high-cost lender whose idea of a late payment penalty is a cigarette burn to the forearm, so we must get the balance right. Regulation has been a success, but ultimately what we need is an alternative, because credit does form a part of people’s lives, and that is where credit unions and others, such as community development financial institutions, come into play.
We have seen development in the sector, but I would like to see a lot more. We have a great example in Northern Ireland—and indeed in the Republic of Ireland—of what a much more developed credit union sector can look like, and I would like to see that in mainland Britain. The proposals in the Bill will continue that development, amending the Credit Unions Act 1979 to allow for conditional sale and hire purchasing agreements to be undertaken by credit unions, along with the marketing of insurance services. I would only encourage the Government to go further, because our credit union sector is still small in Great Britain compared to Northern Ireland and there is much more that can be done. There is also more that can be done on CDFIs, whose growth, frankly, has been disappointing.
I encourage keeping an open mind on the regulatory aspects of the Bill. I do welcome the measures, but while the 3% per month interest cap is very reasonable, in some parts of financial services it is difficult to break even on that cap. Ironically, the demise of the market leader of the home credit business sector makes it more urgent for us to ensure there is very good provision from credit unions and other responsible lenders in its wake.
The other issue I want to comment on briefly is the provisions on authorised push payment scams and mandatory reimbursement. This gives me the opportunity to join others in the nice things they have been saying about my hon. Friend the Member for Salisbury (John Glen), the former Economic Secretary to the Treasury. I had the opportunity to work with him when I was Security Minister and he was bearing down on the awful growth in fraud. We have not just seen that growth in this country. Fraud and economic crime have been growing in countries throughout the world. There is a change in crime, and we need to respond accordingly. I welcome the change in the Bill, because it brings consistency and fairness and will enhance confidence for people using online financial services. One should never take away all responsibility from the consumer, of course, but that is a welcome move.
Very briefly, there are two things I would like the Government to look at, one for the Treasury specifically and one for the wider Government. First, for the Treasury, it is not clear to me why this provision applies just to the faster payment system. It is true that the vast majority of scams happen through faster payments, but they may not in future. It is right that the regulator should have the ability at least to extend that scope.
Secondly, a bigger point—not for my hon. Friend the Economic Secretary, he will be pleased to know, but for others in Government—is that we should extend the principle beyond the banks. It is difficult to get sympathy for banks and bankers, but right now they are bearing the entirety of the burden even though they are just the last link in the chain of the scam. They have responded very well, partly through regulation on such things as strong customer authentication and so on, but also by going further off their own bat. I think that is partly to do with their moral commitment to their customer base, but it is also about the liability they face through the contingent model. One wonders whether, if social media platforms, telecoms companies and others had had those same incentives, we might already have a lower level of fraud than we have today.
Save for those two encouragements to my hon. Friend the Minister for the Government to look at going further, I strongly welcome the Bill and all he is trying to do.
Kate Osamor (Edmonton) (Lab/Co-op)
Thank you for calling me to speak in this very important debate, Madam Deputy Speaker, and I associate myself with the remarks of my hon. Friends the Members for Hampstead and Kilburn (Tulip Siddiq) and for Feltham and Heston (Seema Malhotra). I welcome the Government introducing measures to protect access to cash, and I will use my speech to express my constituents’ concerns about that.
In Edmonton, between 2018 and 2021, a third of our free-to-use ATMs disappeared. I receive correspondence from my constituents telling me how the closure of banks and the lack of free ATMs is putting a strain on them. The importance of using cash on a regular basis is that it remains, for millions of people, simply the best way to budget effectively. Those facing digital exclusion or physical impediments, who are disproportionately elderly, will continue using cash.
I am not alone in saying this. The “Financial Lives 2020” survey found that around 2.4 million people aged 65 and over in the UK relied on cash to a great extent in their day-to-day life, representing around one in five—21%—of all older people. Also, small and medium-sized businesses, such as hairdressers, barbers and nail shops, survive off regular, frequent small cash transactions. I think about the small businesses in Edmonton, such as the nail salon or my hairdresser, Debbie’s, who did my hair for me—[Interruption.] Thank you. These businesses only take cash from customers. Small and medium-sized businesses simply cannot afford to run a card machine. Common charges include transaction fees of between 1% and 3% a sale, authorisation fees of between 1p and 3p a sale and merchant service fees of between 0.25% and 0.35%. Edmonton is one of the most cash-dependent areas in the country.
I welcome the measures to empower the Financial Conduct Authority to ensure that designated bodies must continue to provide “reasonable access” to cash, as I do the powers to potentially stop the closure of certain cash access points if there is no alternative nearby. However, to truly address this looming issue, we must acknowledge that attachment to cash has been much stronger in more deprived communities. Along with age, that is the greatest factor in its continued use.
Admittedly, rates of withdrawing cash have fallen off a cliff in wealthier constituencies, but during the covid crisis, cash withdrawals fell by only a quarter in less affluent areas. That figure would only increase if the free ATMs that have been removed were all replaced, but not with pay-to use machines. With a regular fee of £1.75 just to withdraw cash from a pay-to-use machine, it is a luxury that many cannot afford, yet the Bill makes no clear commitment to protect free-to-use over pay-to-use machines. The latter understandably have much lower usage rates. I hope that the newly appointed Chancellor will instruct the Treasury to differentiate between them clearly in its cash access policy.
We are also still waiting for the Government to define the meaning of “access to cash”. Without a clear maximum geographical distance between cash machines, we risk sleepwalking into a situation where cash deserts are commonplace. Also missing from the Bill is a provision to ensure that there is sustainable funding for free-to-use machines, which has seen serious strain recently. Providers must be compensated for providing this vital public service. Currently, we risk reaching a threshold whereby huge numbers of free ATMs become uneconomical and are forced to close. The funding model should also consider the demographics and economic deprivation in any area, which bears a strong relation to the need for cash access.
The Bill could be an important step in determining safeguards on access to cash in the long term, but sadly what we see is a narrow set of proposals with a lot of detail still unconfirmed. In the meantime, there should be a pause on removing free-to-use ATMs. Otherwise, more of my constituents will be further excluded.
John Glen (Salisbury) (Con)
May I say what a great pleasure it is to speak in this debate? It will be of little surprise to the House that I support many of the measures in the Bill—20 separate measures, I think, over 335 pages. I would like to make a few comments on the process that led to the Bill, some observations on the policy content and, if I may, a few suggestions about some areas in which the Government might consider going further.
It has been the greatest privilege of my political career to have been Economic Secretary to the Treasury for four and a half years. When I started in the role in January 2018, there was considerable ambiguity about the direction of Government policy. It feels a little heretical to say it, but there was great uncertainty about how financial services would land after the Brexit decision. There was no consensus, and there were significant predictions of the demise of the City of London. Over those four and a half years, I was very pleased—I am not saying that it was all my doing—to see the resilience of the City of London. The global hub of financial services in London has proved itself phenomenally resilient over the past three years.
After a lot of discussion about dynamic alignments and thoughts about how things should be delivered, we had an election and we had clarity. We had a new, clear direction, eventually resulting in this Bill, which takes us back to the gold standard of the FSMA model. I welcome that. I also welcome the fact that the Bill has come about through deep dialogue with the City and the trade bodies that represent the financial services industry. As my right hon. Friend the Member for Richmond (Yorks) (Rishi Sunak) says, it is a critical industry for our country: it generates 10% of our tax revenues. That is why the framework that we are setting out today is so important.
I pay tribute to Miles Celic at TheCityUK, to David Postings at UK Finance, to Catherine McGuinness and now Chris Hayward at the City of London Corporation, and to Huw Evans and now Hannah Gurga at the Association of British Insurers. They were instrumental in the constructive dialogue with Treasury officials to ensure that the policy that we arrived at met the needs of this complex industry. I thank them for their engagement during my tenure.
At the risk of being accused of Stockholm syndrome, I also pay tribute to officials at the Treasury. Over the summer, a lot has been said about Treasury orthodoxy and about regulators. I put it on record that my experience of working at the Treasury over the past four and a half years was that Treasury officials worked under the direction of politicians, as we would expect, but that they were also extremely eager to find creative solutions at a time when there was no template, no rulebook and no preordained way forward.
I pay tribute to the work of Sam Woods at the Prudential Regulation Authority. The PRA provides a distinct role from the one that we perform in this place, but the professionalism that it shows in dealing with complex regulatory matters is something that we should be very grateful for in this country. I also want to speak about the Financial Conduct Authority, because the Bill will give the FCA and the PRA a significant degree of responsibility. As we put aside the retained EU law that we spent so much time in Committee sorting out, we now rely on them, under the growth and competitiveness objective, to come forward with new rules. We are not seeking to deviate from norms in other jurisdictions; what we are trying to do is rightsize those rules for the UK.
I want to say that I recognise that the implementation of the future regulatory framework has not come about on a whim, but has taken a great deal of work over a couple of years, along with a great deal of consultation. I also want to say that the EU legacy is not all bad. We in the UK played a significant role in shaping that legislation, and during my interactions with my counterparts when I was a Minister they were very complimentary about the role that we played, but—as my right hon. Friend the Member for Richmond (Yorks) pointed out—that does not mean that we should not now be courageous in taking opportunities.
The wholesale market review presents a phenomenal opportunity to make changes to MiFID. It is one of 30 reviews that we have undertaken in the Treasury over the last year to ensure that we get this right. What we are doing with clearing—the middleman in trading—is also critically important, because the central clearing counterparties in London are instrumental across the globe and will continue to be so. They are efficient, they are world class, and no matter what the EU may wish to do to compete with our clearing environment, we can be certain that the Bill will ensure that those standards remain very high. We have needed to embrace innovation, and the sandbox for which the Bill provides is an important function enabling the FCA to do that.
As we look to the future, we must think about our relationships with other countries that have significant financial services industries. We will need to customise those relationships, and optimise them. I am therefore pleased about the mutual recognition agreement enablement provisions. I welcome the call-in power, although clear principles must be set out in respect of how it is applied; this is not about a random political intervention. I also endorse the moves to deal with packaged retail investment and insurance-based products and get rid of key information documents, and to introduce something that is appropriate in the UK.
I welcome the Bill, and I pay tribute to my successor. I wish him as long a tenure as I have had.
Ronnie Cowan (Inverclyde) (SNP)
I will not consume all my seven minutes. I shall try to give some time back to the House and allow others to speak. In any event, I am feeling absolutely lousy, and standing for more than three minutes may well prove to be a bit of a challenge.
The majority of people are using less cash. The technology which is available, and which we are encouraged to use, has seen cash acceptance and access to cash decline. For many people, including me, using a card or phone to pay for goods and services has become the norm. It is quick, it is convenient, it is practical—but it is not for everyone. As the cost of living has gone up, there is evidence that more people are turning to cash in order to budget. The Post Office reported record withdrawals in July 2022, and a survey commissioned by LINK has indicated that 10% of people are planning to use cash more to help them to budget.
We are not talking small numbers here: more than 5 million people in the UK are already relying on cash, and—quite disturbingly—55% of respondents to a survey of 500,000 people conducted by Cardtronics felt pushed towards cashlessness against their will. We need a sensible strategy that does not discriminate against cash users, who tend to be the elderly and the most impoverished in our society. The Government must provide clarity about the content of their access to cash policy statement. There is no reference to ensuring free access to cash, which is an absolute must. There are no baseline geographic distances applying to withdrawal and depositing facilities. When communities apply for such services, there is no feedback to explain why an application was unsuccessful. This process should be transparent and clear.
I urge the UK Government to make the consumer’s interests their priority, and to produce a Bill that safeguards existing cash users and ensures that firms have complied with their own regulatory obligations. Honestly, how hard can that be?
Stephen Hammond (Wimbledon) (Con)
I was not expecting to be called quite so early in the debate, given the panoply of talent on these Benches and the Benches opposite. In the interest of brevity, I will briefly concentrate on three aspects of the Bill. First, I want to guide the House to my entry in the Register of Members’ Financial Interests.
This is one of the most significant Bills that this House is likely to look at in this Session of Parliament because, as the Minister has said, the realignment of the regulatory architecture offers a unique opportunity to become more nimble, more agile, more accountable—I hope—and more pragmatic in our approach to regulation. The most important parts of the Bill take forward the future regulatory framework. Requiring regulation to comply and to promote international competitiveness will address the widely held concerns that regulators have in the past used their powers narrowly and over-cautiously to reduce risk, thereby reducing innovation, increasing costs and decreasing consumer choice, which has overall been detrimental to competition.
Creating what is, let us be clear, a secondary objective of international competitiveness and growth is absolutely right. Having this objective in place will neither undermine the regulators’ independence nor cause any prospect of a financial crash. I also do not believe, as some have said, that it is in any way a push for the lowering of standards. The industry knows that proportionate and effective regulation by an accountable regulator is the key to international competitiveness. I was interested to hear the Minister say that he thought we in this House should look again at the accountability structures of regulators. I welcome this objective, and I also welcome the cost-benefit analysis panel, which again plays into the objective of ensuring a nimble, agile regime that protects consumers while taking up the opportunities post-Brexit.
However, with the secondary objective and the cost-benefit analysis panel, there is a concern that regulators must be accountable both to this House and to the Government, but in particular to this House. I welcome the setting out in practice of some of the key performance indicators for the regulator and I recognise and welcome the Sub-Committee of the Treasury Committee, but I hope we will be able to discuss this in Committee and I urge the Minister to think about whether amendments are needed to include an obligation on the regulators to state how any new regulation will meet and further the objective of international competitiveness. I hope he will also consider an annual report, at least on the delivery of those objectives, which should include some measurement against specified key performance indicators. There should be no suggestion that the regulators are being allowed to mark their own homework.
I am sure that the Minister will clarify this later, but the cost-benefit analysis panel needs either to have external members—that must be explicit—or to make it clear that it is taking external advice. It ought also to be clear exactly what criteria are being used to measure cost-benefit analysis. Those measures would help considerably in terms of accountability. I do not believe that scrutiny and accountability affect the independence of either the PRA or the FCA. As my hon. Friend the Member for Salisbury (John Glen)—who I have had the pleasure of questioning in this House a number of times—knows, I want to see this industry thrive. It is key to the whole of the United Kingdom, because two thirds of the jobs in the industry are outside London. I think he too would accept that scrutiny and accountability do not threaten the regulators’ independence. They are important if we are to have a regime that continues to be internationally renowned.
I have been fortunate enough to be a member of the Treasury Committee in the past, and I hear entirely what my right hon. Friend the Member for Central Devon (Mel Stride) has said. However, I would suggest to him that as a result of the pressures on the membership of the Treasury Committee and the Sub-Committee—I accept that they have the same powers—caused by the extra work, we should open a debate on whether the House needs to think again about whether just having a Sub-Committee of the Treasury Committee is adequate, given the importance of this industry to jobs and growth across the country. I will ask the Minister, perhaps in discussions, to consider yet again a Joint Committee of both Houses on financial services, which is what happens in other jurisdictions.
I welcome so many measures in the Bill, but let me touch briefly on just one. Others will talk about the revocation of retained EU law and a number of other aspects about which Members have already spoken, but I urge the Minister to press ahead with mutual recognition agreements. They are another key way to ensure that the United Kingdom’s financial services remain at the forefront of global financial trade. It is extremely welcome that we are pressing ahead with Switzerland, but I urge the Minister to continue to press ahead with the powers that the Bill allows to be implemented and the regulators to give effect to. With those words, I warmly welcome the Bill, and I look forward to supporting it.
John McDonnell (Hayes and Harlington) (Lab)
I hope there will be plenty of time to discuss the detail of the Bill both in Committee and on Report, so I wish to make some general comments on my worries about where it is situated. When J. K. Galbraith wrote about the 1929 crash, his advice for the future was that people could set up all the institutions they needed to try to prevent it from ever happening again, but the greatest protection would come from memory. I therefore want to go back in time to some of the lessons that we perhaps should have learned but did not.
I wrote about the big bang in the 1980s and I can remember the concerns we expressed about a wave of enthusiasm for deregulation similar to what we see today. That enthusiasm resulted, in effect, in a casino economy. The City of London and the finance sector are the most successful lobbyists in the history of politics in this country and they are incredibly powerful. Sometimes, that results in corporate capture, not just of Governments but even of Oppositions at times. That period of enthusiasm for deregulation resulted in a casino economy that eventually resulted in a series of crashes—we endured not just 2007-08 but other crises.
I was in this House in 2007-08 and was the first Member to raise the issue of Northern Rock. I remember that in the debate after Northern Rock, the Treasury itself spoke about the “excessive concern for competitiveness” that brought about elements of that crash. I worry that we are re-inserting into legislation an emphasis on competitiveness that could override so many other issues of concern.
Here we go again. We are introducing legislation and placing in it a reliance on the structures that we established after the 2007-08 crash, particularly the FCA. I believe the FCA has been a catastrophic failure. My constituents have gone through London Capital & Finance, Woodford and Blackmore Bond. We saw the FCA’s failure to address HBOS and RBS properly, and we are supposedly still waiting for the independent review of Lloyds that was established in 2017, yet the FCA has moved not one inch to take further enforcement actions. As I have made clear on the Floor of the House, I was concerned that the FCA chief executive at the time was accused—rightfully, I believe—of being asleep at the wheel. Before we even had the report on London Capital & Finance and so on, we appointed him as Governor of the Bank of England.
Bim Afolami (Hitchin and Harpenden) (Con)
The right hon. Gentleman is making an important and interesting speech. On that point about the FCA, will he explain to the House whether he supports changing the regulatory structure and having one super-regulator, or something of a similar description?
John McDonnell
The hon. Gentleman knows where my mind is going. We instituted a regulatory review a couple of years ago, and Prem Sikka, a professor of accountancy, and a team of corporate specialists and finance specialists introduced an excellent report. He is now in the Lords and I warn Members that he will shred this legislation when it goes up there. He outlined that 40 bodies are regulating our finance sector in some way and that there is a need for consolidation and to learn the lessons of the experiences of some of these bodies so far. That job is still to be done. I was hoping that the bringing forward of this legislation would coincide with the Government’s clear recommendations on where we go on that structure and, in particular, the role of the FCA.
I am also concerned about the fact that, although we are having the debate about this legislation, we are not debating potential future threats. I am anxious that in this legislation we are not addressing shadow banking, where we have already seen elements of individual firm collapses, particularly in respect of equity firms, that could create a domino effect and then produce a significant collapse.
I am also anxious about the move away from MiFID II. That issue has been raised and was derided by some in the House. We have recently seen the evidence with regard to speculation on both energy and food prices. Of course the cost of living crisis has been caused by a combination of the breakdown of supply chains, covid and the war in Ukraine, but there is significant evidence now that these increases in energy costs and food costs have been exacerbated by speculation in the markets. This is speculation where the paper markets are distinct from the reality of commodity supply. It is not just me expressing that; it has been expressed elsewhere, particularly in the States, but also by a number of global institutions. I regret that we have not addressed that issue in this legislation. We need to hold to the MiFID II, particularly the constraints on asset holding with regard to food commodities, as I am anxious about price speculation forcing prices up.
I was critical of Gordon Brown on some of his response to the banking crash in 2007-08, but one thing he did successfully was bring the world together, and there were international meetings where we looked at a global response to these problems. I believe that we now need to look at a global response to the food and energy speculation that is taking place, which is exacerbating the cost of living crisis that our constituents are facing. In that way, the Government’s approach is lacking. We will have the discussion tomorrow about their response to the energy prices increase and the cost of living crisis. I am hoping that from that, and as we move forward, we will recognise that there is an international role to be played by this Government in bringing people together, in the same way as Gordon Brown did.
I am particularly concerned about the issue of food. The UN special rapporteur Olivier De Schutter has said that what is happening now is that people are betting on people’s hunger. That cannot be right. Anything that we do that undermines in any way our own national legislation, which is against speculation in essential products such as that, is dangerous, but if we fail to ensure that we take up our international responsibilities, we will regret that for the future, as our people increasingly confront the problems of hunger and starvation.
Martin Vickers (Cleethorpes) (Con)
I fully support the recommendations in the Bill and it is noticeable that it contains a wide-ranging set of proposals. I am not going to dwell on the more serious issues, as they have all been covered admirably by my hon. Friend the Member for Salisbury (John Glen), by the Chair of the Select Committee, my right hon. Friend the Member for Central Devon (Mel Stride) and, of course, by the former Chancellor, my right hon. Friend the Member for Richmond (Yorks) (Rishi Sunak). I am returning to the issue of access to cash, which has been raised by a couple of speakers.
It is not only cash, but the wider range of banking services that is crucial to our local communities. Proposals that have come forward in recent weeks affecting my own constituency involved the closure of what is, in effect, the last bank in the towns of Barton-upon-Humber and Immingham. I am delighted to say that in one case LINK, with which I have been working closely over those recent weeks, has designated Barton as one of its next banking hubs. That announcement came only yesterday, so it has slightly taken the sting out of what I was going to say, but of course, Immingham is still urgently in need of a financial hub. Proposals are being put together, and the local community and I will certainly take those proposals forward to LINK.
It is worth remembering that although when we listen to our constituents we hear tales of how reliant they are on their local bank and the services it provides and so on, we are all to some extent guilty when it comes to the change in the use of branches. I suspect that not one Member present in the Chamber can claim not to have used a credit card or bank card to make a payment when cash would perhaps have been a better option—we have all probably done so today. We have to recognise that; it is very easy to paint the banks as the bad guys, but they obviously have to amend the services they provide. However, it is interesting to note that more than 5 million people in the UK rely on cash on a daily basis, and it is estimated that 4 million adults do not have access to a smartphone and 1.5 million households do not have internet access. As such, while it is important that businesses make decisions in line with the general trends of customer behaviour, it is also important that we do not leave behind those who are in the more vulnerable groups.
As I said, I am delighted that the Cash Action Group and LINK have come together and announced that Barton-upon-Humber will receive a financial hub. That is great news, but we must also remember that it is not just access to cash that is important, so I urge the Minister and his team to think about the wider range of banking services. Until now, people of my generation, certainly, have been more used to face-to-face meetings with banks. Doing online transactions is fine, but when doing online applications for what can be life-changing decisions—a mortgage, for example—giving us guidance and making us think more seriously about the commitments we are making is an important part of the service that our financial institutions provide.
I welcome all that the Government are doing. As it stands, there is no existing legislative framework guaranteeing a minimum level of access to cash and wider banking services, or a single authority with overall responsibility for overseeing a cash system that works for everyone across the country. It is welcome that the Government seek to address that situation through the Bill, which will also empower the regulator to ensure that local communities continue to benefit from a cash withdrawal or deposit facility. I also repeat the point that my hon. Friend the Member for Blackpool North and Cleveleys (Paul Maynard) made: access to cash should be free. One of the things that annoys me and, I am sure, many others is that we are paying to get our own money. I urge the Minister to insert the word “free” into the legislation, something that I am sure would have cross-party support.
Bearing in mind the constraints on time, I thank LINK’s staff for the work they have done in respect of Barton-upon-Humber, and appeal to them to take an equally sympathetic view when making their decision about a banking hub in Immingham. I also urge the Minister to think about inserting that additional word “free” into the legislation.
Stella Creasy (Walthamstow) (Lab/Co-op)
I do not want to disappoint my colleagues on the Government Benches, but I think that they know the issue on which I wish to focus in the time that is available to me. Before I start, I want to put on record, as a Co-operative and Labour MP, my support for the comments of my Labour colleagues on the importance of access to credit unions and of access to cash, which reflects the issue that I want to raise, particularly with regard to high-cost credit regulation.
I also wish to put on record some scepticism about the idea that there are wonderful opportunities as a result of Brexit. To my mind, there are simply problems that we will need to address, and I note that the former Minister, the hon. Member for Salisbury (John Glen), talked about the unlikelihood of a derogation from the existing regulations. Some may wonder whether this is the best use of parliamentary time, but I am willing to look at the legislation.
There is a genuine philosophical disagreement here about the concept of consumer protection. It is the lesson of high-cost credit regulation in this country that I do not think this legislation learns and it is our constituents who will pay the price.
Let me start by highlighting the points of agreement. I agree with the right hon. Member for East Hampshire (Damian Hinds) when he talks about this as an industry that is shape shifting—that it evolves to meet the times that it faces. Let me also put on record my appreciation of the work of the former Minister, the hon. Member for Salisbury. He and I have had many discussions about this industry and how best to address the threat that it poses to our constituents. Although we may not have agreed all the time, I have certainly respected the fact that he has been listening and looking at the evidence.
I am here today as a Cassandra, a broken record, to warn again of these industries and the latest antics of the companies, particularly the buy now, pay later lenders. Two years ago, we started to say that those lenders must be regulated, and I would argue that that was probably 18 months too late from recognising the threat that they pose.
The lessons of payday lending, guarantor lending and hire purchase agreements show that we simply cannot wait until the harm is evident among our constituents, especially when the abuse that is coming is self-evident already. Now that we are in a cost of living crisis, such caution is frankly unforgiveable, because it is our constituents who are paying the price. I hope that we can return to this matter in Committee. I am sure that the Minister now dealing with this Bill will recognise that, especially as the £1.8 billion that this country owes in personal debt—a rise of £62 billion—has not come from nowhere. Credit card borrowing in this country has jumped at its fastest rate in the past 17 years as people deal with the cost of living crisis.
When a third of households with children are cutting back on food to be able to pay their bills, it does not take a rocket scientist to work out that too much month at the end of somebody’s money and mouths to feed mean that credit must be found, and our constituents are turning to the high-cost lenders in their droves. I would be surprised if Members do not know what buy now, pay later is, because it is on every single website in this country now as a result of the delay in action. It has massively exploded as a result of the pandemic and now the cost of living crisis. Those companies are offering the opportunity to spread the payments, but they do not do so out of the goodness of their hearts; they do so because consumers spend 30% to 40% more. Add that toxicity to the way in which people are borrowing now to make ends meet: we are seeing buy now, pay later companies offering to put people’s energy bills onto these processes. We are seeing them offering the loans not for fast fashion, which is where people originally thought this kind of regulation was needed, but for basic goods and essentials. Millions of people in this country are now using this form of credit and getting into a hole that they cannot get out of. Those are not my words; it is what the evidence is now showing us. The previous Minister well knows that the evidence of harm is there. Indeed, that is what the FCA told us more than two years ago.
The average buy now, pay later user is paying off £293 of buy now, pay later debt, but that is at current prices. With inflation rocketing in the way that it is, the only ones that will win from that are those that offer the ability to apparently spread the payments, but that simply gets people into further and further debt. Most of these companies will not be clear with their lenders about the consequences. Indeed, many people do not even realise that it is a form of credit; they just think that they are spreading the payments on the websites.
Shoppers were charged £39 million in late repayment fees on buy now, pay later loans last year. I dread to think what the figure is now. There is agreement across this House that we need to regulate these companies, but what there is not is the political will to make sure that it happens before the pressure points come. We have already been through one Christmas where one pound in every four spent was on buy now, pay later. There are millions of people still paying off those debts. On the regulatory timetable that the Government are talking about, we will not see action before some time late next year. Minister, some time late next year is far too late for our constituents.
John Glen
I cannot resist. I think there is great consensus in the House on this matter. It is not a question of a lack of political will; I can assure the hon. Lady that it is about the complexity of delivering that legislation. In fact, the intent’s having been stated will have a meaningful effect on market practices and will change, and is changing, behaviours in the marketplace.
Stella Creasy
I thank the former Minister for his intervention, but my question is what that means for consumers. The lack of regulation means that my constituents cannot go to the ombudsman to seek redress if they think they have been mis-sold this form of credit. As people are drowning in buy now, pay later lending, they cannot seek assistance except from the companies themselves. We now see mainstream banks moving into buy now, pay later—the very bank that looks at someone’s account to decide how much they can spread payments and how much more they can afford to borrow, because this is a form of borrowing.
The hon. Gentleman may argue that the market is moving, but constituents need help now, because it is now that they are getting into debts that they cannot get out of. The challenge for us all is that the pace of change is horrifically slow, and that is where the damage to our constituents will come. If we all agree that regulation matters, let us get on with it. Furthermore, let us ensure that some of those basic changes, such as the ability for the ombudsman to intervene, happen.
This legislation shows that that matters, because it was the intervention of the ombudsman that made a difference with payday lending. The evidence is clear; the Financial Conduct Authority was overseeing Wonga while it continued to make loans that were unaffordable to its customers. It was only when the ombudsman intervened that Wonga was finally held to account for its behaviour, and as a result it went bust—and Wonga is not a one-off. Our constituents need proper consumer credit protection.
The Minister will know that it is my belief that there should be a proper credit capping process for all forms of credit, so that we do not have to play whack-a-mole. The right hon. Member for East Hampshire reflected that when he talked about shape-shifting: as one of these companies is regulated, another one comes up. In the intervening period, however, it would be perfectly possible to bring in the ombudsman. If we set out a separate regulatory regime for those companies, we are setting a precedent for other forms of credit to come and ask for separate and, frankly, special treatment.
What our constituents need is clarity about who to go to when they get into trouble. We all tell our constituents to go to a debt adviser, but if they have rights, those rights need to be transparent. At the moment, if people are borrowing on buy now, pay later, they have no rights, because it is not regulated. They only have the indulgence of those companies, and asking turkeys to tell us whether Christmas is a good idea rarely ends in a present for anybody.
It is right that we act as quickly as possible. I do not agree with the hon. Member for Salisbury when he says that the political will is there, because frankly this could have been done a while ago. The timetable that the Government have set out, which does not seek any form of actual intervention until some time in late 2023—and even then, it is about consulting on further measures—simply will not wash. Every Member of this House will have constituents coming to them for whom buy now, pay later debt will be part of their debt make-up, who may have put their mortgage on it, because there are companies offering the opportunity of spreading payments. Little wonder, when after all the Government are telling us they are going to spread our energy bills; the Government proposals to date are a form of buy now, pay later.
I wish I was wrong. I wish I had been wrong about payday lending, but we waited too long, and there are still millions of people in this country who are owed money through the compensation scheme from those payday lenders because we waited too long to intervene. We must not make the same mistake again.
I put the Minister on notice, and I ask for support from across the House, because I do not think this is a party political issue; it is about the pace of change. I will be proposing an amendment to this legislation that will give the Government the same time period of 28 days that the buy now, pay laters give our constituents to bring in that secondary legislation and give our constituents the protection of the ombudsman. It is a necessary and vital measure in a cost of living crisis to ensure that when people who cannot choose between eating or heating—because they cannot afford to do either—turn to buy now, pay later, they are not creating further problems for themselves down the road.
I know that hon. Members across the House agree that this kind of lending is a problem, but it is time for clarity, it is time for simplicity and it is time for that legislation. I hope that I will find supporters on the Government Benches, and I know that we will find supporters in the other place. Above all, I know that our constituents deserve better.
Dame Andrea Leadsom (South Northamptonshire) (Con)
I would like to begin by paying huge tribute to my hon. Friend the Member for Salisbury (John Glen), who in four and a half years as Economic Secretary to the Treasury achieved an enormous amount, and the Bill is testament to his huge commitment. It was a pleasure to deal with him on many issues in that period. Having done his job briefly for one year, I can absolutely understand what a huge commitment it was for him. I am torn, however, because I absolutely love the new Minister, with whom I have worked as a Back Bencher on many issues in finance. It is great to be in the Chamber and to be able to contribute to the debate.
Enough of the nice stuff. I think the Bill is essential and deals with a big area. People talked so much nonsense in the Brexit debate—“Oh, the City of London is going to collapse!” I remember going to a Dubai international conference where Xavier Bettel, the Prime Minister of Luxembourg, said, “Well, if the UK leaves the EU, the City of London will move to Luxembourg.” I remember thinking in my jet-lagged brain, “Surely, you could not fit just over a million people in Luxembourg. The queue for the coffee shop would go down the street.” There was so much nonsense, and the Bill is absolutely brilliant and long overdue. It is time that we took control of the City of London and its competitiveness. It is high time that it had a competitiveness objective and that we took advantage of this perfect opportunity to be the leader in the world in setting out financial regulation and in exporting to countries across Asia, where people cannot get mortgages or insurance and all those sorts of policies that we take for granted, which we can buy and regulate in the west. Leading regulation in finance around the world is absolutely critical.
Another huge opportunity for the UK is being the world’s leading green finance centre. My first question for the Minister is what are we doing about that? Is it in the Bill? In my view, it will happen. I think that the green industry is going to be an even bigger employer and an even bigger jewel in the crown than the financial services sector in future, but we should seize the opportunity to make that happen as soon as we can. Mutual recognition agreements are absolutely vital. Having left the EU, we have the freedom to make them, but will the Minister explain how those MRAs will be scrutinised by the House. That is a technical question—I am sure that there is already an answer to that.
Moving on from competition, which is at the heart of this measure and absolutely vital, to payments, I recall from my days on the Treasury Committee from 2010 to 2014, and then as City Minister, how dire our payment systems are, mainly because they have been around for a long time, held together with string, Sellotape and sealing wax. Someone said, slightly bravely, that we should feel sorry for the banks—never feel sorry for the banks—but nevertheless, it is their own doing that the ancient payment systems are very clunky. A lot of fraud today is the result of payment systems not being fit for purpose. Again, will the Minister explain whether there is a requirement in the Bill to improve payment systems and make them more robust? Will banks, particularly clearing banks, invest in those systems? How will new digital currency regulation interact with fiat money regulation and what protections will there be for people who, unfortunately, become victims in the digital money space? How will we protect them from fraudsters who claim that they are regulated by the Bank of England or the FCA? What are we doing about that? Have measures been written into the Bill?
On access to cash, back in the day, after the financial crisis, the big banks wanted to ditch cheques, for example, because they could not see the point of them. They were expensive to administer, but as MPs we know that many of our constituents rely on cheques to this day. Only recently, my daughter was sent a cheque and tried to cash it. People literally cannot do that unless they go to a bank. Otherwise they have to fill it in, take a photo of it and send it to the bank in an envelope with a stamp. That is absolutely ridiculous, as there are many people who depend on cheques.
What are we doing in the Bill to continue to protect access to cheques and, as others have said, access to free cash through ATMs? Those are disappearing at a rate of knots. As the last bank in town has started to close, post offices have picked up a lot of the slack, but that system is waning. A lot of the services that small businesses need are not available through post offices, and of course it is difficult for someone who is not digitally savvy to open a new bank account other than by going to a branch, which can be difficult for older people.
My final point is about credit unions. I am a big fan—always have been. What I love about them is that they teach people to save before they borrow. Like many co-operatives, credit unions have been great at reaching out to schools and teaching young people about the importance of saving and the fact that money does not grow on trees, so they get into the habit of saving their pocket money before they go out and start borrowing money for anything. As has been mentioned, a lot of Government money went into helping the Association of British Credit Unions to create a new, proper platform for credit unions. How is it doing? How is the co-operative movement doing? Is there anything in the Bill that will support not just those co-operatives but, vitally, financial education in schools?
Let me finish by saying that it seems to me that, although financial education is on the national curriculum, it would be so much more valuable to so many young people to know how to open a bank account, what a rental agreement is about, or how to fill out a mortgage form, a tax return or a credit agreement than to learn more geometry and the square root of nine.
Nick Smith (Blaenau Gwent) (Lab)
I am glad to see the introduction of the Bill. Its provisions for securing access to cash, which I think should be free, will be welcomed in Blaenau Gwent. I strongly endorse the focus in chapter 3 on improving the accountability of financial regulators. Which? magazine has described this as a “once in a generation opportunity to strengthen the UK’s financial services regulatory regime”—quite the mouthful—but much more still needs to be done.
Unfortunately, I have lost confidence in the main regulator, the Financial Conduct Authority. Its oversight of the British Steel pension scheme scandal was plain hopeless. I saw the stress and grief of steelworker pensioner constituents who had been ripped off, and I have seen in my own experience as a member of the Public Accounts Committee just how useless the FCA can be. Despite being duty-bound to ensure that consumers were given quality financial advice, the FCA displayed poor oversight of the adviser marketplace. It consistently failed to act, even though it was aware of the risks to pensioners transferring out of a defined-benefit scheme. It failed to regulate a marketplace rigged against the steelworkers.
A recent Public Accounts Committee report found that the FCA failed to protect BSPS members from unscrupulous financial advisers who were financially incentivised to provide unsuitable advice, and that the regulator was “behind the curve” in its response. As a result, after much prodding, the FCA itself found that a staggering 47% of transfer recommendations were unsuitable. This has meant that many BSPS members have suffered years of nagging worry and losses to their pension pots, and had their plans for retirement ruined.
The National Audit Office discovered that, in the claims made to the Financial Services Compensation Scheme, the average individual loss stands at an eye-watering £82,600. Due to the FCA’s failures, the final bill for the coming redress scheme will likely be in the hundreds of millions of pounds. Despite having the powers to respond to the thieving and poor adviser behaviour, the FCA has issued just one fine in relation to the BSPS case.
Although I welcome the FCA’s efforts to improve its consumer-facing work in recent months, I am not convinced that the proposed framework will ensure that consumers are properly protected. It is good that the Treasury will have increasing powers to direct the FCA to make, review and enforce new rules as and when the need arises—the Treasury needs to jump in where necessary—but we need a fit-for-purpose FCA that robustly defends its consumers at the outset. It needs to hold bad actors to account from the get-go.
Therefore, I believe that consumer protection should be better embedded in chapter 3 of the Bill as a key accountability of the regulator. That is why I hope to see amendments made to mandate a much sharper focus on consumer protection with statutory panels that centre on the consumer. In Committee, there should also be a review of the FCA’s enforcement powers, which may need boosting.
Confidence in the regulator to have the best rulebook, enforcement and a culture that stands behind the consumer is key. Financial sharks that rip off working people need to be netted. The FCA needs to look across our country as well as at the City of London. Therefore, I ask the Minister to make doubly sure that the Bill has the strongest possible provisions for consumers and that the regulatory culture at the FCA is fit for purpose—something much more like the Securities and Exchange Commission than the limp enforcement regime at the FCA now.
Experience shows that the FCA consumer panel needs the firepower to challenge the culture at the FCA. Will the Minister please look again at that topic? A strong consumer voice must be at the heart of all our financial regulators; it needs to be a fundamental guiding principle.
Mrs Pauline Latham (Mid Derbyshire) (Con)
It is a pleasure to speak after other hon. Members who are interested in access to cash. The many people who need it cannot exist in this cashless society. I intend to speak briefly to clauses 47 and 48, which aim to put on a statutory footing some of the best conclusions of the independent access to cash review in 2019.
The Cash Action Group is already carrying out important work to ensure that those who need or want access to in-person banking services continue to have it. I support clauses 47 and 48 because they will encourage that activity, put it on a statutory footing and regulate it. In Belper in my constituency, the final high street bank branch, Lloyds, will close in November. That is very common and is happening all over the country as high street banks are closing their branches, much to the horror of the elderly population and of many younger people, particularly those on the breadline.
A significant minority of people in many communities, including Belper, still want to or can only use cash and in-person banking. My right hon. Friend the Member for South Northamptonshire (Dame Andrea Leadsom) talked about her daughter getting a cheque. What do people do with cheques these days? Many people need access to a bank. A survey that I ran locally revealed that more than 60% of respondents had used in-person banking services in the last month, and more than 35% never used online or virtual banking.
When high street banks take the commercial decision to close branches, one option is to open shared banking hubs, where the consulting room is occupied by a different bank one day each week. Every day, businesses and individuals can use the pay-in desk, staffed by the post office, to carry out everyday cash withdrawals and payments. In Belper, many small businesses need access to that service, to the point where the post office is overwhelmed by the number of people who use it.
Respondents to my survey overwhelmingly backed such a shared banking hub in Belper, and I was delighted that it was announced yesterday that Belper will indeed host a shared banking hub. I have been told that the data shows that such hubs increase footfall on the high street and improve cash practices for local businesses, having knock-on effects well beyond simply providing cash and banking services to people. This is in a way a social service for some often very lonely people who will come into Belper to have conversations with real people. They do not want to do banking online, and elderly people in particular, who can be isolated in their homes, need this service so that there is a reason to go into town and actually talk to people. I think this is such an important thing to happen.
In addition, these banking hubs are going to be good for the environment. In my survey, over 50% of those who currently bank with the bank that is closing in Belper said they would have to use a car to get to their new nearest branch and, worryingly, nearly 20% told me that they would have no way at all of getting to another branch. Therefore, the shared banking hub will actively reduce the amount of traffic and emissions Belper residents use while doing their banking. As Belper is a transition town, they are very keen to care for the environment. I am delighted for Belper with the success of this campaign, which I have run alongside local councillors.
I hope that shared banking hubs can be rolled out across the whole country, because I think they are the future. If it is not commercially viable to keep a bank open five days a week, it is much more likely that it can keep going one day a week, and that is where shared banking hubs will really win out. That is why I support clauses 47 and 48, which appoint the FCA as the lead regulator for access to cash and will mean that the Treasury can designate firms to be subject to oversight for the purpose of ensuring the continued provision of cash and banking services access. That should encourage even more banking hubs in communities that do not currently have good access to cash or banking, and I hope that all hon. and right hon. Members will support the Bill when we vote later today.
Sarah Olney (Richmond Park) (LD)
It is a pleasure to take part in this debate. First, I would like to welcome the Minister to his position and wish him a long ministerial career. It is a privilege to take part in this debate with so many well-informed Back Benchers, which I would say has been a real feature this afternoon.
The Liberal Democrats welcome this Bill. Obviously, it is absolutely essential for the ongoing regulation of financial services and markets in this country, and we very much welcome the majority of its provisions. As the hon. Member for Salisbury (John Glen) mentioned, it is a very big Bill. It has 330 pages, and it is clearly the result of a great deal of hard work over many months by many individuals. However, I have to say that it is disappointing, given the flexible nature of the financial services industry and the fast-moving nature of the sector, that this Bill does not go further in anticipating some of the issues we think we will be experiencing. It was interesting to hear from the hon. Members for Walthamstow (Stella Creasy) and for Blaenau Gwent (Nick Smith) about some of the issues they are already experiencing in their constituencies—of course, those issues are not just confined to the ones they represent—that the Bill does not address, and I want to come on to a couple of those.
The main aim of the Bill is to establish a new regulator, and the role of regulators has come under microscope quite a bit over the summer. We have seen, for example, that Ofwat does not have powers to stop sewage being pumped on to our beaches and that Ofgem does not have powers to prevent massively increasing fuel bills for domestic consumers or businesses. I think it has come as something of a surprise to many of our constituents that the role of regulators currently in this country is perhaps not as extensive as they thought. I know that certainly many of my constituents will be expecting a regulator of financial services to have powers that go beyond what is provided for in this Bill.
I am particularly concerned about the focus on competitiveness, which has already been raised by the hon. Member for Brighton, Pavilion (Caroline Lucas) and others, at the expense of other statutory objectives, and I very much want to endorse what she said about the importance of reflecting net zero objectives. Indeed, this would be an excellent opportunity for the Minister to say a little more about that, perhaps in his concluding remarks. For all his many faults and failings, the previous Prime Minister was a massive champion of the net zero agenda. During the summer we heard some interesting signals from the new Prime Minister about her approach to that issue, and this is a great opportunity for the Minister to place on record that the new Prime Minister, and this new Government, will have the same commitment to those net zero objectives, and perhaps to talk more about why we do not see them enshrined in the Bill.
What concerns my constituents is that consumer protection is not as much of an important issue in the Bill as the strategic objective on competitiveness. We have talked already about fraud and scams, which are causing huge harm throughout our economy. I will not say too much about cryptocurrency, but there is no doubt that the landscape of crypto offers unseen, untold opportunities for future fraud, and we must get our heads around that. Fraud is causing huge harm to individuals and our economy, and current structures for tackling it are not fit for purpose.
I am surprised when I hear from constituents who have been victims of fraud, because it is not just vulnerable people or those who perhaps lack education, or older people who are not used to online banking; this issue affects vast swathes of people, and I am often surprised by how well educated, experienced professionals become victims of fraud. It is clear that we are not yet sufficiently on the side of the consumer in tackling it. Yes, there is always an element of buyer beware, but the scales are being tilted too far in favour of the fraudsters, and we need to be doing much more to give people powers to tackle that. I welcome the measures to tackle push payments, but I would like to see a great deal more about fraud. That is not just an existing and growing threat because, as I said, the prospect of threats in future is enormous. The onus is not just on the individual to protect themselves, because I do not believe they have sufficient powers to do that.
A further area of concern is access to cash. Much has been said about that already, so in the interests of time I will merely endorse what the hon. Members for Cleethorpes (Martin Vickers), for Mid Derbyshire (Mrs Latham) and for Edmonton (Kate Osamor) have already said. I particularly want to emphasise free access to cash. Obviously, rural and remote communities have particular needs, but the hon. Member for Edmonton summed it up well when she said that urban constituencies can also be poorly affected by that issue. I support the proposed community banking hubs, but currently their creation requires buy-in from existing banks, and we need something that can be independent of that.
In conclusion, the Liberal Democrats very much welcome the Bill, although we would like to see stronger powers to tackle fraud and more on access to cash. A point was made at the beginning of the debate about regulators. A regulator’s powers are granted by Parliament, which is why it is so important that Parliament has power to hold a regulator to account. The real weakness of the Bill is that so much is being delegated to secondary legislation that will not have scrutiny or oversight. As I said, we want to be at the forefront of financial services and their development. It is a fast-moving sector, and we in this country have the skills and experience for it to continue to be a key sector. However, it is vital that Parliament has the oversight that it needs regarding the set-up and ongoing activities of the regulator, and the Bill must be strengthened to ensure that.
Several hon. Members rose—
Madam Deputy Speaker (Dame Eleanor Laing)
Order. Most unusually, after I imposed a time limit of seven minutes, several colleagues have decided that they do not want to speak in the debate after all. I am therefore able, most unusually, to extend the time limit to eight minutes, starting with Paul Maynard.
Paul Maynard (Blackpool North and Cleveleys) (Con)
Thank you very much, Madam Deputy Speaker. What a lucky boy I am to have another minute to spend—gosh! I refer the House to my entry in the Register of Members’ Financial Interests as a member of the consumer council for LINK, which not only manages the nation’s ATM network but is the overarching body that can get new banking hubs in place. It is important for people to bear that in mind in listening to my comments. I would have paid tribute to my hon. Friend the Member for Salisbury (John Glen) if he were still here. Unfortunately, he is not, but he was always patient as I chased him around Westminster trying to ask about yet further nuance on access to cash.
One thing that we have learned today from listening to hon. Members is that access to cash is the wrong way to talk about the issue. It is about not just cash but access to face-to-face banking. Those who are reliant on cash, whether they are elderly or in financial need, must be able to speak to someone about their financial situation and not just interrogate a computer. We have heard from hon. Members about how reliant so many are on cash as a budgeting tool—increasingly so, given the cost of living crisis—with a jam jar approach to managing bills.
The Bill’s provisions on access to cash need to be about more than ATMs and ensuring that we can spew out cash to consumers; people need somewhere to spend it. The underlying problem is the economics of our cash system—the hidden wiring—and no one has mentioned the provisions in the Bill about the wholesale distribution of cash. If it costs too much for a retailer to use cash, why would they keep on accepting it? They need to be able to deposit it in an ATM just as much as a customer needs to be able to withdraw it to spend it in the first place. Far better still would be more local cash recycling, which would avoid the need for nationwide banknote distribution, if only for environmental reasons.
We must be careful not to accept the rather irresponsible narrative that, somehow, we are on the precipice of all ATMs disappearing. Some 94% of cash withdrawals are still from free-to-use ATMs, and LINK subsidises any ATM that was here in 2018 and no longer has an alternative within 1 km. Should that ATM disappear, LINK will fund a replacement. There is a strong backstop to ensure the presence of ATMs in our communities.
As I said, the debate has moved far beyond ATMs, and towards face-to-face banking, largely thanks to the Herculean efforts of Natalie Ceeney, who wrote the original access to cash review back in 2019. She has banged chief executives’ heads together across the banking sector to ensure that they move forward on banking hubs, which, as we have heard, are making such a difference in Belper and Barton-upon-Humber as well as more and more places across the country. LINK is doing a fantastic job, looking at already announced and planned bank closures to identify where access to cash and face-to-face banking is already being reduced. Where those gaps are appearing, it is working with the overarching company that has been set up to fill those gaps. It assesses each closure and recommends better cash services for places without any branch services left to be delivered by a dedicated operating company.
Some have expressed concerns about the slow roll-out of banking hubs. We have had two pilots that have proved that they are workable measures. However, things such as asbestos removal and finding the right location in a community need to be factored in by a sector that has not previously had to act as a property developer. Some delay is therefore perhaps understandable, and I would rather that we got it right in each community than rushed to buy any old place and hoped for the best.
The creation of an overarching duty for the Financial Conduct Authority is very much the icing on the cake for the work that has gone on so far. It should be seen as a reason to take satisfaction. I think that those criticising the Bill for not going far enough do not fully understand what has already occurred. They need to recognise a win when they see one and then raise it. However, I do seek some clarifications from the Minister. I have sought one already, and he has been uncharacteristically reticent at the Dispatch Box in telling me what I want to hear, and he is normally very good at telling me exactly what I want to hear. Now, he knows where I lurk most mornings, and I will be there tomorrow if he wishes to approach me over my coffee and whisper sweet nothings into my ear about having heard my plea.
There is no point in offering us access to cash if that access costs £2.75 at cash machines in the poorest part of my constituency. That diminishes access to cash, because people will find it even harder to access cash should that cash machine mean that a free-to-use ATM has disappeared. All of this is meaningless unless the word “free” is introduced into the debate.
Secondly, the Government are putting out their access to cash statement. Can the Minister reassure me that it will not just be some crude measure of geographical accessibility—two miles here, one kilometre there or whatever? That would not reflect the need in the likes of Mitcham and Morden, which is a very urban constituency rather like mine. My right hon. Friend the Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell) spoke earlier. He has a vast rural area where one kilometre, frankly, will not mean much on the hills and the moorlands.
Alison Thewliss
The hon. Gentleman is making an excellent point on the proximity of cash machines and arbitrary limits. The city centre of Glasgow is right at the heart of my constituency. Putting a couple of kilometres around that would basically knock out every other cash machine that was not on Buchanan Street, so I agree with his point. Does he agree with me that the Government have to think more carefully about such limits?
Paul Maynard
I very much welcome that. The challenge for the Government is that the access to cash statement must reflect what good access looks like—not just to a cashpoint, but to wider in-person banking services. It cannot just be “Can I get a bank note out of a machine?” It has become increasingly common in my own local area for cash machines not to have been filled up. There is not much point in having a cash machine without any bank notes in it, as if it were a rather decorative antique object.
One important feature that does not require legislation, but which deserves a great deal of comment—more than the two minutes I now have—is the right for communities to review any decision taken on whether they should have a banking hub. Not only is LINK assessing any closure of a bank branch already announced, but the right for a community to request a review of cash access. I am sure every single Member worth their salt in this place will be sitting down looking at the map of their constituency and saying, “I need a review there, there, there and there.” I am sure LINK will not thank me for doubling or quadrupling its workload in that regard, but it is a fantastic opportunity and a mark of how far this debate has moved. In my view, the legislation should specify a simple, fair and independent process that allows communities to appeal decisions. That could easily be placed in the legislation as an additional duty for the FCA. It will help the communities, the banks and LINK by ensuring a fair, independent and transparent method for communities who are not satisfied to have issues quickly considered under the oversight of the FCA. There is a great deal of suspicion out there about the banks and their approach to their branch networks. I do not want communities to appeal or to ask LINK to have a look and then be very disappointed about why they do not get the banking hub they might think they are entitled to. The process must be clear and transparent for communities to have confidence in it.
In summary, the Government proposals ensure that the FCA has the powers it needs to tackle the issue of access to financial services. After many years—my hon. Friend the Member for Salisbury is back now. He missed me saying well done to him. Don’t duck out for your starring moment! I don’t know. [Laughter.] This issue has taken far too many years to solve. It has not his fault either; it has been very complex. Too many communities have lost the banks they already had. Too many have been reduced to a single bank or to no bank at all. We now have a robust process in place to identify the locations, to find an alternative, to find a solution, without people having to drive miles away. For that reason alone, the Bill is to be welcomed. But it can be improved with one single four-letter word: free. Please, Minister, free me from my anticipation and make cash free to access.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
I want to start with a general point about the Bill, which puts an awful lot of faith in our regulators to be able to carry out the functions written in it. I have been approached by members of staff working for the FCA—in fact, staff representatives at the FCA—who have talked to me about the current climate there. There are issues around recruitment and, specifically, around the retention of skilled individuals, and how relations are breaking down to a rather concerning degree. If we want the FCA to do everything that the Government are saying they want it to, especially post-Brexit when we are moving regulation across, then we need a competent and effective FCA. I hope the Minister will take that point away. I am happy to have further conversations with him on the matter, so we can resolve the issue.
It seems particularly concerning that the FCA does not recognise any trade union. When comparable bodies such as the Bank of England recognise trade unions and the FCA does not, that seems to be indicative of the problematic workings of the FCA. I do not want to comment further on that, but I hope that the Minister takes that away as a serious point, because we cannot have effective regulation if we have ineffective working practice.
I was going to intervene on the Minister but I was pipped to it, because he sat down before I could. However, I wanted to mention clause 64, which is about providing insurance after terrorism incidents, so if insurance becomes too expensive, someone can continue to have insurance and the Government will step in. I thought that that was interesting because I have repeatedly raised in the House flood insurance, Flood Re, what happens if buildings are continually flooded and how we make sure that we have affordable flood insurance. It is very good that the Government want to introduce that provision for acts of terrorism, but I hope that the Minister will look more deeply into flooding and businesses’ concerns about that.
Let me turn to my main gripe with the Bill, and I am sure that the hon. Member for Salisbury (John Glen) will know exactly what I am going to say. As I mentioned to him in passing the other day, he is welcome to support any of my amendments, because he has heard all this before. I was disappointed that there was no provision on having regard to financial inclusion. It is great that there is a provision on having regard to the Climate Change Act 2008—the Labour party legislation—but there is nothing on financial inclusion. I will table amendments to give the FCA a cross-cutting “must have regard to financial inclusion” provision, and I genuinely call on Treasury Committee members to support them, as this was a recommendation from one of our reports. The proposals would include a statutory duty to report to Parliament annually on: the state of financial inclusion in the UK; the measures that the FCA has taken, and is planning to take, to advance financial inclusion; and recommended additional measures that could be taken by the Government and other public bodies to promote financial inclusion.
This is a bit of a no-brainer. We have a cost of living crisis, with people suffering from severe levels of debt and hardship. We have a Government who are potentially—though we are not quite sure—bringing forward massive amounts of borrowing to be heaped on taxpayers for years to come, and what I am proposing is free. When do we ever get to do that? I am proposing a small solution to the cost of living crisis that is absolutely free; it would address the poverty premium and ensure that the FCA “has regard” to financial inclusion.
I assume that the Minister will refer to the FCA consumer duty as an example of action that the Government are taking. However, that is not enforceable until July 2023—unless the new Prime Minister decides not to move it at all—and it does not address the fundamental problem of what happens to the clients that the market do not want. I am talking about those who are locked out and excluded from financial services. The previous FCA principles were about treating customers fairly, but that still does not address what happens if the market does not want someone.
What is the poverty premium, and what does that mean? In real life, that means people paying more for credit due to their credit rating, paying more for insurance because of where they live or past health issues and paying more for services, because they cannot benefit from direct debits or—as we have heard mentioned a few times—they need to use cash. I find it ludicrous that we have a situation where it costs more to pay in cash than it does in direct debit. We know exactly the kind of people that harms. Of course, the poverty premium is not limited to areas under the FCA’s remit. We have had previous debates about gas and electric and pre-payment meters, which I will not go into now, but the costs are very real.
Let me give an example from my Kingston upon Hull West and Hessle constituency, where nearly a fifth of constituents are affected. The poverty premium means that it costs them nearly £6 million more a year to access the same services and goods. If any Members who are listening are interested—especially those on their phones—they can look at the Fair By Design website, where they can look up their constituency and find out exactly how much the poverty premium is costing each and every one of them. This can be addressed by ensuring that the FCA “has regard to” financial inclusion.
Financial inclusion has been mentioned briefly, and I pay credit to the Government for what they are doing on credit unions. That is a good step forward, but this is always passed between the FCA, the Treasury, other regulators and Departments. Everyone nods very seriously and says how important it is. Someone says, “We must seriously do something about this but it is not actually our Department’s problem. It is someone else’s problem.” And the next person says, “Oh, this is really important. We must do something about it, but is not for our Department. It is their problem”—so the issue goes round and round with nobody actually taking responsibility. That is why having regard to financial inclusion is so important in terms of the FCA having a remit to actually look at this.
I am thinking particularly about insurance. A specific example is car insurance: people cannot drive without it, yet for so many it is simply unaffordable. That leads either to people driving without insurance or to their being unable to take on specific jobs because they simply cannot afford it. We need to do something about that.
My proposals, for which I will call for support across the House, will try to address it. They would end the current damaging situation by giving the regulator a clear remit and saying, “The buck stops here—you have regard to financial inclusion, so you need to look at this.” Sometimes that will mean the FCA taking a main role, and sometimes it will be others, but it will mean that the buck stops somewhere, so somebody has to take the issue seriously and look at the extra costs facing the most financially vulnerable in our society.
I also call on the Minister to introduce measures for groups facing digital exclusion and give them technological support with banking. Specifically, we need measures to ensure that blind and partially sighted people can access their finances and manage them independently.
I am very excited, because I keep asking to be on the Bill Committee and I think I have finally been given the nod. I look forward to discussing the Bill in more detail at every opportunity and through every clause as it goes through Parliament.
Bim Afolami (Hitchin and Harpenden) (Con)
It is a pleasure to speak in support of the Bill. I will not repeat what so many hon. Members have said about the excellent work of the former Economic Secretary—my hon. Friend the Member for Salisbury (John Glen)—and the present Economic Secretary in bringing it to the House, but I want to bring up a couple of specific issues that may not have come up in the debate as much as they might have.
The former Chancellor, my right hon. Friend the Member for Richmond (Yorks) (Rishi Sunak), mentioned the call-in power. There has been some criticism in the press, which may or may not have come from people within the regulators or from people speaking on their behalf, suggesting that the Government’s call-in power will somehow damage our regulatory system or that it is somehow illegitimate for the elected Government or this House—in extremis, if they feel that something is badly awry—to override the non-elected regulators in a specific area of financial regulation.
I put it on record that those concerns may be well intentioned, but I think they are wrong. It is critical that this House and the elected Government have that power over something as significant as the financial regulation of the sector that is our jewel in the crown. The sector employs millions of people, two thirds of whom are outside London. We all accept, on both sides of the House, that we should champion the sector and work with it. It is almost unconscionable that such a power does not already exist, so we should stand firm if, in the other place or in Committee in this place, Members wish to reject the call-in power. I think it is critical.
Alison Thewliss
The hon. Gentleman speaks with a lot of expertise in the area. Could he give an example of when the power might be used? In what circumstances might the Government want to use it?
Bim Afolami
Lest anybody should think I have any particular specialist knowledge, I stress that this is entirely my own view, but I could imagine a scenario in which the Government, supported by this House, intended certain changes to a regulation such as MiFID II. A strategy document might say that the intention is for a, b and c to occur, but when the regulations were drafted, that intention might not appear to come through. In that instance, it would be very legitimate for the House or the Government to say, “No, what we intend is the following, and we will change the detailed regulation in order to achieve the aim—the democratic aim, supported by the Government and the House—that we seek to achieve.”
There are a couple of other areas in which I think the Government could have gone further in the Bill, and which I hope we will consider in the coming weeks and months. The first is the bank levy. I know that this is not always a popular thing to say, but in politics it is sometimes important to say unpopular as well as popular things. When we have an internationally competitive sector, if the tax burdens of jurisdictions with which we are competing for people, for capital, for institutions or for new investment reach a point at which they are significantly, or even a little bit, less than ours—and people may find those jurisdictions attractive for other reasons—we should consider finding ways of reducing our own tax burden, which has risen in recent years. The bank levy was one of those, but it came during the aftermath of the financial crisis, which happened quite a long time ago. I think we should consider getting rid of it, in order to emphasise as much as we possibly can that Britain is still the leading centre of financial services for the world.
I am not saying that this is a panacea; far from it. The Bill contains 300-odd pages because we have a great deal to do. However, the bank levy is a tax, and if we impose high taxes on internationally mobile capital or institutions, there may well be a penalty for this country in terms of attracting those institutions. I ask the House, and in particular those on the Treasury Bench, to reflect on that point.
My second point concerns ringfencing, which the former Chancellor mentioned. When I was at HSBC—I probably should have declared at the beginning that I worked at HSBC before I came to the House, and indeed in other institutions in the City—I had the good fortune to work for quite a long time on the internal restructuring of the bank as part of a strategy of which ringfencing was a huge element. HSBC and Barclays were the two big British banks that had big consumer retail bits and big investment banking bits.
Even at that time, it was obvious to many of us that the most critical part of what we were doing in ensuring the safety of those institutions—and indeed, because they were so big, helping to ensure the safety of the whole financial services sector—was the recovery and resolution power, and not just the ringfencing aspect. While I think the review that has been carried out is very capable and very thorough, I urge the Treasury to look a bit further, and to ask whether we still need ringfencing even under the terms of the way in which it has been reviewed. Can we look again at the thresholds? Can we make this less onerous for big institutions?
Why should we do that? I return to what I said about competitiveness. If there are ways in which we can improve our competitiveness without compromising on safety, I think we should consider them.
Ian Paisley (North Antrim) (DUP)
Let me take the hon. Gentleman back to his earlier point about competitiveness, and the possibility of certain institutions being turned off from investing or establishing themselves, or removing themselves from the United Kingdom. Where does he think the single largest threat comes from, if there is a turn-off?
Bim Afolami
I would posit two particular jurisdictions. First, I think of the London stock exchange. The House may not fully appreciate the amount of capital that it has, through capital raising by means of initial public offerings and various other measures. However, we have seen a dramatic fall-off since even five years ago, let alone 10 years ago. Meanwhile, Amsterdam’s stock exchange is doing very well. I think that, although Amsterdam as a jurisdiction will never rival London or, I should say, the UK, because we have huge advantages and huge strengths, we need to consider the threat to the London stock exchange from that source.
Secondly, there is the middle east, where various jurisdictions, including some quite surprising ones—particularly Dubai—are trying hard to make themselves attractive to, in particular, capital from America and Asia, and to make themselves into a hub for some of this work. Again, they cannot rival us, but it is not necessary to match us fully to damage our competitiveness, and I think it important to bear that in mind.
Ian Paisley
Does the hon. Member think that that when it comes to those locations, especially the middle east, there may be an opportunity for, let us just say, funds to arrive at those destinations without being scrutinised to the same extent as they would be here in the United Kingdom? Is that a potential threat to the banking sector?
Bim Afolami
I do not want to cast aspersions on any other jurisdiction. It is clear that we should be proud of our own high standards. I know we will probably get to discussing illicit money from Russia later this year, as we did earlier in this Session. In this country we take action and we pride ourselves on our higher standards—that is not always the case everywhere—but that aspect of competitiveness is not a race to the bottom. This is a really important point. We can be competitive and have high standards. We should not say that the drive for competitiveness means that we drop our standards and end up with corruption, money-laundering and all the rest of it. That is not necessarily true. In this country we are proud of our institutions, proud of our sector and proud of our ecosystem, but that does not mean that nothing needs to improve, and this Bill contains a huge panoply of measures that can help to strengthen our financial services sector.
My last point is about mutual recognition agreements. These are quite dry technical things but ultimately they allow for the easing of doing business between one jurisdiction and another—for example, between the UK and Switzerland, with whom we have built a very good relationship. We should do much more of that, but we should work with the International Trade Department to ensure that our trade deals include much more in terms of services provision and not just mutual recognition agreements that are separate from that. Services trade will benefit this country more than pretty much any other country in the entire world, and we need to work with our International Trade Department, with the Foreign Office and with our international ambassadors to achieve that aim.
Several hon. Members rose—
Mr Deputy Speaker (Mr Nigel Evans)
I see that eight Members want to speak, so we will have to reduce the time limit to six minutes to get everybody in.
Wera Hobhouse (Bath) (LD)
My hon. Friend the Member for Richmond Park (Sarah Olney) has already indicated that there is quite a lot to welcome in this Bill, but there also are a number of things that we Liberal Democrats do not agree with and would like to be improved. The Bill does not actively promote the leading green finance sector that we were promised. According to the WWF, we need $32 trillion by 2030 to tackle the climate emergency. The Bill in front of us could be a unique opportunity to develop the green economy that the future needs by providing routes to roll out net zero technologies and allowing UK businesses to capitalise on green transitions.
As the chair of the Climate Change Committee pointed out only this morning, tackling soaring energy bills—currently the most important thing we are considering—and tackling the climate emergency go hand in hand. Net zero technologies could reduce household bills by £1,800 a year—a reduction that is desperately needed by so many people. This Bill could be a unique opportunity to make that happen, but it falls dramatically short.
In its current form, the Bill prioritises competitiveness over net zero and accountability. Clause 25 adds the need to advance compliance with the UK net zero emissions target to the list of regulatory principles to be applied by the FCA and the PRA. However, the new principle—namely, that regulators must “have regard” to the UK net zero target—is not strong enough. Additionally, they will have limited margin to acknowledge the role of nature in achieving net zero. This approach is reckless. The Bill opens up the possibility, as has been mentioned today, of soaring food prices by throwing out reforms introduced in 2008 to protect consumers from volatile trading practices.
The Government always defend their net zero strategy by placing responsibility on the markets, yet before the 2008 reforms, food prices rocketed after speculative trading on future food prices drove up prices. Regulators are vital to ensuring that consumers are protected and that markets function well but not out of control. A former UN special rapporteur has said that speculators
“are indeed betting on hunger, and exacerbating it”.
Our country cannot afford to have another dimension added to the cost of living crisis.
Rather than volatile competitiveness, the Bill must provide clear legal obligations and a commitment to the UK’s net zero target. Net zero must have the same priority for regulators as economic competitiveness. The scale of the climate crisis requires massive shifts in approach that can be achieved only with explicit legal duties, which must include a new objective to decarbonise the financial system. As I have already said, regulations and net zero aims have to work hand in hand. The Government must add climate targets to the primary objectives and thereby give them a status higher than the one the Bill currently proposes.
We Liberal Democrats would go even further and ban new fossil fuel companies from being listed on the London stock exchange. We would also create new powers for regulators to act if banks and other investors do not properly manage climate risks. That is the sort of ambition that we need, but the Government’s ambition is lacking. We have less and less time to act on the climate emergency. The time is now. I urge Ministers not to miss this unique opportunity.
Dr James Davies (Vale of Clwyd) (Con)
My comments on this welcome Bill will focus primarily on its ability to improve access to cash and banking services. In my constituency, like many others, bank closures have become increasingly problematic. It is now seven years since the last bank shut in the city of St Asaph in the heart of my constituency, while Denbigh has also seen closures. Last year, TSB, Barclays and HSBC shut in Prestatyn, following the town’s loss of NatWest, Royal Bank of Scotland and building society branches in the preceding five years. Prestatyn High Street was left without a single bank or cash machine, despite being a busy regional shopping centre.
Cash remains important for many residents and businesses in my constituency. Following a campaign, and thanks to Cardtronics and Principality building society, three new free-to-use cash machines have now been installed in Prestatyn town centre. In addition, since June this year new legislation has brought about cashback without purchase services through various local businesses. However, banking services in the town remain lacking.
Last year, Derek French, a former executive of NatWest and the founder of the Campaign for Community Banking Services, identified the 50 communities in Britain where he believed shared banking hubs are most required. Prestatyn is one of the 22 of those communities that have already lost their last bank branch.
Earlier this year, the Royal Society for Arts, Manufactures and Commerce published a report suggesting that 10 million people would struggle in a cashless society. As incomes are squeezed, there is evidence that some people are turning back to cash to help them to budget. The Post Office reported record withdrawals in July 2022, while LINK ATM withdrawals still exceed £7 billion monthly.
Paul Girvan (South Antrim) (DUP)
I appreciate that the hon. Member has highlighted a number of banks and areas that are being decimated by banks removing themselves from the high street. A section of our community who are not IT literate have a major problem and are being totally disenfranchised. We need to put in place legislation to ensure that those people are not left without access to the banks that they have used all their lives.
Dr Davies
The hon. Gentleman is absolutely correct. I hope the Bill will go a long way to help that situation. I was coming on to say that 10% of people are planning to use cash more in the coming six months because of cost of living pressures.
The access to cash agenda owes much to Natalie Ceeney and her access to cash review. Following a landmark agreement at the start of this year, the banks and leading consumer groups formed UK Finance’s cash action group. LINK took on the role of assessing the impact of proposed bank branch closures on communities. As of 4 July, the agreement was extended to include communities where bank closures have already taken place. LINK can recommend new cash services, such as banking hubs and ATMs, according to the cash access needs in each community. New services will then be delivered by a new banking hub company set up by the banks, or, in the case of ATMs, by LINK.
This Bill puts this very welcome voluntary arrangement on a statutory footing. It confers on the Treasury a duty to prepare a cash access policy statement, which I understand is currently being drafted, and powers to “designate” banks and firms such as LINK and the Post Office to take steps in relation to that policy. Furthermore, it gives the FCA powers to take action on those designated firms.
This summer, I put forward Prestatyn for assessment by LINK for a banking hub. I am very grateful to Nick Quin, head of financial inclusion at LINK, for his visit to the town in January and for meeting me with his colleague Chris Ashton this week to discuss in detail my application on behalf of the town. A banking hub would facilitate cheque and cash deposits, and cash withdrawals, and banking staff from each of the big banks would be based in the hub on specific days to help customers with community banking issues. So this legislation is very much welcomed, and I extend my thanks to the Economic Secretary to the Treasury and, in particular, to his predecessor, my hon. Friend the Member for Salisbury (John Glen), who I know has put an awful lot of time into this agenda.
I urge the Government to consider ensuring that assessments of the needs of communities by LINK should be transparently published and that there should be a formal process of appeal. I also ask that consideration of access to banking services through the Welsh language be referenced in the cash access policy statement. Furthermore, it would be helpful to explore the scope of the community banking services that banking hubs could potentially be mandated to provide—for example, opening a new bank account, amending direct debits and standing orders, applying for a loan, arranging third-party access or commencing bereavement procedures.
It is also important to clarify whether the Bill will give the FCA the power to prevent the closure of a bank branch, ATM or cash access point of another kind where there is no suitable alternative in place, so that in future new gaps in provision do not occur. I understand that in recent times LINK has protected 3,000 free ATMs in remote and deprived areas, and funded new ATMs in more than 100 communities. I hope the Government will commit to protecting free cash withdrawals and deposits, and that that can be explored in the policy statement. An indication by the Minister of the likely publication date of the policy statement would be particularly appreciated.
Other elements of this Bill will enable credit unions to offer a greater range of products and services; strengthen the rules around financial promotions; and enable regulatory action by the Payment Systems Regulator to require the reimbursement of victims of authorised push payment scams. All of that is very much to be welcomed, but I urge the Government to ensure that the authorised push payment scam regulations cover all feasible methods of payment, both now and in the future.
I fully support the Bill, especially as it responds to significant concerns over the availability of cash and banking services. It is important that the Bill be delivered as soon as possible so that existing cash infrastructure can be protected.
Ben Lake (Ceredigion) (PC)
It is an honour to be able to contribute on this important Bill this evening and a real pleasure to follow the hon. Member for Vale of Clwyd (Dr Davies), who gave us a masterful and detailed account of the problems and challenges that the loss of bank services and bank branches causes for rural communities in particular. I hope to emulate some of his mastery of the subject in my remarks.
I wish to begin by associating myself with some of the concerns raised by other Members, particularly my friend the hon. Member for Glenrothes (Peter Grant), who talked about the transfer of responsibility and scrutiny power away from Parliament and more towards the regulators and, in certain respects, as regards the repatriation of some of the regulations, to designated legislation committees.
I also associate myself with the concerns that have been voiced about the need to strengthen as an objective for the regulators the need for sustainable growth and to ensure that they are very much aligned with some of the Government’s expectations on net zero. I do not think that we have yet heard an explanation as to why that statutory objective cannot be placed on the regulators. I see it as working hand in hand with sustainable growth and competitiveness; they do not necessarily need to compete with each other.
As I mentioned, I will focus my remarks on access to cash. In particular, part 2 of the Bill—clauses 47 and 48 —and the corresponding schedules 8 and 9 have a great deal to commend them. I put on record my support for some of those measures, which I believe will bring a real improvement, safeguarding access to cash for so many of our communities. Of course, we must note that a lot of communities, including in my own constituency of Ceredigion, have already suffered the loss of bank branches and ATMs. It has long been the case that people in those communities have had to travel 10 or 15 miles in order to access a free ATM, but the Bill at least puts in place a set of regulations and a process to ensure that no further gaps arise in future. For that, I do welcome it.
However, returning to a point that has been made by several hon. Members, including the hon. Members for Blackpool North and Cleveleys (Paul Maynard) and for Cleethorpes (Martin Vickers), I ask the Government whether it would be possible to extend the remit of the access-to-cash clauses to include certain services, and in particular in-person services. Other Members have explained just how important continued access to in-person services—branch services—is for many individuals; we have heard about their particular importance to the elderly, and to those who are perhaps not IT literate. I would add that in some rural areas, of course, digital banking remains a distant dream due to a lack of connectivity, so the ability to access personal banking advice is an essential amenity for residents of those areas.
However, something that bears repeating—I admit that it is perhaps not something I have afforded enough attention to in the past—is the impact that the loss of in-person banking services has on small businesses and on charitable and community organisations. Over the past decade or so in Ceredigion, we have seen a number of towns lose their final bank. Nevertheless, they are still market towns; they try to plough for a prosperous future, but the loss of in-person banking services has had an impact on small businesses and on charitable and community organisations.
To offer a few examples, small businesses in Tregaron, in Lampeter, and increasingly those in Llandysul, will often have to travel to Carmarthen, which may be a round trip of between 45 and 60 miles, depending on where they are located. Of course, the banks open during business hours, which to small businesses entails either closing for a few hours in order to deposit cash or access other banking services, or going without. I know for a fact that many businesses are now having to amend their business practices in unhelpful ways in order to accommodate that new banking reality.
It has also been a real challenge for many charitable and community organisations to open accounts. For example, I have been told that a community pub initiative had to wait almost nine weeks to open a bank account due to the changes in services locally. Charities, in particular, have reported to me that banks just do not understand the specific requirements they have as account holders; they do not understand that changing mandates in person is a particular task for charities. In rural areas, as in many others, many of those charitable groups and organisations make a valuable contribution to communities. At the end of the day, they are staffed by volunteers, and forcing those volunteers to travel 60-odd miles just to change a bank mandate is unfair.
That is why I would be very interested to see whether the Government could extend the new access-to-cash requirements to include those banking services. At the moment, I am afraid, banks are not waking up of their own volition to the importance of maintaining those services in rural areas, and communities are being let down. That is where the Government could step in; that would be a very important intervention, and would be much welcomed on both sides of the House.
Mr Deputy Speaker (Mr Nigel Evans)
The last Member with six minutes is Harriett Baldwin, and then we will go to five minutes, so everybody will have exactly the same amount of time.
Harriett Baldwin (West Worcestershire) (Con)
It is an honour to be called to speak in support of the Bill. In a way, it is an advantage to be called at this time because so many excellent points have been made by so many wonderful people, and I am pleased to say that I agree with most of them and that they have been expressed better than I could have done, including by the former Chancellor and the former Economic Secretary to the Treasury, who was responsible, I think, for putting together quite a large part of this Bill.
I recall the milestone of when the country voted to leave the European Union on 23 June 2016, because I was Economic Secretary to the Treasury at the time. Many questions came to the fore about what would happen to the regulation of our financial services, which have been referred to many times in this debate as one of our most important export and tax-paying sectors, providing many hundreds of thousands of jobs up and down the land. It is a very important sector, and over the past six years we have flirted with the idea of equivalence.
It is, I think, the EU Commission that has decided that equivalence does not suit it. Frankly, I think it is the EU’s loss, because obviously we are equivalent—or we were equivalent. It is the EU’s small businesses and growing firms that will lose easy access to the United Kingdom capital markets, which is a shame for them. I also know that discussions were had about the EU-Canada trade agreement and about the chapter on financial services, which is not in our current trade agreement with the EU. Clearly that has been rejected as a way forward, although there is scope for much more mutual recognition and the opening up of markets.
I welcome the decisions that have been made before the publication of this Bill, and the opportunities for divergence that are being seized in it. It is also welcome that the industry has been very much consulted and brought along with us on how Solvency II and MiFID II changes can help our economy grow.
However, the point on which I wish to focus has not been brought up much in this debate: the freedoms that this Bill gives us to look once again at the market for advice and guidance in this country. We have heard about many of the challenges that consumers face when they are making financial decisions on their own behalf. The cost of financial advice is high, and the guidance itself can be very generic. There is, of course, access to the Money Advice Service and to Pension Wise, which I encourage constituents to use if they can, but the Bill gives us the opportunity to look once again at the financial advice market and to have more customised guidance because of how technology has evolved and the important role that the FCA’s regulatory sandbox plays in allowing people to experiment.
I urge everyone who has spoken about consumers in this debate to support an amendment that I am planning to table with the help of the Investing and Saving Alliance. It would allow the provision of much more personalised guidance through the use of innovation and technology, helping consumers through difficult decisions such as moving pensions when they change employer. That would create a better informed consumer who would not necessarily fall so easily for some of the scams that we have been hearing about during today’s debate. We need to arm our consumers to be able to tackle those scams.
My final point is about the role of the regulator. Time and again in this debate Members have asked who regulates the regulator if it puts in place something with which we as MPs or our constituents disagree. There is an important role here for the Treasury Committee, on which I sit, and we will take that responsibility of scrutinising changes very seriously.
I also think one of the great strengths of our country is our common law; I know the Minister has been looking at the opportunities that have been outlined for bringing in some further rights of appeal through the common-law system against some decisions that regulators make. I know he has taken these points seriously, and I look forward to his responding to them at the end of the debate.
Mr Deputy Speaker (Mr Nigel Evans)
Just to inform everybody, the wind-ups will begin no later than 6.40 pm, and anybody who has spoken in this debate will be expected to be here at the wind-ups. With five minutes, I call Siobhain McDonagh.
Siobhain McDonagh (Mitcham and Morden) (Lab)
I am furious to report the imminent loss of yet another bank branch in Mitcham town centre. The year before last it was Nationwide, last year it was Barclays and this time it is Halifax—a bank that pretends to consult its long-standing and loyal customers about its branch closure, but then refuses to attend my public meeting to hear the concerns of those customers in person. Contrary to its slogan, “It’s a people thing”, it seems that Halifax does not care at all what people think, at least if they live in Mitcham and are elderly, disabled or rely on face-to-face banking services.
Every day this week I have stood outside the branch, gathering customers’ views and listening to their concerns. Their opposition is overwhelming; this latest bank closure is yet another nail in the coffin of access to free cash, and I have the evidence to prove it. When Barclays Mitcham closed last year, one of a staggering 650 Barclays branches to disappear since 2015, we surveyed more than 500 residents outside the bank. An extraordinary 50% did not use online banking and were reliant on that branch. Many did not have access to the internet. Some did not trust it. Others, particularly the elderly, only used cash. Then there were those who relied on the help and support of the staff, who they could trust with their money.
I do not believe these views are unique to Mitcham. When high streets lose their banks, the digital divide prevents far too many people from turning online. Age UK highlights that one in five older people still rely on cash for everyday spending. But Barclays did not care. Despite having three years still to run on the lease, it closed the branch and swapped it for a bus—yes, really, a bus—that pulled up randomly outside the empty branch, on the off-chance that a customer was fortunate enough to be passing by and willing to queue in the rain. That sounds safe as houses.
“Do not fear,” they said. “There are other branches just a bus ride—or two—away, or your constituents could just use the post office for their basic banking needs.” That is the same post office whose doorway was too small for my disabled constituent to access with her wheelchair, the same post office that no longer has a free cash machine outside. Fortunately, we still had Halifax—well, until now. Its loss is the latest hammer blow to our high street. Does the Minister agree that Mitcham now makes a perfect location for a new shared banking hub?
We are told that a community can demand access to free ATMs, but that is not the experience on the ground. People in Pollards Hill have tried for years to get a free ATM. Residents literally have to pay for access to their cash—small amounts of money that they get on a daily basis and for which they are charged. The nearest post office had one installed, but now even that has gone, and a ridiculous clause in the new Co-op’s lease prevents a free ATM from opening because there is a paid-for machine further down the terrace. How can that possibly make sense?
I believe that the need for access to cash is growing. The cost of living crisis has seen the return of money jars, with households separating their cash and counting out their pennies to ensure they can make ends meet. Of course I accept that we are in a changing society and reliance on cash has changed for many, but those on the wrong side of the digital divide are simply being cut off from society, made to feel not part of the same world that we inhabit.
Take Mr Barley, chair of Mitcham’s British Legion branch. Throughout the lockdowns, he relied on his milkman for milk delivery and the rest, but, as hon. Members will have guessed, Milk & More is now going online too and such loyal, long-standing customers no longer get that service. I say to the Minister that the Mr Barleys of this world are treasured in our communities. Halifax Mitcham’s remaining open is not a silver bullet to solving the problems they face with the digital divide and access to cash, but if we are not careful, and everything from milk to money moves online, then they are at risk of simply being left behind.
David Simmonds (Ruislip, Northwood and Pinner) (Con)
I add my congratulations to Ministers past and present involved in introducing the Bill. It is an incredibly important piece of legislation for my constituents. Ruislip, Northwood and Pinner has a high level of employment in the City and in connected financial services, and the subject is close to my heart, as I belong to an even more cherished race of human beings than Tory MPs—I am a former banker.
There have been a number of exceptional contributions to this debate, so I shall try to confine my contribution to items that have not been covered in a lot of detail. First, the Bill is good and important because it will continue to support innovation in the financial sector, of which the UK has a long and proud. If we look at the role played by financial centres in London and Edinburgh in the development of financial products that have brought security and stability to people’s lives, we can see that for centuries the UK has been a leading light in the world. A piece of legislation that enables the sandbox concept, for example, continues to support that innovation and incredibly important to the sector.
Secondly, as we move away from EU structures and governance, we need to ensure that there is appropriate scrutiny of arrangements for regulation and of the implications of the mutual recognition agreements into which we propose to enter. Contrary to what is sometimes said about EU matters being dealt with by unaccountable bureaucrats in Brussels, if anything, our criticism in the UK was that there was often too much scrutiny and democratic involvement. With trade deals, for example, agreements had to be looked at by the European Parliament and the Committee of the Regions. They had to be signed off by the Council of Ministers. There were multiple levels of engagement in that process, and we need to ensure that organisations such as Zurich, which shared a helpful briefing with hon. Members—it certainly informed my thinking about the Bill—can have appropriate input so that we get the calibration right to support innovation, as the Minister is committed to do, and so that we have appropriate consumer protection.
Many Members have referred to the sector as a jewel in the crown of the British economy, which clearly remains the case. It is striking in the context of the Government’s levelling-up agenda that we see, for example, significant inflows of investment in Northern Ireland as a result of opportunities that have been created by the development of the economy there. That has created an opportunity to look at how we spread the benefits beyond the centres to which my right hon. Friend the Member for Central Devon (Mel Stride) and my hon. Friend the Member for Salisbury (John Glen) referred. That is critical for the reputation of the sector, and it is incredibly important for our economy too.
A key part of that is ensuring that we futureproof the regulation of financial services in the UK. There has been much mention of crypto, but I would like to add the need to ensure that non-regulated activity undertaken by regulated institutions requires scrutiny. Our thanks are due to Private Eye magazine, for example, for the detail that it has provided in shining a light on the activities of a number of organisations. The hon. Member for Glenrothes (Peter Grant) referred to things such as funeral plans, but we also need to pay a good deal of attention to the activities of will writing organisations and trust services—for example, the Family Trust Corporation and the Philips Trust Corporation—because significant numbers of consumers may find themselves heavily disadvantaged as a result of advice that they thought came from a trusted financial source, but which was not regulated.
Finally, access to cash has been discussed a good deal. I specifically highlight the need, especially for small businesses, to be able to access banking for the purpose of transacting in coins. In my constituency, I have heard from a lot of small shopkeepers and small business owners that it is not just about consumers being able to get to an ATM—it is about their being able to pay in coin that they receive in payments from customers and being able to extract it for the purpose of having change for cash transactions, which for the most part they cannot do with ATMs.
In conclusion, I am pleased to support the Bill, which as the Minister said will support innovation in this key UK sector. It will ensure that our country remains a global market leader and, importantly, it will ensure that consumers in my constituency and across the UK are protected from scammers who may seek to do them financial harm.
Mr Deputy Speaker (Mr Nigel Evans)
Those who have participated in the debate should start to make their way towards the Chamber for the wind-ups, which will start at 6.40 pm.
Jim Shannon (Strangford) (DUP)
It is a pleasure to speak in the debate. The Bill is substantial and weighty, and rightly so. Our financial services sector is vital—perhaps never more so than today, given the cost of living, for people at the mercy of the financial institutions to lend them money to carry their businesses through this period, for families looking for a low-interest loan to fix their cars, and perhaps even for the housewife trying to buy a second-hand washing machine. Those are the ordinary things that people have to face.
The regulation of financial services is essential. We must get it right and rectify the remnants of regulation where Europe was unsuccessful in fostering businesses and protecting individuals. I am keen to support clauses 8 to 23, which will grant additional powers to regulators, allowing for greater regulation of financial promotions. This morning in Westminster Hall we spoke about cryptocurrency and cryptoassets. The Minister answered some of our questions, but that is a really important subject. It is estimated that some 2.6 million people across the UK, and 100,000 people in Northern Ireland, use cryptocurrency. Some 15% of people in Northern Ireland use it, and 38% say they have thought about using it but have not yet done so. The regulation of this up-and-coming form of investment and spending is necessary.
Clauses 24 to 46 seek to ensure appropriate democratic accountability for the regulators, given that the Bill gives the FCA and the PRA new secondary objectives to advance the international competitiveness and medium to long-term growth of the UK economy. I have spoken about this a number of times in the House, but I am not entirely convinced that the new regulations for the FCA are strong enough to make a difference, or that the Bill goes far enough in this respect.
I think regularly of one of my constituents, whose case I know exceptionally well. The episode of Panorama broadcast on 16 August, titled “The Billion-Pound Savings Scandal”, detailed a scheme in which some £47 million of life savings was taken from consumers. The initial figure was £16 million, yet although it seems the FCA had ample evidence of wrongdoing and the powers necessary to act, nothing was done. That constituent and a number of others have lost money through that scheme. I am not sure that the Bill goes far enough in that respect.
An essential component of the Bill must be the protection of access to cash. I am old-fashioned, Mr Deputy Speaker; I use cheques all the time, and I use cash. I have the jingle of cash in my inside pocket, and I have the pound notes—sorry, I am going back too far; I have the £20 notes here in my wallet. I heard the right hon. Member for South Northamptonshire (Dame Andrea Leadsom) refer to her daughter getting a cheque. I get them every day, and I write them every day—that is who I am.
Access to cash and its use is essential, particularly for the small business with a small profit margin. The Post Office announced that just last month it handled more than £800 million in personal withdrawals, the most since records began five years ago. That tells me that cash is still king and we should not disregard it.
I am old enough to remember the ’60s and the early ’70s, when my mum and others, on a tight budget, used envelopes to set aside money for the gas, the electric, food and the rent. That meant that the management of the moneys for all the bills was done right. I believe that history will repeat itself and we will see that happening once again. Cash will be more important than ever.
The right hon. Member for East Hampshire (Damian Hinds) referred to the growth of credit unions. In Northern Ireland, credit unions have been an incredible success. They can do better for everyone. In some cases, they have replaced banks where those have closed. Will the Minister say what can be done to ensure greater use of credit unions?
I am concerned that, as we approach the autumn and winter, many will suffer from malnourishment, freezing homes and depression in the coming crisis. I believe that the Bill will do more than just regulate the financial regime; it will ensure that we can support the people we are privileged to represent and keep them protected this winter.
Gareth Davies (Grantham and Stamford) (Con)
It is a great pleasure to speak in this debate on a Bill that is, frankly, the biggest reform of financial regulation in a generation. First, I pay tribute to the longest-serving Economic Secretary that we have known, my hon. Friend the Member for Salisbury (John Glen), who committed his work with great diligence and who is greatly respected in the industry to this day.
I care a lot about the financial services industry. I worked in it for many years, it taught me a lot about the world, and my wife works in it, so I personally want it to thrive, but given its significance to our economy and people, we all should. The Prime Minister was right when she said that it is the “jewel in the crown” of our economy. It is a direct benefit to businesses, savers and investors, and an indirect benefit to us all through jobs, growth and tax revenue. That is why it is important that we do everything we can to unleash its potential, as this Bill does.
I welcome the fact that the Bill takes advantage of our regulatory freedoms now that we are not in the European single market, gives more control to our domestic regulators and ensures that they are more focused on international competitiveness. All those who worry about that resulting in a decline in regulation should be assured that the primary objective remains intact, and that that mirrors established conventions in markets with highly regulated systems, such as Australia and Japan.
I welcome the moves to tighten the regulations on promotions by creating a new regulatory gateway for approvals. I also welcome the provisions to improve the co-ordination between the FCA and the PRA. As a member of the Treasury Committee, I welcome its enhanced role, but join others in saying that it is important that it has the resources and expertise to carry out that role effectively.
This is an excellent Bill that will help to drive the industry and our country forward. I have been struck that we all agree on one aspect, which I will talk about: the need to further democratise our capital markets. Despite the remarkable success in the finance industry, it genuinely bothers me that not enough of our people are directly participating in or benefiting from our capital markets. Although we are all stakeholders in UK plc, not enough of us are shareholders with a stake in our economic success.
We can do three things to address that. First, I am a huge advocate of extending auto-enrolment to those aged 18 to 22, so that they can get on the savings ladder earlier. That would create 900,000 new savers and £1 billion extra in savings for our economy, and it would do a great deal to encourage a better savings culture. Secondly, we should look at removing regulatory obstacles to people receiving investment advice, so that people do not just save, but invest. Thirdly, I want us to get on with reforming Solvency II, so that more pensioners can expand their investment universe into illiquids such as infrastructure. If we do those things, we can build on this excellent Bill and ensure that everyone shares in the success of our world-leading financial services sector.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I am grateful for the opportunity to close the debate on behalf of the Opposition. As my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq) said, we broadly support this important Bill.
We recognise that regulatory divergence from the EU will produce opportunities for the sector, such as through Solvency II reform and making sure that the UK is a welcoming environment for fintech. We also support the principle of a secondary objective on international competitiveness and growth. Labour is committed to supporting the City to retain its competitiveness on a world stage and supporting the UK to remain a global financial centre outside the EU. This should not, however, mean any compromise on financial stability or consumer protections.
I also want to echo my hon. Friend’s point about recent Government infighting. This has undermined confidence in the City just when the sector needs clear direction on post-Brexit reform. The new Prime Minister’s off-the-cuff policy announcements during the summer and threats to abolish our world-leading regulators have left our financial services in a state of uncertainty. The Government must provide the City with the certainty it needs to thrive and to take advantage of opportunities outside the EU. I therefore hope that the Minister will use this opportunity to inform the House, the wider public and the financial services sector whether the Government plan to radically alter this legislation in the coming weeks and months.
While we will support the Bill, there are a number of issues that we believe the Government have yet to address. My hon. Friend raised a number of these important questions in her speech, which I hope the Minister will address in his closing remarks, including whether regulators will be held to account on the advancement of long-term growth in the real economy, and how the Bill will address the decline in the UK’s financial services exports to the EU.
I take this opportunity to thank the hon. Member for Salisbury (John Glen) for the work he did on this Bill. I, along with my hon. Friend the Member for Hampstead and Kilburn and the rest of our team, know that he was always communicative with the Opposition despite our differences and he was always respectful in his delivery. It is also pleasing to see the former Chancellor the right hon. Member for Richmond (Yorks) (Rishi Sunak) speaking in this debate, which shows that he is still taking this Bill very seriously.
I thank hon. Members on all sides of this House for their contributions. I am particularly grateful to my hon. Friend the Member for Feltham and Heston (Seema Malhotra), who talked about how mortgage prisoners are impacted by the SVR. I hope that the Minister will take up the invitation to meet her, as she certainly has a lot of knowledge in this area.
My hon. Friend the Member for Edmonton (Kate Osamor) spoke about how small and medium-sized businesses, such as hairdressers and nail salons, rely on cash payments and how her constituency is one of the most cash-deprived. The right hon. Member for South Northamptonshire (Dame Andrea Leadsom) referenced the need for free access to cash, and highlighted the points raised by Opposition Members. I hope that on this vital topic we can find common ground to resolve this issue in the best interests of all our constituents.
My right hon. Friend the Member for Hayes and Harlington (John McDonnell) and my hon. Friends the Members for Kingston upon Hull West and Hessle (Emma Hardy) and for Blaenau Gwent (Nick Smith) all raised concerns about the FCA. I am sure the Minister will agree that holding bad actors to account is very important, and I look forward to his comments in his summing up.
My hon. Friend the Member for Walthamstow (Stella Creasy) made a particularly important point about how those using buy now, pay later lenders are drowning under the cost of living crisis. The wishy-washy intervention planned for 2023 will just be far too late. We need swift action right now, and my hon. Friend pointed out that there is a lack of strong will from the Government in this area.
My hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh) spoke passionately about the closure of bank branches in her constituency and the impact this is having on elderly and disabled constituents.
All the contributions from across the House were really valuable, but I want to raise a number of additional issues, such as cryptocurrencies. First, clauses 21 and 22 will bring stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, which as the Minister has said, will pave the way for their use in the UK as a recognised form of payment. He and I discussed this in Westminster Hall this morning, but the recent collapse in the value of cryptoassets, including several stablecoins, has put millions of UK consumers’ savings at risk.
The crypto trading platform Gemini has estimated that as many as one in five people in the UK could have lost money in the crash. Does the Minister agree that the crisis in crypto demonstrates that so-called stablecoins are not necessarily stable? How did the recent collapse in the value of cryptocurrencies inform the Treasury’s approach to clauses 21 and 22 of the Bill?
Will the Minister explain why the Government have opted to bring only stablecoins within the regulations? For example, the EU just agreed to a comprehensive regime for regulating the entire cryptocurrency industry, while the UK will not even consult on a comprehensive regime until later this year. In the absence of a comprehensive regulatory regime, the UK has become a centre for illicit crypto activity. According to Chainalysis, a global leader in blockchain research, cryptocurrency-based crime, such as terrorist financing, money laundering, fraud and scams, hit a new all-time high in 2021, with illicit activity in the UK estimated to be worth more than £500 million.
Meanwhile, misleading advertising and marketing of cryptocurrency projects is on the rise. In the absence of a comprehensive regulatory regime, how will the Government crackdown on illicit activity and misleading advertising and promotions, beyond the regulated stablecoins? Finally, how do the Government foresee the regulated stablecoins interacting with the future of central bank digital currency?
Let me express the disappointment felt on the Opposition Benches that the Bill has failed adequately to address financial exclusion. My hon. Friend the Member for Hampstead and Kilburn has already touched on the need to address digital exclusion by protecting access to essential face-to-face banking services, and the Bill has failed to promote financial diversity and resilience by removing the regulatory barriers faced by mutuals, building societies and co-operatives. In addition to my hon. Friend’s important points, the Bill does nothing to address the poverty premium—the extra costs that poorer people pay for essential services such as insurance, loans or credit cards—and right now, those people will be feeling the impact of that.
Labour believes that everyone should have access to the financial services they need, whether that is saving schemes or insurance, and regardless of their income or circumstances. All too often, the most vulnerable in our society are unable to afford or are denied access to financial products and services that meet their needs. If the Government are serious about building a strong future for our financial services outside the EU, they should recognise that the Bill is an opportunity to rethink how financial resilience, inclusion and wellbeing issues are tackled in the UK. I hope the Minister will address those points in his response.
I realise that time is pressing, and I want to give the Minister the opportunity to respond to all the issues raised today. In conclusion, although Labour Members support the Bill, which will enable the UK to tailor financial services regulation to meet the needs of our economy, we will be pushing for bolder, more radical action in a number of areas including green finance, financial inclusion and economic crime, to make Brexit work for our financial services and the wider economy.
The Economic Secretary to the Treasury (Richard Fuller)
With the leave of the House I would like to speak for a second time, and I will start by thanking right hon. and hon. Members for their contributions to the debate. As the hon. Member for Erith and Thamesmead (Abena Oppong-Asare) has just said, I welcome the broad support across the House for the Bill.
As has been clear throughout the debate, I am really a small person standing on the shoulders of the two giants responsible for the Bill—my hon. Friend the Member for Salisbury (John Glen) and my right hon. Friend the Member for Richmond (Yorks) (Rishi Sunak). I will seek to address what I can of what has been said in the time available—[Interruption.] Shush. Where I am not able to, I shall write to colleagues where I feel that I can add something meaningful. I also look forward to Committee, where I will be able to address some of the points in more detail.
As I said in opening the debate, this is an important and ambitious Bill that seizes opportunities afforded by EU exit to make important reforms to the regulation of financial services. As my right hon. Friends the Member for Richmond (Yorks) and for South Northamptonshire (Dame Andrea Leadsom) and my hon. Friend the Member for Salisbury said, the resilience of the United Kingdom financial services market as we exit Brexit has been much stronger and greater than the naysayers said. Once again, people who talked down our country have been proved wrong.
There were questions on a number of areas, but I will start with access to cash, which was raised by a several Members. The UK Government remain absolutely committed to protecting consumers and supporting inclusion. The impact of bank branch closures should already be understood, considered and mitigated where possible so that all customers, wherever they live, and especially the most vulnerable, continue to have appropriate access to face-to-face banking services. Meanwhile, innovative, shared bank hubs allow customers of participating banks to withdraw and deposit cash and seek support from a representative of their bank in person. It was pleasing to hear the contribution from my hon. Friend the Member for Cleethorpes (Martin Vickers) regarding the hub at Barton-upon-Humber, and that of my hon. Friend the Member for Mid Derbyshire (Mrs Latham) about Belper. She mentioned the knock-on benefits that banking hubs can have on high streets both in Belper and in other parts of the country. My hon. Friend the Member for Vale of Clwyd (Dr Davies) and the hon. Member for Mitcham and Morden (Siobhain McDonagh) spoke about the importance of financial hubs in their constituencies.
Those are an important part of access to cash, but the Bill also provides the FCA with powers to protect access to cash specifically. Where appropriate, the FCA could exercise the powers in the Bill to prevent a branch closure where in doing so it is seeking to ensure reasonable provision of cash access services. That may be the case, for example, if a closure would result in a significant adverse impact in relation to accessing cash in that area. The Government expect such situations to be exceptional and temporary while alternative arrangements to meet cash needs are put in place, but ultimately that access to cash must and will be protected.
The Bill allows the FCA to determine standards to ensure reasonable access to cash access services. In determining reasonable access, the FCA may take into account factors that it considers appropriate, which may include appropriateness of facilities for vulnerable users, including cost, security availability and accessibility for, for example, disabled people. The FCA is developing its regulatory approach for access to cash and will consult in due course.
Richard Fuller
I was about to come to that. As I said earlier, while I cannot give an assurance on free-to-use ATMs, I do expect us to return to the matter in more detail in Committee. I tried to write down those right hon. and hon. Members who used those four letters—F, R E and E—in describing their wish for access to cash. They included my hon. Friends the Members for Blackpool North and Cleveleys (Paul Maynard), for Cleethorpes and for Mid Derbyshire as well as the hon. Members for Kingston upon Hull West and Hessle (Emma Hardy), for Feltham and Heston (Seema Malhotra), for Richmond Park (Sarah Olney) and for Mitcham and Morden. As I said, we will return to these issues in Committee, particularly given the level of interest in them.
I turn to other matters. The shadow spokesperson, the hon. Member for Hampstead and Kilburn (Tulip Siddiq), asked about the new secondary objectives for growth and competitiveness and whether they were aimed at advancing long-term growth in the real economy. Those secondary growth and competitiveness objectives will enable the PRA and the FCA to make rule changes to advance the long-term growth and competitiveness of the UK economy, including the financial sectors. The new objectives refer to the UK economy as a whole, including in particular the financial services sector.
The hon. Member for Richmond Park, who is in her place, and the hon. Member for Brighton, Pavilion (Caroline Lucas), who I do not think is in her place, talked in an intervention about whether the regulator should have a green objective. Including the net zero target specifically in the regulatory principles ensures that the Government’s commitment to reach net zero will be embedded in regulator considerations. Therefore, it is more appropriately progressed by regulators as a regulated principle, which means they will consider the Government’s target when they advance their own objectives. We heard a lot about what the Government are doing on green finance which did not pay enough regard to the progress the Government have made already on that. Let me just list it. The UK is rated No. 1 globally in the Z/Yen Global Green Finance Index. The UK has had the largest green gilt instruments globally. The UK had the first green savings account issued with the national savings fund. The UK is the first major economy to implement fully the taskforce for nature-related financial disclosures across both financial services and the real economy. The UK is the largest donor to multilateral climate investment funds. That is a record this Government can be proud of. That is a record that this country can be proud of as well.
The hon. Member for Kingston upon Hull West and Hessle asked about having regard to financial inclusion. The Government believe that the FCA’s current and ongoing initiatives around financial inclusion demonstrate that it can already effectively support the Government’s leadership of this agenda through its additional operational objectives and regulatory principles.
The shadow spokesperson asked how seriously Parliament should take the speculated proposals to merge the regulators. There are no plans to merge the PRA and the FCA. Again, she asked about the independence of regulators and how we can ensure the continued independence of our regulators. The legislative framework underpinning financial services regulation in the UK provides for the regulation to be independent of the Government.
My hon. Friend the Member for Wimbledon (Stephen Hammond), who I think may be in his place, asked about whether we could commit to an annual report on the key performance indicators of the regulators. Both regulators, I am pleased to say, will be required to report on their performance against their growth and competitive objectives on an annual basis. This will be similar to the PRA’s current reporting requirements for its secondary competition objective. My hon. Friend also asked about the important issue of cost-benefit analysis panels and what the accountability of the regulators will be. The Government expect that the panel will operate in the same way as other statutory panels, where they appoint external members. Ensuring the right membership of panels is crucial to their success in promoting and challenging a range of expertise.
The Chair of the Treasury Committee, my right hon. Friend the Member for Central Devon (Mel Stride), asked an important question about the Bank of England’s independence. I can tell him and the House that the Chancellor today met the Governor. I refer him and other hon. Members to Her Majesty’s Treasury’s statement on that meeting. The Chancellor affirmed that the UK’s long-standing commitment to the Bank of England’s independence and its monetary policy remit. The Chancellor and the Governor agreed that getting inflation under control quickly is central to tackling cost of living challenges.
My right hon. Friend the Member for Richmond (Yorks) asked whether the European regulations on PRIIPS will be reformed. Yes, the Bill will repeal and retain EU law for PRIIPS. He also asked about ringfencing and whether ringfencing will be reformed. The Treasury welcomes the comprehensive set of recommendations to the Independent Panel of Ring-fencing and is committed to publishing a Government response later this year.
There were many other questions, particularly on MRAs—mutual recognition agreements—crypto-assets and other issues. I will have to write to Members, given the amount of time available. On the important issue of scams and fraud prevention, which was raised by many Members, I acknowledge the seriousness of the issues we face, but I do not accept that the Government and regulators are not taking action to prevent fraud, both in relation to financial services and more widely. The Government are clear that prevention is better than cure and that a multifaceted approach is needed to tackle fraud. The shadow City Minister asked what we were doing beyond financial services. I point to the Online Safety Bill, which the Prime Minister committed to in the House today.
There were many, many issues also raised that I have not had time to refer to today, but that just indicates the wide breadth and importance of the Bill. The Bill capitalises on our freedoms outside the EU by bringing forward an ambitious set of reforms that assert the UK’s global leadership in financial services, and I commend it to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Financial Services and Markets Bill (Programme)
Wednesday 7th September 2022
(2 years, 2 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text
Financial Services and Markets Bill (Money)
Wednesday 7th September 2022
(2 years, 2 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text
Financial Services and Markets Bill (Ways and Means)
Wednesday 7th September 2022
(2 years, 2 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text
Financial Services and Markets Bill (First sitting)
Wednesday 19th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2022 - (19 Oct 2022)
The Chair
I have a couple of preliminary announcements to make. Hansard colleagues will be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Date Time Witness Wednesday 19 October Until no later than 10.10 am Prudential Regulation Authority Financial Conduct Authority Wednesday 19 October Until no later than10.40 am TheCityUK UK Finance Wednesday 19 October Until no later than 10.55 am Payment Systems Regulator Wednesday 19 October Until no later than 11.25 am Association of British Insurers Investment Association Wednesday 19 October Until no later than 2.25 pm The Bank of England Wednesday 19 October Until no later than 2.45 pm Which? Wednesday 19 October Until no later than 3.10 pm Access to Cash Group Fair by Design Wednesday 19 October Until no later than 3.10 pm New Financial Wednesday 19 October Until no later than 3.55 pm Association of British Credit Unions Ltd. Building Societies Association Wednesday 19 October Until no later than 4.10 pm CIFAS Wednesday 19 October Until no later than 4.25 pm Innovate Finance Wednesday 19 October Until no later than 4.40pm Mr Martin Taylor
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 a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the time available, I hope that we can take those matters formally, without debate.
Ordered,
That—
1. the Committee shall (in addition to its first meeting at 9.25 am on Wednesday 19 October) meet—
(a) at 2.00 pm on Wednesday 19 October;
(b) at 9.25 am and 2.00 pm on Tuesday 25 October;
(c) at 11.30 am and 2.00 pm on Thursday 27 October;
(d) at 9.25 am and 2.00 pm on Tuesday 1 November;
(e) at 11.30 am and 2.00 pm on Thursday 3 November;
2. the Committee shall hear oral evidence in accordance with the following Table:
3. proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedule 1; Clauses 3 to 7; Clause 2; Schedule 2; Clause 8; Schedule 3; Clauses 9 to 13; Schedule 4; Clauses 14 to 20; Schedule 5; Clause 21; Schedule 6; Clauses 22 to 46; Schedule 7; Clause 47; Schedule 8; Clause 48; Schedule 9; Clause 49; Schedule 10; Clause 50; Schedule 11; Clause 51; Schedules 12 and 13; Clauses 52 to 63; Schedule 14; Clauses 64 to 73; 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 5.00 pm on Thursday 3 November.—(Andrew Griffith.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Andrew Griffith.)
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Andrew Griffith.)
The Chair
Copies of written evidence that the Committee receives will be made available in the Committee Room and circulated to Members by email. We will now go into private session to discuss lines of questioning.
The Chair
Before we start hearing from the witnesses, do any Members wish to make any declarations of interest in connection with the Bill?
Stephen Hammond (Wimbledon) (Con)
I guide the Committee and witnesses to my entry in the Register of Members’ Financial Interests.
Craig Tracey (North Warwickshire) (Con)
I chair the insurance and financial services all-party parliamentary group and am a former insurance broker.
Peter Grant (Glenrothes) (SNP)
I have money saved and invested with Nationwide building society, which has submitted evidence on its own account. I am also with a credit union that I believe is affiliated to the association of one of the witnesses.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
I am chair of the all-party parliamentary group on blockchain.
Gareth Davies (Grantham and Stamford) (Con)
I am a vice-chair of the APPGs on environmental, social, and governance and on financial markets and services. I also spent 14 years in financial services and my wife works in financial services.
Shaun Bailey (West Bromwich West) (Con)
I am chair of the all-party parliamentary group on financial resilience.
Sally-Ann Hart (Hastings and Rye) (Con)
My husband and two sons work in financial services.
The Chair
Anybody else? No.
We will now hear oral evidence from Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority; Sarah Pritchard, executive director of markets at the Financial Conduct Authority; and Victoria Saporta, executive director of prudential policy at the Prudential Regulation Authority. 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 order that the Committee agreed. For this panel, we have until 10.10 am. Will the witnesses please introduce themselves for the record?
Sarah Pritchard: I am Sarah Pritchard, the executive director of markets at the Financial Conduct Authority.
Sheldon Mills: I am Sheldon Mills, the executive director for consumers and competition at the Financial Conduct Authority.
Victoria Saporta: I am Vicky Saporta, the executive director of prudential policy at the Prudential Regulation Authority.
The Financial Secretary to the Treasury (Andrew Griffith)
Q
The opportunity of the Bill, which will be the first piece of ab initio legislation for 23 years in the financial services domain, is to help the effective functioning of financial markets in society and to help the economic prosperity on which we all depend. Will you talk a little about how you see the opportunities in the Bill? How do you think about the competitiveness of the UK regulatory corpus? How would you advise the Committee on making the best advantage of changes in technology—such as digital ledger technology, but that is just one—and of the opportunity to pare back the corpus of inherited European legislation to those purposes?
Victoria Saporta: Thank you, Minister. I very much agree with your comment that the Bill presents a unique opportunity to set a framework for financial services that is world leading and the best in practice internationally. In my view, the Bill as introduced on First and Second Reading achieves that.
I will pull out a couple of things that I think are particularly important. Best international practice, as set out by international standards setters and the IMF, is for operationally independent regulators to pursue technical rule making based on the framework and objectives set by Government. That is because there is plenty of empirical evidence that the operational independence of regulators is associated with better financial stability and economic stability outcomes. That is very much recognised among the financial regulatory community internationally, and it supports competitiveness.
That is important, particularly for a global financial centre, which we have the pleasure to have here in London and the UK, because, as the IMF said in its recent FSAP of the UK, financial stability is a global public good within the UK. Our actions over here, as we have seen in recent events, can spill over to other markets. It is therefore very important that we have this high international standing so that regulators who allow firms to come to London to be regulated by us can have trust in that.
The Bill achieves all of that, but it gives us greater powers, and with greater powers must come greater accountability. We at the PRA and the Bank really welcome that greater accountability. We always have seen our policy frameworks as being supported by accountability to Parliament, and the various provisions and amendments support that.
On competitiveness, there is a new secondary objective that did not exist before, which says that we must pursue competitiveness and growth in the medium and long term as a secondary objective. That is, as long as we are advancing safety, soundness and financial stability within the PRA’s remit, we should look at the options that advance competitiveness and growth in the medium and long term.
We think that is the correct balance. It will allow us to take a very proactive approach to competitiveness. The PRA issued our approach to the Bill, as it currently stands, to aid accountability to you. In that discussion paper, we set out some thoughts about how we would go about doing that. The Bill also has certain areas that would help fintech in the UK.
Andrew Griffith
Q
Sheldon Mills: I will be brief, in the interests of time. Clearly, the Bill represents a significant opportunity—almost a once-in-a-generation opportunity—to transform financial services regulation. There are a few components to that. The first is the fact that the regulators will be given the powers to transpose the retained EU law into UK law. That provides an opportunity for us to think in terms of the UK financial services system and what we need to support UK financial services and ensure that we are a leading centre, worldwide, for financial services.
We welcome the other opportunity in the Bill—the secondary competitiveness objective—on the basis that it provides a spur to us to think about growth and competitiveness as we pursue our primary objectives of competition, consumer protection and market integrity.
The final point, which goes to your point about the corpus of rules, is that I think some of the powers, and some of the exhortations in the Bill for us to review our rules, are important. It is important for us always to have an efficient rule book and system so that we do not place as much burden on business as we otherwise would, and so that the system is certain, consistent and effective. There are genuine opportunities in the Bill.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
Q
Sheldon Mills: Of course. It is a matter for Government as to what amendments they put to Parliament, and it is then a matter for Parliament as to what you do with them. You always have to be careful as a regulator not to tell Parliament what to do, but I will put some thoughts forward.
Independence needs to be at the heart of the regulatory system, so I think it will be important, if and when that amendment is put forward, to think about how the independence of the regulators is sustained. I understand from Government pronouncements that there is a commitment to the independence of the regulators, and that the proposed amendment, which I have not seen, is meant to ensure that where a public interest mechanism is needed—where the Government wish to think about the public interest—there is one to bring forward.
I have worked in regimes with public interest tests. I ran the mergers division at the Office of Fair Trading and the Competition and Markets Authority, and my learning from that is that, if put in place, such a test should be used exceptionally and with care, and that there should be specificity about the matters of public interest—in this case, financial services—on which it would be used.
We are working constructively with HMT in relation to this, and we would do so if such a power were introduced. The only point I would make—Vicky may come to this—is that the standing of the UK financial system is also built on its independence and its consistency of regulation, and it is important that we think through that as we design this regime.
Victoria Saporta: I very much agree with what Sheldon said. We have not yet seen the amendment, so we have to reserve judgment on it, but it will depend on the formulation.
A formulation whereby the Government can force or direct us to make or amend rules that we have already made, and that fall squarely within the statutory objectives that Parliament has given us, may be perceived as undermining operational independence and all the benefits that I talked about earlier. That could have adverse implications for our international standing and, ultimately, our competitiveness.
A formulation that is squarely outside our objectives—for matters of national security, for example—and does not have to do with safety and soundness, or the other objectives and “have regards”, could be a different matter if it is tightly done.
Finally, sometimes I have read in the press and in previous ministerial comments that it makes sense in a parliamentary democracy to ask the regulators to take another look. I just want to say that in clause 27 there is a review power that gives the Treasury powers to force us—to direct us—to take another look and, indeed, to appoint a third party to do so.
Peter Grant
Q
Sheldon Mills: Of course we have had discussions with HMT in relation to the proposed amendment. I personally have not seen it.
Peter Grant
Q
Sheldon Mills: That was some months ago, but I recall that in the context of the British Steel pension scheme we have a power that allows us to do some particular things that provide redress en masse for British Steel pension holders. That is what we are using. We have most of the powers that we need to support British Steel pension scheme holders. The Bill does not interfere with any of our existing powers. I do not think it gives us any additional powers that are relevant to the British Steel pension scheme holders issue.
Peter Grant
Q
Sheldon Mills: I think that what we would have said—I would need to look at the record to see the context—is that, effectively, we have to go through due process and understand the evidence and the data that would be there to see how those independent financial advisers are behaving. Therefore, the speed and processing of that may be what we were referring to.
If I remember at the time in relation to the British Steel pension scheme, the law was changed to allow people to exit their pensions under pensions freedoms. There was a range of issues in relation to understanding how independent financial advisers were going to respond to that. The speed and pace with which they did respond led to issues such as some of the challenges that British Steel pension holders have now. To confirm: there is nothing the Bill that specifically gives us additional powers in relation to those individuals.
Sarah Pritchard: I want to come in on a slightly broader point, which is that in the transfer of retained EU files, which encompasses part of the Bill, there are some EU files where, at the moment, the FCA will have limited lawmaking powers. The Bill will provide a framework that, file by file, the FCA will need for rule-making and enforcement powers to be considered at that time. That does not answer your question specifically in relation to British Steel, but it provides a mechanism, so you go through that analysis and assessment file by file.
Stephen Hammond
Q
Victoria Saporta: In the financial regulatory space, the only example I know of where there is a test whereby the Government—I am not talking about Parliament—can intervene and revoke regulatory rules is in Australia. APRA—the prudential regulatory authority in Australia—has never been exercised. Whenever the IMF has done financial sector assessments, it has been critical. There are provisions, again in Canada, but the US system does not have any. It is Congress who can revoke material pieces of regulatory standards within 60 days. This is my understanding of it in financial regulation, which is separate to how it might exist in other types of regulation.
Stephen Hammond
Q
Sheldon Mills indicated assent.
Stephen Hammond
I just wanted to ensure that was on the record. Can we talk a bit about the metrics and transparency you might use to show that you are meeting the secondary objective—that the cost-benefit panel’s analysis will be transparent—and also how you consider you will need to show that you have met the accountability tests?
Sheldon Mills: Sure. I am happy to start with that. We are waiting to see the final description of the clause on competitiveness. Its current iteration talks about competitiveness and growth. It also talks in terms of the medium and long-term growth of the financial services sector and the UK economy. We have started to think about what the input measures we might see. Those are the things we can act upon ourselves.
A good example of that would be our gateway—our authorisations process. Is it as efficient as it can be? Does it place unnecessary burdens on time, pace and the application of it? That can help with the entry of firms into the UK. That is important. We are doing work on our gateway now. That is something on the input measures, but we then need to think about the outcomes. It is important to think about what data and metrics are available that have a causal chain between some of the activity we have—our authorisations activity, our policy activity and so on—and the outcomes we are seeking to achieve. One of the challenges we have is that the data on the link between financial services activity and growth and competitiveness—regulatory activity—is not significant. That said, we are looking proactively to see what measures we can find.
There are also two components to those outcomes. There is the activity that our financial services industry is providing, such as lending and support in terms of insurance and so on to UK firms and overseas. Then there is an outward form of competitiveness, thinking about how our UK plc financial services industry is doing in exporting financial services across the world. Both of those will be outcomes we will need to find measurements on.
Finally, there is the meta outcome. There is certainly Office for Budget Responsibility data that talks about sustainable growth. What is the higher level growth-type outcome you can look at and seek to link? I do not have the full gamut of that, but we are working very closely on it, so that we can provide measures and metrics that can support our use of the objective.
Stephen Hammond
Q
Sheldon Mills: Of course, absolutely. We will be transparent on that.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Q
The Government have opted so far to not have a “have regard” for financial inclusion in the Bill. Do you believe that such a “have regard” for the FCA would ensure financial inclusion as a greater priority for the regulator? What else could be done with the Bill to ensure that financial inclusion is given a greater prominence?
Sheldon Mills: I hope we won’t have the same conversation as before. We have done some more work on financial inclusion following our conversations. Our position is still the same: we do not think we need a “have regard” on inclusion. We don’t think that that would add to our ability to act within our remit in line with our objectives. We have our consumer protection power and we have put in place our new consumer duty, which asks firms to meet a higher standard. We feel that we have sufficient powers to fix any problems that we feel we need to solve.
As we discussed last time, the regulator’s role is to support firms and the market to deliver to as many consumers as possible, including those who are vulnerable or might be excluded. However, we do not do that alone; we do that with partners such as Government, local authorities, charities and others. In relation to that, we are taking a proactive role and arranging a financial inclusion policy sprint in the autumn, working with Fair4All Finance and others. We will bring as many actors as possible into that space, using our innovation labs to work through the types of innovative activity we can put the financial services industry to in terms of tackling financial inclusion.
At the moment, we do not think we need a “have regard” given our current remit and the powers we have.
Emma Hardy
Q
Sheldon Mills: I have worked with HMT and supported the inclusion of a few things in the Bill that might help with this matter. One reason why the financial services sector has adopted more of a risk-based approach to the customers it serves relates to the risks it faces of follow-on redress and other damages. There is always a balance between what you pay out to consumers who might well be harmed now and what happens with future consumers.
In the Bill, we have a duty of co-operation between us, the Financial Ombudsman Service and a few other regulators. We will try to ensure that we are managing some of the extensive use of claims management companies, which puts quite a lot of pressure on firms. Firms should pay redress and compensation where that is necessary, but there is a lot of pressure on those firms. We have to have a reality as to how things work in how the commercial world. That means that boards can then become more risk averse in terms of the services they offer.
I am keen to get some of our largest and smaller institutions innovating around expanding the number of customers they serve. People are keen, but we have to have the balance of how the system works in order to support that.
Another area in the Bill, or in our proposals, that will help is in relation to credit unions. After our action against certain high-cost, short-term credit firms, we are already seeing that credit unions are taking more of a share of credit being provided to people who might be in a category that borders on exclusion. Anything that can support credit unions safely expanding—I have the PRA to my left—will be really helpful for the communities underlying this discussion.
Emma Hardy
Did you want to add anything, Victoria?
Victoria Saporta: No, I think Sheldon has covered it.
Gareth Davies
Q
Sheldon Mills: I’m not aware of one. Vicky?
Victoria Saporta: Singapore has one. Its financial stability, however, is primary; it overrides the competitive objective, which is secondary. There is the Hong Kong Insurance Authority. Otherwise, it is not common, particularly for prudential authorities, which is what I know about.
Gareth Davies
Q
Sheldon Mills: We do not like to comment on other financial centres, but, yes, I would consider them to be robust financial centres.
Gareth Davies
Q
Sheldon Mills: Yes, in certain respects.
Gareth Davies
Which respects?
Sheldon Mills: I think they are competitors to the financial services system. The UK is extremely strong, varied, and has a multiplicity of financial services. Some of the competition that comes from some of those regions is quite specific in terms of what it seeks to compete with. We have a very broad-based financial services system.
Gareth Davies
Q
Sarah Pritchard: From an FCA perspective, it is very much as Sheldon has said. It is important to say we support the Bill as it is currently framed. We think a secondary competitiveness objective can work alongside our primary statutory objectives. It will give us another lens through which to look at the policy work and the development of the regulatory agenda that we are taking forward. Back to the points raised previously on transparency and accountability, it will give us another method by which we will be reporting and considering our outcomes against. We will take that into account. We think it can work as a secondary objective.
On the various elements that make up competitiveness that have been touched on earlier, I think that innovation and ensuring that we can stay ahead of the game with the pace of development across the financial services markets is really important. You can see the financial markets infrastructure sandbox proposals contained within the Bill. There are proposals there on critical third parties as well, so you can already see on the face of the Bill in those particular areas a real desire to make sure that the UK can stay in lockstep or stay competitive as a country enabled through the way in which the financial services regulatory framework is developed going forward.
I think the agility is important. We often hear that regulators are too slow. Sometimes we hear that regulators are too fast in terms of putting out too many consultations. Clearly there is a balance there. We have shown ourselves able to act at speed through the Russia-Ukraine conflict and introduced new rules on side pockets to enable support in that context of war. We will need to maintain that flexibility to be agile when we need to, while retaining the checks and balances that are really important in terms of transparency and accountability.
Siobhain McDonagh (Mitcham and Morden) (Lab)
Q
Sheldon Mills: Thank you very much for the question. The first framing point to this question is to understand that banking services have and are changing, and there are many, many benefits of those changes. The move towards digitalisation of banking services provides a huge amount of support to many people who are vulnerable. My mother is deaf and the change to a digital means of banking services has transformed her life completely.
The starting point must be that we have to consider the variety of ways in which people can provide banking services. That said, we know that, locally, branches can be important for communities. It is not just branches. It is a point at which people can deposit money and take out money. You can have a variety of those. They can be branches or post offices. They can be what we are trying to encourage the industry to develop when they close branches.
Siobhain McDonagh
Q
Sheldon Mills: I am coming to it. In the light of that, what we have sought to do as we have seen firms decide to close their branches in the face of changing to digitalisation—there is the cost of keeping branches, which are very underutilised—is ensure that they look very closely at the alternatives to those branches when they go through those closure plans. We have had branch closure guidance in place for almost a year now. We work very closely with all the largest lenders and institutions to monitor their branch closure activity and ensure that they are providing appropriate services to those who need them in those localities as they seek to close some of those branches.
In terms of access to cash, the majority of the population—99.7% of the UK population—is within 5 km of a free-access cashpoint. We welcome the Government’s proposals on access-to-cash legislation so that we can get greater powers to ensure certain aspects of access to cash.
Siobhain McDonagh
Q
Sheldon Mills: We are using our existing “treating customers fairly” principle in order to put pressure on banks to ensure that they are looking after those customers that you talk about, who are vulnerable, in those communities and providing them with alternatives to branches if they close. Our updated guidance, which is stronger, asks for those alternatives to be in place before they close that last branch in town. It also deals with partial closures and issues such as that. I have been out to many local communities in order to see the impact of branch closures, and I have been public in terms of saying to the banks that they need to pick up the pace in relation to the alternatives for those communities: banking hubs, mobile banking and other activity. We are working very closely with LINK, which is currently helping the banks with the banking hubs, and seeking to get them to pick up that pace.
Siobhain McDonagh
Q
Sheldon Mills: I would be very happy to do so.
Siobhain McDonagh
And I will show you around. It is a great place. I will even buy you lunch in one of the cafés.
Sheldon Mills: I am sold—I will come.
Siobhain McDonagh
Q
Sheldon Mills: Yes, these are real, genuine issues for people and I do understand them. We have researched some of the ways in which people access cash but also branches. It is important that all the institutions—I will not mention individual institutions—should be willing to speak to their customers and their communities as they close branches, because that is the way to understand what alternatives they need to be providing to those services. We recently worked with a major provider and we got it to pause its branch closures while it made a significant assessment and researched the needs of the local community, and then it was able to provide for that, so we are proactive in relation to this. I would be very happy to come to Mitcham and understand what is going on there.
Siobhain McDonagh
Q
Siobhain McDonagh
If people have to pay £1.99 every time they try to access £10 from a machine to keep them going for the week, that is a huge premium on being poor. In Pollards Hill in my constituency, we have only two pay-for machines, and that is what happens on a daily basis—people have to pay £1.99 for every bit of money that they get out. People take small amounts of money to try to control their budgets. We were delighted when the Co-op came to the parade, but it could not get free cash machines because its lease prevented it from having one.
The Chair
Order. I am afraid that brings us to the end of the time allotted for this panel.
The Chair
No. That is the time allotted for the Committee to ask questions.
Sheldon Mills: We would be very happy to write to you.
The Chair
I thank our witnesses on behalf of the Committee.
Examination of Witnesses
Emma Reynolds and David Postings gave evidence.
The Chair
We will now hear oral evidence from David Postings, chief executive officer of UK Finance, and Emma Reynolds, managing director of public affairs, policy and research for TheCityUK. We have until 10.40 am for this panel. Will the witnesses please introduce themselves for the record?
Emma Reynolds: Emma Reynolds, managing director of public affairs, policy and economic research at TheCityUK.
David Postings: David Postings, chief executive of UK Finance.
Andrew Griffith
Q
David Postings: Thank you, Minister. The UK is an extremely competitive financial services centre, and has been for decades. The exit from the EU provides us with some challenges and some opportunities. The Bill has been worked on by my team in conjunction with HMT and the regulators, and we are very pleased with the content, particularly with regard to wholesale and capital markets. The amendments to EU legislation that it contains are quite detailed and technical, but they help with the competitiveness of the market and of the UK in that market.
Andrew Griffith
Q
David Postings: They welcome it. I think it is really important. It gives us balance and the opportunity to make sure that the regulator has regard to that. Ultimately, being a more competitive financial services centre will generate greater tax revenues for the UK and growth—which are really important—as well as stability.
Andrew Griffith
Q
Emma Reynolds: Thank you, Minister. I reiterate that the UK is one of the world’s leading international financial centres. I agree with David that exiting the EU has brought both challenges and opportunities. On the opportunities that the Bill presents, we absolutely welcome the new secondary objective on international competitiveness and economic growth. The industry has been calling for that for some time. The Bill is a result of many years of the Treasury consulting our industry, and overall we are very supportive of it.
If the objective is done properly and the regulators meet it, it gives us an opportunity to tailor the UK’s regulation to our market. Obviously, we do not have 27 member states to negotiate with any more, so we have an opportunity to tailor to our market. However, we want high standards, not low standards. We want the benefits of regulation, and any changes to regulation, to outweigh the costs. We want regulation to be proportionate to the risk involved. Obviously, all that will be rooted in many international agreements to which we have signed up as a country.
We think there are great opportunities here to enhance our competitiveness, but the proof will be in the pudding, rather than the Bill itself. The Bill enables that to happen, but it is very important that the Treasury and Parliament hold the regulators to account on their new secondary objective.
Andrew Griffith
Q
David Postings: If it is true, it should worry us —absolutely. I think the Bill is a good first step in addressing some of those issues. We have had the Lord Hill review, and its recommendations are contained in the Bill. The changes to the double volume cap and the share trading obligation will help the UK’s competitiveness and our ability to grow that share.
Emma Reynolds: We are in a very competitive environment, and I think the UK is losing out to New York, when it comes to listings. We need to focus on that. We should not be complacent. Obviously, there is very big competition from the Asian international financial centres, too.
Tulip Siddiq
Q
Emma Reynolds: First, let me say that we have discussed this power with Treasury officials, and we have submitted a paper to the Treasury and this Committee about how it could be defined. As one of the regulators said earlier, with greater power—obviously, this Bill and the exit from the EU confer a lot of new powers on the regulators—comes greater accountability.
There is a balance to be struck between enhanced regulatory accountability and maintaining the day-to-day independence of the regulators, which is something that international investors and businesses appreciate, because it leads to a stable regulatory environment. If the intervention power is tightly defined and used as a matter of last resort, you can minimise the risks. We think it could be a very reasonable instrument and power to take, given the circumstances and the transfer of power.
David Postings: The EU regulation was constructed through primary legislation in the main, with the agreement of a number of countries in the EU. That is now being put into the rulebook in the UK, so the regulators have tremendous capability to amend those regulations. It is not unreasonable to have a power that allows Parliament to scrutinise that kind of thing. We have not seen a draft clause, but we have talked to the Treasury and the regulators about this.
The most important thing is that it is used sparingly and drawn tightly. The best overseas example that we could come up with was the Australian example. I believe that it has never been used, but it is there in extremis. It should be something that is very rarely used and not politicised. We need to get the balance between the scrutiny of the regulators and not politicising it. That is a very difficult trick to pull off, but we should be able to do it.
Tulip Siddiq
Q
Emma Reynolds: The first question is very difficult to answer. I think it is probably one for the Government, if you do not mind me saying.
The answer to the second question is that there are occasions where regulation is not designed to meet the expected outcome—there could be a case where the regulator is not aware of national security risks—so there are occasions where such a power could be used. As I said before, it needs to be tightly defined. Defining a trigger would be useful, but equally you do not want to define it so tightly that it could never be leant on or even used. Given the amount of power that the regulators are being given, we think it is important that the broader societal and economic impact of the regulation is something that both Government and Parliament have the power to have a say in, if that regulation is deemed not fit for purpose.
Tulip Siddiq
Do you have anything to add, David?
David Postings: I don’t really, no.
Stephen Hammond
Q
“The Financial Services and Markets Bill should be amended to include a power to require regulators to transparently report metrics”.
I wonder if you could comment on that a little, please.
Secondly, you have mentioned proportionality, and again in your written evidence to us you suggest that there may necessarily need to be more of it when we consider the risk, the nature and the scope of businesses, who they are there for and who their customers are. Does the Bill set the right tone for proportionality, or do you think there is still more we should consider?
Emma Reynolds: To take your first question, we think it is important that the regulators are not marking their own homework with regard to the secondary objective. We welcome what the PRA said earlier and the discussion paper it has put out, but we do think the Treasury could take upon itself a power to demand that the regulators report more frequently and when the Treasury has some concern about whether they are meeting the new secondary objective. We do think the Bill should go further in that regard. We do not want this objective to just be in an Act of Parliament and for it to never really be a reality. The question is, “Does this bite?” That is what a lot of our members are saying. We think there are ways that you could hold the regulators to account on that.
Does the Bill set the right tone on proportionality? At its core, it is an enabling Bill, so the proof will really be in the pudding. We hope so. Hopefully, the secondary objective will mean that the regulators will take that very seriously—that their regulation should be proportionate—so we hope so, but it remains to be seen.
Stephen Hammond
Q
Emma Reynolds: Indeed.
Martin Docherty-Hughes
Q
David Postings: I think it needs to be broad, because the digital asset environment can change quickly, and if you define things too narrowly, you risk missing the next wave of change. Yes, I think it is good and wise to define it broadly.
Martin Docherty-Hughes
Q
Emma Reynolds: The definition is broad and, as I understand it, it gives both the Government and the regulators a way to regulate in this area and bring things into the regulatory perimeter. It is our understanding that stablecoins will be the first of those digital assets. This is a very fast-moving area; the EU has its MiCA—markets in cryptoassets—regulation, which you will be aware of, which is a very broad framework. I think there is some advantage for the UK in being the second mover here, because there is some concern about some of the things MiCA has closed down. For example, it is not allowing stablecoin wallets to accrue interest. We are watching very carefully in this space, but I understand your concern about consumer protection. I think that is front of mind for our firms, and they want a level playing field as well.
Martin Docherty-Hughes
Q
Emma Reynolds: That could be a concern, yes.
Emma Hardy
Q
David Postings: I am not sure this Bill is the right mechanism for it. We have been working closely with Government and regulators on a fraud strategy for some time, so anything that takes the agenda forward has to be welcomed, because fraud is a huge burden on society and a rising crime, but I am not sure that this Bill is necessarily the right Bill.
Emma Hardy
Q
David Postings: The ability to share data is one of the key things in terms of helping to prevent fraud and, after fraud has taken place, sending money back to the right place. I would need to look at the wording, because that is not in the Bill at the moment.
Emma Hardy
Q
David Postings: Anything that we can do as a country to stem fraud has got to be welcome.
Emma Hardy
Q
David Postings: There is provision to do that already, or at least we have taken steps to do that.
Emma Hardy
Q
David Postings: Yes.
Gareth Davies
Q
David Postings: Yes, it will.
Gareth Davies
Q
David Postings: I do not have a view on that, I am afraid.
Gareth Davies
Q
David Postings: They can change the volatility in the market. They do not necessarily push the price up, but they can change the volatility.
Gareth Davies
Q
Emma Reynolds: I defer to David.
Peter Grant
Q
Emma Reynolds: From what is in the Bill, I do not think that is the Government’s intention. As I understand it, the Bill gives the power to the Treasury to transfer—restate—EU legislation, and we have encouraged the Treasury to think of this as a sequence, because we do not want big regulatory change in one go, as the compliance costs are quite high. We absolutely see that there is an opportunity to tailor EU legislation to our markets, so I do not think it is the case that this legislation would not apply; I think this is going to be done in a phased way.
Peter Grant
Q
Emma Reynolds: That is a matter for the Government. The Bill gives the Government broad legislative powers to amend the legislation that they have transferred, as I understand it.
Peter Grant
Q
David Postings: It is not in the Bill at the moment. We would need to see the wording of what was proposed and the timescale. If you think about your first point, which I did not respond to, the difference is that the regulation will now be through rules rather than in legislation. We have had a fruitful working relationship with the Treasury and the regulators over the past year and a half since Brexit to produce what is in the Bill. Those changes have been well thought through with industry involvement and therefore get the balance right between protection, regulatory stability and the ability to be commercial. I would hope that, as the rules get translated over time, that process would continue.
On the green agenda, it is difficult for me to comment on something that is not in the Bill at the moment. What I would say is that we need to be thoughtful about the transition to net zero, as opposed to just the taxonomy and the drive to get to net zero. There is a danger that, in prescribing that financial institutions have a balance sheet in a particular form by a particular day, you risk not having a transition to net zero, so that whole thing needs to be well thought through. We risk financial exclusion on the back of that for consumers as well. I would urge caution rather than lumping something into the Bill at this late stage.
Peter Grant
Q
David Postings: The banking industry is 100% behind that transition, but the transition is the important point, not just greening the balance sheets of the firms.
Emma Reynolds: May I add to that? There is a huge commitment from financial services, and we also represent related professional services, in playing a part in enabling the transition to net zero. Financial services and financial regulators are an important part of a much broader picture, which is why green finance is actually led by the Department for Business, Energy and Industrial Strategy, not His Majesty’s Treasury. It is about not just the supply of green finance, but the demand for such products. If we have a transition to net zero, it has to be about every sector pursuing a transition. Financial services has a critical role to play, but that has to be done in tandem with the transition in other sectors too.
Sally-Ann Hart
Q
Emma Reynolds: I certainly think there is room for a more commercial mindset in the regulators. This is not just about regulation by the way; it is about operational efficiency. One of the things we have been working on is delays in authorisations for senior managers, which can slow things down. There are other authorisations as well. We are encouraging the regulators to have a more commercial mindset and to be aware of the businesses’ priorities. It is not just about regulation; it is about how efficient they are. If, for example, you want to bring in a senior manager to a bank or other institution in the UK and it takes you 18 months to 2 years, you could be doing that elsewhere, and that puts us at a competitive disadvantage. So, absolutely, we think that there is room for improvement in having a commercial mindset in the regulator.
Sally-Ann Hart
Q
Emma Reynolds: Proportionate regulation and—we have not got into the cost-benefit analysis panels—careful consideration of the benefits of regulation to make sure that the costs and burdens of regulation do not outweigh the benefit.
David Postings: I agree with Emma. To give a couple of examples, the cost-benefit analysis of the consumer duty had costs but no benefits—no financial benefits. The intent in the Bill to ensure that the FCA and FOS are aligned is really important as well, because it is very difficult for a financial services firm to operate in an environment where we are not clear what the rules are when it comes to interpretation down the line. That makes people cautious, which can add to financial exclusion. The point that Emma made about authorisations is also really valid: there are still significant businesses awaiting authorisation post Brexit from large foreign institutions.
Sally-Ann Hart
Q
Emma Reynolds: And our competitiveness. If that can be done more quickly in another jurisdiction, business might well go there to set up or expand.
David Postings: Fundamentally, what we want is a competitive UK. We are only a small island off the mainland of Europe, but we want to generate big tax revenues to support growth in the economy. Anything we can do to help that is vital. Good, strong regulation is a key aspect of that. A nimble, commercially minded set of regulators to set that stronger regulation is vital.
Andrew Griffith
Q
Emma Reynolds: Sure. We represent the financial and related professional services industry, which employs 2.2 million people, and two thirds are outside London, contrary the characterisation that financial services are mainly in the City of London. We are the biggest net exporting industry, and more than 40% of our exports come from outside London.
David Postings: Yes, we produce higher-paid jobs, and there are big concentrations in Glasgow, Belfast, the north-east, the north-west and down on the south coast. It is a thriving industry and one that we need to support and nurture.
Sally-Ann Hart
Q
David Postings: Absolutely it will work. This is something that we have been working on. We kicked this off as an industry 18 months ago. I have worked with the Treasury, the FCA and the consumer groups for the past 18 months on this. The aim is to make sure that cash provision for the most vulnerable—indeed, for all of society—is protected. The Bill will absolutely do that—through cashback without purchase, ATMs that are free for consumers to use, post office counters and shared banking hubs. Twenty-five shared banking hubs have been announced so far, and that number will increase. All that will provide the right level of cash access going forward. The banks will be subject to LINK as a body to decide what goes where, based on detailed local analysis, and then there is an operating company that banks own, which will implement the solution.
Sally-Ann Hart
Q
Emma Reynolds: No. I defer to David. UK Finance provided leadership in this area—that is where the expertise sits.
The Chair
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witnesses on behalf of the Committee.
Examination of Witness
Chris Hemsley gave evidence.
The Chair
We will now hear oral evidence from Chris Hemsley, managing director of the Payment Systems Regulator. For this panel we have until 10.55. Could the witness please introduce himself for the record?
Chris Hemsley: I am Chris Hemsley, managing director of the Payment Systems Regulator.
Andrew Griffith
Q
Chris Hemsley: First off, I agree with your premise. The payment systems sit behind our day-to-day lives. They underpin what our businesses can do and our daily experiences as individuals paying and receiving. They genuinely underpin our productivity, economy and society. I absolutely agree.
In terms of the opportunity in the Bill, one of the key things that we will no doubt pick up is that it provides an opportunity to correct a specific problem that we have today. Some of the powers in the original financial services banking reform framework that the PSR was created under were turned off by some European legislation, and that prevents us from acting with that full suite of powers. That is really important for competitiveness, because if we can get the rules in the system right, that allows us to build trust in digital payments, which will support the economy and growth.
The other issue that I would pull out is that there are some quite important definitional clarifications in the Bill that ensure that the payment systems regulatory framework works for cryptopayments—stablecoin. We are now a regulator of the sterling finality system, which is a distributed ledger system. That bit of future-proofing, again, allows us to seize that opportunity of new technologies and new ways of payment and to make sure that they are appropriately regulated.
Tulip Siddiq
Q
Chris Hemsley: I think that the short answer to that is yes, but it is a challenge. We are always seeking to recruit and make sure that we have the right balance of skills in the organisation. We have a range of specialists who cover different technologies and payment systems, so it is not something to be complacent about.
The other observation I would make is that some of the risks and issues—and some of the opportunities—presented by things such as cryptopayment and distributed ledger are familiar problems, but with a different technology behind them. We are worried about our consumers’ money. Is it safe? Are arrangements for getting access to these systems fair and open? Are there competition problems? It is really important—the Bill does this—to make sure that that regulatory framework to tackle those familiar problems is also turned on for these new technologies, and that is the balance we need to strike.
Tulip Siddiq
Q
Chris Hemsley: We need to continue working closely with the two other principal regulators that tackle these issues—the FCA and the Bank of England—as we do today. We do that today with other technologies. We want the full framework to be turned on. With the FCA, we for example ensure that individual payment firms protect people’s money. You are absolutely right; in a world where people might not understand what a particular asset is, and its potential to reduce or substantially change in value, there is a really important role for the FCA in ensuring that firms are dealing with their customers properly. There is then a role for us in ensuring that the systems work, and that the rules are open, transparent and protect consumers, system-wide. The Bank of England ensures there is sufficient security and resilience, so that the systems actually work when we need them to, as we increasingly rely on them.
Martin Docherty-Hughes
Q
I am glad to see that there is some regulation in the Bill, but you used terms such as “future-proofing”. With this technology, we bandy around terms such as “innovation” and “future-proofing”. What does that actually mean, in real financial terms? Frankly, it is not the type of language that I, as a legislator, would like to see used in regulation of a market. It is not just that it is unfamiliar; it does not seem like the correct kind of language or descriptives to use when we can have an impact, predominantly on consumers who might use these commodities and assets digitally. What do you mean by “future-proofing”?
Chris Hemsley: That is a very good challenge. I want to ensure that the full regulatory framework that we have in the UK is turned on and applies properly, so that we can manage consumer protection and competition risks. That is what I mean in terms of that definition. That applies particularly to how payment systems regulation works. We have some relatively broad definitions of what can be covered. The Bill helpfully clarifies that those broad definitions of where regulation can apply are sufficiently broad. The way that the regulation works is that it still requires the Treasury to issue a designation—the Minister issuing a designation of a system—and our statutory duties and checks and balances then kick in. It is shorthand. If I try a slightly more precise framework, you need to ensure that the initial definition is sufficiently broad, so that those subsequent decisions on if and how something should be regulated can apply.
Martin Docherty-Hughes
Q
Chris Hemsley: I agree with what you said. There are some familiar risks, and some new ones, that we need to be alive to. The fact that for the first time we could see the use of mass payment systems that are not linked to fiat is a new issue, and one that we need to manage.
I come back to an earlier point, which may help you to take decisions on the elements around definitions of what can be regulated. There is a series of gateways, almost: before something is regulated, it needs to fall within the definition of the Bill, and the Bill helps with that. There is then a test in the Financial Services (Banking Reform) Act 2013 that turns on the PSR’s powers: something needs to be designated by the Secretary of State for it to be regulated, and then our powers can apply. I want that to work. I want the definitions, the designation and our powers to work in this new context. I can see these new issues, as well as the familiar competition access issues that we have had to deal with in the past.
Emma Hardy
Q
Chris Hemsley: The short answer is no. There is an additional requirement for us to bring forward proposals on the faster payment system, and we have already set them out in anticipation of that. We fully support that. The Bill does something broader. It removes this unintended consequence of European law for all payment systems. We will have the ability to use our full suite of powers, including in respect of fraud prevention, for all the payment systems.
Our powers vary slightly depending on which system we are talking about. We could apply these issues to, say, the cheque system or the BACS system, not just faster payments. We take a different approach on those systems, but the Bill allows you to turn on our full suite of powers to tackle the issues across the full suite of payment systems.
Emma Hardy
Q
Chris Hemsley: I agree with what was said in the conversation you had earlier: it is really important to share data. I am not aware of particular barriers, but if there are any, I would of course support addressing them. The Bill gives us what we need: we need our FSBRA powers to be turned on. That allows us to move from the current approach, through which we have been indirectly tackling fraud, to being able to tackle it directly through the system rules.
Emma Hardy
Q
Chris Hemsley: Indeed. We have work under way to encourage and support that.
Sally-Ann Hart
Q
Chris Hemsley: This is principally a matter for the FCA, so it might be best for me to follow up on it in writing, and potentially with the FCA.
Sally-Ann Hart
That would be good.
Chris Hemsley: The PSR’s powers allow us to make sure that people have fair access to payment systems. The access to a particular payment firm’s services would be something for the FCA. I am happy to take that away and make sure that the Committee has a reply.
Sally-Ann Hart
Q
Chris Hemsley: Again, that is more for the FCA, but I can offer you a general view. It is in everyone’s interests that the same risks and regulations apply to people carrying out payments business, including payment systems and payment firms. That is my general answer, but perhaps I could pick that up in correspondence, given that it falls principally to the FCA.
Sally-Ann Hart
That would be great; thank you. Maybe we can take that up with the FCA.
The Chair
Order. I am afraid that that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank our witness.
Examination of Witnesses
Charlotte Clark and Karen Northey gave evidence.
The Chair
We will now hear oral evidence from Charlotte Clark CBE and Karen Northey. We have until 11.25 am for this panel. Would the witnesses please introduce themselves for the record?
Charlotte Clark: I am Charlotte Clark, director of regulation at the Association of British Insurers.
Karen Northey: I am Karen Northey, director of corporate affairs at the Investment Association.
Andrew Griffith
Q
Charlotte Clark: Like all the other witnesses, we welcome the Bill. A lot of work has obviously gone into trying to get the right structure. That is really key in terms of how this works for the next generation. I think it was you who said that it had been 23 years since our last Financial Services and Markets Bill, so the legislation needs to work for a very long time.
On the specifics that you talked about, the competitiveness objective is key. Financial services regulation has been made in Europe for the last however many decades. As we onshore it, getting the structure right and making sure that the regulators balance different objectives is really key. We have argued for a primary, rather than secondary, objective around sustainable economic growth, partly because—as today’s debate has probably shown—competitiveness is quite a difficult thing to articulate, whereas for sustainable economic growth, it feels to me a bit easier to say how you are doing, why you are doing it and whether or not you are successful.
Culture change—I cannot remember who mentioned it—is important as regulators take on greater responsibility, particularly around policymaking. That comes to your point about the call-in power. None of us has seen it—I certainly have not seen it; I do not know whether Karen has—but nobody wants to undermine the independence of the regulators. It is incredibly important that they have their independence, particularly in their roles as supervisors and regulators. Political interference in that is not something that benefits the UK economy.
Policymaking, to me, is about trade-offs. If you are trading off economic growth against stability—we have mentioned financial inclusion and net zero—it is about balance. Sometimes, the regulator is not going to be all-knowing, and sometimes it is the role of Government and Parliament to step in and say, “Actually, we have a slightly different opinion.” I don’t think that is about undermining the independence of the regulators, though.
Karen Northey: I will focus on competitiveness and international competitiveness. The Investment Association represents investment managers in the UK who manage £10 trillion-worth of assets on behalf of clients. Of those assets, £4.6 trillion are from overseas investors. The investment management industry in the UK is truly global, and a global success story.
Our industry has two parts: the fund domicile and the activities that go behind the fund, and then the management of those assets—so the investment management side. We are a world leader in investment management, second only to the US, but the US is a very domestic market, whereas London—London and the UK; I must not forget my colleagues, particularly up in Edinburgh—is international. The international competitiveness is absolutely key to our industry.
We support the Bill. We support the secondary objective of international competitiveness; we think it is really important for our industry. Our position as an international global leader is at risk. We are the second largest and the most international, but we cannot be complacent about it. More can definitely be done to support our industry in continuing to be that world leader. That brings investment decisions closer to home. It enables greater opportunities, in terms of products and services for the wider economy, for investors, and for pension funds and so on in the UK.
Andrew Griffith
Q
Charlotte Clark: It is the United States, Bermuda, and Singapore—Europe as well, but particularly for reinsurance.
Karen Northey: For investment management, I mentioned before that the US is the largest investment management centre. We are seeing growth in other centres, close to home in Europe, but there is also a very significant China and Asia investment management centre. On fund domicile, which is more the back office where the funds are registered, Ireland and Luxembourg are obviously the key places where funds are often established.
Tulip Siddiq
Q
Charlotte Clark: I do not think that there is anything in the Bill specifically around net zero. I understand the debate about whether there should be an additional objective for the regulators around it. Obviously, net zero is incredibly important for the insurance sector. We bear the cost of climate events. The incentive on us to think about and support the transition, particularly financially, is very apparent.
I think our regulators do a pretty good job when it comes to net zero. If you think about the things they are doing, such as the stress test, the establishment of the climate financial risk forum and the work they are doing on disclosure, they are pretty much ahead of most other regulatory organisations on net zero. I guess one of the questions is: what would you want to do differently? This comes back to whether they have an objective. One of the concerns about them having an objective is whether it would be their responsibility to direct investment. Again, that comes back to what the role of the regulators in this is. In some ways, put bluntly, I think it is the Government’s responsibility to deliver net zero. We all have accountability in that, but I would not necessarily say that giving an objective to the regulator should change what they are currently doing, so I would question why you would do it.
Tulip Siddiq
Q
Karen Northey: Again, I would highlight that the UK is a centre for green finance and has done very well in it. It is a big part of what our members do. For risk management, investment managers have to take a long-term view, and that long-term view, by its nature, has to take into account climate change. Additionally, they play a huge role in directing finance towards transition, so there is a dual role for our industry.
In terms of a competitive and growth objective for our regulators, I agree with Charlotte that the regulators are generally doing a very good job. One of the key things in green finance is international standards and compatibility between them. There is a cross-border element to all forms of capital movement and investment, and alignment with international standards, so taking into account what is happening elsewhere is a key part of a regulator’s activity, particularly in green finance.
Craig Tracey
Q
Karen Northey: On your question of whether the secondary objective is enough to change culture, I think an objective is necessary but I do not think it is sufficient—so it is necessary but insufficient. Culture absolutely has to follow. What we do not want is for it to be a check in the box when you are making a new rule for the handbook—“Yes, it will contribute to this.”
There does have to be an overall culture change, but to do that you do need the objective. I think that a lot of the ideas put forward this morning by TheCityUK around, for example, disclosure and transparency reporting on exactly how the objective is being met in each decision, will be key to that. I think we will continue to work with our regulators on that, as we currently do, but we would definitely encourage more transparency and disclosure around how individual measures are meeting that secondary objective.
Craig Tracey
Q
Karen Northey: Parliament plays an important role. If I think of the various roles that, for example, the FCA plays as a rule-maker or a law-maker, as well as in supervision and enforcement, we are specifically talking about the rule-making function of regulators, which will be significantly increased. European directives are created through a process of Parliament, as well as through the Commission and Council, so if the regulators are taking on those responsibilities, it is important that Parliament then also plays a significant role in holding them to account. These are quite significant powers coming back from Europe and Parliament has a legitimate and important role that to play.
One important thing, from our perspective, is that that review and that holding to account of the regulators when they are being reviewed must be sufficiently well resourced and have access to sufficient expertise. Certainly our industry—I know this is true across financial services more generally—is willing and available to provide and help with that expertise, as appropriate. I understand that there are balances that need to be made, but ensuring that level of expertise is important, because there is a lot of this regulation and it is also very technical and across lots of different areas. Parliament absolutely has an important role to play and will need the resources and expertise to do that.
Charlotte Clark: My response is pretty similar. Part of the reason for arguing for the primary objective is that a lot of our experience is coloured or shaped by the debate around Solvency II. The Government proposed three objectives for the review of Solvency II. One was around a vibrant industry, the second was around policyholder protections and the third was around investment—getting investment in infrastructure, net zero and those sorts of things.
I would say that the regulator is still very focused on policy holder protection. While no one would want to undermine that—financial stability is the absolute bedrock of everything—it is a necessary but insufficient condition for everything else that needs to happen with regard to investment and growth. That is part of the reason why we have argued for the importance of a primary objective: that culture shift is needed. Could it be done through a secondary objective? I hope so. It is about whether there is the right reporting and the right accountability and whether the challenge is there.
These are very complicated issues. This is the joy of discussing Solvency II—I apologise if I have inflicted that on any of you. These are very complicated issues and it is very difficult to get that wider challenge. Those people who embed themselves in this day to day can slightly overrule things, rather than find a balance for the way these things are implemented.
Craig Tracey
Q
Karen Northey: I think that is a barrier. Previous conversations have covered authorisations of individuals and firms. If there is something unique in our sector, it is that our products also need to be authorised—the funds themselves need to be authorised. I mentioned the examples of Ireland and Luxemburg as key competitors in fund domicile: in Ireland it is possible to have approval for a fund within 24 hours. The FCA target is a month, but that does not always happen. There are definitely instances where in-depth review is important—we want to make sure that funds are meeting obligations—but sometimes they are very similar to previously authorised funds, run by managers who have a long history and so on. Definitely when it comes to fund domiciles it is something that is considered as important.
I know that the Bill focuses a lot on bringing EU legislation back, which is absolutely essential in terms of targeting certain areas so they are more fit for purpose for the UK market, but there are other areas of reform that are more homegrown that have led to challenges for our members in terms of our international competitiveness—the consumer duty was mentioned, for example, and there is the financial services compensation scheme and a number of others. It is not the only factor in making a decision, but it is definitely a factor.
Charlotte Clark: Similarly, I cannot recall a new insurance company being set up in this country—certainly not in the last 10 or 15 years. They are being set up in Gibraltar, Bermuda and other places where there is equivalent regulation. There is something about how we attract it, do it quicker and ensure that people feel that this is a good place to do business.
I will make a broader point with regard to investment and slightly contradict something I said previously about net zero. One of the things we talk about is that it is harder to invest in a wind farm than it is in coalmines. Those sorts of regulatory barriers need to be changed so that we are investing in the right things for the UK economy, particularly when it comes to net zero.
Emma Hardy
Q
Karen Northey: Financial inclusion is probably not relevant to our industry, in terms of access to bank accounts, but financial wellbeing is critical to our industry, in terms of how money is invested for the long term—particularly later in life—for individual investors. Three quarters of households use an investment manager through their pensions, for example, so it is about making sure they get the most out of their investments.
We have suggested that you address as quickly as possible the advice-guidance boundary. That might sound quite technical, but there are a large number of individuals who simply do not get financial advice because of the way the regulations work at the moment. We are encouraged to hear that the FCA fairly recently announced a comprehensive review of the advice-guidance boundary, but there are definitely things that can and should be done around enabling more people to get help, whether that be more bespoke guidance—there is lots of technology and innovation that will help without giving regulated advice, which absolutely should be the bedrock of complicated financial planning—or simplified advice. In terms of financial wellbeing, that is something we would like to see.
Emma Hardy
Q
Karen Northey: On financial inclusion, it is not something that we thought was necessary, in terms of the powers that the regulators have and the role that regulators have versus the wider Government on financial inclusion.
Charlotte Clark: Our position is similar. Nobody doubts the importance of financial inclusion. Particularly at the moment when people are making very challenging decisions, things like savings and insurance can feel like a luxury. The regulator and the FCA in particular have given great importance to things like consumer duty, vulnerable customers—not a title that I particularly like because it is basically almost all of us at some point in our lives—and ensuring services are available to people in difficult and challenging circumstances. The review of advice and guidance is really important. For us, the point of retirement is key. At the moment, less than 10% of people are getting advice at that point.
Emma Hardy
Q
Charlotte Clark: I think the Bill allows for a review of MiFID—this is horribly technical, isn’t it? There is a lot of regulatory change going on at the moment and we need to get the definitions right. Whether it is simplified advice, broader guidance or just more help for people, all those things need to be thought through. I am not sure that will be done in the time and space in which this Bill will be taken forward, but it certainly gives the FCA and the Treasury the powers to make the changes that could be helpful for people.
Emma Hardy
Is there anything you want to add, Karen?
Karen Northey: No, I think I covered it earlier.
Stephen Hammond
Q
Charlotte Clark: That language is really important. How do we get things like transparency and challenge into the system? I am not sure that writing it into legislation necessarily leads directly to it, but there is something about getting the right mechanisms, the right debate and the right challenge between Parliament and the regulators, without undermining their independence. This is such a big change. I do not think any of us could be completely certain that we have got it right, but it is about making sure that we have got the right balance and the right mechanisms to hold people to account.
Stephen Hammond
Q
Charlotte Clark: A good example is the cost-benefit analysis panel. At the moment, the regulators appoint people to that panel. That could be fine; it might not be. You might want a bit more independence in there and a bit more scrutiny. You might want to think about what those processes are. It is those sorts of areas where they could imbue cultural change. Dave Postings had the example of the consumer duty, whereby they told us what the cost was but not the benefits. We all have our favourite examples of regulatory change where we think, “You haven’t quite made the argument for this; you haven’t quite shown that this is going to be beneficial.” Making sure that changes is one of the things we would want to see.
Karen Northey: I will pick up on the second part of your question, on evolution versus revolution. It comes back to the fact that there is a significant amount of legislation to be reviewed. This is kicking off and enabling a significant review. Our members believe there are a lot of things in European legislation that work, and we do not want everything to go.
I harp back to the figures I mentioned before: £4.6 trillion out of £10 trillion is overseas assets. That relies very heavily on a concept called delegation, which allows UK asset managers to manage European funds. From our point of view, it is fundamental that we operate in a global regulatory framework in a way that does not put at risk what is a significant success story and a significant source of revenue and growth for our country.
The reviews that the Bill enables should be done in a targeted way, focused on those measures that will make the most amount of difference in terms of allowing the UK industry to work better. But we have always said that we are not looking for regulation to be torn up and suddenly having no regulation. This is about making modifications that will make a significant difference to our industry here in the UK.
Stephen Hammond
Q
Karen Northey: Absolutely, and I think the process that comes has to be done in a way that is sequenced in the right way to allow proper consultation and proper input.
Peter Grant
Q
Charlotte Clark: Why would you set up in Gibraltar and sell into the UK market? There is not a big market in Gibraltar.
Peter Grant
There could be a number of reasons why UK business owners choose to set up companies offshore, including in Gibraltar, and they are not always reasons that have the best interests of consumers at heart.
Charlotte Clark: I think that is fair. I am certainly not casting aspersions on the Gibraltar regime, because they should have the same regime as the UK—equivalence with Gibraltar was in the last financial services Bill. The question would be: why would they do that if we haven’t got the right regulatory environment for companies to set up here and to have the oversight of our regulators?
Bermuda is probably a good example. If you speak to the regulators there about how they think about it, how they work with businesses and what they need to do, they have a slightly different culture. I do not think that is to the disadvantage of consumers. The Bermuda market is very similar to the London market in insurance. I do not think it is to the detriment of consumers; it is to the advantage of business, and I do not think that those two things are necessarily against one another.
The Chair
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and the end of this morning’s sitting. I thank our witnesses on behalf of the Committee. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue to take oral evidence.
Financial Services and Markets Bill (Second sitting)
Wednesday 19th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 19 October 2022 - (19 Oct 2022)
The Chair
We are now sitting in public and the proceedings are being broadcast. We will now hear oral evidence from Sir Jon Cunliffe, deputy governor of the Bank of England. For this panel, we have until 2.25 pm. Could the witness please introduce themselves for the record?
Sir Jon Cunliffe: I am Jon Cunliffe. I am the deputy governor for financial stability at the Bank of England.
The Financial Secretary to the Treasury (Andrew Griffith)
Q
I do not reach a conclusion on those matters myself, but I thought it would be helpful if we could start with your evaluation of the United Kingdom’s competitiveness in financial regulation, which is one of the core purposes of the Bill, and how well you think the Bill achieves that objective of improving our competitiveness. The other thing a number of our previous witnesses talked about was which markets in the world they consider to be our competitor set.
Sir Jon Cunliffe: I thank the Committee for allowing us to give some evidence on the Bill. This matters hugely to us. I will say at the outset—this goes to your questions, Financial Secretary—that the Bill is hugely important and it is hugely important for a number of reasons. This is relevant to the competitiveness question. The system we have at the moment is basically that we have onshored the European Union system. That system—I worked in it for many years in different jobs and have been involved in much of the legislation—is designed for, now, 27 member states. It needs to ensure the single market and, although the national competent authorities do the supervision, there is always concern in the single market that you will get differences among them. A huge amount of what in other jurisdictions’ best practice is done in regulators’ rules is hardwired in primary law, and you can see that if you look at the onshored law. That system is justified by the needs of the single market and the need to bring all these jurisdictions together. As a single jurisdiction, as the UK is now, we will have much more flexibility, and the ability to act nimbly and design regulation for our particular needs, than we had in the European Union.
I can give you some examples of that. For example, my colleague Sam Woods at the PRA has put forward ideas for a strong and simple prudential regulation framework for banking. We could not do that under the European Union because we were all locked in a maximum harmonisation phase. In the parts of the Bill that are more relevant to me, around payment systems, there is a schedule that deals with digital settlement assets, more generally known as stablecoins, where we can now develop a regulatory framework that is nimble and flexible on the financial market infrastructure side, where we will see huge technological changes brought about by some of the technology we now see around encryption and tokenisation. Again, we are developing a sandbox with the FCA and the Treasury, but we can bring those much more nimbly into rule. This is a much more flexible and adaptable system, which will help in competitiveness.
It will also help because many of the requirements and the processes in the legislation we have were designed for 27 or 28 countries, and not for one. We report on things—I was there when they were put into the legislation—that were important to other countries but not to us, so there is an on-cost in process. Things that are important to us are not always fully reflected, because all European legislation is a compromise. That flexibility and nimbleness will take time, because the European acquis is very large, but it is a huge advantage for us in designing the regulatory framework that we need.
But—and that is a very important “but”. I might not agree with all the people that have given evidence, and I know the Financial Secretary would probably not expect me to either, but this needs to be underpinned by a strong, credible, regulatory system, and the independence of regulators is a key part of that. It is best international practice, but I think it is particularly important for the UK in two respects.
You can measure our financial system in different ways. The last IMF measure was £23 trillion—that is about 10 times GDP. When that system goes wrong, the cost to the nation is huge. That is not theoretical; we saw that in the financial crisis over 10 years ago. The recovery from the financial crisis, in terms of growth, was slower than our recovery from the great depression in the 1920s. The objective of sustainable growth in the medium and long term is entirely right, but strong, credible regulation is a necessity for sustainable medium and long-term growth. In the short term, there might be trade-offs, but in the long term, we can see what happens to growth if you get a financial sector of the size of ours wrong.
I might touch on the question of a call-in power, because I know you asked my colleague, Vicky Saporta, about that this morning. We have seen the power or the proposed amendment the Government intend to bring forward. Of course, we are subject to Parliament and the framework that Parliament sets for us, and we will work within that framework. However, for the two reasons I gave, I think a power to call in and rewrite veto rules that the regulator had made would, frankly, give us—me, anyway—serious concern given the history I have seen over 30 years in the UK financial sector.
Actually, it goes to competitiveness. We are—I gave you my £23 trillion number—probably the largest international financial centre in the world and we are one of the largest exporters of financial services. Regulators and regulatory authorities of other jurisdictions need assurance and need to be comfortable; they need assurance that they will not import risk from the UK or by their firms using UK financial services. That credibility of the institutional framework is very important to the competitiveness of London as a financial centre.
Of course, it is also important to the firms that locate here. They want to ensure that if they use our infrastructure—I am responsible for clearing houses and settlement systems—and if their banks locate here or trade with our banks cross-border on financial services, then they can be assured of the robustness of the underlying system.
I beg your indulgence, Mr Sharma, as I have one last point. All of that—the nimbleness, flexibility and, on the other side, robustness of the framework—needs to be fully, publicly accountable and accountable to Parliament. We welcome what is in the Bill in this area.
To the question of where our competitors are, I think the US is a large competitor in wholesale financial services. We have competitors in Asia as well, but that is more niche. A lot of particular products, asset management and the like, are located in Ireland and Luxembourg and are used by the UK.
Financial services are not linear. A service will very often be a bundling of products that come from different jurisdictions. That is very important for competition. People need to be assured that they will not import risks by dealing with the UK, and that when financial services are put together with elements from different jurisdictions or when we are competing, we actually are in line with international standards.
Andrew Griffith
I thank the deputy governor for his comprehensive comments.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
Q
Sir Jon Cunliffe: I have not seen the proposed amendment. I have only seen the Financial Secretary’s comments to the Treasury Committee and comments from the previous Economic Secretary at the Treasury, so I would need to look to see. I would say that the Bill as drafted gives the regulator primary and secondary objectives to make the difficult decisions that some of the witnesses this morning were complaining about. It requires us to balance different things before we come to a decision, but underlying that is the primary objective of financial stability and the safety of the system.
I do not know how often a call-in power or an intervention power would be used, and I do not know what frameworks would be around it. Of course, one cannot always assume that the intention when introduced is actually what happens five or 10 years down the line with different Governments. It is something that gives Ministers the ability to take a second judgment on the judgment the regulator has made in line with everything in the “have regards”—the secondary objective—so it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.
Tulip Siddiq
Q
“Anything that would weaken the independence of regulators would undermine the aims of the reforms”
implemented by the Bill. Do you think he was referring to the proposed intervention powers?
Sir Jon Cunliffe: There has been a lot of discussion. There was discussion in the consultation about a number of aspects that might affect either the independence or balance of the regulators. I know there was a discussion on the competitiveness objective, and we think it has been drafted in a very sensible way. That came up in the consultation. At that point there was also talk of an intervention power, so it would apply to that as well, I guess.
Craig Tracey (North Warwickshire) (Con)
Q
Sir Jon Cunliffe: I should say at the outset that our responsibility is the prudential regulation. The FCA deals with a different market. On the prudential and infrastructure side that I deal with, there is not a huge amount of commerce with Singapore. Would I accept that the competitiveness of our financial sector relative to Singapore’s in the areas that I deal with has been damaged? No, I do not think I would. I do not know of any examples. I think the firms that you quoted were in the FCA area. The competitiveness of the financial system depends on many things. It depends on our openness to migration. One thing you hear most from international banks and the like is the overriding importance of getting the best talent. That is a huge advantage for the UK, which has been called into a little doubt recently, but I think is now being re-established.
The taxation regime plays a role, and then there are lots of things about the attractiveness of the location for people to live in. On making a comparison between two financial centres on how many firms have started one and how many firms have started another, and assuming that all of that is to do with the way regulation is designed, I would be careful about making comparisons on that basis. There is a lot more in it.
I will bring it back to my area if it helps. When I look at the technological changes that are coming, and when I look at the European Union, which is where we were, and look at areas where I know we have not had the flexibility to design the regulation that we would have wanted to design—there are pros and cons to being in the European Union, and we can argue about those—you have to be within a single market where the rules are pretty much set for everybody. On the rulebook as we have it now and instances where people have said, “We don’t like that part of the rulebook. We will set up somewhere else”, I do not have any instances where that has happened, but it probably has.
As these powers, which are now coming back to the UK and I think rightly coming into the regulator’s rules, are exercised, where does the regulator put the balance? What is the scrutiny of the regulator? Is there accountability? In the end, those decisions, if I can encapsulate it, lie in the way the Bill has been set up with the primary and secondary “have regards”, and those arrangements should ensure that we are competitive in future.
Craig Tracey
Q
Sir Jon Cunliffe: With the greatest of respect, I do not think I need my culture shifting, within the regulatory framework that we have at the moment. I have made a series of speeches on new technology and the benefits that new technology can bring and the importance of that, so I would not regard myself as in that position. Others might have a different view and are obviously entitled to it, but I certainly would not accept that, if I can make that point clear. You can look at the published statements of the Bank of England and the speeches we have made.
We welcome schedule 6 of the Bill because it will give us the powers to put in place a regulatory framework for stablecoin and digital assets used as payments. I would argue, because I hear this from lots of the fintech community in London, that they want a regulatory framework. They do not want a system where the public think, “This is unsafe. What happened to Terra and LUNA could happen to me. I could be scammed. I am betting in an unfair casino.” They actually want a regulatory system. They want it to be designed to recognise their technology.
There will always be tension between where we put the risk cursor and where the private sector would like it to be put. That is a discussion we have to have. The importance of this Bill is that it will give us the powers to get on and do it. I do not think I would accept the criticism that our culture is anti-innovation and inflexible. We need the powers and the tools to do that job and that this Bill will give us them.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
Q
“In baseball, it’s three strikes and you’re out. In cricket, it’s only the equivalent of one. For systemic payment systems, one is too many. If that means, as it must, very rigorous oversight and rules for private stablecoins, what would then differentiate them from CBDCs?”
First, could you answer the former Governor’s question—what then does differentiate them from a central bank’s digital currency? Secondly, I am glad to hear you rightly say that the industry wants good regulation; is this regulation rigorous enough to enable that to happen?
Sir Jon Cunliffe: I do not normally contradict my ex-colleague and boss, Mark Carney, but I would say a number of things. On the landscape, let us be clear about what we are talking about: we are not just talking about new forms of payment systems; we are talking about new forms of money. Most of us do not realise it, but when we use our credit card, phone or cheques—if we use cheques—we are exchanging private money, which is our deposits at commercial banks. What these stablecoin proponents propose to do is create a new settlement asset—that is, a new form of money—to be used in transactions. I think that is why Mark said that when a payment system—the money going through it and the mechanism for transferring it—breaks down, then one of the basically essential services in the economy, like water or electricity, breaks down and transactions cannot happen. So you do not get one strike: if the payment system goes down, people cannot transact at scale. This is fundamental infrastructure, if I can put it that way.
The money that travels through these payment systems is also fundamental to society. It needs to be robust and safe, and history has lots of examples of what happens when people lose confidence in the safety of the money they are holding and transacting. That is why these things are crucially important. However, 95% of the money that we use in our economy is not public money from the Bank of England but private money from commercial banks, and I do not see, a priori, a reason why a new form of private money could not emerge using different technology in the way that stablecoins have proposed. What I will say, and the financial policy committee at the Bank has said this very clearly, is that the money that they use and the transaction machinery that they use must be as robust as the money we are using from commercial banks or the Bank of England. The public should not need to think, “Which money am I using?” It should all be one money of equivalent value.
I think there is a world in which you have a CBDC, stablecoins, commercial bank money and Bank of England cash, which we will produce as long as anybody wants it, and those things are interchangeable and people use them interchangeably—we use the moneys of different banks interchangeably now—but the regulatory system has to be strong and make it very clear that if what you are offering is a better service, an innovation, that is fine, but if it works because it operates to a lower standard, that is not fine.
Martin Docherty-Hughes
Q
Sir Jon Cunliffe: No, no, it is fine. We are friends.
Martin Docherty-Hughes
He did say this, which I take in terms of stablecoin as well:
“Ultimately, crypto either has such extrinsic value without a use case, or has a use case as an NFT that perfects ownership (which is niche by definition in that it is non-fungible).”
His critique is that it becomes niche.
The Chair
Order. I am afraid that brings us to the end of the time allocated for the Committee to ask questions of this witness. On behalf of the Committee, I thank our witness.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Q
Sir Jon Cunliffe: I would be very happy to write something on—
Emma Hardy
Crypto.
Sir Jon Cunliffe: We will bring out a regulatory framework for stablecoin, but I am very happy to write on how we see it, if that helps.
The Chair
We will now hear oral evidence from Paddy Greene, head of money policy at Which?. For this panel, we have until 2.45 pm. Will the witness please introduce himself for the record?
Paddy Greene: Good afternoon. I am Paddy Greene, the head of money policy at Which?. I welcome the opportunity to speak today. What is probably pertinent is that we have had some long-standing campaigns on access to cash and authorised push payment fraud.
Andrew Griffith
Q
Paddy Greene: I do accept there is a balance to be struck, so thank you very much. The simple thing is that we need to make sure, when we are talking about the financial services sector and consumer protection, that we have the appropriate consumer protection baked in, so that we have a basic level that means all consumers can participate with confidence and they know that whatever they are transacting in they are looked after and they have a form of redress. Then, once we acknowledge that we have that basic consumer protection, we obviously have some judgment to make on how far the other regulations go. I must add that when we are talking about consumer protections we mean that a protected consumer is confident, has trust in markets and will participate well, and that can lead to a competitive market, an innovative market and a market that can help with growth.
Andrew Griffith
Q
Paddy Greene: The trade-off between protections and consumer credit?
Andrew Griffith
Between putting in place—I am not making a point; I am just trying to open this up for the Committee—good, valuable seatbelts and protections versus over-protecting consumers to the degree that large numbers of participants exit the market and then consumers are left with door-to-door, unregulated providers of credit.
Paddy Greene: Affordable credit is absolutely essential for consumers, but we need to make sure that, first of all, access to credit is regulated. We do have a particular form of credit that people are accessing now with buy now, pay later, which is not regulated at all, but consumers presume that it is. There are some basic protections we need to build in. One is to ensure that the parts of credit that people access are regulated themselves and that it is clear that consumers understand what is regulated and what is not. Then there is some basic information, such as key terms and conditions.
I am aware that some of the details in the Consumer Credit Act 1974, which is exceptionally old, are onerous, and there will be a chance to review that—I think later this year. It is about making sure we have efficient information presented to consumers. There is a balance there, but there is key information that we must provide them and there are key protections that must be baked in.
Tulip Siddiq
Q
Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.
Peter Grant (Glenrothes) (SNP)
Q
Paddy Greene: I cannot speak for small and medium-sized enterprises—I am here to represent consumers—but fundamentally I do think that the regulatory framework in this country provides confidence. I think it has been robust, relatively speaking, over the years. If we compare it to some other international sectors, I think it is a framework that can provide people with confidence. We would be remiss to weaken that in any way.
Peter Grant
Q
Paddy Greene: We have some concerns about the current wording around competitiveness. I think we need to be mindful of that. I want to get across that whatever changes are brought in, the primary objectives of the FCA must not be inadvertently undermined. The FCA has a challenging time to balance those objectives at the moment. We would seek amendments that ensure that, from the consumer perspective, if we are going to see changes brought in, in no way shape or form do they undermine the consumer protections that are in place.
On the argument for competitiveness for consumer protection, I would add, similar to my earlier remarks, that a confident, well-protected consumer will lead to a competitive environment. It will lead to innovation and confident consumers interacting in that market.
Peter Grant
Q
I have had a number of representations, as I think other members of the Committee have, from individuals or groups of people who have been victims of financial services scams on a colossal scale. One of their common comments is that they do not think it is justifiable for the regulators to have such a strong degree of immunity from civil liability, even in cases where it is clear that the regulator has failed and that that failure has contributed to members of the public losing what for them are significant amounts of money. Do you have a view as to whether it is time to revisit that very broad immunity that so many of the regulators have?
Paddy Greene: I am struggling to hear your questions.
Peter Grant
I am sorry. I will try to speak into the microphone, so forgive me for not looking at you. Do you have a view on the numerous representations we have had from victims of financial scams who think it is time to revisit the very broad immunity from civil liability that the regulators have?
Paddy Greene: I will talk specifically to parts of the Bill. This is essential, but I am thankful for the provisions that have been brought forward to introduce a mandatory requirement for people who have been the victims of push payment scams to get their money back. In terms of a first step, that is crucial. On changing the regulatory framework, that is a first step and we welcome it.
Peter Grant
Q
Paddy Greene: Yes, I believe there is. It is right that the Bill starts with faster payments—I think 87% of APP scams are run through faster payments. We do not want to delay action. It has taken too long: it has been six years since our super complaint to get to this point, so we must not slow that down. The revisions—the two-month and the six-month provision in the Bill—are ones that we absolutely endorse. As I said, we do not want to slow that down.
We need to make sure, though, that there is an obligation for further action—for example, to look at CHAPS payments. UK Finance figures show that 79 million on CHAPS and on-us payments are already there. We know that scammers and fraudsters are very good at adapting to change, so they will move. I know there have been some debates about what the Bill does or could allow, but we need to make sure there is an obligation so that we know what will happen next. Just because there is provision for the regulator possibly to act in the future, that does not mean the regulator will—there is a lot of pressure on regulatory time and resources—so we would really like to see some clarity on what happens after the changes to faster payments are made. As I said, this is the opportunity to look at the future. We know that change is happening, so we should set out a timeframe for what happens next.
Sally-Ann Hart (Hastings and Rye) (Con)
Q
Paddy Greene: I think we need community-based solutions. The fact is that it will not be one-size-fits-all. We need to recognise that communities have different challenges. When we look at the voluntary solution that the industry has put in place, it accepts that, first, we need not only a geographical spread but a community access point. We need the ability for communities to request a review of access in their areas.
Secondly, we need a raft of delivery channels. That again gets to the point of what is fit for purpose. An ATM might well be suitable in one town, but it might not be suitable for another town for a variety of reasons, be that geographical or the demographics of that part of that society. I do not think it is one-size-fits-all. It is very important that we get the policy statement from the Treasury soon, so that we and you can scrutinise properly what the close details will be, but it should be a basic geographical spread, with the option to interrogate further those who are not captured by the geographical spread and to ensure that we do not inadvertently leave people behind.
Sally-Ann Hart
Q
Paddy Greene: We need to acknowledge that if, let’s say, you came down to a certain kilometre base that might sound reasonable in broad terms, it would under-serve some communities, so we need to be alive to that.
Siobhain McDonagh (Mitcham and Morden) (Lab)
Q
Paddy Greene: I think we need to be specific about the need for consumers to have free access to cash. I have concerns that the Bill could be interpreted in a way that undermines those objectives. We absolutely welcome the provision of cash legislation and I am very happy to see it here, but this is our opportunity to get it right. Consumers need confidence that they will have free access.
Emma Hardy
Q
Paddy Greene: Absolutely. We need to see it and we need to see it very quickly. We are in the situation where a lot of people use such buy now, pay later. I acknowledge that a lot of people use it safely, but a growing number of people are struggling with repayments. It gets to the point where people presume that it is regulated. It is an unfortunate reality that lots of consumers do not really differentiate between types of financial products when it comes to the payments and credits that they use, but we need to have buy now, pay later regulated and we need to have it regulated very quickly.
Tulip Siddiq
Q
Paddy Greene: Yes. Similar to the comments that were made before, it is right to start with faster payments. We need to move to a model where we are absolutely confident—I heard the tail end of the previous evidence about different payment mechanisms and those that are emerging. We must have consumer protection baked in. We want consumers to have confidence and we know people are going to use such systems but, as we have said previously, they do not necessarily understand what is backed and the type of payment mechanism that is used.
In terms of what we want to see next, we are delighted with faster payments, but £79 million is already lost on CHAPS, on-us items and international payments. First, we need to make sure that the PSR and the Bank are talking properly about CHAPS, because when we are talking about CHAPS, we are talking about house purchases. For the people who are scammed during such a payment, there is a huge detriment, not financially but emotionally, and we know that fraudsters will adapt.
Our next steps, after we have got faster payments, are CHAPS and on-us, and we need to look at international payments. We need to make sure the regulator is looking at all the other designated payments and those that will come down the line, because we are seeing innovation, in order to make sure that the appropriate consumer protections are built in from the very start.
The Chair
If there are no further questions from Members, I thank the witness for his evidence and we will move on to the next panel.
Paddy Greene: Thank you very much.
Examination of Witnesses
Natalie Ceeney and Martin Coppack gave evidence.
The Chair
We will now hear oral evidence from Natalie Ceeney, chair of the Cash Action Group, and Martin Coppack, director of Fair by Design. We have until 3.10 pm for this panel. Could the witnesses please introduce themselves for the record?
Natalie Ceeney: I am Natalie Ceeney. I authored the independent access to cash review four years ago. I now chair the Cash Action Group, which is leading the industry’s work to provide a voluntary solution, prior to legislation, for providing access to cash.
Martin Coppack: I am Martin Coppack. I am the director of Fair by Design at the Barrow Cadbury Trust. We exist to eliminate the poverty premium—that is, the extra costs that poorer people pay for essential services. I am also a commissioner on the Financial Inclusion Commission. Previously, I was a regulator, responsible for setting up the FCA’s approach to consumer vulnerability and its engagement with third sector organisations.
Andrew Griffith
Q
Natalie Ceeney: We very much modelled the voluntary scheme that we set up as if the Bill, as currently drafted, were implemented. The model starts with a community need base. The premise is that all banks will have a responsibility to serve their business and retail customers, and if they are not doing it through their own branches, they have to do it through another means.
The mechanism we set up is that anyone—any MP, any member of the public—can request that their community’s needs are reviewed. That is done independently by LINK. The form is very simple, free to fill out and on LINK’s website. LINK is already getting applications. Equally, every time a branch or an ATM is closed, LINK will review the needs of that community. If those needs are not being met, it will consider a new solution. Since 1 January, that has already led to 25 new hubs being announced and 13 communities where we are going to explore pilot services, including deposit services. LINK has also set up a significant number of ATMs; I do not have that number at my fingertips.
Andrew Griffith
Q
Natalie Ceeney: To be honest, we need both. There is a real competitive challenge for any bank that wants to go beyond what is necessary, because if it does that, it could be accused by its shareholders of wasting their money, unless all its competitors do the same. To be fair, it is the threat of legislation that has made everyone say, “Why don’t we work together?”. We do need this legislation for the industry scheme to continue in a viable way, but I am pleased that the industry has stepped up in advance of legislation.
We have worked hard not just with banks, but with consumer and small business groups, so the scheme we have designed truly has the input of everybody. We have run pilots for the last two years in communities to test that our models work, with really high satisfaction rates. We need both, but I think the scheme we have designed means that when the legislation is passed, we are ready to go; there will not be a gap.
Andrew Griffith
Thank you. I think you may get an invitation to some parts of the country.
Tulip Siddiq
Q
Natalie Ceeney: That is a very good question, and I am conscious that every time this issue is debated in Parliament or, frankly, every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population. If somebody needs face-to-face support with their money, which might be about getting money out, paying money in, a standing order or the fact that a payment they expected has not arrived, it is the same demographic group. We have recognised that in the voluntary scheme. When we set up a banking hub, it does not just have a counter where you deposit cash and get cash. There is also a private space where the banks provide a community banker to do basic banking services. As far as the legislation is concerned, the voluntary scheme we set up will cover that need on a voluntary basis.
There is one challenge that you might want to include in the legislation. I am going to stay neutral because of my members. The consumer groups and small business associations would say it should be included and the banks would say it should not, but if you do want to go there, defining what you mean by face-to-face banking services and particularly essential services is really important. I do not think anyone would expect you to offer wealth management or buy-to-let mortgage advice on every high street, but helping someone when they are stuck because a payment has not arrived or they have got locked out of their account feels different. Keeping that definition tight is important.
There is also a question about whether the FCA has the powers that it needs already. Those are the factors I would consider.
Tulip Siddiq
Q
Martin Coppack: Absolutely not. I have worked in this sector for 20 years and we have the biggest opportunity right now to make a systemic change to how people who are excluded are addressed by both the regulator and the Government, and we need to take it. Recently I provided evidence to the Treasury Committee, which supported our call for a “must have regard to financial inclusion” for the FCA—importantly, alongside a requirement to publish once a year the state of financial inclusion, what it can do, what it cannot do, and who else can act. That is so important. If I could just give a little more context about why that is so important, I would appreciate it.
Thinking about where we are now, Governments of all different colours over the years have asked people to take responsibility for their own financial affairs—be a good citizen and look to the market, whether that is saving for a rainy day, saving for retirement, or protection products for insurance—but what happens if the market does not want you? What if the market says, “You are a higher risk and more costly to serve, so we are either going to make our products more expensive for you or we will just exclude you.”? I think everybody can recognise that situation.
With competition-driven markets, we can all agree that firms will naturally design products that are profitable. That is okay if it is not an essential service, but if it involves basic financial products and services that everybody needs, some intervention needs to happen. Over the last 20 years or so, we have been asking amoral markets to make moral decisions about who gets what product at what price and who gets excluded. The biggest issues in the financial exclusion area that are not touched by the FCA’s consumer duty coming out or by its consumer vulnerability guidance are those that lurk around income when people cannot afford a product.
I will give one example to bring this to life. It is on insurance—we have talked about this before, Craig. Increasingly, insurers are becoming ever so good at finding individualised risk per person. Technology is great for that. As a rule of thumb, the mark-up works really well if you are healthy and wealthy. If you are not wealthy and healthy, you are a higher risk, and increasingly you are asked to pay more for your insurance product. We know, for example, that people in poverty pay about £300 more a year for their insurance because of their postcode, and they pay another £150 a year on top if they cannot pay up front and have to pay monthly. Those issues go across insurance. I and many of my colleagues in different organisations spend all our time going to the Treasury and saying, “This is an issue.” The Treasury says, “We have not got the data. Go to the FCA.” We go to the FCA and it says, “The pricing of risk is social policy. It is not for us. Go back to the Treasury.”
Then you go to the Competition and Markets Authority, then the Equality and Human Rights Commission. Everybody points back to the FCA as the only body, often by law, that can get access to this information, but it refuses to because it is not a priority and not within its scope. So we are simply saying there should be a “must have regard to financial inclusion” with a requirement to publish—not to do social policy, but to allow the consumer market organisations to have a conversation about these issues that have been going on for decades. As an ex-teacher, I have a handout, which explains it in one slide.
Dr James Davies (Vale of Clwyd) (Con)
Q
Natalie Ceeney: That is a really important question. When we look at some other countries, that has been the real crisis point. In Sweden, for example, the crisis point hit when shops stopped taking cash. If you are dependent on cash, there is no point having it if you cannot spend it.
I have spoken to literally hundreds of small businesses. The main reason that they do not take cash is not hygiene or anything like it; it is the ability to bank cash. If you go back three or four years, a small retailer used to shut up for 10 minutes at lunch time, pop over the road, deposit their cash in the bank and pop back. What they might now have to do, with the local bank 20 miles away and open between 10 and 3, is to shut up for an hour in the peak of the day, drive, park, queue and drive back. No wonder many shops say, “You know what? It is only 20% of my customers. I will go cashless.”
That is why in this legislation, deposit facilities are just as important as cash access. It is an area where the industry is behind. You can have deposit-taking ATMs—they are just as well tested as ATMs that issue cash. We do not yet have any mechanism in the UK for third parties to use them. It is something that I am working with the industry to solve, but this legislation is utterly critical. If small businesses can deposit cash easily, most will keep taking it.
Siobhain McDonagh
Q
Natalie Ceeney: Yes, I do. The one thing I would say as you consider the drafting is that the Bill covers small businesses as well as consumers. Small businesses, typically, via their contracts, pay for their cash access. As you draft amendments, limiting that to retail consumers is going to be important. I do not think that there is any appetite for banks to want to charge for cash access, so I do not think that you would get any opposition to putting that in the legislation or empowering the FCA to take it through to regulation.
Martin Coppack: There is absolutely a need for this. Bearing in mind today’s audience, I did a bit of research and looked at the poverty premium at a constituency level for different MPs. It might surprise you to know that a typical parliamentary constituency loses £4.5 million a year in terms of the poverty premium. That is money that could be going into your constituents’ pockets. We have linked that to research that shows that the poorer you are, the more likely you are to spend that locally. The reason I am talking about this point right now, as well as it costing £2.8 billion across Great Britain, is that the poverty premium very much exists for people trying to access cash.
If you lived in, let us say, the Conservative constituency of Vale of Clwyd, people are paying about £40,000 to access their own money. If, for example, you were in Kingston upon Hull West and Hessle, you would be paying around £70,000 to access your own money. Say you lived in the SNP constituency of West Dunbartonshire —I cannot say it; I should have practised that before I came—people are paying £64,700 in that constituency to get access to their own money. I hope that is a good representation of why we need to tackle it.
Craig Tracey
Q
Martin Coppack: Unfortunately, not a lot of progress has been made. We have had numerous conversations with the Treasury, signposting to the FCA. Some days we have the conversation about how we do not have enough data, which we cannot get hold of—firms have their own data on insurance, how it is distributed and how the calculations are made—so, unfortunately, nothing can be taken forward.
We have now done a second piece of work. We did one with the Institute and Faculty of Actuaries, which agreed that there is a real positive premium issue. We are doing a second report with the Social Market Foundation, calling again for the FCA to collect the data and for the Treasury to understand how far prices are a market problem, so regulation can tackle it, or how far it is a social policy problem, so social policy makers can tackle it. However, we cannot get further than that. I have probably been having this conversation for the past 10 years. In our world, as an ex-regulator, if it does not get measured, it will not get done.
Craig Tracey
Q
Martin Coppack: Importantly, when asking the FCA to do social policy, it would not allow it. What it is about is closing that complete spiral. Seventy-odd organisations have signed our call, and some firms. We are trying to close that loop so that we can have conversations about the most difficult things affecting the poorest of your constituents. That is all we are trying to do, and what I would urge you to support.
Emma Hardy
Q
Martin Coppack: Gosh, there was a bit there. Remind me if I do not get everything. First, the FCA will talk about the consumer duty and its vulnerability guidance. Neither of those touches anything to do with income. Vulnerability touches lots of things, like losing a partner or disabilities, which is great, but looking at income does not touch any of it. I have had numerous conversations with the FCA, and it is not supportive of this, but it recognises the issue, although it has not come up with an alternative.
On examples of how this would have worked well in the past—actually, I have a current one. How long has Natalie been trying to get some action here, on access to cash, before the infrastructure absolutely wilts away? It is a race against time. I was in the FCA 10 years ago, or whatever, and I saw all the letters going between Departments and the FCA to say, “Let’s not touch that. It is not in our remit.” That is a live one right now.
Past examples: the loyalty premium insurance everyone knew was an issue. It took Citizens Advice getting all its resources together to do a super-complaint to get any further on the loyalty premium in insurance. Access to basic bank accounts—Sian Williams at Toynbee Hall was going at this for years before we got any further. Those are the types of intervention that would be allowed.
On the difference at the ground level, I could go through a few more parliamentary constituencies. For example, tackling the insurance poverty premium would make a huge difference of £500 million to your constituents, James; it would make a difference of one million three hundred for your constituents, Emma. I could go on.
One other quick thing is that, when we talk to people in the community, they do not have a clue why the market is why it is. People like me can say, “Cost to serve—it’s a rational way the market is working.” But if you ring up and say, “I want car insurance,” they say, “We don’t serve you—it’s your postcode.” I have had people say, “If I cross the road in Glasgow, my life expectancy goes down by this much. The same applies in terms of my insurance going up.” People say they are lying on their insurance forms by putting different postcodes on, because they need their car because they are disabled. This is how consumers react to a system that does not work for them.
Emma Hardy
Q
Martin Coppack: No. We have Martin Lewis on board, for example. That might surprise some people. We have Andy Briggs, chief executive of Phoenix Group. We have Lord Holmes of Richmond, from the House of Lords. We have the Legal & General Group chief executive. That is as well as other organisations that you might expect, such as Citizens Advice. There are about 70. This is not a niche area. People see it and see the need for it. It is not just Fair by Design.
Martin Docherty-Hughes
Q
Natalie Ceeney: Yes.
Martin Docherty-Hughes
Q
Natalie Ceeney: I think that is absolutely true. One thing I would say, perhaps to connect to the points that Martin has made, is, “Wouldn’t it be nice if everybody could participate in a digital society?” There is a risk that we talk about protecting cash for its own end. The reason why we are talking about protecting cash is that the most vulnerable need it, because it works better for them than digital.
We also, in parallel, need to work to a society where everyone is included in a digital economy. If you are dependent on cash, you shop locally; you cannot shop online. That means that you pay more for your goods and services. You cannot do direct debits. You probably have a prepayment meter. Actually, your costs of living, if you live on cash, are much higher. But the people who use cash are not stupid. They are not doing it because they have not worked that out; they are doing it because they have not got a choice, so I think that in parallel—this is not covered by this Bill, but it should be something that we collectively work on post the Bill—we need to work on how we include everyone in a digital society.
That is broader than financial services. In Britain, 4.5 million people do not have any kind of smartphone; 1.5 million people do not have any broadband or mobile connectivity; and 1.3 million people do not have a bank account. There are some bigger societal issues to tackle, but we have to really make sure that this is an inclusion debate.
Stephen Hammond (Wimbledon) (Con)
Q
Martin Coppack: I am sorry: I just do not feel quite qualified to answer that one.
Gareth Davies (Grantham and Stamford) (Con)
Q
Martin Coppack: What do you mean by “best case”?
Gareth Davies
Q
Martin Coppack: We have a whole list. We deal with Bristol University. We do a range. We work out an average. And then we have figures that go much higher. If it is one in 10 of people who are in poverty, we would have a higher one. We have a whole range that we can present to you.
Gareth Davies
Q
Martin Coppack: I am not quite sure what you mean by “best case”.
Gareth Davies
Q
Emma Hardy
How they have worked it out is on the website.
Martin Coppack: It is published by the Bristol University Personal Finance Research Centre.
Gareth Davies
That still does not answer my question. If you are going to come to a Committee such as this, please provide your data.
The Chair
Order. I am afraid that brings us to the end of our allotted time for this panel. On behalf of the Committee, I thank our witnesses.
Examination of Witness
William Wright gave evidence.
The Chair
We will now hear from William Wright. We have until 3.25 pm for this panel. Would the witness please introduce himself for the record?
William Wright: My name is William Wright. I am the founder and managing director of New Financial, a capital markets think-tank.
Andrew Griffith
Q
William Wright: Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.
Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.
On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.
Tulip Siddiq
Q
William Wright: Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.
We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.
We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.
There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.
Tulip Siddiq
Q
William Wright: There is certainly a role for legislation; I am not sure that the right place for that role is this Bill in particular. It is important to step back and look at the huge amount of work that has already been done and is being done in and around green finance from a legislative perspective. The latest addition to that is the net zero review, and the green finance strategy is expected from BEIS early next year, maybe. There are sustainability disclosure requirements, the UK green taxonomy and the transition plan taskforce. That work, which is coming down the pipeline towards us, could contain a lot of the legislative impetus for the UK to close the gap.
More importantly, I think the industry is already beginning to fill the gap. Where the UK has a real opportunity in green finance in future is not so much in the level of capital raising by UK companies, but in the fact that it is in pole position to benefit from its existing expertise in markets such as risk management, derivatives and trading, as we see the emergence of a more sophisticated carbon market of green derivatives and green risk management, and in playing to its existing strengths, many of which have not been harmed or damaged in any significant way by Brexit.
Peter Grant
Q
William Wright: On the substance of that question, I will have to put my hands up and say it is not an area that we have done a huge amount of work on, although we have recently hosted some events on that theme—for example with Edward Lucas, talking about Russia, Ukraine and links back to the City.
One point I will make is that back in 2007, in a previous life as a financial journalist, I was at the official launch of NYSE Euronext—this was the merger of the New York stock exchange and Euronext, the European-based stock exchange. The founding chief executive, John Thain, who was then chief executive officer of NYSE, said he thought that London would come to regret its campaign in the previous five or six years to attract Russian companies to list on the London stock exchange. If we look back on those comments with the benefit of 15 years of hindsight, he was probably correct.
Peter Grant
Q
William Wright: I will have to fall back on saying that it is not something I have specific expertise on. I have opinions and views. I have recently read some of the works by Oliver Bullough on different aspects of this—“Butler to the World” and “Moneyland”—and it made me quite angry to read them, but it is not an area where I can claim any professional expertise to answer a question in this setting.
Sally-Ann Hart
Q
William Wright: That is sort of the trillion-dollar question, isn’t it? On EU rules, the Bill and the huge amount of work that the Treasury and others have done over the past three years address the obvious low-hanging fruit—the obvious areas of EU regulation and the framework that were not appropriate for the UK market, which has a unique dynamic within the EU. Most of those areas have been well addressed in the Bill.
On looking ahead at competitiveness, the Bill does create a more agile and nimble framework. By definition, one would hope that the UK can act more swiftly than the EU, and we are already seeing some signs of that. Again, it gets the right balance by making competitiveness a secondary objective and not a primary objective. It gets the right balance to ensure that it is something considered by supervisors and regulators but not something that overrides the fundamental purpose of supervisors to ensure a stable financial system that is competitive within itself, and where customers get appropriate protections.
We need to be very careful, in the debate on competitiveness, about assuming that competitiveness is a mechanical outcome of regulation and tax. One of the lessons we can take from the last few weeks is that a very important element of competitiveness is credibility, predictability and the robustness of independent institutions. It is important to bear that in mind when we talk about competitiveness.
In the short term, the biggest competitiveness threat to the UK—this comes back to the Minister’s opening question—is probably from additional pushback and pressure from the EU as it requires more EU business to be conducted inside the EU. We have this interesting dynamic: the UK is increasingly focusing on making people want to do business in the UK because it is an attractive environment, whereas the EU in many areas is trying to attract business by requiring people to do it there. We also need to be very careful in this debate—
The Chair
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.
William Wright: Thank you.
Examination of Witnesses
Robert Kelly and Robin Fieth gave evidence.
The Chair
Q
Robin Fieth: My name is Robin Fieth and I am chief executive of the Building Societies Association. We represent the UK’s 43 mutual building societies and seven of the large credit unions.
Robert Kelly: Good afternoon, everyone. My name is Robert Kelly and I am CEO of the Association of British Credit Unions Ltd. We represent 157 credit unions across Great Britain—roughly 62% of the market.
Andrew Griffith
Q
I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.
Robin Fieth: Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.
On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.
On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.
Robert Kelly: Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.
In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.
There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.
There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.
Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.
I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.
Tulip Siddiq
Q
Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.
As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.
The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.
Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.
We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.
Peter Grant
Q
Robin Fieth: Whether the term is “corporate takeover” or “demutualisation”, which was very much encouraged by the Government of the day, is a moot point, but you are absolutely right: there is or was a very proud trustee savings bank tradition, and of course it started in the lowlands—well, the borders—of Scotland. Sadly, the last trustee savings bank went into run-off within the last five or six years. That was the Airdrie Savings Bank. It is a tradition that we no longer have. Again, those institutions were not a full service of the kind that the shadow Economic Secretary was talking about. They were not a full service model. They were very much a savings and loans model, largely for retail purposes. That is the tradition we had, yes, but it is now sadly part of our economic history.
Peter Grant
Q
Robert Kelly: Yes, of course; thank you for the question. Credit unions play a unique role in the economic infrastructure of this country. I mentioned that we serve 2 million people, but we have huge aspirations to make sure that that goes much further. After this session, I am joining a call on the cost of living crisis and the impact that the credit union sector is having in different parts of the country. A really good example is Bradford District Credit Union, which is working in tandem with the local authority on a range of products and initiatives that have built financial resilience and financial inclusion in that part of the country. There are many more examples across the UK.
The financial inclusion agenda chimes perfectly with our objectives, our ethics and the co-operation and mutual model that credit unions are built on. The important point to state is that we believe that that work can be accelerated and amplified in a significant way. We can do much more. The phrase that we would use is that we manage to put in place a balanced demographic of membership. The credit union should be seen as a safe and innovative place for any member of society, any consumer, to go to. It goes back to the comment that Robin made on full service. We believe the legislative reform package that is on the table for the credit union sector will allow us to do that. It will allow us to be more competitive, to look at risk-based pricing and to make sure that we are seen as more mainstream—and to serve a wider part of the population. Doing that creates an environment where additional financial inclusion initiatives and objectives are made possible, because we are building sustainability and the strength of balance sheets for credit unions across the country; those things go in tandem.
We have worked closely with a range of Governments over many years to deliver great value, and also financial inclusion objectives, but we need to make sure that there is a balance of products and services, and a balanced demographic that allows us to do much more of that. We have said that in the past, credit unions have unfortunately been seen as the poor person’s bank. We have worked incredibly hard to move away from that area—with, I think, great success. The legislative reform package that is on the table for the credit union sector will allow us to do much more, and it should be seen as very positive.
Peter Grant
Q
Robert Kelly: I will give two examples. Credit unions will have, for the first time, the ability to offer car finance under personal contract purchase or hire purchase—conditional sale activity. We can also be immersed back into the general insurance mediation process. That means that we can diversify our product range. It should mean that we can diversify our income lines, which should result in greater sustainability for the sector. Those are two examples where we were very firmly part of the legislative programme that has been developed for the credit union sector.
On competition, we recognise that we are a small player overall in the financial services landscape, but we can do more, and have huge aspirations. We have that wider product and service range. Investment in technology will allow us to be seen as being more mainstream. A bigger part of the financial wallet for many households across the country could be maintained by the credit union sector. The Bill certainly has its elements there.
We talked about credit union service organisations. It is important that we continue to have that conversation with all relevant stakeholders, look at where in the sector there is innovation in the overall infrastructure, and consider how we can learn from the successes of the model used in North American and other parts of the world. The Bill goes a long way to allowing us to diversify, and to become more competitive and more mainstream. That is to be welcomed. There are certainly follow-on elements that we will undoubtedly talk to officials and regulators about in the weeks and months ahead.
Peter Grant
Q
Robert Kelly: We recognise the difficulties in terms of reputational risk, and the challenges that failure brings. We are working tirelessly with our member base. We are a very broad church. Our members have asset sizes from a couple of hundred thousand to well over £220 million, and everything in between. We recognise that failure is difficult and painful. We are working extremely hard behind the scenes collaboratively with the BSA and other interested parties. Credit unions that fail often have a couple of items in common. There tends to be a lack of good governance, and sometimes there is key person risk. Covid has exacerbated some of that, just in terms of volunteer burnout and sustainability challenges, demand for lending and bad debts. We have been impacted by insolvency and mis-selling in many cases as well. We have identified that it can be difficult to maintain a smaller asset range using a volunteer base—not always, but sometimes. We are working tirelessly behind the scenes to make sure that credit unions look at their business plans and numbers on a regular basis, and take the tough decisions.
Let me bring that to life, very quickly. The original development of the fiscal principles was in 2002. In that year, we had 698 credit unions in GB; we are now down to fewer than 250. Most of that reduction in numbers came through consolidation and mergers or acquisitions. Some of it has been failure. We certainly believe that the number will continue to come down. It would be appropriate to find solutions that allow credit unions to come together as part of mergers or acquisitions and maintain services in their local communities.
Siobhain McDonagh
Q
Robin Fieth: That is a great question; thank you very much. We are already part of the way there with the PRA. It has had a secondary competition objective since the 2014 Act, and it was subsequently enhanced at the BSA’s behest. Every time it consults, it has an obligation and a requirement to determine whether there are specific aspects that disproportionately affect the mutual sector, and that has been welcome. We have seen a real change in the PRA’s approach to the financial mutuals since the financial crisis, and it has been largely positive.
There is a very important question as far as the FCA is concerned. We saw it last year with the proposed demutualisation of LV. It was apparent that the FCA was entirely agnostic on the business model, in terms of their competition objective and the good competition that achieves better customer outcomes on the conduct side. There is certainly a case for the FCA to consider that far more closely. I am always very careful when we talk about conduct outcomes with the FCA because, as a consumer, you should not have a different outcome, but you might experience a different journey. There are some nuances in there. As to how it best achieves that without adding ever more reports and burdens, that is in its annual reports, which are obviously open to examination and scrutiny. In the regulator’s annual reports, it should report back on that; that would be the most straightforward way to achieve that.
Robert Kelly: Thank you again for the question. I echo Robin’s comments, but I will try not to duplicate them. Credit unions have an ongoing consultation with the PRA on future supervision and the regulatory environment. We have a long track record of working in tandem with the PRA, and there is a move towards making sure that the supervision model is in tandem with the legislative reform agenda, which seems eminently sensible. It also allows us to take cognisance of the fact that there are many more larger, asset-based credit unions than there were five or 10 years ago—we have to factor in whether that comes through consolidation, or just through business growth—which is hugely beneficial for all parties.
In terms of the FCA, obviously the credit union sector is dual-regulated. We have a relationship from the conduct side. It will be interesting to see how that approach develops. Again, I would echo Robin’s view: the FCA has such a broad remit, in terms of the firms that it looks after, and we are always championing the cause of proportionality. Consumer duties are an example of where we have to work in collaboration with all relevant stakeholders and interested parties to make sure that the good consumer outcomes that credit unions provide can be evidenced, and that we can go on that journey. There are live examples of those on both sides of the regulatory environment taking steps to be innovative and to future-proof the business development that we expect to see through this legislative programme. That is to be welcomed, but we are on a journey, and we are not yet at the end.
The Chair
Order. I am afraid that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank our witnesses.
Examination of Witness
Mike Haley gave evidence.
The Chair
We have until 4.10 pm for this panel. Would the witness please introduce himself for the record?
Mike Haley: Good afternoon. I am Mike Haley, chief executive officer of CIFAS, the UK’s fraud prevention service. We are a not-for-profit membership organisation of 600 members. Member organisations are, in the main, financial services—banks, fintechs, alternative lenders and mortgage providers. We also share data and intelligence on fraud and financial crime.
Sally-Ann Hart
Q
Mike Haley: Yes. One of the issues with a contingent reimbursement model in any compensation scheme is that it is not a fraud prevention initiative in itself; it really just says who suffers the risk of the fraud. It passes the individual loss on to the banks. The emphasis is on a large amount that you could get away with without thinking that you have taken it out of an individual’s pockets; a faceless bank will pay up to £1 million. Any limit of that size reduces any moral questions a fraudster might have about who they are stealing money from.
Tulip Siddiq
Q
Mike Haley: There are three interconnected reasons why scams have reached such frightening proportions. First, the reach of social media and online platforms means that scammers and fraudsters can reach millions of people—marks and vulnerable people—much more effectively.
Secondly, we have seen organised crime turn its hand to fraud because it is a low-risk, high-return crime. Their skills have grown in something called social engineering, which is how they to persuade someone that they are calling from the bank or from the police by impersonating others. They have become very skilled in that.
Thirdly, faster and instant payments mean that once a fraud has been successful, and you mandate a payment through your bank account, it is very hard for banks to tell that that is a fraudulent transaction, because it has been mandated by the customer. Then, there is a network of money mule accounts, which are either accounts that have been set up for those proceeds to go through, or accounts belonging to people who have been duped into allowing their accounts to be used for that money to go through. Instant payments mean that that is untraceable very quickly. I remember investigating a mass fraud—[Interruption.]
The Chair
Order. We resume our session. I think a question was put to you. Do you want it repeated?
Mike Haley: I do not need the question repeated.
On the question of what has created the significant increase in frauds—particularly authorised push payment frauds, known as scams—I was saying that there are three interconnected issues. First, there is the reach of social media. Secondly, organised crime has turned its attention to fraud. Thirdly, the faster payments regime has enabled fraudsters to quickly dissipate the scam funds.
One of the things we have seen with the dissipation of scam funds is that they often go into cryptoassets and crypto exchanges. That is why, as part of the Bill, we welcome extending the regulatory perimeter to cryptoassets—digital settlement assets—so long as, in that authorisation process, there is a risk assessment around economic crime. Authorised crypto firms should meet the same standards as banks, in terms of know your customer—customer due diligence—and should have in place the anti-money laundering, counter-terrorist financing and fraud operational standards that we expect from the other financial service players so that it is a level playing field.
Emma Hardy
Q
Mike Haley: I will take those in reverse order. Provisions that facilitate greater data and intelligence sharing, particularly on suspicions of fraud and financial crime, would have the biggest impact in helping to prevent this type of crime. It is a crime that is at scale and at speed in the online environment. To be able to share the mobile numbers that are being used, the devices and the IP addresses at speed across the whole of the environment—payment providers, fintechs and telcos—would be enormously powerful. This is a volume crime, and we need to have prevention at the core of any national strategy. That would have a massive positive impact.
I would like to see it go further. I would like it to be mandatory, because why should an organisation sit on knowledge about fraud or financial crime, and not share that with others to protect the whole of the financial services industry? There should certainly be strong leadership saying it should be done. For those who do not, I would like it to be mandatory, but it should certainly be facilitated. There should be something in the Bill that facilitates that sharing.
Emma Hardy
Q
Mike Haley: And that they can. A lot of the time, organisations feel, rightly or wrongly, that they cannot share this type of data and intelligence. They might quote the General Data Protection Regulation, but in my view the GDPR says that it is in the legitimate interests of businesses to share data to protect their services and consumers. There is a lack of confidence in doing that, so we should have something very explicit that says not only that it is allowable but that it is expected, because we are all part of the same ecosystem, in which people are being scammed and organisations are losing literally billions of pounds.
Absolutely, there should be a national strategy, and prevention should be at its core. We are looking forward to the Home Office publishing a national strategy; it has been much delayed, and it is very much anticipated. From what I have seen, I would like it to be more ambitious, and to cover the public and private sectors, as well as law enforcement. Fraudsters do not decide one day, “We only go after bounce back loans because that is a public sector fraud.” They will go after a loan from the Nat West bank, or a mortgage. A lot of data is not being shared between the public and private sectors and law enforcement. That would be a powerful set of data and intelligence, which would make us more effective as a country in defeating fraud.
Emma Hardy
Q
Mike Haley: If we are looking at some of the regulators’ new rule-making powers, and also with the panels that have been suggested, with any rule or policy change they should be thinking about what the economic crime impact will be.
Emma Hardy
Q
Mike Haley: Yes, because there can be unintended consequences some way down the line that were not thought of at the start. Faster payments are a really good example; they put the UK in a competitive position and most people would support faster payments. However, we find that they have been exploited. There could have been some thought about, for example, in what circumstances we slow that journey down to prevent fraud. With any new rule changes we should ask what the impact could be, and what unintended consequences there could be—does it open a gateway for fraudsters or criminals to exploit? I think that would strengthen the Bill and also give some real teeth to a regulator—to be held to account about whether they thought about it at the outset.
Andrew Griffith
Q
Mike Haley: Yes, I think we have seen in the past that regulators have not moved quick enough when there has been widespread harm. We might look at payment protection insurance, for example, where consumers brought plenty of reports into MPs’ and Government in-trays, and yet the regulator was rather slow in intervening in a market—a market that had been abused. I think that an intervention power could be very powerful.
Martin Docherty-Hughes
Q
Mike Haley: I think one of the problems of all legislation is how quickly it keeps up with changes in technology, and it being broad around principles. As I mentioned, with the authorisation of anyone who becomes a regulated entity dealing with digital settlement assets, it is important to have clear criteria for the onboarding—know your customer—and to know who the accounts are opened by. I find that already we are looking at money laundering through coin swap services, for which you do not need an account and may not be under this regulation. There are cross-chain bridges, where someone can move from one blockchain to another. I am not an expert on whether clauses 21 and 22 cover some of those services that have been created, which were probably not in the thinking when the Bill was starting to be drafted.
Martin Docherty-Hughes
Q
Mike Haley: There are a number of questions there. One is whether the legislation is broad enough to ensure that the regulator can act on some of those services. They need to be included in the perimeter. I do not think that some of these services—I talk about those coin swap services—are actually in the purview. There are cryptoassets and cryptocurrency exchanges, but some of these other services have been created, and from my reading of those provisions, I do not think they are covered.
The Chair
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.
Examination of Witness
Adam Jackson gave evidence
The Chair
Q
Adam Jackson: I am Adam Jackson, director of policy and regulatory affairs at Innovate Finance. We are the trade association for fintech in the UK, representing, if you like, all of the new technology-based financial services that have emerged, maybe in the past 10 to 12 years, including payments, challenger banks, consumer credit and personal management tools—and crypto are part of that.
Andrew Griffith
Q
Adam Jackson: I think that is a good phrasing, Minister, of looking ahead. I think we have in the UK a great 10 years. We are No. 2 for investment in fintech in the world, and have been consistently. The question is, how do we maintain that at a time when we are on the cusp or in the middle of a new wave of financial technology?
The first wave of fintech was very much about consumer interfaces. I think what we are then seeing, and will see over the next 10 years, is the application of technology to the whole of financial services—to the financial systems—to the plumbing, if you like, of financial markets, not just that consumer interface. The question is, how do we build on our superb record until now to ensure that we are at the forefront of what will be digital financial markets? That then becomes not just, “How do we maintain our lead in fintech?” but “How do we ensure that we are a global leader in finance?”
If I then look at the Bill and think about what is needed, I tend to categorise it in three ways. First, is there regulation that needs updating? Is the regulatory rules system fit for purpose? Does it enable—or actually open up—innovation? Is how we regulate agile enough, particularly as technology and the economy move quickly?
Looking at the Bill and “fit for purpose”, the proposals, particularly on stablecoin, are really welcome. They tackle an issue that we have seen in the market this year and bring into scope that new technology.
Does it enable innovation? I think, there, the financial markets infrastructure sandbox is important for looking at how we support different ways of regulating. That gets into the agile regulators as well. Then, when we look at systemic stablecoin, that is about enabling innovation. We will only see stablecoin really developing as a fundamental part of payments systems, and therefore only see the UK maintain its lead in payment innovation, if we have new provisions around systemic stablecoins. The Bill covers all those.
Are there other areas that we would like to see? In terms of the regulatory behaviours, the competitiveness objective is very welcome. On the secondary objective, we would love to see it extended to the Payment Systems Regulator. We have heard quite a bit today about the Bill providing new powers to the PSR so there is a strong case for applying the competitiveness objective to them, as well as some of the other bits of the financial future regulatory framework.
On the question whether we could apply a competition objective to the Bank of England, when we think about things such as central bank digital currency, how that is implemented—as well as if—becomes really important. Central bank digital currency could crowd out innovation and stablecoin unless it is designed in a way that promotes competition. Sir Jon Cunliffe talked about how he absolutely sees a place for stablecoin and a CBDC alongside, but is thinking about some protections around that.
Then, two final pieces would be looking at whether there is scope to strengthen the competitiveness objective, moving from facilitate to promote, and finally, thinking about the Financial Ombudsman Service. A lot of our members raise concerns with us that they have agreed approaches with the FCA, only to find that FOS caselaw rules against things that they have already agreed with the FCA. So more to ensure that consistency, and if there is a way of ensuring that the FOS refers to the FCA for rulings on certain issues, that would help.
Tulip Siddiq
Q
The other thing I wanted to ask about is investment in the UK fintech industry, which was down to £9.6 billion in the first six months of this year, which is three times less than exactly the same period last year. Do you want to comment on the reason for that decline? What should we be doing as politicians to try and help with that?
Adam Jackson: Taking your first question, it is worth looking at the EU MiCA regulation and possibly the approach of a territory such as Singapore. It links a bit to the investment. We did some analysis of investment in just crypto alone, looking at that as a vertical within fintech, and again, the UK has always been the second location for crypto investment in the world, after the US, until the first half of this year, when we fell behind to Singapore. That might be a blip, but when you then look at regulatory mapping, you will see that Singapore possibly has the most forward regulatory system, particularly for stablecoin. The EU has a very comprehensive approach, but is has not come into force yet. Singapore has an established system, so I think that shows that if you get it right and have a proportionate regime, you attract the industry and the investment.
Is the EU approach right? There are strong arguments to say that it is possibly too comprehensive, and we come back to the notion that trying to find something that works for all 27 does not fit our circumstances. The UK is right to take a more iterative approach. We obviously have a common law approach as well, which means there are certain things we can do through case law. It is absolutely right that we are focusing on stablecoin and that is where some of the biggest volatility in the market was this year. The Bill addresses that, which will be really important in providing confidence for consumers and, critically, for investors in technology firms in that space.
The EU rule applies to not just stablecoin but cryptocurrencies more generally and exchanges, so should we also have a regulatory regime for other cryptoassets? I think the answer is yes. The question is how it fits within the Bill. The Government have said that they will introduce proposals for wider regulation of other cryptoassets. We expect something at some point, possibly soon.
That begs the question whether the Bill already enables the introduction of regulations. We probably need to ask Treasury counsel about the definition of a digital settlement asset. The Bill allows for the definition to be changed. Do the rules enable it to cover other cryptoassets? If it does, the powers are there to enable regulators to introduce systems subject to the proposals. If not, will we have to wait another 20 years before regulators are given the powers to regulate cryptoassets?
On cryptoassets, the important things that our members, including exchanges and cryptoasset firms, emphasise are an authorisations regime, a set of rules for initial coin offering—essentially, clear guidance on what information should be provided to consumers about individual assets—and custody. The Bill provides for applying rules on custody for stablecoin. If we do not have a parallel system, we will start to see some question marks over why those custody rules do not apply to cryptoassets as well.
On investment, there are different ways of looking at the figures from the first half of this year. Some investment, particularly VC, has really held up, but we know that globally we can expect a fall in investment, and we are just starting to see that trickle through. It is therefore a question of how the UK holds up against other countries. We might even see more mergers and acquisitions. At the moment, the pound makes the UK a nice place to come to buy fintech firms, so there may be a bit of difference there. It comes back to maintaining that competitiveness. Our members tell us that the most important thing is to get the Bill through. It provides important powers. If we can strengthen it in some of the areas that I mentioned to the Minister, that is also critical.
The other thing that I would flag is that there are two other pieces of legislation that are either before the House or slightly in limbo. They are also important for the competitiveness of fintech. One is the Data Protection and Digital Information Bill, introducing digital ID and open data, which will really transform the open banking we have into open finance. Australia already has that, so there is a risk of us falling behind. That Bill is also really important.
We have heard a lot about fraud. The provisions in the Online Safety Bill around making the places where frauds are advertised—the social media platforms and search engines—responsible for fraud, as well as requiring banks to reimburse, are critical. That is starting to be a factor in investment decisions. Whatever happens to that Bill, ensuring that those provisions are introduced as soon as possible is key.
Martin Docherty-Hughes
Q
Adam Jackson: I was not suggesting that we should necessarily compare the exact regulatory regime—the economy is a very different size—but I would take the wider point that a territory that has been seen to introduce some regulatory rules, as opposed to having none, is seeing increased investment.
The other place to look is the US. I was in Washington last month talking to policymakers, and the area where there is most likely to be a bipartisan Bill next year is regulating stablecoin. In terms of our international competitiveness, others are moving, and the Bill enables the UK to keep up.
The Chair
I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.
Examination of Witness
Martin Taylor gave evidence.
The Chair
We will now hear oral evidence from Martin Taylor, former external member of the Bank of England’s Financial Policy Committee. For this panel we have until 4.55 pm. Will the witness please introduce himself for the record?
Martin Taylor: I am Martin Taylor. I have spent a lot of my life in finance and in policymaking work for the Government. What probably most interests you is that I spent seven years—until the end of March 2020—as a member of the Financial Policy Committee at the Bank of England, which is to do with macroprudential policy.
Andrew Griffith
Q
Martin Taylor: None.
Andrew Griffith
Q
Martin Taylor: I have acted as an adviser to Gordon Brown, Alistair Darling and George Osborne—eclectic, you might say.
Tulip Siddiq
Q
Martin Taylor: Let me speak plainly, because it is late in the afternoon. I think this is a shockingly bad idea. I think it will certainly undermine regulatory independence —without any doubt—simply because regulators who are subject to the whim of Treasury officials or Ministers are not independent. It is a major erosion of the institutional framework. One could even say it is a corruption of the framework. For me, the institutional framework is hard-won and very precious. I can only suppose that those proposing the powers either do not understand it or do not care about it.
Stephen Hammond
Q
Martin Taylor: The wording that I have seen is of course not final, but what I find strange is that it suggests the regulators are not acting in the public interest. If they have to be overruled in the public interest, clearly you think they are acting in some other interest. For me, the regulators are the public interest made flesh.
Stephen Hammond
Q
Martin Taylor: The Government have enormous influence over the regulatory process. Sometimes people characterise the regulators as living in an ivory tower or something like that, as if they are academics who sit, removed from the real world, and think up rules without any feeling for what impact they might have. In fact, if you think about it, first of all, the independence of the regulators, such as it is, is circumscribed—it is set by Parliament. It is all set by primary legislation; that is No. 1.
Secondly, the wider Government and particularly the Treasury have tremendous powers to influence regulation. The Treasury appoints all the independent members of committees. The Governor and the deputy governors of the Bank of England are Crown appointments, so effectively No. 10 and the Chancellor have a certain say. The Treasury representatives sit on these committees and let the regulators know the Chancellor’s view. The Chancellor, whoever it may be at the time, writes to the committee and sets out their views on the things they ought to take into account.
There are very close working relationships between the Governor, the Chancellor and the permanent secretary, and then all the way down the chain at the Bank of England. The regulators swim in the soup like everybody else.
Stephen Hammond
Q
May I ask your views on the secondary objective?
Martin Taylor: The new secondary objective?
Stephen Hammond
Yes, the new secondary objective as proposed in the Bill.
Martin Taylor: I have a curious view that the fewer objectives you have the better, because the more likely you are to hit them. I have no objection to the secondary objective, if I can put it that way. It does not seem to me offensive. I was very pleased to hear the then Chancellor say in the Mansion House speech that there was a clear hierarchy of objectives, and that seemed to me to be fine. I don’t worry about that.
Stephen Hammond
Q
Martin Taylor: If that can be done, I would certainly welcome it. One of the difficulties that the Financial Policy Committee has always had is that if your job is maintaining financial stability, it is not always very easy to see if you are succeeding. One can see that recently, for example, the Monetary Policy Committee has not been meeting its inflation objective. That is an objective in hard numbers, and for the FPC and for other regulatory bodies it is harder.
Emma Hardy
Q
Martin Taylor: I do not want to exaggerate. I said this was a corruption of the system and corruptions work slowly, so it does not make us into Argentina or Turkey overnight but that is the direction of travel, if I can put it that way. Independent regulation is not an aesthetic choice; it is a practical one. I think the transparency of the regulatory process in London—the need for the regulators to explain themselves and especially the scrutiny by Parliament—is one of the cornerstones, along with the legal system and various other things we are familiar with, of London’s attraction as a financial centre. The UK’s reputation needs a bit of tender loving care at the moment, I would say, and bringing in unnecessary measures that risk damaging it seems to me unintelligible.
Emma Hardy
Q
Martin Taylor: Completely—just knock it out. I see no advantage in its existence.
Emma Hardy
Q
Martin Taylor: One of the problems that led to the recent turmoil—a very English description of what has just happened—was that the Prime Minister and the former Chancellor chose not to subject the mini-Budget to the scrutiny of the Office for Budget Responsibility. Had they done so, the OBR might of course have objected to various parts of it, which is perhaps why they did not do so.
However, international investors looking at London will have noted this and it has a bad smell, if I can put it that way. I am not worried about the bond traders who price the market day by day. The volatility was extreme and very dangerous. It has been settled by the Bank for the moment, I hope. I am much more worried about the people running really big blocks of money—big foreign sovereign wealth funds or big institutional investors—who look at London and say, “Is it worth having an allocation to gilt-edged stock? Do we want to be exposed to sterling if this is the sort of thing that goes on?”.
These are the strangers on whose kindness Mark Carney told us we relied and we antagonise them at our peril. That is what worries me more than anything else: that we suppose that foreigners will always want to buy gilts. Why should they? You could run a huge international portfolio and have zero allocation to sterling at the moment. If you were in Singapore or New York, you might be more tempted to do that than you would have been a month ago. We should not do anything else to make this worse. Everything is being done by the new Chancellor to steady the ship—thank goodness—but moves like this proposed measure just go in entirely the wrong direction as far as I am concerned. I think it is very dangerous.
Peter Grant
Q
Martin Taylor: I do not know. I probably have the same suspicions that you have. London has a huge financial sector and dirty money is easier to hide in places where there is lots of money than in places where there is not very much. I have never worked in, or with, the Financial Conduct Authority, but sometimes it gets blamed when things go wrong, which is a bit like blaming the police for crime, if you know what I mean. There is a lot of dirty money in the world and a lot of it will try to come here. I think the regulators do their best.
Peter Grant
Q
Martin Taylor: I would rather not accept the premise. We have to ensure that the world is happy to invest clean money in the United Kingdom. It is extremely important that we do that. No, I do not see us becoming a sort of sewer market—I mean, God forbid—but we have to be careful and we have to keep standards up. In taking out some European regulation—which we ought to do, because not all European regulation is good and valuable, and I am glad that the Bill allows us to do that—we need to be very careful. There are babies in the bathwater.
Peter Grant
Q
Martin Taylor: The FPC, for every quarter that I was a member of it—and I think it is still doing it—was saying that the intention was that the regulatory framework, when Britain left the European Union, would be a least as rigorous as the EU’s. In one or two places, it probably needs to be more rigorous than the EU’s, because there is some lowest common denominator there. In others, the EU has unnecessarily gold-plated things, but it needs to be done very precisely and carefully.
The Chair
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witness on behalf of the Committee. The Committee will meet again at 9.25 am on Tuesday 25 October to begin line-by-line consideration of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Third sitting)
Tuesday 25th October 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 25 October 2022 - (25 Oct 2022)
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Chair
I have a few preliminary comments to make. Will Members who speak send their notes by email to Hansard in the usual way—it really helps? Will you ensure that you have turned off all your electronic devices, so that you do not disturb anyone? As ever, tea and coffee are not allowed during sittings—just a reminder. Everyone in Committee is experienced, but there have been a lot of changes over the past couple of years, so I will remind you about proceedings and how we run Bill Committees.
Today, we begin line-by-line consideration of the Bill. The selection and groupings list for the sitting is on the table—it is worth getting a copy—and it shows how the clauses are selected and the amendments grouped together for debate. Amendments grouped together are generally on the same or similar issues. I know you are aware of this, but decisions on amendments do not take place in the order in which they are debated; they are taken in the order in which they appear on the amendment paper. The selection and groupings list shows the order of debates. Decisions on each amendment and on whether each clause should stand part of the Bill are taken when we come to the relevant clause.
The Member who has put their name to the lead amendment in a group is called to speak first—so, I will call Peter first, because his amendment is the first listed today—and other Members are then free to catch my eye in the usual way. I urge you to make that obvious, as sometimes it is a little difficult to tell. A Member may speak more than once in a single debate. At the end of a debate on a group of amendments, I shall call the Member who moved the lead amendment again. Before they sit down, will they please indicate whether they wish to withdraw the amendment or take it to a vote? Will any Member who wishes to press any other amendment in a group to a vote please let me know in advance, because it helps the organisation of our proceedings?
Clause 1
Revocation of retained EU law relating to financial services and markets
Peter Grant (Glenrothes) (SNP)
I beg to move amendment 44, in clause 1, page 1, leave out line 6 and insert—
“(1) The Treasury may, by regulations, revoke the legislation referred to in Schedule 1.
(1A) The Treasury may not make the regulations referred to in subsection (1) if the Chancellor of the Exchequer considers that the revocation of legislation provided for in the regulations would have the effect of prejudicing the interests of consumers, unless alternative and adequate legislative provision has been enacted which mitigates these prejudicial effects.”
This amendment would mean that the Treasury cannot revoke retained EU law relating to financial services if such revocation would be prejudicial to the interests of consumers, unless other provision has been made to mitigate these prejudicial effects.
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
That schedule 1 be the First schedule to the Bill.
Peter Grant
It is a pleasure to see you in the Chair this morning, Dame Maria.
As Members know, the SNP group came close to voting against the Bill on Second Reading. In fact, we tabled a reasoned amendment, primarily because of our concern about how the clause intends to take matters forward, but it was not selected by Mr Speaker. A sad fact for many of us is that the United Kingdom is no longer part of the European Union and that, therefore, all European Union legislation needs to be reconsidered. My problem is that it has already been decided in the Bill that, on financial services, all European Union legislation needs to be thrown out.
We hope that someone in the Treasury will at the same time, or very quickly afterwards, replace that legislation with something at least as good, if not better. I mean no disrespect to anyone here, to any Member of Parliament, the Minister or anyone working in the Treasury, however, when I say that I can have no confidence that that process, on that scale and at that speed, will work—we need only look at the number of amendments that the Government have had to table to the Bill because of mistakes in it, as published. In Delegated Legislation Committees on which I have sat, there have been instances where we have had to correct the correction to the correction of an initial piece of secondary legislation arising from Brexit.
It is simply not realistic to believe that all the revocations and repeals proposed under the clause can be replaced with equally good regulation without mistakes being made. When mistakes are made in the regulation of financial services, people get scammed, companies that should survive go under and the United Kingdom’s reputation as a dodgy place to do financial services becomes even worse. For all that I am not a big fan of the United Kingdom, I do not want to see that happen. I am not a big fan of the United Kingdom Parliament either, but I do not want to see its right to scrutinise in detail any suggested changes to legislation undermined, simply because it suits the Government of the day.
While it may be that the right thing to do with all 200-plus pieces of legislation listed in schedule 1 is to revoke and repeal every single word, Parliament should be given a choice, at reasonable speed, to decide whether that is correct. Ideally, at the same time as Parliament is asked to revoke the legislation, we should be given the chance to consider what will be put in its place.
My view on clause 1 altered slightly when we heard from the witnesses last week, especially those from the financial institutions. Some of them said that they genuinely felt that some of the existing EU legislation needs to go or to be changed significantly. I did not hear anybody asking for a wholesale revision of all 200-plus pieces of legislation. The motivation appears to be to take the European Union sticker off the number plate and put a Union Jack on it instead. If that is the only difference that is being made, what the Government suggest here is far too risky and undermines the right of Members of Parliament, including those who are not on the Committee, and their responsibility to scrutinise legislation that is crucial not only to the wellbeing of the economy on a big scale, but to the wellbeing of the economies of hundreds of thousands of our constituents. For many of them, this legislation has come too late, because they have been ruined by financial services scams that could perhaps have been prevented if this legislation had been introduced sooner.
It is my intention to press the amendment to a Division, Madam Deputy Speaker—I mean, Dame Maria. I do not know whether I should apologise for promoting you. Accepting the amendment would not significantly delay any legislative changes that the Government intend to introduce, but it would ensure that they are scrutinised properly to increase the chance that when mistakes are made in the replacement legislation, as they will be, they are picked up and dealt with before it is too late.
Dame Angela Eagle (Wallasey) (Lab)
Good morning, Dame Maria. It is a great honour to be on a Bill that you are chairing—I think it is our first time together in this iteration.
The Opposition do not have a problem with the principle of repealing some of the EU legislation, but I rise to invite the Minister to give us more detail on precisely how he envisages the wide-ranging power in clause 1 will be exercised in practice. I speak as a former member of the European Statutory Instruments Committee, which did a great deal of work in sifting all of the EU legislation to onshore it ahead of Brexit, including all the legislation covered by the Bill. We sat regularly and looked at thousands upon thousands of pieces of EU legislation, which we brought onshore ahead of Brexit. A great deal of work was done to achieve that, but a great many mistakes were made during the process in the drafting, the interpretation and the way in which powers were onshored in areas where we have not legislated directly for 47 years. This is a great accumulation of technical, but also extremely important, legislation that impacts on our constituents’ experience of everyday life as consumers and on how they use financial services and insurance, banking and savings products. If we get it wrong, there can be a great deal of detriment to our constituents.
Will the Minister give the Committee an idea of how the wide-ranging power to amend a large amount of legislation that has been on the statute book for many years will be done in a way that reassures all our constituents that we have the right balance between consumer protection and consumer rights on the one hand and our financial services industry and the way that it operates on the other? How will Parliament get to look at this? It is possible to argue that clause 1 would allow Parliament to be run over roughshod, without providing proper scrutiny, so will the Minister indicate how it will work in practice? How does he propose the powers will be exercised? What can Parliament do if we perceive that an issue that has been overlooked in all the technocracy impacts on our constituents? We need to ensure we have proper accountability.
I would be less worried if, as the hon. Member for Glenrothes said, we are just taking off an EU flag and sticking on a Union Jack, but I assume the Minister is taking these powers because he wants to use them. Will he set out in his comments on clause 1 precisely how he expects that to happen?
Shaun Bailey (West Bromwich West) (Con)
It is a pleasure to see you in the Chair, Dame Maria. We often cross paths in these Committees and it is great to see you once again in the Chair.
I will speak briefly about amendment 44, following the comments of the hon. Members for Wallasey and for Glenrothes. The Government need to be nimble in how they lay regulations, particularly in this transitional period. Clause 1 provides the ability to be agile, particularly as we redevelop our financial services framework following our departure from the European Union. The Government clearly need the ability to do that. We are dealing with a vast array of regulation, primary legislation and laws that will require a significant amount of time to be developed, but at speed. Clause 1 enables the Minister to do that, and I trust my hon. Friend the hon. Member for Arundel and South Downs to develop the legislative framework in the right way.
Peter Grant
If there is such an urgent need for speed, why has it taken so long for the Bill to be brought before the House?
Shaun Bailey
Perhaps I should have finished my comments, which would have led to the point that the hon. Gentleman has made. There is a need for speed and also a need to make things right. I think that is the point that he and the hon. Member for Wallasey were making, particularly as it is so vital that we get it right. I agree with the hon. Lady that there is a place for scrutiny. Drafting errors are a concern, and we have to make sure that as we build the framework, it is done in the right way. I pay tribute to the work that she did on the EU sifting Committee, because it is a thankless task to go through.
Dame Angela Eagle
It was not the most fascinating thing I have ever done in the House, but it was one of those things that one has to do, or the statute book ends up in a right mess.
Shaun Bailey
I thank the hon. Lady again for the work that she has done.
I will round up my comments by saying that I think it is right that in clause 1 the Minister has the ability to do what he needs to do, but I do ask him to consider what Members have said about the safeguards to ensure that there is the right framework, particularly around drafting amendments and suchlike, so that we get this right. The Bill is needed and the Government are absolutely right to do what they are doing. As with any piece of legislation, it is about ensuring that we iron out the creases. I hope the Minister will give us those assurances today.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to serve with you in the Chair, Dame Maria, especially after our time together on the Women and Equalities Committee.
The Opposition recognise that enabling the City to the thrive will be fundamental to support the country and to help people through the cost of living crisis. We need a regulatory framework that allows our country to take advantage of opportunities outside the EU, whether by unlocking capital in the insurance sector for investment in green infrastructure or supporting the vibrant UK fintech sector to thrive.
The Minister knows that the Opposition are broadly supportive of the Bill. We welcome clause 1, which will empower the UK to tailor regulation to meet our needs outside the EU, but my questions are similar to those posed by my hon. Friend the Member for Wallasey. What reassurance can the Minister provide that clause 1 will not result in the Government diverging for divergence’s sake and, in the process, unnecessarily revoking rules that might boost the competitiveness of the City or protect consumers from harm? As my hon. Friend said, we want a bit more detail on clause 1.
I also have a few technical questions. Will the Minister confirm whether his Government still plan to revoke all retained EU law by the end of 2023? What assessment has he made of the impact of that date on UK financial services? The date seems a bit arbitrary and we want to know how much thought went into coming up with it. Does the Minister think there is a risk of creating uncertainty and extra costs for the sector by forcing financial services businesses to unnecessarily adapt their business models by the end of next year? A bit of information would help us gain clarity on the clause.
The Financial Secretary to the Treasury (Andrew Griffith)
It is a pleasure to serve under your chairmanship, Dame Maria. The Bill is central to delivering the Government’s vision for the future of the financial services sector. The hon. Member for Hampstead and Kilburn talked about some of the great opportunities that it unlocks. It seizes the opportunities of EU exit, although it is not exclusively about that. It tailors financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and to deliver better outcomes for consumers.
Clause 1 revokes retained EU law on financial services. That clears the way to regulate financial services in a way that works for the UK, building on the model established by the Financial Services and Markets Act 2000. In response to hon. Members who asked how it will operate in practice, the settled position for some time has been that the FSMA model delegates the setting of regulatory standards to operationally independent financial services regulators, within the framework that Parliament sets. That is an internationally respected approach that historically has had support from all sides of the House, and I hope that continues.
As a result of our membership of the EU, the UK has been left with a patchwork—the hon. Member for Wallasey talked about her assessing role as that corpus of law was brought into the UK.
Dame Angela Eagle
I wonder about the sequencing. There is a list in schedule 1 of all the legislation that applies to financial services, lock, stock and barrel. The sifting Committee had oversight of that when we onshored it. Once the schedule is law, it does not all disappear at once, does it? Surely, we keep it there and have a look at things that might cause difficulty and at where we may wish to diverge.
Andrew Griffith
I am coming to the point where I will address the hon. Lady’s comments, but that is the substance of the position. The Bill enables the powers to do that, but we do not seek divergence for divergence’s sake. The whole purpose of the Bill and of giving the Treasury and regulators the necessary powers is to allow a thoughtful process that provides continued certainty to the sector—so no arbitrary retirement—and that allows time for those regulatory rules to be put on the UK rulebook in a way that is appropriate for the UK. That is the substance of what we are trying to do in the clause.
As to the question asked by the hon. Member for Hampstead and Kilburn, there is no arbitrary backstop date. The technical repeal is in the Bill, but the rules will sit on the rulebook, providing valuable certainty and continuity to the sector until such time as the operationally independent regulators decide that it is appropriate to revisit the rules and tailor them to UK circumstances. That is what the clause is intended to do.
Liz Twist (Blaydon) (Lab)
As a member of the European Statutory Instruments Committee, I wonder whether the Minister can offer any assurance that there will be parliamentary scrutiny of the clause in the future. Can he offer any suggestions as to how we might be able to ensure that that takes place?
Andrew Griffith
The hon. Lady is right to talk about the important role of Parliament. We are giving regulators a great deal more power because we are importing a large body of European laws into the UK rulebook, which is one of the reasons why the Government have contemplated the public interest intervention power in the past. The large number of rules—the hon. Member for Wallasey talked about how large that body is, and painted a graphic picture of all that sifting work—does not lend itself to Parliament being the rule setter in each case. Again, that is at odds with the approach to rule setting in the UK historically, but Parliament will continue to have a voice where it feels the need to.
Dame Angela Eagle
I apologise for intervening, but Standing Committee is the time when we can ask detailed questions, so I hope the Minister does not mind my coming back in. [Interruption.] I think there was a Siri outburst there.
Dame Angela Eagle
As a member of the Treasury Committee, I can say that we are trying to get a handle on the scrutiny that will be applied as regulators come to look at these things. One assumes that they will announce that they are reviewing a particular area, and they may come up with some divergences. Regulators have their way of doing things, Government Ministers want particular things, and sometimes Parliament has a different view, particularly if something affects our constituents in unanticipated ways. Given the structure that the Bill sets out, I am trying to get a handle on how Parliament’s view on an issue would be put forward.
Andrew Griffith
I will try one more time, Dame Maria, but I want to emphasise that the approach that the Government envisage being taken is exactly the approach embedded in FSMA 2000. We should not be debating these points ab initio simply by virtue of the work that the Bill does in importing the EU rulebook into UK law. The Treasury Committee, of which the hon. Lady is a member, does valuable oversight work and spends a disproportionate amount of time interviewing the regulators. All the regulatory rules are required by statute to have a period of consultation.
We are straying off the clause, but the role of the Treasury Committee and its Sub-Committee is codified in the Bill to enhance the level of scrutiny. There is a Government proposal—it would be interesting to hear the views of the official Opposition on this—for a public interest intervention power, which would cover precisely the sorts of issues that the hon. Lady’s constituents may be concerned about relating to regulations. I say again that there is no substantive change to the way Parliament scrutinises the independence of financial services regulation, and I hope that is something on which we can all agree on both sides of the House.
In the interest of time, I turn to amendment 44, which would, as the hon. Member for Glenrothes said, mean that retained EU law relating to financial services could not be repealed, other than where it is prejudicial to the interests of consumers, unless replacement legislation is already in place. It is not the Government’s desire to sweep away retained EU law in financial services without ensuring that it is adequately replaced in UK law. I can assure the Committee that there is no arbitrary sunset—
Tulip Siddiq
I watched every minute of the Minister’s appearance before the Treasury Committee. He specifically said that the Government would revoke the retained law by the end of next year, in line with the previous Prime Minister’s policy. Is there now a change in that policy?
Andrew Griffith
That is not the position in the Bill, which does not contain that date. Whether or not the Government’s intention at the time was different, nothing in the Bill says that that will happen. The Government will not diverge for divergence’s sake, because we understand the need for continuity to give financial services companies the confidence that they seek.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
It is good to see you in the Chair, Dame Maria. Does that also apply to financial organisations based in Northern Ireland, Minister?
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Will the Minister give way?
Andrew Griffith
One more time. I am being generous in giving way because we are at the early stages of the Bill, Chair.
Emma Hardy
The Minister is being generous, but as my hon. Friend the Member for Wallasey pointed out, we use Committee stage to scrutinise, question and ask for lots of detail that we would not ask for on the Floor of the House.
The Library briefing states that there is to be
“a ‘transitional period’ of undefined length…for each provision that is to be revoked.”
How will the decision be made on which provisions are to be revoked and when? What is the justification for revoking some at a different time from others?
Andrew Griffith
The Committee will indulge me if this sounds repetitive, but the thrust of the questions is the same: there is no change in the fundamental approach to UK financial services regulation, which is that the pen is held by the operationally independent regulators—primarily under the scrutiny of the Treasury Committee, to which they regularly give evidence—and they use the established statutory consultation procedure. That is the position, and will be the position going forward.
If the hon. Member for Kingston upon Hull West and Hessle would like to table an amendment that would dispense with operationally independent regulators in the UK, so that Parliament holds the pen on rule making, the Government will consider it. That is not the Government’s view of what should happen, however, and I do not believe that it is the view of the official Opposition. I understand the important role of parliamentary scrutiny, but an embedded feature, and one that I hear hon. Members pushing back on or challenging, is that regulators—in consultation with industry, following the statutory consultation process—are that ones that make the rules.
I will make some progress. To address a point made by a number of hon. Members, the Treasury will, as it does now, work closely with the Financial Conduct Authority and other regulators to ensure that the transition from retained EU law to UK regulations is orderly and meets the need of UK consumers, and that there is no gap in protections or relevant rules. As I have said, that work will be subject to the statutory consultation process in the normal way.
Amendment 44, tabled by the hon. Member for Glenrothes, is about consumer protection. I can assure the Committee that clause 3(2)(f)—we are getting ahead of ourselves—specifically enables the Treasury to modify retained EU law to protect consumers and insurance policyholders. Clause 4 enables the Government to restate retained EU law in domestic legislation for the same purpose. Consumers of financial services are already assured of appropriate protections under the UK framework for financial services regulation. Parliament has given the FCA a consumer protection objective—one of its core objectives—to ensure an appropriate degree of protection for consumers, which the FCA is required to advance when discharging its general functions. As evidence of that, the FCA has, among other things, recently introduced a new consumer duty. I hope that assures the Committee that there are already adequate consumer protections, both in the Bill and in the wider body of regulation. I therefore ask the hon. Member for Glenrothes to withdraw his amendment.
I will now explain the approach that clause 1 and schedule 1 take to repealing retained EU law. Retained EU law is revoked by clause 1. Schedule 1 lists the retained EU law revoked by clause 1. Part 1 of the schedule captures retained direct principal EU legislation, which means EU regulations such as the prospectus regulation. Part 2 captures secondary legislation that was made to implement EU directives or other obligations. That includes statutory instruments made under the European Communities Act 1972, which implemented significant pieces of EU law, such as Solvency II and the markets in financial instruments directive, known as MiFID.
Part 3 captures EU tertiary legislation, including delegated regulations, implementing Acts and EU decisions. Part 4 repeals part of primary legislation that relates to retained EU law, in particular part 9D of FSMA 2000, which relates to rules defined in relation to the EU capital requirements regulation, and chapter 2A of part 9A of FSMA, which governs technical standards. Those parts of FSMA will not be necessary following the repeal of the retained EU law to which they relate. Part 5 acts as a sweeper provision: it revokes all EU derived legislation relating to financial services that is not directly listed in the schedule. That does not capture any domestic primary legislation; it simply captures the kinds of EU law covered by parts 1 to 3 but not specifically listed. I therefore recommend that clause 1 and schedule 1 stand part of the Bill.
Peter Grant
I thank all the hon. Members who contributed to the debate. I notice that the Minister did not explain why amendment 44 is a bad idea. He has not given any reason why it would make things worse. He has argued that it would not make things better, would make them only slightly better or would make them better in a way that is not needed.
I take the Minister’s point that later parts of the Bill give the Treasury the power to act in the interest of consumer protection. I want to go further than allowing the Treasury to protect my constituents; I want Parliament to force the Treasury to protect my constituents. We do that by not allowing the Treasury to revoke consumer protection legislation until we, the House of Commons, are on behalf of our constituents satisfied that there is a suitable replacement for it.
I draw the Committee’s attention to part 5 of schedule 1, on page 96 of the Bill. It essentially states, “We have listed 200 bits of legislation that we are going to revoke. There are probably lots of other ones that we have not found yet, so we are going to put in a catch-all clause, so that they will all be revoked as well.” That does not strike me as a good way for the House of Commons to revoke legislation. The Minister has repeatedly said that the Government do not expect all the legislation to be revoked overnight. In fact, the explanatory notes to the Bill point out that the Government think that changing all that EU law will take several years. What happened to, “We got Brexit done”? We have hardly even started on the financial services part of Brexit.
As I said in my opening remarks, although I was against the suggestion that that law needs to be changed, I accept that the United Kingdom has to start to change parts of EU law. The wholesale nature of the change intended in clause 1 is not necessary and is extremely dangerous to the interests of our constituents. Amendment 44 would not necessarily remove all of that danger, and I am still concerned about what we would be left with. I have nothing but respect for the Minister as an individual, but let us face it: if recent history is anything to go by, he will not be there when decisions on revoking legislation are actually taken. Who knows? Maybe he has his phone on just now, and is waiting for that call.
Let us be honest: over the summer, this has not been a Government who have honoured their promises. They have not honoured the assurances made to their own party members so that one Member could become Prime Minister—the Prime Minister who recently resigned. Promises made at the Dispatch Box have been unmade almost before the Minister making them sat down. This Government have severely damaged the tradition that assurances given by a Minister, either here in Committee or in the Chamber, will always be honoured. That does not happen any more. I am afraid the House is entitled to ask for a bit more than might have been accepted a few years ago, when the traditions of this House were actually respected by each and every member of the Government.
Dame Angela Eagle
Clearly, Pepper v. Hart applies when a reassurance is given by a Minister. That is partly why we ask questions in these proceedings. We wish to have on record reassurances about the meaning of the statute in front of us, how the Government interpret it, and what the Government’s intent was. If there is any subsequent doubt about that, the record can be looked at under the provisions of Pepper v. Hart.
Peter Grant
I am grateful for that intervention. I do not disagree with a word of it. My point is simply that whatever the conventions, traditions and proceedings of this House might tell us, in practice the doctrine of ministerial responsibility does not apply in the way that I just about remember learning about 50 years ago as a schoolchild, in what was then called modern studies. There are numerous examples of Ministers behaving in a way that would require them to go, if they believed in the conventions of the House. I am not suggesting for a second—
The Chair
Order. I remind the hon. Member that we really need to stick to the text of the Bill, rather than giving a lesson on constitutional law. That would be really helpful.
Peter Grant
Thank you, Dame Maria. I hear the Minister’s assurances, but this issue is too important for us to rely on the conventions of the House, which have been broken far too often. The protection of our consumers and the financial services industry is important enough that any changes to regulations that had to be at least initially consented to by this Parliament should be made only with the consent of this Parliament, to which power was supposed to be returned by Brexit.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss the following:
Clause 4 stand part.
Government amendment 2.
Clause 5 stand part.
Andrew Griffith
Clauses 3, 4 and 5 create the necessary powers to replace retained EU law, which we have just been talking about, when it is repealed through clause 1. While the Government will act quickly to repeal and reform those areas that offer the greatest potential benefits, some of the retained EU law listed in schedule 1 —this may give comfort to hon. Members—will remain in force for a period following Royal Assent.
Clause 3 creates a power for the Treasury to modify the retained EU law in schedule 1 during the transitional period—that is, the period from the Bill’s receipt of Royal Assent to the point at which the revocation of the instrument is commenced, whenever that is. That allows the Government to make proportionate and targeted—Members might like to note those words—modifications to retained EU law before it is repealed. That ensures that financial services regulation continues to function appropriately for UK markets, and that UK firms are not required to comply with outdated regulations while we put in place the new UK-designed rules.
Clause 4 allows the Treasury to modify and restate the retained EU law listed in schedule 1 of the Bill. The clause gives the Government the necessary tools to move, over time, to a comprehensive FSMA model of regulation. Under that model, the UK’s expert and operationally independent regulators will generally make the detailed rules for firms to follow, within a wider framework set by Parliament and Government. Under the FSMA model, the Treasury sets the regulatory perimeter through secondary legislation by specifying which activities should be regulated. Some elements of retained EU law perform a similar function and should therefore be maintained in domestic legislation. That includes provisions that set the perimeter of financial services regulation in which the regulators will operate, enforcement powers for the regulators, and the ability of the Treasury to make and give effect to equivalence decisions in respect of overseas jurisdictions.
The clause also allows the Treasury to modify the retained EU law that it restates. That is essential for the UK to seize the opportunities of Brexit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and to deliver better outcomes for consumers and businesses. The exercise of that power will almost always be subject to the affirmative procedure. The only exception is where the power is used to make transitional modifications to either EU tertiary legislation or legislation that was originally made under the negative procedure. In this case, it is appropriate to follow previous precedent and apply the same negative procedure.
Clause 5 empowers the Treasury to replace references to EU directives in domestic legislation through a statutory instrument. EU directives are EU legislative acts that do not directly have effect in the UK; however, there are various references to EU directives in domestic legislation, and those should be removed as we move to a comprehensive FSMA model of regulation. That is why the clause gives the Treasury the power to modify UK domestic legislation to replace references to EU directives. Sometimes, however, no replacement will be necessary, and amendment 2 simply clarifies that the power can be used to remove such references without replacement.
The Government will be able to exercise the powers given to them in clauses 3, 4 5 and in amendment 2 only in line with the purposes listed in clause 3(2). Those purposes have been drafted to be similar to the objectives of the FCA, the Prudential Regulation Authority, the financial stability objective of the Bank of England, and the special resolution objectives. That will ensure that, while retained EU law remains in place and constrains the action that regulators can take to further their objectives, the Government can act as appropriate.
I acknowledge that these are relatively broad powers, but they are appropriately constrained by reference to existing objectives, with appropriate parliamentary scrutiny and in relation to retained EU law. It is proportionate to the task ahead of us, which is to seize the opportunity of the EU exit to build a comprehensive model of financial services regulation tailored specifically to UK markets. I commend clauses 3, 4 and 5 to the Committee.
Emma Hardy
If I am correct, there was significant questioning of clause 3 and the powers during transition in the oral evidence sessions, particularly with Martin Taylor, who was the last person to give evidence. As the Minister may recall, he spoke about how this extra power that the Treasury will have could undermine the trust of the markets in the independence of the regulators. I was just looking to see if there was a copy of the Hansard of those oral evidence sessions, but I cannot seem to see one—[Interruption.] I have one now.
Martin Taylor’s significant concerns were, as we have recently, that when the markets believe there is not independence of the regulators, they react accordingly. Has the Minister reflected on that evidence, and what reassurance can he give the markets and others that the Treasury will not exert undue influence over the regulators?
One of the points that stuck in my mind, though I cannot remember who made it, was about the Treasury having the power to intervene when something is in the public interest. One of the witnesses said that that implies that sometimes the regulators will act not in the public interest, given that the Treasury have to intervene in the public interest and exert power and control over them. I wonder if the Minister has reflected further on some of those concerns that were raised during the oral evidence session.
Peter Grant
It is interesting that we have three clauses here, each of which give the Treasury the power to amend legislation in very, very closely defined and restricted ways, and every one of them needs regulations to be approved by Parliament. Most of them require approval by the affirmative procedure. However, two minutes ago we were told we could wipe out 200 different items of legislation in their entirety without Parliament needing to have any oversight of the process. It does seem a strange contradiction.
The way the clauses are worded and the restrictions that are placed on them mean that this is one of the very few occasions where I would be comfortable in allowing regulations to be used to amend primary legislation. However, I have to say that for some of the restrictions, one wonders why they are there. Subsection (6) to clause 3 requires the Treasury to consult the regulator, and subsection (7) basically says, “But the Treasury only needs to consult the regulators if the Treasury thinks it is a good idea”. Why on earth does that need to be put into an Act of Parliament?
If clause 1 had been worded in a similar way to these clauses, there would have been no need for my amendment. There would have been no question at all from my point of view about that clause being accepted. I hope the Minister can explain why it is that these very limited and restricted powers to amend legislation are subject in most cases to the affirmative procedure, whereby Parliament has to approve them, when all the legislation that was put up for repeal and revocation in clause 1 needs no further detailed scrutiny from Parliament.
As far as the concerns raised by the hon. Member for Kingston upon Hull West and Hessle, I think those comments perhaps related to an amendment that the Government have flagged that they intend to introduce that may well give the Government far too much power to direct the supposedly independent regulators. If and when that amendment comes forward, we will certainly have concerns about it. I do not think those comments were related to the clauses in the Bill as it stands. On that basis, I will not oppose the clauses today.
Dame Angela Eagle
I want to register some concern and get the Minister’s reassurances on the record about what are very broad-ranging powers for the Treasury, which are then subject to constraints. Was it necessary to have such broad-ranging powers? It is not a good way of approaching things unless there are no other options. Is the Minister worried that, over time, those constraints might loosen and the broad powers will remain? The dynamic of this kind of structure is what worries me, rather than the balance that he has explained the Government have currently set.
Shaun Bailey
I shall be brief. Broadly speaking, I support the three clauses and particularly clause three on the qualifications it puts on how the Treasury will utilise those powers. I do not know the inner machinations of the Treasury. I know there are people in this room, particularly the hon. Member for Wallasey, who probably know it better than me, but the practical reality needs to be an important part of this as we debate the clauses too.
I hope my hon. Friend the Minister will say to me that the Treasury will not fly solo without consultation with the regulator. Clearly, the Treasury has built a partnership with the regulators, which forms a key part of any sort of work within the scope of these three clauses, particularly amendments of regulation and the qualifications under clause three. I am just keen to stress the point to my hon. Friend that as the Bill progresses and is practically applied, that discourse with regulators is a key part of its implementation.
The hon. Member for Wallasey made a fair point about the loosening of restraints. The assurances we seek from my hon. Friend are just to ensure that the frameworks that in place are robustly monitored and maintained. That will be the key to ensuring that the constraints under which my hon. Friend’s Department is placed as he executes the provisions of these clauses are properly maintained.
Andrew Griffith
I welcome the contributions from the hon. Members for Kingston upon Hull West and Hessle and for Wallasey, and my hon. Friend the Member for West Bromwich West. Both sides of the House are wrestling with exactly the same issue, which is taking what is acknowledged to be an unprecedented corpus of European law, which the Westminster Parliament had no opportunity to have oversight of or change—
Andrew Griffith
I will not give way at the moment. The issue is therefore about docking that corpus into an established framework of operationally independent regulators, with Parliament establishing the perimeter and ultimately having the right degree of scrutiny. That may be through the public interest intervention power that the hon. Member for Kingston upon Hull West and Hessle talked about, but which is not tabled in the Bill at the moment and is subject to continuing debate. That was the main thrust of the witness in the final session of last week’s sitting.
As currently written, clause three does not interfere with regulatory independence. Repealing retained EU law means the regulators will generally, as the default position, take over setting the detailed requirements, replacing the function of the European Commission and the European Parliament. However, that will take time and so we will not repeal those rules immediately. The regulators, under direction and intervention, as currently, from the Treasury Committee, will decide on the areas of most focus.
Emma Hardy
When will the details on those intervention powers be published so we can have a good look at them?
Andrew Griffith
I have previously given the assurance to the Treasury Committee that they will be tabled during the course of the Committee stage of the Bill. That remains the intention.
I have broadly addressed the points. I do not think Hon. Members oppose the Bill’s wording. I understand probing and I welcome the scrutiny of Parliament; we are here to provide precisely that function. However, I hope that I have been able to set out to the Committee’s satisfaction why these powers are necessary, but also the wider context in which they will be operated.
Dame Angela Eagle
I wonder whether the Minister could be a bit more forthcoming about when the amendment will be available, because that will give us a fuller picture of the Government’s decisions on the delicate balance that must be struck. Bearing in mind that the Committee sits for two weeks and at the end of today we will have had 25% of the Public Bill Committee proceedings on this Bill, I hope that the Minister will not publish the amendment at the end of next week.
Andrew Griffith
I am afraid that the hon. Lady will have to accept my previous commitment to the Committee. I also observe that mixed messages have come from the Opposition side of the House, because a lot of the thrust today is that Parliament should have greater ability to scrutinise or to intervene; previously, we have heard the opposite. But I have nothing further to add in terms of the timing.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4 ordered to stand part of the Bill.
Clause 5
Power to replace references to EU directives
Amendment made: 2, in clause 5, page 4, line 37, after “provision” insert “(if any)”.—(Andrew Griffith.)
This amendment clarifies that the power conferred by clause 5(1) to remove references to EU directives can be exercised so as to remove such references without replacement.
Clause 5, as amended, ordered to stand part of the Bill.
Clause 6
Restatement in rules: exemption from consultation requirements etc
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 6 supports the efficient transfer of financial services regulation from retained EU law to the regulators’ rulebooks. As retained EU law is revoked, the regulators will take on significant new responsibilities for making rules in areas where EU law currently exists, within the framework set by the Treasury and Parliament through FSMA and enhanced by this Bill. Part of that wider framework sets out the processes that the FCA, the PRA, the Bank of England and the Payment Systems Regulator must follow when they make rules. Those processes rightly include requirements to conduct cost-benefit analysis, to carry out a public consultation and, in some cases, to consult other regulators. Such provisions are crucial to the functioning of our regulatory system and ensure that the impact of new rules on individuals and businesses is appropriately assessed and considered.
However, there are likely to be occasions when existing rules under retained EU law do not need to be materially altered and so, when the regulators bring forward new rules, they may remain broadly similar to the retained EU law that they replace. In those cases, the rules would not require any real changes for firms, compared with the existing retained EU law. The clause therefore enables the Treasury to exempt the regulators from cost-benefit analysis and consultation in those circumstances where they make rules that are “materially similar” to those currently in retained EU law. That will ensure proportionality and will therefore enable the regulators to focus their resources on those areas where reform will unlock the benefits that arise from tailoring regulation to UK markets.
I should reassure the Committee that the clause is framed as a power rather than a blanket exemption. Even when a regulator is proposing to make rules that are “materially similar” to existing requirements, a full consultation and a cost-benefit analysis may be appropriate.
Clause 7 is a technical provision that defines several terms used in clauses 1 to 6 and schedule 1. It governs how those other provisions should be interpreted. I will briefly set out the major elements of interpretation. First, the clause defines the word “regulator” as referring to the Prudential Regulation Authority, the Financial Conduct Authority, the Bank of England and the Payment Systems Regulator. Secondly, it excludes regulator rules from the definition of EU-derived legislation, meaning that where regulator rules implemented EU directives, they will not be revoked by the Bill. That is a necessary exclusion because many parts of the regulatory rulebook would otherwise meet the definition of retained EU law, but it would not be appropriate to repeal them as they are for the regulators to determine. The regulators already have the necessary powers to delete or modify them as appropriate. I therefore commend the clauses to the Committee.
Dame Angela Eagle
Could the Minister spend a bit of time explaining what “materially similar” means?
Martin Docherty-Hughes
I asked the Minister earlier about Northern Ireland, and SNP and Labour Members would be interested to hear what he means by “proportionality” when it comes to services, EU-derived legislation and what differences there will be between the UK and Northern Ireland. He never mentions Northern Ireland—he keeps talking about the United Kingdom.
Andrew Griffith
To the question asked by the hon. Lady, my understanding is that the terms will have the common law usage. It would be inappropriate for me to try to insert my own definition.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7 ordered to stand part of the Bill.
The Chair
Members will have noted that we now come to clause 2, which the Government requested we debate in this order.
Clause 2
Transitional amendments
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 2 be the Second schedule to the Bill.
Andrew Griffith
We have already discussed the provisions the Bill delivers to allow us to replace the entirety of financial services retained EU law with domestic legislation that is in line with the established FSMA model. The Government will use the powers in the Bill and work closely with the regulators to give effect to that. However, it is important that we act now, where we can, to tailor our regulations to seize the benefits of EU exit and support our world-leading financial services sector. Clause 2 and schedule 2 do just that, making two sets of important and immediate transitional amendments to retained EU law. These are technical and important changes, so forgive me for taking some time to set them out.
First, schedule 2 makes a series of priority reforms to the UK’s regulatory regime for wholesale capital markets as identified through the Government’s wholesale markets review. The regime is predominantly set out in EU-derived legislation collectively known as the markets in financial instruments directive—MiFID—framework. The resilience, effectiveness and competitiveness of the UK’s capital markets rest on strong and effective regulation.
However, the MiFID framework was designed for the EU and intended to ensure detailed, harmonised rules across 28 jurisdictions. Many of the rules are therefore not calibrated optimally for the UK and, in a number of areas, have not delivered the intended benefits. This has led, for example, to duplication and excessive administrative burdens for firms or has stifled innovation. Such rules clearly do not work for a global financial centre such as the UK.
Parts 1, 2 and 4 of schedule 2 deliver the most urgent reforms identified through that process. The reforms will result in a simpler and less prescriptive regime that meets the needs of UK markets while still maintaining the highest regulatory standards. Part 1 of schedule 2 removes unnecessary restrictions on firms’ ability to execute transactions, deleting the share trading obligation and double volume cap. The EU argued that these restrictions would increase transparency in share trading, but evidence suggests that they have prevented firms from accessing the most liquid markets and therefore achieving the best price for investors.
Dame Angela Eagle
Obviously, this is an extremely complex area of technical regulation. It requires the regulators, alongside the Basel Committee and the international authorities regulating the flow of this kind of stuff, to operate effectively. If securitisation goes wrong or if markets begin to be opaque, with transparency going down, there can serious consequences for the countries in which such firms are based. That might also engage systemic threats to the banking structures of those countries. We have been through that before, and we know what happened when securitisation went wrong in the global financial crisis and what damage that caused to the global infrastructure.
Clearly, those tasked with ensuring that that does not happen again—those in the Bank of England, the prudential regulators and the FCA who have a handle on this, as well as the international regulators trying to set standards—have to be very aware of how such regulation might change and effect firms in the markets. However, there will always be a push in these markets to move the boundaries towards something less opaque and more profitable for those doing business, hoping that the risks can be left somewhere else. When risks crystallise, however, they are left on the balance sheets of nations that have to cope with cleaning up the mess. So, while I approve of modernising such regimes, little alarm bells go off in my mind when I think about attracting more such business. That kind of business is attractive if it is safe; it is not attractive if it is unsafe.
The Minister ploughed through his speech about all the technicalities of the shift away from EU-regulated systems and about how onshoring back to the UK will be done. Given how large our banking, financial services and insurance sector is, we are clearly at systemic risk if we get this wrong. We have to get the balance right between ensuring that any new regimes are transparent and safe enough to be hosted in our country. The Minister took us through some of the technical changes, but will he reassure us about the transparency and safety issues in the new regime that I have hinted at?
Peter Grant
If the sun moves much further, I will have to sit on the other side of the room to keep it out of my eyes, so my apologies for having to move seat during the debate, Dame Maria.
I thank the Minister for doing what I hoped he would have done in the debate on the revocations in clause 1: outlining in terms understandable to a lay person why some specific items of EU legislation are no longer appropriate for the United Kingdom—in fact, it is questionable whether they are appropriate elsewhere. I would have wanted to see that before the changes proposed in other parts of the Bill. On the basis of the Minister’s comments, and the fact that none of the regulators we heard from raised concerns, I am willing to accept that the changes suggested in the clause and the details in schedule 2 are appropriate.
I want to draw attention to a comment the Minister made earlier and to give him the chance to correct it. He suggested that this is EU legislation that Parliament never had the chance to scrutinise, but that is not the case. I spent several years, as other hon. Members did, on the European Scrutiny Committee. Every single piece of legislation the European Union intended to implement came before that Committee, which had the authority to call in Ministers and to put a stop on them approving things at EU Council meetings if the Committee was unsatisfied as to the impact. The House of Commons—the whole of Parliament—had the right to take action to prevent any of those directives from coming into force. The fact that Parliament seldom did that is a failing of this and previous Parliaments. The fact that Ministers had so much free rein to do what they liked, and could ignore Parliament if they wanted to, is not the fault of the European Union; it is because of the relationship between Parliament and Government. This Parliament is unfit for purpose, and Ministers from other members of the European Union would not have been allowed to agree to those directives without a vote in their respective Parliaments. I hope the Minister will be willing to correct the record. We can agree or disagree about legislation that the European Union put in place, but to suggest that this Parliament was somehow unable to have any impact on that legislation is simply not accurate.
Tulip Siddiq
Has the Minister picked up any feedback from the sector about the Government’s proposed reform to the position limits—a regulation under MiFID II—and the fact that they have not been adequately assessed for commodity market speculation risks? How does he plan to keep that issue under review? If he has heard of concerns, is he planning to address them?
Andrew Griffith
I am happy to stand corrected by the hon. Member for Glenrothes, but I am not happy to relitigate matters that the British people settled, given the chance in a referendum. I hope the hon. Member will reciprocate by looking forwards, not backwards, so that we can go forward with the best financial services regulation for the UK.
The matters raised by the hon. Members for Wallasey and for Hampstead and Kilburn are precisely within the scope of the regulators, and they have been consulted on. The hon. Member for Hampstead and Kilburn raised important points about the commodity market. The regulators are aware of those, and they will remain under constant review. Parliament itself has the ability, as always, to set the perimeter within which the regulators operate. Having addressed those points, I have no further comments.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Schedule 2 agreed to.
Clause 8
Designated activities
Peter Grant
I beg to move amendment 34, in clause 8, page 7, line 4, after “activity” insert—
“(c) the extent to which the activity has the effect of raising finance for any business purpose by means of soliciting financial contributions other than by—
(i) an authorised issue of shares, or
(ii) borrowing from an authorised financial institution.”
This amendment would allow the Treasury to designate and regulate businesses which seek to raise finance by soliciting contributions from the general public other than by an authorised share issue.
First, I welcome the intention behind the clause, because it seeks to close a number of loopholes that have become evident in the way financial regulators are allowed to regulate and in the way that activities come within or fall beyond their scope. Far too often we see dodgy operators deliberately choosing to operate in empty spaces between the remits of different regulators. Too often the regulators seem more concerned about arguing that something is someone else’s responsibility than about taking responsibility themselves.
It is not clear whether the amendment falls within the scope of this Bill or that of the Economic Crime and Corporate Transparency Bill, which is about to start its Committee proceedings, so I am pleased that it has been ruled competent. Essentially, the problem that the amendment is designed to address is what Blackmore Bond and Safe Hands Funeral Plans became. Quite possibly, it was always the intention of the directors that they would move away from being businesses carrying out particular business activities, and towards being businesses of which the main purpose in life was to get the general public to fund those activities. Although Safe Hands was a funeral plan business on the face of it—that was how it was set up—it became a way for the director, who took over a few years before the company collapsed completely, to take money from people who thought their money would be kept safe to pay for their funeral when the time came. The director then used that money to speculate on wildly high-risk and potentially high-profit investments.
Stephen Hammond (Wimbledon) (Con)
I understand exactly what the hon. Gentleman is trying to do with the amendment, and I have a lot of sympathy, but I am not clear about its scope and extent. Is he trying to ensure that the Treasury starts to regulate crowdfunders? That is potentially what the amendment would allow. It is a very widely drawn amendment, and I seek clarification on this point.
Peter Grant
If it became clear to the Treasury or the relevant regulator that crowdfunders were using funds for illicit purposes, rather than for genuinely good causes, I would expect the Treasury and the relevant regulator to step in. My amendment is designed to put primary legislation in place to allow the regulators to step in, and to allow the Treasury to take action, if it becomes clear that there is a problem, regardless of whether that is through crowdfunding or any other method of raising finance. The important part of the amendment is about finances being raised as a way of raising capital. The amendment does not in any way imply that it would cover, for example, crowdfunding for a good cause or to raise funds for someone who has had a serious accident. That would not be covered by the wording of the amendment.
I can understand the concerns, and I am quite happy if someone can come up with better wording—possibly in an amendment to a different piece of legislation—that achieves the aim of the amendment, but I am utterly convinced that there is a serious weakness in our current regulation. As currently worded, neither this Bill nor the Economic Crime and Corporate Transparency Bill will close down that loophole sufficiently.
At Blackmore Bond, the abuse that was taking place was stopped after it was too late. At Safe Hands Funeral Plans, the abuse that was taking place was stopped after it was too late and people had lost their money. The selling of mini-bonds to the general public, which is what Blackmore Bond was up to, is now outlawed, so action has been taken on that specific kind of abuse. Funeral plans are now regulated, so action has been taken on that specific kind of abuse. I do not want the regulator or the Treasury having always to see where the next specific company disguise is going to be, however; I want them to have the power to regulate based on how businesses take money from the general public.
With those comments, I look forward to hearing the Minister’s response. If he is not minded to accept the amendment, I hope that we can get an assurance that the intention behind it will be addressed at a later stage.
Emma Hardy
I have a general question on the clause and the designated activities regime. In the consultation response document produced by the Treasury—“Financial Services Future Regulatory Framework Review: Proposals for Reform. Response to Consultation” to be precise—some consultation respondents were concerned about what activities would physically be regulated, what constraints were to be placed on the powers of the Treasury and what the consequences for failing to comply with the regulator’s rules would be. I have not yet seen their concerns answered by the Minister. Will he address that?
Stephen Hammond
It is a great pleasure to serve under your chairmanship, Dame Maria. Will the Minister clarify quickly proposed new section 71S? The power in subsections (3) to (7) is an exceptional power, rather than a regular power.
Andrew Griffith
The amendment seeks to make it clear that offers of non-equity securities to retail investors—for example, as cited, retail bonds—can be brought into regulation through the designated activities regime. That is the important subject we are talking about. That regime—the DAR—has been designed to allow for the proportionate regulation of activities involving interactions with financial markets in the UK and conducted by many that are not traditional financial services firms. In essence, it is the core scope of regulation. The DAR includes a range of activities, such as an activity connected to the financial markets or exchanges of the UK, or an activity connected to financial instruments, financial products or financial investments issued or sold in the UK. Any of those can be designated under the DAR. Our contention is that it is therefore already sufficiently broad in scope. We will discuss that further when we consider clause stand part later.
Offers of non-equity securities to retail investors as proposed by the amendment would fall within the definition of the DAR should the Government wish to designate that activity in future. Indeed, proposed new schedule 6B of the Financial Services and Markets Act 2000, which is to be inserted by the Bill and which provides illustrative examples of the types of activities that His Majesty’s Treasury may designate, includes
“Offering securities to the public.”
I can therefore give my hon. Friend the Member for Wimbledon the comfort that he seeks, in that the provision does extend to crowdfunding, which was his specific point.
Peter Grant
I am grateful for that assurance, but does the Minister take my point that in the examples of abuses that I mentioned, people did not say that they were offering any kind of securities? They said that they were selling funeral plans. Next time, they will be selling school or university fees plans or Christmas hamper plans; it will not be presented as the selling of equities as he and I would understand it.
Andrew Griffith
We will refer to that in more detail when we return to the DAR this afternoon. The DAR is the important establishment of the perimeter. I hear the hon. Gentleman on how we set the scope and those definitions, but the position of the Government is that the Bill already enables the Government to take action to ensure that offers of retail bonds are appropriately captured by regulation.
In April 2021, the Government consulted on the future regulation of non-transferable debt securities such as mini-bonds. In response to the consultation, the Government decided to bring certain non-transferable securities, including but importantly not limited to mini-bonds, within the scope of the reformed prospectus regime. The Government confirmed that we would bring forward our reforms to the UK prospectus regime using the powers in the Bill to replace retained EU law—following commencement. I am therefore confident that the Bill as drafted can achieve what is needed to regulate such activities. I ask the hon. Gentleman to withdraw his amendment.
Peter Grant
I am still not sure that the Minister gets this. I will not push the amendment to a vote, but I sincerely hope that he will see the need for such a measure in financial services legislation or, more appropriately, in the Economic Crime and Corporate Transparency Bill on its way through the House. If the clause as worded had been in place 20 years ago, Blackmore Bond would still have happened, Safe Hands would still have happened, and my constituents and all others would still have been scammed out of hundreds of millions of pounds.
A couple of years ago, when I spoke about Blackmore Bond, I said that I had a horrible feeling—an almost certain feeling—that it was already happening again somewhere else; six months later, Safe Hands collapsed and tens of thousands of people lost all their funeral plan money. I do not know the nature of the business that is being used as a cover for the latest scam, but deep in my guts I know that it is happening now, and that it will happen again next year and the year after. Nothing in this legislation as framed adequately clamps down on that.
I will not push the amendment to a vote, not because I do not think it is important but because I would rather not put it to a vote to see it voted down, which would be a serious mistake by the Committee. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Fourth sitting)
Tuesday 25th October 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 25 October 2022 - (25 Oct 2022)
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Chair
Before we continue with consideration of the Bill, I have a correction to announce to an earlier Division result. In this morning’s sitting, the Committee divided on amendment 44. The result of the Division was incorrectly announced as two Ayes and 11 Noes. The Noes were, in fact, 10. Apologies for that. Although it does not change the substantive outcome of the Division, I wanted to notify the Committee. The correction will be reflected in the Official Report.
Clause 8
Designated Activities
The Financial Secretary to the Treasury (Andrew Griffith)
I beg to move amendment 22, in clause 8, page 7, line 7, at end insert—
“(7) The financial instruments, financial products and financial investments mentioned in subsection (3)(b) may include cryptoassets.”
This amendment clarifies that cryptoassets may be regulated using the new power in Part 5A of the Financial Services and Markets Act 2000 (designated activities) which is inserted by clause 8 of the Bill. The new provision relies on the definition of cryptoasset inserted by NC14.
The Chair
With this it will be convenient to discuss Government new clause 14—Cryptoassets.
Andrew Griffith
It is a pleasure to serve under your chairmanship, Dame Maria. Cryptoassets and blockchain could have a profound impact across all forms of the financial services sector. We are still on the cusp of this breakthrough technology, and its uses are continuing to evolve. Clauses 21, 22 and schedule 6 will enable the Treasury to establish an effective regulatory regime for digital settlement assets. Those include cryptoassets referred to as stablecoins. The Committee will consider those clauses in a later session.
Following engagement with industry, the Government recognise the need to move ahead with regulating a broader set of crypto activities beyond stablecoins; that includes activities relating to the trading and investment of cryptoassets such as Bitcoin and Ethereum. Through the Bill, we want to ensure that HM Treasury has the necessary powers to deliver that. The Government believe that creating an effective comprehensive regulatory framework for cryptoassets has the potential to unlock innovation in the UK’s crypto sector and to boost growth.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
What do the Government mean by “innovation” in a piece of legislation? I wonder why such a term is used, because it is so broad. What does the Minister actually mean?
Andrew Griffith
If the hon. Gentleman will let me continue, I can offer some clarification. It is vital that the Government have the flexibility to develop a world-leading regime for cryptoassets in an agile way. The innovation itself comes from emerging new technologies or new uses for those technologies. The role of the Government and the Treasury in this respect will be to create regulatory frameworks that enable their safe deployment, which I hope all Members of the House agree with. Together, amendment 22 and new clause 14 will ensure that that happens.
Dame Angela Eagle (Wallasey) (Lab)
The Minister is quite right that all Governments have to think about how to deal with the emergence of cryptocurrencies, but using that phrase is a bit like using the phrase “genetically modified”. We would certainly want any coin that the Bank of England decided to back to be treated very differently from Bitcoin. Could the Minister say a bit more about how regulating for a piece of electronic money backed by the Bank of England would be different from regulating in a way that would make Bitcoin seem almost reasonable? We know that it is a gigantic gamble that no one in their right mind would want to invest in.
Andrew Griffith
I am cautious of time; this issue would be apt for a debate in itself rather than being discussed as part of the Bill’s technical clauses. Aspects of Bitcoin are already within the perimeter of the regulatory regime. As I said at the beginning of my remarks, that is an emerging area. The hon. Member for Wallasey is quite right that there are trade-offs, and we want to protect consumers while not shutting the regulatory regime off from an emerging set of technologies.
Andrew Griffith
I give way again, but I do not want to turn this into a debate about the underlying societal challenges of an emerging technology; I want us to confine ourselves as much as possible to the Bill.
Martin Docherty-Hughes
I am grateful to the Minister. I disagree that crypto is emerging; it has been around for quite a long time. In terms of parity of regulation and consumers, there are also the producers. It seems that there would be a halo effect: for example, larger companies would control stablecoin, but small or medium-sized companies that could produce stablecoin might be excluded. Will the Minister assure us of the Government’s intention to create equity in the stablecoin market?
Andrew Griffith
It is certainly not the Government’s intention to create anything other than opportunities for different participants to emerge and bring forward products in the sector. Those could include stablecoins, which are asset-backed cryptoassets. Over time, they could include central bank-issued currencies. The Government have indicated a desire to explore that, but have not yet confirmed that the Bank of England or the Treasury intend to issue.
Of course, we must ensure that products already out there being advertised to our consumers are appropriately regulated within the regulatory perimeter. We are not preferring or advantaging one or other part of that, but without the amendment and new clause we would not be able to bring forward the appropriate regulations, which the regulators will consult on with industry in due course. I hope that clarifies the Government’s thinking. Outwith the Committee, it will be appropriate in due course for the Government to update their set of policy objectives for this space. The subject that we are discussing today is somewhat narrower; it is just the remit of the Bill.
Amendment 22 clarifies that cryptoassets are within scope of the designated activities regime introduced by clause 8. We talked earlier about the designated activities regime—the DAR. By bringing cryptoassets within its perimeter for the first time, some of the societal outcomes and concerns that hon. Members have raised can be addressed. If we do not bring them within the perimeter, those concerns cannot be addressed.
New clause 14 clarifies that cryptoassets could be brought within the scope of the existing provisions of the Financial Services and Markets Act 2000 relating to the regulated activities order. The substance is that cryptoassets will be treated like other forms of financial asset: not preferred, but brought within the scope of regulation for the first time. That is the aim of the new clause. It will ensure that the Treasury is equipped to respond to developments in the crypto sector more quickly and deliver regulation in an agile, risk-based way that is consistent with our approach to the broader financial services sector.
The Treasury will consult on its approach with industry and stakeholders ahead of using the powers, to ensure that the framework reflects the unique features, benefits and risks posed by crypto activities. I think that is the assurance that hon. Members seek: that the Government will consult before seeking to use the powers. Any secondary legislation made to bring new cryptoasset activities into the regulatory perimeter would be subject to the affirmative procedure, so each House will have an opportunity to debate the legislation. That gives Parliament the appropriate oversight.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
We welcome Government amendment 22 and Government new clause 14, which we recognise would extend financial protection to cryptoassets. It is a welcome and important move that will help to prevent high-risk cryptoassets from being falsely advertised to the public.
Does the Minister believe that the definition of cryptoassets is broad enough to capture financial promotions of as yet non-existent cryptoassets? I also wanted to ask him how the broad-ranging definition of “crypto” used in clause 8 takes account of the fact that the Bill only brings stablecoins into payment regulation.
Martin Docherty-Hughes
I draw the Minister and his Department’s attention to the work of Dr Robert Herian, who is one of the primary academics on regulation. I am mindful that he says it is the technology that underpins stablecoin and other related cryptoassets that we seek to regulate through the legislation. I welcome that—it is a step forward—but he has also said that the technology
“may offer an opportunity to recalibrate the powerplay between those who would engage in aggressive tax strategies and planning, and those charged with regulating them”.
Can the Minister advise Members whether he believes that this approach to stablecoin and future innovative technologies, which are already there, will enable a recalibration, so that finance is not utilised in some type of tax dodge? Could he reinforce that point? Every time we hear a discussion about stablecoin and cryptoassets, there is a certain element of finance that I do not think anyone here would really support.
Andrew Griffith
On the question posed by the hon. Member for Hampstead and Kilburn, I do believe that the definition is broad enough. If there are specific concerns or use cases that the hon. Member feels are not encompassed, I am happy to take that back offline or to write to her with advice. The intention is clearly to allow sufficient flexibility to broaden the perimeter.
I am not fully familiar with the works that the hon. Member for West Dunbartonshire talks about, but I am happy to become more familiar with them over time. It is clearly not part of the Government’s intention to legitimise what would not otherwise be legitimate or to create the opportunity for issuers to evade responsibility to society. That is not the Government’s aim and objective.
Amendment 22 agreed to.
Peter Grant (Glenrothes) (SNP)
I beg to move amendment 35, in clause 8, page 9, line 25, at end insert—
“(ba) in cases where the regulations make provision for liability, make provision for nominated representatives of organisations against whom liability has been found to be held personally liable for actions undertaken in relation to carrying out a designated activity,”.
This amendment would allow for nominated representatives to be held personally liable for the carrying out of a designated activity when an organisation has been found liable.
This is another amendment that attempts to improve the protection of consumers, small investors and others who in the past have been far too easy prey for unscrupulous company directors and other people in charge of companies. In a number of the recent financial services scams, we have seen that even once the investigatory regulatory process has been completed, which in itself can take five, even 10 years, any attempt to recover money from where it should be recovered from—the pockets of criminals—is frustrated by the fact that the companies at the centre of the scam have at best no money left in their books. Most of the time, they have been placed into liquidation long ago.
Part of that liquidation process is always moving the money into other companies, very often hidden in offshore anonymous companies owned by the exact same person. Effectively, the person who works the scam takes steps to get their money well out of the reach of the UK regulators and enforcers long before the liability of the company is established. Amendment 35 seeks not to require but to allow the designated activity regulations in specific circumstances to make regulations that say, “There will be occasions when individuals who have carried out the misconduct will be held personally liable to people who have suffered.” That means that those who have been scammed in a way that is not covered by the financial services compensation scheme at least have a chance of getting their money back. Possibly more importantly, the amendment would be a further deterrent to those who would carry out such scams, because it will at least partially close down the option of their hiding their ill-gotten gains in a different company, where they are no longer within reach of the regulator.
I appreciate that anything that starts to blur the distinction between a shareholder, a director and the legal personality that is a limited company should be used with caution. I fully understand why, in UK law, a company is its own person with its own legal identity, but there are times when we cannot allow the director of a company to hide behind that—times when natural justice says that if we know who is responsible for people losing their money, and know that they have buckets full of money sitting in a company somewhere, it is perfectly reasonable to say to them, “We will have that money to compensate the people you scammed.”
The victims of Blackmore Bond will never see their money again. I understand that one of its directors is now bankrupt, but the other definitely is not. Most of the victims of Safe Hands Plans will probably not see their money again. Remember, its director bought the company at a time when he knew that it would have to wind up in a year or two; we have to ask why he was so keen to buy it. He is not a poor person; he is extremely wealthy. He just managed to move his money out of that company and into others.
Clearly, the amendment could not be retrospective, but if it was agreed to, it would mean that if any person tried the same dodge in future, their victims could, in court, try to get their money back from the person who stole from them, rather than from the company, which will often no longer exist.
Dame Angela Eagle
I do not want to row in behind the hon. Member and support absolutely everything that he says on his amendment, but I know what he is trying to do: to put something in statute that would solve the problem of fraud, which is more and more prevalent in our financial system, especially in and around the perimeter that we have been talking about. There can be questions about whether a person is inside or outside the perimeter, or whether a bit of their company is inside and a bit outside. That kind of fraudulent hiding behind being regulated when the things being sold are outwith the perimeter does fool a lot of people, and a lot of money is scammed out of our constituents’ bank accounts in that way. Does the Minister have any observations on how we could—
Dame Angela Eagle
Before we were so rudely interrupted, I was saying that, although I do not support the detail of the amendment, it is a hook on which to hang the sheer frustration that many of our constituents feel about a system in which vast amounts of money are scammed. Some of those who have benefited are in plain sight, often with their ill-gotten gains, while our constituents have had their life savings wiped out. It seems that the law can do nothing to touch these people, and I share our constituents’ frustration.
We will get on to fraud and other issues later in the Bill, but I understand and respect the creativity of the hon. Member for Glenrothes in using the amendment to raise them now. In replying to the debate, will the Minister say how the Government think we could massively improve the attack on fraud in our financial system, because it is increasing rapidly? The risks for those who perpetrate fraud are tiny, but the rewards are huge, and that is surely driving the ongoing attacks on the life savings of many of our constituents. That makes engaging with financial services—buying and selling, and buying products from the system—difficult and potentially dangerous, and it puts many people off trying to make the provision for themselves that we would normally want them to make.
Shaun Bailey (West Bromwich West) (Con)
I, too, support the intentions behind the amendment from the hon. Member for Glenrothes, which were very well articulated by the hon. Member for Wallasey. We often see these people swanning around the place with their ill-gotten gains, while many of our constituents have been on the receiving end of a scam. Even when there has been some form of regulatory investigation, some people do not feel that justice has been done. The amendment tries to make tangible something that may appear quite abstract to our constituents. I support the amendment’s aim but, to follow one of the Committee’s themes, perhaps this is not quite the place for it.
That said, I echo the request for reassurances from the Minister on how we will construct a regulatory regime that makes our constituents feel that there is a degree of responsibility. As Members on both sides of the Committee have said, many of our constituents, particularly those who have been victims of fraud and scams, feel that although the letter of the regulatory system may have been followed, justice has not been done. As we consider the Bill, we need to keep that at the forefront of our mind. I can get on board with the intentions behind amendment 35, but we have to first consider its practical effects. I hope that in his summing up, the Minister will give the Treasury’s thinking on this issue.
Tulip Siddiq
Later, I will come to my amendment on the Bill’s fraud provisions, but I want to express my support for the intentions behind amendment 35. Does the Minister oppose in principle the idea of nominated representatives being held liable for the carrying out of a designated activity when an organisation has been found liable?
Andrew Griffith
I thank my hon. Friend the Member for West Bromwich West for his reasoned response; I make common cause with him. The issue of liability compensation vexes the sector, and a huge number of regulatory interventions and compensation schemes are concerned with that. I say to all hon. Members that the battle against fraud and for recompense goes much wider than the Bill. It includes the Government’s fraud strategy, our endeavours on economic crime and the activities of various regulators, but I associate myself with colleagues’ remarks.
It is said that hard cases make bad law, and regrettably the Government feel that the amendment cannot be supported. We need to be conscious that limited liability is an important principle in UK law. Measures elsewhere in the Bill—we will come to them later in our discussions on clause 8—allow the Treasury to make regulations concerning liability and compensation in relation to designated activities. That goes some way to answering the question raised by the hon. Member for Hampstead and Kilburn. In principle, the Government are absolutely on the side of victims; sometimes it is just a question of bringing forward the appropriate regulations that will not have unintended consequences.
Given the breadth and variety of activities that can fall within the designated activities regime, we need a tailored supervision and enforcement framework for each type of activity, rather than over-generalising. The Treasury can use powers in the DAR to design and create separate supervision and enforcement frameworks.
Proposed new section 71P, which will be inserted into the Financial Services and Markets Act 2000 by clause 8, allows the Treasury to make regulations concerning liability and compensation in relation to designated activities. That means that the Treasury can make provision in secondary legislation for the Financial Conduct Authority to hold liable individuals—this answers the question—working for a company that is carrying out designated activity, where appropriate. We support that in principle, but it is for the FCA to bring forward the regulations for a particular type of activity.
Proposed new section 71Q to FSMA provides that designated activity regulations—
The Chair
Order. The Minister might want to pause his comments on clause 8 and focus for the moment on amendment 35. We will come to clause 8 stand part shortly.
Andrew Griffith
Thank you, Dame Maria. You are right: many of these matters fall within the domain of clause 8, which we shall discuss shortly.
Peter Grant
I thank Members on both sides of the Committee who have supported the intention behind the amendment. As I said in my opening remarks, I accept that it does not sit particularly comfortably in a financial services Bill under the Treasury, because the Treasury is not usually responsible for the general regulation of businesses. Nor does it sit comfortably in the Economic Crime and Corporate Transparency Bill, which I understand is shared between the Department for Business, Energy and Industrial Strategy and the Home Office. BEIS, through Companies House, is not responsible for the regulation of financial services and will not be responsible for the regulation of designated activities. Nobody is entirely responsible, and that is the problem.
To those who say, “Yes, we agree with you, but this is not the time,” I say, “If not us, then who, and if not now, then when?”. Tomorrow, some of our constituents will be scammed, and more will be scammed the next day. Every day that we delay, waiting for the Government to introduce the perfect clause that has no unintended consequences, causes unintended consequences for our constituents. I accept that the amendment might have unintended consequences, but the Government’s inexcusable delay in closing the loopholes once and for all has already led to unintended consequences. I intend to press the amendment to a vote for that reason.
Question put, That the amendment be made.
Peter Grant
I beg to move amendment 36, in clause 8, page 10, leave out lines 22 to 27.
This amendment would remove the Treasury’s proposed power to make regulations which modify legislation of the Welsh Senedd, Scottish Parliament or Northern Ireland Assembly for purposes connected with the regulation of designated activities.
The Chair
With this it will be convenient to discuss amendment 37, in clause 8, page 11, line 38, leave out from the first “Parliament” to the end of line 40.
See the explanatory statement for Amendment 36.
Peter Grant
The amendment can be summed up in four words: “Hands aff oor Parliament”, whether that Parliament is the national Parliament of Scotland, Senedd Cymru or the Northern Ireland Assembly. Those who claim to respect the devolution settlement cannot do so with any credibility if they continue to give power to Ministers of the reserved Parliament to override decisions of the democratically elected national Parliaments of three of the four equal-partner nations in the Union. This is a power grab of the kind we have already seen in other EU withdrawal legislation. Some of those power grabs will now happen, because the House has voted for them, but that does not make them right or any less of an outrage against democracy. Amendment 36 must be agreed to for the Committee to be able to hold its head up in public and say, “We support democracy and we respect the devolution settlement.”
Amendment 37, although not technically a consequential amendment, is as close to one as makes no difference, because the wording that it would delete on page 11 would no longer be relevant if we agreed to amendment 36. It is my intention to press amendment 36 to a vote.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
I hope that when the Minister responds to the debate on the clause, he will cover proposed new section 71R of FSMA 2000 before reaching the point mentioned by the hon. Member for Glenrothes. Subsection (1) of the new section is a Henry VIII power that allows the Treasury to amend legislation, including primary legislation. Will the Minister outline when, why and how the Government intend to use those Henry VIII powers, and what safeguards we have in the Bill against their abuse?
Andrew Griffith
I hope that we can dispense with the amendments quickly. They are meant simply to prevent the Government from making amendments to devolved legislation. The clause deals with matters that are reserved to the UK Government. We consider new section 71R in clause 8 as an essential power that gives the Treasury the ability to ensure that legislation works consistently and effectively when changes are brought about by virtue of the DAR. It also permits the Treasury to amend legislation made by the devolved legislations. The position of the hon. Member for Glenrothes on that is clear, but it is not shared by the Government. Although we do not expect to amend legislation from the devolved Administrations, this is a precautionary power.
Let me reply to the hon. Member for Kingston upon Hull West and Hessle. There is no current legislation that we expect to be amended in such a way, but it is possible that legislation made by the devolved Administrations has some references buried within it to aspects of financial services and markets legislation, which is why the power is needed. There is precedent for that approach. Section 144F of FSMA contains a similar power that can be used for legislation made by the devolved Administrations. I hope that that reassures the hon. Member for Glenrothes—although I fear it does not—and ask him to withdraw his amendment.
Emma Hardy
I fear that the Minister did not fully address my point, which is that the clause contains Henry VIII powers. I do not think he clearly outlined exactly when those powers would be used. He has mentioned that there are similar powers in a different piece of legislation, but has not said specifically when the Government would use these incredibly powerful Henry VIII powers to overrule primary legislation.
Peter Grant
I hope that the record of the sitting will clearly indicate that the Minister was given the chance to reply to the hon. Lady’s question—twice, in fact—but chose not to.
It is a fundamental principle of the devolved settlement that the Conservative party insists that it wants to protect that if a decision is made by a devolved Parliament under its devolved powers, nobody should have the right to overturn or amend that decision other than that Parliament. The Minister has said that he is not aware of any circumstances when he would want to use the power, so why not wait until the circumstance arises? Why not speak to the devolved Parliaments then—or, indeed, why have the Government not spoken to them already—to say that devolved legislation is causing problems, and to ask whether they can agree, cross-party and cross-nation, to change it, rather than pushing aside the devolved nations and the devolution settlement, and imposing rules on our people against the devolution settlement? Let us not forget that 75% of our people voted for the establishment of the Scottish Parliament.
I do not agree with everything Senedd Cymru does. It is not my party that is in government in Wales; it will never be my party that is in government in Northern Ireland. I will not agree with everything they do, but I utterly respect the rights of those Parliaments to legislate in the best interests of their people. If the Minister is saying that he does not think that he will be able to trust the devolved Parliaments to make a sensible decision if and when that becomes necessary, we have a big problem.
Martin Docherty-Hughes
My hon. Friend talks about not trusting the Scottish, Welsh or Northern Ireland Government. Any legislation brought forward in those places receives the attention of senior legal advice, whether that be from the Lord Advocate or from others in the devolved Administrations. The amendment defends the legitimacy and independence of the legal advice given by senior legal officers to devolved Administrations.
Peter Grant
My hon. Friend makes a valid point. It is sometimes forgotten that the devolved Parliaments have a number of checks in place to prevent them from attempting to legislate on things that are clearly beyond their powers, and there is a clear example of that happening at the moment, but there is no statutory or constitutional check on this place’s ability to push aside the devolution settlement to legislate on matters that are clearly devolved. That is simply not acceptable. Remember, we were talking about what the Government still call the most powerful devolved Parliament in the world. How can it be anywhere near being that if the Parliament that devolved powers to it can grab those powers back at the drop of a hat or the stroke of a pen? I will not withdraw the amendment. Every time I see such a power grab in legislation, I will speak against it, stand against it, and vote against it.
Question put, That the amendment be made.
The Chair
Given that amendment 36 has fallen, may I encourage the hon. Member for Glenrothes not to press amendment 37, which is similar?
Peter Grant
It does not make a lot of sense to press amendment 37 now that amendment 36 has gone. In fact, arguably, on its own, amendment 37 would weaken the position of the devolved Governments, so I will not press it.
Question proposed, That the clause, as amended, stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 3 be the Third schedule to the Bill.
Andrew Griffith
Clause 8 inserts a new regulatory regime into FSMA called the designated assets regime. I feel that it is already becoming an old friend; we have referred to it a number of times this sitting. Once retained EU law relating to financial services is revoked, the UK’s regulatory framework must be capable of regulating activities that are currently subject to retained EU law in a proportionate manner suited to UK markets. Under the FSMA model, firms must be authorised in order to conduct regulated activities. The Treasury determines, with Parliament’s consent, which activities are regulated by adding them to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the RAO. The type of activities in the RAO are those carried out by banks, and by insurance and investment firms, such as accepting deposits or offering investment services. Authorised firms are regulated as a whole entity. That means that regulators can make rules relating not only to the regulated activity, but to the wider activities of the firm.
Where retained EU law relates to activities covered by the RAO, the regulators already have sufficient powers under FSMA to replace any rules as appropriate. However, there are activities regulated under provisions in retained EU law that are quite different. For example, in retained EU law, there are rules relating to entering into certain types of derivatives contracts. A car manufacturer may enter into a metals derivative contract to protect itself from price fluctuations in the metal that it requires for manufacturing. It would be hugely disproportionate to regulate the car manufacturer entering into that contract in the same way as a bank that offers current accounts or mortgages to customers. However, there is no mechanism in FSMA for regulating these activities in a proportionate way. That is why the Bill introduces the DAR. Under the DAR, the Treasury can designate these activities and make regulations in relation to them, or prohibit them where appropriate.
The Government expect that activities will be designated for regulation under the DAR through the affirmative procedure in the vast majority of cases. However, there is an exemption where, for reasons of urgency, the Treasury must act quickly. The Government are content that this is the appropriate procedure. It is similar to the procedure for adding activities to the RAO. The FCA is already responsible for ensuring compliance with the rules set out in retained EU law, and the clause will ensure that the FCA can also determine what rules are appropriate in future. As the DAR will be a new part of FSMA, the FCA will be required to exercise its responsibilities under the DAR in line with its statutory objectives, which include the new growth and competitiveness objective. The FCA will need to be able to supervise and enforce designated activity regulations and rules.
Emma Hardy
I refer the Minister back to a point I made about the DAR and the response to the consultation by His Majesty’s Treasury. Some of the respondents asked for clarity on exactly what activities would be regulated by the DAR. Can the Minister provide that in writing during today’s sitting, or bring further details to another sitting?
Andrew Griffith
I will do my very best to respond to that question. It is a point of detail. Today we are putting frameworks in place to try to legislate for as many outcomes as possible. By definition, that means that there is not a definitive list, but I will write to the hon. Lady and share the letter with the Committee.
To that point, given the breadth and variety of activities that may be designated under the DAR, a tailored supervision and enforcement framework will be needed for each one. We all recognise that we might want to regulate insurance in a different way from investment banking.
Proposed new section 71Q of FSMA therefore gives the Treasury the power to confer appropriate powers on the FCA for the purpose of supervising and enforcing regulations and rules relating to designated activities. Some activities that the Treasury may designate already have criminal offences attached to them under FSMA—for example, part 6 of FSMA contains two offences related to the offering of securities. Proposed new section 71Q will allow HM Treasury to maintain an existing criminal offence of offering securities and to modify it, including by adjusting the scope of the offence to reflect the scope of the new designated activity. I imagine from comments made that that would get broad support.
The Government will be able to apply and modify only criminal offences that already exist in FSMA. The provisions will not enable the Treasury to create a wholly new criminal offence relating to this activity. Schedule 3 sets out proposed new schedule 6B to FSMA. The schedule is inserted by clause 8 and lists examples of the types of activity that the Treasury may designate using the power introduced by clause 8. That may be the source of my response to the hon. Member for Kingston upon Hull West and Hessle. At this stage, schedule 3 is indicative only. The Government intend that a number of market activities currently regulated under retained EU law will be designated for inclusion in DAR. It is anticipated that a wider range of activities will be designated in future to ensure that the regime supports an agile and proportionate approach in the UK.
Martin Docherty-Hughes
Will the Minister help with a quick clarification on proposed new section 71Q? It refers to “conferring powers of entry”. Would that be on His Majesty’s Revenue and Customs? It has UK-wide powers of entry. Does that refer solely and wholly to HMRC, or does it refer to others who might require entry under the legislation?
Andrew Griffith
I will write to the hon. Gentleman to confirm that. It is important that our model of financial services regulation be responsive to emerging opportunities and challenges, and that includes those that can be regulated in future but are as yet unknown. Hon. Members can understand the thrust of what we are trying to do through clause 8 and schedule 3.
Tulip Siddiq
Am I right in thinking that new section 71R gives the Treasury powers to introduce criminal sanctions without reference to Parliament? Does the Minister think it is right to side-step Parliament in this way?
Andrew Griffith
That is not the intent of the Bill. Its intent is essentially to future-proof existing criminal law under FSMA, but to modify its scope as new activities fall within the designated regime.
Question put and agreed to.
Clause 8, as amended, accordingly ordered to stand part of the Bill.
Schedule 3 agreed to.
Clause 9
Rules relating to central counterparties and central securities depositories
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Retained EU law contains frameworks to regulate a number of entities that facilitate the proper functioning of financial markets. These entities are collectively referred to as financial market infrastructure, or FMI.
FMI helps to maintain stability in the financial services sector and performs critical functions that help make markets safer and more efficient. To establish a comprehensive FSMA model, the regulators will need the power, when retained EU law is revoked, to make rules to appropriately supervise and oversee FMI. That is provided for in the clauses that we are considering.
Clause 9 gives the Bank of England, which I will refer to as the Bank, a general rule-making power over central counterparties and central securities depositories, or CCPs and CSDs. CCPs sit between two parties to a trade and ensure that if either firm defaults on its obligations, the CCP can fulfil the firm’s trade. This reduces the possibility of contagion to the wider financial system. CSDs settle securities trades—that is, they complete the trade by transferring ownership of the assets, such as shares or bonds, between two parties.
The clause delegates the setting of regulatory standards to the Bank as the expert, operationally independent regulator. That is in line with the overall approach taken to the financial services regulators in the Bill. With the new rule-making powers provided for in the clause, the Bank will be able to adapt the regulatory regime in an agile and responsive way—for example, to take account of changing market conditions, address emerging risks or facilitate innovation. This will be accompanied by appropriate accountability arrangements that will apply to the Bank when it is exercising these new powers; we will discuss those when we get to new clauses 43 to 45.
The clause also enables the Bank to apply some or all of the domestic rulebook to overseas CCPs that are systemically important to the UK.
Peter Grant
Can the Minister give us an indication of whether there are existing institutions that he believes would be regarded as CCPs that are systemically important to this country? Apart from the obvious factor of the amount of business that a body does with the UK, what other factors will be taken into account when deciding whether to designate an institution in that way?
Andrew Griffith
That is a matter on which we would consult and be advised by the Bank. The Bank is the body with the expertise in this space. It would not be appropriate to try to pre-empt its views. This is an emerging area, and we have to be cognisant of how global clearing houses are developing. The UK hosts a number of the most systemic, but that market share cannot always be assured. This provision allows the regulation to follow the market share, or indeed follow the emergence of new CCPs and new clearing houses. The provision reforms the overseas framework so that the Bank has the power to apply domestic rules to CSDs and non-systemic CCPs as well.
Clause 10 provides the Bank of England with the power to direct individual CCPs and CSDs, requiring them to take action to comply with their obligations or to protect financial stability. Using this power, the Bank may either impose a new requirement or vary or cancel an existing one. The power is equivalent to those that the FCA and the Prudential Regulation Authority have under FSMA in relation to authorised firms, and it contains the same procedural safeguards. That includes, for example, a right of appeal.
Clause 12 ensures that the Bank’s regulation of CCPs and CSDs is undertaken in a way that is consistent with the wider financial services regulatory framework under FSMA. It does this by restricting the general power of direction, which the Treasury currently has over the Bank, to provide that it does not apply to its regulation of CCPs and CSDs. That is in line with the existing exemption that covers the exercise by the Bank of its functions as the prudential regulatory authority, in line with the PRA’s position as an independent regulator.
Turning to clause 11, the FCA is responsible for the supervision of certain other entities that help underpin the proper functioning of markets. Clause 11 gives the FCA general rule-making powers over two types of entity: data reporting service providers and recognised investment exchanges. Recognised investment exchanges are bodies such as the London stock exchange that are recognised by the FCA to facilitate the buying and selling of financial instruments and so help drive investment. Data reporting service providers make trade information public to help market participants make informed investment decisions. They also ensure that the FCA has the information it needs to monitor financial markets and protect against insider dealing and other forms of market abuse.
Despite their importance, both data reporting service providers and recognised investment exchanges currently sit outside the core FSMA regime, as they are largely regulated under retained EU law. To ensure that the FCA has sufficient powers to effectively regulate these entities once retained EU law is repealed, clause 11 brings them into the FSMA framework, in line with the approach taken for CCPs and CSDs in clause 9.
Tulip Siddiq
On clause 9, how does the Minister think third country central counterparties and CSDs will be adequately assessed by the Bank of England for the risks they pose to the UK’s financial stability?
I also have questions on clause 12. I am not sure if the Minister wants to answer those now or to come back to them.
The Chair
I suggest that you make all your comments and then we invite the Minister to respond to all of them at the end.
Tulip Siddiq
We support clause 12, which will empower the Treasury to give directions to the Bank where it considers it necessary in the public interest. Does the Minister not agree that such a mechanism is sufficient to direct the Bank of England when the Treasury believes it needs to do so in the public interest? Does he therefore feel that a so-called intervention power is necessary?
In our evidence sessions, which the Minister and other Members were at, we heard very clearly from the deputy governor of the Bank of England and the former chief executive of Barclays that a future intervention power would endanger financial stability and undermine the independence of the Bank of England. There were stark warnings from our witnesses. Does the Minister agree that it would be reckless to ignore that advice from the experts?
Emma Hardy
I want to add to the points made by my hon. Friend on our concerns around clause 12 and the independence of the Bank of England, given that the Treasury has such significant powers over it. I refer the Minister back to the evidence given by Sheldon Mills from the FCA. He said:
“I have worked in regimes with public interest tests. I ran the mergers division at the Office of Fair Trading and the Competition and Markets Authority, and my learning from that is that, if put in place, such a test should be used exceptionally and with care, and that there should be specificity about the matters of public interest—in this case, financial services—on which it would be used.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 7, Q3.]
That is the FCA asking for specificity—it is easy for them to say—on exactly when the power would be used and when it would not be used.
Victoria Saporta from the PRA stated:
“A formulation whereby the Government can force or direct us to make or amend rules that we have already made, and that fall squarely within the statutory objectives that Parliament has given us, may be perceived as undermining operational independence and all the benefits that I talked about earlier.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 7, Q3.]
Those were really stark warnings from two of our key witnesses from the FCA and PRA, talking about the difficulties they had with this specific clause and how this could be seen as undermining their independence.
Martin Taylor went further in his evidence, when I questioned him on these intervention powers. He said:
“One of the problems that led to the recent turmoil—a very English description of what has just happened—was that the Prime Minister and the former Chancellor chose not to subject the mini-Budget to the scrutiny of the Office for Budget Responsibility.”
He continued:
“However, international investors looking at London will have noted this and it has a bad smell, if I can put it that way.”
Later, he said:
“If you were in Singapore or New York, you might be more tempted to do that than you would have been a month ago. We should not do anything else to make this worse. Everything is being done by the new Chancellor to steady the ship…but moves like this proposed measure just go in entirely the wrong direction as far as I am concerned. I think it is very dangerous.”–– [Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 76, Q149.]
Every single witness seemed to talk about the concerns they have over the level of intervention the Treasury could have over the Bank of England. I would like to hear reassurances from the Minister that he has been talking to the FCA, the other regulators and the markets about this. What reassurance can he give us that this is not HMT trying to again overrule our independent regulators?
Peter Grant
Again, I fully understand the intention behind these clauses and I am not minded to move against them, but I am a bit concerned by some of the interplay between the clauses. I asked the Minister what factors he thought might be taken into account in determining that a CCP is actually a systemic third country CCP, rather than an unsystemic one.
The Bill, on lines 39 to 42 on page 13, suggests that a systemic third country CCP is
“any third country central counterparty that the Bank has determined is systemically important, or is likely to become systemically important, to the financial stability of the United Kingdom.”
The word “systemically” is doing quite a lot of work in that definition. As far as I know, there is no definition of “systemically” in this Bill, or indeed anywhere else, so I am concerned about whether the wording of the clause is tight enough that everybody, including the Bank of England, knows exactly when it can use these powers and when it cannot.
That is important because of the difference that being designated a systemic third country CCP makes. Under proposed new section 300G to the Financial Services and Markets Act, the Bank of England can exercise most of the powers
“only by the application of corresponding rules”,
according to proposed subsection (1)(a). However, proposed subsection (1)(b) says
“except in the case of systemic third country CCPs…only so far as authorised by regulations made by the Treasury.”
That seems to mean that if the Bank of England forms the view that it is dealing with a systemically important CCP, it is free to act in a way that is not explicitly permitted by Treasury regulations, whereas if the Bank decides that it is not systemically important, the ability to act becomes more restricted.
Dame Angela Eagle
My questions seek some reassurance from the Minister, since I think these clauses are broadly welcome and, indeed, vital in the context of the Bill. One would not want to have this system without giving extra powers to the Bank, the Prudential Regulation Authority and the Treasury.
Problems in some of these markets can erupt suddenly and pose substantial, systemic problems. We saw it happen just a couple of weeks ago in the pensions industry with the sudden increase in gilt prices, which suddenly made a lot of the investment strategies of our defined benefit pension fund managers quite perilous. We can all commend the Bank and the regulatory authorities for taking action to try to stabilise the situation with liquidity in the pension funds. I am sure that all of us want to be content that the structures in place for dealing with these kinds of eruptions will be as implied in these three clauses.
Given the extra powers for the regulatory authorities in the Bill, will the Minister give the Committee some comfort about the extra resources that will be made available to the regulators for their extra oversight? The Bill implies that there is much more work for regulators to do across the piece, and it is very important in the vast majority of cases. I worry that they will not be given enough resource to keep a proper eye on the very fast-moving, complex, interactive system that they will be charged with regulating, keeping an eye on and, if required, intervening in, for reasons of contagion or systemic threats to that very interrelated system. If they do not catch that early enough, we know where it can end. I would appreciate some comfort from the Minister, if he can provide it, on the resourcing implications of the powers. Is he satisfied that the resources are there to do the job adequately and properly?
Andrew Griffith
I will try to respond to all the points in turn. First, in answer to the hon. Member for Kingston upon Hull West and Hessle, clause 12 is not an intervention power. It clarifies that the power to direct is effectively removed in respect of the new regulations around CCPs. In many ways, it will give the Bank of England the independence and autonomy that the witnesses she cited sought, although in a more general context. There is a separate point, which is probably not in order for today, about the intervention power, as and when that is tabled. However, that is not the purpose of clause 12, which is a clarifying point in respect of the Bank of England.
The hon. Member for Wallasey raised the issue of resources. The Bill gives the regulators, including the Bank, powers to fund themselves using a levy. That is a stronger financial position than they are in today. The hon. Member knows that I am relatively new—that could change during the sittings of this Committee—but in all my interactions with the regulators, they have expressed themselves satisfied with the resources available to them, but we must be collectively careful about the burdens that we place on them and ensure that those are appropriate.
On the question of what is systemic and whether it is right to regulate overseas CCPs and CSDs, the thrust of what the Bill tries to achieve, and the broad thrust of the debate, is that those are precisely matters that should be decided by the operationally independent regulators in this domain. Although I and others may have views, it will be for the Bank to use its new powers—as now, and as in other domains that are in scope—in consultation with the Treasury, Parliament and others.
Peter Grant
To clarify, if the Bill is enacted as it stands, does the Bank have the option to create a different regulatory regime for overseas parties than it has for those that are based in the UK, or is the intention that the same set of rules will apply regardless of where the organisation is based?
Andrew Griffith
If an organisation is overseas, the approach will be that the Bank, in using those powers, will defer to the overseas regulator where that is appropriate, as it does now. I would not want us to fetter the Bank. It is for the Bank to lay out how it proposes to use the powers that the Bill enables, so as to be able to make the appropriate regulation that it feels comfortable with. I think we can all agree that this is a prudent enhancement of its powers. It broadens their scope, and allows the Bank to follow the risks to this country in a CCP, wherever those may lead it.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clauses 10 to 12 ordered to stand part of the Bill.
The Chair
Before we come to the next group, could I ask the Parliamentary Private Secretary to remove the brown paper bag? It is not appropriate to have our lunch out on the side.
Clause 13
Testing of FMI technologies or practices
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 4 be the Fourth schedule to the Bill.
Amendment 38, in clause 14, page 19, line 35, at end insert—
“(d) the views of the appropriate regulator in response to the consultation mentioned in subsection (5).”
This amendment would ensure that the views of the relevant regulator are included in any Treasury reports on FMI sandbox arrangements.
Clauses 14 to 17 stand part.
Andrew Griffith
Clauses 13 to 17, along with schedule 4, enable the Treasury to set up financial market infrastructure sandboxes. One of the objectives of the Bill is to harness the opportunities of innovative technologies that could disrupt financial services. This is especially important for FMIs, which play an important role in providing the networks and services that underpin financial markets. However, there are currently barriers and ambiguities in legislation that prevent firms from using certain new technologies in FMIs or that prevent the benefit of new technologies from being fully realised.
An FMI sandbox is a safe testing environment that will help address this issue by providing temporary modifications to legislation to participating firms where existing legislation does not accommodate a new technology or practice. Those firms can then test and adopt innovative new FMI propositions while being subject to restrictions on their activities and close oversight from regulators. The provision in these clauses will allow the Treasury to set up FMI sandboxes, and I will now set out what each clause does specifically.
Clause 13 will allow the Treasury to set up an FMI sandbox via a negative statutory instrument that will set out the type of firms that are allowed to participate in a sandbox, the activities they can conduct, the temporary modifications to legislation that will be applied to participants, and the duration of the sandbox. Schedule 4 includes an illustrative list of provisions that could be included in a statutory instrument setting up an FMI sandbox, in order to provide guidance regarding how the powers are intended to be used.
To facilitate parliamentary scrutiny, clause 14 requires the Treasury to prepare and publish a report to be laid before Parliament on the arrangements for each FMI sandbox that is created under clause 13, having consulted the regulators. This will include an assessment of the effectiveness and/or efficiency of the FMI sandbox and how the Treasury intends to make permanent changes to the legislation.
Amendment 38 would explicitly require the Treasury to publish the detailed views given by the FCA and the Bank in response to the consultation. The Treasury is committed to ensuring that the regulator’s views are fully taken into account and represented fairly when any permanent changes are intended to be made to legislation. However, it is essential that during this engagement, regulators are able to express their views candidly, particularly about specific participants, and share commercially or market-sensitive information. It would not be appropriate for that to be published. I therefore hope that the hon. Members for Glenrothes and for West Dunbartonshire will not press their amendment to a vote.
Clause 15 will allow the Treasury to make permanent changes to the relevant legislation based on the outcomes of a sandbox on an ongoing basis. Clause 17 sets out the relevant legislation in more detail. As an FMI sandbox will be designed to test the right regulatory approach to new technologies, clause 15 enables the Treasury to legislate to set different requirements from those within the sandbox. This will ensure that if risks or unintended consequences are identified during the sandbox, these can be appropriately reflected in ongoing legislative changes. Where the Treasury proposes amending primary legislation, the Bill requires that the affirmative procedure is used. Where the legislation being amended is not itself primary, a negative procedure will be used instead. This is to ensure that Parliament gives the greatest scrutiny to the legislative changes that are the most significant—in other words, those that fall within primary legislation.
Clause 16 is intended to enable the Treasury to confer powers on the regulators as part of any statutory instrument setting up a sandbox, so that they are able to operate a sandbox effectively. It also sets out who the Treasury needs to consult before exercising the powers in clauses 13 and 15.
Finally, clause 17 sets out how the various terms and concepts used in the FMI sandbox clauses are to be interpreted. It includes a list of legislation that the Treasury is able to temporarily modify for firms participating in a sandbox, which provides an important constraint on the scope of the Treasury’s powers in relation to the FMI sandbox in the Bill. The Treasury is able to add to the list of legislation via a statutory instrument by using the affirmative procedure to ensure parliamentary scrutiny if the Treasury wishes to bring further legislation into the scope of a sandbox. To summarise, the measure will be a hugely valuable way for financial markets to innovate and enable industry regulators and the Government to learn and change in response to practical experience. For those reasons, I recommend that clauses 13 to 17, and schedule 4, stand part of the Bill.
Tulip Siddiq
We strongly support the clauses. A sandbox for financial markets infrastructure will support innovations in the fintech sector, such as developments in blockchain, which has the potential to boost the transparency and productivity of the UK’s financial services. Could he please explain, however, whether clause 13 gives sufficient flexibility for the sandboxes to be used to support innovation in a wide range of financial technologies? The Bill says that sandboxing testing will occur “for a limited period”. Will the Minister further define that and set out the minimum timescales that he believes are necessary to adequately test a new innovation in financial technology?
On clause 14 and the reports on FMI sandboxes, which criteria will be used in the reporting of sandboxes, so that Parliament can transparently assess their effectiveness in safely supporting innovation? On clause 16, which sets out that prior to conferring such a power, HM Treasury must consult “the appropriate regulators” or such persons that it considers appropriate. Will the Minister please share his understanding of the definition of “consultation”? Which stakeholders would have to be consulted, and what is the estimated timeframe for such a consultation?
Clause 17 provides the Treasury with a power to amend the list of relevant enactments by way of the affirmative statutory instrument procedure. Will the Minister elaborate on how he sees that working in practice? Would every individual amendment to the list of relevant enactments be brought before the House for scrutiny? I presume so, but I want to have that on the record.
Shaun Bailey
The provisions in clauses 13 to 17 are incredibly welcome, because we are dealing with a financial services landscape that is constantly innovating and changing. I should declare that prior to becoming a Member of Parliament, I worked for the legal team at a major big seven bank and saw these developments as part of my role there. The provisions are very important because they will ensure that, as the fintech sector continues to develop and the regulatory framework continues to advance and change, they can do so within the perimeters of the sandbox arrangement introduced by the Government.
I particularly welcome the clause 16 provisions on consulting regulators, and the fact that there is going to be a discourse with them. We cannot cut regulators out of the conversation. The clauses do not seek to do that, but the hon. Member for Hampstead and Kilburn was right to raise queries. We need a bit more clarity on what the consultation will look like. I fully appreciate that it is not always possible to give instant clarity when introducing primary legislation, but it will clearly be incumbent on the Treasury to ensure that, as the process progresses, His Majesty’s Government are as transparent as possible about what the consultation will look like.
We should remind ourselves that the practical application of the clauses will change and develop as the landscape itself develops, because that is the subject matter that we are dealing with. On clause 16, with respect to the development and work with regulators, I urge my hon. Friend the Minister not to forget the important role that lawtech plays in the regulation and monitoring of a lot of the instruments that will be part of the sandbox regime. It is often not talked about, but fintech and lawtech work hand in hand, side by side, particularly in this financial services sector.
I support the clauses; they are the right thing to do. As hon. Members on both sides of the Committee have articulated, they allow not only the financial services sector to innovate and develop, but the regulation to be developed in tandem with them. I would, however, welcome clarity from my hon. Friend the Minister on the what the practical applications will look like, particularly as we build that framework.
Martin Docherty-Hughes
I do not want to be the fly in the ointment, but I would like some assurances from the Minister about the FMI sandboxes. The Clifford Chance briefing notes that
“the FSMA Bill permits HM Treasury to allow broad participation in FMI sandboxes which in practice could include FMI providers, and participants in these systems as well as, conceivably, unregulated service providers such as technology companies and any other person that HM Treasury specifies.”
I am looking for an assurance from the Minister and his civil service team on the notion of unregulated service providers having access to the FMI sandbox. It seems that the EU pilot regime is far more limited in its multilateral trading facilities and securities settlement systems, and that it makes no mention of recognised investment exchanges or any other persons. It is not, therefore, making itself a hostage to fortune with its pilot system. Could the Minister and his team provide reassurance on the broad scope of innovation that they seem to be going for?
Dame Angela Eagle
I find myself rising to try to elaborate on the important points that have been made. I do not think that anyone would argue against the need to think very carefully about how to pilot—or sandbox, to use the jargon—the very rapid development and potential of what is happening. It is also important in the context of financial market infrastructure.
Certain infrastructures in our financial system are really old. One need only consider how long it took to get the bank clearing process vaguely up to date to understand the importance of modernising infrastructures. I do not think that anyone would object to an attempt to come up with a structure that tests activities, which is what these clauses do.
The Minister, however, has not provided any detail on issues such as risk mitigation; whether parallel sandboxes involving similar infrastructures will be developed, almost in competition with each other; whether this will happen in just one area; or how the powers will be used to test whether potential infrastructures might be worth using. Could he add a little more colour to how he sees those things happening? How big will the sandboxes be? How long will they be allowed to continue? The Minister is grinning because this is the kind of detail that an enabling Bill does not contain, but it might be quite important.
Testing regimes in other areas are sometimes very limited. I would be worried if we had an unlimited testing system running for a long period, allowing unregulated organisations in, perhaps running in parallel with each other. If that is what the Minister is suggesting, I would be worried. If he is suggesting something much more minor and limited, to see whether the technology works and whether people can interact with it to redesign the way in which websites work, I would be less worried.
Martin Docherty-Hughes
I am delighted that the hon. Lady has allowed me to intervene. The technology is not new, and that is what concerns me in relation to a lot of the debate on the Bill. There is nothing new under the sun about a lot of the technology, which underpins sandboxes, cryptocurrency and so on, that we are talking about. It just seems that a lot of the terminology takes over the substance of the issue that we are discussing.
Dame Angela Eagle
That is true. Blockchain has certainly been around for quite a while. Its use has implications for transparency and for the levels of employment that there might be in the old, more bureaucratic banks.
What would be the use of artificial intelligence in trying to decide how automated these things could become? Would there be worries about over-automation? How would that be looked at in terms of regulation? How open are we going to be about the way in which AI is applied and how it might evolve in ways that might embed discrimination such that we get a system where certain people may be discriminated against and excluded? There are a range of issues that need to be tested in these kinds of environments. It is hard to do that under a negative resolution procedure. I take the Minister’s point, however, about affirmative resolutions. If one of these things worked during the trial period, was issued and became permanent, it is important, as the Minister has said, that any changes are subject to affirmative regulation.
There are a whole load of black boxes in the Bill that we might need to debate further. Could the Minister give us more colour on whether there will be parallel sandboxes, on transparency on what will be used and how it will be compiled, and on how large the sandboxes will be in terms of money on the exchanges or turnover, or however he wants to put it. Then we could consider whether risk is being mitigated and how we can develop a system using trundling and analogue legislation, if I may put it that way, in an environment where innovation is digital and rapid.
I understand what the Minister is trying to do, but this Parliament must still be aware that we need to be on top of the detail of this Bill, rather than just passing shells of enabling legislation that do not give us enough of a handle on what is intended.
Peter Grant
Thank you, Dame Maria, for clarifying earlier that we are talking about sandboxes, not sandwich boxes. Some Members seem to have been a bit confused about that. I am intrigued by the use of the term “sandbox”. To me, a sandbox can be a road safety feature: it is literally a gravel or sand pit on a bad bend in the road to allow someone who loses control to get off the road safely. Alternatively, a sandbox is something that any cat owner will be familiar with. I am genuinely intrigued as to which of those metaphors somebody thought was appropriate for what we are discussing.
The principle behind these measures is absolutely sound. By this time next year, new practices in financial services will have evolved that none of us can begin to imagine just now. That is how things are moving. I take the point made by my hon. Friend the Member for West Dunbartonshire that the technology itself has not significantly changed—it is certainly not new—but the way in which people will use the technology is. The kinds of products that people will start to devise may well mean that existing regulatory practices need to be changed very quickly. The idea of being allowed to pilot something that is genuinely new in a safe space before letting it loose on the wider world is absolutely correct in my view. However, the devil, of course, is in the detail.
I am a bit concerned that the first in this group of clauses says that the purpose of the sandbox will be to test
“for a limited period, the efficiency or effectiveness of the carrying on of FMI activities”.
It does not say that one of the purposes is to test the effectiveness of any regulation that may go with it, which concerns me. Obviously, if someone knows that the activity they are carrying out in a sandbox will be looked at very carefully, they are going to behave themselves. How can we be sure that as well as being effective, it will work for the purposes of the providers? How do we know that the regulation that goes with it will also be effective? Again, that has to be effective as soon as the thing goes live. We cannot wait and regulate it effectively a few weeks later, because it will be far too late by then.
Emma Hardy
In relation to the sandboxes, and particularly in relation to clause 14, I draw hon. Members’ attention to the written evidence submitted by Spotlight on Corruption—in particular, if anyone wants to read along with me, paragraph 12. The recommendation from Spotlight on Corruption is that the Government should update their regulatory impact assessment
“to ensure that an analysis of the economic crime risks is included as part of the evidence base in each assessment.”
That seems incredibly good and sensible advice. As part of the way someone assesses how effective these sandboxes are, they could look at the potential economic crime risks. Spotlight on Corruption goes on to say that the RIAs should
“include a standalone ‘economic crime risks associated with this intervention’ section based on both quantitative and qualitative indicators. It should also include an assessment of the costs/benefits, and wider impacts as well as establishing how the Treasury intends to monitor and evaluate risks after the regulations come into place.”
If we are going to produce a report on how effective this measure is, one of the key things that I think we can all agree on is the need to look at economic crime. Although I have not tabled an amendment to that effect today, I hope that the Minister will look at the issue seriously and perhaps it is something we can return to on Report.
Andrew Griffith
I thank the hon. Member for Hampstead and Kilburn for her party’s support for these measures, which I hope will be a useful addition to the financial services industry.
I will try to answer some of the questions. By their very nature, there is a discomforting element to trying to create safe spaces for innovation. Let me reassure the Committee that all the existing safeguards, whether they relate to economic crime or to consumer protection duties, relate to any changes that are, as it were, released into the wild after the period of experimentation. There is no attempt to create a back door or any diminution in the high quality of financial regulation throughout.
The overall level of scrutiny for this House was raised by the hon. Member for Wallasey. The statutory instrument would be laid in respect of each potential use of the sandbox. It would not be right for me to fetter whether that will be used in serial or in parallel, so we have to contemplate that there could be multiple sandboxes operating in some really quite separate domains at any one point in time. I do not think that would be a bad thing. In many ways, the test of this legislation’s success is that the sandbox is indeed used, and within that process we should contemplate that many of those pilots should fail, just as many should succeed; that is the nature of risk and innovation.
That statutory instrument would set out what categories are in scope of the sandbox, what sort of securities or products are included within it, traded or settled, the platform involved and what limitations there would be. There was a question about the minimum period of time. That would all be laid out in response to the individual applicant to use the sandbox, so that would be determined, and it would be reviewed by the regulators as part of the process of the Treasury laying the statutory instrument. It could well include any additional regulatory oversight, and the important issue of economic crime and prevention. However, to be clear, that is not the Government’s intention, nor would it be looked on favourably if anyone attempted to use that to create back doors for economic crime. The level of scrutiny of any pilot in a sandbox is generally higher than the level of scrutiny intervention from regulators in general.
Emma Hardy
I do not think that the evidence submitted by Spotlight on Corruption in any way implied that it would be the Government’s intention for these sandboxes to bring about economic crime. However, I think we all accept that economic crime is on the rise. Spotlight on Corruption specifically asks for it to be stipulated that the associated economic crime risks are looked at as part of the report into sandboxes. I would be grateful if the Minister could take that point away to consider further.
Andrew Griffith
I am very happy to take that point away and, if appropriate, I will write to the hon. Lady in response. The construct of regulation in this space is that we have a level of trust in our operationally independent regulators, and prevention of crime and of harm to consumers is at the core of the regulatory structure. She should have some comfort that that issue would not be overlooked.
I will try to give a little bit of colour regarding the intention to use the sandbox. It is the Government’s intention that the sandboxes be used rapidly after Royal Assent; indeed, consultations on the matter have already indicated a strong appetite for things such as the use of distributed ledger technology, both for settlement and for other aspects of the financial regime. Those things would be seen by the Government as an enhancement in many respects—whether dealing with settlement risk, credit risk or the speed of transactions. That is an example of the sort of use case that we would expect to be brought forward.
We talked about the regulatory outcome. The relationship with regulators was one of the first points raised. The Bill contains a provision to ensure that the regulators’ views are taken into account. The regulators will, de facto, have a very strong level of scope. Although we would not want to cut off participants by virtue of not being authorised—that would be to cut ourselves off from a source of potential innovation—it is expected that any participant would have had interaction with the regulators prior to entering a sandbox. As some hon. Members know, the regulators interact intensively with bodies such as the Treasury Committee, which we would expect to have a heightened level of interest in these matters.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Schedule 4 agreed to.
Clauses 14 to 17 ordered to stand part of the Bill.
Clause 18
Critical third parties: designation and powers
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Financial services firms increasingly rely on a small number of critical third parties to provide services, such as cloud computing providers. Although outsourcing can have many benefits, the growing dependence of financial services firms on this small pool of critical third parties also carries risks. A failure or disruption at a critical third party could have systemic impacts affecting market confidence and threatening the stability of our financial system. To mitigate that risk, the Bill grants the financial regulators powers to oversee the services that critical third parties supply to the financial sector.
Clause 18 gives the Treasury the power to designate a third party to the finance sector as critical, bringing the services provided by that third party into the regulator’s oversight. Only third parties whose failure could have a systemic impact on the sector can be designated in that way. Designations will be done in consultation with the regulators, taking into account a clear set of criteria. The first is materiality—that is, how important the services are to the delivery of essential services, such as making payments. The second is concentration—the number and type of firms that rely on that provider. The clause provides the FCA, the PRA and the Bank of England with new rule-making powers to ensure the resilience of services provided by critical third parties. The regulators have published a discussion paper setting out how they may use the powers.
Clause 18 also grants the regulators a power of direction and targeted enforcement powers. As an ultimate sanction, the financial regulators may prevent or limit a critical third party from providing services to the financial services sector. Clause 19 then makes the necessary consequential changes to FSMA to ensure that the regime functions properly, in particular in relation to the Bank of England’s ability to make rules. This approach is flexible and proportionate, addressing the systemic risk posed by outsourcing to keep the UK’s financial system safe, while targeting only the services that critical third parties provide to the finance sector. I therefore recommend that clauses 18 and 19 stand part of the Bill.
Tulip Siddiq
On clause 18, could the Minister set out the range of disciplinary powers that the Bank of England, the FCA and the PRA have at their disposal short of preventing a critical third party from providing new or current services to the financial services sectors? I want some reassurance from him that the clause will not produce an all or nothing approach.
Peter Grant
Again, I do not oppose the clauses, but I do have a couple of questions. First, the Minister pointed out that the ultimate sanction that the regulator can take is to prevent somebody from carrying out the actions of a critical third party. However, given that it becomes a critical third party because the system would collapse without it, is that not the nuclear button that can never be used? Simply trying to enforce the protective regulation could cause more damage than allowing the issue to continue. I understand that it is a difficult issue to square, but is there any proposal to, for example, introduce new criminal offences? Rather than being placed in a position where we would have to damage a system in order to protect it, are there proposals at least to give the option of taking criminal action against the individuals concerned?
I understand why the Bill does not go into detail about the kind of directions and requirements that might be appropriate, but will the Minister reassure us that there is no intention to use the powers to restrict the rights of people working for critical third parties to take industrial action, should they consider it to be important? That would take us into a completely different area of legislation, but the Bill does not say that the Government cannot do that. I would appreciate an assurance from the Minister that that will not happen as a result of the Bill.
Finally, proposed new section 312N refers to immunity. Certainly we must ensure that, if an organisation acts in accordance with the requirements of the regulator, they cannot be sued simply for doing what they were required to do. Is there a potential issue that they could be sued by an overseas party in an overseas court? Has the Minister considered how we might prevent that from becoming an issue? Clearly, this Parliament cannot legislate to give anybody immunity from being sued elsewhere, and there are people who will tout around the jurisdictions all over the world to find somewhere they can lodge a legal action. Is the Minister concerned that the inability to give international immunity might mean that some of the provisions become less effective than we might have hoped?
Andrew Griffith
Let me try to answer hon. Members’ questions. Nothing in the clause restricts people’s ability to take industrial action. That is not in scope. The powers are not anticipated as analogous to existing ones elsewhere, and the provision is not intended to be all or nothing. The powers are in essence an extension of scope into this domain and would relate to activities such as reviewing the senior manager regime, the ability to compel the requirement of information and looking at things such as resilience. They are not designed to be binary in that respect.
The hon. Member for Glenrothes made a point about the fact that the functions have been designated as critical, but that does not necessarily mean that they are monopolistic. With respect, while that is an important consideration, which we would expect the Bank, in this case, to take into consideration, it is also perfectly possible that, in the case of cloud providers, for example, a number of providers offer identical services. If one was not able to demonstrate a degree of resilience but another was, it would be possible to direct that one ceases to be used without causing the sort of systemic risk that the Bill seeks to prevent. I will write to the hon. Member in respect of what is a complex question about international immunity in law. I hope that he will respect the fact that I should not answer that on my feet this afternoon.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Clause 19 ordered to stand part of the Bill.
Clause 20
Financial promotion
Peter Grant
I beg to move amendment 39, in clause 20, page 31, line 37, at end insert—
“(1A) Where the content of a communication for the purposes of section 21 has not in the first instance been approved by an authorised person, approval by another authorised person may only be sought the FCA’s approval for the other authorised person to do so being provided in writing.”.
This amendment would prevent operators from “shopping around” for approval from an authorised person where one authorised person has not given approval, unless the Financial Conduct Authority permits this.
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
That schedule 5 be the Fifth schedule to the Bill.
Peter Grant
The amendment is quite simple. I understand the reason behind the concept of the authorised person. The Financial Conduct Authority will never have the resources or capacity to authorise every single financial promotion that somebody wants to publish, so that role needs to be outsourced. My concern is that, in some of the scams that my constituents have fallen victim to, the authorised person has sometimes been a key part of the web of deceit and concealment that has been laid for my constituents and others to fall into. Very often, when it all goes wrong, we find that the authorised person who approved the financial promotion has gone out of business themselves, so there is nobody left to take responsibility.
I am concerned that something that I have seen happen in a small number of cases might become more common. If someone takes a financial promotion that is clearly not compliant with legislation to an authorised person, the authorised person might well say, “No, I am not going to authorise it.” There is nothing to stop the person from then shopping around and finding someone who will agree to approve the promotion on their behalf. Because these promotions are so common, and because there are so many of them being authorised and then issued, it is very difficult for the regulator or anyone else to pick up on the ones that should not have got through. We are relying on the integrity of the authorised person.
The intention behind the amendment is to ensure that, regardless of which authorised person someone goes to, they get a consistent answer—either yes or no. If one authorised person refused to give approval for a promotion, it could then be approved only with the consent of the Financial Conduct Authority. I am not sure that I am minded to press the amendment to a vote, but I hope that the Minister will be sympathetic to the intention behind it. If he feels that the amendment is not necessary, or that its purpose could be achieved by a better route, I would be quite happy to hear his reasons.
Tulip Siddiq
We welcome clause 20, which we recognise would introduce tighter controls on those who approve financial promotions for others, to ensure that consumers are better protected. How does the Minister foresee the clause facilitating improved approver expertise, due diligence and challenges in exercising appropriate regulatory oversight?
Dame Angela Eagle
Obviously this is an extremely important part of the Bill because it creates a regulatory gateway for financial promotions. We know from what the FCA has reported that there is an issue with misleading financial promotions. We all know it from our constituency casework; we know it from some of the scandals that have been carried out successfully.
Part of the trouble is the closeness to the perimeter of regulation. A firm can have part of itself in the perimeter, while other parts are outside the perimeter, but in the promotions, it gives the impression that all the firm is regulated and all of what it is doing is within the perimeter, while advertising in a very misleading way things that are actually unregulated and therefore much riskier. We know that a lot of scams have happened that way. The way in which the FCA tries to deal with this situation is like trying to hold back the tide. The fact that so many of the promotions that it has managed to get a handle on—4,226 of them—have been withdrawn or amended to make them less misleading demonstrates that the FCA is doing its best. However, members of the Committee know that there is a constant battle with scammers, who constantly change how they present information to consumers and potential consumers through an ever-increasing number of gateways, even on things like TikTok. It is difficult for any regulator to get a handle on that, so anything that helps to battle the problem more effectively will be welcomed by all of us.
Will the Minister explain in more detail why he thinks that this is the right way to proceed, and how effective he thinks the powers in clause 20 will be in tackling the problem? We know—I think we will come on to this later in our proceedings—that cracking down on fraud more effectively will also be important. With the financial promotions and unauthorised third parties that deal with granting permissions, we know that the current regime can cause problems. We know that it is failing and that the FCA cannot be expected to do all this work with the resources it has, so will the Minister go into detail about how effective he thinks the measures will be, and say how he will be assessing this approach’s effectiveness? Clearly we want a reduction in the amount of scamming and fraud, and the number of promotions that are misleading or downright lie about the nature of the products they are pushing, so I will be interested to hear how the Minister sees clause 20 as the solution to this difficult problem.
Andrew Griffith
I thank the hon. Member for Glenrothes for raising the issue, which I understand is of concern to Members on both sides of the Committee. I also thank him for indicating that he will not press the amendment to a vote. I think the reason for that is that clause 20 is a genuine enhancement of the regulatory infrastructure. It creates a new, two-tier regulatory structure that speaks directly to the issue of those who have been authorising harmful financial promotions. It does so by introducing a new assessment by the FCA that requires that they be assessed as fit to do so. I will come on to what that could look like in a moment.
We understand what financial promotions are. They are inducements or invitations to engage in investment activity in its broadest form.
Peter Grant
The Minister says that we all understand what financial promotions are, but do we really? Is the existing definition agile enough? One of the dodgy directors I mentioned earlier has now set himself up on TikTok as a lifestyle guru. Everybody knows he is doing this to groom people. He will say to someone, “I’ve got this brilliant investment plan that nobody else knows about. Why don’t you do it?” Does that sort of thing count as a financial promotion or not? Quite clearly it is an inducement and an attempt to get someone to sign up to an investment that may or may not be legitimate.
Andrew Griffith
I am not familiar with the precise incident that the hon. Gentleman talks about. We have to reflect that there will be a continuum from someone being a lifestyle guru to someone promoting a financial product. Our job as legislators is to understand where those cliff edges lie and to bring forward procedures that mean that the scope is laid in the right place, so that cliff edges are legislated for appropriately.
Peter Grant
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 20 ordered to stand part of the Bill.
Schedule 5 agreed to.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Fifth sitting)
Thursday 27th October 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 27 October 2022 - (27 Oct 2022)
The Chair
With this it will be convenient to discuss the following:
That schedule 6 be the Sixth schedule to the Bill.
Clause 22 stand part.
The Financial Secretary to the Treasury (Andrew Griffith)
Good morning, Dame Maria. It is a pleasure to serve under your chairmanship once again. I thank all hon. Members who are with us again today.
The Government believe that certain cryptoassets and distributed ledger technology could drive transformational changes in financial markets, offering consumers new ways to transact and invest, and that such technology could pose risks to consumers and financial stability. The Bill therefore allows the Government to bring digital settlement assets inside the regulatory perimeter.
In the first instance, the Government are focusing on fiat currency-backed stablecoins used primarily for payment. These are a type of digital settlement asset that could develop into a widespread means of payment and potentially deliver efficiencies in payments. Clause 21 extends the scope of payment systems legislation so that digital settlement asset payment systems and service providers are subject to regulation by the Bank of England and the Payment Systems Regulator.
Today, the Bank of England regulates systemic payment systems and service providers to those systems, where the Treasury makes an order recognising a particular payment system. That is subject to a high bar. Among other criteria, the Treasury must be satisfied that a system’s potential failure may cause disruption to the stability of the financial system.
Clause 21 also extends the scope of the Financial Services (Banking Reform) Act 2013 to ensure that relevant digital settlement asset payment systems are subject to regulation by the Payment Systems Regulator. That will help to protect user interests, promote competition and encourage innovation.
The changes made by clause 21 and schedule 6 will ensure that digital settlement asset payment systems and service providers are regulated to the same high standards as traditional payment systems.
Clause 22 allows the Government to bring digital settlement assets into the UK regulatory perimeter where they are used for payments. Secondary legislation under this clause could give the regulators powers over payment systems and service providers in order to mitigate conduct, prudential and market integrity risks. It could also allow the regulators to place requirements on firms in relation to appropriate backing assets and capital requirements to manage potential stability risks.
Given the nascent and rapidly evolving nature of the cryptoasset market, these provisions give the Treasury powers to amend the definition of “digital settlement asset” through secondary legislation. That is necessary to ensure that regulation can keep pace with the fast-moving nature of the market. The affirmative procedure will apply to any statutory instrument that seeks to amend the definition.
Clause 22 will also allow the Government to apply existing administration or insolvency regimes to digital settlement asset systemic payment systems and service providers to manage potential failures. The clause therefore provides the Government with the necessary powers to ensure that our legislative approach to digital settlement assets is flexible and responsive, and fosters competition and innovation in this fast-evolving sector. I recommend that the clauses and schedule stand part of the Bill.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to see the Minister still in his place. I speak to clauses 21 and 22 and schedule 6 together.
Properly regulated innovations that have emerged in the crypto space, such as distributed ledger technology, have the potential to transform our economy and the financial services sector. As the Minister will know, many innovative companies are embracing different forms of blockchain to improve transparency in finance and create high-skilled, high-productivity jobs across the UK. However, I draw his attention to the recent collapse in the value of cryptoassets, including several stablecoins, which has put millions of pounds of UK consumer savings at risk. I am sure he is aware that the crypto trading platform Gemini estimated that as many as one in five people in the UK could have lost money in the crash. Do the Government agree with Gemini’s estimate? If so, does the Minister agree that the recent crisis in crypto markets demonstrates that so-called stablecoins are not necessarily stable, and that their instability can pose a significant risk to the public? How did the recent collapse in the value of cryptocurrencies inform the Treasury’s approach to clauses 21 and 22?
The Opposition have yet to be convinced that Ministers have acknowledged the scale of the threat that cryptoassets can pose to consumers and our constituents. In our Public Bill Committee evidence session, Adam Jackson of Innovate Finance, which is the trade body for UK fintech businesses, pointed out that the Bill has failed to set out how regulated stablecoins will interact with a future central bank digital currency. Can the Minister shed some light on that interaction? I also hope he can explain why the Government have opted to bring only stablecoins within the regulation. I am sure he is aware that the EU has just agreed to a comprehensive regime for regulating crypto exchanges and cryptoassets more broadly, and Joe Biden has said that he is looking to do something similar, but the UK will not even be consulting on a comprehensive regime until later this year. Does the Minister agree that this risks leaving our country behind in the fintech and blockchain race?
Even more importantly, does the Minister agree that in the absence of a comprehensive regulatory regime, the UK risks becoming a centre for illicit finance and crypto activity? I looked at the analysis from Chainalysis—a global leader in blockchain research—which pointed out that cryptocurrency-based crime, such as terrorist financing, money laundering, fraud and scams, hit an all-time high in 2021, with illicit finance in the UK estimated to be worth more than £500 million. In the absence of a comprehensive regulatory regime, how do the Government think they are going to protect our consumers from such threats?
Will the Minister shed a bit more light on his strategy? Does he believe that the definition of “digital settlement assets” in clauses 21 and 22 is broad enough for regulations on a wide range of cryptocurrencies, other cryptoassets and crypto exchanges? Finally, on pacing this work, I want to know his intention. How long will the public and the fintech sector have to wait until the regulators are given the power that they need to regulate the types of cryptoassets that I have referred to?
Andrew Griffith
I thank the hon. Lady for her comments. In truth, I agree with the assessment that she has set out. The approach taken in the Bill is to start with stablecoins and those that are most likely to be used as a means of settlement. That is what the Government are taking powers for in the Bill. As she says, we have committed to come back and consult on the issue before the end of the year. The nights are getting darker, so she will not have long to wait.
I am mindful of the opportunities and threats that the hon. Lady set out well when citing the evidence that the Committee heard, and it is my intention that the Government now move at a greater pace than is currently provided for in the Bill, which has been in gestation for some time. We will come forward with the consultation, which will happen before Parliament rises for Christmas. It will be a really good opportunity for us to continue to discuss how we can address some of the issues.
The reason we have started with stablecoins is that there are challenges in bringing them into regulation for the first time. The hon. Lady would not want us to rush, because by bringing them into the regulatory perimeter, we confer a status on them that may lead to some of the consumer harms she mentioned. The Government’s position is to start with the most stable, least volatile coins, which are likely to be used by intermediaries as settlement currencies, and then to go forward and consult from there.
I think I have addressed most of the hon. Lady’s comments. I do not disagree with her about the scale of the threat. There are other measures, including those that regulate the online promotion of cryptoassets, that will help to protect consumers who suffer harm.
Dame Angela Eagle (Wallasey) (Lab)
Will the Minister give us a little more flavour on how he sees the evolution of this area? Does the clause give him enough powers to go with that evolution, or will we need to legislate again as the landscape changes? It is clear that we have to avoid the potential harm of allowing consumers to think that all digital coins are somehow the same. We know what Bitcoin is, and do not need to spend much time talking about it. We would not want to give people the impression that it is safe to indulge in investing in it.
At the same time, both sides of the Committee realise that digital payment systems and coins are a huge and rapidly developing area that national Governments must get a grip on. That is why we all welcome the fact that the Bank of England is looking at launching its own non-fungible token, or whatever we want to call it. We have to keep a very close eye and watch this space to see how it evolves. Will the Minister give us an impression of whether the clause is evolutionary enough for his purposes in that rapidly changing environment? Might he want to change it through some later piece of legislation?
Finally, we all know how much energy is used in the creation of Bitcoin. I confess myself ignorant about whether the creation of other non-fungible tokens is as energy intensive as the creation of Bitcoin. Perhaps the Minister can enlighten us. There is a green side to the issue as well.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
My point is further to those made by my hon. Friends the Members for Hampstead and Kilburn, and for Wallasey. My hon. Friend the Member for Wallasey asked whether the definition was evolutionary enough, and I want to pin down the Minister’s response. Does he believe that the definition of “digital settlement assets” is broad enough to allow for regulation to cover the wide range of cryptocurrency, other cryptoassets and exchanges?
Andrew Griffith
I thank hon. Members for their contributions. As currently envisaged, the definition successfully encompasses what it intends to today. The definition starts with the most safe, least volatile domain, which is the use of digital settlement assets. The Bill confers secondary powers, which are subject to the affirmative procedure, that allow the definition to change elastically over time. It is right that Parliament should have the opportunity to look at such changes. That achieves the balance that Members on both sides of the Committee seek. It does not rush headlong to confer legitimacy.
The hon. Member for Wallasey rightly raised the point about the energy used. The truth is that we do not know, but we all suspect that the activity is highly energy intensive. Partly due to the lack of regulation, there is no real data other than anecdotes that one hears that suggest the process is very intensive—even getting into whole percentages of world energy consumption, according to some anecdotes. That is the process of mining that things like Bitcoin and Ethereum are associated with.
Tulip Siddiq
The Minister has talked about regulated stablecoins, but I did not get an answer to my question about how they will interact with the central bank digital currency that we know is very much on the horizon. Have the Government thought about that?
Andrew Griffith
Stablecoins and central bank currencies are both new forms of money. They differ in the issuer: a central bank versus a private issuer. It is likely that a central bank digital currency would simply exist and be regulated alongside that. This is an area where the Government’s thinking continues to evolve. It is something that we will do in conjunction with the Bank of England, and therefore the hon. Lady will appreciate that I would not make commitments unilaterally, but we have committed to publishing a consultation later this year. The Government’s stance can fairly be described as forward leaning in this space, but there is more work to do. It is not a trivial exercise to create a new central bank digital currency. My own hope is that it is a “when”, not an “if”, but the hon. Lady will indulge me if I say, “Let’s wait for the joint Government and Bank of England consultation,” which she will not have to wait that many weeks for.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Schedule 6 agreed to.
Clause 22 ordered to stand part of the Bill.
Clause 23
Implementation of mutual recognition agreements
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Having left the EU, we have a unique opportunity to take the approach to the UK regulatory framework that most suits our markets. The Financial Services and Markets Bill is delivering on that and will support efforts to build on our historic strengths as a global financial centre. That includes developing our relationships with jurisdictions around the world, attracting investment and increasing opportunities for cross-border trade.
Mutual recognition agreements are one of the tools that the Treasury has to support the openness of the UK’s international financial services, alongside free trade agreements, financial dialogues and equivalence regimes. MRAs are international agreements that provide for recognition that the UK and another country have equivalent laws and practices in relation to particular areas of financial services and markets regulation. They are designed to reduce barriers to trade and market access between the UK and other countries. The UK is currently negotiating its first financial services mutual recognition agreement, with Switzerland.
Giving effect to MRAs, including the agreement being negotiated with Switzerland, is likely to require amendments to domestic regulation. Clause 23 therefore enables changes to be made through secondary legislation to give effect to that agreement and future financial services MRAs. That secondary legislation will be subject to the affirmative procedure, to ensure parliamentary scrutiny of the proposed changes. That will be in addition to the parliamentary scrutiny of the mutual recognition agreement that Members will be familiar with under the Constitutional Reform and Governance Act 2010, known as CRaG. Parliament will, therefore—I am anticipating questions that hon. Members may raise—be able to scrutinise MRAs in the usual way before this power is used to implement the ratified agreements.
Clause 23 can be used only to implement MRAs relating to financial services, not to make broader changes to legislation or to implement any other form of international agreement. Each financial services MRA will be different, but it is anticipated that clause 23 will allow the Treasury to confer the necessary powers or impose duties on the financial services regulators to give effect to the MRA. That could include a duty to make rules on a particular matter—for example, rules governing cross-border provision of particular financial services by overseas firms.
The clause requires the Treasury to consult the relevant regulator before imposing any duties. In financial services regulation, market access between the UK and other jurisdictions is generally delivered through the UK’s equivalence framework for financial services, and the mechanisms under that framework are primarily found in retained EU law and based on the EU model of equivalence. The MRAs negotiated by the Government may in some cases go further than, or simply function differently from, those equivalent mechanisms. The clause therefore includes the power to modify the application of existing equivalence mechanisms, or to create new mechanisms to reflect what has been agreed in the relevant MRA.
Together, those provisions ensure that the UK can negotiate and deliver ambitious MRAs and implement the agreements in a timely manner that maintains the UK’s credibility in negotiating future MRAs. I therefore recommend that the clause stand part of the Bill.
Tulip Siddiq
We support clause 23, but how does the Minister think it will help the UK to secure international trade agreements that are favourable to the UK’s financial services sector? I ask because the Government have made very little progress on securing trade deals for the City, including with the EU, which remains, as I am sure he will agree, one of our most important export markets.
We completely recognise that regulatory divergence with the EU on areas such as fintech and Solvency II will help boost our competitiveness on the world stage. However, we cannot ignore the fact that Europe will always remain an important market for our financial services sector. Last year, exports of financial services to the EU were worth more than £20 billion—I am sure that the Minister knows that—which was 33% of all UK financial services exports. I have been speaking to the sector and it is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory corporation, or to negotiate mutual recognition with the EU of professional qualifications for our service sectors. I want to hear more about that from the Minister.
Since 2018, the value of UK financial services exports to the EU has fallen by 19% in cash terms, and very little progress has been made in securing trade deals around the world for our financial services. Will the Minister tell us how the clause will help secure important agreements with the EU? I also want to hear more from him about how he hopes it will turn around the Government’s record on boosting financial services exports.
Dame Angela Eagle
I want to focus on parliamentary scrutiny of these changes. They are quite technical, but they could be very important, including for consumers. If we do not get them right, they could have unintended consequences for financial stability and so on, because of the range of agreements under discussion. One assumes that those negotiating the agreements have a reasonable model of what they want to achieve, but that will also be the case for those with whom we are negotiating. The context is about gaining an advantage in the international competition for financial services. Indeed, both Front Benchers have hinted at that. If we are looking for a competitive advantage and growth, that kind of struggle for an advantage has obvious implications.
Until we left the EU, much of the negotiation on the financial directives that were promulgated went on within the European Commission. The UK had a great deal of influence over how those directives were negotiated, but it did not always win out; for example, the markets in financial instruments directive was a cause of some consternation for our financial services, because it did not fit with our kind of plan. We were always the country with the largest financial services sector, and were mostly likely to be impacted by agreements and compromises that did not clearly represent our best interests. We can now hope to move back towards that position, if we can come to an agreement. However, as my hon. Friend the Member for Hampstead and Kilburn said, we are constrained by the fact that a great deal of our financial services activity happened within the EU. I suspect that the divergence is likely to become greater over time. What does the Minister think would constitute a timely attempt by Government to ensure proper parliamentary scrutiny of these things? Aside, that is, from Parliament potentially debating 50 pages of extremely technical statutory instruments.
We know that the Treasury Committee will have a say, but some of the changes negotiated in these agreements with other countries may have important impacts on consumer rights, and larger number of Members of Parliament might want a say on them. Perhaps the Minister could say how he envisages the process going forward. I presume we will have some agreements—there has been a slow start. How can Parliament keep an appropriate eye on the philosophy behind the agreements, and the way in which they are going, as we diverge more from our closest partner?
Emma Hardy
I want to probe the Minister a little further. Obviously, it is a huge disappointment that we do not yet have a memorandum of understanding with the EU. Will the Minister indicate when we will have one?
Andrew Griffith
The hon. Member for Hampstead and Kilburn is right about the significance of the European Union member states as trading partners for our financial services. It remains the Government’s intention to form the closest possible relationship with those partners, and to help our financial services businesses access those markets in the most frictionless way. Both sides will have to be involved in reaching any agreement. I do not want to stray too far off the point, Dame Maria, but yesterday I met my German counterpart; Germany is probably the state with the biggest market for financial services. I hope the Committee will take that as a statement of our intent to negotiate as many agreements as possible, whether at national or EU level.
As I said, it is not the Government’s position to diverge for divergence’s sake. The hon. Members for Hampstead and Kilburn, and for Wallasey, accurately identified some of the provisions on which there may be opportunities to diverge, based simply on a different fact pattern in our financial services industries.
Emma Hardy
It is positive news that the Minister has met his German counterparts. Could he give any indication of the progress made towards a memorandum of understanding, and of when we might see one with the EU?
Andrew Griffith
The hon. Lady will forgive me, but I cannot give an indication of timing. However, I will undertake to engage with the Treasury Committee, whose acting Chair is with us today, as we go through that process. To speak to the point made by the hon. Member for Wallasey, we have a diligent Treasury Committee that exercises oversight of this area. I consider it unlikely that we will suddenly procure an MRA that blindsides that Committee, and I certainly undertake to keep it informed, so that the detailed parliamentary scrutiny provided for in the Bill is adequately exercised.
Dame Angela Eagle
I thank the Minister for giving way. Flattery will, of course, get him everywhere. Given the nature of that complex negotiation, might it be possible for him to undertake to give the Treasury Committee a heads-up on progress before agreements are made, so that we can try to ensure that we can encompass appropriate consideration in our heavy workload?
Andrew Griffith
I will not fully bind the Government on that, but the hon. Lady makes a reasonable point. These are not matters of overly partisan division between us, and it would certainly be our intention to do that, so that the scrutiny under CraG, and the scrutiny required by the affirmative procedure, can be carried out, and so that the right resources can be dedicated to it.
The hon. Member for Wallasey talked about these MRAs being a struggle for advantage. There is that element to them, but another key element is that they are mutual. It is certainly not the Government’s position that they are a zero-sum game. The objective is to procure such agreements with as many different jurisdictions as possible, so that, as the hon. Member for Hampstead and Kilburn mentioned, we can grow our sector and boost exports of not just financial services but related professional services, which the UK is extremely fortunate to have.
Question put and agreed to.
Clause 23 accordingly ordered to stand part of the Bill.
The Chair
We now come to amendments 43 and 45, in the name of Peter Grant. Would any member of the Committee like to move them? If not, we will move on to amendment 46.
Clause 24
Competitiveness and growth objective
Stephen Hammond (Wimbledon) (Con)
I beg to move amendment 46, in clause 24, page 37, line 13, leave out “facilitating” and insert “promoting”.
The Chair
With this it will be convenient to discuss the following:
Amendment 47, in clause 24, page 37, line 31, leave out “facilitating” and insert “promoting”.
Clause stand part.
Stephen Hammond
It is a pleasure to see you in the Chair, Dame Maria, and to serve under your chairmanship. I would again guide the Committee to my entry in the Register of Members’ Financial Interests.
For many of us, chapter 3 of the Bill is hugely important because it looks at the accountability of regulators. As the Bill could hugely increase their powers, the themes that many of us explored during the evidence session—of transparency, accountability and proportionality—are fundamental. Clause 24 deals with the secondary objective. Regulation and regulatory culture are some of the biggest factors affecting the competitiveness and attractiveness of a jurisdiction.
This is not about a race to the bottom. Any jurisdiction that is not well respected and well regulated, with tough regulation and an independent regulator, will fail on the international stage. It is about ensuring the regulator’s accountability, particularly for the objective. We heard evidence from major City trade organisations last week, and Emma Reynolds from TheCityUK said to us:
“it is important that the regulators are not marking their own homework”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 18, Q28.]
Charlotte Clark from the Association of British Insurers made a similar point.
It is clear that there is a track record, but we must make sure that the regulators stay on track and are held to their duty regarding the new secondary objective. Amendments 46 and 47, which are fairly simple, would change “facilitating” to “promoting”. Facilitating almost implies letting something happen, perhaps through disregard. There should be active promotion of the secondary objective to remain internationally competitive. Internationally, we would not be alone in taking such action. The Swiss Financial Market Supervisory Authority is required to take particular account of the effect that regulation has on competition, innovation and the international competitiveness of Switzerland. There is a very similar objective for the Monetary Authority of Singapore, and no one anywhere will suggest that those are not well regulated, competitive international markets.
London trade bodies, such as the London Market Group, suggest that in the UK, some regulatory costs are up to 14 times what they are in other places around the world. When we look at the one-size-fits-all approach sometimes taken by the Financial Conduct Authority, it is clear that a distinction needs to be drawn. If we are not careful, the objective could be subsumed in others and forgotten. If we want London to be the global financial centre, we should have regard to the secondary objective. I want the Bill to set out more clearly regulators’ accountability for this objective, the intention, and regulators’ role regarding the objective.
Craig Tracey (North Warwickshire) (Con)
As ever, it is a pleasure to serve under your chairmanship, Dame Maria. I refer to my interest, which I declared at the start of Committee proceedings. I welcome the Bill, and particularly clause 24 because of its competitiveness duty, for which I have campaigned for quite some time. I would prefer it to be a primary objective, and perhaps the Minister will look into that, but if we keep it in its current form, then we have to go further for it to be meaningful. There must be proper metrics to ensure that the regulator follows up on it. For that reason, I support the amendments put forward by my hon. Friend the Member for Wimbledon.
In the evidence sessions, I was surprised to hear that the FCA was not aware of any other regulator that had a competitiveness duty. That is quite worrying. It seemed slightly detached from what our competitors are doing. We need to ensure that the FCA is pressed hard on this issue, and that there is a clear, stated objective for them to promote competitiveness in the industry. To be clear, this is not at all about lowering standards. The FCA said in its evidence that it considers jurisdictions such as Hong Kong, Japan, Singapore and Australia to be robust financial centres. They all have a competitiveness duty, so a duty of that kind can be beneficial.
Let me put this into context by giving the example of insurance-linked securities. The FCA created regulations regarding them, which Singapore then lifted—took and used. Because of Singapore’s competitiveness duty, we lost one firm midway through the process. In the same timeframe, 15 firms have been regulated there, against five in this country. The estimated loss is around $700 million. That is money out of our economy that could come our way with just this simple change.
There is a similar story on captives. We do not have any set up here. The reason cited is over-burdensome regulation. The industry agrees that there needs to be regulation, but it needs to be proportionate, and we need to ensure that it does not block investment in this country. I hope the Minister will consider the amendments and see what can be done to strengthen the measures.
Dame Angela Eagle
I approve completely of having a competitiveness and effective competition analysis duty being attached to the regulators, and for them to report on it annually, which would allow us to see how much they are taking account of it. I would also like them to be thinking about financial inclusion, but that comes later in our proceedings.
Will the Minister tease out a little for the Committee how he thinks the regulator can go about discharging that duty safely? We have seen some of the carnage caused by bad regulation in the energy sector, where a superficial view of competition has led to problems in that market, with companies collapsing. There is an obsession with the idea that competition is about the number of firms, whether or not they are sound. If something similar were to happen in this context, it could be even more serious and even more costly. I broadly support the aims of clause 24, but would welcome the Minister’s thoughts on how the problems and the bad effects in the energy market caused by the regulator’s misguided attempts to prove that there was competition—the trap of thinking that competition is just about the number of firms—can be avoided in this context.
Tulip Siddiq
I will speak to clause 24. I was going to speak to amendment 43, but it has not been moved.
We strongly welcome clause 24. We are completely committed to supporting the City to retain its competitiveness on the world stage and we support the new secondary objective for regulators to consider competitiveness and growth. However, I hope the Minister will agree that financial stability and consumer protection must always remain the priority for our regulators. Any compromise on those important objectives would be self-defeating. The competitiveness and global reputation of the City depends on the UK’s reputation for strong regulatory standards.
Although supporting the financial services sector to thrive and grow will be key to delivering the tax receipts that we need to fund public services, it will not be enough. To get the economy growing, the Minister knows that we need to harness the power of the City to drive growth in every part of the economy and the country. The financial services sector will have to play an important role in driving our transition to a low-carbon economy and creating the green jobs and businesses of the future. Perhaps the most interesting part of the new secondary objective is how our regulatory system can incentivise medium and long-term growth beyond the financial services sector in the wider economy.
Andrew Griffith
I thank my hon. Friends the Members for Wimbledon and for North Warwickshire for raising some important matters, and those on the Opposition Front Bench for their support for clause 24. They clearly speak with a great deal of authority from their own experience, and the Government will take away their points and consider them further. Let me describe the clause, and then I will try to come back to the points that have been made.
The Bill asserts our domestic model of financial services regulation, whereby the Government and Parliament set a policy framework within which the regulators are generally responsible for setting the detailed rules. It is therefore necessary to ensure that the regulators’ objectives, as set out in the Financial Services and Markets Act 2000, are appropriate, given their expanded responsibility and the UK’s position outside the EU. The Government believe that the regulators’ current objectives set broadly the right strategic considerations, but we also consider it right that the regulators’ objectives reflect the need to support the growth and international competitive-ness of the UK economy, particularly the financial services sector. I welcome Members’ support for that.
The clause introduces new secondary objectives for the FCA and PRA in relation to growth and competitiveness. The new objectives will require the FCA and PRA to act in a way that, subject to aligning with relevant international standards, facilitates the international competitiveness of the UK economy, including the financial services sector, and its growth in the medium to long term. For the FCA, that objective will be secondary to its strategic objective to ensure that markets function well—I believe the hon. Member for Wallasey mentioned the importance of that, which is clearly paramount—and to its three operational objectives, which sit below the strategic objective, to ensure that consumers receive appropriate protection, to protect and enhance the integrity of the financial system, and to promote effective competition. Again, the hon. Member for Wallasey mentioned financial inclusion, and we will talk about that when we debate later clauses. For the PRA, the growth and competitiveness objective will be secondary to the PRA’s general objective to ensure that UK firms remain safe and sound, and to its insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders.
The new objectives do not require or authorise the FCA or PRA to take any action inconsistent with the existing objectives. I will come back to the hon. Member for Wallasey on that, but they are subordinate objectives and secondary to their financial stability and prudential objectives, which they talk about. The new objectives will give the regulators a legal basis for advancing growth and international competitiveness for the first time. It does not go quite as far as my hon. Friends the Members for Wimbledon and for North Warwickshire have suggested in the amendment. Nevertheless, it is a significant enhancement in that respect on the status quo. As they said, it moves us in line with other international jurisdictions. That is a balanced approach. By making those objectives secondary, we are nevertheless giving the regulators an unambiguous hierarchy of objectives that prioritises safety and soundness, and market integrity. I therefore commend clause 24 to the Committee.
Amendments 46 and 47 seek to amend the new secondary objectives and require the regulators to promote, rather than facilitate, the international competitiveness of the UK economy and its growth in the medium to long term. The wording of the objectives in clause 24 aligns with the PRA’s existing secondary objective, which is to facilitate effective competition. The vast majority of respondents to the November 2021 future regulatory framework review consultation supported the Government’s proposal to introduce new secondary objectives for the FCA and the PRA to facilitate growth and competitiveness.
I reassure my hon. Friends about the importance of the Government’s plans on growth and competitiveness. We expect that there will be a step change in the regulators’ approach to the issue that will be similar to the change that took place following the introduction of the PRA’s secondary competition objective in 2014, which led to a significant number of new policies to facilitate effective competition. I therefore ask my hon. Friend the Member for Wimbledon to withdraw the amendment.
In responding to the hon. Member for Wallasey, I will not assume to myself a degree of expertise about the energy market or any failings in that market. However, I completely agree about the need to avoid an overly binary or unbalanced approach to competition in any market. I think we all agree that we need to get the right balance. On how the regulators can safely advance the objectives, my response is as follows: with a balanced approach; with the right level and volume of resources, in terms of both the quality of expertise and the people they attract and retain; and with good governance. The hon. Lady herself, like all Members of Parliament, is also part of the regulators’ governance model.
Tulip Siddiq
The Minister sounds like he is closing his speech, and I have not heard what he thinks about TheCityUK’s suggestion of asking regulators to report their performance against criteria and metrics. Before he finishes, will he give us his opinion?
Andrew Griffith
The hon. Lady is right to pull me up on my failure to address her point, although later clauses and amendments also address it. I am familiar with TheCityUK’s proposal, and the Government are prepared to look at that area. She gave an example of the regulators helping the real economy through sustainable investments, and potentially reporting some metrics against that. That is worthy of consideration.
Stephen Hammond
I should have said at the beginning that I warmly welcome clause 24. The purpose of the amendments was to tease out the Minister’s exact thoughts. I was pleased to hear that he thinks there is regulatory step forward. I was also pleased to hear that the Government may look again at some of the wording in chapter 3. Will he meet me and colleagues, perhaps next week, or some time in the future? With that, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 24 ordered to stand part of the Bill.
Clause 25
Regulatory principles: net zero emissions target
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
I will speak to clauses 25 and 26 in order. As I set out in previous comments, the Government remain committed to reaching net zero greenhouse gas emissions by 2050, as set out in section 1 of the Climate Change Act 2008. Clause 25 reflects the Government’s commitment by introducing a new regulatory principle for the FCA and the PRA to contribute towards achieving compliance with the net zero emissions target. FSMA 2000 sets out eight regulatory principles that the FCA and the PRA must have regard to when discharging their functions. These existing principles aim to promote regulatory good practice across the regulators’ policy-making. The principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the United Kingdom economy in the medium or long term.
The November 2021 future regulatory framework review consultation proposed amending the sustainable growth principle to explicitly incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the Bill introduces new secondary objectives for the FCA and the PRA to facilitate international competitiveness and growth in the medium to long term, clause 25 removes the sustainable growth principle for the FCA and the PRA to avoid unnecessary duplication.
Clause 25 replaces the sustainable growth principle with a new regulatory principle to require the FCA and PRA to have regard to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008. This new regulatory principle will cement the Government’s long-term commitment to transform the economy in line with our net zero strategy and vision to make the UK a net zero financial centre by ensuring that the FCA and the PRA must have regard to these considerations when discharging their functions. A similar requirement will be introduced for the Bank of England and the Payment Systems Regulator, which we will cover in more detail later.
Clause 26 makes consequential amendments to FSMA 2000 to take account of the new regulatory principle in clause 25, and the new growth and competitiveness objective for the FCA and PRA in clause 24. Clause 26 also requires the FCA and PRA to explain how they have advanced the new growth and competitiveness objectives, as well as their existing statutory objectives, in their annual reports to the Treasury, which are laid before Parliament. This requirement aligns with the PRA’s current reporting requirement for its secondary competition objective. I therefore commend clauses 25 and 26 to the Committee.
Emma Hardy
I have not tabled an amendment to the clause, but the Minister will be aware that on Second Reading there was a huge amount of support across the House for strengthening these proposals on net zero and nature. I hope we will see some movement on these issues as the Bill progresses through Parliament.
I want to start by saying why net zero and nature matter and looking at the situation in France and Germany. The German regulator already has a sustainability objective, with a focus on combatting greenwashing. The French regulator already looks at overseeing the quality of information and has set up the Climate and Sustainable Finance Commission. I want the Minister to note that our competitors are already moving ahead in this area.
One thing that came out of the written evidence, which I have just been re-reading, was the need for net zero transition plans and the establishment of a transition plan taskforce. The Minister has not really mentioned that. The purpose of the transition plan taskforce was to look at a gold standard for climate transition plans, but it is not stipulated in the Bill that companies will be expected to develop these and move them forward.
Disappointingly, although the Bill talks about net zero, it says nothing about nature. I wish I could recall who from the Bank of England came to give evidence to the Treasury Committee, but it was incredibly interesting to hear that, in looking at the risks to our country and our future financial sustainability, it is starting to look at the risk to nature and what the decline in nature will cost us all. We have heard much about climate change and the obvious risks it poses to our country and our financial sector, but people are starting internationally to look at the impact that a decline in nature has on our economic wellbeing. Again, nature is not mentioned in the Bill at all.
Craig Tracey
I will speak specifically to clause 26. It is really welcome that this measure has been brought forward, but I have a big worry that the wording of the clause is open to interpretation. I have therefore tabled a new clause that we will get to later. The main change is to amend the wording in the clause that the regulator has complied with the competitiveness duty, “in its opinion”. I think that is quite worrying. There is a worry that it will turn into a tick-box exercise. As Emma Reynolds from TheCityUK pointed out, there is concern that the regulator will end up marking its own homework. The regulator was not even aware that other jurisdictions had international competitiveness duties.
We should also find it concerning that Charlotte Clark from the ABI said in her evidence that she could not recall a new insurance company being set up in this country in the last 10 to 15 years, yet they are being set up in other countries, including in the EU—countries with which we have equivalence. The main reasons seem to be the time that it takes to get regulated and the cost. As my hon. Friend the Member for Wimbledon said, in some instances it is up to 14 times more expensive to get regulated here than in similar jurisdictions that are similarly robust.
I therefore think that the provision needs to be much tighter and to have some proper key performance indicators and metrics. It was good to hear the FCA say that it was looking at those, but we need to set them out clearly. The types of thing that could be in there are an understanding of who is leaving the country for other regimes and why; rule monitoring and evaluation; the level of duplication in the rulebook; the speed and responsiveness of the regulator; and our success in attracting new applicants. As I said, I have a new clause, which we will come to at the end, but it would be great if I could meet the Minister beforehand to talk this through and to see whether it can be incorporated into the Government’s thinking.
Dame Angela Eagle
Again, there is largely agreement about the aims of clauses 25 and 26. We are on the cusp of a complete transformation in the way our economies have to work. Sometimes, I think we do not quite understand the extent of the transformation that will be needed and the speed at which it will have to be done, given that we are so behind in our attempts to reach net zero and avoid catastrophic climate change. It really is the last few hours, in terms of the biodiversity and climate stability of the Earth, for us to be able to do this.
The scale of the required transformation is mind-boggling. Virtually every piece of infrastructure in existence in our society will have to be transformed. That will have to be done through public-private partnerships, investment to lead the market in areas where there is market failure and investment in innovation in financial services to help to provide that investment, but also through proper regulation, which is what these clauses are about. All those things have to be done in a timely way to create the circumstances for realising all the capital investment potential that will be needed to make this change happen, especially in established economies with old infrastructures, which are often the largest emitters of carbon, as it happens. All of that has to be done virtually in parallel, so that we can try to reach these important targets.
It is very important that, through these clauses, the Government have agreed to incorporate the legislative target of reaching net zero by 2050 into this part of financial services law. However, they have amended it by replacing what was there before—the “have regard to sustainable growth”—with the target. Is that the right way to go about it? By getting rid of that “have regard”, do we lose an opportunity to make progress, rather than just focusing on a future output? That is not a philosophical question; it is a practical one. Why have the Government decided to replace the “have regard”, rather than enhance it? Will the Minister reassure us that, in the context of having to retool the way we do almost everything in all our infrastructure, we could not have gone with both? Will there be the potential for people to think, “We’ll put everything off until closer to 2050,” because the “have regard” has been replaced with an end-date output target? Can the Minister justify why the Government thought that was the best approach?
When regulation is being refocused on net zero, there will be those who wish to greenwash what they are doing—I will use that phrase; the Minister understands what it means—in order to continue to attract investment and piggyback on the good will of people who wish this change to happen when, in the case of those companies, it is not happening. I suspect there is a little bit of that going on at the moment. How does the Minister envisage enforcement mechanisms and proper regulation being put in place to ensure that greenwashing is not going on everywhere? Such greenwashing would move us away from meeting the target. Not only would it be to the detriment of consumer interests; it would squeeze out more genuine activities, firms and investment if it were allowed to be too prevalent.
Stephen Hammond
I am not sure whether I am supposed to, Dame Maria, but I refer the Committee to my entry in the Register of Members’ Financial Interests.
Like many Members, I welcome the thrust of clause 25 and think it is important that we are setting the principle of net zero in legislation. However, I agree with my hon. Friend the Member for North Warwickshire. Clause 26 amends FSMA 2000 in relation to the content of the annual report. I will not go through all the arguments that we may well make when my hon. Friend’s new clause is debated, but I want to register with the Minister my concern about the phrase “in its opinion”. There is a reputational risk for the regulator, as much as for anyone else, if someone were to examine it later. I will not detain the Committee any longer, but I will want to speak to this point quite extensively when my hon. Friend’s new clause comes up.
I ask the Minister to look at the phraseology and consider whether it is appropriate. As we have all said in Committee, during the evidence sessions and in widespread discussion of the Bill, the need for clear metrics, regulatory transparency and regulatory accountability is key. That is one of the things we have all welcomed in the Bill.
Tulip Siddiq
We welcome clause 25 and the new regulatory principles for the FCA and the PRA, which will require the regulators, when discharging their general functions, to have regard to the need to contribute towards compliance with the Climate Change Act 2008—legislation that, I remind the Minister, was brought in by a Labour Government.
However, we think that the Bill lacks ambition on green finance. The Government promised much more radical action. We were promised that the UK would become the world’s first net zero financial centre, but we are falling behind global competitors. In the evidence session, William Wright, the managing director of the New Financial think-tank, stated that the UK is a long way behind the EU on both the share and the penetration of green finance in capital markets. Research by the think-tank has suggested that green finance penetration in the UK is at half the level of the EU and roughly where the EU was four years ago.
I will discuss what the Opposition would like to see in the Bill on green finance when we discuss new clause 9. For now, will the Minister set out what assessment he has made of the impact that clause 25 will have on investment decisions and other financial service activities in the sector?
In the evidence session, William Wright suggested that there is “a disconnect” between the Government’s stated position that the UK is already a global leader in green finance and the ambition for the UK to become the leading international green finance centre. Does the Minister really believe that the provisions in clause 25 are sufficient to close that gap? How much further will the Government go on this agenda? Does the Minister think we have been as ambitious as possible in the Bill, considering that the problem is on our doorstep and is so important for future generations?
Andrew Griffith
A lot of valuable points have been raised by Members on both sides of the Committee. This is the right moment for colleagues to make those points, and I hope it is acceptable to the Committee if I take some of those points away and follow up with further information later, rather than dismissing them trivially here.
The hon. Member for Kingston upon Hull West and Hessle raised something that is close to many of our hearts: nature. She is quite right that the Bill is focused on net zero and climate. She is absolutely right that we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem. I will take her points away to see whether there is anything else that can be done. I hope she will accept that the datasets and the maturity with which some aspects can be measured are not as sophisticated as in the science of climate change. That might be one impediment to the Government moving forward and baking it into statute, but I will take it away and follow up with the hon. Lady.
The hon. Member for Wallasey is absolutely right about the transformative scale of moving to a low-carbon economy. It will change every single aspect of how we generate energy, the activities we engage in, the homes we live in and our financial centre. We are at one on that. I believe that the wording of the clause and the replacement of the “have regard” achieves that objective, combined with the legislative commitment—by the Labour Government, if the hon. Member for Hampstead and Kilburn so wishes—that is being incorporated into the duty by reference. It does do that. There is an ambition there, and we should seek to satisfy it.
Tulip Siddiq
Obviously I do not want to offend the Minister, but I point him to the facts. I would like to hear what he has to say in response to the evidence given by William Wright, who, I would point out, is not a Labour MP but is independent. The think-tank’s research found that green finance penetration in the UK is at half the level of the EU, and roughly where the EU was four years ago. When the Minister writes to me, will he point me to specific evidence that contradicts what we heard in the evidence session?
Andrew Griffith
I will. I look forward to writing to the hon. Lady to set out my case.
The hon. Member for Kingston upon Hull West and Hessle mentioned transition plans. Our progress on those is absolutely on track and I look forward to that being another area in which the UK is leading.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26 ordered to stand part of the Bill.
Clause 27
Review of rules
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 27 inserts four new sections into FSMA 2000 to ensure that the FCA and the PRA review their rules regularly, so that they remain fit for purpose. It is important for the FCA and the PRA to regularly review their rules after implementation to ensure that they remain appropriate and continue to have the desired effect.
Regular reviews improve ongoing policy development by providing the evidence to make better decisions and helping to develop a better understanding of what works, for whom and when. There is currently no formal requirement for the PRA or the FCA to conduct reviews of their existing rules. Proposed new section 3RA will introduce a requirement for the two regulators to keep their rules under review. There are a range of approaches for assessing the effect of rules, from monitoring a set of indicators to an in-depth assessment of the effect of a rule from both a qualitative and quantitative standpoint.
The Government expect that, under this new requirement, the regulator will decide on the most appropriate approach on a case-by-case basis. The requirement to keep their rules under review should lead to a more systematic approach by the FCA and the PRA, in turn improving regulation, as any ineffective or outdated rules will be removed or revised more consistently.
Alongside that requirement, proposed new section 3RB requires the regulators to publish a statement of policy on how they intend to conduct rule reviews. That will provide clarity and transparency for stakeholders on how and when rules are reviewed, thereby increasing confidence in the regulation of financial services. Under these new requirements, how and when the two regulators review their rules to assess whether they function as intended will be an operational decision for the regulators.
In addition to the new legislative requirements, the regulators have confirmed that they will consult publicly on the statement of policy to ensure that stakeholders have an opportunity to contribute views as the regulators consider their approach.
I reiterate that, as set out in the Government response to the November 2021 FRF review consultation, and in response to calls from industry, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels through which industry and other stakeholders can raise concerns about rules. Those channels will be set out in policy statements in due course. However, without further provision, there will be no formal mechanism for the Treasury to require the regulators to conduct reviews of their existing rules.
As the FCA and the PRA take on increased regulatory policy-making responsibilities following the implementation of the FRF review, there may be occasions when the Treasury considers that it in the public interest for the regulators to review their rules—for example, when there has been a significant change in market conditions or other evidence suggests that the relevant rules are no longer acting as intended.
Proposed new section 3RC of FSMA provides for more effective regulation by allowing the Treasury to direct the regulator to review its rules when the Treasury considers that to be in the public interest. Proposed new section 3RD requires the regulator to report on the outcome of the review and the Treasury to lay that report before Parliament. Any reviews initiated under the power will be conducted by the regulator or, where appropriate, an independent person. The regulator will be responsible for deciding what action to take, if any, in response to any recommendations arising from the review. This measure offers a new avenue for challenge of the regulators’ rule making, where that is required, while maintaining their operational independence.
Respondents to the November 2021 FRF review consultation felt that there should be further measures on accountability, although there was no consensus on what they should be. The Government considered the responses and decided that, while we must still uphold our commitment to independent regulation, the accountability framework needs further strengthening, so on Second Reading the Government announced our intention to bring forward an intervention power to enable the Treasury to direct the regulator to make, amend or revoke rules when there are matters of significant public interest. The Government will provide a further update on that power in due course. With that in mind, I recommend that the clause stand part of the Bill.
Dame Angela Eagle
I have a few questions. The measure is sensible, but at the same time, it can be read as being quite sinister. Perhaps it depends on how the power will be used. The past is not filled with massive numbers of examples of the regulator falling out with the Treasury or the Bank of England, so the measure seems rather like a sledgehammer to crack a nut. The powers are to be used in exceptional circumstances, but those circumstances are not really defined; the Minister’s comment on that would be interesting.
If the measure is a sledgehammer to crack a nut, does it risk giving the impression that regulation in this country is not independent and can be overridden when that suits a Government, rather than when that is in the public interest? Might this compromise outsiders’ views of how our system is regulated? In other words, the cost-benefit analysis of whether the measure is an appropriate reaction might be in the balance. Will the Minister say a little more about how he perceives the power being used and what “exceptional circumstances” are?
We would still like to see what the intervention power that the Minister keeps talking about would actually look like. He has not come forward with the wording of it. Today, we will be halfway through the Committee proceedings on the Bill, and past the time when it may be relevant. Will he bring that wording back on Report, or will we see it while we are still in Committee?
Tulip Siddiq
We support the powers granted to the Treasury in clause 27 to require the regulator to conduct reviews of existing rules. We think that is a proportionate and sensible approach. We agree that mechanisms should be available to allow Ministers to ask a regulator to think again about a rule that may not be working in the public interest. However, while it is important that regulators are held to account, does the Minister agree that the operational independence of regulators must be paramount? Does he therefore agree that, with the powers to direct rule making already included in the Bill, a so-called intervention power would be unnecessary and dangerous?
During the evidence session, the deputy governor of the Bank of England, Sir Jon Cunliffe, said that an “intervention power” risked undermining perceptions of the central bank’s 25-year-long independence. He warned that, in turn, it would undermine the global reputation of our financial services sector. Even though the Minister was there, I will quote him:
“That credibility of the institutional framework is very important to the competitiveness”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 39, Q76.]
of the UK. Martin Taylor, a former Bank of England regulator and chief executive of Barclays said that, while it would not necessarily turn us into “Argentina or Turkey overnight”, that would be the direction of travel if such a power were introduced. I ask the Minister once again, echoing what my hon. Friend the Member for Wallasey said: why does he believe that the powers in clause 27 are not sufficient, and why do the Government continue to ignore the advice of the Bank of England?
Andrew Griffith
We have debated this matter under a number of clauses already. My commitment to table the draft wording of the proposed intervention power during this Committee remains. That remains the intention. I do not accept the characterisation of a sledgehammer and a nut. What we are doing in the whole of the Bill is giving vast new powers to the regulators that were previously held and exercised, with potential oversight and intervention, from Brussels. We are bringing that into the UK rulebook. The proposed power here, and any proposed intervention power, is a proportionate response to the significant expansion in regulations of financial services, which touch and are capable of touching every aspect of human life in this country.
It is important that we give the Government of the day, subject to Parliament, that failsafe ability. It may one day even be the hon. Member for Hampstead and Kilburn who is exercising that power, and she may be grateful for the foresight of this Committee in providing that, with the caveat that this is clearly anchored in the public interest. That is a well-understood concept. I do not want to rehearse all the points that the Committee heard from witnesses, but it is the Government’s view that this power is necessary. To the extent that we seek to go forward with what is called the public interest intervention power, beyond merely directing regulators to look again at rules, we should discuss that again in the context of what the checks and balances on that would be.
Tulip Siddiq
I am not sure, but I think the Minister was advocating for a general election; I am not putting words in his mouth. I understand what he is saying, but we asked the witnesses to come and give evidence for a reason, so he needs to respond to the concerns of those witnesses, who were clearly concerned about this intervention power. Those two key witnesses said they were worried about undermining the independence of the Bank of England. What is the Minister’s opinion about that?
Andrew Griffith
The Treasury has consulted widely on the future regulatory framework. One of the key points made by all the industry participants, very few of whom were part of the witness sessions—although we did hear from two particular witnesses, we did not hear the same volume of responses as in past consultations—was that industry is firmly of the mind that this is proportionate and potentially required.
I will clarify a couple of things for the Committee, because these matters are often misunderstood. First, we have operationally independent regulators. That is absolutely right, and no one is seeking to interfere in the findings of any particular regulatory review with respect to an industry participant. Secondly, none of this speaks to the scope of the Monetary Policy Committee. Sometimes the debate is couched in terms of monetary policy independence. What we are actually talking about is the regulatory rulebook. There are large public policy considerations for the insurance industry, for example, and in relation to consumer duty matters, such as access to cash and consumer protection, which we will debate in later sittings. Those are all matters that the Government consider and will continue to consider, notwithstanding the evidence given in that witness session. That is the right, proportionate response.
I should clarify that the hon. Member for Hampstead and Kilburn will get her general election in due course, but I fear she will have some time to wait.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Sixth sitting)
Thursday 27th October 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 27 October 2022 - (27 Oct 2022)
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
Stephen Hammond (Wimbledon) (Con)
I beg to move amendment 48, in clause 28, page 40, line 39, at end insert—
“3RF Requirement to publish specified information
(1) The Treasury may at any time, by notice in writing, direct a regulator to measure its performance against specified metrics and to publish such information if—
(a) the regulator does not already publish such information, or
(b) the Treasury consider the information published is insufficient for the purposes of holding the regulator to account.
(2) A direction under subsection (1) may—
(a) specify the element of the regulator’s performance to be measured;
(b) specify the appropriate metrics to be used;
(c) specify the period for which performance must be measured; and
(d) specify the date by which the performance information must be published.
(3) As soon as practicable after giving the direction under subsection (1) the Treasury must—
(a) lay before Parliament a copy of the direction, and
(b) publish the direction in such manner as the Treasury considers appropriate.
(4) A direction under subsection (1) may be varied or revoked by the giving of a further direction.”
I again guide the Committee to my entry in the Register of Members’ Financial Interests. Clause 28 amends the Financial Services and Markets Act 2000. It gives the Treasury the power to make or to direct rules. A key element of our discussions has been transparency and accountability, and the amendment is designed to make things a little clearer by ensuring that regulators report regularly and transparently on key metrics. The regulators are already mandated to report to His Majesty’s Treasury in their annual reports, which have to contain some performance metrics; the issue is that those metrics are selected by the regulator themselves. At the moment, an oversight body has the power to send for “persons, papers and records”, but it does not have the power to mandate regulators to report on specific performance metrics over time. I think that that leaves a hole in terms of both accountability to Parliament and transparency of regulators.
I accept the evidence that Martin Taylor gave the Committee that Parliament and the Government have a huge amount of influence. Equally, though, the chief executive of the Prudential Regulation Authority, when asked elsewhere for his thoughts on the competitiveness objective, described a lot of it as a “red herring”. When asked how he would report on the competitiveness objective, he said that he had “no convincing answer”. It is important that there is a convincing answer, and that is, in effect, what my proposed new section 3RF of the 2000 Act would provide.
As I have stated quite clearly, I do not believe that this is about a race to the bottom. We need a well-regulated, tough regulated, transparently regulated jurisdiction. Regular accountability on performance is in no way an infringement of a regulator’s independence; I think that it would enhance the regulator’s reputation. The amendment therefore sets out a number of metrics on which a regulator might be asked to report. That could work relatively easily. For instance, the Treasury could use its powers to set out more clearly the elements on which the regulator should measure and report its performance. It could also set out definitions that are relevant to the measures themselves. I think that the direction potentially should be able to be scrutinised by the public, and particularly by Parliament and the Treasury Committee, and that the information should be published, and published more frequently.
My amendment is designed to ensure that the regulator not only has the objective, but has to report on it on a very clear set of metrics, which would then allow us in Parliament and the public to ensure that it is meeting the objective.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
I thank the hon. Member for tabling the amendment. In principle, Opposition Members are supportive of providing regulators with clearly defined metrics to assess their performance. We would need further information about how it would work in practice before we could lend our support to the amendment, but in principle we are in agreement with the views that the hon. Member has outlined.
The Financial Secretary to the Treasury (Andrew Griffith)
I am grateful to my hon. Friend the Member for Wimbledon for raising this important issue, and I note the potential, in-principle support of the hon. Member for Hampstead and Kilburn, speaking for the Opposition.
The Government agree that it is vital to have appropriate public metrics for holding regulators to account on their performance. FSMA already requires regulators to report annually on how they have discharged their functions, advanced their objectives and complied with their other duties. In addition, schedules 1ZA and 1ZB to FSMA provide that the Treasury may direct a regulator to include such other matters as it deems appropriate in the regulator’s annual report.
As part of their annual reports, both the Financial Conduct Authority and the PRA publish data on operational performance. The FCA annually publishes operating service metrics relating to authorisations, timeliness of responses to stakeholders, and regulatory permission requests, among other things. In April 2022, the FCA also published a comprehensive set of outcomes and metrics that it will use to measure and publicly report on its performance. The PRA annually publishes data on its performance of authorisation processes.
Amendment 48 seeks to allow the Treasury, in addition, to determine what metrics the FCA and the PRA should use to measure their performance and over what period, and other technical aspects of the measurement and publication of metrics. Let me reassure my hon. Friend of the importance that I attach to the matter he has raised. I have discussed it with the CEOs of the PRA and the FCA since taking up my role, and I will continue to do so. I am open to discussing the matter with my hon. Friend outside the Committee to see what further reassurance the Government could give, or what further measures we could take. I therefore ask him to withdraw his amendment.
Stephen Hammond
I thank the Minister for his response, and I thank the hon. Member for Hampstead and Kilburn for hers. Clearly, there is a willingness across the House to look at this matter again, so I am going to take the Minister at his word—as I always do—and accept his kind reassurance. Perhaps he might ask the hon. Lady to join us in that discussion, because it would be beneficial. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 28 enhances FSMA by enabling the Treasury to place an obligation on the FCA or the PRA to make rules in a certain area of regulation. Equivalent provision for the Bank of England and the Payment Systems Regulator is made in clause 44 and in paragraph 7 of schedule 7.
FSMA requires that regulators advance their objectives when they make rules, set technical standards and issue guidance. The regulators must also take into account eight regulatory principles when discharging their functions. It is generally up to the regulators to determine what rules are necessary, but as set out in the future regulatory framework review consultation in November last year, that approach may not always be sufficient. There must be a means for the Government and Parliament to require the regulators to make rules covering certain matters, in order to ensure that important wider public policy concerns are addressed. That approach has already been established in legislation through the Financial Services Act 2021, which required the FCA to make rules that applied to FCA-regulated investment firms.
Clause 28 enables the Treasury to make similar regulations and place an obligation on the regulators to make rules in a certain area. The clause aims to strike a balance between the responsibilities of the regulator, the Treasury and Parliament now that we are outside the EU. It does not enable the Government to tell a regulator what its rules should be; it simply enables the Government, with the agreement of Parliament, to say that there must be rules relating to a particular area. The FCA and the PRA must continue to act to advance their objectives and take into account their regulatory principles when complying with the requirements set under this power. The Treasury cannot require the regulators to make rules that they would not otherwise have the ability to make.
I assure the Committee that this power will always be subject to the affirmative procedure. That is the most appropriate procedure, as it means that Parliament will be able to consider and debate any requirements set in this way. It also ensures that the Government are able to act to ensure that these requirements stay up to date with changing markets, rather than setting them out in primary legislation, where they could quickly become out of date. The clause enhances the FSMA model, enabling the Treasury to ensure that key areas of financial services continue to be regulated following the repeal of retained EU law and in the future. I commend the clause to the Committee.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Clause 29
Matters to consider when making rules
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
I beg to move amendment 1, in clause 29, page 41, line 7, at end insert
‘, and also to financial inclusion.
(2A) For the purposes of this section, “financial inclusion” means the impact on those who might be prevented from accessing financial services as a result of the new rules made by either regulator, or from accessing them on the same terms as existed before the making of the new rules.’
The Chair
With this it will be convenient to discuss the following:
New clause 2—FCA: Regard to financial inclusion in consumer protection objective—
‘(1) FSMA 2000 is amended as follows.
(2) In section 1C (The consumer protection objective), after subsection (2)(c) insert—
“(ca) financial inclusion;”.’
New clause 3—FCA duty to report on financial inclusion—
‘(1) The FCA must lay before Parliament a report, as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act is passed, and
(b) every subsequent 12-month period,
on financial inclusion in the UK.
(2) A report under this section must include—
(a) an assessment of the state of financial inclusion in the UK;
(b) details of any measures the FCA has taken, or is planning to take, to improve financial inclusion in the UK;
(c) developments which the FCA considers could significantly impact on financial inclusion in the UK; and
(d) any recommendations to the Treasury which the FCA considers may promote financial inclusion in the UK.’
Emma Hardy
My amendments relate to the issue of financial inclusion, which those who serve on the Treasury Committee have heard me talk about many times before. I will start with an explanation, which is much better than the one I tend to give, that I found in the written evidence from the Financial Inclusion Commission of what financial inclusion actually is. It speaks about its vision for
“a financially inclusive UK where financial services are accessible, easy to use and meet people’s needs over their lifetime, and where everyone has the skills and motivation to use them.”
I would think that that aim and ambition would be supported by everyone. I will add that the Financial Inclusion Commission is a cross-party, cross-organisation group that recommends financial inclusion.
The commission also said in its evidence that
“over a million people in the UK do not have a bank account, one in four households lack insurance protection and one in five adults would not be able to cover more than one month of living expenses if they lost their source of income.”
Financial inclusion is a hugely important and relevant issue. Some 22% of UK adults have less than £100 in savings. The commission says that it believes the Financial Conduct Authority
“does not have the powers to adequately reflect vulnerable consumers’ interests when considering potential regulatory changes.”
That was its argument for my amendment, which is about “have regards”.
I also came across written evidence from the Phoenix Group. I was a little surprised by it, but in a happy way. The Phoenix Group is a FTSE 100 company, and it also argues for the FCA to have regard to financial inclusion. It says in its evidence:
“Financial exclusion is one of the biggest drivers of poor consumer outcomes in the UK – it is a clear oversight that there is no specific statutory requirement for the FCA to address, or even consider, financial inclusion issues across its work.”
It goes on to talk about this in relation to pensions, in particular. It said one of the problems it encounters in the
“long-term savings and pensions space”
is what it calls the “guidance gap” when it comes to making decisions about pensions. It believes that requiring the FCA to have regard to financial inclusion could start to address some of these issues. I have to say that before I read all of the evidence, I had not heard a FTSE 100 company arguing for that.
In oral evidence, the FCA pushed back on the need for a “have regard” for financial inclusion. We might have expected that; people tend to push back on having things added to their workload, even when the evidence says something else. The push-back tends to suggest that the FCA has a consumer duty and therefore does not need a “have regard” for financial inclusion. However, there is a big difference between the consumer duty and the “have regard” that I am talking about.
The consumer duty deals with people who are able to access products, but I am talking about the people who cannot access products at all because they are excluded from the financial market. The clients I am referring to are the ones the market does not want. That is happening more and more as we face the cost of living crisis. In real life, the people we are talking about end up being disadvantaged by paying more for credit, more for insurance and more for services, as we heard in evidence from Martin Coppack of Fair By Design.
The financial inclusion forum, chaired by HMT and the Department for Work and Pensions, addresses some issues, but it has been criticised as a closed talking shop. There are no selection criteria for who is invited and very little is published on what it does, what it discusses, or its actions and outcomes. Many of the organisations that back the “have regard” requirement for the FCA sit on that group already, and they recognise that what we have done is not enough, which is why they are calling for the requirement. In addition, we cannot get the toughest issues talked about at the financial inclusion forum—many allies have asked for the poverty premium to be on the agenda, but with no luck—and it does not seem to have many positive outcomes.
Dame Angela Eagle (Wallasey) (Lab)
It is a pleasure to follow my hon. Friend the Member for Kingston upon Hull West and Hessle, whose comments I wholeheartedly support. I suspect there will be widespread support among Committee members for the objectives of her amendment. Perhaps the Minister will argue that a “have regard” to financial inclusion is the wrong way to go about it, but I would argue that not having these things in mind when an industry is being regulated can make a situation worse.
We know the level of financial exclusion because my hon. Friend mentioned the figures. I do not intend to go over all that, but essentially what we have—this has developed because of the way the market works—is a retail financial services sector that is very focused on a set of quite complex products. It is also very focused on its distribution networks and not so much on the customer. Retail financial products have often focused on the relationship between those who introduce products and those who sell them on to the ultimate customer, often with quite rewarding levels of sales commission. The bad end of that kind of financial services model is that we get a structure that is not focused enough on consumers, and a range of ever-increasing complexity that costs more and excludes more people who might be on basic incomes.
Over time, the dynamic of that structure means that the financial services sector gets more and more complex, more and more focused on the distribution networks, and less and less focused on the end customer. One understands that when the industry starts complaining about the lack of financial education. There is some truth in that, but there is also truth in the fact that the opacity of the price mechanisms and the complexity of the products that the industry comes up with make it confusing, and of course that increases the cost base, which excludes more low-paid people.
A previous Administration that I might have been a member of tried to address the issue with stakeholder products that were meant to be much simpler with very up-front but capped pricing that everybody would understand. Those were throttled out of existence because the industry did not really want them to succeed, and what has happened since—not by anyone’s design but by the dynamics of the way the market works—means that there is less and less available for those who have small amounts of income because the products are simply not profitable in the current structure of our retail financial services.
This is a systemic issue that needs to be solved, because we need a financial services retail sector that serves everybody. We do not have one, and we are getting to a stage where market dynamics make it less and less likely that we will have one; they are actually excluding more people. I think that a “have regard” that prompts thought about structures and, perhaps, about the regulation of some simpler products that could be made available is a really important part of addressing that market failure.
Like my hon. Friend the Member for Kingston upon Hull West and Hessle, I am worried that the Minister will say that we have consumer protections in place. This is not about those who are currently consuming the products; it is about those who cannot even afford to have basic bank accounts, those who have to go to money lenders because they are in such precarious circumstances, and those who pay the poverty premium because accessing financial services costs so much more as a percentage of their overall income than it costs someone on a higher income. I can tell the Minister—I am sure he has come across this in his own constituency—that many people who exist on very tight incomes, and who really have to budget, shy away from having basic accounts because they cannot afford to go into deficit and be charged a fee. That would destroy all their very careful balancing.
This issue is particularly important for people who are on benefits and have them paid into a bank account at a set time, but who have bill payments coming out at a different time. I would really appreciate it if the Minister would think profoundly about how the problem can be solved, so that our financial services sector can get to a stage where it can make profit—a modest profit perhaps, but some profit—out of dealing with people on much more modest incomes. After all, there are millions of them, and the dynamic of the market structures we have at the moment is moving provision away from people on lower incomes.
Emma Hardy
On my hon. Friend’s point about consumer duty, the evidence suggests that one of the unintended consequences is that it can make some currently marginally profitable products unprofitable, thereby excluding more people from them, so one of the things that the consumer duty is trying to address is actually making it more difficult for some people in society to have anything.
Dame Angela Eagle
I agree with my hon. Friend.
I will wrap up. Given that this is a systemic issue, a “have regard” is the best way of dealing with it. I hope that the Minister will think carefully about that and about how it might help us arrest the dynamic that is taking financial services away from people on modest incomes, and making it less and less profitable for the industry to serve them, leaving them much diminished in their attempts to engage appropriately in our society in ways that many people take for granted, such as by having a credit card and bank account, or being able to conduct electronic cash transfers and so forth.
Siobhain McDonagh (Mitcham and Morden) (Lab)
I rise to support my hon. Friend the Member for Kingston upon Hull West and Hessle. Like her, I am on the Treasury Committee, and I have to say to this Committee: please pass the amendment, so she can stop talking about it in our meetings! [Laughter.] To be fair to her, it is something that she repeats and that bears repeating, because I fear that if the FCA is not responsible for having regard to financial inclusion, the responsibility continues to sit with us as MPs. Who became aware that closing bank branches in town centres was getting to be a problem? Who was concerned about access to ATMs, especially free ATMs? It was MPs, through their constituents raising the issue with us. This is a cross-party effort. It is not the sole responsibility or the sole campaign issue of one side of the House.
More and more of our hard-working, respectable constituents are being excluded from financial products. They desperately want to insure their cars, but if they pay their car insurance monthly, they pay more. They desperately want to contribute to their pensions and life insurance policies to give comfort to their families. They want to do all those things, but an increasing proportion of them are being excluded from those products. If the FCA had regard to how the issue affects an ever growing part of our society, we would at least have a different way of looking at it.
An issue that I know is close to your heart, Dame Maria, is women’s exclusion from many financial products, given the nature of their work, including part-time work and periods off work for raising children. In the end, the taxpayer picks up the bill if those products are not available. It is in the interests of all of us—our constituents and our parties—to support the amendment in the name of my hon. Friend the Member for Kingston upon Hull West and Hessle.
Tulip Siddiq
When I was first elected, I was told by another MP here that I should pick an issue, stick to it and talk about it constantly. I pay tribute to my hon. Friend the Member for Kingston upon Hull West and Hessle for following that advice to a tee. I follow in the steps of my hon. Friends the Members for Kingston upon Hull West and Hessle, for Wallasey and for Mitcham and Morden, who spoke about financial inclusion and how it affects us all. Later, we will debate essential face-to-face banking services. For now, I want to focus on the poverty premium, which my hon. Friend the Member for Mitcham and Morden mentioned: the extra costs that poorer people have to pay for essential services such as insurance, loans or credit cards.
We believe that everyone should have access to financial services—whether it is savings schemes or insurance—when they need them, regardless of their income and circumstances. If the Government are serious about building a strong future for our financial services outside the EU, they should recognise that the Bill is an opportunity to rethink how financial resilience, inclusion and wellbeing are tackled in the UK.
We support amendment 1 and new clauses 2 and 3, which would give the FCA a new cross-cutting “must have regard” to financial inclusion measure as part of its regulatory framework. As the Minister knows, that would mean that the FCA would have to consider financial inclusion across all its activities and report on its progress.
In our evidence session, Fair by Design talked about the higher costs that poorer people have to pay for insurance products. Research from the Social Market Foundation, with which the Minister will be familiar, has shown that those who are unable to pay for their car insurance in annual instalments face an average extra cost of £160. Surely the Minister agrees that that is unjust, and that regulation must play a role in tackling the poverty premium. If he accepts that principle, what is the argument against introducing a new “have regard” provision to empower the FCA to monitor how well financial services are meeting the needs of low-income consumers? For example, a “must have regard” for financial inclusion could allow the regulator to review practices such as insurers charging more to customers who pay for their insurance in monthly instalments.
Does the Minister recognise that exclusion from financial services is a growing problem in the UK? If he rejects the arguments for a “have regard”, what solution does he propose instead? It is something we all see in our casework as constituency MPs.
Andrew Griffith
I thank hon. Members for their contributions. I appreciate the work of the hon. Member for Kingston upon Hull West and Hessle. I have been to Hull, but I think that everyone has constituents who face precisely the problem of which she speaks, so I will depart from my text.
The Government oppose the new clauses and the amendment. However, we have heard from the FCA its opposition to this measure and its contention that it is not required. It would say that—I understand that point. I would be happy to consider how the Government respond. That is the most worthy response I can make; I am not inclined to dismiss any of the hon. Lady’s arguments.
Andrew Griffith
I will give way; I do not propose to speak for very long on this point, anyway.
Craig Tracey
I am very much in favour of financial inclusion, but we have to be careful about how we achieve it. I was an insurance broker before coming here. The reason I left was that the cost of regulation on our business meant that we disappeared from the high street. That meant that vulnerable people had less access to insurance. We see more and more access points moving out, and having to go online, so people are losing out. Does the Minister agree that, although we must ensure that we are looking after the most vulnerable people, more regulatory burdens will put up the cost and affect the availability of products?
Andrew Griffith
I thank my hon. Friend for that intervention. He put it far better than I did, bringing to bear his personal experience, but that was precisely the point that I was making.
Siobhain McDonagh
Does the Minister agree, though, that unless we know what is happening and somebody keeps the figures, there can be unintended consequences? Martin Coppack from Fair by Design made the point that he has been trying to get this thing done for years and what he has found is that when he goes to the internal Treasury committee that considers financial exclusion, it says, “It’s not our job to keep the numbers. Go to the FCA.” The FCA says, “It’s not our job to keep the numbers. Let’s go back to the Treasury.” Surely it needs to be somebody’s responsibility, so that we understand and know the direction of travel.
Andrew Griffith
Once again, the Government will not oppose those points for the sake of opposing them. I would like to take this matter away. Powerful arguments have been made and the FCA has made its contention. I think it is entirely appropriate that the Government consider the matter further.
Emma Hardy
I will take Members back to the evidence given by the Phoenix Group as to why the FCA should “have regard”. I think there is broad consensus that financial inclusion is important. The difference of opinion is regarding what we do to achieve it. This point relates to that made by my hon. Friend the Member for Mitcham and Morden. Phoenix said that the “have regard” responsibility should lie with the FCA because it is
“the single UK body with the clearest ability and access to information”.
That is the main point. We heard evidence from a Minister from the Department for Work and Pensions and a Minister from the Treasury, because there is a question around where financial inclusion fits into social policy and financial policy; there is a bit of a mush over who is responsible. Sometimes when we find that lots of people are responsible for something, in reality no one is responsible, because everyone can always say that it is the other person who is responsible and not them. That evidence from Phoenix Group was powerful.
The organisation also said:
“With many of the most pressing issues falling in between the remits of government and regulators, this makes addressing financial inclusion problems more difficult.”
We need the FCA to “have regard” for this matter, to act as that single body to gather the information and look at the issue more seriously, otherwise, we will be failing, as we have done for years, to achieve any real outcomes. I will therefore be pushing the amendment to a vote.
Question put, That the amendment be made.
Andrew Griffith
Under the FSMA model, the detailed rules that apply to firms are generally set by the regulators, acting within a framework set by Government and Parliament.
FSMA requires the regulators to act in a way that advances their statutory objectives when discharging their general functions, including those of making rules, setting technical standards and, in the case of the FCA, issuing guidance. It is generally up to the regulators to determine which rules are necessary, and, when they make rules, to do so in a way that advances, and is compatible with, their objectives. They must also have regard to their regulatory principles. Clauses 29 to 32 ensure that relevant regulator actions, including rule making, are proportionate and reflect important matters of public policy as appropriate.
The objectives and regulatory principles in FSMA are cross-cutting and apply to everything the regulators do. They have not been designed to suit particular policy areas. That is why Parliament, through the Financial Services Act 2021, introduced a limited number of factors that the PRA and FCA must consider when making rules in certain areas—for example, when implementing the latest Basel standards.
Clause 29 therefore provides the Treasury with the ability to specify, by way of regulations, matters that the FCA and PRA must “have regard” to when making rules in a particular area. The regulators will be required to outline how they have considered these “have regards” in their public consultations, just as they do already for objectives and regulatory principles. The power for the Treasury to specify matters in regulations will always be subject to the affirmative procedure. That means that Parliament will be able to consider and debate any “have regards” introduced using the new power.
Clause 30 contains a mechanism to manage the interaction between the regulators’ rule-making and supervisory responsibilities and the Treasury’s deference decisions, including equivalence decisions. Deference is a process endorsed by the G20, in which jurisdictions and regulators defer to each other on relevant matters when it is justified by the quality of their respective regulatory, supervisory and enforcement regimes.
It is the responsibility of the Government to determine whether overseas regulatory and supervisory standards are equivalent to our own, and therefore whether to defer to an overseas jurisdiction. The rules that the regulators make will have a direct bearing on the criteria against which the Treasury assesses overseas jurisdictions for that purpose.
To manage that interaction, clause 30 creates a requirement for the FCA and PRA, when proposing changes to rules or supervisory practices, to consider the impact on deference afforded by the Treasury to overseas jurisdictions, and to consult the Treasury should they determine that the proposed action may lead the Government to review their deference decisions. That consultation process will allow the Treasury to provide regulators with its views on how their actions will impact existing deference decisions, and ensures that the regulators holistically consider deference when considering a change to their rules or supervisory practices.
Clause 31 has a similar purpose. It contains a mechanism to manage the interaction between the regulators’ rule-making and supervisory responsibilities, and the Treasury’s responsibilities in upholding the UK’s international trade obligations. The Government are responsible for ensuring that the UK complies with commitments arising from international trade agreements that the UK has agreed.
The clause supports the existing FSMA model by creating a statutory requirement for the regulators when making changes to rules or supervisory practices to consider whether there is a material risk that these changes are incompatible with an international trade obligation. They must give written notice to the Treasury before proceeding if such a risk arises. Clauses 30 and 31 are necessary and proportionate measures to manage the respective responsibilities of the Treasury and the regulators in these areas.
Clause 32 inserts new section 138BA into FSMA to enable the Treasury to allow the FCA and the PRA to waive or modify their rules where appropriate. Setting the same rules for everyone can sometimes come with unintended consequences. Recognising this, existing section 138A of FSMA already gives the regulators some discretion; however, the existing provisions require the relevant regulator to have determined that a rule is “unduly burdensome”, or would not achieve the purpose for which the rules were made, before modifying or disapplying rules.
We want our regulators to be more proportionate and more agile. The new power in clause 32 will therefore give the Treasury the ability to enable the FCA and the PRA to waive or modify their rules in a wider range of circumstances, which will make it easier for regulator rules to reflect different business models and practices where appropriate. Importantly, it will also ensure that some existing waiver regimes in retained EU law can be maintained. I therefore commend clauses 29 to 32 to the Committee.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Clauses 30 to 32 ordered to stand part of the Bill.
Clause 33
Responses to recommendations of the Treasury
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Under section 1JA of FSMA 2000 and section 30B of the Bank of England Act 1998, the Treasury must make recommendations to the FCA and the Prudential Regulation Committee at least once in each Parliament on aspects of the economic policy of His Majesty’s Government. The FCA and the PRC, as the governing committee of the PRA, should have regard to these matters when carrying out their functions.
Currently, there is no statutory requirement for the FCA and the PRC to respond to the Treasury’s recommendations and explain how they have had regard to them. Clause 33 therefore amends section 1JA of FSMA 2000 and section 30B of the Bank of England Act 1998 to create a requirement for the FCA and the PRC to respond annually. The response must outline the action the regulator has taken or intends to take, or the reasons it has not taken and does not intend to take action, on the basis of the recommendations. The response will be laid before Parliament by the Treasury.
The clause is therefore intended to increase transparency of how the FCA and the PRA have taken into account these recommendations. As a result, this clause aligns the FCA and the PRC with the statutory requirement for the Bank of England’s Financial Policy Committee, which is already required to respond to the recommendation letters sent to it by the Treasury. Finally, this measure formalises an emerging practice, as the FCA and PRC have previously responded to recommendation letters from the Treasury. I therefore commend the clause to the Committee.
Tulip Siddiq
I have one quick question for the Minister. Are the Government required to consult or give advance notice before sending a policy letter to regulators? If not, is there a risk that the new “have regards” for different policy areas could be dropped on the regulators from nowhere, and could distract the FCA and PRA from their primary and secondary objectives?
Andrew Griffith
That is, of course, possible, but it would be unusual. There is regular discourse between His Majesty’s Treasury and regulators, and I consider the risk that the hon. Lady raises relatively small. The regulatory bodies would consult on that change if required.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clause 34
Public consultation requirements
Stephen Hammond
I beg to move amendment 49, in clause 34, page 47, line 38, at end insert—
“(2B) The FCA must publish a list of all of the consultees.”
Again, I guide the Committee to my entry in the Register of Members’ Financial Interests. The amendment is very simple. I welcome clause 34. It sets out public consultation requirements and, after proposed new section 1RA of FSMA 2000, inserts proposed new section 1RB, concerning requirements in connection with public consultation. The key word here is “public”. Proposed new section 1RB(2) states:
“The FCA must include information in the consultation about any engagement by the FCA with…statutory panels”.
That is a public consultation, or it should be. Therefore it seems only appropriate that the FCA and the PRA list all the consultees to the public consultation. That is what amendment 49, for the FCA, and consequential amendment 55, for the PRA, provide. That is a very simple request. If the Government cannot agree to it today, I hope that they will take it away about think about it very carefully.
Andrew Griffith
Amendment 49 seeks to require the FCA to publish a list of all respondents to any public consultation. I recognise that my hon. Friend the Member for Wimbledon intended for the requirement in amendment 49 also to apply to the PRA, where the same issues would arise.
The Government believe that policy making is at its most effective when it draws on the views, experience and expertise of those who may be impacted by regulation. Meaningful stakeholder engagement makes it more likely that final proposals will be effective, understood and accepted as fair and reasonable. The Government also recognise the importance of transparency in supporting the effective scrutiny of the regulators, and are bringing forward a number of measures in the Bill to support that.
I remind my hon. Friend that FSMA already requires the FCA to publish information regarding responses to their public consultations. In particular, section 138I of FSMA requires the FCA to publish an account, in general terms—I accept that that is different from what my hon. Friend proposes—of representations made in response to consultation, and of the regulator’s response to them.
Although I therefore support the ambition behind the amendment, there is a risk that the additional requirement on the FCA to publish a list of all consultees to every consultation could deter stakeholders that want to respond confidentially from engaging fully with the regulators’ consultations.
The Government sympathise with my hon. Friend’s point, but I ask him to withdraw his amendment. I am happy to meet with him, with officials, to see whether there is a different way in which he can obtain the comfort he desires, or in which we can take the matter forward.
Stephen Hammond
I am very pleased to hear what the Minister said, because he has broadly accepted the thrust of what I said. I think he is offering me the chance to explore with him the circumstances in which a body does not wish for its name to be published in respect of a consultation. I am prepared to have that conversation with him so that I understand why he thinks that that might constrain the FCA and PRA. With that reassurance from the Minister, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
FSMA 2000 requires the PRA and FCA to set up and maintain a number of stakeholder panels, also known as statutory panels. Those panels are intended to provide valuable insight, advice and challenge to the regulators’ rule making, drawing on the experience and expertise of their respective memberships. The regulators have regular meetings and discussions with their panels. In those, most major policy and regulatory proposals are presented for comment at an early stage.
The FCA’s statutory panels are the financial services consumer panel, the practitioner panel, the smaller business practitioner panel, and the markets practitioner panel. The Bill also puts the listing authority advisory panel on a statutory footing. The PRA’s statutory panel is the practitioner panel, and the Bill also puts its insurance sub-committee on a statutory footing as the insurance practitioner panel. The Payment Systems Regulator has one statutory panel, which covers the full range of the PSR’s responsibilities.
The additional responsibilities that the regulators take on following the repeal of retained EU law will result in the regulators making more rules across a broader range of topics. The UK’s departure from the EU will therefore increase the opportunities and the need for the regulators to consult their statutory panels from the outset of policy and regulatory development; that was not possible to the same extent while the UK was a member of the EU. It will strengthen the panels’ important ability to provide stakeholder input into the development of policy and regulation.
Clause 34 therefore requires the FCA and PRA to include information in their public consultations about any engagement that they have had with statutory panels. Clause 35 requires the regulators to provide information in their annual reports on their engagement with the statutory panels of the FCA, PRA and PSR over the reporting period. The FCA and PRA already voluntarily provide some information on panel engagement as part of their annual reports. This clause will formalise the existing practice, ensuring clear and consistent communication by the regulators.
The regulators, working with the panels as appropriate, will be responsible for determining how to meet these requirements. Importantly, the regulators will not be required to publish information that they deem to be against the public interest. That will ensure that the FCA and PRA can find the appropriate balance between transparency and the confidentiality crucial to ensuring an open exchange of views between panel and regulator. I therefore recommend that these clauses stand part of the Bill.
Tulip Siddiq
I will speak to clauses 34 and 35 together. Statutory panels make an invaluable contribution, based on panel members’ experience and expertise, to the FCA’s and PRA’s policy-making functions. However, we feel that transparency is vital in ensuring that the public feel that financial services regulation is working in their interests. That is why we support these clauses, which we recognise will increase transparency by guaranteeing consistent communication by regulators about their engagement with panels. Does the Minister agree that representation of the voices of consumers and the public on the FCA’s statutory panels also plays an important role in upholding the transparency of the regulatory process? Ultimately, it is the public, both as consumers and as taxpayers, who are most impacted when regulations go wrong and when regulators fail to adequately uphold consumer protections or financial stability.
I draw the Minister’s attention to the written evidence to the Public Bill Committee from the Finance Innovation Lab. It recommended that
“the government mandate public interest representation of at least 50% on all groups and committees providing advice and making decisions about financial services policy and regulation.”
I want to know whether the Minister has considered the Finance Innovation Lab’s argument about the transparency of statutory panels, and whether that could be strengthened by
“ensuring that the voices of consumers and citizens are given at least equal weight to the voice of industry.”
If he is not familiar with the written evidence, he is welcome to write to me later.
Dame Angela Eagle
I support the position of my hon. Friend the Member for Hampstead and Kilburn. Given the transfer of powers from Brussels to the UK and the fact that a lot of the current structure is up for discussion and potential change—although we hope it will not all change at once—there is bound to be much more interest in the regulators’ decisions for lobbying purposes than there would be normally in any given year. That level of interest will last until the system settles down into whatever its future tracks will be.
In those circumstances, the regulators must be able to demonstrate robustly that there has been no kind of industry or regulatory capture via some of these panels, and that consumer interest has been properly represented. When I talk to consumer stakeholders and groups, there is certainly a view that the balance is not right at the moment, which is why I am so supportive of what my hon. Friend has said from the Front Bench.
We have to be able to demonstrate, in a transparent way, that meetings that may be confidential for very good reasons are not something else. Will the Minister give us some ideas about how consumer representation in these technical panels can be properly shown to be robust and how transparency can be improved, given the fluid context for a lot of these decisions and future structures?
Andrew Griffith
I thank the hon. Members for Hampstead and Kilburn and for Wallasey for their points. We must be alive to the risk of producer capture, and these clauses are a real step forward in bringing the required transparency to the composition of these panels and their recommendations. The Government recognise the importance of the consumer voice; panels that have diverse backgrounds and different expertise avoid group-think, which is an important aspect.
Through this Bill, the Government will introduce a requirement for regulators to maintain statements of policy in relation to their process for recruiting members to panels. That in itself is a step forward. However, it would not be right to move forward with a specific numerical threshold. The panels are there to challenge the policymaking process, in order to give a voice to practitioners, as well as consumers,. They are not of themselves representative. The representative function is one that we discharge here in Parliament, and I think that is the appropriate balance.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35 ordered to stand part of the Bill.
The Chair
We have a lot to cover this afternoon, so I urge Members to take note of the groupings of amendments so we can move through this at the appropriate pace.
Clause 36
Engagement with Parliamentary Committees
Andrew Griffith
I beg to move amendment 3, in clause 36, page 49, line 31, leave out
“and the regulatory principles in section 3B,”
and insert—
“(ba) demonstrate that the FCA has had regard to the regulatory principles in section 3B when preparing the proposals,”.
This amendment ensures that the notification provisions align with the duty in section 1B(5)(a) of the Financial Services and Markets Act 2000, for the FCA to have regard to the regulatory principles set out in section 3B of that Act.
The Chair
With this it will be convenient to discuss the following:
Government amendment 4
Clause 36 stand part.
Andrew Griffith
I will speak first to clause 36 and then turn to Government amendments 3 and 4. Parliament, through primary legislation, sets the overall approach and institutional architecture for financial services regulation. This includes the regulators’ objectives and requirements to ensure appropriate accountability. Parliament therefore has a unique and special role in relation to the scrutiny and oversight of the FCA and the PRA. Given the regulators’ wide-ranging powers, which they exercise independently of Government, it is vital that Parliament can continue to effectively scrutinise and hold the regulators to account. This is particularly important given that the regulators will have additional rule-making responsibilities following the repeal of retained EU law.
Parliament has a number of existing mechanisms to scrutinise the regulators, including the targeted scrutiny provided by Select Committees. The Government’s view is that those are appropriate and flexible and should continue to be the principal ways in which Parliament holds the regulators to account. Clause 36 adds to these existing tools to support more effective accountability of the regulators to Parliament. The clause also addresses concerns raised in debates during the passage of the Financial Services Act 2021.
Members of both Houses highlighted the importance of the regulators having sufficient regard to the conclusions of parliamentary scrutiny, and the importance of parliamentarians receiving sufficient information from the regulators to facilitate their scrutiny and ensure that it is effective. The clause inserts new provisions in FSMA to require the FCA and the PRA to notify the Treasury Committee when they publish consultations on proposed rules, setting out how they exercise any of their general functions, or on proposals under a statutory duty.
The new provisions also require the regulators to draw the Treasury Committee’s attention to certain key aspects of a consultation, including how proposals advance their objectives and have had regard to the regulatory principles. The clause also requires the FCA and PRA to respond in writing to formal responses to any of their public consultations from any parliamentary Committee. While it is expected that the regulators would always respond, this will give Parliament reassurance by placing this on a statutory footing. The Government consider that placing those requirements on the regulators on a statutory basis is appropriate due to the unique circumstances of the financial services regulators’ wide remits, and their position as independent public bodies that are accountable to Parliament.
I now turn to amendments 3 and 4, which make a technical change to the new requirements for the FCA and PRA to notify the Treasury Committee when they publish a consultation. Clause 36 contains a minor drafting error, by requiring the regulators to set out how the proposed rules are “compatible” with the regulatory principles. The Government have tabled these amendments to correct that and remove any ambiguity, and to align the requirement in clause 36 with the broader requirements in FSMA.
Tulip Siddiq
The Minister has already said that he is open to discussion about this, but I specifically want to turn to the role of the Treasury Committee. The Opposition are pleased to see a strengthened role for the Treasury Committee in scrutinising financial services regulation. However, TheCityUK, in its written submission to the Committee, set out that, while the Treasury Committee has the power to send for persons, papers and records, it does not have the power to mandate the regulators to report on specific performance metrics over time.
TheCityUK argues that the efficiency and effectiveness of regulators, and the impact of their operational performance on UK competitiveness, would be improved by greater accuracy, transparency and accountability in operational performance metrics. It has proposed an amendment to give the Treasury powers to require regulators to report specified operational performance metrics, with the Treasury Select Committee consulted on the metrics to be reported. Those could include the regulator’s performance against its secondary objective or its “have regard” for net zero targets, for example. I wanted to hear what the Minister thinks about those proposals.
Dame Angela Eagle
As a member of the Treasury Select Committee and—for an all too brief time—acting Chair, I am also very interested to hear what the Minister has to say about this.
Andrew Griffith
I am struggling to add incrementally to what the Government have said earlier today regarding our receptivity to the idea of greater transparency, and an ability to design or influence the metrics that are being reported. I observe that the Treasury Select Committee appears fairly formidable in its ability to compel witnesses and information, and I would be interested to hear more about any deficiencies or impediments that that Committee, under its acting Chair or its permanent Chair, feels exist. This would certainly be an opportunity to rectify those, but I suggest that either I meet with the hon. Member for Wallasey, or she writes to me in a little more detail about what would help the working of that important Committee.
Amendment 3 agreed to.
Amendment made: 4, in clause 36, page 50, line 41, leave out paragraph (b) and insert—
“(b) demonstrate that the PRA has had regard to the regulatory principles in section 3B when preparing the proposals,”—(Andrew Griffith.)
This amendment ensures that the notification provisions align with the duty in section 2H(2) of the Financial Services and Markets Act 2000 for the PRA to have regard to the regulatory principles set out in section 3B of that Act.
Clause 36, as amended, ordered to stand part of the Bill.
Clause 37
Duty to co-operate and consult in exercising functions
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
The clause will insert proposed new section 415C into FSMA. The new section introduces a statutory duty for the Financial Conduct Authority, the Financial Ombudsman Service and the Financial Services Compensation Scheme to co-operate on issues that have significant implications for each other, or the wider financial services market.
The FCA is the conduct regulator for the financial services sector; the FOS is an alternative dispute resolution service for financial services complainants, such as consumers and smaller businesses; and the FSCS provides financial protection for eligible customers of financial services firms authorised by the FCA. While each has a distinct role within the UK’s regulatory architecture, the work of each organisation will often be relevant to, or have implications for, the others. When issues with wider implications emerge, it is crucial for the functioning of the UK’s regulatory system and achieving the best outcomes for consumers that those organisations co-operate to determine the most appropriate approach to managing them. The organisations already co-operate voluntarily through the wider implications framework. That voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues.
Clause 37 will enhance that co-operation and ensure that these arrangements endure over time. It will also ensure that the FCA, the FOS and the FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with the new duty to co-operate on matters with wider implications.
I will now set out some of the detail of how the clause will function in practice. Proposed new section 415C(3) requires that each regulator maintains a statement of policy explaining how it will comply with this duty. Proposed new subsection (1)(b) requires that those organisations consult other organisations as appropriate, including other regulatory bodies, on wider implication matters. Proposed new subsection (6)(a) requires that they publish an annual report on their compliance with the duty, and proposed new subsection (7) requires that they outline representations received from stakeholders on their compliance with the duty to co-operate on wider implication issues.
Ultimately, this clause will support better outcomes for financial services firms and consumers by maximising collaboration among the FCA, the FOS and the FSCS on issues with wider implications. I have summarised the effects of the clause, and I therefore recommend that it stand part of the Bill.
Question put and agreed to.
Clause 37 accordingly ordered to stand part of the Bill.
Clause 38
Listing Authority Advisory Panel
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 39 stand part.
Amendment 51, in clause 40, page 54, line 26, after “persons” insert “, at least two of which must be external to the FCA, the Treasury, or the Bank of England,”.
Amendment 52, in clause 40, page 54, line 31, at end insert—
‘(9A) The FCA must consider representations that are made to it by non-governmental bodies and recognised industry or trade association bodies.”
Amendment 53, in clause 40, page 54, line 32, leave out “from time to time” and insert “annually”.
Amendment 54, in clause 40, page 55, line 22, leave out “from time to time” and insert “annually”.
Clauses 40 to 42 stand part.
There is quite a lot in this group. If you refer to the selection list, you will see what is to be taken together.
Andrew Griffith
I will first speak to clauses 38, 39, 40, 41 and 42, and I will then turn to amendments 51, 52, 53 and 54.
Clauses 38 and 39 concern the FCA’s and the PRA’s statutory powers. As we have already discussed, FSMA 2000 requires the PRA and FCA to set up and maintain stakeholder panels, also known as statutory panels. These panels provide valuable insight, advice and challenge to the regulators’ rule making, drawing on the experience and expertise of their respective memberships. The regulators have regular meetings and discussions with those panels, in which most major early policy and regulatory proposals are presented for comment. The confidentiality of the panel’s contributions allows the regulators to engage the panels when policy is in the early stages of development ahead of public consultation, and enables the panels to act as a critical friend. The panels represent a diverse range of stakeholders, including consumers, small businesses and market practitioners.
In addition, the FCA also voluntarily operates the listing authority advisory panel, which operates in a similar manner to its statutory panels, and represents the interests of issuers of securities and advises on the FCA listing function. In addition to its statutory practitioner panel, the PRA voluntarily operates an insurance sub-committee for that panel, which represents the interests of insurance practitioners.
Clauses 38 and 39 amend FSMA, to place the FCA’s listing authority advisory panel and the PRA practitioner panel’s insurance sub-committee on a statutory footing. These clauses also set requirements for the FCA and the PRA in relation to these panels, in line with the existing requirements for other statutory panels. That includes appointing a chair to be approved by the Treasury.
Clause 40 requires the FCA and the PRA each to establish and maintain a new statutory panel dedicated to supporting the development of their cost-benefit analysis. CBA is an important part of the regulators’ policymaking process. It helps the regulators to understand the likely impacts of a policy and to determine whether a proposed intervention is proportionate.
Under FSMA 2000, the FCA and the PRA are already required to undertake and publish a CBA when consulting on draft rules, unless certain exemptions are met. Respondents to the October 2020 future regulatory framework review consultation expressed significant concerns about the rigour and scope of the regulators’ CBAs and supported enhanced external challenge as a way to improve the quality of the regulators’ CBAs.
Stephen Hammond
Again, I direct the Committee to my entry on the Register of Members’ Financial Interests. I warmly welcome the creation of cost-benefit panels. In my view, the greater the understanding of the cost and benefit of a regulation, the greater the understanding of the impact, and therefore the effectiveness, of the regulation, and the greater the transparency of that process.
I am pleased that the Bill includes this clause because it sets out the agenda, membership, metrics and outputs that each of these panels should make. I guess the real answer I am trying to get from the Minister—I have listened carefully and I think we have had most of the response, but I want to test him a little more—is that, if we are to get all the desirable outcomes from setting up these panels, we must know how much they are a creature of the regulator and how much they are independent of the regulator.
The Minister clearly said that there is an implicit assumption that the regulator would follow an independent line for these panels. If the purpose of the panels is purely to provide evidence and they are controlled by the regulator, those recommendations will be accepted, but it is key that there is an independent panel.
I agree that regulators are not in ivory towers, as Martin Taylor said in his evidence to us. I do not think there is substantial implicit control, nor do I think there is not an implicit desire to see independence, nor do I think that there is not implicit influence by His Majesty’s Treasury. However, if we want to build the world’s leading regulatory regime, it must be seen to be tough and proportionate, and that is why these panels are very helpful. I therefore support the aim of clause 40.
My amendments seek to address the concern that the panel has marked its own homework—the excuse that “the dog ate my homework”—and the point about independence. I understand that members of the panel could already be external, but I want to make it clear that “could” is not enough; there should and must be external members. I hope that the Minister will be able to give me that further reassurance that that is very much the intention of the Bill.
I take on board exactly what the Minister said about my amendment 52, in that the FCA already has to consider the representations and place them on record. However, I am quite concerned by the wording. I think the Minister got my point, which is about the wording “from time to time”. Those of us who have had the honour to stand at the Dispatch Box will have been asked questions such as, “When is that happening, Minister?”, to which the response is often, “Soon,” or, indeed, as we heard the Minister say this morning, “In due course.”
The regulator might say to us that it is going to publish the responses “from time to time”. I take the point that the Minister does not want to fetter the regulator, but I am concerned that, if there is not something either in implicit guidance to the regulator or potentially set out, “from time to time” could be whenever the regulator chooses and potentially not annually. Therefore, if it were to say “annually or more frequently” I would be a lot happier. I listened to the Minister’s comments and I think he probably has sympathy with what I am saying, but I will listen to his response to my remarks.
The Chair
Before I bring in the next speaker, I apologise to the hon. Member for Wimbledon, who I probably should have brought in first. I apologise for that; it is a bit awkward.
Dame Angela Eagle
It is odd hearing the Minister’s response before we have spoken to the amendments. I just want to make a few comments about cost-benefit analysis, which is not an easy science. I am an avid observer of the Government’s attempts to do a cost-benefit analysis. Let us put it this way: it often leaves plenty to be desired when we start looking at how the Government have decided to cost the effect of their legislative suggestions, and we go into the detail of it and see how back-of-an-envelope and dubious some of it is. I do not want to sound too sarcastic, but perhaps if the CBA panels get to be good, they could teach the Government a thing or two about how to do their own analyses.
It is often a difficult but desirable thing to try to estimate the cost of particular suggestions, especially when regulators impose them in other areas. It is important that regulators think about proportionality for the industry itself. Also, in an industry where all the costs are likely to be passed on to the consumer, it is extremely important that it can be done sensibly, properly and in a way that stands up to scrutiny, and I hope that the scrutiny would be there for others to look at.
One often comes up against quite blank walls when trying to interrogate Government cost-benefit analyses, and one ends up going down dead ends and not really understanding how the judgments about the costs have been made, so the better we can get at the science in whatever context, the better for everybody.
It is important that clause 42 exists to try to provide balance and transparency about who will be on the panels, because we would not want them to be captured by particular parts of the structure. We need to have some objectivity if their work is to have credibility and deserves to be taken into account in regulators’ decision making.
Andrew Griffith
I will be brief. The hon. Member for Wallasey has great experience of these matters. I suspect we are all familiar with the analogy of Government regulatory impact assessments, which, as the hon. Lady says, are probably vulnerable to the criticism of being opaque, with the science and data not fully laid out. Indeed, I am aware of past suggestions by bodies such as the Institute for Government that there be specialist committees and support given precisely for that purpose. That is analogous, although it concerns not the working of Government legislation, but regulators exercising their rule-making powers. All those observations are pertinent to this point.
My hon. Friend the Member for Wimbledon came back to me on the point about the reasonableness of the phrasing “annually or more frequently”. He makes a good point. As we know, there are many cases in statute where it is specified that something should be annual. Every Government Department is required to lay its own annual reports before Parliament, and we impose that annual burden on many private and third sector enterprises, whether via the Charity Commission or the Companies Act 2006.
Stephen Hammond
Indeed. We ask the FCA to produce an annual report as well, so this is not out of line with other expectations.
Andrew Griffith
My hon. Friend has finished my point for me. This is not uncommon in statute, so while the Government do not accept the amendment and will vote against it, I have committed—and I do so again—to meet my hon. Friend and consider these matters further before Report.
Stephen Hammond
Having listened to the Minister, I think amendment 51 might already be included in the Bill, amendment 52 appears to be fettering, and 53 and 54 —it looks like I am going to enjoy substantial tea and biscuits at the Treasury next week. As such, I do not intend to press my amendments to a Division.
Question put and agreed to.
Clause 38 accordingly ordered to stand part of the Bill.
Clauses 39 to 42 ordered to stand part of the Bill.
Clause 43
Exercise of FMI regulatory powers
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
The Committee has previously discussed the repeal of retained EU law so that it can be replaced with an approach to regulation designed for the UK. As part of that, the Bank of England will take on additional responsibility in relation to the regulation of central counterparties and central securities depositories. Clause 43 sets statutory objectives for the Bank of England to advance, and regulatory principles for it to consider, when fulfilling those responsibilities.
Currently, the Bank has an objective to protect and enhance UK financial stability. Clause 43 confirms that that will continue to be the Bank’s primary objective when regulating CCPs and CSDs, reflecting the vital role played by those financial market infrastructures. The clause also sets out further considerations to which the Bank must have regard when pursuing that objective. First, the Bank must have regard to the effect that its regulation may have on the financial stability of other countries where FMIs provide services. It must also have regard to the desirability of regulating CCPs and CSDs in a way that is not determined by the location of users of their services.
The UK is home to clearing and settlement markets used by market participants around the world. UK CCPs and CSDs are therefore pieces of important infrastructure used by firms in many jurisdictions. As such, it is right that the UK authorities, in regulating these firms, should consider their impact on the financial stability not just of the UK but of other countries.
The clause also introduces a new secondary objective for the Bank in relation to its regulation of CCPs and CSDs. This requires it to facilitate innovation in the provision of services as far as is reasonably possible, subject to pursuing its primary objective. The Bank will pursue this new objective with a view to improving the quality, efficiency and economy of these services. The Bank must also have regard to a set of general regulatory principles, which largely mirror those in place for other regulators.
However, there is also a new principle on the desirability of facilitating fair and reasonable access to services provided by CCPs and CSDs. This recognises that individual firms can often serve the majority of the market in their specialist areas and aims to ensure that their customers can continue to access these services on fair terms.
To further reflect the Bank’s increased responsibility in this space, the clause also sets up a new statutory financial market infrastructure committee in the Bank of England and makes provision about its make-up. The committee will be responsible for the Bank’s functions in relation to these matters but the Bank may also expand the committee’s remit to cover other functions, if it deems that to be appropriate.
Clause 45 updates FSMA to reflect the Bank of England’s increased responsibilities for the regulation of CCPs and CSDs, and ensures that the Bank has the appropriate powers to supplement its new general rule-making power. The clause also applies a range of accountability mechanisms to the Bank’s regulation of CCPs and CSDs, which the Bill also introduces for other regulators. These measures have previously been discussed by this Committee and include, for example, the power for the Treasury to set out matters that the Bank must consider when making rules in specific areas of regulation.
Together, clauses 43 and 45 are vital in ensuring that the Bank is accountable for its use of the new powers and follows the appropriate public policy objectives when exercising its powers. I therefore recommend that these clauses stand part of the Bill.
Question put and agreed to.
Clause 43 accordingly ordered to stand part of the Bill.
Clause 44
Bank of England: rule-making powers
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 44 closely relates to clauses 27 and 28, which the Committee has already considered. As we have discussed, clause 27 covers requirements for regulators to review their rules so that they remain fit for purpose, while clause 28 enables the Government to place an obligation on the regulators to make rules in certain areas. Clause 44 applies these same mechanisms to the Bank of England, in respect of its regulation of central counterparties and central securities depositories.
The clause introduces a new section of FSMA, which places a requirement on the Bank to ensure that the rules are reviewed regularly after implementation, to confirm that they remain appropriate and continue to have the desired effect. New section 300J of FSMA, which the clause will introduce, requires the Bank to publish a statement of policy for how it conducts rule reviews.
As the Bank takes on increased responsibility, there may be occasions when the Treasury considers that it is in the public interest for the Bank to review its rules, in the same way that we discussed earlier in relation to the PRA and FCA. Therefore, the clause introduces new section 300K of FSMA, which provides a mechanism for the Treasury to direct the Bank to review its rules. New section 300L of FSMA requires the Bank to report the outcome of the review and requires the Treasury to lay this report in Parliament. As with the corresponding measures for the PRA and the FCA, the Government consider that this offers a new avenue for challenge of the Bank’s rule making where required, while maintaining its operational independence. The clause 44 also places conditions on the Treasury’s exercise of the power, so that it will direct the Bank to review its rules only where it considers it to be in the public interest.
As discussed when the Committee considered clause 28, it is right that, in the context of increased responsibilities, the Treasury should have the ability to require the making of rules in certain areas of financial services regulation. This is equally true of the Bank in regard to its regulation of CCPs and CSDs. The clause therefore introduces new section 300M of FSMA, which enables the Treasury to place an obligation on the Bank to make rules in a certain area. The use of this power will be subject to the affirmative procedure in Parliament. The power does not enable the Government to tell the Bank what its rules should be; it simply enables the Government to say that there should be rules, with the agreement of Parliament.
The clause ensures that the same enhancements to the FSMA model that we have discussed will apply to the Bank as it regulates CCPs and CSDs. These are important tools to ensure that the Bank’s rules are relevant and appropriate. I therefore commend the clause to the Committee.
Tulip Siddiq
We support the clause, which will empower the Treasury to require the Bank of England to carry out a review of a specific rule, but let me ask the Minister again: does he not agree that such a mechanism is sufficient to highlight to the Bank of England where the Treasury believes a rule may not be working in the public interest and therefore requires a rethink? Surely the provisions under clause 44, and elsewhere in the Bill, provide the Treasury with sufficient powers to hold the Bank of England, the PRA and the FCA to account. Why is an intervention power necessary?
Numerous City stakeholders have written to us to warn of the dangers of such a measure. For example, Barclays stated in its written evidence that
“historically the UK has benefited from a global reputation for having a strong, stable and predictable regulatory framework, developed by effective institutions with clear roles and responsibilities. It is critical to ensure any new intervention powers do not risk or undermine this reputation.”
The Minister was there when Martin Taylor told us that the proposed intervention power had a “bad smell”. The Bank of England has warned that it could diminish the independence of our regulators in the eyes of the global markets. If the financial services sector is sceptical of an intervention power, and experts at the Bank of England have given powerful warnings of the risks of introducing such a power, why is the Minister even contemplating such a provision?
Andrew Griffith
I do not wish to detain the Committee further with a repetition of these points. The hon. Lady makes her points in a lucid fashion, but the Government simply disagree. It is appropriate for us to have laid out in statute the relevant responsibilities, both for the Treasury and for regulators. We are giving the regulators, including the Bank of England in this respect, vast areas of additional responsibility. There were previously intervention powers, which sat at the Brussels level. We are now repatriating those to create a rulebook that is appropriate for the United Kingdom.
The hon. Lady cites selectively, if I may say so, from the evidence that the Committee heard. If she engages widely with industry—as I know she does—she will hear other voices that talk about the need for us to have an agile and flexible system. As part of that, it is sometimes appropriate for us to direct.
Tulip Siddiq
I will not detain the Committee too long. The Minister keeps referring to the industry, which he seems to suggest is supportive of the intervention power, but no one has seen it. Has he consulted the industry? Everyone I have spoken to has said that they have not seen the details of the intervention power, so how does he know they support it?
Andrew Griffith
The hon. Lady makes a very good point, but how does she know that she opposes it? I suggest we come back to this debate another day, when I hope to fulfil my commitment to bring the intervention power in front of the Committee.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Seventh sitting)
Tuesday 1st November 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 November 2022 - (1 Nov 2022)
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Chair
With this it will be convenient to discuss that schedule 7 be the Seventh schedule to the Bill.
The Economic Secretary to the Treasury (Andrew Griffith)
Good morning, Mr Sharma. It is a pleasure to serve under your chairmanship.
If it pleases the Committee, I would like to draw the Committee’s attention to a letter that I have written to you, Mr Sharma, and to the interim Chair of the Treasury Committee. I had previously undertaken that it was my intention to table for the consideration of the Committee some draft wording on a public interest intervention power. As a result of the new Prime Minister wishing to understand what is an important matter in more detail, such that consideration can be given to points that have been made and to whether the proposed wording is the right wording, I regret that it will not be possible for us to table a proposal at this stage. There will be further consideration of the matter on Report and at other stages, and my commitment to write to the Treasury Committee, as well as to members of this Committee, as soon as we have draft wording for Members’ consideration, stands. I give that commitment to the hon. Member for Hampstead and Kilburn as well.
The clause introduces schedule 7, which sets out corresponding or similar provisions to those introduced for the Financial Conduct Authority and the Prudential Regulation Authority in chapter 3 of the Bill, relating to the accountability of the payment systems regulator. As the Committee is aware, the Bill repeals retained EU law pertaining to financial services. That means that the regulators, including the Payment Systems Regulator, will generally be responsible for setting the direct regulatory requirements for supervised entities where those were previously contained in retained EU law.
As the Committee has already discussed in some detail, it is important that that increase in responsibility for the regulators is balanced with clear accountability, appropriate democratic input and transparent oversight. It is also important that the accountability measures are applied consistently across the regulators. Schedule 7 therefore makes provisions corresponding or similar to those in chapter 3 in a way that is relevant to and appropriate for the PSR.
The accountability provisions are applied to the PSR by amending the Financial Services (Banking Reform) Act 2013, which is the domestic legislation governing the PSR. The key distinction is that because the PSR makes rules via powers of direction, as opposed to having the rulebook like the FCA, the accountability requirements on rule making apply where the PSR imposes a generally applicable requirement. Those are the PSR’s equivalent for rule making. Overall, the provisions in the schedule apply the accountability measures in a relevant and appropriate way to the PSR’s legislative framework and regulatory remit. This will ensure consistency in the application of the accountability provisions across the financial services regulators.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to serve under your chairmanship, Mr Sharma. I have just one question for the Minister. How does he foresee the Payment Systems Regulator’s new sustainable growth principles taking account of the UK’s net zero emissions target? How will that balance work in practice? Will the regulator be required to report against its performance?
Andrew Griffith
In substance, the Payment Systems Regulator, in the same way as the FCA, the Bank and the PRA, will have the target as one of its principles. It will be for the PSR to decide how it reports against that. These are ultimately decisions for the regulators themselves to put into practice. To the extent that I have more information at this stage, I will write to the hon. Lady with any clarity I can provide.
Question put and agreed to.
Clause 46 accordingly ordered to stand part of the Bill.
Schedule 7 agreed to.
Clause 47
Cash access services
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
I beg to move amendment 40, in clause 47, page 68, line 9, after “of” insert “free of charge”.
This amendment makes reference to the provision of free of charge cash access services in Schedule 8.
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
Amendment 41, in schedule 8, page 150, line 27, after “service”)” insert
“free of charge or on the payment of a fee”.
This amendment changes the definition of cash deposit services to include both those which are free of charge and which require the payment of a fee.
Amendment 42, in schedule 8, page 150, line 29, after “service”)” insert
“free of charge or on the payment of a fee”.
This amendment changes the definition of cash withdrawal services to include both those which are free of charge and which require the payment of a fee.
Amendment 16, in schedule 8, page 151, line 36, after “concerning” insert
“both free of charge and paid access”.
Amendment 17, in schedule 8, page 154, line 12, after “appropriate” insert
“and must include the provision of free of charge cash access services”.
Amendment 18, in schedule 8, page 154, line 18, leave out from “is” to the end of line 22 and insert “—
(a) an absence of free of charge cash access services in a locality in a part of the United Kingdom, or
(b) a circumstance which limits the ability of persons in any locality in a part of the United Kingdom to—
(i) withdraw cash from a relevant current account, or
(ii) place cash on a relevant current account.”
New clause 10—Access to cash: Guaranteed minimum provision—
“(1) The Treasury must, by regulations, make provision to guarantee a minimum level of access to free of charge cash access services for consumers across the United Kingdom.
(2) The minimum level of access referred to in subsection (1) must be included in the regulations.
(3) Regulations under this section shall be made by statutory instrument, and may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.”
New clause 11—Duty to collect data on cash acceptance—
“(1) The FCA must monitor, collect and publish data in relation to levels of cash acceptance amongst retailers and service providers within the United Kingdom.
(2) The FCA must publish a report, as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act is passed, and
(b) every subsequent 12-month period,
on levels of cash acceptance amongst retailers and service providers within the United Kingdom.
(3) The FCA can, by written notice, require a retailer or service provider to provide to the FCA information that it may reasonably require for the purposes of exercising its duties under subsections (1) and (2).”
New clause 12—Access to cash: Guaranteed minimum provision for small businesses—
“(1) The Treasury must, by regulations, make provision to guarantee a minimum level of access to free of charge cash access services for small businesses across the United Kingdom.
(2) The minimum level of access referred to in subsection (1) must be included in the regulations.
(3) Regulations under this section shall be made by statutory instrument, and may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.”
Martin Docherty-Hughes
It is good to see you in the Chair, Mr Sharma, and other hon. Members here today. It is a pity that my hon. Friend the Member for Glenrothes cannot be with us, as he has played a large part in constructing these amendments. I know that other hon. Members will want to participate in a debate on free-of-charge access to cash. I look forward to hearing what they have to say. At the moment, depending on what the Minister has to say, it is my intention to press the amendment to a vote, but I will listen to the Minister’s comments.
It is important to give some examples about the reduction in free access to cash. People sometimes wonder where the constituency of West Dunbartonshire is. We are bound by Glasgow to our east, where we become an urban element of the west of Scotland. We move further west through Clydebank, into Dumbarton and through the Vale of Leven, becoming suburban and then semi-rural, to the base of Loch Lomond itself. The community has a diverse demographic, with a range of deprivation that also impacts on people’s need to access physical cash.
In the last four years in West Dunbartonshire—I am sure this experience is mirrored not only in Scotland but the rest of these islands—we have seen a drop of 27% in access to ATMs, or automated teller machines. That is three ATMs, coupled with closures of local bank branches. We are a population of more than 90,000, but we seem to have only three or four bank branches left, which is extraordinary. My constituents face being forced to travel across a range of areas, including sometimes into the city of Glasgow, to access cash. My hon. Friend the Member for Glenrothes and I think it is vital to protect our constituents and the constituents of all other Members, too, in making sure that they have access to free-of-charge cash, notably for the most disadvantaged groups and the elderly.
Let me declare a non-pecuniary interest as the chair of the all-party parliamentary group on Estonia. Estonia is usually used as an example of what a digital state should be. After the fall of the Soviet Union it picked itself up and ran with a full digital agenda. One of its biggest learnings was that no one should be left behind in the race to digitalisation, critically in relation to access to cash. For the Estonian Government, and the Estonian Parliament, making sure that any financial system is not only fit for purpose in the digital age but that it takes everyone with it, including access to services and free access to cash, was their big learning curve. They believed that they failed in that process to begin with.
I hope that, when reflecting on the amendment, the Government realise that there is a huge opportunity to maintain access to cash for a range of reasons. We can talk about our constituents, and predominantly those who are elderly or from disadvantaged groups who use cash on a more regular basis. We can also talk about small and medium-sized businesses, a lot of which have moved to digital transactions. When Members go to a small shop in their own constituencies, they will notice that a lot of transactions have moved to digital due to the pandemic, but shops still have a substantial amount of cash that comes through their doors. One of the big problems that shops also have—not just free access to cash for those consuming their products—is depositing their takings at the end of the day. They are finding that very difficult as well. Businesses rely on consumers who use cash, especially in disadvantaged communities.
I am mindful of what the NM Group said in its submission:
“Cash remains an important form of payment for millions across the UK, particularly during times of economic hardship.”
The narrative of the cost of living crisis is used across the House, so there is clearly an agreement that people are facing economic hardship and that access to cash during that time is critical. That is why we think amendment 40 is important, as are the other amendments in this group.
We should also note that the payment method with the lowest economic friction, providing businesses and members of the public with a crucially important alternative, is cash. It is an important way for people to manage their finances, especially those in a disadvantaged group or those who are elderly who do not use digital money. I also note that the figures published by LINK, UK Finance and the Post Office show that around £10 billion in cash is withdrawn each month. That is £120 billion per annum in physical cash from ATMs, or from bank counters and post offices. The volume of withdrawals from the LINK system alone equates to about two withdrawals per month for each adult member of the UK population.
To bring my thoughts to a conclusion, we need to also be mindful of some of the infrastructure. UK consumers can access cash from over 55,000 ATMs, 11,500 post offices and certain bank branches—if they are not closing down in our local communities. The number of post offices is actually shrinking; there are no longer two or three post offices in a community—there is maybe only one. Over 90% of cash withdrawals take place at actual ATMs. The critical issue around free cash deposit and withdrawal services within the amendment is extremely important.
The access to cash review in 2019 noted that we cannot sleepwalk into a cashless society. That reflects back to what I was saying about the Estonian learning about digital infrastructure: it can leave a substantial number of people behind. That was the reality for Estonia. Cash continues to be important. Contactless payments and online banking can make it easy for some people to live entirely cash-free. However, given the volumes of cash in society, its usage remains extremely high. That reminds us that we do not live in a cashless society. The LINK network still handles around 1.6 billion transactions a month—that was the average in 2021. On average, adults still withdrew over £1,500 a year. During a global pandemic, cash was still being physically used. It is important to listen to the Minister and the Government’s view on it, although it is my intention to press the amendment to a vote. I look forward to hearing what others say.
Shaun Bailey (West Bromwich West) (Con)
It is a pleasure to see you in the Chair, Mr Sharma—
Siobhain McDonagh (Mitcham and Morden) (Lab)
I apologise to the hon. Member; I am getting my procedure a bit mixed up, Mr Sharma, so I wonder whether you could clarify something for me. I have amendments 16, 17 and 18, on the issue of free access to cash. When will it be convenient for me to come in?
Shaun Bailey
Thank you, Mr Sharma. I do not want to add too much to what the hon. Member for West Dunbartonshire has said. He has articulated well the reasons why the original clause and his amendments are vital to our communities. The stark reality is that cash is still an important part of our local economic infrastructure, and more so for my communities, where we have seen two bank closures in the last 18 months. Many have had free access to cash taken from them. That is compounded by other infrastructure challenges, such as the lack of public transport and the inability to access free cash services elsewhere.
The amendments tabled by the hon. Member for West Dunbartonshire are interesting and strike a balance in seeking to ensure that our communities can access a vital service, mainly cash. I listened with interest to him explaining the rationale behind his amendments, because I think we agree. We have to remember who these measures are ultimately targeted at. I often think of people with vulnerabilities who utilise cash as part of their budgeting. They use it every day, and for them it is a vital part of being able to continue to sustain themselves. Although the technological revolution over the last few years in particular might be great for some, for others it is not. For the communities that I represent and the areas where people are really trying to get by, cash plays a vital role in ensuring that people can function and manage their finances and their affairs. It is therefore vital that we have a strategy in place.
The amendments proposed by the hon. Gentleman, particularly the element of keeping the service free of charge, is important, particularly for communities like mine. We all talk about acute pockets of deprivation, but I remind the Committee that I represent the fourth most deprived ward in the west midlands. For many people, paying for ATMs is simply unacceptable. It takes away from them a vital part of the means they need to subsist and survive. Ensuring that we have a strategy to keep access to cash free for those who rely on it every day is vital. If we do not, we create a cycle whereby, because people have to pay out to access the means by which they survive, they use less and less of their income.
At a time when we are dealing with an acute cost of living crisis and people’s incomes are stretched, it is vital that the main source that they can use to survive is not tagged with a condition that makes it harder for them to access it. I agree with the philosophy, so to speak, behind the hon. Gentleman’s amendments. This is about enabling people to just survive and do the basics that they need to do. It is as simple as that.
I think of a constituent who came to my constituency office the other week. She could not access an ATM and was absolutely distraught. Her bank branch had just been closed and she did not know where to go. She was distraught and we had to help her out. That is at the forefront of my mind when I think of these amendments and what the Government are trying to achieve through their policy and strategy documents.
I ask my hon. Friend the Minister—I am afraid that he has had a bit of a shopping list from me, which I know his officials will have noted down—to ensure that cash is kept at the forefront of the Treasury’s thinking. I appreciate what the clauses are meant to achieve, but I hope that the Minister will take note of the intention behind the amendments, even if the Government decide not to support them, and ensure that the issue is brought to the forefront.
Siobhain McDonagh
It is a wonderful moment when there is unity on both sides of the Committee. SNP and Conservative Members, as well as—I hope—my Labour colleagues, are coming together to ask the Government not just for access to cash, but for free access to cash. I believe that much of the Bill arises as a direct result of Members of Parliament doing our constituency work and understanding our constituents’ concerns.
Dame Angela Eagle (Wallasey) (Lab)
My hon. Friend’s amendments are an extremely important part of the debate, and I hope that the Government accept them. I should point out that when I sat on the Treasury Committee several iterations ago, we held an inquiry about free access to cash. We got agreement that all machines that charge for withdrawals should say so up front rather than right at the end. Although that transformed some of the problems, we are now discussing access to cash itself. It is funny how these things evolve but the issues remain the same.
Siobhain McDonagh
I thank my hon. Friend, who I understand is currently serving as the interim Chair of the Treasury Committee.
Siobhain McDonagh
My amendments 16, 17 and 18, together with new clauses 10, 11 and 12, address access to free cash, which is indisputably important in our society. Ten per cent. of UK adults—5.4 million people—continue to rely on cash to a great or very great or extent in their daily lives. One in five people says that they would struggle to cope in a cashless society, and that struggle would disproportionately affect those on lower incomes, the elderly and people with physical or mental health difficulties.
Without Government intervention, we are losing free access to cash in our society. In my constituency, the number of free-to-use ATMs has declined by 36% in the last five years, while the number of pay-to-use ATMs has increased by an extraordinary 22%—there is money to be made somewhere. The problem is not confined to Mitcham and Morden: since 2015, the UK has lost more than half its branch network—5,003 branches—at a terrifying rate of 54 branches each and every month.
Through my amendments, I wish to draw the Committee’s attention to the notable decline in the provision of free-to-use ATMs. Since August 2018, the UK has lost 12,599 free-to-use ATMs—a decrease of nearly 24%. Meanwhile, almost a quarter of ATMs now charge people for access to their own cash. It is no wonder that more than half of consumers experienced one or more issues accessing cash at a bank branch in the past year.
Who are the losers in this cashless society? The access to cash review unsurprisingly revealed that those earning less than £10,000 per year were 14 times more likely to be dependent on cash than those earning more than £30,000 per year, and yet they are the residents of the areas where free access to cash is hard to come by.
Take Pollards Hill in my constituency, where a ridiculous clause in the lease prevents the new Co-op from opening a free-to-use ATM because of two paid-for cash machines further down the row of shops. Residents are taking out small sums of money in order to control their budgets, some of them at just £10 a time, but they are charged £2 to take that out—a 20% charge for every single payment. They literally have to pay for access to their cash. Surely the legislation must be tightened to avoid imposing additional costs such as that on the most hard-pressed.
I believe that the need for access to cash is growing. Age UK highlights that one in five older people still relies on cash for everyday spending. The cost of living crisis has seen households reliant on cash counting out the pennies to ensure that they can make ends meet—it is no wonder that in August, the Post Office handled its highest total of cash ever. The evidence is overwhelming and I believe that there should be a societal duty on the Government to ensure that the most vulnerable people in our society have free access to cash and are not left behind.
It is not just me who has such concerns. The hon. Member for Vale of Clwyd (Dr Davies), now the Under-Secretary of State for Wales, stated on Second Reading that he hoped the Government would commit to protecting free cash withdrawals and deposits, presumably in light of Prestatyn losing TSB, Barclays, HSBC, NatWest and Royal Bank of Scotland in recent years, initially leaving the town’s high street without a single bank or cash machine despite being a major regional shopping centre.
On 19 April, the hon. Member for Beaconsfield tweeted after the announcement of bank branch closures in her constituency that she would take up the issue in Westminster, describing crisis talks with the banks on access to cash on high streets everywhere as essential. I am sure she agrees that this is the moment to vote where her voice was.
The hon. Member for Havant has seen at first hand how damaging the removal of access-to-cash provision has been for his most vulnerable constituents, having launched campaigns against TSB, NatWest, Barclays and HSBC in recent years, and having raised his concerns with HSBC about the potential impact on the elderly, who might not be able to access online banking and are reliant on face-to-face services. The hon. Member for Orpington has seen Nationwide, Santander and Barclays close in Petts Wood. He pledged to hold the latter to account in support of those residents who do not use mobile or online banking. Well done to that Member!
The hon. Member for Grantham and Stamford, in advance of the closure of the HSBC branch in Bourne, shared concerns with his constituents about the impact on his elderly constituents whom he said relied on the bank as a vital service in the town centre.
Gareth Davies (Grantham and Stamford) (Con)
The hon. Lady is making a fantastic speech—let me say that straight out of the gate—but may I clarify that her proposed access-to-cash solution is for the Treasury to make an intervention on the regulator?
Siobhain McDonagh
I do not believe that the regulator, the FCA, will force through free access to cash unless we legislate for that. As Members, we are responsible for that. I suppose I am trying to say that hon. Members are doing their job excellently by highlighting concerns in their constituencies. Even though we have been through a very rough time in politics and a lot of our constituents are unhappy about the turbulent times we have entered, many of them still have faith in democracy, party politics and our system because Members do that sort of work. I believe that we need to follow through when we are given the power to do so.
I have more. The point was even more strongly expressed by the hon. Member for West Bromwich West, who made a powerful speech. Following HSBC’s decision to close its branch in Wednesbury, he gave this message to his constituents:
“The argument of go to West Brom is not good enough! I am determined to fight this”—
good on him!
The hon. Member for North Warwickshire described the impact on local residents as “obvious” when the Lloyds Bank branch closed, leaving Coleshill High Street without a bank branch. As an MP for a rural constituency, the hon. Member for Hastings and Rye detailed her concerns to our witnesses last week about her constituency being able to access cash free, and about the distance her residents would have to travel otherwise.
I do not doubt that my constituency neighbour, the hon. Member for Wimbledon, shares my concern about the loss of cash machines and bank branches in Morden town centre, which we share. One of the only remaining free-to-use ATMs is hidden in a Cashino—an arcade. That is extraordinary.
Government Members need not worry: the new Chancellor shares their view. He was pictured in the Alton Herald just last November celebrating the arrival of a new free-to-use cash machine in his constituency. I say to the Minister: do not worry. If these amendments pass, the Chancellor is right behind you.
Given what appears to be an overwhelming consensus on the issue, I hope Members on both sides of the Committee acknowledge that the Bill needs to be amended to ensure not only that there is access to cash but that there is free access to cash. They will be lauded in articles in their local newspapers and posts on Twitter and their social media for passing these amendments.
Emma Hardy
It is an absolute pleasure to follow my hon. Friend the Member for Mitcham and Morden, who is just awesome. Is awesome a parliamentary word? It should be. On a personal level, let me say how much I enjoy being on the Treasury Committee with such incredible Labour women. It is brilliant—inspiring.
To follow on from a couple of points that my hon. Friend made, I hope the Minister’s response will touch on the baseline geographical distances between free cash points. It frustrates me immensely that in one of the poorest estates in my constituency, the ATM charges £1.50 every time people use it. We would like some details about the geographical distances between the places where people can access free cash.
We should also look at why businesses do not take cash. As my hon. Friend said during the evidence sessions, it is often because there is nowhere for them to deposit it. If we are to make access to cash free, which I completely support, we should also help businesses to take cash. There is no point having free cash if it cannot be used. Bank or other branches should accept cash, and we should look at the geographical distances.
I got a bit frustrated when banks were closing branches in my constituency, because they said, “Well, the other one is only one-point-however-many miles away, so it’s fine.” I said, “It is not easy for people to get to.” There is sometimes an assumption that everyone is able to drive and has the mobility to go around and find a free cash machine, but that is not always possible. Can we look at geographical distances, at businesses accepting cash and at ensuring branches accept cash so that businesses can pay it in? My hon. Friend made a powerful speech on cash access and the principle that people’s access to their own money should be free.
Tulip Siddiq
I will speak to clause 47 and the various amendments tabled to it by my hon. Friend the Member for Mitcham and Morden and the hon. Member for Glenrothes, who cannot be here because of a personal commitment. I pay tribute to him and all the work he has done so far. While we sympathise with the principle behind amendments 41 and 42, we believe that the amendments tabled by my hon. Friend the Member for Mitcham and Morden would better achieve free cash access. Before I continue, I pay tribute to her for all her work on financial inclusion. She is not stopping her fight for justice, and she talked about this being a societal duty. She also has a ten-minute rule Bill that seeks to persuade the Government to give free internet access to children on free school meals. I pay tribute to her work.
We are delighted that after years of delay, the Government have brought forward some legislation to protect access to cash. The industry, particularly the major banks, should be applauded for coming together to help protect cash services at the end of last year, which put this legislation on a statutory footing. However, the delay in bringing forward the Bill has cut off whole sections of society from our economy, including millions of the most vulnerable, the poorest and older people, as my hon. Friend the Member for Mitcham and Morden pointed out. It has also damaged smaller businesses that rely on cash.
On top of this, almost 6,000 bank branches have closed since 2015 on this Government’s watch, and the Bill does nothing to protect essential face-to-face banking services, which the most vulnerable in our society depend on for financial advice and support. I know we are discussing new clauses 4 and 5 later, which will protect access to essential in-person banking services, so I will stay focused on cash for now, but I do not feel that we can have this debate without talking about face-to-face banking services, or the lack thereof.
It is inevitable that payment systems will continue to innovate, but a recent report from the RSA that I am sure the Minister is aware of found that 10 million people still depend on cash and that the pandemic, which saw an acceleration in the digitisation of payment systems, has made it increasingly difficult for many of us to pay for the goods and services we need—especially people from a lower socioeconomic background.
The Bill is a welcome step in guaranteeing access to cash, but clause 47 goes nowhere near far enough in ensuring that cash is available for those who depend on it. My hon. Friend the Member for Mitcham and Morden pointed out how so many people in her constituency—where I was born, I am proud to say—still rely on cash, especially free cash. The Bill makes no commitment to protect free access to cash. That is what we are worried about. That is why we support amendments 16, 17 and 18, as well as new clause 10, which were all tabled by my hon. Friend the Member for Mitcham and Morden. They would provide a guaranteed minimum provision of access to free cash.
Protecting free cash access has never been more important, as I am sure the Minister will agree. Data collected by the Post Office has shown that the use of cash in recent months has increased. As the cost of living crisis deepens, the poorest in society are increasingly turning to cash to manage their budgets on a week-by-week, often day-by-day basis. Data collected by the consumer group Which? found a notable decline in the provision of free-to-use ATMs in recent years.
In July 2022, there were around 12,000 fewer free-to-use ATMs in the UK than there were in August 2018. That is a decrease of nearly 24%. Does the Minister agree that forcing the poorest in society, who are increasingly reliant on cash, to pay for access to cash in the middle of the worst cost of living crisis on record risks further deepening financial exclusion in our country? Is this the kind of society we want to live in?
I am sure the Minister knows of Natalie Ceeney, chair of UK Finance’s Cash Action Group. During the Committee’s evidence session, she made it absolutely clear that the Government have a societal duty to ensure that the most vulnerable people in the UK have free access to cash.
Which? warned that if these clauses do not make it clear that they will protect free cash withdrawals and deposits, the entire objective of this part of the Bill will be undermined. Which? is right to stress the importance of free cash withdrawals and deposits. That is crucial to securing cash acceptance. There is little point in the most vulnerable having access to cash if they have nowhere to spend it. That is why Labour will support new clause 11, which would place a duty on the FCA to collect data on cash acceptance.
During her oral evidence, Natalie Ceeney also warned that we have to ensure that the Bill
“covers small businesses as well as consumers. Small businesses, typically…pay for their cash access.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 51-52, Q101.]
Increasingly, small business owners also have to travel long distances to deposit. That is a dangerous disincentive for them to accept cash. Natalie Ceeney also pointed to Sweden, where shops have largely stopped taking cash. If the UK wants to avoid a similar outcome, we must ensure that small businesses can deposit cash easily. That is why we will push new clause 12 to a vote. It would guarantee minimum provision of free cash access services for small businesses.
The Minister is likely to respond that we must wait for the Government’s access to cash policy statement. If he does, will he confirm when that statement will be published? Does he not agree that, if the Government are truly committed to protecting free access to cash services, there is no reason not to make protections for free access explicit in the Bill?
Andrew Griffith
I will speak first to clause 47, before turning to the many amendments and new clauses proposed by hon. Members.
Although the transition towards digital payments brings many opportunities, the Government’s view is that cash remains an essential payment mechanism for many, particularly those in vulnerable groups. I am particularly familiar with the work of Age UK in this respect. Protecting access to cash for those who rely on it is a priority for the Government, and clause 47 delivers on that.
The hon. Member for Mitcham and Morden highlighted not just her own concerns about the issue but, rather thoughtfully, those of all hon. Members, to which I should add mine as well.
Siobhain McDonagh
I thank my brilliant researcher, Dan Ashcroft, for finding the great comments of all the Conservative Members. It was harder to find anything from the Minister, so it is good to find out what he believes about free access to cash.
Andrew Griffith
As part of the research for this debate, I looked at the prevalence of free-to-use ATMs in the constituencies of members of the Committee. My quite rural constituency is somewhat bereft compared with the embarrassment of riches, surprisingly, in the constituency of the hon. Member for Kingston upon Hull West and Hessle, which has a staggering 120 free-to-use ATMs, reportedly. That puts many of us to shame.
Andrew Griffith
That was the figure supplied to me; I will happily correct the record if that is not the case.
Emma Hardy
I am astounded that there are 120. I would be grateful if the Minister could show us a map of where they are, because I certainly have not found them. What can I say? We like our cash in Hull.
Andrew Griffith
Very good.
Until this moment, there has been no substantive legislative framework for access to cash. No regulatory authority has the legislative responsibility or powers to ensure that cash withdrawal and deposit facilities are available for people and businesses to use. We should not underestimate the degree to which the Government are moving on this important issue.
Clause 47 addresses cash access in statute for the first time. It introduces schedule 8, which sets out a legislative framework granting the Financial Conduct Authority responsibility to seek to ensure that there is reasonable provision of cash deposit and withdrawal services across the UK. It also gives the regulator the powers it needs to fulfil that responsibility.
The hon. Member for Wallasey talked about the pioneering work by the Treasury Committee. We should all celebrate this clause; we should celebrate the achievement of this House in significantly moving forward the protection for access to cash. We just need to remember that what we are talking about here is a very small increment—from the statutory protection of access to cash, to the precise terms on which that is agreed. I understand that there may be different views on that, but we should not allow that to detract from the significant advance on access to cash that the Bill represents.
The Treasury will publish a policy statement in due course, and doing that “in due course” is the right thing to do. There will be the right moment to do it—
Andrew Griffith
The hon. Lady is very good at anticipating what I would not say. Perhaps she is going to finish my sentence for me.
Tulip Siddiq
Well, we have certainly spent enough time together. “In due course” is very vague, as I am sure the Minister will agree. Can he not give us any sort of timeline? I have not had a straight answer to this question for a few months now—to be fair, I recognise that it was not him in that chair, but his predecessor.
Andrew Griffith
I am a big fan of taking one step at a time, and the step in front of us today is to pass clause 47 and put it on the statute book—to make that very significant advance in the statutory protection of access to cash. I look forward to continuing my tenure and engaging with the hon. Lady, and it seems appropriate for us to bring forward the policy statement very rapidly once Royal Assent has been achieved, taking this important topic step by step.
The hon. Member for Kingston upon Hull West and Hessle nodded vigorously at the obligations on the FCA to collect more data. I think that that is absolutely right. One challenge, as cash potentially diminishes over time, is to ensure that we nevertheless have the right and detailed datasets in order to continue to protect our constituents.
Emma Hardy
Without wishing to return to a previous debate, one way we could ensure that the FCA collects data is to ensure that it has regard to financial inclusion.
Andrew Griffith
The hon. Lady has made that point powerfully, and I assure her—notwithstanding the disappointment that I seem to continue to cause to the hon. Member for Hampstead and Kilburn—that that has lodged very firmly with the Government and is something I would hope we can continue to discuss before Report.
The provisions introduced by clause 47 are vital to support those who continue to use cash. With that, I recommend that the clause stand part of the Bill.
Let me now turn to the amendments. Amendment 40 would change the description of schedule 8 in clause 47 to refer to free-of-charge cash deposit and withdrawal services. Amendments 16 to 18, in the name of the hon. Member for Mitcham and Morden, concern free access to cash. There is a commendable focus on this issue from Members on both sides of the Committee, and we heard the intervention from my hon. Friend the Member for West Bromwich West about his constituents and their vulnerabilities.
The Government do not believe that it is appropriate for legislation itself to stipulate that access to cash must be free. Let me try to explain why, because I understand the consternation of some hon. Members. This very significant step forward having been taken to protect statutory access to cash, the Government are concerned that taking a blanket approach might have unintended consequences and leave us stuck with legislation that is too prescriptive. In turn, that might stifle innovation by industry to support cash access. For example, ensuring the free provision of cash for certain vulnerable consumers is quite different from ensuring provision for business customers, which could be delivered through different solutions.
The provisions in schedule 8 ensure that legislation provides appropriate flexibility now and in the future. Consistent with a lot of the debate that we have heard about the independence of regulators and the regulatory model being baked into financial services regulation since the Financial Services and Markets Act 2000, the Government believe that the FCA is best placed to deliver a sustainable, agile and evidence-based approach to managing cash over time in order to respond to the needs of people and businesses. The FCA has the flexibility and powers to do that.
The Chair
Before I call Martin Docherty-Hughes, I inform the Committee that I will take one vote on amendment 40. There will be no other vote on this group.
Martin Docherty-Hughes
Thank you, Mr Sharma.
It was interesting to hear what the Minister and Members on the Government Back Benches had to say—I congratulate the hon. Member for Mitcham and Morden on the litany of exasperation from the Back Benches, which I thought was well played. I was glad to hear the hon. Member for West Bromwich West agree with the vast majority of what I had to say, and I go back to what the Minister said about the statutory protection of cash. If that is the truth, 27% of free ATMs in West Dunbartonshire would not have closed in the past four years.
I am usually minded to push my amendments to a vote. I seek some reassurance from my colleagues on the official Opposition Benches that if I do not push my amendment to a Division, all the amendments in the name of the hon. Member for Mitcham and Morden will be moved. The Clerk may want to give some advice to the Chair on that issue, because I know that if I withdraw my amendment, I can bring it back on Report. I look for some clarification on that issue first.
The Chair
The advice is that if you withdraw your amendment, I will take one of the three amendments from the hon. Member for Mitcham and Morden.
Siobhain McDonagh
Just to clarify, Chair, will you take 16, 17 or 18, or will you take the whole bunch?
The Chair
You choose one of those three, and I will take it if the hon. Gentleman decides not to push his amendment to a Division.
Martin Docherty-Hughes
I think I am getting my assurance that one of those amendments will be pressed to a vote by the official Opposition, so in order to make sure that we have a coherent and agreed process, I will not push my amendment to a Division. However, I make it clear to the Government that I have not heard anything today that means that free access to cash will be safeguarded for my constituents, and I will probably bring my amendment back on Report. I look forward to voting with my colleagues in the official Opposition. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 47 ordered to stand part of the Bill.
Schedule 8
Cash access services
Amendment proposed: 16, in schedule 8, page 151, line 36, after “concerning” insert
“both free of charge and paid access”.—(Siobhain McDonagh.)
Question put, That the amendment be made.
Siobhain McDonagh
I beg to move amendment 19, in schedule 8, in page 154, line 12, at end insert—
“(2A) Before making a determination under subsection (2), the FCA must publish how it intends to define and assess the reasonable nature and extent of provision when making the determination.”
The Chair
With this it will be convenient to discuss the following:
Amendment 21, in schedule 8, page 154, line 32, at end insert—
“(7) In carrying out its functions for the purposes of section (1) the FCA may put in place arrangements for the purposes of ensuring that members of the public, elected officials, community groups, local authorities, councils, and other local persons the FCA considers may have an interest, can request a review of their local community’s access to cash needs.”
Amendment 20, in schedule 8, page 154, line 32, at end insert—
“(8) Upon making a determination of local deficiency in the course of carrying out its functions under subsections (1) to (7), the FCA must—
(a) make provision for the publication of this assessment, and
(b) outline steps to be taken by relevant parties to address such deficiency.”
That schedule 8 be the Eighth schedule to the Bill.
Siobhain McDonagh
I rise to support my amendments 19, 20 and 21, which are grounded in transparency and evidence, requiring the Financial Conduct Authority to collect and publish relevant data related to access to cash. Examples include enabling public bodies to request a review of the local community’s access to cash needs or to publish how they intend to define and assess the reasonable nature and extent of provision when meeting a determination of access to cash; making provision for the publication of that assessment; and outlining steps to be taken by relevant parties to address such a deficiency.
Currently, under the voluntary agreements put in place by the Cash Action Group to preserve access to cash, individuals or community groups can request a review of their access to cash where they consider it to be inadequate. Where unmet needs are identified, LINK can recommend the installation of a new cash access point. I must say that it is doing precisely that in my constituency, in Pollards Hill, so I am grateful to LINK and the Cash Action Group for their progress.
The amendments call for a similar ability for individuals or communities to request a review of local cash provision, irrespective of whether baseline geographic distances set in the Treasury’s policy statement are met. I argue that that should be enshrined in the Bill to give consumers confidence that their concerns in their local areas will be considered by the regulator. Whether for transparency, fairness or consumer confidence, it is vital that the legislation compels the FCA to publish both the criteria that will apply when determining whether a cash access point is required in a community and the assessment of a local community’s access to cash.
I hope that chimes with commitments made by the hon. Member for Vale of Clwyd on Second Reading, when he argued that assessments of the needs of communities should be transparently published and that there should be a formal process of appeal. Surely such an appeal is impossible unless the data is collected, understood and available. I hope that this uncontroversial call will have the support of hon. Members as we seek to strengthen access to cash for communities and individuals up and down the country.
Tulip Siddiq
I shall speak to schedule 8 and amendments 19, 20 and 21 together. We recognise that the Bill sets out an important, overarching framework to protect access to cash. However, many critical elements, such as the baseline geographic distances that will apply to withdrawal and deposit facilities and which are factors that the FCA will take into account when assessing a local area’s needs with regard to access to cash, will be set out in a policy statement to be published by the Treasury. That makes it impossible for members of this Committee, more widely, Members of Parliament to judge whether the Government’s proposals will deliver an adequate level of free access to cash services. That is why the organisation Which? and others have called on the Government to assess the significant gap by setting out, in Committee, the details of the draft policy statement, which will determine the proposed baseline distances between cash facilities.
As my hon. Friend the Member for Mitcham and Morden has said, we also want the Government to set out how local deficiency of free cash access will be assessed by the regulator and how local people can request an FCA review of their communities’ access to cash needs. That is why we will be supporting amendments 19, 20 and 21 today. If the Conservative party does not lend its support to the amendments, will the Minister set out how he will ensure that Parliament has adequate opportunity to scrutinise the Government’s draft policy statement before the Bill leaves the House of Commons?
Andrew Griffith
I shall speak first to amendments 19, 20 and 21, before turning to schedule 8. Amendments 19 and 20 seek to introduce requirements on the FCA in relation to how it will determine reasonable provision of cash access services and how it will assess and address local deficiencies in provision. I am grateful to the hon. Member for Mitcham and Morden for raising that important issue, and I recognise the strength of feeling expressed by many in the debate on Second Reading and here this morning. I reassure the hon. Member that the Treasury has considered the matter carefully, and will continue to consider it through its approach to a policy statement.
Siobhain McDonagh
I would suggest to the Minister, though, that the FCA was late to the party over bank branch closures and that the groundswell created by people and by Members of Parliament forced the FCA finally to act. Who believes that individual communities, particularly poorer communities, have the same strong voice as the chief executive of a major high street bank? That is not going to be the case, and we know it is not going to be the case. We also know that unless the guidelines are there, people will not be listened to.
I held a public meeting about the closure of my local Halifax branch, and I could not convince anybody from the Halifax to attend. The idea that we can get these things done by institutionally agreeing that those people will understand the same things we understand, and understand the concerns of those who come to our advice surgeries and the concerns in our constituencies, is also not the case.
Andrew Griffith
The hon. Lady makes a powerful point that I will take away, but I perhaps do not entirely share her view of the FCA. It will be interesting to explore that further. However, I should congratulate her, which I omitted to do earlier, on successfully procuring a new LINK ATM for Pollards Hill. If she would like me to do so, I should be delighted to come to witness her opening this important facility for her constituents.
Let me turn to amendment 21. Following the Government committing themselves to legislating, industry has, in parallel, established voluntary arrangements to co-ordinate its response to provision of cash access—that includes the process for LINK, of which the hon. Lady has availed herself; LINK operates the UK’s largest ATM network—to assess a community’s needs in the event of closure of a core cash service or a request made by a local community, or indeed by a diligent Member of Parliament representing their constituents.
The Bill will provide the FCA with powers over operators of cash access co-ordination agreements such as those operated by LINK, so it provides a legislative safety net. However, members of the Committee will recognise that no decisions can be made in respect of designating any firms until we get the Bill on the statute book—the important work in which we are engaged today.
More widely, the Bill will require the FCA to use its powers to seek to ensure reasonable provision of cash access services—we are giving the FCA the corpus of work to do that. The Bill will allow the FCA to make rules or issue a direction requiring designated entities to establish a process to allow cash users to request reviews, should the regulator consider that appropriate. I understand the point made by the hon. Member for Mitcham and Morden about the conduct to date, but I would respectfully say that we are also giving the FCA very significant powers and putting duties upon it. The Treasury, the Select Committee and Parliament itself will continue to scrutinise those duties, and ensure that they are being fulfilled diligently. For that reason, I ask her not to press amendments 19, 20 and 21 to a vote, following a good debate on them.
Briefly, schedule 8 has attracted considerable interest from Members. Part 1 of the schedule inserts a new part 8B, titled “Cash access services”, into FSMA 2000. That introduces the legislative framework for access to cash and establishes the FCA as the responsible regulator. The schedule places a new statutory responsibility on the FCA to exercise the powers granted to it for the purpose of seeking to ensure that there is reasonable provision of cash access services in the UK. The FCA is then responsible for determining what it considers to be reasonable provision—I understand that some hon. Members would like to go further and be more prescriptive on that—while having regard to the policy statement, which will be issued in due course and at the appropriate moment by the Treasury, and any local deficiencies in the provision of cash access that the regulator has identified, the impacts of which it considers significant.
The FCA may also have regard to other matters that it considers appropriate. The FCA has already developed extensive monitoring of the coverage of cash access, and has undertaken research on the use of cash to inform its approach. In terms of the entities that will be subject to FCA oversight, the Government believe that it is right that the largest retail banks and building societies are held accountable for ensuring that their customers or members can continue to access cash services. The schedule therefore gives the Treasury powers to determine which banks and building societies—[Interruption.] I can see from the expression of the hon. Member for Mitcham and Morden that Halifax may well be auditioning as a candidate. It would be wrong for me to prejudge that list, but I imagine that hon. Members have lots of potential candidates to put to the Treasury.
The schedule gives the Treasury powers to determine who they should bring within the scope of FCA oversight through the designation regime. Furthermore, the Treasury will be able to designate operators of cash access co-ordination arrangements for FCA oversight. In order for it to fulfil its new role effectively, the Bill grants the FCA the ability to make rules, issue directions and impose disciplinary measures, including financial penalties upon any of the organisations designated by the Treasury. The new legislative framework will be an effective, proportionate and strong way to ensure that there is reasonable provision of cash access across the UK in the future. I therefore recommend that the schedule stand part of the Bill.
Siobhain McDonagh
We will come back to the amendment, and those with which it is grouped, but for now I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 8 agreed to.
Clause 48
Wholesale cash distribution
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 9 be the Ninth schedule to the Bill.
Andrew Griffith
In addition to ensuring reasonable provision of cash access services in the UK, it is vital that we have an effective, resilient and sustainable wholesale cash system to support continued access to cash.
The UK’s wholesale cash infrastructure is a system of cash centres that sort, store and distribute banknotes and coins. A decline in the transactional use of cash has put pressure on the business models of the existing wholesale cash networks. Over time, the industry is expected to transition to a smaller overall network.
Clause 48 and schedule 9 contain provisions to give new powers to the Bank of England to oversee the wholesale cash distribution industry by creating a two-level regime. First, it gives the Bank oversight over, and the ability to regulate, the market activities of the wholesale cash industry. That will ensure the effectiveness, sustainability, and resilience of the system. Secondly, it gives the Bank the ability to prudentially regulate a systemic entity in the market, should one form in the future, to manage risks to financial stability.
Schedule 9 enables the Treasury to make a wholesale cash oversight order, which specifies an entity as a recognised entity. That will set out whether an entity is recognised as having market significance only, or systemic significance. If a firm has market significance, it will be subject to the market oversight regime. If it is systemically significant, it will be subject to both the market oversight regime and the prudential regime.
The Treasury does not currently consider any entity to be systemic, but the provisions will ensure that the Treasury and the Bank can respond effectively to future changes in the market to manage risks to financial stability. It is expected that the industry will transition to a smaller overall network, potentially with fewer operators, in the coming years.
The powers given to the Bank under both parts include the ability to publish principles and codes of practice, gather information, give directions as required, make inspections and enforce the regime. Under the regime, the Bank can also collect fees, which must relate to a scale of fees approved by the Treasury. The Bank will seek to exercise its powers proportionately.
Schedule 9 also requires the Bank of England to prepare and publish a policy statement on its regulatory approach before exercising its powers under the legislation. The Bank will launch a consultation on that policy statement shortly. Once the regime is operational, the Bank is required to provide an annual report on the regime to the Treasury, which must be laid before Parliament.
In summary, clause 48 and schedule 9 are necessary to ensure that the wholesale cash industry remains effective, resilient and sustainable. The measures form part of the Government’s action to support the continued access to cash. I therefore recommend that clause 48 and schedule 9 stand part of the Bill.
Tulip Siddiq
We welcome clause 48, but I have two questions for the Minister. First, how will Parliament and industry be consulted on the scale of the fees placed on businesses by the Bank to cover the operation of the scheme, and on the penalties for non-compliance? Clause 48, as drafted, allows the Treasury to designate an entity as being subject to the Bank’s new prudential regimes for the wholesale cash industry, but how will the Government ensure that the Bank is adequately consulted on additions to the regime?
Andrew Griffith
The answer is that, in the normal way, the measures will be laid before Parliament. If there is any extra detail with which I can furnish the hon. Lady, I will write to her.
Question put and agreed to.
Clause 48 accordingly ordered to stand part of the Bill.
Schedule 9 agreed to.
Clause 49
Recognised bodies: senior managers and certification
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.
Andrew Griffith
The clause introduces schedule 10, which provides for the new senior managers and certification regime—SMCR—for financial market infrastructures. The existing SMCR was first introduced following the 2008 financial crisis to strengthen governance in financial services firms and to promote high standards of conduct among all staff. Today, the regime applies to most authorised firms across the financial services sector, including banks and insurers; however, it does not apply to firms that are regulated outside the main FSMA authorisation framework. The clause addresses that by allowing a new SMCR to be created for certain types of financial market infrastructure. It will help to bring governance requirements for such systemically important firms in line with the majority of the financial services sector.
Schedule 10 provides for the new regime by inserting proposed new chapter 2A into part 18 of FSMA 2000. That will allow for an SMCR to be applied to central counterparties and central securities depositories through the negative resolution procedure. The schedule also allows for the regime to be extended in future to recognised investment exchanges and credit rating agencies, should that be appropriate. The power can be exercised by the Treasury through the affirmative resolution procedure in respect of credit ratings agencies, and through the negative procedure in respect of recognised investment exchanges. The Government will undertake consultation with relevant parties before deciding on whether the regime should be extended to such entities.
The key features of the new regime mirror those of the existing regime: a senior managers regime, a certification regime and conduct rules for all employees. The certification regime applies to employees whose roles do not have senior management functions but could cause significant harm to the firm or its users. Those roles must be performed only by employees who have been certified by the firm as being fit and proper to perform the roles. The regime will also allow regulators to make conduct rules for all employees of the firms.
Schedule 10 also provides supervisory and disciplinary powers for the Bank and the FCA, including the power to impose financial penalties and to take action against misconduct. The Bank and the FCA will be able to make prohibition orders such that any individual they do not consider to be fit and proper can be banned from performing a function at one of those types of entity, or at any authorised or exempt financial services firm.
The new regime will be an effective and proportionate way to strengthen governance arrangements and to promote high standards of conduct among all staff. I therefore recommend that the clause and schedule 10 stand part of the Bill.
Question put and agreed to.
Clause 49 accordingly ordered to stand part of the Bill.
Schedule 10 agreed to.
Clause 50
Central counterparties in financial difficulties
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 9, 24 to 28, 10, 29, 11 and 12, 30, 13 to 15, and 31.
That schedule 11 be the Eleventh schedule to the Bill.
Andrew Griffith
The clause introduces schedule 11, which expands the existing resolution regime for central counterparties, or CCPs. CCPs provide clearing services for large volumes of financial trading activity and are systemically important pieces of market infrastructure.
Resolution is the framework for managing the failure of systemic financial institutions. It provides the Bank of England, the UK’s resolution authority, with the tools required to manage the failure of a financial firm safely. If a CCP got into difficulty and could not continue to provide its clearing services, there could be serious consequences for financial markets, affecting financial stability and potential risks to public funds
Although the UK has an existing resolution regime for CCPs, introduced in 2014, a fuller and stronger set of powers will enable the Bank to take faster and more extensive action than it can now. Schedule 11 will therefore expand the existing CCP resolution regime, providing the Bank with a comprehensive set of tools and powers to protect financial stability and limit contagion within the financial sector. That includes powers to remove impediments to resolvability in a CCP before it gets into any difficulties, and the ability for the Bank to put a CCP into resolution before the CCP’s own recovery measures have been exhausted, if continued recovery actions would be likely to compromise financial stability.
The schedule gives the Bank the powers needed to impose losses on the CCP and its clearing members in the first instance of the very unlikely event of failure, thereby protecting public funds. It also enables the Bank to take control of a failing CCP to stabilise the CCP and ensure the continuity of critical clearing functions while it is in resolution.
By expanding the existing regime we are also ensuring that our regime reflects international standards, as set out by the Financial Stability Board. That will cement the UK’s reputation as a global leader in providing clearing services and further enhance confidence in the UK’s financial system. The provisions therefore demonstrate the Government’s ongoing commitment to high standards and effective stewardship of the UK’s financial services sector, so I recommend that clause 50 and schedule 11 stand part of the Bill.
I also commend amendments 9 to 15 and 24 to 31. They are technical amendments that will ensure that schedule 11 functions as intended, reflecting the original policy intent by rectifying drafting errors and ensuring the legislation is applied consistently across the UK.
Tulip Siddiq
Because of the volume of trades cleared through CCPs, the failure of one could pose risks to the stability of the financial system. We therefore welcome clause 50 and the Government’s various technical amendments. Does the Minister agree that, because of the high risk to the financial system that a failed CCP could pose, the expanded regime must be brought in as a priority? How long after the Bill has passed will the provision become law and the regime be implemented?
Andrew Griffith
I agree with the hon. Lady that, given the systemic importance, it is important to bring the regime into place as quickly as possible. It will be for the Bank to consult on that. I expect the Bank to do that shortly after Royal Assent and then bring forward the necessary measures to put it in place. I hope that is enough for the hon. Lady at this time. We want to see the implementation proceed as quickly as possible.
Question put and agreed to.
Clause 50 accordingly ordered to stand part of the Bill.
Schedule 11
Central counterparties
Amendments made: 9, in schedule 11, page 205, line 21, leave out “9A” and insert “9B”.
This amendment corrects a cross-reference so that the provision refers to paragraph 9B of Schedule 17A to the Financial Services and Markets Act 2000, which is inserted by clause 10 of the Bill.
Amendment 24, in schedule 11, page 228, line 22, leave out sub-paragraph (1) and insert—
“(1) This paragraph applies where the Bank uses one or more of the stabilisation options mentioned in paragraph 1(3) in respect of a CCP unless the CCP has ceased to be subject to the exercise of any stabilisation power mentioned in paragraph 1(4).”
This amendment widens the scope of paragraph 39 of Schedule 11, on shadow directors etc, by ensuring that it applies following the exercise of any of the Bank’s stabilisation options under Schedule 11, not just the powers in paragraph 38.
Amendment 25, in schedule 11, page 228, line 28, leave out
“, or as a temporary manager under paragraph 6,”.
This amendment is consequential on Amendment 27 and omits the reference to temporary managers as they will be included in the list of relevant persons in paragraph 39(3) under Amendment 27.
Amendment 26, in schedule 11, page 228, line 38, at end insert—
“(e) the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19));
(b) the Company Directors Disqualification (Northern Ireland) Order 2002 (S.I. 2002/3150 (N.I. 4));”.
This amendment ensures that the list of relevant enactments in paragraph 39(3) of Schedule 11 includes the relevant Northern Ireland legislation so that the position regarding shadow directors is consistent across the UK.
Amendment 27, in schedule 11, page 228, line 41, at end insert “, and
(c) a temporary manager appointed under paragraph 6 of this Schedule.”
This amendment ensures that the list of relevant persons in paragraph 39(3) of Schedule 11 includes temporary managers, for consistency with the bank resolution regime.
Amendment 28, in schedule 11, page 255, line 43, after “EMIR” insert
“where they have a contractual relationship as principal with the CCP”.
This amendment operates on paragraph (d) of the definition of “relevant person”, to limit that group of persons entitled to compensation to those who are direct creditors of the CCP.
Amendment 10, in schedule 11, page 256, line 16, leave out “or 29(3)” and insert “, 29(3), 66(2) or 73(2)”.
This amendment provides that the definition of “residual CCP” applies to properties transferred under paragraphs 66(2) and 73(2) of Schedule 11 (transfers subsequent to resolution instrument and transfers subsequent to share transfer to bridge CCP).
Amendment 29, in schedule 11, page 257, line 43, at end insert—
“(5) An obligation imposed on the residual CCP or a group company under sub-paragraph (2)(d) or (e) continues to apply despite the residual CCP or group company entering insolvency, and may not be disclaimed by a liquidator under section 178(2) of the Insolvency Act 1986 or Article 152(1) of the Insolvency (Northern Ireland) Order 1989.”
This amendment provides an equivalent provision to section 64(6) of the Banking Act 2009 (continuity obligations relating to property transfers), to ensure that certain obligations continue to apply despite the residual CCP or group company entering insolvency.
Amendment 11, in schedule 11, page 259, line 25, leave out
“CCP whose business has been transferred”
and insert “transferred CCP”.
This amendment provides the correct terminology in relation to share transfers, to which this provision relates.
Amendment 12, in schedule 11, page 259, line 26, leave out “property” and insert “share”.
This amendment provides the correct terminology in relation to share transfers, to which this provision relates.
Amendment 30, in schedule 11, page 260, line 19, at end insert—
“(5) An obligation imposed on the transferred CCP or a former group company under sub-paragraph (2)(b) or (c) continues to apply despite the transferred CCP or former group company entering insolvency, and may not be disclaimed by a liquidator under section 178(2) of the Insolvency Act 1986 or Article 152(1) of the Insolvency (Northern Ireland) Order 1989.”
This amendment provides an equivalent provision to section 67(6) of the Banking Act 2009 (continuity obligations relating to share transfers), to ensure that certain obligations continue to apply despite the residual CCP or former group company entering insolvency.
Amendment 13, in schedule 11, page 267, line 2, leave out “or onward” and insert “, onward, bridge or subsequent”.
This amendment is consequential on Amendment 14.
Amendment 14, in schedule 11, page 267, line 3, after “50,” insert “52, 66,”.
This amendment adds to the list of instruments in paragraph 105(6) to include instruments made under paragraphs 52 (bridge CCP: share transfers) and 66 (property transfer subsequent to resolution instrument).
Amendment 15, in schedule 11, page 267, line 5, leave out “or onward” and insert “, onward, bridge or subsequent”.
This amendment is consequential on Amendment 14.
Amendment 31, in schedule 11, page 299, line 30, at end insert—
“(g) the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19));
(b) the Company Directors Disqualification (Northern Ireland) Order 2002 (S.I. 2002/3150 (N.I. 4)).”—(Andrew Griffith.)
This amendment ensures that the list of relevant enactments in paragraph 165(2) of Schedule 11 includes the relevant Northern Ireland legislation so that the relevant law can be applied consistently across the UK in the event of a resolution of a CCP.
Schedule 11, as amended, agreed to.
Clause 51
Insurers in financial difficulties
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 32 and 33.
That schedule 12 be the Twelfth schedule to the Bill.
That schedule 13 be the Thirteenth schedule to the Bill.
Andrew Griffith
Clause 51 introduces schedules 12 and 13. The UK insurance industry is the largest in Europe and the fourth largest in the world, managing investments of more than £1.8 trillion. It is an incredibly important part of our financial services sector. The UK’s insurance sector is robustly regulated and supervised, well capitalised and resilient to shocks; as a result, insurer insolvency is uncommon. However, as the UK is a global financial centre, the Government are through the Bill enhancing the powers available to the authorities to manage an insurer in financial distress. That will strengthen protections for policyholders and mitigate potential value destruction when an insurer fails.
Schedule 12 makes provision for the powers of the court in relation to the liabilities of an insurer that is, or is likely to become, unable to pay its debts. I will describe its key provisions. The schedule defines an order made in the exercise of such powers as a write-down order, which involves reducing the value of an insurer’s contracts. It makes amendments to FSMA that are designed to make the new procedure more viable for an ailing insurer.
Part 2 of the schedule introduces the new role of a write-down manager—an officer of the court who will monitor a write-down. The manager will consider, on an ongoing basis, whether a write-down remains likely to lead to a better outcome for an insurer’s creditors and policyholders than if the write-down were not in effect.
Part 4 of the schedule provides for the PRA to amend its rules governing the Financial Services Compensation Scheme, requiring the scheme to provide top-up payments to certain policyholders affected by write-down orders. This safeguard aims to ensure that FSCS-protected policyholders are not worse off following a write-down than they would have been in insolvency.
Amendments 32 and 33 ensure that the drafting meets full policy intent. Amendment 32 ensures that the moratorium on legal proceedings does not interfere with certain collateral and security arrangements among participants in the financial markets. It also provides the Treasury with the power to amend the list of exclusions, which is given legal force by amendment 33. Both amendments mirror exclusions and a similar power to amend the exclusions contained in schedule 13.
Schedule 13 inserts proposed new schedule 19C into FSMA. It introduces provisions for the enforcement of contracts while an insurer is undergoing a write-down or certain insolvency proceedings. The changes are intended to provide certainty and stability to an ailing insurer’s financial position. The schedule defines “financial difficulties” and provides for restrictions on policyholder surrender rights when an insurer is judged to be in such difficulties.
Surrender rights allow policyholders to surrender life insurance contracts in exchange for cash value. Annual withdrawals of up to 5% of the policy value will continue to be permitted. The provisions will mitigate against the possibility of mass surrenders by policyholders, which could further destabilise an insurer in financial difficulties. However, part 2 of schedule 13 also enables specific parties, including the court, to consent to a surrender when satisfied that not doing so would cause hardship to a person.
Part 3 of schedule 13 provides that while an insurer is in financial difficulties, relevant contracts to which the insurer is party cannot terminate because the insurer is in financial difficulties. That seeks to mitigate the risk of value destruction, business disruption, policyholder harm and cost arising from the contracts being terminated.
Andrew Griffith
The clauses contain a mix of substantive and technical amendments to FSMA, which lists the functions and responsibilities of the FCA and the PRA and requires them to perform them in line with their statutory objectives and principles. Clause 52 adds to that list the responsibilities conferred on the PRA and FCA by the Bill and any functions conferred on them by future regulations made under the Bill.
On clause 53, currently, except in a few specific circumstances, the FCA and the PRA cannot use their disciplinary powers against firms that committed misconduct when they were authorised if they cease to be authorised. That means that if a firm has committed misconduct while authorised, and that comes to light only once the firm has ceased to be authorised, the regulators cannot take disciplinary action. It also means that when an authorised firm is under investigation for misconduct, the regulators must sometimes choose to maintain the firm’s authorisation to preserve the ability to sanction it following the conclusion of the investigation. To address that, the clause will enable the FCA and the PRA to take action against unauthorised firms in relation to misconduct that occurred while they were authorised.
Clause 54 enables the regulators to impose conditions on new controllers of financial services firms when to do so would advance their statutory objectives. That fills a gap in the regime identified by the PRA and the Treasury Committee in its Greensill inquiry. It will give the regulators more flexibility to manage changes of control in a way that they consider appropriate with reference to their statutory objectives.
Clause 55 makes two minor technical changes to the legal framework governing the Financial Services Compensation Scheme. The Office for National Statistics reclassified the FSCS as a public financial auxiliary in 2020. To reflect that change and bring the FSCS in line with other public financial auxiliaries, clause 55 removes both the requirement for the FSCS to have an accounting officer and the Treasury’s power to require certain information in connection with accounts.
Clauses 56 and 57 are necessary to reflect the regulators’ additional rule-making responsibilities when retained EU law is repealed. Under the comprehensive FSMA model of regulation that the Bill enables, the direct regulatory requirements that apply to firms will generally be in regulators’ rulebooks rather than set out in legislation.
Clause 56 inserts proposed new section 141B to FSMA, giving the Treasury the power to make consequential changes to legislation to reflect changes to regulator rules. At the moment, domestic and EU legislation sometimes makes reference to regulator rules; the power will ensure that the legislative framework remains up to date and consistent if those rules change. It is a consequential power only.
Clause 57 enables the Treasury and regulators to make ambulatory references to regulator rules and domestic legislation respectively. That means that when the Treasury references regulator rules in secondary legislation, it can do so in such a way that the references will automatically update to refer to the current version of the rules whenever the regulator updates them, thereby ensuring that the regulator rulebooks and the legislation will remain consistent over time, without the need for constant amendments in response to respective changes.
Clause 58 allows the Treasury to amend and repeal provisions in part 9C of FSMA that were introduced by the Financial Services Act 2021, which dealt with the immediate post-Brexit priorities for financial services, including by implementing the latest Basel standards, while the wider approach to regulation was considered as part of the Government’s future regulatory framework review.
Sections 143C and 143D of FSMA create duties for the FCA to establish the investment firm’s prudential regime, and section 143G requires the FCA to have regard to certain matters when making rules as part of that regime. Those provisions will be replaced by the general approach to obligations and “have regards” that the Bill introduces, which the Committee has already considered. Clause 58 enables those sections to be amended to avoid duplication.
Clause 59 introduces small technical amendments to two provisions of FSMA that cover transitional arrangements. The amendments ensure that an existing power to make transitional arrangements under sections 426 and 427 of FSMA is updated to correctly refer to the current regulators—the FCA and the PRA—and is available to the Bank of England when it is acting as a FSMA regulator. I recommend that the clauses stand part of the Bill.
Tulip Siddiq
We welcome this series of technical clauses, but I have two questions for the Minister. First, will he set out what disciplinary action regulators could take under clause 53 against firms that are no longer authorised? Secondly, on clause 55, the Transparency Task Force has recommended the creation of a financial regulators’ supervisory council, which would have a number of roles, including appointing and overseeing the Financial Services Compensation Scheme, to ensure greater independence. If the Minister is aware of that proposal, what assessment has he made of it? If he is not, I would be happy to hear his thoughts about it after the sitting.
Andrew Griffith
I thank the hon. Lady for those points. The powers that the regulators will have in relation to formerly authorised firms will mirror those that they have in relation to authorised firms: they will have the full range of powers to seek information and to impose sanctions, remedies and conduct. The substantive purpose of the measures is to ensure that those powers are not extinguished at the moment a firm becomes unauthorised.
I am not familiar with the detail of the proposal for a financial supervisory board that the hon. Lady mentioned, but we have a good framework for the supervision of financial regulators. I and the Government will always be interested in any practical suggestions to enhance that without duplication and unnecessary obfuscation about where true responsibilities lie.
Question put and agreed to.
Clause 52 accordingly ordered to stand part of the Bill.
Clauses 53 to 59 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Eighth sitting)
Tuesday 1st November 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 November 2022 - (1 Nov 2022)
The Economic Secretary to the Treasury (Andrew Griffith)
It is a pleasure to serve under your chairmanship, Mr Sharma.
Clauses 60 and 61 deliver on the Government’s commitment to replace the Bank of England’s cash ratio deposit scheme with a new Bank of England levy. Under the cash ratio deposit scheme, banks and building societies with over £600 million in eligible liabilities must place a portion of their deposits with the Bank on a non-interest-bearing basis. The Bank then invests the deposits, and the income generated is used to fund the costs of the Bank’s monetary policy and financial stability functions.
However, the Bank of England’s policy remit and policy responsibilities have grown in recent years, and the cash ratio deposit scheme has not generated the income required to fully fund those functions. As a result, the shortfall has been funded by the Bank’s capital and reserves. Clause 60 replaces the scheme with a new Bank of England levy, repeals the provisions governing the cash ratio deposit scheme in the Bank of England Act 1998, and inserts new section 6A and new schedule 2ZA into the Act.
As with the cash ratio deposit scheme, the new levy will fund the Bank’s financial stability and monetary policy activities. The same eligible financial institutions participating in the cash ratio deposit scheme will pay the levy, with contributions proportionate to their size. Each year, the Bank will be required to publish information setting out the policy functions that it intends to fund through the levy, and the amount that it intends to levy.
The Bank will remain subject to National Audit Office value-for-money reviews to ensure that it remains cost-effective. The levy will deliver a more reliable and stable funding stream to the Bank, and banks and building societies will benefit from greater certainty about the size of their annual contributions towards those functions. Secondary legislation will be introduced in due course to set out further details of the operationalisation of the levy, including how institutions’ contributions will be determined. The Treasury will consult on the draft legislation and has committed to review it every five years.
Clause 61 simply makes a number of consequential amendments to the Bank of England Act 1998 that are required to reflect the new levy. The levy will provide greater certainty to the Bank, as well as to financial institutions. I therefore recommend that clauses 60 and 61 stand part of the Bill.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
The operation of the cash ratio deposit scheme referred to in clauses 60 and 61 is subject to changes in two variables—the gilt rate and the size of deposits eligible for the scheme—so I have two quick questions for the Minister. How did the recent crisis in the gilt market affect the Bank of England’s income under the scheme, and how has the recent crisis in the gilt market, and the subsequent actions taken by the Bank, informed Government thinking on clauses 60 and 61?
Andrew Griffith
There is not a direct relationship between the recent turbulence in the gilt market and the Bank. The clauses will deliver a more reliable income stream to the Bank to fund its activities, because it will receive a levy rather than the income on the difference between interest-free deposits—the money that it gets from levy payers—and the returns that the Bank is able to harness from them.
The current scheme was set up in an environment of higher rates, when higher yields were obtainable. The recent experience over many years of much lower levels of return is the reason why the Bank has not been able to fully finance its activities simply from those interest-free deposits. I hope that answers the hon. Lady’s question.
Question put and agreed to.
Clause 60 accordingly ordered to stand part of the Bill.
Clause 61 ordered to stand part of the Bill.
Clause 62
Liability of payment service providers for fraudulent transactions
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 62 enables and requires the Payment Systems Regulator to take action to improve the reimbursement of victims of authorised push payment scams, or APP scams as they are commonly known. APP scams occur when someone is tricked into sending their money to a fraudster. Almost 200,000 cases of these scams were recorded in 2021, with known losses to victims totalling £583 million. Sadly, fraudsters often target the most vulnerable people in our society.
Under the European regulatory system that we have inherited, there is no statutory or regulatory requirement for payment service providers to reimburse victims of these scams. We need to do better and we can do better for victims of fraud in the UK.
Although the creation of a voluntary industry reimbursement code has improved matters, reimbursement outcomes for victims have been inconsistent and only around half the money stolen is being reimbursed. As a result, many victims are left facing significant losses; in the worst cases, victims lose their life savings.
We recognise these issues and so clause 62 does two things. First, it removes legal barriers in retained EU law that currently prevent regulatory action by the PSR. That will finally enable the PSR to mandate reimbursement in any payment system under its supervision.
The PSR has the relevant expertise, powers and objectives to tackle this crucial issue. However, regulation 90 of the Payment Service Regulations 2017, which form part of retained EU law, prevents the PSR from using its powers to require reimbursement. Therefore, clause 62(11) amends regulation 90 of the 2017 regulations to remove the existing legislative barrier to regulatory action. That will enable the PSR to use its relevant powers in relation to APP scam reimbursement across any payment system designated for regulation by the PSR.
Secondly, clause 62 places a specific duty on the PSR to take action in relation to the faster payments service. This service is the main UK instant payment system and is currently the payment system within which the highest volume of APP fraud is committed. Therefore, action is needed in this regard as a priority.
Clause 62 places a duty on the PSR to consult on a draft of the regulatory requirement in relation to the faster payments service within two months of this legislation coming into force, and the PSR must impose the requirement within six months of the clause coming into force. In 2021, 97% of APP scams occurred across the faster payments service, because it is the UK’s main payment system for instant consumer-bank transfers. Therefore, by requiring the PSR to take action in relation to the faster payments service, the legislation will improve outcomes in the vast majority of APP scam cases.
As a result of the clause and subsequent regulatory action, consumers will be more consistently and comprehensively protected when they fall victim to an APP scam. This is a vital measure to ensure that customers are protected amid the growing threat posed by APP fraud.
I therefore recommend that the clause stand part of the Bill.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
Labour fully supports clause 62, which enhances protection for victims of authorised push payment schemes, but we are deeply disappointed that the Bill does nothing to strengthen fraud prevention.
When asked about fraud in February, the former Chancellor, the right hon. Member for Spelthorne (Kwasi Kwarteng), claimed that fraud and scams are not something that
“people experience in their daily lives”,
which is tone-deaf. Essentially, he dismissed crime as inconsequential. In the real world, countless lives have been destroyed by fraud and scams, and I am sure the Minister will have examples from constituents in his inbox. There is a new Chancellor now, but the lack of ambition in this Bill on fraud shows that the Government’s approach to fraud remains the same. We will debate my new clause 6 on broader strategies for tackling fraud later, but I want to focus on the inadequacies of the provisions in clause 62.
UK Finance has estimated that the amount of money stolen directly from the bank accounts of hard-working families and businesses through fraud and scams has hit a record high of £1.3 billion. That is bad at the best of times, but it is even worse in the midst of a deepening cost of living crisis. That is because the Government have failed to get to grips with new types of fraud, such as identity theft and online scams, which have seen people’s life savings stolen and their economic security put at risk. I ask the Minister to explain why his Government continue to fail to take fraud seriously and continue to push responsibility on to just the banks. For example, the Bill ignores the fact that digitally savvy criminals are increasingly exploiting a range of financial institutions, such as payment system operators, electric money institutions and crypto asset firms, to scam the public.
In its written evidence to the Committee, Santander UK stated:
“Bringing crypto-exchanges into the scope of the Payment Systems Regulator’s powers to mandate reimbursement for APP fraud would be consistent with the principle of ‘same risk, same regulation’ and would introduce important new protections for consumers in area where risk of fraud is significant.”
I ask the Minister to explain why clause 62 completely ignores the emerging fraud and scam risk that EMIs and crypto asset firms pose to the public. What is his response to Santander’s evidence? Barclays similarly asked for clause 62 to be amended to expand the reimbursement protections beyond faster payments scheme payments to cover payments made over other relevant payment schemes or systems. Will the Minister explain why the Bill provides only for the reimbursement of fraud victims who send money using the faster payments system and why other payment systems have not been included in the scope of the Bill?
Emma Hardy
In reading the written evidence, there was an interesting cautionary tale from Mobile UK about how the banks introduced two-factor authentication through SMS without speaking to it. It found that fraudsters had worked out that they could get a one-time code by having a duplicate SIM card and intercepting the code sent from the bank, which immediately made me slightly worried about using two-factor authentication text message schemes. Mobile UK was able to find a way around that, but it highlights the need to involve as many stakeholders as possible when looking at fraud.
Mobile UK’s evidence was damning. Its conclusion stated:
“The mobile sector is committed to fighting fraud; the banking sector is clearly also committed, but, from the fraudsters point of view, this is a very low risk crime, as the chances of being pursued are very slim. This has to change.”
I recognise that some of these points are outside the scope of the Bill, as they would involve policing, investment and national crime agencies, but there are lots more things that could be done in the Bill to deal with fraud.
In its written evidence, Barclays said it welcomed that all payments made over FPS are covered by the new protection, but that it
“would note there are other relevant commonly used payment schemes and systems that should benefit from the same protection—for example, the CHAPs payment scheme, and ‘on us’ payments… The Bill should therefore be amended to give the PSR power to require participants in other payment schemes to reimburse scam victims.”
That seems to be incredibly sensible advice from Barclays.
It was echoed in the evidence given by Which?:
“to avoid gaps in protections the PSR should also be required to work with other regulators to introduce reimbursement requirements, including for payments made between accounts held with the same bank or payment provider (which are regulated by the FCA) and for the CHAPs payment system used for high-value transactions”.
That is exactly the same as what Barclays said.
There seems to be a lot of consensus among consumer representative groups such as Which? and in the banking sector about broadening out the provisions, looking at other ways in which fraudsters are working, and dealing with the issues raised by Mobile UK. At the moment, the people who are committing these frauds seem to be getting away with it.
Andrew Griffith
I will be brief. We all join hands in taking any action that we can against fraudsters. It is a terrible crime, and one that is on the rise, and the Government will do everything in our power to take action.
I say to the hon. Member for Hampstead and Kilburn that I will take no lessons from the Opposition on fraud. The impediment to cracking down on this issue lies solely within EU law. It is this Government that have withdrawn from the European Union—a policy that her party now belatedly supports, but did not for many years. It is only by bringing forward this legislation and withdrawing from the European Union that we are able to put in place clause 62.
Andrew Griffith
I will happily give way to my colleague, who I think, unlike the Opposition, still wants to be part of the European Union.
Martin Docherty-Hughes
Definitely. Is the Minister therefore saying that the European Union was promoting fraud within the financial framework of the United Kingdom of Great Britain and Northern Ireland? Is that what he just said?
Andrew Griffith
I wish the hon. Gentleman was attentive to what I was saying. That was not what I said; I did not use the word “promote” in any way. I said it was an impediment. Clause 62 addresses the fact that under retained EU law, it is not possible to take the action that we wish to take on push payment fraud. That is a fact, and that is why we came forward with the Bill. There are many other things the Government are doing outwith the Bill to tackle fraud, and I will happily sit down and talk with anybody—and meet with any party—who has practical suggestions to tackle fraud.
Dame Angela Eagle (Wallasey) (Lab)
The Minister is reasonably new to his post, but will he look at the Treasury Committee’s report on fraud, which contains a great deal of very practical things the Government could do to crack down on what is a growing problem? Everybody recognises that the anti-fraud authorities—the people who are trying to fight this—are very fragmented, there is no co-ordination across the piece and there is very little enforcement of the laws that are already there. That is why fraud is a growing problem—the rewards are so fantastic and the risks that fraudsters take are so miniscule that no fraudster is ever put off by the thought that they might get caught.
Tulip Siddiq
UK Finance found that fraud has hit a new high under this Government. Is the Minister going to blame the EU, once again, for that record high? Would he like me to send him the UK Finance report?
Andrew Griffith
I am sorely tempted, but I will resist the urge to rise to that.
If my officials can find the report to which the hon. Member for Wallasey refers, I will look at it, and outwith the Bill, I will ensure that our efforts are equal to the task. I accept that fraud is rising, and in particular that this level of fraud is rising. That is facilitated by both online technology—there are other measures outwith the Bill to tackle and police the unregulated online world—and, as we heard earlier, the shift from cash, which suffered from its own forms of fraud and theft, into a more digital world.
Emma Hardy
Will the Minister refer to the specific examples that Barclays and Which? raised around CHAPS payment and other payments? If he is unable to give a full response today, I hope that he will consider before Report whether we could extend some of the provisions in the clause to cover the specifics that Barclays and Which? raised.
Andrew Griffith
I can confirm to the Committee that, because the measure relates to all payment systems that fall within the remit of the Payment Systems Regulator, the measure is not confined solely to fast payment. Fast payment makes up about 97% of reported fraud—those are UK Finance figures—so of course it makes sense for it to be the first in our sights, but the clause will follow fraud and payment systems as they evolve. That is its whole purpose. It is not confined simply to the faster payment system. If that is the understanding that Barclays and Which? have, we should correct it, because any of the PSR-designated platforms are in scope.
Tulip Siddiq
The Bill provides for the reimbursement of fraud victims who send money using the faster payment system. Is the Minister saying that other payment systems are included in the scope of the Bill?
Andrew Griffith
Yes. If that is not correct, I will write to members of the Committee, but my understanding is that all the measures that we have been talking about cover the scope of the Payment Systems Regulator.
Question put and agreed to.
Clause 62 accordingly ordered to stand part of the Bill.
Clause 63
Credit unions
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 14 be the Fourteenth schedule to the Bill.
Andrew Griffith
The Government are a strong supporter of the mutuals sector, and recognise the unique role that credit unions play in their communities. Clause 63 introduces schedule 14, which makes amendments to the Credit Unions Act 1979—a particularly good year—to allow credit unions in Great Britain to offer a wider range of products and services, thereby supporting the growth, diversification and development of the sector.
The Credit Unions Act 1979 sets out the regulatory framework for credit unions and specifies the products and services that they can provide. Schedule 14 adds proposed new subsection (3ZZA) to section 1 of the Act, introducing a new optional object, or objective, for credit unions, which specifies additional products and services that they may now choose to offer. The services included are hire purchase agreements, conditional sale agreements, and insurance distribution services. When the Association of British Credit Unions Ltd consulted the sector in 2019, those were the additional products and services that credit unions wanted to be able to offer their members. In order to offer those additional products and services, credit unions must obtain permission from the Prudential Regulation Authority or the Financial Conduct Authority in the same way as other providers, and of course secure approval from their members.
Schedule 14 also grants the Treasury a power to add further products or services to the new object via a statutory instrument. That will ensure that the Government can continue to support credit unions in Great Britain to expand into other areas. The schedule also adds proposed new section 11E to the 1979 Act, which makes provision in relation to those new products and services. It caps the interest that a credit union can charge on hire purchase agreements and conditional sale agreements at 3% per month. That cap already applies to loans offered by credit unions.
The schedule gives the Government the power to amend the cap in the future via secondary legislation. The Government already have that power in relation to other credit union products and services. It allows the cap to keep pace with changes in the economic environment and allows credit unions to offer hire purchase agreements, or conditional sale agreements, to corporate members, subject to member agreement. The aggregate outstanding balance that can be owed to corporate members is capped at 10% of a credit union’s total aggregate balance under those agreements.
The Bill also makes provision for a credit union’s ability to lend to and borrow from other credit unions. Section 11 of the 1979 Act will be amended to clarify that credit unions may offer loans to other credit unions, regardless of whether they have a membership link. That will further support the growth, diversification and development of the sector.
The Bill introduces a requirement for credit unions to submit annual returns to the FCA, and to be subject to the “year of account” provisions in the Co-operative and Community Benefit Societies Act 2014. Those amendments will ensure greater regulatory oversight and support good corporate governance practices. Together, clause 63 and schedule 14 will support the credit union sector to grow sustainably for years to come, and help them to expand their reach as providers of affordable credit. I therefore recommend that clause 63 and schedule 14 stand part of the Bill.
Tulip Siddiq
Clause 63 contains some welcome and long-overdue provisions, such as enabling credit unions to offer a wide range of products. However, I do not think the Bill does much to address the outdated regulatory regime facing credit unions as a whole. We will discuss Labour’s proposals to address that, and the barriers facing the wider co-operative and mutual financial services sector, when we debate new clauses 7 and 8.
However, for now, I will push the Minister on some of the areas where the Building Societies Association—and others—has called for bolder action in its written submission to the Committee. First, why do clause 63 and schedule 12 not relax the same-household requirements for family members? Secondly, why does the Bill fail to restrict access to the register of members, in line with best practice for the protection of members’ personal data?
Martin Docherty-Hughes
I agree with the official Opposition on clause 63. I must say, we have talked about 1979, but I would mention 1977, when the Dalmuir Credit Union was opened, and I was number 501 with a membership card, around the age of six, on the church hall stage.
I am very aware of the good works that credit unions such as Dalmuir, Dumbarton and Vale of Leven do in my constituency, and, I am sure, across other Members’ constituencies, but I share the concerns expressed by the official Opposition about the existing infrastructure. I hope that the Minister can say something to alleviate concerns about that existing framework—not only for credit unions but for other local banks, which have been diminished over the past couple of years—and about how the legislation helps to grow this sector of mutual financial support in local communities. We know our banks and post offices are closing, but the credit unions, especially, can be a good cause on which we can all agree.
Andrew Griffith
I thank the hon. Members for West Dunbartonshire and for Hampstead and Kilburn for raising those points. I look forward to hearing the debates about the new clauses that have been tabled.
The Government are on the side of credit unions. We would like to see the mutual and co-operative movement flourish. We need more diversity, affordable options and access to credit. The Government introduced this clause with the absolute intention of helping to expand the range and create more economic opportunities for those bodies. If we have, in some way, fallen short of what could be achieved, I look forward to hearing more about that. I cannot comment on the specific point made by the hon. Member for Hampstead and Kilburn about sharing households and data, so perhaps she would allow me the courtesy of writing to her afterwards if I can find out anything about those points.
This Bill is part of a wider set of measures. On Friday, we discussed on the Floor of the House a Bill to help to prevent the demutualisation that has reduced the number of mutuals in recent years. I was pleased to give Government support to that Bill. There is an ongoing conversation with the Law Commission on the options to review the Co-operative and Community Benefit Societies Act 2014 and the Friendly Societies Act 1992. There is a very good case for looking at modernising the legislation in this sector.
Question put and agreed to.
Clause 63 accordingly ordered to stand part of the Bill.
Schedule 14 agreed to.
Clause 64
Reinsurance for acts of terrorism
Andrew Griffith
This clause is targeted to support the effective management and oversight of money on the public accounts. It confers on the Treasury a power to issue a direction in order to oblige public sector bodies extended a guarantee under the Reinsurance (Acts of Terrorism) Act 1993 to comply with the necessary controls so that money on the public accounts is managed appropriately.
The power will be a safeguard to ensure that public sector bodies within scope comply with the requirements expected of a public sector body, in line with Government policy and the expectations of Parliament. The clause also confers a specific power to direct such bodies to appoint an accounting officer.
Ultimately, ensuring compliance with these requirements will provide value for money, probity, regularity and propriety in the public sector bodies within scope. The ability to issue a direction is a backstop power that will only be used if the relevant body does not comply with the requirements expected of a public sector body.
The new power is similar to powers the Treasury already has to issue directions to central Government Departments in relation to their estimates and accounts. For transparency and accountability, the clause also requires the Treasury to publish and lay any given direction before Parliament.
Emma Hardy
As well as my campaign for financial inclusion, I am sure Members will have heard me talk about flooding. I have not tabled an amendment to the clause, but I might be minded to in order to have a further conversation in future.
The clause addresses reinsurance for acts of terrorism. Has the Minister explored looking at reinsurance for acts of flooding? We have the Flood Re scheme, as I am sure he is aware, but that only applied up to 2007 and properties built after that are not included, nor does it apply to businesses. With this welcome move to consider reinsurance for acts of terrorism, has the Minister thought about other aspects, specifically flooding?
Tulip Siddiq
We welcome clause 64. I support the principle of the Treasury guaranteeing support for reinsurance in the event of a terrorist attack, but how will the provisions in the clause ensure that the taxpayer is adequately protected from such risks? How will the Treasury hold any public sector body to account regarding the requirements in the clause? Will the Minister provide some detail on the role of the accounting officer, in terms of ensuring that public sector bodies have sufficient oversight of the requirements of the clause?
Andrew Griffith
On the point about flooding, that is simply outwith the scope of the Bill. The Flood Re scheme is the responsibility of the Department for Environment, Food and Rural Affairs, and it is not something that falls under this Bill or the Acts I have mentioned.
The role of the accounting officer is the same as colloquially accepted in any public body—the person responsible for maintaining financial records and owning that liability. The governance remains with the board of directors of the relevant body and the duty to the taxpayer is exactly the same as it would be. The clause effectively gives step-in rights or the power to direct in particular circumstances. It does not alter where the core cost and liability start and should remain.
Question put and agreed to.
Clause 64 accordingly ordered to stand part of the Bill.
Clause 65
Banking Act 2009: miscellaneous amendments
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 66 stand part.
Government amendments 5 to 7.
Clauses 67 to 69 stand part.
Government amendment 8.
Clauses 70 and 71 stand part.
Government amendment 23.
Clauses 72 and 73 stand part.
Government new clause 13—Chair of the Payment Systems Regulator as member of FCA Board.
Andrew Griffith
First, I shall speak to new clause 13 and Government amendment 23, which appear in my name, before speaking to clauses 65 to 73 and Government amendments 5 to 8, which also appear in my name.
New clause 13 adds the chair of the Payment Systems Regulator to the board of the FCA. Since the PSR was established in 2014, the roles of the PSR chair and the FCA chair were performed by the same person. As a result, the PSR chair has always been on the FCA board. However, the FCA chair and the PSR chair roles will now be performed by separate individuals, following the appointment of Ashley Alder as the FCA chair in July 2022. The composition of the FCA board is set out in the Financial Services and Markets Act 2000, and the new clause adds the PSR chair to the FCA board. This will help continued effective co-operation between the FCA and the PSR. Government amendment 23 provides for those changes to come into effect two months after Royal Assent.
Clause 65 makes five minor but necessary technical amendments to the Banking Act 2009, to ensure that it continues to function as intended. Clause 66 sets out a small number of definitions to ensure that the provisions of the Bill are interpreted correctly.
Turning to clause 67, the Bill makes a number of changes to the matters that the regulators must consider when they consult on rules. In particular, the Bill introduces a new growth and international competitiveness objective and a new regulatory principle to consider the Government’s net zero target. The clause allows the regulators to fulfil their obligations to consider such matters in consultations that are published before the Bill receives Royal Assent. That means that the regulators can begin acting to meet all their new consultation obligations in this Bill as soon as they are ready to do so, avoiding any unnecessary delays to important regulatory reforms.
Government amendments 5, 6 and 7, which appear in my name, widen the effect of clause 67 to include any obligation to consult introduced by the Bill. That includes, for example, the obligation for the FCA and the PRA to consult their cost-benefit analysis panels.
Clause 68 provides for any expenditure incurred under the Bill to be paid out of money provided by Parliament in the usual way. Clause 69 empowers the Treasury to make consequential changes to other legislation, to ensure that the provisions in this Bill function effectively where they interact with existing legislation. The Treasury will be required to use the affirmative procedure to make consequential provisions that amend, repeal or revoke any provision of primary legislation. That will ensure that there is appropriate parliamentary scrutiny of the exercise of this power.
Clause 70 provides for powers delegated by the Bill to be exercised by statutory instrument. The clause also allows the Treasury to make regulations under this Bill that include ambulatory references to rules and other instruments. Government amendment 8 makes a technical change to clause 70 to ensure that the power to restate and modify saved legislation can rely on the power to make ambulatory references provided for by the clause.
Clauses 71 to 73 are technical in nature. Respectively, they set out the territorial extent of the Bill, when provisions in the Bill will come into force, and the short title of the Bill. I therefore recommend that clauses 65 to 73 stand part of the Bill, and commend Government amendments 5, 6, 7, 8 and 23 and new clause 13 to the Committee.
Tulip Siddiq
I will go through the clauses in this group and ask my questions in turn.
Clause 65 will give the Treasury powers to consider whether a payment system using digital settlement assets or a digital settlement asset service provider is likely to threaten financial stability and should therefore be considered for recognition. How will the Treasury consult the Bank of England when making such a decision? How will the Treasury ensure that the Bank has the expertise it needs to have effective oversight of the operators of a new digital settlement asset or recognised payment system?
I understand that clause 67 and associated Government amendments 5, 6 and 7 would mean that all consultation duties arising from the Bill can be met by consultations made before commencement. The Minister can correct me if my understanding is wrong, but will the Government ensure that this does not result in consultations becoming mere tick-box exercises, with no real impact on the design or implementation of the reforms?
We welcome new clause 13, which will enable better integration across the Payment Systems Regulator and the FCA. What does the Minister hope to achieve with this provision, and how will the FCA and the Payment Systems Regulator be held to account against it? I just want a bit more detail from the Minister on this clause. How will the Treasury guarantee that there are adequate safeguards in place to ensure that the chair of the Payment Systems Regulator does not influence FCA decisions where it may not be appropriate?
Finally, the Minister might not be aware of this, but there are rumours in the press that the Government were exploring merging the Payment Systems Regulator and the FCA. They might just be rumours, but that would be an absolute disaster for consumer protection, so will the Minister, if he has heard these rumours—or if he is the source of them—confirm that the Government have no plans to merge the regulators?
Andrew Griffith
I will write to the hon. Lady about digital settlement assets, in order to try and fully understand what she was pushing at with her question.
On clause 67 and the amendment, the propensity to consult in this space is extremely prevalent, because of the need and desire to get the practitioner and the consumer voice fully represented. Indeed, the hon. Lady and I could both spend a large proportion of our lives responding to the many consultations that are held. However, I have seen no evidence whatever that those consultations are merely tick-box exercises, and I can assure her that that is not the intention. I look forward to engaging with those consultations as we go through this, as they are a fundamental part of the regulatory structure.
On new clause 13 and the chair of the PSR being on the FCA board, I think the hon. Lady mostly welcomed that as an opportunity for the two regulators to work closely together. As I explained, that is de facto the status quo. To the extent that there were any conflicts, I would expect the responsibility to manage and police those conflicts to lie primarily with the chair of the board, as it would in any board. That said, I want a Payment Systems Regulator and a Financial Conduct Authority that work hand in hand, cheek by jowl. I do not anticipate many examples of where we would see conflicts. What we want is effective close working together, as more and more of the systemic risk in the financial system sits with payment service providers.
I have not seen rumours of a PSR and FCA merger. Of course, the PSR effectively emerged from the FCA. It is certainly not my intention to merge them, nor am I aware of any proposals to do so. If anything, by establishing the PSR chair as a separate body or separate person, those two organisations are actually become strong siblings rather than being forced together. That is my understanding.
Tulip Siddiq
The rumours were in the press and the sector was quite worried about it. I appreciate the Minister’s clarification of his position.
Question put and agreed to.
Clause 65 accordingly ordered to stand part of the Bill.
Clause 66 ordered to stand part of the Bill.
Clause 67
Pre-commencement consultation
Amendments made: 5, in clause 67, page 81, line 2, leave out “relevant”.
This amendment, read with Amendments 6 and 7, broadens the effect of clause 67 so that it applies to all consultation duties arising under the Bill rather than only those duties specifically mentioned in subsection (3) of that clause.
Amendment 6, in clause 67, page 81, line 7, leave out “relevant”.
See the explanatory statement for Amendment 5.
Amendment 7, in clause 67, page 81, line 9, leave out subsection (3).—(Andrew Griffith.)
See the explanatory statement for Amendment 5.
Clause 67, as amended, ordered to stand part of the Bill.
Clauses 68 and 69 ordered to stand part of the Bill.
Clause 70
Regulations
Amendment made: 8, in clause 70, page 82, line 17, at end insert
“, except so far as making provision by virtue of section 4(1)”.—(Andrew Griffith.)
This amendment ensures that clause 4(1) of the Bill (power to restate and modify saved legislation) is within the scope of clause 70 for the purpose of being able to rely on the powers in clause 70, when making regulations by virtue of clause 4(1).
Clause 70, as amended, ordered to stand part of the Bill.
Clause 71 ordered to stand part of the Bill.
Clause 72
Commencement
Amendment made: 23, in clause 72, page 82, line 35, at end insert—
“(aa) section (Chair of the Payment Systems Regulator as member of the FCA Board);”.—(Andrew Griffith.)
This amendment provides for NC13 to come into force two months after Royal Assent.
Clause 72, as amended, ordered to stand part of the Bill.
Clause 73 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Ninth sitting)
Thursday 3rd November 2022
(2 years ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 November 2022 - (3 Nov 2022)
The Committee divided: - Ayes: 6 / Noes: 8 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
I beg to move, That the clause be read a Second time.
I wish to say from the beginning that I will push the new clause to a vote. I move the new clause in the name of my hon. Friend the Member for Walthamstow (Stella Creasy). As we heard in evidence, buy now, pay later companies offer consumers the opportunity to spread payments, but they remain unregulated. They represent a large, growing and unregulated form of debt, the growth of which was fast-tracked during the pandemic. Because the loans are initially interest free, consumers lack the key consumer credit protections they receive with other products, which potentially puts them at risk.
We know that buy now, pay later products drive people to spend more money because the providers tell us so. That risks pushing people to spend money that they do not have, without adequate protection against mis-selling. In the cost of living crisis, millions more consumers have turned to this form of credit to make ends meet. As with all forms of high-cost credit, regulation is critical to ensuring that buy now, pay later can be a constructive way for consumers to manage their financial situations.
Labour put forward a proposal to that effect in 2020, which the Government voted down. In 2021, the Financial Conduct Authority called for regulation, and the Government did a U-turn. Now, over two years later, consumers are still waiting for those vital protections, but there is little sign that the Government recognise the urgency to act. In the meantime, the industry has rapidly expanded, so the risks to consumers have grown, which has further increased the need to intervene.
In 2021, Citizens Advice reported that 41% of buy now, pay later users had struggled to make a repayment. One in 10 have been chased by debt collectors, rising to one in eight among young people. Some 25% have fallen behind on another household bill in order to pay a buy now, pay later bill. Those effects of this form of credit were echoed in research by StepChange. Its data shows that 40% of buy now, pay later customers took negative coping actions to cover the debt that they had accrued through this service, including using credit to repay credit, falling behind on housing payments or utility bills, asking family or friends for help, and cutting back to the point of hardship. The figure is 40% for buy now, pay later and 21% for users of other forms of credit.
With Christmas approaching, it is likely that more consumers will be driven to use buy now, pay later and risk unaffordable debt. Equifax data from Christmas 2021 showed that 9% of Christmas shoppers in 2020 used buy now, pay later to spread the cost of presents, and that a quarter of all 18 to 34-year-olds plan to use buy now, pay later to buy presents this Christmas. Last year, one in five people using buy now, pay later said that they felt pressure to buy presents for family and friends, and roughly a quarter—27%—said that they would struggle to afford Christmas without its help. These trends are only likely to increase. The Equifax data shows that two in five users report missing at least one payment in the past, and half of them say that they have been hit with extra fees as a result.
New clause 1 therefore requires that urgent action be taken now to ensure that consumers are protected against being sold unaffordable debt by these companies. It would ensure that some key protections form part of the regulation. That includes ensuring that buy now, pay later users have access to the Financial Ombudsman Service, that there are credit checks before use, and that users are protected by section 75 of the Consumer Credit Act 1974. Those changes would bring buy now, pay later products into line with other forms of credit and ensure that our consumer credit landscape could not be pulled apart by other forms of credit demanding bespoke arrangements.
Dame Angela Eagle (Wallasey) (Lab)
I add my voice to those supporting new clause 1. I commend my hon. Friend the Member for Kingston upon Hull West and Hessle for her speech on this very important issue and my hon. Friend the Member for Walthamstow, who has long campaigned to bring buy now, pay later credit companies into some form of regulation. Obviously, their emergence has been assisted by the shift to online shopping, which we all have experienced and which was turbocharged during the lockdowns.
The consumer credit legislation that protects customers from taking on unaffordable levels of debt and paying over the odds for credit, in a way that is often quite opaque, did not anticipate the existence of online shopping or the explosion in the kind of credit that is now easily available to those who roam the internet or look at TikTok and see lovely things that are just within reach. I speak as someone who has been around for quite a while and whose parents used to put money away in shops so that they could afford Christmas presents, before consumer credit exploded in the way that it did. The Consumer Credit Act tried to make that fair and to regulate it. This is another switch in velocity, capacity and the availability of things, and it is very difficult to discern what the price is when you take something out.
We are now in an instant gratification culture, rather than the place where we said, “Put money away months before and hope you can afford to get the Christmas presents you want for your kids.” It is now a case of instantaneous availability—literally a click on a website. Klarna and various other of the buy now, pay later organisations are everywhere that it is possible to spend money. It is very difficult to imagine how that might be adding up—what the price of it actually is—when a person is in the middle of a purchase, particularly a younger person who is used to that kind of instant availability. It is very difficult for anyone to argue sensibly that the people who are clicking and making those purchases have a good idea of the price of the credit and the burden of the repayments they are taking on.
New clause 1 seeks to bring the new fintech ways of getting access to consumer credit—if I can put it that way—within the existing consumer protections in the Consumer Credit Act 1974, which admittedly is now pretty long in the tooth. Clearly, it is important for those to whom we give the job of protecting consumers to think in detail about how that can best be done, but it is pretty difficult to argue that we should allow the current circumstances to persist. I am interested to hear what the Minister has to say about that.
It is important that people have time to think about what they are doing and that the pricing of credit is obvious at the time of the click, so that people can make genuine decisions and not feel that they have been conned, that the price is wrong or that they have got themselves into a vortex of increasing costs that were not in front of them at the time. The consequences of allowing an entire generation to have access to that kind of consumer credit without protections are too dire to contemplate.
I hope the fact that this Parliament has always put consumer protection at the heart of what it does and legislated for that purpose will prevail, and that the Minister will think about how we can sensibly and quickly bring this part of the growth industry of credit, including consumer credit, into the protected space.
Harriett Baldwin (West Worcestershire) (Con)
Thank you, Mr Sharma, for allowing me to contribute to the debate on new clause 1. My colleagues on the Treasury Committee have raised a very interesting and topical subject for us to debate regarding the best way forward. I must declare an interest, as someone who has bought things on the internet and has used this convenient way of paying for them. Clearly, when we have the FCA in front of us, we need to ask how it is approaching regulation in what has been an area of innovation, where fintech has really come to the fore.
It will be very interesting to hear the Minister’s reply to the points that have been raised, and what he sees as the best way forward. That innovation is supporting our retail sector, but at the same time, consumers deserve to know what they are getting into and to have good information when they make decisions. I look forward to hearing the Minister’s comments.
Siobhain McDonagh (Mitcham and Morden) (Lab)
I, too, support new clause 1, not because I wish to stop buy now, pay later as a form of credit or to restrict people’s choice, but because I want people to fully understand what they are getting into before they do it. I did not understand what Klarna was. I like the Space NK website as much as the next woman who likes to spend too much money on skin products, but I could not quite understand why all of a sudden, about two years ago, Klarna was mentioned as a means of buying now and paying later. I thought, “How terrifying. If you cannot pay that ridiculous price this month, how are you going to pay that ridiculous price next month?”.
My hon. Friend the Member for Walthamstow has done some brilliant work on this issue. Buy now, pay later is the form of credit for the under-30s. They use it more than store cards or credit cards. It is often used on clothing websites, primarily by young women who buy different sizes to see which dress they actually want.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
I rise to support the new clause moved by the hon. Member for Kingston upon Hull West and Hessle.
Some things do not change. The technology might, but the need for continuation of consumer protection does not. I heard Members talk about parents using buy now, pay later. I remember buying a sideboard with my sister in the ’80s using the old-fashioned financial system of paying money every week—that took a long time to pay back. That reality does not change, and this form of credit is now happening with single items, whether they be trousers or shoes, or make-up, which raises a whole range of diverse issues. We cannot lose sight of the fact that most people who might utilise the service in my constituency might not know that they do not have the appropriate consumer protections. The SNP will support the new clause if it is pushed to a vote.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to serve under your chairmanship again, Mr Sharma. I start by paying tribute to my hon. Friend the Member for Walthamstow, as others have done, for tabling the new clause and for her relentless work in the House to highlight the risks that unsecured credit poses to the most vulnerable in society, including many of my constituents in Kilburn. I also pay tribute to her successful campaign for better regulation of payday loans and companies. I am sure everyone has heard her speak on that campaign in the Chamber at some point.
As my hon. Friend the Member for Kingston upon Hull and Hessle said, we are disappointed that the Bill has failed to address buy now, pay later regulation. For years, the Government have promised to regulate the sector, but have not done so, which has left millions of consumers without protection. I recognise that many of my constituents, particularly the young, value buy now, pay later products, because they allow people to pay for expensive products over time. However, the products can also result in debt building up quickly and easily. That is why it is so important that the sector is properly regulated, as my hon. Friend the Member for Mitcham and Morden outlined.
An investigation by the FCA, the Woolard review, which reported in February last year, found that many consumers simply do not know that buy now, pay later products are a form of credit, which means that some people do not consider the risks associated with taking out such products and may not look at the products as carefully as they might have done otherwise. That should be deeply concerning to all of us here, and it has left the most vulnerable, financially excluded people at risk of getting trapped in a cycle of debt. The review made it clear that there is an urgent need to regulate all buy now, pay later products.
We are almost two years on from the review and nothing has been done—no action has been taken. The Government’s consultation concluded in June, and this Bill was the perfect opportunity to bring forward provisions to regulate the sector. Will the Minister explain why the Government have chosen not to do so? It is not just consumers who are in desperate need of regulation. As shadow City Minister, I have engaged with the main players in the buy now, pay later sector in recent months. They too have called on the Government for proper regulation to provide certainty for businesses and to keep bad actors out of the market. I hope the Minister will explain why his Government have chosen to leave consumers unprotected and have ignored calls from the sector by failing to include this regulation in the Bill today.
The Economic Secretary to the Treasury (Andrew Griffith)
It is a pleasure to serve under your chairmanship, Mr Sharma. It is always a pleasure to follow the hon. Member for Hampstead and Kilburn. I would like to add my recognition for what the hon. Member for Walthamstow has achieved, particularly when it comes to payday loans.
The debate on this clause is not about the ends. Rather, it is about the means and the best way of proceeding from here to an end that, as we heard from my hon. Friend the Member for West Worcestershire, is common to both sides of the Committee. However, there is a difference. The Government will not be supporting this amendment. I want to make it clear that we are trying to find the best path on which to proceed, and we are trying to get this important area right.
The amendment would require the Treasury to make regulations to bring buy now, pay later products into regulation within 28 days of the Bill’s passage. I contend that that would be breakneck speed. I hear and understand the frustration of colleagues that the legislation has taken a certain amount of time to mature, but it is also an innovative product and something that provides real utility to millions of people. It is important that we get this right.
The challenge for us in bringing forward appropriate regulations in this domain is that we must ensure we give no succour to the greater evil of informal or illegal credit. As we look to regulate the credit market, we have to acknowledge that what we do not regulate creates a floor, beneath which nefarious providers operate—for example, those whom the hon. Member for Walthamstow has been vigilant in cracking down on.
I understand the desire to move at pace, but I do not accept that nothing has happened. The FCA has significantly moved the dial on this, although there is more to do. It is our contention that we should do it in a thoughtful way and by consulting with the sector, which is supportive of endeavours to bring forward the right amount of legislation.
We also acknowledge that to many people credit can be a valued lifeline. Like the hon. Member for West Dunbartonshire, I remember being sent to do the weekly grocery shop, and that shop provided credit of a buy now, pay later form. As a growing family, and particularly at certain moments of the year, we had a more-than-average amount of groceries. It was a real lifeline. It was a way to spread the cost in a measured way. We should recognise that we must be very careful of the unintended consequences.
Dame Angela Eagle
I am glad to hear that the Minister was helpful to his mother when growing up by doing the grocery shop. He has just made a subtle point about unintended consequences of unregulated lenders—nefarious was the word he used. We would all associate ourselves with that. I wonder if the Minister would talk about speed, given that he does not agree with a month. When does he expect this process to bring forward the wherewithal to incorporate this kind of lending into regulation? Is it his view that the price and consequences of the interest rates that are attached to lending like this should be presented far more upfront when it comes to the button being clicked?
Andrew Griffith
I will address both of those points. In terms of timing, the Government published, as the hon. Member knows, a consultation on the proposed approach to regulation in October 2021; I acknowledge that was some time ago. The response to that consultation was published in June 2022. The Government are now developing the necessary legislation and intend to consult on that draft legislation soon. The Government aim to lay secondary legislation in mid-2023.
The hon. Member talks about price, and I will defer to her expertise if this is the case, but my understanding is that the category that is defined as “buy now, pay later” is required to be credit-provided for no more than 12 months, in no more than 12 instalments, and interest free. So although I am an addict for data, and I believe that transparency is—in most markets—the best oxygen, in this case it is clear and established that this product category is not allowed to charge interest. That does not mean that it does not have charges; there is hidden small print, and I understand and support the need for that.
Dame Angela Eagle
I accept what the Minister has said, but the price here is not an interest rate, it is actually what happens if one does not make the payments. It is the consequences of falling behind that are the issue rather than an interest rate.
Andrew Griffith
I think that the hon. Member and I are at common cause in terms of what we are talking about. To make a wider point, I think we would all understand and aspire to a culture that was “save first, and buy later”. What we are talking about are societal changes. We live in a society where too many people have early recourse to debt and where we perhaps do not have the level of financial education that we would like. That is something that I discussed yesterday with the Money and Pensions Service.
There is a great deal more work to do. I would like to champion that in my relatively new ministerial role. Although it is important that we regulate, and although we have to recognise that, however much we try to work upstream, there will be people who are exploited or simply vulnerable, or who are not operating on the sort of level of financial resilience that they should be. I know the Treasury Committee spends a great deal of time on that; it is a concern to me and the ministerial team in the Treasury. That is an area that we can collaborate and work on; it need not be something that we divide over. That is particularly pertinent to younger people.
As well as committing to move forward with regulation, we commit to do so in a measured way, in the right way and at the right time. That also brings into consideration wider initiatives about financial education in general.
Emma Hardy
I want to press the new clause to a vote.
Question put, That the clause be read a Second time.
The Chair
With this, it will be convenient to discuss new clause 5—Essential banking services access policy statement—
“(1) The Treasury must lay before the House of Commons an essential banking services access policy statement within six months of the passing of this Act.
(2) An ‘essential banking services access policy statement’ is a statement of the policies of His Majesty’s Government in relation to the provision of adequate levels of access to essential in-person banking services in the United Kingdom.
(3) ‘Essential in-person banking services’ include services which are delivered face-to-face, and may include those provided in banks, banking hubs, or other service models.
(4) The policies mentioned in sub-section (2) may include those which relate to—
(a) ensuring adequate availability of essential in-person banking services;
(b) ensuring adequate provision of support for online banking training and internet access, for the purposes of ensuring access to online banking; and
(c) expectations of maximum geographical distances service users should be expected to travel to access essential in-person banking services in rural areas.
(5) The FCA must have regard to the essential banking services access policy statement when fulfilling its functions.”
This new clause would require the Treasury to publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including policies relating to availability of essential in-person banking services, support for online banking, and maximum distances people can expect to travel to access services.
Tulip Siddiq
I would like to say from the outset that I will push new clauses 4 and 5 to the vote.
New clause 4 would require the Treasury and the FCA to conduct and publish a review of the community need for, and access to, essential in-person banking services, and enable the FCA to ensure that areas in need of such services receive them, and to make sure that banking services have a minimum level of access.
New clause 5 would require the Treasury to publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including policies relating to availability of such services, support for online banking and maximum distances that people can expect to travel to access banking services.
Of course Labour welcomes the fact that, after years and years, we finally have a Bill that introduces protection for access to cash. However, the Bill has some serious gaps that we are concerned about. We have already debated in a previous sitting the Government’s failure to guarantee free access to cash, but this Bill also does nothing to protect essential face-to-face banking services, which the most vulnerable people in our society depend on for financial advice and support.
Analysis published by the consumer group Which? found that almost half the UK’s bank branches have closed since 2015. That has cut off countless people from essential services. In its written evidence to us, Age UK called for the Bill to be amended to protect the in-person services that older people rely on, such as the facility to open a new account or apply for a loan, to ensure that banking services can meet their needs.
However, it is not just older people who struggle without support. Natalie Ceeney, chair of the Cash Action Group, who many Committee members will know, warned us at our evidence session of the significant overlap between those who rely on access to cash—around 10 million British adults—and those who need face-to-face support. She said that
“every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 49, Q98.]
She is completely right: it is the most vulnerable, the poorer people in society and the older members of society, who depend on that extra face-to-face help, for instance in making or receiving payments, or dealing with a standing order. These are the people who will be left behind if this question about banking is left completely unaddressed. Nor should we forget those without the digital skills needed to bank online, people in rural areas with poor internet connection, or the growing number who cannot afford to pay for data or wi-fi as the cost of living crisis deepens.
As the FCA warned in its written evidence to us, the powers granted to the regulator by this Bill do not extend to the provision of wider banking services beyond cash access. That is why I hope the Minister will today commit to supporting new clauses 4 and 5, which will give the FCA the powers it needs to protect essential in-person banking services.
Just to be clear, Labour is not calling for banks to be prevented from closing branches that are no longer needed—far from it. Access to face-to-face services could be delivered through a shared banking hub or other models of community provision. We also recognise that banking systems will inevitably continue to innovate, which is a good thing. Online banking is a far more convenient way for people to make payments and manage their finances. However, we must ensure—indeed, as constituency MPs we have a duty to ensure—that the digital revolution does not further deepen financial exclusion in this country.
That would require protecting face-to-face services and putting in place a proper strategy for digital exclusion and inclusion. Banking hubs or other models of community provision must be part of that solution. These spaces have the potential to tackle digital exclusion through their dedicated staff, who can teach people how to bank online and provide internet access for those without it. I was delighted to hear this week’s announcement from the Cash Action Group that the sector will be launching additional banking hubs on a voluntary basis, but if we want to ensure that no one is left behind—the most vulnerable in our society—these services must be protected by legislation. I ask the Minister to support these two new clauses.
Siobhain McDonagh
I rise to support new clauses 4 and 5, which we know are supported by our constituents. No matter what kind of constituency we represent, whether it is wealthy, rural or urban, people are desperate for face-to-face services. Recently, in Mitcham town centre, Barclays and Halifax have closed. I stood outside both branches for a week during their opening hours, asking customers why they wanted face-to-face services and if they used online banking. In both cases, about 50% of customers had no access to online services, either because they did not know how to access them or were too frightened to use them because they were concerned about being scammed. That is an enormous concern, but it is completely rational and understandable, when we consider how many people are scammed.
This is about those quintessentially un-financial market issues of community and human contact. The closure of our banks and building societies is symptomatic of so much more—of our town centres being destroyed, of people feeling excluded from progress and the new society, and even of their feelings of loneliness. I am not suggesting that it is the banks’ job to resolve issues of loneliness, but we can talk about these issues as much as we like; people crave human contact to give them the confidence to use financial services and their bank accounts.
The branch staff do an enormous amount for our communities by protecting some of our most vulnerable constituents from doing things they really should not do, such as giving their life savings to people who they have never met who have offered to marry them. So much goes on in our banks and building societies, but it is only through the closure of banks in my town centre that I have understood what is really happening. Banks are retreating from branches on the high street but also from phone services. The number of banks that will allow people to do things by phone is reducing. Anyone here who has tried to contact their bank by phone knows that unless they have a significant amount of credit on their phone, they will not get through any time soon.
Emma Hardy
I thank my hon. Friend for the incredible speech that she is making. Looking at the Royal National Institute of Blind People briefing, does she agree how important it is for visually impaired or blind people to be able to access telephone and face-to-face banking services?
Siobhain McDonagh
Absolutely. As always, I agree with my hon. Friend. I think we will see an even greater explosion of financial fraud if there is an ever-quickening closure of branches in our town centres, and even more reductions in the ability to access services by phone. Unless there is regulation, we can appeal to the best motives of banks and building societies, but I understand that they are challenged. They have new competitors that do not have the infrastructure of the branches or staff. They are doing everything online, but they are doing it for a particular segment of society that does not, and will not, include everybody. We really have to grapple with that.
The work by the CASH Coalition has been excellent, but unless there is pressure from regulation, that will not happen. The idea that we all have to wait for the last bank in our town centre to close before we can even start thinking about a banking hub is as good as useless. I am only saying things that every member of the Committee knows, and that we know the consequences of. We have an opportunity today to do something about it on behalf of our most vulnerable constituents.
Dame Angela Eagle
It is a pleasure to follow the powerful speeches of my hon. Friends the Members for Hampstead and Kilburn and for Mitcham and Morden on this important issue. It is not an issue that affects most people, who have been able to make the switch to online banking and find it more convenient—although it has to be said that there is an increasing level of worry about online banking services because of the increasing prevalence of fraud and scams. We dealt with that in earlier parts of the Bill, but we touched only the very edge of it, as the tide of the problem rises. I am sure that we will come back to the issue many times in future Bills.
A significant number of our constituents cannot participate, for whatever reason, in the IT and tech changes that have made banking available on our phones and computer screens, and that allow us to chat to various bots that put us through to the places where we need to go. I do not know whether the Minister has had occasion to phone a bank recently or, to be honest, any other service after the pandemic, but it is one of the most frustrating things that anyone has to do. It seems there is only one phone line for all the telephone access points. One has to hang on listening to appalling music for hours on end.
Dame Angela Eagle
We will have to come in a Digital, Culture, Media and Sport Bill to outlawing the appalling music that one has to listen to when trying to access any kind of service, private or public, by phone. We have to remember that many people cannot hang on the phone forever. They cannot afford to, and they are the people who tend to need the most help. They may have pay-as-you-go phones that run out quite rapidly. They may be unable to afford to hang on at the whim of an artificial intelligence bot, or the fewer and fewer actual human beings at the other end. They cannot access even ordinary banking in the way that the majority of people do. As I have said, that can be for a number of reasons. All Members present may get to a stage in our lives when we cannot either, and when we cannot remember our PIN numbers.
Dame Angela Eagle
We already have trouble with our PIN numbers, but many people’s memories fail as they get older, or they may be in the early stages of Alzheimer’s or other dementias. They cannot remember things, they cannot deal with the security issues that are required to make banking in this way safe, and they cannot go and ask somebody to help them.
Emma Hardy
On that point, will my hon. Friend flag to the Minister that, if a bank machine does not have buttons and is just a touch screen, it is very difficult for blind and partially sighted people to know where the numbers are, so as to put their PIN in correctly? That is another reason why face-to-face banking is so important.
Dame Angela Eagle
My hon. Friend makes an extremely good point: tech developments sometimes leave people behind. That is not usually deliberate; sometimes it is thoughtless. However, we in Parliament must ensure that all citizens in this country are able to participate in what is, increasingly, effectively a utility, even though it is not in public hands—I make no comment one way or the other about that. Being unable to access banking services for whatever reason is a real disadvantage, whatever an individual’s age or time of life.
That is a primary reason why we must ensure that what the market cannot provide, regulation provides. I am interested in what the Minister has to say about that. This issue will get bigger as more and more services go online. Regulation cannot happen merely at the end of a process, when access has completely disappeared. Even in some places where bank offices still exist, not everybody can access them. As a Parliament, we are people who point our regulators in particular directions to deal with emerging issues, and this is an important one. I look forward to what the Minister has to say.
Stephen Hammond (Wimbledon) (Con)
It is a pleasure to serve under your chairmanship, Mr Sharma. I will make a short speech. It is more of a speech of curiosity. I listened very carefully to my next-door neighbour, the hon. Member for Mitcham and Morden, who said what most members of the Committee would probably say. She will know as well as I do that everybody looks at my constituency and thinks “leafy Wimbledon suburbia”. But she will also know that parts of south Wimbledon, of Raynes Park and of Morden town centre, which we share, have exactly the problems that she spoke about.
I may have misheard the hon. Lady, but she said that she did not wish to compel banks to stay open, or did not think that we necessarily could do so, and she spoke therefore about the establishment of banking hubs. What I am curious about is how banking hubs would be established. Are we saying that, as part of getting or maintaining a banking licence, there should be a contribution to a social fund, so that banking hubs can be established around the country? Are we saying that that levy should be extended, particularly because some of the harm that we are talking about is the rise of online banking? Should online banks make a contribution to the cost of those banking hubs? Or are we saying—I think it was said that the hubs should be inside local authority areas—that local authorities should offer them, for instance in town centres?
That is a genuine point of curiosity. As in previous discussions with the hon. Members for Kingston upon Hull West and Hessle, for Wallasey, and for Mitcham and Morden—my next-door neighbour—there is huge sympathy for ensuring that our constituents, including vulnerable constituents, have access to banking services. But we need to more tightly define the practicality of how we ensure that they have that access.
Siobhain McDonagh
I am completely open-minded about how the hubs are paid for, but they have to be paid for from the banking sector itself. I would not wish to put the responsibility on already overstretched local authorities. Many high street banks have had decades of loyal support from these customers, and they cannot just walk away from that responsibility and ignore them. They have been good, loyal customers. There should be a banking hub, but not at the point that the last bank closes. We need to have a view towards what happens in the future. There can be collaboration about sites, but there needs to be access to those services.
Stephen Hammond
That is extremely helpful in setting out the thought processes behind the new clause. One of the issues that the hon. Member for Hampstead and Kilburn might wish to clarify is that, if the hon. Member for Mitcham and Morden is correct, the new clause has to contain the stipulation that to get a banking licence in the United Kingdom, one needs to pay a certain amount of social levy so that banking hubs can be established. For me, that is the issue with the clause. I therefore suggest that the hon. Member for Hampstead and Kilburn might want to take it away and bring it back on Report, or have a discussion with the Minister about exactly how the levy that the hon. Member for Mitcham and Morden is effectively talking about is to be established. This new clause does not make that clear, and therefore, frankly, the practicality of the new clause—notwithstanding that we all agree with its intent—is clearly flawed.
Andrew Griffith
I once again note the strength of feeling on both sides of the Committee. The hon. Member for Mitcham and Morden has spoken in a number of debates on clauses of the Bill about the importance of bank branches to our constituencies and local communities. When I visit her constituency to see the opening of the new cash machine, perhaps I will be able to review the provision for myself.
Andrew Griffith
The Government do not support the new clause, but if I may make eyes at the Opposition, I would be very open to accepting an amendment about appalling hold music, as suggested by the hon. Member for Wallasey. That is something to look forward to—I am not sure I should say that in front of my Whip, but one has immense sympathy with the point made.
There are very real issues here, which no one disputes. I am familiar with the sobering challenges that the hon. Member for Wallasey talked about. I know from my meetings with charities that one in three of us will end up with dementia. The RNIB has done fantastic work for those with impaired sight or sight loss, and Age UK does lots of great work in our constituencies—very practical work, as well as raising these issues. I am very open to meeting representatives of all three organisations, so I am happy to give that commitment: they are on my long list of people to meet in this role.
Notwithstanding the wider debate about the role of statute in protecting bank branches from closure, I am keen that we harness the positive uses of technology to try to solve problems. We know that voice recognition can help people who are partially sighted, and the internet now has a great deal more regulation—every website now has accessibility options for people with sight issues—so there are things we can do to close that delta. The point about the importance of the consumer voice is also very well made and understood. It is very important that we make sure there is the right level of consumer representation and consumer voice across our entire financial regulatory system, rather than its representatives solely being producers or practitioners.
Emma Hardy
This might not be strictly within the scope of the new clause, but will the Minister take away the point about the problems with touchpads when people pay for things in shops? With flat surfaces, it is incredibly difficult for visually impaired and partially sighted people to know which buttons they are pressing when entering their PIN number. It is one of those cases where, as the Minister has said, technology advances and does not mean to discriminate against people, but it is causing difficulties.
Andrew Griffith
I do understand that point, and I will take it away. We are all challenged by the wonderful two-factor authentication that even the parliamentary authorities require of us as we log in, and I understand that as we move from analogue to digital, some really important protections are sometimes lost.
The availability of alternative channels by which customers can access their banking means that this issue is quite distinct from access to cash. We have talked about access to cash, and we understand the significant steps forward presented in the Bill and the new duty on the FCA. That is very positive. Where a branch is the only source of cash access services, the closure of that branch will be within the scope of the powers, which starts to address the issue of branch closure. We are giving the FCA powers to do its job. As we know, the purpose of the Bill is to give the FCA powers, not for Parliament to be overly prescriptive. In that circumstance, the FCA could delay the closure until some other reasonable provision for access to cash applied.
Tulip Siddiq
The Minister mentions the FCA, and I also want to take the chance to respond to the earlier comments by the hon. Member for Wimbledon. I am not endorsing a specific model—this is something to consider—but the proposed banking hub could work in exactly the same way as the current banking hub model, which is funded by the sector and regulated by the FCA, which also ensures that sites provide in-person services as well. If the Minister is willing to talk further on the provisions in the new clause—the hon. Member for Wimbledon was generous in suggesting that he would do so—I would be happy to explore banking hub models with him.
Andrew Griffith
There is a great deal of good evolution. I suspect that members on both sides of the Committee would say that it has come quite late in the process, but nevertheless there has been evolution in the banking hub solution—that dynamic, sector-led initiative—as well as the work of the Post Office, which offers in-person facilities for a wide range of, if not all, transactions. There may be a gradient of availability, but post offices that offer a certain range of services to deal with the most common and frequently made transactions are almost ubiquitous. The need to travel for more complex needs would not be an unsurprising feature in this market.
I welcome the initiatives developed by the Cash Action Group, Natalie Ceeney and UK Finance, and implemented by LINK, which are making the local assessments to determine where shared solutions are most appropriate. The industry has committed to shared bank hubs in 29 locations across the UK. Yesterday, it committed to a further four, in Luton, Surrey, Prestatyn, and Welling in south-east London. There is a good rate of change coming now, albeit from a low base.
The Government’s perspective is that while many people need and prefer to use in-person banking services, at this time it would not be proportionate to legislate to intervene in the market. Instead, we want to see the impact of closures understood, considered and mitigated wherever possible by the array of initiatives that have been put forward. I will continue to work with the sector, the FCA and other stakeholders from both sides—I mentioned some earlier—on this important issue.
Dame Angela Eagle
The Minister says that it is not enough of a problem at the moment to legislate. Why might that be the case? This is not going to become less of an issue. As more people get to the stage where they cannot access services, I suspect it will get worse rather than better. Could he give the Committee an idea of his thinking about how bad the situation would have to get before regulation would be appropriate? We must make certain that we do not leave millions of people behind and shut them out of access to necessary banking services.
Andrew Griffith
While taking nothing away from the hon. Member’s view, and indeed her experience in this space, I do not entirely share her pessimism that it is a one-way street and that the problem will only get worse. Solutions will be deployed. The rate at which banking hubs can be deployed, the sorts of services that people use, and technology will all evolve. I talked earlier, as she did, about some of the challenges of an ageing society in which loneliness is prevalent, both in urban and rural areas. There are initiatives, both community-led and technological, to help with some of that. We do not decry in any way the statement that there is a problem. I do not think that Members have heard that from me, or from any Government Members. The aim is to proceed in a proportionate manner.
Martin Docherty-Hughes
The Minister talks about how he wants the impact of closures to be understood in the decision-making process. Understood by whom? The banks are telling us why they want to close their branches: they are saving money. The FCA is saying, “The banks are closing their branches to save money.” Our constituents know what it means to lose a bank branch. There is nothing new here. We understand why banks are closing their branches: they want to save cash. They do not want to continue a local service for our constituents, so what does the Minister mean by “understood”? Understood by whom—the banks, the FCA or our constituents?
Andrew Griffith
Ultimately, the banks are downstream of the widespread issue that is the change in consumer behaviour. We have heard both in evidence and in comments made in Committee that 86% of transactions are now digital. The use case of going to a bank branch has evolved rapidly in my lifetime and the lifetime of all Committee members. That is the ultimate macro issue that we are dealing with. Is that issue understood? I think it is.
Solutions could be brought to the table, in terms of both a greater toolkit for the FCA and greater prominence and scrutiny of the FCA as it uses the existing toolkit and the new powers in the Bill. There are also industry-led solutions, which having perhaps started slowly are increasing at greater pace. Proportionality is about giving those developing trends time to mature to see what models can be developed, while accepting the underlying need for action.
I therefore ask the hon. Member for Hampstead and Kilburn to withdraw the motion.
Tulip Siddiq
After listening to contributions from Members on both sides of the Committee, I would like to have a conversation with the Minister about the new clause. I will bring it back at a later stage, but for now I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 6
National strategy on financial fraud
“(1) The Treasury must lay before the House of Commons a national strategy for the purpose of detecting, preventing and investigating fraud and associated financial crime within six months of the passing of this Act.
(2) In preparing the strategy, the Treasury must consult—
(a) the Secretary of State for the Home Office,
(b) the National Economic Crime Centre,
(c) law enforcement bodies which the Treasury considers relevant to the strategy,
(d) relevant regulators,
(e) financial services stakeholders,
(f) digital platforms, telecommunications companies, financial technology companies, and social media companies.
(3) The strategy must include arrangements for a data-sharing agreement involving—
(a) relevant law enforcement agencies,
(b) relevant regulators,
(c) financial services stakeholders,
(d) telecommunications stakeholders, and
(e) technology-based communication platforms,
for the purposes of detecting, preventing and investigating fraud and associated financial crime and, in particular, tracking stolen money which may pass through mule bank accounts or platforms operated by other financial services stakeholders.
(4) In this section ‘fraud and associated financial crime’ includes, but is not limited to authorised push payment fraud, unauthorised facility takeover fraud, and online and offline identity fraud.
(5) In this section, ‘financial services stakeholders’ includes banks, building societies, credit unions, investment firms, Electric Money Institutions, virtual asset providers and exchanges, and payment system operators.”—(Tulip Siddiq.)
This new clause would require the Treasury to publish a national strategy for the detection, prevention and investigation of fraud and associated financial crime, after having consulted relevant stakeholders. The strategy must include arrangements for a data sharing agreement between law enforcement agencies, regulators and others to track stolen money.
Brought up, and read the First time.
Tulip Siddiq
I beg to move, That the clause be read a Second time.
We fully support the provisions in the Bill that enhance the protection for victims of authorised push payment scams, but we feel that an opportunity has been wasted to do something on fraud prevention. UK Finance, the financial services trade body, recently published data that revealed that the amount of money stolen directly from hard-working families and businesses’ bank accounts through fraud and scams hit a record high of £1.3 billion in 2021. That is bad enough at the best of times, but even worse during a cost of living crisis. We need to get to grips with new types of fraud such as identity theft and online scams, which have seen criminals get rich at the public’s expense, with people’s life savings stolen and their economic security put at risk.
The current approach to fraud will always leave law enforcement agencies one step behind the criminals, who are exploiting new financial technologies and bank accounts to steal and hide the public’s money. The Opposition want to see enforcement agencies given the powers that they need to crack down on digitally savvy criminals, and to track stolen money through payment system operators, electronic money institutions and cryptoasset firms. If the Government are serious about tackling fraud, they will support our new clause to allow regulators and enforcement agencies to pursue criminals and bring them to justice wherever they hide their stolen money, and to protect people’s financial security.
New clause 6 would put in place a single, dedicated national strategy to tackle fraud. It would deliver a co-ordinated, interagency response across the Treasury, the Home Office, the National Economic Crime Centre, law enforcement agencies, the major banks and wider partners in financial services, telecommunications and social media centres. It would put in place a data-sharing agreement to help investigators and the sector prevent fraud and track stolen money. That agreement would extend beyond the banks to include social media companies, fintechs, payment system operators and other platforms that are exploited by tech savvy criminals. That is important, because for too long, tackling fraud has been solely the banks’ responsibility. That approach is completely outdated.
Mike Haley, the chief executive of CIFAS, said in evidence to the Committee:
“Provisions that facilitate greater data and intelligence sharing, particularly on suspicions of fraud and financial crime, would have the biggest impact in helping to prevent this type of crime. It is a crime that is at scale and at speed in the online environment. To be able to share the mobile numbers that are being used, the devices and the IP addresses at speed across the whole of the environment—payment providers, fintechs and telcos—would be enormously powerful. This is a volume crime, and we need to have prevention at the core of any national strategy. That would have a massive positive impact.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 68, Q129.]
The new clause would facilitate that sharing. Does the Minister agree with Mike Haley? If so, will he commit the Government to introducing a fraud strategy with data sharing at its heart?
I am sure, because I have heard the Minister speak so many times in this Committee, that he will tell us to be patient; he will say that change is coming. However, the millions of people who have fallen—or will fall—victim to fraud cannot afford to be patient any more. We cannot drag our feet over this. Scams will continue to rise, and countless more lives will be destroyed or lost. We need to make sure that the outdated way of tackling fraud is challenged once and for all. I ask the Minister to support the new clause.
Dame Angela Eagle
It is a pleasure to talk about this extremely important issue. The Treasury Committee produced a long and detailed report on this issue, with a series of recommendations. I hope that the Government will work cross-departmentally to put those into effect. Data sharing certainly featured in our views in that inquiry.
It is hard to contemplate the size of the explosion in fraud, how little of it is captured, and how few of the perpetrators are brought to justice. That is partly because of the massive number of chances for fraudulent activity to be perpetrated, which have come with changes in access to banking and digital capacity. They range from push frauds, fraudulent emptying of bank accounts and credit card cloning, all the way through to the text messages that we all get regularly on our phones.
The text messages tell us, for example, that we have recently been near someone who has covid—the message is purportedly from the NHS—and we need to give them our banking details so we can pay £1.75 for access to a PCR test. We have all seen them. I am getting a load now on energy support—probably everyone is getting them—which say that the Government’s support for energy bills has to be applied for and that we have to give these people our banking details. These are very plausible texts, which many people fall for. There are phone calls as well, purportedly from the bank, and emails too. This is a sophisticated level of fraud that is psychologically very well organised.
Emma Hardy
One message worth highlighting that I received was, “Hi mum, I’ve lost my phone. Please send some money to this number.” I rang both my daughters to ask, “Is this from one of you?”. They both said it was not. This “Hi mum” one that is going round at the moment has caught many people out. These messages play on emotions and can make people deeply concerned when they receive them.
Dame Angela Eagle
It makes people deeply concerned and it makes them do things that they obviously live to regret in the fullness of time.
Increasingly, there are also phone calls from fraudsters pretending that they are the fraud police and that the person’s bank account has been accessed for fraudulent purposes. It is very difficult to keep up with the level of activity on our phones—we are being bombarded every day—and that is without considering the scamming that the FCA is fighting, day in, day out, on products offered online, such as pensions, insurance and investment products, all of which regularly lie beyond the regulatory border, but can lead to massive amounts of financial loss if they are believed. It is also without considering the areas where younger people tend to get their financial advice, such as TikTok and other places, where we probably—it has to be said, Mr Sharma—do not spend that much of our time.
The windows for getting to people with these kinds of fraudulent intents and sophisticated frauds widen constantly. The capacity to deal with them does not widen as regularly and, by definition, legislation is much slower than the innovation of these people.
We have asked the authorities that are tasked with fighting fraud what they are doing about it. The Treasury Committee has taken evidence on the topic, and we were struck by how fragmented those fighting fraud are across Departments and by how process-related, rather than output-related, the evidence from the authorities was. They said things like, “We have 150 different things that we are meant to do by 2023, and we have done 91% of them,” but fraud is still massively increasing all the time.
We need a system—a national fraud strategy—that looks at the output of fraud, rather than the processes or tick boxes by which the different anti-fraud authorities, which are fragmented all the way through, justify what they are doing. In reality, even if there is lots of work going on, the outcome is not nearly what we would want to see. Levels of fraud are rising significantly, affecting more and more people, and there are fewer and fewer successes in dealing with it.
It ranges from very sophisticated money laundering kinds of fraud—we are not talking about money laundering here, but we could talk about it for a very long time, and about the way banking structures seem to facilitate it—to lower levels of fraud. There is fraud that is perpetrated from outside our country’s boundaries and there is sophisticated money laundering activity. We are talking about frauds that are ruining the lives of the many constituents who fall victim to them. Many people do not get compensation when they have been conned into sharing their bank details and have had their bank accounts emptied or their credit cards cloned, because they have had a hand in it in some way. I know that the authorities work closely with the banks to create circumstances in which compensation can be given when there is no fault, but there are big blurred lines.
Martin Docherty-Hughes
If the hon. Member for Hampstead and Kilburn presses the new clause to a vote, I will certainly support it. I declare an interest as the chair of the all-party parliamentary group on blockchain.
To build on what the hon. Member for Wallasey said, in subsections (2)(f) and (3)(d) and (e), we have a huge opportunity to help the Government by ensuring that there is a strategic overview of how fraud impacts on the technology sector. The problem is not necessarily the technology but the people utilising it. Distributed ledger-type technologies, for example, are used to access investments and assets, but those who are supposedly selling assets are taking advantage of technology that a lot of younger people use.
Critically, I hope that the Government hear the concern that there might be no strategic overview of how such technology can be manipulated. The tech is fine, but we must consider that manipulation—particularly of closed distributed ledger technologies and closed blockchains—and how it can block out the people who actually buy into those systems. I hope that the Government hear what has been said on the new clause.
Emma Hardy
I support the new clause. I refer the Minister to the evidence given by Mike Haley, the chief executive of CIFAS. In respect of fraud, he said:
“Absolutely, there should be a national strategy, and prevention should be at its core.”
He said that the Home Office was looking at
“publishing a national strategy; it has been much delayed and it is very much anticipated.”
One reason for including a national strategy in the Bill is the need for that strategy to be introduced as quickly as possible.
Mike Haley also said that he would like that strategy to be
“more ambitious, and to cover the public and private sectors, as well as law enforcement.”
He made the very good point that
“fraudsters do not decide one day, ‘We only go after bounce back loans because that is a public sector fraud.’ They will go after a loan from the NatWest bank, or a mortgage.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 68, Q130.]
He highlighted the inability to share information and said that some people might say that GDPR was preventing them from sharing information. He went on to say:
“It is a crime that is at scale and at speed in the online environment. To be able to share the mobile numbers that are being used, the devices and the IP addresses at speed across the whole of the environment—payment providers, fintechs and telecos—would be enormously powerful. This is a volume crime, and we need to have prevention at the core of any national strategy. That would have a massive positive impact. ”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 38, Q129.]
Our witnesses called for a national strategy that looks at crime seriously and that is more ambitious than that suggested by the Home Office and broader in scope. Although many of the frauds relate to small amounts, they are numerous and they cause people significant harm. When the Minister responds, I would like him to recall that oral evidence and the reason why our new clause calls for a national strategy.
Andrew Griffith
I will be brief. The Government are committed to tackling fraud, and we recognise that it goes far wider than financial services. There absolutely should be a national strategy, and there will be.
The Government recognise that tackling fraud requires a unified and co-ordinated response from Government, law enforcement and the private sector better to protect the public and businesses from fraud, reduce the impact on victims, and increase the disruption and prosecution of fraudsters. That is why the Government, led by the Home Office, which is the right body to be the lead, but with full Treasury input, will publish a new broad-based strategy to address the threat of fraud. I hope the Opposition will welcome that. The Government intend to publish it later this year.
Andrew Griffith
Indeed.
The Government will work with industry to remove the vulnerabilities that fraudsters exploit, we will work with intelligence agencies to shut down fraudulent infrastructure, and we will work with law enforcement to identify the most harmful offenders and bring them to justice. We will also ensure, with all partners, that the public have the advice and support they need. That should reassure the Committee that a clear strategy to tackle fraud will be forthcoming and that the new clause is unnecessary.
I note the Opposition’s concerns about data sharing, which are specifically referenced in the new clause. I reassure them that the Payment Systems Regulator has work under way with industry participants to enhance data sharing to prevent fraud. The PSR’s managing director, Chris Hemsley, did not raise any legislative barriers to data sharing for that purpose when he gave evidence to the Committee recently.
I will rise to the challenge put down by the hon. Member for Wallasey to turn the tide on fraud, because we all must acknowledge that it is a critical policing issue in this day and age. In that spirit, I hope that she will join us to ensure that her colleagues reverse their opposition to the Public Order Bill, which is tying up hundreds of thousands of police hours that could usefully be spent prosecuting the challenge of fraud. I also hope that she supports our initiative to cut red tape in policing and to end woke policing, so that we no longer arrest people for Twitter posts, we do not send the police off to dance the Macarena at carnivals or Pride events, and they no longer take the knee. If the hon. Lady is as serious as we are about tackling fraud, she has to acknowledge that there is a need to think about how we allocate our resources.
Dame Angela Eagle
After what I thought was quite a consensual debate, it is slightly unworthy of the Minister to resort to those comments in the week when there has been an inspectorate report about the misogyny, behaviour and culture of a lot of the police force. That needs to be reformed so that all members of our communities, whatever their age, gender or ethnicity, can trust the police; we all want to see that.
Will the Minister admit that so-called woke policing is not an issue in fraud? The issue is fragmentation. Woke policing was not raised during the great number of Treasury Committee evidence sessions about the fraud, so it was unworthy of him to make those points at the end of his speech. We need a system that is not fragmentated and that is focused relentlessly on output, and where there is cross-departmental working and proper funding, as well as data sharing, so that we can crack down on something that all of us want to see driven out of our system.
Andrew Griffith
I would never want to be unworthy in the hon. Lady’s eyes, so I am distressed that my offer to build consensus about how the police could best deploy their resources has, at this first stage, been rebuffed.
I ask the hon. Member for Hampstead and Kilburn to withdraw the motion.
Tulip Siddiq
The Minister was doing so well and I was hoping we could go through this sitting without hearing the Conservatives say the word “woke” once, but unluckily that has now been crossed off my bingo sheet.
I will press the new clause to a vote, because I want to hold the Minister to account and ensure he does not push this commitment too far down the road, and because every person in the sector I have spoken to has stressed the importance of legislative change when it comes to data sharing.
Question put, That the clause be read a Second time.
Financial Services and Markets Bill
Wednesday 7th December 2022
(1 year, 11 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 7 December 2022 - Clarification of Schedule 2 (Transitional amendments): Large print edition - (7 Dec 2022)
18:01 - The House divided: - Ayes: 205 / Noes: 282 - Question accordingly negatived.
18:16 - The House divided: - Ayes: 204 / Noes: 278 - Question accordingly negatived.
18:30 - The House divided: - Ayes: 206 / Noes: 271 - Question accordingly negatived.
The Economic Secretary to the Treasury (Andrew Griffith)
I beg to move, That the clause be read a Second time.
Mr Deputy Speaker (Mr Nigel Evans)
With this it will be convenient to discuss the following:
Amendment (a) to new clause 17, after “mentioned in paragraphs (a) to (ia) of paragraph 11(1);” insert—
“(aa) the effect of the Financial Services and Markets Act 2023 on financial stability, and potential risks to financial stability, in the UK;
(ab) an assessment of the delivery of the FCA’s objectives in the previous year;
(ac) an assessment of measures which could improve the delivery of the FCA’s objectives in the next year;”
Amendment (b) to new clause 17, after “mentioned in paragraphs (a) to (f) of paragraph 19(1);” insert—
“(aa) the effect of the Financial Services and Markets Act 2023 on financial stability, and potential risks to financial stability, in the UK;
(ab) an assessment of the delivery of the PRA’s objectives in the previous year;
(ac) an assessment of measures which could improve the delivery of the PRA’s objectives in the next year;”
Government new clause 18—Composition of panels.
Government new clause 19—Consultation on rules.
Government new clause 20—Unauthorised co-ownership AIFs.
New clause 1—National strategy on financial fraud—
‘(1) The Treasury must lay before the House of Commons a national strategy for the purpose of detecting, preventing and investigating fraud and associated financial crime within six months of the passing of this Act.
(2) In preparing the strategy, the Treasury must consult—
(a) the Secretary of State for the Home Office,
(b) the National Economic Crime Centre,
(c) law enforcement bodies which the Treasury considers relevant to the strategy,
(d) relevant regulators,
(e) financial services stakeholders,
(f) digital platforms, telecommunications companies, financial technology companies, and social media companies.
(3) The strategy must include arrangements for a data-sharing agreement involving—
(a) relevant law enforcement agencies,
(b) relevant regulators,
(c) financial services stakeholders,
(d) telecommunications stakeholders, and
(e) technology-based communication platforms,
for the purposes of detecting, preventing and investigating fraud and associated financial crime and, in particular, tracking stolen money which may pass through mule bank accounts or platforms operated by other financial services stakeholders.
(4) In this section “fraud and associated financial crime” includes, but is not limited to authorised push payment fraud, unauthorised facility takeover fraud, and online and offline identity fraud.
(5) In this section, “financial services stakeholders” includes banks, building societies, credit unions, investment firms, Electric Money Institutions, virtual asset providers and exchanges, and payment system operators.’
This new clause would require the Treasury to publish a national strategy for the detection, prevention and investigation of fraud and associated financial crime, after having consulted relevant stakeholders. The strategy must include arrangements for a data sharing agreement between law enforcement agencies, regulators and others to track stolen money.
New clause 2—Local community access to essential in-person banking services—
‘(1) The Treasury and the FCA must jointly undertake a review of the state of access to essential in-person banking services for local communities in the United Kingdom, and jointly prepare a report on the outcome of the review.
(2) “Essential in-person banking services” include services which are delivered face-to-face and which local communities require regular access to. These may include services provided in banks, banking hubs, or other service models.
(3) The report mentioned in subsection (1) must be laid before the House of Commons as soon as practicable after the review has been undertaken.
(4) The report mentioned in subsection (1) must propose a minimum level of access to essential in-person banking services which must be provided by banks and building societies in applicable local authority areas in the United Kingdom, for the purpose of ensuring local communities have adequate access to essential in-person banking services.
(5) The applicable local authority areas mentioned in subsection (4) are local authority areas in which, in the opinion of the FCA, local communities have a particular need for the provision of essential in-person banking services.
(6) In any applicable local authority area which, according to the results of the review undertaken under subsection (1) falls below the minimum level of access mentioned in subsection (4), the FCA may give directions for the purpose of ensuring essential in-person banking services meet the minimum level of access required by subsection (4).
(7) A direction under subsection (6) may require a minimum level of provision of essential in-person banking services through mandating, for example—
(a) a specified number of essential in-person banking services within a geographical area, or
(b) essential in-person banking services to operate specific opening hours.’
This new clause would require the Treasury and FCA to conduct and publish a review of community need for, and access to, essential in-person banking services, and enable the FCA to ensure areas in need of essential in-person banking service have a minimum level of access to such services.
New clause 3—Essential banking services access policy statement—
‘(1) The Treasury must lay before the House of Commons an essential banking services access policy statement within six months of the passing of this Act.
(2) An “essential banking services access policy statement” is a statement of the policies of His Majesty’s Government in relation to the provision of adequate levels of access to essential in-person banking services in the United Kingdom.
(3) “Essential in-person banking services” include services which are delivered face-to-face, and may include those provided in banks, banking hubs, or other service models.
(4) The policies mentioned in sub-section (2) may include those which relate to—
(a) ensuring adequate availability of essential in-person banking services;
(b) ensuring adequate provision of support for online banking training and internet access, for the purposes of ensuring access to online banking; and
(c) expectations of maximum geographical distances service users should be expected to travel to access essential in-person banking services in rural areas.
(5) The FCA must have regard to the essential banking services access policy statement when fulfilling its functions.’
This new clause would require the Treasury to publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including policies relating to availability of essential in-person banking services, support for online banking, and maximum distances people can expect to travel to access services.
New clause 4—FCA duty to report on mutual and co-operative business models—
‘(1) The FCA must lay before Parliament a report as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act is passed, and
(b) every subsequent 12-month period,
on how it considers the specific needs of mutual and co-operative financial services providers and other relevant business models when discharging its regulatory functions.
(2) The “specific needs” referred to in subsection (1) must include the needs of mutual and co-operative financial services providers to have a level playing field with financial services providers which are not mutuals or co-operatives.
(3) The “mutual and co-operative financial services providers and other relevant business models” referred to in subsection (1) may include—
(a) credit unions,
(b) building societies,
(c) mutual banks,
(d) co-operative banks, and
(e) regional banks.’
This new clause would require the FCA to report annually on how they have considered the specific needs of mutual and co-operative financial services.
New clause 5—PRA duty to report on mutual and co-operative business models—
‘(1) The FCA must lay before Parliament a report as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act is passed, and
(b) every subsequent 12-month period,
on how it considers the specific needs of mutual and co-operative financial services providers and other relevant business models when discharging its regulatory functions.
(2) The “specific needs” referred to in subsection (1) must include the needs of mutual and co-operative financial services providers to have a level playing field with financial services providers which are not mutuals or co-operatives.
(3) The “mutual and co-operative financial services providers and other relevant business models” referred to in subsection (1) may include—
(a) credit unions,
(b) building societies,
(c) mutual banks,
(d) co-operative banks, and
(e) regional banks.’
This new clause would require the FCA to report annually on how they have considered the specific needs of mutual and co-operative financial services.
New clause 6—Updated Green Finance Strategy—
‘(1) The Treasury must lay before the House of Commons an updated Green Finance Strategy within three months of the passing of this Act.
(2) The strategy must include—
(a) a Green Taxonomy, and
(b) Sustainability Disclosure Requirements.
(3) In preparing the strategy, the Treasury must consult—
(a) financial services stakeholders,
(b) businesses in the wider economy,
(c) the Secretary of State for Business, Energy and Industrial Strategy, and
(d) the Secretary of State for Work and Pensions.
(4) In this section a “Green Taxonomy” means investment screening criteria which classify which activities can be defined as environmentally sustainable including, but not limited to—
(a) climate change mitigation and adaptation,
(b) sustainable use and protection of water and marine resources,
(c) transitions to a circular economy,
(d) pollution prevention and control, and
(e) protection and restoration of biodiversity and ecosystems.
(5) In this section “Sustainability Disclosure Requirements” are the requirements placed on companies, including listed issuers, asset managers and asset owners, to report on their sustainability risks, opportunities and impacts.’
This new clause would require the Treasury to publish an updated Green Finance Strategy. This must include a Green Taxonomy and Sustainability Disclosure Requirements.
New clause 7—Access to cash: Guaranteed minimum provision—
‘(1) The Treasury must, by regulations, make provision to guarantee a minimum level of access to free of charge cash access services for consumers across the United Kingdom.
(2) The minimum level of access referred to in subsection (1) must be included in the regulations.
(3) Regulations under this section shall be made by statutory instrument, and may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.’
New clause 8—Stewardship reporting requirements for occupational pension schemes—
‘(1) Section 36 of the Pensions Act 1995 (Choosing investments) is amended as follows.
(2) In subsection (1) after “(4)” insert “and, for relevant schemes, (4A)”.
(3) After subsection (4), insert—
“(4A) The trustees of relevant schemes must publish information regarding their stewardship activities. In doing so they must have regard to, amongst other matters, the scheme’s—
(a) purpose, culture, values and strategy;
(b) governance structures and processes;
(c) conflicts of interest policy;
(d) engagement strategy, including escalation steps;
(e) aggregate statistics on total engagement activity;
(f) thematic engagement priorities; and
(g) engagement outcomes.”
(4) After subsection (6), insert—
“(6A) For the purposes of this section—
(a) a “relevant scheme” means a scheme with £5bn or more in relevant assets,
(b) “relevant assets” is to be calculated in accordance with methods and assumptions prescribed in regulations.”’
This new clause raises the baseline standard of stewardship for large institutional investors beyond the minimum standards set by the UK’s implementation of the Shareholder Rights Directive, drawing on the Financial Reporting Council’s Stewardship Code and ShareAction’s Best Practice Engagement Reporting Template.
New clause 9—Stewardship reporting requirements for certain investors—
‘(1) The FCA may make rules requiring some or all of those managing investments to publish information on their stewardship activities. In doing so they must have regard to, amongst other matters—
(a) purpose, culture, values, business model and strategy;
(b) governance structures and processes;
(c) conflicts of interest policy;
(d) engagement strategy, including escalation steps;
(e) aggregate statistics on total engagement activity;
(f) thematic engagement priorities; and
(g) engagement outcomes.
(2) The FCA may make rules to clarify the definition of “the most significant votes” in rule 3.4.6 of the systems and controls section of the FCA Handbook.’
This new clause would enable the FCA to make rules raising the baseline standard of stewardship for large institutional investors beyond the minimum standards set by the UK’s implementation of the Shareholder Rights Directive, drawing on the Financial Reporting Council’s Stewardship Code and ShareAction’s Best Practice Engagement Reporting Template. It would also allow the FCA to define and monitor “significant votes”.
New clause 10—Consumer Panel duty to report to Parliament—
‘(1) FSMA 2000, as amended by Section 6 of the Financial Services Act 2012 and Section 132 of the Financial Services (Banking Reform) Act 2013, is amended as follows.
(2) At the end of section 1Q, insert—
“(7) The Consumer Panel must lay an annual report before Parliament evaluating the FCA’s fulfilment of its statutory duty to protect consumers, including comments on—
(a) the adequacy and appropriateness of the FCA’s use of its regulatory powers;
(b) the measures the FCA has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support; and
(c) the FCA’s receptiveness to the recommendations of the Consumer Panel.”’
This new clause would introduce a further level of Parliamentary scrutiny of the work of the FCA to protect consumers by requiring the Financial Services Consumer Panel to lay an annual report before Parliament outlining its views on the FCA’s fulfilment of its statutory duty to protect consumers.
New clause 11—Personalised financial guidance: power to make regulations—
‘(1) The Treasury may by regulations make provision for UK citizens to access personalised financial guidance from appropriately regulated financial services firms, for the purposes of supporting them to make decisions which improve their financial sustainability.
(2) The “UK citizens” referred to in sub-section (1) include, in particular, UK citizens who are unlikely to have access to financial advice (provided in accordance with Chapter 12 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001).
(3) In this section, “personalised financial guidance” means a communication—
(a) that is made to a person in their capacity as an investor or potential investor, or in their capacity as agent for an investor or a potential investor;
(b) which constitutes a recommendation to them to do any of the following (whether as principal or agent)—
(i) buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular investment which is a security, structured deposit or a relevant investment; or
(ii) exercise or not exercise any right conferred by such an investment to buy, sell, subscribe for, exchange or redeem such an investment; and
(c) that is—
(i) based on a consideration of the circumstances of that person; and
(ii) not explicitly presented as suitable for the person to whom it is made.
(4) The provision that may be made by regulations under this section includes provisions—
(a) relating to the provision of financial advice;
(b) relating to suitability requirements under MiFID;
(c) conferring powers, or imposing duties, on a relevant regulator (including a power to make rules or other instruments).
(5) The power to make regulations under this section includes power to modify legislation.
(6) The power under subsection (5) includes power to modify the definition of “personalised financial guidance” in subsection (2).
(7) Regulations made under this section, and which modify only the following kinds of legislation are subject to the negative procedure—
(a) EU tertiary legislation;
(b) subordinate legislation that was not subject to affirmative resolution on being made.
(8) Regulations under this section to which subsection (7) does not apply are subject to the affirmative procedure.
(9) Before making regulations under this section, the Treasury must consult the FCA.
(10) In this section—
“legislation” means primary legislation, subordinate legislation and retained direct EU legislation;
“MiFID” means Regulation (EU) 2017/565 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.’
New clause 12—Requirement to publish regulatory performance information on new authorisations—
‘(1) The FCA and PRA must each lay before Parliament a report on their regulatory performance as soon as practicable after the end of—
(a) the period of six months beginning with the day on which this Act receives Royal Assent, and
(b) each subsequent quarter.
(2) A report under this section must include analysis of data on—
(a) the number of new applications for authorisation made to each regulator during the reporting period, with a breakdown by authorisation type;
(b) the rates of approval for applications for authorisation by each regulator, with a breakdown by authorisation type;
(c) the average length of time taken from application to final authorisation decision by each regulator;
(d) the FCA or PRA‘s assessment of the time and cost incurred by applicants to comply with information requirements for authorisation; and
(a) such other matters as the Treasury considers appropriate.’
This new clause requires both regulators to publish regular reports to Parliament on their regulatory performance for new applicants for regulation.
New clause 13—Requirement to publish regulatory performance information on authorised firms—
‘(1) The FCA must lay before Parliament a report on its regulatory performance as soon as practicable after the end of—
(a) the period of six months beginning with the day on which this Act receives Royal Assent, and
(b) each subsequent quarter.
(2) A report under this section must include the average length of time taken from the initial submission of an application for authorisation by an applicant to the issuing of a final decision by the FCA for each of the following regulatory responsibilities—
(a) approved persons;
(b) change in control;
(c) variation of permission;
(d) waivers and modifications that alter compliance obligations.’
This new clause requires the FCA to publish regular reports to Parliament on its regulatory performance for existing authorised entities and persons.
New clause 14—Determination of applications—
‘(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After section 61(2) insert—
“(2ZA) In determining the application, the regulator must—
(a) assign a new application to a case handler within five working days of the application being received;
(b) complete an initial application review within ten working days of allocation to a case handler; and
(c) make no requests for additional information after a period of fifteen working days from the receipt of the application.
(2ZZA) The regulators must publish, on an annual basis, monitoring data relating to—
(a) the proportion of cases which require escalation to sponsoring firms, including summary trend data on the reasons for escalation;
(b) the average time taken to assign a case handler; and
(c) the average number of days it takes to complete determination of an application.’
This new clause would add to the regulators’ authorisation KPIs outlined in the Financial Services and Markets Act 2000 and require them to publish monitoring data related to the determination of authorisations.
New clause 15—Regulators’ duty to report on competitiveness and growth objective—
‘(1) The FCA and PRA must each lay before Parliament a report as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act receives Royal Assent, and
(b) every subsequent 12-month period,
on how they consider that they have facilitated the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term.
(2) Reports under this section must include analysis of data on the following—
(a) steps taken to simplify regulatory rulebooks and frameworks;
(b) the number of new market entrants to the UK;
(c) new regulations introduced in the previous twelve months;
(d) an assessment of the impact of the new regulations to UK competitiveness;
(e) comparative analysis of the number of new authorisations in the UK and other international jurisdictions in the previous twelve months;
(f) comparative analysis of product and service innovations introduced in the UK and other international jurisdictions in the previous twelve months; and
(g) such other matters as the Treasury may from time to time direct.’
This new clause would require both the FCA and PRA to each publish an annual report setting out how they have facilitated international competitiveness and growth against a range of data and analysis requirements.
New clause 16—Regulatory principles to be applied by both regulators: proportionality principle—
‘(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) In section 3B(1)(b), leave out from “benefits,” to end and insert “taking into consideration the nature of the service or product being delivered, the nature of risk to the consumer, whether the cost of implementation is proportionate to that level of risk and whether the burden or restriction enhances UK international competitiveness.”’
This new clause would amend the existing regulatory principle for both regulators and require them nature of and risk to the consumer, and the service or product being delivered, must be taken into account when imposing a new burden or restriction.
New clause 21—Prudential capital requirements for specified financial institutions—
‘(1) Within six months of the passing of this Act, the Treasury must by regulations set prudential capital requirements for specified financial institutions.
(2) Regulations under this section must require financial institutions to hold in reserve £1 for every £1 used to finance assets connected with fossil fuel activities, which is liable for potential loss due to the climate risk exposure of the assets.
(3) In this section “fossil fuel activities” means the extraction, production, transportation, refining and marketing of crude oil, natural gas or thermal coal, as well as any fossil-fuel fired power plants, unless covered by an exemption.’
This new clause would give the Treasury the power to make regulations requiring financial institutions to hold capital in reserve to reflect the climate risk exposure of assets connected with fossil fuel activities.
New clause 22—FCA: Regard to financial inclusion in consumer protection objective—
‘(1) FSMA 2000 is amended as follows.
(2) In section 1C (The consumer protection objective), after subsection (2)(c) insert—
“(ca) financial inclusion;””.
New clause 23—FCA duty to report on financial inclusion—
“(1) The FCA must lay before Parliament a report, as soon as practicable after the end of—
(a) the period of 12 months beginning with the day on which this Act is passed, and
(b) every subsequent 12-month period,on financial inclusion in the UK.
(2) A report under this section must include—
(a) an assessment of the state of financial inclusion in the UK;
(b) details of any measures the FCA has taken, or is planning to take, to improve financial inclusion in the UK;
(c) developments which the FCA considers could significantly impact on financial inclusion in the UK; and
(d) any recommendations to the Treasury which the FCA considers may promote financial inclusion in the UK.’
New clause 24—Rules relating to forest risk commodities—
‘(1) FSMA 2000 is amended as follows.
(2) After section 19 (The general prohibition) insert—
“19A Specific requirements regarding forest risk commodities
(1) A person must not carry on a regulated activity in the United Kingdom that may directly or indirectly support a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity, unless relevant local laws were complied with in relation to that commodity.
(2) A person that intends to carry on a regulated activity that may directly or indirectly support a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity, shall establish and implement a due diligence system in relation to that regulated activity.
(3) In this section, “due diligence system” means a system for—
(a) identifying and obtaining information about the commercial activities of any beneficiary of the regulated activity and of their group regarding the use of a forest risk commodity,
(b) assessing the risk that relevant local laws were not complied with in relation to that commodity, and
(c) mitigating that risk.
(4) A person that carries on a regulated activity in the United Kingdom that directly or indirectly supports a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity shall be subject to—
(a) the reporting requirements under paragraph 4 of Schedule 17 of the Environment Act in relation to the due diligence system required under subsection (2) of this section, and
(b) Part 2 of Schedule 17 of the Environment Act as though they are a person to whom Part 1 of that Schedule applies.
(5) Terms used in this section that are defined in Schedule 17 of the Environment Act shall have the meaning given to them in that Schedule.”’
New clause 25—Long term economic resilience and prosperity objective—
‘(1) FSMA 2000 is amended as follows.
(2) In section 1B (FCA’s general duties)—
(a) in subsection (2) leave out “function well” and insert “deliver long term economic resilience and prosperity”;
(b) in subsection (3) for paragraph (c) substitute—
“(c) the climate safety objective (see section 1E);
(d) the nature protection objective (see section 1F).”
(3) For section 1E (The competition objective) substitute—
“1E The climate safety objective
The climate safety objective is: facilitating the net UK carbon emissions target in section 1 of the Climate Change Act 2008, and the 1.5 degrees temperature goal of the Paris Agreement.
1F The nature objective
The nature objective is: facilitating alignment with halting and reversing biodiversity loss by 2030.”’
This new clause would make the FCA’s strategic objective ensuring that the relevant markets deliver long term economic resilience and prosperity, remove the competition operational objective and introduce two new operational objectives; climate safety and nature protection.
New clause 26—Prohibited regulated activity: new fossil fuel developments—
‘(1) A UK bank, or person acting on behalf of a UK bank, may not carry on a regulated activity where the carrying out of the activity would have the effect of providing financial investment in, or facilitating the financing of, new fossil fuel developments.
(2) In this section—
(a) “new fossil fuel developments” includes—
(i) any activity, in the UK or elsewhere, which enables or contributes to the enabling of, the extraction, processing and distribution of fossil fuels, and
(ii) the construction, in the UK or elsewhere, of fossil fuel-powered electricity generation;
(b) “fossil fuels” has the same meaning as in section 32M (Interpretation of sections 32 to 32M) of the Electricity Act 1989;
(c) “UK bank” has the same meaning as in section 2 (Interpretation: “bank”) of the Banking Act 2009.
(3) The FCA may impose sanctions against the relevant bank, where the prohibition in subsection (1) is contravened.
(4) The sanctions mentioned in subsection (3) includes—
(a) the imposition of a penalty of such amount as the FCA considers appropriate;
(b) suspension of variable components of remuneration;
(c) suspension of dividend pay-outs;
(d) removal of access to central bank funding; and
(e) removal of permission to carry on regulated activities.
(5) This section shall come into force on 31 December 2023.’
This new clause would prohibit banks from conducting regulated activity which may enable new fossil fuel developments from December 2023 onwards, and give the FCA powers to impose certain sanctions for non-compliance.
New clause 27—Refusal to provide services for reasons connected with freedom of expression—
‘(1) No payment service provider providing a relevant service (the “provider”) may refuse to supply that service to any other person (the “customer”) in the United Kingdom if the reason for the refusal is significantly related to the customer exercising his or her right to freedom of expression.
(2) Where a customer has prominently and publicly exercised his or her right to freedom of expression, it is to be presumed that any refusal by a provider to supply a relevant service was significantly related to the customer exercising his or her right to freedom of expression unless the provider can provide a substantial basis for believing there was an alternative good and proper reason for the refusal.
(3) Where a customer has prominently and publicly exercised his or her right to freedom of expression and has been refused a relevant service by a provider on application by the customer, the FCA must within 5 working days issue an order to the provider immediately to recommence supply unless the FCA considers it clearly inappropriate to do so.
(4) An order issued pursuant to subsection (3) must last until the FCA is satisfied that there was or there has subsequently arisen an alternative good and proper reason for the refusal.
(5) Upon considering an application by the customer under subsection (3), where the FCA decides not to issue an order to the supplier, the FCA must give reasons in writing to the customer explaining its decision not to issue an order.
(6) Where the FCA is satisfied that there has been a breach by a provider of the obligation in subsection (1) or the failure to comply with an order issued pursuant to subsection (3), the FCA may impose a penalty on the provider of such an amount as it considers appropriate. The FCA may, instead of imposing a penalty on a provider, publish a statement censuring the provider.
(7) The FCA must within three months of the coming into force of this section prepare and arrange for publication of a statement of its policy with respect to—
(a) the circumstances the FCA will consider under subsection (3) in deciding whether it is clearly inappropriate to issue an order; and
(b) the imposition of penalties and statements of censure under subsection (6).
(8) A breach by a provider of the obligation in subsection (1) and the failure to comply with an order issued pursuant to subsection (3) are actionable at the suit of the customer, subject to the defences and other incidents applying to actions for breach of statutory duty.
(9) In this section—
(a) a “relevant service” means a service which is (in whole or in part) directed at users in the United Kingdom and constitutes—
(i) any service provided pursuant to any regulated activity; or
(ii) any service in relation to a payment system for the purposes of enabling the transfer of funds using the payment system as referred to in section 42(5) of the 2013 Act;
save for any service expressly excluded by regulations;
(b) a “payment service provider” has the same meaning as under section 42(5) of the 2013 Act;
(c) the right to freedom of expression has the same meaning as under Article 10 of the European Convention on Human Rights—
(i) save that it includes the right to campaign for or seek to protect the right to freedom of expression of others; and
(ii) save as excluded by regulations;
(d) “the 2013 Act” means the Financial Services (Banking Reform) Act 2013.
(10) Regulations under this section may be made pursuant to the provisions of section 428 of FSMA 2000 save that—
(a) before preparing regulations under this section, the Secretary of State must consult the FCA and such other persons as the Secretary of State considers appropriate; and
(b) they must be adopted using the affirmative procedure before Parliament.’
New clause 28—Regulation of buy-now-pay-later firms—
‘(1) Within 28 days of the passing of this Act, the Secretary of State must by regulations make provision for—
(a) buy-now-pay-later credit services, and
(b) other lending services that have non-interest-bearing elements
to be regulated by the FCA.
(2) These regulations must include measures which—
(a) ensure all individuals accessing services mentioned in sub-section (1) have access to the Financial Services Ombudsman,
(b) ensure that individuals applying for services mentioned in sub-section (1) are subject to credit checks prior to the service being approved, and
(c) ensure that individuals accessing services mentioned in paragraph (1) are protected by Section 75 of the Consumer Credit Act.’
This new clause would bring the non-interest-bearing elements of bring buy-now-pay-later lending and similar services under the regulatory ambit of the FCA, as proposed by the Government consultation carried out in 2022.
New clause 29—Cost benefit analyses to include assessments of economic crime risks—
‘(1) FSMA 2000 is amended as follows.
(2) In section 138I(7), at end insert—
“(c) an assessment of economic crime risks posed by the proposed rules”’.
This new clause would require cost-benefit analyses to include assessments of the risk of economic crime arising from the proposed rules.
New clause 30—Establishment of Financial Regulator’s Supervision Council—
‘(1) The Secretary of State must, within six months of this Bill receiving Royal Assent, make provision for the establishment of a body to be known as the Financial Regulator’s Supervision Council (“FRSC”).
(2) The role of the body established under subsection (1) is to provide independent scrutiny and oversight of the work of the FCA and its fulfilment of its duties and responsibilities, particularly its consumer protection objective.
(3) The responsibilities of the body shall include, but not be limited to—
(a) overseeing the performance of the FCA from a consumer perspective, including undertaking annual appraisals and commissioning or undertaking periodic reviews as appropriate; and
(b) appointing, reviewing annually the performance of and, where appropriate, dismissing—
(i) the Chair and Chief Executive of the FCA (jointly with HM Treasury);
(ii) the non-Executive Directors of the FCA appointed by the Department for Business, Energy and Industrial Strategy;
(iii) Members and Chair of the Financial Services Consumer Panel;
(iv) the Financial Regulators’ Complaints Commissioner;
(v) the directors of the Financial Ombudsman Service and its Independent Assessor;
(vi) the directors of the Financial Services Compensation Scheme; and
(vii) such employees as the FRSC requires to perform its statutory role.
(4) The body is to be funded by a 1% levy on the FCA’s revenue.
(5) Membership of the body shall be selected through open competition and must include individuals representing the interests of financial services consumer groups.
(6) The Secretary of State may by regulations, following consultation with consumer groups, make further provision for the body’s responsibilities, powers, constitution and membership.
(7) Any reports published by the body must be laid before Parliament.’
New clause 31—Regulators’ duty of care—
‘(1) Individuals and organisations undertaking activities within the remit of the FCA and PRA shall owe a duty of care to consumers.
(2) The “duty of care” means an obligation to act towards consumers with a reasonable level of watchfulness, attention, caution and prudence.
(3) An individual or organisation in breach of this duty of care may be subject to legal claims for negligence.’
New clause 32—Regulators’ immunity from civil damages action—
‘(1) Relevant regulators may be the subject of civil damages actions in cases where—
(a) a consumer has suffered material financial loss,
(b) the loss has occurred since 1 December 2001,
(c) the activity in the course of which the consumer suffered material financial loss is within the remit of the relevant regulator, and
(d) the relevant regulator was aware, or could reasonably be expected to have been aware, that the consumer would have been at risk of suffering financial loss and negligently failed to take sufficient action to prevent the consumer from suffering such loss.
(2) Any recommendations made by the investigator appointed under section 84(1)(b) of the Financial Services Act 2012 following the upholding of a complaint made against a regulator by a consumer who has suffered financial loss, which may include the providing of material financial redress, shall be considered binding on the regulator.
(3) The Limitation Act 1980 shall not apply in relation to any civil actions brought under this section until six years after this section has come into force.’
New clause 33—Reporting requirement: Green agenda—
‘(1) Within six months of the passing of this Act, and every twelve months thereafter, the PRA and FCA must jointly lay before the House of Commons a report setting out their assessment of—
(a) the ways in which the PRA and FCA have incentivised and promoted green finance for the period covered by the report,
(b) the impact of the UK financial system in incentivising green investment for the period covered by the report, and
(c) the ways in which the PRA and FCA have supported the Secretary of State’s ability to meet the duty set out is section 1 of the Climate Change Act 2008.
(2) For the purposes of this section, “green finance” means financial products or services which aim to reduce emissions, and enhance sinks of greenhouse gases, and aim to reduce vulnerability of, and maintain and increase the resilience of, human and ecological systems to negative climate change impacts.’
This new clause would place a requirement on the PRA and FCA to report on ways in which they have promoted and incentivised green finance and green investment.
New clause 34—Investment duties of occupational pension schemes—
‘(1) Section 36 of the Pensions Act 1995 (Choosing investments) is amended as follows.
(2) In subsection (1) remove “(4)” and insert “(4A)”.
(3) After subsection (4), insert—
“(4A) The trustees must act in the way they consider, in good faith, would be most likely to be for the benefit of the beneficiaries as a whole and to be fair as between the beneficiaries, including as between present and future beneficiaries and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the impact of their investments on society and the environment,
(c) environmental, social and governance risks and opportunities (including, but not limited to, climate change),
(d) the desirability of the trustees maintaining a reputation for high standards of business conduct,
(e) the need to act fairly as between beneficiaries and members of the scheme, and
(f) in relation to investments that provide money purchase benefits, the views of beneficiaries and members of the scheme.
(4B) The trustees shall publish a policy statement of its understanding of benefit as relevant to its beneficiaries and of how it has regard to the matters in subsection 4A(a) to (d). The Secretary of State may make regulations regarding such policy statements.
(4C) The trustees shall report to beneficiaries the performance of the portfolio in delivering the benefit as defined in the policy statement and shall do this at the same time as it reports on the financial performance of the portfolio.
(4D) A fiduciary investor shall take all reasonable steps to ensure that all of its delegates and advisers comply with this section.”’
This amendment broadens the investment duties of trust-based pension schemes and FCA-authorised personal pension providers to require specified investors to make investment decisions in the “best interests” of beneficiaries.
New clause 35—Investment duties of personal pension providers—
‘(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After section 137FD insert—
“137FE FCA general rules: pension investment
(1) The FCA must make general rules requiring managers of some or all relevant pension schemes to invest the assets in the best interests of members of the scheme and in the case of a potential conflict of interest, in the sole interest of members and survivors. In doing so they must have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the impact of their investments on society and the environment,
(c) the desirability of the managers maintaining a reputation for high standards of business conduct, and
(d) the need to act fairly as between members of the scheme.
(2) The FCA may make general rules requiring managers of relevant pension schemes to report publicly on how they have met the requirement in sub-section (1)
(3) In this section “relevant pension scheme” means—
(a) a personal pension scheme within the meaning of an order under section 22, or
(b) a stakeholder pension scheme within the meaning of such an order.”’
This amendment broadens the investment duties of trust-based pension schemes and FCA-authorised personal pension providers to require specified investors to make investment decisions in the “best interests” of beneficiaries.
New clause 36—Duty to report fraud—
‘(1) Financial services providers must, upon the detection of fraudulent activity or suspected fraudulent activity, report such activity to a relevant investigating authority.
(2) Financial services providers must publish an annual report which includes information on levels of identified fraudulent activity and steps taken, or planned to be taken, to reduce and prevent such or further fraudulent activity.’
Government amendments 8 to 11.
Amendment 19, in clause 29, page 41, line 12, at end insert
‘, and also to financial inclusion.
‘(2A) For the purposes of this section, “financial inclusion” means the impact on those who might be prevented from accessing financial services as a result of the new rules made by either regulator, or from accessing them on the same terms as existed before the making of the new rules.’
Government amendments 12 and 13.
Amendment 1, in clause 40, page 54, line 29, at end insert—
‘(c) be provided with any information or data that the Panel requires in order to fulfil its duties;
(d) publish the agendas and minutes of meetings of the Panel; and
(e) make publicly available its recommendations in full including, but not limited to, the evidence base and analysis it used to make its recommendations, the assessed costs and benefits of the FCA’s activities and the range of representations made by Panel members regarding those recommendations.’
Amendment 2, page 54, line 36, at end insert
“at least two of whom must be representatives of FCA authorised firms.”
Amendment 21, page 54, line 38, at end insert
“, at least three of whom must have experience and expertise in the field of economic crime, with one each drawn from the public, private and third sectors respectively”.
This amendment would require the FCA’s Cost Benefit Analysis Panel to include individuals with expertise in economic crime.
Government amendment 14.
Amendment 3, page 54, line 41, leave out from “must” to end of line 42 and insert
“within 30 days of the receipt of representations made to it by the FCA Cost Benefit Analysis Panel, publish a response to such representations, including a statement of actions it will take as a result of the representations.”
Amendment 4, page 55, line 20, at end insert—
“(c) be provided with any information or data that the Panel requires in order to fulfil its duties;
(d) publish the agendas and minutes of meetings of the Panel; and
(e) make publicly available its recommendations in full including, but not limited to, the evidence base and analysis it used to make its recommendations, the assessed costs and benefits of the PRA‘s activities and any dissenting representations made by Panel members regarding those recommendations.”
Amendment 5, page 55, line 2, at end insert
“at least two of whom must be representatives of PRA authorised firms”.
Amendment 22, page 55, line 29, at end insert
“, at least three of whom must have experience and expertise in the field of economic crime, with one each drawn from the public, private and third sectors respectively”.
This amendment would require the PRA’s Cost Benefit Analysis Panel to include individuals with expertise in economic crime.
Government amendment 15.
Amendment 6, page 55, line 32, leave out from “must” to end of line 33 and insert
“within 30 days of the receipt of representations made to it by the PRA Cost Benefit Analysis Panel, publish a response to such representations , including a statement of actions it will take as a result of the representations.”
Government amendment 16.
Amendment 7, in clause 64, page 78, line 20, at end insert—
“(5A) The relevant requirement referred to in subsection (5) must specify that reimbursement in qualifying cases cannot be refused on the basis that a victim, or victims, ought to have known that the payment order was executed subsequent to fraud or dishonesty.”
This amendment would prevent reimbursement for victims of fraudulent or dishonest payments being refused on the basis that that they should have known the payment was fraudulent or dishonest.
Amendment 20, page 78, line 20, at end insert—
“(5A) The relevant requirement mentioned in subsection (5) must set out clearly that—
(a) those to which the requirement applies have a duty to ensure that reimbursement is made in all qualifying cases, and
(b) the penalty imposed by the Payment Systems Regulator, under section 73 of the Financial Services (Banking Reform) Act 2013, for failure to comply with that duty, will be not less than £100,000 in each instance of failure.”
Amendment 23, in schedule 2, page 119, line 19, leave out sub-paragraphs (2) and (3).
This amendment would maintain the regulator’s duty to establish appropriate position limits in commodity speculation, to ensure the effective functioning of commodity markets and prevent potentially risky speculation.
Amendment 24, page 119, line 2, leave out “that paragraph” and insert “paragraph (1)”.
This amendment would maintain the regulator’s duty to establish appropriate position limits in commodity speculation, to ensure the effective functioning of commodity markets and prevent potentially risky speculation.
Amendment 25, page 119, line 32, leave out sub-paragraph (5).
This amendment would maintain the regulator’s duty to establish appropriate position limits in commodity speculation, to ensure the effective functioning of commodity markets and prevent potentially risky speculation.
Amendment 27, page 120, line 4, leave out paragraph 48.
This amendment would remove the proposed amendment to the FCA’s power to intervene, to maintain transparency in commodity markets and reduce the scope of so-called “dark pools”.
Amendment 26, page 120, line 10, leave out sub-paragraph (4).
This amendment would maintain the regulator’s duty to establish appropriate position limits in commodity speculation, to ensure the effective functioning of commodity markets and prevent potentially risky speculation.
Government amendments 17 and 18.
Amendment 28, page 155, line 7, at end insert—
“(1A) When exercising its functions under this Part, the FCA may issue a direction to a designated person, for the purpose of establishing a banking hub.
(1B) A designated person must comply with a direction under subsection (1B).
(1C) A “banking hub” is a facility which—
(a) provides cash access services,
(b) is facilitated jointly by multiple providers of such services,
(c) contains private consultation spaces at for users of cash access services, and
(d) is established for the purpose of ensuring reasonable provision of cash access services where there would otherwise be a local deficiency of such provision.”
This amendment would require designated persons to comply with direction given by the FCA for the purposes of establishing banking hubs.
Andrew Griffith
The financial services sector is central to our Government’s ambition to bolster our global competitiveness and boost growth in all parts of the United Kingdom. This Bill delivers on our ambition by seizing the opportunities of our departure from the European Union, tailoring financial services regulation to UK markets and delivering better outcomes for the economy, consumers, victims of fraud and businesses. There are many amendments for consideration today, so I will be as succinct as possible, and I look forward to having time to respond to hon. Members’ contributions later.
In Committee, I heard from colleagues on both sides of the House about the importance of holding the operationally independent regulators to account regarding their performance—in particular, that there should be regular reporting on their performance to support scrutiny, beyond just the annual report. Regulation is about not just the contents of the rulebook, but how effectively and on how timely a basis those rules are enforced and implemented.
The Government and regulators are both committed to the highest standards of operational effectiveness. That is why last week we published an exchange of letters with the regulators, making clear the intention to publish more detailed performance data in relation to their authorisation processes on a more regular basis. However, I also noted the clear consensus in Committee on the need to enhance the existing statutory provisions. In particular, I thank my hon. Friends the Members for Wimbledon (Stephen Hammond) and for North Warwickshire (Craig Tracey) for raising this important issue.
As a result, new clause 17 provides a new power for the Treasury to require the regulators to publish additional information on a more regular basis, where that is necessary to support this House’s scrutiny of their performance in discharging their general functions.
Richard Fuller (North East Bedfordshire) (Con)
I have seen the exchange of letters—that is very welcome—and I have read new clause 17. Both lack any specificity about what those metrics may be. I do not expect the Minister to respond now, but perhaps in his summing up, to reassure those of us on the Back Benches, he could provide some comfort about how specific he and the Treasury will get.
Andrew Griffith
I thank my hon. Friend who, as one of my predecessors, has made a significant contribution to getting the Bill to where it is today. I will try to indulge him, but he will also recognise that the Bill is about putting enabling powers in place, and there will be opportunities on future occasions to discuss how we deploy those.
New clause 18 introduces a requirement for the regulators to ensure that all members of their statutory panels are external and independent of the Treasury, the Bank of England and the regulators. That will codify the current approach taken by regulators, putting it in statute, building confidence in their independence and ensuring that it is maintained on a long-term basis.
New clause 19 introduces a new requirement for the regulators to publish a list of respondents to their public consultations, provided that the respondents consent. The requirement is limited to the financial services regulators and their specific statutory consultation in existing financial services legislation. New clauses 18 and 19 also address points raised by my hon. Friend the Member for North East Bedfordshire (Richard Fuller) and the hon. Member for Richmond Park (Sarah Olney).
I also note the interest of my hon. Friend the Member for Harrow East (Bob Blackman) in enhancing regulator accountability through his new clauses on a new regulators’ supervision council and ending regulators’ statutory immunity from civil damages. I understand where he is coming from, and I note that he chairs the all-party parliamentary group on personal banking and fairer financial services, but the Government’s position is that a new supervisory council would duplicate existing accountability structures. Indeed, none of the representations that I receive from industry says that the biggest thing that will help growth and competitiveness is another layer of regulators. There is also a great deal of existing accountability structures, including the role undertaken by this House and its various Committees, which is why that position was supported by the Treasury Committee in its July 2021 report. Removing the regulators’ statutory immunity from liability and damages would risk regulators over-regulating to avoid the risk of liability. There are already mechanisms for holding regulators to account, including the complaints scheme. That scheme is overseen by the independent complaints commissioner, who has powers to recommend redress.
Peter Grant (Glenrothes) (SNP)
I certainly appreciate the Minister’s concern that we might see precautionary regulation, but is the best way to avoid that not simply to restrict the removal of liability to cases in which the regulator has clearly and negligently failed to act to deal with a situation in which an already regulated activity was being carried out in an unacceptable way? That is what happened with Blackmore Bond. It was not an unregulated activity; it was an activity that fell within the scope of the Financial Conduct Authority, but it failed to act and £46 million was stolen from people as a result.
Andrew Griffith
The hon. Member draws our attention to the very tragic cases that occur when financial regulation goes wrong and does not do its job in the way every Member of this House would like to see. He also talks about a legal threshold for that. He will perhaps appreciate that I do not have the facts of that particular case before me and that we are not drafting things here and now. I have heard from Members on both sides of the House about some of the problems in what we are talking about, which is essentially the conduct of the regulator, and I understand colleagues’ desire to look at legal liability as one remedy, but there are many powers in the Bill, and as I say, the Bill will not constrain the ability of this House or Ministers going forward.
The hon. Member for Kingston upon Hull West and Hessle (Emma Hardy), with whom I spent a lot of time in the Bill Committee—I suspect we will hear from her later this afternoon—has tabled a new clause on considering economic risks in regulators’ cost-benefit analysis panels. I would like to reassure her that the regulators already take steps—and, to assuage her concerns, they could perhaps do more—to think about economic crime when they do that. They have the power, of course, to consult experts where they consider it relevant.
I thank my hon. Friend the Member for North East Bedfordshire again for raising the issue of regulatory proportionality. I wish to reassure him that the Government are clear that the burden of any regulation should be proportionate to its benefits, and that is set out in existing legislation. I am very happy to reiterate again today that I expect the regulators to fully and proactively embrace that principle, which is embedded in statute. That is particularly important, as the Bill confers on them greater rule-making responsibilities. I suspect we will hear from my hon. Friend later on.
I will now turn to Government amendments 8 to 11 —I apologise, but there are quite a lot of amendments to crack on through. Clause 6 already enables the Treasury to exempt regulators from the statutory requirement to consult on rules when they are replacing retained EU law repealed by the Bill without making material changes. Amendments 8 to 11 go further. They create a blanket exemption from the statutory requirement to consult in situations in which the regulators remove EU-derived rules from their rulebooks without replacement. The amendments also allow the Treasury to exempt the regulators when they are amending EU-derived rules or replacing retained EU law in their rulebooks, and when the only material effect of the change is to reduce regulatory burdens. That ensures that the regulators can take that proportionate approach to consultation, accelerate the repeal of retained EU law, and not let the requirement to consult be an obstacle or delaying factor. It is a long time since the British people voted for Brexit, and it is time to start delivering those benefits. Nothing in the amendments changes the obligation on the regulators to act to advance their statutory objectives, so any reduction in regulatory burdens must be compatible with those objectives.
Let me briefly cover the two remaining Government amendments, and I will then move on. New clause 20 ensures that a new type of fund vehicle currently being explored—the unauthorised contractual scheme—would be commercially viable if it were introduced. The proposed fund has the potential to improve the competitiveness of the UK by filling a gap in the UK’s existing fund offering and supporting the domestic growth agenda by facilitating greater investment in UK real estate by UK funds. Amendment 17 is a minor and technical amendment to rectify an inadvertent omission in drafting.
I will now address the amendments tabled by other Members. I am conscious that I am speaking before Members have had a chance to introduce their amendments, so I look forward to responding in more detail, where necessary, at the end of the debate. Let me start with the important issue of access to cash. I represent a rural constituency with a higher-than-average proportion of elderly and vulnerable residents, so I am acutely aware of the very real concerns around this topic. As of today, there remains extensive access to cash across the UK as a whole—over 95% of people live within 2,000 metres of a free cashpoint. I want to be clear that it is not acceptable for people to have no option but to travel large distances or pay ATM fees to access their own money.
If hon. Members have a concern in their local area, as I know many have, I strongly recommend that they reach out to LINK, which is leading the industry-led initiative to see what can be done to help constituents. LINK is delivering, for example, a new free-to-use ATM in the Pollards Hill estate in the constituency of the hon. Member for Mitcham and Morden (Siobhain McDonagh)—I have already made a commitment to her to visit and open it.
Siobhain McDonagh (Mitcham and Morden) (Lab)
May I say to the Minister that I am delighted that LINK is providing that machine? That part of outer London is, as many Members here will know, inaccessible apart from by limited public transport. There are two paid-for machines in the terrace, but a free one has been refused for years and years and years. I believe that this machine may be coming because of this very amendment—new clause 7. Unless it is there in writing, how can anybody in this House feel confident that free cash machines will be kept? Their numbers are reducing at pace.
Andrew Griffith
The hon. Lady probably proves each of our points, including my point that we start from a position where there is an industry-led solution, and I am sure that many colleagues will be auditioning for these new industry-led free cash machines.
Dame Andrea Leadsom (South Northamptonshire) (Con)
Will my hon. Friend give way?
Dame Andrea Leadsom
The Minister and I had a very good conversation about this very subject. He is aware that back in the days of a former Treasury Committee and an earlier Government, there was a huge move away from ATMs per se, let alone free access to people’s own cash. Can he therefore make it clear at the Dispatch Box what he said to me, which is that the Government are entirely behind free access to cash and will make that clear in the guidance?
Andrew Griffith
My right hon. Friend is just one of many colleagues—many in the Chamber today, but also my hon. Friends the Members for Newton Abbot (Anne Marie Morris) and for Don Valley (Nick Fletcher)—who have made precisely this point. It is the Government’s expectation that the industry-led initiative must deliver. As I will come on to clarify, the powers we are taking in the Bill—we are not mandating them, because we do not support the amendment from the hon. Member for Mitcham and Morden (Siobhain McDonagh)—give us the flexibility in future, by means of a direction statement to the industry, to mandate free cash machines.
Andrew Griffith
Let me finish this point, because I know many Members are vexed by this issue and we understand how important it is. Work has been done since my right hon. Friend the Member for South Northamptonshire occupied my position. A further 47 communities represented in this House will benefit from similar cash facilities funded by the banks, as part of that LINK assessment process. I urge all colleagues to take advantage of that, and my office is happy to help to do that.
Several hon. Members rose—
Andrew Griffith
I am going to finish this point, and then we will hear from more Members. We must not underestimate the significance of what the Bill is doing: it is taking legislative action for the first time in the more than 1,000-year history of the Royal Mint, where the UK pioneered paper banknotes in the 17th century and since we introduced the world’s first ATM in 1967. This Government—right now, today—are putting on the statute book and protecting access to cash, to safeguard the needs of those who need it.
David Mundell (Dumfriesshire, Clydesdale and Tweeddale) (Con)
Like my right hon. Friend the Member for South Northamptonshire (Dame Andrea Leadsom), I had a very useful conversation with the Minister. Will he confirm what I think he just said, which is that if it becomes clear that people do not have free access to cash across the United Kingdom, the Government will proactively intervene to make sure that they do?
Andrew Griffith
We talked about my right hon. Friend’s relative munificence of 53 free cash machines in his constituency—I think it was that at the last count. What he says is the case. The Bill gives the Government the ability at any point in time to give direction to the Financial Conduct Authority, the relevant regulator—this is the basis on which we regulate all our financial services in this country—through a policy statement that will set out the Government’s policy on such matters as cost and location. I am being clear that it is our expectation that the industry will deliver on this important issue for our constituents. If not, the Bill gives any future Government the ability to mandate that.
Kit Malthouse (North West Hampshire) (Con)
Notwithstanding the support that the Minister is giving to the notion of free cash, he will recognise that the Government cannot sit there like King Canute, and that between 2010 and 2020 the number of payments made in cash went from 50% to 17%. That has fallen yet further during the pandemic. There are significant advantages to cashless transactions, not least in the elimination of crime. Actually, it is a bit of a myth that there are sections of society that struggle, and we see that most apparently in the advent of cashless parking. There are hardly any councils left in the country now that use cash for their parking. They are all using apps on smartphones. When we introduced it when I was at Westminster City Council, we did not have a single complaint from an elderly person—quite the reverse. They often found it much easier than fumbling around for coins and notes to be able to park, as well as having the ability to extend the time using the phone. There are great advantages to the elimination of cash in society too.
Andrew Griffith
My right hon. Friend is right and illustrates well the Government’s desire to achieve the right balance in this debate, rather than operate at either extremity. He will know from his former role the significant move in relation to Oyster and the ability to be cashless.
Siobhain McDonagh
Is the Minister aware that we have lost 12,599 free-to-use ATMs since 2018? That is a reduction of 24%. Who in this House, understanding that trajectory, would believe that the numbers are not going to fall further?
Andrew Griffith
I will repeat my previous point, and the hon. Lady will have her chance to speak later. It is the objective of the Government, in the course of the transition that my right hon. Friend the Member for North West Hampshire (Kit Malthouse) talked about, to protect the vulnerable and ensure that protection of access to cash. The hon. Lady’s statistic is right, but I reiterate that more than 95% of people today live within 2,000 metres of a free cashpoint, and I hope she recognises that.
Anthony Browne (South Cambridgeshire) (Con)
I want to follow up on some of the comments from my right hon. Friend the Member for North West Hampshire (Kit Malthouse). Cash is being used far less than it was previously. That is good and convenient for many people. I fully support the Government’s moves and the ambition across this House to ensure that we have access to free cash, but there is no point in people having access to free cash if they cannot spend it on essential items. I just flag that many retail outlets no longer accept cash. It is not just parking; there are cashless bars and so on. That is fine, but there is a scenario where outlets that sell essential items such as food shops and chemists might at some point be required to accept cash, because if they do not accept cash, lots of people will be excluded.
Andrew Griffith
My hon. Friend makes another important point, and I fear we are in danger of previewing the debate that we shall have this afternoon. When we talk about access to cash, we are not just talking about withdrawals; we are also talking about the deposits that are so vital. If our small businesses in particular are to continue to take cash, they need to be able to deposit that securely, safely and conveniently.
Dr Rupa Huq (Ealing Central and Acton) (Ind)
I just want to broaden the debate from ATMs to bank hubs. These were promised as a panacea for towns where the last bank has gone, such as Acton. It is not just about rural communities. Acton was one of 10 places that were promised a bank hub last December, but nothing has happened. There is a lack of will, and they are under-resourced and voluntary. Perhaps there is an argument for more regulation to make them happen, because The Daily Telegraph and the Daily Mail were saying in the autumn that none of these—zero—has happened, but I understand that since then two of them have. In the meantime, Acton is a cash desert. In 2018 we lost our post office, never to be replaced. What advice does the Minister have for me? How can he compel that bank hub to open?
Andrew Griffith
The bank hub initiative, just like the new voluntary initiative on LINK cash machines, has an important role to play. Frankly, these initiatives have started relatively recently, and as well as making sure today that we get the right balance in statute, we also need to see them delivered. I will take that case forward for the hon. Lady, and I will write to her. The bank hubs programme is now being deployed at pace. My hon. Friend the Member for Totnes (Anthony Mangnall) boasts of his bank hub, which I suspect will not make the hon. Lady delighted, but it shows that they can deliver, and that is what we want.
I will clarify for the record what we are saying, if I may. Under the Bill, the FCA, when acting to ensure reasonable access to cash, has to have regard to the Treasury’s policy statement in this area. That is the statement that will set out from time to time the Government’s position on matters such as cost and location, and the FCA will have to have regard to that when setting the detailed prescriptive regulations.
That gives time—I am putting the industry on notice—for those industry-led schemes to prove that they can deliver, and to ensure that the Government have a robust regulatory framework: a belt-and-braces framework. I believe that is the right and flexible way of dealing with the matter, rather than right now locking it in statute for all time. I will ensure that we reflect the House’s views on that when we craft the policy statement.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
The Minister is being very generous in giving way. The point made by the right hon. Member for North West Hampshire (Kit Malthouse) makes clear the need for free access to cash to be provided for in the Bill. As the number of people making cash transactions falls, it becomes more expensive to distribute cash freely. There is, however, as I hope we all understand, a vulnerable group in our society who still need free access to cash. As cashless transactions increase, the need to maintain free access to cash for the most vulnerable people in our society increases. That is why we are asking for it to be provided for in the Bill.
Andrew Griffith
I agree with the hon. Lady’s point that it becomes a pressing issue. The justification, having successfully transacted in cash since the first Roman emperor decided to dispense pieces of metallurgic value with his head on them, is precisely that we see the transition and we want to get it right, in the interests of the vulnerable. The Bill also contains powers to regulate the wholesale distribution of cash—those people who trunk cash up and down cash centres across the United Kingdom.
Andrew Griffith
We have spent a long time on cash, so I will take one final intervention on this. Then I will make progress, simply to allow other Members the chance to make the points that they are here to make.
Kit Malthouse
I am grateful to the Minister. He may not be old enough, but some of us will remember the moment the cheque started to go out of usage. There were lots of claims of damage to certain sections of society, and that lots of people would be outraged when the cheque disappeared. Now people operate without chequebooks on a daily basis, and no retailers, as far as I am aware, accept cheques. On the idea that we should mandate that cash be accepted, we cannot stand in the way of the fact that consumers are voting not to use cash. The market is telling us that cash is running out of use, and let us scotch the myth that there is such a thing as a free ATM. The network at the moment costs about £5 billion to operate. That is paid for by every user of the bank, whether they use the ATM or not.
Andrew Griffith
My right hon. Friend makes his points very well. As he said earlier, there are significant benefits in relation to fraud, traceability and the environment from dematerialising, but it is not the position of the Government to advocate for it.
Mr Deputy Speaker (Mr Nigel Evans)
Order. I reiterate what the Minister said: a lot of Members wish to speak in the debate, and he has been on his feet for about half an hour. If we are to have time for the amendments and other contributions, we need to cut back on interventions.
Andrew Griffith
Thank you, Mr Deputy Speaker; you are as wise as my right hon. Friend the Member for North West Hampshire is flattering. We will make some progress and allow others to contribute.
Let me move on to access to banking and payment services. Just as we have said about cash, they are the essential ingredients of modern life and for many businesses. The new clause tabled by my hon. Friends the Members for Hastings and Rye (Sally-Ann Hart) and for Northampton South (Andrew Lewer) raised the important issue, to all of us in this House, of free speech, and the crucial role of payment service providers in delivering services without censorship. Since Committee stage, I have met with my hon. Friend the Member for Hastings and Rye, the FCA and PayPal regarding its recent temporary suspension of some accounts. I draw hon. Members’ attention to my letter deposited in the House, in which I set out the Government’s position on that important matter. I also circulated the letter from PayPal that sets out that it re-evaluated and reversed its decision in a number of the specific cases raised. It says that it was never its intention to be an arbiter of free speech, and that none of its actions was based on its customers’ political views.
I want to be extremely clear that the Government are committed to ensuring that the regulations respect the balance of rights between users and service providers’ obligations, including in respect of freedom of expression, whether of the Free Speech Union, the trade union movement, law-abiding environmental movements or anyone else expressing lawful views. To ensure that the existing regulatory regime is operating as it should in that respect, I will seek further evidence through the Government’s review of payment services regulation in January. To continue this transparent dialogue with colleagues on an important subject, I will provide an update to Parliament in the form of a written ministerial statement before the formal closure of that review, and table amendments to the relevant regulations using the powers in today’s Bill, if necessary.
We recognise the value that the mutuals sector brings to the UK economy in providing a door to affordable credit. The Government are committed to the health and prosperity of the mutuals sector, which is why we supported the private Member’s Bill of the hon. Member for Preston (Sir Mark Hendrick), which would allow co-operatives, mutual insurers and friendly societies further flexibility in determining for themselves the best strategies for their business. As I said in Committee in response to amendments tabled to today’s Bill by the hon. Member for Hampstead and Kilburn (Tulip Siddiq), the Government consider that the Financial Services and Markets Act 2000 already ensures that regulators consider mutual entities as they exercise their regulatory functions.
Mr John Baron (Basildon and Billericay) (Con)
On the FCA and financial inclusion, it is very wise that we ensure that good financial advice is imparted by the powers-to-be. In referring Members to my entry in the Register of Members’ Financial Interests, may I say that when it comes to things such as investment trusts, we are still trying to throw off the yoke of well-intentioned but misguided EU regulation when it comes to information that could lead to a misunderstanding about risk? The FCA seems somewhat reluctant to carry that forward. Will the Government ensure that the regulators, including the FCA, are doing their job?
Andrew Griffith
My hon. Friend makes a very fair point. To be clear, the purpose of good financial regulation cannot be to extinguish risk, but is to give people choice and indeed allow them to reap the rewards of taking risk in an appropriate and informed fashion, so I completely agree with him.
On the theme of reporting, I assure the hon. Member for Blaenau Gwent (Nick Smith) and my hon. Friend the Member for The Cotswolds (Sir Geoffrey Clifton-Brown) that the consumer panel, like all other statutory panels, already produces an annual report with the panel’s opinion on matters that it has engaged with the FCA on; however, following new clause 10 being tabled, I recognise the need to ensure that reports are brought to the attention of the House. I have engaged with the FCA, which has agreed with me that in future it will notify the Treasury Committee, as the relevant Committee of this House, on publication of the consumer panel’s report, to ensure that Members of this House are aware of and can fully engage with it. I hope that that goes some way to giving the hon. Members the satisfaction that they seek.
Before I speak about the financial advice guidance boundary, raised in new clause 11 in the name of my hon. Friend the Member for West Worcestershire (Harriett Baldwin), the Chair of the Treasury Committee, let me congratulate her on her relatively recent election to that role—although I hope that we have worked well together even during her short time in it.
Nick Smith (Blaenau Gwent) (Lab)
I congratulate the Minister on his earlier remarks about seeking to improve the performance of the FCA. Many people on both sides of the House want that to happen. It is pleasing that the Treasury Committee will hear information on reporting from the consumer panel of the FCA; however, a number of financial scandals have affected the constituents of Members across the House in recent years. While I hear what the Minister says, I am really looking for a greater opportunity to challenge the FCA through its consumer panel than he has so far suggested, but I hope that we can work together to strengthen that point.
Andrew Griffith
I thank the hon. Member for his point. I had that conversation with the FCA precisely to try to achieve that purpose. If there are other ways to do that that will help him, I am happy to do so.
I was talking about the financial advice boundary, which is a real concern and speaks as much to financial inclusion as to the work of the advisory sector. My hon. Friend the Member for West Worcestershire, when she was in this role, undertook some important work on the comprehensive financial advice market review, which led to some important improvements in the market at that time. Unlike me, however, she was not blessed with the Brexit freedoms of being able to influence our own rulebook.
I completely agree with my hon. Friend that it cannot be right that only the wealthiest can access financial advice. The situation today is a good example of the unintended consequence of well-meaning regulation that we should be alive to. I thank the Investing and Saving Alliance and others for their efforts to promote reform in this area, and it is something that I will take forward and see what I can do to progress. We will revisit the issue and work closely with the FCA and the industry. I assure her that there is nothing in the Bill that would impede any of the things that she seeks to do.
Harriett Baldwin (West Worcestershire) (Con)
The Minister is making some encouraging sounds about new clause 11. In addition to the commitments that he has just made, will he instruct officials to look at the matter with the greatest urgency?
Andrew Griffith
I am happy to confirm that we will pursue it with great urgency, as the Government should be doing with everything in this important domain. Although the Government will not be supporting new clause 11 today, it goes some way to address the issue, so I will look at it as a basis for potentially moving forward. The Bill enables us to do that, so we do not have to do it today. I commend the other amendments tabled in relation to preventing consumer harm.
Stella Creasy (Walthamstow) (Lab/Co-op)
The Minister has been talking about the importance of regulation. He will know that one area that is not regulated at all is buy now, pay later, and he will have seen new clause 28 in my name. A poll published today says that 40% of the British public will do their Christmas spending with a buy now, pay later loan. A quarter of those who use buy now, pay later are missing other payments, because they are getting into a cycle of unaffordable debt. We have been talking about regulating these companies for nearly three years now; the Government’s proposals talk about regulation possibly coming in another year’s time. Can he see a way to at least introduce the protection of the ombudsman, so that this Christmas does not leave families with a nasty wake-up call come 1 January?
Andrew Griffith
I will try to respond to the hon. Lady’s points further when I sum up, so I can make some progress. We had that debate several times in Committee. We have to be slightly cautious about the unintended consequences of taking into scope a much wider set of transactions that involve an element of deferred payment, but I am sympathetic to her points.
I thank my hon. Friend the Member for Harrow East for raising the topic of a statutory duty of care for consumers. Ensuring that consumers of financial services get the right protection they need remains a priority. The FCA comprehensively analysed the options for improving that, which led to the consumer duty that will come into force in July.
The hon. Member for Bath (Wera Hobhouse) tabled new clauses 34 and 35 to require trustees of occupational pension schemes and fund managers to act in the best interest of beneficiaries, which is indeed the position as it stands today, although I will listen carefully to her points. Trustees and fund managers will be subject to the FCA’s consumer duty, which puts on them a focus of delivering good outcomes for customers.
I turn to amendments relating to frauds and scams. The Bill is a huge step forward in tackling the growing problem of authorised push payment scams. I will be clear that, as I set out in my response to the hon. Member for Hampstead and Kilburn in Committee, the Government are committed to tackling fraud far more widely than in just financial services. She may like to know that the Home Office has now confirmed that a national fraud strategy will be published early in the new year.
Specifically for financial services, UK Finance publishes a half-year fraud update, which sets out how the industry is working together to respond to the fraud threat and to support customers. In relation to the amendments concerning the reimbursement of victims of authorised push payment scams, the payment systems regulator has already signalled its intention to deliver a higher degree of consumer protection.
On sustainable finance, no Government have done more on the climate. We have legislated to reach net zero greenhouse gas emissions by 2050. We support strengthening the UK financial services regulatory regime’s baking in of the climate, as underlined by clause 25, which requires the regulators in discharging their functions to have regard to the need to contribute to achieving compliance with net zero. The regulators will be required to report annually on how they have considered that regulatory principle. That is a significant step in our goal of making the UK a net zero-aligned financial centre, and builds on our green finance and net zero strategies across the whole gamut of regulatory activity. The Government committed to updating our green financial strategy and will announce further information on timing imminently.
Dame Andrea Leadsom
I am delighted to hear that from my hon. Friend. Does he agree that that not just gives the UK a competitive edge but creates many new jobs and opportunities for the UK to lead the world in green finance, as well as other green industries in future?
Andrew Griffith
Absolutely; it is a strategy that pays back on many levels. It is biased towards left-behind communities and parts of the United Kingdom, it creates jobs and prosperity, it safeguards the prospects of the City of London and our financial and professional services and, of course, it ensures that we deploy capital in pursuit of the transition to a clean, low-carbon world.
Olivia Blake (Sheffield, Hallam) (Lab)
How does the Minister square the language that he has just used about how great the UK is with two major banks that are based here providing £107.44 billion to the top 50 companies expanding upstream oil and gas? Is that not exactly why we need some of the sustainable finance amendments that have been tabled?
Andrew Griffith
I beg to differ with the hon. Lady, because it is important to finance the transition to achieve a just green financial future. While we are making all these efforts and coming forward with things such as the taskforce on nature-related financial disclosures, we will therefore make sure that we are not defaulting to divestments and boycotts, because that is not our view of the way that the Government will finance the clean energy revolution.
Caroline Lucas (Brighton, Pavilion) (Green)
The Bank of England’s climate stress test, published in May, showed that banks need to take climate action immediately or face a hit to annual profits of up to 15%. This is not just about airy-fairy words about the transition, but about banks that, as we have just heard, are bankrolling the fossil fuel industry, which will bring real risks to the finance sector as well as to the rest of the world. Can the Minister say whether he will support new clause 25?
Mr Deputy Speaker (Mr Nigel Evans)
Before the Minister does, I will just say that he has been speaking for three quarters of an hour now. A lot of people want to contribute to the debate.
Andrew Griffith
On this side of the House, we are about action not words. I listened with great care to what the hon. Lady said, but action starts at home. In her constituency, the Green party leader flew on a jet aeroplane to COP and the level of recycling is half that of neighbouring West Sussex. People should get their own house in order before coming to virtue-signal about others’.
New clauses 8 and 9 in the name of the hon. Member for Sheffield, Hallam (Olivia Blake) raise the important issue of financial stewardship. The Department for Work and Pensions, which is responsible for that, has already made a public commitment to review stewardship disclosure requirements. That will be done during 2023.
Finally, the Government believe that effective commodities market regulation is key to ensuring that market speculation does not lead to economic harm. The current regime we have inherited from the EU is overly complicated and poorly designed. To ensure that this is calibrated correctly, the Bill delegates the setting of position limits from the FCA to trading venues themselves. The amendments in the name of the right hon. Member for Hayes and Harlington (John McDonnell) seek to reverse this. The Government’s position is that this would place unnecessary restrictions on investors, to the detriment of all market participants. It would place the UK at a disadvantage compared with other international financial centres, such as the EU, that apply restrictions only to contracts that genuinely pose a risk.
John McDonnell (Hayes and Harlington) (Lab)
On a point of order, Mr Deputy Speaker. I do not wish to delay the debate, but in the Financial Times today there is an announcement that the Chancellor of the Exchequer will make a significant statement on Friday about the future of our financial services. There was no reference by the Minister to that statement. It looks as though the statement will be made outside the House, not to the House, because it is being made in Scotland on Friday. Could I ask for your intercession to remind the Government that major statements of this sort, and it is billed as the most significant statement in the last 20-odd years, should be made on the Floor of the House?
Mr Deputy Speaker (Mr Nigel Evans)
I am getting no indication that the Minister wants to comment on that, but the fact is that the Speaker has said time and again that he deprecates statements that should be made to the House first being made elsewhere, and I am sure the Minister will take that on board.
I call the shadow Minister.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
The Opposition support the Bill, particularly the new secondary objectives for regulators on international competitiveness and long-term growth. It is a welcome first step in supporting the City to take advantage of opportunities outside the EU, such as creating a welcoming environment for new financial technologies and incentivising financial services to increase investments in domestic industries through reform of solvency II.
We were delighted when, after much pressure from the Labour party, the Minister decided to drop his dangerous policy of the intervention power. Despite repeated warnings from the Bank of England, business and the Labour party that he should not be putting the UK’s international competitiveness at risk by threatening our system of regulatory independence, the current Minister pushed on and told me it was a good thing. In my eyeline, I can see the hon. Member for North East Bedfordshire (Richard Fuller), who, when he was the Economic Secretary to the Treasury, said to me on Second Reading that it was right for Ministers to be able to intervene in such a way.
Bim Afolami (Hitchin and Harpenden) (Con)
On regulatory independence, notwithstanding the particular call-in power the hon. Lady is describing, would she agree that it is important for the elected Government and this House to be able to set the direction in which regulators are meant to go, and that if the regulators are not going in that direction, this House and the Government should be able to correct the direction they are going in?
Tulip Siddiq
I support much of what the hon. Member says, and I will come on to that a little later in my speech, but the call-in power is very different from what he is describing. Time and again, we warned Ministers that this would be detrimental to our regulatory independence, and they did not listen. However, if the hon. Member listens carefully, he will hear, when I come on to the next page of my speech, that I will address the valid points he is making.
In Committee, when I pushed the current Minister on why this dangerous intervention power was necessary, he told me that voices in the industry had told him we needed an “agile and flexible system”, which he claimed could only be brought about by this intervention power. After all of this from the three Economic Secretaries I have shadowed in 10 months, who kept pushing this dangerous intervention power, strangely enough the Government then dropped the policy: I just received an opaque letter, which did not really offer any proper explanation for why this Government have had a change of heart. If you do not mind my saying so, Mr Deputy Speaker, I thought about when I got a text from my crush in the sixth form telling me there would be no second date, without his actually telling me face to face why he did not want to see me again. I do wonder why, but I say to the Minister that I am grateful that he listened to the Labour party and has dropped the dangerous intervention power. I only wish he had done it sooner, so we could have saved some unnecessary damage to our global reputation.
While the intervention power was wholly inappropriate, we recognise that the Bill facilitates an unprecedented transfer of responsibilities from retained EU law to the regulators, and this does require democratic accountability. That is why I am glad the Government have listened to the concerns raised by me and others in Committee and have introduced new clause 17, which will allow regulators to be held to account against key metrics.
I hope the Minister will be able to commit to supporting new clause 10, tabled by my hon. Friend the Member for Blaenau Gwent (Nick Smith), to further strengthen the democratic accountability of regulators.
I was absolutely delighted that the hon. Member for West Worcestershire (Harriett Baldwin) was following my speeches at the Labour party conference so closely, where again and again I made the case for a new form of regulated personalised guidance. She has tabled new clause 11, which would create the space to do that, and I hope the Government will support her new clause.
Mr Baron
I hope the hon. Lady’s ex-crush realises what he has missed, but may I briefly pick up the point about democratic accountability when it comes to supervision of the regulators? I suggest that those regulators need to heed the advice of the professional bodies working in the sector. I raise again the issue of investment trusts. We have the Association of Investment Companies and many others saying that key information documents—a well-intentioned but misguided legacy of misguided EU regulation—are actually assessing risk incorrectly, to the detriment of investors. They are saying that now, and the FCA has control, yet we do not seem to be doing much about it. We are not making much progress on this issue, and meanwhile investors are being misled. Would she agree that we need to listen to the trade bodies as well?
Tulip Siddiq
I always want to listen to experts such as the trade bodies. The hon. Member has a wealth of knowledge in this area, and I accept what he is saying. Overall, the Labour party agrees with a lot of the policies in this Bill, which is why we have given it our wholehearted support. There are some missed opportunities that we feel could have been taken, and I think we could have strengthened our attractiveness for investments, as he is saying—I will come on to that later in my speech. I take his point, which is well made, and I hope the Minister will listen and will respond to it in his summing up.
Turning to my own amendments, I am worried about the lack of ambition in the Bill on strengthening fraud prevention. My new clause 1 would introduce the first national fraud strategy and data sharing arrangement for a decade. The National Audit Office, in its recent report, said that the Government simply do not understand the full scale of the fraud epidemic, despite the NAO calling for rapid action over five years ago. That is a damning statement. UK Finance has found that the Government’s failure to act on the fraud strategy and data sharing has seen the amount of money stolen from hard-working families’ and businesses’ bank accounts through fraud and scams hit a record high of £1.3 billion.
Despite that, in Committee, the Minister urged me to withdraw my new clause on the matter. He told me to be patient, and he told me that there would be a fraud strategy before Christmas. Now he is saying there will be one early next year, but how can we trust him not to kick the can further down the road? So I will be holding the Minister to account. There are only 24 days left until the end of the year, and people whose lives have been ruined by fraudsters cannot afford to be patient any longer.
Following our debate in Committee, leaders from across the financial services sector told me that the Government’s approach of placing data sharing responsibilities on the banks alone was stuck in the last century and allows tech-savvy criminals to get rich at the public’s expense. My new clause would put in place a data sharing arrangement that extends beyond just the banks to include social media companies, crypto-asset firms, payment system operators and other platforms that are exploited by criminals. If the Minister does not listen to the Labour party, I hope he will listen to the National Audit Office, businesses and victims of fraud, and finally give enforcement agencies the powers they need to crack down on criminals by voting for our new clause today. I also hope the Government will support my new clauses 2 and 3 and new clause 7, tabled by my hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh); because we have spent a substantial amount of time speaking about free access to cash I will not elaborate too much on that, but she has our full support.
Matt Rodda (Reading East) (Lab)
My hon. Friend is making an excellent speech. Does she agree that new clause 3, on access to banking, is particularly important? For many disabled and elderly people and others with mobility issues, and indeed for small businesses, access to banking as a whole, as well as access to cash, is hugely important; that has been very evident in my constituency.
Tulip Siddiq
My hon. Friend is a doughty champion for his constituents. I will speak about that later, but I feel that we politicians have a duty on this: even if there has been a decline in the number of people using cash, there is still a small group of vulnerable people who do so, and they risk being excluded if we do not save free access to cash and face-to-face banking services. We have a duty to our vulnerable constituents, disabled constituents and those from black and minority ethnic backgrounds who still rely on cash.
David Mundell
I fully understand what the hon. Lady is saying, but it is not a small number of people: it was estimated in 2019 that 8 million people across the United Kingdom would struggle without access to cash.
Tulip Siddiq
I thank the right hon. Gentleman for his intervention. I welcome the fact that the Government have finally announced that they will bring forward access-to-cash legislation, but this Bill does nothing to protect face-to-face banking or free access to cash, which is our main concern and is what the most vulnerable in our society depend on.
Since 2015, on this Government’s watch nearly half of the UK’s bank branches have closed. It is inevitable that banking systems will continue to innovate—no one is denying that—but the failure to protect these services risks leaving millions of people behind. My amendment would empower the Financial Conduct Authority to review communities’ needs for and access to essential in-person banking services. To be clear, I am not saying banks should be prevented from closing underused branches—far from it. I explained this thoroughly in Committee but will say it briefly again now: vital face-to-face services could be delivered through a variety of models, such as shared banking hubs, which are already being set up across the country to provide cash services.
In Committee, the Minister was again very persuasive and convinced me to withdraw my new clause. He said he accepted the underlying need for action and that solutions would be brought to the table. I believed him, but despite warnings from Age UK, Which? and the Access to Cash Action Group—which does fantastic work in this area—that vulnerable people are at risk of being cut off from the services they desperately rely on, the Government have completely failed to engage on this important issue, and this time I will not be making the same mistake: I will not withdraw my new clauses. The Government need to demonstrate they will not simply abandon those who are struggling to bank online.
Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)
I want to pledge my support for new clauses 2 and 3. In my constituency we have lost 13 to 15 banks since 2015, and we are more or less wholly reliant now on the Post Office to provide financial services in large parts of north Carmarthenshire. Worryingly, the new deal starting next year only lasts until 2025, and if that were to break down for whatever reason, there would be real issues in many communities.
Tulip Siddiq
The hon. Gentleman is right that this is not just about bank branch closures; it is also about pressures in the Post Office. It is possible to provide some of the services through the Post Office, but we have a duty to preserve some of the banking hubs to ensure that the Post Office does not get overwhelmed. I am sure the hon. Gentleman has travelled around his constituency, and anybody who walks around their constituency will see the need for bank branches, banking hubs and post offices for our most vulnerable constituents. I am also surprised that the Bill has so little to say on financial inclusion more broadly, despite my hon. Friend the Member for Kingston upon Hull West and Hessle (Emma Hardy) flying the flag for financial inclusion with her brilliant amendments.
The co-operative and mutual sector also plays an important role in delivering financial inclusion. The Bill’s measures fall short of the Labour and Co-operative parties’ shared ambition to double the size of that sector in the UK. That is why I have tabled new clauses 4 and 5 requiring the regulators to report on how they have considered mutual and co-operative business models. In Committee, the Minister said that given that appropriate arrangements are already in place for regulators to report, that the FCA and Prudential Regulation Authority already produce well combed-through annual reports and that there is no deficiency in the level of engagement with the sector, such a measure is simply unnecessary. The sector was shocked by the Minister’s ill-informed response. It pointed to the FCA’s most recent annual report, published in July, where there is not one mention of the needs of co-operatives, mutuals, building societies or credit unions, while in the latest PRA annual report, building societies are just lumped in with standard banks. Every single business leader that I have spoken to, from Nationwide to the firms represented by the Building Societies Association, have called for the FCA and the PRA to report separately on these specific business models. Either the Minister believes he understands the needs of British mutuals and co-operatives better than the sector itself or he should support my amendments.
What is perhaps most striking, however, is how little the Bill has to say about green finance. Over a year ago, the present Prime Minister promised to make the UK the world’s first green financial centre, but on Monday the CBI warned that the Government are “going backwards” on building a greener economy. CBI director-general Tony Danker said firms need more action from Government on green finance. I therefore hope the Minister will support my new clause 6 requiring the Treasury to publish an updated green finance strategy with a clearly defined green taxonomy, as well as new clause 24 tabled by the right hon. Member for Epsom and Ewell (Chris Grayling) introducing greater protections against deforestation. The Minister has said he is going to produce such a strategy imminently, but we look forward to hearing a timeline, because we are now very suspicious of the word “imminently” and want to hear clear dates and times.
In Committee, the Minister and his Conservative colleagues seemed astounded when I said that the Government and Minister were complacent about green finance. They took such issue with that that I felt I had to provide some evidence in my speech as to why I said it. The Government’s own independent Green Technical Advisory Group told them last month that they had to send a rapid market signal or we would risk falling further behind Europe, which launched its taxonomy back in 2020. In 2020 the Government legislated through a statutory instrument for a legal deadline of 1 January 2023 for the UK to establish the first set of green taxonomy criteria. That is less than a month away, so can the Minister tell me whether he is going to meet his own legal deadline? He is welcome to intervene on me if he thinks he is going to meet it.
The highlight of the Committee stage was when I received an early birthday present from the Minister: he gave me a copy of the “Global Green Finance Index” to read, which I read from cover to cover. It is scintillating. I thank him for the interesting read, but has the Minister read his Government’s own policy document, “Greening Finance”? If not, I have a copy here for him. The report says that the country is committed to consulting on the UK’s green taxonomy in the first quarter of 2022. No one will disagree that we are well beyond the first quarter of 2022. The reason I used the word complacent is that we are dealing with a Government who have missed their own deadlines and their own targets on green finance. If that is not complacency in action on green finance, I do not know what is.
Vicky Ford (Chelmsford) (Con)
I want to talk about new clause 17, especially in relation to the insurance sector.
The insurance sector is extremely important in my constituency. Insurers and insurance brokers based in Chelmsford are responsible for about 3,000 jobs in my constituency. In addition, Chelmsford is a major commuter city and many more of my constituents commute into London to work in the insurance sector. It is also a very important sector to the UK. The entire UK insurance industry accounts for 4% of our national GDP. The sector brings in an estimated total tax contribution in the region of £16.1 billion, or 2.2% of UK Government tax receipts for 2020. To put it another way, the insurance sector’s tax paid the salaries of every single nurse in the NHS in 2020-21. It is a really important sector and we do not discuss it often enough.
Insurance is also a very international business. Insurers and brokers based in Chelmsford have parent companies in the US, Switzerland, Japan and Australia. All have chosen to be in the UK as a centre for investment, and more international investment means more highly paid jobs supporting not only the City of London but local economies such as those in my constituency and beyond. That investment is under threat. It faces competition from other jurisdictions and the amendments we are debating today will help to show new and existing investors that the UK is open for business. It is a highly competitive global trading environment and London must keep pace with other parts of the world—they want our business. London remains a world-leading speciality insurance market. Three quarters of business booked in the UK comes from outside the UK and London. It is an export-led market. It is not replicated anywhere else in the world.
London retains a lead role thanks to its historical prominence. However, its market share has stagnated in the past decade. The UK needs a renewed focus on competitiveness and growth, and the amendments we are discussing today will help to ensure clear accountability and transparency in how we do that. It is not a theoretical risk that we will lose business to other countries. We have already lost out on new markets, investment and opportunities. Singapore copied the UK’s insurance-linked securities regime, a new form of insurance and risk transfer product. It recognised the quality of the UK’s legislation that this Government introduced in 2017, but when it implemented the regime, the Singapore regulator took a proportionate regulatory approach and that has encouraged many more new entrants. Singapore has approved 18 ILS vehicles in less time than it took the UK to do five. In 2021 alone, the UK lost out on over $700 million of foreign investment in ILS to Singapore, because its regulator is more agile and more proportionate, even though it has the same legislation.
There are also problems in just getting the day-to-day work done. The Bill Committee heard evidence from industry about how the FCA is sometimes taking nine months to authorise a chief executive coming from overseas to operate in the UK. That is just not good enough. I have also been told that not a single new insurance company has been set up in the UK in the last 15 years. Surely that is a clear sign that the UK is risking its position as the world’s leading insurance centre? Businesses face vital choices about where they place capital, income and people. Regulation is a key part of that decision-making process. That is why it is so welcome that the Government are introducing the new secondary objective on international competitiveness and economic growth. It is crucial. This is not a call for a race to the bottom in regulation. High regulatory standards are a strength of the UK system, but regulators across the world, from Australia, Hong Kong, Japan, Malaysia, Singapore and the EU, are all required to consider international competitiveness, so we should do so, too.
I congratulate the Minister and his officials on their work to date, especially on new clause 17. It is a very welcome recognition from the Government that there is a cultural problem with the regulators, that action is needed on the part of the regulators to address key issues regarding their performance, and that the Government have a key role in holding the regulators’ feet to the fire. The new clause introduces a power over the regulators’ reporting requirements by providing a mechanism through which to direct information to be published, but it is unclear how and in what circumstances His Majesty’s Treasury would use the powers within it. Can the Minister therefore confirm whether he intends to seek a report on the new international competitiveness and growth objective as soon as possible, given that it is a critical new objective for the regulators? Can the Minister also confirm that, in future reporting of the international competitiveness objective, he and other Ministers will impress upon the regulators the need to consider metrics specific to competitiveness, not just domestic competition, and that that must include comparative analysis of our regulators’ performance against competitor jurisdictions, as well as analysis of product and service innovations taking place in key markets?
The new clauses tabled by my hon. Friend the Member for North East Bedfordshire (Richard Fuller) go further on proposing a clear reporting criteria for the regulators to follow and on delivering international competitiveness and the growth objective. That would enable Parliament—I am looking at the Chair of the Treasury Committee, my hon. Friend the Member for West Worcestershire (Harriett Baldwin) here—to understand better how the regulators have been performing and the contribution they are making to facilitate our competitiveness and growth. In particular, new clauses 13 and 14 are designed to give the Government powers to require the publication of more performance metrics, including on new applications, authorised entities and persons. They already have some performance criteria, but the new clauses would extend that approach. It does not mean reinventing the wheel. Many are taken from the performance criteria of regulators in competitive jurisdictions. It would not compromise their independence, high standards, financial stability or consumer protection.
New clause 14 would add to the regulators’ authorisation key performance indicators outlined in the Financial Services and Markets Act 2000. It would require them to publish monitoring data related to the determination of authorisations. This is a real issue for many of those acting in financial services. It would reduce the compliance burden for firms that regularly need to give clear applications for approved individuals and would, in turn, promote the openness of the UK for highly skilled talent. I am nearly finished, Mr Deputy Speaker, but there are a few more I want to mention.
New clause 15 would require both the FCA and the PRA to publish an annual report setting out how they facilitated international competitiveness and growth against a range of data and analysis requirements. Instead of allowing the regulators to mark their own homework, it would enable Parliament to understand how the regulators are helping the UK to be more competitive and ensure that they undertake comparative analysis with other jurisdictions.
New clause 16 is targeted at achieving a more proportionate approach to wholesale and retail financial services. Although the regulators have a proportionality principle, it is clearly not working in practice. I have heard time and again from insurers in my Chelmsford constituency and others that the regulators have adopted a one-size-fits-all approach to regulations by treating all financial services, no matter the product or customer, as the same. This means that the regulators in insurance are spending time and effort on over-regulating sophisticated corporate entities with teams of professional advisers, which is really affecting their competitiveness. It would be much better for them to spend that time and effort on protecting individual retail customers, such as our constituents, when they are buying products online or on the high street. The wording of the new clause should be familiar to the Minister’s officials, because it is borrowed from the recommendation for a proportionality principle for all regulators, which was published in June of last year by the Government’s taskforce for innovation, growth and regulating reform.
Amendments 1 to 6 would ensure that the cost-benefit analysis panels are better equipped to undertake the necessary scrutiny of regulators’ work, and would ensure that they are independent from the regulators, that they can publish their recommendations, and that the regulators must respond to those recommendations. Again, this would mean that Parliament, industry and public see the data and avoid a situation in which the regulators are marking their own homework behind closed doors.
I understand that my hon. Friend the Member for North East Bedfordshire might not move the amendments, but they are all extremely serious. As I said, the industry makes such an important contribution to the tax income of this country and is key to funding our public services. It would be a tragedy to lose our international competitiveness and an industry that dates back to the Great Fire of London, so let us make sure that the Minister and the Treasury team can take the amendments into account.
Peter Grant
Thank you, Madam Deputy Speaker. I am pleased to speak on behalf of the Scottish National party in this afternoon’s debate, and I find myself in a strange position: after welcoming the new SNP leader last night, it is quite possible that, having stood up from the Front Bench, I might be sitting down on the Back Benches. It is a strange experience for me, but it has been quite common on the Conservative Benches for most of this year.
Colleagues who served on the Bill Committee will know that I had to miss most of its considerations for family reasons, and I want to place on the record my thanks to my hon. Friend the Member for West Dunbartonshire (Martin Docherty-Hughes), who unhesitatingly took on my share of the work on the Committee as well as his own. By all accounts, from what I have heard from Members of all parties, he did so very well. None of them said that he did it better than I would have done, although quite possibly he did.
We have well over 60 new clauses and amendments in front of us today, and we are not going to do justice to 10% of them—that is the nature of the way this place operates. I am also well aware that since we started the Committee deliberations, only three parties have had the chance to contribute, and I think it is only fair—I hope it is possible—that that balance be addressed later today. Other parties have voices and constituents, and the voters and constituents who do not like the governing party have a right to have their voices heard in the debate, which will be the only chance that they get.
I intend to simply restate the SNP’s position on the main themes of the Bill, as an indication of where we stand on most of the amendments. I will mention some specific amendments, but I hope that my comments will give an indication of which ones we support.
We recognise that there is a need for a complete overhaul of the UK’s financial services regulatory framework, although possibly in a slightly different direction from where the Government want to take it. For example, I have long argued that the Financial Conduct Authority does not have enough powers or resources. It has to be said that sometimes it does not seem to have the desire to take swift and effective action to stop frauds before they happen, and sometimes it does not have the power to compensate victims afterwards.
The SNP continues to have severe reservations about forcing regulators to put international competitiveness on an equal and sometimes higher footing than their actual regulatory responsibilities. There is a potential and very clear conflict of interests between being responsible for regulating the conduct of organisations and being responsible for helping them to become profitable. There are ways that companies can become more competitive that are quite clearly helpful to the public interest, and there are ways they can do it that are neutral to the public interest. There are also ways that a company can become more competitive that are extremely damaging to the public interest—for example, look at the way P&O treated its workers a few months ago. That made the company more competitive, but it was clearly against the wider public interest.
The regulators should have clear responsibilities on matters such as financial stability, consumer protection, fraud prevention and climate change objectives. On climate change objectives, I will not shilly-shally and make excuses; I will support new clause 25 if the House divides on it.
The Government have missed the chance—although from the Minister’s comments, I think we can assume that they have deliberately ignored the chance—to put financial inclusion at the heart of the Bill, so we will support amendments that address that. My understanding is that the official Opposition will press new clauses 2 and 7 to a Division today and we will certainly support them. As has been mentioned, free access for people to get their cash out of the bank is important and has to be available as a legal right, not simply as a by-your-leave on behalf of the banks and other financial institutions. I share the suspicion that if the amendments had not been tabled and if the banks had not known that those were coming, they would not have been nearly so keen to adopt voluntary codes of practice, and so on. We will also support new clause 23, which will force the FCA to give much more recognition and priority to the requirement for greater financial inclusion.
As I mentioned, we welcome the Bill’s anti-fraud measures, but they do not go nearly far enough. The Bill is hardly even present-proof, never mind future-proof. It is almost as though we are finally catching up to legislate, at the end of this year, for last year’s scams, and we are failing to notice that the bad guys and gals have designed new scams for this year and are already working on next year’s. For example, I welcome the fact that the Bill will give the Payment Systems Regulator a duty to improve the reimbursement of authorised push payment scams, but the same provision will not be carried over to the victims of crypto-scams, pension scams, investment scams or various others.
We will support new clause 1, as well as new clause 36, if that is pushed to a vote. New clause 36 emerged from a conversation between Public Accounts Committee members after we took evidence recently on the Government’s record on tackling fraud. A lot of us were struck by the fact that we knew, but had never really thought about, the fact that nobody has any idea of what the real level of fraud is in the United Kingdom, because, too often, financial institutions have a self-interest in choosing to cover it up rather than to report it. We know that 40% of reported crime in the United Kingdom is fraud, and the proportion is probably higher than that because a lot of the frauds against individual institutions are covered up rather than reported.
I am grateful to the hon. Member for Sheffield, Hallam (Olivia Blake) for taking the time and trouble to introduce that new clause. If, as I strongly suspect will happen, the Government say that they are not against the principle but that they do not like the way in which it has been drafted, I hope that they commit to introducing a similar amendment in the other place in due course.
I remember—I think a lot of Opposition Members do—that not that long ago, the Tories were very enthusiastic about the idea of forcing people, including Members of Parliament, to report cases of suspected illegal immigration. It will be a real test and give a real indication of how seriously the Government take the damage that fraud causes to all our constituents if they refuse to even consider a similar requirement to report cases of suspected fraud.
The final serious concern that we have about the Bill, as with several other Bills that we have seen being rammed through this place, is the relentless drive to become as different as possible from the European Union, just for the sake of it. Although I do not know whether amendments 8 to 11 will be voted on tonight, had the Government submitted those as new clauses in Committee, or had they been part of the Bill as published, it is almost certain that we would have opposed them.
It will come as no surprise that, on behalf of the people of Scotland, the SNP will resist any attempt to drag us further from our European friends and neighbours than we already are. We make no secret of our intention to keep our country in a position where the restoration of our independence will be followed as swiftly as possible by our restoration to our rightful place as a sovereign nation in the EU. We want the transition back into EU membership to be as easy as possible, so we want that to be from the starting point of being as close to alignment with the EU as we can be.
This morning, an opinion poll showed support for Scottish independence at 56%—by jings! The new leader of the SNP group has fairly made his mark, has he not? Fifty-one per cent. would vote SNP in a Westminster election; that is even more than the landslide that we had in 2015. That increases to 53% if, as the SNP intends, the Westminster election becomes a de facto referendum.
The prospect of Scotland applying to rejoin the European Union as an independent nation within the next few years is not just a fanciful idea, nor is it just likely; it is now highly probable and is rapidly becoming a certainty. We have to act in the best interests of the people of Scotland by making sure that after independence we remain as close as possible to our friends and neighbours in the European Union so that our transition back to European Union membership can be as swift and smooth as possible.
When we rejoin the European Union, it is very likely that central Scotland will immediately become its second biggest financial services centre. It matters to our economy to be able to get back into the European Union with as little fuss and disruption as possible. For that reason, the future of our financial services sector lies not in isolationism from the Government, but in internationalism through membership of the European Union.
Several hon. Members rose—
Madam Deputy Speaker (Dame Rosie Winterton)
Order. My plan is this: because there is a lot of pressure on time, I intend to prioritise those hon. Members whose amendments have been selected. It is really important for everybody to stick to six minutes. I am sure that the Chair of the Treasury Committee will lead by example so that I do not have to impose a time limit.
Harriett Baldwin
Thank you, Madam Deputy Speaker. I will try not to gabble.
I rise to speak to new clause 11, which stands in my name and in the name of many right hon. and hon. Members; I am pleased to hear from the hon. Member for Hampstead and Kilburn (Tulip Siddiq) that the Opposition support it too. I should clarify that I am speaking in this debate as an individual Back Bencher, rather than as Chair of the Treasury Committee.
As the Economic Secretary has highlighted, one of the many benefits of being able to bring financial regulation back into the UK is that we can create rules that will help to unleash growth and investment here. My new clause highlights the opportunity that reviewing MiFID presents for us to look again at the boundary between regulated advice and guidance.
I am proposing personalised guidance on financial matters. As we all know, the implementation of the retail distribution review about a decade ago has meant that financial advice is now a very high-quality service that is very expensive. The vast majority of our constituents do not pay and are not willing to pay for it. Something like 8% of people—I confess that I am one of them—are lucky enough to afford a financial adviser, but 92% of our constituents do not have that luxury.
When I was Economic Secretary in 2015, I launched the financial advice market review, which came up with 28 recommendations to help our constituents. Many wise steps were taken at the time, including enabling people to use £500 from their pension savings to pay for financial advice when using their pension freedoms. Despite those measures, however, there is still an enormous gap for our constituents. For example, about 10 million people in this country are fortunate enough to have more than £10,000 in savings, but 58% of that money is just sitting there in cash, and we all know how inflation is eroding the value of those investments.
My new clause 11 approaches the problem from the other direction. I was pleased to hear the Economic Secretary commit at the Dispatch Box today to using the new flexibilities and seeing whether he can do something like a personalised guidance review with great urgency. That will help our constituents in the following generic examples.
A customer may be saving for a deposit for their first home, but doing so with a cash individual savings account. They could get a nudge from their financial institution to consider putting the money into a lifetime ISA so that they get the Government rebate.
A customer may be sitting on a large cash balance for many months, well above their normal three-month outgoings. They could get an alert to warn them about the detriment to the value of cash as a result of inflation and to narrow down some suggestions for getting a better deal for their cash. With many of our constituents, particularly our elderly constituents, there is a lot of inertia because they are not receiving very much on their deposits. This approach would give them a nudge that there are better rates out there that they could be receiving.
A customer might have invested in a fund on a platform many years ago and have done nothing with it since. If the fund is poorly performing, they could get a nudge with some personalised guidance. A customer who opened a junior ISA, which by definition would have a very long time horizon, might get a nudge that cash was not the ideal investment, and that in his or her circumstances an investment with a longer time horizon might provide better protection from inflation.
Sir Stephen Timms (East Ham) (Lab)
I agree with the case that the hon. Lady is making—indeed, I have signed her new clause. I wonder whether she has seen the report produced by the Work and Pensions Committee in September, which expressed concern about stepping across the advice-guidance boundary and constraining the ability of pension schemes and employers to give people helpful, sensible support as they make their choices about what to do with their pension savings. Would her new clause help in that regard?
Harriett Baldwin
I thank the right hon. Gentleman for signing the new clause, and for his Committee’s excellent report. He is right to suggest that the workplace is one of the best places for people to be given these nudges, and for employers to explore that boundary between advice and guidance.
Our constituents are craving advice of this kind, especially during this cost of living crisis. They want more guidance from their financial institutions. They are turning to online sources of often unregulated information to help them navigate their finances. They are finding the process complex and confusing. They are choosing investments that are often very high risk and not suited to them at all, such as meme stocks, crypto or spread betting.
It should not need to be this way, because the technology exists for financial services and fintech firms to guide people towards making better financial choices and following good mainstream investment opportunities, but MiFID-originated legislation is getting in the way. My new clause would enable the Treasury to introduce, with great urgency, the necessary legislation to allow regulated financial services firms to offer UK households personalised guidance. It is a great opportunity to unlock investment in our country, it will help our constituents to earn more, and it will allow innovation. Financial technology will help our constituents to level up their own economic futures. I am therefore delighted that the Economic Secretary has agreed today to look into this as a matter of urgency.
Crispin Blunt (Reigate) (Con)
I fully support the proposed measure. Let me say something that is specifically for the ears of my hon. Friend and those on the Treasury Bench. Just is a company in Reigate, formed from a company called Just Retirement and Partnership, which provided products that challenged the existing ones, involving, for instance, equity release and life insurance for smokers. As a provider of challenger products, it was anxious for people to have access to independent advice, rather than just being directed only to its own products.
Harriett Baldwin
Let me end by saying that personalised guidance would offer the Economic Secretary the chance to make his mark and help all our constituents to benefit from better financial information. I am very pleased that he has committed himself today to look into it with the utmost urgency.
John McDonnell
I entirely agree with what the hon. Member for West Worcestershire (Harriett Baldwin) has said, and I apologise for not signing her new clause; I wish I had.
I will be very brief, Madam Deputy Speaker. This is an appeal more than anything else. I am concerned about the way in which the Bill will undermine the constraints on commodity market speculation that were introduced during the financial crash of 2007-08. I was in the House before and during that crash. People remember that it was a banking crash based on the sub-prime housing market, but what is less discussed is what then happened with regard to commodity speculation. The funding shifted from housing to commodity and, in particular, food speculation, and we saw massive food price increases as a result. The price of wheat rose by 168% during that period, and the price of rice doubled. This was largely not to do with supply, which at that time was relatively stable; it was to do with commodity speculation.
We supported, on a cross-party basis, reforms to regulate the market. We gave the FCA the task of setting position limits. We also opened up the whole commodity market to greater transparency. I accept that there has been a watering-down of those regulations since then, particularly by the Trump Administration but also by signals from Ministers in the UK Government. That weakened regulation and weakened culture have opened the door to what is happening now, which is billions shifting into food commodity speculation. This is fuelling the cost of living crisis. It is not just about energy; it is now also about food prices, some of which have gone up by as much as 16%.
Of course, we cannot ignore Ukraine, climate change or the breakdown of supply chains with regard to covid, but another severe factor that is influencing this is commodity market volatility. Speculation is creating price rises, and this is making fortunes for individual speculators, but I have to say that the banks themselves are also making a killing at the moment.
I say this not as some kind of Cassandra—I was the first to raise Northern Rock in this Chamber, although others have claimed that too—but economists on both sides of the Atlantic are saying that this could be a systemic crisis unless we get to grips with it and accept that we need to strengthen, not weaken, regulation. One of the reasons I am concerned is that the Lighthouse report suggests that a lot of commodity investment is taking place by pension funds themselves. That could have an effect not only on prices but on the stability of people’s pensions.
The Government will say, “Don’t worry, we’re not scrapping the limits. We’re handing over control to the trading floors.” That is madness in itself. The trading floors have an interest in attracting traders, and the lesson of history is that they cannot be relied upon to regulate themselves. They do not worry about the interests of the whole economy. That is the job of the Government and Parliament. Also, I see no rationale for scrapping the transparency element of MiFID II. I would love to know what possible justification there could be for undermining access to more transparent information, because the markets are already opaque and this would make them worse.
A final comment from me—you will note that I am well under time, Madam Deputy Speaker—is one that I have made before. The best writer on the banking crash of 1929-30 was J. K. Galbraith, who said that, yes, we would put institutions in place to protect against a repeat of that kind of crash but one of the most significant things would be memory; people would remember what had happened. Unfortunately, I fear that we are now replicating the circumstances of 2007-08 and undermining the very regulations that we as a House put in place to protect against the food speculation, the price increases and, I have to say, the starvation that occurred as a result of that crisis. I never want to see that again. I think this is a mistake by the Government, and I hope that they will think again. I also think we might be able to bring forward some amendments in the other House that will help the Government to move along a more constructive path than the one they are on at the moment.
Chris Grayling (Epsom and Ewell) (Con)
I rise to focus on new clause 24, tabled in my name and with the support of a number of Members on both sides of the House. It focuses on one of the great challenges of the moment, which is how we reverse the loss of habitats and forests around the world. Deforestation in South America, Asia and, to an increasing degree, in the northern parts of the world is a real crisis for our planet. It is appropriate that we are having this debate today, the day on which the biodiversity summit begins in Montreal. It is my hope that that summit will lead to a new international agreement on tackling habitat and biodiversity loss around the world.
New clause 24 focuses on taking the battle against illegal deforestation to the next step. This Government and this House took the first important step last year in the passage of the Environment Act 2021, which introduces a requirement for those dealing in potential forest risk products in the United Kingdom to have a due diligence process in place to ensure that they are not sourcing their products from areas of illegally deforested land. That was a substantial and very positive step, and I am pleased to see that the European Union has taken a similar step this week and is perhaps going slightly further in tackling the issue of forest risk products.
But a substantial area that remains untouched both here and in many countries around the world is the question of financial services investing, whether through equities, loans or bonds, in companies that source forest-risk products. We know from the work of organisations such as Global Witness that, over the years, there have been far too many examples of banks knowingly, or sometimes unknowingly, financing the activities of companies that purchase directly from those who are illegally deforesting areas of the Amazon, for example, for beef production or soya production.
We need to extend the work we have already done on forest-risk products, and those who directly deal in them, to the financial services sector and the banks that fund companies that have the potential to participate directly or indirectly, knowingly or unknowingly, in illegal deforestation.
I hope the Government will take this on board, and I am grateful to the shadow Minister, the hon. Member for Hampstead and Kilburn (Tulip Siddiq), for her words of support. New clause 24 would replicate almost exactly what this House has already approved in the Environment Act 2021, translating it into a duty on the financial services sector to carry out similar due diligence to ensure that its work does not support illegal deforestation.
The reality is that these financial services businesses already do due diligence. No major institution simply lends or invests in a business without doing very careful due diligence on where it is putting its money, on the likely return on that investment and on the likely risks of that investment. New clause 24 would not ask them to do something wholly different from what they are already doing; it would simply require them to extend their due diligence into this area, which most institutions, at a senior level, would say is vital to all of us.
Anthony Browne
My right hon. Friend is making an incredibly important point about an issue I also massively care about, and I totally support the ambition to get some form of regulation in this space. When I was environment editor of The Observer and The Times, I often wrote about deforestation. There is a real problem with doing due diligence on supply chains, as the loggers in Brazil log illegally but tell their intermediaries that they log legally, so the intermediaries say they are logging legally, and so on. That is all quite difficult to trace. If there is not a robust due diligence system, and many people have struggled on that, my fear is that financial services companies will end up not backing any wood product companies at all, as even the legitimate ones would be seen as a risk.
Chris Grayling
My hon. Friend makes an important point. What makes it possible for big organisations to track their supply chains is the presence of Earth observation data, which many supermarkets now use to understand where they are sourcing from. Interestingly, it is a central part of this week’s proposal by the European Union. The data is available, but it is complicated. I recently had a meeting with a major institution that financially supports companies in Brazil, and it said it is incredibly difficult to track, all the way down the supply chain, where products are coming from. Well, it may be incredibly difficult, but it still has to be done.
New clause 24 would place a duty on financial institutions, as we did with retailers, to carry out proper due diligence on their investments, to understand and to be absolutely certain that the companies they deal with have due diligence processes in place themselves, so they know from where they are buying beef, soya or palm oil and so they work properly to ensure they deliver products from sustainable sources in a responsible way.
We hear warm words coming from the executive suites of our major financial institutions all the time about their commitment to sustainability, to net zero and to being responsible citizens. Sometimes they do it, sometimes they do not. There might be the will in head office, but sometimes a local branch does not deliver. New clause 24 would make it a clear duty on those institutions to do due diligence to make sure they know where products are coming from and so they know where investments are being made. This country has been a leader, and new clause 24 would be one further step in dealing with the blight of deforestation, which affects everyone’s future.
Siobhain McDonagh
I rise to support new clause 7, which stands in my name and those of dozens of right hon. and hon. Members from all corners of this House. The amendment is simple: it proposes that the Treasury must not only make provision to guarantee a minimum level of cash access, but ensure that this access is free. Why? Because surely it cannot be right in 2022 that almost a quarter of our cash machines charge people to access their own money.
Siobhain McDonagh
I am tempted to give way, because I want to debate this, but I am observant of the Chair’s ruling on limiting speeches, so I apologise to the hon. Gentleman.
Adding the word “free” into the Bill would not result in the loss of a single paid ATM. It would simply preserves free access for every community, so that no one is obligated to pay for their own money. We have all seen how devastating the impact of bank branch closures can be on our communities, particularly for the elderly, the disabled and the most vulnerable, who are least likely to be able to use online banking and most reliant on access to cash. For them, cash is king. It is why MP after MP has led local campaigns fighting to save bank branches in their town centres, but what is the point of the photo in the local newspaper or the packed public meeting unless the rhetoric is matched by a vote in favour today?
It is time for Members to put their money where their mouth is, to listen to their constituents, to challenge their Whip, and to make a simple, lasting change for the most vulnerable people in their community. It is uncontroversial, tangible, straightforward, no nonsense, common sense and cross party. Free access to cash is, quite simply, bang on the money, and I hope that it will have the support of the House.
Richard Fuller
After such a thoughtful presentation by the hon. Member for Mitcham and Morden (Siobhain McDonagh), I am sure the Minister will consider carefully her entreaties and also the opinions of those on the Conservative Benches.
I congratulate the Minister and his Treasury team on this important and big Bill passing through its Committee stage and maintaining its cross-party support, which is so evident here today.
One of my greatest concerns about the Bill is that we underestimate the importance and the severity of the international competition that our financial services face. We are in a fierce global competition and the balance of risk has to be that the UK will not move fast enough, it will not be smart enough and its moves will not be significant enough to maintain and build the comparative advantage of our financial services sector, which is why I have tabled some of my new clauses. It is also why I am looking forward to hearing what the Minister will say to reassure me in his closing remarks.
We need a Bill, a Government and a country that are pro the financial services sector. That is where the wealth is created in this country. If we do not allow the financial services sector in this country to grow to be globally competitive we are harming the taxes that then pay for all the public services on which our constituents depend. In addition, as my right hon. Friend the Member for Chelmsford (Vicky Ford) has said, and as is the case in my constituency and the constituency of my hon. Friend the Member for North Warwickshire (Craig Tracey), I have many constituents whose incomes are directly related to the success of our financial services sector.
My new clauses put down some requirements on the regulator to get with that spirit behind its new objective of international competitiveness. New clause 12 would make it a requirement to publish regulatory performance information that is material to new authorisations, because new authorisations mean growth for the United Kingdom’s financial services sector. We need a very close focus on how effective the regulators are being on that, and the new clause asks for some general statistics.
New clause 13 talks about how the Financial Conduct Authority and the Prudential Regulation Authority work effectively to support already authorised firms, and is specifically to do with approved persons, rules and timings on change in control, variation of permissions and waivers and modifications. Those are the tools of doing business, and if they are not greased and moving quickly enough, that is a source of competitive disadvantage.
New clause 14 is about determination of applications. It would create a new key performance indicator for the FCA. None of this is a criticism of the two individuals who run the FCA and the PRA. They are doing a fine job, but the FCA has a lot of KPIs, which have nothing to do with how effective it is in building the financial services sector in this country. It needs to rebalance—I know the Minister is supportive of this—and I will talk about that in a minute.
New clause 15 would create a duty for the regulators to report on their competitiveness and growth objectives. For me, this is a crucial new clause, and I would like to hear from the Front Bench today that the Minister will commit to this report. If he could look through some of the specific items in my new clause about what should be included, I would very much appreciate a specific response.
The Minister talked about the proportionality principle, and there is indeed a proportionality principle, but I reworded it, because it was not done in a way that was effective for the success of our financial services sector and made a difference between wholesale and retail financial services firms. I have tabled amendments about the cost-benefit panel, which gets to the root and branch of how Government should work out whether to enact a new regulation: what are the cost and what are the benefits?
I appreciate that the Minister has said that he is excluding people who are direct employees of the regulators from being part of those panels, and it seems a pretty basic principle that people should not mark their own homework. However, we need the voices of those who are being regulated in that cost-benefit analysis—their opinions, their views and their data.
Several hon. Members rose—
Richard Fuller
I am afraid I cannot give way because of your desire to get on, Madam Deputy Speaker, which I completely agree with.
Amendments 1 and 4 bring in the importance of transparency for those two regulators, the FCA and the PRA. We do not want to see regulators going away into a secret room, not telling anyone what the cost-benefit analysis is, and then coming out and saying, “We’ve decided it is X.” We need true transparency on their deliberations and on the opinions that they have received. I am very specific in those amendments.
The hon. Member for Hampstead and Kilburn (Tulip Siddiq), the shadow spokesperson, who is not in her place, spoke about her concerns about the intervention power, which I think she completely mislabelled as a dangerous thought—I think it is a fairly reasonable thought. In her absence, I will just say to those on the Opposition Front Bench that what looks good in an era of declining yield curves and quantitative easing in a democratic country may look differently in an era of rising yields and quantitative tightening.
My amendments are quite specific. The Minister has been supportive throughout the process and I look forward very much to hearing his conclusions in his summing-up.
Sarah Olney (Richmond Park) (LD)
The Liberal Democrats recognise the importance of good regulation. Well-designed, effectively administered, properly enforced regulation creates a level playing between competitors and instils confidence in consumers and players in all markets. As the Liberal Democrats’ Treasury and business spokesperson, I have spoken to many businesses in many sectors, including in the City, and I have not found anywhere an appetite for the sweeping away of regulations often advocated by Members on the Conservative Benches. Everywhere I hear calls for effective regulation, properly administered.
Andrew Griffith
Would the hon. Lady be able to identify any Member of this House who has talked about the merits of sweeping away regulation? That is not the position of the Government.
Sarah Olney
With respect, I did not say it was the position of the Government, but the Minister cannot deny that it has been advocated for on many occasions during the referendum campaign and on many occasions since. I think he is being disingenuous.
Although the Liberal Democrats welcome some aspects of the Bill that will update the regulatory framework for financial services, we remain concerned by the lack of accountability of the regulators to Parliament and by the potential impact of this Bill on financial stability. The Government have described this Bill as a once-in-a-generation opportunity to reshape financial regulation, but as currently written the Bill lacks ambition and inspiration. In particular, it is a missed opportunity to create a regulatory framework that turbocharges the green agenda and strengthens protections for victims of fraud.
My fundamental concern with the drafting of the Bill is how it undermines the role of Parliament while extending significant new powers to both regulators and the Treasury. As ever, the devil is in the detail, which will be largely hidden within secondary legislation that will not receive parliamentary scrutiny or oversight. Accountability and transparency are the cornerstone of effective regulation. It is vital that those principles are upheld to maintain national and international confidence in the UK’s financial services sector and to improve the operational performance of regulators.
The Bill did not previously contain sufficient powers to require the regulators to report on their performance against their objectives. I am therefore pleased that the Government have made some steps towards improving accountability and transparency though the addition of new clause 17. However, the new clause still does not go far enough in establishing parliamentary oversight of the regulators. Regulators’ powers are granted by Parliament, and that is who they should be accountable to—not to a Minister who may only be in place for a matter of weeks.
I remain concerned that the new statutory objective on international competitiveness could increase risk-taking in the financial services sector. We do not need to be reminded of just how damaging that sort of behaviour can be. I am particularly concerned that the secondary objective of competitiveness will negatively impact the regulator’s delivery of its primary objective of ensuring financial stability.
Our amendments (a) and (b) to new clause 17 would place additional requirements on the regulators to report on the delivery of their objectives, including with an assessment of the impact of the Bill on financial stability. If the last few months have proved anything, it is that volatility in financial markets has a very real and direct impact on households, so I urge the Government to think about how the Bill can be strengthened to ensure that financial stability remains at the forefront of regulators’ activities.
I am pleased to see that a number of amendments on green finance have been tabled, but it is disappointing to see the Conservatives’ lack of ambition in that area. We have such an opportunity to be a leading global centre for green finance, but the Bill does nothing to facilitate that. There is an increasing appetite among investors to support the green transition, but British businesses often struggle to access the green capital they need. New clause 33, tabled in my name, would place a requirement on the regulators to report on ways in which they have promoted and incentivised green finance and green investment. Time is running out for us to lead the world on this, and I urge the Government to commit to a green finance strategy and to start thinking seriously about how a regulatory framework can mobilise green finance.
Sally-Ann Hart (Hastings and Rye) (Con)
In 1215, the Magna Carta was written and signed into law by King John I of England. Although that important document did not guarantee freedom of speech, it was considered the cornerstone of liberty in England and began a tradition of civil rights in Britain that laid the foundations for our first Bill of Rights of 1689, which granted freedom of speech in Parliament.
That was the first time in history that any form of freedom of speech was codified in law. It was extremely influential throughout the western world, leading to the declaration of the rights of man in 1789—a fundamental document of the French revolution that provided for freedom of speech—and the US Bill of Rights in 1791. In 1948, the universal declaration of human rights was adopted virtually unanimously by the UN General Assembly, and urged member nations
“to promote a number of human, civil, economic, and social rights”,
including freedom of expression. Under article 10 of the Human Rights Act 1998,
“Everyone has the right to freedom of expression…subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society”.
Criminalising the incitement of violence or threats, for example, is widely considered a justifiable limit on freedom of expression.
What we cannot have are global tech firms, online payment services, banks and others deciding who they can censor because they do not like or are offended by the views of others. It is essential to have freedom of expression—it is essential to society—and we have to be able to express and discuss differing ideas and ideals to ensure that we have a full and therefore better understanding of the challenges we all face in this modern world.
Freedom of expression in the UK is under threat and must be protected. New clause 27 protects free speech and the exercise of free expression. It seeks to prohibit service refusal by financial service providers on grounds relating to lawful exercise of free expression by requiring providers to explain the reason for a refusal of service, allowing the Financial Conduct Authority to intervene, and creating a civil law remedy for affected customers. We should not allow a system where payment service providers or even high street banks can terminate the accounts of individuals or organisations on the basis of lawful speech if adequate notice is given. Britain has led the world for centuries on democracy and freedom of speech, and it needs to do so again against the global tech companies that want to impose their view of the world and stifle free speech.
Members may remember in early September media agitation surrounding PayPal’s decision to cancel the online payment accounts of the Daily Sceptic, the Free Speech Union and an individual’s personal accounts. Many of us here may not agree with the politics of these organisations or that individual, but it is fundamentally wrong that online payment accounts can be exited because the payment service provider or its staff do not agree with the opinions of the service user. We are not talking about hate speech, terrorism or crime—we have legislation to deal with that; we are talking about lawful speech.
The relatively recent digitalisation of financial transactions has placed an unprecedented amount of power in the hands of online payment service providers such as PayPal, as well as banks, credit companies and online platforms. UK legislation must keep pace with these rapid technological changes and financial censorship must be prevented. As we switch to an increasingly cashless society, we must put in legislation to protect people from being punished by payment processors for expressing legal, but different views, no matter our politics.
New clause 27 is designed to ensure that the regulator has the ability to ensure that financial service providers cannot withdraw or withhold service from a customer on political grounds. The battle to preserve free speech in our society is something we must all fight for. Rising political polarisation is contributing to the threat to our freedom of expression, and the alternative—placing power in the hands of the easily offended—cannot be an option. This issue has to be of grave concern to us all, whatever our politics. I am grateful to the Minister for his assurances earlier, spelling out what he is going to do and his commitment to take this matter further. There are plenty of colleagues who will hold him to that.
Nick Smith (Blaenau Gwent) (Lab)
I rise in support of new clause 10, and I am pleased to have worked alongside the hon. Member for The Cotswolds (Sir Geoffrey Clifton-Brown) on it, as fellow members of the Public Accounts Committee. Since 2017, I have worked with others supporting steelworker pensioners across Blaenau Gwent and the United Kingdom. Thousands of them fell victim to financial sharks. They were wrongly advised to move out of their defined benefit British Steel pension scheme. It took until last Monday, five years later, for the Financial Conduct Authority to announce a redress scheme. It was about time. The FCA righted those wrongs, but I think too late.
Early on in the campaign, I remember meeting the then chief executive of the FCA, now the Governor of the Bank of England, Andrew Bailey, where I was met with a lacklustre response. Along with my hon. Friend the Member for Aberavon (Stephen Kinnock) and other campaigners, I continued to press the FCA. In 2020, I wrote to its newly appointed chief executive, however Mr Rathi did not want to meet. He asked one of his directors to meet us instead.
Later, in 2021, frustrated with the FCA giving us the cold shoulder, I wrote to the Comptroller and Auditor General of the National Audit Office. I asked if it would please investigate the FCA’s oversight of this terrible scandal. Fair do’s, the NAO did that, and it published its full report in March this year. It observed that in the summer of 2017:
“The FCA had limited insight into…what was happening in the BSPS at the time of its restructure.”
There were terrible things going on.
Even more damning were the conclusions of the Public Accounts Committee. We found that:
“The FCA failed to take swift and effective action at all stages of the BSPS case.”
It failed
“to prevent consumers from being harmed”,
which makes clear the
“limitations with the FCA’s supervisory approach”.
The point is that the FCA took proper notice of this injustice only when Parliament, through the NAO and eventually the Public Accounts Committee, dug deep to investigate.
Of course, the BSPS case is not the only example of the FCA’s failure to protect consumers in recent years; I have heard many complaints from Members across the House. The scandals surrounding Blackmore Bond, Dolphin and Azure come to mind. Consumers are our financial sector. As long as the FCA fails to exercise its powers to protect ordinary workers, it will continue to fail our constituents. New clause 10 would require the FCA’s consumer panel to lay an official report before Parliament. We could then judge whether the regulator is fulfilling its duty to protect consumers.
During my 12 years in this House, I have learned many things, but one thing stands out: parliamentary scrutiny matters. I am pleased to have support from across the House for the new clause—from our Labour Treasury team, senior Conservative Members, the Liberal Democrat spokesperson, Treasury Committee members, other colleagues and fellow members of the Public Accounts Committee. By supporting our new clause, Britain’s consumers could be better heard, and our financial services sector would be all the better for it.
David Mundell
I apologise in advance to you, Madam Deputy Speaker, to the Minister, and to the hon. Member for Mitcham and Morden (Siobhain McDonagh), who tabled new clause 7, as I may not be able to be present at the conclusion of the debate, but I wanted to speak on the issue, having campaigned on it since I returned to the Back Benches, principally with my hon. Friend the Member for Blackpool North and Cleveleys (Paul Maynard). I am very pleased with what is proposed overall in the Bill, because during the period of covid it became clear that the system of use of cash could have collapsed. It was incoherent in the way it was managed and regulated, and we saw the potential pressures of not using cash or its usage not being permitted.
I am disappointed that my right hon. Friend the Member for North West Hampshire (Kit Malthouse) has left the Chamber, because I could not disagree more with the points that he made in interventions. We cannot simply move in an unstructured way to a cashless society. We are not ready for that. As I pointed out in an intervention, about 8 million people, whether they are rural dwellers or those living in deprived areas, rely on cash and will continue to do so. I declare that I still have a chequebook, because there are circumstances, particularly when dealing with small voluntary organisations, where a cheque is accepted. Cheques may be on the way out, but there are still circumstances where they are required. Therefore, we have to move forward at the pace of the slowest in our society.
I believe that the prospect of regulation has been very positive, in terms of forcing the banks and others in the sector to become a lot more constructive in the debates and discussions. As the hon. Member for Mitcham and Morden mentioned, the banks have been pretty disingenuous over the period. I have had many closures in my constituency, and they have often been made with undertakings that certain things would happen. For example, in the community of Lochmaben, the branch closed and the free auto-teller was to remain; now it is to be removed, two or three years on. Often the promises given are not worth very much, but I am sure that the threat of legislation, and hearing the Minister say that the Government’s position is a commitment to free access to cash, will ensure that the industry stays on board and delivers for people.
As has been set out, there has been a significant drop in the number not only of bank branches but of free-to-access ATMs, while the number of ATMs that require a fee has risen. As the Minister would expect from our lively discussion, I am in favour of consumer choice—if people want to pay for convenience, that is fine by me—but they should not have to pay several pounds to withdraw £10 from an ATM. At the core of this issue is the fact that many transactions are small transactions, not the ones that we might think of that are made of larger cash sums, which is why we have to stick to the free-to-access commitment.
Madam Deputy Speaker (Dame Rosie Winterton)
If there are any other right hon. or hon. Members who cannot stay for the wind-ups, they should let me know. I was not aware that the right hon. Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell) could not stay. It is important that people stay, so I would not necessarily have called him.
Emma Hardy
I rise to speak to new clauses 22, 23 and 29 and amendments 19, 21 and 22 in my name, which are all about financial inclusion. I thank Martin Coppack from Fair By Design, the Phoenix Group and Mastercard for meeting me earlier this week to talk about why they support financial inclusion.
When we think of financial inclusion, we tend to think of the consumer groups that support it, such as Citizens Advice, and it is not widely known that it is supported by FTSE 100 companies such as the Phoenix Group, Mastercard and Legal & General. When I asked why they support it, they said that since we left the EU, regulators are more powerful than ever before. Of course, I do not believe that the Government should have the call-in powers that were debated earlier. That huge transfer of powers to the regulator means that it becomes even more crucial for Parliament to set the correct objectives; we have to get the objectives right if we are to allow our regulators to function effectively in the post-Brexit world.
There was a rumour that the Government were keen to push back on any additional objectives for the regulators. Apparently, they compared it with the national curriculum, where everybody wants to get their bit in, and perhaps in the same way, everybody wants their bit to be a new objective for the regulators. But even if that is the case—clearly, there is a demand for the regulators to have many new objectives and for objectives to be strengthened—that does not mean that we are incorrect, because financial inclusion is important. Ensuring that the FCA has regard to financial inclusion turns it from a nice to have to something that we must have. It would embed financial inclusion in the design of financial services and products forever.
When I met people from Mastercard and they were talking to me about future innovations in financial services, fintech and the way financial services are developing new products, they said that at the moment financial inclusion is seen as an add-on, in that they develop a product, and financial inclusion is fitted into it by asking, “Well, how can we make this financially inclusive?” Those from Mastercard told me that they want financial inclusion to be there from the beginning, so that when new products are designed and created, it is given primacy, and is there throughout the whole design.
Without financial inclusion, constituents will continue to face what is called the poverty premium. I have spoken before about the poverty premium, which is basically the additional cost of being poor, and it explains why it is so expensive to have such a low income. In Kingston upon Hull West and Hessle, the poverty premium works out at £459 per household, which is nearly £6 million paid in extra costs by my constituents just because they happen to come from lower-income families. This is all calculated by Fair By Design.
For too long, the idea of financial inclusion has been a hot potato passed between the FCA, the Treasury and other regulators and Departments, with nobody prepared to take ultimate responsibility. For example, the Competition and Markets Authority started to carry out investigatory work on the poverty premium across essential services, but in the end determined it was too difficult, and it now signposts organisations to sector regulators such as the FCA. However, the sector regulators say that this is not their responsibility, as it involves elements of social policy and pricing of risk—and so we go on.
We are asking the FCA to collate the information needed to really look at and analyse the poverty premium. Of course, as we expected, the FCA says it does not want another objective. I think we probably understand why it does not want to be given any additional work to do, but it is our job as Parliament to set and establish the types of financial services we want, and to ask what our principles are as parliamentarians, what things we care about and what we want our future financial services to look like. Surely Members across the House would agree that having a financially inclusive sector or financially inclusive products that cater for people right across the population of the UK, not merely the most profitable ones, is a good thing.
When I was talking to people from Mastercard and Phoenix about this, they said that financial inclusion could open up new markets for them among those who would be interested in their products, if they were designed in an effective way. My new clauses and amendments ask the FCA to have regard to financial inclusion, and would place a duty on the FCA to report to Parliament annually on how well it is doing with financial inclusion and giving that information back to us. The proposals would end the current damaging situation by placing a clear remit on the regulator to ensure it routinely and properly explores financial inclusion issues across its work, allowing greater clarity on unintended consequences and the best interventions needed to ensure financial inclusion, as well as who is best placed to act.
The Government could save my constituents in Kingston upon Hull West and Hessle nearly £6 million, and it would not cost them a penny. Surely that, if nothing else, means that the Government should look more favourably at the amendments I have tabled.
Sir Geoffrey Clifton-Brown (The Cotswolds) (Con)
I am grateful to catch your eye, Madam Deputy Speaker.
I congratulate the hon. Member for Blaenau Gwent (Nick Smith) on tabling new clause 10, for which he should receive much of the credit. This amendment has an extremely simple intent in laying a duty on the FCA to report to Parliament on
“(a) the adequacy and appropriateness of the FCA’s use of its regulatory powers; (b) the measures the FCA has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support; and”—
finally and most importantly—
“(c) the FCA’s receptiveness to the recommendations of the Consumer Panel.”
I will now say why paragraph (c), in particular, is so important. The hon. Member has explained clearly why the FCA should regularly report to Parliament, and in my role as deputy Chairman of the Public Accounts Committee, I have constantly urged openness and transparency, wherever possible, so that our constituents can make full and proper judgments on the actions, or lack of them, of regulators such as the FCA.
Like the hon. Member for Blaenau Gwent, I will give the House an example. The PAC inquiry that we held in April and June this year highlighted the plight of some 2,000 of the 7,700 British Steel pensioners who in 2019 suffered significant financial shortfalls because of the wrong advice given by a significant number of independent financial advisers who advised pensioners to opt out of their valuable defined-benefit pension schemes. To add further insult to injury, the actions by the regulator caused a number of independent financial adviser companies to go out of business or merge with others, and therefore the compensation that pensioners received rightly was capped. I know this is a complicated subject but both the hon. Member and I are using it as an egregious example of why the FCA needs to be more accountable to Parliament and our constituents. This amendment stems from recommendations 5a and 5b in the PAC report “Investigation into the British Steel Pension Scheme”, published on 21 July:
“The FCA should be more proactive and consumer-focused in its engagement with stakeholders. It should have a better mechanism for responding to consumer harms and collect more evidence on a regular basis to pick up on issues that are being raised, especially from emerging risks in financial markets…The FCA must also review how effective the Financial Services Consumer Panel is at consumer protection and how it influences policy debates within the FCA from a consumer angle.”
The hon. Member and I have had discussions with the Economic Secretary, who is on the Front Bench today, and I believe he is sympathetic to the principle that the FCA needs to be much more accountable. If that is the case, I very much hope that he will concede the principle of this amendment and incorporate it as a Government amendment in the other place. Neither the hon. Member nor I wish to be prescriptive about how or when this reporting should take place to Parliament; that is a matter for the Government.
No financial institution will ultimately exist without its consumers. The whole point of the FCA as a regulatory authority is to protect their interests. Rather than having to work through long and complicated reports, there needs to be clear, easily available information on what regulators are doing, or not doing, on their behalf. All of this requires a fundamental shift in the regulator’s—the FCA’s—attitude to the consumer and a commitment to engage more when things go wrong.
Finally, I want to comment on the fraud aspects of the Bill. The PAC recently conducted an inquiry on fraud and discovered that 41% of all reported crime in June was accounted for by fraud, up from 30% in 2017, yet just 1% of police resources is being devoted to fraud crimes. So we urgently need to see the Government’s new comprehensive fraud strategy.
Stella Creasy
I rise to add my wholehearted support to the comments of my hon. Friend the Member for Kingston upon Hull West and Hessle (Emma Hardy), to new clause 7, to my Front Bench, and indeed to the points made by the hon. Member for The Cotswolds (Sir Geoffrey Clifton-Brown): many of us have had concerns about the FCA and its ability to represent consumers for many years, and it is good to see that work being done.
I shall focus on new clause 28. The bridge of the Titanic received seven warnings about icebergs. It was told exactly where the iceberg was, but on hearing those warnings it varied the direction of travel by one or two degrees yet kept going full steam ahead. The visible iceberg was 50 to 100 feet high and 200 to 400 feet long, yet still they ploughed into it. It does not take a rocket scientist to recognise that we have a personal debt crisis in this country with a cost of living crisis, that our constituents are struggling because there is too much month at the end of their money, and that those who make their money from those who are struggling are licking their lips.
This Bill is about financial regulation yet one of the most pernicious legal loan sharks is the buy now, pay later industry. The pool in which they fish is wide. This country has £205 billion-worth of consumer credit lending to account for, up £482 million on the previous month. People are borrowing not just to pay Peter and Paul, but to pay for their mortgages, to put food on their table, petrol in their car and clothes on their children’s backs. Let me be clear: I do not stand here with a hair shirt on saying nobody should borrow, but in that environment, when our constituents are being exploited by these companies, it is absolutely right to regulate them and protect our constituents, yet that is not what is happening here.
For nearly three years we have been warning the Government on the need to act on legal loans harks and the buy now, pay later companies—those warnings that came to the bridge of the Titanic. The Klarnas, the Laybuys and the Clearpays are the companies whose names we see when we go to check out online. They account for 6% of all online spending in the UK, and that is expected to double in the next two years. High thousands of reputable retailers have them on their websites. They have them not to help people to spread their payments as the companies claim, but because people spend on average 30% to 40% more if they use buy now, pay later.
But what people are telling us very clearly is that they are spending money they do not have. A quarter of all buy now, pay later users have been unable to pay for at least one essential because they are having to make repayments on buy now, pay later products. Some 25% of users have also missed a payment or made a late payment on a buy now, pay later loan in the last 12 months.
Miriam Cates (Penistone and Stocksbridge) (Con)
I rise to speak in support of new clause 27, tabled by my hon. Friend the Member for Hastings and Rye (Sally-Ann Hart). As she said, it would prohibit payment service providers from refusing to supply a customer based on the customer exercising their lawful right to freedom of expression.
On 15 September, PayPal notified the Free Speech Union that it had closed its account with immediate effect. The reason given was that the Free Speech Union had breached the company’s acceptable use policy, but no further information was forthcoming. The accounts of UsForThem, the Daily Sceptic and the journalist Toby Young were also terminated. It is still not entirely clear why PayPal closed the accounts, but the apparently common theme among those organisations and individuals is that they have each become prominent champions of free speech, expressing critical, non-conforming opinions and asking challenging questions.
The effect of PayPal’s decision was to temporarily disrupt the ability of those organisations to operate. In some cases, their accounts were frozen, thereby denying them access to their funds. In the light of that, 42 peers and MPs wrote to the then Business Secretary, my right hon. Friend the Member for North East Somerset (Mr Rees-Mogg), and to the Minister currently on the Front Bench. PayPal then restored the accounts of UsForThem and the Free Speech Union. Although PayPal’s actions may seem unjustifiable, payment providers and high street banks may terminate the accounts of groups on the basis of lawful speech, so long as adequate notice is given. As the law stands, the only thing that PayPal did wrong was not to give sufficient notice of the closure.
Sadly, the actions of PayPal in September were not a one-off. It also closed the accounts of the UK Medical Freedom Alliance and Law or Fiction, both of which are opposed to lockdowns, and it has not reopened either of them. It is therefore hard to avoid interpreting PayPal’s actions as an orchestrated, politically motivated move to restrict certain views within the UK. This is unacceptable.
In an increasingly cashless society—we have heard a lot about the merits of cash today—access to a digital payment system is not a luxury, but a basic requirement for participation in society. No campaigning organisation can function without the ability to perform financial transactions. Imagine if the suffragettes had not been allowed to have or use cash, or if those campaigning for Brexit had been refused a bank account. Freedom of speech and freedom of expression are foundational to democracy, and there can be no meaningful freedom of expression without the ability to conduct financial transactions.
It is of course right that in the UK private companies can choose which customers they do and do not want to do business with, but this is based on the assumption that there is a functional marketplace with healthy competition and that companies are regulated by, and compliant with, UK law and regulations. PayPal is eight times larger than its nearest competitor. It is a Californian company with its European headquarters in Luxembourg. Are we happy to delegate important powers relating to freedom of speech and expression to unaccountable global tech firms?
Of course, unlike socialists, conservatives want markets to operate freely, without unnecessary bureaucracy and state control. But as conservatives, unlike liberals or libertarians, we understand that there must be limits to this freedom, because without limits, human beings and organisations will sometimes—perhaps often—put their own interests before the best interests of customers and societies. As UK national conservatives, we believe that the proper bodies to set the bounds of free speech and political opinions in the UK are the UK Parliament and UK courts. That is why we must act to legally prevent payment providers from closing accounts of the basis of political beliefs, because if we do not, big global companies will put their own interests—financial, reputational and political—before any moral duty to act fairly.
The principle of using law to protect free speech is well established. The Equality Act 2010 prohibits discrimination on the grounds of religious or philosophical beliefs, but this protects individuals, not organisations, which is why it cannot be used in this case. The Government are also acting to protect free speech in universities, and the Higher Education (Freedom of Speech) Bill is today making its passage through the other place.
The PayPal saga identified a gap in our free speech protection that must be filled with appropriate legislation, which is why I support new clause 27. I thank the Minister for his engagement on this issue, which I know he takes very seriously—I was delighted by his opening remarks and commitment to work further on it. I very much hope that, following the evidence that he will gather, he will legislate if it is appropriate to do so. I appreciate his assurances on that.
I want to finish with a recent example of what happens when free speech is threatened. I know we do not want to think back to covid, but we had lockdowns and school closures. In fact, UK schools were closed for longer than those in almost any other country in Europe, and our children missed more face-to-face learning than those in any country other than Italy. The effects on children have been absolutely horrendous and will last a generation. They include lost learning, an increase in eating disorders, self-harm, a loss of socialisation, exposure to domestic violence—I could go on and on. [Interruption.] But I will not, because you are clearly telling me not to, Madam Deputy Speaker.
The Government now say that doing that was a mistake and that there was not sufficient evidence, but one reason that schools were reopened and children were eventually protected was the effective campaigning of the group UsForThem, which—unlike so many—stood up for children and their welfare. Its views were unpopular and it was said to be spreading misinformation. Imagine if its bank account had been cancelled two years ago—where we would be now? We need this protection. I appreciate the Minister’s commitment and I look forward to working with him further.
Olivia Blake
The Bill is important because it presents an opportunity to set out a new, responsible and green vision for the City and financial services, but the Government are squandering that opportunity. That is why I rise to speak in support of amendments that would enshrine climate protections and harness the power of the City to act as a force for people and planet.
Let us look at the resources in that sector. Globally, privately invested financial assets are expected to reach $145.4 trillion by 2025—a 250% growth in less than 20 years. In the UK, pension assets amount to a staggering £2.7 trillion. The financial challenge for decarbonising the economy is significant. The UN has estimated that, globally, we require £90 trillion of infrastructure investment by 2030 alone. In the UK, private investment in carbon-cutting activities needs to grow by an extra £140 billion over the next five years to reach our net zero goals. We should mobilise the huge resources in the finance system to meet the existential challenge of the climate crisis. Instead, financial institutions are adding fuel to the fire, as I mentioned.
Britain is a financial giant and is the biggest net exporter of financial services in the world. I support new clause 6, tabled by my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq), because we need a strategy for how we use that influence to reshape the system in accordance with climate priorities. However, those climate priorities are not the priorities in the Bill. Rather than making it a statutory aim of regulators to ensure compliance with our net zero aims and protect our natural environment, the Bill makes the main aim of regulation growth and competitiveness in the sector. In fact, although it is supposed to represent the Government’s vision for the future of financial services, it does not mention “nature” once. That is why I support new clause 25, which aims not for growth and competitiveness on its own, but for a regulatory regime designed for long-term economic resilience, climate safety and nature restoration.
The science is clear: complying with our net zero and Paris agreement obligations means keeping dirty fossil fuels in the ground, so we should encourage divestment in fossil fuels and put an end to fossil fuel extraction. New clauses 21 and 26 have my full support because they rightly restrict and provide disincentives for that kind of harmful investment. We need not only to incentivise fossil fuel divestment, but to ensure that investors make demands of companies on climate action.
I tabled new clauses 8 and 9 because we need to raise the bar on stewardship rules, putting ethical engagement with companies on the climate crisis and much more at the heart of investor activity. I support amendments 23 to 27 because they would reinstate the position limit rules on the kinds of awful things that we have seen relating to speculating on food and betting on hunger. We should stand firmly against that, especially given global heating.
I will finish by saying a few words about fraud. My constituents have been frustrated by the lack of accountability in the financial services sector. Some fraud victims are passed from pillar to post in trying to access justice, so I welcome new clause 1, which tasks the Government with creating a national strategy on preventing fraud. Although these will not be pressed to a separate vote, I draw the House’s attention to my new clause 26 and my amendment 20, which make clear the responsibility for reporting fraud and compensating victims. I also express my support for new clause 2, which would ensure that everyone has access to essential in-person banking services.
We need financial services that work for people and planet. As the clock ticks on climate action, now is the time to pull every lever and seize every opportunity to decarbonise our economy and society. However, the Bill has presented us with more of the same agenda—deregulation and lip service to climate goals. As the slogan goes, we need “system change not climate change.” I am afraid that without significant changes, the Bill will deliver the opposite.
Craig Tracey (North Warwickshire) (Con)
I declare an interest as chair of the insurance and financial services all-party parliamentary group. I welcome the Bill as a great opportunity to cement the UK’s position as a leading market for financial services.
The London insurance market alone is bigger than all its competitors combined. That is great news, but it also means that it is a target and that it has the most to lose, so it is really important that we get this key legislation right. I thank the Minister for his engagement at earlier stages; I know he is keen to make the Bill a big success, as I am, and I really appreciate the conversations that we have had.
Caroline Lucas
This Bill should be a once-in-a-generation opportunity to ensure a rapid, stable, co-ordinated and just transition to a low-carbon economy, to advance financial inclusion and to protect consumers, investors, banks, asset managers and other financial institutions against the catastrophic financial risks associated with climate and nature breakdown. Sadly, I believe that it fails to deliver on all those counts, and many others too.
I have signed a number of new clauses with the aim of improving the Bill, on matters such as free access to cash and better regulation of buy now, pay later credit. I also strongly support the new clauses tabled by the hon. Member for Sheffield, Hallam (Olivia Blake). However, I want to use my speaking time to focus on three new clauses in my name.
New clause 25 goes to the heart of what the Bill is about. It seeks to reposition the objectives of the regulator so that they are consistent with the future that we are facing. It would change the strategic objective so that it is no longer simply about ensuring that the relevant markets function well, but about ensuring that they deliver long-term economic resilience and prosperity. It would also create two new operational objectives. The first is a climate objective to facilitate the meeting of targets set out in the Climate Change Act 2008 and the 1.5°C temperature rise limit of the Paris agreement. The second is a nature objective, to facilitate alignment with the Government’s commitment to halting and reversing biodiversity loss by 2030.
Those changes matter on a great many levels. Most obviously, as the United Nations Secretary-General warned just last month:
“We are in the fight of our lives and we are losing…And our planet is fast approaching tipping points that will make climate chaos irreversible.
We are on a highway to climate hell with our foot on the accelerator.”
We therefore need to deploy every tool at our disposal to the task of creating an economy that reflects this new reality. There is no greater moral imperative, or indeed any greater financial imperative.
The Bank of England’s first climate stress test was published in May. It sought to understand how climate change would affect banks’ business models, and whether they held enough capital to cover climate-related risks. The results were clear: banks need to take climate action immediately, or face a hit to annual profits of up to 15%. If the net zero transition is delayed by a decade and global temperatures reach 1.8°, by 2050 banks will face losses of £225 billion. However, the banks are not alone in being exposed to huge climate risks. Investors, consumers, anyone with a pension, asset managers, savers, mortgage holders and other financial institutions are all threatened.
The Bill should provide an opportunity to meet those challenges and lay the foundations for a secure and stable future-facing economy, but I believe that without my new clauses, it simply does not do that. Leading financial institutions agree, including Aviva Investors, Phoenix, Hargreaves Lansdown and BUPA Insurance. They raised concerns with the Bill Committee, saying that
“the proposed regulatory principle will not provide a sufficiently strong legal basis for regulators to promote a thriving net zero financial sector. It certainly won’t encourage the regulators to ensure that the UK becomes the world’s leading green financial centre.”
Moreover, as it stands, nothing in the Bill acknowledges the crucial role of nature, although the Economic Secretary himself recognised in Committee that we could not achieve our climate goals without recognising and acknowledging that vital role.
New clause 25 would go further and remove the proposed competitiveness and growth operational objective for the FCA. The financial impacts of pursuing a climate-busting competitiveness and “growth at all costs” approach over climate action is clear. For example, it is estimated that the UK will lose 10% of GDP by 2050 if we do not tackle climate change, and that Europe will see a 30% rise in defaults on corporate loans to the most exposed companies. No wonder the Treasury Committee advised against a primary focus on competitiveness, warning that it could lead to weakening standards and a reduction in the UK’s financial resilience, and could undermine the reputation of the UK’s finance sector.
It is worth recalling that Parliament itself deliberately removed competitiveness from the mandate of the financial regulator just a decade ago, learning the lessons from the regulatory failure leading up to the global financial crisis of 2007-08, which saw millions lose their savings, homes, businesses and jobs. With so much at stake, I can think of no good reason why the Government is making such a reckless move, and no good reason why it could not instead support a focus on the creation of a wellbeing economy designed to foster long-term economic resilience and prosperity.
I have also tabled new clause 21, which mandates the introduction of a one-for-one capital requirement for the financing of new fossil fuels. In other words, for each pound that finances fossil fuels, financial institutions should have a pound of their own funds held liable for potential losses. It is a principle that is used elsewhere. In June 2021, for example, the Basel Committee on Banking Supervision—the global standard setter for the regulation of banks—recommended its application to some cryptocurrencies’ exposures. At present, however, the Government are not seizing these opportunities.
Even with no fossil fuel expansion, by 2025 global emissions from existing projects will be 22% too high to stay below 1.5° and 66% too high by 2030—all while the scientific reality makes it clear that fossil fuels assets are uneconomic and financially uncompetitive in a 1.5° or 2° world. Fossil fuel financing increasingly threatens economic stability. It increases the physical risks of climate change, thereby leaving the financial system exposed to significant losses from balance sheets and from environmental damage to the wider economy. That is why these amendments are so important and that is why we should get fossil fuels out of our financial sector now.
Danny Kruger (Devizes) (Con)
I am going to speak briefly to new clause 7 on access to cash, and to new clause 27 on access to banking services. I very much support the Bill and completely commend what the Government are trying to do. It is a source of great pride that they are bringing financial regulation home as one of the great benefits of Brexit. I applaud what they are doing and appreciate all the engagement that Ministers have had with colleagues on the new clauses that I am speaking to.
I understand that there is an intention not to push new clause 27 to a vote, and I intend to abstain on new clause 7 if there is a Division on it, because I look forward to the policy statement that the Government have promised. I support the principle behind both the new clauses. As Members have mentioned, we seem to be moving inevitably towards a cashless society, and we can all see the personal convenience of that. Like the royal family, I personally do not carry cash around. It is only embarrassing when I am in church and the platter comes around. That is pretty much the only occasion when I feel the need for it, but that is not the case for everyone.
For anyone using a digital payments system, the operator of the platform has potentially immense control over their life, in principle and in practice. That is why what PayPal did to the Free Speech Union and others a few months ago is so important. Yes, we can acknowledge that that event was an outlier. It was a rare and slightly inexplicable event and, yes, it was quickly corrected in some of the cases of the accounts that were closed, but the fact is that it happened. It was a straw in the wind, and the fact that individuals and organisations with heterodox political opinions found themselves unable to operate economically because of the decision of a private company acting entirely on its own initiative, possibly under pressure from external campaigns, is a troubling development. So it is vital that we send the strongest regulatory, and also cultural and political, signal to these private payment platforms that the opinions of their customers are none of their business.
Nor are private opinions any business of the state, and this is why the question of access to cash is about more than the important issue of protecting the vulnerable, although I agree with the points that have been made on that. It is also about liberty. Just now, behind the scenes, the Government and the Bank of England are developing plans for their own central bank digital currency. Again, we can see the practical appeal, but the threat is that the Government will have oversight of the economic activity of private citizens, which is something that no Government of this country have ever had in our history. It is therefore vital that the debate on a central bank digital currency has liberty front and centre. We can all say warm words about the importance of safeguards and freedoms, but the fact is that if the emergency is bad enough and the powers are available, those powers could well be used.
We saw this happening around the world, and to some degree in our own country, during the covid crisis. We have only to look at what the Canadian Government did to block access to the bank accounts of truckers protesting against the covid policy there to see what can be done in a modern liberal western country. It would be a shame if we took back control of financial regulation from the EU only to empower private payment platforms, or indeed our own central bank, in that way. Cash services and banking services are part of the infrastructure of our communities. They are also part of the infrastructure of liberty.
Wera Hobhouse (Bath) (LD)
I rise to speak in support of new clauses 34 and 35. Both are tabled in my name and deal with the rules and duties of pension schemes and investments.
This Bill could be a unique opportunity to develop the green economy we need by providing the finance required to support our net zero transition. Unfortunately, this Government might again miss the boat. The Bank of England recently warned that UK banks and insurers will end up shouldering nearly £340 billion-worth of climate-related losses by 2050. Such losses will be unrecoverable, so it is cheaper to save the planet than to destroy it.
The World Bank suggests that up to 216 million people could be forced to move within their countries by 2050, but immediate climate action could reduce that by up to 80%. Limiting global warming to 1.5°C instead of 2°C could result in around 42 million fewer people being exposed to extreme heatwaves. We have pensions to provide adequate quality of life after retirement. How absurd it would be if the climate catastrophe meant that there was little quality of life left.
Several hon. Members rose—
Madam Deputy Speaker (Dame Rosie Winterton)
I now have to announce the results of today’s deferred Divisions.
On the draft Agricultural Holdings (Fee) Regulations 2022, the Ayes were 291 and the Noes were 159, so the Ayes have it.
On the draft Combined Authorities (Mayoral Elections) (Amendment) Order 2022, the Ayes were 289 and the Noes were 12, so the Ayes have it.
On the draft Local Authorities (Mayoral Elections) (England and Wales) (Amendment) Regulations 2022, the Ayes were 289 and the Noes were 12, so the Ayes have it.
On the draft Police and Crime Commissioner Elections and Welsh Forms (Amendment) Order 2022, the Ayes were 289 and the Noes were 13, so the Ayes have it.
Returning to the debate, if everybody speaks for five minutes instead of six minutes, it will give the Minister what I would consider to be a reasonable amount of time to respond.
Bim Afolami
With your indulgence, Madam Deputy Speaker, I would like to start, before getting into the meat of this, by paying tribute to a Labour councillor in Hitchin who recently and suddenly passed away in my constituency. Judi Billing had served as a district councillor since 1980 and was an excellent servant, and I wanted to make that point on the Floor of the House.
I rise in particular to support new clause 17. As we all know, this is really an enabling Bill and a lot of its meat will come in regulations that will be passed in the coming weeks and months. In the short time available to me, I think it is important to stand up for the regulators, because someone has to in this debate. I want to stand up for them not because I have agreed with every decision of the Prudential Regulation Authority, the Financial Conduct Authority, the Payment Systems Regulator or anyone else, but because a lot of the right criticisms that I and many other colleagues have had of the regulators arise more as a function of the system in which they operate than as a result of the decisions made by those individual regulators or institutions.
There is a key point about accountability, which many colleagues on both sides of the House have already raised: there needs to be strengthened accountability to this House. I have made the point many times before, but I urge those on the Treasury Bench, His Majesty’s Treasury and Parliament to look at this more deeply. Unless we can strengthen the accountability to this House and the other place of the regulators directly, we will continue to run up against criticisms that they are not taking colleagues’ considerations into account.
There is also a need for more effective accountability to the Government. What I mean by that is that the Government have clearly set out, in a series of actions, policy statements, speeches and strategies over the past few months, and in numerous reviews, what their intentions are. Those have been supported when it has come to votes on the Floor of this House, but sometimes there is a gap between the intention of the Government and what ends up coming through, even when regulations are passed to that end. It is important that the regulators and the Government work together to find a system whereby the Government can ensure that their strategic aims are being supported on an ongoing basis by the regulators. This is not just about saying what the policy is, passing regulations and allowing the regulators to get on with it. However well they try to do that, a lot will get missed, so we need to think about that.
We need to rethink the entirety of our regulatory structure, particularly as to how it governs financial services. We have very powerful regulators that have taken on a huge amount of power from the European Union, and they are doing their best. There are some overlaps between them and there are times when certain aims of one conflict with the aims of the other, even in relation to the competitiveness objective that has come up many times in the passage of this Bill. We end up with the situation where the regulators have to balance off competitiveness and other secondary objectives, and indeed the primary objectives. We have to work out how we are going to put together a framework that enables better accountability to this House, and better accountability to the political aims that have been passed by this House and to the aims of the Government, so that we get a regulatory system that drives a better, more competitive, safer financial services system.
To that end I have set up the Regulatory Reform Group, of which some Members of this House and others outside are a part. I intend to work with the Government on this issue, because unless we get it right, all the best intentions that all colleagues have in different areas will find it hard to be effected because of the structural difficulties that are inherent. So I would like to stick up for the regulators but say that they need to be able to operate in a more effective system.
David Simmonds (Ruislip, Northwood and Pinner) (Con)
I am delighted to be able to speak in support of the Government this evening, because this Bill is of great importance to my constituents, many of whom work in our financial sector, and also to the capital city, of which my constituency is a part.
Since I contributed to the earlier stages of the Bill, I have had the opportunity to hear from UK Finance, Zurich, Lloyds, the London Chamber of Commerce and Industry, the Property Institute and Just Group and many others, and they have reflected back to me the broad and strong support of the financial sector, which is the jewel in our industrial crown, for the measures that the Bill envisages. The key thing from the perspective of my constituents is that the Bill seeks to right-size regulation in the United Kingdom to reflect the fact that the risks and the challenges that the sector faces change over time. Just as we need to manage the risk from competitors, through the measures on competitiveness, we also need to ensure that we have a financial sector that enables all of our citizens to access the broadest possible range of financial services.
I have listened carefully to the points made about financial inclusion, for example, which are very important in the context of our financial sector. We need to ensure—and I think this Bill does—an appropriate balance between products that are pricing in a degree of risk, but that enable people to build their creditworthiness and their participation in the benefits that the financial sector can bring in their lives, with a recognition that there are risks to constituents, in particular from the development of new products, which the Bill seeks to address through better regulation in areas such as crypto investments.
Briefly, on new clause 27, although I have sympathy with the points that have been made by a number of Members, this strikes me as an example of where there is a significant risk of unintended consequences. As Ministers have heard, there is a need for due process for those who feel that they have been wronged by the decisions of a provider to be able to seek a remedy for that, but we do not want to get into the kind of situation that we have seen in the past, where an obligation to provide a universal service sees significant numbers of providers—useful providers—exiting the market because they are not prepared to accept the risks that come with that. My view is that the Government are finding about the right balance.
Let me turn now to the issues around the Financial Conduct Authority and the regulators. There will be a new chair of the FCA from 21 February next year. I wish to bring to the attention of the House and of Ministers that the strong view of my constituents and many in the sector is that we need to see a greater degree of rigour in the enforcement action that the FCA in particular is able to take. It is a matter not of new powers, but of making sure that they are operating effectively.
In respect of access to cash, I would like to thank Ministers. Certainly, in my constituency, we have seen really significant efforts by financial institutions to ensure that every high street has at least one free-to-use cashpoint, and, thus far, the feedback from business owners is very good.
In conclusion, I strongly support the Government’s position. I am not afraid to say if I think things are going wrong, but, in this case, it is clear to me that the Bill is beneficial to my constituents as business owners, as employees in the sector, and as consumers of the sector’s product, and it is beneficial to the taxpayers of the United Kingdom.
Anna Firth (Southend West) (Con)
I rise in support of new clause 17. The Bill is central to the Government’s commitment to long-term economic sustainability while also ensuring that our banking system is fair and provides reasonable protections for the vulnerable, including continued access to cash. Now that we are outside the EU, it is vital that we take this opportunity to build an even more agile and an even more muscular internationally facing financial centre. To do that, we need regulation that is designed to unlock growth, that will attract international investment into the UK, and that will also attract the best talent into our financial services sector, while not forgetting our equally important duty to level up financial services across the UK, including continued access to cash, to which I wish to turn straight away.
I welcome the wording of the Bill about providing “reasonable” access to cash. I appreciate that the Government have a balancing act to perform, given a fast-moving sector, changing consumer patterns and the need to provide protections. It is a balance that the Government have provided with this “reasonable” access to cash.
I wish to place on record that in picturesque Leigh-on-Sea, a part of wonderful Southend West, we have lost every single one of our high street banks over the past four years. In a constituency such as Southend West, where over one fifth of the population are over 65 and more than 6% are over 80—significantly more than the national average—local banking services are vital. Senior citizens in Southend West do not want to bank online, they do not want to bank on an app, and they should not have to. That is why I am working with fantastic organisations such as LINK and OneBanx to set up a local banking hub.
Anthony Browne
As I have made clear in previous iterations of this legislation, I am very broadly supportive of the aims of this Bill and on the Treasury Committee we have scrutinised it in detail, so I will limit my comments to just some of the huge number of amendments. I love this exercise in democracy where different MPs with different interests come forward with their amendments; I have actually worked with many of them in my life and have direct experience with them.
I absolutely support new clause 27 on freedom of expression, which my hon. Friend the Member for Penistone and Stocksbridge (Miriam Cates) mentioned. UsforThem, which was founded by someone in my constituency, has done some great work campaigning on schools, but was utterly traumatised by the sudden loss of access to PayPal, and we need due process around that.
On new clause 28 relating to buy now, pay later, which the hon. Member for Walthamstow (Stella Creasy) mentioned, I was involved with the regulation of payday loans, something else that fell between the gaps and needed to be sorted—it was outrageous. I am convinced by her arguments that buy now, pay later is another gap that is not addressed. I am sure the FCA has powers to deal with that already, but I hear her frustration that the Government keep saying that they will deal with it but have not done so, so I urge the Minister to put that on his list of things to take up and deal with.
The same applies to new clause 11, which the Chair of the Treasury Committee, my hon. Friend the Member for West Worcestershire (Harriett Baldwin), talked about convincingly. It is an absolute scandal that huge swathes of the population cannot get access to financial advice and are impoverished as a result because of a failure of regulation, or excessive regulation—we can blame the EU. I was on an FCA taskforce some time ago to try to sort out this problem—I was trying to remember where it went, but it clearly ran into the sand. We absolutely need to deal with this urgently. Again, I take reassurance from the Minister’s comments that he will deal with it as a matter of urgency. I will hold him to that, as, I am sure, will the Chair of the Treasury Committee.
Access to in-person banking is really important. In fact, I negotiated the deal with the Post Office on behalf of the banks to open up post offices to offering banking services. There are actually more post office branches than all the bank branches in the country combined. A lot of people complained to me about the lack of access to certain banking facilities, and I would always point out that they can do those things at their local post office, which they did not know—we need to raise the profile of that.
Opposition Members need to define clearly what they mean by “in-person banking”. There are lots of different things. Do they mean going to ask for a mortgage or just paying a bill, for example? We do lots of different things in different places. The deal with the Post Office is being renegotiated, and I think the main thing there will be to ensure that whatever services we want are put into the negotiations.
Finally, I want to talk about access to free cash. I said in an intervention earlier that I massively support access to cash. Cash use is dwindling—clearly, more people are using cards and other payment types—but we need to make sure that people who do not want to use other means have access to cash and, indeed, access to free cash. I should say—I do not think anyone has remarked on it—that paid ATMs have been dying a death over the last 15 years. There is about half the number now than there was 15 years ago. People pay for only 5% of ATM withdrawals—I never do because I find it offensive to pay to take out my own money. I fully support the sentiment.
However, on new clause 7, there is already a power in the Bill for the FCA to ensure access to cash, and that could include pricing so that the FCA can ensure access to free cash. I have two things to say about the drafting of the new clause. First, it does not stipulate whether it applies to personal or business customers. Traditionally and historically, a lot of business customers have paid for cash-handling services. Is the new clause saying that they should no longer pay for them? It is not quite clear. If they are no longer required to pay, are non-cash businesses cross-subsidising them? Secondly, the new clause does not stipulate whether it applies just to sterling cash and not to foreign exchange. If I was a bureau de change dealer, I would be rather worried about having to offer my services for free.
With those comments, I basically urge the Minister to stand by the various commitments he has made this afternoon. I support the Bill.
Mr Baron
I very much welcome the Bill and congratulate my hon. Friend the Minister on listening to and engaging with the points raised by many of us on the Back Benches.
I support new clause 11 in particular—I was heartened to hear what the Minister had to say about it—but may I perhaps reinforce a very simple message about the urgency required on financial advice? We in this country have been blessed with the City of London and many other world-leading financial institutions around the UK. I think I can say with some confidence that London is the financial capital of Europe, if not the world. The world comes here to do business on a variety of fronts. Yet we have very little good access to advice. In fact, if anything, we have a widening advice gap.
On the one hand, we have wealth managers raising their minimums, banks withdrawing from the high street and withdrawing fully from providing investment advice; we also have the retail distribution review, which I supported because it was ending the backhand commission for unit trusts—that was bad for the consumer—but it has resulted in independent financial advisers having to charge more and few of them being used. On the other hand, with all that advice in retreat, we have the Government and all parties saying that we must take greater control of our finances, there are greater pension freedoms and there is a great demand for good advice.
A lot of people of modest means who have no access to good advice fall into that void. They may be tempted, for example, to leave cash in the bank earning a pitiful rate of interest while inflation erodes its value. This is where the law of unintended consequences comes in, because all that regulation that had to be met before one could offer full-blown advice is fine when we are talking about full-blown advice, but there is a middle ground that needs to be covered. I offer a basic statistic that might interest or help those willing to take a particularly long-term view to their financial planning: instead of leaving money in cash, if they invest in equities over the long term—25 years, for example—they stand a very small chance of losing money. There will be volatility, but because they are investing, hopefully, in growing businesses, they will do well, and 97 times out of 100, that will beat cash deposits. That is the sort of advice that banks, building societies and many others could give, without getting too complex about financial planning. It would offer consumers a choice, rather than just letting their cash sit in banks and get eroded. Will the Minister therefore give impetus to the assurance he has given on new clause 11 and really get the Treasury looking at this issue, because there is a halfway house, and we must not stop regulation being the enemy of the good? That is what we are asking for.
I will add one other thing quickly in the minute I have left. Please make sure that our regulators listen to the various trade bodies when it comes to regulation, because we are inheriting—I very much welcome this Bill—a lot of powers from the EU. We are in control of our own destiny, but I take issue with the FCA on a number of points. One of them is that when it comes to investment trusts, there are such things as key information documents. They are an invention of the EU and are misleading about risk and putting consumers at risk of losing money—it is as simple as that. The Association of Investment Companies has said that. By the way, it has also said, in relation to those key information documents, “burn before reading”. Despite that, there has been no meaningful action from the FCA on that issue, and that is wrong. I ask the Minister to make sure that our regulators do not rest on their laurels, realise the greater freedoms they have got and rise to the occasion.
Andrew Griffith
I thank Members from all parts of the House who have spoken today for their valued and often very informative and sometimes passionate contributions. I sense a tone of disappointment in the hon. Member for Hampstead and Kilburn (Tulip Siddiq), my shadow on the Opposition Front Bench. I will try to endeavour not to disappoint her in return for her party’s support for this important and landmark Bill. I spoke at length in my opening remarks. I hope I was generous in taking interventions, and perhaps colleagues will indulge me if I try to get through this as quickly as possible.
We heard from my right hon. Friend the Member for Chelmsford (Vicky Ford), my predecessor, who contributed so much to this Bill. We also heard from my hon. Friend the Member for North East Bedfordshire (Richard Fuller) and from my hon. Friend the Member for North Warwickshire (Craig Tracey), who served on the Bill Committee. They all spoke to a greater or lesser degree in support of new clause 17 and about how we can make that better and better hold the regulators to account.
We heard about the specific metrics suggested in new clauses 12, 13, 14 and 15—my hon. and right hon. Friends are very productive. I can say that I will consider things very carefully. In those amendments, they gave specific examples of how we could potentially deploy the powers in new clause 17, and I undertake to consider carefully whether those are the right way forward. We heard from my right hon. Friend the Member for Chelmsford about that sense of urgency, and we got that again in new clause 11. Again, it is potentially a good way forward that I would like to consider.
We all understand that it comes down to financial inclusion, for which the hon. Member for Kingston upon Hull West and Hessle (Emma Hardy) rightly never fails to agitate. If, however, the consequences of our financial regulation exclude, as I think we heard, 92% of people from getting basic guidance on the sorts of products that are right for them, that is a problem for inclusion and for the industry. It is something that I was asked to take away with due urgency, and I commit that once we have the Bill on the statute book that is absolutely what I will do. Technology can be our friend there as well. We heard that from my hon. Friend the Member for West Worcestershire (Harriett Baldwin), the Chair of the Treasury Committee.
David Simmonds
I recently heard from my local borough police commander that a major priority in the recruitment of new officers to the Metropolitan police is finding people not to go out on the beat but to do the detailed back-office work of tracking down fraudsters and scammers, and that the Met had enjoyed considerable success. Does the Minister agree that should be a high priority for the Home Office and police forces across the country?
Andrew Griffith
My hon. Friend is absolutely right that that is a critical priority. We heard the figures—no one disputes them—about the growing prevalence of fraud, much of which is displacement as people go online. We need to give people the tools to protect themselves and we need to ensure that it is a high priority for those who seek to protect us.
We will empower the public with information. The hon. Member for Kingston upon Hull West and Hessle talked about financial inclusion. As we know, there is a slight difference of opinion, in that the FCA considers that that is already within its remit. It is absolutely something that I would like to see greater transparency on, and perhaps that is somewhere we can make common cause.
Sir Geoffrey Clifton-Brown
On fraud, about which I gave the figures to the House earlier, we had a hearing of the Public Accounts Committee the other day. I suggested two things: first, fraud should be made a strategic priority for every police force; and secondly, every police officer in the country should receive at least some basic training in the likelihood of fraud crimes.
Andrew Griffith
Fraud is of course a shared responsibility between the Treasury and my hon. Friends in the Home Office, and when it comes to the report that the hon. Member for Hampstead and Kilburn is quite rightly challenging us to produce as quickly as possible, we want that report to be right rather than quick, but we do need to bring it forward as quickly as possible. We will use the time wisely to engage with expert stakeholders, which could well include the training of which my hon. Friend speaks, and we will come forward with that early in 2023.
In addition, this Bill is a seminal moment in protecting victims of authorised push payment fraud. It will ensure swift protections for the vast majority of APP scam victims, reversing the presumption and making sure they receive swift reimbursement so that they are no longer victims of this crime. The measure enables the Payment Systems Regulator to take action across all payments systems, not just faster payments, which is where the fraud occurs most, so that it does not merely get displaced. The Government expect protections for consumers across all payments systems to keep pace with that.
Richard Fuller
My hon. Friend has not yet had an opportunity to talk about the Government’s initiative on stablecoins and digital currencies. Given that he has just talked about scams and some of the concerns with cryptocurrencies, is he reassured that what is in this Bill relating to stablecoins remains absolutely front and centre of the Government’s attention?
Andrew Griffith
I again thank my hon. Friend, who did so much work on this Bill. It is absolutely right that the Government keep an open mind to new technologies, and my hon. Friend the Member for Devizes (Danny Kruger), who is always very thoughtful, talked about this, but we have to understand the risks. While the risks to consumers of scams in the crypto-space, among others, is extremely high and has been well telegraphed, when it comes to looking at different payment systems—with the power of distributed ledger technology to solve issues such as settlement to make our financial markets cleaner, faster and more efficient—it is absolutely right that the Government consider looking at that, and we will be looking to do more in that domain.
Tulip Siddiq
I thank the Minister for his response, and he is making encouraging noises about the forward strategy, which I look forward to seeing, but I have not yet heard him mention anything about data sharing. The fact is that frauds and scams have moved on from what they might have been in the past. Is he going to give some indication of whether there will be a data-sharing arrangement that goes beyond just banks and takes into account social media companies, crypto-asset firms and other platforms that criminals are exploiting, because our vulnerable constituents are falling prey to frauds and scams? It is no good just going back to the old ways on frauds and scams—I am sure he understands that—so could I hear a bit more about data sharing, please?
Andrew Griffith
He does indeed understand that. We are addressing legal challenges to data sharing in the Economic Crime and Corporate Transparency Bill, which will introduce provisions to protect firms from civil liability. As was discussed earlier, it is important to regulate the online world, which my colleagues in the Department for Digital, Culture, Media and Sport are doing in the Online Safety Bill.
Andrew Griffith
I will not give way to my hon. Friend this time.
To conclude, financial and related professional services play a crucial role, as we have heard from many speakers. They contribute nearly £100 billion in taxes and, as my right hon. Friend the Member for Chelmsford reminded us, that pays for more than the cost of the salaries of every nurse in this country. The Government have an ambitious programme for an open, outward, sustainable, technologically advanced and internationally competitive sector that will unleash the most opportunities not just for those who work in it, but for communities across the United Kingdom.
Stella Creasy
I am sorry to interrupt the Minister in his final flow, but he did promise he would give me a direct answer. With 40% of people saying they are going to put their Christmas spending on buy now, pay later loans, and they have no regulatory protection, what is going to do to help them this Christmas?
Andrew Griffith
The hon. Lady knows from our conversations in the Bill Committee our ambition to look again afresh at the regulations in the consumer credit market. That is outwith this Bill, but it is a commitment that remains and that we will bring forward at the earliest opportunity.
Do not underestimate the power of this Bill. This is an unlock for our financial services. This is the start of delivering our Brexit freedoms. It is giving us back the opportunity to make ourselves competitive—a more prosperous economy, jobs for our children and grandchildren, tax revenues that will pay for our high-quality services, and higher GDP growth. All of that is contained in this Bill, at the same time as protecting the consumers that Members opposite talk about, and delivering on the ambition to put this on the statute book.
Question put and agreed to.
New clause 17 accordingly read a Second time, and added to the Bill.
6 pm
Proceedings interrupted (Programme Order, 7 September).
The Deputy Speaker put forthwith the Questions necessary for the disposal of the business to be concluded at that time (Standing Order No. 83E).
New Clause 18
Composition of Panels
‘(1) FSMA 2000 is amended in accordance with subsections (2) to (8).
(2) After section 1M (FCA’s general duty to consult) insert—
“1MA Composition of Panels
(1) A person who receives remuneration from the FCA, the PRA, the Payment Systems Regulator, the Bank of England or the Treasury is disqualified from being appointed as a member of a panel established under any of sections 1N to 1QA or 138IA.
(2) Subsection (1) does not apply in respect of a panel mentioned in that subsection if regulations made by the Treasury provide for it not to apply to that panel.
(3) Regulations under subsection (2) may make provision in respect of a panel—
(a) generally, or
(b) only in relation to such descriptions of persons or cases as the regulations may specify (but the power to make such regulations may not be exercised so as to specify persons by name).”
(3) In section 1N (FCA Practitioner Panel), after subsection (5) insert—
“(6) Subsections (4) and (5) are subject to section 1MA.”
(4) In section 1O (Smaller Business Practitioner Panel), after subsection (6) insert—
“(6A) Subsections (5) and (6) are subject to section 1MA.”
(5) In section 1P (Markets Practitioner Panel), after subsection (6) insert—
“(7) Subsections (4) to (6) are subject to section 1MA.”
(6) In section 1Q (Consumer Panel), after subsection (4) insert—
“(4A) Subsection (4) is subject to section 1MA.”
(7) After section 2L (PRA’s general duty to consult) insert—
“2LA Composition of Panels
(1) A person who receives remuneration from the FCA, the PRA, the Payment Systems Regulator, the Bank of England or the Treasury is disqualified from being appointed as a member of a panel established under any of sections 2M, 2MA or 138JA.
(2) Subsection (1) does not apply in respect of a panel mentioned in that subsection if regulations made by the Treasury provide for it not to apply to that panel.
(3) Regulations under subsection (2) may make provision in respect of a panel—
(a) generally, or
(b) only in relation to such descriptions of persons or cases as the regulations may specify (but the power to make such regulations may not be exercised so as to specify persons by name).”
(8) In section 2M (the PRA Practitioner Panel), after subsection (5) insert—
“(6) Subsections (4) and (5) are subject to section 2LA.”
(9) In section 103 of the Financial Services (Banking Reform) Act 2013 (regulator’s general duty to consult) after subsection (5) insert—
“(5A) A person who receives remuneration from the FCA, the PRA, the Payment Systems Regulator, the Bank of England or the Treasury is disqualified from being appointed as a member of a panel established under subsection (3).
(5B) Subsection (5A) does not apply in respect of a panel mentioned in that subsection if regulations made by the Treasury provide for it not to apply to that panel.
(5C) Regulations under subsection (5B) may make provision in respect of a panel—
(a) generally, or
(b) only in relation to such descriptions of persons or cases as the regulations may specify (but the power to make such regulations may not be exercised so as to specify persons by name).”’—(Andrew Griffith.)
This new clause disqualifies those who are paid by a regulator, the Bank of England or the Treasury from being appointed to a statutory advisory panel, subject to any exemptions the Treasury may set out in regulations.
Brought up, and added to the Bill.
New Clause 19
Consultation on Rules
‘(1) In section 138I of FSMA 2000 (consultation by the FCA), after subsection (4) insert—
“(4A) The FCA must include, in the account mentioned in subsection (4), a list of the respondents who made the representations, where those respondents have consented to the publication of their names.
(4B) The duty in subsection (4A) is not to be read as authorising or requiring such processing of personal data as would contravene the data protection legislation (but the duty is to be taken into account in determining whether particular processing of data would contravene that legislation).
(4C) For the purposes of this section, the exemption relating to functions conferred on the FCA mentioned in paragraph 11 of Schedule 2 to the Data Protection Act 2018 (exemption from application of listed GDPR provisions) does not apply.”
(2) In section 138J of FSMA 2000 (consultation by the PRA), after subsection (4) insert—
“(4A) The PRA must include, in the account mentioned in subsection (4), a list of the respondents who made the representations, where those respondents have consented to the publication of their names.
(4B) The duty in subsection (4A) is not to be read as authorising or requiring such processing of personal data as would contravene the data protection legislation (but the duty is to be taken into account in determining whether particular processing of data would contravene that legislation).
(4C) For the purposes of this section, the exemption relating to functions conferred on the PRA mentioned in paragraph 9 of Schedule 2 to the Data Protection Act 2018 (exemption from application of listed GDPR provisions) does not apply.”
(3) In section 104 of the Financial Services (Banking Reform) Act 2013 (consultation requirements), after subsection (5) insert—
“(5A) The Payment Systems Regulator must include, in the account mentioned in subsection (5), a list of the respondents who made the representations, where those respondents have consented to the publication of their names.
(5B) The duty in subsection (5A) is not to be read as authorising or requiring such processing of personal data as would contravene the data protection legislation (but the duty is to be taken into account in determining whether particular processing of data would contravene that legislation).
(5C) In this section “data protection legislation” has the same meaning as in the Data Protection Act 2018 (see section 3 of that Act).”’—(Andrew Griffith.)
This new clause would require the FCA, the PRA, the Payment Systems Regulator and the Bank of England to publish the names of respondents to their consultations on proposed new rules, where those respondents have consented to such publication.
Brought up, and added to the Bill.
New Clause 20
Unauthorised Co-ownership AIFs
‘(1) FSMA 2000 is amended as follows.
(2) In section 261E (authorised contractual schemes: holding of units)—
(a) before subsection (1) insert—
“(A1) This section sets out requirements for the purposes of section 261D(1)(a) (authorisation orders).”;
(b) in subsection (1) for “a contractual” substitute “the”.
(3) After section 261Z5 insert—
“Chapter 3B
Unauthorised co-ownership AIFs
261Z6 Power to make provision about unauthorised co-ownership AIFs
(1) The Treasury may by regulations make provision about unauthorised co-ownership AIFs that corresponds or is similar to, or applies with modifications, any of sections 261M to 261O and section 261P(1) and (2) (rights and liabilities of participants in authorised co-ownership schemes).
(2) Regulations under subsection (1) may make provision about unauthorised co-ownership AIFs generally, or about unauthorised co-ownership AIFs of a description specified in the regulations.
(3) In this section “unauthorised co-ownership AIF” means a co-ownership scheme that—
(a) is an AIF, and
(b) is not authorised for the purposes of this Act by an authorisation order in force under section 261D(1).”’—(Andrew Griffith.)
This new clause would enable the Treasury to make provision about the rights and liabilities of participants in unauthorised co-ownership AIFs which is similar to that made in relation to authorised co-ownership schemes in Chapter 3A of Part 17 of the Financial Services and Markets Act 2000.
Brought up, and added to the Bill.
New Clause 1
National strategy on financial fraud
‘(1) The Treasury must lay before the House of Commons a national strategy for the purpose of detecting, preventing and investigating fraud and associated financial crime within six months of the passing of this Act.
(2) In preparing the strategy, the Treasury must consult—
(a) the Secretary of State for the Home Office,
(b) the National Economic Crime Centre,
(c) law enforcement bodies which the Treasury considers relevant to the strategy,
(d) relevant regulators,
(e) financial services stakeholders,
(f) digital platforms, telecommunications companies, financial technology companies, and social media companies.
(3) The strategy must include arrangements for a data-sharing agreement involving—
(a) relevant law enforcement agencies,
(b) relevant regulators,
(c) financial services stakeholders,
(d) telecommunications stakeholders, and
(e) technology-based communication platforms,
for the purposes of detecting, preventing and investigating fraud and associated financial crime and, in particular, tracking stolen money which may pass through mule bank accounts or platforms operated by other financial services stakeholders.
(4) In this section “fraud and associated financial crime” includes, but is not limited to authorised push payment fraud, unauthorised facility takeover fraud, and online and offline identity fraud.
(5) In this section, “financial services stakeholders” includes banks, building societies, credit unions, investment firms, Electric Money Institutions, virtual asset providers and exchanges, and payment system operators.’—(Tulip Siddiq.)
This new clause would require the Treasury to publish a national strategy for the detection, prevention and investigation of fraud and associated financial crime, after having consulted relevant stakeholders. The strategy must include arrangements for a data sharing agreement between law enforcement agencies, regulators and others to track stolen money.
Brought up.
Question put, That the clause be added to the Bill.
Andrew Griffith
I beg to move, That the Bill be now read the Third time.
It has been a privilege to lead on this Bill’s progression through the House, and I extend my thanks to hon. Members on both sides for their collaborative engagement, challenge and scrutiny. I extend particular thanks to the Chairs of the Public Bill Committee, my right hon. Friend the Member for Basingstoke (Dame Maria Miller) and the hon. Member for Ealing, Southall (Mr Sharma). On the Opposition Benches, I extend my particular thanks to the hon. Members for Hampstead and Kilburn (Tulip Siddiq), for Wallasey (Dame Angela Eagle), for Kingston upon Hull West and Hessle (Emma Hardy), for Glenrothes (Peter Grant) and for West Dunbartonshire (Martin Docherty-Hughes) for the constructive way in which they have approached the scrutiny of this Bill and for their support where they felt it was appropriate.
On the Government side, I am particularly grateful for the contributions from my hon. Friend the Member for West Worcestershire (Harriett Baldwin), who was plucked from the Bill Committee to her position as Chair of the Treasury Committee, and my hon. Friends the Members for Wimbledon (Stephen Hammond), for North Warwickshire (Craig Tracey) and for Hastings and Rye (Sally-Ann Hart). I also pay tribute to my predecessors, my right hon. Friend the Member for Salisbury (John Glen) and my hon. Friend the Member for North East Bedfordshire (Richard Fuller), for their efforts to prepare and introduce this Bill.
The Bill is a culmination of more than 30 consultations published by the Government over many years and follows extensive engagement. I thank all the stakeholders with whom we have consulted. Before the Bill moves to the other place, I wish to extend my thanks to the significant number of Treasury officials and lawyers for their work in preparing such a substantial Bill, my parliamentary counsel, the witnesses who gave evidence to the Public Bill Committee, the parliamentary Clerks, in particular Bradley Albrow, without whose efforts we would not have got to this point, and those who have helped Members of the Opposition support their work on this Bill.
Finally, as is customary, I wish to thank the Bill team from the Treasury: Matt Molloy, Ciara Lydon, George Guven, Nicola O’Keefe, Charlotte Bennett, Mathilde Durand-Delacre, Maithili Jayanthi, Rohan Lee, Catherine McCloskey and my assistant private secretary, Harry Coloe, who have supported me throughout this process.
We have already discussed at length the significance of this Bill. It is important to remember that our scrutiny does not end with the Bill moving on to the Lords. When the Bill receives Royal Assent, it will kickstart a wide-ranging and ambitious programme of secondary legislation and regulator rules to replace retained EU law, get back our freedoms and move to a comprehensive, domestic model of regulation. I look forward to seeing this important piece of legislation come into force. I commend the Bill to the House.
Tulip Siddiq
Despite some of the disappointments in the Bill, which I have outlined to the Minister in great detail, the Opposition support this important piece of legislation, as he will know. It will enable the UK to tailor financial services regulation from insurance to fintech to meet the needs of our economy. At the risk of sounding like an Oscar-winning speech, there are a few people whom I need to thank as well. People will know that, in Opposition, we do not have a whole team of civil servants working behind us. I must thank Mark Hudson in my team, who has worked really hard to make sure that I understand each and every aspect of the Bill. I wish to thank TheCityUK and UK Finance for their help and the Finance Innovation Lab for its advice on the Bill.
I thank, too, Lloyds, Santander, Barclays, HSBC, NatWest and Starling for setting out the dangers posed by the new forms of fraud, and the Building Societies Association and Nationwide for their help with my mutuals and co-operatives amendments. I also thank the Association of British Insurers, Phoenix, the Investment Association, Hargreaves Lansdown and TISA for their help on green finance and personalised financial guidance.
I also want to say thank you to all the Conservative MPs who served on our Committee, which, I think the Minister will agree, was a very good Committee, as we got through quite a lot of detail. I thank my hon. Friends the Members for Blaydon (Liz Twist), for Wallasey (Dame Angela Eagle), for Kingston upon Hull West and Hessle (Emma Hardy) and for Mitcham and Morden (Siobhain McDonagh) for their support on the Public Bill Committee and for their co-operation as well.
Finally, in my 10 months as shadow Economic Secretary to the Treasury, I have shadowed three Economic Secretaries, all of whom were very helpful when it came to this Bill. Let me just mention them. They are: the right hon. Member for Salisbury (John Glen), who is not in his place right now, but who was very helpful when I first took on the role; the hon. Member for North East Bedfordshire (Richard Fuller), who is also not in his place; and, of course, the current Minister whom I thank. This is a complex and wide-ranging Bill. The Minister and I spent an enormous amount of time together, but I think he will know that Labour supports both this Bill, and the opportunities for the City to thrive after we leave EU regulations. I hope the Minister knows that, overall, I have enjoyed working with him.
Peter Grant
I endorse and share the thanks of both the previous speakers to all those who have helped the democratic process to happen. Obviously, we are not particularly happy about the results of some of the votes, but that is what happens in life. If we go back to the day before this Bill got its First Reading, we will see that the six Treasury ministerial posts have been held by 21 different people. Who knows, we might have the same Minister on the Front Bench by the time the Bill comes back from the Lords, but I would not bet on it.
Among the people I want to thank personally are my very good and hon. Friend the Member for West Dunbartonshire (Martin Docherty-Hughes), who did such a power of work on his own in the Bill Committee, and someone who will not be a well-known name to most people here, although those of us who know her will understand she has been an absolute star, and that is Sarah Callaghan of the SNP research team. She joined a very good research team not long ago and she has been a fantastic support to me and my colleagues in preparation for this Bill, so I say thanks to Sarah.
I thank the Minister for the courtesy he has shown throughout political debates in which we have not always agreed, but in which I hope we have always been able to be courteous to each other. We will not oppose the Bill; we have reservations about it, but on balance it is just about good enough to get through.
Madam Deputy Speaker (Dame Eleanor Laing)
I pause, lest there be further excitement—but no.
Question put and agreed to.
Bill accordingly read the Third time and passed.
Financial Services and Markets Bill
Thursday 8th December 2022
(1 year, 11 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 7 December 2022 - Clarification of Schedule 2 (Transitional amendments): Large print edition - (7 Dec 2022)
Financial Services and Markets Bill
Tuesday 10th January 2023
(1 year, 10 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 7 December 2022 - Clarification of Schedule 2 (Transitional amendments): Large print edition - (7 Dec 2022)
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years. Perhaps it is a signal of the significance of this legislation that we have the pleasure of three maiden speeches during this debate. I welcome my noble friends Lady Lawlor, Lord Remnant and Lord Ashcombe to the House. I very much look forward to hearing their contributions.
I also pay tribute to the former Chancellor and Financial Secretary to the Treasury, my noble friend Lord Lawson, who has recently retired, having served Parliament in both Chambers for nearly half a century. While serving as Chancellor he transformed the tax system, unleashed the City and revolutionised the approach to macroeconomic policy, setting the economy on the path of growth. His voice, reason and perspective will be sorely missed in this Chamber, and I thank him for all his service.
The Bill represents the platform upon which much of this Government’s vision for financial services will be delivered—a vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across all four nations of the United Kingdom.
Effective, efficient and easily accessible financial services are a foundation for people’s everyday lives and the bedrock upon which our economy is built. They also make their own direct contribution to our economic growth, with financial and related professional services employing more than 2.3 million people across the UK and, in 2020, contributing nearly £100 billion in taxes. In recent decades, the UK has become a leading global centre for financial services and, as the Chancellor highlighted in the Autumn Statement, the sector is one of the UK’s five key areas of growth for the future. Our exit from the EU creates the opportunity to ensure that continues by implementing a more agile and internationally competitive set of rules, better tailored to the UK market, while ensuring the sector remains well-regulated and effectively supervised.
The Bill has five overarching aims. First, it implements the outcomes of the future regulatory framework review. Secondly, it bolsters the competitiveness of UK markets and promotes the effective use of capital. Thirdly, it takes steps to make the UK an even more open and global financial hub. Fourthly, it harnesses the opportunities of innovative technologies, enabling their safe adoption in the UK. Lastly, but by no means least, it promotes financial inclusion and enhances consumer protection.
I turn to the first aim, to implement the future regulatory framework or FRS review. Clause 1 revokes retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This approach builds on the existing model established by the Financial Services and Markets Act 2000 which empowers our independent regulators to set the detailed rules that apply to firms operating within the framework set by the Government and Parliament. The Government consulted extensively on how the UK’s approach to financial services regulation should be adapted following EU exit, and there was widespread support for the approach taken in this Bill. Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. These instruments will cease to have effect when the Treasury and the regulators have put into place the necessary secondary legislation or regulator rules to replace them as appropriate.
It is important for the House to recognise that putting this into effect will require a significant programme of secondary legislation to modify and restate retained EU law. As part of the Edinburgh reforms announced on 9 December the Treasury published Building a Smarter Financial Services Framework for the UK, which set out how the Treasury intends to use these powers. Alongside this we published several illustrative draft statutory instruments demonstrating how the powers in the Bill can be used to replace retained EU law.
As the regulators take on greater responsibility for setting rules following the repeal of retained EU law, the Bill makes changes to the regulators’ objectives to ensure that they consider the sector’s critical role in supporting the UK economy. For the first time the Prudential Regulation Authority and the Financial Conduct Authority will be given new secondary objectives to facilitate the international competitiveness of the UK economy and its growth in the medium and long term. The status as a secondary objective strikes the right balance and sets a clear hierarchy by ensuring that the FCA and the PRA must work to advance growth and competitiveness while maintaining their focus on their existing objectives.
The Bill also ensures that the regulatory principles of the financial services regulators require them to have regard to the UK’s statutory net-zero emissions target. This will embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the Government’s long-term commitment to transform the UK economy in line with their net-zero strategy and vision.
It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators. There are already a number of provisions in this regard, and the Bill makes further provision to support Parliament in carrying out this important role. It introduces new requirements for the regulators to notify the Treasury Select Committee of a consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee. In addition, the regulators will need to be transparent about all respondents to a consultation, subject to their consent. These measures were strongly informed by the views of this House, as expressed during the passage of the Financial Services Act 2021. The Bill also gives the Treasury the power to require the financial services regulators—or, where appropriate, an independent person—to review their rules where it is in the public interest.
I turn now to the Bill’s second aim of bolstering the competitiveness of UK markets and promoting the effective use of capital. The measures in Schedule 2 make important changes to the MiFID framework, which regulates secondary capital markets. They do away with burdensome rules such as the double volume cap and share trading obligation while maintaining high standards and protecting the smooth functioning of markets. High regulatory standards are an essential element of competitiveness in UK markets, and the Bill introduces a senior managers and certification regime for key financial market infrastructure firms, ensuring high standards of governance in these systemically important firms. The Bill also expands the resolution regime for central counterparties to align with international standards and enhances powers to manage insurers in financial distress.
The Bill’s third aim is to strengthen the UK’s leadership as an open and global financial centre. The UK is now able to negotiate its own international agreements, and the Government are currently negotiating an ambitious financial services mutual recognition agreement, or MRA, with Switzerland. While the MRA itself will be scrutinised under the procedures in the Constitutional Reform and Governance Act 2010, Clause 23 enables the Treasury to amend existing legislation to give effect to this and any future financial services MRAs once finalised. Schedule 2 will enable the UK to recognise overseas jurisdictions that have the equivalent regulatory systems for securitisations classed as simple, transparent and standardised, or STS, providing more choice for UK investors.
As its fourth aim, the Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure sandboxes, allowing firms to test the use of new and potentially transformative technologies and practices in the infra- structures that underpin financial markets.
The Bill’s final aim is promoting financial inclusion and consumer protection. The Government are committed to fostering a financial services sector that supports everyone, with appropriate consumer protections and measures to ensure that no one is left behind by the rapid advancement in financial technology. There is an extensive programme of work ongoing related to consumer protection, particularly in areas raised by noble Lords during the passage of the Financial Services Act 2021 such as buy now, pay later and the FCA’s new consumer duty. That Act also made legislative changes to support the widespread offering of cashback without purchase in shops and other businesses, following a proposal by my noble friend Lord Holmes of Richmond.
Clause 51 and Schedule 8 of this Bill go further and give the FCA responsibility for seeking to ensure reasonable access to cash across the UK. The Treasury will designate banks, building societies and operators of cash access co-ordination arrangements to be subject to FCA oversight on this matter. Clause 52 and Schedule 9 give the Bank of England new powers to oversee the wholesale cash infrastructure to ensure its ongoing effectiveness, resilience and sustainability.
Finally, the credit union sector plays a crucial role in providing access to affordable credit to its members. Clause 69 will allow credit unions in Great Britain to offer a wider range of products and services to their members. The Bill also strengthens the rules around financial promotions, requiring all authorised firms to undergo a new FCA assessment before they can approve financial promotions by unauthorised firms. This will reduce the risk of consumer harm. Additionally, Clause 68 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers for all payment systems it regulates. It also places a duty on the PSR to mandate reimbursement in relation to the Faster Payments system specifically.
This is a substantive Bill; in opening this Second Reading debate I have been able to touch only briefly on many of its main measures. I have no doubt that, when we enter Committee, noble Lords will subject the Bill to the level of scrutiny that it deserves.
As I conclude, I think it is worth reflecting on the journey that we have taken to the production of the Bill. It is the result of several years of consultation with industry, regulators and the public. The Government first consulted on the future regulatory review in October 2020, with a further consultation in November 2021 setting out detailed proposals for reform. It will enable a programme of essential reforms that will help drive our economy, including reforms to Solvency II and the prospectus regime and changes resulting from the wholesale markets review. So, as we conduct the important work of scrutinising this Bill, I hope that the Government’s broad approach will draw support from across the House and that many noble Lords share the Government’s ambition to ensure that the UK’s financial services continue to be an engine of growth for our economy. I beg to move.
Lord Hunt of Kings Heath (Lab)
My Lords, it is a great pleasure to open the Back-Bench debate by thanking the Minister for her opening address and, like her, welcoming the maiden speeches of the noble Lords, Lord Remnant and Lord Ashcombe, and the noble Baroness, Lady Lawlor. I reassure the Minister that I support the Bill and the intent to modernise our financial services and ensure that the City retains its competitiveness in a global marketplace. However, this has to be done in parallel with measures to promote financial stability, inclusion and consumer protection as well as—I hope—recommitting the Government to making the City the first net-zero aligned financial centre.
Like the Minister, I can concentrate on only three or four aspects of this. First, I want to talk about financial inclusion. How is the Government to address the poverty premium—the extra costs that poorer people pay for essential services such as insurance, loans or credit cards? This is closely linked to the ease of access to cash and banking services, to which the Minister referred. The fact is that the Bill does nothing to protect essential face-to-face banking services, which the most vulnerable in our society depend on for financial advice and support.
Indeed, on this Government’s watch, almost 6,000 bank branches have closed since 2015, yet there is a significant overlap between those reliant on cash—estimated at about 10 million people—and those who need in-person bank support. Those without the digital skills to bank online, people with poor internet connections and people who are unable to afford wi-fi are at risk of being left behind.
The Government have committed to protecting access to cash, but will free access be protected? The key to this is ensuring that the ATM network is sufficiently funded by the interchange fee. Since 2018, this funding has seen successive real-term cuts, which is risking the closure or the conversion of an estimated 37,000 free-to-use ATMs. I believe that the regulator must be mandated to consider the funding of ATMs through legislation in this Bill.
I hope that we will do more to protect people from the buy now, pay later industry. We know that many millions of people are borrowing to pay their mortgages, and to put food on their table and clothes on their children’s backs. A quarter of all buy now, pay later users have been unable to pay for at least one essential item because they are having to make repayments on buy now, pay later products. Many did not realise what they were getting themselves into because buy now, pay later is currently so pervasive on websites. Users have nobody to complain to; they cannot go to the ombudsman if they feel they have been mis-sold this type of credit. I understand that the Government have accepted proposals to regulate, yet regulation has not come. Why is that, and why cannot this Bill be the vehicle?
I turn now to financial fraud. The Bill offers protection for victims of authorised push payment scams but little to address the growing problem of financial fraud. According to the latest figures from the NAO, 41% of all crime against individuals in the year ending June 2022—with an estimated 3.8 million incidents—was actual or attempted fraud. Yet, the number of fraud offences resulting in a charge or summons is pathetic. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Moreover, less than 1% of police personnel were involved in rendering fraud investigations in the year ending March 2020.
I am particularly concerned about the impact on older people. As Hourglass has pointed out, suffering economic abuse as an older person can have really life-changing effects leading to trauma, mental health problems and, in some cases, death. I do not understand why the Government continue to fail to take fraud seriously and why we cannot see a fully fledged fraud strategy. Again, this Bill provides an excellent vehicle for us to ensure that that happens.
Finally, one other area where the Bill could have done so much more is in relation to cryptocurrency. Recent events following the collapse of FTX have shown the risks in the Government’s aim to make the UK a global hub for cryptocurrency assets. It is true that the Bill contains measures to bring stablecoins into the scope of regulation, but surely they could be doing much more. I say to the Minister: overall, the Bill is welcome but it is certainly ripe for improvement.
Lord Sharkey (LD)
My Lords, we welcome the overall objectives of the Bill but have some significant reservations. In the absurd five minutes allowed, I will focus on the reservations rather than the merits of the Bill.
We have very serious reservations about the wholesale bypassing of parliamentary scrutiny that the Bill could bring about. We are sceptical about the merit of the proposed new growth and competitiveness objectives. We are concerned about the extension of the SMCR, and disappointed by the imbalance in the Bill between regulatory modifications in the interests of the financial services sector and measures to protect the interests of consumers.
Schedule 1 sets out what retained EU law is to be revoked, modified or replaced. I counted at least 250 items. Some will be subject to the negative SI procedure, some to the affirmative SI procedure and some to no parliamentary procedure at all. What all this means is that this wholesale transposition, modification, repeal and replacement exercise is not subject to any meaningful parliamentary scrutiny. We need to find a way of allowing the relevant Select Committees to initiate proper inquiries into the drafts of proposed changes that they see as important and have this done before any instruments are laid before Parliament or changes are made without reference to Parliament. Parliament should not be used as a kind of consultee. The structure of our financial services regime is far too important to be left to the Treasury and the regulators alone.
I turn to Clause 24 and to the proposed addition, as a secondary objective, of growth and competitiveness to the existing FCA and PRA objectives. There does not seem to be much in the way of compelling evidence for this. In fact, much of the evidence and testimony points in the other direction. This has all been tried before. Many commentators laid a part of the blame for the 2008 crash on these objectives; that is why we repealed them in 2012. Andrew Bailey said then that it did not work out well
“for anyone including the FSA.”
Writing in the Financial Times a month ago, Sir John Vickers, who was the fons et origo of some of this, concluded:
“For the UK economy, it would be best to reject this addition to regulators’ objectives.”
Over 50 economists and policy experts wrote to the Government in May with similar misgivings; so did Which? and, tellingly, so did the FCA’s own consumer panel. We will return to the issue in Committee.
The next area I want to touch on is the extension of the SMCR. The proposal is to extend, mutatis mutandis, the existing regime to FMIs—a good idea if the current SMCR had worked, but it has not. The current version of the SMCR has not produced the results intended or envisaged. In fact, I can recall only a single case of a truly senior manager being held to account: that was the egregious Jes Staley at Barclays. This is not because the financial services sector has forsworn misbehaviour. We will want to return to this issue in Committee.
I now turn to measures to protect consumers. The last time we discussed imposing a duty of care, it was agreed that the FCA would examine the case. The FCA has decided that preferable to a duty of care was a new set of rules for firms’ behaviour called the new consumer duty. This consumer duty is due to come into effect at the end of July, a year after the final rules were published in a 90-page paper, helped by a 114-page guidance note. Not only is this extremely complex and yet another very heavy burden on firms, but it is very unclear that the new duty is superior in any way to a simple duty of care. Critically, it omits private right of action provisions. We will bring forward amendments to replace this consumer duty with a duty of care and a private right of action. We will also bring forward amendments to extend the FCA’s perimeter to cover lending to SMEs, which have suffered at the hands of predatory and unscrupulous lenders.
We will bring forward an amendment to relieve the plight of the mortgage prisoners. These are people who, in the collapse of 2008, had their mortgages acquired by the Treasury and then sold on to various inactive lenders and American vulture funds. Since then, these people have been trapped on very high SVRs. This is entirely the Treasury’s fault. It has caused and still causes immense suffering to many thousands of families. We will try to put that right.
Lord Vaux of Harrowden (CB)
My Lords, I first draw attention to my interest in the register as a shareholder of Fidelity National Information Services, which owns Worldpay. Like others, I generally support what this Bill is trying to achieve. There is much that is good here, but there are areas for improvement. It is a pleasure to follow the noble Lord, Lord Sharkey, who chaired the EU Financial Affairs Sub-committee of this House, which I sat on. In its last publication before it was wound up following Brexit, that sub-committee stated that
“Delegating more powers to the financial regulators will require increased parliamentary oversight of their activities”.
It suggested that
“This might require a change in the way that parliamentary committees are structured and an increase in resources to enable effective scrutiny”.
While the Bill gives strong rights of oversight and direction to the Treasury, it does very little to provide increased parliamentary oversight. Frankly, informing the Treasury Select Committee of consultations does not really cut the mustard, nor are the performance reporting requirements strong enough. Treasury oversight and parliamentary scrutiny are not the same thing. Our financial services industry is so important and its regulation so complex that I continue to believe that this House—possibly jointly—should create a committee specifically for this purpose and to provide the systematic scrutiny of the decisions, actions, policy-framing and impact of the financial services regulators and of HM Treasury. Financial services regulation is too big a topic to be a part of a wider committee such as our existing Industry and Regulators Committee; it needs dedicated coverage.
Importantly, the systematic scrutiny should be forward-looking. Historically, the regulators have tended to be too reactive after the event and have not done enough to identify future risks. Most of the financial scandals of recent years were foreseeable—indeed they were foreseen by some. I do not see anything in this Bill that will improve that.
I welcome the secondary objective to support growth and international competitiveness. Our financial services industry is such an important part of our economy that it must not be held back by overzealous regulation. It is not possible or even desirable to eliminate all risk. I do not understand, though, why the net-zero objective should not be given equal importance. It is welcome that the regulators should “have regard” to net zero, but I would be keen to hear from the Minister what the practical difference is between a secondary objective and a “have regard” requirement, and why net zero should not have equal billing to growth, given that the Government agree about its fundamental importance to our future. I do not believe that the two are incompatible.
I welcome the introduction of the sandbox rules, which should enable innovation. I have one question: when rules are disapplied for this purpose, who will be liable for any losses suffered if things go wrong? Consumers should not bear that risk.
I am pleased that crypto assets are at last being brought into the regulatory environment, although in a small way—only stablecoin when used as a means of payment. The Bill allows for further regulation in the future, which is welcome. But crypto has become the wild west, increasingly used by fraudsters both as a scam in itself and as a means of extracting value from other scams.
The Government’s stated objective is that activities having the same risk should have the same regulatory outcomes. Crypto is clearly of the highest risk, but it is almost entirely unregulated. That feels like a missed opportunity. When will we see crypto assets being properly regulated?
The Bill requires the PSR to consult and to regulate for the mandatory reimbursement of victims of APP scams which used faster payments. That is very welcome, but it is only a very minor step in addressing the huge and growing fraud epidemic to which the noble Lord, Lord Hunt, referred earlier. Why does it include only faster payments and not all forms of payment? Faster payments themselves are part of the problem, so where is the ability to slow down payments in certain circumstances? What about the sharing of the liability, preferably with all those who facilitate the crime, such as social media and telecoms companies, or at least the sharing of the liability between the victim’s bank and the bank which received and processed the money for the fraudster? Has the Minister read the recent report from the Fraud Act 2006 and Digital Fraud Committee, of which I am a member? When will we see real action from the Government to address fraud, not just consultation?
The inclusion of access to cash is welcome, but access to cash is meaningless if cash is not accepted. The main reason why businesses stop accepting cash is the closure of nearby bank branches where it can be deposited. I again agree with the noble Lord, Lord Hunt, that we need to find a solution to the closure of bank branches.
Overall, this is a necessary Bill, and I generally support it. However, there are areas where it could be usefully improved, and I hope the Government will be receptive to constructive suggestions during the next stages.
The Archbishop of Canterbury
My Lords, this year marks the 10th anniversary of the final report of the Parliamentary Commission on Banking Standards, Changing Banking for Good. I declare my interest having served on that commission, and I welcome the presence in this debate of the noble Baroness, Lady Kramer, who also served, as did the current Lord Speaker. I also welcome the maiden speeches of three noble Lords today: the noble Lords, Lord Ashcombe and Lord Remnant, and the noble Baroness, Lady Lawlor.
We need to remember that the extraordinary crisis in 2008—which led to the various commissions, reports and changes in regulations, including the financial services Act 2013, in which the Parliamentary Commission on Banking Standards played a part—caused huge and ongoing crises. While welcoming the Bill very strongly, I join some of the hesitations mentioned by the noble Lords, Lord Hunt, Lord Sharkey and Lord Vaux. It has been estimated that the financial services industry, and particularly the major banks, have an effective subsidy as a result of the implicit government guarantee that they receive, which is worth approximately £30 billion a year. If there is £30 billion a year going spare, many other industries and not a few churches would welcome that very warmly. However, that subsidy, which is at the risk of the taxpayer, as we saw in 2008 and 2009, is what gives the result of the banks having heavy social obligations; we must look carefully at that when the Bill reaches Committee, as has already been said. The issues of inclusion, stability and access at all levels, especially for micro-businesses, are very important, not least for levelling up.
I will raise three particular and short issues, the first of which is the human factor. The banking standards commission commented that, in the rapidly changing science of the financial markets, regulation is a vain hope, as the noble Lord, Lord Vaux, has already said. By the time regulation is brought in to address a problem, all but the doziest horses will have long since fled the stable. The commission highlighted that the question of culture is at the heart of good banking practice: attitudes of greed, the socialising of losses and the personalising of profits, the kind of legacy people wish to leave, and the issues of virtue. Is the mindset and approach of key leaders in the industry one of casino banking or banking for the common good? That is essentially a moral question.
Some of that is addressed very well in the Bill. I particularly welcome Clause 69, addressing credit unions, and the opportunity that that will give for levelling up and extending the range of financial access to small businesses. But we see in the recent crypto-market crash a perfect example of the failure of culture, as well of regulation, and of technology moving infinitely faster than any regulation. We need a system that is agile and keeps regulation light, so that the industry is competitive, but keeps principles tough and flexible, with heavy consequences for breaking them.
On the importance of capital adequacy and the ring- fence, this was clear at the time of 2008, when one of the major banks had 2% capital to support a more than £1 trillion balance sheet. We need to recognise that banks go under because of bad lending and bad dealing, and the remedy to that is adequate capital and adequate principles and culture—otherwise, we will get back to the point, as we did in 2008, where the taxpayer bears the burden.
Finally, we need competition and an effective industry but not a race to the bottom. There needs to be a race to the top, to the best-quality services, which serve people and the common good both now and in future generations through its green aspects. There has been a tendency over the years to say how much the City contributes, but let us be clear that, if we take into account the roughly £250 billion pumped into the banking system in 2008, it is not so obvious that the City is in credit to the taxpayer—it may well be that it is in significant debit. Nevertheless, this Bill is very positive. As long as it ends up reminding financial services that they are services for all and has principles at its heart, it will be welcomed and make a significant difference.
Lord Bridges of Headley (Con)
My Lords, I declare my interest as an adviser to and shareholder in Banco Santander.
This Bill touches on many topics, but I want to focus on two big questions: what are the objectives of financial services regulation, and who holds the regulators to account, and how?
On the first question, we know that the main objectives of regulation are ensuring that markets function well and that there is market stability, market integrity and consumer protection. As has been said, this Bill adds a secondary objective of competitiveness and growth. I support that new objective entirely, not because I want a race to the bottom—quite the reverse. I believe that simple, proportionate and robust regulation, applied by regulators in a timely, consistent way, is the bedrock of a competitive financial centre. To achieve that, regulation must reflect developments in finance.
We all know how much finance has changed over the past decade or so, since the financial crisis: crypto, AI and blockchain—technology in all its guises—turbocharging areas such as payments; green finance and ESG; not to mention the rise in Asian markets. All this has dramatically reshaped the financial sector, not just here but across the world. For us, obviously we have had Brexit, raising challenges but also opportunities. We need our regulators to be mindful of this new world in all they do, so that our financial service sector continues to attract capital, investment and talent—and, yes, that means change. But regulations are judgments; they are made at a moment in time. We should not get into the mindset of treating them, dare I say it, as tablets of stone, brought down from the mountain and never to be changed.
To ensure that our regulatory framework is fit for purpose, we must remember the lessons learned in previous crises, but we must not regulate via the rear-view mirror but for the world as it is and for emerging risks. My concern is not that the new objective goes too far but the reverse: that it will not have any meaningful impact. One reason for that is that it is a secondary, not a primary, objective. Another reason is that I question how it is going to sit alongside the new regulatory principle contained in the Bill that regulators must be mindful of the Climate Change Act 2008. How many trade-offs, should they arise, would be made between the green objective and competitiveness?
This brings me to another concern and my second big question: who holds the regulators to account? There is of course the specific issue of how regulators will be held to account in implementing the new secondary objective, but there is a much broader issue, raised a moment ago by the noble Lord, Lord Vaux. The Bill will give ever more power to unelected regulators; how are they going to be held to account? Of course, they are independent, but independence and accountability must go together hand in hand, and by accountability I mean regular systematic processes whereby the main actions of the regulators are thoroughly scrutinised by Parliament. As has been said, we have no such effective system at the moment.
I know the Bill stipulates that the Treasury Select Committee will scrutinise consultations, but consider just one fact: last year, on my reckoning, the FCA, the PRA and the Payment Systems Regulator between them launched 75 consultations—and that is just consultations, not policy statements or anything else. On my reckoning, there is no way that one parliamentary committee, under the current system as currently resourced, can possibly scrutinise this torrent of regulation; it will simply be washed away by the flood. Of course, we need to avoid politicising the regulatory process, which would undermine the confidence we all want. We also need to avoid parliamentary scrutiny making regulators so nervous that they become excessively cautious in all they do, gold-plating regulation and creating the stability of the graveyard. That said, we need to have an answer to this simple question: who regulates the regulators? At the moment, as the Bill stands there is no clear and effective answer.
Baroness Twycross (Lab)
My Lords, I look forward to hearing the maiden speeches of the noble Lords, Lord Remnant and Lord Ashcombe, and the noble Baroness, Lady Lawlor. I join others in welcoming them to the House. I declare an interest as London’s Deputy Mayor for Fire and Resilience, as the points I shall raise relate to an issue identified as a risk to the resilience of individuals and vulnerable groups—a societal risk—in the London City Resilience Strategy in 2020. This strategy, published shortly before the first Covid lockdown, identified the trend in digital transactions and away from cash:
“A proliferation of digital payment technologies allow individuals to all but avoid the use of cash on a day to day basis. According to the AT Kearney Global Trends 2019-2024 Report ‘the growth of digital applications, e-commerce, and online payment technologies will keep growing over the next five years and beyond’ and we are ‘likely to see the emergence of the first truly cashless society in the next five years. A move away from cash may pose a risk to certain vulnerable groups, notably those facing barriers to digital transactions, or those more likely to be excluded from the mainstream banking system. This could affect the resilience of these groups, as well as … the personal resilience of isolated people, including older generations who are more likely to be reliant on cash.”
During the pandemic, there was a clear acceleration of cashless services, with the organisation LINK identifying that use of cash has reduced by 40% compared with pre-pandemic levels. More recently, however, there has been a subsequent increase in the use of cash by consumers during the cost of living crisis, with 10% of people saying they plan to use cash more than previously to help them budget. This alone demonstrates a clear continued need for cash by the public, despite what has been described as the turbocharging of a move away from cash since 2020. It is welcome, therefore, that the Bill includes a requirement on the Treasury to publish a cash access strategy and a requirement on the FCA to ensure reasonable provision of cash access services—and “reasonable” should, must, mean “adequate”.
The requirements must also ensure that older people, those with disabilities and those on a lower income who rely on cash are not adversely affected. We have a tradition in this country that the public are not charged for withdrawing their own money. This is a good tradition and should become an explicit right. This legislation should make it clear that there should be a default right to access cash free of charge and a right to use cash to buy basic goods and services for those for whom other forms of payment are not an option. This group, which is at risk of being marginalised, includes more than 5 million people who rely on using cash for their normal spending—a significant minority who should be protected.
Equally important is that there is no poverty premium on cash users and that the decline in free-to-use ATMs and the increase in pay-to-use ATMs—all too often found in some of our most deprived communities, as well as many rural communities—are halted. The closure of almost 6,000 bank and building society branches since the start of 2015, as has been noted, has left many consumers without easy access to a bank branch and is exacerbating the issue.
There have been some imaginative approaches to piloting ways to address these issues, but more needs to be done to assess the pilots to make sure they work and to roll out measures that can address this issue. The Bill provides the ideal opportunity to do this. I agree with the noble Lord, Lord Hunt, that it could go further in this regard. As the consumer organisation Which? has said, we need to avoid sleepwalking into
“a situation where cash users struggle to make purchases or are excluded from certain services.”
Without ambitious plans to ensure that all those who require cash can still use it and that they have easy and free access to it, there is a clear risk of further increasing the impact of financial exclusion, which is all too widespread in our society already.
Baroness Bowles of Berkhamsted (LD)
My Lords, I declare my financial services interests in the register and my membership of the international Systemic Risk Council.
This Bill falls short on accountability. During the passage of the 2021 FSA, I suggested regular independent reviews akin to the Australian system—a more advanced vision than the sporadic reviews in this Bill, which are reliant on government initiation. Why not have rolling and thematic reviews and regulators reporting to Parliament under independent assessment criteria, such as from the NAO?
The framework consultation touted parliamentary scrutiny as a safeguard, but that is deceptive when the Government have blocked adequate parliamentary influence. Committees have modest power through public interrogation, and Ministers now regularly avoid attending Lords committees. Should parliamentary reports not get specific attention in review processes, not least to reflect public interest, which is left faint among the numerous industry hotlines to Downing Street? The Government cannot hide behind regulatory independence when they fix the regulatory perimeter and key policies, appoint regulators and control reviews. Failure is on the tab of government—maybe a different one further down the track, but the collective reputation of the UK in financial services is on the line.
We have just had an example of that with the market turmoil from DB pension schemes. At its root is the setting aside since 2005 of EU rules requiring pension scheme investment to be vanilla because pension schemes have only light-touch supervision and trustees are mainly ordinary folk and not financial experts. Trustees were thus left at the mercy of unregulated, liability-shirking advisers and the hapless Pensions Regulator.
I have been involved in investigations through the Industry and Regulators Committee, giving evidence to the Work and Pensions Committee and participating in conferences, where polling on the biggest loser in the debacle put the reputation of the UK top. Gilt turmoil is a named issue in papers for international organisations looking at systemic risk.
The timid excuse is that we are waiting for international agreement relating to non-bank systemic risk—that is outrageous, given that this is a UK-created and UK-specific issue of financial stability, with a regulators’ muddle, gaps and an issue that the Financial Policy Committee should have been all over. In evidence to the Economic Affairs Committee, Sir Paul Tucker questioned the point of the Financial Policy Committee if all it does is report. Now, there is some pulling up of socks, again after the event. Systemic risk exists in many funds, but the corralling and correlation of risky investment strategies in pension schemes with emphasis and concentration in gilts is uniquely ours, uniquely crafted and well-known where it should have mattered. It is not black swans and larger buffers; Bank of England yield tables show turmoil well under way at under 40 basis points’ change, and the transposition dirty secret has long been protected by the Treasury and its alumni.
The Bill also touches on issues of cryptocurrency and critical third parties, a reminder that financial services are not really penned in to entity and activity-based perimeters. As the IMF said, we are already into the era of reimagining regulation, otherwise it is not possible to cope with fintech or big tech which blur and exploit the boundaries of regulation. Online brokerage mimics the addictive features of social media, targeting the vulnerable. We regulate gambling but we do not even have robust age verification for online investing. Fraud is at epidemic levels and respects no regulatory boundaries. Far from having agile principles and simple regulation, we have a rigid perimeter and rule dinosaur, which is fostering fraud and revelling in the abuse of position and asymmetry of information. Regulators are operationally inefficient, underfunded, late and thwarted on enforcement.
Financial services are the food of the economy. Where there is harm, there should be justice—and not just where it is regulated. I will be offering amendments.
Lord Cromwell (CB)
My Lords, how do I follow that? It is always a pleasure to follow the noble Baroness, Lady Bowles, with her knowledge and her forensic contributions. I also look forward to the three maiden speeches we are going to hear this evening.
In the time available, I will speak about two things—including, perhaps perversely, one that is not yet in the Bill—and then say a few words about crypto. I saw in the Financial Times today that the new chair of the Treasury Select Committee rather humorously described crypto as:
“The freedom for people to do silly things with their money”.
The absent area is the urgent need to tackle the use of dirty money to prevent public interest investigations into market participants. It is widely recognised that the UK legal system is used, often with money very questionably obtained and possibly laundered in UK markets, to suppress the publication of matters in the public interest. We discussed these activities—which have become known as SLAPPs or lawfare—during the passage of the economic crime Act, so I do not propose to repeat what was said then. Nevertheless, the use of such intimidation to suppress, in the context of this Bill, matters of keen investor need-to-know interest is a distortion of the information and accountability that should underpin efficient financial markets in the UK.
The Bill seeks to address the senior managers regime standards and conduct rules. It should also address this area of coercion, which prevents markets and investors being properly informed about the activities of some leading business figures, illegal activities, market abuse and corruption. For example, there are newspapers which today will not publish stories about so-called oligarchs for fear of the lawfare that will then be waged against them. The consultation following the economic crime Act resulted in a statement from the Secretary of State on 20 July last year that primary legislation would be introduced at the earliest opportunity to enable an early dismissal of such cases. This was recently and vigorously reiterated in response to an Oral Question in this House.
There is both government and cross-party support for cleaning up this abuse of our financial markets and the associated legal system. I should inform the House also that the necessary clauses to give effect to this government commitment have already been drawn up by lawyers and could be included in the Bill. So far, so good. However, the noble Lord answering the Oral Question I referred to a moment ago described the selection of the right legislative vehicle to bring this into effect as “above my pay grade”. Therein lies the problem. It seems that everyone agrees that this legislation is needed, but where is the government impetus to get it done? The matter has become a legislative Cinderella, but the pantomime season is over and it is high time that the promised legislation was enacted. I therefore ask the Minister, when she winds up today’s discussions, whether she will agree to meet with me and others to review the clauses proposed, with a view to arriving at an appropriate amendment to the Bill.
I turn briefly to digital assets, and declare my membership of the APPG for crypto. Blockchain and digital assets are already here, and here to stay. I have long advocated UK regulators getting a better understanding of them, so it is encouraging to see the Bill making some steps in that direction. The Bill introduces a new term, “digital settlement assets”, and appears to put the regulator’s toe in the water with stablecoins, albeit only as a medium of exchange. However, it then makes provision for going far wider—and using secondary legislation—to enable engagement, seemingly with any other digital and crypto assets. Despite my interest in this area, I must sound a note of caution. The constant evolution of digital assets represents not just a financial revolution but a technological and conceptual one that will not fit simply into existing regulatory categories and approaches. Managing emerging innovation and opportunities while preventing abuse is going to pose serious capacity and structural challenges to the regulators. I say candidly that I have my doubts as to whether the FCA is really ready for this.
Today, in brief, I have just two questions for the Minister. First, stablecoins sound so inviting, do they not? However, in reality some have proved to be far from stable, and even those backed 100% by a fiat currency are subject to fluctuations in that underlying currency. I therefore ask the Minister to clarify whether the Treasury is concerned about this and, in particular, whether it has a clear definition of what tests an asset must pass to be truly worthy of branding itself to retail investors as a stablecoin. Finally, and more succinctly, the Treasury surprised us all some time ago by announcing that it was going to produce its own non-fungible token. Can the Minister confirm that this is still the case, and if so, why, or was it just a passing fancy of the Government to be down with the crypto bros?
Lord Hill of Oareford (Con)
My Lords, I declare my interest as both the lead NED at the Treasury and an adviser to financial and professional service firms in Europe and the UK. My real interest today is in talking about the accountability of the new regulatory framework proposed in the Bill.
The underlying purpose of the Bill is clear enough: to give our financial regulators more independence and more flexibility in setting the regulatory framework for our financial services. As someone who was responsible for financial regulation in the EU and who saw some of the downsides of that rather clunky, consensus-based system, I fully support that objective. The ideal regulatory framework is flexible and dynamic. Risk is not static, and regulation should not be static either.
But if we are to give our regulators more independence and more control day to day over an industry that is so important to the well-being of our country, that surely has to go hand in hand with more accountability. The question that follows is whether this Bill does enough to increase the accountability of our regulators alongside the increase in independence that it clearly gives them. The answer at the moment is that it does not.
To say we need more accountability is not, by the way, to attack our regulators or question the importance of independence. They have an incredibly difficult job and have gradually had more responsibilities dumped on them by politicians who have outsourced their own responsibility for managing risk. If we get it right, clear accountability should strengthen our regulators and protect their independence.
When we talk about accountability, we first need to be clear on our terms. I draw a distinction between the regulations themselves on the one hand and the application of those regulations on the other. Very often, the two are conflated and we just talk loosely about regulation, but the UK’s overall regulatory environment, and our competitive position, are shaped by both the detailed law and what we might call regulatory culture or behaviour. Both affect sentiment in the marketplace and shape the decisions that companies take as to where they want to base their business. When people grumble about regulation in the UK, it is often the process—the length of time it takes to get approvals, inefficiencies, a box-ticking mentality—rather than the rules themselves which infuriates them.
I draw this distinction because we need accountability mechanisms which cover both points—both the rule-making and the application of those rules. When we talk about holding the regulators to account, I am sure we will have a lot of discussion about the proper role of Parliament in the process. As has already been asked, does a session in front of the Treasury Select Committee amount to proper accountability? Is the TSC properly set up and resourced to provide proper scrutiny? Clearly, the answer to both questions is no.
We also need to look at non-parliamentary mechanisms for increasing accountability. Should the regulators publish how long it takes them to process approvals, for example? Should an independent body provide some comparative statistics on how UK regulators do compared with other jurisdictions? Can we beef up the annual “state of the City” report which the then Chancellor, Mr Sunak, committed to publish once a year? Should we think about establishing a body modelled on the OBR which could provide some independent validation of the work the regulators are doing? After all, their decisions have a massive impact on the functioning of our economy and thus our ability to fund public services. If it is good enough for the Treasury goose to have the OBR, why not for the regulatory gander?
This is a vital Bill which will set the framework for one of our most important industries for years to come. I am all for the independence for the regulators it contains, but we will need to do better on accountability.
Lord Frost (Con)
My Lords, as has been said by many, this is very important legislation. It is crucial to giving effective support to the City and our financial services sector more broadly, and there is a lot of good stuff in it. I want to begin by highlighting three of those good things.
First, I welcome the broad approach taken to the onboarded EU legislation on our statute book. It has taken the Government a long time to get here, but the powers to revoke and replace with genuine UK legislation and rules are very important. They show that it is entirely possible to take an ambitious and potentially sweeping approach in this area, which I hope the Government will follow more generally in the other reviews of aspects of our domestic legislation which are under way, if perhaps not taking quite so long about it.
Secondly, the secondary objective on competitiveness is a very good thing. I fear it will be undermined by the duty of compliance with net zero as a regulatory principle as well, but nevertheless it is a very good secondary objective. Obviously, it is correct that regulators should have to pay due regard to our economic prospects in their actions.
Thirdly, the proposals in the Bill to support access to cash are very important. I support much of what the noble Baroness, Lady Twycross, said on this subject. Access to cash is important not just for practical and social inclusion reasons but also to preserve a bit of personal freedom and the ability to conduct transactions without the Government or institutions looking over your shoulder. There is of course no point in financial institutions ensuring access to cash if there is in practice nowhere to spend it, so I hope the Government will look in due course at the other side of this problem—the withdrawal of cash in the retail sector more broadly. Getting this right is in the interests of a free and inclusive society.
As others have not mentioned it yet, I mention in passing the commitment made by the Minister in the other place to keep under close scrutiny the PayPal issue—the withdrawal of financial services for essentially political reasons. I welcome the Minister’s commitment to follow up on that and possibly to use the powers in the Bill if necessary.
As with others, my main concern with the Bill is on the accountability of regulators. I have two concerns. The first issue is the quality of regulation. It seems a little pas comme il faut nowadays to criticise the independence of the regulators, but independence is not the same as immunity. It is right to acknowledge the concerns that the FCA and PRA potentially have powers that are too wide-ranging already and sometimes appear to act with impunity, and that sometimes firms are reluctant to challenge because of their relationship with the regulator. There is no statutory requirement on the regulators to make clear rules or act predictably or consistently and, as others have said, sometimes they are slow, risk-averse and reluctant to commit themselves, and that in itself can harm competitiveness.
The second issue is the politics of regulation. The way the regulators fulfil the objectives they are given is in practice highly political. There are many ways of fulfilling those objectives and in choosing how to do so they reflect a political view. They have to make such judgments; for example, and most obviously, on whether the City’s prospects are best protected by divergence—my view—or relative alignment with the way things are done in the EU. That is a political judgment, influenced by the Government’s view, yet the Bill gives the Government no way to compel regulators to act in line with such a political view. The prickly reaction of the regulators to the call-in power, which is now dropped—in my view, mistakenly—shows clearly that they want to keep discretion in this area. I worry that the Bill will create a system in which all the incentives are to go along with what regulators want in order to avoid public arguments.
To conclude, giving new rule-making powers to the regulators against this backdrop, without corresponding duties and genuine accountability, is pretty risky. The system it would put in place of only post-facto accountability involving only the Treasury Select Committee is not good enough. There are likely to be amendments on this subject and I hope the Government will look carefully at them. With those caveats, I am happy to support the Second Reading of the Bill, but I hope the Government will look to improve it in Committee.
Lord Davies of Brixton (Lab)
My Lords, I should mention that I am a fellow of the Institute and Faculty of Actuaries and, in one way or another, have worked in the financial services industry throughout my professional career, albeit generally on behalf of consumers.
The Bill is in effect a Brexit Bill, as emphasised by the two previous speakers, but the Government are taking the opportunity to pursue wide-ranging changes in the way the industry is regulated. This has led to the concerns which have been expressed and will be expressed subsequently in the debate. For my part, my main concern is to ensure, given any changes, that the interests of consumers are fully protected. The industry owes a duty of care to consumers, and how this should be implemented needs to be set out clearly and directly in the Bill.
Against that background, I want to highlight one aspect of providing care for consumers where more needs to be done. Mental health and financial circumstances are clearly linked. Problems with your mental health can make it harder to earn money, to manage spending and, crucially in the context of financial services, to get a fair deal on products and services. Facing financial difficulties should not result in needing mental health treatment, but too often those things come hand in hand. Financial difficulty itself causes stress and anxiety, but this is often made worse by, for example, collections activity or having to go without essentials. It is important, therefore, to understand the scale of the problem. In any given year, one in four people will experience a mental health problem, and the pandemic and the cost of living crisis have made things worse.
Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, can make managing money significantly harder. Those symptoms can also make it more difficult to interact with financial services. For example, four in 10 people say that they find it difficult or distressing to make phone calls. Experiencing a mental health problem can also make people more vulnerable to fraud and scams. People with mental health problems are three times more likely to report that they have been the victim of an online scam than other people.
The relevance of all this to the Bill is that the financial services industry needs to be placed under an explicit obligation to act responsibly towards its customers who have mental health problems. The industry needs to recognise and understand the nature and scale of these problems, it should be placed under a duty of care towards its customers, and it should be required to take active steps that will minimise the potential difficulties faced by those who have or are at risk of having mental health problems that are associated with their finances. Obviously, this will be of benefit to the individuals concerned, but it will also relieve much of the pressure on our mental health services, and, finally, it will be of benefit to the financial services industry itself in not accumulating bad business.
Baroness Sheehan (LD)
My Lords, I declare my interest as a director of Peers for the Planet. The public want action on climate change. When people are given a choice, they are voting with their feet—the uptake of electric cars, which is beating all expectations, is a case in point. It is clear that businesses and financiers also want a robust net-zero framework. The UK Sustainable Investment and Finance Association, an organisation of over 300 financial services firms with over £19 trillion in assets under management, published recommendations of a number of “critical actions” to move the UK’s financial sector towards net zero. The Aldersgate Group business alliance, which has a collective global turnover of over £550 billion, has noted how the
“lack of clarity on the direction of public policy confuses businesses and investors and leads to an ineffective allocation of money.”
People and businesses want action because the dire impacts of climate change are visibly here with us now, and the increasing ferocity of climate events has taken even pessimistic scientists by surprise. The Met Office has confirmed that 2022 was the hottest year on record in the UK, and 2023 is set to be even hotter. This legislation should reflect that concern.
I will leave it to others far more knowledgeable than myself to speak on the technicalities of the regulatory framework for financial services and to say whether the Bill is fit for purpose. I will confine the rest of my remarks to what I believe to be a serious shortcoming of the Bill, which is its almost dismissive approach to the role that money plays in safeguarding the health and natural capital of our planet.
To start with deforestation, the agriculture, forestry and land use sector produces almost a quarter of all global greenhouse gas emissions. The Global Resource Initiative task force, established by the Government and comprising finance and private sector leaders, has independently recommended the introduction of new legislation applying deforestation and human rights due diligence obligations to UK financial institutions. Its report is worth reading—the stakes are high. It states:
“No pathway to 1.5 degrees is possible without addressing forest loss”.
However:
“If properly protected and restored, forests and other ecosystems could provide more than one-third of the total CO2 reductions required to keep global warming below 2° C. This decade provides a narrowing window of time to act.”
Deforestation is a “top priority area” in the UK’s net zero strategy, yet the UK is a major financier of global deforestation. The Government could have used the Bill to follow through on the GRI’s recommendation and stop UK financial institutions bankrolling forest destruction abroad to the tune of hundreds of billions of pounds. Why did they not do so?
I have a list of other concerns, which include: the regulators’ requirement to “have regard to” climate goals is inadequate to support net zero and nature; the removal of sustainable disclosure requirements from the Bill is causing concern; there is a need for a better interpretation of “fiduciary duty” to help clarify that climate change is financial risk; and, last but not least, the implications of the abolition of Solvency II rules and the safeguarding of environmental targets by a replacement regime—information on that would be welcome.
In conclusion, the markets serve a societal function, but they are there to serve us, and it is up to the Government to set the parameters within which the market will deliver the social and environmental values without which we cannot thrive.
Lord Forsyth of Drumlean (Con)
My Lords, I declare my interest as set out in the register as chairman of a publicly quoted bank. I am also regulated by the PRA and the FCA under the senior managers regime, so I am putting a book down my trousers for the rest of my speech.
I welcome the Bill and its commitment to supporting our financial services sector by creating competition and removing needless bureaucracy and regulations which were made for Europe but were wrong for Britain. There is, however, a fundamental weakness that needs to be addressed in Committee. That is, while the Bill gives regulators more powers and independence, it is shockingly weak on ensuring their accountability to Parliament. These points have been made by the noble Baroness, Lady Bowles, and my noble friends Lord Bridges, Lord Frost and Lord Hill, so I think there is a degree of consensus across the House on this matter.
That accountability is vitally important to ensure that we achieve the growth and wealth creation our country desperately needs after the ravages of Covid lockdown. We have already seen the undermining of Parliament’s role in voting means of supply, with the Bank of England’s expansion of its balance sheet through quantitative easing—money created out of thin air on an industrial scale. Quantitative easing amounts to just short of £1 trillion—in fact, almost 40% of our GDP—in which Parliament was a bystander and the Chancellor unable to be held to account because we are told the Bank of England is independent.
Your Lordships’ Economic Affairs Committee warned that QE was a dangerous addiction in 2021 and that the Bank’s view that inflation was a transient phenomenon while continuing with QE risked serious inflation. Its own chief economist resigned while expressing similar concerns. The committee was ignored, and it turned out to be right and the Bank wrong. The consequences have been inflation, higher interest rates and a bill in excess of £100 billion for taxpayers to allow the asset purchase facility of the Bank of England to pay interest to the banks under an indemnity agreement with the Treasury, which the Treasury has insisted on keeping secret.
I voted for Brexit, to coin a phrase now so popular with the leader of the Opposition, because I wanted to take back control. I wanted to restore to Parliament, particularly the elected House of Commons, the ability to make our laws and be held to account for them at every general election. Frankly, this Bill seems to pass control of regulation from one unelected European bureaucracy to other unelected bureaucracies in the form of the Treasury, the PRA and the FCA. Parliamentary scrutiny and accountability in a thicket of Henry VIII provisions and regulatory powers, whose purpose is unclear, is derisory.
The fact that we have only five minutes each to discuss this Bill is an absolute abuse of the House. Also, as I discovered this afternoon, thanks to the noble Baroness, Lady Bowles, that we are expected to deal with this Bill in a Grand Committee, not on the Floor of the House. Whatever was the Official Opposition thinking in agreeing to such a matter?
Of course, Clause 36 purports to tackle this issue by providing that the FCA and the PRA would have to notify the Treasury Committee when they published a consultation and responded to any committee replies to their consultations. We do not need a clause in the Bill to do that; such a measure already exists. It is already part of custom and practice. Is that really accountability? Is that it? Surely, at the very least, we need a Joint Committee of both Houses made up of Members with the necessary experience and properly resourced, with informed and expert advice for overseeing what is a Herculean task.
There is no timescale associated with achieving the Bill’s objectives and it is not inconceivable that little, if anything, will change. I do also worry about how all this is going to be resourced. It can already take months for regulators to approve senior appointments and transactions in regulated businesses, damaging their ability to operate effectively. The FCA has itself acknowledged that it is underresourced to perform its existing responsibilities. This House and the other place have, on numerous occasions, raised the politically exposed persons regime as it affects Members of Parliament and their families to no clear purpose, but nothing has changed. Nothing has been done about it.
The ECB rules on capital, which limit lending by smaller banks to housebuilders as a result of abuses in Spain and Ireland, continue to apply in the UK at a time when the Government’s policy requires more housing. It is far more profitable for banks to lend money for mortgages than to build houses, so why are we surprised by the consequent increases in house prices? The countercyclical capital requirements now being introduced as the country experiences recession will require banks to hold more capital, restricting increased lending by smaller banks when so many good businesses need a lifeline. It seems unwise to me but neither the Treasury nor Parliament can do anything about it as the regulator’s independence is not to be questioned. I hope that, during the remaining stages of this Bill, my noble friend the Minister will address these issues.
Brexit presents us with many opportunities, including the chance for Parliament to unleash the talent and expertise of the City. However, I fear that this Bill needs to focus more clearly on execution and delivery. “Doing nothing often leads to the very best of something” might have been good enough for Winnie-the-Pooh but it will not be for us if we are to succeed as a nation.
Baroness Hayman (CB)
My Lords, I declare my interest as co-chair of Peers for the Planet. It is a pleasure to follow the noble Lord, Lord Forsyth; I absolutely agree with his comments and those of other noble Lords as to the importance of taking action during the passage of this Bill in terms of the parliamentary accountability gap that currently exists.
At COP 26 in Glasgow, the then Chancellor—now the Prime Minister—pledged to make the UK
“the world’s first net-zero aligned financial centre.”
That pledge reflected both the necessity and opportunity for this country to embrace green growth. The potential benefits of the UK being a global centre for financial flows, which will power the economy of the future, are huge. Embracing innovation and private investment to scale up new technologies can bring sustainable jobs and growth, far from being a barrier to growth, as the noble Lord, Lord Frost, suggested.
According to analysis by McKinsey, the supply of goods and services to enable the global net-zero transition could be worth £l trillion to UK businesses by 2030. However, the UK financial services industry will not be able to fulfil the Prime Minister’s pledge unless it has both the right regulatory framework to support it so to do and the policy certainty and long-term trajectory that give business the confidence to invest. As the helpful briefing for this debate from Aviva makes clear,
“a booming UK green finance sector requires a transparent and trusted market that combats greenwashing, has clear standardised metrics, and levels the playing field to reward rather than penalise early action.”
I fear that, as currently drafted, this Bill is a missed opportunity. For example, consideration of nature appears to be entirely absent from the Bill, and with it the chance for our financial sector to scale up the nascent and fast-growing nature-based solutions market. While we delay, other countries are making leaps ahead in green finance. Both France and Germany have given their regulators statutory objectives linked to climate change and sustainability.
I know that the Minister spoke in her opening speech about the inclusion of a climate change regulatory principle but, as others have said, this is just one of seven regulatory principles that sit beneath the regulator’s main strategic and operational objectives and is much weaker than if the Bill had contained a clear climate objective. I am sure that the issues as to the hierarchy of priorities and the trade-offs between the objectives, the secondary objective and the principles contained in this Bill—the noble Lord, Lord Bridges, mentioned these—are matters to which the Committee will give great attention during the Bill’s passage.
I fear that the Bill also misses the opportunity to progress previously announced policy steps to align our financial services sector with net zero, notably the commitment to require all UK-regulated financial institutions and publicly listed companies to publish net-zero transition plans by 2023. This Bill is the obvious place to legislate for that policy yet it is silent. Progress has also stalled on taking forward the UK sustainability disclosure requirements and the UK taxonomy. An updated green finance strategy has been promised but not yet published. All this delay risks sending a signal to our financial sector and internationally that the Government are unsure about whether they are truly committed to being a leader in green finance.
Yet businesses are calling for clear, consistent policy and long-term financing frameworks. The CBI has said that
“the big policy lever that’s missing is around green growth”
and that businesses are “confused and disappointed” that the Government appear to be going backwards on their green growth agenda. We need strong leadership, a sense of direction and clarity from the Government. With so much to be gained from creating the right regulatory framework to allow our financial sector to capitalise on the green transition and the many investment and growth opportunities, I am really worried that we will not move at pace to become the world’s first net- zero financial centre. If we do not move at pace and decisively, others will beat us to it; all the competitiveness objectives in the world will not change that.
The Lord Bishop of St Albans
My Lords, theologians sometimes discuss the personal and social ethics in the teaching of Christ under the three headings of money, sex and power, those three areas which can be the most extraordinary gift and blessing when used rightly and for the common good but which, when they are an end in themselves, can become extraordinarily disruptive. Of these three areas, Christ had most to say about money, as its use reveals our values as individuals and as a society, often in a very stark way. A close reading of this Bill reveals a set of cultural assumptions and values about what is considered important and valuable. There are four areas that I want to highlight and which we need to consider if a growing and vibrant financial sector will work for the common good.
First, on crypto asset regulation, as others have said, we need to act fast both to protect our citizens and so that we do not fall behind the rest of the world. The problem at the moment is that the almost complete lack of regulation means that, for many people, crypto- currencies are just another form of gambling. The recent collapse of FTX has demonstrated the volatility of this market and its vulnerability to fraud. Some have made a fortune, while others have lost their life savings and will now be looking to the state to provide for them. Just as we need a sensible and balanced approach to the regulation of online gambling, so we need sensible, balanced regulation of crypto- currencies. The provision in this Bill to ensure that crypto is treated as a regulated activity and giving the FCA and the PSR the power and, as others have noted, the resources to do their work and to protect customers, is welcome.
Secondly, His Majesty’s Government’s laudable levelling-up agenda needs to ensure access to cash. Here I declare my interest as president of the Rural Coalition. Over 8 million people across the UK rely on cash, primarily the elderly or those who live in rural areas or not-spots, where you cannot get online. Poorer areas are being dominated by pay-to-use cash machines, which hit poorest people the hardest. Research indicates that the most deprived areas are dominated by private operators charging those most affected by the cost of living crisis to withdraw cash. This is the poverty premium, where the poorest are forced to pay more for essential services. When the Minister sums up, can she tell us whether the FCA is under the same obligation as government departments to rural-proof the regulations that it makes about access to cash? If not, will this requirement be introduced?
Thirdly, I welcome the proposal for credit unions and urge His Majesty’s Government to explore ways in which we can encourage their growth. The Church of England has been involved in a very large project using the insights of credit unions in our secondary schools to teach financial literacy, and to teach young people how to handle cash and their money and how to plan responsibly. We need to build on this work urgently.
Fourthly, on green and zero carbon, it is more urgent than ever that we introduce mandatory net-zero transition plans, so that large companies report on how they will manage the transition to net zero. We are told that the Bill will update
“the objectives of the financial services regulators to ensure a greater focus on long-term growth and international competitiveness.”
However, if we are to fulfil our COP 26 commitments, it will also need a secondary statutory objective to protect and restore nature and deliver a net-zero economy. There is much to be welcomed here, but there is a great deal more work to be done.
Lord Hunt of Wirral (Con)
My Lords, I draw attention to my financial services and legal interests as set out in the register, and that I am co-chair of the All-Party Parliamentary Group for Insurance and Financial Services.
As many speakers have pointed out, this Bill represents a golden opportunity to adapt to the new reality of post-Brexit and, we hope, post-pandemic life. Financial services provide over a million jobs directly across the UK, amounting to 8% of GDP. It is a success story and vital to our welfare. However—we must stop deluding ourselves about this, if any of us still do—the UK is not pre-eminent in the world of financial services. Too much of the big reinsurance work in particular is going elsewhere. There is far too weak a partnership between government and the sector, if indeed there is any meaningful partnership at all. We still await a definitive sustainable financial services deal with the European Union. We also need the right infrastructure and the right tax system.
It is all about having a vision, but it is also about regulatory culture. I use “culture” advisedly. If this legislation fails to address not only the letter of regulatory law but the culture of the regulators, it will have failed. Effective, proportionate, efficient and good regulation is about having the confidence to strip away unnecessary redundant regulation as well as policing necessary regulation. That in turn is about having the right people and the right relationships. I refer not to cosy deals over the third cognac in the Reform Club but to brisk, efficient, timely, professional, mutually respectful regulation, with each side having a lively but robust appreciation of how the other operates.
I strongly welcome the new objectives on competitiveness and growth. Effective regulation should enable the sector to burnish its reputation for efficiency, innovation and integrity. It can also reduce costs, thereby improving access to goods and services. I hope that the necessary metrics can be crafted to provide reassurance that the regulators really do act on these new secondary objectives. I acknowledge and respect the concerns of those who feel that the commitment to growth feels a little bald and even old-fashioned in the light of climate change. I reassure the noble Baronesses, Lady Sheehan and Lady Hayman, that I am constantly struck by how seriously climate change is being taken by a sector that is literally, as well as figuratively, right in the eye of the storm. Financial services growth is increasingly, of necessity, green growth.
Finally, as senior independent director of LINK, I welcome the fact that for the first time ever the concept of access to cash and a right to access it will be enshrined in law. As the noble Baroness, Lady Twycross, pointed out, and the right reverend Prelate the Bishop of St Albans has just mentioned, for millions of people cash is a vital part of day-to-day life. Younger consumers may brush off credit card fraud and the panoply of pins and passwords as a necessary if tiresome aspect of modern life, but for many older citizens all that is an undiscovered country, and one that will remain undiscovered. Sadly, there is no such thing as a free cash withdrawal. The banking hubs have been slow to get moving, bank branches continue to close, and the economic situation squeezes the independent ATM providers more and more.
This Bill barely marks the end of the beginning for this task. I hope that it will be seen as an important milestone. I wish it safe passage and a successful arrival in port.
Baroness Bryan of Partick (Lab)
My Lords, the Second Reading of this Bill in the other place on 7 September was just one day after Liz Truss became Prime Minister, and just two weeks before her disastrous mini-Budget which has left millions of families facing frightening hikes in their mortgage payments. The reaction of the markets caused far more damage in one day than industrial action has over months. Markets are not democratic or accountable and, even before this Bill, are only lightly regulated.
The 50 leading economists who signed the letter to the now Prime Minister when he was Chancellor of the Exchequer in May 2022 warned that competitiveness is an inappropriate objective for regulators. They called it a recipe for excessive risk taking that could harm the real economy and reduce economic growth, and said that it was a poorly defined and confusing objective to give a regulator. The most worrying comment coming from across the spectrum of economists was that encouraging competitiveness as outlined in this Bill could result in the same conditions that led to the crisis of 2007.
The case for giving the FCA the task of ensuring competitiveness is at odds with its primary function of regulation. Few are convinced by the Government’s claim that this will not result in a race to the bottom. Evidence shows that lack of regulation results in bigger risk taking for short-term financial gain, at the expense of the rest of society. As Einstein warned us, insanity is doing the same thing over and over again and expecting a different result.
I move on to access to cash. The Government have stated that the Bill will ensure that people across the UK continue to be able to access their own cash with ease. However, there is no end in sight to bank branch closures and the removal of free-to-use ATMs. The seven big banks have already earmarked 193 branches for closure during 2023. There is overwhelming evidence, as has been cited from around this House, that the less well-off suffer most from difficulties in accessing cash.
So it was with dismay that I heard the then Economic Secretary to the Treasury, Richard Fuller, say at Second Reading:
“When I say ‘access to cash’ I mean access to cash. My hon. Friend raises the question of whether that access should be free … I cannot give him that assurance at this stage.”—[Official Report, Commons, 7/9/22; col. 285.]
That, together with the dismissive response from Sheldon Mills from the FCA to the Bill Committee on 19 October, when he was asked about having regard to inclusion, demonstrated a lack of understanding of the impact on people in more deprived areas. That is not acceptable. We expect a much greater commitment to free access to cash to be included in the Bill.
I am sure that, after today’s debate, the Minister will understand that there are some aspects of the Bill that are unacceptable and need to be substantially amended. I look forward to seeing these concerns addressed in Committee. I also look forward with interest to the maiden speeches today, particularly at this point to that of the noble Lord, Lord Remnant.
Lord Remnant (Con) (Maiden Speech)
My Lords, it is a great honour and privilege to make my maiden speech today on this important Bill, in which I declare my interest as a director of Prudential and chairman of Coutts. When I remarked to a friend that I was waiting to speak on a topic of which I had some knowledge, if not expertise, he rather acidly observed that it would then be a very long time before your Lordships heard from me.
I thank noble Lords from all sides of the House for their support and encouragement in the last few months. I am also extremely grateful to all the officers and staff, particularly the doorkeepers and police officers, who have been so helpful in their advice and guidance.
The first Lord Remnant was my great-grandfather. He represented Holborn in the Commons for 28 years, from 1900 to 1928. He is perhaps best known for introducing successfully—but against much opposition, I regret to say—a Bill guaranteeing members of the police force one day’s rest off duty in every seven.
My father was a more infrequent attender, but I well remember sitting on the steps of the Throne, as my son does now, listening to his maiden speech in a debate on invisible exports, which I hope meant more to their Lordships at the time than it did to me as a callow youth.
As for myself, I followed my father into the City, as a chartered accountant and then an investment banker. Since then, I have sat on the boards of major listed financial services companies and so have long been subject to the rules of our financial regulators. I have also been a regulator myself: last year, I stepped down from the Takeover Panel after 10 years as deputy chair.
At the time of the financial crisis, I was working within government as chairman of the Shareholder Executive. I then sat on the board of UKFI, which was responsible for the Government’s shareholdings in the banks, and I was also appointed to the board of Northern Rock as one of the two Government-appointed directors. I can then perhaps view this Bill through the lens of both a regulator and a regulatee, and from the perspective of government, setting a framework which strives to find the right balance between the two.
The overarching objective of this Bill must be to deliver positive change and protection for individuals and business. To achieve this, we must maintain the high regulatory standards that are a cornerstone of the current regime and boost the competitiveness of the UK globally. These two aims need not conflict with each other. Indeed, they should be complementary. Further, there is a quid pro quo for the independence of our regulatory regime which underpins its effectiveness, and that is appropriate scrutiny and accountability of the regulators and their powers.
My main focus is on the regulatory framework proposed and its implications. Of particular note is the introduction of a secondary objective for the PRA and the FCA to promote the sector’s international competitiveness to support long-term growth. This will give business the confidence to expand and invest in the future.
This is an objective which would be by no means unique to the UK. Indeed, it is established globally. My own current experience is in the Far East, where Hong Kong, Singapore and others all have the promotion of economic growth and/or competitiveness as a key objective. This leads to a congruence of interests between industry and regulators, promoting greater access to financial services and improved client offerings.
So, this is a very positive additional dimension to the conduct and capital and solvency rules which should be the prime role of a regulator. Importantly, the Bill proposes economic growth and international competitiveness as a secondary objective. I believe this to be an appropriate balance. All investments carry risk. If the system is such that it effectively mandates regulators to use their powers only to reduce, if not eliminate, risk, the result is likely to be reduced innovation, increased costs and less consumer choice.
The prime responsibility for taking appropriate risk within established risk appetite must lie with companies themselves, in accordance with rules made by regulators and those within a framework set by Parliament. This new secondary goal will mandate our regulators, in the exercise of their powers, to consider proportionality and global competitiveness.
This Bill transfers significant additional powers to our regulators, as EU regulation is transferred from the statute book to the regulators’ rulebooks. So, it is also right that there should be a commensurate increase in accountability and transparency. We need a regime which balances consumer benefits with regulatory burden and cost. Too often, rules expand in response to a perceived problem but there is little analysis of the often greater cost of regulatory intervention.
Therefore, I am very much in favour of the additional reporting requirements which have been introduced into the Bill at this stage, and the strengthening of cost-benefit analysis through the creation of new CBA panels. At a later stage there will be the opportunity to clarify and strengthen these specific proposals further, and to enhance the scope of parliamentary scrutiny. I hope that my noble friend the Minister will be receptive to this.
I believe that these proposals overall are balanced and pragmatic. The Bill lays the foundation for a more competitive financial services sector, without compromising the UK’s high regulatory standards, which can now be tailored to our own specific needs.
Lord Grimstone of Boscobel (Con)
My Lords, it is a special pleasure to follow my noble friend Lord Remnant. His eloquent maiden speech clearly demonstrates his deep expertise in financial services. This should be of no surprise to your Lordships, because the City is truly part of his DNA. I had the pleasure of serving on the board of the Shareholder Executive under my noble friend’s chairmanship, and I have witnessed at close quarters his knowledge and integrity. His presence in your Lordships’ House will contribute massively to our wisdom and expertise. I welcome him.
This is an important Bill. The financial services industry is our most important industry. It is a huge driver of economic activity, it creates high-quality jobs throughout the UK and the taxes it pays underpin our ability to provide public services. It is therefore even more remarkable that Governments have paid so little attention to the City in recent years. For example, too little priority was given to the City in the Brexit negotiations, and in general Ministers have shown a marked reluctance to support the industry through either words or deeds. At times, I have even felt that Ministers were almost ashamed of the City’s existence. Partly as a consequence of this, it is no longer the global force it was. This decline will continue unless something is done about it. Action is urgently needed. Speaking as a former chair of TheCityUK and of two of our largest financial services firms, I have to say that this is a very sorry state of affairs.
This Bill provides the potential to remedy matters. Whether it succeeds in this will depend critically on whether the secondary legislation and rulebooks which will come in its wake, as well as ensuring financial stability and consumer protection, will allow the industry to flourish and remain globally competitive.
Enacting this Bill will, though, mean that the success of our most important industry will rest more than ever on the shoulders of its myriad regulators. The challenge is that our regulatory regimes are not best in class and, despite the many talented people who work for them, neither are our regulators. We have to do something about this. We have created a culture, not just in financial services but elsewhere in our economy, that too often has allowed and, indeed, encouraged regulators to operate in a bubble of their own making. This has no doubt often been rather convenient for Ministers because they have been able to hide behind this bubble.
Your Lordships know what a strong supporter I am of regulatory autonomy, but that autonomy must be exercised within an envelope set by Parliament, with proper accountability and transparency and subject to strong and continuous independent oversight by people who know what they are talking about. No regulator is an island.
Late last year, the Economic Secretary to the Treasury exchanged letters with the CEOs of the PRA and the FCA about the need for world-leading levels of regulatory operational effectiveness. I congratulate him on this initiative. It is interesting that, in his reply, the CEO of the FCA highlighted that it is the FCA board that has statutory responsibility for overseeing the effective use of the FCA’s resources. As an exemplar, this caused me to look at the membership of that board. Although I have no doubt that its independent members fulfil their roles diligently and exercise due care and attention, it is striking that, according to their bios on the FCA website, not one seems to have served on the board of any UK-listed company. I also note that the incoming chairman of the FCA, who again is no doubt very able, has spent the last 20 years of his professional life in Hong Kong—a city I know well, but which is, to say the least, a rather different environment from the City. It is all rather surprising.
I would be very interested if my noble friend the Minister, in responding to this debate, could let us know whether she is satisfied that the FCA board and the other boards that oversee our regulators have the firepower to carry out their appointed tasks.
Baroness Tyler of Enfield (LD)
My Lords, I refer to my registered interests as president of the Money Advice Trust and as a member of the Financial Inclusion Commission. I congratulate the noble Lord, Lord Remnant, on his excellent maiden speech.
Although I welcome the Bill overall as an opportunity to strengthen and improve the regulation of the UK’s financial services, in too many places it feels like a missed opportunity. I will focus my remarks on financial inclusion, where I feel the Bill currently falls shorts in important respects. I make no apology for this emphasis, given the huge power imbalance that exists between banks and other financial services providers, who have plenty of people to speak on their behalf, and vulnerable customers, who have far less of a voice in these debates.
As highlighted so compellingly this afternoon, the lack of focus on improving the transparency and accountability of the regulators, and on giving Parliament greater powers of scrutiny, sadly runs through the Bill like a stick of rock. I hope we will be able to redress this balance as it progresses.
The 2017 Lords Select Committee on Financial Exclusion, which I had the privilege to chair, called on the Government to set out a clear strategy for improving financial inclusion in the UK. Without such a strategy, it is simply not possible to make the progress needed to ensure that everyone can access the financial services they need at a price they can afford. The committee also recommended that the Government expand the FCA’s remit to include a statutory duty to promote financial inclusion as one of its key objectives. These key recommendations were reiterated in the 2021 follow-up Liaison Committee report. I readily acknowledge that setting up a Financial Inclusion Policy Forum in response to the Select Committee report provides welcome discussion of some of these issues, but it is no substitute for a government-led strategy, alongside a regulator that has statutory responsibility for ensuring that financial inclusion plays a part in its everyday operations.
We now have the opportunity to plug the “black hole”, as I often call it, that exists between social policy and financial regulation. We have heard time and again how consumer groups are passed between government departments and the FCA, with no one institution willing to act; and how the Treasury refuses to act on well-known issues such as the poverty premium, which we have heard about this afternoon, until enough data is collected, when the only organisation able to obtain this data is the FCA, which in turn says it is not its remit to collect such data.
The Bill provides the opportunity to plug this gap and prevent the most vulnerable falling through the cracks. By giving the FCA a cross-cutting “must have regard” to financial inclusion duty, along with a requirement to publish findings, it will have the ability and incentive to ensure that the needs of those currently denied access due to affordability issues are considered. This will allow clarity on how far market regulation can address financial exclusion and where government-instigated social policy is needed. I will bring forward amendments on this in Committee.
Turning briefly to the duty of care, another Select Committee recommendation, I concur completely with the sentiments expressed by my noble friend Lord Sharkey. A consumer duty as brought forward by the FCA is not a duty of care. The former has many exemptions and does not provide wronged consumers with the right to secure monetary redress through litigation. For accountability and parliamentary sovereignty, it is a matter of real concern that, after Parliament passed the Financial Services Act, placing a duty on the FCA to consult and bring forward rules on a duty of care, it chose not to. This Bill provides an opportunity to remedy this unsatisfactory state of affairs.
Finally, I turn briefly to access to cash. I welcome the commitment to legislate to give consumers greater protection in accessing and depositing cash. It is long overdue. Difficulties in accessing cash by the 5 million people—I know other figures have been quoted, but that is the figure I have—who still rely on it have grown hugely in recent years. The UK has lost half its bank branch network since 2015 and there has been a 25% decline in free-to-use ATMs since 2018. It is a particular problem for many of the elderly, those with certain physical disabilities and mental health conditions, and those in deprived communities who are digitally excluded and financially vulnerable. I hope to see more action in this area, including extending the FCA’s remit to consider other services that should also be protected. I would like to see the Bill guaranteeing a minimum level of free cash access services and local authorities having the right to request a review of local cash provision.
Lord Butler of Brockwell (CB)
My Lords, it is a particular pleasure to start by congratulating the noble Lord, Lord Remnant, on his maiden speech. As it happens, I have often heard him speak before, but always in a frivolous context, so I was awaiting his speech today with particular interest—and he did not disappoint. As the noble Lord, Lord Grimstone, said, his expertise will be a great asset to this House as we consider the Bill.
The regulatory issues have been well identified in the speeches that have been made. There seems to me to be three types of balance: the balance between freedom and regulation; the balance between regulatory independence and the role of the Executive; and the balance between the Executive and Parliament. It is particularly important that we get this balance right in debating this Bill about an industry which is of such huge importance to the British economy and where international competition is so very strong.
I welcome the Bill; it has much to be commended in it. In the first place, it is based on a proper examination of the regulations inherited from the EU. That included extensive consultation with practitioners in the future regulatory framework review between 2019 and 2022. In this respect, it is markedly different from the cavalier attitude taken by the Government in other areas of inherited EU law in the Retained EU Law (Revocation and Reform) Bill. Secondly, although I have not always agreed with the noble Lord, Lord Forsyth, on Brexit, I think it is a particularly important and welcome benefit of Brexit that the United Kingdom has the freedom to establish our own regulatory regime without being bound by some of the more ponderous regulations of the European supervisory authorities. However, that freedom needs to be exercised with prudence.
There has been much reference to the provision in the Bill to give regulators a new statutory objective to promote the international competitiveness and growth of the UK economy with special reference to the financial services industry. That objective has been generally welcomed, but as the noble Lord, Lord Sharkey, said, the Government owe us an explanation. Before the 2008 crisis, the Financial Services Authority, the predecessor of the FCA and the PRA, had a duty merely to “have regard to” the competitiveness of the UK financial services sector. In the post-mortem on the 2008 crisis, the Treasury recognised this obligation as a factor in regulatory failure leading up to that crisis and, as the noble Lord, Lord Sharkey, said, it was consequently removed from the regulatory remit by the Treasury and Parliament. Just over a decade later, Ministers are seeking to give the regulators a stronger statutory requirement to make sure that their regulatory activities promote the international competitiveness of the financial services sector, not just to have regard to it. I ask the Minister to explain, in replying to the debate, why the Government have concluded that this reversal is safe.
In the proceedings on the Bill we will be debating the degree of delegation of powers to regulators, the balance between the Treasury’s power to make recommendations to the regulators and the regulators’ independence, and the mechanisms for Parliament to oversee these important operations. However, we have to recognise that parliamentary control, to which there has been much reference, is made worse by Parliament’s own procedures. Even when Parliament is given a role in approving statutory instruments, Parliament’s inability to amend such instruments, and its unwillingness to reject them, makes such power purely nominal. The remedy for that lies in our own hands.
Having said that, I believe that there is much to support in the Bill. Although there are plenty of issues for the House to consider and debate, I regard this as an important Bill, and I welcome it.
Lord Naseby (Con)
My Lords, I too congratulate my noble friend Lord Remnant on his maiden speech and, in particular, on the depth of that speech in relation to the Bill we have before us this evening. I hope he will contribute in Committee.
My primary congratulations go to His Majesty’s Government. I have had the privilege of serving in the other place and here for 48 and a half years, and I do not think there has been a Bill as helpful to the City of London as this Bill has the ability to be. I say to my noble friend on the Front Bench, and to the whole of her team, well done on actually producing a Bill that is going to help the City of London. There have been a whole lot of positive reactions from the financial services market and from the City itself. I shall pick out just two that I received. First, “The City welcomes the creation of a more nimble, agile and proportionate regulatory regime for the implementation of the FCA’s and PRA’s growth and competitive secondary objective, alongside improving the speed of FCA authorisation turnaround times”. That is a bit mechanical, but it is very important. Equally, and even more important, probably—the noble Baroness, Lady Hayman referred to this—on the issue of the green area, “The world’s financial system through engaging internationally has to facilitate international standards and global alignment, ensuring that the ESG taxonomies are interoperable”. That seems to me absolutely vital. So much for the congratulations.
The other dimension that I noted the other day is the 30 Edinburgh reforms that the Chancellor has brought forward, almost—but not—on the sly. There is no doubt that they are important. One will drive investment into UK growth companies, in particular the new guidance for asset pooling of local government pension schemes—I declare an interest as a trustee of the parliamentary pension scheme. I can assure my noble friend that it is much needed and to be welcomed. I noticed that the leaders involved in this have got together and set up an organisation called the UK Capital Markets Industry Taskforce. That in itself is enormously welcome.
I want primarily to comment on an area that nobody has mentioned to date, thankfully. For some 25 years, I have been involved in the mutual movement. I had the privilege of being the chairman of the Tunbridge Wells Equitable Friendly Society for just over 10 years. As my noble friend on the Front Bench knows, at the moment a Private Member’s Bill from Sir Mark Hendrick, the Co-operatives, Mutuals and Friendly Societies Bill, is going through the Commons. It is there to deal with the scandal, frankly, of the demutualisation of mainly our building societies, which was not to the benefit of investors in the building societies but for somebody else to turn a penny—or several pounds. In its present form, that Bill will match the best legislation that exists in many other countries. It also introduces a voluntary power to enable a mutual to choose a constitutional change so that its legacy assets would be non-distributable, details precisely the destination of any capital surplus on a solvent winding up, and outlines the procedures in the mutual’s moves. That is a major step forward, and I very much hope His Majesty’s Government get it on the statute book. It will certainly have my support.
Secondly, there is the position of raising capital for the mutual movement. I had a Bill, which is on the statute book as the Mutuals’ Deferred Shares Act 2015. It was welcomed by all parties but unfortunately has been bogged down somewhere in the system and very little capital, if any, has been raised by the mutual movement. I understand that the Government are thinking of asking the Law Commission to look at that. I say to my noble friend that that is kicking it into the long grass a bit. I hope we can look at it again.
Finally, we come to the regulatory dimension. It seems to me, as one who sat on the Public Accounts Committee in the other place for some 12 years, that the reason that succeeds is that it is basically backed up by a government body providing the evidence. Maybe that framework is something we should look at. Something certainly needs to be done. We have listened enough this evening to know that movement in that area is absolutely vital.
Lord Sikka (Lab)
My Lords, I too welcome the noble Lord, Lord Remnant, to the House and thank him for his excellent maiden speech.
This is not a Bill that will clean up the City, enhance its accountability or streamline the regulatory architecture. There are at least 41 overlapping and buck-passing regulators. These include the Bank of England, the FCA, the PRA, 25 anti-money laundering regulators, OPBAS, the Pensions Regulator, the Pension Protection Fund and sundry others, all poorly co-ordinated. The enforcement architecture is also fragmented. It involves the SFO, the Crown Prosecution Service, the FCA, the National Crime Agency, the Bank of England, the Treasury, the Home Office and God knows who else. Can the Minister explain why this potholed regulatory architecture will not hinder the Bill’s objectives?
The FCA has been severely criticised for its failures in episodes such as Connaught, London Capital & Finance, Blackmore Bond, the Woodford fund and Link Fund Solutions. The Work and Pensions Committee’s July 2021 report relating to protecting pension savers said that the FCA’s evidence lacked integrity. John Swift KC’s December 2021 review into the supervisory intervention on interest rate hedging products criticised the FCA. The National Audit Office investigation into the British Steel Pension Scheme was also critical of the FCA. Can the Minister tell us why the Bill has not been preceded by an inquiry into the operational efficiency of the FCA?
The regulatory apparatus in this country is adept at sweeping things under its dust-laden carpets. Indeed, the Government themselves have done that. They have a history of shielding banks engaged in “criminal conduct”. A good example is that of HSBC, which the Bank of England, the Treasury and the then banking regulator colluded to cover up. This week the Times reported that Barclays, HSBC, NatWest, Standard Chartered and Lloyds are facing nearly 100 lawsuits, mostly in the US, for violating competition law, fixing prices, interest and exchange rate violations, sanction busting and terrorist financing, yet we have not heard a peep about it from anybody in the UK. As usual, they think things will go away. The Bill dilutes the current regulatory system and even eliminates the modicum of independence enjoyed by regulators by empowering Ministers to direct the FCA. Ministers’ objectives are entirely different from the regulators’.
Since 2015, 4,685 bank branches—almost half—have closed. Many districts and villages do not have a physical bank branch and millions cannot access online banking, so it is hard to see how the FCA is promoting effective competition when people just cannot access banking services. Can the Minister explain how the Government are dealing with disappearing bank branches?
The Bill adds an international competitiveness element to the FCA’s remit—something that was removed after the last crash, as others have said. This really opens the floodgates to reckless practices. The regulator would need to look at what Cayman, Bermuda, Belize and other jurisdictions are doing and use those as a benchmark to recalibrate UK regulation. This is ultimately a race to the bottom and will surely undermine the prime objective of securing financial stability.
The collapse of FTX and other companies has led to losses of nearly $1 trillion, which shows that crypto assets and currencies are highly dangerous. Yet instead of banning these dreamt-up currencies, the Bill legitimises the trade. That will send a message to ordinary people that it is perfectly safe to hold and trade in those assets. After all, it is regulated. The ultimate result will be that, before long, the regulators will be paying millions of pounds in compensation. I urge the Minister to reconsider this part of the Bill, because it could well be the beginning of the next crash. In due course, I will table a number of amendments.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I need to begin by reminding the House that I have two interests. I am an approved person under the FCA rules, and I chair a regulated firm.
The Bill is big and important. I always felt that the task of trying to create a Europe-wide regulatory structure to deal with the many different types of financial markets—from quite small and unsophisticated to quite big, as we see in London—was going to be a big ask. Therefore, I was not surprised when we found a number of pinch points, many of which did not operate to London’s advantage. Given that the Bill’s strategic objective is to onshore our regulation, to get rid of one size fits all and to operate within a risk-based assessment framework appropriate to London, I support the Bill.
There are lots of things I would like to talk about, but I have only five minutes. I would like to talk about cash and the role of MiFID II, but I will focus on process. Here I follow the noble Lords, Lord Sharkey and Lord Butler. How do we get from here to there? What is the process to be followed? How is it envisaged that Parliament will play a role in the process envisaged under Chapter 1, Revocation of Retained EU Law? As the noble Lord, Lord Butler, pointed out, this Bill is a carve-out of a much larger Bill that will come before your Lordships’ House in a few weeks.
I chair the Secondary Legislation Scrutiny Committee and we have been taking evidence from Ministers on some of the practical aspects behind the Government’s thinking. I suspect that not many of us—not even my noble friend Lord Forsyth—who voted for Brexit thought that this risked handing powers from Brussels to Whitehall without any serious effective parliamentary scrutiny or involvement along the way.
I have made a rough count of the number of regulations listed in Parts 1 to 3 of Schedule 1; there are, I think, 246. Some of these will be technical and of no significance; others will not. It is this fact that makes the Bill a framework Bill. At the moment of passing the Bill, Parliament will not know what it is signing up to. That is really important. Will all of these 250 or so regulations be treated in the same way? There appears to be no triaging process to sort the important ones from the less important ones. I fear that the idea of saying “Affirmative resolutions go this way, and negative resolutions go that way” may not be sufficient in as complex an exercise as this.
There is a widespread view—again, pointed out by the noble Lord, Lord Butler, in his remarks—that the existing parliamentary powers for scrutinising secondary legislation are inadequate for the increasingly heavy weights being placed upon them. When my noble friend the Minister comes to wind up, will she tell the House what supporting documentation will be made available in respect of each regulation, to aid parliamentary scrutiny? Under current law, any regulation that carries an impact of more than £5 million is required to have a specific impact assessment, tabled at the time the regulation is laid. If this is now not to be the case, there is a real danger of Parliament being effectively muted.
Secondly, an important statutory requirement is the provision of post- implementation reviews. Post-implementation reviews decide where hope and expectation met reality and how they clashed. If we are not going to have post-implementation reviews—PIRs—then the opportunity for improving government performance will be greatly missed.
Finally, there is the question of tertiary legislation. Tertiary legislation is where the Government hand away the pen to another body, usually having very little if any democratic accountability. Despite that, the laws and regulations that these bodies produce bind us all just as tightly as any other law. Can my noble friend the Minister confirm my understanding that, under Clause 4, all tertiary legislation will be subject only to the negative procedure? If I am right about that, then I am afraid I shall regard this as a very disappointing response.
To conclude, I support the direction of travel of the Bill but, as we enter this brave new world, we should at the same time not allow the role of Parliament to examine, scrutinise and hold the Government to account to be further reduced.
Lord Ashcombe (Con) (Maiden Speech)
My Lords, it is a great honour to speak to you today for the first time, concerning the Financial Services and Markets Bill being introduced by the Minister, my noble friend Lady Penn. Before continuing I must declare my interest as an employee of Marsh Limited, the insurance broker.
I would like to take a moment to thank the many who have shown me huge kindness on my arrival in the House feeling like the new schoolboy all over again. I thank the doorkeepers, clerks, special advisers, librarians and Black Rod for their generous advice on so many issues. In particular, I would like to thank my noble friends Lord Glenarthur, Lord Ashton, Lord Borwick and Lady Sanderson, who have encouraged me and given me great help and guidance. Finally, without the help of the Opposition Chief Whip, I think I would still be wandering the passages of this labyrinthine building even now, two months later, yet to be discovered, totally lost. I hope he does not regret it.
The Cubitt dynasty was founded by Thomas Cubitt, who was the first to establish the building contracting business as we know it today. In the process, he became one of the great developers of early 19th century London, including in the development of the Grosvenor estate from Belgravia to the Thames. Two of his best-known buildings are the east front of Buckingham Palace and Osborne on the Isle of Wight. It was not he who was awarded the Ashcombe peerage but his son, my great-great-grandfather, in 1892. George Cubitt served in the House of Commons for over 30 years followed by 25 years in this House. His son Henry followed in his footsteps but was very unfortunate in that he lost his first three sons in the Great War. They are remembered on the Royal Gallery memorial. In 1920, the family building company built the Lutyens-designed Cenotaph in Whitehall.
I inherited not from my father but from his first cousin. I was brought up in the Republic of Ireland and took a civil engineering degree here, then entered the world of insurance where I have spent 35 years working in the energy sector. It is the insurance aspect that brings me here today. Many of us have experience dealing with personal insurance but there is a great deal more to the subject than that. Insurance is one of the country’s greatest economic strengths and a source of vital capital to an increasingly fractious global risk landscape.
Indeed, without the abilities of the London insurance market, grain and other vital foodstuffs trapped in Ukraine would not have been exported last year to those countries desperately in need of food; as the sanctions start to bite there have been many restrictions put in place, but the market has responded by continuing to provide insurance on a humanitarian basis. Also, development and investment in new technologies would be significantly reduced. An example of the London market innovation is the provision of insurance for the surge in green and blue hydrogen prototypical initiatives to reduce carbon footprints and combat climate change.
Insurance has often been portrayed as the poor relation of the City of London. However, this financial sector today employs almost 50,000 people. We have the highest concentration of insurance-related intellectual capital, experience, insurers, brokers and affiliated professional services. This is what makes London a world-leading global insurance market. Using 2020 data, the London market share of the worldwide premium is in excess of $120 billion, although the market share of 7.6% has been static over the last five years. It is larger than its next three competitor markets—Bermuda, Singapore and Zurich—combined but is continually being challenged. The sector generated 24% of the City’s GDP and just under 1.8% of the United Kingdom’s GDP.
One of the secondary objectives of this Bill is for the regulators to promote the growth and competitiveness of the UK economy. An area where the London market has no participation is captive insurance companies. This would certainly be an opportunity for growth as it is a $54 billion industry. Even UK companies such as Network Rail and Transport for London have their captives in foreign jurisdictions. These captive insurance companies are designed to provide insurance to their parent company or its entity. It is no longer the tax legislation, an oft-cited reason for this being the case, but the regulatory hurdles, as the regulators treat them as commercial insurance companies.
Regulators will always remain an important part of the checks and balances of financial business, but they need to be proportionate in recognising that personal consumers need a greater level of protection than the more sophisticated companies, which have significant experience and take professional advice on how to manage their risk protection. It should not be one size fits all.
Secondly, the Bill currently allows the regulators to determine how they believe they have met the requirements of the competitiveness objective. This suggests that they can mark their own homework. Would it not be preferable to have a set of key performance indicators laid down in the Bill, by which they can be measured when reporting back to the Government and Parliament?
With these thoughts in mind, I thank noble Lords for this opportunity and look forward to supporting this Bill, promoting growth and competitiveness for our financial services industry and, ultimately, growing this vital sector of the economy.
Lord Altrincham (Con)
My Lords, it is an honour to follow my noble friend Lord Ashcombe, to welcome him to this House and to reflect that it really is a blessing for this Bill that there are three maiden speeches. My noble friend has spent his whole career in insurance. We nearly met around the age of 30, when he was working at Lloyd’s of London but he has always otherwise been at Marsh. He brings expertise to us in financial services that is often, as he said, a little overlooked.
In addition to insurance experience, it is worth adding that my noble friend brings us experience in energy. His whole career has been around energy, which we quite often talk about in this House. Energy and energy infrastructure are important, as is understanding how that infrastructure in this country is laid out. My noble friend brings us expertise in that area. Finally, I would mention that three noble Lords have already asked him for insurance advice. At this time of year, we all have to work out endorsements and exclusions in policies, with the small print and all the rest of it. We may have only one Peer—certainly one Peer in the Chamber today—who really understands this stuff. He would be welcoming of any inquiries as well. He is very welcome and I look forward to working with him for many years ahead, and indeed on the Bill.
Turning to the Bill, I declare my interests as a director of South Molton Street Capital, Financial Services Capital and, in Manchester, the Co-Operative Bank. In the Autumn Statement, the Chancellor reminded us of the importance of growth. He specifically referenced energy, broadband, road and rail. The shadow Chancellor has made some very similar comments, so it is particularly important that we reflect on how the Bill, among the other financial Bills that we have seen, can help to support that growth, in particular with reference to infrastructure. We see Bills come through the Chamber and imagine that they will be financed by somebody, but there is going to be a limit to how much the Government can really support infrastructure investment. The OBR has already said that the Government will need to reduce infrastructure spending in two years’ time.
This means that spending on infrastructure will rest on the private sector and unlocking that private sector capital really rests on the Bill, so it is very welcome that Chapter 3 makes reference to growth. As we know and have heard from many Peers, the regulators have been somewhat cautious and prudent, for the reasons well expressed. At this point, we need to find ways to unlock capital to support infrastructure and for the wider economy. We might look carefully at Chapter 3 and reflect on how to address the growth opportunity, but also some of the concerns expressed about adding risk, or the prudential issues, which have been well covered.
The regulatory environment needs to be a little refreshed. Nearly immediately after this Bill was started in the House of Commons, on 7 September, we ran into the extraordinary pension LDI debacle. This was around the time when the Bill was going into Committee. It is worth reflecting on how we got to this extraordinary situation, which in some ways arises from an abundance of caution; that is to say, it goes in several steps.
Step 1 was to require companies to reflect actuarial changes in the valuations of their pension funds in their annual accounts. These are modelled changes of future liabilities and, because rates were very low, those liabilities felt very high at the time. It was a prudent thing to do; at the same time, it was not commercial and did not reflect a broader commercial understanding.
Step 2 was, remarkably, to de-risk these funds—that is to say, de-risk them from the point of view of the company and not, incidentally, necessarily that of the beneficiaries—by moving them into gilts. There not being sufficient long-dated gilts, they were moved into derivatives of gilts. These funds were suddenly hugely invested in derivatives for the purpose of de-risking. Again, this de-risking looked somewhat prudent. It is not, as we know, but it looked somewhat prudent then. At the same time, these enormous funds, which are effectively closed—they are in run-off and are barely supervised, while their beneficiaries have little control of them—were invested in an enormous amount of financial derivatives.
Had this growth chapter been in place, some of this error might have been caught. We had an extraordinary situation whereby very large captive funds were not invested in long-dated investments in this country or in infrastructure; we also had the savings of Canadian public schoolteachers making long-dated investments in UK infrastructure, while the savings of our own teachers were put into financial derivatives. This extraordinary debacle is an illustration of how prudent, cautious, step-by-step regulation can lead you into enormous risks.
I commend and support the Bill, which is extremely well thought through and, as the Minister explained, has been broadly consulted on. But regarding Chapter 3 and growth, I hope we will discuss in Committee the opportunities to invest in infrastructure and perhaps to meet the green agenda, which has been mentioned—again, that is often infrastructure. In Chapter 3 lies an opportunity to direct financial regulation for the benefit of the economy and of this country, and to meet the needs of this Government and indeed the next Government.
Baroness Northover (LD)
My Lords, I too congratulate those who have just made their maiden speeches. Their expertise will be very welcome. The most reverend Primate the Archbishop of Canterbury spoke of values; others have made it clear that values and self-interest can and should be aligned.
My focus here will be on climate change and the transformative role the financial services sector can and must play in combating this. My question is therefore whether this comprehensive Bill helps to deliver the UK as a green finance centre, as the Government have promised. I noted that the Minister emphasised in her speech that our financial services need to be open and green, as well as technologically advanced.
We are familiar with the pledges agreed by Governments in 2015 in Paris, seeking to keep global warming below 1.5 degrees. We know how far we are from meeting that. Developed countries’ money and pledges are vital but will not deliver on the scale required. A key change that occurred at the Glasgow COP in 2021 was business and finance becoming involved, with outstanding leadership from Mark Carney. That is potentially transformative.
As the noble Baroness, Lady Hayman, pointed out, at COP 26 the Government committed to creating the world’s first net-zero-aligned financial centre and announced that they would mandate large companies to publish their net-zero transition plans and climate reporting standards. Rishi Sunak described the UK as
“the best place in the world for green finance”.
As a trade envoy, I noted the high reputation of the City of London. It needs to maintain that leading role. The Government also committed to match the ambition of the EU on green finance, with particular reference to disclosures of sustainability impacts and the development of a green taxonomy. The UK became the first G20 country to mandate its largest companies to disclose climate-related data.
At COP 26, the International Sustainability Standards Board was announced, to seek global harmonisation in this area. The UK needs to continue to play a leading role in that. Consumers, the public and investors are increasingly scrutinising the green credentials of companies and looking at what banks and funds are investing in. This is where the world is heading. The noble Lord, Lord Ashcombe, has just made clear that the insurance industry is already addressing this. Just as we have seen that the decision to end the sale of new petrol and diesel cars by 2030 has given a major boost to the EV sector, because the automotive industry can see which way it needs to head, the same clarity of intention is required in the financial sector. We need to ensure that regulation shows the direction of travel.
As Chris Skidmore has said in relation to his net zero review for the Government, we may be committed to net zero by 2050, but are the guardrails in place to deliver that? Those guardrails must include regulation. Therefore, what do we see in this legislation? As others have pointed out, the Bill states that regulators should only “have regard” to climate goals. There are seven other principles to which the regulators must also have regard. These are subsidiary to the strategic and operational objectives, as the noble Lord, Lord Vaux, my noble friend Lady Sheehan, the noble Baroness, Lady Hayman, and the right reverend Prelate the Bishop of St Albans have all pointed out. That must be addressed as this Bill goes through.
Shortly before this Bill was announced, it was reported that the Government had removed from the Bill the expected sustainable disclosure requirements. These would have required large companies and financial institutions to disclose and justify their environmental impacts, their alignment with the UK’s green taxonomy and their net zero transition plans. With the publication of their Greening Finance road map in 2021, the Government reaffirmed their commitment to developing a green taxonomy and sustainable disclosure requirements, yet these are delayed.
In the meantime, the EU has legislated in this area. We have already fallen behind, despite the Government’s declared ambitions. HSBC has just announced that it will no longer finance new oil and gas fields. That is the future. Others need to do likewise, with the transformative effect that will have. Regulation can spur that on. This Bill, replacing EU regulation with specific UK regulation, needs to make sure that the UK and London are forward looking, leading the way, modern and drawing in green investment and jobs. I can assure the Minister that there will therefore be amendments to this Bill in this vital area, so I suggest that she starts writing round now.
Lord Thomas of Cwmgiedd (CB)
I congratulate the noble Lord, Lord Ashcombe, on his maiden speech and in particular on drawing our attention to the importance of the insurance industry to London’s financial centre—which is often overlooked. I too welcome the Bill warmly and express my interest as chairman of the London Financial Markets Law Committee. I draw attention to that interest because, in the few minutes I have, I would like to ask some questions about the central issue in the Bill: the extent of delegation. How do we do it? How to we make it accountable? One must bear in mind that regulators have two functions. The first is to make law that is binding on us; the second is to interpret and enforce that law when there is a dispute.
I wish to ask four questions. First, are the powers that Parliament is giving to the regulators and delegating to them ones that they can exercise more appropriately than Parliament? The answer to that is generally “yes”, but when we look at certain detailed provisions we must ask: are they being asked to make political decisions—which would be wrong—or are we consigning decisions where we just have to hope that they do what they are asked because there is no accountability? The first question is intricately linked to accountability and a judgment on what is right.
Secondly, have we given the regulators a sufficiently clear mandate for the regulations they are to make? As the noble Lords, Lord Butler and Lord Sharkey, pointed out, there are some contradictions in the Bill. Should we examine those and give clearer guidance? We should not complain hereafter if they tell us, “We’re independent, go away”. Another question which particularly interests lawyers is: are we to give more clear direction as to the type and format of regulation? Are they to follow what has become the traditional European and, to an extent, British Government way of writing long screeds of guidance rather than following good, Victorian principles of short, clearly drafted legislation? It is a question we ought to ask ourselves. Vast rulebooks are a complete disincentive to proper regulation. The more we delegate, the clearer the answer to that question has to be.
The third question we have to ask ourselves is: are we sure that enforcement and punishment for breaches are sufficiently independent of the regulators that make law? When we make law, we do not interpret it or punish people for breaching it; we give that to independent people. The more power we give regulators, the more we have to be satisfied that the interpretation is independent. You do not want a rulebook where people turn around and say, “I know it’s not clear, but we know what it means because we wrote it”. That is bad lawmaking. Of course, if we have not got that bit right and we do not have proper accountability, there is another problem.
That ties in with the fourth question. We must ask, in respect of all these provisions: is there sufficient accountability to Parliament, to outside bodies or through an independent enforcement agency separate from the lawmaking part? Having spent much of my professional life dealing with the fallout of regulatory failure, I have no doubt that most regulators are competent and hard-working and that they try their hardest to achieve a good result. However, their life is extremely difficult and, if I were a regulator, I would welcome with open arms proper scrutiny. They need all the help they can get. If you are truly independent—having spent much of my life as a judge, I have had to be independent—you always welcome people who cast a critical eye from the outside. The regulators, therefore, ought to welcome scrutiny and not oppose it.
Baroness Noakes (Con)
My Lords, I draw attention to my interests in the register, in particular that I hold shares in a number of listed financial services companies. This Bill could certainly have been bolder, and it needs to be improved, but it also has my broad support. I would like to touch on just four aspects of the Bill in the short amount of time we have been allowed.
First, the competitiveness and growth secondary objective is welcome, if overdue. We must never forget that, without a strong economy—and in the context of the UK that inevitably means a strong financial services sector—there will be nothing worth regulating. The financial crisis led to a series of risk-averse reforms and a decade of regulatory gold-plating. It is no coincidence that the last decade has been disappointing in economic terms. We need a period of rebalancing.
However, whatever we do in the Bill will come to nought unless the regulators themselves change. I fear that they will find ways to marginalise the new secondary objective. We need them to put the interests of the UK ahead of the comfort blanket of precautionary regulation and, if necessary, to stand against the consensus in international regulatory fora, however comfortable that seems. The PRA’s public statements to date on what it will do with the new secondary objective and the FCA’s radio silence on the subject do not give me any comfort that they get what is needed.
The Government were right to bring forward amendments in the other place to strengthen the regulators’ reporting arrangements to reinforce the new objective. We will need to explore that in Committee to see how it will work in practice, and I suspect that we will conclude that it will need more teeth.
My second point relates to the role of Parliament. I am glad that the Government have finally accepted that there is an important role for Parliament in holding the regulators to account alongside the transfer of huge new rule-making powers. Most of us argued strongly for that in the passage of the Financial Services Act 2021. My noble friend the Minister will not be surprised that I am disappointed that the role of your Lordships’ House is something of an afterthought in Clause 36. I promise her that I will return in Committee not only to the role of your Lordships’ House but to the narrow construct of the remit for Parliament in that clause.
My third point concerns getting rid of retained EU law. Chapter 1 of Part 1 of the Bill is very welcome. I fully accept that replacing retained EU law with something tailored to the circumstances of the UK is a large task, but the Bill needs the discipline of a deadline. The approach of the Retained EU Law (Revocation and Reform) Bill is what we should be seeking to replicate in this Bill.
My final point relates to access to cash, and I fear that I shall disappoint my noble friend Lord Holmes of Richmond, who will speak after me. I fully accept that cash remains important to many people, but the fact is that the use of cash is in permanent secular decline. UK Finance expects only 6% of transactions to be in cash form by 2031, down from around 15% now. The Bill imposes costs on all consumers to maintain access to cash for a decreasing proportion of the population. The Access to Cash Review estimated the cost of providing cash at around £5 billion per annum—to put that in context, that is roughly equivalent to 1p on the basic rate of tax. Trying to preserve cash in our society, as if it is part of our national heritage, is just crazy. The Bill goes too far.
I end with a plea for the Government to bring forward a consolidation of financial services legislation. Most of the Bill comprises yet more alterations to FSMA 2000, which is itself already heavily amended. If now is not the right time for consolidation, will my noble friend the Minister say when that time will come?
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in this Second Reading debate and to follow my noble friend Lady Noakes, about whose points I will say more in a moment. I congratulate the two maiden speakers from whom we have heard. I am very much looking forward to my noble friend Lady Lawlor’s maiden speech; I will not detain her much longer. I also congratulate my noble friend the Minister on the eloquence and erudition she showed in introducing the Bill. I declare my interests in the register, particularly those pertaining to fintech advisory work.
I will focus on two areas: financial inclusion and the regulator, mainly because nobody has mentioned the latter yet. Financial inclusion matters not just for those who find themselves on the wrong side of it. If we can drive financial inclusion, there are not just economic but social and national benefits for each and every one of us. That is why I am pleased to see the access to cash clauses in the Bill. It is important because cash still matters; it matters materially to millions. Looking at the reasonableness terms in the Bill, can my noble friend the Minister say what factors will be taken into account when we look at reasonable access to cash? It is a question of both distance—whether that distance is covered by public transport links— and cost. There are many factors to be considered, and I would welcome more detail on that in her wind-up speech.
As many other noble Lords have commented, access to cash is but one part of this. If there is no acceptance of cash, what currency does cash have if there is no place to spend it? In Committee, it is incredibly important that we look at the whole question of acceptance: which businesses are included; what size they are; what line of business they are in; and business clusters. There are so many issues to consider on how we nail the question of cash acceptance, because, without it, access does not go very far at all, as other noble Lords have commented.
The cashback amendment I tabled to the now Financial Services Act 2021, which my noble friend the Minister was kind enough to reference in her opening speech, demonstrates the enduring importance of cash. Evidence so far, since the introduction of cashback without the need for a purchase, clearly demonstrates that most of those transactions are for £20 or below, and therefore clearly serving individuals who were massively underserved or unserved before the passage of that legislative change.
Finally, on cash, does my noble friend the Minister believe it is time to consider cash as critical national infrastructure, and not just for financial inclusion? In the current uncertain world in which we exist, if there were to be a serious and sustained cyberattack on our financial systems, it seems that cash would provide a pretty robust first line of resilience.
Before noble Lords think that I am all about cash, I am interested in cash only while millions still rely on it and while we have not moved fully to the digital world. The future is inexorably digital, not least for payments. There is nothing necessarily problematic or negative about that, but that future has to be inclusive for all—and the transition to that future has to be similarly inclusive. Is it not high time to build on the work of the Access to Cash Review that the Government commissioned with, crucially, a review of access to digital payments?
On the regulator, as others have said, Parliament needs to consider seriously and urgently what we want our regulators in this space to do, without in any sense encroaching on their independence. What do we want them to do? How do we fit them out to do that? How do we put the structure and resource in place to set them up to succeed? How will we then hold them to account on all the principles which have been set out in that structure? It cannot be the case that it takes nine months for an overseas CEO to be able to come over to work in our financial services. It cannot be that it takes over a year for a start-up business to get a licence to operate in this country. It cannot be the case, as my noble friend Lord Ashcombe pointed out in his excellent maiden speech, that one size fits all. In insurance, how can it be that the same regulatory regime applies whether you are insuring a pet or a plane?
We know how to get this right with regulators. We saw that in the first part of the 2010s with our approach to fintech, and with the sandbox and with GFIN, which came as result of that. There was no better measure of success from the sandbox, and no better KPI, than the fact that it has been replicated in well over 50 jurisdictions around the world. That was all under Project Innovate; we need a second, third and fourth version of that project to drive forward all the opportunities which currently exist, combining common law, new technologies, and the potential geographic and historical benefits for London and the rest of the UK. As everybody in financial services knows, history is no guarantee of future success.
On the international competitiveness objective and the international perspective, what have the Government looked at in taking the best from around the world in this area—not least the MAS in Singapore, the Swiss regulator, and those in Bermuda and Australia, to name but a few?
In conclusion, this is the most important financial services Bill in a generation. It has extraordinary potential—but it is potential; it will not inevitably drive economic social good for citizens, cities, communities and our country. This is an extraordinary opportunity to make things better. In Committee and on Report, let us all work to make it even better.
Baroness Bennett of Manor Castle (GP)
My Lords, having been in your Lordships’ House for a little over three years, I am now on my second financial services Bill, and I have to welcome the level of engagement we are seeing today. I was quite new when the last one happened, and it was in the depths of Covid, but the breadth and quality of debate was not an advertisement for the House. There seemed to be a view that financial services regulation could largely be left to the bankers, hedge fund managers and insurance brokers, yet already today we have heard from the noble Lord, Lord Forsyth of Drumlean, how anyone concerned with house prices should be looking to regulate the financial sector to prevent it being an accelerator of prices rather than a funder of secure, affordable homes. The most reverend Primate the Archbishop of Canterbury said that anyone who wants the banks actually to serve the real economy of small businesses, to which lending has effectively stopped, should be concerned with financial regulation; and of course, anyone who wants a liveable planet with a healthy natural world should be concerned with financial regulation, as the noble Baronesses, Lady Sheehan and Lady Hayman, among others, have highlighted.
We have a financialised economy, including everything from care homes to health provision, public transport to housing, tax dodging to serving oligarchs and plutocrats. Every Member of your Lordships’ House, whatever they regard as their speciality, whether it is alleviation of poverty or delivery of better health education, should be concerned with this Bill, and every member of the public should be concerned with this Bill. So I am going to agree for a second time with the noble Lord, Lord Forsyth, that the official Opposition would be letting the Government and the financial sector off the hook if our Committee stage was consigned to the murky obscurity of the Moses Room. That is, of course, perhaps unsurprising behaviour, given the Times report that the leaders of our official Opposition are heading off to Davos to send a message to the super-rich that Labour is the party of business.
Noble Lords might expect me to focus on nature and climate, but others, most notably the noble Baroness, Lady Sheehan, have already covered at length the “dismissive view” that this Bill takes of the very foundation of our economy, that on which every penny of our banks and every pound in a worker’s pocket depends: functioning ecosystems. But I shall take a more systemic and structural view: what is the financial sector for and what is the economy for? The economy should be in the service of a healthy, prosperous and sustainable society. The financial sector should be a tool for that type of economy, and this Bill should redirect our financial sector towards that. Instead, we have a primary objective of competitiveness. More finance is the aim—snatching it from other nations and growing what we have when we already have too much finance.
The noble Baroness, Lady Penn, in her introduction, proudly boasted that 2.3 million people are employed in the financial sector. We really need to change our thinking here. Human resource is a scarce resource and should be used well. A holder of a maths PhD creating the next complex financial instrument to break the global economy is not an example of it being used well. That person could be improving our health, securing our food supply or increasing the sum of human knowledge. Letting the financiers rip, seeking to lead a global race to the bottom on regulation, when lack of regulation is a huge threat to the security of us all, is heading 180 degrees in the wrong direction.
I could illustrate that point in many ways, but I am going to pick one example—the proposals on position limits in Schedule 2, on page 124 of the Bill. For those in the know, I mention the London Metal Exchange nickel debacle. Some might have read the recent European Economic and Social Committee cry from the heart about much greater regulation of food and commodity trading. As it and many others are identifying, that is a major factor in inflation, hitting every household in the UK and around the world today. A few are profiting while the rest of us pay.
Many commentators—among them I highlight Ann Pettifor, in the Financial Times and elsewhere—are suggesting that commodity derivatives could be the next big systemic risk, because they are so under-regulated. Global commodity markets involve an annual volume of at least $700 billion in buying and selling, with trillions in derivatives piled on to that.
Finally, if we grow the financial sector, we also grow corruption. The City of London is the global centre of corruption. If you do not want to believe me on that, I quote from a debate secured by my noble friend Lady Jones of Moulsecoomb. The noble Lord, Lord Evans of Weardale, chair of the Committee on Standards in Public Life, said that
“we have clearly, as a matter of policy, turned a blind eye to the perpetrators of corruption overseas using London for business”.—[Official Report, 13/10/2022; col. 156GC.]
If we grow the financial sector, we grow global corruption —that is the reality.
Baroness Lawlor (Con) (Maiden Speech)
My Lords, it is an honour to address this House for the first time. I thank all who have so kindly helped in my introduction—Black Rod and her team, the Clerk of the Parliaments, the Doorkeepers and your Lordships, as well as my two supporters, my noble friends Lord Balfe and Lord Black of Brentwood, and my mentor, my noble friend Lady Eaton.
I am grateful to the former Prime Minister, Boris Johnson, for nominating me, and pay tribute to his remarkable achievement in opening a new chapter in Britain’s constitutional and political history. One consequence, this Bill to revoke retained EU law and provide for a homegrown alternative, has won the broad support of the Opposition. It was anticipated in 2018 by the then Chancellor, Philip Hammond, now my noble friend Lord Hammond of Runnymede, who explained that the laws for such an important sector of our economy should be made in this country and under the jurisdiction of our courts.
The Bill reflects the continuity of recent political history and therefore links to my own working life, which began as a historian in Cambridge, where I had moved from my native Dublin. I later switched to contemporary policy, initially education, and then founded and established a think tank in London, Politeia, to bring academic and other specialist attention to broad matters of social, economic and constitutional policy, working with different parties and politicians. More recently, we have published material on the financial sector as part of our work on the future legal framework for trade in goods and services. I therefore declare a special interest in this subject and have written on it, although not at great length.
The Bill aims to revoke retained EU law for the sector and replace it with legislation that builds on the UK’s approach. Under it, UK regulators will have certain powers but also obligations to promote competition and medium to long-term growth. It envisages that the regulators will be accountable to Parliament via the House of Commons Treasury Select Committee and will report on their policy, consult, and engage with statutory bodies.
The Bill, therefore, is concerned in a practical way with a more abstract problem: the role played by officials operating the system under the laws made by Parliament. It aims for regulator accountability, something that will be music to the ears of many, often small businesses which are reluctant to act competitively because they fear they may fall foul of the regulator, although observing the law, and do not understand the mysterious application of the rules.
I hope we shall consider how the Bill’s approach to these two central regulator aims, accountability and competition, can be further strengthened, to avoid the erosion of one of the most dynamic sectors the world has ever known. Competition, the rule of good, clear law and a free economy encouraged businesses to start up and flourish in the City of London, a port and commercial centre to which merchants, shipowners, insurance underwriters and other entrepreneurs flocked, establishing banks and businesses. In this country, small entrepreneurs who staked their future on a start-up could enter the market knowing where they stood in law, and that the laws of this country would act as fairly for them as for established businesses. The Bill opens a new era in the story of this dynamic sector. Providing competition and regulator accountability can be achieved, it will help the sector to be a world leader. I welcome this measure and its aims, with one caveat: that Parliament, in giving the regulators greater powers, does not give them a blank cheque.
Lord Blackwell (Con)
My Lords, it is a great pleasure to follow the excellent maiden speech of my noble friend Lady Lawlor, and to welcome her to the House. I have had the great good fortune to collaborate with her on policy issues over what now amounts to several decades in her role as founder and head of a major think tank with a well-deserved reputation for well-researched and detailed reports—perhaps the hallmark of somebody who started her career as an academic historian. I know that she has wise but spirited and forthright views on many topics, and I have no doubt she will bring that sharp intellect and independent mind to the business of the House. We look forward to her future contributions.
Before I speak on the Bill, I should note my role as a former chairman of Lloyds Bank, but I have no current interests other than as a continuing shareholder. I welcome the Bill, in particular the proposal to add competitiveness to the objectives of regulators, but my fear is that the Bill does not go far enough to redress the overly burdensome nature of the regulatory system that has built up over the last decade. I am not proposing that we turn the clock back to the inadequate regime prior to 2008—many of the reforms introduced then were necessary and are effective—but as my noble friend Lord Hunt of Wirral argued, the excessive regulatory burden on the financial services industry comes not so much from the regulation itself as from the overly bureaucratic way it has been implemented by the UK regulators.
This culture stems from the regulators’ overriding internal objective to avoid the risk of being blamed for failing to do something, with little incentive to balance that against the costs that their intervention may impose on the industry. I fear this tendency to gold-plate is fuelled by the current superficial nature of the parliamentary scrutiny by the Treasury Select Committee in the other place, which tends to focus on naming and shaming someone for anything that has gone wrong. Furthermore, the growth in staff numbers means that much of the regulation of major institutions is undertaken by relatively junior staff who are more likely to stick to a rigid interpretation of the regulatory rules because they simply do not have the confidence or experience to make balanced supervisory judgments.
The senior managers regime, for example, is, in principle, a sensible safeguard to ensure appropriately qualified people are in key industry roles and are held accountable. However, when a major institution has gone through a responsible and exhaustive recruitment process involving an external search firm, it is simply unnecessary and damaging to then have the appointment held up for further lengthy scrutiny by often far less experienced staff at the PRA and FCA. The overly forensic attempt by regulators to pin every mistake on some individual and require consequential penalties has had a corrosive impact, discouraging individuals from making difficult decisions or taking on difficult roles that carry a risk of failure. It has led to a huge increase in bureaucratic processes and documentation, as managers seek to syndicate responsibility and cover their backs.
Another example is the tendency of the regulators to apply a one-size-fits-all approach, unwilling to recognise this may be disproportionate for some sectors or firms. The FCA’s fair pricing review is a case in point: in seeking to address certain consumer pricing practices, the review spread across the whole industry and imposed burdensome data collection on sectors such as the wholesale insurance market, where the participants are skilled professionals. Ring-fencing is another example where the overly rigid application of something which is in principle a sound idea has had a disproportionate impact on banks with relatively small non-ring-fenced activities. The FCA’s worthy objective of protecting the customer has been developed under the customer duty approach to the point where firms fear that even negligent or unreasonable customers will claim redress for buying a financial product that, after the event, causes them a loss. As a result, many products and helpful financial guidance have been withdrawn or repriced out of many people’s reach. This overly protective approach to customers needs to be replaced by a more even-handed objective of simply ensuring fair trading. Caveat emptor has been replaced too much by caveat venditor.
The downside of this overly intrusive regulatory approach is not just the direct costs but, more significantly, the diversion of management time and IT resources away from transforming businesses to better serve their customers. The introduction of competitiveness as a regulatory objective may be helpful to provide a counterbalance. I also welcome the provisions in this Bill for the Treasury to require regulators to review their activities and to set up independent cost-benefit panels, but these measures will not solve the problem without a fundamental shift in attitude, skills and culture within the regulators. I welcome the Chancellor’s commitment in Edinburgh to bring forward further measures to address some of these issues, including reviews of ring-fencing, the senior managers regime and the boundary between advice and financial guidance, but even then, I am not sure we will transform the regulatory approach without a more fundamental reshaping of the organisations and their accountability.
I think it is worth considering whether smaller regulators with fewer and more experienced staff would do a better job of providing supervision, with more considered judgments, and whether the benefit of having two separate regulators outweighs the burden of having two overlapping supervisory teams for major institutions. Finally, while I support the Bill, as other noble Lords have argued, given the powers it transfers to regulators it is important that it is accompanied by a more informed and balanced structure of parliamentary scrutiny that can also hold regulators to account for their new objective of the competitiveness of the industry. I ask my noble friend whether the Leader of the House has any plans to bring such proposals before the House.
Lord Balfe (Con)
My Lords, I draw attention to my entry in the register and I begin by welcoming my noble friend Lady Lawlor. I was one of her sponsors. I am delighted to see her here; she will add huge intellectual firepower to our Benches. I hope not too much of it will be turned on me, as I do not think we agree very much on the European Union. I also thank my noble friends Lord Remnant and Lord Ashcombe, who will also add considerably to these Benches.
This is an interesting Bill. It is a good basis for a debate, and it follows a good deal of consultation. I am afraid that I disagree with my noble friend Lord Holmes, who is not in his place, on the subject of cash. Things move ahead. In 2020, I went to our local Turkish shop just after Covid started. I offered the shopkeeper some money and he said, “We’ve stopped accepting money, sir. We might get Covid.” I thought, “This is interesting.” Believe it or not, I stopped using money. Of course, the difficulty for poorer people is that they do not have access to credit or debit cards that they can just hand over all the time, so we need to retain the ability to pay in cash. But shops will maintain that for us, because they will want to continue to sell their goods, which is a pretty good thing.
As I see it, the growth of cryptocurrency, which I regret, is the next big scandal on the horizon—I thank the most reverend Primate for giving me a drink of water; it is jolly good to be given one by the Archbishop of Canterbury.
I warn us against cryptocurrency. We need to look at regulating it, because it is totally out of control, and it is meaningless. I discovered the principles of Warren Buffett before they were popular; if you want an investment, you should be able to see it, understand it and answer the question, “Does it do anything useful?” If you cannot get positive answers to all those points, you are likely to be investing in a dud. All these bubbles over the last umpteen years have been about things that do not exist. They did not have any benefits and most of them did not pay any dividends. You need to be very careful. I predict that anyone investing in cryptocurrency will come to regret it pretty shortly.
I welcome Clause 69 of this Bill, in particular the ability to develop credit unions further. We often forget the role that they play, particularly in providing secure finance for poorer people and in the trade union and working people’s movement. Anything we can do to strengthen credit union regulation, while making them dependable, is something to be gained. Enabling them to extend cautiously into hire-purchase agreements and insurance, and to lend to and borrow from each other, is extremely good. I hope that, as we pass this Bill, we can look carefully at how to support credit unions.
Finally, we need to look at the dangerous “buy now, pay later” phenomenon. Problems are already beginning to arise with the idea that you can go into a shop and say, “I’ll pay in three months.” This sector needs bringing under some sort of financial regulation. I hope that we can get some sort of outline during the course of this Bill of how we can get a regulatory framework.
Lord Mountevans (CB)
My Lords, it has been a great pleasure to hear the three maiden speeches this evening. The noble Lord, Lord Remnant, was a fellow alderman in the City of London; I remember we all thought that he was first-rate material to be lord mayor, but unfortunately the City assumed him and took him away from us. We have seen tonight just how valuable his contribution will be. I equally congratulate his colleagues. Our House has been enriched this evening.
This is an important Bill, which I welcome and support. There is much that is valuable in it, such as enshrining that regulators exercise their new powers in the service of public policy objectives, set by Parliament, which maximise the industry’s contribution to society. I warmly welcome moves to build a robust regulatory regime for digital assets and to support digital innovation in distribution ledger technology, employing the sandbox technology that has been so successful in fintech. The introduction of references to economic growth and competitiveness has long been on the industry wish list.
Bringing the marketing of crypto assets under the existing financial promotion rules is highly desirable, as are the introduction of a new regulatory principle for the FCA and the PRA to have regard to the need to contribute towards achieving the UK’s net-zero obligations and steps to ensure that domestic legislation is amended to ensure that mutual recognition agreements can be fully implemented. This should reduce the cost of doing business and facilitate more competitive client service and offerings.
Some noble Lords have regretted that the Bill is not more proscriptive and wider ranging. However, the UK’s regulatory regime is a key factor in its perceived attraction as a global financial centre. With respect, profound changes are unappreciated and unhelpful. As we saw as recently as last autumn, it is important to be perceived as predictable, stable and strategic. Profound changes are to be avoided.
I am not an expert in regulation and have not worked in banking, insurance or, for example, the LSE. I was elected 11 years ago in the City and worked there for 45 years. From my contacts there, I think there is contentment with the Bill and its contents. These are steps in the right direction. It is a very important sector; as I and others have said, from research, it is critical that financial services flourish in this country.
I too would have liked to see more action on fraud and regulatory accountability, and opportunities for consumers have been missed. Hopefully, the Government can address this. The principal concern is the speed at which reform is proceeding. We have suffered the negative impacts of leaving the EU but are not succeeding in enhancing and improving our offer fast enough to compensate. Can the Minister say in summing up whether the regulatory organisations, with their immensely demanding and complex responsibilities, are fully equipped with the staff and resources required for the discharge of their duties and functions? This is more critical than ever at this time, as underlined most eloquently by the noble Lord, Lord Grimstone.
Lord Randall of Uxbridge (Con)
My Lords, a few hours ago, before this debate started, one of my noble friends saw that I was down to speak and said something in terms similar to, “What on earth do you know about this?” He hit the nail on the head. That feeling has been only heightened by the quality of the speeches we have heard from noble Lords who really know what they are talking about, not least the three maiden speeches. I am delighted to have such erudite noble friends joining us on these Benches—I will probably have to keep quiet now, unless it is a subject that I know a little more about.
I say that I do not know much about this but, listening to some of the speeches, I realised that—as the noble Baroness, Lady Bennett, who is not in her place at the moment, said—I represent the man or woman in the street who does not understand these things but needs to because they are really important. As a former retailer, I have something to say on the subject of cash. Also, I say to my noble friend Lady Noakes, who is not here, and others that, if there is any spare cash she does not want, I have various charities—I will put a bucket outside and we can take it. That would solve that problem.
I declare an interest as a director of Peers for the Planet. I was going to emphasise the point about net zero and so on, but that has been amply discussed and there is no point in overdoing things. The noble Baronesses, Lady Sheehan and Lady Hayman, and others have mentioned this, so I will just add my voice to that. I can almost hear one or two of my noble friends in particular thinking that this will somehow be a burden, but it will not: these very institutions and businesses are asking for it to make sure that there is a level playing field.
However, there is one amendment I hope to table in Committee—unless I can persuade my noble friend the Minister that the Government need to take this on, which would save me the job of having to make a further speech on the Bill—and it is on deforestation. This amendment would echo one tabled by my right honourable friend Chris Grayling on Report in the other place, which had a great deal of cross-party support. My amendment would introduce a mandatory due diligence obligation for UK financial services to prevent the financing of commodities, businesses and activities that destroy climate-critical and biodiversity-rich forests, and indeed the lives of the local communities and indigenous peoples who depend on them. I tabled a similar amendment to the Environment Bill as it went through this House. It was a rather good amendment but, to my astonishment, the Government did not seem to agree with me entirely on it. I did cry myself to sleep that night, but I woke up again and thought, “There will be another opportunity”—and that is what I hope we will have in Committee, where I am sure the Government will realise the error of their ways and accept this, because it is incredibly important. I do not believe that Schedule 17 of the Environment Act is enough to stop the UK’s role in global deforestation.
I fully support the Bill but, like so many others have said, I am sure that there is room for improvement. It may not be down to me to do it; I think I have found the experts we need. I salute the Government for bringing this forward, and I salute my noble friend the Minister—not just because I want her to accept my amendment but because her stamina in sitting through this debate has been fantastic. With that, I think I will sit down.
Lord Carrington of Fulham (Con)
My Lords, it is a great pleasure to follow my noble friend Lord Randall, but I am not planning to follow him into the woods and forests and deforestation. I find myself in a situation which many noble Lords in this Chamber will have been in at various times of their career, where you have prepared a speech which is, frankly, brilliant, and you have all the points laid out with wonderful clarity, only to find that the second speaker makes your points, and the fourth speaker makes your points—I lost count after that. Everybody has talked about regulation, which is what I was planning to talk about. So, noble Lords will be extremely relieved to hear that my speech is going to be quite short, because nearly everything that can be said about regulation has been said—but, I have to say, not quite everything.
I do not have any interests to declare; I used to have interests to declare in financial services. I used to be a regulated authorised person by the PRA and the FCA, and I used to be the chairman of a very small bank, so I have had some experience of being regulated and recognise the importance of regulation. I recognise the very important role that the regulators play in keeping London as a premier financial centre. One of the principal reasons we are still a major financial centre in the world and manage to fight off the competition, which now comes from Europe as well as from New York and Singapore—China may well become competition again, but Hong Kong has largely disappeared —is our honesty and probity through regulation. That is very important, and we need to preserve it. For that reason, I also very much support the part of the Bill which gives the regulator further duties, particularly the duty in relation to international competition and growth, and to the green agenda. All this is very important, but it raises quite serious issues about what we want the regulator to do.
Perhaps I could digress for a moment and say a little bit about what I think regulators ought to be doing. This follows on a bit from what the noble and learned Lord, Lord Thomas, who sadly is not in his place at the moment, said earlier about large and detailed rulebooks being a disincentive to effective regulation. In fact, I would say—only he is a lawyer—that the great danger is getting the lawyers involved in regulation at all.
The point about regulation is that it is there to stop the villains and to stop people doing things that they should not do, but it is trying to do that in markets that are extremely fast-moving and highly inventive and innovative. A regulator that has rules that were set in stone 20 years ago and stretch from here to eternity will never catch those people. Indeed, there is a very strong argument, which I have seen written up by people who know much more about it than I do, that the great crash of 2007-08 was caused largely by regulators being hidebound by what they had seen in the past, rather than understanding what was happening and developing for the future—not just in this country, I have to say, but principally in the United States as well.
Regulators have to be very close to their markets and understand what is going on in them. They have to see the trades being done, know the participants and hear the gossip. In all markets, whether traded or over-the-counter, the participants know who is good, who is stupid and who is bad. They may not get it 100% right but they get it pretty nearly right, which means that we have to get the regulation of the regulators right. That is desperately important.
I do not believe the Treasury can do it, because it is too close to the regulators. The Bank of England clearly is a regulator and cannot do it. The Treasury Select Committee, of which I have some experience, having been a chairman many years ago, cannot do it. We have to find a way of doing it which is effective. It may involve parliamentary committees, but my guess is that it will involve another regulator, to regulate the regulator. We need little fleas on the backs of big fleas to bite them. I am afraid that that is what we will have to do. We need to find a solution, because the regulators are becoming too powerful and too important, and they need to change.
Lord Moylan (Con)
My Lords, I was worried that my noble friend Lord Carrington of Fulham would take away the very last thing I might have said that has not already been said, but happily he has left a little scope for my contribution to the debate. I will start by saying something which has been widely said, by offering congratulations to all my noble friends who made their maiden speeches today and saying how welcome their contributions were, as their many contributions in future will be, adding to the quality of debate and the experience of your Lordships’ House.
There have been many points of consensus around the whole of the House as we have debated this, and I share those points. Among them is the astonishing lack of parliamentary scrutiny of what is in fact lawmaking. Whether this constitutes taking back control and whether it could be done better need to be explored in Committee. A second point of consensus is the need to ensure that a cash option remains available, not just for those who need it but for those who want to exercise it. There is broad consensus on that around the House. A third point on which there is consensus—I do not intend to put this too controversially—is that there appears to be a shared mild uncertainty around whether the current regulators are up to managing the new jobs that are about to be thrust upon them. That is something else that I am sure we will want to explore in Committee.
I would like to add one item, which I hope will command widespread support in your Lordships’ House. Over the last 20 or 30 years, retail access to regulated investments has practically dried up. It used to be the case that one could buy government bonds, gilt-edged securities, at the Post Office. It used to be the case that one could bid, non-competitively, for new issues of gilts through clipping a coupon in a newspaper—even the Daily Mail—and put one’s money into government bonds, as a safe, secure investment that one could hold over the long term. It used to be the case that new issues of equities were widely available to retail investors. All these had different risk profiles, but we need to trust that retail investors understand to a degree what they are doing—and they do.
Over the last few years, investors with money in their pockets which they would like to put into savings have been precluded by regulation from these markets and have instead put their money into dodgy schemes and things calling themselves bonds that have been marketed in a way that sometimes gives the impression that they are regulated by financial regulators. Sometimes there has been sufficient justification for that claim, such that we had to pass legislation only last year to authorise the Treasury to bail out the investors in one of the schemes—I believe it was called London Capital & Finance, but I may have that slightly wrong. We are saying that investors are going to be regulated out of nice, secure, sensible investments, but in effect encouraged to go into dodgy investments. It is all completely wrong.
A large part of it comes from the European Union’s prospectus directive. One thing it said was that, for investment in corporate bonds, the minimum denomination for a new bond issue has to be €100,000, and that denomination stays with the bond for the whole of its life. So unless you have a sum of roughly €100,000, you cannot buy. Most retail investors do not have that. The prospectus directive is included in Schedule 1 and is listed to go. It is vital that we put the retail investor at the heart of this.
Furthermore, treasurers are discouraged from giving a retail offer in new issues of equities because they have additional regulatory requirements to meet. We should be able to address those. All those things could be done if they were an explicit objective of the Bill and if the Government committed to doing them. The Investor Access to Regulated Bonds Working Group in the City has been talking to the FCA about this. The working group represents the industry; I have had some briefing from it, but have no interest to declare. There is a definite opportunity, but it needs to be taken up and pressed by the Government.
Finally, my noble friend Lord Forsyth of Drumlean mentioned the outrageous way in which politically exposed persons are dealt with in this country in the domestic regime. I put it to my noble friend on the Front Bench that this Bill, dealing as it does with financial regulation, would be the perfect mechanism for sorting out that problem once and for all, through any necessary amendments to primary or secondary legislation required, so that we cease to have the humiliating prospect of watching the Front Bench go off and beg the Financial Conduct Authority to treat us reasonably.
Baroness Fox of Buckley (Non-Afl)
My Lords, I welcome the three new Peers and their thought-provoking contributions so far to this crucial Bill. I want to focus on one fairly narrow but I think important consequence of an increasingly cashless society: that is, that a handful of mainly US tech giants now have unprecedented power over the public square.
Consider how any civil society organisation has to operate today. Consumer campaigns, pressure groups, NGOs, the third sector—all will be dependent on payment processes such as US fintech PayPal to operate in order to organise online payments for goods, services, events, and to receive membership fees and donations, et cetera. Can your Lordships imagine if these digital corporates took it upon themselves to freeze assets and suspend accounts with no notice or explanation, all because some big-tech apparatchik disapproved of the aims of such organisations? Surely such censorious demonetisation would be a threat to democracy. Yet this is not some dystopian future—it is happening now. So I urge the Government to use the Bill to protect civil society organisations’ ability to conduct basic commerce regardless of their political views.
Noble Lords will remember the media coverage of events in September last year when PayPal deplatformed a number of UK organisations. Suddenly the Free Speech Union—I declare an interest as a member of the advisory board—the Daily Sceptic, Law or Fiction, and UsforThem, an advocacy group set up by mums who opposed school closures during lockdown, had no way to process membership or access their own funds, had no ability to raise money and were made to feel like criminals. All their processing services were just switched off abruptly, risking their whole financial viability. Toby Young, who heads up two of the targeted organisations, explained at the time:
“PayPal’s software was embedded in all our payment systems, so the sudden closure of our accounts was an existential threat.”
Indeed, even PayPal’s co-founder Peter Thiel told the Free Press in December:
“If the online forms of your money are frozen, that’s like destroying people economically, limiting their ability to exercise their political voice.”
Such financial censorship reminded me of when the Canadian Prime Minister Justin Trudeau froze the Freedom Convoy protesters’ bank accounts last February. That was shocking, but at least it was clearly a political act. The problem when payment process organisations defund based on content is that they are often evasive and opaque about who it is targeted and why. PayPal gave contradictory and vague explanations last September, initially citing its acceptable use policy associated with criminality and hate speech, and later telling the Times that the accounts were guilty of misinformation about vaccines. Few were convinced. Miriam Cates MP told the other place:
“It is … hard to avoid interpreting PayPal’s actions as an orchestrated, politically motivated move to restrict certain views within the UK”,—[Official Report, Commons, 7/12/22; col. 430.]
or, in the FSU’s case, even defending those expressing such legal but dissenting views.
After high-profile press coverage and Members from both Houses—across parties and of none—causing a fuss, PayPal eventually backed down, reinstated the accounts and denied that there was any political interference. However, there is no room for complacency. When Sally-Ann Hart MP proposed an amendment to this very Bill in the other place, seeking to legally prevent financial service providers refusing to provide services if related to the exercise of the right to free speech, the Minister Andrew Griffin gave a robustly positive response. He stated that the Government respected
“the balance of rights between users and service providers’ obligations … whether of the Free Speech Union, the trade union movement, law-abiding environmental movements or anyone else expressing lawful views.”—[Official Report, Commons, 7/12/22; col. 395.]
However, he seemed rather reluctant to agree with the need for primary legislative change and stated that the PayPal incidents did not represent a wider pattern. I beg to disagree.
We need to look at what has happened in the US over recent years—and think about whether it might happen here—where big tech companies regularly use defunding to regulate speech, so much so that in June 2021, a large coalition of US civil liberties groups wrote to PayPal and its subsidiary Venmo asking for transparency, due process and clarity behind this escalating practice of economic limitations on multiple varied accounts, from WikiLeaks to News Media Canada’s payment to submit an article about Syrian refugees for an award. The coalition, comprising eminent organisations such as Article 19, the ACLU and the Electronic Frontier Foundation, never even got a reply from PayPal. Also, less high-profile instances of deplatforming dissenting views are happening in the UK, for example with Patreon, CrowdJustice and GoFundMe affecting our citizens. What is more, the majority of major payment providers grant themselves the right to block accounts of those whose views clash with Silicon Valley’s increasingly ideological corporate values.
I intend to table an amendment to say that, while I understand that private companies have a right to choose who they do business with and should be vigilant about fraud and illegal transactions, they should never discriminate on the basis of an organisation’s political, philosophical or religious beliefs. This Bill might be a place where we can put that right.
Lord Northbrook (Con)
My Lords, first, I declare an interest as a consultant to an FCA-regulated investment management firm. Overall, I strongly welcome this Bill, as do important UK financial institutions, including the Investment Association, UK Finance, TheCityUK and Linklaters’ Financial Regulation Group, to name but four.
Politically, the Bill seems to be generally supported by all major parties. I particularly welcome the provision to establish a regime to regulate stablecoins. I also like the idea of bringing in measures to allow regulators to reduce regulations in order to enable technological innovation in a sandbox. I also approve of the measure allowing regulators to make rules for entities deemed to pose systemic risks to the UK’s financial markets. As the Prime Minister said in his Back-Bench speech at Second Reading:
“Why does all this matter? It matters for three specific reasons. The first is jobs. The industry provides more than 1 million jobs, and not just in London and the south-east; two-thirds of those jobs are in places such as Southampton, Chester, Bournemouth, Glasgow, Belfast, Edinburgh and Leeds. It is incredibly important. Secondly, it is one of the most important industries for our economy in terms of contribution to our GDP and tax revenues, and it is something that we as a country are genuinely world-class at.”—[Official Report, Commons, 7/9/22; col. 292.]
I recognise that the City is now in a very different place from where it was in 2016. The consensus view is that the ship has now sailed on regulatory equivalence with Europe. However, the fact is that, since 2018, the volume of financial exports to the EU has fallen by 19% in cash terms. Some £1.3 trillion of UK assets have reportedly moved to the EU and there has been little progress on securing trade deals for our financial services around the world—although Switzerland was mentioned earlier.
Still, in 2021, exports of financial services to the EU were worth £20.1 billion—33% of all UK financial services exports. So is it wise just to repeal all the 200-plus pieces of retained EU law en bloc rather than identifying which are helpful and necessary? Also, the sector is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory co-operation or negotiate with the EU for the mutual recognition of professional qualifications for our service sectors. In her winding-up speech, will the Minister tell us what impact she believes this Bill will have in securing these important agreements with the EU and boosting financial services exports more generally?
I move on to what has not been included in the Bill. I agree with my noble friend Lord Balfe: I feel that the Bill lacks ambition in its lack of support for the mutual and co-operative sector. Although Clause 63 contains some welcome and long-overdue provisions, such as enabling credit unions to offer a wider range of products, the Bill does little to address the outdated regulatory regime faced by credit unions, building societies and co-operative banks. We have seen numerous building societies threatened with demutualisation in recent years, while the number of mutual credit unions has plummeted by more than 20% since 2016. Unlike the USA—and many other European countries, as I understand it—the UK is uniquely lacking in co-operatively or mutually owned regional banks. That lack of diversity in the financial services sector has had bad consequences for financial inclusion and resilience, with many desperate families forced into the arms of unethical lenders.
Next, like the noble Lord, Lord Hunt of Kings Heath, and other noble Lords, I find it disappointing that the Bill fails fully to address the growing problem of financial fraud. Clause 62 only partially addresses the issue. It enhances protections for victims of authorised push payment fraud, which, according to the Labour Treasury Minister in the other place, quoting UK Finance figures, reached an all-time high of £1.3 billion in 2020. The Government in the other place promised a review without giving a timescale, but more immediate action is needed. The Bill ignores the fact that digital-savvy criminals are increasingly exploiting a range of financial institutions such as payment system operators, electronic money institutions and crypto asset firms to scam the public. According to UK Finance, in 2020, 45% of the £1.3 billion was payment card fraud, while 38% was authorised push payment and 16% was remote banking.
Last November, our House of Lords Fraud Act 2006 and Digital Fraud Committee released a report stating that the Government should introduce a new corporate criminal offence to ensure that big tech platforms and telecom companies tackle financial crime. While online platforms will face a duty of care to protect their users from fraud under the Online Safety Bill currently going through its stages in the other place, it does not cover telecoms and other related sectors:
“‘It’s a very good step but I do think that more needs to be done,’ said Sian McIntyre, a managing director at Barclays UK, including requiring tech companies to publish data on the nature and volume of scams on their platforms.”
I support other noble Lords’ views on the limitation of Treasury Select Committee scrutiny, general clarity on crypto regulation, regulators’ requirements to focus on international competitors, problems of buy now, pay later, and the opportunity to still have a cash option. In summary, I welcome the Bill and look forward to scrutinising it further in Committee.
Viscount Trenchard (Con)
My Lords, it is a pleasure to follow my noble friend Lord Northbrook. I thank my noble friend Lady Penn for her impressive introduction of this Bill and declare my interest as set out in the register as a director of two investment companies. I welcome the Bill. I wish to place on record my strong objection to the imposition of a five-minute so-called advisory speaking time at Second Reading. I add my congratulations to my noble friends Lord Remnant, Lord Ashcombe and Lady Lawlor on their excellent maiden speeches.
I was a member of the Joint Committee on Financial Services and Markets, which reported in 1999 on the need for the Financial Services and Markets Act 2000. At the time, we did not appreciate how much of the responsibility for framing financial services regulation would be transferred to the European Commission, as Union competence steadily increased its reach. We were powerless to prevent the entry into force of AIFMD in 2013. We did not resist the adoption and eventual entry into force in 2018 of MiFID II, which requires fund managers and brokers to set separate charges for trade execution and research, and fund managers to pay for research themselves or agree a separate research contract under which they may recover their costs. These and other legacy EU regulations, such as PRIIPs and its requirement that companies produce consumer-friendly kids, have had the opposite effect on consumers from that which was expected.
A return to the FSMA 2000 model, balancing responsibilities between Parliament, government acting through the Treasury and the regulators, makes a great deal of sense. I was never sure that the decision following the financial crisis of 2008 to create the PRA as a second regulator, which was neither an independent regulator nor fully a department of the Bank of England, was the right one. The creation of the FCA, with its one strategic objective, that markets function well, and three operational objectives, which include a competition objective but one limited to promoting competition in the interest of consumers, has contributed to the emergence of a culture within the institution which is overcautious and generally perceived by the industry as anti-innovation. Participants in London’s insurance markets have explained to me that this is the principal reason why our share of the global insurance markets is stagnant at around 7%, whereas those of other jurisdictions such as Bermuda and Singapore are growing.
From the point of view of your Lordships’ House, Clause 36 of the Bill, governing engagement with parliamentary committees, is very unsatisfactory. It is very far from even-handed between your Lordships’ House and another place. I question whether the Treasury Committee, as it currently operates, can conduct the required level of oversight. Surely a Joint Committee of both Houses should be established for this purpose. We need a committee resourced well enough to replicate the activities of the ECON committee of the European Parliament.
I welcome the Government’s decision to act in accordance with a recommendation of the Listing Review, undertaken by my noble friend Lord Hill of Oareford, to create a competitiveness and growth objective. Clause 24(2) makes clear that this objective is secondary. However, as I mentioned, the FCA has one strategic objective and three operational objectives. Could my noble friend the Minister please inform the House whether the new competitiveness and growth objective is to be a secondary strategic objective or a secondary operational objective? Could she explain why the Government does not recognise that, if the FCA’s new objective is only secondary, it will not be effective in changing the FCA’s culture and behaviour to the extent necessary to achieve the Government’s ambition for the UK to be the world’s most innovative and competitive global financial centre?
The regulators are required to report on how well they are performing their new objectives, but Clause 26 suggests that the FCA sets its own homework and then marks it. Unlike the PRA, it is not required to undertake public consultation. Could my noble friend the Minister tell the House whether she thinks that the empowerment of the FCA to regulate Stock Exchange listings through the designated activities regime will make admissions more, or less, expensive and cumbersome than they have become over the past 14 years—during which, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%?
I welcome the Bill and look forward to working with other noble Lords to make it a better one.
Lord Lilley (Con)
My Lords, I begin by paying tribute to my noble friend Lord Lawson. As his researcher in my spare time before I entered Parliament, then his PPS for four years, then his Economic Secretary to the Treasury for two more, I learned my politics at his feet. I also learned to admire his immense intellect, his sound judgment, and—what may be less well known to others—his incredible, uncanny insight into human psychology, enabling him to forecast in advance the reactions of individuals and the public to events long before they occurred. When I saw him in the summer, his intellect, judgment and insight were undimmed. They will be sorely missed in this House.
I want to make five simple points. First, the four major global financial centres, London, New York, Hong Kong and Singapore, are all based on common law, as are the three newest players, Dubai, Abu Dhabi and Astana. By contrast, the largest European financial centre, based on civil law code, is Frankfurt, which clocks in at number 18 as the most significant globally. That is not a coincidence; it is because common law is uniquely suited to financial markets. In recent decades, layers of civil law code have been added to Britain’s financial system, so the objective of this Bill, to return rule-making to a more common-law-based approach, is very welcome.
Secondly, it is not clear whether the Bill will achieve that objective. Historically, the common-law approach involves laws and regulations made by Parliament and explicated by the courts by the accumulation of precedents. The Bill at present will effectively hand over rule-making to independent regulators, with minimal accountability to Parliament or involvement of the courts.
Thirdly, the economic analysis of regulation is a comparatively new discipline, but its seminal conclusion is clear: we cannot rely on the beneficence of regulators. Left to their own devices—and I stress this—regulators regulate in the interests of regulators, without accountability. That is why, in practice, they mind their own backs by taking a bureaucratic, box-ticking approach to every decision, rather than focusing their resources on areas of genuine concern. As a result, bona fide businesses face pointless delays to obtain the least contentious decisions; regulators refuse to offer advice on how they will apply specific rules in specific cases, leaving businesses to face uncertainty and risk; and regulators refuse to publish reasons for their decisions, with the result that there is no coherent body of case law for firms to follow. Finally, regulators tend remorselessly to extend their remit, increasing their own importance.
I understand that amendments are likely to be proposed to make regulators more accountable to Parliament, or at least to a powerful Joint Committee of both Houses. Having chaired the Joint Committee scrutinising legislation following the great financial crisis, I can vouch for how much value the Members of this House give to such committees, as well as those of the other House, to which I then belonged. It is also important that there are amendments to require regulators to apply common law disciplines and to enable tribunals to ensure that a body of publicly available case law develops to give practitioners greater legal certainty. I am predisposed to support such amendments, as I hope will the Government.
Fourthly, I understand that the regulators have been arguing that their independence is sacrosanct. To quote Mandy Rice-Davies, “They would say that, wouldn’t they?” Of course politicians should not meddle in how regulators apply rules to specific practitioners, but the Bank of England was given independence to set interest rates for a very specific reason: because the timing of interest rate changes is electorally sensitive. There is no equivalent reason to allow the financial regulators to be immune to influence and oversight from Parliament or the courts.
Fifthly, finally and rather differently, there is no reason to extend the regulators’ competence to include climate change. The sensible path to net zero, which we have adopted in this country, is to reduce demand for fossil fuels, not to reduce their supply. If businesses overinvest in producing fossil fuels ahead of declining demand, they will lose money. That is their problem, not the regulators’. If the UK unilaterally bans investment in fossil fuels, which would be a bizarre thing to do given that we do not ban their import, other people will supply them, both here and abroad. If the world collectively restricts the supply of fossil fuels faster than we phase out demand, there will be shortages, prices will shoot up and fossil-fuel producers will make enormous profits; we will have done to ourselves what Putin has just done to the world. Giving regulators a climate objective would be either pointless or disastrous. In all other respects, I support the Bill.
Baroness Kramer (LD)
My Lords, I begin the first of the winding-up speeches by saying how much I welcome our three maiden speakers and by remarking on the excellence of their speeches. I look forward to their further contributions.
This a significant Bill. There are aspects of it that I strongly support. I do believe that we should tailor regulation to the UK market, although I am of the community that thinks this refers much more to the efficiency of the way that rules are applied than to the removal of gold-plating. I hope that I do not misspeak for the noble Lord, Lord Mountevans, when I say that the absence of profound change would be rather welcomed by most of those I talk to in the financial services industry. I support protection for access to cash, protection against push payment scams, greater scope for credit unions and beginning attempts to regulate crypto assets. In some of these areas, we on these Benches will have amendments to strengthen those changes.
There are missed opportunities. My noble friend Lord Sharkey is leading for us to introduce an effective duty of care, unlike the box-ticking of the consumer duty, and to adjust the regulatory perimeter to properly include small businesses. My noble friend Lady Tyler will lead for us on an objective of financial inclusion, as well as dealing with issues around access to cash and to services. My noble friends Lady Northover and Lady Sheehan are leading on strengthening the net-zero and biodiversity elements of the regulators’ roles. And I think the House is now prepared to understand that my noble friend Lady Bowles is proposing changes to make the regime far more effective at enforcement, including against fraud; to drive regulatory efficiency; and to significantly improve monitoring of systemic risk and financial stability across the financial sector. I suspect that yet more amendments will be coming from her pen.
All of us on these Benches are concerned with accountability. I was going to list everyone who spoke on this issue, but I would have to read out virtually every name engaged in the debate. From my perspective, powers that had democratic oversight in the EU system will be transferred wholesale to regulators with pretty much no engagement with a meaningful democratic process once this Bill is passed. As many have said, the Treasury Select Committee has taken steps to improve its oversight, but it is far too little and I agree with those who say that it is retrospective, which is not what we need. I look to my noble friend Lady Bowles in particular to craft a series of amendments.
In this Second Reading, I want to take a step back and ask to what extent the changes introduced in this Bill, combined with what the Chancellor calls “the Edinburgh reforms”, which are, of course, largely coming through secondary legislation, reintroduce risks to the sector and to financial stability that existed prior to the 2007 crash and set us up for the next major crisis. The financial crash was driven by the deliberate disguise of risky assets and irresponsible management by major banks. Consumers endured abuse from extensive mis-selling and, astonishingly, Libor was corruptly manipulated for at least a decade.
Today, we have a shadow banking system—I have to thank the noble Baroness, Lady Hayman, and the noble Lord, Lord Butler; I am afraid this glass of water will not turn into wine, as happened for the noble Lord, Lord Balfe—which now almost matches the formal banking system in size and has embedded new levels of risk. I think LDI, is an example and I say to the noble Lord, Lord Altrincham, that it was the leveraging of those instruments using a loophole that caused the problem. Give them an inch and they take 10 miles, and it continues to be true of the sector.
I accept that some change to Solvency II makes sense, but many insurers see its replacement by solvency UK, which will be empowered by this Bill, as the gateway to extensive investment in high-risk illiquid assets, sub-investment grade—I have talked to the industry—without compensating capital requirements. I am very concerned at the weakening of the matching adjustment. I think the Government are mesmerised by the hope that these investments will fund upscaling of new companies, net-zero projects and high-risk infrastructure with somehow no real risk involved. I suspect a lot will go to remuneration and dividends, frankly. I am constantly referred to the Canadian Pension Plan Investment Board as evidence that a fund can safely invest in high-risk illiquid assets without being burned. I quote from the S&P Global Ratings Review of the CPP:
“The rating also reflects the agency’s opinion of a moderately high likelihood that the Canadian government would provide extraordinary support in the event of financial distress.”
I wonder how much the UK taxpayer wishes to stand behind our insurance industry—and in many senses it also involves the pension industry—with a moderately high likelihood of extraordinary support in the event of financial distress? Taxpayers cannot keep bailing out the financial sector.
The financial services sector, especially the City, is also aggressively behind the international competitiveness objective in this Bill. Many want it elevated to a primary objective. This was discussed by the noble Lord, Lord Bridges, and the noble Lord, Lord Remnant, in his maiden speech. Actually, I may do injustice to the noble Lord, Lord Remnant, on that. He may have said that he is happy with it as a secondary objective. They believe that the regulators—again, I talk with the industry extensively—will find that this objective combined with the mutual recognition agreements in trade negotiations, which, of course, do not come to Parliament for approval, will force UK regulation to be lowered to match that of trade partners, and I suggest that that is very dangerous.
I quote from Paul Tucker, former deputy governor of the Bank of England, in evidence in November to the Economic Affairs Committee:
“please do not, as the UK Parliament, give the Prudential Regulation Authority a competitiveness objective. Someone would only do that if they really disliked the City of London and wanted to damage the City of London in the long run ... I can summon the ghosts of Eddie George and George Blunden in assuring you that the City does not always know its best interests over the medium to long run.”
We are of course bleeding financial services business to the EU and other global financial centres. Financial services exports to the EU are down more than 6%, and it will get seriously worse when euro clearing leaves in 2025, but regulatory arbitrage is not the answer. I am with those who are convinced that a strong rulebook is essential to the reputation and success of the financial services industry as well as the necessary bulwark against a repeat crisis which would create years of damage to the UK economy and bring many further years of austerity.
But the Chancellor has gone farther. The Edinburgh reforms set up processes to weaken the ring-fencing of core retail banking from investment and international banking. I urge the House to stop this in its tracks. Like the most reverend Primate, I sat on the Parliamentary Commission on Banking Standards for nearly two years. Few things fuelled irresponsible behaviour more than the banks’ ability to use what they saw as the free and insured money sitting in personal bank accounts to roll on high-risk casino banking. Add to that the lifting of the cap on bankers’ bonuses and we set up actual incentives for another risk and greed-fuelled crisis.
The Edinburgh reforms also set up a process to change the senior managers and certification regime. My dispute with the SMCR is that the FCA has made it into a box-ticking exercise that does not fulfil its primary purpose to act severely against individual senior managers who fail in their duties, either deliberately or through mismanagement and incompetence. My noble friend Lord Sharkey discussed this. Instead of returning that regime to its original purpose, the industry is very confident that the Edinburgh reforms will remove individual responsibility completely. I suggest that Members of the House visit the evidence given to the commission. Virtually every senior manager, including the CEOs, pleaded a mix of incompetence and collective responsibility to explain away the failures in their institution and why they could not be held to account.
This is a Bill we have to get right. Risk applies asymmetrically in the financial services industry. In the 2007-08 crash, almost no senior manager or executive was hurt and, indeed, almost every one of them walked away with years of bonuses based on what were really false profits. The taxpayer and ordinary people, coping with the austerity that followed—never mind the funds that had to go into the banking system—bore the real cost. On the Parliamentary Commission on Banking Standards, we were very afraid that after a few years the lessons of the crash and the abuse would be forgotten and the new safeguards watered down. This is an industry that knows how to promote itself and speaks with a great sense of invincibility. As we work our way through the Bill, we should keep at the front of our minds the concern that those safeguards, which were so necessary, will be pushed to be watered down.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for introducing the Bill and for the positive engagement we have had with government. Today has been a constructive and considered debate, and I congratulate the three maiden speakers.
In the other place, Labour gave broad support to the Bill. Some regulatory divergence with the EU, and a more outcomes-based approach to regulation, will create some important opportunities for industry. For example, long-awaited reforms to Solvency II, if done well, will unlock capital for investment in productive assets, including those that will be needed for the green transition.
However, my party’s support had one glaring exception: the intervention power. The Government mooted this and then wisely abandoned it following widespread condemnation. This was not just the Opposition opposing it, as noble Lords might expect. The Treasury Committee, the Bank of England, the FCA and every serious City stakeholder and commentator expressed profound concern about the risk of any interference with the independence of our regulators. The foundation of the City of London’s success as a financial centre is precisely its robust regulation, shielded from the political caprices of Governments of all stripes.
Our world-class financial services sector needs its reputation as a safe and stable place to do business. The Prime Minister and his Treasury threatened that when they flew their amateurish intervention power kite, gambling with over 1 million UK jobs. Now that this threat has been removed, I am happily able to support what has made it into the Bill, with a number of important changes.
As has been outlined, the Bill implements the outcomes of the future regulatory framework review and attempts to set out a clear direction of travel for financial services regulation now that we have left the EU.
I welcome Chapters 1 and 2, which will allow us to both revoke remaining retained EU law and strengthen the regulators’ powers and oversight of important areas, such as central counterparties and financial promotions, now that we have left the EU. I look forward to scrutinising these measures in detail in Committee.
Clauses 21 and 22 allow for the regulation of stablecoins. Crypto is no longer a niche investment but is widely popular with retail investors. Many currencies are big enough that their collapse can cause systemic shocks in the “real economy”. Can the Minister give an update on the Government’s current strategic approach to crypto, in light of the FTX collapse? Clause 24 establishes new regulatory objectives of medium-term growth and competitiveness, which will help to tackle our chronically stagnant economy.
I believe that these measures have successfully struck a difficult balance between protecting financial stability and unlocking the potential of the sector to boost the UK’s growth and international competitiveness. I have to note serious concerns from stakeholders, however, that the new objectives risk encouraging bad behaviour or, indeed, that they do not go far enough. As we know from the excesses of the 2008 financial crisis, there are unscrupulous actors in the system.
If, in pursuit of growth and competitiveness, the PRA even slightly deprioritises
“promoting the safety and soundness of PRA authorised persons”,
or if the FCA deprioritises
“ensuring that the relevant markets function well”,
consumers and the markets will once again be under serious threat. It is a fact that the last crisis is now a relatively long time ago and many have forgotten the extent to which the taxpayer was required to save the London financial system and, indeed, to a large extent, the world’s financial system. I would therefore appreciate it if the Minister could assure us that the regulators’ primary objectives will and must remain their utmost concern and, crucially, of the mechanism by which she will guarantee this. If not, we will consider tabling or supporting a Committee stage amendment to this effect.
Clauses 27 to 46 provide for the accountability of the regulators to the Treasury, Parliament and the public. Clause 36, in particular, will formalise the role of the Treasury Committee.
I commend the hard work of all the parliamentarians who made efforts to secure these clauses. This is a positive step and good for the scrutiny of government policy. I was involved in the 2021 efforts to introduce scrutiny when we got relatively limited support. I am therefore pleased to see the extent of support for improved scrutiny in today’s debate. It is particularly important that there should be such consensus on this point. We may have to move well beyond equality with the Commons in our activity towards a firmer, more powerful approach, which will need to be of high quality and properly supported; the essence of much of today’s debate has been about balance.
I therefore also ask the Minister to give the House of Lords’ expert Economic Affairs Committee an equal statutory scrutiny role—or, indeed, as I have just said, going beyond that. Although it is welcome that regulators will have to reply formally to any responses the EAC gives to their consultation, I will look to amend the Bill to ensure that this House is given a similar, thorough oversight role.
As concerns the rest of this section, new powers allowing greater involvement from government in the FCA’s and PRA’s rule-making process must be carefully balanced with the need to protect their independence, which has already been threatened by the intervention power. I know that HMT works closely with the regulators informally, but I can see how a statutory right to request rule reviews and reports, on any matter and at will, could tempt overreach by an activist Chancellor. This will need careful scrutiny once again from your Lordships’ House. I would appreciate an assurance from the Minister that these new powers will be used only sparingly. An example of when she imagines they might be necessary would be useful.
Turning to what is not in the Bill, a lot of these provisions, though important, probably feel quite distant and specialist to members of the public. This is not so regarding access to cash. I strongly welcome Clauses 51 and 52 which will finally, after years of delay, protect cash access. Regrettably, the Bill does nothing to protect face-to-face banking services, nor free-of-charge access to cash. The most vulnerable in our society depend on these for financial advice and support. Again, this is not a niche issue, as 15% of transactions by volume are still made in cash. I recognise the forces referred to by the noble Baroness, Lady Noakes, that will bring about the eventual end of cash, but we are not there yet. Cash will be very important for at least a couple of decades and it will need preserving in law.
However, because almost 6,000 bank branches have closed since 2015, small business owners in particular have to travel longer distances to deposit any cash they accept. This is a huge disincentive for them to accept cash; consequently, we see more and more businesses now being unwilling to do so. We must ensure that small businesses can deposit cash easily, which is why we will table an amendment guaranteeing a minimum level of free-of-charge access to cash services for the UK’s SMEs. I hope the Minister will agree that both face-to-face and free-of-charge cash access are absolutely crucial for financial inclusion. I therefore hope we can work with her and colleagues across the House to implement robust guarantees.
It is equally disappointing that the Bill misses the opportunity to address the gigantic problem of financial fraud, which costs the economy over £1 billion every year. The Bill hints at it with Clause 68, which enhances protection against authorised push payments. On this measure, reimbursement is eligible only for Faster Payments system payments and not others. The reason for this demarcation is not entirely clear. I would appreciate any light the Minister can shed.
Scammers are outpacing the Government. As the last National Fraud Strategy came out 12 years ago in 2011, since when vast billions have been lost by this Government to Covid fraudsters, I would have thought action in this area would be a quick win. I urge the Minister and her officials to think about how the Bill might be used to be proactive on this. Your Lordships’ House can expect an amendment from us to compel the Government to produce a national fraud strategy for this decade, and update it at least every five years.
Another area in which we feel the Bill lacks ambition is support for the mutual and co-operative sector. Clause 69 contains some long-overdue provisions, such as enabling credit unions to offer a wider range of products. But the Bill does not otherwise address the outdated regulatory regime faced by credit unions, building societies and co-operative banks. We have seen numerous building societies threatened with demutualisation in recent years, while the number of mutual credit unions has plummeted by more than 20% since 2016.
The UK stands apart from other advanced economies. We lack a strong system of mutually and/or co-operatively owned regional banks. A lack of consumer choice in this area has driven many people to high-interest or unethical borrowing options and is part of our financial inclusion problem. I venture that a helpful first step might be to require the FCA and PRA to report on how they have considered the needs of credit unions, building societies, mutuals and co-operative regional banks. Does the Minister agree that these models deserve parity of esteem and should be encouraged? Would she be sympathetic to an amendment to facilitate this?
Furthermore, the Bill has very little to say about green finance. Clause 25, which codifies the regulators’ responsibility under the Climate Change Act 2008, is welcome. However, the Government have promised much more radical action. It was suggested that the UK would become the world’s first net-zero financial sector. In contrast, there is still no updated green finance strategy after years of promise. The Government have had enough chances to produce it, to introduce sustainability disclosure requirements and, particularly importantly, to produce a plan for green taxonomy. I fear it now falls to this House to help the Government by amending this Bill.
Finally, turning to the Edinburgh reforms, if amendments are to be introduced through the Bill to facilitate these proposals, it is essential that the House has a full appreciation of the reforms. The Government should produce a comprehensive briefing document to avoid the requirement to move many probing amendments to clarify government intentions. We must fully understand the package and, in particular, the extent to which it may enable a weakening of the senior managers and certification regime, or a reversal of the essential ring-fencing measures designed to protect the UK from the catastrophe of a financial crash. We must keep reminding ourselves that the UK’s financial stability is essential to encouraging investment and growth. To abolish ring-fencing and the stability it brings to facilitate growth is a contradiction in terms.
In sum, I hope I have made clear my support for the Bill, which marks an important step in the journey of our financial services sector outside the European Union. In this debate there has been an amazing degree of consensus. Outstanding issues in each of these areas have, in general, been issues of balance. No serious, obvious political divisions have arisen—I even found myself agreeing with the noble Baroness, Lady Noakes, so it could not have been too bad. I ask the Minister to recognise that there will be a need for significant change to adjust those balances and that force, I hope, will come from overwhelming consensus.
Baroness Penn (Con)
My Lords, I thank all noble Lords who have spoken in this debate for their valuable contributions, which reflect the breadth and significance of this Bill. I will try to get through as many points as possible but, looking at the stack of papers before me, I think I have been overambitious—so I will dive straight in.
Turning first to the future regulatory framework review, which is a once in a generation opportunity to update our rulebook and tailor it to UK markets, as I have said before, the Bill revokes retained EU law relating to financial services so it can be replaced by a coherent and agile approach designed for the UK, building on the FiSMA model. I reassure my noble friend Lord Hodgson that, when the repeal of retained EU law commences and the Government lay secondary legislation to replace it, the Treasury will fully assess the impacts of the exercise of these powers in secondary legislation. We will conduct impact assessments and post-implementation reviews in line with the Cabinet Office guidance and the Government’s Better Regulation Framework.
My noble friend and the noble Lord, Lord Sharkey, probed further on the process for replacing the different regulations and Clause 4 and the procedures associated with it. The affirmative procedure applies to statutory instruments made under Clause 4, except where the power is used to restate either EU tertiary legislation or legislation which was originally made under the negative procedure, or where there is no modification of retained EU law. In this case, it is appropriate to follow previous precedent and apply the negative procedure. EU tertiary legislation is technically complex and the same is true where the negative procedure was used for UK statutory instruments—these were technical SIs. Given the thousands of pages of retained EU law to deal with, as has been referenced in this debate, it is important that we ensure that Parliament can focus on potential policy implications from the changes we may make to retained EU law.
I turn now to the debate on the objectives for the regulators which are the starting point for the framework we will be taking forward. Those objectives are set out in FSMA and are amended in this Bill in two key ways: the introduction of the secondary objective on international competitiveness and medium and long-term growth, and a new regulatory principle to have regard to the Government’s net-zero commitment. The noble Lords, Lord Sharkey and Lord Tunnicliffe, the noble Baronesses, Lady Kramer and Lady Bryan of Partick, and others raised concerns about ensuring that the secondary objective does not dilute the regulators’ focus on the primary objective, whereas many other noble Lords spoke in favour of the new secondary objective. Noble Lords such as my noble friend Lord Bridges were perhaps concerned that it may not go far enough. The Government believe that having growth and competitiveness as a secondary objective strikes the right balance between providing a new focus on advancing medium to long-term growth and competitiveness while maintaining the regulators’ focus on their existing objectives. It provides a clear hierarchy of objectives to consider, and the regulators will need to balance those objectives and consider them in a way which respects that hierarchy.
The PRA’s existing secondary competition objective provides the model for how that hierarchy operates: the regulators must advance their secondary objectives in so far as that is compatible with their primary objective. However, with the introduction of the secondary objective, the Government expect that it will fulfil the expectations of many of those who have spoken in this House in support of delivering a step change in how the regulators approach growth and competitiveness, resulting in more proportionate rule-making while still ensuring high regulatory standards. As my noble friend Lord Remnant said in his excellent maiden speech, the UK is not unique in giving its regulators such an additional objective. He demonstrated the expertise that he will bring to this House, particularly in debates on this Bill.
The noble Lords, Lord Sharkey and Lord Butler, and the noble Baroness, Lady Kramer, spoke of the context for some of their concern around the introduction of the secondary objective and the previous structure we had for regulating financial services prior to the financial crisis. The FSA’s objectives prior to the financial crisis were market confidence, public awareness, consumer protection and the reduction of financial crime. The FSA did not have a financial stability objective. Noble Lords are right that one of the regulatory principles that the FSA had to take into account was the international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom. However, the post-crisis reforms focused on the institutional design and allocation of responsibilities, with the FSA abolished and replaced by both the PRA, which focuses on the safety and soundness of the financial sector, and the FCA, which focuses on market integrity, consumer protection and competition. The Government’s view is that those post-crisis structural reforms, along with the regulators’ existing primary objectives, mean that the environment in which the regulators are considering competitiveness is very different from that which has gone before.
The noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and the noble Lord, Lord Vaux of Harrowden, questioned the Government’s decision to make the net-zero commitment a regulatory principle rather than an objective. The noble Lord, Lord Vaux, asked about the difference between the two, while my noble friend Lord Bridges asked what would happen if objectives and principles are in tension with each other. On the question of objectives versus principles, the FCA and the PRA are required to advance their objectives when discharging their functions. The regulatory principles, on the other hand, are principles that the FCA and the PRA are required to take into account when discharging their functions. Having the net-zero target as a regulatory principle ensures that the Government’s commitment to achieve net zero will be embedded across the FCA’s and the PRA’s considerations when they discharge their general functions. The net-zero target is a cross-cutting government policy that we have seen in many different pieces of legislation that we have taken forward through this House. On the specific goal, many of the levers sit outside financial services regulation, so it is appropriately progressed by the FCA and the PRA as a regulatory principle, which means that they will consider it in advancing their own objectives.
Another significant focus of today’s debate has been, rightly, on how we hold the regulators to account for their progress in furthering their objectives and regulatory principles and their broader approach to regulation. Any Minister would be wise to listen carefully when an issue draws such a diverse set of voices from across the House as we have heard today.
It is worth setting out the parliamentary scrutiny and oversight procedures that are already a key part of the FiSMA process and how the Bill builds on those. There are already robust mechanisms to ensure appropriate parliamentary scrutiny of the regulators. Select Committees play an extremely important role in this process, as we have heard. As noble Lords know and have pointed out, they have the power to call for persons, papers and records that they consider relevant, and committees in both Houses regularly exercise this power to hold the regulators to account. Senior officials from the regulators attend general accountability hearings. For example, the FCA chair and chief executive appear before the Treasury Select Committee, or TSC, twice a year, and the chief executive of the PRA appears before the TSC after the publication of each annual report.
Parliament, through the TSC, conducts the pre-commencement hearings following the appointment of the chair and chief executive of the FCA, and the chief executive of the PRA. Most recently, the TSC held a pre-commencement hearing for the new FCA chair on 14 December before he takes up his role next month. FiSMA requires the Treasury to lay the regulators’ annual reports before Parliament.
The Bill builds on and strengthens these existing mechanisms of parliamentary scrutiny. First, the Bill requires the regulators to notify the Treasury Select Committee when they publish a consultation. Secondly, the Bill requires the regulators to respond formally to representations made by any parliamentary committee. I note the suggestion from the noble Lord, Lord Tunnicliffe, that the Economic Affairs Committee of the House of Lords should also be notified, and I am happy to discuss that proposal with him as the Bill progresses. I note that the noble Lord, along with many other noble Lords, proposed alternative committee structures, including Joint Committee structures, to scrutinise the work of the regulators. But here it is Parliament’s responsibility to determine the best structure for its ongoing scrutiny of the regulators, and the Government do not intend to make any recommendations to Parliament on this matter. In response to the noble Lord, Lord Blackwell, and others, I am sure that those responsible for determining those structures in Parliament will follow our debate on this question very carefully.
However, I would add that the additional accountability and reporting mechanisms provided by this Bill are designed to assist Parliament and government in holding the regulators to account. For example, when the regulators make rules using the powers that FiSMA gives them, they are required to do so in a way that advances their objectives. When notifying the TSC of a consultation, the regulators will be required to set out the ways in which their proposals advance the objectives and are compatible with their regulatory principles. This will support ex ante scrutiny of proposed rules at a point in the process where there is scope to influence the final outcome.
The changes that the Bill makes regarding cost-benefit analysis, including the additional challenge provided through the formation of a new cost-benefit analysis panel, will ensure that Parliament has access to high-quality information on the expected costs and benefits of new regulatory proposals to inform their scrutiny. The Treasury may also make recommendations to the regulators on aspects of the Government’s economic policy to which the regulators should have regard, known as remit letters. The new provisions in Clause 33, with equivalent provision made elsewhere in the Bill for the Bank of England and the Payment Systems Regulator, will require the regulators to respond in writing to these recommendations and the Treasury to lay the responses before Parliament. Clause 37 enables the Treasury to require the regulators to publish relevant information on a more frequent basis than in their annual reports, or in greater detail. This can also be used to support parliamentary scrutiny and oversight. For example, it could be used to publish further information on authorisation decisions, as highlighted by my noble friend Lord Hill.
These changes are designed to support Parliament in fulfilling its existing role in scrutinising the work of regulators. If there is a concern that any of the regulators’ rules are not operating effectively, the Bill gives the Treasury a power to require the regulator to review its rules when this is in the public interest. When appropriate, the Treasury may specify that the review should be carried out by an independent person rather than the regulator.
I reassure the noble Lord, Lord Tunnicliffe, that the Government expect that this power will be used only exceptionally, and that any such direction must be laid before Parliament, but I think noble Lords will agree that it is an important element of these reforms. I also expect that, in considering the exercise of this power, the Treasury will consider representations from relevant parties, including within Parliament.
The provisions we have put forward in the Bill seek to balance the operational independence of the regulators with clear accountability mechanisms and appropriate democratic input. We have heard a range of views on where that balance should lie, and the Government are confident that we have struck it in an appropriate way. We will continue to listen and will discuss further ideas in Committee in a thoughtful and constructive way, and will welcome suggestions from noble Lords in this area, including from my noble friend Lord Ashcombe, who I congratulate on his maiden speech, as I do my noble friend Lady Lawlor on her contribution to the debate today.
More broadly, on the regulators’ capacity to take on their further responsibilities, my noble friend Lord Grimstone asked about the FCA board. The Government believe that the board comprises members with extensive and broad experience in financial services, consumer advocacy and governance, among other things. The Government are further strengthening the FCA board this year, with Ashley Alder starting as the new FCA chair, as I already referenced. The Government are also running a campaign to appoint at least two new non-executive directors.
The noble Lords, Lord Sikka and Lord Mountevans, asked about FCA capacity more broadly. As noble Lords will be aware, the FCA is part-way through a transformation programme designed to make it a more innovative, assertive and adaptive regulator. Among other things, it aims to ensure that the FCA can make fast and effective decisions and prioritise the right outcomes for consumers, markets and firms. The Government continue to engage the regulator on its work here.
On innovation more broadly, many noble Lords asked about the Government’s strategic approach to crypto assets. We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin. My understanding is that it is still the intention for the Royal Mint to create a new NFT, and an update on this work will be provided in due course. It will be the regulations under the Bill that will allow for the regulation of stablecoins, backed by fiat currency. I can say in response to the noble Lord, Lord Cromwell, that specific definitions will be provided for that in secondary legislation.
The noble Lord, Lord Vaux, asked about the operation of regulatory sandboxes. The Government have emphasised that the testing of technology and practices in an FMI sandbox should not compromise existing regulatory outcomes, including market integrity and financial stability. The Treasury and regulators will very carefully consider what sort of investors should be able to use platforms in a sandbox. If consumers are allowed to use a platform participating in a sandbox, it is essential that the platform operates in a way that is consistent with existing regulatory objectives relating to consumer protection.
I turn to consumer protection and financial inclusion, an issue raised by a number of noble Lords, many of whom have done very important work in this area, and I am grateful to them for that. The noble Baronesses, Lady Twycross, Lady Bryan and Lady Tyler, the noble Lord, Lord Tunnicliffe, my noble friend Lord Holmes and others highlighted the important role that cash continues to play for many. The Government are committed to ensuring through the Bill reasonable access to cash across the UK. The FCA is best placed to deliver an effective, agile and evidence-based approach to regulating access to cash that can endure over time, and the Bill will allow for that. In approaching the policy statement that will inform this, the Government will consider how effective industry schemes have been in ensuring reasonable, free access to cash for individuals, and the policy statement is the right place to consider this matter further. The Government will reflect on the views of parliamentarians when crafting that statement.
The right reverend Prelate the Bishop of St Albans asked how rurality will be considered in that process. The FCA will be obliged to consider local as well as national deficiencies in cash, which would be relevant in rural areas; even if it is not subject to the same rural-proofing guidance, it will be subject to the equality duties around protected characteristics in undertaking that work. Where closure of bank branches affects access to cash, intervening in a closure would be within the scope of the FCA’s new powers in the Bill, provided that this fulfilled the purpose of seeking to ensure reasonable provision of cash access services. More broadly, decisions on in-person banking services are made by the providers of those services. However, that is still governed by the FCA’s existing powers and recently strengthened guidance on actions that must be taken when people seek to close branches to ensure that customers are treated fairly.
Financial fraud was raised by the noble Lords, Lord Hunt and Lord Tunnicliffe, my noble friend Lord Northbrook and many others. In financial services specifically, this Bill takes a crucial step forward in protecting victims of APP fraud. I emphasise that the measure enables the Payment Systems Regulator to take action in relation to any payment system that it regulates, not just faster payments. However, the initial focus is on faster payments because that is where the vast majority of APP fraud currently takes place. The Government expect protections for consumers in other payment systems to keep pace with those established for faster payments.
More broadly, noble Lords are right that tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector. I attended a meeting of the Joint Fraud Taskforce, which brings those different players together, just before the end of last year. The Government are committed to publishing their national fraud strategy later this year.
The consumer duty versus the duty of care was raised by many noble Lords. The FCA’s consumer duty consultation paper explains that there is a lack of consensus on exactly what constitutes a duty of care in this context. It cannot be exhaustively defined, but the FCA’s view is that a duty of care is a positive obligation on a person to ensure that their conduct towards others meets a set standard. It believes the consumer duty meets that definition.
The noble Lord, Lord Davies of Brixton, rightly and powerfully raised the challenges those with mental health issues can face when accessing or using financial services. The Government have taken quite a bit of action in this area, such as the introduction of the breathing space scheme for problem debt. The FCA has also been clear about the need for firms to respond flexibly to the needs of customers with characteristics of vulnerability, which includes mental health.
Buy now, pay later was raised by the noble Lords, Lord Hunt and Lord Balfe. We committed to bring this into regulation and will publish a consultation on draft legislation very soon. We intend to lay secondary legislation in mid-2023, so action on that is under way.
Finally, I am conscious of time, but I must turn more broadly to sustainability and green finance issues, as raised by the noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and many others. They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.
I will not dwell on that any further, except to respond to a point made by the noble Baroness, Lady Hayman, on the French and German regulators having climate change objectives. The codes and objectives for French and German regulators focus on instances of financial risk and greenwashing; the FCA can already consider these issues through advancing its operational objectives to ensure appropriate consumer protection and protect market integrity, and the PRA can similarly consider climate-related financial risks under its existing objective to ensure the safety and soundness of its regulated firms.
More broadly, noble Lords asked about measures that go beyond those in this Bill. I reassure them that work continues on taking forward the policies in the Greening Finance road map, including introducing economy-wide sustainability disclosure requirements—the FCA has launched its consultation on this already—and introducing transition planning requirements. We have also launched the transition plan task force, which has published its consultation, which will close next month. We are committed to updating our Green Finance Strategy early this year, setting out our approach on the green taxonomy and having a net-zero aligned financial sector. I am sure we will have many more discussions on this topic in Committee, which I look forward to, including on deforestation, which was raised by the noble Baroness, Lady Sheehan, and my noble friend Lord Randall.
On deforestation, financial institutions rely on the information disclosed by companies trading in these forest-risk commodities in order to take action, so a global framework for this disclosure is needed to make any action by UK financial services and firms overseas workable. That is exactly why we are a leading backer on the Taskforce on Nature-related Financial Disclosures. I was really happy to meet the task force in Montreal at COP 15 to discuss its work and how we are taking it forward.
I am out of time. I will pick up further questions from the debate in writing; I have not been able to cover them all here. To conclude, this is a landmark Bill, which I think many of the speakers in this debate have recognised, and the most ambitious reform of our regulatory framework in over 20 years. The Government are committed to building an open, green and technologically advanced financial services sector to deliver better outcomes for consumers and businesses. I am confident that the Financial Services and Markets Bill delivers on this commitment.
Baroness Penn
That the Bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the Bill in the following order: Clause 1, Schedule, Clause 2, Schedule 2, Clauses 3 to 8, Schedule 3, Clauses 9 to 13, Schedule 4, Clauses 14 to 20, Schedule 5, Clause 21, Schedule 6, Clauses 22 to 48, Schedule 7, Clauses 49 to 51, Schedule 8, Clause 52, Schedule 9, Clause 53, Schedule 10, Clause 54, Schedule 11, Clause 55, Schedules 12 and 13, Clauses 56 to 69, Schedule 14, Clauses 70 to 79, Title.
Financial Services and Markets Bill
Wednesday 25th January 2023
(1 year, 10 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-I(a) Amendments for Grand Committee (Supplementary to the Marshalled List) - (24 Jan 2023)
Lord Sharkey
“(1) The Treasury may by regulations revoke any legislation referred to in Schedule 1 provided that—(a) the regulators have drafted and, where necessary, consulted on rules that are ready to be enforced, where it is appropriate, to replace the legislation, and(b) any such revocation or replacement which represents a significant divergence from current rules or practice has had the opportunity to be scrutinised by the relevant Parliamentary select committee and the views and recommendations of that committee or those committees have been taken into account.”Member’s explanatory statement
This is a probing amendment to allow debate on possible means of Parliamentary scrutiny of the changes generated by the implementation of Clause 1 and Schedule 1.
Lord Sharkey (LD)
My Lords, the purpose of the amendment is to allow debate on the possible means of parliamentary scrutiny of the many legislative changes that will be brought about by the implementation of Clause 1 and Schedule 1.
The question of meaningful parliamentary scrutiny was frequently mentioned in all parts of the House at Second Reading. There seemed to be consensus that there is nothing in the Bill that would enable proper scrutiny of the changes proposed by the Bill. The whole wider question of parliamentary scrutiny was debated at length in the Chamber on 12 January. That debate was on the report from the DPRRC called Democracy Denied? and the report from the SLSC called Government by Diktat. The titles of the reports accurately represent their urgent concerns.
The debate was led by the noble Lords, Lord Blencathra and Lord Hodgson of Astley Abbotts, the respective chairmen of the Select Committees. There were 35 speakers, 34 of whom were sympathetic to the notion that our system of dealing with delegation is defective and does not provide effective scrutiny. Regrettably, there is plenty of evidence that that is the case, and much of it is presented vividly in those two reports. There is also plenty of evidence to support the view that Governments try, when they can, to bypass real parliamentary scrutiny, and plenty of evidence that the balance of power between Parliament and the Executive has been shifting in favour of the Executive.
I noted at Second Reading, as did the noble Lord, Lord Hodgson, that the Bill seems likely to generate more than 250 pieces of secondary legislation or binding rules. That might seem like a lot, but, in reality, it is just a very small and very important subset of the estimated 4,000 pieces of legislation to be revoked, amended or substituted in the Retained EU Law (Revocation and Reform) Bill, and it may be more than that if the National Archives find any more down the back of their sofa, in addition to the 1,300 which the Government have already overlooked. The scales of 250 to the retained EU law Bill’s 4,000 plus may be very different, but the underlying problem is exactly the same: how can parliamentary scrutiny be effectively and proportionately applied to those proposed legislative changes?
As things stand, the Bill provides that some of the proposed changes will be subject to the negative procedure and some to the affirmative procedure; for others, it is not clear whether they will be subject to any procedure at all. In practice, that amounts to no parliamentary scrutiny at all. The negative SI procedure is not scrutiny of any kind, nor is the affirmative procedure. If SIs cannot be amended and are not voted down, they are not scrutiny. In reality, our SI procedures are legislative theatre. Our recent debates and comments at Second Reading have shown a strong feeling across the House that, as a means of scrutiny, our current SI procedures are simply not fit for purpose. It does not help to have the Government insisting, as I am certain the Minister will, that they do in fact provide meaningful scrutiny. I am equally certain that she will not provide us with any evidence that that is the case.
The amendment suggests a way of achieving a modest amount of parliamentary scrutiny over the regulation-making powers in the Bill. The first part of the amendment simply places in the Bill the exact text of an important commitment made by the Treasury in paragraph 16 of its memorandum to the DPRRC. It says that, as a condition of the Treasury’s power to revoke, the regulators must
“have drafted and, where necessary, consulted on rules that are ready to be enforced, where it is appropriate, to replace the legislation”,
and so on. I am not certain of the force of a Treasury commitment made in a memorandum to a parliamentary committee, and that is one reason why I think it should be in the Bill: to put beyond doubt that the commitment is legally binding.
However, there is another reason for inserting the memorandum text: that is, to be able to ask the Government what the tests are for “necessary” and for “appropriate”, who decides, and how, whether the tests have been satisfied, and how much of this will be transparent. Without such detail, the commitment may be completely meaningless. I would be grateful if the Minister could address those points when she replies.
The second part of the amendment says that before the Treasury can, by regulation, revoke any legislation in Schedule 1:
“any such revocation or replacement which represents a significant divergence from current rules or practice has had the opportunity to be scrutinised by the relevant Parliamentary select committee and the views and recommendations of that committee or those committees have been taken into account.”
That is a rather broad-stroke first attempt at triage and at inserting a scrutiny mechanism. It is intended to identify a subset of changes that represent significant alterations in policy or practice and to provide the opportunity for the relevant committees to scrutinise these if they choose and to require the Treasury to take into account any views or recommendations expressed by the committees. The word “significant” is obviously key. We will need some specified tests for significance or perhaps leave it to the discretion of the relevant committees to decide for themselves. The amendment is not prescriptive about what form any committee scrutiny might take; that seems best left to the committees themselves.
I am sure that debate will generate improvements on Report or entirely different and better methods of ensuring that Parliament can play a meaningful scrutiny role with respect to the provisions in the Bill and perhaps make a contribution to addressing the similar but numerically much larger problem presented by the Retained EU Law (Revocation and Reform) Bill.
I conclude as I did at Second Reading by saying that the structure of our financial services regime is far too important to be left to the Treasury and the regulators alone. Real parliamentary scrutiny is vital, but it is entirely absent from the Bill. I look forward to hearing the contributions of other noble Lords. I beg to move.
Baroness Noakes (Con)
My Lords, as this is the first day of Committee, I declare my interests as recorded in the register, in particular that I hold shares in listed financial services companies. I will not comment on the government amendments in this group; I am taking those on trust.
I share the desire of the noble Lord, Lord Sharkey, for Parliament to be involved in the new rules that will replace retained EU law, but this is part of the larger issue of how there will be parliamentary accountability of the regulators. A number of us have tabled amendments of slightly different varieties on how to achieve that in the Bill. I for one will not contribute to that issue in this debate, because it is better saved until the various mechanisms that some of us have proposed are debated later in Committee.
I have two amendments in this group: Amendments 244 and 245. At Second Reading I acknowledged that the replacement of retained EU law on financial services would take some time, but I felt that the process needed the discipline of a hard stop along the lines of the Retained EU Law (Revocation and Reform) Bill. I have not copied that Bill, with its deadline of the end of this year, but I have instead proposed one three years later: that is, on 31 December 2026.
That will doubtless disappoint some hardliners among my Brexiteer colleagues, but I see that as a pragmatic compromise between getting the issue fixed and letting the regulators do a proper job in turning EU rules into something that works for the UK or indeed, whenever possible, removing the rules entirely.
I am not convinced that, left to themselves, the FCA and the PRA will prioritise the task of dealing with the full corpus of retained EU law, especially once the first batch of relatively easy issues has been dealt with. A deadline is a simple device in order to incentivise them to get on with it or risk losing the related law entirely.
If my noble friend resists the notion of a statutory deadline, even though it is government policy for retained EU law generally, perhaps she will explain what sticks and carrots the Treasury has at its disposal to get the job done within a reasonable timeframe. I do not think it reasonable to have this large body of EU law left in limbo for any considerable period of time.
Viscount Trenchard (Con)
My Lords, I share the views of the noble Lord, Lord Sharkey, to a large extent, but I agree with my noble friend Lady Noakes that the question of parliamentary scrutiny is better dealt with when we come to that part of the Bill to which her amendments are tabled.
I declare my interest as a director of two investment companies, as stated in the register. On the whole, I welcome the Government’s amendments in this group and look forward to hearing my noble friend the Minister explain them. Insofar as they increase the powers of the regulators, I welcome the improved clarity and transparency, but we need to improve the method of scrutiny and degree of regulators’ accountability to Parliament, as I have said.
I support my noble friend Lady Noakes in her Amendments 244 and 245. While the task of reviewing, revoking and replacing retained EU financial services law is monumental, it is important that there be a time limit to this process. Ideally, it should be completed this year, because more than four years have passed since the passage of the withdrawal Act and more than two years since the end of the transition period. We have not acted as fast as we should perhaps have done in moving to exploit the opportunities available to make bold moves away from the cumbersome, expensive and anti-competitive regulatory regime that has progressively constrained the competitiveness of the City of London and its innate ability to innovate. There has been some inbuilt resistance to making any changes, and I am glad that this Bill takes some significant steps in that direction.
I would have preferred the Bill to be more radical and to require that certain EU regulations automatically be repealed without replacement, such as the whole regime around the alternative investment fund managers directive and its subordinate legislation. That directive was opposed by the whole City establishment and has served merely to divert new and innovative fund managers wishing to launch new products for professional investors away from the City to other jurisdictions. However, too little work has yet been done, and I think that my noble friend’s suggested latest revocation date of 2026 is a reasonable compromise. I look forward to discussing that later, and I hope the Government will accept my noble friend’s two amendments.
Lord Hunt of Kings Heath (Lab)
My Lords, I want to lend some support to the noble Lord, Lord Sharkey, for raising the issue of parliamentary scrutiny in relation to this clause and Schedule 1. Clause 1 and Schedule 1 are an extraordinary exercise in executive powers through regulations and the regulators. In a later debate some days down the line, we are coming on to that issue, but it is appropriate that we start this debate with a reminder to the Minister that the issue of parliamentary scrutiny is very important.
I just want to reflect on what the noble Lord, Lord Sharkey, said about regulations. The Minister will no doubt pray in aid the fact that Parliament has processes for dealing with regulations. In your Lordships’ House, praying against a negative SI leads to an affirmative debate, unlike in the other place, and we debate it in full—but to what end? I have tabled a Motion today in the Chamber relating to an affirmative Motion on a completely different issue, data use in the NHS. I have no doubt that we will have a very good debate, but the Government will just plough on without having to take account of any debate that has taken place.
Baroness Altmann (Con)
My Lords, I too congratulate the noble Lord, Lord Sharkey, on his amendment. I agree with his explanation of why parliamentary scrutiny is so important and his interesting explanation of the choice of words he has used in his amendment. I accept that later on, as my noble friend Lady Noakes said, we will debate parliamentary scrutiny once again, but in my view it is absolutely vital that we in this House recognise the dangers coming at us from various legislation that is taking away Parliament’s future ability to oversee and scrutinise important legislation.
I also understand what my noble friend Lord Trenchard said about the importance of allowing competition. However, we must not lose sight of the fact that what is sometimes called regulation may of course be inconvenient for the financial services providers and hamper the ability for innovation and free-for-alls to try different things, but it is also relevant to think of regulation as consumer protection. These are rules that will stop financial services companies taking advantage of consumers.
Asymmetry of information in financial matters is obviously something we are all too aware of, but just doing away with regulation, rushing to get rid of all the EU regulations without proper scrutiny and saying that the Financial Conduct Authority must work to a deadline, otherwise it will drag its heels, misses the point. If there is a forced deadline that precludes scrutiny and consideration of what these regulatory changes will mean for the general public or even more informed investors, without considering those risks, one has to ask whether it is resourced enough to do that. If not, which most of us would probably suggest is the case, what other elements of its duties will not be attended to while it is rushing to perform this job to an artificial deadline? It is a massive task—I respect that.
We need to take seriously the thrust of the remarks by the noble Lord, Lord Sharkey. I also look forward to hearing my noble friend’s remarks about the Government’s own amendments.
Lord Naseby (Con)
My Lords, I was one of the 34 who took part in the debate on secondary legislation, and I previously had the privilege of being on the Public Accounts Committee for some 12 years.
The debate on those two reports was an absolute watershed. Here is a golden opportunity to ensure that this Bill, which is so fundamental to the growth of our country, particularly the City of London, at a particular time can be pioneering. I am sorry to load that on to my noble friend; at any other time it might not be loaded on to her.
The key elements are there: secondary legislation basically means that those of us here in Parliament, in both Houses, have an opportunity to debate any changes made to a Bill. If I had to take issue with the noble Lord, Lord Sharkey, it is that he has in his amendment, at proposed new paragraph (b), the word “significant”. One company’s “significant” might be insignificant to another, and vice versa, so I do not think that is quite the right word to use.
We will go through this Bill in detail. Others have made their points, but for me—I did previous work with two quoted companies and a friendly society in the role of chairman—this is an opportunity. We must recognise that growth for our country is fundamental. That fundamentality is, to a fair degree, influenced by the Bill before us.
Baroness Bowles of Berkhamsted (LD)
My Lords, for the purposes of Committee I declare my interests in the register, in particular as a non-executive director of the London Stock Exchange.
I will comment only briefly in this debate because, as others have said, it touches on some issues that run throughout the Bill. This is a matter of great importance: how we transpose the legislation and get the benefits of that transposition into UK law. If we have the flexibility, we ought to be able to use it, but financial services are our largest-earning industry, and I believe it is right that Parliament has to be able to keep track of what is going on and why when there are changes, and, as has already been pointed out, to have its attention drawn to significant changes.
If this amendment comes round again on Report, I would also like to see in it a report on the resulting change to the regulatory perimeter. Quite a lot of change is already going on and it is not necessarily something that we have had our eye on. Some of this change will be entirely at the behest of the regulators rather than in the hands of government. We will come across this later. It was always clear with EU legislation—maybe irritatingly so, in some instances—that the regulator “shall” do something, which did not give it any room for manoeuvre if it thought something did not need to be done. It looks like we will give our regulators the bits of wriggle room and the flexibility that we want, but it is wholly right that there should a report back to draw to the attention of our House and those who scrutinise this the intended difference in the regulatory perimeter, among other things, so that we can watch it and see how it goes.
I will return to the regulatory perimeter in many ways, because one of the problems is that once something is inside that perimeter, a whole truckload of things that were not really necessary might come along. AIFMD might be a good example of that. It is a whole load of extra reporting: where has it gone, what has happened to it, and has it done anything?
At the same time, if bad things are going on, you want there to be some kind of powers of intervention. It should not be a whole caboodle, with lots of rules and regulations and reporting on one hand but nothing on the other. We need to be able to do the things that are in the middle and bridge that gap. Given the way the edges of what is or is not a financial service are getting more and more blurred, what with the big tech industries and so on as well as the more nimble fintechs, we need that ability to ensure that where there is harm there is a route for action, without it having to mean that the whole kitchen sink of reporting is thrown at it across the board.
Lord Davies of Brixton (Lab)
My Lords, I thank the noble Baroness, Lady Noakes, for pointing out that the process here differs from that in the retained EU law Bill. Could the Minister in her response set out more clearly the differences between the process here and the process in the other Bill, and the reasons for the differences?
Lord Thomas of Cwmgiedd (CB)
My Lords, I have just one brief point. I agree with the comments so far made that this may not be the appropriate place to deal with the whole problem of delegation, because this deals with revocation, although the amendment sensibly deals with what is inevitable, which is the replacement. It seems to me that parliamentary scrutiny is essential. We need to come back to this time and time again.
It is essential because, unlike the position of a Minister or that of a Government, we have, first, the issue of the accountability of regulators and, secondly, we do not want to politicise regulators. That is Parliament’s job. Therefore, we have to scrutinise this whole area, where we are moving financial services to regulators and away from being dealt with largely through a political process in the European Union. We are hoping to make great improvements, but the one thing we are losing is the input of the political process. One cannot pretend that the direction of financial services policy is not a political question as well as a regulatory question. Politics should be for this House and, although I hate to use this word, we should not taint the regulators with politics.
Baroness Kramer (LD)
My Lords, I must agree with every word that the noble and learned Lord, Lord Thomas, has just said. I thank my colleague and noble friend Lord Sharkey for putting this amendment where it is, because the fundamental constitutional issue that underpins this Bill is probably one of the most crucial that we will address, not just in the next days of debate but, frankly, as a Parliament. I think that if the public had any sense of the authority that is now, in a sense, being passed to regulators without accountability—and to some extent to the Treasury without accountability—frankly, they would look at us and say to Parliament, “That is a dereliction of duty. We expect you to be responsible”.
This is not just a political process but part of a fundamental democratic process. As others, including the noble Lord, Lord Naseby, have said, what could be more fundamental than framing an industry that not only determines so much of our national economy but, when it goes badly wrong, can completely undermine that whole economy. I very much support the amendment brought by my noble friend. I know that it was tabled to trigger discussion and I look forward to the further debate that we will have later.
Lord Tunnicliffe (Lab)
My Lords, I too thank the noble Lord, Lord Sharkey, for tabling his amendment and provoking this discussion. It is interesting to find such a wide consensus on the general direction. I support the general direction which has emerged in the debate, but I question whether this is the right solution.
Nobody could be more sensitive to the meaningless process of the scrutiny of affirmative SIs; I have done hundreds over the years. It is a very nice little club. It is usually me and the Minister—and, I have to admit, the Liberals often provide the third person in the room, as it were. It is ridiculous at that level. There is a great attraction in saying that the House should consider secondary legislation as a whole and produce some solutions, but the problem is that that would take for ever.
We have a particular issue with secondary legislation in this Bill. As those of us who ploughed our way through the last financial services Bill will remember, there is a big chunk of EU legislation which, whether we like it or not, went through the democratic process in Brussels and was then put into UK law. That has been, effectively, removed and in this Bill we are creating the processes to substitute it. We are pretty well agreed that substituting 500,000 pieces of law—whatever the figure is; I do not know—through primary legislation is impossible, and that it has to be done by secondary legislation. However, because that intermediate level of legislation is so important, we must, for the purposes of financial services regulation, have a better scrutiny process than we do at the moment.
As the noble Baroness, Lady Noakes, pointed out, she, a number of other noble Lords and I have tabled a lot of amendments and we will have a good discussion. I see myself working with others, both in this Room and further afield, to see whether we can produce a consensual set of amendments to improve scrutiny in this area. In the meantime, I hope the Minister will listen to this debate and those that will follow and see whether the Government can come up with their own proposals to address this problem of scrutiny. Whether we like it or not, it is unfortunate that when the amendments we pass in this House get to the other end, they get chopped. If we can achieve some sort of consensus with the Government, that would be the best way through. If we cannot, I think we have to send something pretty powerful back to the other place, saying that this scrutiny process must be improved.
As an aside, I think it was yesterday when my colleagues at the other end said they had done an SI. I asked, “How long did you take?”, and of course the answer was, “Under 10 minutes”. Their level of scrutiny is worse than ours. At least we make useful points—not that anybody really listens to them.
I am pretty agnostic about the amendments in the name of the noble Baroness, Lady Noakes. My experience of deadlines is that they are real only in retrospect: you know of a deadline for real only when you have passed it. If you motor up to an impossible deadline—which is what these amendments may produce—you introduce a law to change it. I can see the benign nature of her intent but not what good it would do, in practice, somehow to punish an organisation that has missed a deadline by saying, “You won’t be able to make the rules, but we have to make the rules because we need the rules,” and so on. I am not going to get carried away about it, but I am not that seized of it.
The Minister will no doubt give us an appropriate assurance about her bucketful of amendments—that they are technical, minor and all that sort of thing—and I will listen. One is left wondering how many amendments will emerge from down the side of the sofa between now and Report, and even perhaps thereafter, because it seems there has been a failure to find all these amendments by the due date for the original procedures in the Commons. It is unfortunate that so many were missed that they have to be introduced now, but we will have no opposition to them.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I will speak first to Amendments 1, 244 and 245, before turning to the government amendments in this group.
With respect to Amendment 1, the Government are seeking the agreement of Parliament to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation, whereby the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.
As the noble Lord, Lord Sharkey, noted, it is not the Government’s intention to commence the repeal of retained EU law in financial services without ensuring appropriate replacement through UK law. That commitment was made by the Economic Secretary to the Treasury, including to the Treasury Select Committee and, as the noble Lord noted, in our memo to the DPRRC. His Majesty’s Treasury will commence a revocation only once appropriate secondary legislation and rules are in place.
Parliament will therefore play a key role in scrutinising any replacement secondary legislation. Where the Treasury replaces retained EU law through the powers in the Bill, this will almost always be subject to the affirmative procedure, with some limited exceptions specified in the Bill.
I recognise the wider debate in the House of Lords about secondary legislation and its scrutiny. I will resist the invitation from my noble friend Lord Naseby for this Bill to be the place where we address that wider debate. I point out to noble Lords that, in its report on the Bill, although the DPRRC did not bring to the attention of the House the delegated powers related to retained EU law, it did report on one specific issue regarding hybrid instruments, which I will respond to shortly. The committee commended the Treasury for
“a thorough and helpful delegated powers memorandum.”
That is not to say that the question of parliamentary scrutiny of the provisions in the Bill and the regulations that will be made under it is not important. I know that we will return to it many times during this Committee.
The Government have made efforts to set out how the framework provided by the Bill will work in practice. As part of the Edinburgh reforms, the Government published their approach in a document entitled Building a Smarter Financial Services Framework for the UK, which makes it clear that they will carefully sequence the repeal to avoid unnecessary disruption, and there will be no gaps in regulation. The Government have also recently published three illustrative statutory instruments under the powers in the Bill to facilitate scrutiny of the powers under which they will be made in Parliament.
It is also worth noting, as the noble and learned Lord, Lord Thomas of Cwmgiedd did, that large parts of retained EU law will be replaced by the regulators through their rules. The regulators have the tools and expertise to make rules at pace, in line with their statutory objectives, within a model of appropriate parliamentary scrutiny and oversight. Clause 36 of the Bill supports Parliament in that scrutiny and oversight, requiring the PRA and the FCA to notify the Treasury Select Committee when they consult on rules and to respond to any representations made by that Committee. That is a specific element of the provisions to which we will return at a later stage in Committee.
Ahead of considering the Bill, the Treasury Committee itself considered the appropriate model for parliamentary scrutiny of regulatory rules, concluding that effective scrutiny of regulatory proposals should be carried out through a targeted approach, with Parliament scrutinising proposals in more detail where there is a public interest in its doing so. The Government consider that the provisions of the Bill are consistent with the recommendations of the Treasury Committee.
I turn now to Amendments 244 and 245 tabled by my noble friend Lady Noakes. I can assure her that the Government intend to act at pace to complete the repeal and replacement of retained EU law, but we must also act in a way that allows everyone to adapt to the new model. That will often require the regulators to make replacement rules, which must be done in line with the appropriate procedures for consultation and engagement, as noble Lords have pointed out. As my noble friend Lady Altmann pointed out, there is a balance to be struck between the pace at which we undertake that work and the proper processes for consultation and scrutiny that that will need to be subject to.
Baroness Kramer (LD)
I am sorry to interrupt, but perhaps the Minister could clarify something we discussed before. What she describes puts Parliament in the position of a consultee, which I do not believe is the appropriate role for a democratically elected Parliament. Can she confirm that that is exactly what she is saying?
Baroness Penn (Con)
No, that is not what I am saying; I am saying that we will have procedures in place to allow Parliament to scrutinise legislation. We will also have procedures in place to ensure that, as part of that, relevant parliamentary committees can be notified of work by the regulators. That is just one aspect of how Parliament will conduct its role in the scrutiny of financial services, legislation and regulation. While the notification of consultations is one aspect, there are many others, such as the procedures for secondary legislation, the other procedures that Select Committees have to scrutinise the regulators’ work, the procedures for the provision of annual reports laid before Parliament, and others. So Parliament will be notified of consultations, but that does not imply that the Government view Parliament simply as a consultee in the process.
Lord Tyrie (Non-Afl)
The Minister has said that the use of Treasury powers under this Clause will normally be subject to affirmative resolution by Parliament. In the Minister’s experience—she could offer her personal view if she feels unable to offer a government view—does she think that that scrutiny is usually relatively effective or ineffective?
Baroness Penn (Con)
My Lords, standing here at this Dispatch Box, I would offer only a government view. I view it as entirely appropriate for the model we have set out today. I acknowledged the wider debate being had within the House of Lords on different mechanisms of scrutiny and lawmaking. As I have noted, the approach we have taken in this Bill has not been drawn to the House’s attention by the Delegated Powers and Regulatory Reform Committee.
In the model of financial services regulation that we seek to put in place, a large number of the rule-making powers flow to the regulators. We are delegating that further to the independent regulators that have the expertise to make rules in this area. This is the right model for the UK. We have consulted on it carefully and extensively, and we received broad support in that consultation. It reflects the careful approach we have taken and the choice we have made as to the model for the regulation of our financial services.
Baroness Noakes (Con)
I was interested in what my noble friend said about a forward look. Can she explain a little more what this forward look is and where one might find it?
Baroness Penn (Con)
In short, the approach is set out in Building a Smarter Financial Services Framework for the UK, which was published alongside the Edinburgh reforms. A number of those reforms set out where our priorities are. They set out where we have already done consultations and will be ready to move forward with new secondary legislation or regulator rules. They set out where we are starting consultations or calls for evidence in a number of areas where we seek to make changes. They also give a forward look at some of those other areas where we seek to make changes but have not yet published our consultation or call for evidence.
Baroness Noakes (Con)
Does that represent a comprehensive analysis of what the Government expect to happen to all the retained EU law covered by the powers in this Bill?
Baroness Penn (Con)
No, it does not. This comes back to the point about prioritisation. It represents the Government’s initial prioritisation of the measures where they think that making amendments or using the powers under this Bill to repeal the retained EU law and put in place regulator rules under our new model would have the biggest or most important effect. There will be subsequent work to do after what is set out in that vision, but in sequencing it is important that we direct our efforts and resources to measures that will make the most difference.
My noble friend asked how the regulators and the Government can be incentivised to complete the replacement of EU law in a timely way. We are working closely with the regulators to co-ordinate the programme to deliver the rules and legislation that will be necessary to enact the repeal of retained EU law. Where necessary, the Treasury could use the power under Clause 28 of this Bill, which sets requirements on the regulators to make rules in specific areas of regulation. So there would be that option within the powers in the Bill.
The noble Lord, Lord Davies of Brixton, asked about the difference in approach in this Bill from that in the Retained EU Law (Revocation and Reform) Bill. Unlike the approach taken in that Bill, this Bill repeals retained EU law in financial services, as set out in Schedule 1. The Government will continue to repeal and replace the contents of Schedule 1 until we have an established a comprehensive FSMA model of regulation. It will take time for regulators to make, and for industry to adapt to, technical and less important rules, as well as delivering major reforms. The Treasury developed a bespoke approach to financial services, given the existing role of the regulations to preserve that and bring the regulatory regime into line with the FSMA model.
I hope I have addressed the points about the desire to complete this work in a timely way, the need to balance that with resources for regulators and, indeed, industry to adapt to this change, and the importance that the Government place on therefore prioritising the work so that those reforms that have the biggest impact will take place earliest.
I turn to the government amendments in this group, Amendments 20, 28, 29, 242 and 243, which are all in my name. The Treasury undertook an extensive exercise to identify retained EU law relating to financial services to be repealed by this Bill, listed in Schedule 1. Late last year, the National Archives identified additional pieces of retained EU law across the statute book, some of which relate to financial services. The Government have also, through their own work, become aware of a small number of additional pieces. Amendments 2 to 20 make changes to Schedule 1 as a result of this. Government Amendments 2 to 16 and 18 add a number of statutory instruments, and Amendments 19 and 20 place three provisions in FSMA into Schedule 1 to be repealed. Amendment 17 removes one statutory instrument from the schedule, which was included in error, due to containing a small amount of retained EU law alongside largely domestic legislation.
I reassure the noble Lord, Lord Tunnicliffe, that every effort has been made to identify all legislation that should be repealed though this process. If he looks at the balance of what we have identified and what is in these amendments, it was a comprehensive job. None the less, to be as transparent as possible, when we find further measures that would be provided for under this Bill, we have sought to include them by way of amendment.
Amendment 28 clarifies the legislative effect of Clause 3, ensuring that the Government have the necessary tools to create a comprehensive FSMA model of regulation. It does so by clarifying that the Treasury can use the powers in Clauses 3 and 4 to create powers to make further regulations. Under the FSMA model, the Government are responsible for setting the regulatory perimeter via secondary legislation. There may be times in future when, for example, the Treasury will need the ability to update key definitions that sit within legislation restated under Clause 4, to clarify what sits within the UK’s regulatory perimeter.
Amendment 29 makes a technical fix to the explanation requirement in Clause 6, requiring the Bank of England to explain how updates to its rules are compatible with its new regulatory principles, introduced by Clause 45.
Baroness Kramer (LD)
May I ask again for a bit more clarification, which I specifically asked for on Amendment 28? Is the Minister saying that this is a power for the Treasury to amend primary legislation outside the Bill through secondary legislation designed to enhance the powers of the regulators? Is that what this is? I tried reading the letter but it did not get me any further.
Baroness Penn (Con)
My understanding is that Amendment 28 contains powers to provide for amending secondary legislation, not primary legislation. I will seek a fuller explanation and I suggest that we briefly degroup that amendment, if we reach it today, to provide that explanation for the noble Baroness, so that she has further clarity. I do not think I will provide it for her at this point.
Lord Tyrie (Non-Afl)
That would be very helpful. Before the Minister leaves Amendment 28, can she say whether she discussed with officials whether to add a sunset clause to what otherwise will be a very open and extensive power in the hands of the Treasury?
Baroness Penn (Con)
No, that discussion was not had. The powers are constrained in that they relate to the provisions in place to transition away from and replace retained EU law, rather than going beyond that.
Amendments 242 and 243, put together, enable provisions subject to the negative procedure under an Act other than this Bill to be included in affirmative regulations made under the Bill. This is a procedural change with well-established precedent. Where any element of a statutory instrument is subject to the affirmative procedure, the combined instrument would also be subject to the affirmative procedure, so there will be no reduction in parliamentary scrutiny.
To conclude, the Bill will repeal retained EU law to establish a model of regulation based on FSMA. It will do so in a way that prioritises growth while moving in a sequenced and measured way, and through scrutiny, engagement and consultation. At this stage, I hope the noble Lord, Lord Sharkey, will feel able to withdraw his amendment and that other noble Lords will not move theirs when they are reached. Subject to providing that extra clarification to the noble Baroness, Lady Kramer, I intend to move the government amendments when they are reached.
Lord Sharkey (LD)
I thank all noble Lords who have spoken. I did ask the Minister about the Treasury’s assertion, or guarantee, that it will have replacements where necessary for the stuff that gets repealed, and about the tests for what is “necessary” and what is “appropriate”, how they will be applied and how transparently. I would be grateful if the Minister could write to tell me the answer to my question.
If we are to rely on SIs as a means of scrutiny of the measures in the Bill, that is the practical equivalent of having Parliament largely bypassed in this discussion. We need two fundamental mechanisms for effective parliamentary scrutiny: an effective means of triage and an effective means of revision. I am sure we will return to those issues either later in Committee or on Report. In the meantime, I beg leave to withdraw the amendment.
Baroness Penn
“Official Listing of Securities (Change of Competent Authority) Regulations 1991 (S.I. 1991/2000)”Member’s explanatory statement
This amendment and the Minister’s other amendments to Schedule 1 (except for the amendment at page 100, lines 45 and 46) would add various instruments containing retained EU law relating to financial services to the list of subordinate legislation to be revoked in Part 2 of Schedule 1 to the Bill.
“Official Listing of Securities (Change of Competent Authority) Regulations 2000 (S.I. 2000/968)Financial Markets and Insolvency (Settlement Finality) (Revocation) Regulations 2001 (S.I. 2001/1349)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001 (S.I. 2001/2587) Public Offers of Securities (Exemptions) Regulations 2001 (S.I. 2001/ 2955)Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001 (S.I. 2001/2956)Financial Services and Markets Act 2000 (Official Listing of Securities) (Transitional Provisions) Order 2001 (S.I. 2001/2957)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Electronic Commerce Directive (Financial Services and Markets) (Amendment) Regulations (S.I. 2002/2015)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 (S.I. 2007/ 126)Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Amendment No. 2) Regulations 2007 (S.I. 2007/2160)Financial Services and Markets Act 2000 (Motor Insurance) Regulations 2007 (S.I. 2007/2403)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Reinsurance Directive) Order 2007 (S.I. 2007/3254)Financial Services and Markets Act 2000 (Reinsurance Directive) Regulations 2007 (S.I. 2007/3255)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Takeover Code (Concert Parties) Regulations 2008 (S.I. 2008/3073)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Amendment) Regulations 2009 (S.I. 2009/2461)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009 (S.I. 2009/3128)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Prospectus Regulations 2013 (S.I. 2013/1125)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Payments to Governments and Miscellaneous Provisions Regulations 2014 (S.I. 2014/3293)” Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014 (S.I. 2014/3350)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Qualifying EU Provisions) (Amendment) Order 2016 (S.I. 2016/936)Financial Services and Markets (Disclosure of Information to the European Securities and Markets Authority etc. and Other Provisions) Regulations 2016 (S.I. 2016/1095)Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (S.I. 2016/1194)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Banks and Building Societies (Priorities on Insolvency) Order 2018 (S.I. 2018/1244)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“Financial Services and Markets Act 2000 (Central Counterparties, Investment Exchanges, Prospectus and Benchmarks) (Amendment) Regulations 2020 (S.I. 2020/117)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
Member’s explanatory statement
This amendment would remove from the list of instruments to be revoked under Part 2 of Schedule 1 the Payment and Electronic Money Institution Insolvency Regulations 2021 (S.I. 2021/716) which predominantly comprise domestic regulation.
“Financial Services and Markets Act 2000 (Qualifying Provisions)(Amendment) Order 2022 (S.I. 2022/1252)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
“(za) section 55J(7A) to (7C);(zb) section 55KA;”Member’s explanatory statement
This amendment would add sections 55J(7A) to (7C) and 55KA of the Financial Services and Markets Act 2000 to the list of legislation to be revoked in Part 4 of Schedule 1 to the Bill. The provisions implemented in part the Solvency 2 Directive and concern powers of the Prudential Regulation Authority to cancel permission of certain undertakings.
“(fa) section 367(3)(za);”Member’s explanatory statement
This amendment would add section 367(3)(za) of the Financial Services and Markets Act 2000 to the list of legislation to be revoked in Part 4 of Schedule 1 to the Bill. The provisions implemented in part the Solvency 2 Directive and concern winding-up petitions where the Prudential Regulation Authority has cancelled permission of certain undertakings.
Baroness Worthington
Member’s explanatory statement
These amendments maintain the duty for FCA to set position limits on commodity derivatives and over the counter equivalents, and the associated powers to request information and intervene, whilst onshoring the power to set limits which are appropriate for the UK.
Baroness Worthington (CB)
My Lords, I am very pleased to speak to this group of amendments this afternoon, having sadly been unable to make Second Reading. I declare my interest as a co-chair of Peers for the Planet. I also declare my relative ignorance of this topic, as I am not steeped in the details of financial services. I very much approach this issue from a layperson’s perspective, guided by common sense. Much of my efforts here are to apply parliamentary scrutiny to this very complex issue and to seek reassurances from the Minister.
As we debated in the previous group, it is vital that we have proper scrutiny of proposed changes to laws and regulations governing financial markets. Potentially poorly regulated markets could have significant negative real-world consequences, as we have seen in the past. Complexity is now endemic in this sector and can catch regulators, and indeed parliamentarians and Ministers, out. Derivative markets are particularly complex and require especially careful scrutiny.
My Amendments 21 to 25 and 41 concern the proposed future regulation of trading in commodities and their derivatives. Many noble Lords will be aware of this, but to give some background, derivatives are used in the financial markets and the wider economy to hedge exposure to commodity prices in the future. However, this opens up the opportunity to speculate and seek profit from volatility. Roughly two-thirds of commodity trading relates to commodities in the energy and food markets. Therefore, unchecked speculation and poor regulation in these markets can have very real-world consequences. Some types of commodity derivative investment are of course socially desirable. For example, soft commodity or energy producers seeking to insure themselves against future risks arising from such things as weather and an unstable climate are making a necessary hedge to keep products economic. However, there are dangerous aspects of this as they relate to food and energy, which affect people’s lives and the affordability of living.
Momentum-based trading strategies can exacerbate steep price rises and the cornering of markets, by which I mean taking large positions that are disproportionate to your genuine participation in the market, which could force unnatural or artificial scarcity into the market and raise prices. More generally, increasing volumes of capital being tied up in future derivatives removes money from the real economy today, where it could be delivering much greater real-world impacts.
There is overwhelming evidence that unchecked speculation produces price bubbles. I do not intend to go into this in detail, but in relation to oil, a 2021 piece in Resources Policy looked back at a whole host of research dating back to 2009 in highly cited journals. So firm is the consensus that there is now a whole body of techniques dedicated to measuring and modelling bubbles. We are well past the point of discussion of whether there is a risk; it is now about how we manage it and its impacts.
The co-author of last October’s UN Conference on Trade and Development—UNCTAD—trade review said that a ratio of around 70% real hedging and 30% speculation might be seen as “healthy”. However, he added that what we see in the market today indicates that the ratio has been reversed: 70% speculation and 30% real hedging. The same report warned of a policy-induced global recession. The report said that insufficient attention has been paid to the “betting frenzies” on future markets in the current crisis and called on Governments to tighten rules on speculation. However, with this legislation we seem to be doing the opposite.
EU legislation on commodity derivatives was introduced, and it was not simply pointless bureaucracy. There was clear evidence in the run-up to and during the financial crash of 2008 that food and energy prices were being driven upwards not by shortages but by fevered speculation, so action was taken. Investment banks were seen to be profiting by around $16 billion a year from commodity trading. Thanks to these new approaches, we have seen that profit-making fall by around three-quarters, according to analysis from the research firm Coalition. So there was a reason for the EU regulations that we are seeking to modify as we translate to post-Brexit financial regulation.
The general point is that we should be seeking to allow the socially beneficial, but not allowing bubbles to be created in this market. We should not be making it easier to do that but keeping a careful eye and tracking trends, while requiring clear data and better disclosure. You could argue that the EU perhaps overreached or did not get it exactly right, and that we should seek to take our own approach, but I have some questions about the Government’s proposals in the Bill.
It appears to me, and I seek reassurance from the Minister on this, that Schedule 2 is handing the power of setting appropriate position limits and controls—and the maximum position any firm can take on trading on a commodity—to financial exchanges, or certainly taking the power to do so. But are those exchanges not incentivised commercially to maximise liquidity and volumes of trade, so does this not create something of a conflict if they are also setting their own limits?
These new arrangements would see the FCA retaining backstop powers to give directions, but only in certain fairly narrowly defined circumstances. It can request information and intervene, but the drafting suggests that the exchanges would be free to set their own limits. Is this the case and, if so, how does the Minister expect them to handle this potential conflict between their commercial interests and a more cautious approach to the prevention of harmful speculative bubbles?
There is also the question of what will be regulated in future. The current rules cover both over-the-counter trades and exchange trades but, as I understand it, this new approach is about simply deciding not to continue to seek oversight of over-the-counter trades. From what I have been able to read, this seems to be based on the fact that those consulted said it was too difficult to do. That does not seem a good enough reason to remove the oversight of OTC trades and focus simply on exchange trades.
There is also the point about exchanges having less oversight of systemic risks building up in the global market. Whereas the FCA engages via the IOSCO, the International Organization of Securities Commissions, and the FSB—
Baroness Worthington (CB)
I shall seek to remember where I was in my speech. I was talking about international co-ordination and how the FCA currently is part of a global network of regulators, and therefore has a more effective chance of spotting systemic risks building up in the global markets, and that the exchanges would not be plugged in at the same level of international co-operation and co-ordination. The FSB warned, in the aftermath of Russia’s invasion of Ukraine, that
“prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain”.
So I ask the Minister: in these uncertain times, how certain are we that UK exchanges can be patched into that wider market scrutiny and regulatory infrastructure, which the regulator currently has the power to do?
The powers retained by the FCA are limited to intervening on operational objectives and, most relevantly here, consumer protection and integrity, but I am concerned that that definition of consumer may be rather too narrow. It could refer, as it does in Section 1 of the 2000 Act, to the investor, rather than the man or woman on the street. I worry that “integrity” could simply refer to soundness, stability, orderliness and lack of crime. I would welcome the Minister’s view on how this maps on to the existing grounds for regulation that are to be revoked, which are much broader and relate to preventing market abuse and market distortion and try to ensure that there is no artificial inflation of commodity prices.
My concern is that we can have a sound and orderly market which works very well for investors but inflates prices for consumers and businesses and adds extra costs on to essential commodities. I believe the FCA should retain the power to intervene in these cases, and that the definition of grounds for intervention should be as broad as it is currently.
I mentioned the over-the-counter derivatives no longer being covered in regulation. I was rather worried to read in the Treasury’s consultation on wholesale markets that:
“The objective of including them as part of the regime was to prevent market participants from circumventing regulatory requirements that are applicable to exchange traded commodity derivatives by dealing in lookalike OTC contracts. However, in practice, identification of these contracts has proven difficult, and they have only been reported in a very small number of instances.”
Therefore, the Treasury concluded that
“the inclusion of these contracts and uncertainty about the scope of this requirement imposes increased legal risk and potential compliance costs for firms.”
To me, that sounds as though something important is proving difficult and, rather than seeking to solve it, make it easier and provide clearer guidance, we have decided to drop it altogether.
The consultation goes on to say:
“to ensure market integrity, the government proposes that the FCA and trading venues should continue to take account of relevant OTC contracts when monitoring markets.”
But amendments to Regulations 27 and 28 take away the power from the FCA to do this and to request information on these contracts. That is my reading of it, but I look forward to reassurance or clarification from the Minister. If the FCA is not able to monitor these transactions, how can we oversee them? Would it not be more desirable to have the FCA retain the powers it has?
I am grateful for the support of the noble Baroness, Lady Bennett of Manor Castle, for my amendments. Essentially, they seek to unhook the legislation from the EU but continue to require the FCA to maintain the same powers to set position limits and to intervene as widely as possible to ensure proper consumer protection and maintain international co-ordination, which is so essential in these markets.
Amendment 41 requires the FCA to make rules requiring listed companies to publish the revenue and earnings attributable to trading commodity derivatives and economically equivalent over-the-counter contracts. I think this is important because I have personal experience—and there is plenty of anecdotal evidence—of firms that are operating very significant trading activities but hiding their profits in their financial statements and in other parts of their accounts, because to disclose quite how much was being made from trading would bring a lot of questions about the nature of those companies. I am specifically talking about energy companies, which have very significant trading activities and are not, at the moment, required to disclose in their accounts the level of profit they are making from those activities.
This is important because it materially affects the ability of financial services to assess the health of these companies. If we are not seeing the extent to which they are engaged in these derivative-trading activities and we are unable to see where the profits are being made, how can we make fair and open assessments about the nature, success and propriety of their business? It is important that we give ourselves the transparency to see exactly how much of this is happening and the degree to which it is altering the balance sheets of companies in these sectors, which are so essential to maintaining our standard of living and, in the case of energy and food companies, have such a material impact on our environment and global climate.
I am sorry that that was a very long speech, but I look forward to hearing the Minister’s responses and to continuing the debate.
Baroness Noakes (Con)
My Lords, I will speak to the amendments from the noble Baroness, Lady Worthington. I do not support them, because I think that what the Government are trying to do in this Bill is moving in the right direction.
We have to remember that derivatives are basically a success story. It is a huge financial activity. The total value of derivative trading is sometimes estimated to be a multiple of global GDP. Of course, commodity trading is only a relatively small part of that, but it is important because the advantages of trading allow effective risk management, price discovery and market efficiency. Those are the sorts of things that actually help consumers, at the end of the day, so we must be very wary of trying to interfere in what is fundamentally a successful part of our financial infrastructure.
Of course, speculation is involved in derivatives, there is risk for some counterparties—and sometimes systemic risk—in derivatives, and sometimes they are extremely complicated as individual instruments, even to understand. But they are part of and underpin something that works well for markets overall. We should intervene in that only if absolutely necessary.
My own view is that the changes in the Bill probably do not go far enough to take the dead hand of EU prescriptive regulation away, but they are a solid move in the right direction. As the noble Baroness, Lady Worthington, pointed out, they replace a mandatory regime with a permissive one that allows the rules to be designed for the particular markets. In particular, the changes in Schedule 2 will allow the FCA to transfer responsibility for setting position limits to trading venues, if indeed position limits are needed. For some time now, the FCA has not been enforcing excesses on position limits in respect of the majority of contracts, and the world has not come to an end.
I think Amendments 21 and 22 are a step backwards in trying to preserve a mandatory EU regime. So too is trying to drag over-the-counter derivatives into that regime, because—as the noble Baroness pointed out—it has been found that they are extremely difficult to identify. Their removal from the regime was almost universally supported in the consultation that the Government carried out on changes to the derivatives regime.
Amendment 41 from the noble Baroness, Lady Worthington, is about putting additional information in annual reports and accounts. There are already obligations on companies to report things that are material to an understanding of the financial position of those companies. They are required to describe their trading model and the operating segments that are relevant to them, but they are not required to identify income streams from particular instruments that they operate. There is a good reason for that. Annual reports are already very long, complicated and difficult to understand, and the noble Baroness is asking for information that in very many cases will be wholly irrelevant to an understanding of the financial position or operations of the companies that involve some trading. For many, it is embedded in their marketing activities for the products they engage in. I do not support any of the amendments put forward by the noble Baroness.
Baroness Bowles of Berkhamsted (LD)
My Lords, I congratulate the noble Baroness, Lady Worthington, on venturing into commodities. I remember many happy hours—I call them that—when I was chair of ECON, discussing commodities with the chair of the CFTC, Gary Gensler, in particular, and the chairs of the agriculture committees in the Senate, which deal with a lot of the derivatives. It is an impossible task to get a grip on everything, but that does not mean you should not try to get a grasp of things that might go wrong.
Baroness Kramer (LD)
My Lords, I will speak very briefly to the amendments tabled by the noble Baroness, Lady Worthington, because my noble friend Lady Bowles has set out the position very well.
I am concerned that we see, in parts of this new legislation, a very libertarian view of how financial markets should be structured. Even libertarians will say to me, “Look, it all works in the long run, but in the short run there are an awful lot of victims and collateral damage”. Because of that, we are asking the Government to go back and relook at the changes they are proposing. The developing world, including some of the poorest people, will suffer from the volatility of many commodity prices. Particularly where that volatility is artificially created, it seems to me that we ought to expect the regulators to play a disciplined and effective role.
While I must admit that most of this legislation is beyond my comprehension—the markets are extremely complex—I am rather concerned that regulators, whom the Minister herself has said have great expertise, knowledge and understanding, should not be in a position to apply those to ensure that there is no market abuse. I will leave it at that, because all that has been far better said by others.
My Amendment 27 in this group amends the Minister’s Amendment 26. It is another probing amendment, because I am not quite sure exactly what the Minister’s amendment says. My noble friend Lord Sharkey and I were both very involved in the Financial Services Act 2012, which set in place the framework for regulation of behaviour by central counterparties. That was after the 2007-08 crash, which was, as much as anything, a severe liquidity crisis. The chaotic nature of the derivatives market meant that no particular financial institution knew whether the financial institution with which it would normally do business was about to collapse, because, in turn, it had complex derivative products with yet another financial institution that was about to go under.
I am very supportive of the decision that was made, obviously at a global level, to channel virtually all financial derivatives, particularly the standard ones, through central counterparties. The largest of those central counterparties was of course the London Clearing House. I think we all recognise that, in doing that, a great deal of risk cumulated at the central counterparty. That is mitigated by the central counterparties themselves by requiring collateral.
However, to give the Committee a sense of the size of this market, I was looking at a typical number for outstanding financial derivatives on any one day. It is approximately $600 trillion, so it is vast, and a good part of that is now run through central counterparties. The problem is that there is not enough quality collateral in the whole wide world to meet margin calls from the various central counterparties, even after they have gone through a compression or netting process, which of course was led by London. Part of the reason that London is so dominant in this arena is that it has such a large market share.
The way in which the sort of fiction works—that collateral sits in place to cover risk—is that low-quality collateral can be used in these cases through a mechanism of discounting it for its embedded risk. Frankly, there is a point at which you can discount junk as much as you like but that does not turn it into high quality. It might do so on paper or by calculation, but it does not in reality, so there is always a weakness and high risk at the central counterparties.
In that 2012 legislation, we were attempting to put in place a resolution mechanism for the moment when central counterparties went sour. It is easy to put a resolution mechanism in place when a single member fails, because the other members of the central counterparty bloc are usually in a position and have sufficient financial strength to step in, and there are requirements under that resolution waterfall to be able to do so. But when the problem is at a systemic level, the waterfall does you no good at all. Most of the amendments here are meant to strengthen the waterfall, but the reality is that when there is a systemic problem, the waterfall collapses in a matter of seconds—and the ultimate backstop is, basically, the taxpayer. With the numbers that I am talking about, your Lordships can see that the exposure for the taxpayer is very significant.
All central counterparties across the globe, no matter where they are located and what rules they sit under, tend to have exactly the same membership. So if one CCP goes, you can pretty much count on all the rest of them going. In that environment, I am trying to understand the changes that the Minister is bringing forward under Amendment 26. I had understood that it was the Treasury that gave equivalence status to third-party central counterparties—I could be wrong because I am so out of date—if advised by the relevant regulator, which in this case would be the Bank of England. If I understand Amendment 26 correctly, it effectively extends the equivalence recognition to EU CCPs from one year to three years and six months. That is in primary legislation and we can make the decision whether we think that is appropriate.
I am rather troubled by proposed new paragraph (4), to be inserted by proposed new sub-paragraph (3) in Amendment 26, which says:
“The period determined by the Bank of England in a particular case”
under the rule I just described
“may be varied by the making of a subsequent determination.”
Can the Minister help me understand what on earth that means? Does it mean that equivalence can be extended by a decision of the Bank of England, say from three and a half years to 10 years? Does it mean only that the Bank of England could shorten the period of equivalence recognition and that it is limited by the three years and six months? I can see no way that there is any mechanism at all for scrutiny around this issue, even though it can represent a very serious chain of risk.
I just need some help to try to understand what power is being given to the Bank of England. It is a little like the previous question on the earlier amendment. What exactly is this power? What does it enable the Bank of England to do? What kind of scrutiny is there? Is there a sunset clause to it? How open-ended is this? I am just trying to understand those implications, so I would be very grateful if I could have the Minister’s help in doing that.
Lord Tunnicliffe (Lab)
My Lords, I will not make a long speech on this group, largely because I do not have the knowledge or skills to do it. What I am seized of is that financial crises come relatively often, about a generation apart. It seems that those who suffer in a financial crisis then set about putting in controls to try to make markets more stable. Clearly, markets are intrinsically not stable; they need rules to be stable.
One has a sense in some of the debate about the Bill that somehow the crisis of 2008-09 did not happen, and anyway it will not happen like that again. I share the little bit of concern about the central counterparties. We had debates on it about four or five years ago, and I could not see how we were protected against a systemic collapse. Every time you make a set of rules, you create some other areas of potential crisis.
I did not come here with a particular mandate on this subject, but in the debate so far it seems to have been argued that regulators need to have the ability to step into a situation and set some rules that might help limit the damage in a crisis. We will await the Government’s argument and I will read Hansard with particular care to come to a conclusion, but so far a very good case for retaining the power to the regulators has been made.
Baroness Penn (Con)
My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.
Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.
While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.
The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.
Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.
Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.
The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.
Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.
On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.
However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.
To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.
The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.
I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.
On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.
The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.
I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.
Lord Sikka (Lab)
I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.
Baroness Bowles of Berkhamsted (LD)
If I may drag the Minister back to where she was just finishing off, in her response to me and the noble Baroness, Lady Worthington, she said that the UK would continue to observe its G20 commitments, which I do not doubt, and that various agricultural products and so on would definitely still be within scope. However, it says here in legislation that the FCA “may”. It does not say, “Apart from the fact that we are observing G20, and agriculture is still in”—it just says “may”. Where does it say in primary legislation that there will be guidance—or whatever the appropriate word is—as to how these things will be dealt with by the exchanges in the circumstances that give rise to concern? Otherwise, looking at our legislation—at least, our primary legislation —I see that we would not have that certainty, and it is proper that we have it.
Baroness Penn (Con)
It might be wise for me to write to the noble Baroness to address that specific point. Under the overall framework for the regulators, they need to make their rules in a way that is consistent with international standards, to which the noble Baroness referred. That would be the additional way in which one would have that reassurance, but it is worth writing to set out the point for her with more clarity.
The noble Baronesses, Lady Bowles and Lady Worthington, talked about whether the FCA, in acting to advance its objectives, would have sufficient grounds to intervene in these markets. The Treasury is confident that it would, and an example of humanitarian grounds for intervention was given. We are confident that the FCA could intervene on humanitarian grounds, acting in line with its objectives, but perhaps I will also write to the Committee to expand on that further.
The noble Lord, Lord Sikka, somewhat pre-empted me: I was just about to turn to Amendment 41. I am afraid that the Government will disagree with the noble Lord and the noble Baroness. Arguments were advanced by my noble friend on this point. Amendment 41 would require all listed companies to disclose how much revenue they make from trading commodity derivatives. However, listed companies are already required to publish comprehensive information about their operations and finances as part of their annual reports. The Government view that as sufficient.
It may be worth turning to the questions asked by the noble Baroness, Lady Kramer, on government Amendment 28, if the Committee is happy for them to be addressed here. Does the power in Clause 3 allow the Treasury to amend primary legislation to give us or the regulator new powers? The power in Clauses 3 and 4 to modify legislation, including to create new powers for the Treasury or regulators, is limited to retained EU law, as set out in Schedule 1. Clause 3 powers cannot amend primary legislation.
The powers in Clause 4 can be used to move provisions from retained EU law into primary legislation. The power in Amendment 28 applies where the Treasury is making transitional amendments to retained EU law or restating it. It is designed to allow, for example, the Treasury to give itself a power to update a definition or threshold in legislation. This mirrors delegated powers for the European Commission in retained EU law. While it would be possible to deliver the same outcome by reuse of the powers in Clauses 3 and 4, the Government consider it more appropriate to create a specific power to allow for such updates to be made, where they consider it appropriate. When creating such powers, His Majesty’s Treasury will have the ability to specify the procedure for any statutory instruments made using the new power. The Treasury will follow the same approach to determining the appropriate procedure as it has in the Bill. Where the Treasury exercises the power to create further powers, the instrument doing that will be subject to the procedure specified in Clause 3(9), which, in the vast majority of cases, will be the affirmative power.
Baroness Kramer (LD)
The Minister has been very helpful, but I will ask the question that I think the noble Lord, Lord Tyrie, would ask if he were still in his place: is there any kind of sunset clause on this?
Baroness Penn (Con)
There is no sunset clause on this power, just as there is no sunset clause on the powers in Clauses 3 and 4, so it is consistent with the approach we have taken with those other powers.
I thank the Committee for allowing me to address those points in this group. With that and the further information I shall deliver to the Committee on some of the questions from the noble Baroness, Lady Worthington, I hope that she will withdraw her Amendment 21 at this stage and will not move her other amendments.
Baroness Worthington (CB)
My Lords, I am genuinely grateful to the Minister for her response, which was very helpful and contained information about which I was not aware—I thank her for that. I will read Hansard in great detail. In her letter, can she explain a little more about those 18 contracts that will be covered and the retained powers? I would find that very interesting, although I am sure I can also google it.
I will now sum up. I am very grateful to the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. Returning to the statements by the noble Baroness, Lady Noakes, I am sure it is seen as a great success that we have this $600 trillion market in stuff that exists in the future, which is hugely complex and can crash the global economy. Some people will have benefited hugely from it; I have no doubt that some of those people may be in this Room. The point is that there is someone paying at the other end of that profit, and often it is the people at the very end of the chain who are trying to buy food in supermarkets or heat their homes. If a bubble in that market is definitely benefiting some—even maybe benefiting the Government, if they are receiving revenues from it—it comes at a cost, so we should be very mindful of the need to regulate that market. There is evidence after evidence of these bubbles forming because, quite frankly, the incentives to make cheap money are huge. Compared with the real economy, where you actually have to do things, build things, sell things and employ people, the desire to make money fast is overwhelming, and I do not want the UK to become the home of ever more exotic derivatives that allow us to make money the quick and easy way. Let us make banking and the financial markets boring again by getting them back to basics: using money to further society’s aims. If we cannot do that individually, we should do it collectively. I do not want to get on my soapbox, but the fact that we are exiting Europe makes that more difficult, so even more scrutiny needs to be applied now that we are setting our own rules.
I am grateful for the responses. I will end by saying that I had the pleasure of meeting a gentleman who worked in a bank that was more than 500 years old. I asked him about its ESG policies, and he listed them. They started with, “We will make no profit at all from soft commodities”, then went on to the usual checklist about arms and whatever else. I asked him where that came from, and he said, “Oh, we can’t remember”. Because it was such an old-fashioned concept—that we should take a moral position that we will not engage in profiteering from soft commodities—it sort of lapsed into the history of time.
Banking was moral once. I am not saying it is immoral now, but it is incredibly complicated. The incentives to make money in ever more novel ways are always there. Even the noble Baroness, Lady Noakes, alluded to the fact that systemic risks exist. They have existed in my lifetime and I am sure they will come again.
I am glad that we are here to do this scrutiny and very glad of the Minister’s offer to write. I hope that we will revisit some of these questions, and I will end on Amendment 41. I have personal experience of how energy companies are loath to disclose how much of their profits rest on trading. If that is the case, the markets should care about it and disclosure is the most obvious step to address it. With that, I beg leave to withdraw.
Baroness Penn
“PART 4AAMENDMENTS TO THE CENTRAL COUNTERPARTIES (AMENDMENT, ETC., AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 201850A (1) Regulation 19B of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184) is amended as follows.(2) In paragraph (2) for “one year” substitute “3 years and 6 months”.(3) After paragraph (3) insert—“(4) The period determined by the Bank of England in a particular case under paragraph (2) (whenever determined) may be varied by the making of a subsequent determination.””Member’s explanatory statement
This amendment would allow the Bank of England to extend the period during which third country central counterparties that have fallen out of the temporary recognition regime following IP completion day can continue to offer services to firms in the United Kingdom, from a maximum period of one year to a maximum period of 3 years and 6 months.
Baroness Penn
“(aa) authorise the making of subordinate legislation by the Treasury;”Member’s explanatory statement
This amendment would ensure that the powers in clauses 3 and 4 of the Bill to make transitional amendments or saving provision in relation to the retained EU law listed in Schedule 1 for revocation, also include the power to confer new regulation-making powers on the Treasury.
Baroness Penn
“(ii) the Bank’s duties under section 30D(1)(a) of that Act;”Member’s explanatory statement
This amendment would ensure that when the Bank of England makes material changes to rules where consultation exemptions apply under clause 6, the Bank must publish a statement explaining how the rules are compatible with the Bank’s duties relating to the regulatory principles inserted by clause 45 of the Bill. (The words after “with” in line 38 become sub-paragraph (i)).
Baroness Noakes
Member’s explanatory statement
This amendment, and another, would ensure that the designation of activities did not go beyond the FCA’s operational objectives (consumer, integrity and competition).
Baroness Noakes (Con)
My Lords, in moving Amendment 30 I will also speak to Amendments 31 and 34 in this group. Amendments 30 and 31 would amend Clause 8 and Amendment 34 would amend Schedule 3. They all concern a new power in the Bill to designate activities that the FCA will regulate.
The power to designate activities in Clause 8 is a very wide one. I have no problem in principle with the designation of activities, as there have been too many instances in the past where activities went unchecked and where the FCA’s inaction was blamed on lack of powers. But it is not necessary to regulate absolutely everything in the financial services sector, and new Section 71K(3) of FSMA allows practically anything to do with finance to be regulated.
My Amendments 30 and 31 are modest, in that they say the power to designate activities can be used only if the Treasury thinks it necessary for the purposes of the FCA meeting its operational objectives. These operational objectives are consumer protection, enhancing the integrity of the financial system and promoting effective competition in the interests of consumers. That should not be a high bar, but it is important that when the Treasury brings forward designated activity regulations, it demonstrates that the activity is needed for these objectives and that it would not result in mission creep for the FCA.
I illustrate this with my Amendment 34, which would remove paragraph 4 from new Schedule 6B to FSMA which is introduced by this Bill’s Schedule 3. I am not at all clear why the Government have included Schedule 3, given that the unconstrained new power to designate activities expressly says that nothing in the schedule limits the power. I can conclude only that new Schedule 6B to FSMA contains the FCA’s wish list of areas that it wants to regulate.
My amendment, which deletes new paragraph 4, concerns short selling. I strongly believe that this should not become a designated activity, or should do so only if there is clear evidence that it is needed for one of the FCA’s objectives. Of the three objectives, I imagine that the only one that would be engaged is the market integrity objective, and I am not aware of any evidence that the regulation of short selling is necessary from a market integrity perspective. What enhancement of market integrity would be achieved? Is it actually necessary?
Viscount Trenchard (Con)
My Lords, I support all the amendments in this group introduced by my noble friend Lady Noakes, to many of which I have added my name. I do not need to repeat the arguments so powerfully put by my noble friend. Clause 8 amends FSMA 2000 through new Section 71K to create a designated activities regime, which allows certain activities related to financial markets to be regulated within a framework that is separate to the existing FSMA regime for authorised persons, while still being compatible with a comprehensive FSMA model. The intended purpose of the designated activities regime seems to be to enable the Government to perpetuate the various retained EU law regimes without adequate parliamentary scrutiny, particularly given earlier comments on the inadequate way in which we scrutinise SIs.
New Schedule 6B is an indicative list of designated activities. This regime may at first be used to replace the retained EU law being revoked under the Bill, but there is no apparent limitation to the Treasury extending it in future to new or different activities. The designated activities regime is almost completely unconstrained in scope and effect. As such, it could be used to ban all kinds of products and classes of provider, and/or to establish parallel licensing requirements for particular activities, for both authorised and unregulated firms. The Explanatory Notes to the Bill state:
“Initially, the government expects most designated activities to be activities which are currently regulated through retained EU law”,
suggesting that new designated activities may be introduced.
The market will be keen to ensure a level playing field for regulated activities among FCA-authorised, dual-authorised and unregulated firms. Can my noble friend the Minister confirm that FSMA 2000’s new Section 71N means that rule-making in relation to designated activities will be the sole competency of the FCA? Currently, the PRA and the Bank of England share regulatory responsibility with the FCA for a number of technical standards relating to the entering into of OTC derivatives, for instance. Additionally, if the requirements are set out in the FCA handbook for authorised firms and in separate instruments for unauthorised firms, there may be a risk of divergence and inconsistency.
I have tabled Amendment 35 as a probing amendment, on removing the admission of securities to listing on a stock exchange from the lists of designated activities. First, I would question whether listing should be a regulated activity at all, because many listings happen without an issue of new shares or other securities and may, for example, be undertaken by companies wishing to show that they are good corporate citizens that want their corporate information to be available to the public in the same way it is for other listed companies. This was certainly a major consideration when many major Japanese companies such as Toshiba, Fujitsu and Honda listed their shares on the London Stock Exchange in the 1980s and 1990s. They subsequently undertook capital-raising exercises involving the issuance of securities, but those were separate exercises. I see no reason why unregulated firms may not act as sponsors for stock exchange listings, and therefore would question why the arrangement of listings should be a regulated activity.
Do the Government intend as a matter of urgency to act on the recommendations in the listings review undertaken by my noble friend Lord Hill of Oareford? Does the Treasury intend to undertake a fundamental review of the prospectus regime, as recommended by the review? Does my noble friend agree with the recommendation that prospectus requirements should be changed so that, in future, admission to a regulated market and offers to the public are treated separately? Could she tell the Committee whether she thinks that the empowerment of the FCA through the designated activities regime will make stock exchange listings more expensive and cumbersome than they have become during the past 14 years, or less? In that time, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%. I look forward to hearing the Minister’s comments.
Lord Stevenson of Balmacara (Lab)
My Lords, I shall speak to Amendment 32 in name, which is part of this group, although it points in a slightly different direction from the speeches we have just heard. I declare an interest, as I was chair of StepChange, the debt charity, in the period 2010 to 2014, although I have no current connection with it.
This is a probing amendment aimed at ensuring that a particularly egregious form of high-cost credit, log-book loans, issued under the bills of sale legislation dating from Victorian times, is afforded the customer protection measures rightly offered to consumers who use other forms of credit. In that sense, it needs an extension of the power discussed in this clause. To be clear, I would much prefer it if the Bills of Sales Acts of 1878 and 1882, and their related legislation, could be repealed. One way or another, I hope that some speedy action can be taken to resolve this issue. Such efforts appear to have stalled, despite a lot of work nearly a decade ago by the Treasury and the Law Commission.
Over the past few years, the Government and the FCA have been largely successful at clearing up the high-cost credit market. It is true that they had to be pushed to get started, and many noble Lords present may recall this House playing a significant part in focusing attention on payday loans, for example. But there are still issues to be addressed. The consumer duty is also a valuable step forward, and I hope that it will be a great success. At the same time, the introduction of statutory backing for the debt respite—the breathing-space regulations—and the forthcoming statutory debt repayment plan will offer immediate and effective help to the many hundreds of thousands of people who face unmanageable debts each year. The Government have done well in this area, and I commend them.
However, the current credit squeeze and cost of living crisis are going to exacerbate this situation. Indeed, if past history is a guide, logbook loans may well become as prevalent as they were in in 2014, when 52,000 bills of sale were registered in one year at the High Court. As I said, logbook loans are issued under bills of sale, which are governed by two Victorian statutes that I have already mentioned: the Bills of Sale Act 1878 had immediately to be amended, so there is also the Bills of Sale Act (1878) Amendment Act 1882. Basically, they allow individuals to use goods they already own as security for loans while retaining possession of the goods. This legislation is archaic and, in the words of the Law Commission,
“wholly unsuited to the 21st century.”
It went on to say that
“it causes detriment to all those who use it, including logbook lenders, logbook borrowers, business borrowers and third party purchasers.”
Nobody, it seems, has a good word to say for them.
This is all set out in a substantial Law Commission Report commissioned by HM Treasury in 2016. In that report, the Law Commission went on to point out the following. Most people who take out logbook loans are borrowers who already have difficulty in securing other forms of credit. Its research revealed that the term is usually six months to three years, while the interest rates ranged from 60% to 443% APR but were usually in the range of 120% to 187%—high-cost credit indeed.
There are complaints that some lenders use the threat of repossession of the goods to demand unreasonable and unaffordable extra payments, even when the loan is substantially repaid—something which is not permitted in, for example, hire purchase agreements. However, logbook loans lie outwith modern consumer protection legislation. It is true that the Financial Ombudsman Service may provide redress after the event, but the FOS is not able to prevent repossessions. There is no protection afforded to private purchasers who buy goods subject to a bill of sale, even if they act in good faith. Those who buy a second-hand car without knowing it is subject to a car-book loan face an unpalatable choice: pay off somebody else’s loan or lose the car.
The 1882 bills of sale legislation requires all bills of sale to be completed on a complex standard form and registered with the High Court, which uses a paper-based record system. Failure to comply with any of the documentation requirements carries substantial sanctions, not least being that the lender loses any rights over the goods or money owed to them. Those sanctions clearly would be out of scope if current consumer protection standards applied, but—
Lord Stevenson of Balmacara (Lab)
As usual, I have forgotten where I was in my perorations, so the Committee might get a few words that it has heard already, which can be ignored. I think I was talking about the requirement in the 1882 legislation that all bills of sale have to be completed on a particularly complex standard form, and then registered with the High Court, which, of course, uses a paper-based record system. The sanctions for failing to comply with any of its documental requirements would be out of scope if current consumer protections applied, and lenders are understandably loath to amend them.
It costs about £45 to register a bill of sale with the High Court, and another £50 to search it. That does not happen very often, because you cannot search by vehicle registration number or any other useful form; it is just a simple list of all the registered cases.
I think most people would agree that the Law Commission makes the case very well for the repeal of the Victorian bills of sale legislation. What is so disappointing about all this is that, originally, the Treasury seemed to share that view. In a Ministerial Statement in February 2017, the Government accepted
“the overarching thrust of the recommendations”,—[Official Report, Commons, 7/2/17; col. 6WS.]
albeit warning that they would not proceed until they had further reflected on some of them. The reflection took the form of a limited consultation with stakeholders, which received 25 responses, after which the Treasury decided not to take forward the draft Law Commission Bill. The principal reason given was that several of the 25 respondents felt that some of the consumer protection proposals in the draft Bill prepared by the Law Commission did not go far enough. It is almost difficult to believe that.
That remains the position. I have tried to keep the pressure on: I took over the Law Commission Bill as a Private Member’s Bill. I got 10th place in the ballot one year, but then lost the Bill because of a snap election called by, I think, Mrs May—I forget now who was Prime Minister. However, I have had meetings; in 2019 I was kindly joined by the noble Lord, Lord Young of Cookham, and the then Economic Secretary to the Treasury, John Glen, but to no avail. In his last letter to me, he accepted that there was consumer detriment taking place but, as numbers of logbook loans were falling, he said he believed
“that the rationale of the Government’s decision not to proceed with legislative reform in this area still stands”.
John Glen is now promoted and in the Cabinet, and I am where I am. However, I respectfully disagreed with him then and still do today. Only a few months ago, I was written to out of the blue—they must have got my name from the news about the Bill when it was first introduced—by people who had been scammed, aided by logbook loan legislation. An elderly couple had put all their hard-earned savings into a motor home, which they wanted to use for their retirement. Just when they had completed the purchase and the renovations, spending almost as much again as they had on buying the vehicle, they discovered that it had mysteriously acquired an outstanding logbook loan, and they lost the vehicle and their capital. This is the sort of thing that happens.
I look forward to the Minister’s response today, and I remain willing to attend further meetings if she thinks that might help move this issue forward. I know from discussions with StepChange that consumer detriment is still happening in this area. I agree with the FCA, which I spoke to earlier in the week, that the credit squeeze, inflation and the energy cost crisis is going to make the return of logbook loans—and, indeed, many other forms of high-cost credit—as inevitable as it is undesirable. If accepted, my amendment would give the FCA the tools it needs to assist the many people affected by this egregious legislation—albeit I still believe that the right solution is for the Government to commit now to repeal the Victorian legislation as soon as reasonably practicable.
Lord Naseby (Con)
My Lords, I am not going to repeat what my noble friends Lady Noakes and Lord Trenchard have said, but I certainly think that His Majesty’s Government—I am a very loyal member of the governing party—need to recognise that this is a once-in-a-lifetime opportunity in this Bill. Therefore, for me, the driving force should be to ensure that in doing what we are doing—I accept that it is important to mention designated activities—we should be driven by the need for growth for our economy, good competition and innovation. Those things are so key to the future of this country, the City and the whole of the financial services area that we need to be a little bit careful. I think that my noble friend Lady Noakes’ proposal is a perfectly valid one. The Government can have another look at it, but I do not think that it is necessary.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have some questions which arise from what the noble Baroness, Lady Noakes, said. If we want to go back to before the EU had the single market in financial services, we need to know how it worked with short selling. Unfortunately, I do not know how it all worked in the UK back then. When we started to do, or were forced into doing, the short selling regulation, I was told repeatedly from all sides in the UK that we did not need it but that naked short selling was banned. A lot of the concern was about short selling when you had not actually located where you would be able to get the share from for delivery. After the regulation was done, you had to know where you were going to get it, and it was a little firmer. However, I was assured that the wording was more or less the same as was applied, so how did we apply it? We did not have a designated activity regime.
There may be lots of little snippets around in financial services where you just need a simple rule like that—that you cannot do naked short selling but covered short selling is fine—without having lots of regulation, reporting and things around it. How are we going to do this? Would we do a designation just for a one-line piece of information? This is a genuine question, because absurdities begin when you have to invoke something that then requires complex rules. As soon as you go beyond the simple principle of no naked short selling, it will become a much bigger thing, as the European regulation did. There are other drivers for that, and it may be that more than just not doing naked short selling is necessary. My question is, within this designated activities regime, how do you do just one simple, little thing?
Baroness Kramer (LD)
My Lords, I fear that if we were to follow the amendment from the noble Viscount, Lord Trenchard, we would indeed permit naked short selling. Like most people, I have no problem with short selling in highly liquid markets.
Viscount Trenchard (Con)
I am a little surprised that the noble Baroness is taking my name in vain here. My amendment is not about short selling; it is about listing.
Baroness Kramer (LD)
I apologise; it was the noble Baroness, Lady Noakes. I have attacked the wrong conspirator, as it were. I say to her that my concern, from listening to various people argue for changes in the rules that govern short selling, is that that is exactly what they have in mind, the argument being that if we allow short selling then illiquid markets will suddenly become much more liquid because many more players will be attracted into that particular end of the market. There is a great deal of risk at play, so I am quite nervous about making that kind of change. We always assume that the investors who would engage in these products would be highly sophisticated and understand fully the risks they are involved in, but the practical reality that we see in everyday life is that many people get involved who, frankly, have insufficient understanding and find themselves very much at risk.
It is for a similar reason that I say to the noble Viscount —I think accurately this time—on ending regulatory criteria for listing, that the listing issue is quite complex. I was one of the people who agreed with the IoD—I do not agree with the IoD all that often—on the changes that the London Stock Exchange made to enable a secondary listing for Aramco. It did not end up with the business, but the IoD was very concerned that the LSE compromised its approach to corporate governance to get that listing, which would obviously have been a highly profitable activity. That issue made the IoD very irate. It described it as
“an opportunistic attempt at boosting short-term primary issuance which ignores the longer-term implications for the overall UK corporate governance regime.”
This is actually quite a contentious area, so removing it completely from the regulatory sphere strikes me as rather dangerous.
I will bring my comments to a halt, except to say to the noble Lord, Lord Stevenson, and to the Government that the noble Lord should not have to fight such a difficult battle to try to deal with such a potential abuse. I wonder whether the Minister might, on a very personal basis, take up the cudgels here, because Ministers sometimes are in a position to get the relevant action that has been sitting many pages back on the back burner. I remember the battles we had to get rid of payday lenders. In the end, the noble Lord, Lord Sassoon, working very closely with all parts of the House on a very personal basis, was able to bring in the legislation that brought an end to that kind of abuse of consumers. The Minister has a very good precedent in the noble Lord, Lord Sassoon, and his capacity to use financial services legislation to deal with an aberration that puts people at risk.
Lord Tunnicliffe (Lab)
I am not persuaded by the amendments in this group, apart from the one from my noble friend Lord Stevenson. Obviously, I shall listen to the debate and check Hansard before we come to Report. My noble friend’s amendment may not be the right way to address this problem, but, in all honesty, it has been five and a half years since this issue was spotted. There has been a perfectly good Law Commission report, as I understand it, which makes a very strong case. It is no good saying that we will cover this elsewhere, or that it has to be integrated. There is a solution to this problem, and it is important that the solution happens in this Bill. I strongly commend to the Minister that she “does a Sassoon” and comes up with an acceptable compromise so that an end is put to what I would call almost an evil practice.
Baroness Penn (Con)
My Lords, I shall briefly address government Amendment 33 in this group before I turn to the other amendments.
Government Amendment 33 fixes a minor drafting error in Clause 8, which introduces the designated activities regime, or DAR. Subsection (2)(a) of new Section 71P of FSMA states that contravention of a DAR rule does not constitute an offence except as provided under regulations made under Section 71R. These provisions allow the Treasury, when designating an activity, to apply existing criminal offences within FSMA to that activity. This amendment inserts a cross-reference to new Section 71Q, as it too makes provision for DAR regulations to apply existing criminal offences in FSMA.
Amendments 30 and 31 together seek to prevent the Treasury designating, and therefore bringing into regulation through the DAR, any activity unless the regulation of that activity is necessary for the FCA to further its operational objectives. I assure my noble friend that the FCA will be required to make rules relating to designated activities in a way which, as far as is reasonably possible, furthers one or more of its operational objectives. Simply put, the FCA will not be able to make rules about a designated activity unless doing so is in line with its objectives under FSMA. This approach is modelled on the way activities are currently regulated under FSMA, whereby the Government determine the regulatory perimeter by specifying which activities are regulated, and the regulators then make rules to advance their objectives.
Amendments 34 and 35 seek to remove short selling and the admission of securities to trading from the list of activities in Schedule 3. That schedule inserts new Schedule 6B into FSMA; Schedule 6B is designed to give noble Lords a sense of the types of activity that Treasury may designate under the DAR. However, my noble friend is absolutely right that this is an indicative list and does not mean that Treasury will designate that activity in future, or that it will do so in the way described in the schedule. Should the Treasury decide to designate short selling or the admission of securities to trading in future, it will be through a statutory instrument subject to the affirmative procedure, so that Parliament can fully consider and debate the implications.
I should say to my noble friend that the list included in Schedule 6B is not an FCA wish list: it is a set of activities currently regulated through retained EU law that may be appropriate for the designated activity regime. I should also be clear to my noble friend and to the Committee that the Government believe that there should be a regulatory regime for short selling in the UK.
My noble friend set out that short selling can play a role in the healthy functioning of financial markets. It provides essential liquidity to markets, helps to ensure that investors pay the right price when investing in shares, and allows investors to manage risks in their portfolios. However, there can also be risks associated with short selling. For this reason, all major financial services jurisdictions, including the UK, have some form of short selling regime. Noble Lords will know that the losses that short sellers can incur if prices increase rather than fall have no upper bound, making it riskier than a traditional investment. In exceptional periods, markets can be dysfunctional, and there is a risk that short selling can exacerbate volatility and undermine market integrity.
The UK intends to regulate in this area, and, as the noble Baroness, Lady Bowles, notes, the UK has a history of regulating short selling which predates the introduction of the EU’s short selling regulation. Parliament legislated to give the FSA specific powers over short selling in 2010 and, prior to that, the FSA took action to address instances of short selling in the financial crisis. The powers in the Bill will allow the Government to put in place a proportionate and appropriate short selling regime that is tailored to the needs of UK markets, companies and investors. The Treasury has issued a call for evidence to support this work, which will close in March.
To answer the question asked by the noble Baroness, Lady Bowles, on how you do just one simple thing, the DAR has been designed to be flexible and proportionate and would allow the Treasury to do something very targeted if appropriate. It removes the need to introduce a Bill every time something small but important arises, and it removes the need as potentially an alternative form of regulation for it to make a regulated activities order and for it to be regulated under that regime with the associated regulations of the authorised persons that come along with it rather than just the activity itself.
On regulation for companies listing on a stock market, the Government are in the process of a fundamental overhaul of the prospectus regime. There is clear scope to make this simpler and more effective and enhance the competitiveness of UK capital markets. I reassure my noble friend Lord Trenchard that the Government have committed to deliver the outcomes of the UK Listing Review from the noble Lord, Lord Hill. We published an illustrative statutory instrument in December showing how the Government plan to use the DAR to put in place a simpler, more agile and more effective listing regime. I therefore reassure my noble friend that the Government are fully committed to improving the attractiveness of UK markets, and that the powers in the Bill will be used to deliver on that objective.
My noble friend also asked whether the FCA is the only regulator able to make rules under the DAR. I can confirm that it is the only regulator that would have powers under this regime.
Amendment 32 from the noble Lord, Lord Stevenson, seeks to enable the DAR to regulate currently unregulated credit agreements secured by bills of sale. As the noble Lord set out for the Committee, the Bills of Sale Acts allow borrowers to use goods which they already own as security for a loan, while retaining possession of those goods. Today, they are most commonly used for logbook loans. Logbook loans are a type of high-cost credit regulated by the FCA in which a consumer uses their car as security, while allowing the consumer to keep using their vehicle. However, bills of sale are also used for other unregulated secured lending, such as businesses which wish to borrow against their assets, such as machinery.
I understand that the noble Lord would like to see the framework for these products modernised, and we have discussed this during the passage of previous Financial Services Acts, although his work on it predates that. He has suggested that the DAR might be the way to achieve this.
As the noble Lord noted, the Government previously considered repealing the Bills of Sales Acts and replacing them with a new goods mortgages Act. While there was support for this approach by many stakeholders, others raised significant concerns about the degree of consumer protection afforded by the proposed regime. The Government were also concerned that a modernised and streamlined regime could lead to more consumers using goods that they already owned as security for a loan, which is inherently a higher-risk form of borrowing.
Baroness Noakes (Con)
My Lords, I thank my noble friend the Minister for her comprehensive reply to this short debate. I also thank all noble Lords who have taken part in it.
For my amendments, one was in relation to whether the Treasury’s power to designate activities should be constrained in any way. I understand that the FCA will of course be able to make rules only in accordance with its own objectives. I was trying to put an earlier hurdle in: that the Treasury should go in that direction only if it has had evidence that there was need in relation to the FCA’s objectives. I regret that the Minister indicated that she did not want to go down that route, so I will have to think carefully about that.
I was disappointed though perhaps not surprised on short selling, because there is a kind of prevailing view that if something moves in financial services, it ought to be regulated somehow. I can see that if it was regulated in the EU, it will end up being regulated again and some of the advantages of us having left the EU will simply not be realised because there is a mindset, in particular in the Treasury, which never wanted to leave the EU, that what happened in that era of our membership has to be preserved if at all possible. That is, as I say, disappointing to me.
When the noble Lord, Lord Stevenson of Balmacara, got up, I thought, “It’s déjà vu all over again”, because I too remember our debates on earlier financial services legislation. However, I believe that he has a good point and I was particularly glad to hear my noble friend offer a small possibility that some progress might be made. I think the whole Committee would be happy if that could be achieved, because it clearly does not seem like a happy state of affairs. With that, I beg leave to withdraw my amendment.
Baroness Penn
Member’s explanatory statement
This amendment would insert a cross-reference to section 71Q to ensure that the exception in section 71P(2)(a) of the Financial Services and Markets Act 2000 as inserted by clause 8 of the Bill (on liability in connection with designated activities) also refers to designated activity regulations under section 71Q.
Baroness Noakes
“(4) Omit subsections (3), (6) and (7).” Member’s explanatory statement
This amendment probes why the power to make recommendations to and obtain information from “bankers” remains relevant.
Baroness Noakes (Con)
My Lords, Amendment 36 would delete some subsections from Section 4 of the Bank of England Act 1946, the only nationalisation legislation that made any sense. Indeed, it was surprising that the Bank of England existed outside the public sector for as long as it did—the best part of 250 years. Section 4(3) says:
“The Bank, if they think it necessary in the public interest, may request information from and make recommendations to bankers, and may, if so authorised by the Treasury, issue directions to any banker for the purpose of securing that effect is given to any such request or recommendation”.
Subsection (6) says that a banker is any banking undertaking that the Treasury declares to be a banker for the purpose of Section 4. That is quite a sweeping power in relation to all kinds of banks: retail banks, commercial banks, investment banks and so on.
This is a probing amendment to find out why on earth this power is still on the statute book, given that we have a highly defined system of prudential regulation laid out in extensive detail in FSMA. In addition, the various Bank of England Acts deal with the Bank’s other functions. Collectively, the legislation gives extensive powers to the PRA, the Monetary Policy Committee, the Financial Policy Committee and the Bank of England itself. There is no deficit in powers related to bankers, as anyone operating in the financial services sector will attest.
Why does Section 4 retain these powers? How often have they been used? When was the last time they were used? If my noble friend cannot make a case for these powers still being needed—if they were ever needed—I invite her to agree to their removal from the 1946 Act. I beg to move.
Baroness Penn (Con)
My Lords, my noble friend has just described what Amendment 36 probes and the power it is seeking to look at, so I will not repeat that. What I will say is that the power is designed to be used only when it is necessary to do so in the public interest, such as in an unexpected or emergency scenario.
The Government looked at some of my noble friend’s questions. We are not aware that the Bank has ever used this power, but it could be useful in some scenarios—for example, for the Bank to require certain actions from troubled firms during a period of financial crisis. As we saw in 2007-08, such crises can develop quickly and create novel policy challenges that may not be anticipated in advance. As such, the Government consider the power to be a useful potential backstop. Any changes to this power would require careful consideration and consultation before acting.
I have been brief, but I hope that I have answered my noble friend’s questions, at least in part, and that she feels able to withdraw her amendment.
Baroness Noakes (Con)
My Lords, I rather thought I would get that answer—that the power has never been used—because I certainly could not recall any situation when it could have been used. My noble friend the Minister has put up a good case for keeping something that has been there since 1946—which is rather a long time—and has never been used but might be needed in an emergency, notwithstanding that, certainly for the last 20 years, we have been legislating on financial services and banks in extenso and there exists a range of powers that any intelligent person involved in this area thought that the Bank or the PRA would ever need to use. I think the case for removing these powers is unanswerable. I hope that my noble friend the Minister might think a little more about that between now and Report. It would be a good thing for the Government to bring forward something that would clean up our statute book. I beg leave to withdraw.
Baroness Noakes
“(3) In complying with the duty in subsection (1) the relevant regulators must ensure that any information or other requirements imposed on a critical third party minimise, so far as is reasonably practicable, the burden placed on the critical third party.”Member’s explanatory statement
This amendment shifts the emphasis from burdens on regulators to burdens on third parties.
Baroness Noakes (Con)
My Lords, I understand regulators’ desire to have more insight into the risks that critical third parties present to the provision of financial services. The regulators have been fretting about the provision of cloud services for some time—not always with good cause, because cloud providers offer some significant benefits to financial services firms in a range of areas. The PRA and the FCA have already increased their focus on critical third party suppliers by way of operational resilience requirements on regulated firms, and they already have the ability to get information via the regulated firms.
I was not hugely surprised to find a regulatory power grab regarding critical third parties in this Bill, but I was genuinely shocked to find 10 whole pages of legislation giving the regulators huge powers over critical third parties: the power to make rules, a power of direction, information powers, censure and disciplinary powers, and so on. This is typical regulatory gold-plating of the kind that I hoped we had left behind when we exited the EU. The Treasury ought to be on the alert against this kind of thing, rather than being complicit in it.
The regulators will have to exercise real care when they use these new powers. It would be a very bad outcome if some—for example, the cloud providers or the major ICT providers—decided to exit the UK financial services market because of heavy-handed regulation. If that happened it would likely increase the concentration risk within the financial services sector, as well as reducing competition in the provider market.
My Amendment 37 is in fact extremely modest. TheCityUK has called for one of the regulators to be in the lead for any critical third party, so that the likelihood of duplicative requirements and other burdens between the regulators involved would be minimised. TheCityUK is not comforted by the co-ordinating duty in the new Section 312U of FSMA because just about everybody who has been involved in financial services has been on the receiving end of unco-ordinated regulator action, despite the existence of co-ordinating duties already in FSMA. Those duties have not been a resounding success, and I may return to the idea of a lead regulator on Report.
For today, my Amendment 37 would delete subsection (3) of new Section 312U and replace it with a more third-party friendly version. Subsection (3) says that the duty to co-ordinate
“applies only to the extent that compliance with the duty does not impose a burden on the relevant regulators that is disproportionate to the benefits of compliance.”
This is typical of regulation, in particular financial services regulation. It sees things through the prism of the regulators, not the persons impacted by the regulation. My amendment would replace this with a requirement to minimise the burden placed on critical third parties so far as is reasonably practicable.
I do not regard this rebalancing of the new rules as a radical proposition in the context of the radical new powers that are being taken. The impact on third parties really does need to be taken into account, and it is curiously absent from the 10 pages of the Bill dedicated to the new powers over critical third parties. The need for rebalancing of the new regulatory provisions ought to go wider than the duty to co-ordinate, and I should probably have drafted something broader to consider in our Committee today. My purpose is to probe how the Government see the new provisions impacting on third-party suppliers, not just on the regulators, and whether they even acknowledge that they might have created something of a monster in these new rules. I beg to move.
Baroness Kramer (LD)
My Lords, I shall speak only very briefly, because I have a great deal of sympathy with the proposition that the noble Baroness, Lady Noakes, puts before us. The resistance in the industry to rules is not to the principle of the rules but to the way in which they operate, and the cumbersome methodologies—the dotting of every i three times and crossing of every t four times—that drives people completely insane. It has undermined respect for both the regulator and its effectiveness. The noble Baroness, Lady Noakes, said she had something broader in mind, and she will find amendments coming forward later, particularly in the name of my noble friend Lady Bowles, focusing on the issue of efficiency. I think that is something we would all like to see.
There are those who would like to see less regulation per se, and those like me who are very cautious about having less regulation. Obviously, less regulation may release animal spirits and innovation, as the noble Lord, Lord Naseby, pointed out earlier; in fact, he did not talk about animal spirits, but he talked about innovation. The downside is that light-touch regulation could leave you with a financial crisis, an awful lot of victims and, potentially, an undermined economy. It is very asymmetric. But efficiency ought to be built into the very heart of this, and regulation ought to be designed to put a minimum operational burden on the various parties affected. If we can adopt that somewhere as a principle in the Bill, it would be exceedingly useful.
Baroness Penn (Con)
I thank my noble friend Lady Noakes for her amendment. It is a good opportunity to talk about the Government’s proposals for mitigating the systemic risk posed by critical third parties in the finance sector, such as cloud service providers. The Government agree with the spirit of what my noble friend and the noble Baroness, Lady Kramer, have said.
The critical third parties regime has been designed with the aim of minimising the burden placed on these parties, while mitigating the systemic risks that could be posed by the use of these services. Rather than bringing, for example, a whole cloud services provider into the financial regulators’ remit, the regime instead gives the regulators powers over only the services that a critical third party provides to the financial services sector. I believe that that approach contrasts with the EU approach known as DORA, which I thought was the name of my parents’ dog. DORA bears similarities to the UK’s approach, but I am told that it is less proportionate than our regime, which targets only the services provided to the finance sector and not whole firms.
Proportionality and resource-effectiveness are therefore built into the design of the regime. I draw all noble Lords’ attention to the obligations that the regulators already operate under, including those resulting from FSMA, and the Bank of England Act 1998. In addition to public law obligations to act reasonably and proportionally, the regulators must also have regard to their regulatory principles. These include the principle that burdens or restrictions imposed on a person should be proportionate to their expected benefits. As the noble Baroness, Lady Kramer, indicated, we will come back to this question of proportionality and effectiveness as we go through our debates in Committee.
Baroness Noakes (Con)
My noble friend correctly anticipates how I intend to conclude my remarks. We will return to this in Committee because, as she noted, I and other noble Lords have tabled amendments on proportionality. Although proportionality is in the legislation as a regulatory principle, there are considerable concerns among those who are regulated that proportionality does not mean much to regulators—or that it never seems to actually bite.
I am grateful for the information on my noble friend’s parents’ dog, and I have learned something about the EU that I did not know before—although I do not generally need to learn things about the EU. We will also return to the important issue of efficiency. I have added my name to at least one of the amendments on efficiency in the name of the noble Baroness, Lady Bowles.
The weight of this regulatory package that has been put together looks scary to those who may potentially be drawn within it, and there are concerns among those who wish to use the services of cloud providers in particular—but also some of the other ICT providers —that the UK regulators will scare off things that are important to them.
I will read carefully in Hansard what my noble friend has said, but I feel that we will probably need to return to one or more specific aspects of this on Report, as well as explore further the issues of proportionality and efficiency in Committee. However, for today, I beg leave to withdraw my amendment.
Financial Services and Markets Bill
Monday 30th January 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-III Third marshalled list for Grand Committee - (30 Jan 2023)
“FCA powers beyond designated activities
(1) This section applies to any person (P) conducting or purporting to conduct any financial services and markets activity, including advisory services, whether or not that activity is designated or regulated, provided that P—(a) occupies a position in which they are expected to safeguard, or not to act against, the financial interests of another person (CP), or in which there is significant asymmetry of information,(b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position—(i) to make a gain for P or another, or(ii) to cause loss to another or to expose another to a risk of loss.(2) A person may be regarded as having abused their position even though their conduct consisted of an omission rather than an act.(3) If the conditions set out in subsections (1) and (2) are met, the FCA has the following powers in relation to P—(a) a power to require the supply of information;(b) a power to make investigations (including the making of reports);(c) a power of entry into premises controlled by P;(d) powers of inspection, search and seizure with respect to premises controlled by P;(e) a power to make a private or public statement of censure;(f) a power to impose monetary penalties.(4) The Treasury may by regulations make provision about enforcement in connection with the powers included in subsection (3), and may make such modifications to the provision in subsection (3) as the Treasury considers appropriate.(5) If the conditions set out in subsections (1) and (2) are met, P is liable—(a) to account to CP for any gain P has made directly or indirectly by the transaction, and(b) to indemnify CP for any loss or damage resulting from the transaction.(6) If the FCA is satisfied that the conditions set out in subsections (1) and (2) are met, it may order P to pay to the appropriate person or distribute among the appropriate persons such amount as appears to the FCA to be just, having regard to the profits appearing to the FCA to have accrued to P.(7) The FCA has the power to institute criminal proceedings, including under section 4 of the Fraud Act 2006, provided that the conditions set out in subsections (1) and (2) are satisfied.”
Baroness Bowles of Berkhamsted (LD)
My Lords, the amendments in this group address matters of fraud or misrepresentation that occur around and because of the regulatory perimeter and have been factors in various recent scandals. Amendment 38 establishes a regulatory offence for fraud by abuse of power and reaffirms FCA power to undertake criminal prosecutions for fraud. I thank the noble Lord, Lord Naseby, for his support on that amendment. Amendments 39 and 198 deal with instances where there are forms of deception or inadequate or lack of information that can mislead about regulated status but which are not caught by existing offences.
A central feature in various scandals has been the abuse of a position of power and/or a belief that an entity was regulated and therefore all its activities had some seal of approval. It has later been discovered that there is no regulatory, supervisory or any other cover and no redress via regulators. The list of examples is extensive, and includes Lloyds Bank’s business support unit, HBOS Reading, Blackmore Bond, London Capital & Finance and RBS’s Global Restructuring Group, but there are many more.
Smaller but nevertheless still substantial businesses have been particular targets: bankers taking advantage of business lending being outside the regulatory perimeter, seemingly not covered by the integrity objective or anything else, which I and other noble Lords have laid out in detail and has been covered by the APPG on Fair Business Banking and others.
The FCA explained in excruciating detail how the asset stripping in the GRG case fell outside its objectives and its own created interpretations, and Andrew Bailey, then CEO of the FCA, said that even if the SMCR had been active at the time, it would not have been covered by it. Later, he hedged and said that maybe it would have applied, but it would all depend.
In its final report, the FCA concluded that there was no case to rule senior RBS managers not fit and proper, because the bar was too high. The fact is that the relationship that businesses and individuals have with their bank is a special one: finance, loans, mortgages, outgoings and income, available capital and other assets, trading accounts, major clients, cash flows—all such things are known by the bank, indeed required to be known, to access finance. But little is known about the bank’s assessment criteria. The relationship is inherently asymmetric in both power and information, and can and has been abused repeatedly.
The relationship with your bank is the lifeblood of businesses, especially small businesses, the homes of which are often subject to a charge. It is known what you are good for and can be taken for. Consumers have had additional protections that businesses do not.
Amendment 38 is specific to abuse of power within financial services and it uses the same wording that appears in Section 4 of the Fraud Act 2006 for fraud by abuse of power. The Fraud Act conditions are that if a person is in a position in which they are expected to safeguard, or at least not act against, the interests of another person, or where there is asymmetry of information, and there is dishonest abuse of that position to make a gain or cause loss to another, it is a criminal offence. My amendment replicates those Fraud Act provisions and introduces a corresponding regulatory offence.
Subsection (7) of my amendment reaffirms the power of the FCA to institute criminal proceedings under Section 4 of the Fraud Act. I say “reaffirm” because the FCA has power to prosecute beyond offences explicitly listed in FSMA, as confirmed in Regina v Rollins [2010] UK Supreme Court 39, in which the court found that the FSA’s powers to prosecute criminal offences were not limited to the offences referred to in Financial Services and Markets Act. The FSA always had been able to bring any prosecution, subject to statutory restrictions and conditions, provided that it was permitted to do so by its memorandum and articles of association, which were so permissive. The FCA, in essence, has the same articles and legal position as the FSA did then, but seems to need both more tools and more encouragement.
Various particularly relevant offences continue to be singled out and put into FSMA. Adding an offence of fraud by abuse of power is therefore long overdue, given the power and asymmetry of information that I have already explained. We know that the bar is high for criminal prosecution—to the extent that some rely on that, a chain of command and shared responsibility to eliminate mens rea and the ability to obtain a conviction, hence my suggestion that there is also a regulatory offence.
Turning to the other amendments in the group, Amendment 39 is also about when a regulated person carries out unregulated activity, the boundary is not clearly understood, and a customer may not know when they have strayed into riskier waters. A common thing may be to see headed paper or a website displaying, as required, that a person is regulated for a given activity, but the limiting language is not always going to be meaningful to the ordinary person. As we discovered in the Gloster report, even the FCA got it wrong.
Baroness Kramer (LD)
My Lords, my noble friend Lady Bowles’ speech was so powerful that I saw a lot of heads nod, but perhaps that has discouraged other noble Lords from standing up to speak on this occasion.
I am not going to attempt to repeat an excellent speech which made the points which such clarity. I just want to underscore two things. Whenever I have conversations with the FCA and whenever you read its articles, it prays in aid the complexity of the regulatory perimeter so that on so many occasions it is hard to know exactly where it is and how it is applied. However, when you look at abusers and scammers, they have absolutely worked out where the regulatory perimeter stands and know exactly what scope they have, and they make sure they use every scrap and every inch of that space which is provided to them. That is addressed by these amendments.
The second issue that I want to underscore was raised by my noble friend. It is that, culturally, the FCA seems to be very timid about pushing to the limit of the perimeter the regulatory powers it already has. It is so because it is very afraid of stepping over the boundary at any point. These amendments provide not only much more clarity but some backbone for the FCA to take a far more positive stance. It is quite shocking to most people that the key financial regulator can be absolutely aware that abuse is taking place, that mis-selling is taking place, but feels that it is unable to do or say anything because there is a regulatory perimeter after which the issue is caveat emptor and those who are defrauded can turn only to the enforcement agencies, which relies on finding a local police force that has the resources and capacity to pick up the issue. We know that with the Lloyds Reading case small businesses that were very badly abused went to police force after police force and were turned down until they went to Thames Valley Police, which had more resources, and the police and crime commissioner, Anthony Stansfield, whom I utterly praise in this issue, decided to take on the case—a very rare instance. They got no help from the National Crime Agency or the Serious Fraud Office because they considered that the fraud that everyone recognised was taking place was too small fry to occupy them. Frankly, it is a shocking situation to be in. Many people have said that this must be remedied. I congratulate my noble friend on bringing forward an amendment that aptly provides that remedy. I very much hope that the Government will take it up.
Lord Tunnicliffe (Lab)
My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.
The Parliamentary Secretary HM Treasury (Baroness Penn) (Con)
My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.
As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.
As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.
In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.
Baroness Kramer (LD)
I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.
Baroness Penn (Con)
In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.
Baroness Kramer (LD)
May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?
Baroness Penn (Con)
No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.
Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.
Lord Hunt of Kings Heath (Lab)
My Lords, I accept that the Minister is, essentially, responding in the narrow terms of the amendment before us, but she will be aware that our Lordships’ Select Committee looked into the whole issue of financial fraud and crime. The Minister mentioned the FCA, but the committee found that there are so many agencies involved that their collective effort is a total lack of integration and co-ordination, and that thousands of people are left completely unsupported. Less than 1% of police resources are spent on tackling a huge sector. The Government have now stopped publishing statistics in relation to crime that includes financial crime. I wonder why.
Baroness Penn (Con)
I opened my remarks by acknowledging that fraud needs a co-ordinated response from government, law enforcement and the private sector. That is at the heart of our approach, and it is why the Government established the Joint Fraud Taskforce to bring all those actors together. I attended it towards the end of last year, and it meets regularly. There are many different actors that need to take action in this space, including the regulators but also law enforcement, industry and companies—not just the financial services sector. Measures in the Online Safety Bill look at online platforms, for example.
Lord Vaux of Harrowden (CB)
I apologise for interrupting, but all this would be a lot easier if we had the national fraud strategy. When can we expect it?
Baroness Penn (Con)
I agree with the noble Lord. We can expect it soon—or imminently; I could use a variety of different descriptors, but it will be sooner than “in due course”.
Lord Tunnicliffe (Lab)
I hope the Minister will appreciate the utility of publishing it before Report.
Baroness Penn (Con)
I note the noble Lord’s point about the timing of that.
The noble Lord, Lord Hunt, mentioned resources. I repeat that additional resources have gone into tackling economic crime—£400 million during the spending review period, including £100 million dedicated specifically to fraud.
In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud, and recognised the important role it plays in tackling this issue. This existing remit allows the FCA to take proactive steps to tackle fraud and wider financial crime while driving a whole-system approach with relevant stakeholders.
Baroness Bowles of Berkhamsted (LD)
I thank the Minister and other noble Lords who have spoken and intervened in this debate. We have strayed a little from my amendments into the general issues of fraud, which will come up in later groups because I think the body of opinion is that not enough is yet being done to prevent fraud.
The Minister suffers to some extent from exactly the same tunnel vision as the FCA, in that it wants to deal only with those things that are convenient, and it is not looking for the enemy and the evil within—and within regulated entities. One would have thought that those banks that defrauded business customers were reputable institutions, and that deception is not addressed at all by anything that the FCA is doing or that the Minister has said. It is doubtful whether it can be addressed even by the senior managers regime, because again, that has been diluted and spread around in such a way that you have the same problem as trying to find mens rea with a board.
The FCA may have done all the things that the Gloster report required but most of those were to do with things that were operationally bad within the FCA; they were not necessarily going to do anything to address the kind of “enemy within” fraud in banks, on their customers, that I outlined in my first amendment.
There is an urgent need to do something about this. It is ridiculous to say that there is a role or any integrity in our financial markets when this kind of thing can go on and be unpunished. The FCA may indeed be able to take a criminal offence if it ever finds the guts to do so, but I was giving it a regulatory offence here, which would be much easier for it to do, and at least there would be punishment and maybe more awareness through reputational damage within the banks so that that they would do something about it. I am not convinced that it cannot happen again. This is special—the inherent asymmetry of power and information—and this appears to be totally disregarded both by the FCA and by the Minister.
The other two amendments also plug important gaps that, no matter much you tweak Section 24, are not covered by it; therefore they can be used and abused. So I am far from satisfied that the Minister or the FCA is in any way serious about trying to tackle the type of fraud that I am discussing here. We will come on later to other kinds of things—there are other ways to do it. However, to say it is caveat emptor everywhere does not leave us in a good state when the next scandal comes along and everybody says, “There’s the rotten UK banking system again. Don’t do business in the UK—your own bank might fleece you.”
Due to lack of enthusiasm, obviously I will withdraw this amendment for now. However, I will not leave this issue alone, because it is quite clear that the Government have not understood the seriousness of this for businesses—small businesses and profitable businesses—which are being scammed by their own banks. However, with the leave of the Committee, I beg leave to withdraw the amendment.
Lord Sharkey
“Regulation of commercial lending to SMEs
(1) The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) is amended in accordance with subsections (2) to (4).(2) In article 60C, in paragraph (3), at the end of sub-paragraph (b) insert “, and(c) the borrower is not an SME.”(3) In article 60D, at the end insert—“(6) This article does not apply to an agreement if the borrower is an SME.”(4) In article 60L(1)—(a) at the appropriate place insert—““SME” means a small or medium-sized enterprise, being any person who is not an individual which—(a) carries on business of any kind which employs fewer than 250 persons, and(b) has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.”;(b) in the definition of “relevant recipient of credit”—(i) omit the “or” at the end of paragraph (a), and(ii) at the end of paragraph (b) insert “, or“(c) an SME;”.”(5) Article 3(1) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (S.I. 2001/2256) is amended in accordance with subsections (6) to (8).(6) In sub-paragraph (a), for “any individual, unless he” substitute “any individual or SME, unless he or it”.(7) In sub-paragraph (b), after “individual” insert “or SME”.(8) At the end insert—“(c) “SME” means a small or medium-sized enterprise, being any person who is not an individual which carries on business of any kind which employs fewer than 250 persons; and has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.””Member’s explanatory statement
This would bring lending to SMEs within the perimeter of the FCA.
Lord Sharkey (LD)
My Lords, Amendment 40 is in my name and that of the noble Baroness, Lady Bennett of Manor Castle, whose support I am grateful for. The amendment would bring lending to SMEs within the FCA’s perimeter and would allow a private right of action to enable SMEs to sue lenders for breaches of regulatory protection, as I believe would Amendment 219 in the name of the noble Lord, Lord Holmes of Richmond.
However, there appears to be some uncertainty about the definition of an SME. The government website, which I checked this morning, says that it encompasses all businesses with no more than 250 employees and a turnover or balance sheet of no more than €50 million—the qualification is still given in euros—but it seems that Liz Truss might have changed all this. In an article in the Telegraph of 3 October last year, she raised the employee limit from 250 to 500. I cannot find this on any government website and I do not know whether the turnover and balance sheet requirements were also raised. If this is still government policy—perhaps the Minister can tell us whether it is—that is a good thing, bringing with it a significant relaxation in reporting rules and red tape to an important part of our commercial base. In fact, any encouragement or support for SMEs is a good thing.
As Rishi Sunak said in the policy booklet he wrote in 2017 for the Centre for Policy Studies:
“We have a world-beating record when it comes to creating entrepreneurial start-ups. Some 21% of UK firms are less than two years old, a higher figure than even the US … Yet when it comes to growing those businesses—the stage at which access to capital is most crucial—Britain’s record is dismal. In a ranking of 14 OECD countries, the UK comes a lowly 13th in terms of the proportion of start-up businesses that grow to having 10 or more employees within three years.”
He also noted that
“UK companies are far too reliant on banks for their credit financing needs”,
a reliance that has increased post pandemic. This reliance has been extremely problematic. Mistreatment of SMEs by banks is a truly serious problem, not just because it causes immense damage to companies and individuals but because the means of redress are cumbersome, full of long delays and generally unsatisfactory.
Commercial lending to SMEs is not regulated. It sits outside the FCA’s regulatory perimeter. In its annual perimeter report published last year, the FCA said:
“SME lending is a longstanding perimeter issue, as business lending is generally only a regulated activity where both the loan is up to £25,000, and the borrower is either a sole trader or a ‘relevant recipient of credit’”.
That excludes most of the SME sector by value. That sector operates without FCA regulation and has suffered some of the most appalling mistreatments at the hands of banks. Some examples of this have already been quoted this afternoon by my noble friend Lady Bowles.
There was the scandal of the mis-selling of interest rate hedging products, about 90% of which were subsequently found to have been mis-sold. There was also the treatment of SMEs by the Royal Bank of Scotland’s global restructuring group; the Tomlinson report on the scandal suggested that there were occasions where RBS had engineered businesses into default to move them out of local management and into the clutches of the GRG. The FCA later found that there was a systemic and widespread mistreatment of SME customers between 2008 and 2013. Andrew Bailey said
“GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so”
the FCA’s
“powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”
Then there was the HBOS Reading fraud in the early 2000s. A group of bankers was found by a court to have run
“an ‘utterly corrupt scheme’ that left hundreds of small business owners ‘cheated, defeated and penniless’”.
Those are just three of the major scandals affecting SMEs. There are others: mis-selling of loans under the Government’s enterprise finance guarantee scheme; mis-selling of tailored business loans by Clydesdale plc; allegations of misconduct involving business support units at other banks and mistreatment of small business borrowers when they are in arrears. There is clearly widespread, long-standing mistreatment of SMEs by financial services organisations. The case for regulation is particularly compelling because SMEs rarely have the practical ability to enforce whatever legal rights they may have against the banks. It would be exceptional for an SME to have the financial resource to take a bank to court.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in the second day of Committee on this Bill. In doing so, I declare my financial services interests as set out in the register. In speaking to my Amendment 219, I give more than a nod to the amendment in the name of the noble Lord, Lord Sharkey, which he set out so eloquently; had I had a pen, I almost certainly would have signed it and put my name against it.
In simple terms, this is very straightforward: SMEs are the backbone of the British economy. They are the largest private employers and the big companies of tomorrow yet, in this area, we are leaving them high and dry and at the will of many of the schemes that were set out so well by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles. I know that the noble Baroness, Lady Kramer, has all those unfortunate instances tattooed and ready to come out at any moment—rightly so because they all demonstrate that, when things go wrong, they go badly wrong. All too often, it is individuals and, in this instance, SMEs that are on the wrong end of it without a right of action against the FCA. My amendment would provide that right of action for breaches of the FCA handbook; I believe that it is similar to the amendment set out by the noble Lord, Lord Sharkey.
The Government talk, rightly, about the need to grow the UK economy. That growth will come largely from SMEs. Does my noble friend the Minister agree that they deserve our support? By simply accepting either of these amendments or, indeed, tabling a government amendment on Report, they would enable commercial loans over £25,000 to be brought within the perimeter and give SMEs not only the protection but the support that they should have from the regulator—and through that, from the Government—to enable that growth, which we all need for the UK economy and society. I ask my noble friend whether she will look to engage and potentially bring a government amendment to this effect on Report.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to take part in this debate on the second day of Committee. I have to say that it has been an extraordinarily powerful debate thus far and an absolute indictment of the UK financial sector. I begin by apologising for not taking part in the first day of Committee, despite having signed a number of amendments. I am afraid I was taking part in the debate on the so-called Genetic Technology (Precision Breeding) Bill, and it is impossible to spread oneself across too many places.
The case for these amendments, in particular Amendment 40 in the name of the noble Lord, Lord Sharkey, to which I am pleased to attach my name, has already been powerfully made, by the noble Lord himself and by the noble Baroness, Lady Bowles of Berkhamsted, in the debate on the previous group of amendments. I will make a couple of additional points. In particular, I draw on a survey by the Federation of Small Businesses, published in December, which found that 30% of small and medium-sized enterprises thought that they had signed financial contracts that contained unfair clauses and provisions.
The survey also found that successful applications for loans and other financing for SMEs had fallen precipitously. Less than half were successful in the third quarter of 2022; before Covid, two-thirds had been successful. One of the things we are always hearing from the Government is, “Rely on the market! People can shop around and choose”. We have already heard the reality of the inequality of arms—as the lawyers would put it—between a small business and a giant financial-sector company. But there is also no opportunity: small and medium-sized enterprises have to take money from wherever they can get it, if they are lucky enough to get it at all.
What we have here is a practical reality, as the noble Lord, Lord Holmes of Richmond, just set out. The financial sector is not meeting the needs of the real economy, and that issue underlies all our debates on the Bill. Is the financial sector there as a high-stakes casino in which a few people can make a lot of money and the rest of us have to pick up the pieces when it all goes wrong, or is it there to meet the needs of the real economy and give us a genuinely sustainable—in all senses of the word—society?
Although we have perhaps not needed him, it is a pity that the noble Lord, Lord Sikka, is not currently in his place, as he could also have contributed very powerfully to this debate. What we have is a litany of disaster. The FCA has a terrible track record. Your Lordships’ Committee is trying to do something to fix that, and, boy, does it need fixing.
Baroness Altmann (Con)
My Lords, I too support both amendments in this group. I congratulate my noble friend Lord Holmes on his Amendment 219, and the noble Lord, Lord Sharkey, on Amendment 40 and the way in which he explained it. I urge my noble friend the Minister to take seriously the comments that have been made and the reference to the Treasury Select Committee, which recommended just this kind of change.
I would like to understand from my noble friend: if the Government do not agree with the Treasury Select Committee, why? How do they believe that SMEs are protected against the kinds of scandals and bad behaviour that have clearly been rife within the sector over a number of years? Does my noble friend seriously believe that small and medium-sized enterprises are equipped enough to stand up against the information and resources available to the financial services industry to avoid the kind of problems that we have seen in the past?
Baroness Kramer (LD)
My Lords, the last group of amendments and this one are not identical and cover different aspects of abuse by financial institutions. Were the Government to accept them, together, or to draft their own versions, that would completely change the playing field. Small businesses would be in a position whereby they could breathe easily and make business decisions, and not worry that, embedded in whatever product they were purchasing—
The Deputy Chairman of Committees (Lord Geddes) (Con)
I hate to interrupt the noble Baroness, but a Division has been called in the Chamber. The Grand Committee stands adjourned until 5.20 pm.
Baroness Kramer (LD)
My Lords, in light of all the pressures we have—the speeches were so brilliant—I will not try to add to them, other than to say that I very much support the amendments in this group.
Lord Thomas of Cwmgiedd (CB)
I will make one brief observation and declare my interest as chairman of the Financial Markets Law Committee. It seems to me that the real problem, which both amendments rightly seek to address, is to give SMEs an effective remedy. The courts system—for various reasons—and the costs that lawyers charge make it almost impossible for SMEs to take on the banks. Therefore, there seems a good deal of force in the arguments that have been put forward. I would be grateful if the Minister were able to tell us what the attitude of the regulators, particularly the FCA, would be to extending the position in this way. It is very important for the Committee to know what they think of this amendment. Really, the object of it is to cure a deficiency in the way in which our legal system functions.
Lord Tunnicliffe (Lab)
My Lords, once again, the arguments for these amendments seem quite persuasive, and I look forward to the Minister’s reply. Having probably been responsible for this legislation in the past—since I failed to duck most of it—I cannot remember for the life of me why SMEs are excluded. Before addressing the amendments, I would be grateful if the Minister could explain the thinking behind the law as it stands.
Baroness Penn (Con)
My Lords, Amendment 40 intends to offer additional regulatory protections for businesses taking out finance. I hope this, in part, addresses the question of the noble Lord, Lord Tunnicliffe: the Government are committed to regulating business lending only where there is a clear case for doing so. Bringing SME lending into regulation would risk increasing costs for banks and alternative finance providers, which would in turn be passed on to businesses in the form of higher fees and interest rates. This could negatively impact the price and availability of credit for small businesses.
However, the Government see a case for regulation where that asymmetry which we have talked about is at its greatest. At the moment, loans of £25,000 or less to the smallest businesses are already regulated as consumer credit agreements under the Financial Services and Markets Act 2000. This captures over 60% of all UK businesses and aims to protect them where there is the potential for detriment in their dealings with banks and alternative finance providers.
Even for medium and larger firms outside the perimeter, multiple protections are already in place which, in some instances, act as a de facto extension to the regulatory perimeter, without the associated costs that formal regulation would bring. Over 99% of UK businesses can access independent dispute resolution through either the Financial Ombudsman Service or the Business Banking Resolution Service. I note the comments from the noble and learned Lord, Lord Thomas of Cwmgiedd. Alternative dispute resolution services provide a form of access to businesses that can be less costly to them. On his specific question about the views of regulators on the regulatory perimeter, I will write to both the noble and learned Lord and the Committee.
Furthermore, a recent FCA investigation found that many lenders, particularly large banks, extend regulatory protections to many or all of their unregulated business relationships. All the major bank lenders are signed up to a voluntary industry code, the Standards of Lending Practice, which contains clear guidance on best practice and can be considered by the Financial Ombudsman Service when adjudicating a business’s complaint against a financial institution. This achieves many of the same outcomes as extending the regulatory perimeter, so many loans that are not captured by consumer credit regulation nevertheless benefit from effective protections.
Given these factors, at this time, the Government do not believe that there is a clear and proportionate case for bringing business lending into regulation. I should be clear that we are open to considered, evidenced arguments on specific regulatory questions related to SME lending. That is why we have invited views on it as part of our ongoing consultation on the reform of the Consumer Credit Act.
Amendment 219 seeks to ensure that SMEs are given rights of action against firms that breach the FCA handbook. Currently, a breach of the FCA handbook may not be actionable by an SME in court—as noted by my noble friend. However, as I have already said, the Financial Ombudsman Service provides consumers and small businesses with a route to raise complaints against firms. This is an alternative to going through the courts, which can be expensive for the parties involved and delay redress. The Financial Ombudsman Service is required to decide cases on the basis of what it considers is fair and reasonable, in all the circumstances of the case, including whether there has been a breach of FCA rules.
Since 2019, SMEs with an annual turnover of up to £6.5 million and fewer than 50 employees have been able to take cases against financial services firms to the Financial Ombudsman Service. All firms regulated by the FCA are required under the FCA’s rules to co-operate with the ombudsman, which includes complying with any decision that it may make.
Since 2021, SMEs with a turnover of between £6.5 million and £10 million can also raise complaints about firms to the British Banking Resolution Service. This is a voluntary body set up and funded by banks to provide an alternative dispute resolution service without the need for litigation or external legal support. Given that more than 99% of UK businesses can access independent dispute resolution through either the FOS or the British Banking Resolution Service, it is unnecessary to provide for a right to take civil action in the courts for a breach of the FCA handbook.
Lord Tunnicliffe (Lab)
The Minister’s argument seems to be about the cost of introducing regulation—that there is a big black cloud that means they cannot do it—but I have not heard any figures. Can she find an estimate of the cost of introducing the sort of regulation envisaged under the amendments and send us all a letter when she has?
Baroness Penn (Con)
I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.
Those were all the points—
Lord Sharkey (LD)
The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?
Baroness Penn (Con)
I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—
Baroness Kramer (LD)
Perhaps the Minister would confirm that the only cases in which the BBRS will intervene is where the bank complained against is Barclays, Danske, HSBC, Lloyds, NatWest, Santander or Virgin Money and that any institution outside that group—and there is a great range of new banks, challenger banks and others—is not included in its activities? Is that correct?
Baroness Penn (Con)
I note that it is a voluntary body. I do not have the list of those who have signed up to it to hand. If it differs from those outlined by the noble Baroness, I will write to the Committee, but she may well have listed those who have signed up to it. I note, however, that the combination of that service, and the scale of those involved in it, with the ability to go to the Financial Ombudsman Service means that research suggests that more than 99% of UK businesses can access independent dispute resolution. We should look at the size of the customer base as well as the number of organisations signed up to such dispute resolution mechanisms. I will write to the noble Lord, Lord Sharkey, on the number of cases taken by the organisation.
Baroness Altmann (Con)
I thank my noble friend for giving way, but perhaps I could press her a little more on the effectiveness of the Financial Ombudsman Service in providing a deterrent against poor practice in the areas where we have seen it in the past. The noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Sharkey, have outlined instances of banks not treating their customers well. Does my noble friend agree that having a statutory duty written into the legislation would be much more of a deterrent against the behaviour we have seen than the potential threat of someone going to the Financial Ombudsman Service?
Baroness Penn (Con)
That is one element to be considered. I was pointing in particular to the combined role of the FOS and the Business Banking Resolution Service in providing a route of redress for over 99% of businesses. In part, it comes back to my question in relation to Amendment 40 from the noble Lord, Lord Sharkey, on the Government’s commitment to regulating business lending only where there is a clear case for doing so, given some of the increased costs that bringing SME lending into regulation would bring. I return to the point that we currently have a consultation out on the Consumer Credit Act in which there is a question on business lending; the Government are considering this through that consultation.
With that, I hope that the noble Lord, Lord Sharkey, will withdraw Amendment 40 at this stage—
Baroness Bennett of Manor Castle (GP)
I think the whole thrust of the noble Baroness’s argument is that the non-statutory protection effectively offered to SMEs through the ombudsman and independent dispute resolution procedures is essentially the same as having statutory protection. She suggested that statutory protection would cost more, but if the protection is equal through these other mechanisms, surely the costs of the banks providing the documentation and the system to enforce those mechanisms would be very similar to the statutory costs.
Baroness Penn (Con)
The noble Baroness touches on one possible difference in documentation needing to be provided where something is regulated versus where it is voluntary. That comes back to the question of SME lending having increased costs for banks and alternative finance providers. This can be passed on to businesses in the form of higher fees and interest rates, and it can affect the availability of credit for small businesses. The noble Baroness, Lady Kramer, mentioned start-up banks and challenger banks. When we have discussions elsewhere on other issues related to financial services regulation, we also discuss how we create a more competitive environment in the banking sector, as smaller banks can struggle to deal with regulations. This is a general point about balance.
Baroness Bowles of Berkhamsted (LD)
I am sorry to intervene again, but I am also intrigued about what the extra cost is of this coming into regulation. We are not suggesting that there should be great big oversight mechanisms which mean that the FCA would have to do a lot more—until problems occur, when there must be a route to justice. Is the Minister saying that banks will make less profit when they cannot cheat their customers, and that is where the cost comes from? I do not understand it. The suggestion was that it might be documentation, but the cost of that is the same wherever the documents go. What is this extra cost other than banks having to behave responsibly?
Baroness Penn (Con)
In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.
On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.
Baroness Kramer (LD)
I will add one more piece to the response from the Minister—one more request. I just want to double-check what she said. She said that small businesses could go to the FOS and that they have to employ fewer than 50 people. The definition of a small business seems to encompass something much larger than that. Can she help us understand what happens to the businesses that are still considered small but have more than 50 employees? I would imagine that they are pretty easy targets. As I say, one of the things that is always noticeable is that those who decide to exploit are very clear about where the perimeters are and who they can freely approach, so they get away with it.
Baroness Penn (Con)
As I hope I was setting out for the noble Lord, Lord Sharkey, there are different definitions of businesses that can have different protections and routes of redress within a system of small business lending. The system that we have is aimed to be proportionate, focusing on the smallest SMEs which are at the most risk. On the difference between the voluntary measures that are in place and bringing it within the regulatory perimeter, we are not saying that those are entirely equivalent protections but that they are proportionate protections to the risks faced by those firms. I set out different thresholds in my answer in relation to both those businesses that are protected under the Consumer Credit Act, which are sole traders, loans under £25,000 and a few others there, and businesses that are able to access either the FOS or the Business Banking Resolution Service. There are other thresholds too. Therefore I appreciate the point that that is different from the definition of a SME that the noble Lord asked about. The system is designed to be proportionate to the size of the SME and the protections it affords to them as regards business lending.
Baroness Altmann (Con)
I thank my noble friend for giving way once again. This is an important area for the whole financial services framework that we have in this country. I think that the noble Baroness, Lady Bowles, the noble Lord, Lord Sharkey, and my noble friend Lord Holmes are all trying to press the Minister on the issue of protection before scandals happen so that our system can be trusted more. The point here is about deterring financial institutions from even trying to undertake these actions by having stronger regulatory protection upfront, rather than this or that right of redress after the event has happened.
Baroness Penn (Con)
I understand my noble friend’s point, and of course the Government also consider that when we look at what to bring into the regulatory perimeter or the right of redress, both as a route of redress and as a point of deterrence. The Government take all those factors into account when considering this question.
Baroness Bowles of Berkhamsted (LD)
If I may ask one more question, one area that might be interesting for comparison, especially if we are looking at the Consumer Credit Act, is what the difference is between the loans of £25,000 to small businesses and bounce-back loans, where the conditions of the Consumer Credit Act were dispensed with. Can we have a comparison to see whether they have fared better or worse? That will perhaps show us where the true costs of regulation and lack of regulation lie.
Baroness Penn (Con)
The noble Baroness makes an interesting point. However, bounce-back loans were designed for a specific set of circumstances, and the aim of disapplying the Consumer Credit Act provisions was to do with the speed of being able to get bounce-back loans out to customers. The noble Baroness has indicated that there can then be some regulatory cost to having those protections in place. That is an interesting point, which I am sure people will want to think about in the consultation that is under way on the Consumer Credit Act and the direction of travel there.
Baroness Bowles of Berkhamsted (LD)
I must point out that I was fearing that the true cost was with the small businesses.
Baroness Penn (Con)
The true cost of the protections afforded under the Consumer Credit Act—
Baroness Penn (Con)
To be honest, I am not sure that I totally follow the noble Baroness’s point.
Lord Sharkey (LD)
I thank the Minister for her response but this all seems astoundingly Panglossian. It is as though there is nothing wrong with all this and the SMEs are protected, happy and profitable. That is not the case. If it were the case, why has there been this succession of appalling scandals and appalling mistreatment, causing so much damage to our small businesses? We cannot both be right here. If the system is working, why do all these things continue to happen?
I beg leave to withdraw the amendment and give notice that we will return to this issue on Report.
Baroness Sheehan
“Vote reporting
(1) The FCA must—(a) make rules requiring relevant FCA-regulated persons to give clients information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest, including in respect of any specified description of scheme or investment vehicle, and(b) issue guidance in respect of the format of the information provided.(2) A Minister of the Crown must make regulations requiring other relevant persons to give beneficiaries information on request about the exercise by the persons or on their behalf of all voting rights attached to assets in which the clients have an interest.(3) In this section—“relevant FCA-regulated persons” means—(a) managers of personal pension schemes within the meaning of an order under section 22 of FSMA 2000 (regulated activities),(b) managers of stakeholder pension schemes within the meaning of such an order,(c) persons managing investments within the meaning of an order under section 22 of that Act, including the activity described in paragraph 6 of Schedule 2 to that Act,(d) persons effecting or carrying out a contract of insurance within the meaning of an order under section 22 of that Act;“other relevant persons” means—(a) trustees of occupational pension schemes within the meaning of section 1 of the Pension Schemes Act 1993 with £1 billion or more in assets;(b) an administering authority of the local government pension scheme.”Member’s explanatory statement
This amendment requires (a) the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients, and (b) Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.
Baroness Sheehan (LD)
My Lords, I rise to move Amendment 42 in my name, to which the noble Baronesses, Lady Hayman and Lady Wheatcroft, have added their names; I thank them for their support. I refer noble Lords to my interest as per the register as a director of Peers for the Planet.
Amendment 42 seeks to inject a much-needed dose of realism into this Bill. I quote my noble friend Lady Kramer’s summing up of the debate on it at Second Reading:
“This is an industry that knows how to promote itself and speaks with a great sense of invincibility.”—[Official Report, 10/1/23; col. 1394.]
Yet this is also the industry that comprehensively crashed the economy in 2007. Some individuals walked away with accumulated profits, leaving the taxpayer to pick up the costs, with the most vulnerable suffering the most—as ever—through the years of austerity that followed.
I am sure that there are those who say that the financial services sector is our biggest asset; that we must unleash its potential, not shackle it with undue openness and transparency; and that we should most definitely not saddle it with an overarching requirement to safeguard the future of the one and only planet we have. However, I profoundly disagree, which is why I think that a healthy dose of realism is needed—not wishful or short-termist thinking, but reflection on what is happening to our planetary ecosystems in the real world and whether our sons and daughters will curse us in future as the last generation that could have acted in time to save the planet but did not do so.
Money matters. Money drives our economy and all our futures. We need to be able to find out easily what is being done in our name with our money. Amendment 42 is a simple but necessary one. It would require the FCA to make rules requiring fund managers, personal pension providers and insurers to give information on request to clients. It would also require Ministers to make regulations requiring pension funds to give information on request to beneficiaries, on the exercise of all voting rights on their behalf, however those rights are held.
This amendment is necessary because, at present, investors cannot easily find out how fund managers managing their money have voted on their behalf. This cannot be right. Good disclosure principles dictate that investors should be able to find what they need easily, be able easily to understand what they find and be able to use what they find to make informed investment decisions. It also goes without saying that good disclosure principles are a precursor to good governance and essential to a stable financial sector.
Noble Lords will be aware that with ownership of listed companies comes the opportunity to exercise the right to vote at the company’s AGM, including on the appointment of the chair and other independent directors, to accept or reject the annual report and accounts, to appoint auditors, and to agree pay arrangements and any shareholder resolutions which have been tabled or to table resolutions if they meet the minimum threshold. Voting with or against the management and supporting or rejecting shareholder resolutions is an incredibly important tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly.
Of course, it is also important for the journey to net zero. The Treasury acknowledges this in its report Greening Finance: A Roadmap to Sustainable Investing, which was published in September 2021. In that report, the Government set out their expectations that pension funds and investment managers should
“Actively monitor, encourage, and challenge companies by using their rights and direct/indirect influence to promote long-term, sustainable value generation”
and
“Be transparent about their own and their service providers’ engagement and voting, including by publishing easily accessible, high-quality quantitative and narrative reporting.”
This is what Amendment 42 would do. It is necessary because, regardless of the Government’s expectations, the reality is that the complicated architecture of investment with large numbers of intermediaries, such as investment managers, insurers, consultants and additional fund managers, means that despite efforts by the DWP and the FCA to give pension savers greater transparency about how votes connected with their investments have been cast, it is still practically impossible for savers and often difficult even for the pension funds to get the information.
It is true that the FCA has made rules under the shareholder rights directive, which—in another world many millions of years ago now, it seems—the UK Government championed to improve levels of corporate governance and oversight across the EU. However, in DWP’s implementation of the directive, the pension fund must publicly report on only those which it considers significant. Guidance issued by the pension funds trade body—the Pensions and Lifetime Savings Association—recommends that around 10 out of at least 1,000 votes in which a pension fund typically has a stake should be disclosed. A fundamental weakness is that the pension fund does not have a statutory right to information on unreported votes from the fund manager, and the pension saver does not have a statutory right to information on unreported votes from the pension fund. Obscurity rules, it seems. I guess that even this weak reporting requirement will be swept away by the Retained EU Law (Revocation and Reform) Bill.
The difficulties with obtaining information on voting were covered at length by the DWP-commissioned task force on pension scheme voting implementation—I think it is called TPSVI—which reported in September 2021 and recommended that the DWP and the FCA should closely monitor delivery of vote reporting at fund level. It recommended that if investment managers do not deliver by the end of 2022 the FCA should legislate or issue handbook guidance to deliver fund-level reporting. Managers have not so far delivered.
In its letter to the DWP in October 2022, more than a year after the report, the FCA indicated that it was setting up a vote-reporting group with a view to having draft proposals by the middle of this year. However, the solution still seems entirely reliant on voluntary participation by investment management firms, which I understand are lobbying furiously against standardised disclosure. Some firms do not wish to provide reports on request because it will make them look bad and some do not want to invest in the technology to allow them to provide the data, but neither of these positions is acceptable today.
It was surprising to hear, in response to two Parliamentary Questions from the noble Baroness, Lady Ritchie of Downpatrick, that the Government do not appear to know anything at all about the voting records of UK-authorised fund managers and pension funds in relation to climate-related resolutions at AGMs. Yet the Government are reliant on the financial sector to take strong action on climate change through the exercise of voting rights.
For 16 years, the Government have had powers to require comprehensive vote reporting via the Companies Act 2006, but they have not yet used them. My amendment is intended to give the FCA, which regulates the voting behaviour of fund managers and insurers, the duty to make rules, rather than BEIS or the Treasury.
The US Securities and Exchange Commission regularly updates requirements for standardised disclosure of voting by fund managers, which must be presented in a consistent and machine-readable form, so action by our regulators in the UK is long overdue. Smart regulation is a vital aspect of retaining competitiveness, and this amendment is intended to be smart by giving the FCA the nudge to make rules and ensure that reporting is standardised, with similar provisions for pension funds, but it is not prescriptive on the details. If the FCA intends to make comprehensive reporting in standardised form mandatory, the Minister should welcome the amendment. I look forward to his response. I beg to move.
Baroness Wheatcroft (CB)
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, and I echo everything she said. I apologise to the Committee that I was unable to be at Second Reading.
I believe that this amendment is necessary if we are to have a properly active shareholder democracy in this country. At the moment, shares are not held by the majority of individuals directly; they are held through institutions, and shareholders tend to be passive. The individual shareholder does not know what is happening with his or her money. Yet when we look at how companies behave, all too often, one is reduced to saying, “How on earth could the owners allow that to go on?” Whether it is overpaying executive directors while the people at the bottom of the pile in the business are dependent on universal credit, paying the executives in the water companies huge bonuses while they pour sewage into our rivers or continuing to do business in Russia when the country is absolutely begging people to come out of Russia, too many companies behave badly, and they are not held to account.
It is very rare for institutional investors to vote against a remuneration report to the extent that a majority forces the company to think again. It is probably even rarer for institutional investors to vote against a proposed merger when it will be in the long-term interests of the executives, perhaps, but not of the workers in the UK.
We need individual investors to take a serious interest in what the business is doing. Not all of them will, but for those who are interested, it should be very easy for them to find out how their money—their shares—are being voted. It is a perfectly simple thing to do. Websites could easily be made accessible to show how the vote has been cast on every issue with every company at every annual meeting. Technology would find that quite straightforward. The majority of private individuals with investments in pension funds and insurance companies would not find it difficult to access that information, but it has to be made available.
It has to be an absolute requirement that all companies make all that information available, not just a fraction of it, and the sooner the regulators and the Government move towards that position, the better. The more information is out there, the more individuals will look at it and decide, for instance, that their company—the company in which they have a stake through their pension fund or insurance company—is not behaving as they would wish it to, and they can begin to put pressure on those who hold their shares. That might be because they are passionately involved in the employment issue or in remuneration, or because they want to see evidence that the company is taking its net-zero responsibilities seriously, and in many cases companies now have a vote on the net-zero target and how they are meeting it. Let us give the majority of people who hold shares through intermediaries the chance to see how those shares are being voted and to decide for themselves whether they approve of the way their shares are being used.
Baroness Hayman (CB)
My Lords, as this is my first contribution in Committee, I remind the Committee of my interests as set out in the register, particularly Peers for the Planet. I also have a son who is employed by Make My Money Matter, an organisation that campaigns in this area.
We have had two powerful speeches in support of this amendment, and I do not need to detain the Committee long in registering my support for it. It comes back to that very basic issue that both noble Baronesses dealt with: transparency. It is only with information that individuals can make meaningful choices about the investment of what is their money. It is tremendously important that we do not fall behind on this and assume that decisions that will be made are nothing to do with the little people who actually put the money into the companies which make the decisions. As I understand it, other jurisdictions have found ways through technology and standard reporting procedures to allow this to happen as a matter of course. I would be interested to hear from the Minister why we cannot do that in this country too.
Baroness Bennett of Manor Castle (GP)
My Lords, I will briefly express support for this amendment, which has already been so powerfully argued for. I would have signed it had I caught up with the legislative deluge.
I want to make two additional points. First, the Pensions Regulator’s most recent survey of defined contribution schemes found that more than 80% did not allocate any time or resources to managing climate risk. It would be interesting if we were to see the way in which fund managers were voting, not only to have that recorded, but I would assume that they would have to have some kind of thought behind it to explain what was recorded. The transparency might force some more thinking to happen, which would clearly be a good idea.
I also want to ask a question of the proposers of this amendment because I was slightly puzzled by the information on request element of the amendment. The noble Baroness, Lady Sheehan, noted that US regulators forced this to be published openly as a matter of course. It seems that that would be the logical thing, that this should be available not only to clients but to anyone who might like to make an assessment of how companies and asset fund managers are behaving and why they are behaving in that way. Perhaps in my classic Green position, I wonder whether we should not go further, and, rather than saying “to clients on request”, say that this should be freely published and available to all.
Baroness Kramer (LD)
My Lords, with three outstanding speeches, I have very little to add other than to say that I very much support this. However, I have a question for the Minister. I was just looking up the definition of a fiduciary duty, which is when someone
“has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
We know that many people feel that there is an implied and inherent fiduciary duty between the person who puts their money into a pension fund and those who act to invest it—I see that the noble Baroness, Lady Noakes, is shaking her head. I know that in various pieces of legislation there has been an attempt to clarify that. However, surely at the very least there is a responsibility to transparency. This seems to me a very mild but important principle to establish. I suspect the Minister would be very concerned if she were to put her money into an entity and did not know, within reasonable boundaries, how it was being invested and used and what impact it had. Surely, these amendments are minor and mild but important.
Lord Harlech (Con)
My Lords, I thank the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Hayman, Lady Bennett of Manor Castle and Lady Kramer, for raising voter reporting.
The Government recognise that the ability of investors to exercise their voting rights is an important issue, which is why they are taking steps to address barriers in this area. The Financial Reporting Council’s world-leading UK Stewardship Code 2020 already requires detailed and annually assessed reporting from its voluntary signatories on voting disclosure, and the recent stewardship guidance for pension scheme trustees from the Department for Work and Pensions, which included substantial guidance on the exercise of voting rights, came into effect in October 2022.
However, the Government recognise that there is still more work to do. The DWP’s guidance includes sustainability-related issues, and its stewardship guidance focuses on areas where existing policies and reporting appear to be weakest: stewardship and, to a lesser extent, consideration of financially material ESG factors and non-financial factors. Stewardship encompasses a range of activities, and this guidance focuses specifically on voting and engagement; it is about creating long-term, sustainable value for savers and includes recognition of environmental and social governance factors, which is encompassed in the DWP’s guidance.
Furthermore, the DWP has already made a public commitment to review voting disclosure requirements in the response to the consultation on Climate and Investment Reporting: Setting Expectations and Empowering Savers. This review will be conducted jointly with other government departments, including the Treasury, and regulators. This will ensure consistency across the investment chain. The review will begin in late 2023, which will give the Pensions Regulator time to gather evidence on how the DWP’s existing guidance has influenced standards of voting disclosure.
Baroness Sheehan (LD)
Why is this review starting in late 2023 necessary when substantial reviews have already been carried out and there are various ongoing task forces? I am really at a loss to understand why this is necessary.
Lord Harlech (Con)
Is the noble Baroness asking why the review is necessary or why it is scheduled for that time?
Baroness Sheehan (LD)
It would be useful to have answers to both: why is a review necessary and why is it scheduled so late?
Lord Harlech (Con)
The review is necessary because it is important to take into account multiple government departments, including the Treasury, and non-governmental bodies such as the regulators. I believe it is scheduled for that time to facilitate the gathering of evidence and set out the scope of the review.
Baroness Wheatcroft (CB)
Rather than talking about a need for more investigation, could the Minister say what he thinks could possibly be wrong with telling organisations that they must put this information up? I cannot see the downside. Can he explain?
Lord Harlech (Con)
If I could go on, perhaps my further remarks will address the noble Baroness’s question; if not, I will endeavour to write to her, if that is all right.
In November 2022, the FCA convened an independently chaired vote reporting group following the recommendations made by the Taskforce on Pension Scheme Voting Implementation. The aim of this is to develop a more comprehensive and standardised vote disclosure framework for asset managers, ensuring a fair, proportionate and practicable approach. The group’s draft proposals are expected to be published in April 2023 for public consultation. Moreover, local government pension scheme funds are already required to publish an investment strategy statement, including their policy on voting rights and ESG matters, with guidance on annual reports also encouraging transparency on how voting rights are exercised.
The FCA’s Conduct of Business Sourcebook—COBS—Shareholder Rights Directive rules already require all investment firms to develop and disclose an engagement and voting policy. This includes how the engagement is integrated into the investment strategy; how environmental, social and governance issues are monitored; and how conflicts of interests are managed. This policy must be reported on annually online.
The Government believe that it would be premature and unnecessary to amend voting disclosure legislation at the current time, given the initiatives that are already under way. I therefore ask the noble Baroness, Lady Sheehan, to withdraw her amendment.
Baroness Sheehan (LD)
I thank the Minister for his response. I also thank the noble Lords who spoke in support of my amendment.
I found the Minister’s response unsatisfactory. It did not address any of the issues that have been raised. We know that the voting reporting group is doing its work at the moment. The issue that I wanted the Minister to address is that participation is going to be voluntary; over the past 17 years, that has not produced any further transparency of the kind that we are looking for in this amendment.
Before he sits down, I want to ask the Minister a question about the rules made under the Shareholder Rights Directive. If the rule Bill becomes an Act, will there be a void there? Will there be nothing in its place? I assume that that will be the case.
Baroness Sheehan (LD)
Undoubtedly, there are a great deal of unanswered questions but, for now, I beg leave to withdraw the amendment.
Baroness Noakes
“Regulation of consumer credit
(1) The Treasury may by regulations make such provision as they consider appropriate for the purpose of, or in connection with, the regulation of consumer credit.(2) The power under subsection (1) is exercisable only by making such provision as the Treasury consider necessary or desirable for or in connection with one or more of the following purposes—(a) promoting effectiveness in the functioning of financial markets; (b) promoting effective competition in the interests of consumers in financial services and markets;(c) facilitating the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term;(d) protecting consumers;(e) providing for efficient and effective regulatory, enforcement, investigatory and supervisory arrangements in relation to the provision of financial services or the operation of financial markets.(3) The provision that may be made by regulations under this section includes provision—(a) conferring powers on the Treasury (including a power to legislate);(b) conferring powers, or imposing duties, on the FCA (including a power to make rules or other instruments).(4) In exercising their powers under this section, the Treasury must have regard to—(a) the general principle that consumers should take responsibility for their decisions,(b) the importance of securing an appropriate degree of protection for consumers, and(c) the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.(5) The power to make regulations under this section includes the power to modify legislation.(6) Regulations under this section are subject to the affirmative procedure.(7) Before making regulations under this section, the Treasury must consult the FCA.(8) In this section, “legislation” means primary legislation, subordinate legislation and retained direct EU legislation.”Member’s explanatory statement
This amendment would give HM Treasury the powers necessary to implement the findings of its ongoing review of the Consumer Credit Act 1974, saving the need for further primary legislation.
Baroness Noakes (Con)
My Lords, Amendment 43 would confer on the Treasury a wide-ranging power to legislate for consumer finance.
As I am sure noble Lords are aware, reform of consumer credit has been a long time in the making. The core legislation is nearly 50 years old and remains the Consumer Credit Act of 1974. That legislation was forged in a very different era: there were much lower levels of consumer credit; the internet was only a gleam in the eye of a few researchers; and regulation of financial services firms barely existed, certainly compared with what exists today.
The 1974 Act is based on a very different legislative approach from FSMA; it is based heavily on processes and paperwork rather than outcomes. When FSMA was passed, the Consumer Credit Act was left basically as it was despite the fact that the FSA became a powerful financial services regulator with a clear consumer focus. Some of the 1974 Act was later imported into the FCA model, in 2014, but that was only a partial exercise; the FCA was then tasked by statute to look at what could be done with the rest of the Act’s territory. That review eventually reported in 2019; last December, more than three years later, the Government finally produced their own consultation document.
Lord Tunnicliffe (Lab)
My Lords, I shall speak to both the amendments in this group. I was not going to speak on the amendment of the noble Baroness, Lady Noakes, because, frankly, I did not understand it as well as it was just explained. The key point she is making is that there is a whole series of things about credit. It is complex, and that allows the Government to go behind the screen of saying, “We need this review; we need more time to think about it”, and so on. The gripping words she used were that society needs this stuff up to date as quickly as is reasonably practicable. There is no area where that could be more true than buy now, pay later. We are in a period of enormous stress for poor people. They desperately need reasonably priced credit because they just do not have any reserves.
In this area, there is this wonderful illusion that the credit is free. People do not lend money for free, except, perhaps, foolish parents. Buy now, pay later depends, as far as I can see, on the borrower failing to obey the rules, and companies make their money out of the default situation. They also make some money out of what they charge to retailers, but it is a very uncomfortable area.
I recognise that buy now, pay later can be a lower-interest borrowing option for some consumers, and that it is an area where a lot of innovation takes place, but neither of these points means that it should not be properly regulated. The Government have again and again committed to bring in regulation. Indeed, we are talking about 18 months since we got the first assurances from the Government that this would be subject to proper regulation. The Government have not acted, and harm is happening all the time. For example, Citizens Advice research has found that nearly two in five buy now, pay later customers do not fully comprehend the nature of the loan they are signing up to and often vulnerable shoppers are signing up to financial products that they do not fully get. What are the Government doing and which buy now, pay later companies are they meeting to ensure greater transparency?
We need to act in this area. I cannot understand how the Government can expect the assurances they give on these sorts of legislation to be taken seriously in future with the delays that have appeared in this area.
Baroness Altmann (Con)
My Lords, I support both amendments in this group. I think my noble friend Lady Noakes’ Amendment 43, which she so eloquently explained, is very much needed within our financial services system. I agree that it is possible that we should consider introducing into the wording greater parliamentary scrutiny rather than the discretion that may otherwise be given wholly to the Treasury, but I think the explanation by the noble Lord, Lord Tunnicliffe, of the situation with buy now, pay later is a good example of the kind of amendment that my noble friend wants to put in which would have facilitated some faster action had it been put in. I am not sure, but with the Bill we are going back time and again to the asymmetry of information and power between those transacting with financial services in general and the financial services industry that is putting products out to those customers. I think these amendments would be very useful additions, and I look forward to hearing from my noble friend.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to express support for Amendment 212 and to make a couple of points about it. I noticed that a couple of days ago the New York Times reported that buy now, pay later is an industry facing “an existential crisis”. I also note that various market analysists are reporting that this is a huge area of growth for the UK economy and the UK financial sector. Putting those two things together is a cause for concern not just for individual consumers, as the noble Lord, Lord Tunnicliffe, set out so clearly, but for the structural impact on the UK economy.
A survey was done for a household debt report by a company called NerdWallet. I cannot attest to the value of the survey, but it confirms what I have observed: 20% of women and 11% of men have used buy now, pay later in what amount to loans. So there is a gender aspect to the use of buy now, pay later. We look at many other areas of our system where women are financially disadvantaged but there is real cause of concern here.
My final point concerns something that really puzzles me—I understand that we may not be able to get an answer on it now. It was reported recently that a company called Zilch, which has 3 million buy now, pay later customers, is planning to report to all the major credit agencies the amount of debt that is being held by its customers. I think customers’ understanding is that it does not show up on their credit records—this is usually a soft search—so they are able to keep borrowing money through this mechanism and it does not show up. I do not quite understand how, if something was taken out on that basis, it can suddenly become declarable to credit rating agencies. This is an area where it is clear that regulation is necessary.
Lord Northbrook (Con)
My Lords, I listened with interest to my noble friend Lady Noakes moving her amendment. Clearly, consumer credit is at a record level, due, I am sure, to a long period of low interest rates. I just find, probably deliberately, that the amendment is a little vague. Like the noble Lord, Lord Tunnicliffe, I like the idea of focusing on specific issues such as buy now, pay later. Perhaps more power should be given to the FCA to look at institutions that are offering huge rates of interest on loans.
Baroness Kramer (LD)
My Lords, I take a slightly different view on the two amendments in this group.
I say to the noble Baroness, Lady Noakes, on her amendment that I am entirely sympathetic to the idea that we need an up-to-date Consumer Credit Act sooner rather than later. However, I am concerned about the absence of parliamentary engagement in the process. To understand how controversial this is, we just have to look back at some of our discussions on amendments earlier today in which Ministers prayed in aid the Consumer Credit Act for taking no action to protect, for example, small businesses from abuse by a great variety of lenders. It is quite a controversial Act, in many ways, and it is one where, when the Government enter into a review, there tends to be quite a bit of industry capture, as we see in virtually all consultations. Essentially, Parliament tends to be the body that brings forward the consumer voice, so the absence of parliamentary engagement in the process as envisaged in the noble Baroness’s amendment troubles me hugely.
I say to the noble Lord, Lord Tunnicliffe, that we are very supportive of his amendment on buy now, pay later. I am disturbed by the growth of the industry, particularly at a time of such huge economic pressure. I think something like 17 million people in the UK have used buy now, pay later, with two in five young people using it regularly. It is particularly around young people that there is the greatest concern because they lack life experience to recognise the consequences of their purchasing habits and find it particularly tempting to exceed the budget that they should observe because buy now, pay later makes it sound so utterly painless. In discussing this issue, many people have looked at what happens to people when repayment eventually becomes due: individuals find themselves is very deep trouble indeed. That is one of the reasons why I am supportive of this amendment.
I have to say that I get angry with many of the companies that offer this because credit is never free. Someone is picking up the time value of money; in other words, the cost of the financing, the cost that is embedded in the reality that payment comes later. That presumably encompasses all the people who pay on time. I am curious to know whether we have any kind of assessment of how much more people who pay on time are paying as they pick up the cost of the credit that is extended to others. I think there might be some backlash to buy now, pay later, if people were conscious of what is added to their bills as a consequence. I admit that I am one of those stuffy people—I am sure we are laughed at—who pay on time rather than trying to use some mechanism to provide credit, so I admit to a personal interest but, in the end, young people may find themselves trapped.
Lord Mitchell (Lab)
My Lords, I thank the noble Baroness, Lady Kramer, for drawing your Lordships’ attention to the three-year campaign we had on payday lending, which in the end won. We removed a great scourge from consumer credit in this country. I apologise for not speaking at Second Reading; I intended to, then Covid got me.
I will make a couple of general points before getting into buy now, pay later. When I was 16, I was asked to leave school. One mock GCE pass out of seven subjects at O-level led to my marching orders. I got a job at Hoover selling vacuum cleaners and washing machines door to door. That truly was the school of hard knocks. It was 1959. We were sent to sales training school to learn how to complete a sale. They told us, “Wear a dark suit, white shirt, firm handshake, and at all costs, get your foot in the door. Demonstrate the product to the lady of the house and then present her”—it was always her—“with the dual positive suggestion: ‘Will madam like to pay cash, or would she prefer hire purchase?’ Whatever the outcome, you’ve got the deal.”
So, I know about deferred payments, which in those days were also called “the never-never”. I emphasise to noble Lords that I am not against buy now, pay later. In fact, I think it is a good thing. People’s budgets are squeezed, and if a financial mechanism can be devised to make purchasing easier, it surely must be applauded. The problem is when it gets out of control, as many noble Lords have said.
Buy now, pay later has no interest component, and because of this, it is not regulated by the FCA, it is not protected by Section 75 of the Consumer Credit Act and individuals do not have recourse to the Financial Ombudsman Service. This loophole was surely never intended and ought to be closed.
It is currently too easy for consumers to acquire debt beyond their affordability, and therein lies the danger. Plus, of course, consumers can acquire payment liabilities through a host of different providers, each of whom has no knowledge of the existence of the other. We saw that in payday lending, whereby you got to your limit with one payday lender, so you went to another and then another, you got the money from here to repay this one, and so it went, until people got into terrible situations.
I do not have the foggiest why the Government have said that they want to regulate that but are telling us that it is not appropriate. I ask the Minister: why are the Government dragging their feet on something that seems so dangerous, obvious and uncontentious?
I have one further point to make. Buy now, pay later is growing exponentially and we now have a measure of just how big it is. Half the population use this unregulated form of finance. Casting our minds back to the financial collapse of 2008, we cannot ignore the subprime mortgage crisis in the US that triggered all the turmoil. We are not there yet, but massive and increasingly unaffordable debt is simmering below the radar, and it is a huge potential danger. Can the Minster assure the Committee that the Government are tracking this sector and are aware of the risk?
Baroness Penn (Con)
My Lords, I shall turn first to Amendment 43, tabled by my noble friend Lady Noakes, before dealing with buy now, pay later. The Government fully support the intention behind this amendment to facilitate the swift reform of the Consumer Credit Act, and work is under way to do just that. There is no doubt that this legislation needs updating. The Act is becoming increasingly outdated, and its prescriptive nature means that it is unable to keep pace with advances in the market without modernising reform.
However, we must appreciate that the Act is complex, and any work to review it requires careful consideration to ensure that any future approach is fit for purpose. For this reason, a first public consultation on this reform was published in December, which will close for responses in March. As part of the review, the Government are seeking views on how to rectify the complex split of regulation currently contained in primary legislation, secondary legislation and FCA rules which is hard for consumers and businesses to navigate.
Baroness Penn (Con)
My Lords, as I was saying, we can also simplify the way in which information is provided to consumers throughout the lending process, which can be both inefficient and ineffective. This reform will also allow us to review retained EU law in the Act and amend regulation to better suit UK businesses and consumers.
Given that this work is at an early stage of policy development, the Government believe that it would be premature to consider legislative changes at this stage. I heard what my noble friend said about introducing more parliamentary scrutiny into her amendment but I am not sure that that would be sufficient to address the fact that we are not yet at the stage where we can bring forward our proposals and legislate on this issue.
On Amendment 212, the Government are working at pace to regulate buy now, pay later products, recognising the risks they may pose to consumers. We are now drafting secondary legislation and intend to consult on it very shortly. Subject to the outcome of the consultation, the Government aim to lay regulations later this year.
Lord Tunnicliffe (Lab)
I just point out to the Minister that “later this year” could be December. I hope the Government have a rather more optimistic view than that.
Baroness Penn (Con)
I would like to share the noble Lord’s optimism. We need to have the consultation on the secondary legislation, which we are expecting very shortly, and then progress as quickly as we can to lay the regulations after we have completed that consultation. I completely accept the point from the noble Lord and the Committee more widely that there is a desire for swift action in this area. We understand that there are concerns about the pace of the delivery of this secondary legislation. This is a new and developing market, and it is important to get the regulation right. We need to ensure that it is proportionate and that lenders can continue to offer a useful form of interest-free credit to consumers responsibly.
While work continues to bring this fully into regulation, I should stress that buy now, pay later borrowers already benefit from wider consumer protection regulation. This includes standards on advertising, rights concerning the fairness of contracts and regulations to protect consumers from unfair commercial practices. However, to reiterate, I reassure the noble Lord, Lord Tunnicliffe, and other noble Lords in the Committee that they can expect to see draft legislation very soon and that we are committed to progressing this as quickly as we can.
I therefore hope my noble friend Lady Noakes will withdraw her amendment and that the noble Lord, Lord Tunnicliffe, will not move his when it is reached.
Baroness Noakes (Con)
Will my noble friend say how she sees the timetable going forward? I think she said that the Treasury is at the first stage of consultation, but it would be interesting to see the outline timetable that my noble friend thinks the Government will work to on this. It has taken a long time even to get to this stage, and it would be very useful to have an idea of when something tangible might be expected.
Baroness Penn (Con)
I will do my best, but I am afraid it will disappoint my noble friend. We expect to publish a second-stage consultation in due course, and it is likely that the FCA will also consult. Implementation of the final approach will require primary legislation, which will be brought forward when parliamentary time allows. I hope she draws some comfort from the fact that this process has started and that this reform is under way. We heard from everyone that this legislation is long overdue for reform, but we also heard a desire from the Committee that appropriate parliamentary scrutiny be applied when the Government bring forward proposals for reform.
Baroness Noakes (Con)
I thank all noble Lords who spoke in this debate, especially those who supported my amendment. I freely concede that, as I said in my introductory remarks, more parliamentary involvement would be required before any proposals were finalised.
Consumer groups have already been heavily involved. There are problems because the Consumer Credit Act focuses on paperwork and processes and not on whether it produces good outcomes. For example, it has no concept of vulnerable customers. There are real, good reasons for progressing this into law.
I was not surprised but somewhat disappointed by my noble friend’s response; it is a big step to take a big Henry VIII power when dealing with anything other than EU law. Normally, of course, the Committee would be criticising such a power, but I was particularly disappointed not to get a sense of the real urgency from my noble friend. Having a secondary consultation in due course is the kind of timetable beloved by Governments who do not really want to do anything. I hope that my noble friend will go back to her department, the Treasury, and say that this issue must be progressed. With that, I beg leave to withdraw the amendment.
Baroness Hayman
Baroness Hayman (CB)
My Lords, this group of amendments aims to ensure that the future regulatory framework of the financial services sector supports the Government’s net-zero and nature commitments. I have Amendments 44, 53, 56, 62 and 68 in this group, and I thank the noble Lords, Lord Vaux of Harrowden and Lord Randall of Uxbridge, and the noble Baroness, Lady Northover—I wish her a speedy recovery—for supporting and adding their names to the amendments.
Before I turn to the rationale for these amendments, I will say a word about another amendment to which I have added my name: Amendment 69, in the name of the noble Baroness, Lady Sheehan. She will of course explain her amendment when she speaks later in the debate, but it might seem slightly perverse to have added my name to it, since it is amending the regulatory principle that I will argue against in principle in a moment. However, at Second Reading, I and many others drew attention to the fact that the Bill as written and presented to the House is totally silent on issues of nature, nature-based solutions and investments in natural solutions. This is a ridiculous and wrong omission, and it was in some way recognised in Committee in another place, when Andrew Griffith, the Economic Secretary to the Treasury, recognised that
“we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem.”
He promised to consider the issue further
“to see whether there is anything … that can be done.”—[Official Report, Commons, Financial Services and Markets Bill Committee, 27/10/22; col. 162.]
So I hope that, in the spirit of a probing amendment, the Minister will be able to respond to the general principle of the inclusion of nature objectives in the Bill.
But, as I say, I want to go beyond a statutory principle to a statutory objective—a new secondary statutory objective that would sit alongside the proposed competitiveness and growth objectives. My amendments mirror the same drafting structure. The intention is that a climate and nature objective would require the regulators actively to facilitate or contribute to net zero and nature’s recovery through their activities and bring financial services regulation in line with government policy. The amendment uses existing drafting and recognised targets. On the climate, the objective attaches the targets under Section 1 of the Climate Change Act 2008, and, on nature, it follows the language included in the Natural Environment and Rural Communities Act 2006 and suggests supporting the targets in Part 1 of the Environment Act 2021 as a starting point. As I say, the Government’s proposed regulatory principle on net zero would be removed to avoid duplication.
It was clear from the Minister’s comments at Second Reading that the Government intend the new regulatory principle to embed net zero within the regulator’s functions, but I am afraid this step remains insufficiently robust to support their commitment to become
“the world’s first Net Zero-aligned Financial Centre”
or to invest, as was stated in their response to the Treasury-commissioned Dasgupta review,
“in nature and a nature-positive economy.”
Baroness Sheehan (LD)
My Lords, I rise to speak to Amendment 69 in my name and those of the noble Baronesses, Lady Hayman and Lady Young of Old Scone. I should say at the outset that I support all the amendments in this group. It is heartening to see support from across your Lordships’ House for strengthening the Bill’s remit on green finance.
My noble friend Lady Northover is unable to be with us today as she has Covid. I know other noble Lords will join me in wishing her a speedy recovery.
Baroness Sheehan (LD)
I thank your Lordships. In my noble friend’s absence, I will speak briefly in support of the amendments to which she has added her name.
I turn first to Amendment 69, which should not have been necessary if the Government truly understood how intertwined the twin threats of climate change and nature loss are. They are two sides of the same coin. Climate change is destroying nature and the destruction of the natural world is accelerating climate change; it is us humans who have set this downward spiral in motion, and it is us who can put a stop to it. My Amendment 69 would add nature to the new regulatory principle on net-zero emissions; I tabled it purely for the sake of completeness and to make the point that the Government have, at best, been careless in leaving out nature from the single line that they have devoted to this issue in the entire Bill. I quote from the Explanatory Notes:
“This clause embeds the UK’s net zero target into the regulatory principles for the PRA and the FCA.”
It patently does not do that. My tabling this amendment in no way takes away my support for the series of amendments in this group tabled by the noble Baroness, Lady Hayman, which is a far more satisfactory way of embedding the net-zero target and nature loss into the Bill. She has already introduced her amendments in such comprehensive style that I have little left to say on them.
In any case, let me turn to those amendments in the names of the noble Baroness, Lady Hayman, my noble friend Lady Northover and the noble Lords, Lord Vaux of Harrowden and Lord Randall of Uxbridge. I strongly support their Amendment 44, as well as the consequential Amendments 53, 56, 62 and 68. That is because Amendment 44 would introduce a climate and nature secondary objective for the FCA, alongside the competitiveness and growth objective. That has to be the correct place for this objective. It must be clear that it is an overarching objective for the two most important regulators in the financial space.
Government is as government does. Failure to put in place firm rules on the drivers of the economy, the institutions of the financial services and markets sector, would be irresponsible on the part of the Government. The reason why this is important is because there will inevitably be difficult decisions ahead, where the fork in the road points one way to a short-term gain but with negative effects on the environment while the other fork points to a safer, greener investment that will mature later but will be beneficial to future generations. Decisions must be made to favour the greener, more sustainable path. There must be no incentive to take the quick buck to the detriment of the carbon budget or nature.
Amendment 65 in the name of the noble Lord, Lord Tunnicliffe, is not in this group and will appear later. However, it is interesting because it probes such a dilemma, albeit from the point of view of potential conflict between primary and secondary objectives. I look forward to the debate on that amendment.
Where in the Bill are the safeguards for future generations, the respect for nature and the recognition and acceptance of the findings of the seminal Dasgupta review? Nowhere. It unleashes the power of money to do its worst and seek short-term profit. I say to the Minister, for whom I have a great deal of respect, that a reference to the medium and long term does not cut it without clear direction to the financial sector that green growth and international competitiveness in long-term, net-zero and nature-compatible investment is where sound investment decisions must be directed.
In the US, the IRA—the Inflation Reduction Act—is showing the power of government to unleash private investment into this century’s big growth opportunities. All that UK investors need is a regulatory nod from the Government, then they will take money to where it can deliver good green growth. Growth is the holy grail and future growth will be green; of that, there is no doubt. We will let UK Ltd down big time if we do not put in place policy and regulatory levers to deliver the confidence that business needs to move forward.
In the blink of an eye, the US has transformed international investor confidence in renewable energies. The EU will follow suit. Where are we in giving the clear direction that business is calling for? Chris Skidmore’s review and the report from the Industry and Regulators Committee by the noble Lord, Lord Hollick, made it clear that there is a large quantity of money waiting for a clear signal from the Government to invest in the UK. In the words of the Minister at Second Reading,
“this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years.”—[Official Report, 10/1/23; col. 1331.]
Our Government cannot let this historic opportunity pass by without adding those words to a third secondary objective: climate change and nature.
I have added my name to Amendment 208 in the name of the noble Lord, Lord Tunnicliffe, for the simple reason that the Government have stated their ambition for the UK to become the world’s first net-zero financial sector yet we are still waiting for an updated green finance strategy. For the regulators to be able to do their job on net-zero and nature targets, we must have sustainable disclosure requirements and a green taxonomy.
Finally, I support the amendment in the name of my noble friend Lady Northover, which seeks to place a requirement on the PRA and the FCA to report on the ways in which they have promoted and incentivised green finance and green investment. It would be very useful if that information were placed in Parliament.
To conclude, we do not have the luxury of waiting another 20 years for the next financial services Bill. This is the Bill that will decide whether the transformative change that we need in our big investment decisions gets the nod from the Government. The answer has to be yes.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to speak to Amendment 69A in my name and briefly express my support for all the other amendments in this group. They have been very ably and clearly introduced.
I had something of a flashback to the Pension Schemes Bill, which was the first time I spoke in this Room. I believe that that was the first time that climate had ever appeared in any finance Bill. The noble Baroness, Lady Sherlock, did a great job of supporting me through that: I had no idea when to speak so she gave me a nudge with her elbow. That was three years ago. We have now got to the point where we are trying to get nature to join climate, which is so obviously necessary.
As you might expect from a Green, my Amendment 69A goes further. I do not know whether the Minister can respond to this but the fact is that the economy and financial system are complete subsets of the environment. There is no financial system on a dead planet, to amend a phrase. All the amendments on climate and nature are clearly essential but we know that they do not fully cover the way in which we are breaking the limits of this planet.
Baroness Lawlor (Con)
My Lords, I thank the noble Baroness, Lady Bennett, who I am very pleased to follow, and the noble Baronesses, Lady Hayman and Lady Sheehan, for their lucid and eloquent statements, but I oppose Amendments 44, 53, 56, 62, 69 and 69A. I see no grounds for increasing or extending the obligation as the amendments in this group propose. The Bill already includes a new regulatory principle for the FCA and the PRA, requiring them when discharging their role to have regard to the need to contribute towards achieving compliance with Section 1 of the Climate Change Act 2008. Were we to go along with this group of amendments, we would see as a consequence the further erosion of the competitiveness of the sector. Adding a climate and nature objective, as Amendments 53, 56 and 62 would, or adding, as Amendment 69 proposes, a further regulatory principle on the natural environment to that in Clause 25, would do likewise.
To my mind, such a way of thinking is vague and aspirational. “Climate and nature” or “the natural environment” are vague, whereas the tangible aims of clean water or clean air, or of mitigating against pollution, are serious and important aims of policy. There, the policy is clear and has been pointed out in the legal context; the law is clear. The “polluter pays” principle of tort law establishes the obligation to compensate those injured by these kinds of harm. Indeed, there is scope for strengthening the prohibition on dumping industrial chemicals in rivers or disincentivising the use of petrol engines in crowded cities.
The amendments in this group would undermine competition. The UK is competing in a world in which it is already legally bound by net-zero emissions law, although many of its rivals are not. In the Global Financial Centres Index table of the various global financial centres, New York and London stand at the top and are followed—in this order—by Hong Kong, Shanghai, Los Angeles, Mumbai, Singapore, Beijing and Tokyo. Tokyo is under a net-zero target regime, and Los Angeles has recently introduced a law. Of the top greenhouse gas emitters, only Japan, Canada and the EU have legally binding net-zero commitments. The bulk of Asian markets and those rising in China do not. As matters stand, these are the competitors.
There is also a danger that such amendments are parochial, whereas the sector is—and must continue to be—global, not retreating into a little UK or little EU syndrome. The result of putting the extra demands on the UK’s financial services and market would be to handicap the sector and make it less competitive—a less attractive place to do business, with global competitors edging their way up the league tables. The world has changed since London overtook Amsterdam in the 17th century and Paris at the end of the 18th. Since the 20th century, it is rivalled only by New York.
If we are to take the competitiveness object seriously, the law must facilitate and encourage competition, not handicap it. Each successful demand for an extra law in pursuit of one or the other’s picture of an ideal world will handicap our financial sector and make this country a less attractive place to do business. At the moment, London and New York, static at the peak of the pyramid, face stiff competition.
This is a very controversial question—too controversial and political to be slipped into the Financial Services and Markets Bill. The measure will have an impact on our whole economy, as noble Lords have quite rightly pointed out throughout. Constitutionally, we have not the mandate to change the policy and, politically, I doubt whether there is an appetite for extending the law beyond what there now is. If anything, there may be an appetite to suspend it during these periods of shock.
Lord Naseby (Con)
My Lords, I declare an interest: I am a trustee of the parliamentary pension fund. I am also a former chairman of a financial services organisation, Invesco. I have tried to put myself in the shoes of when I did that, some 15 years ago.
It comes down to what my noble friend has been talking about: the practical side of financial services. There have been major changes in the time since I last chaired an organisation, but the trustees of the parliamentary pension fund have a meeting this Thursday and we always have to balance the objectives of that fund, which is primarily to ensure that there are adequate funds to pay the pensions of our membership—that is the primary purpose of that organisation. Secondly, we have to respond to the laws of the land; indeed, because we are a parliamentary group, we are adamant that we should keep track of what is happening on the green dimensions as they affect financial services.
In her speech, which we have just listened to and which I was certainly listening to, my noble friend Lady Lawlor made it clear that, in her view, the amendments before us—with one exception, which I will come to in a minute—are, frankly, not practical. On Thursday, I will have to be practical. If anything, as matters stand at the moment, the amendments will handicap the financial services world. This worries me even more because it undermines competition. We must remember the primary new dimension that we are talking about in financial services: the requirement for growth. We look for the key kernel of that growth to come from the City of London and financial services in general. For my money, this is a stage too far. Having previously been an RAF jet pilot, I must say that, when I read about planetary limits et cetera in Amendment 69A, I think that that is going too far.
However, although I am not sure that it is ideally written, I think that there is merit in Amendment 240 —particularly proposed new subsection (1), which would require a reporting system on green material—in broad terms. Whether that is the right phraseology, I am not able to judge, but, from a practical point of view, I do not think that the amendments we have before us are appropriate at this point in time.
Lord Vaux of Harrowden (CB)
My Lords, as this is the first time I have spoken in Committee, I should start by declaring my interest in Fidelity National Information Services, which, among other things, owns Worldpay.
I support the amendments in this group—particularly those in the name of the noble Baroness, Lady Hayman, to which I have added my name. She and other noble Lords have already explained the reasoning for them, so I will try not to be repetitive. I have added my name to them because I think that the climate and nature objective is so important that it deserves at least equal billing with the other secondary objectives of growth and competitiveness. For the record, I wholeheartedly support those growth and competitiveness objectives.
As we heard from the noble Baroness, Lady Lawlor, a few moments ago, some have argued that the climate and nature objectives conflict with the growth and competitiveness objectives. Frankly, I do not believe that that is the case. There are always trade-offs, of course, but, if done well, encouraging and facilitating the financing of the technologies and businesses that will enable the path to net zero will be a substantial driver for growth. I want to see the UK financial market become the global leader in financing and facilitating these exciting technologies. I believe that there is an enormous opportunity for the UK here.
The noble Baroness talked about this being a somewhat parochial objective. I could not disagree more. This is a global opportunity. Just the other day, I was talking to the ambassador from Vietnam, a country that is looking to expand its offshore wind arrangements massively; it has the most perfect coastline for it. That is something that this country could be hugely involved in from both a technology point of view and a financial services point of view—that is, financing this stuff.
Another argument that I hear against the climate and nature objective is that it is a negative objective focused on banning and stopping activities. In my view—this is where I suspect I disagree with the noble Baroness, Lady Bennett of Manor Castle—a climate and nature objective should not be about, for example, preventing investment in companies that are involved in fossil fuels or other activities.
Baroness Young of Old Scone (Lab)
My Lords, I very much enjoyed what was just said by my fellow countryman. I will talk to Amendment 69 in the name of the noble Baroness, Lady Sheehan, which I have also put my name to. The amendment adds nature to the new regulatory principle on net-zero emissions. I also recognise everything that the noble Baroness, Lady Hayman, said about needing an objective rather than a regulatory principle. However, if we are to be stuck with a regulatory principle, it needs to address the twin existential crises we are facing globally and as a nation: climate and nature decline.
I must confess that I was kind of taken aback by the two previous speakers. The fact that climate and nature are such major things and go hand in hand, with one not being able to be resolved without the other, is now so commonly recognised globally by the business and financial communities and by Governments that I felt there was a whiff of quill pen coming from the other side, which is most distressing. The reality is that our financial institutions have a key role in enabling the financing of decarbonisation of the economy but also in promoting nature-based solutions. It is partly about making sure that the natural environment is lending its full hand to solving the climate change crisis, because we need every lever in the kit—every tool in the toolbox—to step up to that challenge. The financial institutions have a key role in that.
However, we also already have government commitments on the natural environment in this country: the Environment Act targets. That was the first time we have had statutory nature conservation targets in this country, which the Environment Act introduced and which become binding on government at midnight tomorrow night. We have to recognise that, if we have big bucks that are directed by the financial institutions and by investment, they absolutely have to tackle both climate change and nature conservation.
We should not look at this as a sort of dead-weight cost on the regulatory process or the financial markets because these investments in nature and climate are vital for our future economic growth. They are the heartland of our future economic growth; the jobs of the future are green jobs. We are behind the curve at the moment; the director-general of the CBI and others are all commenting that we are falling behind and losing our international competitiveness because we are not being vigorous enough in getting investment streams into climate change and nature. So we need the regulators to drive green growth and green investment really hard, for both net zero and nature recovery, to give businesses the confidence to invest.
These are very big bucks: the director-general of the CBI was absolutely clear that, in the past two years, the UK has lost its market share in green tech, which is equivalent to a potential value of £4.3 billion by 2030. Globally, an estimated $32 trillion of investment is needed by 2030 just to tackle climate change. So we are talking about big bucks, big investment, big jobs, big economy and big growth, and we were on it until a very small number of years ago. We have to get back on it to be able to hold our heads up in the international economic community.
So I hope that some of the things I have heard tonight are not government policy and that the Government are still absolutely clear about their commitment to action on the twin crises to turn them into opportunities. So, if the amendment moved by the noble Baroness, Lady Hayman, on regulatory objectives is not adopted, I ask the Minister at least to ensure that the regulatory principles reflect that commitment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I had not intended to speak on this subject, but I very much agree with everything that has been said, especially by the noble Baroness, Lady Young, just now, about the lost opportunity if we do not take climate change and embedding it in financial services seriously. ESG investing is the big growth area at the moment, and what message are we giving if we say, “Well, we’re not really that interested in the ‘E’”? I am not sure about the “S” and the “G” either. We will potentially lose out.
It is not as if this will be an environmental tax on every business, or as if it has to be woven into every last little bit of financial services, like some chain round their neck. I spend some time looking at the general duties of the regulators, and, if I were to say anything about the positioning of this, I would say that it is not necessarily high enough up in the hierarchy because it is entirely forgettable within the layering that we have. I object to the notion that we are still in an era where we can do damage and compensate; you cannot compensate for a ruined planet. That is very much old thinking. It is almost centuries old in my book.
The FCA’s general duties state:
“In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which … is compatible with its strategic objective and … advances one or more of its operational objectives.”
What we are talking about here is a secondary operational objective, but the whole thing could be forgotten. If you ask me, it should be in the strategic objective, which is the only thing that cannot be rubbed out, because that is where we are at. We can go through this lovely list. Integrity gets rubbed out when it comes to SMEs—we have been through that debate—so climate things will be rubbed out if you want to be one of the rough-and-tumble financial firms that wants to deal with gas and oil exploration. Money is needed for that to work it all through and make sure that there are no stranded assets.
What is the big problem with what I would call a measly secondary objective? I understand the competitiveness and growth objective, which seems to be liberally sprinkled throughout to try to give it some kind of priority, but you have to balance that with sustainability in its broadest sense. All these things are about balance. We cannot have a Climate Change Act that says we will do things and then just ignore it in our biggest industry. It is the biggest case out there and we need something on it here. I will look at this again on Report and the Minister jolly well knows where I will put it.
Baroness Kramer (LD)
My Lords, this has been such an enjoyable debate, although I fear that the Government may not be listening as much as they should. When I first looked at this Bill, I was absolutely shocked that the word “sustainable” was not in front of “economic growth”. That seemed quite extraordinary in the era in which we live. It is a very old-fashioned, limited kind of approach that does not recognise the significant intertwining between finance, economic growth, the future of the planet and meeting our targets on climate change and protecting nature. It is extraordinary that it was removed.
I want to pick up the comments of the noble Baroness, Lady Lawlor, in particular. I disagree with her purpose but in one thing she is exactly right: as this Bill is currently written, that international competitiveness objective will largely drive us to try to compete with Asian financial centres that, frankly, could not give a single hoot about climate change and nature. That is why, frankly, the way in which the Bill is currently structured is so weak. As my noble friend Lady Bowles, who knows about this even more than I do, said, we have seen how the FCA deals with secondary operating objectives—I forget the exact phrase—in the past. Occasionally, it might pay attention to them if it suits it but they are certainly not embedded in its culture and do not light the core of its thinking or drive most of the decisions it makes.
I very much support the amendments led by the noble Baroness, Lady Hayman, and joined by others, as well as Amendment 69 in the name of my noble friend Lady Sheehan. However, I will talk in particular to two of the other amendments: first, that from the noble Lord, Lord Tunnicliffe, which asks, as the noble Lord, Lord Vaux, said, that we get this green taxonomy in our sustainable disclosure requirements fast because we desperately need that structure and strategic update.
This is in the context that the European Union already has its sustainable financial disclosure regulations; noble Lords may notice that the initials are exactly the same, bar one letter, which is part of my general concern in all this. Financial investors based in the UK are now using that as their template. As far as they are concerned, having to run one regime if they fall under EU regulations and a different one if they fall under UK regulations would be a nightmare. They are now wondering whether they are being pushed to choose between the two.
In its consultation on sustainable disclosure requirements, the FCA very helpfully provides a chart of how you can cope if you are trying to be under what is contemplated for the UK regime while also dealing with the EU regime. I honestly think that that is in there because the FCA thought that it would be helpful, but I recommend that somebody go and look at it, because it is a nightmare. You can see that it will be incredibly difficult and very costly for companies that work in both arenas to deal with these different alignments.
Lord Tunnicliffe (Lab)
My Lords, the debate this afternoon, not just on this group, has been around how this Bill will influence the future. One of the advantages of being old is that you do not have to look too far, because you know where you are going to be. That is not true for our grandchildren. The present progress on the environment is painfully, frightfully slow. All the stuff I read says that, if there is not a change—if not in direction, then in the commitment and energy we put in—the future for our grandchildren will be very grim.
The other thing that has come out of this debate is the recognition that we have to move beyond carbon. If we crack net-zero carbon by 2050 and do nothing else for all the parts of the green world—the world that should be green—then we will live on a virtually lifeless planet, and we will have lost so many things. There are so many other issues that have to be taken into account in shaping the world of the future.
What does that have to do with financial services? Some may argue that financial services are just about making money and so on, but the way in which people in the past have chosen to make money has had a profound effect on societies—some good, some pretty frighteningly bad—and financial services and the way society develops are intertwined.
I do not support all the amendments in detail in this group, but their direction surely speaks to the fact that financial services will influence the future. The hopeful thing about financial services is that they will be provided by young people. They will not be young when they get around to doing it, but they are young now, and young people grasp this crisis much better than we do. One or two of us in this Room are young but, in general, it is the teenagers and the 20 and 30 year-olds who are really taking this issue on board. They will be the investors and shareholders of the future, so it is right that, in this Bill, we give them the best possible basis for their desire to create a greener world. It has to be a global solution—they will want that to happen.
Our effort, Amendment 208, may be a good vehicle. The Government said that they will publish an updated green finance strategy, relating in particular to a green taxonomy and sustainability disclosure requirements. The concept of a green taxonomy will have the same impact that universal financial reporting standards have had in improving the clarity with which you can look at enterprises. While it remains unregulated, the statements that companies make—especially those that are true—are diluted by the fact that nobody understands the terminology. Only when we bring the descriptions together—at least nationally and ideally internationally—will we start to shape the way that society develops and allow finance, which is so important in creating direction, to play its part.
I commend Amendment 208 to the Committee. Ideally, we should be going with the grain, because Ministers are committed to producing a financial strategy. We are told over and over again in some places—including, I believe, in the other place—that we might expect it imminently. Can we have some clarity about the Government’s commitment? I hope that in doing that, they will see the importance of a green taxonomy and that we can get this in hand and play our small part in what it is not overstating it to call saving the planet.
Baroness Penn (Con)
My Lords, the Government recognise and understand the importance of supporting the growth of sustainable finance in the UK. Indeed, it is because of the importance that Parliament, the Government, the regulators and industry have collectively applied to these issues that London ranks, once again, as one of the leading centres in the world for green finance in the Z/Yen global green finance index. The Government are committed to further strengthening the UK’s financial services regulatory regime relating to climate, which is why Clause 25 introduces a new net-zero regulatory principle for the FCA and the PRA.
Amendments 44, 53, 56, 62 and 68 seek to go further by introducing a secondary objective for the regulators to facilitate alignment of the UK economy with commitments outlined in the Climate Change Act and the Environment Act 2021. Similarly, Amendment 69 seeks to extend the new net-zero regulatory principle to also include nature, and Amendment 69A seeks to oblige the financial services regulators to have regard to a range of environmental concerns beyond the net-zero commitment.
It is important that we consider the regulators’ objectives, secondary objectives and regulatory principles in the round. The FCA and the PRA are required to advance their objectives when discharging their general functions. The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The PRA’s general objective is promoting the safety and soundness of PRA-authorised persons. It also has an insurance-specific objective of contributing to the securing of an appropriate degree of protection for those who are, or may become, policyholders. The PRA also has a secondary objective to facilitate effective competition.
As we have discussed, the Bill provides a secondary growth and competitiveness objective for both the FCA and the PRA. The Government consider that alongside these core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. This proposal received broad support through the FRF review consultation.
These objectives are underpinned by a set of regulatory principles which aim to promote regulatory good practice and set out the considerations that the FCA and the PRA are required to take into account when discharging their functions. The regulators’ primary focus must be to ensure the safety, soundness and integrity of the markets they regulate. While the Government expect that regulators will play a crucial role in supporting the achievement of the Government’s net-zero target, it is not their primary responsibility given that many of the levers for change sit outside financial services regulation.
Having said that, we should not underestimate the significance of Clause 25, which will embed in statute consideration of the UK’s climate target across the full breadth of the regulators’ rule-making and therefore support the Government’s action and ambition to transform the UK economy in line with their net zero strategy and vision.
As noble Lords have noted, the legislation creates a clear hierarchy. However, it is not simply the case that issues relating to climate change will be addressed only through the new regulatory principle. The Government’s view is that consideration of climate is already core to the regulators existing objectives: both safety and soundness for the PRA and market integrity for the FCA.
The Government expect that this will also be the case for their new secondary growth and competitiveness objective. Indeed, the recent recommendation letters from the Chancellor to the FCA and the PRA, published as part of the Edinburgh reforms, set out the Government’s view that delivering net zero is part of the wider economic policy objective of achieving strong, sustainable and balanced growth. This means that the new regulatory principle will ensure that where there are broader issues relating to climate change that are not captured within their existing objectives, the regulators will be required to give them specific consideration, where appropriate, in taking forward their general functions.
Regarding consideration of nature issues, the Environment Act 2021 provides a framework for setting the definitions of the Government’s future targets in this space. Noble Lords will recognise that work is ongoing to understand the interaction between these targets and the work of the financial services regulators, which is not yet clear. The Government consider that it would therefore not be appropriate to place such a requirement within the FiSMA regulatory principles without this clarity. However, I reassure noble Lords that there are clear examples of how the FCA and the PRA are supporting the Government’s work on nature under their existing objectives.
The Government and the financial services regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosures, which aims to help organisations to report and act on evolving nature-related risks. The UK is its largest financial backer. We are also committed to the International Sustainability Standards Board process, which will deliver a global baseline of sustainability disclosures that meet capital market needs, while working to decrease systemic environmental risk. These standards are expected to address aspects of the natural world beyond greenhouse gas emissions. The Government will continue to consider bringing these standards into any UK disclosure framework as they achieve global market consensus.
Baroness Hayman (CB)
My Lords, I am extremely grateful to everyone in Committee who has taken part in this debate. I expected it to be an argument—that did indeed take place and filled much of the Minister’s response—about the hierarchy of objectives and missions that the regulators should employ in meeting an agreed agenda for our financial services to be part of growth, to be central and, indeed, to be world leading. I have no problem with world leading. World beating always worried me, but world leading I am absolutely happy with. I am happy with the aspirations of the now Prime Minister, then Chancellor, in this field.
However, the debate went beyond whether the regulatory principle was enough to do what the Minister agrees should be done and it questioned—the noble Baroness, Lady Lawlor, did this—whether it should be a smaller objective in the first place and whether it was the right strategy to pursue. It was very useful having that debate opened up. In response, the noble Lord, Lord Vaux, spoke eloquently on this issue, but there are three things that I want to say to refute, if you like, the arguments put forward.
One is that this is not a little-Englander debate. It is absolutely a global debate; it is absolutely because other countries are investing in these areas and want their financial centres to be the lead that we are talking about finding the right regulatory framework to allow us to go forward.
I also bridled a little at the suggestion that what we have put forward in these amendments is vague. I have to say that, in terms of definition, my amendments, referring to the targets under Section 1 of the Climate Change Act 2008 and in Part 1 of the Environment Act 2021, are very specific and, might I even say, slightly more specific than “growth” and “competitiveness”—and slightly better defined.
The last thing I will say perhaps mirrors something that the noble Lord, Lord Tunnicliffe, said. The other criticism was that in these amendments we were somehow chasing a picture of an ideal world. Would it were so. We put forward the case for taking strong action on climate and nature because we have a vision not of an ideal world but of a world that is far from ideal and highly dangerous economically and in all other ways for us, our children and grandchildren.
I think we will return to this issue on Report but, for now, I beg leave to withdraw my amendment.
Financial Services and Markets Bill
Wednesday 1st February 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-III Third marshalled list for Grand Committee - (30 Jan 2023)
The Earl of Kinnoull
“(4B) The FCA must monitor and measure to what extent it has advanced the competitiveness and growth objective in various ways, including but not limited to—(a) the PRA’s responsiveness to entities that are regulated or seeking to become so,(b) its consistency of approach to entities that are regulated or seeking to become so, and(c) the proportionality of its approach to the regulation of entities that are regulated or seeking to become so.”Member’s explanatory statement
This amendment seeks to provide some measurable ways in which the competitiveness and growth objective can be monitored and subjected to scrutiny.
The Earl of Kinnoull (CB)
My Lords, in moving Amendment 45 in my name, I will speak also to Amendment 63. I apologise for being unable to contribute at Second Reading; the opening speeches were at the same time as a major evidence session for the European Affairs Committee. However, I sat through much of the debate and have my well-thumbed copy of Hansard here. I declare my relevant interests, as set out the register, as a shareholder of Hiscox Ltd and Schroders plc and a director of Alpha Insurance Analysts.
In my commercial career, I was a director, chief executive or chair of regulated financial services businesses in eight different major jurisdictions. I dealt with the regulators in those jurisdictions and regulators in other EU jurisdictions because of the passporting regimes, and with regulators in places where we decided not to set things up.
However, this amendment has nothing to do with that. Its genesis was in the report of the European Affairs Committee from June last year, The UK-EU Relationship in Financial Services. That report was a major piece of work; we took evidence from a galaxy of stars, including two of the four deputy governors of the Bank of England. The report was settled in the usual House of Lords way, on a unanimous basis.
Paragraph 145 of our report begins a section titled “A competitiveness objective”. In considering this, the committee was trying to form a better view on four real issues: first, the wisdom or otherwise of a competitiveness objective; secondly, what it actually meant; thirdly, how a regulator might implement such a thing; fourthly, how Parliament might scrutinise it. We will come to the fourth issue when we discuss later amendments, particularly those to Clause 36.
We put the problem of the competitiveness objective to our galaxy of star witnesses, including both of the deputy governors of the Bank of England. It was quite difficult for us to form a view on the wisdom of it because, throughout our evidence generally, there were considerable differences among all the witnesses as to what a competitiveness objective amounted to. That difference in the set of views, which were honestly held, was quite difficult for us to reconcile. While the committee generally felt that it was a good idea, it was a bit like how I took the mood of the Second Reading debate to be. There was an interesting set of differences in what it meant; if you do not know what it really means, it is jolly difficult to implement it consistently across a regulator. How will you do that not only between regulators but within a regulator when the FCA has several thousand employees? We were a bit dubious about that. In terms of scrutiny, if it is all unclear above you, scrutinising it is jolly difficult.
The committee tried to assist in this. We wrote various descriptive paragraphs; in paragraph 151, the first of our two conclusive paragraphs on this—not on actual scrutiny—we said:
“The Committee notes that, as a result of the Future Regulatory Framework Review, the Government is considering introducing an additional, secondary ‘competitiveness’ objective for the Financial Conduct Authority and the Prudential Regulation Authority. However, it is equally important for the UK’s overall economic competitiveness for the Government and regulators to work together to develop a broader regulatory culture that is responsive, consistent, and proportionate”—
I emphasise those words.
Noble Lords will have noted that the words “responsiveness”, “consistency” and “proportionality” appear in Amendments 45 and 63. These amendments are designed to give effect to what we as a committee wanted to do, which was to give some directional help to regulators as to how they would be able to implement a competitiveness thing and to have measurable things before them. I must say that I have played the refrain of “responsiveness, consistency and proportionality” to various market associations since the report and I have heard nothing but a feeling that that is at least a start in finding a way of being able to help to define this elusive thing of the competitiveness objective.
It is worth quoting our second paragraph of conclusions:
“We ask the Government, in its response to this report, to explain in further detail how a secondary ‘competitiveness’ objective would be applied by the regulators in practice and how success will be measured.”
The Government’s response to our report was, in general, a very good one. I worked out that I have been in receipt —either as a committee chair or member—of well over 50 government responses, and I can promise noble Lords that this one was pretty good. On this particular bit, however, it was very weak. The response on this area had a quite a lot of paragraphs, but most simply repeated the question. The operative sentence is:
“The regulators will be responsible for operationalising their new objectives.”
I must say that my spellcheck is not modern enough for “operationalising”, so I am not quite sure what that means. But I am sure that the Government are washing their hands of that, which I feel is a mistake.
I submit that the European Affairs Committee’s view on this—remembering, of course, that the committee is cross-party and this was, as usual, an entirely unanimous report—is that there are three benefits to having clarity in this area. First, as a client—either an existing client or a prospective new client who wants to come in to be regulated in the United Kingdom—it provides some clarity. It is jolly good, let me say, if you are thinking of moving capital or business to a jurisdiction, to feel that the regulator will be responsive and consistent and will take a proportionate view of things. Those are all things that are directly relevant to any decision to set up in that jurisdiction or to maintain yourself in that jurisdiction.
Secondly, it is good for the regulators, because they will then know what they are meant to be doing. As I said, we asked regulators about that in our evidence sessions and we heard different answers as to what the thing meant. Thirdly, it is good for scrutineers. We, as scrutineers—I have jumped over the fence now; I am a solid scrutineer and do not do any business at all—will be able to ask the right questions and to have metrics given to us to see whether the regulators are doing a good job. That, I would submit, is a win-win-win scenario.
These two amendments build faithfully on the work of a major committee of this House and should, I feel, properly be part of this Bill. I beg to move Amendment 45.
Lord Naseby (Con)
My Lords, I will not repeat what the noble Earl has said, but I thank him for the depth of his proposal and the work that he has done in tabling these amendments.
I remind the Committee that I have chaired two quoted companies. I have been chairman of one friendly society and seen through both Houses the Mutuals’ Deferred Shares Act, so I think that I have some heritage, in particular in the mutual movement, which I think is really important to our society and our economy. I take a deep interest in that mutual movement and, indeed, I know that my noble friend on the Front Bench and the Government are particularly concerned about helping the mutual movement move forward. This group of amendments is there to help that.
For me, these two amendments are central to the Bill. I have said this before and will say it again: growth in financial services is dependent on, and an extension of, what is happening in the financial world. There are some really exciting new developments happening, but they need help and occasionally a little persuasion. The FCA has a major challenge on its hands. I welcome that, as I am sure it does, but there is an understandable danger that having an increased spectrum of activities is new to the FCA. It should be reminded to look around the corner, do a little investigation and find out what is happening underneath and therefore what is coming forward. I am sure it will do that, but it needs prompting and these amendments do that.
I say finally to my noble friend on the Front Bench that the mutual movement, both the friendly societies and the credit unions, is looking for new ways to raise capital. That is fundamental to both those mutuals. I therefore hope the Government will look at the noble Earl’s amendment with an open mind and accept it.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in day 3 of Committee. In doing so, I declare my financial services interests as set out in the register. I will speak to Amendments 66, 115, 116, 196 and 222 in my name. Before doing so, I give more than a nod to the amendment in this area that has already been so eloquently and eruditely set out.
Amendment 66 is on reporting on competitiveness, which is essential. As drafted, Clause 26 in effect enables the regulators to mark their own homework—“in its opinion”. Does the Minister agree that it would be far better for accountability to government and Parliament for there to be a criterion for measurement of adherence to the competitiveness objective? Amendment 66 sets this out. I would be grateful for her thoughts on each of the paragraphs proposed in Amendment 66.
Amendments 115 and 116 look at reporting the regulators’ activities in making authorisations for new and existing firms. There are many elements set out in these amendments and I would be grateful for the Minister’s response on all of them because we are really talking about the time and cost to firms and prospective firms. We need a lot more transparency and clarity, and Amendments 115 and 116 are focused in that direction.
Amendment 196 looks to reporting on determinations. Significant concerns have been raised on this issue across the industry. I point the Minister to the joint report of the City of London Corporation and HMT on the state of the sector. Does she agree with its conclusions on declining levels of responsiveness and the need for the regulator to up its game in this respect?
Similarly, when this Bill was in Public Bill Committee in the Commons, we heard of it taking nine months for an overseas CEO to receive authorisation and that it has been 15 years since a new insurance firm was established in the UK—a sector in which we have such heritage and past success. That evidence to the Public Bill Committee is a clear indication that heritage and past success are no guarantee of future performance. The regulator has played a key role in that being the current state of affairs.
I think we need to revisit the timelines for determinations and have a greater level of specificity and streamlining. A number of concerns have been expressed about the appropriateness of questions that people have found themselves on the end of. Rather than just seeing the 90-day statutory time set out, would it not be better to revisit this whole process and see how we could have a far more effective and efficient means of determination related to the type of determination that was being sought?
Baroness Bowles of Berkhamsted (LD)
My Lords, there are many good suggestions in this group of amendments. Indeed, they are all good and they are all very supportable. It is particular pleasure to follow the noble Lord, Lord Holmes, because with the amendment on the determination of authorisations he has put his finger on a specific problem that interferes with the day-to-day running of businesses, or those hoping to run new businesses, and is at the heart of competitiveness. So without addressing those kinds of issues, we will not get anywhere. This lies behind similar amendments in my name, in a later group, relating to efficiency.
I hope that, given the number of amendments, and no doubt contributions, from noble Lords from all sides, the Government and the regulators will acknowledge the need and the parliamentary appetite for further accountability through formal reporting and, as I point out in my Amendment 121, for independent performance metrics. I thank the noble Lord, Lord Naseby, for signing that amendment. Of course, it is a probing amendment directed at the FCA. To be thorough, there would need to be another one replicating it for the PRA, but I had tabled enough amendments already. I am conscious also that the noble Lord, Lord Bridges, has proposed a more fully developed model, with an amendment in a later group creating an office for financial regulatory accountability. I have signed that amendment.
My amendment suggests that the FCA report its performance against a set of statistics developed and periodically updated by the National Audit Office, in consultation with consumer representatives, through which the FCA’s achievements and progress may be objectively evaluated. The idea for the amendment developed out of discussions that we had in your Lordships’ Industry and Regulators Committee when we were looking at competitiveness in financial services, particularly in the insurance sector, as well as the wider discussion about competitiveness.
The issue with reports by the regulators is that, even within a given topic, they are setting their own exam questions and then grading themselves on how well they have passed. There is a constant need to get different specifics and granularities as new issues arise, and that is not necessarily being done—for example, reporting on authorisations, as I have mentioned. The committee had some discussions with the NAO, finding it very helpful and astute, and there are always lots of interesting things in its report that at times already challenge what the regulators have said about themselves and how they have spent their resources. It sheds light on things that—shall we say?—have certainly been exaggerated by the regulators in the past.
It is clear from the number of amendments in this group and elsewhere that to address problems comprehensively within the structure of FSMA is quite difficult and convoluted, needing many amendments that make it ever more difficult and convoluted. That is one reason to have an external body that can look over everything and cut through some of the obfuscation and difficulty one has in trying to put something comprehensive into FSMA and needing about eight amendments to do it. My fundamental question is: does the Minister recognise that need for an independent body of substance that can update what is reviewed and measured around regulatory performance and is free from the regulators’ own glossing, and if not, why not?
I need touch only briefly on my other two amendments in this group, Amendments 157 and 158. They simply suggest that when respondents to consultations do not wish to be named—that is perfectly reasonable—there should nevertheless be an indication of the nature of the respondents so that we can see how many have come from industry and how many from elsewhere. That is done sometimes; it is done routinely in some departments but in others it is never done. It is just good governance because, without revealing the identity of individuals or companies, you can nevertheless see what the universe of respondents truly looks like.
Baroness Noakes (Con)
My Lords, I have Amendments 83 and 84 in this group and I have added my name to Amendments 66, 115 and 116 in the name of my noble friend Lord Holmes of Richmond. I did not add my name to some of the other amendments in this group but I think a pattern of considerable agreement is emerging from all parts of this Committee as to the things that we need to address. Perhaps we have not quite honed in on how to find the one solution to that, but the purpose of Committee is to explore these things.
My noble friend Lord Holmes of Richmond’s Amendment 66 aims at much the same target as Amendments 45 and 63 in the name of the noble Earl, Lord Kinnoull. I support what both said in introducing their amendments. I understand what the noble Earl, Lord Kinnoull, is seeking to achieve but it is not enough just to tell the FCA or the PRA to monitor and measure what they are doing in certain areas. We need to go further, and into regular and focused reporting, which is why I particularly wanted to support my noble friend Lord Holmes’s Amendment 66. Of course, the two issues are not mutually exclusive, and I can see the start of a way forward to an amendment on Report that encapsulates many of the issues arising in respect of the competitiveness and growth objectives.
I am particularly concerned that the regulators will pay lip service to the new objective: we will get pages of elegant words in their annual reports but whether they will amount to anything useful in terms of information is something of a moot point. I also believe that relatively few people actually read the annual reports of the regulators, much as not many people read the annual reports of listed companies. If noble Lords are in any doubt about the capacity of the PRA to write a lot of words without saying much of substance, they need only look at the PRA’s discussion document on how it will respond to this new competitiveness and growth objective. It runs to 70 pages but there is virtually no meat in there at all. We need hard data in a regular report which will get attention in Parliament and elsewhere, which is the other main theme that will emerge from our Committee: how we can start to build a proper system of accountability. However, reporting by the regulators is an important building block in there.
My Amendments 83 and 84 also concern the competitiveness and growth objective, but this time in the context of consultation on new rules. These amendments amend new Sections 138I and 138J of FSMA, as inserted by Clause 29, so that the PRA and the FCA have to include an explanation of the impact of how the competitiveness and growth objective has affected whatever new rules are brought forward. Whenever new rules are proposed, there is an important opportunity to consider their potential impacts on competitiveness and growth. As we know, regulators do not need many excuses to create new rules, but every time they respond to real or perceived risks with another addition to the rule book, they will end up imposing costs, and costs are ultimately borne by consumers. They can also have the effect of slowing down or hampering innovation, so it is important that, at the point before new rules are introduced, we have the opportunity to review the impact of those rules on competitiveness and growth in the UK. I like ex poste reporting, but I also like ex ante analysis and, if necessary, action to change rules before they have an adverse impact.
I have also added my name to my noble friend Lord Holmes’s Amendments 115 and 116 because they would give hard data on how speedy the regulators are in handling new approvals, which is an important area. Amendment 116, which would require information on various kinds of regulatory decisions made by the FCA, could usefully be extended to the PRA because it, too, seems to drag its feet on those areas.
Anybody who has worked in a bank will have a story about how long it took to get directors and key executives approved. Last week the Financial Times reported that a digital asset technology company was forced to register in Switzerland because the FCA was too slow to deal with its UK authorisation application. We really must have regulators in the financial services sector that work efficiently and effectively if the UK is to remain a successful financial centre. We need the kind of reports covered in these amendments to form part of a suite of information on which Parliament can start to hold these regulators to account more effectively.
Viscount Trenchard (Con)
My Lords, I declare my interests as stated in the register. The noble Earl, Lord Kinnoull, is right in his Amendment 45 to bring the Committee’s attention to the need to ensure that the regulators take seriously the new objectives which may be given to them under the Bill. As your Lordships are aware, the Bill strengthens rather than weakens the regulators. My worry is that, if it is not made explicit, the regulators may not give enough importance to the new competitiveness and growth objective. Rightly or wrongly, the regulators are considered by much of the industry to be set on ensuring the stability of the graveyard and the protection of the investor against any possible risks. I entirely support the FCA’s new strategy to become more assertive and agile in detecting and taking action against scammers, but I wonder how, in practice, it can measure its advancement of the new objective in terms of consistency and proportionality and how it will balance that against its strategy to halve by 2025 the number of consumers who invest in higher-risk products.
The noble Earl’s amendment would also place a duty on the FCA to measure the PRA’s responsiveness to regulated entities. Does this not indicate clearly the additional complexity—especially for dual-regulated firms—that the well-intentioned but misguided decision to split the FSA into two regulators has caused? What proportion of the FCA’s time and costs will be spent on monitoring the PRA, and vice versa? Will my noble friend commit that, in the medium term, the Government will conduct a review of the effects on regulatory standards and the City’s competitiveness that have resulted from having two principal financial regulators?
Baroness Kramer (LD)
My Lords, I take serious note of the comments of the noble Viscount, Lord Trenchard, because they reflect my fear that the amendments in the names of the noble Earl, Lord Kinnoull, and the noble Baroness, Lady Noakes, and the first amendment in the name of the noble Lord, Lord Holmes, could easily be interpreted as pressure to raise the international competitiveness objective and the growth objective very close, if not equal to the financial stability objective. Frankly, that should be a major concern to us all. I do not want to put the regulators on the back foot when they prioritise financial stability.
In many ways, that is how it was in the 1980s and the 1990s, and we saw how the industry responded to that set of priorities and arrangements. The industry was blithe about risk as long as it generated short-term profit. In discussing the new international competitiveness and economic growth objectives, I have heard from many in the industry that they want them not only to be given greater weight but even to be primary objectives and to stand entirely equal with financial stability. That is such dangerous territory.
At Second Reading, I quoted Paul Tucker, a former deputy governor of the Bank of England, who lived through all that turmoil of 2007-08 and after, who urged Parliament not to give the regulators—particularly the PRA—an international competitiveness objective, praying in aid former governors of the Bank of England, who knew the very soul of the industry and knew that that would be dangerous and unadvisable. Those were not his exact words—his were more excoriating.
Risk in the financial sector is asymmetric, as we saw in 2007. The profits of risky behaviour go to the leading figures in the industry, and they typically keep those proceeds, despite the failure of the sector and the organisation and, in many cases, despite the fact that if you were to go back and unpick it, one could say that such proceeds were based on false profits.
The taxpayer then had to come in and rescue the sector with £137 billion in 2007-09. Much of that has been recouped, but what has not, even to this day—and which we and the country live with—is the damage to the wider economy. We had more than a decade of austerity, and it is a price we are still paying to this day. At our peril do we put ourselves in a position where there is increased likelihood of a repeat of that cycle.
I remember from his memoirs that Alistair Darling was shocked that banking chiefs uniformly showed no gratitude for the massive rescue package that kept their businesses afloat after the 2007-08 crisis. I sat on the Parliamentary Commission on Banking Standards, but have yet to find one to take any significant responsibility, not only for their institution but for the broader sector.
On competitiveness, let me quote from the report of the Parliamentary Commission on Banking Standards, because this was central to its findings of why the industry had become so out of control and behaved as it did:
“There is nothing inherently optimal about an international level playing field in regulation. There may be significant benefits to the UK as a financial centre from demonstrating that it can establish and adhere to standards significantly above the … minimum. A stable legal and regulatory environment, supporting a more secure financial system, is likely to attract new business.”
That was the consequence of nearly two years of taking evidence.
I turn to other amendments. Those in the name of the noble Lord, Lord Tunnicliffe, in this group focus the need for mutual and co-operative financial services. I wholly support that. I very much support the proposals of the noble Lord, Lord Holmes, on the establishment of regional banks. Local services focused on geography or a specific group are often treated as an afterthought or a Cinderella part of the sector today in the UK, but they can be the best way to deliver opportunity to ordinary people, including those presently excluded, and to help small businesses, especially in difficult times. We shall return to some of these issues in later amendments that we will discuss today.
I also support the amendments of the noble Lord, Lord Holmes, which, in essence, are on efficiency. They seem to mesh very well with the amendments of my noble friend Lady Bowles, which are about transparency and mechanisms to evaluate the performance of regulators.
I return to my additional theme: I introduced a discussion on financial stability, almost out of shock that we now have such an intense focus on enhancing international competitiveness and economic growth—as if, somehow, financial stability were not the absolutely fundamental delivery that we expect from our regulators. Without that, frankly, everything else is worth nothing.
The Earl of Kinnoull (CB)
Before the noble Baroness sits down, I would just like to ask her a question about her very interesting speech. This also allows me to say that, in Amendment 45, the first “PRA” should read “FCA”—a good spot by the noble Viscount, Lord Trenchard. But I do not quite understand how financial stability is threatened by a regulator being responsive, consistent and proportional. Could the noble Baroness explain that again?
Baroness Kramer (LD)
The noble Earl may find that this is already a requirement of the regulator, but this is not about that. If the amendment were taken in the way that I suspect the noble Earl reads it, I might feel reasonably comfortable with it. However, as we listened to the discussion, we saw where this was going. The noble Viscount, Lord Trenchard, captured that: the industry is looking at these kinds of amendments as a mechanism by which it can find leverage to enhance the status of the international competitiveness and economic growth objectives. If we could find a balance, in asking for the kind of language that the noble Earl, Lord Kinnoull, is after, but making sure that that does not become weaponised and potentially raises those objectives to an equal status to financial stability, I would feel much more comforted.
Lord Tunnicliffe (Lab)
My Lords, we are on day three of six. I cannot possibly envisage the seventh day, so I will make short speeches. Our amendments in this group are 118 and 119. Amendment 118 would give the FCA a duty to report on mutual and co-operative business models, covering how it considers the specific needs of credit unions, building societies, mutual banks, co-operative banks, regional banks, mutual insurers and co-operative insurers. Amendment 119 would do the same for the PRA.
Following Second Reading, I read the Minister’s letter on this topic with interest and was pleased with her assurances on the matter. However, a letter has little substance; virtually nobody knows about it, to start with. Therefore, as a minimum, I hope the Minister will repeat the assurances in that letter about mutuals, et cetera, and get them on the record in Hansard.
I hope the Minister will assure me that the department takes a keen interest in the growth of the mutual and co-operative sector. The UK has a smaller industry than some international economies, particularly in Europe. I would be interested to know what the direction of travel is in government on this. If we are committed to consumer choice and a diverse, dynamic financial services mix, a strong mutuals and co-operatives sector is surely an important part of it.
There are many amendments in this group and, in general, I like the direction they take. I hope the Government will look at the thrust of these amendments and, as the debate on the Bill develops, try to come back with proposals that take the best of them.
I am very interested in the introduction of the word “proportionality”. My career has been in aviation, in railways, in nuclear and, indeed, even in the military. Proportionality, done well, is undoubtedly the optimal way of introducing and managing regulation. Of course, it is a dynamic concept. As things change, if you really do believe in proportionality, your interpretation of proportionality has to change with the changing facts.
The problem with this is that it needs very able and mature regulators. That is why so much of safety regulation and, in a sense, financial regulation is prescriptive. One knows how to interpret prescriptive regulation: you do what it says and, when you cannot agree, you go to a court. I hope that we persist with proportionality, but I feel that we will need a very special regulator to do it. If that can be achieved, it will give a dynamism to the regulation in this Bill.
Baroness Lawlor (Con)
My Lords, I support this group of amendments to improve and tighten arrangements to monitor, scrutinise, measure, consult on and report on the competitiveness and growth objective. As matters stand, I fear that the Bill’s provisions here are without clear and precise external measures against which the regulators’ success can be assessed and scrutinised.
Yet, as noble Lords across the Committee have pointed out, we are giving the regulators greater powers in the new regime than under the old and, with the Treasury, are responsible for the legacy of retained EU law for deciding which rules will be kept, which are adapted and which are modified, and how they will be applied. The operation of the new system will be critical to the sector’s competitiveness and growth and how the regulator objective works will be central to that operation. If it is to be anything other than a vague aspiration under the heading of Chapter 3 in Part 1 of “Accountability of regulators”, all who want or need to know must know what, in practice, is being done to achieve it and how well it is being done against clear criteria.
These amendments for reporting on the numbers and metrics of market entrants, rules simplified, new regulations, performance measures or the time taken to process the various stages of authorisations will make things more transparent and give an outline of how, and how well, the new objective is working. I think particularly of Amendments 66, 115, 116, 121 and 196, although that is not to say that I do not welcome the support of the noble Lord, Lord Tunnicliffe, and other noble Lords for strengthening the mutual sector.
These amendments would serve another, vital purpose: they would help the regulators to focus on outcomes—tangible measures in assessing and defining the regulator objective of competitiveness and growth. This is particularly important, given that regulators will now be on a steep learning curve, having, for the most part, trained in an EU approach to rule-making, influenced by the precautionary principle in devising rules to cover every potential situation in a system based on process. They will now have to change course to the UK approach—the outcomes-based approach—which is indeed facilitated under UK law, which accommodates innovation and develops case law in the courts.
These amendments indicate a range of outcomes on which success can be measured. If such specific measures are included in this Bill, the regulators will be helped to make the change and to adapt from the EU law approach to one designed for UK markets in a way that builds on the UK’s own approach—an approach that, in practice, over many centuries, has facilitated and encouraged international competitiveness and growth.
I therefore support these amendments and urge the Minister to accept the strong case made by noble Lords.
Lord Remnant (Con)
My Lords, I declare my interest as a director of Prudential and chairman of Coutts.
I apologise to the Committee that I was unable to attend the first two days of this debate, but I spoke at Second Reading. I said then that I was very much in favour of the additional reporting requirements introduced to the Bill at that stage but hoped that they could be strengthened further. Many of these amendments do just that. I will not repeat the eloquent arguments of those noble Lords advancing them—indeed, there seems to be a large amount of consensus in this Committee—but I would like to emphasise my support in two areas.
First, on Amendments 45 and 63, in the names of the noble Earl, Lord Kinnoull, and my noble friend Lord Naseby, and Amendment 66, in the names of my noble friends Lord Holmes of Richmond, Lady Noakes, Lord Trenchard and Lord Naseby, I regard as of paramount note the introduction of the secondary objective for our regulators to promote the sector’s international competitiveness to support long-term growth. As this is a new objective, it is critical that the regulators should account to Parliament for their performance against this objective and against a clear set of reporting and performance metrics, measurements which are indeed measurable, verifiable and independently set.
Secondly, I especially support Amendments 115 and 116, in the names of my noble friends Lord Holmes of Richmond and Lady Noakes. I have direct experience, both personally and at firms with which I am involved, of how long it can take for seemingly eminently well-qualified individuals to gain authorisation. For the avoidance of doubt, I exclude myself from that category. Businesses have choices about where they place capital and people. The burden and cost of regulatory supervision really can damage London’s ability to attract talent and capital. I do not for one moment suggest that there should be any diminution in the rigour with which applications should be assessed, merely that in pursuance of their competitiveness objective, our regulators should give enhanced emphasis to the speedier clearance of the applications before them. These amendments should help them do just that.
Lord Bridges of Headley (Con)
My Lords, I will make a brief intervention. I declare my interests as an adviser to and shareholder in Banco Santander in Madrid. I have a lot of sympathy with some of the amendments in this group, especially those in the name of my noble friends Lord Holmes of Richmond and the noble Earl, Lord Kinnoull.
I will take a quick step back. The Bill needs to be improved in three key ways. First, we need to improve the reporting by the regulators. Secondly, as the noble Baroness, Lady Bowles, said, we need to make sure that the regulators are not marking their own homework, which is why it is important that we create a form of independent analysis. Thirdly, we need to improve parliamentary accountability. The amendments clearly address the first point on reporting. I will not repeat the number of points made very eloquently by the noble Earl and others, especially my noble friend Lady Noakes. However, I strongly believe that, as has been said, this will help regulators define their actions and, in so doing, help address confidence in the regulators that they are meeting those objectives.
I listened to the noble Baroness, Lady Kramer—I was about to call her my noble friend; she is a good friend—and she is absolutely right. We absolutely have to get right the balance between competitiveness and stability here. I do not think anyone here is arguing for a race to the bottom; that would be a disaster for our financial services sector. A strong financial services sector is based on robust, proportionate and simple regulation, so I completely heed that concern. However, I look at some of the amendments, especially some of the metrics being quoted here, and the data that they would provide would be exceptionally valuable to us as Parliament when we come to assess the performance of our regulators in a critical sector for our economy, and we can then judge them on those actions. I look at the consultation that the PRA set out, which states that it will include its performance in meeting this new objective but it does not say how. It is important that we send a signal, and at least have a very thorough debate as to what that might be.
I end on this point: does the Minister seriously think that the current reports we get from our regulators are satisfactory and adequate, especially in the light of the new powers and the new objective that the Bill confers on them and the concern that I think many on both sides of the Committee have about what that means for their powers and their accountability? That is a simple question.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh & Co, the insurance broker. I too support Amendments 66, 115 and 196 in the names of my noble friends Lord Holmes of Richmond, Lord Naseby, Lord Trenchard and Lady Noakes. Since Second Reading the Bermuda authority has reported that it saw the highest number of new insurance-broking companies registered in more than a decade as 84 new companies were set up in 2022, but not one has been set up in the UK for 15 years. This is the reality of international competition that the UK is facing as it competes with jurisdictions around the world for investment, capital and jobs, but we note that we depend on high standards of regulation. It seems that a number of key changes are needed to address this to improve the accountability of UK regulators, making them more consistent in their approach and more responsive in ultimately ensuring that they act more proportionately, as mentioned by the noble Earl, Lord Kinnoull.
Amendment 66 requires that the FCA and the PRA each publish an annual report setting out how they have facilitated international competitiveness and growth against a range of data and analysis requirements. Clause 26 currently allows regulators to decide for themselves how they believe they have met the requirements of their new competitiveness, as already mentioned. For example, the clause states that the FCA can decide “in its opinion” how to report on the objective and therefore decide solely for itself how it has met the objective’s requirements. The objective must therefore have alongside it a clear reporting criterion so that the Government and Parliament can properly hold the regulators to account. It is unclear whether the regulators will consider metrics specific to international competitiveness, not simply domestic competition. The criteria set out in the amendment can be measured and targets created to ensure that the regulators are operating effectively.
The Bermuda Monetary Authority takes a different approach and has different classes of insurers and reinsurers, together with authorisation criteria and KPIs that match the level of risk that the entity poses to the system. This allows it to undertake an authorisation of an international reinsurer with clients that are solely other insurance companies in less than one week—can you imagine?—thereby freeing resources to focus on entities serving individual retail customers.
Clause 37 gives Ministers a power over the regulators’ reporting requirements by providing them with a mechanism through which to direct information to be published. The danger is that this clause becomes more of a backstop measure, rather than something embedded in our new regulatory framework. While the clause is welcome in demonstrating the Government’s recognition of issues around needing to improve regulatory culture, it asks more questions than it necessarily answers. It is unclear how the Government will decide the criteria for requesting a report and whether they will seek input from industry and Parliament or the new bodies that the Bill creates, such as the cost-benefit analysis panels, in understanding where there is a demand for information. It is unclear whether, as part of its report, the regulator will undertake comparative analysis of its performance against the UK’s competitor jurisdictions as well as analysis of product and service innovations taking place in key markets. This is how Parliament will best understand whether the UK is performing well globally.
What we need are mechanisms in the Bill that help ensure that accountability becomes part of the day-to-day operation of the regulators, not something used ad hoc. That is the only way that we will get culture change and deliver the kind of culture change that we in Parliament and industry want, as addressed by my noble friend Lord Hunt of Wirral at Second Reading. That is why measures set out in these amendments are so important. I hope we can look at further changes along these lines.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, there is a large number of amendments to cover in this debate, so I aim to be succinct. While these amendments cover a range of issues, they all relate to reporting requirements on the regulators to enable effective scrutiny and oversight of their work.
First, on Amendments 45 and 63, in the name of the noble Earl, Lord Kinnoull, and Amendment 66, in the name of my noble friend Lord Holmes, the Government agree that it is vital to have appropriate public metrics to ensure that the operationally independent regulators can be held to account for all aspects of their performance, including against their new growth and competitiveness objectives. FSMA establishes multiple channels for this, including annual reports. The regulators also voluntarily publish a range of data—for example, on operating service metrics. Specifically, Clause 26 will require the FCA and the PRA to report on their performance against the new growth and competitiveness objective, as part of their annual reports. That sets out for my noble friend Lord Bridges the existing reporting done by the regulators—but the Government recognised the need to go further in requiring the regulators to publish information, which is why we added Clause 37. It provides an additional mechanism for the Treasury to require the regulators to publish information, including performance data, on a more regular basis, where the Treasury considers it necessary to support scrutiny of performance.
The broad approach is that FSMA requires the regulators to report on how they have discharged their functions and that the decisions on publishing operational metrics are appropriate for the operationally independent regulators to determine, working with government, where appropriate. It is impossible to predict how the power in Clause 37 requiring regulators to publish information on a more regular basis may be used, but I reassure noble Lords that the Treasury will work with stakeholders, industry, consumers and Parliament to understand the evidence base for whether it is in the public interest to exercise this power and the kinds of situations in which it would be desirable to do so. That power also includes a number of safeguards to ensure that it is exercised appropriately.
However, locking specific, detailed metrics into primary legislation would result in a static framework unable to adapt and respond to wider changes, and impose fixed requirements which may not be possible or appropriate for the regulators to report on. Clause 37 provides a more flexible—and therefore future-proofed—mechanism for ensuring appropriate scrutiny. Similarly, Amendment 121, tabled by the noble Baroness, Lady Bowles, seeks to impose a requirement to report against metrics determined by the National Audit Office, along with consumer representative bodies. Again, embedding this in primary legislation would not be the most effective approach. The NAO is already able to examine and report on the value for money of spending by public bodies, including the FCA and the PRA, and it reports its findings to Parliament. The Government consider that the setting of specific reporting requirements for these bodies goes beyond the scope of the NAO’s remit.
Baroness Bowles of Berkhamsted (LD)
May I interrupt the Minister? The whole point of my amendment—whether it be the NAO or otherwise—was specifically to address the fact that the criteria might need to be changed, so it would not be a fixed list but would develop depending on circumstances. Perhaps the Minister does not think that the NAO is the body, but the question I posed was about this in general. There is a difference between it being an independent body and it being the Government. Given all the other powers that the Government have to direct the regulators, it could look like a conflict of interest if it is not done with a greater degree of independence. The fact that the Minister said that Clause 37 needs to be used with discretion seemed to recognise that that potential tension and conflict might be wrong. Would it not be better to have an independent body involved?
Baroness Penn (Con)
I thank the noble Baroness for teeing me up to answer the question that she posed at the end of her remarks. I understand her point about trying to have a more flexible framework of criteria and the NAO being one idea for an independent organisation that can do that. She will know that the Government considered this as part of the future regulatory framework review and found that there are substantial practical costs and resourcing obstacles to overcome in making such a body operationally effective. Such a body would also duplicate existing accountability structures and potentially undermine the regulators’ operational independence.
In considering that question, the Government concluded that the existing avenues for stakeholders to provide input, feedback and challenge through public consultation are appropriate, supported by strengthening the statutory panels, independent challenge and cost-benefit analysis.
In addition, the Treasury and Parliament will continue to assess the work of the regulators in their oversight role, strengthened by a number of the measures in the Bill. That position was supported by the TSC report The Future Framework for Regulation of Financial Services, which said:
“The creation of a new … body … would not remove the responsibility of this Committee to hold”
the FCA and the PRA
“to account, and it would also add a further body to”
the regime that Parliament would need to scrutinise. The Government therefore concluded that the Treasury, as the department responsible for financial services policy, is best placed to assess whether, as a backstop, further reporting is required by the regulators and to direct them to publish this if necessary and appropriate.
I fully appreciate that the Committee will want to continue to explore this question in discussing these amendments and further amendments as we reach them, but I think it is helpful to set out that the Government considered this question as part of their consultation and work in the development of the Bill. Careful thought has been given to it. We have been open to making improvements: indeed, I believe Clause 37 was an improvement made when the Bill was in the House of Commons, so we are open to further thoughts, having already given this quite a lot of consideration.
Turning to Amendments 83 and 84, I hope I can reassure my noble friend Lady Noakes that Sections 138I and 138J of FSMA already require the FCA and the PRA to provide an explanation of how their draft rules advance their objectives as part of their public consultations. The Government’s policy intention is that this requirement extends to the new secondary objectives. However, I thank my noble friend for raising this issue. We will consider whether the legislation could be made clearer on this point before Report.
I move to Amendments 113 and 114, tabled by the noble Baroness, Lady Kramer. The Government recognise that the Bill represents significant reform, and it will be important to provide an assessment of its effects on the system. However, we think it would be inappropriate to task the regulator with this assessment. In line with Cabinet Office guidance, within three to five years of Royal Assent, the Government will submit a memorandum to the Treasury Select Committee with a preliminary assessment of the impact of the Act in practice, to allow the committee to decide whether it wishes to conduct further post-legislative scrutiny.
Turning to Amendments 115, 116 and 196, tabled by my noble friend Lord Holmes, I am aware that the speed and effectiveness with which the regulators process applications for authorisation and other regulatory approvals remains an area of concern for both Parliament and industry, and the Committee has reflected that to me again today. I welcome the report published by TheCityUK last week about this important issue and, just as importantly, the constructive way in which the regulators have engaged with that feedback from the sector.
The Government share these concerns. In December, the Economic Secretary wrote to the CEOs of the PRA and the FCA setting out the importance of ensuring that the UK has world-leading levels of regulatory operational effectiveness. In their replies, both CEOs committed to publishing more detailed performance data on authorisation processes on a quarterly basis going forward. The FCA, in particular, has an extensive programme of activity under way to improve the timeliness of its approvals. It recruited almost 100 new authorisation staff in the last financial year, streamlined its decision-making processes and is digitising its application forms to make the process smoother for firms. The power in Clause 37, which I mentioned earlier, for the Treasury to require additional reporting from the regulators could be used to hold the regulators to account on the important issue of authorisations raised by these amendments, but, as I say, there is a commitment by the regulators to publish more detailed quarterly information on this matter. However, the Government will continue to engage in discussions with the regulators on continuing to improve operational efficiency.
Lord Carrington of Fulham (Con)
On a point of clarification, my noble friend talks about mutual societies, which are very important. Mutual firms have many characteristics that are similar to those of so-called Islamic banks—banks that are sharia-compliant. Do her comments also refer to that slowly growing part of the economy?
Baroness Penn (Con)
They refer to organisations that were formed under the legislation to which I referred. We are taking forward work to look at amending the Building Societies Act, the Co-operative and Community Benefit Societies Act and the Friendly Societies Act. The definition of who I am talking about is driven by those Acts.
Amendments 157 and 158 are on transparency over who has responded to the regulators’ consultations. While promoting transparency is important, confidentiality must be respected. If a respondent has not consented to the publication of their name, they may be deterred from responding by the knowledge that a category description will be published, which risks making them identifiable. This is particularly the case in areas where only a small number of firms are affected. It could therefore reduce the number and scope of responses, which would weaken the effectiveness of the consultation process as a way for the regulators to receive challenge and feedback on their proposals. This would be contrary to the Government’s aims and, I believe, to the intentions of noble Lords, including the noble Baroness, Lady Bowles.
This brings me to the conclusion of my remarks—
Lord Holmes of Richmond (Con)
Before my noble friend sits down, would she care to spare a few words on Amendment 222?
Baroness Penn (Con)
I believe I have just addressed Amendment 222. We are supportive of the establishment of regional mutual banks in the United Kingdom, but they are currently still establishing themselves and are not yet trading. So it is a little too early for us to report on the current regime and any possible limitations of it for regional mutual banks.
Lord Tunnicliffe (Lab)
Does the Minister intend to make any response on the concept of proportionality?
Baroness Penn (Con)
As the noble Lord himself noted, proportionality is already within the regulators’ objectives and operating principles. It is a concept that the Government support in how the regulators undertake their business. I believe that it is provided for within the current framework.
I hope, therefore, that the noble Earl, Lord Kinnoull, will withdraw his amendment and that other noble Lords will not move theirs.
The Earl of Kinnoull (CB)
I thank the Minister. It has been a fascinating hour and 20 minutes on reporting requirements. The common themes, I think, have been clarity and independence. I associate myself with the remarks of the noble Lord, Lord Bridges, and his very good way of expressing the problems with the Bill. Coming from the insurance industry, I was of course very worried by what the noble Lord, Lord Ashcombe, had to say about the number of insurers being set up in Bermuda versus the number being set up here. Bermuda overtook the UK in 2004 in size of market; we remain number two but we are going backwards, and this needs to be addressed.
I feel that many of the amendments in this group need to be discussed with the Minister. I hope I will see her nod her head. My amendments derive from a big committee of this House which thought a long time and took a lot of evidence on this. The amendments tabled by the noble Lord, Lord Holmes, have a lot of merit in them as well. When we sit down, we will certainly hear the warnings issued by the noble Baroness, Lady Kramer, in our ears, but I hope that she agrees to discuss those well before Report so that we attain some additional clarity and some independence for the data that comes to whatever it is that will scrutinise all this. In the meantime, I beg leave to withdraw the amendment.
Lord Lilley
“(4B) When discharging its general functions in the way mentioned in subsection (1) the FCA must, so far as reasonably possible, act in a way which, as a secondary objective, advances the predictability and consistency objective (see section 1EC).”Member’s explanatory statement
This amendment and Lord Lilley's other amendments to Clause 24 require the FCA and PRA to maintain high standards of clarity, predictability and certainty in exercising their general functions and applying their rules and guidance.
Lord Lilley (Con)
My Lords, I rise to address the amendments in this group standing in my name and those of my noble friends Lord Moylan, who is currently speaking on the Online Safety Bill, and Lord Trenchard.
The Bill gives the regulators the responsibility for replacing retained EU law and regulations with more user-friendly common-law rules. That greatly enhances their already considerable power to make as well as to apply regulations. That has led to demands from across your Lordships’ House to increase the accountability of the regulators to Parliament, which I support. However, parliamentary scrutiny is inevitably broad-brush and largely ex post facto so it cannot alone provide effective accountability. Legal accountability is also needed—above all to ensure predictability and consistency in the way that regulators develop and apply their rules.
The amendments standing in my name and those of my noble friends attempt to achieve that. I am not a lawyer, so I am grateful to those distinguished legal practitioners who have drafted these proposals and whose glove puppet I am. The overall aim is to ensure that regulators act predictably and consistently: first, by giving them that explicit objective; and, secondly, by enabling more case law to develop on the meaning of the regulators’ rules through the application of legal reasoning to disputes between financial institutions and SMEs, consumers and others.
We have sought to achieve that aim subject to two constraints: first, the revised system should not generate unnecessary litigation or legal costs; and, secondly, SMEs and consumers should retain all their existing rights. That is most relevant to the amendments in a subsequent group, which mainly concern the Financial Ombudsman Service. Today’s set of amendments deals with the higher-level regulators: the Financial Conduct Authority and Prudential Regulation Authority.
Amendments 54 and 64 would set predictability and consistency objectives for the FCA and PRA, respectively. Amendments 46 and 57 would require them to act in accordance with those objectives. Amendment 82 would require them, when making rules, to ensure that they meet the objectives of predictability and consistency. Amendment 85 would then oblige them to use a common-law approach in interpreting regulatory rules. This is the usual and powerful way that we achieve predictability and consistency in other legal contexts.
Regulators have increasingly taken to laying down general principles; inevitably, the detailed implications of such principles may not be predictable. Amendment 85 would therefore allow regulators to continue to make rules with such a high level of generality, but they would be able to enforce such rules only if either the rule itself or the guidance issued by the regulator made the implications of such general rules clear. Otherwise, general principles may be used to interpret and apply more concrete rules laid down by the regulators.
I hope that the objectives of predictability and consistency are self-evidently desirable, but let me briefly deal with issues that arise from making them a statutory objective. First, concerns have been raised about adding additional objectives in other contexts, such as the growth, competitiveness and net-zero objectives. However, those objectives greatly widen the responsibilities of the regulators and add to their burdens. The predictability and consistency objectives would not expand the regulators’ responsibilities; they merely spell out the way in which those responsibilities should be exercised. Nor would they conflict with other objectives; indeed, predictability and consistency contribute to competitiveness, growth and stability.
The second question that these objectives raise is: why are these objectives so important? Clearly, predictability and consistency are an end in themselves and make life easier for business in the financial markets. That is a feature of our markets that has attracted businesses from across the globe, and reinforcing it will restore and enhance that attractiveness. I recall that, post big bang, London has been able to boast more American banks operating here than in New York and more European banks than in any European centre. But there are further benefits to the economy: the more predictable and consistent the regulatory environment, the less the burden of compliance. Compliance costs have been the fastest increasing cost faced by most firms in recent years. That, in turn, will remove the dampening effect that unpredictable regulation has on enterprise and innovation.
I mentioned at Second Reading that the seminal conclusion of studies of the economics of regulation was that, in the absence of accountability, regulators regulate in the interests of regulators. A number of financial institutions that have contacted me in support of these amendments—and I am glad to say that they do seem to have considerable support in the City—have reinforced that point. They say that the amendments would not only result in better regulation but, equally important, help to change the culture of the regulators. At present, our largely unaccountable regulators tend to be bureaucratic and negative. They prioritise box-ticking and find it easiest to say “No”. Moreover, companies admit that this culture feeds back into their own compliance departments, often staffed by people from the regulators who bring the same bureaucratic negativism with them. That dampens companies’ enterprise and initiative from within.
I also mentioned at Second Reading that it is no coincidence that the four greatest global financial centres are all based on common law, as are the new ones starting up in the Middle East and elsewhere. Part of the reason for the dominance of common law in finance is that it provides the maximum predictability and consistency with the maximum freedom to innovate. These amendments are designed to strengthen those attributes. I hope my noble friend the Minister will give them serious consideration.
Viscount Trenchard (Con)
My Lords, I support my noble friend Lord Lilley’s Amendment 46, to which my noble friend Lord Moylan and I have added our names. It adds a further objective to ensure that the regulators discharge their duties in a manner which maintains high standards of predictability and consistency. Noble Lords might ask why this is necessary, given that the competitiveness and growth objective obviously requires them to act in a predictable and consistent manner. As I have already remarked, it is hard to be confident that this secondary objective will have enough effect on how the regulators exercise their functions.
I agree with what the noble Baroness, Lady Kramer, said on the previous group: it is necessary to find the right balance between different objectives. However, I fear that defining an objective as secondary and placing it lower in the hierarchy will in reality lead the regulators to apply an anti-competitive balance. These amendments provide a necessary safeguard against the lack of certainty currently worrying many market participants due to the very great transfer of powers to the regulators. As my noble friend has explained so well, this additional objective should make our financial market rules more predictable, increasing the attractiveness of our markets as the best place to introduce new and innovative products.
I also support Amendment 70 from the noble Baroness, Lady Bowles, and my noble friend Lady Noakes and its intention to introduce a principle to require the regulators to exercise their functions in an efficient manner. I also support Amendment 72 from my noble friend to promote proportionality as something that the regulators must apply in exercising their general duties. I am not advocating a race to the bottom, but it is widely believed that much of our current regulatory regime is applied in a less than efficient manner; it is often disproportionate in that the benefit, if any, is often smaller than the cost of achieving it.
Amendment 74 from my noble friend Lord Holmes of Richmond also seeks to strengthen the existing regulatory principle when the regulators are considering a new restriction but, on balance, I prefer the amendment from my noble friend Lady Noakes, which has wider application. In considering all these amendments, we should not lose sight of the need to question what the regulation is for. Amendment 77A in the name of my noble friend Lady Noakes ensures that we constantly ask ourselves this question. If there is no evidence that a regulation is needed or brings any benefit, we should not introduce it, or if it exists, we should abolish it. I hope my noble friend the Minister will accept these amendments and look forward to hearing her response.
Lord Naseby (Con)
My Lords, I will speak briefly to Amendments 54 and 64. They are vital to the future planning of existing companies, but they seem even more important to people entering a financial market, whatever it may be. When they are doing their planning, they must recognise—it must be self-evident to them—that there is consistency and objectivity. Most of my commercial life has been in the creative world and bringing it into the ordinary world—for want of a better description.
It may be that there is a difference between what is required for growth, which is the primary objective behind the Bill, and the competitive nature. They are two distinct objectives.
Lord Sandhurst (Con)
My Lords, I first apologise for not having spoken at Second Reading. I speak in support of Amendments 46, 54, 57, 64, 82 and 85 tabled by my noble friends Lord Lilley, Lord Moylan and Lord Trenchard. When effected, they will provide a much-improved basis for regulation. These amendments introduce an additional statutory objective, consistent with the existing objectives—namely, predictability and consistency.
Amendment 85, as we can see, obliges the FCA and PRA to apply common-law techniques of interpretation to regulations. These are to be interpreted in the same way as a court would look at them. That is critical for the promotion of predictability and consistency. Here I speak, as noble Lords know, as a lawyer, not a financier. By Amendment 85, rules of high-level generality will be used by the FCA only to assist in interpreting specific rules, not as stand-alones, as a general principle.
The context of these amendments is important. First, the ombudsman can award as much as £375,000—that is a lot of money—in an individual case and there might be 50 claims. Secondly, its determination is in respect of a vast body of technical rules with which the financial companies have to comply. Thirdly, as we have heard, the ombudsman decides a dispute on the basis of what is “fair and reasonable”, but is under no obligation to be predictable or consistent, nor to explain its reasoning. Indeed, the ombudsman is
“free to make an award different from that which a court applying the law would make”
when applying a rule. Lack of consistency results in unpredictability. We need legal accountability and predictability. We are dealing here with complaints about potentially large sums of money.
Lack of predictability means that firms must build compliance programmes based, in part, on guesswork about how the regulator might react when applying its rulebook. This is particularly so when considering the vaguely drafted rules known as “principles”. To take one example, it will be a principle for there to be a new vague duty to
“act to deliver good outcomes for retail customers”.
That is a rule with a high level of generality, which our amendment will address. It should not stand alone.
To apply such concepts to specific fact situations, without case law precedent, can be contentious. It is hard to challenge the assertions of the regulators as to how their rules are to be applied. Lack of definition in the rules cannot be good for entrepreneurs or for the competitiveness of the United Kingdom. Compliance activity becomes materially inefficient where there is lack of clarity and certainty in drafting and where there is lack of predictability and consistency in application. Costs are driven up; ultimately, the consumer pays.
We seek to introduce a new approach which produces predictability. Having established the principles set out in the amendments in this group, there will follow in later groups the means to give them practical effect through properly conducted adjudications. The gain for all concerned will be consistency and predictability, flowing from having to apply the regulations consistently and in accordance with ordinary legal principles of interpretation. Everyone concerned will know where they stand.
It will be simple, therefore, for the regulator to see whether a regulation is being applied—by adjudication or on appeal by the courts—as it would wish. It can then make changes based on hard evidence. Consumers and financial companies, meanwhile, will know where they stand. We invite my noble friend the Minister to acknowledge the need to incorporate these new objectives and the need for consistent, predictable application of the rules.
Baroness Noakes (Con)
My Lords, I have added my name to Amendment 70 in the name of the noble Baroness, Lady Bowles of Berkhamsted, because any way that we can reinforce the need for the regulators to be efficient is welcome. I look forward to hearing what she has to say when she speaks to her amendment.
I also have two amendments of my own in this group: Amendments 72 and 77A. Amendment 72 deals with proportionality, which the noble Lord, Lord Tunnicliffe, referred to in the discussion on the first group of amendments. My amendment seeks to raise proportionality from a regulatory principle to a general duty. I have to say that I have always found the hierarchy of what the regulators have to follow rather difficult. They have general duties, strategic objectives, operational objectives, secondary objectives and a number of statutory “have regard” duties, which include regulatory principles. On top of that are the so-called recommendations from the Treasury to which they also have to have regard.
The regulatory principles in Section 3B of FSMA are a list of eight motherhood and apple pie things about which I am sure there is little debate, but there should be a debate about whether all or any of them have any practical impact on the way in which regulators behave. For example, one of the principles is that consumers should take responsibility for their decisions, but the FCA’s direction of travel is the opposite. Indeed, I do not think that caveat emptor has any part in the FCA’s thinking. There are other principles on value for money and transparency, but if we thought that they had any impact, we would not have the amendments that we have in today’s Marshalled List.
I am sceptical about regulatory principles not because they are bad things but because they appear to be ineffective. With Amendment 72 I have sought to elevate the proportionality principle, which is one of the eight, into a duty so that it has more meaning in how the PRA and the FCA go about their business. In case anybody has any doubt about whether proportionality concerns are real, I will give a few examples.
The first is PEPs, which we will be debating later in Committee, but, for today, both Houses of Parliament are full of people who have faced wholly disproportionate action by financial services providers. Of course, at the end of the day, it is the financial services firms—the providers—which apply the rules, but the FCA has done nothing of substance to ensure that the firms act in a way that is proportionate. Had it done so, the aggravation that we and, importantly, our family members have had to face would have been considerably reduced. It is obvious that we present no more risk than the general UK population, yet enhanced due diligence is still required—and is often extremely officiously applied.
Baroness Kramer (LD)
If I could just interrupt, the noble Baroness might want to go back and take a look at the MREL rules. It is in the UK that smaller banks got loaded up with the MREL requirement. I do not have the exact numbers in front of me but I could easily get them for the noble Baroness. She will discover that within the EU, small banks do not have to deal with the MREL issue. This was the particular interpretation by the UK PRA and has long been a battle that I have every time I meet PRA officials.
Baroness Noakes (Con)
I thank the noble Baroness for that. Of course, I got carried away by my usual desire to knock the EU and lost sight of the essential principle, which is that the PRA is in fact applying the MREL rules disproportionately. I think that on that, the noble Baroness and I will agree.
So the PRA is applying a system that is designed for systemic bank failure to smaller banks, which present no systemic risk at all. While some modifications were made in 2021, medium-sized banks still end up having to issue MREL-compliant capital, which adds to their cost of capital, and this in turn reduces their capacity to lend. A number of mid-sized banks told the Treasury late last year that this reduction in the capacity to lend could amount to £62 billion over the next five years. Everyone loses—except the larger banks, who see smaller competitors facing considerable competition barriers. I believe that the regulators need to focus more on proportionality, which is the aim of my amendment.
Earlier I said that I was sceptical about the regulatory principles in FSMA, but they exist and we need to make sure that they are comprehensive. My Amendment 77A introduces an additional regulatory principle of being evidence-based. We have inherited all those EU rules, which were drawn up in the context of the EU’s well-known precautionary approach to regulation. I can see how easy it is to slip into the habit of regulating in the UK in the same way, just because we had to regulate that way in the past.
On our first day in Committee, we had a short debate on short selling. There is no evidence that short selling is or has been a problem in the UK, and yet the Government and the FCA are lining up to carry on regulating it. We need a shift of mindset in financial regulation in the UK, because the regulators should regulate only where the evidence points to the need for regulation, and we should not be regulating on the basis of hypothesis or speculation. That may well mean stepping back from regulating in areas where there is a possibility of a problem but no evidence that problems actually exist.
If we have a nimble system with agile and responsive regulators—I accept that that might be a rather big assumption—we should have no problem in stepping back, because we can act when a problem emerges. I certainly do not recommend or seek the widespread dumbing down of our regulation, because good regulation is part of the strength of our financial services sector. However, I believe that we are failing to take advantage of our Brexit freedoms to liberate our financial services businesses where there is no evidence that it is not safe to do so. That is what lies behind my seeking to add an additional regulatory principle.
Lord Tyrie (Non-Afl)
I declare my interests as in the register. I was not intending to begin with these remarks but I think the one thing we can all agree on is the fundamental weakness of the Bill, which is that it repatriates considerable powers to UK regulators from the EU without giving any meaningful consideration as to how these powerful bodies will be scrutinised and held accountable.
The noble Lord, Lord Bridges, has made a detailed proposal; there are others around. Somewhere in that area we have to put something on to the statute book to accompany these measures. I think that is relevant to the consideration of the amendments in the name of the noble Lord, Lord Lilley. One task such a body can be asked to accomplish is to evaluate and make suggestions for more far-reaching reform. A number of the amendments in the noble Lord’s name might fall into this category and they may have quite profound effects on the way that we are regulated.
As for competition—which I also was not intending to speak about but I cannot resist it—I spent an enormous amount of effort and time, with the noble Lord, Lord Flight, and others, when we were in the other place, trying to get competition and competitiveness built into FiSMA; this was in 1998-99. We largely failed and even now we have not succeeded as much as we would like. I strongly agree with what the noble Baroness, Lady Noakes, said about these multi-tiered objectives and principles—operational objectives, strategic objectives, et cetera. The consequence, of course, is that they are gamed by regulators, which implement the bits that they most like and leave behind the bits that they do not like if they are all too difficult.
These two first points I have made are interlinked. Currently nobody holds regulators to account for that gaming. If we did have a more powerful body, if Parliament could have at its disposal more effective expertise—something akin, perhaps, to the NAO but much smaller and specialising in regulatory scrutiny; we will come on to this in more detail next week—we might find that the regulators stopped picking and choosing.
When I first read the amendments in the name of the noble Lord, Lord Lilley, I thought they were easy to support. They have some of the character of motherhood and apple pie about them. What could be more reasonable than that the regulator should be given the additional statutory objective of predictability and consistency? But, having thought about it a bit and discussed it with quite a few people, now I am not so sure. I am becoming concerned that, taken together—the noble Lord’s amendments are interlinked—and notwithstanding his good intentions, they could have a major effect on the conduct of financial regulation in the UK, and not altogether necessarily for the public good.
Perhaps I could step back for a moment and explain why, in the context of some of the work we did on the Parliamentary Commission on Banking Standards. The current regulatory framework derives directly from that commission, which I chaired, and from the Vickers commission. These proposals have largely been put on to the statute book and implemented, where appropriate, in the rulebook, with many of those rules being implemented only recently.
When the PCBS and subsequently the Treasury Select Committee were trying to work out how to improve the regulatory framework, which had so manifestly failed in 2008-09, we had several core purposes in mind. Among these were, first, to challenge and, where possible, expunge the box-ticking, back-covering culture which had grown up in both the regulators and the regulated community, often in the search for safe harbours—safe harbours for both of them, incidentally. In doing so, we hoped to bear down on regulatory capture—the dangerous community of interests between the regulators, the regulated and the sponsor departments, which develops at the least opportunity. I strongly agree with what the noble Lord, Lord Lilley, said about what regulators will regulate for if no one keeps an eye on them at all.
A second purpose we had in mind was to try to safeguard market entry; that is, in particular, to develop a regulatory framework that did not discourage challenger banks: regulation to competition, not from it. I mention in passing that this is very much unfinished business, to put it mildly. There are barriers to entry everywhere.
A third purpose, and closely related to the second, was to bear down on excessive legalism. Access to the law is rarely cheap and usually favours large incumbents. Regulatory barriers to entry suit them and they are difficult and expensive for small firms to deal with. Big firms can certainly look after themselves. Tracey McDermott—I am almost quoting; I tried to look up the quote just before I came in this afternoon but could not quite find it—once suggested in evidence that we catch the small fry, the big fish get away.
A related point on excessive legalism is that legal scrutiny can provide greater certainty, but after a certain point it comes at the price of effective regulation. Markets are themselves inherently uncertain. Risk-making is of its nature forward looking. It will therefore always be imperfect for the conditions in markets at any one time. Regulation can be a lot better than nothing, but there will always be regulatory failure, and there will always be some legal uncertainty.
The fourth purpose we had in mind was to limit the FCA to a narrow range of objectives and to expect it to explain in much more detail than prior to the crash how they should be applied. This lies at the heart, at least in theory, of principles-based regulation supported by guidance. Multiple objectives, as I said a moment ago, will always be gamed by the regulator. Generally, the fewer the objectives, the better.
Others may disagree with everything I have said, but I still think that those purposes, which were not the only purposes that we had in mind, were probably on the right track. What concerns me about these amendments is that, among other effects, several of them will strike at some of these core purposes. For example, building on Amendment 54, Amendment 85 seems to suggest that the regulator can make new rules only if, or will find it difficult to make new rules unless, they are fully consistent with existing rules and that they are capable of prediction. At the least, even if the regulator can make rules, can they be enforced? This is what I understand proposed new subsections (1) and (2) in that amendment to say. It seems to me that it is how the objectives of consistency and predictability will be satisfied in law. My concern is that this will restrict adaptation and enforcement by the regulator. Fast changes in markets and the creation of new markets are features of much of the financial sector. We want to encourage dynamism and creativity and it seems to me that this proposed new requirement of predictability could make it more difficult for a regulator to enforce rules to address new market developments. It certainly seems likely to make regulators more cautious about enforcement.
I heard calls on the radio today for regulation of the cryptocurrency markets. I offer no view on the merits of cryptocurrency market regulation at the moment, but if they are to be regulated and enforced, does that have to be done in a way that could have been predicted from current regulation; for example, from the regulation of securities markets? I hope not, and I may have misinterpreted. I certainly do not think that was the intention of the noble Lord, Lord Lilley, but I hope it is not the effect of his proposal.
Lord Roborough (Con)
My Lords, I declare my interests on the register as a shareholder in an FCA-regulated asset management company. I should add that I have worked for 30 years within investment banking and investment management, including five years as a designated senior manager, and in that role I had direct experience of the FCA. I also apologise that I did not contribute at Second Reading.
I speak in support of my noble friend Lord Lilley’s Amendments 54, 85, 46, 57, 64 and 82, which require the regulator to act with predictability and consistency. I believe these also tie in neatly with a number of amendments, yet to be discussed by my noble friend and others. Those address oversight, accountability and right of appeal, and following precedent will be important to those functions—fundamental to our legal system but not necessarily to our regulation at present.
I think all would agree that predictability and consistency of rule interpretation and enforcement are desirable, but they are not always in evidence, and I do not believe that the Bill addresses that. Indeed, by placing on the FCA secondary objectives around economic growth, international competitiveness and UK net-zero emissions, I agree with my noble friend that the Bill is likely to reduce predictability, defeating those secondary objectives by making the UK a more difficult place to do business.
From my own experience, I believe that the FCA is an effective and informed regulator, but there can be a fear of the unknown when interacting with it. Dealing with the FCA often requires legal intermediaries to try to understand what that body is currently thinking about interpretation of the rules. Enforcement actions frequently happen in the shadows and are surrounded by rumour. The legal intermediaries have the only access to these precedents that are established by those actions. There is also pressure on senior managers to enforce these unspoken interpretations under threat of personal liability if they fail to implement them in line with the FCA’s thoughts. Who would want to be a senior manager?
To address the noble Lord’s points on legal uncertainty, I believe this can be avoided by dynamic communication from the FCA on emerging issues and how those rules will therefore be enforced in future. That appears to remain perfectly possible under the amendments proposed.
These amendments would force the FCA to be clearer about how it interprets and enforces rules, leading to greater disclosure around the precedent being established in its recent actions—where information is confidential, perhaps anonymised. That in turn will also allow for more effective oversight of the FCA, as greater disclosure will allow more informed investigation of whether these rules and interpretations are consistent with the mandate of the regulator. Greater regulatory certainty would reduce barriers to innovation and entrepreneurialism. It would reduce the cost and complexity of doing business in the UK by removing unnecessary precautionary compliance expenditure. We need the regulator to demonstrate that it is acting with predictability and consistency to free our finance industry to focus on creating wealth for this country within a transparent regulatory framework.
These are excellent amendments, and I would have put my name to them had I known how.
Lord Holmes of Richmond (Con)
My Lords, I rise to speak to Amendment 74 in my name, but before I do so, I give my wholehearted support to the amendments in the name of my noble friend Lord Lilley and those in the name of my noble friend Lady Noakes, particularly Amendment 72, which is excellent.
My Amendment 74 can be summed up in one word: proportionality—simply that—no more, no less. Disproportionality does not reduce risk or increase consumer protection, and it certainly has nothing to say about optimising the resources of any organisation. Amendment 74 seeks to simply insert the proportionality concept, as does Amendment 72 in a broader sense—rightly. I hope my noble friend the Minister will respond positively when she comes to sum up.
Lord Thomas of Cwmgiedd (CB)
My Lords, I will make three brief observations. First, in this context, we are looking at the mandate that we are giving the regulator. One obviously could look at rules by some ex ante supervision, but that is not how this will work. Leaving it all to accountability after the horse has bolted is not the right way to proceed. It is very important that we give attention to the scope of the mandate.
Secondly, there is an obvious illustration as to the scope of the mandate in the proposal from the noble Baroness, Lady Noakes: proportionality. I would be astounded if anyone disagreed with that proposition, because only a fool would argue that you should make disproportionate legislation.
It seems to me that, in looking at this, we ought to know how the people given the mandate by Parliament intend to operate. Do they intend to produce consistent and predictable rules? I would imagine that they do intend to. They may agree with many of these objectives, but it is very important for the Committee to know the Government’s view of the form of regulation—the mandate—before we decide on what should happen. We also need to know how they are going to do it, because you always ask your agent how they will do something. If we were informed, there might be much less dispute.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have Amendment 70 in this group, which was also referenced by the noble Baroness, Lady Noakes, who supported and signed it. It would insert a regulatory principle of efficiency that the PRA and FCA must ensure that their supervisory and approval interactions are efficient from the perspective of the regulated entities and in comparison with regulators in comparable countries. Clearly, it overlaps with some of the issues that we have already discussed, but it gets to the heart of the matter as to how and for whom the regulators are thinking, and whether they recognise what their impact is.
My Amendment 122 establishes that a corresponding report is required, which must include how they have undertaken this efficiency comparison, including the periodicity of the comparison and its outcome.
Amendment 144 is another go at inserting the same principle into the bank’s supervisory roles. It will not have escaped the notice of those who have read all the amendments that a similar amendment also appears in other places and formats, in part as a response to the layering of objectives to make sure that they actually happen. The point is really to find the best place for this, not to keep repeating it, but I had several bites at the cherry.
As I said, the substance of my amendment has already been discussed in the previous group, but I wanted to bring out the perspective point. The regulator itself might be very efficient at the expense of the industry it regulates—for example, by using the same template letter at the start of institutional approval processes, without any regard for proportionality or without saying anything useful about what might already have been presented at an extensive, exploratory, preliminary meeting. I recognise the traps that the regulators are trying not to fall into, but this has to be looked at from the other side.
As I said before, when the Industry and Regulators Committee was looking at competitiveness, there was a constantly repeated complaint from industry about delays over routine approval matters, including staff appointments, which caused delay and costs in day-to-day matters. These issues keep coming up, both in real life and in the amendments from noble Lords from around the House, including from the Government’s side. I therefore hope that the Minister and Government will help us to address them as we proceed on the Bill. It is obviously a matter to which we will return on Report, probably in more than one way. Therefore, some preliminary discussions with the Minister would be very useful.
I must also comment on the proposals from the noble Lord, Lord Lilley. If you look at all his amendments, you will see that he is also a victim of the need to insert the same thing all over the place in FSMA in order to make it happen—and I appreciate that there are bigger and more developed amendments to come. My concern is whether the amendments achieve the objectives they set out to. I see the attractiveness of predictability, but I think that some of the concepts underlying these kinds of amendment are about reintroducing thinking in the regulator and in industry. By having layer on layer of complex rules, starting at the top, drilling down, then making the next one slightly different and providing lots of tick boxes, you can get certainty. But everybody says they want principles. I thought the idea was to have principles and then to discover that, if you did not take some reasonable precautions, there may be some regulatory actions against you. I have had these kinds of conversations with some of the authors of these proposals.
This almost goes back to where it used to be, when there was unlimited liability, but you took a little more care, because you might be for the high jump. You had to think about what you would do and consider the harm, instead of looking at a set of rules, against which you could put a little compliance tick that took away the thought and judgment that should be going into what you are doing in such an important industry. This cannot be tick-box. I fear that this is driving in the same direction. If I heard correctly, even the noble Lord, Lord Lilley, talked about these broad principles needing more detail underneath.
These amendments do not solve what some of those who have spoken in this group have told me that they want them to solve. I fear that this will be static rather than agile, yet after Brexit we keep saying that we want our regulators to be agile to new things and able to adjust. One cannot be both agile and wholly predictable, because you have to respond to new circumstances.
Baroness Kramer (LD)
Thank you. We are desperately trying to work out what we do to remain winding speakers but, thanks to the flexibility, that is allowed in Committee. It disappears at Report, but it has been very useful.
I wanted to make a few comments because I want to ensure that we focus strongly on the issues raised by my noble friend Lady Bowles: looking at the international competitiveness objective through the lens of efficiency of the regulator. When I talk to the industry, its beef is typically not with the regulation but with the way it is applied. It is the endless paperwork, delays, time-wasting, and everything else. The amendments that she has tabled get us laser-focused on that and tell the regulator, “This is unacceptable. It may mean that you need more resources, but then open your mouths and ask for them, because I think you would find that Parliament would row in behind you to ensure that you have that capacity to deliver that effective, efficient regulation.”
I was slightly taken aback by the example of a one-week approval authorisation in the Bahamas only because I am very conscious that the 2007-08 crash was finally tipped over the edge by AIG, the major US insurance company, saved at the last minute by a bailout of $150 billion. It has rectified itself today. I would hope that our regulators would take more than four or five days to look at authorisation for company with the capacity to bring down a very large part of the world’s economy. I just turned pale for a moment. I hope that we will not take that as a continuing example.
I also do not see the regulators as typically capricious—inefficient, but not really capricious. I am therefore concerned about the amendments from the noble Lord, Lord Lilley, to the extent that they would remove agility. All of us who work in some way or other in relation to the financial services industry recognise that we are in a period of the most extraordinary change. Technology and globalisation are driving it, and all kinds of innovation are out there. We need a regulator that can cope with the pace of change that is taking place and does not come late to the table.
When I first got involved in politics, fintech was new. I remember asking every member of the fintech industry to meet me, and there were 12 people around the table. Now the leading figures associated with fintech would not fit in the Royal Albert Hall. That is brilliant—but I remember the difficulty then in trying to explain to the regulators that we needed a completely different regulatory environment, if fintech was going to develop. It wanted regulation. Being without regulation led the industry to fear that rogue players would suddenly enter that would disgrace the industry and cause a regulator to come on to its lawn with tanks blazing. There was a real desire to get appropriate and sensible regulation in place, but it had to be different and innovative and had to recognise the features of the industry.
When it comes to the word “predicted”, it seems to me that for a court it would be very hard to go through that kind of analysis, and to understand the business issues and the differences and risks in various industries, to understand whether or not predictability applied. When I looked at this issue, I thought, “My goodness, I bet this was drafted by lawyers because it looks rather like a lawyers’ charter.” I do not think that providing additional business to some of the law firms in the City is one of the purposes of the Bill. I have some real concerns, and they centre very much on that area. I hope we will think this through extremely carefully. Anyway, I consider that I have wound up, and I will sit.
Lord Tunnicliffe (Lab)
My Lords, we have no amendments in this group. I have listened to this interesting debate. It comes back to the classic dilemma in all parts of life, from family dilemmas right through to how you manage an industry, and it comes right to this proportionality issue. It is very easy to create rules so simple that you cannot see what they are trying to achieve. It is very idealistic to try to create some ideas that the industry should contain. I look forward to listening to the Minister’s reply, but I have enormous sympathy with her, and I hope she might perhaps give some thought to whether we might try to develop some mechanism between now and Report to see if we can create common ground on this extraordinarily important issue.
Baroness Penn (Con)
My Lords, the Government agree with noble Lords that the efficiency, predictability and proportionality of financial services regulation are a particularly important issue, and one that the Government and Parliament should continue to hold the regulators to account on. We have heard in this discussion many different approaches and ways of getting at this issue and seeking to advance it. I hope that in my response I can set out how the Government have had those concepts at the forefront of our mind when looking at the framework, and I shall seek to support the points that have been made by noble Lords today.
Put together, Amendments 46, 54, 57, 64 and 82 from my noble friend Lord Lilley seek to introduce a new effective for the PRA and the FCA relating to predictability and consistency. As I have said, the Government agree that predictability and consistency are an important component of an effective regulatory regime. As observed by IMF studies, when independent regulators make judgments on the design of regulatory standards, they are more likely to deliver predictable and stable regulatory approaches over time, and thus the centrality of the independence of our regulators at the heart of our regime seeks to support those objectives.
As we have discussed in previous debates, the FCA and the PRA are required to advance their objectives when discharging their general functions, as set out in FSMA. The Government’s view is that the regulators’ objectives should be focused on the core outcomes they should seek to achieve. The Government agree that, where possible, the regulators should advance their objectives in a predictable and consistent way. The framework already addresses this through the regulatory principles, as set out in Section 3B. These regulatory principles aim to promote regulatory good practice. The statutory requirement in FSMA for the FCA and the PRA to consult on rule proposals seeks to ensure that there is a predictable approach to rule-making. As part of this consultation, the regulators must explain why the making of the proposed rules advances, and is compatible with, their objectives as set by Parliament in legislation and how the proposals are compatible with their obligation to take into account the regulatory principles. These requirements are designed to ensure that consumers, market participants and wider stakeholders have a meaningful opportunity to scrutinise and feed into the development of regulator policy, guidance and rules. It also ensures that stakeholders are aware of planned changes to rules and can engage in their development.
In addition to seeking to introduce the new objective, Amendments 54 and 64 would also insert a provision that would prohibit the FCA and the PRA from taking retaliatory action against firms that challenge regulatory decisions. While I understand that firms may be concerned about how an appeal or judicial review may impact their relationship with the regulator, the Government consider that it would be wholly inappropriate for a regulator to treat a firm differently simply because it had chosen to challenge a decision. The Government would expect a regulator to respond to any such challenges appropriately and professionally. I am not aware of any evidence that the regulators have taken such alleged retaliatory action, and firms already have avenues available to them to contest and appeal enforcement decisions. The Government therefore do not believe that an amendment is required in this area.
Amendment 85 seeks to restrict the regulators from enforcing rules made at a “high level of generality”, except in certain circumstances. The FCA’s approach to regulation involves a combination of high-level principles and detailed rules. We discussed this balance and the benefits of those different approaches earlier in Committee and I am sure that we will continue to do so. Through its Principles for Businesses, the FCA aims to encourage firms to exercise judgment about, and take responsibility for, conducting their business in line with those principles. When conducting the future regulatory framework review, the Government reviewed over 100 responses to two separate consultations, which concluded that the provisions concerning enforcement and supervision remained appropriate. Enforcement decisions are specific to the firm and the rules concerned, and the FSMA model requires independent supervision and enforcement.
Amendment 85 would also require that regulator rules are interpreted according to common-law methods of interpretation. The Government are repealing the prescriptive provisions in EU law though this Bill so that they can be replaced with domestic legislation and regulator rules made under FSMA. I reassure my noble friend that it will be up to the UK courts to determine how that domestic legislation and rules are interpreted.
I turn to Amendments 70, 72, 74, 77A, 122 and 144, which in various ways aim to ensure that the regulators act proportionately. Again, I emphasise that the Government agree about the importance of proportionality and agree with the words of my noble friend Lord Holmes when he spoke to his amendment on this. A number of the regulatory principles already address the themes of good policy-making that these amendments seek to embed. These include principles of efficiency and economy, proportionality, and requiring the regulators, where appropriate, to exercise their functions in a way that recognises differences in the nature and objectives of different businesses subject to requirements imposed by or under FSMA. The Bill also introduces these principles for the Bank of England in its regulation of central counterparties and central securities depositories.
Lord Thomas of Cwmgiedd (CB)
Would the Minister be able to get the views of the FCA and the PRA on this matter? It would be interesting, in examining consistency and all these issues, to see if—hopefully—they could do that in no more than two pages.
Baroness Penn (Con)
Is the noble Lord referring to their views on the question of proportionality and efficiency, or on a specific case?
Lord Thomas of Cwmgiedd (CB)
On the specific question of drafting rules, what do they think their mandate is? Do they accept that the rules have to be proportionate and clear? It would just be very useful to know how they see their new approach to things. I think it can be done in two pages, but that is a good test.
Baroness Penn (Con)
I am sure that the regulators have provided some of those views already. For example, they gave evidence during the Commons Committee stage of this Bill. I do not want to speak for them but I absolutely undertake to the Committee to seek that from the regulators, and obviously it will be down to them as to how they wish to deal with the request. With that, I hope that noble Lords will not press their amendments.
Lord Lilley (Con)
My Lords, this has been a fascinating and valuable debate, the highlight of which was obviously the agreement between my noble friend Lady Noakes and the noble Baroness, Lady Bowles, on the disproportionality of the PRA. Another common feature of the whole debate was that everyone seemed to express concern about the lack of accountability of the regulators. I was encouraged by the Minister’s remark that she would look positively at the debate.
I am grateful for the support of my noble friends Lord Trenchard, Lord Naseby, Lord Sandhurst, Lord Roborough and Lord Holmes for the amendments that stand in my name. I am also grateful to the noble Lord, Lord Tyrie, and the noble Baroness, Lady Bowles, for applying their critical faculties to the amendments that we tabled. I will consider carefully what they said. It will be easier for me to respond when I can actually read the text rather than doing so immediately now—anyway, I only have time for a few words now—but I think I can assure them that the amendments would not require new rules to be predictable from old, existing rules, nor would they forbid new rules that were inconsistent with existing rules; it would just have to be explicit that they overrode an existing rule—although I may have misunderstood what they said.
The noble Baroness, Lady Bowles, mentioned that she is worried about excessive powers to lawyers and litigation. I am in the unusual position of being in alliance with lawyers. I got into trouble early in my parliamentary career by quoting
“let’s kill all the lawyers”
in a debate in which it turned out that I was the only non-lawyer. I think we have to recognise that the only alternative to the common law approach which we seek to entrench here, which is the purpose of the Bill, is the codified approach, which is very much more rigid and unable to respond quickly to the rapidly varying world to which the noble Baroness rightly referred, or simple discretion which may not lead to being capricious, but does mean that it is very unpredictable for practitioners who do not know how rules are going to be applied. I will, of course, withdraw the amendment, but I hope we will return to these issues on later groups and perhaps on Report.
The Deputy Chairman of Committees (Lord Beith) (LD)
Before I call Amendment 47, I advise the Committee that if it is agreed, I cannot call Amendment 48 by reason of pre-emption.
Amendment 47
Baroness Noakes
Member’s explanatory statement
This amendment probes what “relevant international standards” are and their relationship with the competitiveness and growth objective.
Baroness Noakes (Con)
My Lords, I shall speak also to Amendment 58 in my name. The new competitiveness and growth objective, which I strongly support, is rather curiously drafted, as the FCA and the PRA are mandated to pursue competitiveness and growth
“subject to aligning with relevant international standards”.
My Amendments 47 and 58 remove this from the formulation for both the FCA and the PRA on a probing basis to try to understand what the Government mean by it.
International standards come in all shapes and sizes and it is far from necessary for the UK to adhere to everything which claims to be an international standard. The term is not defined in this Bill nor, I think, in FSMA. Part of what I am seeking is to understand what is a “relevant standard” and what kind of standards can in effect trump the competitiveness and growth objective. I hope that my noble friend will be able to explain this when she winds up.
The competitiveness and growth objective is already circumscribed by its status as a secondary objective. Using the PRA as an example, this means that it has to act only
“so far as reasonably possible”
in a way which advances its competitiveness and growth objective. Its primary objective—promoting the safety and soundness of PRA-authorised persons—will always trump a secondary objective. In this respect, I am not sure that Amendment 65 from the noble Lord, Lord Tunnicliffe, is necessary. That is certainly the view of the PRA, which has been clear about the primacy of its prime objective.
Although some of us might have preferred competitiveness and growth to be a primary objective, which could then raise different issues, the Bill does not go that far and the secondary objective is therefore secondary to the primary objective. I completely understand if the PRA choses to follow international standards because it believes that this advances its primary objective, and that would trump the secondary objective. On that basis, there is no need to refer to international standards in relation to the competitiveness and growth objective because if the PRA thinks that they are necessary, they are already absorbed within its primary objective. However, if an international standard is not necessary for the primary objective, I do not understand why any such international standard should crowd out the competitiveness and growth objective.
There may well be a presumption that standards promulgated by bodies such as the Financial Stability Board or the BCBS will be followed, but that is accommodated within the primary objective. However, even in that context I think we have to remember that, for example, the Basel capital standards have not always been followed universally, most notably by the USA, which pursued its own course for a considerable period of time. International standards are not matters of international law. Their implementation is always a matter of judgment for the home regulators and therefore needs to be considered in the judgments they make on their primary objective.
I believe that the words
“subject to aligning with … international standards”
give too much weight to policies developed outside the UK and could damage our competitiveness and growth. The regulators should not be allowed to ignore the secondary objective on the grounds that they are following international standards if those standards are not core to their primary objective.
I look forward to hearing the noble Baroness, Lady Bowles of Berkhamsted, on her Amendment 49, but my initial view is that it is right to keep the reference to financial services in the competitiveness and growth objective. Whether we like it or not, the financial services sector contributes around 12% to the UK economy and 7% of all UK jobs, according to the City of London Corporation. The regulators that can have the biggest impact on the financial services sector are clearly the financial services regulators: the PRA and the FCA. It seems to me only right to emphasise that their new secondary objective should specifically refer to the financial services sector. I beg to move.
Viscount Trenchard (Con)
My Lords, I support Amendments 47 and 58 in the name of my noble friend Lady Noakes, to which I have added my name. I also appreciate the support of my noble friend Lady Lawlor.
The FCA is influential in the formation and development of standards, and states on its website:
“We contribute to and implement international standards, and supervise and enforce rules based on them in the UK.”
The principal international standard-setting body for the industry is IOSCO. Will the Minister confirm that the UK is already using its enhanced influence in that body resulting from our having a seat at the table in our own right rather than through the EU? IOSCO’s key strategic goal is to be accepted as the recognised standard-setter for securities regulation. The International Association of Insurance Supervisors seeks to play the same role for the insurance industry. Its mission is to promote effective and globally consistent supervision of the insurance industry to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.
Nevertheless, international standards are a very subjective concept, and the introduction of this concept does not assist the need for clarity and predictability, besides the question of whether international standards will assist or impede the advancement of the competitiveness and growth objective. I am unable to support the proposal of the noble Baroness, Lady Bowles, to include sustainability in addition to relevant international standards because I think that sustainability is an even more subjective concept and that this amendment would reduce clarity and predictability.
I do not understand Amendments 49 and 59 from the noble Baroness; I think the financial regulators’ responsibility for financial services does not extend to different spheres of activity, although I, too, question why this limitation is included in the Bill anyway. The amendments in this group are really important because the Bill provides for rather limited supervision of regulators, and I believe it is necessary to improve parliamentary oversight.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have several amendments in this group. Amendment 48, which has already been referred to, seeks to add “sustainability” in as a sort of foil to the international aspect. Amendments 49 and 59 seek to remove the bits in brackets relating specifically to financial services, which is more of a comprehension issue. Amendments 51 and 60 propose another placing of the efficiency amendment in case it might sit better within the competitiveness and growth objective.
There is another very dangerous thing going on here, on which I agree with the noble Baroness, Lady Noakes—we agree more often than people would think. To some extent I support her Amendment 47, as I will explain later.
As has already been said, my Amendment 48 seeks to add in “sustainability” so that the competitiveness and growth objective would be “subject to sustainability and aligning with relevant international standards”. We have been talking about the need for balance and I felt that that, potentially, was a balance that we wanted. That also seemed a suitable place in which to write sustainability into the Bill. Perhaps we could choose other words, because I meant it to cover sustainability in financial terms and in a humanitarian and environmental context, too. I am not clear that some of the things which are said to be covered actually are covered.
When we were talking about position limits, I believe that the Minister said that taking humanitarian matters into account was something that the FCA could do. I cannot see anywhere among its objectives or anywhere else where that comes about. I can see that there can be market integrity things on position limits, but not whether you want to think about whether you are causing people to starve. There are things that we expect to be taken into consideration—it is not a subliminal matter, but just by implication—but they are not there if you look for the words. From experience of looking at things when they have gone pear-shaped and the regulators want an excuse, it seems to me that they will be asking where it says those things.
Returning to the competitiveness and growth objective, the more I look at it, the less I like it, not from the point of view of the competitiveness and growth bit but for all the other drafting around it. This is where I agree: what on earth is this “subject to international standards” doing there?” It gets sprinkled around quite liberally in legislation. When I was an MEP, I learned very soon after I got to Brussels that the Treasury wanted “alignment with international standards” put liberally into EU legislation as a way to try to cut down EU degrees of freedom. Now, here we are, post-Brexit, trying the same trick on ourselves and handing it to unelected bodies. Much as I did not object to the EU system, we are where we are. I do not think it is right. If we think recently in terms of LDI and so on, we hear the Bank of England saying, “Until we have the international rules on non-bank financial institutions, we have not done anything”, when something that is a complete viper’s nest is going on that is completely within everything to do with the United Kingdom. That shows us—we will come to this later on with some of my financial stability amendments—that it is looking for support and to hugger-mugger together with the rest of the regulatory organisations rather than putting the UK first and thinking clearly about what we want.
Are we now trying to control the regulators as we tried to tie the EU? We do not need it to control the regulators because they largely control what goes into the international standards, and those international standards have far less parliamentary scrutiny than anything done by UK regulators for the UK. I accept that the Treasury has a seat at the table and therefore knows what is going on, but it is very difficult to scrutinise what goes on at Basel and the other international organisations. You can get our regulators to explain what they agree with and claim victories where they put things in, but to get any explanation in time to be able to react to it and to influence it is extremely difficult. I tried this while I was chair of ECON in the European Parliament when we were doing the capital requirement rules. We forced one or two meetings with them, but they did not really want to know, and we are going to be in even more difficulty trying to follow those kinds of things within the UK’s parliamentary system.
Here we are signing up blind to something rather than signing up after scrutiny. That is what happens in other countries, notably the EU and the US, which have a whole system, including parliamentary procedure, to determine whether they are going to sign up to the international rules.
There is nothing wrong with political statements being made which say that the broad expectation is for us to be in alignment with the international standards, but I do not see what that does without any kind of caveat around it within primary legislation. It makes a mockery of us trying to scrutinise anything when we know that what we will be getting is just what the regulators have decided with other regulators, at a different level over the UK’s head.
As I mentioned on the last group, I also put my amendments on efficiency here, so I will not go into those again. We can discuss among ourselves where they fit best.
My final point relates to the words in brackets, which I address in my Amendments 49 and 59. Simply, when I read this part of the Bill, it did not read as if the financial services references were in there because that was the bit that the regulators were empowered to do; I thought that it was possible to make it read as if some kind of preference could be given to financial services over and above other things. I know that that is not the intention, so my only objection to these words is to ask whether the Government are absolutely sure that they read properly. I am not suspicious of the motives but, if one of my assistants had written this back in my patent attorney days, I would have been thinking that it was not quite right and asking if we could rephrase it. So there is nothing more suspicious to it than that.
I do not think that those words are actually needed because, as the noble Baroness, Lady Noakes, said, they can only influence financial services. Financial services must serve the economy and must serve other businesses. So you could, theoretically, enhance the economy within financial services by putting up all your charges to the rest of industry. One hopes that competitiveness and competition laws would stop that from happening, but you could have that interpretation. Somebody might be able to hang something on those words if they are still there.
That explains my amendments. I do not think there is anything too untoward; I would be interested to hear from the Minister about international standards. I accept that we have them in other pieces of legislation, but if we have got it wrong somewhere else, we do not need to keep repeating it.
Lord Holmes of Richmond (Con)
My Lords, I speak briefly to give full-throated support to the amendments in the name of my noble friend Lady Noakes. This tying to international standards seems odd, at best, for at least two reasons: first, this is attached to the competitiveness objective and not run through all objectives, not least the primary objectives; and, secondly, this objective, even before it has been launched, is fettered and shackled through this connection to international standards and the ISSBs that they are under. That seems curious, in that it seems to run counter to the espoused purpose and intention of the Bill. I would be very keen to hear my noble friend the Minister’s comments when she comes to sum up on those points.
Baroness Hayter of Kentish Town (Lab)
My Lords, I declare my interest as a board member of the Association of British Insurers. I apologise that I was not able to speak at Second Reading. I had my name down, but unfortunately had to scratch because of a commitment from the committee that I chair.
I speak very briefly on Amendment 65 in the name of my noble friend Lord Tunnicliffe—I was not going to, because I am sure that he will explain it, but as it has sort of been challenged already, I thought it would be useful to bring the Committee’s attention to the view of TheCityUK. On the secondary objective, it says that economic growth and competitiveness would remain subordinate to the regulatory primary objective of promoting competition, preserving stability and protecting consumers. TheCityUK thinks that is the proper place for it. I think my noble friend may explain that his was more of a probing amendment, but certainly I hope that the Committee is of the view, along with many of us, not just TheCityUK, that primary means primary and secondary means secondary, and therefore that the primary will always trump the secondary.
Lord Sikka (Lab)
My Lords, I and the noble Baroness, Lady Bennett of Manor Castle, oppose the Question that Clause 24 stand part of the Bill.
As I read the Bill, I wondered why growth and competitiveness as a regulatory objective appear at all. A friend in the City reminded me that the Government have been unable to deliver any Brexit benefit and have to show that they are doing something; therefore this had to be tagged into the Bill—although I understand that this clause was written at the behest of TheCityUK and UK Finance, which wanted to sponsor it.
The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection. If there is growth because of financial stability and consumer confidence, that is fine, but to go out of your way and say that the regulators must somehow grow the finance industry and promote international competitiveness is something else. Unless the Minister points me to it, I could not find anything in the Bill which indicates exactly what kind of weight is to be attached to each of those four conflicting objectives.
How much growth are the Government trying to secure in the finance industry? Are there any limits, and what are the economic and social costs? What would be the opportunity cost of more graduates going into the finance industry and shunning other careers, whether in manufacturing, chemicals or any other industry? How will the regulators ensure that somehow the UK has a greater supply of graduates? How will they ensure that there is adequate infrastructure? I could not see that any of these issues were answered in the long and hefty impact assessment.
The promotion of competition is an existing aim of the financial regulators. Here we can see that the FCA has persuaded some challenger banks to enter the market, although it has been utterly unable to tame the major banks that dominate the market; they have not been broken up and have reduced people’s access to the market—for example, by closing bank branches. Is taming the banks and breaking them up a matter for the FCA or for the CMA? The regulatory architecture continues to become more and more complex. Each regulator already passes the buck to somebody else, saying, “It’s your job to secure competition”, and that is domestically. When we move on to the bigger picture, it becomes even more complicated.
The common understanding is that the notion of competition relates to the state of the market and access to it. That is very different from the notion of competitiveness, which as a discourse does not have any permanent meaning in any sense; its meaning is always constructed and needs to be given. Essentially, however, it relates to the industry as a whole. That is a task for the Government, not for the regulators at all.
International competitiveness, as many noble Lords have already said, is about the ability to attract business from other financial centres. In the words of the former Business Secretary, Vince Cable,
“chasing ‘competitiveness’ really means … a race to the bottom—watering down standards in the hope of attracting more dubious sources of money to an industry.”
That is quite an indictment of the government objectives by a former Minister. Similar principles—that is, the principle of competitiveness—and approaches were behind the 2007-08 crash that hammered the whole economy. We are yet to recover from that folly, but they are being brought back. The Governor of the Bank of England, Andrew Bailey, said that before the last crash the regulator
“was required to consider the UK’s competitiveness, and it didn’t end well, for anyone”,
yet we are embarked on exactly the same course again.
There was an unprecedented bailout of the finance industry. No other industry in British history has needed that kind of state support, and we continue to be plagued by all kinds of scandals, even in an environment where regulators are not pursuing international competitiveness. We have had nearly £1 trillion of quantitative easing to the finance industry. The result is that there is asset price inflation and real wages are still down, yet it is hard to see any reflection of that in the Government’s impact assessment.
Competitiveness, as we all know, was specifically removed from financial regulation in 2012, but it is being unceremoniously smuggled back in. The Government are clearly opting for a race to the bottom for a sector that has been a serial offender and has actually eroded growth. The finance industry has mis-sold numerous financial products over the years, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, payment protection insurance, mini-bonds and much more. It has led the field in international tax abuse, money laundering and sanctions busting. Is that what the Government really want to grow? Is that what the regulators are supposed to be growing?
Rather than cleaning up the industry, this Bill should have been preceded by a public inquiry into the finance industry to see what exactly needs to be cleaned up, but that never happened. Rather than cleaning up the industry, the Government, the Bank of England and other regulators have actually colluded with the UK banks over the consequences of their own criminal conduct. I have given examples, and I will repeat one here. HSBC was fined $1.9 billion in the US for facilitating money laundering. It admitted in writing that it had been engaged in “criminal conduct”. The then Chancellor, George Osborne, in collusion with the Bank of England and the head of the FSA, secretly wrote to the US regulators to say that they should go easy as HSBC was too big to jail and too big to fail. The result is that HSBC continues to commit financial misdemeanours.
Is that an example of the regulators somehow managing to balance growth and competitiveness? There is certainly growth in dirty money; that has continued. As for competitiveness, all the banks are still charging us roughly the same fees for overdrafts, and they are engaged in other nefarious practices as well. I provided that example regarding HSBC in the previous debates on the Bill.
Scholarly research carried out at the University of Sheffield, where I am emeritus professor, shows that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion pounds to the UK economy, yet the Government are weakening what modest regulation there is under the guise of the pursuit of growth and competitiveness. Just how bloated does the finance industry have to be before anyone recognises the danger signs flashing all over it? What evidence is there to show that the financialisation of everything is a positive development?
At the next crash, which will come if these objectives are implemented, not just banks but the whole high street will be in trouble, because organisations such as Morrisons, Asda and many others are under the control of private equity, which is utterly unregulated but meshes into the sector that we are trying to regulate. I hope the Minister provides us with some evidence to show that the financialisation of everything, which is inevitable if we grow this sector, will somehow be positive. I look forward to that reply.
The Government have provided no evidence to show that the finance industry has turned a new leaf. Since the 2007-08 crash, there have been scandals galore, whether London Capital & Finance, Blackmore Bond, the Woodford fund, banks forging customers’ signatures or numerous others. What are regulators going to do when faced with multiple objectives?
Do the Government and the regulators even know what the finance industry does? Mini-bonds came as a shock to the FCA; when people told it about them, it did not pay much attention. After the Kwarteng Budget, the gilt market declined because neither the Government nor the regulators knew anything about the impact of market yields on liability-driven investments and pension funds. Just yesterday, the Work and Pensions Committee was told that that Budget resulted in a £4 billion loss to pension funds. The Bank of England earmarked £65 billion of expenditure to bail out that market. As a result, some people made fortunes, but many innocent people made huge losses. There were huge wealth transfers from City speculators to pension funds.
How is the regulator going to adjudicate which kind of wealth transfer is good and which is bad? Regulators have no mandate to do that; only Parliament has that mandate and only the Government can act on behalf of Parliament to do that. Financial stability, growth and competitiveness cannot be reconciled, because there are too many contradictions and the Government are not willing to deal with them.
These kinds of losses are part of the reason why our economy is in the doldrums. The IMF is telling us that we are a basket case in terms of economic growth, yet we are piling on more and more of exactly the same. Ministers have not explained what the competitiveness and growth objective will do to regulators’ duties. We have about 41 regulators in the finance industry; will they all be required to promote competitiveness? How will their efforts be measured? There are 25 anti-money laundering regulators; how will they promote growth? Will they encourage more money laundering and bring in more hot money? Will they object? What will they actually be doing? Perhaps the Minister can spell that out.
We have a real patchwork of enforcement. We have the FCA, the Serious Fraud Office, the Crown Prosecution Service, HMRC, the Bank of England and others. How will they be promoting competitiveness and growth? Will they be lax? Will they copy Chancellor George Osborne, secretly intervene and say to somebody, “Please do not prosecute HSBC, even though it has been caught laundering money and admitted to it”? The Government have provided no answers to these questions and there is nothing about in in the Explanatory Notes. The Government are, in effect, laying the foundations of the next crash, just as the Conservative Government’s light-touch regulation laid the foundations of the 2007-08 crash.
Experienced voices are telling us to change course and not to go down the line that the Government are pushing. For example, Howard Davies, who served as chair of the Financial Services Authority between 1997 and 2003, said that
“he was ‘not keen on’ the competition clause, which went further than the guidance laid out prior to the financial crisis. At that time, he said the FSA only had to prove that issues such as competitiveness were ‘taken into account’ and were not something ‘you were trying to achieve directly’.”
So that is a warning. He added:
“In my view, to give the regulator the objective of promoting competitiveness, could be the thin end of a rather peculiar wedge. I mean, why would … the regulators not come in and tell us to cut our cost-income ratio? That would improve our competitiveness. And if they had a competitiveness objective, it seems that would give them an ‘in’ to the way we run our business, which I think would be a bit tricky, really, and that is one reason why the regulators aren’t really keen on it either.”
Baroness Kramer (LD)
My Lords, I start by speaking to my own two amendments in this group and will then move on to winding for the Liberal Democrats.
In a sense it is quite pertinent that I follow the noble Lord, Lord Sikka, because, as members of this Committee will know, I have some real concerns about the competitiveness objective and its effect and implications. It comes from people who are very much founded on the experience of the financial crash of 2007-08 and a fear at the time that lessons would be learned very briefly but the industry would very quickly push back as it is now, hoping that the crisis has been forgotten. I notice that all the speakers who are in favour of the competitiveness agenda seem very careful not to go back to that time, and they describe in some way why this is inherently different from then. If that cannot be done, or if they have all forgotten exactly what the experience was in that period, we are moving into difficult territory.
My amendments are quite specific and are very definitely probing—I hope that the Minister will disabuse me. When talking with a leading player in the industry, who was encouraging me to support the competitiveness objective, I took the government and regulators’ line: “It is a secondary objective—financial stability is clearly the priority.” I was told, “No, you haven’t read the Bill. You need to look at the section that refers to mutual recognition agreements. You have to read the two together. When you look at mutual recognition agreements, that gives us the leverage, combined with the competitiveness objective, to force the regulator to always adopt for the UK whatever is the standard that is embedded in that mutual recognition agreement.”
I am extremely troubled by that strategy, but from reading the language I can see where that thinking comes from. The attractiveness of the mutual recognition agreement to this individual was that it was an arrangement—in effect a treaty or an agreement—that was not negotiated by regulators. They might have a discussion with regulators and there might be input from regulators, but ultimately it was negotiated by businesspeople, and therefore that would be the guiding principle, not concerns about financial stability—those are not the concern of a trade negotiator—but arrangements, while measures within a trade negotiation contain a lot of compromises and trade-offs. This disturbs me hugely, and I would like the Minister to explain how those concepts and clauses work together. I was talking with someone who was using their imagination, but there was a lawyer present who was confirming what was being said, so I am really quite concerned about that interaction. We need to understand how that works as we proceed with this Bill.
I very strongly support my noble friend Lady Bowles. I am not going to repeat the arguments that she made, which were really important, but I want to pick up on the issue of relevant international standards. Like others, I am troubled by the idea that we might have slavish adherence to a set of rules that are made elsewhere, but on the other hand I am trying to trade off in my mind what we do if we do not have international standards in significant areas of financial services. We may say, as the Americans often do, that we know better than everybody else, that the way we structure our industry means that international standards do not really apply to us and that their capital requirement standards veer quite considerably away from the standards that were agreed at Basel and were largely adopted within the EU. But how do we turn to other places and say that they need to use international standards or that they should not fall below them if we say that that is allowed to us? I am trying to work my way through that thinking process because we live in a very globalised world.
The financial crash of 2007-08, which essentially exposed huge weakness, abuse and mismanagement in the UK, was triggered by events in the United States—the way in which subprime mortgages there had been packaged up and sold as collateralised debt obligations. As I mentioned earlier, subprime mortgages brought down the largest insurance company in the world, AIG, which was rescued by the American Government who, when Lehman Brothers began to collapse, said “Wait a minute. Enough. Suddenly we’ll have to rescue everybody if we’re not careful. We draw the line here.” The consequences reeled not so much through the United States but through the UK, exposing all our various weaknesses.
With this globalised world, what happens in one country, what is done by one regulator, impacts others. How do we manage this unless we have some sort of standing for international standards? I am not arguing against the amendment tabled by the noble Baroness, Lady Noakes; I am just saying that we somehow need to think this through, how it works, how we scrutinise it and how we consider it. It seems to me that it ought to be on only an exceptional basis that we decide that we do not apply those standards in the UK, but we need a mechanism for that and it seems to me that this should be largely something that Parliament determines, because it has significant consequences and would fit with much of the parliamentary accountability agenda that we have talked of today.
I want to pick up on the sustainability issue. Forgive me if I have the wrong person, because I had done that before, but I think it was the noble Lord, Lord Naseby, who mentioned sustainability and said, “How vague can you get?” As far as I remember, we have used sustainability in a lot of prior legislation, so I think there is a body of understanding. Some of the energy legislation that we dealt with certainly had the word “sustainability” in it, so there is a body of definition that sits behind that. I am one of those who would very much like to see sustainability attached to the words “economic growth”. I am not so concerned by the secondary economic growth objective, but I want growth to be sustainable. For me, that encompasses sustainability in every sense, both environmental—as it is often used—and economic.
As I say, I remain concerned about the competitiveness objective. We need to be very clear about its implications. If there are other levers that I have missed in the loan agreement that provide it in a non-obvious way with additional power and strength and the ability to get court rulings in its favour, I hope the Minister will explain them to us because I would find that very necessary for our future discussion.
Lord Tunnicliffe (Lab)
My Lords, I do not wholly associate myself or my party with my noble friend Lord Sikka’s comprehensive description of the finance industry, but I go back to one important area. I mentioned earlier that my previous career had a lot to do with safety. One of the things that it brought out was that people readily forget the catastrophic because the catastrophic occurs so rarely that attention drifts away and they get on with the day to day.
We broadly support the growth and competitiveness concept, although its impact will be modest. It would be a miracle if it added 1% per annum to the growth of the UK. If we read Alistair Darling’s autobiography—and yes, I am aware of the Mandy Rice-Davies test, “He would say that, wouldn’t he?” but it reads pretty convincingly—we see just how close we came to a totally catastrophic situation. It was only saved by a number of individuals, including Alistair and Gordon Brown, taking the very brave decision to do what had never been done before, which was essentially to throw the whole economy at a guarantee of the banking system. That is a pretty dodgy thing to do and, frankly, if you look at the timeline, it got very close to a catastrophic situation.
When one is looking at catastrophic risk—a low probability, perhaps, but catastrophic—you have constantly to bear that in mind. I do not think that the average practitioner in the finance industry works like that; I feel that day to day they are making trades and so forth. The sense of the primary objective is that that should be the salient thought behind all their decision-making: “We must not create another catastrophic situation.” To be fair to the Government, over the past decade or so quite a lot of sensible legislation has been introduced to protect ourselves from catastrophic risk. The Bank of England has a department working away at the regulation of financial institutions to make sure that they are orderly, safe and so on.
I have forgotten what the words are, but the concepts of stability, security and probity must be there in the primary objective and must be well-defined and clearly prime—the top objective. After that, competitiveness, growth and so on would be great.
Our Amendment 65 was a probing amendment and it has worked very well. The noble Baroness, Lady Noakes, assured me—perhaps the Minister will use similar words—that there is no question about the primacy of the objectives, that it is set in other rules and that if I looked at all the rules together, I would not be worried about it. I think that is basically what she said, and I hope it is right, because it is absolutely right that we bear in mind protection from catastrophic risk.
I note the assurances that the Minister gave in her letter following Second Reading, but I am still not clear about the specific mechanism whereby the primary objectives are expressly meant to take precedence in FSMA. To me, it appears that they are indeed split up, but there is nothing to define what it means to be primary. I may be wrong in that concern, and I am here to be persuaded that I am wrong. The more effort that is put into persuading me, the more will go on the record and form the environment in which financial services are delivered. I feel concerned that there is nothing in legislation, in the regulators’ rulebook or elsewhere to guarantee the primacy of the FCA’s and the PRA’s most important objectives. However, as I said, that is an open question, and this debate has been good.
Regarding the international dimension, I see the concerns being expressed about giving it too much primacy—although I do not want to use that word, because it has the wrong effect. My memory is useless but, about two years ago, we had what I will roughly call the Basel III Covid legislation. Many of us were there to debate it. If I remember rightly, it took out the EU law and made space for the regulators to create the situation we are talking about now. My recollection is that aligning with Basel III and the FSB—or whatever it is called—became an objective within that. I see the Minister is nodding, so my memory has some fragments of it.
Once again, it is clearly a good idea to be that bit looser if we are to be innovative. The probing worked brilliantly, as I far as I am concerned. The noble Viscount, Lord Trenchard, quite openly said that competitiveness and growth should be equal to the regulators’ concern about stability and safety. Arguably, that is a properly viewed position, but it is not my position. Failure must be avoided—not quite at all costs but, wherever there is a debate between bigger risk and modest profit, the bigger risk should be avoided.
Baroness Penn (Con)
My Lords, I will speak first to Clause 24 before turning to the other amendments in this group. The Government consider that, alongside their core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. Therefore, Clause 24 introduces new secondary objectives for the FCA and the PRA to provide for a greater focus on growth and international competitiveness. This will ensure that the regulators can act to facilitate long-term growth and competitiveness for the first time.
For the FCA, this objective will be secondary to its strategic objective to ensure that markets function well and to its three operational objectives: to ensure consumers receive appropriate protection; to protect and enhance the integrity of the financial system; and to promote effective competition. For the PRA, this objective will be secondary to its general objective to ensure that UK firms remain safe and sound and its insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are, or may become, policyholders.
This is a balanced approach. By making growth and competitiveness a secondary objective, the Government are ensuring a greater focus by the regulators on growth and competitiveness. However, by making these objectives secondary, the Government are giving the regulators an unambiguous hierarchy of objectives, with safety and soundness and market integrity prioritised.
As set out in Clause 24(2) and (4)(b) and in paragraphs 215 and 216 of the Explanatory Notes, Clause 24 does not permit or enable the regulators to take action that is incompatible with their existing primary objectives. It is therefore clear that the FCA’s strategic and operational objectives and the PRA’s general and insurance-specific objectives are prioritised ahead of the secondary objectives in the regulatory framework. I hope that that provides further reassurance to the noble Lord, Lord Tunnicliffe, on his Amendment 65 that, in instances where the regulators’ primary and secondary objectives are incompatible, their primary objectives will take precedence over the secondary objectives.
I turn to Amendment 49, tabled by the noble Baroness, Lady Bowles, which seeks to ensure that, when facilitating the new growth and competitiveness objective, the FCA does not consider the financial services sector specifically. The Government are committed to ensuring that the financial services sector is delivering for businesses and consumers across the UK. It is therefore right that the objectives of the financial services regulators reflect the Government’s view that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The Government are confident that the current drafting recognises that the levers with which the regulators can act are specific to the markets that they regulate—the financial services sector. We believe that this is a helpful clarification, and expect the new objectives to benefit the growth and competitiveness of the wider economy as well as of the financial services sector specifically.
I now turn to Amendments 51 and 60, tabled by the noble Baroness, Lady Bowles, concerning the efficiency of the regulators’ operations. I believe that we have discussed this in Committee before, so perhaps we will move on if the noble Baroness permits me.
That brings me to Amendment 48, also tabled by the noble Baroness Lady Bowles, which seeks to amend Clause 24 to include consideration of sustainability. The new secondary objective is clear that the regulators should seek to facilitate sustainable growth by specifically mentioning growth of the economy in the medium to long term. The Government do not want the PRA or the FCA to act in a way that benefits short-term competitiveness at the cost of long-term growth. However, the Government are aware that, increasingly, and particularly over recent years, “sustainable” has also been taken to mean green or environmental considerations by some stakeholders.
As discussed in previous groups, Clause 25 introduces a new regulatory principle to require the FCA and PRA, when discharging their general functions, to have regard to the need to contribute towards achieving compliance with the Government’s net-zero emissions target. Therefore, the current drafting of the objective is clear that economic growth should be pursued sustainably, and the Government are already strengthening the requirements for the regulators to consider environmental sustainability targets in undertaking their duties.
On Amendment 50, tabled by my noble friend Lord Altrincham, the Government agree that high-quality infrastructure is crucial for economic growth, boosting productivity and competitiveness. More than this, it is at the centre of our communities: infrastructure helps connect people to each other, people to businesses, and businesses to markets, forming a foundation for economic activity and community prosperity.
In the Chancellor’s recommendation letters to the FCA and PRA, of December 2022, he set out that the supply of long-term investment to support UK economic growth, including the supply of finance for infrastructure projects, was a key aspect of the Government’s economic policy to which the regulators should have regard. Therefore, the Government already expect that, when advancing their new growth and competitiveness objectives, the FCA and PRA should include investment in infrastructure among their considerations. There are a number of other aspects in this Bill, such as reform to Solvency II, which will remove barriers to private investment in infrastructure.
I turn to Amendments 47, 52, 58 and 61. Robust regulatory standards are the cornerstone of the attractiveness of the UK’s markets. Including a reference to international standards in the growth and competitiveness objective demonstrates the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards and maintaining its reputation as a global financial centre.
The noble Baroness, Lady Kramer, expressed the importance of those standards well. Many of the issues that regulators need to address require international co-ordination and co-operation. To address the Committee’s concerns, the Government also recognise that it will not always be appropriate to fully consider international standards—for example, if it is best for UK markets to go beyond the international standard or where nuances of the UK market mean that the international standard is not appropriate. Those international standards operate on a comply-or-explain basis, recognising that individual jurisdictions will sometimes need to tailor standards to their own markets.
No standard trumps the objectives, and the clause does not constrain pursuit of the objective in relation to standards that we have not signed up to or that the regulators do not think are relevant in pursuing their objectives. It is there to acknowledge the importance and role of international standards, but we appreciate this nuance, where we may need to look at those standards and either go beyond them or adapt them to the UK market. I appreciate that this is difficult to navigate, but I hope we have done so successfully.
I also reassure the noble Baroness, Lady Kramer, that the Government do not consider MRAs to be international standards. To expand on this further, we consider international standards to be those set by specific standard-setting bodies listed in the Financial Stability Board’s compendium of standards. These standards are internationally accepted as important for sound, stable and well-functioning financial systems, and include those from organisations such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. To reassure my noble friend Lord Trenchard, we are using our seat on those organisations to influence those standard-setting bodies effectively.
Alternatively, MRAs are international agreements subject to international law and based on the principle of deference, where the UK and another country agree to mutually defer to each other’s regulatory, supervisory and enforcement regimes. MRAs are therefore simply a vehicle to recognise where another country meets equivalent regulatory standards to those already established in the UK. They provide a mechanism to reduce barriers to cross-border trade and facilitate greater market access between the two jurisdictions.
Baroness Kramer (LD)
Would an MRA covering these issues be enabled only if an equivalence decision had already been provided by the Treasury? In other words, are these only for countries whose financial services industries are already covered by equivalence decisions or could they be in agreements where that standard has not been met in the eyes of the Treasury?
Baroness Penn (Con)
I suggest that I triple-check that for the noble Baroness and write to her. The provision to enable the implementation of MRAs included in the Bill does not enable the Government to change the clear hierarchy of the regulators’ objectives, only to specify the areas in which regulators should make rules to give effect to an MRA. If, after I have written to the noble Baroness, she wants to discuss the Government’s interpretation of international standards, or if my noble friend wants to discuss her points further, I will happily meet them if that would be helpful.
I hope that the noble Baroness, Lady Bowles, can withdraw her amendment and that other noble Lords will not move theirs when they are reached. The Government, of course, support Clause 24 standing part of the Bill.
Baroness Noakes (Con)
My Lords, I think my noble friend is confusing me with the noble Baroness, Lady Bowles.
Baroness Penn (Con)
When the noble Baronesses sign up to each other’s amendments, it can be confusing.
Baroness Noakes (Con)
I thank all noble Lords who have taken part in this debate, which has turned out to be a rather more interesting one than I thought we might have on this subject. It has raised a lot of very interesting points. The noble Baroness, Lady Kramer, challenged us on why we do not keep referring back to the financial crisis. There is a very simple reason: we are in a different world now. As we know, financial regulation was overhauled both in the UK and internationally. The banks have far more capital but, more importantly, significant changes have been made to ensure that they can fail safely. We are not talking about carrying the inherent risks which came to fulfilment in the early part of this century. Constantly harking back without recognising the huge changes that have happened since then is just not helpful.
I thank my noble friend the Minister for explaining which standards are intended to be covered by this. That is a helpful statement to have on the record. However, I confess that, while I completely accept the notion that we will want generally to comply with international standards—we lead them quite a lot of the time—as far as I can tell, the regulators spend at least half their lives on airplanes to exotic parts of the world to have meetings about international standards. I am not sure that that is a very good use of their time.
It could be that we do not wish to follow particular standards, even though being in a leadership position would imply that we would generally do so. It continues to trouble me that the wording says
“subject to aligning with relevant international standards”,
as if we align with them automatically, not merely as our default position. I am not entirely convinced that my noble friend has explained to my satisfaction that this wording gives sufficient flexibility to allow international standards to be ignored when relevant to the UK. I completely accept that whether or not international standards are followed will be primarily determined by our regulators, in the light of what is necessary. I may well want to revisit this on Report but, for this evening—which has gone on for rather a long time—I beg leave to withdraw.
Baroness Bowles of Berkhamsted (LD)
Before the noble Baroness sits down, I mentioned that I wrestled with this in the EU. There it says “having regard to”, which I would have thought was the appropriate wording: we have regard to it and usually do it, but do not have it in binding language.
Financial Services and Markets Bill
Monday 6th February 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-IV(b) Amendments for Grand Committee (Supplementary to the Fourth Marshalled List) - (6 Feb 2023)
Lord Moylan
“(3A) In section 2B (PRA’s general objective), insert—“(3A) In advancing its general objective, the PRA must act so as to minimise barriers to the wider ownership of regulated investments by the general public consistently with its general objective in subsection (2).””
Lord Moylan (Con)
My Lords, I will also speak to Amendment 241, also in my name. I hope this will be the least controversial mini-debate on the Bill, because I do not think anybody in the Committee is other than opposed to financial exclusion. We favour financial inclusion, especially in a modern digital age. What is normally meant by financial inclusion is the opportunity for people of limited means or living in marginalised circumstances to participate in the financial and banking system—something that is all the more necessary now that people are so dependent on access to it, not least for benefits but also for other, ordinary means of getting about in life and so forth. Who can be against that? A number of amendments in this group tend towards strengthening the obligations on the regulators to promote financial inclusion, and I am happy to lend my general support to them.
Amendments 55 and 241 in my name relate to a different sort of financial exclusion that has grown up over the last 25 or 30 years: the general tendency to exclude the retail investor from the opportunities to invest in regulated products. For example, we have gone from a situation 30 years ago where it was possible to buy gilts—UK government bonds—at the Post Office, or to bid for new issues of gilts at an average price through cutting out a coupon in the newspaper, to a situation where it is very difficult for ordinary people to buy government bonds.
In the case of highly rated corporate bonds, an EU regulation incorporated from its prospectus directive has set the minimum denomination of new issues of bonds at €100,000, which we have applied of course. The result is that very few sterling bonds are in denominations small enough for ordinary investors to buy, and even they are long-dated issues that are running off, so soon there will be no more unless we take some action.
The days of Sid are long gone. Nowadays, when companies do new share issues—what have come to be known as IPOs, initial public offerings, or even subsequent offerings—corporate treasurers are simply uninterested in engaging with retail investors, partly because the burden of additional regulation involved deters them from doing so. Shares are generally placed in private placements with institutional investors, because it is easier and quicker—no room for the retail investor.
There have been two reasons for this. The first is overcaution on the part of regulators. They feel responsible for regulated investments, so they do not want anyone to lose any money unless they are a really big player. The easiest way of preventing smaller players such as retail investors from losing money and complaining is to prevent them from investing in the first place. The second is the reluctance of corporate treasurers to engage with the retail market, because they have no incentive to do so, only additional burdens.
This might have been motivated by a good sentiment for protecting investors, but the results have been completely perverse. Nothing prevents retail investors investing in unregulated investments, so we see people out there quite freely putting their money into spread-betting; contracts for difference, which are similar to spread-betting; and even some things misleadingly known as mini-bonds, on which they regularly lose their shirts. Indeed, one issue of mini-bonds, from London Capital & Finance, was unregulated; it was ambivalent whether or not the regulator had actually regulated it. Noble Lords will recall that, last year, we had to pass a special Act of Parliament to allow the Treasury to indemnify those investors, because they had potentially been misled on the legal position. The core point is not that we had to indemnify them; it is that they were perfectly able to invest and to lose their shirts. But we stopped them—regulators and the circumstances prevent them—from investing in much safer, regulated products.
Amendment 55, in my name—I am grateful for the support of my noble friends, Lord Trenchard and Lord Naseby, and the noble Baroness, Lady Kramer—puts a new objective on the Prudential Regulation Authority to ensure that, as part of its work, it aims to minimise the barriers to retail participation in regulated products in the financial market.
Amendment 241 deals specifically with the narrow point that denominations of corporate bonds are required at the moment to be a minimum of €100,000 and replaces that with what we were used to many years ago, by having £1,000. That would make them accessible to retail investors.
I have had conversations with brokers—and I am grateful for them—who deal with retail investors in the City. I know that they are already in contact with the Treasury and that the Treasury is sympathetic to these arguments. There is nothing in what I say that will come as a surprise to the Minister, and I hope that, when she stands up, she will say many warm words in support of both my amendments, which I would appreciate. But I am concerned that there should be more than simply warm words and unbankable promises about what regulators might be asked to do in the future, so my inclination at the moment is that legislation would be a jolly good way forward. I beg to move.
Viscount Trenchard (Con)
My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.
I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.
Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.
As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.
I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.
My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.
The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.
I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.
I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.
Lord Tunnicliffe (Lab)
I rise to speak to this group, particularly my Amendments 75 and 117. The group contains the important amendment which would give the FCA a “have regard” duty for financial inclusion within its existing consumer protection objective. The FCA’s and the Government’s argument is that its consumer duty means that it does not need a financial inclusion “have regard”, but there is a fundamental difference between the two. A consumer duty deals with people who are able to access products. I want to know how the FCA—and, incidentally, the Government—will be required to consider those who are not yet consumers.
We are not arguing for a new primary or even secondary objective, and very much want to wait for the outcome of the FCA’s consumer duty work. A “have regard” duty is the proportionate approach to ensure that those who are currently excluded are supported to become consumers and begin to benefit from the new consumer duty that we have heard so much about. We are not being radical or party political in this; we have Lib Dem and Cross-Bench support for Amendment 75. Nor are we alone: the Phoenix Group, a FTSE 100 company, is also arguing for the FCA to have regard to financial inclusion.
I hope that the Minister will consider this amendment favourably and, if she does not, I want to know why not, and what the Government will do to tackle financial inclusion issues, including the poverty premium—the fact that people who can pay for things only monthly rather than in an annual lump sum pay more.
We also have in this group Amendment 117, which
“would require the FCA to report on financial inclusion”
yearly. Perhaps the Minister would value having evidence on how to fix the manifold problems in this area, enabling HMT and stakeholders to feed in too.
Lord Naseby (Con)
My Lords, I thank my noble friend Lord Moylan for tabling these amendments and digging fairly deep in this area. There is a lot happening in the City of London and in the whole financial world. There are opportunities for people who want to stay but, at this point in time, the windscreen is pretty misty as to what exactly is out there and whether or not it is regulated. What my noble friend has done is draw attention to this important area.
I talked to my two granddaughters, who take an interest in financial affairs, about what they think about their savings. What is interesting to me is that, for sixth-formers today, maths is absolutely key to their progress. Secondly, somebody is making them take an interest in their futures. That says a lot.
I support Amendment 55; I am very much behind it. I should mention—I think the Committee already knows this—that I have been deeply involved in the mutual movement, which wants to go into new waters to look at what is available and sensible within its clienteles. The same applies to the credit unions.
Noble Lords have spoken about financial inclusion. It is very important. However, I am not sure that there needs to be a report every 12 months. I can see that it should be so initially, but it seems like quite a burden on the authority to produce what I assume would be a long and detailed report.
As regards Amendments 228 and 241, I will wait to hear what my noble friend the Minister says but, in my experience, the joint-stock banks and anything with the Royal Bank of Scotland are in a pretty disastrous state at the moment. Branch after branch is being closed. People are not answering the phone. Emails are not being responded to. The banks do not even tell us when a branch will be closed; they forget then apologise afterwards. It is an absolute, unmitigated disaster; I hope that my noble friend on the Front Bench will try to get a grip on it.
I make no comment on Amendment 241 other than to say that I am really interested to hear the answer on it from my noble friend on the Front Bench.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in day 4 of the Committee’s deliberations on the Bill. I declare my financial services interests as set out in the register.
I agree with all the amendments in this group. My noble friend Lord Moylan’s amendments are clear, and I ask my noble friend the Minister to answer him in the affirmative when she comes to respond and to say that legislating in this area would be helpful on whatever agenda it was measured against. He also reminded us of Sid, who was the poster child for British Gas. It seems only appropriate, in that I find myself sitting next to a former prima ballerina, for me to say that I seem to remember BT using the music from “Swan Lake” for its initial public offerings—all to the good. It must be right that people have an opportunity to take part, with all the correct safeguards and rails around it, in these activities. I very much support Amendments 55 and 241.
Similarly, I support the amendments around the “have regard” duty for the FCA. My noble friend the Minister will be familiar with these arguments; we talked about them very much in our debates on the 2021 Bill, now an Act. We have had Oral Questions and Written Questions on the subject, so she will be well rehearsed in her answer on a “have regard” duty.
For this reason, I tabled Amendment 67A. It is time for the FCA to have a financial inclusion objective. That is in no sense to fetter the regulator’s independence or existing objectives. The financial inclusion objective could only be additive and assistive to its existing objectives on consumer protection, market integrity and competition, and to any potential future objectives as set out in the Bill.
Following the intervening two years since we last discussed financial inclusion in detail on the 2021 Bill, are there now more or fewer bank branches and ATMs? Is there more or less cash acceptance and financial inclusion? Whatever government agenda we consider—growth, levelling up, or increased connectivity and creativity for our citizens, communities, cities and country—a financial inclusion objective for the FCA makes sense. Will my noble friend agree that it is now time to enable the FCA to play a spearheading role in financial inclusion, and to accept Amendment 67A?
Baroness Tyler of Enfield (LD)
My Lords, as this is my first intervention in Committee, I refer to my interests in the register as a member of the Financial Inclusion Commission and as president of the Money Advice Trust.
I will speak to Amendments 75 and 117 in the name of the noble Lord, Lord Tunnicliffe, to which I attached my name, and Amendment 228 in the name of my noble friend Lady Kramer, to which my name is also attached. I also support Amendment 67A in the name of the noble Lord, Lord Holmes, who we have just heard from. Indeed, I would have been pleased to add my name to his amendment had I been able to do so.
In its 2017 report, the House of Lords Select Committee on Financial Exclusion, which I had the privilege to chair, recommended on a unanimous, cross-party basis that
“the Government should expand the remit of the FCA to include a statutory duty to promote financial inclusion as one of its key objectives.”
These key recommendations were reiterated in the 2021 follow-up Liaison Committee report, so this issue has been around for quite a long time. In my view, the Bill is an excellent opportunity finally to make some progress.
Amendment 75 would mean that the FCA must “have regard” to financial inclusion in the consumer protection objective. Amendment 117 would insert a statutory duty to report to Parliament annually on the state of financial inclusion, measures that the FCA has taken, and any recommendations to the Treasury that the FCA wants to give. I know some have argued that that would be onerous. I see it as adding a critical layer of parliamentary scrutiny and accountability to discussions on financial inclusion—something, frankly, that is sorely lacking at the moment. It has been a key theme of many of our deliberations on the Bill.
Whether through a primary duty, as in Amendment 67A from the noble Lord, Lord Holmes, or as a must “have regard” duty, as in the amendment from the noble Lord, Lord Tunnicliffe, such a duty would directly remedy the fact that the FCA’s consumer duty, which we will look at in a later group, deals primarily with existing customers—a point made by the noble Lord, Lord Tunnicliffe. The consumer duty does not address the needs of the customers whom the market views as more expensive and less profitable to serve and who are therefore excluded from the market.
This proposed new duty would also future-proof policy decisions made after the Bill passes. This would ensure that financial inclusion issues, such as free access to cash, which featured so heavily in our Second Reading debate, are dealt with as they emerge rather than dragging on for years, resulting in a race against time before the cash delivery infrastructure disappears completely.
Our previous debates on people’s need to have free access to their own cash are an excellent example of how the regulator is currently unable to act early on such financial inclusion issues, because they are viewed as outside its remit. The heart of my argument is that, by giving the FCA a cross-cutting “must have regard to” duty, with a requirement to publish findings, it will have the ability, and perhaps more importantly the incentive, to ensure that the needs of those currently denied access due to affordability issues are considered.
Why is this so important? Briefly, in a competitive market firms will naturally design a market around the people who are the most profitable. Certain consumers—we need to be honest about this—are seen as not desirable. These consumers tend to be those who are the most vulnerable and equipped with the least resources. That has consequences for those on the lowest incomes: they struggle to afford or have to pay extra for particular services or products and, if they cannot, they are often unable to access these products at all and are therefore excluded altogether.
Essentially, these amendments seek to remedy that harm. We have already heard a couple of examples of this: some people are paying more for insurance because of where they live, and some are excluded from credit or are paying more for credit due to their credit rating or, frankly, because they cannot benefit from direct debits or they need to use cash. We all know what has happened with the terrible scandal of forcible entry to install prepayment meters.
I will finish by talking briefly about the black hole between the FCA and the Treasury, and why what are seen as social policy issues too often fall through the cracks. That point was repeatedly made by witnesses giving evidence to the Select Committee. In essence, the problem is that industry is just not providing products to meet the needs of all consumers, and some customers it will never be profitable for the industry to serve. If consumer representatives take the issue to the Treasury and the FCA, the Treasury says that it requires more data to act. It sends consumer representatives to the FCA, which says that it is not its responsibility to investigate issues that touch on social policy, so it sends consumer representatives back to the Treasury. That is a totally Catch-22 situation.
It is not just people like me banging on about this. I was very pleased to speak last week to a senior representative of Phoenix, a FTSE-100 company focusing on savings and pensions, which is also calling on government to add a new regulatory principle so that the regulations must have regard to the need to tackle financial inclusion. I thought it was very telling that the company saw this as critical to the growth agenda.
I want to explain briefly why I have added my name to Amendment 228 in the name of my noble friend Lady Kramer. It very ingeniously adds a clear financial inclusion element to the authorisation or renewing of a bank’s licence, while requiring the FCA to have regard to a bank’s services to low-income communities. Major banks, frankly, have had little interest in people on low incomes and were, in my view, dragged pretty reluctantly into having basic banking accounts. That has got a bit better but not an awful lot. If we use bank licences, that gives banks another way to provide such services by supporting credit unions and community banks—institutions that are often better placed to provide banking that is properly tailored to low-income and excluded people.
There is a lot of scope for expansion here. The UK has a far smaller community bank and credit union sector than many other countries. I will not go through all the figures, but certainly the penetration rates in the USA, Canada and Australia are far bigger. Having this sort of arrangement in place is also very much linked to people's desires to have continuing access to face-to-face services, something that we have heard so much about, particularly from the excluded groups, older people and others. Although the banking industry has made some limited progress in addressing this issue, particularly through the launch of shared banking hubs, it has, frankly, been pretty glacial so far. As this amendment so cleverly says, however, there are other things that banks can do to ensure the provision of services, including face-to-face services in low-income communities, and that is why I support it.
Baroness Bull (CB)
My Lords, I will speak to Amendment 75, to which I have added my name, and in support of Amendment 117, which complements Amendment 75 by looking to provide greater clarity and transparency on how financial inclusion issues can be effectively tackled in future. The noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler, have said all there is to be said, so I will be very brief. I also support Amendment 67A in the name of the noble Lord, Lord Holmes of Richmond, which makes many of the same points.
Lord Davies of Brixton (Lab)
My Lords, I will speak to Amendment 55. I broadly support the other amendments on financial inclusion and will perhaps say a bit more about that aspect when discussing the amendments in later groups. I thank the noble Lord, Lord Moylan, for explaining many of the points on which I had questions about his amendment, although I am still unclear what is covered by the term “regulated investments”. I do not think it is defined in the legislation, so perhaps it could be clarified.
I want to add a note of caution. I am not against the idea—obviously, it is motherhood and apple pie, and we are all in favour—but our old friend shareholder democracy is coming up again, and we should recognise that it has a political subtext. The truth is that, unfortunately, that ship has sailed, the bus has left the stop and it has gone the other way. Quite rightly, reference was made to our old friend Sid: the “Tell Sid” campaign was a masterpiece of promoting a policy that has had a lasting legacy, but that legacy has not been greater share ownership—greater ownership of regulated investments. In fact, we have seen the reverse, as the noble Lord mentioned in his introductory remarks. The whole thing has gone into reverse such that now, according to the ONS, only 12% by value of UK shares, for example, are owned by individuals, with the majority of shares owned by overseas entities. It is true that other shares are owned through other bodies, such as pension funds and unit trusts, but, in total, that is less than 10%, which I do not believe provides the individual holders with any sense of ownership.
There are many reasons for the shift away from individual ownership, and I think the attitude of the regulator is only a very minor part of it. In a sense, the objectives set out in the amendment have been overwhelmed by bigger forces. There are many reasons why people do not have individual ownership; many people are too poor and simply do not have the money. Even those who have some money in savings—this is a bit of a caricature—have it for rainy days. Regulated investments are not necessarily, depending on the definition, the best place to put your rainy day money.
My concern is the extent to which this amendment suggests it is advisable for people to use their money in this way. It would be very unfortunate and of great concern—perhaps the noble Lord can give me an assurance on this—if the regulatory bodies by implication were providing investment advice. I certainly do not think investment advice belongs in an Act of Parliament.
Baroness Twycross (Lab)
My Lords, I declare an interest as London’s Deputy Mayor for Fire and Resilience, as risks associated with access to cash were noted as a risk to financial inclusion in the London City Resilience Strategy published in 2020.
I am grateful to my noble friend Lord Tunnicliffe and the noble Baroness, Lady Tyler, for allowing me to add my name to their excellent Amendment 117 on financial inclusion. I will speak particularly on digital inclusion. The other signatories have already outlined in much better words than I could why this amendment is required. This amendment would ensure that the heart of this legislation takes account of the needs of the most vulnerable and that we have the opportunity to mitigate the risk that a significant minority of the population may be unwittingly left behind or excluded from crucial financial services. This amendment would be an important addition to the legislation. I agree with my noble friend Lord Tunnicliffe that this is not party political. It is a really sensible and pragmatic measure which should afford significant protection.
On financial inclusion, I ask noble Lords to note specific issues of digital inclusion. This relates to financial inclusion as, without access to a smartphone or computer, it is almost impossible to carry out online banking or transfer money to a family member or a business.
I apologise for using a string of statistics, but beneath them there is a significant minority of the population whose stories and suffering because of financial exclusion often get missed. These people may be unable to access basic banking services online, relying heavily on cash or even cheques, and may struggle to pay for very basic things we all take for granted—for instance, automated parking.
Latest figures from the ONS estimated that, in January to February 2020, 96% of households in Great Britain had internet access. This increased from 93% the year before and 57% in 2006, when comparable records began. Although this number is increasing, and statistically it looks as if there is not a huge number of people without internet access, in the same period 76% of adults were using online banking. This leaves a significant minority who still do not. Estimates suggest that over 7 million adults in the UK—around 14%—could be classed as potentially financially excluded, with around 5.8 million having no record of an open or closed bank account. There are well over 600,000 people who could be classed as credit invisible, with the issues that causes for affordable credit.
Digital exclusion’s effects fall disproportionately, and research by the Centre for Social Justice has found that digital exclusion is significantly higher among those on the lowest incomes. It has a disproportionate impact on those who can least afford it. A fifth of adults with a household income below £15,000 are digitally excluded, compared to just 1% of those with an income of £50,000 or more. In turn, this adds to the poverty premium they already pay, as they cannot access the best prices or deals. This poverty premium, which has already been mentioned in this debate, includes borrowing and other financial services, so the proposed duty to be placed on the FCA would ensure that it, as well as the Government and the banking sector, can act to mitigate the risks posed by increasing digitalisation of the sector.
I note that technology often moves faster than we can imagine, Covid changed behaviours that now cannot be unchanged, and any duties imposed on the FCA in relation to financial exclusion will need to assume that the discussion about cash versus card that we are currently having will move to card versus phone, as well as include other technological approaches. Ensuring that the FCA has oversight over that would provide additional protection for the most vulnerable in our society, and I hope the Minister sees the merit of safeguarding which this amendment would provide and agree to include it in the Bill.
Baroness Kramer (LD)
I shall combine speaking as a winding speaker with addressing the amendment that sits in my name. I added my name to the two amendments from the noble Lord, Lord Moylan, Amendments 55 and 241. Like him, I am very conscious of many of the recent scandals we have seen—he mentioned London Capital & Finance, but there is also Blackmore Bond and mini-bonds, to mention just two of the most recent. They were fuelled by ordinary investors looking for improved returns. I would hope that with easier access to regulated markets, which typically come with information and analysis by independent entities such as the rating agencies, an investor would be far less likely to fall into unscrupulous hands. That is a consequence that neither the regulator nor the Government have been fully aware of. They are always surprised when an unscrupulous product appears, and they should not, given the general track record.
I also join the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler, in their amendments to insert at least “have regard” for financial inclusion and for proper reporting on financial inclusion. I also support Amendment 67A, in the name of the noble Lord, Lord Holmes, to turn that into an objective.
My biggest gripe with the FCA on the financial inclusion agenda is that it is passive. If a new product or organisation were to come forward serving part or all of that community, it would of course appropriately regulate it. The problem is that it does not use its incredibly powerful and influential role as a regulator to spearhead the actual change—to pick up the words of the noble Lord, Lord Holmes. It does not, for example, ask the competition to come up with a product or even look at mechanisms such as bank in a box, which is very popular across the globe. That makes it very easy for new entities to come to market, because the whole core regulatory piece comes off the shelf. That changes the dynamic dramatically. It does not take the initiative and, until it does, I can see that no one else will.
All of that in a sense leads me to my Amendment 228. Others have talked about the intractable problem of financial inclusion, and I suspect that many in this Room, like me, have been to round table after round table, meeting after meeting, conference after conference, with banks, credit unions, mutuals, fintechs and civil society groups to hear proposals for cracking the financial inclusion problem. Year after year, it is the same conversation, with relatively little headway. Others may correct me, but the number I have is that we still have 1.2 million people without a bank or credit union account, and in modern society that means that you simply cannot function.
I have huge respect for credit unions; I am delighted that there are amendments to support them and mutuals in the Bill. However, only 1.4 million people in the UK actually use them. That is a fraction of those who could benefit. Other forms of community development financial institutions are scattered, tend to be small and have limited scope. Local and community banks, as well as the old savings and loans, have largely been absorbed by the high street banks. In turn, as others have said, they have rapidly closed branches and anyway rely on a centralised system of decision-making that does little for local businesses or circumstances; we saw that graphically after the 2007 crash. There is a regional mutual bank movement—the noble Lord, Lord Holmes, addressed this in our debate on a previous set of amendments—that is trying to build, but the lack of capital is a major hurdle. Again, my noble friend Lady Tyler referred to the banking hub scheme driven by the access to cash task force, but it is growing exceedingly slowly.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I will speak first to Amendments 55 and 241, tabled by my noble friend Lord Moylan, before turning to Amendments 67A, 75, 117 and 228, tabled by my noble friend Lord Holmes, the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer.
On Amendments 55 and 241, I am happy to report that action is already being taken to reduce barriers for retail investors, while ensuring that appropriate consumer protection measures are in place. The Government are reforming the UK prospectus regime through the powers that are being legislated for as part of this Bill. These reforms will remove barriers to retail participation in equity and bond markets by removing the duplication and disincentives that exist in the current regime. Additionally, the reforms will require the FCA, as the responsible regulator, to have regard to the desirability of offers of securities being made to a wide range of investors when making rules in this area.
Separately, the Government appointed Freshfields’ partner Mark Austin to lead the secondary capital raising review and have accepted all his recommendations addressed to the Government. One of the objectives of the review was to promote retail shareholders’ inclusion in further issuances by listed companies. I assure my noble friend that this is not jam tomorrow; the reforms to the prospectus regime are set out in a draft statutory instrument published alongside the Edinburgh reforms. Taking that SI forward is part of the first-priority tranche of work that will happen once we have passed this legislation. We have a very clear plan.
The remaining amendments in this group relate to promoting financial inclusion through a different lens from that put forward by my noble friend. The Government seek to ensure that people, regardless of their background or income, have access to useful and affordable financial products and services. We work closely with regulators and stakeholders from the public, private and third sectors to improve people’s access to useful and affordable financial services, and we are taking a significant step to protect the most vulnerable by legislating to protect access to cash through this Bill—something noted by my noble friend Lord Trenchard and others.
Amendments 75 and 67A, tabled by the noble Lord, Lord Tunnicliffe, and my noble friend Lord Holmes, respectively, seek to add financial inclusion to the FCA’s objectives. While I commend these amendments and agree with their intention, the FCA’s objectives are core to its functions and should not be changed lightly or without detailed consultation, given the complexity of, and the risk of unintended consequences for, the way financial services are regulated in the UK.
Where there are gaps in the market that mean that some consumers struggle to access appropriate financial products, it is right that the Government, not the regulator, take the lead on action to address them. The Government have done this by, for example, requiring major banks to provide basic bank accounts for those who might otherwise be unbanked.
The FCA plays an important role in supporting this work. In his evidence to the Public Bill Committee, Sheldon Mills, the executive director of consumers and competition at the FCA, highlighted the proactive approach that the FCA takes on this issue, in line with its existing objectives, working in partnership with Fair4All Finance and others, and using the FCA’s innovation labs to explore how innovation can promote financial inclusion.
Amendment 67A also highlights the important issue of the accessibility of financial services products. I know that my noble friend Lord Holmes is a champion of consumers in this area. I agree that it is important that this continues to be an area of focus for industry. I am pleased that UK Finance has been working closely with the Royal National Institute for the Blind to develop accessibility guidelines for touchscreen chip and pin devices, as well as an approved list of accessible card terminals. The Government’s Disability and Access Ambassador for the banking sector, Kathryn Townsend, is encouraging firms to drive a more consistent consumer experience, as well as continuing engagement with deaf advocacy groups to identify opportunities for improved accessibility. The Economic Secretary will shortly convene the next Financial Inclusion Policy Forum with senior representatives from across financial services and the third sector, which will include a discussion specifically on accessibility in financial services. I hope that this provides reassurance that the Government are taking this issue seriously.
Amendment 67A raises financial literacy. My noble friend is right to recognise the importance of financial literacy, and financial education forms part of a broad and balanced school curriculum. However, it is the Government’s view that delivery of financial literacy in primary and secondary settings is a matter for government, rather than for the financial services regulator.
The amendment refers to digital inclusion, an issue also raised by the noble Baroness, Lady Twycross. Again, we absolutely recognise that digital skills and access to technology are increasingly required to take full advantage of services made available by financial services providers. Some examples of action in this space are that the DCMS has negotiated a range of high-quality, low-cost broadband and mobile social tariffs for those in receipt of universal credit and other means-tested benefits. Libraries are also a key focus, able to serve as an alternative point of internet access with in-person support. The digital entitlement allows for adults with no or low digital skills to study for new essential digital skills qualifications for free. There are also banks and financial services providers taking their own action to promote digital skills with their customers.
Amendments 67A and 117 would require the FCA to report on financial inclusion, but that would largely duplicate existing publications, including the FCA’s annual reports, its comprehensive Financial Lives Survey, and the Government’s financial inclusion report, which details joint work with the FCA to promote financial inclusion. On digital inclusion specifically, Ofcom’s latest data on digital equality was published on 30 January.
Finally, I turn to Amendment 228, tabled by the noble Baroness, Lady Kramer. While I sympathise with the intention of the amendment—and I hope that I have set out some of the ways in which the Government are seeking to tackle some of the issues that the noble Baroness raised today—it has the potential for unintended consequences which could harm consumers. As part of the authorisation process, the regulators already take into account a range of different objectives, such as promoting effective competition in the interests of consumers, including those in low-income communities. Adding additional complexity to the process of acquiring a banking licence could create barriers to entry and therefore harm the consumers we are trying to help by reducing the provision of services in the market and limiting competition.
As I have noted already, there are other policies in place which will do this without creating potentially burdensome expectations, particularly on new entrants to the market—for example, through the provision of basic bank accounts. We have also taken action to increase the provision of affordable credit for vulnerable consumers, including those on low incomes, such as providing £3.8 million of funding to pilot a no-interest loan scheme.
I hope that I have set out for noble Lords the wide-ranging government work on the issue of financial inclusion—
Lord Tunnicliffe (Lab)
My Lords, it is obvious that there is a problem, because virtually everybody has spoken to a problem and said that it must be addressed. It seems to me that the speech the Minister just made was that it is all right, because all these things that the Government are going to do will make it all right. The beauty of the amendments that have been put forward is that somebody is expected to do something. If government has such an important role, who in government will be personally responsible for delivering the improvement that we all seek?
Baroness Penn (Con)
In government, the Financial Inclusion Policy Forum is jointly chaired by my honourable friend the Economic Secretary to the Treasury and a Minister from the DWP; I will confirm who to noble Lords, because I would not want to get it wrong. That is the forum by which the Government drive the work and bring other actors into this space to co-ordinate on issues.
We recognise financial exclusion and the need to promote financial inclusion as an important area of policy work. We recognise some of the gaps raised today. I would point noble Lords towards progress that is being made in some areas.
We have also heard today about a changing landscape and how we will need to continue our work to keep up with it. As use of cash changes, we are legislating to protect access to cash, but we also need to consider how we can promote digital inclusion, so that, as services move online, people can access them in the same way as they have been able to previously.
The point of difference is not whether there is a problem but whether it is for the Government to lead on co-ordinating the response to that programme, with an important role for the regulators, or whether it is the regulators that should have more emphasis on driving this work.
Baroness Kramer (LD)
Can I put in a real request to the Minister? I understand that she is keeping to her brief, but could she get back to the department and tell it that it is time to do something about this, not just to have endless meetings, gatherings, reports, reviews or pieces of minor tinkering at the corners about it? This needs a driven central initiative. If she can answer me at all, can she take that on and go back to the department to tell it that it is time to do, not just to talk?
Baroness Penn (Con)
I will absolutely take that back to the department, but I disagree with the noble Baroness that no action is happening on this issue. We talked about access to cash; that is being legislated for in the Bill. On access to low-cost finance, I have talked about the money that the Government have put in to pilot a programme of interest-free finance for those who are most vulnerable. We have talked about access to bank branches. I acknowledge that the initiatives on banking hubs have not been as fast as people would want, but they put forward a solution to an issue that we face. We agree that it is a common issue. I have given examples of what we are doing on digital inclusion. In a later group, we will discuss the importance of mental health. We have put in place the Breathing Space scheme for those who are in problem debt and have mental health problems.
Yes, there is a lot more action to take. I recognise the problem and I will take the noble Baroness’s words back to the department, but we are legislating on some measures in the Bill. I have set out very specific measures that we are taking in other areas. It does not mean that the job is done, but it does mean that action is happening.
Lord Moylan (Con)
My Lords, I am grateful to all noble Lords who have spoken in the debate and for the support that has been given generally for the amendments tabled. It is true that one or two noble Lords have quibbled about the detail of particular proposals in the amendments, but I think there was universal support for the general principles underlying them.
It falls on me briefly to deal with the quibbles raised by the noble Lord, Lord Davies of Brixton, because they were pointed directly at amendments in my name. First, he is right to say that over a period of 30 or 40 years there will be a large number of sociological and economic changes that might explain the appetite for different types of investment among the population at large, but surely he will accept that these are completely dwarfed and made irrelevant if the fact is that you are not allowed to purchase the investments in the first place. The object of the amendment here is to allow this to happen. If you have to put €100,000 on the table to buy a corporate bond, people are excluded in very large measure, and questions of their appetite for different types of risk simply do not arise. If there is routinely no retail element to a new issue of shares, retail investors will not be able to buy those shares, so that is that.
The noble Lord, Lord Davies, also picked me up on what I meant by regulated investments. It is true that if the amendment were to come back on Report, it should perhaps be drafted more carefully to say, “investments traded in regulated markets”. I accept that it might have been infelicitously drafted but, to give a more substantive answer, perhaps one should take a more apophatic approach and define what non-regulated investments are. They are things such as betting, spread-betting, contracts for difference and mini-bonds.
The noble Lord is concerned that putting your money into highly rated shares, corporate bonds or gilts might be a little risky and inappropriate for somebody setting aside money for the future, but he has not tabled the amendment that I would hope to see in that case that would have prevented them investing in all these different products, which are there freely available and which people invest in. As the noble Baroness, Lady Kramer, pointed out, the mini-bond crisis was about perfectly respectable people believing that they were investing in something that looked like a bond, when it was not at all, for a return that appeared attractive. If we do nothing for them and allow that, why are we worried about them investing in real bonds?
Finally, there is the question of whether by agreeing such an objective for the regulators they would in effect be giving advice. I simply refute that: to remove a barrier to investment is not to give advice. I do not know where the noble Lord keeps his money for a rainy day. Perhaps it is all in a savings account somewhere, but I would encourage him to think a little more broadly and to look upon various safe and regular opportunities that would be available to him for his spare cash if he were to swing in behind this amendment. I am sure he would benefit in many ways from that.
I turn briefly to the remarks of my noble friend the Minister. I am grateful to her for the encouragement she has given and will look carefully at what she has said. I am still not wholly persuaded that proceeding on the basis of the Treasury’s current work, rather than by way of legislation, is entirely the best way. I will consider whether these amendments, or one of them, might come back on Report.
On the broader question of the financial inclusion of people who are marginalised by the financial system—I hope I am not presuming too much if I speak for the Committee at large—my noble friend might want to reflect a little further on whether a process of engagement with noble Lords on all sides of the Committee who have brought these issues up would be beneficial between now and the issue returning on Report. I know that it is not in her personal nature to sound negative and unwelcoming, but her speech had that tone of saying that everything was a little too complicated and might have an unintended consequence. Well, anything might have an unintended consequence; by definition, one would not know. I wonder whether she might consider some process of engagement on the issue, because I think the feeling around the Committee is quite strong. With that, I beg leave to withdraw my amendment.
“Prevention of fraud objective
In section 1B of FSMA 2000 (FCA’s general duties), in subsection (3) at the end insert—“(d) the prevention and detection of fraud perpetrated in or through financial services.””
Baroness Bowles of Berkhamsted (LD)
My Lords, in this group, we return to the issues of fraud and encouraging the financial regulators to be more active. Fraud now accounts for nearly half of all crime and there are still issues around ensuring that there are preventive steps.
I have three amendments in this group, which I offer in order to probe the best way to engage the regulators more actively in matters of fraud. I thank the noble Lord, Lord Vaux, for his support on two of my amendments; I also thank the noble Lord, Lord Naseby, for his support on one of them. I note the overlapping of some of my amendments with those in the name of the noble Lord, Lord Hunt.
My first amendment in this group, Amendment 67, would add an additional operational objective for the FCA in
“the prevention and detection of fraud perpetrated in or through financial services.”
As I have indicated on previous days of our debates, there are questions about where best to place requirements so as to ensure that they are effective. In this case, I put it high in the layering of the objectives, although the requirement of the FCA is in fact only to do things that advance one or more of its operational objectives. As has been said previously, this allows the regulators to pick and choose, and underlies what the public and many parliamentarians see as manifest failure.
With that in mind, I concluded that it perhaps needed to be a strategic objective because that cannot be dodged. After all, fraud is already a significant factor undermining payment systems—in particular, the faster payment system—and calling into question the general sustainability of instant payments.
With that strategic thought, I proposed Amendment 73, which would add to the definition of “relevant markets” in the FCA’s strategic objective. My addition—proposed new paragraph (d)—would include
“the financial markets and the markets for financial services, whether regulated or not, in matters of fraud.”
Given the role of banks, the PRA should also have a similar objective, although my thinking is that it would need to be wider than its applicability to rule-making. I hope that, collectively, we will be able to return to the issue of best placing when it comes to Report. The fact is that our financial services regulators are, or should be, well placed to discover fraud beyond the confines of specifically regulated financial services. There may be freedom in those services being unrestrained, but that does not mean cheating and fraud, as with the Libor rigging case, for example, and other matters that have been discussed earlier.
Lord Hunt of Kings Heath (Lab)
My Lords, I have Amendments 71 and 210 in this group, which deal with financial fraud. I very much support what the noble Baroness, Lady Bowles, said, and am sure that, between now and Report, there can be further discussions about the best way to embed in the Bill the tackling of financial fraud. As she said, we have two pieces of legislation going through in parallel, and we need to ensure that at the end of the day there is a concerted strategy to deal with financial fraud, which has been lamentably missing from our affairs over many years. The Bill certainly provides protection for victims of authorised push payment scans, but little else to address the growing and worrying problem of financial fraud.
We had a canter round some of these issues last Monday, when the Minister was very reassuring. She said that
“tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector”;
that
“strong punishments … already exist under the Fraud Act”;
that
“the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support”;
and that
“The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.”—[Official Report, 30/1/23; cols. GC 123-24.]
She mentioned the Joint Fraud Taskforce on a number of occasions and said that the Home Office will shortly publish a long-awaited new strategy—which I think was briefed out in some of yesterday’s Sunday newspapers.
That is all well and good. The problem is that one needs an act of faith to believe that the Government have finally recognised that they have to grip this in a much stronger way than has been evident over the last 12 years. The figures from the NAO are stark: in the year ending June 2022, fraud represented 41% of all crime against individuals, and there were an estimated 3.8 million incidents of actual or attempted fraud against individuals. Yet the number of fraud offences resulting in a charge or summons was paltry. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Less than 1% of police personnel were involved in conducting fraud investigations in the year ending March 2020. The public know that it is just hopeless going to the police; the default position is that they have no interest and want to give no help whatever, apart from encouraging you to go to Action Fraud—which your Lordships’ Select Committee on fighting fraud renamed “Report Fraud”, because it is a completely useless organisation.
I am particularly concerned about the financial abuse of older people, and noble Lords will see that my second amendment in this group is tailored towards that. It struck me that the previous debate on inclusivity is very much related to some points that I wish to raise this afternoon. The excellent organisation Hourglass has pointed out that the impact of financial abuse on older people can be devastating, especially as so many of them are on limited incomes such as the state pension. There are so many examples of frail older people losing large sums of money or property that they have lived in for years, or incurring large debts.
In September 2021, Hourglass and Hodge Bank collaborated on a survey to gain insights into the scale of financial and economic abuse and the impact of the digital divide. The report noted that 14.1% of respondents indicated that an older person they knew or cared for had been a victim of financial abuse in the past year. Research also pointed to a significant number of older people falling victim to economic abuse, in part due to the digital nature of banking and the digital divide.
Your Lordships’ Select Committee report, Fighting Fraud: Breaking the Chain, published only last November, was explicit about the scale of the problem generally. It said:
“A person aged 16 or over is more likely to become a victim of fraud than any other individual type of crime, including violence or burglary”,
and that
“Even though fraud is a massive problem,”
it is hardly given any priority at all. Indeed, my understanding is that fraud statistics are removed from public statements on crime rates. I wonder why that is. We know that law enforcement is hopelessly underresourced for the fight against fraud. Law enforcement agencies and digital investigation remain outside the capacity of mainstream policing, despite police forces operating in a highly digitalised society.
The Select Committee points out that
“The organisational structure for policing fraud is complex and confusing”—
it certainly is for members of the public seeking to report fraud—and that
“The criminal justice system has also failed to keep pace with the threat, resulting in a significant decrease in the prosecution of fraudsters over the last decade.”
The Select Committee warns that
“The telecoms sector has no … incentive to prevent fraud and has allowed blame to be placed elsewhere for too long.”
Similarly, the tech sector does not do anything like enough to
“slam the brakes on fraudsters using online advertising and social media platforms to reel in consumers”
and must
“do more to verify the identity of those using online dating platforms before they commit romance fraud.”
The Select Committee makes the point that all these industries, which are doing very well and enable fraud to take place, do not fear any significant financial, legal and reputational risks for failing to prevent fraud.
When fraudulent payments slip through the net, it should not be the sole responsibility of the financial services sector—in particular, the victim’s bank—to pick up the bill, although I believe that banks need to do much more than they do at present. All stakeholders in the fraud chain, including the payee’s bank, must know that they have a duty to prevent fraud and to address their failings and the victim’s losses once it has occurred. Despite the Minister’s confidence, the Government have shown very little enthusiasm. It has taken so long to even produce a strategy, that one really doubts the commitment to taking this forward.
My first amendment would add to the list of regulatory principles to be applied to the FCA and PRA
“the need to promote the detection, prevention and investigation of fraud in relation to the provision or use of financial services.”
In a sense, this can be seen in parallel to the amendment in the name of the noble Baroness, Lady Bowles. My Amendment 210 complements and adds to my noble friend’s amendment by emphasising the strategy he proposes, which I very much support, but there are some special arrangements in relation to older people.
I am sure that we will want to come back to this on Report. I am sure that noble Lords with an interest in this can come together with a unified amendment—I almost said composited amendment, but I hesitate to use those wonderful words in your Lordships’ Committee. We have to persuade the Government that, once and for all, we take fraud seriously. We need to kick a lot of the regulatory bodies, including the police, into taking this seriously.
Lord Tunnicliffe (Lab)
My Lords, I will speak to my Amendment 209. This Committee is unusual, in that the level of consensus seems enormous. A lot of the differences are around how to achieve where we want to go, but the coming together should worry the Government.
I will say a word or two about fraud. My noble friend has set out the fraud world. The two features, certainly of personal fraud, which are supposed to solve the problem are compensation, and investigation and prosecution. I am not against the idea of compensation being clearer and more open, but this has the potential for moral hazard. I will say no more than that. The problem with the compensation solution is that it takes the incentive away from proper investigation into criminality and prosecution. That is a bad thing.
There is so much fraud that there is an industry, and that industry breeds its own criminality—I fear that somewhere in the Bahamas they are setting up a university course on it. That spreads the atmosphere or culture more widely. We know that London has a horrible reputation for financial criminality in general—for example, money laundering. This is bad. We do not want big chunks of our society, particularly bright, competent people, involved in criminality. From every point of view, we must up the effectiveness of prosecution—treating the fraudsters as criminals and, where appropriate, locking them up.
Lord Davies of Brixton (Lab)
My Lords, like my noble friend Lord Hunt, I make a point in my amendment about the link between financial fraud—in practice this now broadly means “online scams”—and mental health. I made this point last Wednesday, in dodging between the Committee and the House, when I raised this issue in the context of the Online Safety Bill. The same issue arises under this Bill and should be dealt with.
There is no doubt that people who have problems with their mental health are, for a variety of reasons, more vulnerable to fraud than people generally. According to a recent survey, people with mental health problems are three times more likely to say that they have been the victim of an online scam than people generally. In reverse, scams are a threat to people with normal health that risk their mental health.
I will talk about this in a bit more detail during debate on the next group of amendments, but we must understand that the result of fraud, however perpetrated, is much misery, destroying people’s finances, in many cases their families and, in some cases, tragically, their lives, so the Bill should address the issue and face up to the need to provide adequate protection. Anyone can fall victim to a scam, but people with mental health problems are at particular risk and can suffer more as a result. We must do what we can, therefore, to improve scam protection and ensure that, when people fall victim to scams, they receive adequate support.
I must pay tribute to the great work being done on this area by the Money and Mental Health Policy Institute. It has drawn attention to the fact that although harm can arise in diverse areas—gambling, retail and scams—across them all, including financial services, there are recurring themes. There is the lack of friction in transactions, advertising of investment opportunities, and high-pressure techniques applied which can put people under pressure, particularly in online spaces.
The institute concludes that these concerns have, up to now, gone relatively unchecked and underexamined, with current regulation either lacking or poorly matched to the real environments in which people find themselves. Although the Online Safety Bill has an important role in this area, it needs to work with the regulations in this Bill to address the problems that cause so much misery.
Lord Flight (Con)
My Lords, might there be a case for the regulators to play a more active role in addressing fraud?
Lord Thomas of Cwmgiedd (CB)
My Lords, I want to make just four points on fraud, which damages the markets so greatly and damages individuals. The amendments reflect the four points. First, we need a strategy. I do not see how we can go forward any longer without one. I have two comments on strategy. First, the bodies to be consulted should include lawyers and accountants, not because there might be a bent lawyer or bent accountant in the fraud but because often it is their failure to see a flaw in the system that has caused the fraud. Therefore, they need to be part of those consulted. Secondly, five years is a long time for a new strategy. We need some form of accountability for the performance of the strategy in the meantime.
My second point is the object, the principle or the duty—however you put it—of the regulators looking into fraud. This seems critical, and there are two primary reasons for this. First, there is the prevention of fraud. I have too often been told after a fraud has come to knowledge and things are being done about it by those in the market, “Oh, the return was too good to be true. Him? We would not have touched him with a bargepole.” Regulators ought to be able to pick that up, and the duty on them ought to emphasise that responsibility.
Secondly, if fraud occurs—and it is bound to—the expertise of the regulators is needed to guide the way in which prosecutions take place. These days, because virtually everything is documented, you cannot move money. In the old days you could take a suitcase of cash somewhere, but you cannot do that any more. You need someone who can interpret what is usually the defence, “Yes, I did this but I wasn’t dishonest”. The skill and expertise of those in the market who can point to and make clear why it was so obviously dishonest are critical.
Thirdly, dealing with fraud is expensive. If you are accused of fraud, you have nothing to lose by spending all you have in defending yourself. If you fail, that was the end anyway, so you might as well have tried to save your money. If you are successful, you generally get most of it back. In a sense, there is an imbalance. Therefore, I warmly support the amendment saying that the Treasury should hand over the cash. There is no conflict of interest there, because the decision on the level of fine is made by the court. That is a good idea.
Fourthly and finally, the idea of criminalisation is essential. It is often nice to be able to pay tribute to the wisdom of His Majesty’s Treasury. One of the most effective tools in its armoury in relation to sanctions has been criminalisation, because that is what frightens people. Therefore, criminalising the failure to act would be a welcome step, and is something that I hope His Majesty’s Treasury, with all its wisdom, will see the force of.
Lord Naseby (Con)
My Lords, I support Amendments 67 and 75—obviously, as I added my name. I will speak only to Amendment 67. I have spent nearly 50 years in Parliament, legislating on issues that needed urgent attention. I cannot think of any issue more important in monetary affairs, now or in previous years, than the one before us in this group of amendments.
In particular, I am very grateful to the UK Finance Annual Fraud Report, which highlights in some detail what is happening. Indeed, one of the paragraphs at the end says that the Bill before us, which the Government proposed, will legislate to deal with it. Look at the figures and the sheer scale of it:
“Most notable is the rise in impersonation scams and in authorised push payment (APP) fraud overall. In 2021 communications regulator Ofcom found that eight out of ten people that were surveyed had been targeted with scam texts or phone calls, intended to convince them that they were from trusted organisations such as banks, the NHS or government departments.”
The report goes on to say:
“The majority of APP fraud starts with some type of social engineering. As well as scam texts, phone calls and emails, more and more of us are paying for goods and services remotely”,
which opens the door to the fraudsters.
I will say no more other than this. My friend the noble Baroness, Lady Bowles—I greatly respect the work she does in this area—has produced a very simple amendment, but it is very powerful and clear and I highly recommend it to His Majesty’s Government.
Lord Sikka (Lab)
My Lords, I find all the amendments and all the arguments made by various speakers very persuasive, and I hope the Government take note of that.
I have some concerns that I do not think have yet been aired. Do we have the regulatory architecture to deal with fraud? There are at least 41 financial regulators. Just think about the duplication and buck-passing. Is it not time for us to have a British version of the Securities and Exchange Commission, or something equivalent, to deal with that? It may help not only to save resources but to have a co-ordinated approach.
The people perpetrating banking fraud do not live in one particular district of the UK; they are spread all over. The police in Bristol cannot go and raid somebody in Reading or Glasgow; they need permission from and to co-ordinate with somebody there. We do not have a national police squad to look for or investigate fraud. They are utterly fragmented. That itself encourages buck-passing.
Lord Northbrook (Con)
My Lords, I declare an interest as a consultant to an FCA-regulated investment management firm. Like the noble Lord, Lord Hunt of Kings Heath, and others I find it disappointing that the Bill fails to address the growing problem of financial fraud.
There was an interesting article in the Times on Saturday. It said that
“according to the National Fraud Intelligence Bureau, in the last 13 months there has been a reported loss of £4.3 billion from fraud and cybercrime. That is an eyewatering amount of money going into the pockets of criminals … Criminals are getting away scot-free but what is even more worrying is that they know that it is unlikely that any law enforcement are looking for them. This is not because the police are not interested, but simple maths. According to the Social Market Foundation, in 2021 in England and Wales just 1,753 officers and staff were dedicated to economic crimes such as fraud. That equates to just 0.8 per cent of the total workforce and yet”—
as other noble Lords have said—
“fraud accounts for 40 per cent of all reported crime. In many cases … the victims were simply given a crime reference number by the police and told there was nothing more they could do. It remained up to them to try to get their money back from their bank.
If one is determined to find the culprits, an alphabet soup of crime agencies such as the NCA, NECC and NCSC, all with different remits and jurisdictions, awaits. Most people give up and the scammers get to keep their cash.
Unless we increase the number of officers and staff that investigate fraud to reflect the amount of fraud reported we will continue to lose billions to criminals.”
Clause 62 addresses the issue only partly. It enhances protections for victims of authorised push payment fraud, which, according to the shadow Treasury Minister in the other place, quoting UK Finance figures, reached an all-time high of £1.3 billion in 2021. In the other place, the Government promised a review without giving a timescale, but more immediate action is needed.
The Bill ignores the fact that digitally savvy criminals are increasingly exploiting a range of financial institutions, such as payment systems operators, electronic money institutions and crypto asset firms, to scam the public. As my noble friend Lord Naseby mentioned, UK Finance pointed out that, in 2021, 44% of fraud was authorised push payments, about 40% was payment card fraud and 15% was remote banking.
As several noble Lords have already stated, last November, our House of Lords Fraud Act 2006 and Digital Fraud Committee released a report stating that the Government should introduce a new corporate criminal offence to ensure that big tech platforms and telecom companies tackle financial crimes. Under the Online Safety Bill, which is currently going through its stages, online platforms will face a duty of care to protect their users from fraud, but that Bill does not cover telecoms and other related sectors. It is a very good step but more needs to be done, including requiring tech companies to publish data on the nature and volume of scams on their platforms.
Of the amendments in this group, I am very much in favour of the all-encompassing Amendment 209 from the noble Lord, Lord Tunnicliffe, particularly as it includes, under the proposed new subsections (3)(d) and (e),
“telecommunications stakeholders, and … technology-based communication platforms”.
I have been disappointed by the Government’s reaction so far. Although Mr Griffith said in the other place that the Government
“are dedicated to protecting the public from that devastating and sadly growing crime”,
he also said that the Government want
“to be right rather than quick”.—[Official Report, Commons, 7/12/22; cols. 446-47.]
Well, one can be right and quick. As with several other points on this Bill, such as credit card monitoring, the Government do not seem to be moving very fast at all. If we believe the Sunday press, something may be happening, but I await the Minister’s response with interest.
Baroness Kramer (LD)
My Lords, the Minister will have picked up the mood of the Committee and I hope she takes it into consideration when she looks at and decides on her remarks. The concern that has been expressed from all sides of the Committee on fraud and the absence of action on it is loud and strong.
I support all the amendments in this group, including those from my noble friend Lady Bowles, and the noble Lords, Lord Hunt, Lord Davies and Lord Tunnicliffe. I particularly recommend my noble friend Lady Bowles’s Amendment 214, which goes after the enablers and facilitators with a “failure to prevent” clause. This group is continuously overlooked and is absolutely pivotal. Action in this area could be really effective and leverage some significant change.
My Amendment 217, in a small way, tries to counter one of the reasons why financial fraud flourishes: the lack of resources for investigation and enforcement against the perpetrators. The noble Lord, Lord Sikka, has addressed some of this.
I, too, am a great fan of Anthony Stansfeld and his personal courage in deciding, as the then police and crime commissioner of Thames Valley Police, to pursue the HBOS Reading fraud case when others had turned it away. That fraud amounted to £800 million and six people—I thought that it was five but the noble Lord, Lord Sikka, said six—went to prison. However, the fine that was levied on Lloyds, as HBOS’s parent, was £45 million. As the noble Lord said, not a single penny of that went back to Thames Valley Police even though the pursuit of the case cost that force £7 million. The consequence of that was heard loud and clear by police forces across the country. They expected that, because of its success, Thames Valley would end up getting reimbursed, and saw clearly when it did not. Since then, no police force has taken on a major case of financial fraud; that dates back to 1977. Frankly, it is a failure of duty. I hope that the Government will finally understand the consequences of that kind of funding decision.
Baroness Penn (Con)
My Lords, I will first cover Amendments 67, 71, 73 and 214 tabled by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Hunt of Kings Heath. The question of the FCA’s powers on fraud has been raised before in this Committee, as noted. Before I address the detail of the amendments, it may be helpful if I set out for the Committee the FCA’s role under FSMA in relation to fraud. The noble Baroness, Lady Kramer, asked me specifically about this last Monday. I will write, but I thought it might also be useful to set it out in the context of these amendments.
Although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. If fraud is committed by an authorised firm in the course of a regulated activity, or if it carries out a regulated activity without the correct authorisations, the FCA will be able to take action against the firm on the basis of a breach of the FCA’s rules or other FSMA requirements. If a senior manager within the firm is responsible for the fraud or has culpably failed to prevent one occurring within the area of their responsibility, the FCA can take action against that firm and senior manager.
Where a firm is authorised for one activity, but is also carrying out an unregulated activity, FCA powers in relation to the unregulated activity will depend on the specific details of the case. In the case of a serious fraud, the FCA is able to take action, including on the basis that the firm or the senior manager is not fit and proper. If a firm provides regulated products or services without being authorised, unless exempt, it may be carrying on unauthorised business in contravention of the “general prohibition” in Section 19 of FSMA.
The FCA does not have powers to investigate a firm that is unauthorised and not carrying out any regulated activities unless, for example, that unauthorised person is carrying out market abuse—where the FCA has a specific role. In these circumstances, where problems fall outside the FCA’s statutory remit, the FCA assists other agencies and regulators wherever it can. That is important context for the noble Baroness’s amendments.
As I said last week, the Government take the issue of fraud very seriously. I repeat the point made by the noble Lord, Lord Hunt, that the prevention of fraud is a cross-cutting policy that requires a unified and co-ordinated response from many stakeholders. However, I acknowledge that the financial regulators, including the FCA, play a critical role in that, but many levers for change also sit elsewhere.
The Government’s view is that the FCA’s broad existing remit in relation to reducing and preventing financial crime, including fraud, allows it to take proactive steps to tackle fraud and wider financial crime, while driving a whole-system approach with relevant stakeholders. The FCA is an active and named agency in the national economic crime plan and the soon-to-be-published fraud strategy. Most crucially, the FCA and the PRA require regulated financial services firms to maintain effective systems and controls to prevent their being used to further financial crime, including fraud. In the first half of 2022, UK banks blocked over £580 million being stolen from customers. In its 2022-23 business plan, the FCA announced that it was developing its approach to supervision to include further oversight of firms’ anti-fraud systems and controls.
The noble Baroness, Lady Kramer, asked about the number of vacancies in the FCA for those working on fraud. I will write to the Committee to provide that detail. Under the FCA’s existing remit, it is able to have a leading role in this important issue. It does not require further powers to pursue fraud, but I will come on to address other points raised in the Committee about what more must be done overall about fraud.
In respect of Amendment 214, as noted by the noble Baroness, Lady Bowles, the Government are currently assessing options presented by the Law Commission for strengthening the law on corporate criminal liability, including for fraud. This includes committing to address the need for a new offence of failure to prevent fraud through the Economic Crime and Corporate Transparency Bill. I note the differences highlighted by the noble Baroness, but the Government believe that that Bill is the right approach and vehicle for dealing with the failure to prevent offence.
Amendments 209, 210 and 211, tabled by the noble Lords, Lord Tunnicliffe, Lord Hunt of Kings Heath, and Lord Davies of Brixton, respectively, relate to a national financial fraud strategy. As I have said, the Home Office will shortly publish a new strategy that will set out the Government’s plan on fraud, including fraud prevention, consumer protection and criminal prosecution. I am afraid that I did not read the Sunday papers as closely as other noble Lords, but I hear, understand and note the great interest in the strategy from this Committee and a desire to see it published as soon as possible. I reassure noble Lords that that continues to be a key priority for the Home Office, which is working closely with the Treasury and other government departments to make sure that we get it right.
Lord Hunt of Kings Heath (Lab)
I am grateful to the Minister for giving way. As part of this work, are the Government looking at the costs to the various statutory agencies of pursuing fraud? The noble Baroness, Lady Kramer, raised the example of the cost to Thames Valley Police—I think—of a prosecution, which on their budget was enormous. The fine was substantial, but there seemed to be no way of compensating the police for those costs. Can the Minister say whether that will be looked at within the strategy?
Baroness Penn (Con)
Funding is of course an important part of any strategy, and I have set out to noble Lords previously the increased funding that has gone to the specific issue of tackling fraud. I will turn to the specific proposal from the noble Baroness a little later, but I understand the point about not just the amount of funding but the incentives that different approaches can create.
The noble Lord, Lord Tunnicliffe, and other noble Lords talked about the devastating personal costs that fraud can have and the societal costs that having high levels of fraud in our society can bring. I agree with noble Lords on that. The noble Lord spoke about compensation not overshadowing the need for investigation and prosecution, and I also agree with that. Those considerations are all being taken forward through the strategy.
Lord Sikka (Lab)
I am encouraged by the Minister’s determination to tackle fraud. Can she answer the three specific questions I asked? First, can she give us a commitment that a copy of the Sandstorm report in relation to BCCI, which is now more than 30 years old, will be placed in the Library of this House? Secondly, can she make a statement now or come to the House soon to tell us why the Government covered up criminal conduct by HSBC in the US and how many other instances there are of that kind of cover-up?
Thirdly, in this country we have virtually eliminated the risk of bankruptcy for major banks and insurance companies. That then raises questions about the pressure points on directors to behave and act honourably. Fines are fairly puny and have not made much of a difference. Personal prosecutions of directors of banks hardly ever take place, and neither do they face any personal fines. Can the Minister explain what the pressure points are on the directors of major financial institutions to act with honesty and integrity?
Baroness Penn (Con)
I am afraid I will not be able to address the noble Lord’s first two points, but I will happily write to him. On his third point, I referred to the fact that, as part of the Economic Crime and Corporate Transparency Bill, we are looking to take forward the issue of corporate criminal liability and the offence of failure to prevent fraud, which would strengthen action in the areas he talks about.
I was talking about our work with other sectors. My noble friend Lord Northbrook and the noble Lord, Lord Sikka, raised the issue of online fraud. There is an intention to bring forward a tech sector charter with industry, to include public and private actions to drive down fraud in this area. Of course, fraud has been brought into the scope of the Online Safety Bill to better protect the public from online scams through, among other measures, a new stand-alone duty requiring large internet firms to tackle fraudulent advertising, including that of financial services.
The Government also recognise the particularly devastating impact that fraud can have on the elderly and the most vulnerable people in society and on people’s mental health. They have taken various steps, including banning cold calls from personal injury firms and pension providers and supporting National Trading Standards to improve the quality of care available to vulnerable fraud victims. More broadly, the FCA’s guidance on vulnerability explores how firms can understand the needs of vulnerable customers. This includes those who are older or have mental health conditions and sets out how the sector can provide targeted services for this cohort, including in the context of fraud. Where firms fail to meet their obligations to treat customers fairly, the FCA will take further action. I hope noble Lords are assured that further work is being taken forward on data sharing and on supporting older people and those with mental health conditions who are victims of financial fraud.
The noble Lord, Lord Davies of Brixton, mentioned measures in the Online Safety Bill, as have I. I have also mentioned the measures in the Economic Crime and Corporate Transparency Bill and revisions to the Data Protection Act. I am cognisant of the need to ensure that this work is well co-ordinated and that the progress we are making in other Bills is co-ordinated with the work we are doing on this issue more generally.
I turn finally to Amendment 217. Currently, the proceeds of such fines imposed by the courts must, by law, be paid—
Lord Hunt of Kings Heath (Lab)
I am sorry to interrupt the Minister again, but her comments have prompted a thought. Many of us are trying to cover, albeit not always successfully, three or four different Bills that are running through your Lordships’ House with slightly similar amendments around this issue of financial fraud. I do not know whether it would be possible for the Ministers dealing with all these Bills to come together at some point for a more general discussion; it might make this easier for us all. The Minister will know that these debates are going to be repeated on a number of occasions.
Baroness Penn (Con)
I will absolutely take away the noble Lord’s suggestion. I cannot speak for others but I would be happy to engage further on this before Report, drawing on the other strands of government work; I agree with the noble Lord that it might be useful to have other Ministers there too. I recognise that the other Bills are not as far along as this one is, so we will not be able to pre-empt some of that work, but I think we can co-ordinate it for noble Lords if that would be helpful.
Finally, I was dealing with Amendment 217 and noting that, by law, income from fines imposed by the courts needs to be paid into the consolidated fund. That income is not ring-fenced but is used towards general government expenditure on public services. The Government agree that it is important for bodies responsible for investigating and prosecuting fraud to be appropriately resourced to discharge their responsibility. The NCA’s budget is made up of a number of different funding streams. That budget has increased every year since 2019-20 and, as part of the 2021 spending review, it was allocated a settlement of more than £810 million. This represents an uplift of approximately 14%, or £100 million, compared with the previous spending review. The noble Baroness, Lady Kramer, asked me a few more specific questions beneath those headline figures; perhaps I can write to her and the Committee with that information.
The FCA and the PRA are operationally independent regulators funded by a levy on the firms they regulate. I would like to reassure the noble Baroness that the regulators already have the power to ensure that they are resourced appropriately, without the need to divert funds away from general government expenditure. As I said to the noble Lord, Lord Hunt, I recognise the important principle behind this amendment—that consideration should be given to how the proceeds of fines can support the costs of enforcement activity.
Lord Northbrook (Con)
Can the Minister address the point about Thames Valley Police not being reimbursed for the £7 million it spent, which has discouraged other police forces from carrying out those sorts of investigations? Will there be any sort of move to reimburse police forces investigating crimes of this sort?
Baroness Penn (Con)
I have heard the point and I acknowledge the principle that this amendment seeks to explore in terms of those incentives, but I point to the NCA’s budget and the regulators’ budgets. We seek to ensure that enforcement agencies have the proper money available to them to take enforcement activity. I also point out that, while the funds currently go into general expenditure, that funding is spent on other public services, so it does not go unspent elsewhere.
Lord Flight (Con)
This point seems absolutely central to me. Unless police forces have either a strong negative or a strong positive incentive, they are not going to be bothered, if you like, to prosecute serious fraud crime. I do not know what the Government’s preference is, but it has to be one way or the other.
Baroness Penn (Con)
I have listened very carefully to the debate, and I see the point that noble Lords are making. This operates in other areas of government—there is the Proceeds of Crime Act and how that operates—but I slightly counter leaning too heavily into the fact that the police would have no incentive to investigate serious organised crime unless the costs of the investigation and the prosecution are reimbursed to them. Their fundamental role is to investigate and prosecute crime. I understand that there is a complex landscape when it comes to investigating and prosecuting fraud, and that is something that the Government have tried to tackle with the establishment of the economic crime command at the NCA—but it is ongoing work for us. The challenge before me today is that the funding that comes from these fines currently goes to the consolidated fund and is spent elsewhere on public services, so any change of this nature would have implications that go—
Baroness Kramer (LD)
If the Minister is able to persuade the Treasury or the Government to look again at this issue, can she make the point that, if you can get much more activity from the police forces on pursuing fraud, you end up with much more coming in in fines? To look at the US example, it makes far more money out of financial crime because it prosecutes financial crime far more extensively.
Baroness Penn (Con)
I absolutely note the noble Baroness’s point. That same principle has informed our approach to proceeds under the Proceeds of Crime Act, so this has happened elsewhere in Government.
I was going to note that, previously, the FSA was able to keep all the income it took from penalties and use it to subsidise the levy it charged on the firms it regulated. That was changed because, when the regulators took a large amount of money from those they had fined, they reduced the charges they made on those firms. In thinking about these issues, we would want to avoid similar unintended consequences in the future.
I close by saying that I have heard noble Lords’ strength of feeling on this debate. As I said on the previous group, I am always open to meeting noble Lords to discuss issues further. We have different ways in which we think those issues can be tackled, but it is always right to see what more we can do. The noble Lord, Lord Hunt of Kings Heath, suggested perhaps having a co-ordinating meeting on fraud, particularly to cover the specific issues raised in the different Bills before your Lordships. I will endeavour to take that forward ahead of Report.
Baroness Bowles of Berkhamsted (LD)
Your Lordships will be pleased to know that I cannot possibly go through everything, yet again, that has been spoken about. I thank all noble Lords who have spoken in this debate. The Minister must have heard the concern from all sides of the Committee.
The only bit of good news that I can hang on to from what was said is that more work is being done on data sharing between banks. That is important. The list of roles of the FCA just proves that it does not have a great deal of power to do things within financial services in general. It can do things with regulated bodies, but that is very limited, as we discussed previously, so I will not go into it again. It can do things with bodies that are pretending to be regulated but are not, but we are for ever bashing up against this regulatory perimeter, one way or another. That just does not deal with fraud, because fraudsters are well aware of it and are going to use it.
We have tried to cover various different types of fraud. Fraud by and in financial services surely should be caught, even if it is by a regulated entity but in an unregulated area. The financial services regulator should still be able to prosecute the entity, not just through cases that deal with criminal matters which it can take; there should also be some regulatory approach. Then there is fraud in which financial services are the final vehicle. Financial services are in a special place because, ultimately, how can you monetise your fraud? You have to put it through a bank or somewhere else, no matter whether it was started or perhaps enabled by a telecoms company, online platform and so on. Ultimately, financial services firms have a special duty for extra vigilance, because that is where this all funnels down.
I agree that probably more has been done to capture these things in financial services than in some of the online platforms and telecoms companies. I will not go through the whole of the very thick fraud report, but there are issues in it that go across the piece. That is part of the problem. We have this complete alphabet soup of organisations that are supposed to be helping us address crime, and fraud in particular, in different ways. However, it is not well co-ordinated, and fraud falls between the gaps, and so it is with the financial services side of it.
One thing that was in the report from the Fraud Act committee was about engaging regulators more in the fight—that is, regulators in general—through having regulatory offences. Here, the imagination has to be used. We should not just pin down regulators to doing very small things within a tiny regulated bit, while everywhere else people can either get away with it or it has to go over to less specialised people to deal with. There are big holes, and we will have to come back to this.
At the bottom of it, there are issues around the funding. You will have to fund regulators more if they are to address fraud more. I do not see any harm in the recycling of fines. They should not be recycled so as to say “Right, now the levy is less”, but they could be recycled specifically for prosecutions. Given that you can turn a profit from them and that you are helping individuals who have had their money stolen, it is very bad if the Treasury does not look at that more favourably. Everybody is crying out for this, but we acknowledge that you have to have money to do it.
For now, I will obviously withdraw my amendment. However, we will have to come back on Report with one or two amendments aimed at furthering things, unless the Minister is able to persuade the rest of the Treasury that it needs to act in this area, as there would be ways in which it could ring-fence the financing and turn a net profit.
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
At this point, it might be convenient if the Committee were to adjourn for 10 minutes.
Lord Sharkey
“Duty of the FCA to make rules introducing a duty of care to replace the Consumer Duty
(1) After section 137C of FSMA 2000, insert—“137CA FCA general rules: duty of care and replacement of the consumer duty(1) The power of the FCA to make general rules incudes the power to replace the consumer duty with a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.(2) In this section—“consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015 (key definitions);“consumer duty” means the rules and guidance contained in the FCA’s Policy Statement PS22/9 and in the FCA’s Final Guidance FG22/5 of July 2022;“duty of care” means an obligation to act in consumers’ best interests and to exercise reasonable care and skill when providing a product or service.”(2) The FCA must make rules in accordance with section 137CA of FSMA 2000 which come into force no later than six months after the day on which this Act is passed.(3) In section 138D of FSMA 2000 (action for damages), omit subsection (3).(4) The FCA may not make rules which change or qualify the definition of “duty of care” as provided for by virtue of subsection (2), reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”Member’s explanatory statement
This is a probing amendment to allow debate on the FCA’s new Consumer Duty and a replacement Duty of Care and on a Private Right of Action.
Lord Sharkey (LD)
My Lords, Amendment 76 in my name and that of my noble friend Lady Tyler of Enfield—I am very grateful for her support and look forward to hearing her speak later on in our debate—would require the FCA to make rules replacing the new consumer duty that it has devised with a duty of care. This duty of care would be
“owed by authorised persons to consumers in carrying out regulated activities under”
FSMA 2000. The amendment also makes provision for redress via a private right of action; it does this by removing the barrier contained in Section 138D of FSMA. Finally, the amendment contains provisions to prevent the FCA using its rule-making powers to
“change … the definition of ‘duty of care’ … reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”
This last bit is to ensure that Parliament’s intentions are rigorously carried out and reduce the opportunities for dilution.
The questions of imposing a duty of care on financial services providers and creating a private right of action have been debated in this place many times. The last time was during the passage of what is now the Financial Services Act 2021. In Committee on that Bill, I proposed the introduction of a duty of care in terms that were very similar to the text of the amendment before us; that amendment had strong support. I closed the debate by setting out the five key reasons for adopting a duty of care:
“The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues … The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry.”—[Official Report, 22/2/21; col. GC 120.]
All those points remain valid today. Indeed, the FCA has openly acknowledged the need for significant improvement in how consumers are treated.
At the Report stage of the same Bill, in March 2021, the noble Lord, Lord Stevenson of Balmacara, put forward a duty of care amendment in terms nearly identical to the one that we debated in Committee and nearly identical to the text now before us. All the speakers in that debate—apart from the Minister, the noble Baroness, Lady Penn—were in favour of the amendment, which was passed in the House by 296 votes to 255—a majority of 41. The Commons removed our amendment and, in ping-pong, proposed an amendment in lieu. This amendment required, among other things, the FCA to carry out
“a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.”
It was also required to consult on whether it
“should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care.”
Whether that actually happened in any meaningful way is strongly contested. The Transparency Task Force has long argued that the consultation was deeply flawed. It has argued, and continues to argue, that the FCA only ever really consulted on its proposed new consumer duty and not, since the 2021 Act was passed, on a duty of care. It is a contentious area, but there is merit in these criticisms. At the very least, I understand how the impression might form that the FCA had it regulatory thumb firmly on the scales.
This matters because the FCA’s new consumer duty is not a duty of care; it is significantly different and significantly weaker. These differences can be summarised as follows. First, there is no private right of action for breaches of the consumer duty. This means that the FCA will not be able to implement a redress scheme using its powers under FSMA if there are breaches of the consumer duty. This lack of a power to order redress will weaken the incentive to comply with the consumer duty.
The second flaw in the consumer duty is the lack of disclosure of information about how firms are complying with it. A firm’s board is required to assess only annually whether the required outcomes under the consumer duty are being achieved and agree any actions needed for compliance, but the firm will be able to keep that assessment secret from its customers and shareholders and will not have to publicly disclose any action it has taken. That is hardly transparent. For example, Which? has noted that:
“Without some kind of compulsory form of publication, it’s very hard to see how industry commentators, stakeholders and consumer representatives will gain an insight into the impact of the consumer duty.”
The third flaw in the consumer duty is that the standard required by firms to comply with its terms is based on the “reasonable expectation” of consumers. All this brings to mind the Equitable Life debacle and the difficulty of imposing a regulatory standard based on the reasonable expectations of consumers. In 2001, Sir Howard Davies described the concept as having a “chequered history” and as
“lacking in clarity and definition.”
The concept was also described by the then Treasury Minister as “nebulous”. The concept was eventually removed from the FSA’s regulatory framework in 2001-02. With the new consumer duty, it will be impossible to measure what the “reasonable expectations” of consumers are in any particular case. There would be obvious problems if the FCA or firms believed that consumers could be treated poorly because they had low expectations.
When the Government proposed the reintroduction of the concept of “reasonable expectations” during the passage of what became the Financial Services Act 2012, the Joint Committee that examined the Bill noted that the concept would make it difficult for the regulator to be clear on the meaning of its duties and near to impossible for consumers and Parliament to hold the regulator to account. The Joint Committee described the concept as “problematic” and concluded that its reintroduction would be unwise. Yet here it is again.
The final flaw is that the fair value assessment that firms are required to do under the consumer duty allows them to consider
“The market rates and charges for comparable products or services and whether the product is a significant outlier compared to these”.
There is a significant risk that this will allow firms to continue to exploit trapped customers as long as other firms are doing it at the same time. For example, in the case of mortgage prisoners who are trapped with their existing lender, a firm will say that they are being offered the “market rate” because they are being charged a similar rate to other mortgage prisoners at other vulture funds. All the customers across many firms are being exploited, but it is not a breach of the consumer duty.
The FCA’s proposed new consumer duty is deeply flawed and is not a duty of care. It is an enormous addition to the box-ticking culture and the antithesis of an aid to judgment. The new rules and feedback run to 161 pages with a further 121 pages of guidance to help. Diligent application of all these rules and guidance notes will not produce the required consumer benefits, nor drive a change of culture in the regulator or the firms it regulates.
The fact is that FSMA does not adequately protect consumers. Malfeasance continues and is unlikely to be much influenced by the new consumer duty. Under the new duty, redress is patchy, lengthy, uncertain and not really available to those who need it most. We should return to what this House originally voted for: a statutory duty of care. I beg to move.
Lord Tunnicliffe (Lab)
My Lords, this group contains Amendment 120, signed by me, my noble friend Lady Hayter of Kentish Town, the noble Baroness, Lady Altmann, and the noble Lord, Lord Morse. Our amendment would facilitate further parliamentary and public
“scrutiny of the work of the FCA to protect consumers by requiring the Financial Services Consumer Panel to lay an annual report before Parliament outlining”
the extent to which the FCA is successfully fulfilling
“its statutory duty to protect consumers.”
We have included the provision that the Consumer Panel must comment on the “adequacy and appropriateness” of its use of its powers; the measures it
“has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support”;
and its “receptiveness to the recommendations” of the panel. We need a mechanism to encourage the FCA to exercise its regulatory duties more readily and consistently.
This is all in the context of very serious FCA failings. I am thinking particularly of the British Steel pension scheme scandal to which the FCA was found to be “slow to respond” at every turn, according to the Public Accounts Committee. If the Government are inclined to reject this amendment, I would appreciate further work in this space in the interests of all those who have fallen foul of FCA failures. I urge the Minister to look seriously at this amendment, given its cross-party support across the House and in the other place.
Baroness Kramer (LD)
My Lords, I am speaking a little earlier than I usually do on my amendments in case others want to join in on the Equitable Life issue. I thank the noble Baroness, Lady Altmann, for signing my first amendment; it is hard to tell what happened with the second. I hope she signed both of them. Yes? Fantastic.
I want quickly to follow up on the comments from my noble friend Lord Sharkey. Perhaps the Minister can clarify this for me. She will remember that the PPI scandal was widely spread across the industry. It was not unique to one or two companies, therefore no company that invested in that mis-selling was behaving as an outlier. Again, when interest rate caps were inappropriately sold to small businesses, it was not the action of one or two particular banks. It was industry-wide, therefore nobody was the outlier. Can she explain to me what this new consumer duty will contribute to enabling the FCA to act on these kinds of abuses? She will note that the FCA did not act until there was a major scandal and a huge amount of public pressure and pressure in Parliament because, when it looked at it, it could see no basis for action. Perhaps she might tell us how the consumer duty would have worked in those two key cases. I am sure that the Government must have tested those cases in coming to their decision to support the consumer duty, so I think she will be able to give us clarification on that.
Both of the amendments in my name arise out of the Equitable Life policyholder cases. I thank the Equitable Members Action Group, which has been frankly magnificent in support of the victims of the collapse of Equitable Life. It has fought for them in the past and continues to fight for justice.
Amendment 225 is a direct plea for compensation. When Equitable Life collapsed, 1 million people lost a significant part of their retirement savings. In 2008, the Parliamentary Ombudsman concluded that the victims’ losses were directly attributable to a decade of serious, serial regulatory maladministration.
The ombudsman made 10 determinations of maladmin-istration: one against the DTI; four against the Government Actuary’s Department; and five against the FSA, which
“resulted in the true financial position of the Society being concealed and misrepresented”.
I cannot think it extraordinary that, in a situation such as that, one would have expected the loss to the victims to have been remedied in full. In recommending redress, the ombudsman said that she would
“normally expect that, where appropriate, such a loss should be remedied in full”
and she called for the Government to
“fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.”
The Government later accepted that the amount of compensation to achieve that would have amounted to £4.5 billion but only £1.5 billion in compensation was announced by George Osborne. Some 37,000 with-profits annuitants were fully compensated but a further 10,000 received only £5,000—or £10,000 if they were on pension credit—because they took their annuities before September 1992. The vast majority of the victims—895,000 people who were not with-profits annuitants—received only 22.4% of their acknowledged losses. My amendment would carry out the recommendation of the Parliamentary Ombudsman and put everyone back into the position that they would have been in had maladministration not occurred.
This leads to my second amendment, Amendment 226, which would establish in law a requirement that, when the ombudsman finds maladministration by the regulators or government departments, all consumers affected
“are put back into the position they would have been in had that maladministration not occurred.”
Just imagine how we would react if a bank decided that, instead of paying the full compensation it owed, it would pay just a portion of it. I cannot see why the Government should be treated differently from an entity such as a bank. We would expect compensation to be paid in full.
How can we ask people to turn with confidence to the Parliamentary Ombudsman when recommendations are watered down after the fact? How we ask people to save when a rogue society—I think that describes Equitable Life quite well—cheats them? The Government make appalling mistakes to the level of maladministration —that is a very high bar; it is not a low bar—and then will not make it right. Many of the victims are now in their eighties and nineties so time is running out for justice; indeed, many have died without justice. That is the reason behind my two amendments. I very much hope that there is support for that perspective; indeed, I hope that we will finally see support from government.
In making a brief comment on the amendment proposed by my noble friend Lord Sharkey, on a return to a proper duty of care—it is one of the most important amendments that we are considering today —I want to stress, in this context, the private right of action. It seems to me that, without a proper duty of care or private right of action, we can never make banking institutions or other regulated financial services sector institutions live up to their full responsibilities to consumers.
Lord Davies of Brixton (Lab)
My Lords, I support all the amendments in this group. I dipped down the order a little because I wanted to hear what the noble Baroness, Lady Kramer, would say on Equitable Life. I have nothing to add. I was an Equitable Life policyholder twice over and no one came out of that whole sorry saga well. I do not think that all the necessary lessons have been learned, but that is perhaps for another debate.
I will address my Amendment 77. I am sure all noble Lords accept the principle that financial regulation should pay regard to the particular problems faced by people who have problems with their mental health. The issue is not about the principle but about whether it requires or deserves a place in Section 1C of the Financial Services and Markets Act 2000. I think it does, which is why I start by re-emphasising something. Many noble Lords might have heard this part of this speech before, because it has arisen in debates on the Online Safety Bill and on the last group—although the personnel attending this part of the Committee has changed somewhat, so I am not that embarrassed at repeating myself.
There are strong links between having a mental health problem and experiencing worse financial outcomes. Either a financial problem leads to poor mental health or pre-existing poor mental health leads to financial problems. Either way, mental health difficulties all too frequently make it harder to earn money, manage spending and get a fair deal on products and services. Life is likely to cost more precisely when we have less money available to spend.
Facing financial difficulties should not result in needing mental health treatment, but too often these things come hand in hand. Financial difficulties do not just cause stress and anxiety; this is often made worse by the follow-up actions—collections activity and having to go without essentials. It is not just an occasional problem. Here I must pay tribute again to the work of the Money and Mental Health Policy Institute, which in a series of reports has amply illustrated the scale of the problem and the relationship between good mental health and well-regulated financial markets.
Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, are just the things that make managing money significantly harder. These symptoms can also make it more difficult to interact with financial services firms. For example, people with mental health problems are three and a half times more likely to be in problem debt than those without. Just under half of adults in problem debt also have a mental health problem. In nationally representative polling from November last year, the institute found that around half of those who were behind on multiple bills have had suicidal thoughts as a result of the increasing cost of living. More than 100,000 people in England attempt suicide while in problem debt.
A problem we face is that communicating with financial services providers can be particularly challenging for people with mental health problems. Three-quarters of people with mental health problems found at least one communication channel difficult to navigate, with four in 10 saying they found it difficult or distressing to make phone calls, for example. This has to be taken into account in FCA guidance. Part of the problem is that providers simply do not have the information about their customers to enable them to make better decisions. That is a crucial issue that will have to be addressed.
Baroness Tyler of Enfield (LD)
I support Amendment 76 in the name of my noble friend Lord Sharkey, to which my name is attached. I will say briefly that I support Amendment 77, which we have just heard set out very persuasively by the noble Lord, Lord Davies of Brixton. The links between money problems and mental health are now very well established. They were covered in some detail by the 2017 Lords Select Committee on Financial Exclusion, which I have already referred to. We had a number of recommendations in this area. Five years on, the case is stronger than ever. I hope the Minister will be able to respond sympathetically to that point.
Turning to the duty of care to replace the consumer duty—indeed, having a duty of care was another of the Select Committee’s recommendations—I concur with the sentiments expressed by my noble friend Lord Sharkey. A consumer duty of the sort in the Bill and which was brought forward for consultation by the FCA is not a duty of care. The former has many exemptions and, critically, does not provide wronged consumers with the right to secure monetary redress through litigation. This point was made very compellingly by my noble friend. While the purpose of the consumer duty is to deliver improved outcomes for consumers, because the proposals are diluted from the duty of care—which was voted on in Parliament and enshrined in the Financial Services Act 2021—we have to ask why this has happened.
The external bodies calling for a duty of care, the financial services Consumer Panel, many consumer organisations and the House of Lords Liaison Committee were all clear that what they wanted was a duty of care, not a consumer duty. I would be grateful to the Minister if in summing up she can explain why this move from a duty of care to a consumer duty was made and why it was allowed to happen. In terms of accountability and parliamentary sovereignty it is of real concern that, after Parliament passed the Financial Services Act 2021, the regulator chose to consult and bring forward rules on something different. This amendment provides an opportunity to remedy a very unsatisfactory state of affairs.
In my view, the consumer duty provides little more consumer protection than is in the existing “treating customers fairly” principle. Nor do these proposals really help to rebalance the power and information imbalance between financial services providers and vulnerable customers, which is a real concern of mine. We need a convincing explanation of how the consumer duty enhances the “treating customers fairly” principle and how this new approach will provide the regulator with more of an ability to ensure better outcomes for consumers than at present. I must say that is not at all clear to me.
Finally, the problem is that, as currently drafted, the consumer duty places the responsibility on consumers to understand the benefits and risks of different products and services. There needs to be less emphasis on what consumers should be able to discern for themselves and more emphasis on what should be in place to stop firms exploiting that power and information imbalance between themselves and customers. This is something that a duty of care amendment would do.
Lord Sikka (Lab)
My Lords, I will speak to Amendments 229 to 231. They overlap with the amendments tabled by the noble Lord, Lord Sharkey; I congratulate him on his excellent speech and the wonderful case that he made for a duty of care.
The key theme of these three amendments is the empowerment of consumers—that is, enabling consumers to secure redress from negligent authorised persons for failure to act with due care as well as enabling them to seek compensation from regulatory bodies for their failures. Empowering consumers generates pressure points for regulatory bodies and authorised persons to ensure that they act diligently, efficiently, honestly, fairly and with some care.
The key element in these amendments is a duty of care, about which the noble Lord, Lord Sharkey, has already said a few things; I will add just a few more. The FCA has failed to carry out the mandate given to it by Section 29 of the Financial Services Act 2021. The consultation was fundamentally flawed; indeed, the wording of its questions indicated the bias against its mandate to create a duty of care.
I have time to go through only one example. Question 12 on the consultation paper was very badly designed. As an academic, I have carried out many questionnaires over the years, but I have never written a question like this with so many questions in one:
“Do you agree that what we have proposed amounts to a duty of care? If not, what further measures would be needed? Do you think it should be labelled as a duty of care, and might there be upsides or downsides in doing so?”
That is supposed to be one question. This question and the accompanying information provided in the consultation paper are severely misleading. The FCA asks, “Do you agree that what we have proposed amounts to a duty of care?” Does it not know what a duty of care is? Has nobody there ever studied any English case law from the 20th century to understand what it is? What a strange question to ask.
First, it was not for the respondents to inform the FCA whether or not it had proposed a duty of care; that was for the FCA itself to do. Secondly, if it is not a duty of care but the majority of respondents believe it to be one, does that make it so? Thirdly, if it is a duty of care but the majority of respondents believe it not to be, does that mean it is not one? It is very strange. Fourthly, if it is a duty of care then the FCA has proposed such a duty without asking the question, specifically mandated by Section 29 of the 2021 Act, as to whether there should be one. Fifthly, if it is not a duty of care then the FCA has proposed that there should not be one. If you look at it on logical grounds, none of it makes any sense. The questions and the accompanying statements do not make any sense, so the FCA has not really consulted on a duty of care.
The FCA’s consultation paper says that a duty of care “may have different meanings”—in other words, that is why it did not really want to go down that route. That is misleading. Just because the meaning of duty of care evolves does not mean that the FCA should not carry out its statutory duties. The principle of duty of care is well established in English law, especially since the 1932 case of Donoghue v Stevenson. It is found in fields as diverse as sale of goods and professional negligence, but it seems to have eluded the FCA.
The FCA has failed to create a duty of care as that phrase is commonly understood in law. What it has done is propose general rules about the level of care that must be provided to consumers by authorised persons. That is not a duty of care. Principle 2 of the FCA’s handbook does not create a duty of care because a breach of the FCA’s Principles for Businesses does not give rise to a right of private action by parties injured by a breach thereof. That has already been commented on; unless consumers can enforce something, it is not really a duty of care.
The FCA’s chair, Charles Randell, rejects the commonly accepted legal definition of the term “duty of care” and states that, for the FCA, it means nothing more than
“a positive obligation on a person to ensure that their conduct meets a set standard.”
That does not sound like a duty of care. Randell further commented in relation to the consultation paper that
“whether or not a private right of action for damages should attach to the duty … there would be alternative ways of enforcing such a duty. These include not only voluntary redress or a restitution order, but also our routine supervision and enforcement activities. And individuals have the ability to seek compensation by referring complaints to the Financial Ombudsman Service, which would have regard to the duty in its decisions.”
In a sense, I have no problem with regulatory remedies being in place in addition to the private right of action—I welcome them—but they cannot be a substitute for that right, which is what Amendment 229 calls for. There are two reasons for rejecting the FCA’s position. First, elsewhere—for example, in the sale of goods or professional negligence—a breach of a duty of care is by definition actionable, so why is that prevented in the world of finance? Why are the financial services and the FCA an exception to it? Secondly, the alternatives listed by Randell and the FCA have consistently been shown to be unsatisfactory. Individuals are therefore left in the lurch with nowhere to go.
A right of private action is desirable and creates a pressure point for financial services providers. While the consumer duty has many exclusions and qualifications I do not welcome, attaching a private right of action to it would materially strengthen consumers’ rights in relation to wrong scores and be of benefit to consumers. A right of private action would enable consumers to seek redress and compensation in the event that they are dealt with badly by a financial company. In the absence of that right, consumers, investors and pension savers remain dependent on the FCA. As we have already heard, the FCA is always dragging its feet to do anything. We need to set consumers free. In essence, I am supporting what the noble Lord, Lord Sharkey, said.
Baroness Altmann (Con)
My Lords, I added my name to three of the amendments in this group. I will speak to Amendments 225 and 226 first. The noble Baroness, Lady Kramer, has expertly explained the issues surrounding the Equitable Life compensation scheme and the problems suffered by more than 1 million people who lost money through what was reputed to be an extremely strong and stable investment company. Even though the Parliamentary Ombudsman ruled that this was due to official maladministration across a wide range of actors, about 900,000 people have received only 22% of the compensation due.
I understand that taxpayer money is not a bottomless pit and that it is difficult when there is such an enormous number of people involved for any Government to consider this kind of compensation, but we have a Parliamentary Ombudsman for a reason. If a Parliamentary Ombudsman rules in a particular direction, it is troubling to me that the Government would suggest that they disagree with their own referee and therefore are not going to comply. The amendments from the noble Baroness, Lady Kramer, would require the Government to honour the recommendations of the ombudsman. I urge my noble friend to look seriously and carefully at how much has been paid out and to whom, and whether the Government can justify not complying with the recommendations of their own ombudsman.
I have personal experience in the case of the Financial Assistance Scheme where the Parliamentary Ombudsman ruled that government must compensate. The then Government in 2005-06 simply said that they were not going to and that they disagreed. We had to take the Government to court. They lost in the High Court and then in the Court of Appeal. It was only after that and at the risk of the complainants losing their homes and everything else, after also having lost their pensions, that in 2008, thankfully, a proper redress scheme was set up. So it is possible, but it was very much dependent on the Secretary of State at the time being willing to agree.
Amendment 120 in the name of the noble Lord, Lord Tunnicliffe, to which I added my name too, refers to the Financial Conduct Authority’s Consumer Panel. The amendment would like to see the Consumer Panel reporting to Parliament. At the moment this excellent panel is doing quite a bit of work trying to look at the interests of consumers. Clearly, consumers as a group and individually do not have the resources that the financial services industry has in order to promote their interests relative to those of the financial services companies. The Consumer Panel has often come up with important recommendations to the board of the FCA to look at and act on behalf of consumers who have been wronged in different ways. But Parliament generally does not tend to hear about what the Consumer Panel says, and the board of the FCA is at liberty not to agree or comply with recommendations of the Consumer Panel.
It would be helpful for parliamentarians, particularly Members in the other place representing their own constituents who may have been wronged in these cases, to know what has been considered by the Consumer Panel. I hope that my noble friend might consider this very reasonable amendment, which is just asking that Parliament is directly informed by the Consumer Panel of its concerns at actions taken by the financial services industry to the detriment of consumers.
That leads me finally to the other amendments in this group. The Consumer Panel has recommended that a duty of care is required in the financial services industry. As we know, Section 29 of the Financial Services Act called for a duty of care, and Parliament was supposed to introduce a duty of care, yet what we have is this consumer duty rather than a fully fledged duty of care.
Amendment 76 calls for a duty of care, and the amendments tabled and so eloquently explained by the noble Lord, Lord Sikka, Amendments 229, 230 and 231, also represent what could be considered a duty of care—as, indeed, does Amendment 77 from the noble Lord, Lord Davies, which talks about consumers with mental health issues, and how the industry looks after them. These are all extremely important for the Government to consider in strengthening the protection for the public.
To give one brief example, if noble Lords will indulge me, most recently we have had the problem of liability-driven investments and the dislocations in the government bond markets caused by the market turmoil a few months ago. For many investors in personal pensions—where the Financial Conduct Authority oversees the supposed “know your customer” and new duty of care requirement—the products and offerings given to ordinary members of the public in pensions under auto-enrolment and in other areas have default options, which the majority of workers are put into. They typically use what is called a life-styling or target date approach, which means that, in the approximately 10 years running up to retirement, those customers are switched out of assets with higher expected returns such as equities into what are meant to be safe assets such as bonds, in the expectation that they will buy an annuity when they reach retirement—and annuities are priced relative to bonds, so everything should be fine.
There is no duty on those pension providers to ask a customer once a year, for example, if they are planning to retire at the date that they are gearing towards or if they plan to buy an annuity. They may plan to keep the money invested. If that is the case, we have seen millions of people—potentially, certainly hundreds of thousands, although we do not have the number—who have been coming up to retirement and lost a huge chunk of their pension, because the price of those supposedly safe assets has fallen significantly. They were never asked whether they were going to buy an annuity, and the majority of them will not do so. No provider had any requirement to check with their customer, on something as fundamentally important as this, whether they planned to buy an annuity or even to take out any money at all at the date that the product automatically switches them to. Nothing has been updated on that since the pension freedoms were introduced.
That is just an example of where, I hope, my noble friend will understand that a duty of care must extend beyond where the industry is today, so that the interests of individuals are taken into consideration by the financial services industry.
Baroness Penn (Con)
My Lords, let me start by dealing directly with Amendment 76, moved by the noble Lord, Lord Sharkey, and spoken to by many other members of the Committee.
I assure noble Lords that, in coming to this debate, I took the time to remind myself of our debate on the then Financial Services Bill in 2021; it is either an advantage or disadvantage, depending on your perspective, that I participated at the time. It is worth going through what that Bill, now the Financial Services Act 2021, required. It required the FCA to consult on whether it should make rules requiring regulated financial services providers to owe a duty of care to consumers. It also set out that the consultation must include
“whether the FCA should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care”.
The then Bill further set out that the consultation must be carried out by the end of 2021 and any new rules introduced, if considered appropriate, before 1 August 2022. The FCA publicly consulted on its consumer duty in May 2021 and again in December 2021, and issued its final consumer duty policy statement in July 2022. In its consultation, the FCA noted that its proposals met the requirements in the Financial Services Act 2021.
Baroness Kramer (LD)
I think the Minister said that the legislation, as it finally went through, gave the FCA the option of either a duty of care or something else. Did that imply that it could be much weaker than a duty of care—and did anybody signing up to it understand that?—or was there a sense that it might be done in a different way but would be equally as strong and effective as a duty of care?
Lord Flight (Con)
The other fundamental point is that it is not the law; it is a sort of quasi-law that does not have the same power as law.
Baroness Penn (Con)
If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.
The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.
The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.
I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.
The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.
In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.
Lord Sharkey (LD)
Before the Minister moves on, what are her views on the point I made about “reasonable expectations” for consumers, which is the standard required by firms to comply with the terms of the new consumer duty? The Minister will have heard the historical criticisms of the notion of reasonable expectations for consumers. How would she feel about having this concept at the heart of this new duty?
Baroness Penn (Con)
The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.
Baroness Kramer (LD)
Can I ask the Minister to follow up seriously on this? The reasonable expectation point matters so much. If it is a case only of outcomes, but that is then qualified by reasonable expectations, the reasonable expectations provide a complete out for PPI, interest rate swaps or virtually anything else that we see. The core concept of the consumer duty is that somebody has to be behaving outside the norm within the industry. The problem is that the norm within the industry was abusive.
Baroness Penn (Con)
The points that I gave in reply to the noble Baroness’s specific question on PPI and interest rate hedging products were in the context of the consumer duty as written, with the reasonable expectations provision in there. However, of course I take seriously the point raised by the noble Lord, Lord Sharkey, and I will write to the Committee to further expand on that.
Baroness Bowles of Berkhamsted (LD)
My recollection from the passage of the 2021 Act was that the final wording was government wording, put in as a concession to amendments from my noble friend Lord Sharkey. The government amendment said that a duty of care, or variations thereof, could be consulted on. Was it the Treasury’s, or the Minister’s, expectation at the time that it would be severely diluted? Was that the point of those extra bits?
Baroness Penn (Con)
I think I said directly what was required of the FCA, and the FCA has fulfilled its obligations under that Act. Furthermore, the FCA is not of the view that it has diluted the approach; it has taken a different approach from the duty of care. I have attempted to set out some of the reasoning and thinking behind the approach it has chosen to take versus the alternatives that were put to it. I am happy to write further.
Lord Sharkey (LD)
I am afraid to say that I am not sure I take much comfort from the FCA saying that it is right. Mandy Rice-Davies would know how to deal with that. My next question is about the lack of redress provided by the new consumer duty.
Baroness Penn (Con)
With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.
Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.
The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.
Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.
Lord Sikka (Lab)
Could the Minister clarify something? If I buy a bar of chocolate, the producer owes me a duty of care and, if I get injured, I have a right of redress. If I buy financial services, why can I not have the same rights?
Baroness Penn (Con)
My Lords, the concept of a duty of care in financial services may be different to the concept of a duty of care in other contexts. This was considered very carefully and consulted on by the FCA in 2019 and in 2021. It considered these questions and the issues we have discussed in the Committee today.
Baroness Altmann (Con)
I thank my noble friend for giving way. On these consultations, did the financial services companies generally respond not wishing to have the right of redress? Were the consumer organisations in favour of it?
Baroness Penn (Con)
I do not have a breakdown of the different responses to the consultations. However, as I said, in its feedback statement on a previous consultation on the duty of care, the FCA noted that industry stakeholders did not support a statutory duty of care. It also noted that a number of consumer groups did not support a statutory duty of care. I can point back to when that was considered in 2019 as not being a single view from a single source of consultees.
Baroness Bowles of Berkhamsted (LD)
One is a number, as I was always taught when I was training as a patent attorney. It might mean that one consumer organisation did not agree, but the vast majority did.
Baroness Penn (Con)
The noble Baroness has made her point.
I was turning to the private right of action, which was also consulted on by the FCA. It has concluded that it will not be beneficial at this time to introduce a private right of action, as it sees benefit in giving firms time to implement the significant changes that the duty entails without the threat of private action.
However, the FCA has committed to keeping this matter under review. The FCA has the power to introduce a private right of action through its rules, without the need for legislative change, if it considers it appropriate to do so in future. In addition, as noble Lords know, consumers will remain able to seek redress via the Financial Ombudsman Service where they believe a financial services firm has breached the consumer duty.
Lord Sharkey (LD)
I thank the Minister for that reply. It is hard to understand exactly what the defence of the new consumer duty is, and why the private right of action is not included. I am very grateful for all the contributions made. I note that the Minister did not really address the defects of the consumer duty that we set out in detail, and I hope she will write to me and explain her views on that.
I close by saying that there is a slight Alice in Wonderland quality to this argument because, essentially, it boils down to something that we have discussed before: that it is not in the consumer’s best interests that financial service providers act in their best interests. That simply cannot be right. There is something fundamentally wrong with all this, and I look forward to having more time on Report to return to the issues.
Financial Services and Markets Bill
Monday 20th February 2023
(1 year, 9 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-V(a) Amendment for Grand Committee (Supplementary to the Fifth Marshalled List) - (20 Feb 2023)
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes, but self-evidently we are not expecting a Division.
Clause 27: Review of rules
Amendment 78
Baroness Bowles of Berkhamsted (LD)
My Lords, it is a pleasure to open day five in Committee on the Bill. First, I will relay apologies from my noble friend Lady Kramer, who is not in her place, having had knee surgery last week. She is recovering well and will return as soon as she has permission from her surgeon.
Several of today’s groups concern accountability, both how regulators are accountable to Parliament and then, as with this first group, what that accountability to Parliament means. Is it more than a hot-seat grilling every now and then? What happens to the output of that accountability?
Here I challenge the Government, who have made much of the regulators’ accountability to Parliament in the consultations but then, during the passage of the 2021 Act, said that that accountability has nothing to do with government. We can all see through that. The examples that the Government have set are: failing to reply to committee reports in the allocated time; failing to find parliamentary time for debates on committee reports; and even failing to attend Lords committees, including such important committees as the Economic Affairs Committee and the Industry and Regulators Committee, which engage in financial services matters, and on both of which I and other noble Lords present have served for many years—so we know what we are talking about.
The question is: do the Government want to be part of this scrutiny or not? Do they want the regulators and Parliament to form their own arrangements together and maybe gang up on the Government? I have had experience of organising that in order to challenge the European Commission, and I can see similar seeds being sown here. This is the last chance saloon for the Government to stand by their advertising on parliamentary scrutiny.
I have eight amendments in this group, but it is really four for each of the FCA and PRA instances. I can be brief on the detail. They all relate to the independent reviews of regulators’ rules that can be commissioned by the Government. Amendments 78 and 145 insert into the Government’s powers of review the possibility to seek thematic review as well as reviews of specific rules. They do not compel the Government to do this; it is an empowerment. The Government would still have control over what they choose to implement, but it seems a reasonable power to have. The noble Baroness, Lady Noakes, has supported this amendment so, to go by the commentary that has been made, if we two agree then there must be something in it. It may well be that a thematic review would in fact be more useful for general issues rather than having to identify specific rules, which might not be comprehensive. I would want this if I were the Government.
Amendments 81 and 148 are related and more prescriptive, in that they require the Treasury to establish a rolling programme of thematic reviews and report annually to Parliament on that programme and any changes made to it in the light of other reviews that might be carried out for other circumstances. They also require a work programme for the next three years, along with indicative timetables. The Government would still have control of the programme, but a programme is required.
I have tabled these amendments because somebody should be, if you like, regulating the regulators. My attempt during the passage of the previous Bill to establish an oversight body failed to inspire the Government. These amendments highlight that all the responsibility therefore falls on government, and it is what a responsible Government might be expected to do.
Amendments 79 and 164 include parliamentary committee requests as a potential trigger for the Government to commission an independent review. Again, this is not a compulsion, as the power to seek that independent review would still reside with the Government. The Government claim that there is parliamentary oversight of regulators; this would be a small step in recognition of that, while respecting the work of committees and the evidence that they collect.
Finally, Amendments 80 and 147 require the person appointed to do the independent reviews to be approved by the Treasury Select Committee, as well as by the Treasury. If Parliament is to be regarded as having oversight, these are the kinds of things that endorse that status. I beg to move.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
The noble Baroness mentioned Amendment 164 but I wonder whether she meant Amendment 146, because Amendment 164 is in a later group.
Baroness Noakes (Con)
My Lords, I support Clause 27 and, in particular, its new Clause 3RC of FSMA, which allows the Treasury to require the regulators to review their rules. As the noble Baroness, Lady Bowles of Berkhamsted, said, I have added my name to her Amendment 78 because it is important to widen out the scope of the reviews which the regulators will have to carry out. I also support her Amendment 145 for the same reason and should have added my name to it as well, so that we cover both the PRA and the FCA.
A lot of the things that regulators do are grounded in the specific rules that they apply, which is the focus of new Clause 3RC, but it should also be possible for the Treasury to tell the regulators to review, for example, the cumulative impact of rules as they affect innovation or new market entrants or any particular segments of the financial services industry. The Bill as drafted simply does not give the Treasury that power.
My Amendment 79A in this group seeks to involve more parties in the review-initiation process. At the moment, it involves only the Treasury and the regulators. My amendment is designed for other voices to be heard and responded to by the Treasury; it would require the Treasury to “consider any representations made” by various sources. I have included all the statutory panels attached to the regulators, including those created by the Bill. These panels ought to have good insights into how the rules work in practice and their opinions on which should be reviewed should be heard, so my amendment says that the Treasury must consider representations from representative bodies, which would include all trade and consumer bodies involved in the sector.
My noble friend the Minister may well say that the Treasury will of course consider any representations made to it in respect of the review of rules and that it is quite unnecessary to put that into statute. I accept that, but only up to a point. The relationship between regulators and their sponsoring departments is often much too close and certainly has the potential to shut out anything that might be uncomfortable for either the regulators or the sponsoring department, or both. That is why the second leg of my amendment requires the Treasury to “inform the body” making the representations if it decides not to require a review.
I do not believe there should be any power for outside bodies to tell the Treasury what it should do, but there needs to be something to counteract the imbalance of power that the Treasury has. Transparency is often the best remedy and it is, in effect, what I propose in my amendment by requiring the Treasury to respond with reasons for not pursuing a particular review. If Ministers do not like the idea of transparency by the Treasury, my noble friend will need to be very persuasive when winding up this debate.
Lord Tunnicliffe (Lab)
My Lords, I will not make any specific comments on this group but I will comment on all that we are doing today—certainly the first three groups, all of which seem to me to have a common theme: the accountability of the Executive to Parliament. The degree of consensus between the amendments is almost historic. I said to my researcher, “I think I am in support of all today’s amendments.” She said, “You mean other than ours?”
Lord Tunnicliffe (Lab)
I will not get carried away—I will probably declare neutrality and opt out—but this issue is so important. I suspect that this Bill is much more constitutional than we expected when we first picked up the document. It is about filling in the space between primary legislation and secondary legislation in all these difficult areas relating to financial services. Members of the Committee have done a great job of putting together a series of proposals.
As far I can see, the proposals in this grouping are to use, in different ways, the age-old device of requiring reports. I can see the value of that. My own experience is that, because time goes on, they are not as effective as one might hope; however, once again, that is down to the membership of Parliament in particular. I support the general thrust of this group but I see it as part of our looking at the first three groups and, with or without the Government’s co-operation, working together after the end of Committee and before Report to try to achieve a common thrust that, if necessary, we can vote through in order to make the important step forward in the relationship between the Executive and Parliament that is so needed.
Lord Harlech (Con)
My Lords, the Government agree that the regular review of rules after implementation is essential to ensure that they remain appropriate and continue to have the desired effect.
The Bill makes a number of substantial changes to the regulators’ framework to ensure that such reviews will be an integral part of the regulators’ functions going forward. In particular, Clause 27 inserts a new provision into FSMA that will require the FCA and the PRA to keep their rules under review. To supplement this duty and ensure that there is a mechanism to require the regulators to conduct reviews of their existing rules where needed, Clause 27 also inserts a new power into FSMA for the Treasury to direct the regulators to review their rules where the Treasury considers it is in the public interest. Clause 46 inserts similar provisions into FSMA for the Bank of England in relation to its regulation of CCPs and CSDs.
I will speak first to Amendments 78 and 145 in the name of the noble Baroness, Lady Bowles. I assure her that the powers inserted into FSMA by Clauses 27 and 46 of this Bill already allow the Treasury to require these regulators to review a range of rules, entire regimes and interrelated rules, as appropriate, where that is in the public interest.
I turn next to Amendments 79 and 146, also in the name of the noble Baroness, Lady Bowles. In order for the Treasury to direct the regulators to review their rules, certain criteria must be met. One of the key criteria is that the Treasury considers the review of the rule or rules in question to be in the public interest. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.
Lord Forsyth of Drumlean (Con)
I am most grateful to my noble friend; I apologise for not having been able to attend all the Committee’s meetings. Can my noble friend help me by defining “public interest”—that is, how it will be defined?
Lord Harlech (Con)
I understand what my noble friend is getting at and think that, when each issue is put to the Treasury, it will consider whether or not it is in the public interest.
Baroness Noakes (Con)
I think that is merely restating the problem. Could my noble friend have another go?
Lord Harlech (Con)
I will write with a full definition of what constitutes “in the public interest”.
Lord Forsyth of Drumlean (Con)
I am most grateful to my noble friend and do not want to detain the Committee, but the whole point of the noble Baroness’s amendment is to avoid exactly this kind of debate. To my mind, what is in the public interest suggests a very substantial test, leaving the regulators to mark their own homework.
Lord Harlech (Con)
Like I said, I will speak to the department and write with a definition of what constitutes “in the public interest”.
Parliamentary committees can already conduct their own inquiries and hearings, call for papers, and call for individuals and organisations to give evidence. The power in Clause 27 seeks to complement, rather than substitute or detract from, the important role played by parliamentary committees. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.
On Amendment 79A, from my noble friend Lady Noakes, as with parliamentary representations, it will be important for the Treasury to consider the views of the regulators’ statutory panels and representatives of those affected by the rules. However, it would be inappropriate for the Treasury to provide a running commentary on the individual representations made. In addition, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules. These channels will be set out in the regulators’ policy statements on rule review, required by Clause 27, in due course.
Baroness Noakes (Con)
Could my noble friend explain why it is inappropriate to have transparency on why the Treasury chooses not to pursue representations that have been made to it by bodies that clearly have an interest in and experience of the matters under consideration?
Lord Harlech (Con)
I do not think I said that it would be inappropriate; I said that it would be inappropriate to provide a running commentary, not that there would be no comment on individual representations. Again, my understanding is that it will be done on a case-by-case basis.
Baroness Noakes (Con)
Could my noble friend explain that a little further? If I am a panel, consumer body or one of the trade bodies and I make a representation to the Treasury, what can I expect from the Treasury?
Lord Harlech (Con)
I am sorry; at this stage, I will have to take that back to the department and write to my noble friend.
On Amendments 80 and 147, tabled by the noble Baroness, Lady Bowles, the new rule review powers inserted by Clauses 27 and 46 concerning the appointment of an independent person are in line with the practice of other powers in the regulatory framework. For example, the appointment of Dame Elizabeth Gloster to investigate the FCA’s regulation and supervision of London Capital & Finance plc was approved by the Treasury. The Government do not consider that it would be appropriate to require that appointment to be subject to approval by a parliamentary committee, which, as I have mentioned, can already undertake its own inquiries.
Amendments 81 and 148 were also tabled by the noble Baroness, Lady Bowles. The primary role of the Government in the regulatory framework is to ensure that the regulators operate effectively and in accordance with the framework, as set out by Parliament in legislation. Where there is a case for external review of the rule-making of the regulators, the Bill provides powers to enable this.
Section 1S of FSMA and Section 7F of the Bank of England Act 1998 already permit the Treasury to appoint
“an independent person to conduct a review of the economy, efficiency and effectiveness”
of how the FCA and the PRA use their resources. In addition, Section 77 of the Financial Services Act 2012 allows the Treasury to direct an investigation into relevant events, such as the FCA’s regulation and supervision of London Capital & Finance plc.
The Bill further strengthens these accountability arrangements with regard to specific rules through Clauses 27 and 46, allowing the Treasury to direct the regulators to review their rules. In addition, as we have already discussed in this Committee, Clause 37 inserts new provisions into FSMA which permit the Treasury to direct the FCA and the PRA to report on performance where that is necessary for scrutiny of the discharge of their functions. Clause 47 modifies FSMA so that these provisions also apply to the Bank of England in relation to its regulation of CCPs and CSDs.
Finally, as I have already mentioned, Parliament is already able to conduct thematic reviews where it considers these necessary. Clause 36 is designed to support this scrutiny by requiring the regulators to notify the Treasury Select Committee of their consultations and to respond to representations to consultations by parliamentary committees. We will discuss noble Lords’ views on the operation of those specific provisions later today.
With that, I hope I have provided sufficient reassurance to the noble Baroness to withdraw Amendment 78, and that she and my noble friend do not move the remaining amendments when they are reached.
Baroness Bowles of Berkhamsted (LD)
My Lords, I am afraid that the Minister has not given me any reassurance. I think the only thing I have learned is that the Treasury is all at sea and does not understand what parliamentary scrutiny is actually about. It has to have effects and consequences. It is no good saying that Parliament can do its own inquiry and its own report and it is a very pretty document—yes, quite a lot of people praise such reports from time to time—but nothing happens. The attitude of the Government is that these reports can be completely ignored, that there is nothing in them that they wish to do—they do not want anybody else to have any ideas. That is a poor state of affairs.
There are some things that the Treasury does all right. I agree that, for example, when it appointed Dame Elizabeth Gloster to investigate the FCA, it appointed a good person and there has been a good report. I think that in general the people who have been appointed by the Treasury have been reasonably okay, but that does not mean that the responsible committee should not be able to have a view. I can think of instances in other departments where totally unsuitable people have been appointed to do some reviews.
What is wrong with Parliament having a say? I do not think that the constitutional point, as made by the noble Lord, Lord Tunnicliffe, has been understood. We still do not know how high a barrier this “public interest” is. The public interest is just what the Treasury thinks from time to time, by the sound of it. I do not think that there are sufficient safeguards there for when the regulators, as the noble Lord, Lord Forsyth, said, are, in essence, marking their own homework. This is something that has gone wrong in the past.
Yes, Section 1S is there but it is not used often enough. It is a last resort when you have had a whole history of errors and similar things happening and then there is a review. The whole idea of regular review is to make sure that you can intervene before big things happen, that there is the ability to nudge if something is heading off in the wrong direction. You can say that the review is, “All clear: it’s going well”. Why is there such a fear of them?
We will continue this discussion, because there are many formulations in which this can be done. If the Government do not want to have responsibility for it, maybe there has to be some kind of independent body to do it. While Parliament may be ready and willing to do it, what is the point when you are going to ignore what Parliament says? That is not parliamentary scrutiny; scrutiny must have a purpose and must lead to a result.
As this stage is exploratory I will, of course, withdraw my amendment but, as we go through the rest of this group, I hope that some enlightenment will dawn on the Treasury that these are not issues that can be just left. There is a body of opinion around the Committee, on all sides and none, that something has to be done. Most certainly, I will support things returning on Report.
Baroness Noakes (Con)
“The Financial Services Regulators Committee of Parliament
(1) There is to be a body known as the Financial Services Regulators Committee of Parliament (“the FSRC”).(2) The FSRC is to consist of nine members who are to be drawn both from the Members of the House of Commons and from the members of the House of Lords.(3) Each member of the FSRC is to be appointed by the House of Parliament from which the member is to be drawn.(4) A person is not eligible to become a member of the FSRC if the person is a Minister of the Crown.(6) A member of the FSRC is to be the Chair of the FSRC chosen by its members.(7) Schedule 7A makes further provision about the FSRC.”Member’s explanatory statement
These new Clauses, together with a new Schedule 7A, create a joint committee of both Houses of Parliament to oversee the FCA, PRA and the Payment Systems Regulator.
Baroness Noakes (Con)
My Lords, in moving Amendment 86 I will also speak to the other amendments in my name in this group. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Trenchard for adding their names to the lead amendment.
As has already emerged again this afternoon, there is clear agreement in this Committee that Parliament needs to exercise more oversight of the financial services regulators than has been the case in the past. The proximate cause is that huge new rule-making powers will be granted to them by the Bill, but a number of other issues, which noble Lords have raised in connection with the Bill and doubtless will continue to raise through Committee, also point to the need to put more effective accountability arrangements in place.
The Government have been on something of a journey on this. Their consultation on the future financial framework in October 2020 basically said that the existing arrangements involving the Treasury Select Committee in the other place were fine; your Lordships’ House did not even get a mention. By the time the Government’s final proposals came out in November 2021, they rode in behind the views of the Treasury Select Committee, which, by then, had reported that it was well equipped to carry out the accountability role. It subsequently set up a sub-committee for this purpose.
The November 2021 document did acknowledge that there were serious debates in your Lordships’ House during the passage of the then Financial Services Bill 2021, in particular the view expressed by a number of noble Lords that a Joint Committee of both Houses was the appropriate way forward. I think many of us felt then that the expertise that noble Lords would be able to bring to that accountability should be harnessed. The Government, however, said that this was a matter for Parliament. Well, we now have an opportunity for Parliament to express its views and determine the issue in this Bill.
My Amendments 86, 87, 88 and 156, together with the other amendments in my name that are consequential, would create a Joint Committee of both Houses. I have called it the financial services regulators committee, or FSRC. This would not technically be a Select Committee of Parliament, but the only difference between a committee of Parliament set up by statute and one set up by Parliament itself is the absence of parliamentary privilege, which I do not see as a crucial feature of any accountability oversight committee.
The main amendments in this group are based on the precedent of the Intelligence and Security Committee, a committee of both Houses of Parliament set up by the Intelligence Services Act 1994 and given stronger powers by the Justice and Security Act 2013. It is a committee that has demonstrably worked well on a joint basis.
Lord Forsyth of Drumlean (Con)
My Lords, it might be helpful for me to speak now as my noble friend referred to my amendment, which is in the next grouping. My noble friend has always been cleverer than me; I absolutely, 100% support what she puts forward in this amendment. I have an inkling that the Minister will say, “Ah, but we cannot be instructing Parliament on what to do”; that is why my amendments are in the next group, which we may or may not come to.
My noble friend is presenting the Committee with a Rolls-Royce, whereas my amendment is a Trabant, but it provides an opportunity to do what this amendment would do: set up a powerful Joint Committee of both Houses that is properly resourced. In my view, that is the right solution. I entirely agree with everything that my noble friend said. It seems to me that for the Government to resist this is a great mistake because it actually damages the position of the regulators. The regulators themselves would benefit from having proper scrutiny and accountability.
It is important to remember what this Bill is doing, which is extraordinary. It is taking all our financial regulation, giving it to a bunch of regulators who are not in any way democratically accountable and leaving it to them to decide what they will change, at what pace and everything else. It is absolutely essential that there is parliamentary scrutiny. My noble friend is right in the structure that she is proposing, where the elected House will have a pre-eminent position, but it strikes me as very foolish in this legislation to exclude from any role of scrutiny the House of Lords, which, at the risk of flattering members of the Committee and others, contains people with considerable experience and expertise in this area who could add an enormous amount to the regulators in carrying out their duties.
I seem to recall at an earlier stage—my noble friend Lady Noakes follows these things much more closely than I do—the regulators themselves saying that we need to have proper parliamentary scrutiny in order for us to be certain that we carry the degree of consensus and support that is necessary in the regulatory framework. I hope that my noble friend the Minister will accept this amendment. Then we will be able to make enormous progress because we will not need to discuss my amendment.
Lord Vaux of Harrowden (CB)
My Lords, after a number of days in Committee and at Second Reading, it is clear that the major theme of scrutiny of the regulators has emerged and that we have an extraordinary level of cross-party agreement on the Bill—almost unprecedented, as the Minister will see if she turns around and looks behind her.
This is so important because, as the noble Lord, Lord Forsyth, just said, the Bill transfers huge amounts of power to the regulators but does very little to provide Parliament with the means to scrutinise what they do. This has been raised by a number of parliamentary committees, including the EU Financial Affairs Sub-Committee, of which I was a member before it was wound up, and the European Union Committee, among others. The Bill does give strong oversight, scrutiny and direction rights to the Treasury but that is not the same as parliamentary scrutiny.
The Minister said this at Second Reading:
“It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators.”—[Official Report, 10/1/23; col. 1332.]
However, nothing in the Bill does that. All the Bill does at the moment is make requirements for the regulators to notify the Treasury Select Committee of the consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee.
I am sorry, but that is not the same as providing for genuine parliamentary scrutiny of the activities of the regulators. Are the regulators meeting their objectives? Are they protecting consumers from excessive risk and fraud? Are they ensuring stability? Are they carrying out their activities efficiently? Are they encouraging growth and competitiveness? Are they acting in accordance with the climate change rules? Are they horizon scanning for future risks and so on? Nothing in the Bill, as currently drafted, provides for real parliamentary scrutiny as I would understand it.
I am afraid that the noble Baroness has form in this respect. Perhaps I could take her back a few months to the discussions we had around the UK Infrastructure Bank Bill when we queried her reference to parliamentary scrutiny of various documents within that. To paraphrase, she suggested that the more informal parliamentary scrutiny, such as the ability to ask Oral Questions and such like, was sufficient. We seem to be heading down the same way with this Bill. It is not acceptable.
The other day, the noble Lord, Lord Bridges, set out with his usual clarity the three things required for effective scrutiny of the regulators. To paraphrase, they were reporting, independent analysis and parliamentary accountability. There are various amendments in this group and the next group dealing with the third of those: parliamentary accountability. I have added my name to those in the name of the noble Baroness, Lady Noakes, which aim—as she has explained—to create a bicameral committee that will focus specifically on scrutiny of the financial regulators.
I have long argued that financial regulation is such a large subject, so complex, and dealing with such an important sector of our economy, that it deserves a committee dedicated to it. It is just too big to be able to be meaningfully scrutinised by a committee that covers a wider subject area, such as the Treasury Select Committee of the Commons, the Economic Affairs Committee or the Industry and Regulators Committee, as we heard a minute ago. I strongly support the idea of creating a new bicameral committee that will focus specifically on this subject.
Importantly, Amendment 87 from the noble Baroness tries to widen the scope of parliamentary scrutiny. It says that:
“The FSRC—
the new committee—
“may examine or otherwise oversee the administration, policy and operations of”
the various regulators and may examine any consultations and reports issued by them. I am slightly nervous about the word “oversee” as I worry that might imply interference in the independence of the regulators. More importantly, I also want to add that the new committee should consider the impact of the regulators, in addition to administration, policy and operations. As I have said before, it is really important that the scrutiny is forward-looking, that we are horizon scanning for future risks, so I would widen the amendment further rather than it just being backward-looking. As I say, I wholeheartedly support the principle of a new, properly resourced bicameral committee with a much wider remit than the narrow focus that the Bill currently provides to the Treasury Select Committee. As we have heard from the noble Lord, Lord Forsyth, the involvement of this House is incredibly important. There is enormous expertise throughout the House.
I recognise that there are other ways of achieving proper parliamentary scrutiny, as we can see from the various other amendments in this and the next group in the name of the noble Lord, Lord Forsyth. I am not going to get too religious about this. It is clear that there appears to be near-unanimity on the importance of strengthening the arrangements for parliamentary scrutiny of the regulators and of the Treasury, as the Minister said at Second Reading, given the greater responsibility this Bill pushes on to the regulators.
In the interests of time, I am not going to speak on the next group. It would just be repeating what I am saying now. But I hope the Minister will take it as read that I support the theme and concept in the next group. just as I do within this one. What I hope will now happen is that the Minister and all interested Peers can get together between now and Report to try to come up with something mutually acceptable that we can all get behind. Is that something the Minister can facilitate?
Baroness Lawlor (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Vaux of Harrowden, and I support the amendments in this grouping proposed by the noble Baronesses, Lady Noakes and Lady Bowles, the noble Viscount, Lord Trenchard, and others, for the reasons which have been explained. I have an indirect interest in this subject, which I declare. As a founder and research director of Politeia, I have been involved in publishing some analysis on the question of regulation and, indeed, contributed myself on a problem which is very great in Britain now, that of accountability, and more generally this regulatory state into which we have slipped.
My Amendment 175 should be seen as complementary to this grouping. Its aim is slightly different but complementary; it is designed to focus scrutiny ex ante on the rules proposed. The focus is on new, adapted or maintained regulations that are due to come into operation and to consider how consistent, predictable and transparent they will be, as well as how much they will be in accord with the law. Given the fast pace of how the sector works and the speed with which, by necessity, regulators must act and decide things, it is important that we have this external check before rules come into operation. The regulators will have the power to intervene and make new rules within the broad terms of the law, if they judge that they should, without the searching analysis and testing that are needed beforehand. The sector will in most senses be a guinea pig for this process.
Lord Thomas of Cwmgiedd (CB)
My Lords, I will make three brief points in support of this amendment.
First, from a constitutional perspective, it is essential that the accountability is to Parliament. It is subdelegated from us. It seems inconceivable to me that any legislative body should give power to a body that is not accountable to it. That is the first constitutional point.
Secondly, it seems to me that the Treasury is not the right body to do this job—partly for the reason I have given and partly because some of the objectives that are already in the Bill span areas way beyond the Treasury’s competence. One can certainly see on climate change, for example, a real worry that, if the Treasury is left in charge, there will be all kinds of considerations—short-term, mainly; certainly not long-term—that will not be able to examine precisely whether the regulators are doing what they should be doing.
Thirdly, we cannot ignore the vast pace of change. It is difficult to stand back and appreciate that many of the things we have developed over the centuries are having to be changed within a few years. The financial markets is one area where change is enormous, such as in dematerialisation and the use of digital assets. This morning we debated electronic trading documents in this Room. Therefore, we need such a body. I am afraid that whoever joins this committee will find it very hard work but that is no excuse not to set it up, because it must be absolutely on top of things and gingering the regulators. I hope the regulators will come to see that this is good. We cannot have delay and, without a special committee to do it, that is what will happen.
Lord Bridges of Headley (Con)
My Lords, I will make a couple of points quickly. In so doing, I once again declare my interests as an adviser to and shareholder in Santander and, more appositely, as current chairman of the Economic Affairs Committee.
I want to pick up on the noble and learned Lord’s excellent points. If I may be very frank, I was disappointed that in the Minister’s response to the previous group he consistently referred to accountability to the Treasury. We are talking here about accountability to Parliament. This is what matters; it is what concerns so many noble Lords who take a great interest in this debate. There is just nowhere near enough of that in the Bill. I am very disappointed by the tone and approach that the Government seem to be taking, so far, to what I see as a highly constructive set of amendments, especially my noble friend Lady Noakes’s amendment, which I entirely support. I have two brief points to make about the committee structures of this House and of the other place.
As we have seen and are already seeing, the remit of committees here and in the other place is not set up to handle and scrutinise the avalanche of regulation coming out from all the regulators. It is nowhere near adequate to handle the consultations, let alone everything else. They do not have the resources either. It is imperative that the Bill is amended to reflect this. I very much hope that when my noble friend responds she will give this amendment some warm words of support, go away and think of ways in which she might support it. I will be speaking again in support of my noble friend’s other amendments.
Lord Sharkey (LD)
My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Noakes, and observe that the Government have said, more or less consistently, that it is for Parliament to decide what form of scrutiny it requires. This acknowledges the importance of the issue. This is Parliament, and the amendment sets out a clear way ahead to establish parliamentary oversight. If the Government mean what they say, they will not oppose these amendments. They might join in a constructive discussion of how to make them better, but they will not oppose these amendments if they are to be at all consistent.
It is worth noting, though, that accountability and scrutiny are not quite the same. Even if we were to pass the amendments in the name of the noble Baroness, Lady Noakes, we would need to take a closer look at the delegated powers mechanisms that the Bill contains. As things stand, Parliament will have no meaningful say in whatever the new rules may be. Unless I have misunderstood, the proposed financial services regulators review committee will not be able to intervene as the new rules become law. We will need to think about that carefully as we make progress with the Bill.
Lord Tunnicliffe (Lab)
Can I say a couple of words about regulation and regulators? This is usually a political divide and I am proud to be on my side of it. I believe that society is the richer for good regulation; I am against bad regulation but in favour of good regulation. When one has good regulation, the problem is often that it is poorly executed. These financial regulators do the execution, so processes to hold them better to account have to be a good thing. That may include the distasteful fact—it may or may not emerge—that they are underresourced. Certainly, this sort of debate will bring out those sorts of issues.
I have to be careful here, but my general view is that this is really a rather good group. I shall consider it carefully and discuss it with colleagues across the House between now and Report to decide on the extent to which we will support it. I strongly recommend that the Minister does as asked and enters discussions with us, to see how much of this can be agreed and included in the Bill. We had a similar tussle two years ago when we did a big chunk of this and tried to draw in the regulators more. The regulators put down on paper that they were willing to talk to us more. The problem was that we did not have mechanisms in the House to take advantage of that. This would be a game-changer, by breaking through into that area and creating processes to have proper accountability and scrutiny—supervision is the wrong term—of these enormously powerful regulators, which are vital to the success of our financial markets, in terms of both opportunities and appropriate restraint to avoid catastrophes.
Baroness Bowles of Berkhamsted (LD)
My Lords, I strongly support the proposals for a Joint Committee. As ever, the noble Baroness, Lady Noakes, has researched this well. I know she has been looking at it for a long time, because we talked about it back when we debated the 2021 Bill. I commend the thoroughness with which she has done that. I also welcome the amendment by the noble Baroness, Lady Lawlor. One thing about that proposal is that it would be slightly larger at 12 members, instead of nine. It is a different committee, as has been explained. I have done this kind of scrutiny and we really need to think what volume of it there will be—especially now, post Brexit.
After the financial crisis, when I was chair of ECON in the European Parliament, we did 40 pieces of major financial services legislation—directives or, if that Parliament wanted them to be more direct, regulations. That is a huge number, and the volume of rules that came out from them is even more huge. It is an enormous task for the regulators doing those rules and for those who have to scrutinise them. My committee, which did that scrutiny work in the European Parliament, had the advantage of doing the legislative side first and then moving on to the rules. Nevertheless, it had some 60 members so could specialise in small groups, rather as we do with a Committee of the whole House; we self-select a group. Some people would do banking, some would do funds and some insurance. There would be a happy band, probably only five or six, who developed extra expertise in the self-selecting sub-committees. Of course, within that idea of self-selection, you could run parallel informal sessions at the same time.
With our small committees, we will not have the ability to do that. There is no way we can emulate it, as we have already said. Nevertheless, we should think about the size of the committee we might want. I thought having 12 was better than nine, but maybe the number has to be odd. If you go to 13, that is not a happy number so let us up it to 15. Maybe that is as far as we can push it.
I think that a lot of the work of such committees will not be everyone wanting to get in on questioning somebody. An awful lot of such work is an awful, dreadful grind of going through document after document, and documents explaining the documents, then asking somebody what the hell it all means anyway. That is time-consuming. We should have a few more people concentrating on that, maybe with the opportunity to specialise. If we rotate the committee membership frequently we might lose that expertise, although in this House at least we do not seem short of people who can turn their minds to these kinds of things. I know that that is more of a comment, but maybe we can bear it in mind as we debate among ourselves what we will do on Report.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government are keenly aware of the interest in Parliament in the appropriate committee structures for scrutinising the regulation of financial services and will listen to the debate that we have on all the different groups very carefully. However, as noble Lords have noted, and I note myself, Parliament is of course responsible for determining the best structure to scrutinise the regulators.
As other noble Lords have also recognised, this debate has been had across different parts of Parliament over previous years, including during the Government’s consultation on our proposals. As my noble friend Lady Noakes said, the Treasury Select Committee considered this question in its report of June 2022, Future Parliamentary Scrutiny of Financial Services Regulations. That resulted in the establishment of a new sub-committee for scrutiny of financial services regulations. I also note that the All-Party Parliamentary Group on Financial Markets and Services published a report in February 2021, which recommended the creation of a Joint Committee.
I note that my noble friend modelled her amendment on the provisions relating to Parliament’s Intelligence and Security Committee, which is a Joint Committee set up on a statutory basis. Let me say to the Committee that the requirements applying to the ISC are quite unique, given the extreme sensitivities concerning the operation of the intelligence services. A large part of the provisions related to the ISC are about limiting its scrutiny powers to ensure that the intelligence services can operate and that the information they require to do their jobs is appropriately protected in those circumstances. The financial services regulators do not handle such sensitive information so the Government consider that a similar approach in statute is unlikely to be required in this instance. As I have said, it is not for the Government to impose an approach on Parliament.
I recognise the contributions from noble Lords saying that, by amending the Bill to create a Joint Committee, Parliament would be expressing its view. However, the point I would make in relation to that is that Parliament has the capability to set up Joint Committees without the involvement of government; they are usually established by Standing Orders in both Houses. This process does not require legislation. Introducing a Joint Committee at this stage of the Bill would be a significant change to the structure of the scrutiny of financial services. There is already a mechanism by which Parliament can establish such a Joint Committee should it wish to do so. Through this Bill, the Government intend to ensure that Parliament has the information it needs to conduct effective scrutiny of regulators, whatever structure it determines to be correct for doing so.
Clauses 36 and 46 and Schedule 7 require the regulators to notify the Treasury Select Committee of their consultations and draw the committee’s attention to specific sections, including those that deal with how the proposals advance the regulators’ objectives and how they have had regard to the regulatory principles. Those references to the TSC are in line with wider requirements elsewhere in existing financial services legislation, which establish that committee as the main committee for financial services matters. However, I note the wide range of sincerely held views on this matter and the fact that a number of different committees have previously been involved in scrutinising the wide breadth of financial services regulation.
Lord Forsyth of Drumlean (Con)
I am trying to follow the logic of my noble friend’s argument. If her argument is that Parliament can set up committees so there is no need for legislation, why is it necessary to reference the Treasury Select Committee in the legislation?
Baroness Penn (Con)
In the legislation, the Government are seeking to formalise and make explicit some of the ways in which committees can have their work facilitated. I recognise that this Bill refers to the Treasury Select Committee. That is the case in existing financial services legislation; for example, Schedule 1ZA to FSMA requires that the person appointed as the CEO of the FCA must appear before the TSC before their term can begin. Also, when appointing independent reviews of ring-fencing and proprietary trading, as required by Sections 8 and 10 of the Financial Services (Banking Reform) Act 2013, the Treasury was required to consult the TSC.
Lord Vaux of Harrowden (CB)
I am struggling with the logic here. If it is the case that scrutiny by the Treasury Select Committee is in previous legislation, why is it wrong to change that and enhance the scrutiny in this way? Logically, the two seem to be the same thing.
Baroness Penn (Con)
Perhaps I could finish my point; we will also come to this issue in the next group. In seeking to ensure that the relevant committees of Parliament have the information that they need to do their jobs, the Bill references the TSC, but I acknowledge that other committees in Parliament have done this role in the past or may wish to do it in future. That is something we will want to reflect on in our discussions of both this group of amendments and the next one. I recognise the point that has been made to me and will, I think, be made to me again in our debate on the next group. Although there is precedent for the TSC—indeed, it has set up its own sub-committee on this matter—I completely see the value of contributions of committees from this House or, if Parliament determined it, Joint Committees. We want to reflect carefully on how we can ensure that we are able to facilitate that also.
The noble Lord, Lord Vaux, invited me to reflect on this discussion and discuss with noble Lords between Committee and Report if and how we can take the thoughts and ideas further. That is something that I would be very happy to do. We will reflect on the points raised during this debate and consider them carefully before Report.
I wanted to make two points regarding this group. First, it is for Parliament to determine its committee structure and it has the ability to determine that, including the establishment of a Joint Committee, through existing procedure. Establishing a Joint Committee through statute is the exception rather than the rule and reflects the specific circumstances of the Intelligence and Security Committee. It is, I think, the only committee that has been established by statute in the last 100 years or so.
The other point, which we will discuss further, is that although we do not want to determine the correct committee structure, we do want to ensure that committees have the information they need to do their work. We have put clauses in the Bill to reflect that but, as I believe we will come on to, we will want to consider whether they fully reflect the work done in both Houses to scrutinise the regulators.
Baroness Bowles of Berkhamsted (LD)
I do not know whether the Minister is going to come on to this, but I hope she will also say something about what I called the consequences of scrutiny and what my noble friend called accountability. We can set up all the committees we like within the permissions of the parliamentary structure, but the point is what the Government then do and take notice of. There is no point in doing it otherwise. That is what we want to hear: how are they going to, as I would say, put wheels on it so that the reports are acknowledged? We are not saying that the Government or the regulators have to take everything but they at least need to comment and such things. Will the Minister say something about that, please?
Baroness Penn (Con)
On that point, the noble Baroness referred to the Government responding, but we are broadly discussing the committee’s scrutiny of the regulators and the Government’s role as well. The Bill provides a specific power to ensure that the regulators respond to representations made to them by parliamentary committees in response to their consultations. That clause is not limited to the Treasury Select Committee but applies to any parliamentary committee that makes a representation.
I look forward to debating the next group, which continues the theme, but for now, I hope that my noble friend will withdraw her amendment.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who took part in this debate—with the possible exception of my noble friend the Minister.
I think we were pretty much at one in this Committee on the importance of setting up proper accountability arrangements for the financial services sector. I make no apology to my noble friend Lord Forsyth for trying to design a Rolls-Royce solution. The financial services sector is the biggest contributor to the national economy. What regulators in the financial services sector do has a huge impact, not just on the players in the financial services sector but on the whole economy. For that reason, we have to take this extremely seriously. It is at this point, when we are about to make a very radical change in the scope and responsibilities of those regulators, that we should consider this all very carefully.
The noble and learned Lord, Lord Thomas of Cwmgiedd, is absolutely right: this is about the importance of accountability to Parliament, and we must not forget that. That is what we have been trying to do.
Lord Forsyth of Drumlean
Lord Forsyth of Drumlean (Con)
My Lords, perhaps I should repeat the declaration of interests I made at Second Reading. I am regulated by both the FCA and the PRA and am chairman of a publicly quoted bank, Secure Trust Bank. In tabling this amendment, I anticipated my noble friend’s response to the previous group. I have Amendments 89, 93, 97 and 109 in this group; Amendments 89 and 97 are the guts of it. Basically, they would enable Parliament to set up a committee—a Joint Committee or its own committee or whatever.
In making her case for the last set of amendments, my noble friend Lady Noakes pointed to a key point, which is about resources. The noble Baroness, Lady Bowles, has talked about the scale of the task that is being put before the regulators. It is hard to believe that without some kind of statutory backing, the huge resources that will be required to do this task and to do it effectively are likely to be forthcoming. I think that is in the nature of things. Certainly, my experience as chairman of the Association of Conservative Peers has been that getting any change in this place is a lifetime task. I just do not see Parliament being able to rise to the challenge.
If my noble friend cannot countenance writing into the statute book that there should be a Joint Committee of both Houses, which I believe is the right solution, these amendments at least provide for that. It is evident from this quite short debate that every member of this Committee thinks that this is desirable, although I quite understand why my noble friend’s briefs say that it is not.
I do not wish to be rude about the Treasury Select Committee in any way but, as a former chairman of the Economic Affairs Committee—I am sure my noble friend Lord Bridges agrees—I have not detected within the Treasury Select Committee the kind of commitment that we see in the Select Committees of this House. That is because their members have constituency and other responsibilities. You can see that in the committee’s attendance and in the way in which it operates. As the noble Baroness, Lady Bowles, pointed out, this is a monumental task.
Now, I hate all this consensus so I will introduce a degree of controversy. I voted for Brexit. I voted for Brexit because I believe in Parliament taking back control over our regulations. I did not vote to give all the European regulations, over which we have had insufficient parliamentary scrutiny and control, to a bunch of regulators who are not subject to any parliamentary control. From the Government’s point of view, when they keep being asked “What did Brexit ever do for us?” to refuse even minimal accountability over our most important earner and job creator is extraordinary.
We should listen very carefully to the points made by the noble and learned Lord, Lord Thomas, in the debate on the previous group: this is a central constitutional matter. Without wandering into a Second Reading debate, throughout the Bill we have endless examples of where power is being taken away from Parliament by the Executive without being subject to scrutiny.
I am actually speaking to my amendments, in the hope that, at the very least, my noble friend will say that, as I made the case against my noble friend Lady Noakes’s amendments on the basis that it is for Parliament to decide, these amendments enable Parliament to decide what it should be. At the same time, I recognise that they do not deal with the issue of resources although—believe it or not—it is entirely up to Parliament how much resources its committees adopt. It is not within the Treasury’s control; Parliament votes resources to the Treasury, not the other way round.
My noble friend is a very effective and much respected Minister at the Dispatch Box but, if I were a Minister faced with a Committee as unanimous as this, knowing the views that were expressed at the Second Reading on the Bill, I would not hope to proceed without making a major concession in this area. Not doing so would make it more difficult for the passage of this legislation.
It is a great experience for me to have the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, support an amendment in my name. I am not used to this degree of consensus. That in itself ought to make my noble friend aware that she needs to take this away and come back with a government amendment that establishes a Joint Committee.
I will deal with the argument about the ISC, which my noble friend said is unique. It is indeed. It is a unique committee, because the powers that are operated by the security services are great. The powers that are operated by the regulators are great. We can argue that this is about confidentiality—it certainly is—but it is also about ensuring that people who wield great power are held to account, and that is missing from the Bill, as so many have said during this debate.
The other point I make to my noble friend is that yes, it is true that it is the only statutory committee that has been established, but we have made a fundamental change in taking financial regulation away from the European Union, where it was subject to considerable scrutiny—a moment of praise from me for the European Union and the wonderful work that the noble Baroness did as chair of ECOFIN. Whatever criticism one might make of the regulations, there was proper scrutiny, and that is completely absent here. Are we really going to say that we as a Government have delivered Brexit by making sure that there is little democratic accountability and less than was achieved in respect of the European Union?
In responding, I ask my noble friend to accept the amendments, but go further if she can.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, I have to inform the Committee that if Amendment 89 is agreed, I cannot call Amendment 90 by reasons of pre-emption.
Lord Bridges of Headley (Con)
My Lords, I am grateful to my noble friend Lord Forsyth for tabling this amendment. As he said, there has been an outbreak of consensus on this point overall, and the fact that the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, have also put their names to the amendment, shows what we have heard time and again on this Bill: that it does not go nearly far enough to increase parliamentary accountability and scrutiny.
As I said in a previous debate, and as my noble friend mentioned, we need to improve this Bill in three ways. First, we need to ensure that the regulators publish more data about their own performance. Secondly—this is an amendment we will come to on another Committee day—we need to create a new source of independent analysis of regulators’ actions and performance. Thirdly, by this amendment, as with those in previous groupings, we need to ratchet up parliamentary scrutiny.
I see this amendment—I use this word carefully—as a backstop. My noble friends who have Brexit dispositions may take exception to the word, but it is absolutely a backstop to what we need to achieve here, given the reservations that my noble friend the Minister made about my noble friend Lady Noakes’s previous amendment. As I have said before, and as my noble friend just mentioned, the Treasury Select Committee is an admirable body. We all know that it has created a new sub-committee to scrutinise consultations published by the regulators but, as many noble Lords will be aware, although consultations are very important, they are just one aspect of the regulators’ work. Furthermore, there are numerous consultations. I spent a joyous few minutes counting the number of consultations published last year by the FCA, PRA and the Payment Systems Regulator; I counted 75.
Finally, as my noble friend pointed out, there is expertise in this House. I will spare the blushes of those in this Room, but there is enormous expertise not just here or on the Economic Affairs Committee or the Industry and Regulators Committee but in numerous other aspects. That expertise should be mobilised effectively and systematically to scrutinise this avalanche of regulation. For those reasons alone, it is critical that the Bill ensures that this House—not just the other place—is seen as a key means of increasing scrutiny and accountability.
Before I end—I know that others want to speak—I say just this: increasing accountability and scrutiny should not be portrayed as a means of undermining independence. I very much hope that no one thinks that. The scrutiny of our regulators and their accountability to Parliament should and indeed must go hand in hand with their independence. This is not just to ensure that regulators are accountable, nor simply because there should be no regulation without representation, but because if regulators wield great powers, as my noble friend said, they must be seen to account for their actions in public, and those actions must be seen to be scrutinised and judged by Parliament to be appropriate and within their remit. The point is that doing so increases the legitimacy of the regulators themselves. That is why this debate is not arcane but highly relevant to the power and the position that regulators hold.
I was grateful to hear my noble friend the Minister’s constructive tone in her response on the previous group, so I end by asking her a very simple question; it requires only a yes or no answer. Does she think that this Bill contains sufficient measures to increase parliamentary scrutiny of the regulators in the light of the powers that those regulators are now getting—yes or no?
Lord Naseby (Con)
My Lords, I have a couple of quick comments. I have had the privilege of being across the two Houses for coming up to half a century. In my judgment, this Bill, which has a clear objective of growth—a brand-new element that has not been laid on financial services before—means that Parliament needs to show leadership. We are not often asked to show particular leadership but, with this substantial change, we in Parliament need to show leadership. That is what this amendment is all about.
Baroness Bowles of Berkhamsted (LD)
My Lords, I have two rather modest amendments in this group. They are again part of my drawing attention to the fact that there needs to be accountability to Parliament. All they would do is insert that, when a regulator does its consultation and is giving the notification to Parliament, it should mention and draw attention to the fact that issues have been covered by a parliamentary report. I know that the regulator will already have responded to a parliamentary report but it might have been some time sooner.
This is a relevant issue. Any sensible regulator would probably make the comment anyway but that does not mean you cannot put little pieces into legislation here and there that just remind people of the status of parliamentary reports. That is what these two amendments would do, with one for the FCA and one for the PRA. When those notifications come to Parliament, they would have to indicate when they have been covered by a parliamentary report. They would not have to say that they agree with it; one presumes that they would comment on it.
I will not say anything more about the scrutiny—I have said a lot already—other than that I basically agree with everything that everybody has said. We are all agreeing with one another. When the Minister has meetings to work out what concessions can perhaps be made, they will have to be substantial, not a little tweak. They will have to recognise the importance and magnitude of financial services—including the great power that they have, as has been said—and move towards what must be great accountability to measure up to that great power.
Lord Tunnicliffe (Lab)
My Lords, I hope I will be forgiven for not going through my various amendments. Their essence seems to be in the general direction of this group of amendments and I think it highly likely that, between now and Report, the supporters of this group will knock together a cohesive set of amendments to achieve our common objective. I know that the noble Lord, Lord Forsyth, finds it painful but we are agreeing with each other on this group.
One of the problems of society is that people grow old in waves. We are already running out of people who have forgotten about the last financial crisis. It was by a hair’s breadth that the economic system in the world did not fail. It took some brave decisions, in this country in particular and in the United States, to save the world from an economic catastrophe. This is different from the Intelligence and Security Committee but in no way is it less important. It is crucial to this nation.
We are suggesting that we in this House should be a backstop. That is not particularly surprising because that is what we do all the time. When the Government do not have a working majority, I believe that they are much more alert to what happens in this House because, suddenly, they are all there, they have their majority, they have got something through the House of Commons but then it runs into the Lords and new questions are asked. People spend a lot of time worrying about particular points. Yes, our role is a backstop, but we could not be one as the Bill is drafted at the moment because it sees two levels: the House of Commons level and the House of Lords level. This Bill brings us into parity of access. It is not nearly as comprehensive as the proposal from the noble Baroness, Lady Noakes, but it is a basic matter of equity to bring this on to a level playing field.
My next point concerns the issue of volume. The volumes will be very significant. One of the best things that the House of Lords does is its committees, where people actually put the time in. I really am quite pleased that I avoided becoming an MP. I only aspired to it before I knew what it was all about. Once you are an MP—I hope that ex-MPs will interrupt me if I am wrong—the first thing it is all about is getting re-elected. That requires a lot of work in the constituency and all that sort of thing. That is all part of the democratic process but the volumes need the sort of people who are in this House—as the noble Baroness, Lady Bowles, said, they almost self-select—to put the effort and energy in.
Scrutiny is not a negative process. Too often, in the way we run bits of society, it is a single heroic leader passing down the rules, but very good organisations encourage dissent in their top teams—not external dissent but internal dissent where people ask, “Do you really mean that? Have you thought through the consequences of that?” The effect of those processes is extremely benign. Either things get changed for the better or people understand what they are saying better and are able to present it better. Scrutiny is an extremely positive thing.
The mood that has got us here today has been around for years, I would say. We need a discontinuity; this group of amendments is the minimum discontinuity that I believe this House will tolerate. We will all be working across the House over the coming weeks to put together something that cannot be resisted. I hope that the Minister does not floor us by coming forward us early on in discussions with some sensible concessions to embrace the direction of this group.
Baroness Penn (Con)
My Lords, first, I will briefly speak to the government amendment in my name in this group—I feel I should—before turning to the substantive measures raised by the debate.
Amendment 151 corrects a minor drafting error in Schedule 7 to the Bill. The current drafting requires the PSR, when notifying the Treasury Select Committee of consultations, to set out how the proposals are compatible with the regulatory principles. However, the Financial Services (Banking Reform) Act 2013, which established the PSR, requires it to have regard to its regulatory principles. The Government are therefore bringing forward this amendment to Schedule 7 to align this Bill with that Act. The amendment also aligns the requirements on the PSR with those imposed on the FCA and the PRA through Clause 36 of the Bill.
I turn to the amendments tabled by my noble friend Lord Forsyth and the noble Lord, Lord Tunnicliffe. Through FSMA and, in respect of the PSR, as I just noted, FSBRA 2013, Parliament sets the regulators’ objectives and gives them the appropriate powers to pursue those objectives. I therefore agree with this Committee that Parliament has a unique and special role in relation to the scrutiny of the FCA, the PRA, the PSR and the Bank of England.
I also agree that effective parliamentary scrutiny provides a valuable service for consumers, firms and the regulators themselves. It can help ensure that the regulators’ resources are appropriately targeted to consider appropriate democratic policy input from Parliament and bring important public policy considerations into focus.
I recognise noble Lords’ point that regulators in this sector are in a somewhat unique position and the approach that we take to financial services regulation is somewhat unique in the level of delegation that we give regulators in their rule-making. The Government’s approach, through our FRF consultations and this Bill, is an attempt to recognise that somewhat unique position and role of regulators in this sector, their wide remits and their position as independent public bodies that are accountable to Parliament.
As I mentioned in the debate on the previous group, I will set out the rationale for the Government’s approach in the Bill and our consultations. Our intention is to ensure through the Bill that the Treasury Select Committee has access to the information needed to best scrutinise the work of the regulators. The requirements for the regulators to notify the TSC in Clause 36, and the PSR in Schedule 7, are in line with requirements elsewhere in FSMA that establish the TSC as the main committee for financial services business. This is intended to support more effective accountability and scrutiny of the regulators by Parliament as a whole.
The Bill requires that notifications sent to the TSC must be made in writing. As is usual practice, the Government expect this correspondence to be published. It will therefore facilitate broader awareness of the regulators’ consultations and enable relevant Lords committees to consider the matter. The clauses also require the regulators to respond in writing to formal responses regarding their consultations received from any parliamentary committee. The Government recognise the significant interest of this House and Committee in ensuring that all committees conducting regular scrutiny of financial services are adequately notified of the regulators’ consultations to ensure that they have the information required to conduct that scrutiny.
As I said in the previous debate, parliamentary scrutiny is first and foremost an issue for Parliament to consider. It is not for the Government to determine the best structure for ongoing scrutiny of the financial services regulators, but we do have a role in setting out the suitable mechanisms by which the regulators must give Parliament the appropriate opportunity to scrutinise the work of the regulators in taking forward their functions. I would like to reassure noble Lords that the Government have heard the points made in the debates today and that ahead of Report we will carefully consider the views expressed today.
I recognise the level of consensus among speakers in this Committee. My noble friend picked up my point and said that there was not a range of views on this issue. In the debate on the previous group—and we have touched on it in this debate—in some respects we are talking about the establishment of a Joint Committee of both Houses. If you look across both Houses, there is a range of views about how this should be taken forward. I will listen very carefully to the views of this Committee as we conduct our scrutiny of the Bill at this end—in our House—but, when I made that point, I was maybe pointing to the whole of Parliament, not just our end of it.
Lord Forsyth of Drumlean (Con)
My Lords, my noble friend referred to the range of views and the House of Commons. I hope that this does not get into a kind of turf war between the House of Commons and the House of Lords. The reason I say that is that if I look at the scrutiny the Bill got in the other place, it is not impressive.
The noble Lord, Lord Tunnicliffe, said that he does not regret not becoming a Member of Parliament. When I was first elected as a Member of Parliament in 1983, it was exceptional to have a guillotine in consideration of legislation. Now everything is timetabled in the House of Commons and when you say that it results in almost zero scrutiny, the response one gets is, “Ah, yes, but that’s because all parties agreed that only that time was necessary”. That is why this House spends so much of its time looking at badly drafted legislation that has not even been considered.
If we think about the work that this House has to do and the burden of the legislation that comes our way, it is particularly acute at the moment. I certainly find it difficult to keep up with all the legislation that we are at present being asked to look at. I would like to be speaking today on the legislation in the Chamber but cannot because I am here, and so on. The idea that the main purpose of the House of Commons is scrutiny is completely wrong—accountability, yes, because they are elected. They are accountable to the voters, unlike all of us here.
At the heart of, if I may say so, the Treasury’s misreading of this situation is its not distinguishing between accountability, scrutiny and independence. Yes, we want the regulators to be independent and to have scrutiny, but we also want accountability. They need to be able to explain why they have done or are proposing certain things. To argue that that is achieved by getting them to send a copy of their latest consultation documents, which they might have spent two years thinking about, and that they will respond to letters and representations from committees that are overloaded and focused on long-term scrutiny is just—I am sorry to use the word—fatuous. It does not begin to meet the challenge created by the decisions to leave the European Union and to give the responsibility for these regulations to the regulators.
My noble friend the Minister keeps referring to the legislation that was passed in FSMA. As my noble friend Lord Bridges has said, that was then and this is now. This is a complete sea-change in what is required, and the Bill does not meet the test. My noble friend Lord Bridges asked the Minister to answer the question with a yes or no. Listening to her speech, I thought that was definitely a “yes”—that she does think the Bill provides sufficiently for parliamentary scrutiny and accountability. There is no one else in this Room, who is a Member of this House, who thinks that.
It is not enough to say, “I hear what you say and we will come back at Report stage.” I can see a car crash here. I can see us getting into a fight, which might be represented as a turf war between the Commons and the Lords, but is actually about ensuring that our regulators have the credibility that will come from effective scrutiny and that we get regulations that have been properly accounted for. At the end of the day, it will be for the House of Commons to decide what should happen.
That is the central role of this House. Frankly, it is insulting to this House to say, “Don’t worry your heads about this. The House of Commons and the Treasury Select Committee are the designated bodies to deal with scrutiny on an unprecedented scale.” It is the scale of the thing that I do not think is understood. A little voice in my head says that the Treasury sees itself as providing the scrutiny. Well, how do we hold the Treasury to account for the scrutiny? The argument may be that we do so by asking Oral Questions or Written Questions, but I have heard a few recently and the answers, frankly, do not persuade me that we have effective scrutiny through that route even in this House. I will not give examples as that would be embarrassing to those concerned.
I thought my noble friend the Minister might say, “I’ll grab this as a lifeboat because it is the very least that can be done,” but, actually, my noble friend is sticking to her guns. I agree with the noble Lord, Lord Tunnicliffe, that, if the Government are not prepared to bring forward amendments, we will have to find agreement on a suitable amendment. I think the Government will be defeated; there are very strong feelings on this. I say to my noble friend that she should go back to the Chancellor and to her colleagues and ask whether they really want to get into an unnecessary fight about something that any reasonable person would see is essential for the proper conduct of the financial services in our country, on which we so depend. I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
We have had a request from the Minister for an adjournment for 10 minutes, which I am going to grant. The Committee stands adjourned until 5.51 pm, when we will proceed with Amendment 123.
Lord Holmes of Richmond
“(c) be provided with any information or data that the Panel requires in order to fulfil its duties,(d) publish the agendas and minutes of meetings of the Panel, and(e) make publicly available its recommendations in full, including, but not limited to, the evidence base and analysis it used to make its recommendations, the assessed costs and benefits of the FCA’s activities and the range of representations made by Panel members to those recommendations.”Member’s explanatory statement
This amendment would require the FCA to provide its CBA Panel with the necessary data and information to undertake its duties and ensure that the Panel’s recommendations were made publicly available.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to start this fourth group on day five of Committee. As it is the first time that I have stood up today, I declare my interests in financial services as set out in the register.
I will speak to my Amendments 123, 129, 130, 132, 138 and 139; I thank my noble friend Lady Noakes for co-signing them. In essence, what they try to get at is pretty simple: to enable the CBA panels to be effective in the mission they purport to be set up to achieve.
I present to the Committee a new financial instrument: the ISA. Noble Lords might think that they are familiar with the ISA, but this ISA is “independence, scrutiny and accountability”, which we have heard so much about today and previously in Committee. I gift this particular ISA to my noble friend the Minister. Treat it as a woodworking router or some such device. If we take independence, scrutiny and accountability and apply them throughout the Bill, will she agree that, if current clauses do not stack up, they should be kicked out, improved and changed before Report?
With the CBA panels we currently have a conceptually useful form of ISA approach. However, the difficulty is that, as we have heard with so many other provisions in the Bill, as currently constructed they are the plaything of the regulator, again enabling the regulator to mark its own homework—or, even more so, to simply respond to whatever the CBA panels might say with, to put it in common parlance, “Whatevs”.
Importantly, rather than, for example, the membership of the panels, their agendas and outputs being down to the regulators, this suite of amendments can, in effect, empower a CBA panel to do its job effectively for all our benefit. Consider the membership: would it not be good if at least some of those members came from the sectors, with clear, recent and relevant expertise to bring to bear on the matters at hand?
If Amendment 123 and other amendments in my name—and others in this group, which all have a similar purpose—were agreed, it would enable these panels to operate far more effectively. The panels could also take a cumulative view on the impact of regulatory change. They could have a power of pre-regulatory scrutiny to consider the impact and force the regulator to think again before such regulations are brought into being. They could look at and opine on the overall economic impact of regulatory change. Having such an approach would make it far clearer and more transparent for all to see, when the costs are out there, whether there is necessarily any benefit from a particular change.
When my noble friend the Minister responds, will she agree that the CBA panels are a good thing, but it would be a great thing to fully enable and empower them to pass the ISA test? I beg to move.
Lord Lilley (Con)
My Lords, I did not speak on the previous group of amendments, but I endorse everything that my noble friend Lord Forsyth and the consensus of speakers said on that issue. I also strongly support what my noble friend Lord Holmes has spelled out, in not only proposing his amendment but providing an overview of this whole group.
We all agree that regulators must meet the objectives set by Parliament, but should do so in a cost-effective way, without erring, as regulators can, on the side of overburdensome regulation that makes life simpler for them without consideration of the costs to others. As drafted, the Bill requires both the FCA and the PRA to have two panels that undertake cost-benefit analysis. That is excellent but, as with much else in the Bill, it allows the regulators to mark their own homework or, at least, to appoint most of the panel of examiners who will mark their homework for them.
My Amendments 124 to 128 and 133 to 137 do, in essence, three things. They ensure, first, that all the members, not just the chair, are appointed by the Treasury rather than by the regulators; secondly, that they are independent; and, thirdly, more specifically, that they are not employees of the FCA or the PRA. I hope they find acceptance from the Government and this Committee. They are not contentious and are quite simple. They are within the spirit of the Bill, but simply tighten it up and make sure that what the Government appear to want is achieved without allowing the regulators to take over the process and run it in their own interest.
Baroness Noakes (Con)
My Lords, I have added my name to the amendments in this group in the name of my noble friend Lord Holmes of Richmond, and I endorse everything that he said in introducing them. I should also have added my name to my noble friend Lord Lilley’s amendments, because I agree with everything that he said in respect of them.
I congratulate the Government on embedding cost-benefit analysis panels into the architecture of the PRA and FCA. That is a very good thing. These amendments, which focus on transparency and independence, are intended to be helpful and to make the implementation of cost-benefit analysis panels more effective so that we can properly rely on their contribution to regulation. I hope that my noble friend the Minister will welcome these amendments.
Baroness Bowles of Berkhamsted (LD)
My Lords, again, I have a few niche amendments in this group. I have never been entirely comfortable with statutory panels. I understand their origins as wise men—undoubtedly, they were supposed to be men then—and that they formalise and take into the structures the voices of experienced people, but I am concerned that either they become about favoured sons or daughters or there is a potential to capture the people on the panels. Neither am I necessarily convinced that having them fragmented is all that sensible, because if you discuss things that may be relevant to big business in isolation from the public interest and smaller business, the big picture that is then put together is left to the regulator.
Those are the issues in my mind as I propose my amendments. I was not going to unpick the panels, but I suggest that every panel should have to have on it some representation of the public interest. That is probably already there on the Consumer Panel, but it is not on some of the others. Amendments 141 and 142 are to make sure that, even when you are dealing in a more specialised context, somebody is there putting the pieces together with regard to the bigger picture. I am not saying that they are supposed to keep intervening and doing the consumer bit when you are on the big business bit, but this is part of making sure that you are not too compartmentalised.
For a similar reason I have, in Amendment 143, proposed empowering Parliament to nominate one person to panels. This is part of Parliament representing the public interest. I am not saying that a parliamentarian should be on that panel, but it could choose to do that. In its wisdom, the European Parliament once chose to do that to me, and to some extent I wish that it had not, because it was a lot of work. When we started having these positions through appointment from the ECON committee, the Commission initially did not like it, then eventually it decided that it did rather like it because it helped to join up the processes and open up transparency and communication channels.
That is the point of suggesting that there be a parliamentary nominee. Again, it is just to make sure that we do not have sameness all the time, with the nominations coming from the same place. That is one way that it could be addressed. If others have other ideas to address the same problem, I am quite happy that those be incorporated, but those were the points of my Amendments 141 to 143. I think I am in common cause with the noble Lord, Lord Holmes, who does not want the panels to be the plaything, if you like, of the regulator, and with the noble Lord, Lord Lilley, who thinks that they are appointing their own examiners. I am trying to address the same problem. Whoever’s amendments we work with, the message again is that we need some change in this area.
Lord Flight (Con)
My Lords, the big change over the last decade has been the explosion in the number of people and the costs of those working in the regulatory context. I would have hoped that this debate and further consideration would look at what really adds very little to this Bill but costs a fortune in terms of people.
Lord Ashcombe (Con)
My Lords, before I start, I declare my interest an employee of Marsh Ltd, the insurance broker.
I again find myself supporting my noble friend Lord Holmes. These amendments would ensure that the cost-benefit analysis panels are better equipped to undertake the necessary scrutiny of the regulators’ work by ensuring their independence from the regulators. As the Bill stands, all the powers are given to the regulators in controlling the membership, agendas and outputs of these panels, thus allowing the regulators to set and mark their own homework, as people have said.
These amendments would ensure that the CBA panels have the necessary independence from the regulators by giving them powers to set their own agendas and work programmes. Where appropriate, the work of the panels should be made public. The amendments would ensure that the panels have the powers and authority to gain access to the data and impact assessments on which the regulators propose to make their decisions, including a cumulative cost-benefit analysis to understand the cumulative impact of regulation. The panels would have powers to have two existing representatives—or a number that noble Lords so suggest—in order for the views of the prevailing market to be heard. Importantly, the CBA panels would be given the freedom to offer a view on the overall economic impact and effect on UK competitiveness of regulatory changes, including scrutiny over the regulators’ reporting on the competitiveness objective. Finally, the panels should have the ability to undertake pre-regulatory scrutiny of rules, with the ability to challenge the regulators and seek a response to new regulations coming into force.
Lord Tunnicliffe (Lab)
My Lords, I think I want to commend the Government on actually bringing in the concept of cost-benefit analysis panels. Generally speaking, the amendments in this group elaborate on that and probably make them better balanced. I will certainly be interested to hear the Government’s reaction to them.
We have Amendments 131 and 140 here, which would require the FCA and the PRA respectively to put on their CBA panels
“at least three individuals with experience and expertise in the field of economic crime, with one drawn from the public, private and third sectors”
and to consider
“any economic crime risks posed”
by any new rules they propose. These amendments have come from thinking at the other end and from the organisation Spotlight on Corruption. I thank it for contributing its expertise, and Emma Hardy MP for pursuing the amendments in the Commons.
These amendments are part of our overarching push to highlight the Government’s weaknesses on economic crime, mainly fraud. There are serious concerns from consumers and stakeholders across the board about the slowness of regulators in preventing and tackling the vast amount of economic crime in the system. The size of the prize is vast. Money laundering is estimated to cost the UK £100 billion a year and fraud costs us £137 billion a year. The regulators need to do much more. I hope the Minister will agree that having panel members with specific expertise in economic crime is one way to ensure this, given the perverse ingenuity of the criminals they are up against.
Baroness Penn (Con)
My Lords, perhaps it would be helpful to start with a bit of context behind the Government’s approach to the statutory panels and the new cost-benefit analysis panel established in the Bill. I will then turn to the specific amendments.
The FCA and the PRA are required by FSMA to maintain statutory panels as part of their general duty to consult. As noble Lords have noted, these panels play a vital role in supporting the PRA and the FCA in developing regulatory proposals. As noble Lords have also noted, robust cost-benefit analysis—CBA—is an important part of the regulators’ policy-making process. It helps the regulators to understand the likely impacts of a policy and determine whether a proposed intervention is proportionate.
Respondents to the October 2020 future regulatory framework review consultation recognised the value of cost-benefit analysis but expressed some concern about the rigour and scope of the regulators’ analysis. Several respondents also supported enhanced external challenge as an effective way to improve the quality of the regulators’ cost-benefit analyses. Clause 41 addresses these concerns by introducing requirements for the FCA and the PRA each to establish and maintain a new statutory panel to support the development of their CBAs. Clause 47 includes a requirement for the Bank to consult the PRA cost-benefit analysis panel in relation to its FMI functions, while Schedule 7 includes a requirement for the Payment Systems Regulator to consult the FCA cost-benefit analysis panel. The new CBA panels will have a crucial role to play in providing challenge to regulatory proposals and ensuring sufficient scrutiny of the regulators.
I turn first to Amendments 123, 129, 130, 132, 138 and 139, tabled by my noble friend Lord Holmes, and Amendments 125, 126, 134 and 135, tabled by my noble friend Lord Lilley. The Government agree that the composition of the regulators’ panels is important for ensuring that they can effectively fulfil their role as a critical friend to the regulators. In particular, the Government consider that the CBA panel should benefit from those with experience of working in authorised firms.
During the debate in the Commons, the importance of ensuring that the regulators’ statutory panels, including the new CBA panels, are made up of a diverse range of independent experts was highlighted. In response, the Government introduced Clause 44, which requires the FCA, the PRA and the PSR, when appointing persons to their statutory panels, to ensure that all members are external to the FCA, the PRA, the Treasury, the PSR and the Bank of England. The regulators’ existing panels are currently made up of external members so this requirement will ensure that the approach is standardised and maintained on a long-term basis. In addition, the Government expect the FCA and the PRA to publish responses to the CBA panel’s representations at appropriate intervals, although it would not be appropriate to fix in legislation specific deadlines for independent regulators that may not be deliverable in practice.
Turning to Amendments 131 and 140 from the noble Lord, Lord Tunnicliffe, I assure the Committee that the Government are committed to tackling economic crime, as we have discussed in previous debates. This is also a priority for the regulators. For example, since 2015, the FCA has prioritised its strategy to ensure that firms take adequate steps to prevent them being used for financial crime.
Section 1D of FSMA sets out the FCA’s market integrity objective while subsection (2)(b) makes it clear that, in advancing that objective, the FCA must ensure that the financial system is
“not being used for a purpose connected with financial crime”.
The Government therefore expect that consideration of economic crime will feature in the regulators’ considerations when conducting a CBA. This is reflected in the FCA’s existing published guidance for CBA, which sets out that, when considering the rationale for a regulatory proposal, it should be clear what type of market failure or harm it seeks to address—including, for example, economic crime.
Lord Holmes of Richmond (Con)
My Lords, I thank everyone who has spoken in this group; indeed, I thank my noble friend the Minister for her response. At the beginning of that response, she set out very clearly the role and purpose of these panels—a role and purpose that could only benefit from much that is in the amendments in this group.
This is an area to which we will return. To pick one example, if good people, even independent people, come through such an approach—as I am sure they will—as currently drafted, they will not be independent appointments; that is clear, and that is just one example. We will need to return to a number of these issues for the sole purpose of making the panels as effective as they can be; this will lead to better regulation, help the regulator and benefit the wider sector. For the time being, however, I beg leave to withdraw Amendment 123.
“Recommendations to FCA and PRA: systemic risk
In section 9Q of the Bank of England Act 1998 (recommendations to FCA and PRA), after subsection (2) insert—“(2A) The Financial Policy Committee may make recommendations to the Pensions Regulator, FCA and PRA about financial stability and systemic risk from investment strategies in Pension Funds, including concentration, risk modelling, margin, collateral and stress testing.(2B) The Financial Policy Committee may request a joint annual report from the Pensions Regulator, PRA and FCA about investment strategies in Pension Funds, and the outcomes of any risk modelling and stress testing, and to highlight aspects of investment or otherwise that may present a risk to financial stability or systemic risk.(2C) The report must be sent to relevant Parliamentary Committees.””
Baroness Bowles of Berkhamsted (LD)
My Lords, this is probably an appropriate time to remind the Committee that I am a member of the international Systemic Risk Council and a director of the London Stock Exchange. My three amendments in this group are inspired by the events of last September, when it became necessary for the Bank of England to intervene in the gilt markets, and by the subsequent inquiries into and analysis of liability-driven investment, especially leveraged liability-driven investment.
The Lords Industry and Regulators Committee recently published a 22-page letter to Ministers—it is more like a mini-report—following its investigations into LDI. Among its suggestions was that, like the PRA and the FCA, the Pensions Regulator should come under the “comply or explain” category for recommendations made by the Financial Policy Committee; I am aware that this suggestion was also floated in the Economic Affairs Committee’s session with Sir Paul Tucker. This is exactly what my Amendment 149 would do, together with the necessary context—in this case, regarding
“systemic risk from investment strategies in Pension Funds, including concentration, risk modelling, margin, collateral and stress testing.”
I have also included specific mention of the FCA and the PRA, both to clarify their roles in relation to systemic risk from pension funds and to emphasise that pension funds need to be considered in that context because it is inevitable that there will be far more correlation and groupthink than there would be among other groups of funds. The collective size of pension funds and their substantial role in gilt investment is not going away; the specifics of the Pensions Regulator’s rules and accounting standards relating to pension scheme valuation have driven and will drive that correlation, even if adjustments are made. It would take too long to cover all the things that have come to light but one reason why such an amendment is necessary is to clarify that it is an ongoing source of systemic risk that must be routinely monitored.
It is true that, in 2018, the Financial Policy Committee noted the fact that leverage in pension funds was greater than in hedge funds. It also noted the substantial concentration—indeed, almost a cornering of the market—in index-linked gilts. The claim is that the FPC then worked with TPR, the FCA and the PRA on stress tests. Further analysis by TPR in 2019 highlighted again that there was significant borrowing and leverage in large defined benefit pension funds but, again, it left out analysing the smaller end of the market, where operational challenges were greatest. TPR said that it could not impose on the small schemes, while we heard from L&G in the Industry and Regulators Committee that it got the okay for its pre-existing buffer of 100 basis points.
Frankly, nothing got changed. Nothing was done on leverage. The Bank sat happily by as sponsor companies effectively ran off-balance sheet hedge funds in their pension schemes. Nothing was done about the concentration in index-linked gilts and—guess what?—when the glitch came due, to the mini-Budget, the part of the market that was cornered found it had nobody else to sell to. So, it was a pretty bad job all round. Meanwhile, many are patting themselves on the back because the mark-to-market valuations, following accounting standards based on gilt discount rates, make it look as if liabilities have dropped more than the drop in asset valuations, so they say that the losses do not matter. It is, of course, an illusion: the pensioners are paid out of real assets and the losses will be paid for, down the line, by the sponsor companies and the taxpayer via tax relief. That will be measured in very many billions.
To put in some real figures, pension schemes had assets of £1.8 trillion. Losses are put at £400 billion by the Pension Protection Fund; others reckon it may be £500 billion. The ONS will tell us the actual figure next month. That £400 billion or £500 billion has to be replaced, whether through sponsor contributions or growth. All that will be tax advantaged in some way, thus a loss of maybe some £100 billion to the public purse, without any increase in pensions from which tax would be recouped. None of this is escaped through buyout.
Whether you are a back-patter or a sharper analyst, we cannot afford a repeat and routine reliance on Bank of England intervention. There has to be increased diligence. As part of that, the specific need for the Financial Policy Committee more thoroughly to consider pension funds should be up there in lights and in legislation. That is the basis for the proposal in my Amendment 149.
It will be noticed that I have then amended my own amendment with Amendment 149A, which would also bring accounting standards and the endorsement board under the auspices of the Financial Policy Committee. This is not a totally off-the-wall suggestion because the Bank of England used to have a role in accounting standards back in the day, before Basel standards took over for banks. Nowadays, the Bank is not interested in accounting standards because it does its own calculations. That is, in fact, a quote from an important person at the Bank, who I will not embarrass today because it was made privately, but Andrew Bailey also told the Treasury Select Committee that he did not understand arcane pension fund accounting.
However, accounting standards can substantially affect the economy, financial stability and systemic risk, and there is no systemic oversight. After the financial crisis in the US, Bob Herz, then chair of the Financial Accounting Standards Board, asked to be given accountability to Congress. In the UK, we accept international standards created by the IASB, a private body, after review by the unaccountable endorsement board, which has no financial stability or systemic risk remit or experience.
Liability-driven investment and concentration in gilt investment was driven by the predominant use of gilt discount rates in accounting standards for valuing pension scheme liabilities on corporate balance sheets. The volatility that gave to corporate balance sheets drove towards investments that would match and counteract that volatility—that is, towards gilts and, in particular, away from equities. Indeed, as given in evidence to the Work and Pensions Select Committee, the extent of this is such that the London Stock Exchange listings are the most foreign-owned and most subject to foreign takeovers of any major exchange.
Matching accounting standard valuations has dominated thinking to the extent that the FTSE group of 100 CFOs has written to the Work and Pensions Select Committee, essentially saying, “We’d rather invest in gilts than in ourselves.” Meanwhile, as I have said, the “nothing to see here” illusion in the attitude to pension scheme funding—despite asset losses and because the gilt-linked discount rates on liabilities has made them look smaller—prevails even at the Bank of England over its own pension scheme.
Lord Davies of Brixton (Lab)
I broadly support the proposals in these amendments, although I have doubts and I do not think this is the final answer—I suppose that is what I am struggling to say—in part because I have yet to be convinced that the Bank of England is the appropriate holder of the knowledge on these issues. It is a highly contested area; there are strong views and a range of views.
It is not clearly understood, except perhaps by the noble Baroness who moved this amendment, that there is total confusion between different standards involved in assessing a pension fund. There are the technical provisions under the solvency legislation; the accounting standards set by the accounting bodies so that the sponsor has some idea of the ongoing liabilities to the pension fund; and the standards set by the Pension Protection Fund. They are all important, but they are not the funding standards. The funding standard is the assessment of what money is required to be paid into the scheme to fund future benefits, and none of those other three funding standards is designed to produce that result.
The technical provisions are not a funding standard, just a way of assessing whether further contributions to the scheme are required; they do not tell you what those contributions should be. Similarly, the accounting standard does not tell you how to fund the scheme; it is purely for the purposes of the sponsor, so it has some idea of its financial standing. The standards set by the Pension Protection Fund, which are a specific insurance-type approach, are certainly not a funding standard.
The problem is that there is total confusion, and I am not sure that we can look to the Bank of England in its present state of knowledge, or the financial responsibility committee, to make that assessment. The issue is: who is going to promote this debate and arrive at a conclusion?
Another point that needs to be clearly understood is that pension funds are distinct from insurance offices. They are two financial institutions of a completely different nature. Over the last 20 years we have edged to a situation in which pension funds are expected to behave as though they are insurance companies.
I support the amendments, but I raise some doubts as to whether we can really look to the Bank of England and its committee to provide the clarity that is so sorely needed on these issues.
Baroness Noakes (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.
I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.
I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.
I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.
Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.
Lord Sharkey (LD)
My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.
There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.
Lord Davies of Brixton (Lab)
I intended to make a second point about risk. Everyone tends to think about risk in terms of systemic risk—the finances of the country come under some pressure—but there is another risk that is not given sufficient attention, which is the risk that pension funds will fail to deliver the benefits that people expect to receive. That risk is given insufficient attention, but I hope it will be covered if there is a system where someone is given responsibility to look at risk. There is the risk of not getting out the benefits expected, as well as the risk to the financial system.
Lord Tunnicliffe (Lab)
My Lords, I do not particularly understand the technicalities that have been alluded to in this debate. I will just say a word or two about the bigger issue here, which is the problem that human beings as individuals and institutions have with handling low-probability, high-consequence risk. We know that younger human beings, particularly, gamble their lives on it in how they behave.
Of course, I was very close to this because, in 1988, I took over London Underground, which had just killed 31 people. In a sense, the syndrome that led to that was, “Well, it won’t happen”. The defence was that it was unforeseen—that is, the circumstances that led to that catastrophe were unforeseen. Yes, it was unforeseen because it was not looked for. It was not unforeseeable. That is the issue.
Anybody or any organisation—public bodies, in particular—that is responsible for big risks has a duty to pursue the low-probability, high-consequence risks. I think it was the noble Baroness, Lady Noakes, who said that this is about risk management. It is much deeper than individual bits and bobs. We have had centuries of knowing just how high the consequences of systemic risk can be. If these amendments can address this problem in the financial world, I hope that the Government will give them a fair wind.
Baroness Penn (Con)
My Lords, as the Chancellor has set out previously, it is vital that lessons are learned from both the recent disruption in the gilt market and the vulnerabilities in leveraged funds that this exposed. Pensions and, more specifically, liability-driven investment—LDI—funds are regulated by a number of different bodies. In the UK, the Pensions Regulator oversees pension schemes and the FCA supervises fund managers that manage LDI funds. Many LDI funds are based overseas; authorities in these jurisdictions are responsible for supervising the funds themselves.
In accountancy, the Financial Reporting Council is responsible for regulating auditors, accountants and actuaries, whereas the UK Endorsement Board works internationally to agree accounting standards and adopts these for use by UK companies. More broadly, considering the financial system as a whole, the Bank of England’s Financial Policy Committee—the FPC—is responsible for monitoring and addressing systemic risks to promote financial stability in the UK.
It is therefore right that the FPC has played and will continue to play an important role in ensuring that vulnerabilities in LDI funds are monitored and tackled. The Government welcome the FPC’s Financial Stability Report from December as an important milestone in the “lessons learned” process. The Government and the Bank of England agree that the FPC’s existing powers and duties remain appropriate and are sufficient to monitor and address the systemic risks associated with pension funds and their investment strategies.
Regarding Amendments 149 and 149A, the FPC already has broad powers of recommendation, as set out in the Bank of England Act 1998. It can make recommendations to the PRA and the FCA on a “comply or explain” basis and can make recommendations to any other persons it deems necessary to fulfil its objectives, including the Pensions Regulator, the Financial Reporting Council or the UK Endorsement Board. The FPC is also able to make recommendations to the Treasury, including in relation to the regulatory perimeter. These powers are used by the FPC to ensure that it can effectively monitor and/or address systemic risks, including those that may arise from pension funds and their investment strategies or accounting standards.
Additionally, the FPC must keep its recommendations under review and publish an assessment of the effectiveness of the committee’s actions in its financial stability reports. These must be published twice per year and laid in Parliament, allowing for further public scrutiny with regard to the impact of any recommendation made by the FPC, including whether it was complied with.
The FPC’s proactive approach to reviewing and addressing systemic risks was demonstrated in December when the FPC recommended that regulatory action be taken as an interim measure by the Pensions Regulator in co-ordination with the FCA and overseas regulators to ensure that LDI funds remain resilient to the higher level of interest rates that they can now withstand, and defined benefit pension scheme trustees and advisers ensure these levels are met in their LDI arrangements. The FPC has welcomed, as a first step, the recent guidance published by the Pensions Regulator in this regard. The FPC can also make recommendations in relation to reporting and monitoring requirements for LDI funds and pension schemes. The FPC’s financial stability reports then provide a public assessment of risks to UK financial stability.
With respect to Amendment 159, the Government agree it is essential that appropriate risk oversight and mitigation systems are in place, including for non-bank financial institutions. Sections 9C and 9G of the Bank of England Act 1998 stipulate that the FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system. This responsibility includes risks emanating from all parts of the financial system, including the broader system of non-bank finance such as defined benefit schemes. It is right that this responsibility sits with the FPC which is able to prioritise its work as necessary to improve financial stability. The FPC has well-established processes for achieving this task, working closely with the FCA and the PRA.
Lord Vaux of Harrowden (CB)
The Minister seems to be telling us that it has all the powers it needs and that everything is fine, and yet it happened. What went wrong and how do we fix it, if not this way?
Baroness Penn (Con)
There is ongoing work to look at that question. There has been an interim finding, as it were, setting out a number of recommendations. At the moment what they do not do, in my understanding, is set out the need for increased or different powers. But the noble Lord makes the correct point that we then need to understand whether those powers were used in the most effective way to prevent something like this from happening in the first place. The point I was seeking to make was that, so far in its work in reviewing what went wrong and why, it was not a question of a lack of powers or the inability in its remit to make certain recommendations. That is not to say that that work has concluded or that all the action that we need to take after reflecting on what happened has concluded either.
I was talking about the FPC’s powers and responsibilities to look at risks emanating from all parts of the financial system, including non-bank finance. It has the powers to recommend and, under Section 9H of the 1998 Act, also to direct the FCA and PRA to implement certain measures as specified by Parliament in order to further its objectives. Furthermore, as the IMF noted last year, UK authorities have often taken the lead in international efforts to improve the surveillance of risks beyond the banking sector.
In dealing with Amendment 159, looking at the risk from the non-banking sector in terms of financial stability and echoing my words to the noble Lord, Lord Vaux, the Government’s position is not that those risks are all fine, managed and under control. It is that the FPC has the powers it needs to deal with those risks where it can at a domestic level. In the Chancellor’s annual remit letter to the FPC, he reiterated the importance of prioritising work with international partners to address the vulnerabilities associated with non-banks. The FPC welcomed this recommendation. I say to the Committee that we agree that this area has been identified for more work at an international level but, alongside this co-ordinated international work, the Bank will continue to take unilateral action to reduce domestic vulnerabilities where it is effective and practical to do so.
Lord Tunnicliffe (Lab)
Will the FPC go out of its way to seek out risks—not risks known at the moment or even evolving risks, but the possible risks that could lead to a catastrophic effect?
Baroness Penn (Con)
My understanding is that that is what the FPC does. One of the mechanisms by which it does it is through its stress tests; it operates regular stress testing of the banking system and has also undertaken stress tests of the non-bank system. For example, in the latest Financial Stability Report in December 2022, it included a specific chapter on market-based finance. In 2023 it will run for the first time an exploratory exercise to test the resilience of the financial system against a scenario focused on the risks associated with market-based finance. This is one route by which it seeks to explore and seek out what those risks could be, to help inform understanding of those risks and future policy approaches that should be taken to mitigate them.
As I have said, much of the work needs to take place at an international level, but I accept the point made by the noble Baroness, Lady Bowles, that we also need to take unilateral action at home to reduce domestic vulnerabilities where it is effective and practical to do so. That work is ongoing.
I hope I have dealt with the noble Baroness’s amendments and reassured noble Lords that the Government are conscious of the risks—including systemic risks—that can be posed by the non-banking financial sector. With the FPC, we are undertaking further work to ensure that we can better understand and explore those risks, and take domestic action where possible to mitigate them, but also lead the work internationally to ensure a co-ordinated response.
Baroness Bowles of Berkhamsted (LD)
I thank all noble Lords who have spoken in this debate. I will reply to some of the points, but I will start with the Minister’s response. I am a little disappointed in two things. The main point of these amendments is to draw attention to the fact that, while the Bank of England and the FPC maybe had the powers to do things, they did not do them. As the noble Baroness, Lady Noakes, and I said, they did not do them after having spotted that the problems were there.
They did something pretty de minimis—some stress tests that basically followed what the industry was already doing—and left out the smaller end of the market. Had they put their thinking caps on, they might have realised that that is exactly where you would have problems with providing collateral. They did not do it because the Pensions Regulator said, “We can’t put this onus on the small schemes”. Maybe that was a comply or explain type of answer, but they just took it as given.
The fact is that, once again, they are shutting the stable door after the horse has bolted. I am saying that they need to be more proactive. They have to stop being scared. This was not an issue where, by doing something first, we would have put ourselves at a competitive disadvantage with industry in other countries; that is why you do “hug a mugger” or “let’s do international rules”. I understand it for insurance companies, where there is big competition and if we do something and they do not do it in Europe, there will be issues.
By the same token, if you think you are ever going to get something agreed about insurance companies globally, you will hear some rude expressions. For starters, in the United States it is state-based, and they do not do Solvency II, so it will be very difficult to get that agreement on non-bank financial institutions, which basically means insurance companies. There is absolutely no reason to prevaricate and hide behind NBFI when you are taking about our specific defined benefit pension schemes. It is just an excuse, and I do not buy it. I do not buy it from the Minister, the Chancellor, the regulators or the Bank of England.
Baroness Penn
“(b) demonstrate that the Regulator has had regard to the regulatory principles in section 53 when preparing the proposals,”Member’s explanatory statement
This amendment ensures that the notification provisions align with the duty in section 49(3) of the Financial Services (Banking Reform) Act 2013 for the Payment Systems Regulator to have regard to the regulatory principles set out in section 53 of that Act.
Financial Services and Markets Bill
Wednesday 1st March 2023
(1 year, 8 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-VI(b) Amendment for Grand Committee (Supplementary to the Sixth Marshalled List) - (1 Mar 2023)
Lord Bridges of Headley
“Office for Financial Regulatory AccountabilityCreation of an Office for Financial Regulatory Accountability
(1) The Treasury must, as soon as practicable after the end of the period of 12 months beginning with the day on which this Act is passed, by regulations make provision to create a body corporate called the Office for Financial Regulatory Accountability.(2) It is the duty of the Office to examine and report on the performance of the FCA and the PRA.(3) The Office must perform its duty objectively, transparently and impartially.(4) The functions of the Office are to be exercised on behalf of the Crown.(5) Regulations under subsection (1) are subject to the affirmative procedure.”Member’s explanatory statement
This amendment would require the Treasury to create an Office for Financial Regulatory Accountability, with duties to provide independent and impartial analysis to Parliament and the public of the financial regulators’ performance against their statutory objectives and regulatory principles.
Lord Bridges of Headley (Con)
My Lords, I once again declare my interest as an adviser to and shareholder in Banco Santander. It gives me great pleasure to open today’s proceedings. After several days of debate on this Bill, I get a sense that there is widespread agreement from all sides of the Committee on one point: the measures in this Bill to improve accountability and scrutiny are insufficient and must be strengthened. While the regulators are getting more powers, there is no commensurate increase in their scrutiny and accountability. That comes at a time when many of us were already concerned that that level of scrutiny is too low and the accountability too weak. The breadth of that concern is shown by the fact that there is cross-party support for this amendment. I thank those who put their names to it.
That said, as I have said before, in addressing our concerns we need to proceed with some care. We must get the balance right between accountability and independence and we need to avoid new forms of accountability and scrutiny, politicising the regulatory system and thereby creating uncertainty. With those caveats in mind, we need to do three things, all of which require amendments to this Bill. We need to improve the reporting by the regulators; improve parliamentary scrutiny; and—this is the purpose of these amendments, Amendments 160 to 166, to which I have put my name—improve the quality of scrutiny and accountability by providing independent and impartial assessment and analysis of two things.
First, we need an assessment of the FCA’s and PRA’s overall performance in meeting their statutory objectives and regulatory principles under FSMA 2000. Secondly, we need to provide analysis of the impact assessments for specific pieces of financial regulation so as to determine how those regulations are contributing to meeting the regulators’ objectives, also under FSMA 2000. That can be achieved, as the amendments set out, by creating an office for financial regulatory accountability, a specialist, independent, statutory advisory body, which would work to a charter set by the Government and laid before Parliament. To be clear, this is not a new concept. It has been proposed in various guises by others—and here I am thinking particularly of the noble Baroness, Lady Bowles, as well as the International Regulatory Strategy Group in the City of London and the London Market Group, with which I have worked on this proposal. While I accept full responsibility for any flaws in these amendments, I cannot take credit for the idea.
I shall not waste your Lordships’ time in giving a line-by-line description of each amendment, from Amendment 160 to Amendment 166, which set out the body’s role, its powers and duties and its membership and financing. I think, or rather I hope, that they all speak for themselves—and for that I am thankful for the work of the Delegated Powers and Regulatory Reform Committee, which set out precisely how these kinds of bodies should be set up and whose approach these amendments follow.
I am sure that the amendments could be improved and I would be delighted to discuss with any of your Lordships, on any side of the Committee—in particular, my noble friend the Minister—how we might do so. Rather than regurgitate what the amendments say, instead I shall address questions that may be in the minds of those who may be wary or sceptical of the need for this body.
First, is it not going to duplicate the work of the Treasury Select Committee? No, it will not. As we all know, parliamentary committees are there to hold regulators to account, not to provide the rigorous analysis needed to do so—nor do they have the capacity to do so, as we have discussed previously. Furthermore, few question whether the OBR duplicates the work of parliamentary committees; it provides analysis for Parliament and everyone else to use. The same applies here.
Secondly, will not this body duplicate the work of the cost-benefit analysis panels that the FCA and PRA will now be required to set up? No, it will draw on their work and analyse and interrogate it, but it will also take a wider view. Perhaps more important, this new body will be utterly independent of the regulators, not a body created by them—nor, for that matter, will it duplicate the work of the Regulatory Policy Committee, whose focus is on government departments.
Thirdly, what about cost: can we afford to set up this body? Of course, setting up a new body will carry cost, but I argue that this will be outweighed by its benefit. Let us not forget the enormous contribution that financial services make to our national coffers. They demand, if not deserve, special attention to ensure their regulation meets the objectives that Parliament has set.
Fourthly, will not this simply be a regulator of the regulator? No, as I have said, its role and purpose is one of analysis, to improve and inform scrutiny by and accountability to Parliament and others, period.
Finally, and most important, will this new body undermine the regulators’ independence? I argue—this is crucial—that it will do the reverse. If we have a source of independent analysis of their actions, we can have a debate about that based on fact. It should therefore strengthen the legitimacy of regulators which are fulfilling their objectives and acting in a proportionate and timely manner.
I cannot see any real objection to the overall concept. As I said, I am sure that the amendment can be improved and I look forward to hearing from others how that might be done. Given the wide support that it has, I very much hope that my noble friend the Minister will give it a supportive reply. Many of us want to avoid unnecessary confrontation with the Government on Report, not just on this point but on all the other proposals we have debated that would strengthen accountability and I stand ready to work with her and others to turn this idea into reality. I beg to move.
Lord Tyrie (Non-Afl)
I am surprised that nobody else is rising to support this; I was hoping that everyone would. I certainly agree with just about everything that the noble Lord, Lord Bridges, said, but then again I agreed with just about everything that the noble Baronesses, Lady Bowles and Lady Noakes, the noble Lord, Lord Forsyth, and others said on 20 February, about all this. We are all agreed because we can all see the same problem. As has been suggested, the Bill confers huge new powers on the regulators, repatriated from the EU, without making any meaningful suggestions to make them more accountable when they exercise those powers. I will support any and all amendments that improve scrutiny and accountability until and unless the Government come forward with a meaningful proposal of their own. I will come to how they might go about that in a moment.
Our first job as a Committee must be to make sure that the Government grasp that we just cannot carry on as we are. I am not sure that Ministers and, in particular, the Treasury have fully grasped how inadequate the existing structure of accountability is. There are four major bodies that should be contributing and all of them, in their various ways, will be defective. There is the NAO, but we cannot rely on VFM studies alone; the Treasury is frequently conflicted in its relationship with both the regulators; nor can we rely on the boards of those bodies. In principle, there should be some rigorous internal challenge—and that achieves a lot in some regulators—but in practice the boards are all too easily captured by the senior executives and there is a massive problem of asymmetric information.
As the noble Lord, Lord Bridges, said, parliamentary Select Committees should be on the case, and frequently they are, but on the current resources available to them it is simply not reasonable to expect them fully to plug the gap, particularly given their range of other responsibilities —at least not in enough detail on a sustained basis to make the difference that I think most of the Committee thinks is necessary.
The clearest evidence that something needs to be done is the performance of the regulators themselves. Among the many criticisms of the financial regulators have been neglect of some of their objectives and duties, a box-ticking culture, excessive and unnecessary regulation stifling innovation—the “confetti before quality” problem—and inadequate ex post scrutiny of existing rules, without which a steady one-way ratchet develops right across the regulatory piece. A slow and legalistic approach is also a frequent complaint.
In defence of the financial regulators, for the most part they are in much better shape since the crash. That shook them to the core—indeed, one of them was split. Both the Bank and the FCA provide much better explanations for their actions and decisions than prior to the crash. No doubt some of the criticisms have been levelled unfairly, but not all of them.
In any case, we are not in a steady state. With new powers conferred by the Bill will come more of what has come to be known as the restless regulator syndrome. As the regulators identify new problems—real, imaginary or media fuelled—the risk must be of further inadequately considered additions to the rulebook. If the Government can be brought to agree that something needs to be done, one or more of at least three routes to forcing greater accountability are available.
First of all, and in principle the most attractive route for the Government, could be to try to pre-empt pressure from Parliament by creating their own much more rigorous scrutiny team at the heart of Whitehall, probably in the Cabinet Office. A body such as that could do some good work, but I am not convinced that it could fend off the vested interests that all too easily cluster around the sponsor departments at the moment and will no doubt cluster around such a group in the Cabinet Office over time.
A second approach has been set up by the noble Lord, Lord Bridges, today. It is the statutory independence of the body he proposes that makes it particularly attractive. Like the OBR, on which I think it is modelled, it has a reasonable chance of fending off those lobby groups. Therefore, I will certainly support his proposal if it is put to a vote.
But by far the most straightforward approach would be for Parliament to plug the accountability gap directly, as colleagues from all sides of the Committee have suggested, by creating its own specialist scrutiny committee. To be effective, a new committee would need support from a small group of specialists in financial regulation, much as the PAC is supported by audit specialists from the NAO, now a much larger group. This body would need only a small group, but it cannot hope to rely on the kind of very ad hoc tiny group, without institutional memory across Parliaments after elections, that Select Committees rely on at the moment.
Furthermore, in my view the committee—the Joint Committee, if some want that—would need to empower the specialists in a number of ways. Among the tools that should be considered are powers to see all people and papers, the authority to embed experienced and specialist staff into the Bank or the FCA where a particular concern has been identified, and the power to attend key decision-making committees to check out the quality of governance in regulators. In theory, all Select Committees have those powers already, but in practice, for various reasons, few use them fully. Those powers were all deployed to good effect by the Parliamentary Commission on Banking Standards without being disruptive to the work of regulators.
My main concern about this whole issue is that the Government will now listen carefully to what we have all said and murmur friendly noises but do nothing. The Minister told the Committee on 20 February that
“it is not for the Government to impose”—[Official Report, 20/2/23; col. GC 394.]
a scrutiny tool on Parliament. I understand where she is coming from but, as she well knows, that is not a strong line. If the Government come forward with a worked-up proposal for a new committee with adequate staff support—that is essential—and commit to supporting a change to Standing Orders to implement that reform, it will happen. If they did so, I for one would reconsider my support for statutory reform of scrutiny, and I think many others would too.
I think the Minister is listening—she certainly is now. I hope that her department and a couple of Treasury Ministers in the Commons listen to her and that she will tell us in a moment that she has been listening carefully and agrees to this amendment or to the lion’s share of what was said on 20 February.
Lord Hunt of Kings Heath (Lab)
My Lords, I have added my name to Amendment 160, the principal amendment in the name of the noble Lord, Lord Bridges, to show that there is support for him all round the Committee and to show the Government, too, that at some point the House of Lords is going to make its views known when it comes to voting on the Bill. It would be good to see the Government acknowledge that they are going to have to do something to strengthen the accountability of these arrangements.
My principal concern is about the integrity of Parliament and the more general issue of the accountability of so many of the regulators, public bodies and quangos that we have established, because I see them as an extension of the Executive, in many ways. They do functions which traditionally the Executive may themselves have done. We are talking about financial markets but a recent example of extraordinary behaviour is that of the Arts Council, in its perverse decision to try to destroy opera in this country by the abolition of English National Opera and the withdrawal of a huge grant from Welsh National Opera for touring, when the Arts Council’s mission is ostensibly that it is supposed to be encouraging the touring of such companies.
The Arts Council apparently did that because the then Culture Secretary, Nadine Dorries, said that she wanted more money to go out into the regions for levelling up. That was translated into the destruction of a centre of excellence which had been very committed to inclusivity. At that point, she denied that she had ever wanted ENO to do that, but the Arts Council remains unaccountable to Parliament for that action and Ministers say, “It is nothing to do with us”. We are left in a quagmire as to how to know, in the end, who was accountable for what seems, on the face of it, a crass decision.
My main experience is not in financial services but in the health service, which is awash with regulators, public bodies and quangos. I will name just three: NICE, NHS England and the Care Quality Commission. They have huge influence and power over the affairs of the National Health Service but it is very difficult to say that they are accountable to Parliament at all. If we seek to ask questions about their performance in questions or debates, or meetings with Ministers, we will be told, “That’s nothing to do with Ministers”.
When it comes to financial services, I am therefore at one with the noble Lord, Lord Bridges. It is surely in the interests of the United Kingdom, in any case, that our regulatory arrangements be seen to be of the first order. I agree with him when he talked about the balance. We want the regulators to be seen to be independent, and robustly so, because that adds to their credibility. We clearly want to avoid politicisation, because that would undermine the esteem in which they would be held nationally and internationally. However, we want them to be subject to not just proper scrutiny but accountability. So far, we have heard nothing from the Government to suggest that they understand that, or why the current arrangements will not be sufficient.
As the noble Lord said, this proposal will not duplicate the Treasury Select Committee. His point about the OBR was important, because the OBR has fulfilled an important function, but I do not think anyone has suggested that it has undermined the working of Parliament or any of its Select Committees; indeed, it has enhanced what they can do. I think he was making that point when he said that his amendments will not undermine the regulators’ independence. In many ways, I think they would enhance them. This is not going to cost much money compared to the benefit it would bring and, as he also said, it will not duplicate the work of the FCA and PRA.
There is an overwhelming case for supporting this measure, alongside the previous debate about the need for a much strengthened Select Committee to carry out work inside Parliament, as the noble Lord suggested. I very much hope that the Government will listen to what he has said.
Lord Naseby (Con)
My Lords, I have added my name to this amendment, which in my judgment is absolutely vital. On 8 February, I listened to the chairman of the City of London Corporation’s policy and resources committee; I will quote a couple of points that he made on that evening. He said:
“Faced with increasing global competition”
the UK needs
“a long-term sense of direction, a programme for government, regulators, and industry to act and sustain our global powerhouse status. As a country we need a renewed focus, to adjust our compass, to be the destination that incentivises investment, thrives with talent, and commands the competition. And we need ambition and focus to achieve these goals.”
He finished by saying that we need “the courage to change” in three areas. I will quote two, which are relevant to this amendment:
“Firstly, we need to reduce frictions. That means strengthening UK policy and regulation with an effective and coherent sustainable finance framework. Secondly, we need to nurture innovation. More creativity in the market will inspire better products, which will help attract capital, firms, and customers.”
The City wants confidence in scrutiny and the supervision of the regulator. I hope that my noble friend on the Front Bench will take note of the feelings of the City. I am sure that it would be more than happy to communicate directly with my noble friend and put some flesh on the summary that I have given.
Lord Vaux of Harrowden (CB)
My Lords, I, too, have added my name to the amendments in the name of the noble Lord, Lord Bridges. The noble Lord explained in detail the need for the amendments far better than I can, so I will be brief. I support the noble Lord’s every word but, rather than repeating what has been said, I will comment specifically on how this would complement rather than replace the parliamentary scrutiny that is also required.
We have had a lot of discussion so far in Committee about the need for strengthened parliamentary scrutiny and accountability of the performance of the regulators, with an extraordinary level of agreement on all sides— I hope that the Minister listened to that. I strongly supported the idea of creating a bicameral committee specifically for that purpose, as proposed by the noble Baroness, Lady Noakes. Having an independent office for financial regulatory accountability would greatly assist such a committee in carrying out its work. We heard on a previous day in Committee from the noble Baroness, Lady Bowles, who is probably the expert in such matters, and from others about the enormous volume of work that scrutiny of the financial regulators will involve. That is one reason why we need a parliamentary committee focused solely on this subject. Having available independently prepared and, importantly, non-political analysis of both the performance of the regulators and the regulations themselves would make the work of the parliamentary scrutiny committee, or committees, that much more effective, enabling the focus to be on areas where shortcomings were identified, rather than wading through unmanageable volumes of information trying to find those areas.
I therefore make the point that the Minister should not be tempted to see these amendments as an alternative to the enhancements to parliamentary scrutiny that we have already discussed. Rather, she should understand that they are an important element within the three legs required for effective scrutiny and accountability, which the noble Lord, Lord Bridges, has previously explained as being reporting, independent analysis and parliamentary accountability. All three aspects should be embraced. These amendments cover the second, but please do not think that they would replace the others.
Lord Hill of Oareford (Con)
My Lords, I will speak briefly but strongly in support of this amendment and, in doing so, state my interest as the lead NED at the Treasury and as an adviser to a number of global and European financial businesses.
It is a pleasure to follow the noble Lord, Lord Vaux, because he made the point that I wanted to start with: we must not think of this as an alternative to parliamentary scrutiny. We all agree that we need much more thorough parliamentary scrutiny; this amendment would help Parliament to do its job. The point that the scrutiny is to be fact-based and analytical is key.
The proposal for the overall framework of scrutiny has an OFRA-sized hole, which this amendment would fill. It is rare to find an amendment where you cannot detect anyone who is going to lose from it, but I can see only an upside for all groups with this amendment. It would be good for the regulators, as we have heard, because it has the potential to detoxify the political debate. It would be good for the Government because it would provide a more stable, long-lasting framework. We need to get this right now because I do not know when next a Bill will come along that will enable us to look at this framework. We have been waiting for a long time, since 2016, so we need to get something that is stable and going to endure. As we have argued, it would be good for Parliament because it would aid its task of scrutiny and it would be good for the financial services sector, which is our most important contributor to tax revenue, because it would provide an analytical basis in which it could have confidence and trust. My noble friend Lord Bridges has presented the Minister with a gift horse and I very much hope that she will not look it in the mouth.
Lord Deben (Con)
My Lords, I remind the Committee of my interests, including chairmanship of PIMFA, which represents financial advisers, and at Sancroft we advise a number of financial institutions on sustainability.
I merely want to say that one of the groups of people who will benefit considerably from this are those who are regulated. The fact is that we need to recover confidence in the regulator in two particular areas. The first is what I call the conflicts between regulators, for which there is really no way of unpicking them so that they can work more effectively. That is particularly true among many of the people with whom I deal almost every day.
The second reason why this is so important is that I do not believe that anyone should be unaccountable if they have a public position. I very much agree with the noble Lord opposite who talked about the terrible opera story. I just do not think regulators can do their job properly unless they look over their shoulder to the public as a whole, which is what we are talking about in this bit regarding accountability. As a Minister for 16 years, I know that one’s accountability to Parliament and the public was an essential part of doing the job properly. One had to say to one’s civil servants, “Look, we can’t do that because it really would make people feel that we were behaving in a way that was unacceptable to Parliament or to the public.”
That is the problem for the boards of these regulators, which seems to me to be one of the issues. As my noble friend Lord Bridges suggested, some say that the boards should deal with it. That is not possible unless a board is itself accountable to the public and, in that sense, to Parliament. I do not believe that you can expect the boards to do their job of saying to the regulator, “Look, I’m sorry, you really can’t do that”, or indeed, “You can and should do this”. I am not suggesting that it should always be “Don’t do it”; sometimes it should be “Do it”. Later on, for example, we will discuss the issue that in the City of London the regulator does not insist that a competent person says not only whether, for example, there are gas deposits but whether under the law of Britain those gas deposits will be able to be used, which is just as important. At the moment the regulator does not do that and there is no way of insisting that it should. I therefore strongly support what my noble friend Lord Bridges has said.
Lord Forsyth of Drumlean (Con)
My Lords, this amendment is absolutely inspired. We had a debate earlier about the merits of parliamentary committees, and it was questioned whether they would have sufficient resource to do the work. I am very taken by what the noble Lord, Lord Tyrie, had to say. At the risk of embarrassing him, he was a very distinguished member of the Treasury Select Committee and did some fantastic work there. He comes from a background in the Civil Service and has experience inside government. Therefore, we should take very seriously what he had to say about the merits of this proposal.
Lord Lilley (Con)
My Lords, until the noble Lord, Lord Hunt, led me to it, I had not realised the similarity between the Arts Council and the financial regulators in the City of London—but he is absolutely right. Both are manifestations of that growing and alarming phenomenon, the administrative state. These are bodies that set their own rules, mark their own homework, are largely unaccountable, often wayward and certainly unpredictable. The one weakness of this Bill, which in other respects is good, is that it creates even more freedom and power for the regulators to operate without accountability or predictability.
There are two ways in which to deal with this problem, which are compatible and probably both necessary. One is that to which the amendments proposed by the noble Lord, Lord Bridges, make a major contribution: bringing parliamentary accountability to bear. His amendments effectively arm Parliament to carry out that accountability. The other is to try to constrain the behaviour of the regulators within the disciplines of the common law, which is what my amendments here and elsewhere seek to do. I speak particularly to Amendments 169, 171, 173, 174 and 200. The changes in those amendments deal with the Upper Tribunal and the regulators; I shall go on to those which deal with the Financial Ombudsman Service.
At present, firms can take a challenge to a regulator’s decision to the Upper Tribunal. If a challenge is about a regulator’s enforcement decision, the UT decides the matter again on its merits. If the challenge is about a supervisory decision, the UT effectively carries out a judicial review. It may hear fresh evidence, but it merely decides whether or not the regulator’s decision was reasonable and, if it was unreasonable, refers it back to the regulator to take the decision afresh. These amendments would not change that role but, I hope, would constrain the way in which it was carried out.
Amendment 169 would simply give the Upper Tribunal the obligation to give consideration to the predictability and consistency in any case before it and to comply with those objectives when deciding a fresh enforcement decision, and it would empower the Upper Tribunal when making findings on a supervisory decision to help the regulator meet the predictability and consistency objective when reconsidering a case. It would also require the regulator to prove in each case that it had acted predictably and consistently on any issue referred to the Upper Tribunal.
Amendment 169 would also give firms that believed they had acted in good faith within what they knew of the meaning of the regulations laid down by the regulator the right to apply to the Upper Tribunal, if they were found to be in conflict with the regulator, within three days for a declaration of reasonableness. If the Upper Tribunal granted a declaration of reasonableness, the FCA or PRA could not pursue enforcement action against the firm.
There are comparatively few references to the Upper Tribunal. If the Upper Tribunal and the regulators achieve greater predictability and consistency, there are likely to be fewer still in future, which is a good thing. Moreover, those that do take place will themselves create case law, making the meaning of the regulations clearer and more predictable. However, because the volume of cases will be small, the amount of case law that will arise at the level of the Upper Tribunal will be small.
By contrast, a huge number of customers—SMEs and individuals—claim losses that they attribute to breaches of regulatory rules by firms providing financial services, and they do so to the Financial Ombudsman Service. In the most recent quarter, over 43,000 complaints were made to the FOS. At present, consumers, largely small businesses, can take a complaint free of charge to the ombudsman, which can decide whether a financial services company has treated them fairly and reasonably and require the finance company to pay compensation. The costs of the ombudsman service, whose budget for 2023-24 is £240 million, are met by a compulsory levy and some fees payable by financial institutions.
The advantages of this arrangement to the consumer are that there is no fee, there is no risk of having to pay the finance company’s costs if the complaint is not upheld, and the process is generally faster than a court case would be. However, there are disadvantages too: the Financial Ombudsman Service has the power to decide what is fair and reasonable without any obligation to be predictable and consistent before or afterwards, or to explain its reasoning, and it is
“free to make an award different from that which a court applying the law would make”.
Financial institutions that object to the ombudsman’s ruling can in theory appeal to the Upper Tribunal or seek judicial review, but if they did so they would have to prove that the Financial Ombudsman Service’s decision was so unfair or unreasonable that no right-minded person would ever have made a similar decision, so they stand little chance of success and few cases have been brought.
The ensemble of my amendments would respond to those weaknesses in a number of ways. First, earlier amendments would introduce the explicit objective of predictability and consistency, and any challenges to the regulators on those grounds would primarily be considered by the Upper Tribunal. The other amendments in this group would ensure that the internal review bodies within the FCA and PRA that consider enforcement decisions before they are finalised, known as the RDC and the EMDC, were fully independent, and would require them to apply similar tests. That should ensure that most cases would not need to be taken to the Upper Tribunal since concerns would have been addressed before the regulator made a final decision.
Secondly, the amendments would change the role of the ombudsman system into an adjudication system, and that is perhaps the most important element of this group. Instead of being empowered to reach decisions simply on its own subjective view of what was fair and reasonable, the financial adjudication service would be tasked with adjudicating on the basis of the law, including case law as it built up. That is modelled on the adjudication system in the scheme for the construction industry in the Housing Grants, Construction and Regeneration Act 1996. The idea of transferring the lessons there to the financial sector was suggested by Lord Dyson, a former Supreme Court Justice and Master of the Rolls, in a report by the APPG on Fair Business Banking in 2018, which also recommended the formation of the First-tier Tribunal. The adjudication system would remain free to consumer complainants, who would still have the benefits of the obligations on financial businesses to treat them fairly as in the FCA rules and legislation, such as the Consumer Rights Act 2015.
Viscount Trenchard (Con)
My Lords, I declare my interest as a director of two investment companies, as stated in the register.
I too congratulate my noble friend Lord Bridges and his supporters on their most interesting proposal to set up an independent office for financial regulatory accountability. The Bill as drafted does not secure sufficient change in the way the regulators carry out their duties and the speed with which they will work to simplify and improve the rulebook. In particular, I welcome the provision in Amendment 162’s proposed new subsection (2): that the office “must prioritise” analysis of regulations that reduce competition, negatively affect competitiveness and add compliance costs. In other words, the office will be bound to identify regulations such as the myriad anti-competitive and cumbersome regulations adopted by the ESAs in recent years.
I support my noble friend’s amendment and believe it would augment but not replace the work of an FSRC, such as my noble friend Lady Noakes and I proposed in Amendment 86. As such, it would mitigate further the regulators’ lack of accountability to government following the transfer of significant rule-making powers. This is most likely to be a good thing, although alone it does not do enough to improve the deficit in accountability to Parliament.
I would like my noble friend Lord Bridges to tell the Committee whether he envisages the office working alongside a Joint Committee such as the FSRC and whether he would consider amending his Amendment 165 to replace the Treasury Committee of another place with a suitable Joint Committee. I agree entirely with what the noble Lords, Lord Hunt and Lord Vaux, said about the need for a new Joint Committee.
Along with my noble friends Lord Sandhurst and Lord Roborough, I have put my name to Amendments 169 to 174, so eloquently proposed by my noble friend Lord Lilley. In common with my noble friend, I am not a lawyer; I am a banker. I was proud to work in the City of London when I joined Kleinwort Benson as a management trainee in 1973 because, by and large, the City was an honest place and its leading firms were well regarded. We knew the importance of the old maxim, “My word is my bond.” The banks did not maintain vast compliance and legal departments. During my banking career, I have seen the relative size of these departments increase massively as a proportion of total staff. This itself has had a negative effect on the culture of our leading firms, reducing the emphasis on innovation and business development and increasing the number and influence of those employed in compliance and legal, and of the interlocutors with the regulators.
We believed that Brexit would enable us to return to our simpler, less cumbersome, common law-based regulatory system. These proposals will enable this and encourage agility and precision in the drafting of rules. The regulators operated in this way after the Financial Services and Markets Act 1986, and this is how the FSA was empowered to act under FSMA 2000. But by then, the EU acquis on financial services was beginning its period of rapid expansion, so most of the rules since then have actually been made at statutory level by the EU. FSMA 2000 already accepts that judicial review is an inadequate safeguard against unduly harsh decisions by the regulators, and it gives the final say on enforcement decisions to the Upper Tribunal. These proposals would ensure that the regulators act predictably and consistently. They would ensure that they are no longer above the law—now even more important, as a result of their greater rule-making powers.
I believe that the opportunity costs of the current regulatory system are too high. Legitimate financial business, such as providing new products for consumers, is not being done because of regulatory uncertainty. These amendments would ensure that the wording of the rules is more thoughtfully drafted than it was under EU regulation and would reduce compliance costs. The rules would be based on common law methodology. The wording would be applied to facts on the basis of their natural and ordinary meaning. The renamed financial adjudication service would reach decisions not only on its own subjective opinion but on the basis of the growing body of case law deriving from decisions of the new first-tier tribunal.
Does my noble friend the Minister understand just how important it is that the Bill be made a lot more radical in changing the way our regulators operate? As drafted, nothing much will change. There was no point in Brexit if we continue to apply a bureaucratic, overly cautious and cumbersome regulatory system. These proposals would take us down the right road as a significant step to ensuring the City’s future and reversing the recent decline of some of our most important institutions, such as the London Stock Exchange.
Lord Turnbull (CB)
My Lords, I have not spoken before in this Committee, but as one of the surviving members of the Parliamentary Commission on Banking Standards, I want to address an instance where an amendment directly challenges one of the proposals that was incorporated following the commission’s report. Earlier in proceedings—on day three, I think—the noble Lord, Lord Tyrie, addressed Amendment 46, which introduced the concepts of predictability and consistency. He asked, “Who could possibly object?”, and went so far as to describe them as “motherhood and apple pie”. On examination, these principles, particularly predictability, can be seen to be simply duplicating the existing provisions of administrative law, but also as introducing provisions that could limit the scope of the regulator to address new and previously unforeseen problems.
A similar problem arises with Amendment 174 in this group. How could one possibly object to acting
“reasonably and in good faith”
as a defence against sanction under the senior manager conduct regime, the SMCR—the principal sanction being disqualification from practising? By way of a bit of background, the PCBS spent a great deal of time on structural issues—bank break-up, ring-fencing, capital adequacy, liquidity adequacy and so on—but it also attached a great deal of importance to conduct issues, hence the creation of what was then called the senior person conduct regime and is now the senior manager conduct regime.
Is there evidence that this regime has proved oppressive and needs to be relaxed? Quite the contrary, in my view. There have been very few cases, although it has only been fully in force since 2018. Following the 2008-10 financial crisis, Mr Peter Cummings of HBOS is the only senior person to have been seriously sanctioned. One can debate whether that verdict was fair or unfair, but it is undeniable that it is unfair that he should be the only person sanctioned of the big players in those events. I do not think the case for further easing has been made out; more effective application is needed.
The introduction of a defence of acting
“reasonably and in good faith”
would, in my view, be a serious weakening of the regime. Very few people who made serious errors—which were costly to their customers, their own companies or the economy at large—set out intentionally to do harm. The thinking behind this amendment is that it is unfair to sanction people who claim that they did not intend to do harm, even if their actions were genuinely harmful. The protection of consumers is not achieved if those who mis-sell financial products or take what prove to be excessive risks are immune from regulatory action if they can show that they did not intend to do so.
Once again, these amendments look superficially desirable, but they would weaken the SMCR and could cause a lot of damage. The normal pattern in Committee is that an amendment is proposed and others stand up to support it. I want to do the opposite: I urge the Minister to stand firm in rejecting Amendment 174. In any case, I wonder whether the right way to change the underlying philosophy of regulation and the balance between the regulator, the common law and the courts should be to set out a comprehensive proposal, rather than through the accumulation of a disparate set of amendments in this Bill.
Lord Sandhurst (Con)
My Lords, I speak in support of Amendments 169 to 174 and 200. These have been proposed forcefully by my noble friend Lord Lilley and are, I suggest, worthy of acceptance.
I speak from the perspective of a lawyer. First, I suggest that three adjustments are needed to the decision-making and supervision of regulators to drive predictability and consistency in rule-making. Amendment 200 would make the regulators’ enforcement committees more independent in their decision-making. This should reduce the number of firms that bring unnecessary challenges to regulatory decisions in the Upper Tribunal.
Secondly, Amendment 173 gives the existing Financial Regulators Complaints Commissioner power to order the correction of regulators’ errors. Currently, the FRCC can find that regulators have acted unlawfully, but the regulators are free to ignore that finding. In fact, the FCA has ignored the FRCC’s only such finding. So, the overarching oversight of the FRCC is toothless; it will, if our amendment is accepted, have some teeth.
Thirdly, we propose a set of adjustments to the supervision of regulators by our judiciary in the Upper Tribunal and courts. Currently, challenges by financial institutions to supervisory decisions in the Upper Tribunal are rare, and rarely successful. That is because the tribunal is reluctant to interfere with regulatory decision-making and lacks a framework within which to consider regulators’ decisions. Judicial review is even rarer. To succeed, firms have to prove that the decision was not just wrong, but unreasonable.
The problem is that because it is so difficult to overturn a decision, firms rarely go to the Upper Tribunal or seek judicial review, so there is no body of jurisprudence by which financial companies can set their practices consistently. The lack of predictability therefore means that firms have to build compliance programmes based in part on guesswork as to how the regulator may react when applying its rulebook in the future. This is particularly so when considering the vaguely drafted rules known as principles.
Lord Roborough (Con)
My Lords, I declare my interests as a shareholder in an FCA-regulated asset management company, and as having been regulated as an employee for 30 years in financial services, including five years as a senior manager.
I have put my name to my noble friend Lord Lilley’s amendments. While they follow on from the amendments adding the requirement for predictability and consistency that were discussed on day two of Committee, to some extent they also stand alone. I also support my noble friend Lord Bridges’ amendments and indeed any proposal for effective oversight and scrutiny of regulatory performance.
Lord Roborough (Con)
The Bill introduces secondary objectives unrelated to the core objectives. Should that unlimited liability also be extended to these? Will the regulator be determining acceptable travel policies for business? Which financial markets are priorities for growth and competitiveness? What will be the enforcement process if individuals or companies disregard these? How can the regulated have confidence in the application of these objectives without some kind of body of precedent and rapid appeals process? The regulators themselves will benefit from a clear body of case precedents when making decisions. I urge the Minister to give serious consideration to the importance of rapid and practical accountability of the regulator for its actions to those it regulates, if London is to remain a financial hub where the global community wants to base its investments, businesses and careers.
Lord Eatwell (Lab)
My Lords, I regret that I was not able to take part at Second Reading as I was working in the United States. I hope I have the indulgence of the Committee to make some comments on this set of amendments. As someone who has chaired a major regulator, I found the representation of the principles and approach to regulation as “vague” a rather chilling remark.
What we have seen with the amendments of the noble Lord, Lilley, and those who have supported them, is an attempt significantly to change the entire philosophy on which the regulatory system has so successfully developed in this country. That philosophy has been based on principles-based regulations. Those principles are not vague, as has been asserted; they are determined by Parliament. The rules have then been developed on the basis of serving an industry which is dynamic and continuously changing, unlike the building industry, many of whose practices have not changed since Tudor England.
The fact that the regulatory system can adapt to a rapidly changing industry has been a source of considerable strength within our regulatory system. If we are to introduce an entirely different legal approach, that has to be argued out. There should be a Green Paper, a White Paper and a proper Bill saying that the regulatory approach in this country is going to be fundamentally changed. That is what I fear: the amendments of the noble Lord, Lord Lilley, would effectively introduce a wedge of change that would fit very uncomfortably with the current structure.
On the other hand, I support the amendments proposed by the noble Lord, Lord Bridges, and particularly commend the remarks of the noble Lords, Lord Hill and Lord Forsyth. They argued that although this new accountability device—this new entity—would deal with, let us say, the technical side of regulatory issues, we still need a parliamentary committee to deal with the political side because regulation is both highly technical and has an essential political core. That is why we need both components. Therefore, I strongly support the amendments of the noble Lord, Lord Bridges, and the views put forward by the noble Lords, Lord Hill and Lord Forsyth, on the need for the dual structure to ensure a proper level of both technical and political accountability.
Lord Tyrie (Non-Afl)
First, I declare my interest as in the register. I am deeply concerned about this second set of amendments; they could have a profound impact on and consequences for the SMR, the ombudsman’s service and the RDC in particular, and I shall go through each in turn. I strongly agree with what has just been said about the nature of regulation and the risks of moving at such pace to a wholly different approach, bearing in mind for how many decades this system has been in place and has become understood and accepted—at some cost, by the way, and, therefore, changing it is itself something whose costs we need to bear in mind.
On the question of predictability, consistency and unintended consequences, in response to an earlier amendment I cited abuse of cryptocurrency technology, which might be made more difficult for the regulator to adapt to if it has to show that what it has done was predictable on the basis of existing law. That could be spread betting or, to take a topical example of 15 years ago, asset-backed securities. I am extremely nervous about including this without substantial consultation, which should be preceded by a detailed explanation of what is intended. We have not had any of that, and it is certainly not suitable to be put in this Bill.
Although I have not said very much so far on the Bill, I fear I will speak at some length on these three areas, which in my view are crucial to providing fairness and making sure that we are better prepared for the next financial crash that will inevitably come.
As I read Amendment 169, it would create a defence before the Upper Tribunal, and possibly a complete defence if a person could show that they had acted reasonably and in good faith. That might sound quite reasonable in itself—more apple pie—but a defence of reasonableness and good faith would mean that if an individual did not know about a problem, he could not be held responsible for it. That would be goodbye to the SMR, at least, as an effective regulatory tool. It strikes me as likely to reintroduce all the gateways to unacceptable risk and risk taking that the SMR was designed to expunge.
Lord Deben (Con)
My Lords, much of what we have just heard would be very much supported by the group of people with whom I work. We do not want to reduce the protection of either group of which we are speaking, particularly small people asking for redress.
The ombudsman service needs reform; there is no doubt about that. We really have to discuss putting some stakes in the ground about not blaming people for things they would never have thought of at that point because we now think of them. I am afraid that my noble friend Lord Lilley’s amendments do not help us in that direction. In other words, all the issues I would want to raise about the ombudsman are not covered by these amendments. Similarly, it is true about the protection of people from the effect of investigation, even when that investigation turns out not to be justified.
I finish by reminding the Committee of the original discussion we had. We need a system that people see to be fair and is shown to work effectively for small as well as big people. I do not think these amendments will help this, but I hope we will be able to have changes. I do not think that you should accept any changes just because you want changes, and I submit that these are the wrong changes.
Baroness Bowles of Berkhamsted (LD)
My Lords, I am speaking later than I would have in the debate, due to the absence of my noble friend Lady Kramer. The Committee will be pleased to know that I shall not try to say everything that I would have said, as well as everything that she would have said.
It is well known from the previous FSMA that I support independent review. I had an earlier amendment to this Bill suggesting the use of the NAO, to which the noble Lord, Lord Bridges, referred. I am pleased to support his amendments, which I have put my name to and which lay out a much more thorough range of new provisions. At this stage, I should probably remind the Committee of my interests in the register, in that I am a director of the London Stock Exchange, as I am going to talk about my regulator.
The UK would not be alone in having independent review of financial regulations as part of its accountability. That was one outcome of the review of the financial crisis in Australia. I have been around this argument many times, and today it has already been eloquently explained by the noble Lord, Lord Bridges, so I pose instead the question: what happens without an independent review? One thing that is certain is that there will be complaints about regulations and, by and large, the regulators will defend their work. Parliament’s committees will try to scrutinise, but that is a public process—or it has been called the political process. They are well adapted to do the kind of inquiry that they do and often get into the nub of the matter. But as we have found out in the Industry and Regulators Committee, it is difficult to get industry to state in public what its issues are with the regulators. As I have pointed out with amendments and speeches on previous days, the Government do not give any legislative status to the parliamentary reports, so there is scrutiny but no consequence, which is not accountability.
Additionally, within intensively supervised frameworks, such as that which exists, probably uniquely, in the financial services sector, there is genuine concern on the industry side about regulators’ retaliation or suspicion if they complain. I acknowledge that the heads of the regulators have said that this would not happen, and would be wrong, but that does not allay concerns or whispers about this most crucial of relationships between industry and its regulators, where every word is guarded. There are also genuine concerns that explanations require public disclosure about investigations or other difficulties that firms may have faced in compliance, which they would rather not put in the public domain—for example, out of commercial confidentiality about future plans and not for reasons of bad behaviour.
Industry will therefore instead bend the ear of government through many of the private channels that it has, whether through the Treasury or at Cabinet level—for example, as it has about international competitiveness. The Government may choose to act, as they have in that instance. Meanwhile, the public channels remain uninformed or unconvinced, because—and I refer again to the experience of the Industry and Regulators Committee—we were given evidence of only operational inefficiency and not of rules that caused any lack of competitiveness. How is public trust to be maintained under these circumstances? How is there to be the legitimacy that has been spoken about? How are reviews to get through the confidentiality concerns in a way that the public trusts?
The Minister has sat tight on review in all the previous debates on this Bill and the previous one, saying that the Government have given themselves powers to satisfy those requirements—powers to ask the regulator to review its rules. I do not object to that, but it hardly has any independence or new eyes. There are powers to seek independent reviews but as we know from experience, because those powers have been around for a while, such reviews have not been used quickly or frequently. They tend to follow a sequence of disasters, as the Gloster review did, and not to be done in any checking or anticipatory way. I understand why that is, because government must keep a certain distance and look for some systemic concern rather than one-off causes, but that distance leaves a gap.
Of course, there are powers to intervene by way of directions, which need to be used with care if the independence of regulators and international respect for them are to be maintained. None of those powers satisfactorily address how there should be checking in a way that permits private submissions but remains free of it looking as if government either is interfering too much and getting too cosy with industry, which is what it will look like if the Government use their powers to intervene as much as might be needed, or never acts until there has been substantial damage, when it really is too late.
I would also be interested if the Minister would inform the Committee of the level of resources and number of personnel that the Treasury is able to put behind its own monitoring, and whether it is free from reliance on industry and consultancy involvement. It is no good if it is just sent back to the same people, who will give the same information as comes in through the private channels anyway. How is that meant to be independent? I hope the Minister will take account of the fact that calls for independent review, as well as enhanced parliamentary scrutiny, come from all sides of the House and need to be addressed. There should be some serious conversations before we get to Report.
I will briefly say a few things about the amendments put forward by the noble Lord, Lord Lilley but I agree entirely with the noble Lord, Lord Tyrie. It would be a dreadful shame if one of the major achievements of this Parliament after the last financial crisis were watered down or, even worse, set aside. I fear that, as has been explained, that could well be the case. When the noble Lord, Lord Lilley, introduced his previous amendments, I said that I am not totally against a libertarian approach—one where you have to take care, and if you get it wrong then you are for the high jump—but that is not what is presented here. This proposal would make it extremely difficult for the regulators. It does not fit with the kind of regulatory system we have, with its underfunded regulators. It is a way to make it easy to set aside what the regulators have done. Given what I just explained about the relationship that firms have with their regulators—one of the reasons why, regrettably, they will shy away from legal action—it will not necessarily overturn that.
I do not agree with the predictability and consistency objective, for the reasons that others have explained: we want agility and change, and have to adapt to circumstance. If something comes to court, surely it could remain that a judge ultimately applies it, but that would be in the light of circumstances and an acknowledgement that circumstances change and regulation necessarily proceeds.
Likewise on a good-faith defence and reasonableness, my take on the senior managers regime is that the whole point is to make individuals be proactive, rather than just coasting along in what has been a comfortable way of life—how things have always been done. It has meant they have to engage their brain, think about it and update in the light of circumstances. Just saying, “There was a set of rules and I complied”, is not meant to be enough; you have to take account of what is going on.
Is there not a conflict here to some extent between people on the one hand talking about wanting principles-led regulations and, on the other, talking about that being vague? There are complaints that there are too many rules, yet it is industry compliance departments that are first off the blocks saying, “Where are the rules? Give us the rules! I want to know where to put my tick”, so I am not sure which section of the market this proposal is supposed to serve.
Lord Tunnicliffe (Lab)
My Lords, the most important thing to have come out of this debate, which is now in its fifth or sixth day—frankly, I have lost count—is that the regulatory environment lacks sufficient parliamentary scrutiny; there is enormous consensus about that idea. We have heard several solutions. At least three groups have touched on this issue, and I hope this is the last group to do so. I will go as far as saying that it is an interesting idea. I say that in the sense that I am representing His Majesty’s loyal Opposition, and at the moment we have some concerns about resource consumption, et cetera.
However, if we take all the ideas together, I am convinced that they can be moulded into an important step forward in involving Parliament, and involving sufficient resource to make that involvement effective. We should set about trying to do that. The noble Lord, Lord Turnbull, said this more elegantly than I will, but if you toss a bunch of amendments together and hope that they are internally consistent and capable of execution, you are kidding yourself. I fear that that is where we are at the moment. If we were to vote on all the amendments we have had over the last five days or so, that would not work.
What should happen now—it will be interesting to see whether it does, and I shall do all I can to encourage it—is that cross-party discussions take place, focused on taking the best ideas and putting them together in a way that will work and will have support. This has to be a coalition that is irresistible in the parliamentary process, and that is possible. When you look at that lot over there, this lot here and us, that is a hell of a force for the Government to try to ignore, so I hope we can find ways of bringing us together. I hope the Minister will want to join in that process at some point and will want to see whether we can achieve a consensus with the Government. I strongly advise her today not to close off options. Options have to be open to try to move into this area.
There seems to be a secondary area, which I will loosely call the Lilley area, about legal involvement. I clearly do not understand enough of what this is about; I suspect a lot of people do not. There is confusion and, from what I have heard experts say, it is a dangerous confusion. We should stick to that central issue of parliamentary scrutiny, properly supported to be effective—and the time has come.
Some of us slogged through a Bill, about a year and a half or two years ago—I am losing track of time—where we worked quite hard on this and made very little progress, as we got rid of all the EU rules and then put all the stuff in the hands of the regulators. Many of us felt uncomfortable that there was not more scrutiny, but we did not really come up with a solution. Clearly, we are in a solution-rich environment now; the trick is to bring it together into a solution that will work, and it must be done now. This is the last legislative opportunity, in my view, that we will see for some time, so I hope that cross-party discussions take place and that we can take a real step forward for the industry and for democracy.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I thank my noble friends Lord Bridges of Headley and Lord Lilley for tabling these amendments, and for their contributions to this discussion.
I will speak first to Amendments 160 to 166, tabled by my noble friend Lord Bridges. The Government agree, and have been clear, that more responsibility for the regulators should be balanced with clear accountability, appropriate democratic input and transparent oversight. The proposed creation of a new regulatory body to oversee the regulators—a so-called regulator of the regulators, although I know that my noble friend set out why he thought that term did not apply—raises further questions about how the accountability structures for the various regulatory bodies would operate. The Government would need to carefully consider how to ensure clear accountability to both government and Parliament under such a model.
The noble Lord, Lord Hunt, talked—it feels a long time ago—about the need for greater clarity on where accountability lies in this system. I am not sure whether it is clear that the addition of a further body to the system would provide greater clarity on where accountability lies.
Lord Bridges of Headley (Con)
How does the OBR undermine accountability? Surely it just provides independent analysis and assessment, and I see no problem there.
Baroness Penn (Con)
I believe that is sometimes subject to debate. What I was saying to noble Lords is that it raises questions in this area that we need to consider. If I look back to the creation of the OBR, it was in the Conservative manifesto at the 2010 election; indeed, it was set up in shadow form in 2009. It was first established not in statute and operated without statute after 2010. The provisions for its establishment in statute were then brought forward in a Bill, where there was sufficient time to consider those questions.
I am not saying definitively one way or another, but it raises questions that we would need to consider more carefully about who this body is accountable to and the interactions with parliamentary accountability that we have discussed today; the need for clarity on accountability, raised by the noble Lord, Lord Hunt; and, for example, the remarks by the noble Baroness, Lady Bowles, on the role that the body could have in filling the space that allows industry to make private submissions to the new body, rather than public submissions as happened through Select Committees, and how that marries with the provisions in the amendments on the need for this body to operate transparently.
These are questions that are raised in considering how such a body would operate in this landscape. There is the potential that it could duplicate or dilute the roles within the regulatory framework of government and Parliament to scrutinise and hold the regulators to account.
Lord Hunt of Kings Heath (Lab)
There is a problem in the approach that the Minister is taking. She is suggesting that the body proposed by the noble Lord, Lord Bridges, will add to the accountability structure. I have added my name to the amendment and, as I see it, the body is there to support those who wish to hold the two regulators to account. It is not there to add to the architecture of accountability but to aid Parliament and others to hold them properly to account. There is a distinction.
Baroness Penn (Con)
Whether it is there to aid others in the accountability structure or is an accountability body itself is a further question, but its proposed role raises questions about, for example, how transparently it operates, as the noble Baroness, Lady Bowles, touched on, and other such considerations. I merely said to my noble friend who raised this point that the establishment of the OBR happened in a Bill of its own after a manifesto commitment, and that it had been up and running for some time before it was put into statute. It is not unreasonable to say that considerations need to be made when we think about this issue.
Lord Deben (Con)
There are certainly considerations, but surely one of them is that we have an opportunity to make the change in this Bill, and we will not have another opportunity for a very long time. The Minister is proposing that we do not do it, frankly. Therefore, let us do it in this Bill, because it is the one opportunity that we have.
Baroness Penn (Con)
My Lords, I would never want to speculate as to future parliamentary timetables. My noble friend Lord Naseby talked about the importance of listening to those who are impacted by the provisions of the Bill. He spoke about the City, and we have heard various points of view in that respect. I would add consumers into that mix, too. I say to noble Lords that the Government have consulted extensively on the approach we are taking in the Bill, and we have received a number of responses on this specific issue in both future regulatory framework review consultations that took place. Although I absolutely recognise that a small number of respondents were supportive of further consideration of such a body, the vast majority were focused on how existing mechanisms for accountability to Parliament and government and engagement with stakeholders could be strengthened. The Government therefore decided, in response to those consultations, against creating a new body, and focused on ensuring that the mechanisms for Parliament and government to scrutinise the regulators are effective.
Baroness Bowles of Berkhamsted (LD)
Will the Minister clarify what the questions were in the consultation? My recollection was that it was relatively open. Obviously, at that stage, industry was focused on its very important relationship with government—one cannot overestimate the importance of that—and it answered questions saying that it was happy with parliamentary scrutiny, but I have no recollection of there being a suggestion as to whether there should be another body that enabled any kind of regular review. Since that time, industry bodies have said that it would be a good idea, so it seems a bit inconsistent to claim that the consultation cleared the way to say that none was required.
Baroness Penn (Con)
My Lords, I was simply pointing out that this Bill is the result of two rounds of consultation. The Government are criticised for bringing forward proposals without sufficient consultation. I note the noble Baroness’s points but, even in the context of those questions, there were bodies that put forward the kinds of ideas that we are discussing today. However, in the balance of responses to that consultation, they were not the dominant voice or viewpoint from the range of different people who responded to us.
Lord Forsyth of Drumlean (Con)
My Lords, in my day, although it may have changed, when the Government issued a consultation document, it was basically to get agreement to what they wanted to do. In the case of the OBR, I remember the then Chancellor, George Osborne, arguing that the OBR was necessary in order that people could see that the Government were being honest and were subject to some kind of scrutiny, and that it would provide independent information that would enable Parliament and others to take a view.
I am trying to put this delicately, but my noble friend’s argument seems to be that the Treasury set out a consultation and reached an agreement so it is in the Bill. But the view that is coming out very clearly is that, for Parliament or anyone else to effectively hold the Treasury and the regulators to account, it is necessary to have an independent source of information. My noble friend is just reading out what we already know is in the Bill, but there is pretty well universal acceptance that that does not actually provide for sufficient accountability. Could she deal with that point? Why on earth would she be against something that would enable more transparency and more effective scrutiny?
Baroness Penn (Con)
I am afraid I am going to have to disagree with my noble friend’s point about consultation. I have spent too long in this Chamber, even in a limited time, being on the receiving end of scrutiny from noble Lords about the lack of consultation. The proposals in the Bill have gone through two rounds of public consultation. My noble friend may not see the value in public consultation, but that is not something that has been fed back to me in my dealings in other policy areas.
Lord Forsyth of Drumlean (Con)
Forgive me, but I did not say anything of the sort. Of course I can see the value in consultation. What I do not see the value in is consultation that then concludes that the Government should do what they wanted to do in the first place.
Baroness Penn (Con)
That is not what I am saying. One of the things that I was referring to with regard to the powers in the Bill was an amendment tabled in the Commons stages to try to respond to further questions about how we can facilitate accountability. I think I have been clear to all noble Lords in this Committee that that is a question that the Government will continue to consider and to engage with noble Lords on, whether it is about strengthening parliamentary accountability or other measures that help to provide the information and resources that people need to do that work. The Government will continue to reflect on those points.
Baroness Bowles of Berkhamsted (LD)
I am sorry to interrupt, but I find it slightly strange that the Minister is saying the Government will continue to interact with us. All that that interaction has been so far is “No”.
Baroness Penn (Con)
In Committee, we are discussing the different proposals that have come from noble Lords to solve these problems. I am trying to set out where the Government have previously considered these questions and the thinking behind our approach in the Bill, demonstrating that where we have been able to, for example in the introduction of Clause 37, we have made amendments to the Bill further to take into account some of these issues. When it comes to the specific proposals we are talking about, it is right that I set out that this has been considered by the Government, including through public consultation.
Baroness Noakes (Con)
I was not going to speak on this group in order to have a speedier debate, but I completely failed in that aim, so I think I am allowed to say something now. Can my noble friend explain to what extent these two consultations actually address the issues that have been raised by the amendments of my noble friend Lord Bridges? From memory, neither of the consultations examined the idea of having some kind of independent scrutiny of the regulators; they merely proceeded on the basis of what the Government wanted to do and did not seek to analyse the benefits of an alternative solution.
Baroness Penn (Con)
That is a similar question to that of the noble Baroness, Lady Bowles, and it is probably because I did not answer it satisfactorily that it has come up again. Noble Lords are right that there was not a question on those specific proposals in those consultations. I endeavour to point out, however, that does not prevent the respondents to those consultations, where they believe it to be a good idea, to use them to put forward their support for such an approach. Perhaps I could write to noble Lords specifically on the areas within both those consultations that touched on accountability measures.
Lord Bridges of Headley (Con)
To be absolutely clear and just to put it on the record, therefore, the proposal in my amendment has not been consulted on? Is that correct?
Baroness Penn (Con)
It would be best to set out in writing for noble Lords the specific areas of the consultation that sought to address the issues we are discussing today. As I have said, in response to those consultations, certain respondents put forward proposals in this area, so it is not right to say that it was not a topic for consultation. However, as my noble friend wants clarity on the record, I think that would be best delivered in writing.
Baroness Bowles of Berkhamsted (LD)
Perhaps I could intervene on this important point. In the first consultation, there were some respondents—I confess, I was one of them—who put forward notions of there being independent scrutiny. There were possibly some other organisations, I do not know, of the kind that come forward with policy ideas. But I suggest that the majority of respondents tended to be from the industry, and it is not usual for industry to invent new ideas in their responses to consultations. I asked some of the industry bodies about this at the time, and that was the response I got. They said that they thought that, as I had led the way, they might want to pick it up in later consultation—but by the time you get to round two, it is much more concentrated on what will be in the Bill and “Do you agree with this?” It does not say “And, by the way, what have we left out that might have been a good idea?” Industry does not spend its time and risk putting in responses about that kind of thing.
I should be very interested to hear the analysis of the type and numbers of people who responded. Frankly, we have to rely on what we are told. Once upon a time, you used to know who had responded and could judge, and if the weight of the responses came from industry, I am not surprised that there was nothing in there. If the weight of the responses from the non-industry part had some good ideas, perhaps the Minister could tell us.
Baroness Penn (Con)
As I have said, I will set out further detail on the consultation process in writing. It is worth just noting that this question was also considered by Parliament through the Treasury Select Committee in its report The Future Framework for Regulation of Financial Services, which said that
“The creation of a new independent body to assess whether regulators were fulfilling their statutory objectives would not remove the responsibility of this Committee to hold the regulators to account, and it would also add a further body to the financial services regulatory regime which we would need to scrutinise.”
Lord Tyrie (Non-Afl)
Can the Minister explain whether that constitutes opposition? I had a cup of tea with the chairman of the Treasury Select Committee only the day before yesterday to try to establish exactly that. She is fully supportive of the idea—we ought to get that on the record—although I should also say that she had not specifically consulted her committee on it.
The Minister must see that the Government are probably going to lose a vote on this at Report. Would she be prepared to sit down with a group of us to see whether we can work up some sort of proposal that she might be prepared to accept? To make that meeting effective, in the meantime, would she be prepared to ask her officials, on a contingency basis and without any commitment at all on her part, to write down on the back of an envelope—a long envelope, I admit—what it is that might conceivably, in certain circumstances, be acceptable to the Government?
Baroness Penn (Con)
My Lords, I believe that I have already made the offer to noble Lords to meet to discuss the issue of accountability, both parliamentary accountability and the proposals such as those put forward in the amendments today. That still stands. I am afraid that I cannot—
Lord Vaux of Harrowden (CB)
I apologise for interrupting. The Minister is quite right that she has made that offer. We were grateful for it, but it is of fairly limited use if there is no recognition on the part of the Government that there is a gap here in terms of parliamentary accountability and scrutiny. She has not actually said yet that she recognises that there is a gap. I have to say that she should look around her: it is pretty clear that it is there.
Baroness Penn (Con)
What I have tried to say to noble Lords is that, in bringing forward the proposals in this Bill, we absolutely recognise that, with the increased responsibilities that go to the regulator, we need to ensure that there is proper accountability and scrutiny. We have put forward the proposals in the Bill to attempt to do that.
Baroness Penn (Con)
I did not finish the note I was writing to myself to try to draw the debate on my noble friend’s group of amendments to a close for now. In response to the noble Lord, Lord Vaux, I was setting out that the Government believe there needs to be clear and greater accountability for the regulators, given the greater powers they are taking on. We have set out our approach to this in the Bill. When it went through the House of Commons, we demonstrated our openness to finding new and improved ways to strengthen our approach.
Where the Government have considered and consulted on some of the options the Committee is discussing today—or bodies such as the existing Select Committees of this or the other House have considered those options—it is right to draw this Committee’s attention to the feedback we have had in those consultations or through those Select Committee processes. As I have said to noble Lords on numerous occasions, we will listen carefully to the various debates we have had, reflect on what has been discussed and meet and engage with noble Lords, who have clearly expressed their concerns on this matter, to see what further progress can be made.
I turn to my noble friend Lord Lilley’s Amendments 169 to 174. On Amendment 169, I believe I set out the Government’s position on a predictability and consistency objective in earlier debates. While the Government agree that predictability and consistency are important components of an effective regulatory regime, we do not think they are appropriate objectives for the regulators. Similarly, the Government consider that such objectives do not need to be applied to the Upper Tribunal’s decision-making.
Amendment 171 seeks to enable the Upper Tribunal to quash all rules made by the regulators. The Government consider that the regulatory framework, including through enhancements in the Bill, provides multiple opportunities and avenues for challenge and review of the rules, both before and after they are made. For example, Clause 27 introduces a new power for the Treasury to require the regulators to review their rules when it is in the public interest. I also note that the courts already have a role within the existing framework, where necessary, as decisions of the regulators are subject to judicial review.
Amendments 170 and 172 both concern the routes of redress available to consumers. The Financial Ombudsman Service already plays a valuable role in providing consumers with a swift and effective means of resolving disputes with financial services firms.
Amendment 170 would enable those currently eligible to bring claims to the FOS—consumers and most SMEs—to bring actions against firms for breaches of regulator rules in a new financial services chamber within the First-tier Tribunal. These actions could be brought even where the FOS had made a final decision. The FOS and the Business Banking Resolution Service already provide a cost-free alternative to the courts for consumers and 99% of SMEs. Going to court can be expensive for the parties involved and delay redress. It would likely be more expensive for consumers and SMEs to bring civil actions in the First-tier Tribunal than through the existing redress process.
I turn to Amendment 172. Establishing a new body with a different remit would take up resource from industry, government and the regulators and slow down redress for consumers without a clear need for this change. The key difference between the proposed new body and the FOS is that the new body would not be able to consider what was fair and reasonable in all the circumstances of a case when taking a decision. This consideration enables the FOS to take into account wider factors relevant to the case, such as regulator guidance and industry codes of practice at the time. This is in addition to the requirement in FSMA for the FOS to consider relevant law and regulator rules, and it enables it to tailor its decision to the particular circumstances of a case and ensure a fair and reasonable outcome for all parties.
The FOS’s ability to consider issues of fairness and reasonableness beyond a strict application of the law and regulator rules is consistent with its role as an informal alternative to the courts. FOS decisions can be, and have been, judicially reviewed by parties who are not satisfied with the reasons provided by the FOS for the decision.
Baroness Bowles of Berkhamsted (LD)
I think the Minister has just said that she will engage but that the answer is still “no”.
Baroness Penn (Con)
I have set out why the Government have concerns and that we should have further conversations to explore the issues that have been raised. I believe that is neither a “yes” nor a “no”.
Lord Bridges of Headley (Con)
My Lords, I will conclude this two and a half hour debate on just the first group and my amendment. I am delighted and thankful to noble Lords on all sides of the House who have supported it. The amendment is mine; the concept belongs to others. I am extremely grateful to my noble friend the Minister for offering to engage. However, I question the word “further”; I have not had any engagement and, so far, all I have heard is three things.
The first is that the Government believe that the measures in the Bill are sufficient. I think there is unanimous support, on both sides of the Committee, that, as far as accountability and scrutiny go, the measures are insufficient and need to be improved. The second is that the Minister is actually against the measures in my amendment today and the third is that they have been consulted on, whereas we have established from the earlier interventions that the specific amendment I propose, with this concept, has not been consulted on and that it was up to others to come up with that. In my view, that is not a consultation.
The Committee has stressed just how important this issue is, not just by the fact that we have been debating it for two and a half hours but because of what my noble friend Lord Hill and others said about the importance of ensuring that our regulators are truly accountable. The noble Lord, Lord Eatwell, made this point extremely well, as does my noble friend Lord Hill in an article in the Financial Times which was published just this afternoon. My noble friend says that
“what regulators decide directly affects our ability to compete and grow”
and that it follows that getting a regulatory framework right
“is central to our national wellbeing”.
He then says that we risk creating
“a new system of unaccountable British regulation”.
I repeat: unaccountable British regulation, and that is despite the measures that my noble friend says are in the Bill to increase accountability and scrutiny. I think we agree that they are completely insufficient.
As the noble Lords, Lord Eatwell and Lord Tyrie, said, this is not a question of just one or another of the little things that we have debated over the last few weeks on the Bill. A package needs to be brought together and it should address three points. One is improving the data that the regulators themselves provide. The second is arming Parliament with independent analysis, and I do not buy for a moment what my noble friend says about it undermining the independence of regulators. It is about arming Parliament and others with independent analysis of what the regulators are up to. The third is improving parliamentary accountability and scrutiny; my noble friend Lord Trenchard and others have made this point, as my noble friend Lady Noakes did in a previous session. These three things hang together.
I am delighted that my noble friend the Minister is willing to meet us, but I very much hope that she comes there with an open mind and a constructive attitude, not just a sense of no. I will obviously not press this amendment to a vote now but I can absolutely assure her that if the outcome of those conversations is not one that meets the challenge at hand, I will have absolutely no hesitation in pressing this to a vote at Report.
Baroness Worthington
“PRA dutiesReview of capital adequacy requirements risk weights and solvency capital requirements
(1) Within six months of the day on which this Act is passed the PRA must complete a review of the risk weighting and capital requirements applied to loans, guarantees or investment via shares or securities in—(a) group undertakings engaged in existing fossil fuel exploitation and production,(b) group undertakings carrying out new fossil fuel exploration, exploitation and production, and(c) group undertakings otherwise at significant risk from the low carbon transition, including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry.(2) In conducting this review, the PRA must have regard to—(a) the full implications of climate change for the risk of investments including physical climate risks, transitional climate risks and climate liability risks,(b) the likelihood of assets becoming wholly or partially stranded before the end of their normal cycle,(c) the impact of climate change and climate change-related disruption on financial stability, and(d) the advice of the Climate Change Committee.(3) The Treasury must lay before Parliament the outcome of this review within one month of its completion.”Member’s explanatory statement
This amendment requires the PRA to complete a review of the risk weighting and capital requirements of banks and insurers in relation to firms engaged in financing fossil fuel exploration, exploitation and production alongside other climate-risk exposed sectors, taking account of the climate risk on those investments and on financial stability, the likelihood of the assets becoming stranded, and the advice of the climate change committee.
Baroness Worthington (CB)
My Lords, moving on to a different set of topics, Amendment 168 is in my name, and I am grateful to the noble Baronesses, Lady Sheehan and Lady Drake, for lending their support. This is the only amendment in the group which has my name on it but I am broadly supportive of many of the others in it, as they seek to address a broad range of questions relating to how risk is taken into account in financial services regulation, with a specific focus on climate risk, as in my amendment.
Amendment 168 is about the risk weighting of assets for the purposes of capital adequacy requirements, in the case of banks, and solvency capital requirements, in the case of insurers. It is not a terribly prescriptive amendment. It would require the PRA to complete a review of these matters in relation to loans, guarantees or investment in firms engaged in new and existing
“fossil fuel exploration, exploitation and production”
and other sectors which are particularly exposed to low-carbon transition and climate risks
“including but not limited to those engaged in fossil fuel-based power generation, agriculture, automotive engineering, aviation and heavy industry”.
Proposed new subsection (2) sets out a number of matters to which the PRA should have regard, including the different types of climate risk and the risks to both individual stranded assets and wider macroeconomic financial stability. It also requires it to take advice from the Climate Change Committee. I have referred to loans, guarantees and investments in relation to the group undertakings to capture particular climate risks in the wider groups of firms. A loan to a firm engaged in clean technologies is still exposed to financial risk if it is a wholly owned subsidiary of a firm which is significantly exposed to low-carbon transition, or if the firm itself owns firms which are.
To be clear, I am seeing this through the lens of financial risks to firms. I have noted that Sam Woods, the chief executive of the PRA, has said that the organisation should not seek to pursue a climate policy in stealth mode or on the quiet, as a second Government, unless government gives it that duty. He says that the PRA and Bank of England remits are currently to pursue financial stability and accordingly to manage climate risk, which has the potential—I go so far as to say the likelihood—to constitute a huge risk to financial stability. I agree with him, but I do not believe that, for the management of these risks, the tools that the bank has deployed to date are sufficient; in fact, they include methodological issues that are disastrously understating the financial risks.
Before I turn to that issue, I should address one other point. During the passage of the Financial Services Act 2021, an amendment in relation to capital risk requirements was tabled by the noble Lord, Lord Oates. In response, some Peers said that there was no emergency embedded in banks’ balance sheets, as corporate lending in short to medium-term in nature. However, I need to emphasise that significant impairments are possible in both the short and medium-term.
This is not only as a result of more unpredictable and extreme weather—more particularly, it is as a consequence of technological and societal change. Global investment in low-carbon technology has increased by 20% a year in the past five years alone, and has now overtaken global fossil fuel investment. There is a whole economy change under way. It is not about a few companies and discrete sectors that have failed to take into account incremental improvements but about whole sectors exposed to broad-based technological change, increasing the rates of company failure, and the rapid shrinking of some industries, accompanied by the expansion of others. Banks and insurers that have not taken account of such changes face much higher impairments and, given the systemic risks of allowing them to fail, socialised public bailouts. It is right that the PRA should assess that these risks are being adequately managed and that the banks and insurers participate in supporting that review. It is about investing a little now to avoid spending a lot further down the road.
How are these risks being managed? Currently, through the climate biennial exploratory scenario, or CBES. In this exercise, the PRA offers up sample temperature rise scenarios and underlying assumptions of the implications for different assets, and firms plug in their portfolios to get the impairment data out as a result. This all feels safe and precise, but the climate is something that cannot be predicted specifically in those ways with any degree of accuracy. It is about the extent and nature of the risks that must be taken into account. This whole streamlined, reassuring and seemingly precise approach is hopelessly wrong in the face of climate risk.
A paper by the noble Lord, Lord Stern, of this House highlights that the methodologies employed by such climate risk models rest on flawed foundations, with huge error bars and unknown unknowns. Critical methodological problems have led to perverse outcomes, such as the suggestion that a 3 degree temperature rise, global average, offers the optimal balance of benefits and costs. That is more or less what we get from CBES. Where temperature rises are limited to under 2 degrees or rise to more than 3.3 degrees, the drag on company profits is predicted to be at around 10% to 15% on average. I have no idea how any model could reach that conclusion that had any bearing with what is actually happening to our physical climate.
Let us remember that the economy and the financial markets are a wholly owned subsidiary of our natural environment, and we are now in a destabilised climatic environment. This same 3 degree rise, which is the global consensus, involves steep drops in food production, dire water shortages, a sharp increase in urban heat waves, forced migration and mass extinction events. An increasing body of literature sets out why the models do not work. The former chief economist of ING Group in a Policy Exchange publication concludes that central bank scenarios have so far been based on assumptions and models that ignore or downplay crucial evidence of climate risks—notably the rising frequency of extreme weather events and critical triggers, tipping points and interdependencies between the climate, the economy, politics, finance and technology.
That is true for the CBES model. The underlying assumptions in the CBES paper highlight minimal economic impact from inaction on climate change over the next 25 years and a reduction in GDP growth of only 0.12% in 2050—another ludicrously precise number, given all the future uncertainties that lie ahead of us. That is very poorly aligned with the scientific consensus. Other academics have identified dangerous underlying assumptions in the functions that feed into those used by CBES, including that 90% of GDP will be unaffected by climate change because it happens indoors, and using the relationship between temperature and GDP today as a proxy for the impact of global warming over time, ignoring any possibility of cascading climate feedbacks and tipping points.
Baroness Boycott (CB)
My Lords, I shall speak to Amendment 199 tabled by the noble Lord, Lord Randall, who unfortunately is absent today, which is supported by the noble Baroness, Lady Sheehan, the noble Lord, Lord Tunnicliffe, and me.
This amendment would simply extend the same due diligence system that has already been introduced for large companies under Schedule 17 to the Environment Act, which looks at products in terms of deforestation, to UK financial institutions. The purpose of such due diligence is to prevent British banks knowingly financing deals that lead to deforestation worldwide. Sir Ian Cheshire, the former chair of Barclays and head of the Global Resource Initiative task force, has already written to the Minister saying that our regulations should now ensure that financial institutions do not directly or indirectly fund or support deforestation linked to forest commodities.
Between 90% and 99% of all deforestation is driven by agriculture, chiefly to produce soy, beef and palm oil—the big commodities—but on the whole that clearance is completely unnecessary to produce the food we eat. New research from the Stockholm Environment Institute shows that a vast proportion of all deforestation is speculative and does not in fact lead to any agricultural production. Sadly, corruption, fraud and labour abuses are the norm in the global agriculture sector. At least 69% of forest clearance for agricultural purposes between 2013 and 2019 is considered to have been illegal. Our existing regulations are practically an open invitation to banks to launder the proceeds and profits of forest crime.
Evidence from the charity Global Witness shows that, in the five-year period between the Paris COP and our own Glasgow COP, British banks and financiers made deals worth $16.6 billion, with just 20 agribusinesses implicated in these transactions. WWF calculates that the UK financial sector faces up to £200 billion in risk exposure to Brazilian beef and soy supply chains and Indonesian palm oil supply chains alone. This clearly exposes the UK economy as a whole and individual financial institutions to significant material risk. Globally, agribusinesses are expected to lose an average of 7% in value by 2030 due to unpriced nature and climate risk, with some companies losing up to 26% of their value.
Bringing an end to deforestation is one of our most imminent climate targets. At COP 27, the UN high-level working group on net zero made clear that this means an end to the financing of all deforestation. We do not need to do it; we should not do it any more. Fortunately for the Government and the Minister, Schedule 17 to the Environment Act has laid the necessary foundations by reducing the import market in the UK for commodities grown on illegally deforested land from places such as the Amazon. Under that Act, businesses will need to conduct due diligence to ensure that they have no deforestation anywhere in their supply chains. All this amendment would do is ensure that the already available information travels one step further to the banks and finance institutions.
I know that the Minister will reply that this is all in hand because of something called the Taskforce on Nature-related Financial Disclosure, TNFD, but this is yet another voluntary reporting scheme designed to help companies identify how biodiversity loss threatens their profitability. We must wake up to the fact that just identifying it is not the same as reducing it. Indeed, a lack of data is not at all the problem. Satellite technology enables real-time monitoring, and images can be mapped against suppliers’ farms. We have already accepted that such due diligence is made possible by passing the Environment Act.
If charities such as Global Witness can do it, so can the banks. The TNFD is shaping up to be the
“next frontier in corporate greenwashing”
unless we pass an amendment such as this one. Voluntary schemes have already tried and failed to deliver on similar objectives. The Soft Commodities Compact signed by British banks failed, and so has the New York Declaration on Forests. Financial institutions signed up to the Glasgow Financial Alliance for Net Zero, spearheaded by our Government, but they have barely decreased their deforestation investments since signing up to that scheme at COP 26. Many members have in fact increased their exposure to notorious deforesters in that time.
We cannot waste any more time with more voluntary initiatives if we are to meet the 2025 deadline for ending deforestation. We have a plan and a blueprint, with mandatory due diligence at the core. Without this reform to our financial regulations, there may well be no forests left to save and the British public will be left holding the bill for this unnecessary race to the bottom.
Baroness Hayman (CB)
My Lords, with this group we return to the issues of how this legislation can support the ambition of the now Prime Minister—then Chancellor—to be the leading net-zero financial centre.
In this group I have Amendments 201 and 235 to 237, and I am grateful for the support of the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Northover, Lady Drake and Lady Altmann, on those amendments. It is not a monstrous regiment; I think it is a rather impressive regiment of women who will put forward amendments in this group. We have already heard from the noble Baroness, Lady Worthington; I very much support her words and the argument just made by the noble Baroness, Lady Boycott.
Investment in deforestation will undermine financial firms’ transition plans and sustainability impact reporting. It needs to be underpinned by real action. Bringing mandatory due diligence into law is supported by the Government’s own expert body, the GRI task force, and the UN Secretary-General at COP 27. It is not sufficient that UK firms stop importing deforestation risk commodities, as the Environment Act requires; UK financial firms must stop funding them too. This amendment would achieve that.
I have also added my name to Amendment 233, in the name of the noble Baroness, Lady Wheatcroft, on sustainability disclosure requirements. I will leave it to her to explain the amendment in detail but, fundamentally, there is little dispute over the importance of sustainable disclosure requirements, but equally little progress being made, and the legal basis for those requirements is unsure. Those issues would be addressed by this amendment, and I support it.
I turn to my Amendments 201 and 237, which relate to fiduciary duties and would require the Secretary of State for Work and Pensions and the FCA to publish guidance—to which occupational pension schemes and FCA-regulated firms must have regard—considering the long-term consequences of decisions and the impacts of their investments on society, climate and nature. This reflects duties applicable to companies under the Companies Act, but those provisions apply to financial services companies only in relation to their shareholders, not their clients, and they do not apply to pension funds at all. I very much welcome the work to date of the DWP and FCA on fiduciary duty. However, research by the Principles for Responsible Investment, a UN-founded body with 3,000 signatories and $100 trillion in assets, found that investor understanding of their duties was discouraging them from pursuing—or even considering—positive sustainability impacts, and recommended further guidance from the UK Government and regulators. Similarly, a study by the UK Sustainable Investment and Finance Association reported that
“We continue to see a common lack of understanding within financial services on the extent to which ESG”—
Environmental Social and Governance—
“factors form part of investors’ fiduciary duties. This area needs urgent clarification for finance to reach net-zero.”
UKSIF also recommended that guidance that both risks and impacts should be considered a core component of fiduciary duties.
My amendments do not overturn existing fiduciary responsibility. They would merely result in guidance on how impacts and long-term matters are considered when acting in investors’ financial interests. They are not prescriptive about the content of the guidance, which would not be legally binding. The Government have made much of their desire for more productive investment by the financial sector, but confusion about fiduciary duty has been raised as a key barrier. This amendment could help to end that confusion.
Amendment 235 on green taxonomy relates to commitments dating back to 2019 and reiterated in October 2021 to at least match the ambition of the key objectives in the EU’s sustainable finance action plans. They follow through on the commitments made for the Treasury to publish the taxonomy and for the FCA and government departments to make the necessary changes to implement it.
I must say that the Government’s approach to taxonomy is somewhat confusing. The Green Technical Advisory Group—or GTAG—was established in June 2021 and delivered advice to the Treasury in October 2022. The Minister reconfirmed a commitment to the taxonomy in the House of Lords in November. However, this was followed in December 2022 by a Statement seeming to back away from producing a green taxonomy, describing it as a “complex, technical exercise”. Although the noble Baroness, Lady Penn, stated in Committee on 30 January:
“The Government are committed to implementing a green taxonomy as part of their sustainable finance agenda”—[Official Report, 30/1/23; col. GC 170.],
I fear that what the Government have in mind is a voluntary model, which would be fragmented and incomplete, rather than robust and comprehensive. I should be grateful for clarity and reassurance from the Minister.
The delay is frustrating for the many parts of the industry that have directly and indirectly assisted the development of a green taxonomy. More than a dozen other jurisdictions have brought forward their own green taxonomies, seemingly without insuperable difficulties. The Government need to restate a clear timeline for implementation. The Skidmore review agreed, and proposed a “transition taxonomy”. This amendment makes provision for that.
Baroness Wheatcroft (CB)
My Lords, this group of amendments has already been spoken to by several eloquent speakers. I support the amendments in this group, but I shall speak particularly to Amendments 233 and 235 to 237, to which I put my name. The common thread in them is encouraging financial institutions to be serious about their intention of helping the country meet its net-zero target. If the Government are serious about that target, they will surely see the merit in these amendments.
Financial institutions may understand that the long-term health of countries, their economies and their businesses requires a focus on net zero, but short-term considerations such as this year’s profit all too often influence their decisions. Hence, in 2021, the 44 largest members of the Net-Zero Banking Alliance, a group that includes Barclays, HSBC, Lloyds, Nationwide and NatWest, provided $143.6 billion in lending and underwriting for the 75 companies doing the most to expand oil and gas. Principles sometimes come too expensive for these institutions to follow. If those organisations are to be discouraged from such behaviour, in their own long-term interests as well as ours, it will be by forcing them to make firm environmental commitments and to publicly report on them.
It seems that the Government have shared this view. According to a report in the Financial Times last May:
“Ministers made a last-minute decision to withdraw plans to force big UK companies and asset managers to disclose their environmental impact”.
They decided to drop that from the Queen’s Speech at the last moment. The sustainability disclosure requirements were apparently seen as being at odds with the Government’s deregulatory strategy. There is plenty of deregulation rhetoric around at the moment, but those of us who were in the Chamber yesterday for the agonising discussion of the Retained EU Law (Revocation and Reform) Bill might feel that the strategy was far from evident.
These amendments are intended to provide help to the Government as they seek to implement their net-zero strategy. Amendment 233 would do for financial organisations what the Government have been planning for business generally. It would require the financial regulators—the FCA and the PRA—and Ministers to make regulations by the end of this year requiring sustainability disclosures for listed firms, fund managers, personal pension providers, banks, insurers and pension schemes.
In addressing this amendment, perhaps the Minister will confirm that this complies with the Government’s thinking in the wake of COP 26, when the transition plan task force was set to work to look at how large companies and financial firms should be required to report on how they are managing the transition to net zero. If the Minister accepts that, will she explain why this Bill should not contain this amendment?
Amendment 236 further details requirements. Amendment 237 complements Amendment 201. It refers to pension schemes and requires trustees to have regard to the long-term effects of their investment decisions. Pensions are all about the long term, so they should have regard to the long-term effects of their decisions, not the short-term effect on the bottom line for the fund manager who is interested in his bonus that year. A little legislation to help them on their way to doing the right thing seems a good idea.
The aim of Amendment 235 in the name of the noble Baroness, Lady Hayman, is, essentially, to provide that help to institutions in making these crucial decisions. A green taxonomy—long discussed—needs measurable criteria and this amendment would require the Treasury to provide a framework for that. As the Minister said, the Government are—apparently—committed to implementing the green taxonomy. This amendment, like the others in the group, seeks only to encourage the Government to demonstrate their commitment with the sense of urgency that is now required.
Baroness Meacher (CB)
My Lords, I wish to speak extremely briefly to support my noble friend Lady Boycott—I am sorry, I did not see the noble Baroness, Lady Sheehan.
Baroness Sheehan (LD)
My Lords, it is a pleasure to follow the noble Baroness, Lady Wheatcroft. I am sorry that I kept bobbing up and down while she was speaking.
This is an essential group of amendments, several of which I have added my name to. They are important because billions to trillions of pounds will be invested over the near to medium term into an economy that is transforming with increasing rapidity into a low-carbon one. It is clear that climate risk is financial risk: returns on investments and the ability to pay back loans are exposed to the risks of rising temperatures, as evidenced by recent catastrophic climatic events, and action taken by policymakers to transition to a low-carbon economy, such as the US Inflation Reduction Act.
Businesses, big and small alike, are poised to pull the start trigger on investments but are held back in the UK by lack of clarity about the Government’s intentions. The Government have made the right noises but not followed through, leaving doubt and uncertainty in their wake. The situation is urgent. The US Inflation Reduction Act is a game-changer, and the EU will follow suit. Green investment is the future. Our businesses know that but are hesitating to commit, waiting for a clear signal from the Government that they are 100% behind the green revolution. Currently, the messages are rather mixed.
For the sake of the debate’s flow, I will address the amendments to which I have added my name before addressing my Amendment 232. I start with Amendment 168, in the name of the noble Baroness, Lady Worthington. Climate risk is not specifically factored into either the regulatory capital risk requirements for banks or the solvency requirements for insurers. I support Amendment 168 and have added my name to it. I have pursued the theme of stranded assets for several years. I am concerned that the taxpayer is not left to pick up the cost, for example, of decommissioning oil and gas platforms in the North Sea abandoned after profits have been creamed off. How much better it would be if the Government clearly laid out a framework, via their regulator, that the risks in financing fossil fuel exploration, exploitation and production, as well as other climate risk-exposed sectors, must be taken into account prior to investment decisions being made.
I move on swiftly to Amendment 199 on deforestation. After fossil fuels, deforestation is—as the noble Baroness, Lady Boycott, pointed out—the second-largest contributor to global warming. It is responsible for 12% of all global greenhouse gas emissions. Scientists tell us that, to stand any chance of limiting global temperature rise to 1.5 degrees centigrade, commodity-driven deforestation must be ended by 2025.
What happens to rainforests matters to us all. In fact, although thousands of miles away, the UK has a large deforestation footprint. It is for this reason that, in July 2021, I and noble Peers from across the House tabled amendments on the issue to the Environment Bill, now the Environment Act 2021. I was pleased to see the noble Baroness, Lady Meacher, poised to add her contribution to this. I commend the Government for the action that they have already taken on this issue. Schedule 17 to the Environment Act was the first time that forest risk commodities have been addressed in legislation.
As already mentioned by the noble Baroness, Lady Boycott, Sir Ian Cheshire, the former chair of Barclays and head of the Government’s own Global Resource Initiative task force, tells us in an open letter dated 23 January and addressed to the Minister, the noble Baroness, Lady Penn; Andrew Griffith, the Economic Secretary to the Treasury; and all Members of the House of Lords:
“Under forthcoming secondary regulations, large companies will be required to establish a due diligence system to assess and mitigate the risk of importing commodities grown on illegally deforested land, reporting annually on their progress”.
When the Minister comes to reply, can she tell us when we may expect to see these regulations?
Sir Ian goes on to say that
“while this is an important step, regulating supply chains alone is not enough”.
It is therefore recommended that
“the Government should make it illegal for financial institutions to invest in or lend to supply chain companies that are unable to demonstrate forest risk commodities have been produced in compliance with ‘local laws’ (i.e. legally)”.
Baroness Sheehan (LD)
Thank you. I come to Amendment 232 in my name on green savings bonds. My reason for tabling this amendment is to draw attention to the success of the National Savings and Investments green savings bonds, which are an important part of the green finance landscape. Really it is a pat on the back for the Government—much-needed, maybe —so the Minister should view this as an opportunity for the Government to congratulate themselves. For me, it is an opportunity to ask them what more they can do to raise awareness of these bonds and promote them more aggressively. After all, the Climate Change Committee identified public engagement and behaviour change as major elements in the success of measures to keep the planet in a fit state for future generations, but many people complain that knowing what to do for the best is confusing. These bonds represent a safe way of putting their money to work for the benefit of all our futures.
Here is the background. The NS&I’s new green savings bonds became available from 22 October 2021, introduced by the then Chancellor, Rishi Sunak. They pay a fixed rate of interest over a three-year fixed term, and the current rate is 4.2%. The minimum deposit is £100 and the maximum is £100,000 per person. NS&I’s savings accounts are long-standing, recognisable and safe. They are hugely popular with UK savers, not least because investments are totally safe, being 100% backed by the Treasury. There is not the usual limit of £85,000 that there is with providers covered by the Financial Services Compensation Scheme. Many savers want to make green and ethical investment choices. Work by the Cambridge Institute for Sustainability Leadership found that the median saver would prefer a sustainable fund, even if they have to sacrifice up to 2.5% returns.
Money saved with NS&I’s green savings bonds is used to fund six types of green projects: making transport cleaner; switching to renewable energy; improving energy efficiency; pollution prevention and control; protecting living and natural resources; and adapting to climate change. These projects are publicised and clearly audited for climate and nature benefits. Another benefit is that raising funds through NS&I can actually give greater financial stability than raising funds on the financial markets. During the meltdown in borrowing costs following the botched “fiscal event” in September last year, investors in NS&I did not dump their bonds because they could not do so; there was no panic in NS&I’s offices in Blackpool, Glasgow, Birkenhead and Durham—please note, none in the south-east—because the bonds are not transferable. Further, when a larger amount of a Government’s debt is held by their citizens, it is less prone to volatility. There is lots to like about the products. There are few cash-based green savings products in the market, especially ones with such a high level of transparency about their use of proceeds.
My amendment is intended to put in the public domain at regular intervals the contribution made by the NS&I’s green bonds and the like towards UK green financing and the consequent reduction in targeted greenhouse gas emissions. It is worded in such a way as not to make proposals over the amount of government borrowing or how they should raise taxes, only to seek information on how the Government are raising funds for green investment. It would be helpful if the Minister could say how much has been raised through the Government’s green bonds to date, how much is forecast to be raised annually in future and what the Government’s ambition is for their future, including in relation to the promotion of these products.
Financial Services and Markets Bill
Tuesday 7th March 2023
(1 year, 8 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-VII Seventh marshalled list for Grand Committee - (3 Mar 2023)
Baroness Meacher (CB)
I think we had got on to Amendment 199. Is that correct?
The Deputy Chairman of Committees (Baroness Fookes) (Con)
Amendment 168 is the lead amendment; the other amendments are grouped with it. People can debate any amendment within the group.
Baroness Meacher (CB)
Amendment 168 is the lead amendment; that is absolutely right. I think we had got on to Amendment 199. Is that correct, Minister? Are you happy with that?
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
Noble Lords can speak to any amendment in the group once the lead amendment has been put, I believe.
Baroness Meacher (CB)
One or two people had talked to Amendment 199 and I was just about to do the same. Is that okay?
The Deputy Chairman of Committees (Baroness Fookes) (Con)
It is in order to speak to any amendments in the group.
Baroness Meacher (CB)
I apologise; I am completely confused.
The due diligence system reintroduced for companies under Schedule 17 to the Environment Act is world-leading in its intentions. However, we have to finish the job to end our financing of deforestation. The GRI Taskforce has been unequivocal in its advice that financial actors should conduct deforestation due diligence too for their own sake as well as for everyone else’s. In the meantime, as somebody mentioned last time, Britain’s financial institutions are contributing $16.6 billion to businesses implicated in deforestation.
This is a huge global issue. Experts say that we must end commodity-driven deforestation by 2025 if we are to limit global warming to 1.5 degrees centigrade. At present, as a result of those investments, climate-critical tropical forests are shrinking. This is absolutely appalling. The UN’s high-level climate champions have begun to refer to deforestation as the new coal in investors’ portfolios. There should be no investment in companies involved in deforestation. It is quite simple.
The amendment responds powerfully to the GRI Taskforce’s advice. It has significant cross-party backing in the House of Commons. The Government are inclined to go for a weaker policy against the advice of their own expert task force on deforestation. I hope that the Minister will do all she can to persuade her colleagues in the other place to support Amendment 199 before Report. Rishi Sunak has promised that the UK
“will be the world’s first net zero financial centre”.
His support for Amendment 199 is an obvious step on the way. I thank the WWF, Greenpeace, Global Witness and Mighty Earth for their excellent joint briefing. I call on all noble Lords to support Amendment 199.
Baroness Drake (Lab)
My Lords, I rise to speak to Amendments 168 and 201. I refer to my interests as a trustee of defined benefit and master trust pension schemes.
The loss of financial stability can occur quickly. History shows us that risks that crystallised and caused that instability were often insufficiently captured by regulators and that actions to mitigate their impact were not taken in good time. It would be extraordinary for any Government to believe that financial regulators could deliver the objectives of competitiveness and sustainable growth without embedding in that delivery the finance sector’s response to climate risk.
Climate change brings immense risk, but it is not specifically factored into either the regulatory capital risk requirement for banks or the solvency requirements for insurers. We already see the weaknesses: banks and insurers still retain exposure to fossil fuel investments and a significant number of the largest UK banks do not have interim targets to cut funded emissions. I could quote many other statistics to confirm that weakness.
As the Bank of England stated in the executive summary of the Results of the 2021 Climate Biennial Exploratory Scenario, its assessment is that UK banks and insurers still need to do much more to understand and manage their exposure to climate risks. The Bank admits that there is a lack not only of managing that exposure but of understanding it. That makes Amendment 168 important in calling for a PRA review of capital adequacy and solvency capital requirements, having regard to the full implications of climate change physical, transitional and liability risks and for financial stability.
Failing effectively to factor climate risks into regulatory requirements tolerates the failure of firms that make unwise bets on the continuation of “business as usual”. Inevitably, it necessitates government intervention, socialising of losses and consequences for taxpayers. When a similar amendment was sought previously, the Government argued that the CBES work that I have just referred to would assess the implications of climate change risks for investment, stranded assets and financial stability. However, we have heard from speakers in this debate, including my noble friend Lady Worthington, and read from informed commentators worrying concerns with the work, reinforcing the need for the PRA to review its risk assessment approach and modelling. In a Policy Exchange publication, the former chief economist of ING Group put those concerns succinctly when he concluded that
“central bank scenarios have been based on assumptions and models which ignore or downplay crucial elements of climate risk and critical triggers, tipping points and interdependencies between climate, economy, politics, finance and technology”.
As has just been referred to, the Prime Minister, Rishi Sunak, promised that the UK would create the world’s first net-zero financial centre. However, London recently lost its position as Europe’s most valuable stock market to Paris. The London market is more heavily exposed to unpredictable sectors such as mining and oils and we now see the issue of listings emerging as a problem.
Achieving a net-zero financial sector requires regulators having the necessary mandate and accountability. The finance sector’s practices, as a major investor in companies and as an insurance underwriter, have a vital role to play in the transition towards zero carbon. In an area with which I am familiar, the closure of private defined benefit pension schemes has been followed by an accelerating trend for trustees to enter buy-out financial agreements with insurance companies, paying premiums in return for individual annuity policies covering members, with assets and liabilities transferring to insurers.
Buy-in is also occurring, such as the record-breaking £6.5 billion buy-in recently by the RSA pension scheme. That market saw a £30 billion transfer in 2022 of pension liability to insurers. It could exceed £40 billion in 2023. There were many billions that preceded 2022 and the trend means that there will be many more in 2024. Auto-enrolment means that billions of pounds of defined contributions are being invested each year. The market is consolidating into fewer master trusts, some set up by vertically integrated finance companies that also manage the assets in those trusts, and individual pensioners. Tomorrow’s pensioners will be much more dependent on insurer stability. That clearly reinforces the need for the PRA review and for raising the bar on the investment duties of asset managers, as Amendment 201 seeks, by requiring the FCA to publish guidance on the consideration by investment managers of the long-term consequences of decisions, the societal and environmental impact of investments, standards of conduct in governance and transparency of reporting.
The UK Sustainable Investment and Finance Association reports that it continues to see a common lack of understanding within financial services on the extent to which ESG factors form a core component of investors’ fiduciary duties. The Principles for Responsible Investment Association similarly identified that lack of understanding and recommended further regulator guidance. As a jobbing trustee, for want of a better phrase, there is a part of me that wonders to what extent there is such a lack of understanding, rather than a reluctance to understand, but there is a problem. The investment association found that only 14% of members incorporated ESG across their entire portfolio in 2019, while 44% said that it accounted for less than 25% of their portfolio.
The Government want to see more productive investment by the financial sector. For government to direct how citizens’ private assets are invested would displace fiduciary duties which rest with trustees, providers and asset managers and raise issues of state liability, political expediency trumping best interest and litigation. Amendment 201 could assist regulators, providers and asset managers in considering decisions on productive investment consistent with fiduciary duties and identifying the barriers to aligning these. We can perhaps address some of those barriers on another amendment later in the Bill.
However, the ability of trustees to discharge their ESG and climate risk duties to greatest effect has a clear dependency on how regulators expect asset managers to discharge their duties. We cannot do ours well unless asset managers do theirs well, too. It also depends on central bank scenarios and the regulation of the finance sector’s response to climate risk, because it will influence attitudes and the value of different assets. The whole eco- system needs improvement in both transparency and due diligence. The two amendments that I speak to, on the PRA reviewing its whole approach to modelling, regulating and embedding climate risk, and the contribution that asset managers are required to make to mitigating climate risk, both have merit and are badly needed.
Lord Lilley (Con)
My Lords, I will address the amendments just addressed by the noble Baroness, Lady Drake, and others, which are intended to discourage investment in fossil fuels. There are two routes to net zero: one is to phase out demand, which is the route that we have adopted in this country. My noble friend Lord Deben, who is not here today, provides guidance and forecasts to the Government on how to phase out that demand to meet net zero by 2050. That is the sensible way of doing it. The alternative is to try to phase out supply. If fossil fuel producers invest in more production capacity for those fuels than is needed for declining demand, they will lose money. They may even be left with oilfields that have not been fully depleted —it could not happen to a nicer bunch of people.
I am really touched that so many green noble Lords and noble Baronesses are determined to protect the oil industry from losing money. That is not their real intent, of course; that is to discourage investment and reduce it as fast as possible, if need be by reducing the supply of fossil fuels faster than we reduce demand for them. If they achieve that, we will have a shortage of fossil fuels. We will have rising prices with those shortages and will have done to ourselves exactly what Putin has done at the moment. Is that what they want?
Noble Lords pretend on the first argument that they want to save the banks and the industry from being left with stranded assets. As I say, it is touching that they should be so concerned about them, but why do they think they are better at forecasting the future demand and supply balance for fossil fuels than the oil companies and others whose business it is, or others in the City whose business it is to try to work out whether it is worth investing? I used to be an energy analyst in the City; it was my job to try to forecast these things. In some years, I was the most highly rated analyst in the City on these matters, presumably because I was making long-term forecasts and no one could tell that they would prove wrong. But the idea that the PRC knows better than people in the City—
Baroness Sheehan (LD)
I find the noble Lord’s contributions really very valuable. But on supply and demand, for him to label us people who just do not want fossil fuels is so incorrect. We need more energy, but it does not have to come from fossil fuels. The fossil fuel industry is supported to an extent.
Baroness Sheehan (LD)
It has been supported by Governments, through subsidies, through tax breaks, through decommissioning tax reliefs—any number of routes for support exist. So I say to the noble Lord: please do not try to categorise the noble Baronesses who have spoken on this issue as people who do not like fossil fuels. What we do not want is for fossil fuels to be needlessly supported in the future when they are patently no longer able to support themselves.
Lord Lilley (Con)
I agree with the noble Baroness. I do not want to support fossil fuels. If she looked at the tax revenue levied on the production and consumption of fossil fuels, she would see that it is enormous. To describe that as a subsidy or support is very strange. But to the extent that there is anything that is a subsidy, I am with her: let us remove it, but that is not what these amendments do. They simply aim to make it more expensive to invest in fossil fuels. I do not know whether the noble Baroness, Lady Castle—whatever it is; bouncy castle—is upset at being described as being against fossil fuels. I would have thought that she would be positively flattered. I do not know whether the noble Baroness, Lady Drake, is offended at being told that she is trying to discourage the production of fossil fuels; I thought she was. I am simply saying let us stick to the CCC’s recommendations of phasing out demand and we can leave the supply side to look after itself. We should not pretend that we know better than the industry what is likely to prove excessive or insufficient.
Baroness Sheehan (LD)
Before the noble Lord sits down, perhaps I could say a little about stranded assets; I think we have had this exchange before. If stranded assets transpire—from where I am sitting, I think that is inevitable—what assurance can he give that the cost of those stranded assets will not be socialised?
Lord Lilley (Con)
Clearly, the Government ought to deal with that problem. These amendments do not deal with that problem. If there is a problem, if the noble Baroness thinks that BP or Shell will go bankrupt and be unable to pay for the liabilities it incurred, we should take steps to deal with that situation. I do not think it is likely but if she thinks it is that serious, she should table amendments that would deal with that, but these amendments do not. They simply make it more expensive to invest in things which we are going to continue consuming, according to the Government’s own plans and the CCC’s own projects and recommendations, in considerable quantities until 2050.
Baroness Worthington (CB)
I will interject on behalf on the amendment I drafted, as the noble Lord has completely mischaracterised what we are attempting to do here and has narrowed the debate into a very narrow conversation about oil and gas assets. We are talking here about climatic risk across the whole economy. It is not just oil and gas operators; it is anybody who has any money wound up in any of the sectors that will be affected by the physical risk, the risk of transition and the societal risk when we finally realise that science does not negotiate with oil and gas companies, financial regulators or anybody who pretends to be able to predict the future. We have poor modelling, we have terrible risk assessments, and the PRA and the Government need to issue better guidance so that we can understand the risks we are facing. Let us not reduce this to a narrow discussion about oil and gas interests.
Lord Lilley (Con)
I read the amendment in the name of the noble Baroness. Proposed new subsection (1) refers to
“group undertakings engaged in existing fossil fuel exploitation and production … group undertakings carrying out new fossil fuel exploration, exploitation and production”.
If this is not about fossil fuel exploration, that is not very clear from her amendment. I am dealing specifically—
Lord Lilley (Con)
Hang on, I must have the right to reply to the previous intervention before I take the next. I am not dealing with things other than fossil fuels. I am talking just about fossil fuels. It seems to me that the noble Baroness’s amendment is about fossil fuels, in large measure. My arguments have not been responded to because they are fundamentally logical. They are the whole basis of government and CCC policy. But I give way to the noble Baroness now.
Baroness Worthington (CB)
The amendment lists certain sectors which are likely to be most affected. It does not in any way say it is limited to those sectors, and I think it is egregious to assume that this is a narrow amendment when it is, in fact, a very broad amendment.
Lord Lilley (Con)
My remarks are narrow. The noble Baroness’s amendment may be broad. Can we agree on that and deal with the aspect of fossil fuel investment?
Lord Lilley (Con)
We ought to allow the industry to invest as long as we are phasing out demand. If it invests too much, it is its problem. If it invests too little, it is our problem.
Baroness Altmann (Con)
My Lords, I declare my interests as set out in the register. I support many of the amendments in this group. My Amendment 241A is in this group. I have added my name to Amendments 201 and 237, which require FCA guidance about long-term returns for occupational pension investors. I think that is very important when considering climate change and is very relevant to the remarks of my noble friend Lord Lilley. I have also added my name to Amendment 235 as I think it is equally important for institutional investors in the UK to be equipped with some green taxonomy so that we have some standards by which we can measure the impact of climate investment.
As regards the issues raised by my noble friend, particularly, perhaps, in relation to Amendment 168, when I read that amendment it seems to me to be calling for a review. It calls for the FCA to review and perhaps guide pension schemes and insurance companies, which have very long-term liabilities, on assessing the long-term risks of investing in assets such as fossil fuels. There is a widespread opinion suggesting that over the long term, whether that is 20 years or 30 years —those timescales are relevant for Solvency II and the annuity books of insurers, for example—there is a significant danger in relying on the continued thriving of those large energy companies.
It makes sense. We have been taken by surprise too many times in the financial world by supposedly very small long-term risks which materialise in a cliff-edge event that people had not been prepared for. Whether or not the review concludes that there should be any change, it is appropriate that this review should be carried out, so I support the amendment, but I understand the points made by my noble friend. Perhaps, on a shorter-term timescale, given the need for fossil fuels and the work that is being done by those large companies to try to transition to more green energy, that is an issue that needs to be carefully weighed up by any investor who is considering the potential returns from their investment.
In the interests of time, I will now speak to my Amendment 241A. I hope that my noble friend will be interested in this amendment and, indeed, that other Members of the Committee might consider that there is merit in this proposal. It is a relatively modest reform. It would be deregulatory. It supports the transition to net zero and nature preservation and it would encourage innovation. I hope it would garner more of our domestic institutional asset base to be used for the kinds of investments that all of us who are concerned about the long-term impact of human activity on the climate and nature would want to see happen.
I thank the Public Bill Office and Susannah Street, as well as Peers for the Planet, for their assistance in trying to ensure that the amendment is in scope of the Bill, which was quite a feat. It is a probing amendment; I am not wedded to the wording, but the principle of the proposal would make it easier for funded occupational pension schemes to join together to establish fund managers under a lighter-touch regime that already exists in order to invest in and support climate and nature protection. We all know that there is a growing need to find the funding to rebuild, repurpose or have new infrastructure for low-carbon and nature-friendly projects. Indeed, nature’s impact on and interaction with climate change and net zero is increasingly recognised. These issues feature in the other amendments I have attached my name to, so I hope that the scientific and political consensus that we need urgent action might help my noble friend and the Committee recognise that this could be a win-win for pension funds to get better long-term returns, for pensions to be perhaps better than they otherwise might be, and for the economy.
Much of the investment needed to reach net zero will be in very large long-term projects. It is not always easy to find the money. Normally, perhaps, with a Government who were in a much stronger fiscal position than most western Governments now are, we might look to the majority of this being funded by government, but that is less likely at the moment. Yet we have in this country this enormous pool of long-term assets that is currently being encouraged to invest in assets with a much lower expected return or so-called safe assets—gilts and corporate bonds, for example—shunning long-term growth with equities and projects such as the one I have in mind for this type of approach. Only 100 schemes or so have more than £5 billion worth of assets. Even with the kind of forecast consolidation, it is unlikely that we will have very many of the £5 billion-type scale that is normally suggested to be required to put forward a prudent, risk-diversified portfolio of such infrastructure and other protective investments.
My amendment would facilitate asset pooling for the smaller pension funds as well, so they can all join together in FCA-authorised investment managers specifically for pools of pension assets to benefit from and contribute to the benefits for green growth and sustainable long-term returns for the specific purposes set out in proposed new subsection (3) of my amendment. The Local Government Pension Scheme is already starting to do this, but private schemes would have to use commercial fund managers, which often either deters such investing or incurs much higher costs, whereas big schemes such as USS and NEST are already looking to invest or have the expertise to do so, but they are not joined with the smaller schemes.
I hope that the currently existing lighter-touch regime that the FCA offers in its occupational pension scheme firm rules, which currently apply only to fund management firms that are wholly owned by one pension fund, could be applied to a combination of pension funds that are investing for their own purposes in the various schemes that belong to it. It is not commercially available or available to other members of the public, but it is for long-term pension investing.
I would be grateful if my noble friend considered this modest reform, or, if she feels that there is some flaw in the wording of the amendment that could be changed and still facilitate this, I would be happy if she, or indeed any other noble Lords, wanted to meet to discuss it. As I said, it is deregulatory, it supports the aims of net zero and nature preservation, it would encourage innovation and it should provide better diversification and therefore long-term risk reduction for a number of occupational pension schemes which otherwise could not take advantage of it.
Lord Davies of Brixton (Lab)
My Lords, I support the objectives behind all these amendments. I was going to direct my remarks specifically to Amendment 237, but I want to make a narrow but important point of qualification. I support the principle, but I cannot stop myself responding to the discussion we had earlier, led by the noble Lord, Lord Lilley, about fossil fuels. The important point about fossil fuels is that there are massive externalities—external costs—which are not caught in the market, and, unless we do something now, our children, and their children, will pay the price. It is not just a question of moving the market now; we need to stop using this stuff, which is poisoning the planet.
Lord Lilley (Con)
I was not disputing that; I was saying that we accept that we have to find the route to net zero, but the question is: should we phase out demand for fossil fuels, as the noble Lord’s last sentence indicated, or should we phase out supply? Which does he prefer?
Lord Davies of Brixton (Lab)
Both. I am not really being given that choice but, as I said, it was just a narrow point.
My question on Amendment 237 is: would you take investment advice or guidance from the Secretary of State? Is the Secretary of State even authorised to provide investment guidance or advice? I am troubled by the involvement of the Secretary of State, and I hope that we could perhaps consider a different wording if we wish to raise this on Report. If the Government want something to happen—net zero—as a matter of public policy, they have to accept the risk themselves and not pass it on to private individuals. I am talking about pension schemes, and the underlying point is that the money in a person’s pension scheme is their money, provided to them to be used in accordance with their wishes to provide them with a retirement income. Part of that retirement income depends on solving climate change—that is clear. I do not doubt the importance of taking these issues into account; I simply question the relevance and role of the Secretary of State in that process.
Over many years’ involvement with pension funds, I have seen that, when people see the massive amount of money involved, as highlighted by the noble Baroness, Lady Altmann, they see that the economic power is there, but it is there on behalf of the members’ interests and not, in principle, as a means of implementing government policies—however worthy. They might be in alignment, but the leading factor should be the members’ interests.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton. Since the noble Lord, Lord Lilley, appeared to be directing a question at me about whether I oppose fossil fuels, I will take a moment to answer that. Do I think that pulling up carbon which has been stored in the ground over hundreds of millions of years, which was a crucial part of delivering the Holocene that gave us 10,000 years of incredibly stable climate in historic terms, and then pumping it into the atmosphere needs to be stopped with great speed? Yes, I oppose pumping out that stored carbon.
More than that, the fact is that extracting, transporting, burning and getting rid of the waste products from that fossil fuel causes huge damage to the health of people on this planet. One in five premature deaths that occur on this planet is as a result of burning fossil fuels—that is based on a study in environmental health in 2021. So do I want to do something urgently to make this a healthier planet for people? Yes, I do. However, that is not what any of these amendments are about. These amendments are to the Financial Services and Markets Bill, and all of them are about trying to stop the crashing of the financial markets, which are also crucial to our security and health in different kinds of ways. That is what all these amendments address.
It is really interesting that we have here a set of amendments which we might, collectively, for the purposes of Committee look at how we can hone and shape—I take the point made by the noble Lord, Lord Davies. But what we have in Amendment 168 are directions to the PRA to review capital adequacy requirements. That is about the security of firms. In Amendment 201, we have directions to the FCA to direct personal pension providers. Picking up on that point, I note the figures from the Pensions Regulator’s most recent survey of defined contribution schemes, which found that more than 80% did not allocate any time or resources to managing climate risk.
Then in Amendment 233, we have sustainable disclosure requirements, so that companies would report to investors what risks they are taking with their money by not dealing with all the sustainability risks which relate to the fact that we are exceeding planetary boundaries—not just on climate but on biodiversity, the loss of ecosystems and novel entities, and on phosphate geochemical flows. All these things are taking risks with people’s money, which is what we are talking about. Amendment 233 might indeed guide us in the direction of each major company having to have a chief environmental officer, who should be of equal status and importance to a chief financial officer because it is about ensuring the sustainability of the company, as well as the sustainability of this earth. Going on to Amendment 235, we are directing the Treasury to provide government guidance on how we achieve all of this.
That is an overview but I want to pick up one specific point. I would have signed Amendment 119, in the name of the noble Lord, Lord Randall of Uxbridge, and others in a full cross-party group, had there been space. When people think about forest risk commodities, they often start by thinking, naturally enough, about timber but, if we look at some statistics, palm, beef and soya production collectively amount to 36% of global deforestation. When Orbitas, an investment body, surveyed 24 capital providers in 2020, all of which had high levels of tropical commodity exposure, not one had screened their loan books and/or investments for agricultural transition risks. I want to major on that point while we debate this today, because if we look at Indonesia, 76% of unplanted forest concessions and 15% of existing palm oil assets could be at risk—that is, financial risk—should Indonesia adopt what is seen as its essential plans to meet its Paris climate commitments.
I said that we need to look at all aspects of planetary boundaries being exceeded. We also must include water risk. Fresh water supplies rely heavy on fossil water aquifers—in the American high plains, in Mexico, in eastern Europe, in Egypt, in Arabia, Iran and China. All agricultural production of food—the big sectors globally and financially—is utterly dependent on fresh water supplies, which are not being replenished. That is a huge financial risk as well as a risk to when any of us can eat in the future, at a basic level.
Finally, I focus on Amendment 168, tabled by the noble Baronesses, Lady Worthington, Lady Drake and Lady Sheehan. I would like to work with them ahead of Report because, as others have highlighted, this focuses particularly, though not exclusively, as the noble Baroness, Lady Worthington, said, on fossil fuel exploration, exploitation and production. We must broaden this out to look at the agricultural sector, because it is an area of enormous financial risk. I draw on the work of the investment group FAIRR, which looks at the extremely high financial risks. The majority of the largest protein producer companies are at high risk for greenhouse gas emissions, deforestation, water and waste. Over 60% of them saw soya feed from areas at high risk of deforestation and have still not set deforestation targets. Fewer than one in five meat, egg and dairy firms is adequately managing the pollution of waterways from manure. Just ask the people of Herefordshire about that if you want to know more.
FAIRR finds that the volume of waste produced by the 70 billion animals processed each year is equivalent to the volume of waste produced by twice the entire human population on this planet. Only 18% of global meat and dairy producers track even partial methane emissions, even though annual methane emissions from global capital and livestock make up 44% of anthropogenic methane emissions.
We are talking about the future of our life on this planet. We are talking about a liveable planet. That is inescapable. However, today we are talking about ensuring that we do not see the next financial crash. Let us remember the last financial crash, when the cash machines were within hours of stopping working. We must do something to stop the next financial crash from being at the point where the size of the carbon bubble, the level of stranded assets across a range of sectors—fossil fuels, animal agriculture and other areas—is such that it suddenly hits the markets. The markets are not counting this now. They must count this in if we are to have a sustainable financial sector.
Lord Naseby (Con)
My Lords, I will not repeat what my noble friend Lord Lilley said earlier, other than to say, speaking for myself and, I suspect, for my colleagues, that we do believe in net zero. That is a target. It is not an immediate diktat, but it is a target that I guess almost everybody in Parliament has accepted.
My noble friend is right that key in the judgment of those of us who have worked in the commercial sector, as I did before I came to Parliament nearly 50 years ago, is that we live in a free society. The answer to this problem is to phase out demand. It is easier to phase out demand than to phase out supply. If they both have the same effect in the end, you might as well take the easier and cheaper route, which does not involve subsidy to remove activity. We live in a free society and unless it is absolutely vital, it should be based not on government diktat, but on competition.
I will also comment on Amendment 199 on forestry. I had better declare an interest; it is hardly a forest, but there are 40 acres of woodland adjacent to my property. It is a wonderful hobby for me to have become someone who now understands woodland, at least; I could not claim that it is a forest.
Lord Tunnicliffe (Lab)
My Lords, this is a cross-party group on the environment. It has no amendments led by Labour, but I have signed Amendment 199 in the name of the noble Lord, Lord Randall, on outlawing someone carrying out a regulated commercial activity that directly or indirectly supports deforestation risk commodities, unless relevant local laws are complied with.
I pay tribute to the noble Lord, Lord Randall, and thank Global Witness for its support on this amendment. My party is committed to securing the highest sustained growth in the G7. That means modernising our economy and financial regulation. We cannot deforest our way to sustainable growth nor a robust financial system.
Leaders across the City of London, along with BNP Paribas, Legal & General, Unilever and Tesco, are supportive of the measure proposed by the noble Lord, Lord Randall. Sir Ian Cheshire, former chair of Barclays and head of the Global Resource Initiative task force, has written to the Minister to remind the Government that the task force concluded its work in May 2022 by reiterating the need for new legislation to provide due diligence obligations for financial institutions equivalent to those that will be in place on supply chain companies under the Environment Act 2021. The Minister has previously argued that enhanced risk reporting eliminates the need for this amendment but the GRI task force has already rejected that argument. Sir Ian’s letter put this issue to bed when he wrote that risk reporting mechanisms, such as the task force on nature-related financial disclosure and voluntary net-zero pledges, are insufficient to prevent deforestation financing.
This expert backing and the desire of the British public to eliminate the scourge of deforestation are key reasons why this amendment has such considerable cross-party support. It would allow us to be global rule-makers, not rule-takers, when it comes to our financial system; I urge the Minister to take it seriously. Beyond Amendment 199, this group contains a lot of common-sense amendments that highlight the expertise of this Committee.
Baroness Penn (Con)
My Lords, I welcome this chance to continue this Committee’s important debate on amendments concerning green finance. As I stated in a previous Committee session, the Government are committed to fostering sustainable finance in the UK and will shortly publish an updated green finance strategy to that effect.
I will speak first to Amendment 168 from the noble Baroness, Lady Worthington. It is of course correct that all models have their limitations in depicting the real world but the Bank of England’s models have considered the views of experts in the field; they therefore do not need to be directed to do so. The scenarios used in the climate biennial exploratory scenario, or CBES, were formed by the Network for Greening the Financial System, an international network of central banks in which the Bank of England plays a prominent role. The scenarios have been produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers—not to mention being used by and continuing to be used by the Intergovernmental Panel on Climate Change. These scenarios are updated continually by the Network for Greening the Financial System, which also ran a public survey welcoming feedback on its most recent iteration of climate scenarios.
It is also not the case that CBES is the PRA’s only tool to manage climate risk. It is actively using its position as a supervisor to ensure that firms are not materially undercapitalised for climate risks, setting out its expectations in its supervisory statement published in 2019. Furthermore, the PRA is an active member of two of the leading international standard setters: the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The Bank is actively participating in both forums to ensure that the regulatory frameworks for the banking and insurance sectors address potential gaps in the management of climate-related financial risks. This work will flow through to our domestic framework and at the same time ensure international co-operation on what is fundamentally a global issue.
I now turn to Amendment 199 in the name of my noble friend Lord Randall of Uxbridge, which is supported by other noble Lords in this Committee. The Government agree that the financing of illegal deforestation is a serious global issue that must be tackled. However, this amendment would involve implementing a new and untested regulation that would impose a broad supply chain rule on all regulated financial services firms. It would currently be very difficult, time-consuming and expensive for UK financial services firms to ascertain whether firms or products that they invest in are exposed to forest risk commodities in compliance with local laws.
In introducing this amendment, the noble Baroness, Lady Boycott, referred to the provisions in the Environment Act 2021. These provisions will apply to the supply chains of large UK corporates. However, UK-based banks and fund managers engage in lending and investment activities with companies in jurisdictions across the globe, not just commercial activity in the UK. There are currently no consistent, equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe. Given that, capturing the activity of all of their customers and supply chains would not be as simple as adding an extra stage of disclosure to the regime set out in the Environment Act 2021, as had been suggested. However, I assure noble Lords that the Government are committed to addressing this issue and will work with the financial services sector and those with expertise in tackling deforestation to consider how we can make further progress.
Baroness Sheehan (LD)
Before the Minister moves on to another amendment, I put a question to her on Amendment 199 on deforestation. I hope she is coming to answer it.
Baroness Sheehan (LD)
The question was about the regulations under Section 17 of the Environment Act 2021 that are supposed to be forthcoming. I asked the Minister when she thought they might be ready.
Baroness Penn (Con)
I will have to get back to the Committee on that point. I had picked up the noble Baroness’s other point, which was also referenced by the noble Lord, Lord Tunnicliffe, on the letter from Sir Ian Cheshire on this issue. I looked closely at his report and the recommendations in it. I am happy to place a copy of that letter and my response to it in the Library so that all noble Lords have access to them.
I was going to add something about the importance, in seeking to address this issue, of co-ordinating action internationally. This is necessary to reduce the financing of illegal deforestation and not simply drive it into other jurisdictions.
The noble Lord, Lord Tunnicliffe, referenced the work by Sir Ian Cheshire’s task force and its references to the Taskforce on Nature-related Financial Disclosures, the TNFD. The Government accept that that will not solve this problem on its own but it is important to recognise it as an important building block in creating an international solution. As I have pointed out, other jurisdictions do not have disclosure regimes. The TNFD is an attempt to create a global standard on nature-related disclosures that could be an ingredient in making progress in this area. The UK is the largest financial backer of the TNFD. We support its work to develop a global framework for reporting on nature-related impacts, dependencies and risks, within which deforestation is being considered. Once the task force launches its final recommendations in September 2023, the Government will consider bringing these standards into the UK disclosure framework.
Finally, on deforestation, in response to Sir Ian and the noble Lords who raised it today, as I set out, we are looking at what we can do further in this area. If noble Lords would like to meet to take those discussions forward, I would be very happy to do that.
Baroness Sheehan (LD)
Before the Minister moves on, could I reiterate the strength of feeling across the Committee on deforestation? It is not just about the 12% of global carbon dioxide that is released by burning and cutting down forests; it is also about the destruction of the carbon sink. It is a double whammy. This is an issue that we can and must solve. We have a report by the Government’s own appointed head of the GRI, Sir Ian Cheshire, who clearly lays out how we move forward on this. I wonder why the Government will not accept the findings of their own reports.
Baroness Penn (Con)
I say to the noble Baroness that I absolutely agree. I appreciate the point that the issues concerning deforestation are about not just nature and biodiversity but our ability to tackle climate change. That is why we are such strong supporters of the TNFD’s work, for example. She mentioned Sir Ian Cheshire’s report. I said to the Committee that I have read that report and looked at it very carefully. I do not think that we are in disagreement in wanting to find solutions to this problem. Sir Ian’s report also sets out that work needs to be done to ensure that the solutions that we identify are effective. For example, he refers to ongoing work in other jurisdictions such as the EU and the US on disclosures that would be building blocks towards making the progress that we all want to make. The Government do want to make further progress on this issue and I understand the strength of feeling, so I commit to this Committee to take those discussions further and see where we can build consensus on it.
Baroness Sheehan (LD)
I thank the Minister. On behalf of the noble Lord, Lord Randall, I accept the meeting. I know that he cannot be with us today, sadly. The final point that I leave with the Minister is that Sir Ian Cheshire was very clear in his letter about why he thought the UK should be acting. It is because, as a financial sector, we really matter. We may have 1% of the global emissions footprint but, in terms of the deforestation footprint and the money that passes through London, it is substantial.
Baroness Penn (Con)
The Government understand and agree with those points. That is why we are also seeking to find a way forward on this work and have driven considerable work at a global level to try to tackle deforestation. I hope noble Lords can take some heart from our commitment on that.
On Amendment 232, also from the noble Baroness, Lady Sheehan, my noble friend Lord Naseby will be pleased to hear that NS&I’s retail green savings bonds, which I think have been available for a couple of years, are integral to the continued successful delivery of our green finance programme. We clearly have more work to do in promoting them, so the NS&I will continue to promote them and encourage retail investors to help finance the fight against climate change and other environmental challenges.
The Government committed to publishing a biennial impact report by September 2023, which will detail the environmental impacts and social co-benefits of the green financing programme’s spending. This will include available reporting on greenhouse gas emission reductions of projects financed by the green savings bonds and green gilts. The upcoming impact report will complement the programme’s first allocation report, published in September 2022. These annual allocation reports detail how funds raised from sales of green gilts and green savings bonds contribute to different green priorities such as clean transport and renewable energy.
Amendment 232 proposes publishing an assessment of the scope for future green financing. Decisions on future green financing ambitions are based on eligible green spending commitments and will be taken each financial year as part of wider decisions for the Treasury’s budget. Financing decisions are also influenced by gilt and retail savings market conditions and consultations with investors. Reporting on the future scope of green financing in advance, rather than at the beginning of each financial year, could create the risk that future spending requirements and conditions in the gilt and retail savings market are disregarded. That would make the successful delivery of the green financing programme more challenging.
I turn to Amendments 233, 235 and 236 from the noble Baronesses, Lady Wheatcroft and Lady Hayman, which concern sustainability disclosure requirements, green taxonomy and transition plans. Sustainability disclosure requirements—SDR—are designed to provide an effective and co-ordinated reporting framework for sustainability information. This is already being taken forward at pace. The FCA recently consulted on new sustainability-related disclosure requirements for all regulated firms and more detailed rules for asset managers and asset owners.
The Government’s 2021 road map made it clear that disclosure of transition plans will be a part of SDR. The Government launched the independent Transition Plan Taskforce in April 2022 to develop a gold standard for transition plans. The task force has since made huge progress, having just consulted on its recommendations, framework and guidance, with the final framework and guidance to be published later this year, alongside additional sectoral guidance.
The FCA has already implemented the guidance from the Taskforce on Climate-Related Financial Disclosures for transition plans for asset managers and asset owners, on a “comply or explain” basis. It is continuing to work closely with the Transition Plan Taskforce to develop and implement its recommendations.
As I reaffirmed to noble Lords in a previous debate, the Government are committed to implementing a green taxonomy as part of their sustainable finance agenda and, as I set out in my Written Ministerial Statement to the House on 14 December 2022, the Government will provide an update as part of the green finance strategy. We are clear that the value of a taxonomy rests on its credibility as a practical and useful tool for investors, companies, consumers and regulators in supporting access to sustainable finance.
Noble Lords have only to look at the implementation challenges the EU is facing, including on data availability and reporting, coherence with regulatory frameworks, and international interoperability, to see that this is a complex exercise. We have been clear in the UK that, with the support of our Green Technical Advisory Group and with public consultation, we will take the time to get the taxonomy right to ensure that it is usable and effective.
On Amendments 201 and 237, the Government and regulators are taking steps to improve the UK’s regulatory framework to support more effective stewardship. We have already discussed in Committee the Financial Reporting Council’s world-leading Stewardship Code 2020. This asks trustees and managers to disclose how they have considered environmental and social factors, including climate change, in their investments. The Department for Work and Pensions’ recent stewardship guidance for pension scheme trustees came into effect last October.
In addition to these existing initiatives, the DWP, along with the FCA, the Pensions Regulator and the Financial Reporting Council, has already committed to a review later this year of the regulatory framework for effective investment stewardship, to ensure that it is consistent across market participants and financial products. I recognise that this is a complex issue and recognise the concerns raised by the noble Lord, Lord Davies of Brixton, about the specific framing of the amendments. This is an issue that would warrant further discussion before Report.
On Amendment 241A, tabled by my noble friend Lady Altmann, UK pensions have been at the forefront of tackling climate risk and will undoubtedly continue to play a crucial role. The Government are working hard to drive consolidation among pension schemes so that they deliver increased scale, better value for money and improved access to investments such as green infrastructure. As part of this drive, the DWP recently published a consultation on a value for money framework for defined contribution pension schemes. Furthermore, the pooling of Local Government Pension Scheme assets, from the 86 funds into eight asset pools, has already led to £380 million in net savings to March 2022; these are projected to exceed £1 billion by March 2025.
We are also working hard to lower the barriers for individual pension schemes to invest in green. The DWP is reforming the treatment of performance-based management fees to enable individual pension schemes to invest more easily in assets such as green infrastructure.
Finally, when it comes to the noble Baroness’s amendment, we are aligned in wanting to see more of this pool of capital able to be directed in the way we have discussed in this Committee. It is important that we lower barriers to such projects and solutions. We do not see the benefit in creating a distinct, lighter-touch regulatory regime to support pooled investments in green projects. There may be risks in reducing regulatory oversight in this way.
The UK’s world-leading regulatory standards are important in providing market participants with the confidence to invest and we should be cautious about changes that could undermine that confidence. I say to my noble friend Lady Altmann and the noble Baronesses, Lady Hayman and Lady Drake, that we want to think about how we can make progress in this area. While the specific amendments suggested might not be the right way, we should continue to put our thinking caps on when it comes to how we can guide progress in this area.
With that, I hope that, for now, the noble Baroness, Lady Worthington, is able to withdraw her amendment and that other noble Lords will not press their amendments when they are reached.
Baroness Worthington (CB)
My Lords, I am grateful for the Minister’s reply to this varied group of amendments covering a range of issues that fundamentally speak to the need for the financial sector to take a more serious look at how it can help prevent the exacerbation of environmental challenges, including climate change, and invest in solutions at scale.
I was encouraged to hear that the Government are about to produce their green finance strategy. I wonder whether it might have been a good idea to have done that before the Bill, as then we might have had—
Baroness Penn (Con)
We produced our green finance strategy in 2019 and we provided a green financing road map in 2021. I very much hope that before we reach the end of the Bill noble Lords will have sight of the refreshed green finance strategy.
Baroness Worthington (CB)
That is great, but my point still stands. It would have been good to have had the refresh before the legislation so that we could have incorporated any findings into the Bill.
On my amendment on the assessment of risk in relation to capital requirements, it is not the case that everything is fine in the world of climate modelling. It really is not. If you spend time with climate scientists who are empirical scientists out in the field witnessing the impact of climate on the natural world, they will tell you that the models are not in line with what they are witnessing. That tells you that we have not got a handle on the speed and pace of change in the physical world thanks to decades of unmitigated emissions of greenhouse gases and the never-ceasing increase in concentrations of greenhouse gases in the atmosphere.
The noble Lords, Lord Lilley and Lord Naseby, may well say that it is fine and that we are just going to look at demand. We have been doing that for about 30 years. It has not made a jot of difference. The reason for that is that we have an economic system based on an incumbent power that is very adept at keeping demand for its product healthy and at finding new sources of demand for its product, so we absolutely need to cut with both sides of the scissors. We need constraints on demand and constraints on supply; otherwise, we will carry on with this merry dance and the emissions in the atmosphere, which are what matters, will continue to rise.
I believe that the finance sector is not the place to solve this. We need political will across all member states to pass the legislation necessary to drive capital into solutions and to stave off the continued licensing of extraction. That will take time, but it needs to be done.
In the meantime, if we walk into believing that the finance sector has got this—“Don’t worry; the models are all fine”—we will be making a grave error. These models are not sufficient; they do not take a whole host of measures into account. The noble Lord, Lord Stern, is not here, but he is an expert in these matters and he will tell you how flawed these models are. How can they be sufficient when many of them conclude that a global increase of around 3 degrees will take roughly 5%, 10% or 15% from GDP? That is ludicrous. Do not forget that an average global increase of 3 degrees means warming at the poles at three times that rate and hugely different regional impacts. That is not a safe place to be.
Baroness Tyler of Enfield
“(1A) When exercising its functions under this Part, the FCA may issue a direction to a designated person, for the purpose of establishing a banking hub.(1B) A designated person must comply with a direction under subsection (1A).(1C) A “banking hub” is a facility which—(a) provides cash access and other basic banking services,(b) is facilitated jointly by multiple providers of such services,(c) contains private consultation spaces for users of cash access services, and(d) is established for the purpose of ensuring reasonable provision of cash access services where there would otherwise be a local deficiency of such provision.”Member’s explanatory statement
This amendment would require designated persons to comply with direction given by the FCA for the purposes of establishing banking hubs.
Baroness Tyler of Enfield (LD)
My Lords, this has been a wide-ranging debate and we now come to a very important group of amendments regarding access to cash and other physical banking services. Noble Lords may recall that this issue attracted a lot of interest at Second Reading and, in my view, is fundamental to financial inclusion. I remind noble Lords of my interests in the register.
I am speaking to Amendments 176 to 178 in my name. I also put my name to Amendments 180 to 184 in the name of the noble Lord, Lord Tunnicliffe. I very much look forward to hearing him speak. In addition, I am sympathetic to nearly all the other amendments in this group, which have similar aims.
My amendments are interconnected and cover face-to-face services, which the Bill does not specifically cover. Amendment 176 would require designated parties to comply with a direction given by the FCA to establish banking hubs. In short, my amendment provides, first, a high-level definition of a banking hub and, secondly, a power for the FCA to require one to be established. Without these, there is a real risk of inadequate face-to-face services being provided under the label of “banking hub”, which is not yet defined, or of no services being provided at all, despite all the warm words and promises.
I have long been a supporter of community banking hubs, as high street bank branches are disappearing at an alarming rate. To put this in context, there are currently some 5,000 branches in the country. By comparison, there were some 20,000 branches 30 years ago. Indeed, since the Bill entered Parliament on 20 July 2022, there have been 390 bank branch closures. Some estimates suggest that as many as 4,000 of the branches which still exist could close in the coming years, leaving an unrecognisable banking landscape about which customers have had no choice and no voice. It has just disintegrated before their very eyes.
Looking ahead, there could be as many as 2,000 shared banking facilities, generally referred to as community banking hubs. The importance and benefits of banking hubs, based on a full-service model—which my amendment sets out—include, first, allowing people who need or wish to speak to someone or to access physical banking services to do so. This may include people who need help and advice on complicated matters, such as loans and mortgages, or on issues such as powers of attorney, probate and third-party signature, when a family member becomes incapacitated or passes away. At moments of great emotional stress—I speak from personal experience here—people need a real human being to talk to and to navigate them through unfamiliar territory. They do not want to do this over the phone, online or in a distant town.
Secondly, for many people banking hubs could be a lifeline. We know that 5 million people still rely on cash, particularly to budget week to week. There is also a big overlap between those 5 million and the millions who are digitally excluded, deprived or otherwise vulnerable. We should not restrict the ambition of the Bill just to withdrawing cash.
Thirdly, and equally importantly, many shops are suffering. It is a challenging time on the high street. Banking hubs have been shown to improve footfall and make it easier for businesses to bank locally. Early evidence suggests that they have been welcomed in the locations where they have been installed and piloted. There is also early evidence of regeneration of the high street and of the service to individual customers. For example, the Financial Times reported that in Rochford, a local hairdresser can now stay open longer because it can bank its cash in its own town rather than having to travel. Also, Cambuslang has reported increased footfall at both the banking hub and the post office. Looking to the future, as we must, we should be using a national network of shared banking hubs to work with communities to help all our citizens to prepare to use digital services.
While there is clear potential for a major new national network of banking hubs, progress to date has been, I am sorry to say, glacially slow. We currently have a grand total of four, despite LINK, the UK’s largest cash machine network, having recommended 38 locations to receive a banking hub. There are two problems standing in the way, which this amendment addresses.
First, at present the legislation has nothing in it saying what a banking hub is. My amendment provides a broad definition that includes access, which is very important, but goes wider. Why is this important? Well, what I am calling a full-service banking hub would have a dedicated banker from your bank to offer support and advice as well as the full range of basic transactional services. There have been instances where banks have said that they are providing a banking hub when, in effect, it is a chair at the back of a church hall.
One of the big four high street banks, whose blushes I will spare—though I do not know why—set up a pop-up community service after the branch had closed. In reality, the service was advertised by a chalkboard and some flyers. It was a member of staff with a desk, a laptop and nothing else, in a small room at the back of a community centre. The banking rep could not do anything with cash, there were no cheque or printing services, and the rep could help only with very basic queries, not with actual transactions. In my book, that simply is not a banking hub.
We are told that we can expect a policy statement from the Treasury, which Amendment 181 calls for, among other things, but what guarantees do we have that it will actually provide the services that communities need? Could I ask the Minister when that policy statement will be published, what it will cover and whether we will have an opportunity to scrutinise it before the legislation reaches the statute book? I have given her notice of that question.
Secondly, given the very slow progress to date on the rollout of banking hubs, it is important for the FCA to be able to require delivery from the designated body. Delivery is a problem; as I said, of the 38 banking hubs recommended, we have only four so far. Yes, the chain of those involved in delivery is complex, with many suppliers and banks involved, as well as the Post Office, but the FCA needs to set out a clear target for rollout from the designated co-ordinating body, because without this requirement there will be endless arguments about who is responsible for what will happen, time will drag on and many communities will be left without a service.
Briefly, Amendment 177, which complements Amendment 176, relates to access to other banking activities often associated with a current account that the FCA considers to be significant. I believe that the legislation is too narrow as currently framed, as it covers only cash and would allow this to be delivered through fully automated services without real-life people present. That is not in line with the industry’s findings from the successful Rochford and Cambuslang pilot schemes that I have already talked about.
I readily acknowledge that the Bill is helpful in providing a framework to protect basic access to cash services so that the high street will still have ATMs and deposit services, which millions of people and shops rely on. However, consumers withdrawing and paying in cash also need other basic services delivered face to face. I have already talked about this, why they need it, the complexity, et cetera. If you do not have digital skills, access to broadband or appropriate devices, you often cannot use online services and increasingly face being cut off from basic financial services. The FCA must be given the powers to oversee this issue.
The amendment would give the FCA the authority to take other essential face-to-face transactions into account when it supervises banks. I am sure that none of us in this Room wants people who need face-to-face support to be left behind by an unambitious Bill. Indeed, the Bill is an ideal opportunity to protect those face-to-face services as long as they are needed, supporting millions of consumers, including the elderly and vulnerable groups, such as those with mental health problems, physical disabilities or long-term health conditions. To be absolutely clear, I am not stuck in the past. I am talking not about a bank branch on every corner but rather about protecting the core services we expect from our financial services and which many people would struggle to function without.
Amendment 178 relates to the closure of cash access services and preventing gaps in services—or banking deserts as they have been called. I have already talked about shared banking facilities and the benefits they bring to individuals and small businesses but, and this is critical, when the last bank branch announces that it is going to close, a gap rapidly opens up and leaves people simply cut adrift from vital financial and banking services. Although the existing voluntary arrangements are an improvement on what came before, they are simply not allowing for replacement services to be put in place anything like quickly enough.
The truth is that delivery is not fast enough because the incentive, frankly, is not there. In my view, the current voluntary arrangements lack teeth. I know there are some valid reasons why it is quite tricky. After all, it is a new network of services and it takes time to get these things right, particularly in relation to staffing and premises, but this is simply not acceptable for those communities where a service is recommended but not delivered. We should not accept a gap in service and nor should the FCA. The solution is simple, and this amendment would achieve it. It would give the FCA the explicit power to stop branches closing until the alternatives are in place, thereby protecting consumers, businesses and the high street.
Finally, on Amendments 180 to 182 and 184, I will simply underline the critical importance of free-to-use cash access services being in the Bill. In September 2022, there were nearly 13,000 fewer free-to-use ATMs in the UK than there were in August 2018—a decrease of nearly 25%. In contrast, there has been a much smaller decline in the number of pay-to-use ATMs. People living in the most deprived areas find it hard to access cash without incurring charges; to compound this, those on lower incomes understandably often withdraw smaller amounts of money more frequently and are disproportionately affected by flat fees, which are often in the region of £1 to £2 per withdrawal.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in day seven of Committee on the Bill. I again declare my financial services interests as set out in the register. I agree with almost all of the amendments in this group. Indeed, I have put my name to Amendment 184, in the name of the noble Lord, Lord Tunnicliffe. I will not say anything more about that; I will leave him to introduce it far more eloquently than I could.
However, I will speak to Amendments 186, 187, 189 and 239 in my name. I wish to talk about the accessibility of financial services and products, as well as access to them. Sometimes those two things are the same; sometimes they are not. I hope that I can bring that point to life with these amendments. In essence, what we are talking about here is a Bill that sets out some very good principles on access to cash. Cash still matters; it matters materially to millions. However, that is only one side of the coin. Without looking at the acceptance of cash, we might as well say, “What currency has cash if there’s no place to spend it?”, hence the need to look at access to and acceptance of cash if we are really to take the opportunity that this Bill presents us with.
Moving on, my Amendment 186 is about the need for “Accessibility of financial services and financial products”. It is what anybody should be able to rely on. Probably the best way to explain the intent of this amendment is through an example. For years, card payment machines were very accessible. They had raised numbers and a dot in the middle of the “5” key so everybody could use those machines independently, inclusively and accessibly. Now, we see a worrying and extraordinary rise in the use of flat-screen card payment machines. They are impossible for me to use. They are impossible for millions to use.
A worrying principle—I hope my noble friend the Minister will agree that it is such—underpins this. Through technological update, change and rollout, things that were previously accessible are now inaccessible. I do not believe that anybody in your Lordships’ House or elsewhere in the country wants that to be the case when it comes to financial services and products—surely not when it comes to any services or products. Does my noble friend the Minister agree? What do the Government intend to do to ensure that all financial services and products are indeed accessible for all users?
I move on to Amendment 187 on access to banking services, and a number of issues that the noble Baroness, Lady Tyler, touched on. With this amendment, I want to highlight the issue of acceptance of cash. There are a number of ways in which one could have gone about trying to assure its acceptance, such as imposing an obligation on retailers or on those of a certain size or kind, or on retailers offering a particular service. One of the major issues with acceptance of cash, specifically for small businesses, is what they do with that cash once they have it. It cannot be that cash becomes burdensome and expensive, particularly for small and micro-businesses. It cannot be that they have to spend an hour at lunch or the end of the day potentially closing their premises to drive to the next town or village to deposit the cash.
In Amendment 187, I suggest that all high streets of a specific size should have banking services which include deposits—
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, if the noble Lord, Lord Holmes, will forgive me for interrupting him, I am afraid that there is a Division in the Chamber. The Committee will adjourn for 10 minutes, but perhaps the noble Lord will resume his speech when the Committee resumes.
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, could I just have the attention of the Committee for a second? The 10 minutes are now up but we know that there will be another vote, almost certainly immediately after the result of this one has been declared. Perhaps it would be better if the Committee did not properly resume until after that vote is completed, if that is agreeable to noble Lords.
Lord Holmes of Richmond (Con)
My Lords, my Amendment 187 seeks to draw together the need for access to cash and acceptance of cash, but in no sense places burdensome requirements on retailers or financial services providers, in terms of the provision in local communities, by virtue of what is now possible through shared banking hubs. As we heard earlier in the debate, since the Bill entered Parliament on 20 July 2022, 390 bank branches have closed. Can the Minister say how many shared banking hubs have opened in that time? If we plot a similar trajectory for this year, which seems reasonable on the data we have available to us, and suggest a similar, if not slightly higher, number of bank branches closing, how many shared banking hubs will be open by 31 December this year?
Amendment 187 would provide access to banking facilities on every high street and give the Treasury the power to determine the size and scale of that high street to enable provision across the country for individuals and micro, small and medium-sized enterprises for deposit and withdrawal for the benefit of the community, the economy and our country.
Moving to Amendment 189, if we consider not only the need for cash but the current geopolitical circumstances we find ourselves in, it would seem a very good idea to classify the cash network as critical national infrastructure. I thank my noble friend Lord Naseby who has put his name to this amendment, which simply states that the cash network should be critical national infrastructure because of economic reasons. I believe we can move positively to a digital financial future where everybody is included. It is one heck of a transition, but I believe we can get there. Even when we reach that point, for reasons of reliance, there may well still be a need for cash. The level of the cash network could be determined by the Government, but having a cash network would seem to be a thoroughly good idea for reasons of resilience, unless the Minister can suggest an alternative second or third line of resilience, which I would be delighted to hear.
Finally, my Amendment 239 asks the Government to consider an access to digital financial services review. This is critical and timely. It would build on the great work that was done with the Access to Cash Review published in 2019. It would have many of the same aims, but in no sense the same specificities. If the logic was good for an access to cash review, which I believe it was, does my noble friend agree that the logic for an access to digital financial services review is equally good? I suggest that the review should look at issues around access to digital payments, online platforms, mobile applications, skills and, crucially, connectivity.
It is probably best to look at this in terms of an example. Imagine a mobile application, the best digital payments application ever created. However, I do not own a smartphone, so that digital payment is not being made. Imagine the same application, but it is not accessible. That digital payment is not being made. Imagine I own a smartphone and I have that app, but I am in an area of low or no connectivity. I could have the best digital skills, the best smartphone and this best app, but the payment is not being made. Imagine I have the app, the smartphone and the connectivity, but I do not have the digital skills. That payment is not being made.
It is those issues and more that we urgently need to look into with an access to digital financial services review, which can come up with recommendations for the Government to put into practice for the benefit not just of individuals but of micro-businesses, small and medium-sized enterprises, local economies, communities, cities and our country. The logic was good for an Access to Cash Review; I believe it is good for an access to digital financial services review.
To conclude, we need access to cash, as well as acceptance of cash; access to banking services on every high street; cash as critical national infrastructure; and an access to digital financial services review. Will my noble friend the Minister channel a retro TSB marketing campaign and, for all these amendments, be the Minister who likes to say yes?
Baroness Noakes (Con)
My Lords, I have Amendments 179 and 190 in this group. I am not very enthusiastic at all about the provisions for cash access and distribution in the Bill. I am far from clear that a heavy-handed regulatory solution, which is what we have in the Bill, is necessary to preserve cash access and distribution, but, if we have to have it, I believe that the powers in the Bill should be time limited, which is what my Amendments 179 and 190 seek to achieve. Under these, the powers would expire in 10 years, unless the Treasury brought a statutory instrument giving a later date.
This is not a hard-nosed sunset clause, because we genuinely do not know what the future will be like. What we do know is that, before Covid, the use of cash was on a long-term downward trend and the use of debit cards had already overtaken cash. Covid then accelerated those trends so that, by 2019, debit card usage was 50% higher than the use of cash, and the latest data for 2021 shows that debit cards were used three times more often than cash. UK Finance forecasts that, by 2031, cash will account for only 6% of transactions while debit cards will account for more than half.
I do not deny that some people are more comfortable using cash than other payment options, and I accept that digital exclusion exists. It may well be a proportionate response to the current need for cash to protect its availability in the way that the Bill does, but I find it hard to see why we should set cash up on a pedestal as though it is some form of human right.
There is a large cost associated with cash provision. The Access to Cash Review found that it costs around £5 billion per annum. That is ultimately borne by all users of banking services, with the possible exception of holders of basic bank accounts, which do not cover their costs anyway and are already loading costs on to other users. As the use of cash continues to plummet, the cost will become disproportionately high because most of the costs involved are fixed.
I am certain that the future is digital, and the real need in the medium term is not to build shrines around cash points but to incentivise the financial services sector to make digital payment systems more accessible and inclusive. The best fintech brains should be put to work on this, and the banks need to see that it is in their interests to support innovation. This is where the regulators should be putting their efforts, rather than working out where cash points should be.
For this reason, I quite like the idea behind my noble friend Lord Holmes of Richmond’s Amendment 239, which calls for a review of access to digital financial services, although I am not sure that now is quite the right time. I am also not sure that a review should result in decisions made by government. We need to incentivise the providers of financial services to provide answers for this, rather than thinking that government can dictate how things will work in practice as society changes.
Some of the other amendments in this group, in particular those in the name of the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler of Enfield, seek to cling to an idea of high street banking that has already been overtaken by events. Bank branches closed because people stopped going to them; I predict that the new hubs will go the same way. The future is digital—that is what we should be trying to encourage. Making banks shoulder the costs of branches or hubs that are little used will simply increase the costs of the banking sector. This will end up harming consumers because costs will be passed on to them or, in some cases, providers may decide to withdraw from servicing particular sectors. In trying to preserve high street provision, the outcomes for consumers are not good.
I do not believe that it is responsible to legislate to preserve a version of the past unless there is clear evidence that the benefits outweigh the costs. I doubt that the cost-benefit case could, in truth, be made at the moment for maintaining branches or paying for the setting up of hubs, but I am absolutely certain that, when we look back in 10 or 20 years’ time, we will be amazed that we even thought that standing Canute-like against technological and societal change was the right thing to do in this area.
Viscount Trenchard (Con)
My Lords, I recognise the good intentions of the noble Baroness, Lady Tyler of Enfield, in introducing her Amendment 176. However, the tide is running out for cash. We are not the most advanced country in this area. It is now almost impossible to use cash in Sweden. What does my noble friend the Minister know about how the authorities in countries such as Sweden, which have largely dispensed with cash in daily life and where retailers are not prohibited from refusing to accept cash, support those who have no bank account, debit card or credit card?
I sympathise with the aim of this amendment. I regret the disappearance of the bank manager, but I doubt that this is an area where the Government should be too prescriptive. Where there really is demand to meet a bank manager, surely the market will respond and one or more banks will locate a manager where he or she is needed.
I support Amendments 179 and 190, to which my noble friend Lady Noakes has already spoken so ably. Her amendments recognise the reality of the disappearing role of cash.
I have sympathy for the aims of Amendments 180 and 181 in the name of the noble Lord, Lord Tunnicliffe, as I think it important that banks continue to provide in- person banking services where there is demand for them.
I sympathise with Amendments 238 and 239 in the name of my noble friend Lord Holmes of Richmond. The way the KYC rules are interpreted by banks and credit card providers is completely absurd and disproportionate. It really is ridiculous to have to prove one’s existence to an institution with which one has had an active business relationship for many decades. Can my noble friend the Minister tell the Committee whether she agrees that a review of the KYC rules is absolutely necessary?
Lord Naseby (Con)
My Lords, I shall be brief. I have put my name to Amendments 180, 182 and 189.
I have a couple of points to make on Amendment 180. First, proposed new subsection (2) is on essential in-person banking services. My wife and I were just in a position in which we needed a face-to-face meeting with our joint-stock bank. The nearest one is eight miles away, which is not exactly around the corner. It was extremely difficult to find the right person in that particular bank, despite the requirement being created by that bank. I am sure that others have had that experience. There is a need to have the ability to have reasonably convenient face-to-face meetings with knowledgeable people who are prepared to work on Fridays, when the rest of us are working. In our case, we work only four days a week—they are just long days—but that is by the by.
Secondly, proposed new subsection (4), to be inserted by the amendment, refers to “applicable local authority areas”. We must never forget that we now have a combination of district and single-tier authorities. The difference is that it can be many miles from one town to another in single-tier authorities.
Apart from that, I hope that my noble friend the Minister takes very seriously the points made in the amendments of my noble friend Lord Holmes. They are well worth listening to and analysing.
Lord Hunt of Kings Heath (Lab)
My Lords, I support the general thrust of the amendments on access to cash and the availability of real banks, if I can put it that way. I take the point of the noble Baroness, Lady Noakes, that the future is digital and that our effort should be to incentivise the financial sector to make it easier for those people who, at the moment, lack the confidence to use digital methods. I accept that she is right, up to a point; we probably are moving to a cashless society. So far, however, the financial sector has shown itself to be rather backward in coming forward with innovative solutions for people who lack confidence.
Secondly, there is enough evidence around to suggest that, at the moment, enough people—millions of people—use cash. They often use cash as a way of budgeting at a very difficult time. I would be loath for us to take action that disenables them from doing so. One of the concerns about access to cash is not just that the number of machines is being reduced but that the amount of free access to cash is, I understand, also reducing. Some of this is to do with the way that fees are charged by the LINK facility. I will not put the noble Lord, Lord Hunt of Wirral, on the spot, but there are issues around the way in which that policy has developed over the past few years, as it seems to be putting pressure on some of the cash providers. This, again, needs to be looked at.
I was very struck by an article in the Guardian today about a 91 year-old who
“discovered that her pension and benefits payments had been stopped and her direct debits cancelled after a Barclays agent recorded that she had died and closed her account.”
I realise that hard cases cause bad law but her experience brought home to me many of the problems that are being faced. She
“informed Barclays that her husband had died. She asked for his name to be removed from their joint account and replaced with that of her daughter … who has third-party access to her account. Instead, she was marked as deceased and the account was closed. Her pension and benefit payments were returned to the Department for Work and Pensions and her direct debits were stopped. She discovered the mistake when she returned from a family Christmas to find her phone line and energy supply had been cut off and a sheaf of letters from companies and the council demanding payment.”
The article continues, as she then
“made two trips to her nearest Barclays branch and was told on both occasions by staff that she was recorded as dead. The bank refused to discuss the case with her daughter because her third-party authority had been revoked when the account was closed.”
This recalls the experience of my wife and I, who had power of attorney for our parents. Once they have died, you lose that power of attorney; it becomes very difficult to have any interaction with the bank at all, and the bank itself is often unsympathetic when you try to discuss this.
In Mrs Roper’s case, the account was eventually reopened and the payments restored after intervention by the Guardian. However, as the article states:
“Roper’s ordeal highlights the obstacles facing vulnerable customers who do not have access to online banking. A Barclays customer for 65 years, she is unable to cope with the automated menus on the customer service phone line and, since her local branch closed, she is forced to take two buses to the next town to withdraw money and manage her account. The only available appointment to request the account change was at a branch 23 miles away where staff did not know her. She brought the required documents, but the bank refused to proceed with the requested name change because she could not recall her little-used pin number. She was told her to make another appointment when she had remembered her pin.”
I am afraid that this is all too common. When we talk about encouraging people to use online facilities, I recall my mother in her last year or so. She was very frail. Even using phones with big numbers, not smartphones, became very difficult. With banks and other financial services, we know who the policy people are; they are often the same young people who work in government developing policy. I accept that the noble Baroness, Lady Noakes, is right about where we are going as technology moves on. However, we are talking about forgotten millions of people here. So far, because I do not see the financial sector responding, we need some safeguards in the Bill. Before Report, I hope that we can coalesce around one amendment that will really enable us to ensure that there are strong responsibilities on the regulator to encourage best practice here.
Baroness Twycross (Lab)
My Lords, I want to speak to my Amendments 185 and 188 in particular, as well as on the broader points made by other amendments in relation to access to cash and basic banking services. I declare an interest as London’s Deputy Mayor for Fire and Resilience and the chair of the London Resilience Forum, not least because the London City Resilience Strategy highlights the risk of moving to a cashless society.
First, Amendment 188 concerns the importance of cash to national resilience. It is of critical importance that the Government have due regard to what might happen in some crisis situations were we to become an entirely, or almost entirely, cashless society. Comment has been made on the march towards a cashless society in Scandinavian countries, including by the noble Viscount, Lord Trenchard, but we should also note that these countries have not only greater equality and lower financial exclusion than the UK but, in formal government guidance to their populations on preparedness, they recommend that their citizens have some cash for use in an emergency.
The Norwegian Government’s English language public information leaflet on personal preparedness says:
“Most of us are completely dependent on electricity in our everyday lives: for heating, light, cooking, hot water and running electrical appliances and devices. Storms, natural disasters, sabotage, technical problems, terrorism or acts of war can result in many people’s electricity or water supply being cut off.”
The digital world in which we live, which is reliant on electricity, creates huge risks as well as opportunities. The world is in many ways less resilient to shock than it was previously as a result. You only have to look to the recent cyber incident that Royal Mail experienced, with weeks of not being able to send international post, to understand the real risks of a world in which individuals, companies, sectors and countries become overly reliant on digital finance and digital infrastructure.
On a national basis, everything from a major power outage to a rota power outage—your Lordships will know that local resilience forums were asked to plan for one this winter so this is not a hypothetical situation—whether this is through shortages, hostile cyberattacks or a major storm, could restrict the ability of individuals, businesses and government to function. I agree with the noble Lord, Lord Holmes, that access to cash should be viewed as part of the national critical infrastructure.
The scenarios in which an overreliance on digital banking, with an absence of cash as a back-up, becomes an additional complication or risk in an emergency situation are not far-fetched. This is a genuine threat to our country’s resilience and to our national security in an unstable world. I therefore ask Ministers to consider including this amendment and would suggest that, as a minimum, the ongoing work that the Government are undertaking on the national risk register considers what additional risks might emerge in relation to emergency situations in which cash was no longer available.
There is limited reference to this issue online. In my attempt to get more extensive examples or comments to back up my points, I did not find much of note to cite relating to the UK. This actually made me more concerned, not less. The reality is that it is not far-fetched to have a scenario in which we could lose access to digital finance or payments systems for a number of days—or weeks—on a national, regional or sub-regional basis. The reason cash has lasted so long is that it is, in essence, resilient. That is not the only reason for keeping cash but we need, as a country, to avoid sleepwalking into losing the resilience that it can provide. If you spoke to people working on resilience in Sweden, for example, I think they would also note that it presents additional problems. This is not about preserving history, as the noble Baroness, Lady Noakes, suggests, but about preserving our resilience.
Amendment 185 in my name, which is on the regional experience of cash provision, is intended to highlight the need for us to understand and plan, through the FCA, for cash provision—not just on average, or on the whole, but in relation to whether provision has a regional and potentially sub-regional imbalance. This would enable any regional disproportionality that exists to be addressed. I am particularly concerned that we have large areas, both rural and within cities, that no longer have banks. I know, for example, that the entire constituency of Bradford South no longer has a bank. Like others, I am particularly concerned about the risks of there being a lack of cash and basic banking services for the most vulnerable in society. Others have already spoken on this point and given detailed statistics illustrating it, so I will not dwell on it.
In conclusion, I commend those noble Lords who have tabled specific amendments covering free access to cash and access to basic banking services. It is not a coincidence that Amendment 182 has cross-party sponsors and I commend my noble friend Lord Tunnicliffe, the noble Lord, Lord Naseby, and the noble Baronesses, Lady Tyler and Lady Altmann, for their work on it. I also commend those in the other place, particularly the honourable Member for Mitcham and Morden, who have pushed for this matter to be addressed. Quite simply, free access to cash and basic banking services must be guaranteed. At the heart of British personal banking lies free access to your own money. It is outrageous that if you are poor, you are more likely to have to rely on charged-for cash machines. This legislation provides an opportunity to address the issue, as well as ensuring that we safeguard our country’s resilience.
The Lord Bishop of St Albans
My Lords, I will not detain the Committee for very long but perhaps I could say one or two things. Briefly, I come at this by thinking about rural sustainability and rural business. I declare my interest as president of the Rural Coalition.
Before I say anything on that, a month ago I had my wallet stolen on my way into Parliament and I learned a lesson: do not keep all your cards in your wallet but have some different ones. I was, to use a theological term, absolutely stuffed that morning. Fortunately, I had a member of staff at home. I went back and cancelled the cards then phoned up my bank, which said, “Yes, come up—we can give you some cash”. When I got up there, I was told, “No, the system’s got it wrong and we aren’t able to give you cash here”. I then had to get someone to take me six miles to get some cash. When I eventually got into London for some meetings, I went to four places before I could find somewhere to buy lunch because I had only cash. This is actually quite a complex thing.
Actually, I agree with the noble Baroness, Lady Noakes: there is a huge change going on—of course there is. But how are we to work with that, not least if we are going to think about levelling up? In my diocese, for example, if I go into Citizens Advice in poor areas in Stevenage, they tell me that people sometimes positively get rid of their credit and debit cards because they do not know how to control money. There are some real issues here about financial literacy and discipline to help people with saving and so on.
Going back to the rural issue, much of this stuff depends on rural businesses having broadband. Large rural areas of our country are not-spots, where there is no access. Some places do not even have good access on a direct phone line, certainly to do some forms of banking. I therefore think that we are in a transition period. We certainly need protections in place for the foreseeable future as we try to work out how this goes and how we take it forward.
I was recently in the small rural town of Ampthill in my diocese in Bedfordshire. A whole group of people talked to me afterwards; they got on to this subject and said how it really affects small start-up businesses at the moment. I hear that we have to think about how we should take this forward but, over the coming years, we need some sort of provision to guarantee some basic levels of service so that we can help rural sustainability, rural businesses and individuals who live in those areas.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly to offer the Green group’s support for the general sense of direction here on both the provision of cash and the review of resilience. It is not an accident or a convenience that those two things have been brought together, as the noble Baroness, Lady Twycross, just made clear.
We come back to a fundamental question: what is the financial sector for? If it is there to serve the real economy and real lives, it must meet people’s needs in both good and bad times. That applies at the individual level and the national one. The system must be able to stand up to not just financial shocks but the kinds of shocks that we know about in this age of the climate emergency, the nature crises and the threat of pandemics.
As the noble Baroness, Lady Twycross, was speaking, I was reflecting on being in Lancaster in 2016 about a week after Storm Desmond. I saw a city in shock. I saw what happened when they lost electricity for a day and a half or so. Digitisation and the disappearance of cash have come a long way since 2016 but people were absolutely desperate. They were not able to meet their basic needs, which surely must be part of the financial sector’s responsibility.
I broadly agree with the general tenor of everything that has been said but I want to make one strong point of disagreement with what most people have said. There is an idea that this is a transitional phase and that, once we have gone past the generation where people have not had digital in the prime of their life, the phase will end and everybody will then be able to use digital. I was going to tell exactly the same story as the noble Lord, Lord Hunt of Kings Heath, did. I will not repeat it but I will draw a further lesson from it. It is a story about a 91 year-old lady. She may have been able to cope with the telephone system and the buttons at 70 or even 80. I know someone in this situation; he is an older gentleman who finds it harder and harder each year to navigate the complications of digital.
None of us in this Room knows what our capabilities will be in 10, 20 or 30 years’ time. Just because you can do something now, you cannot guarantee that you will be able to do it in 20 years’ time. In terms of national resilience and meeting everybody’s needs, we genuinely have to make sure that, long into the future—potentially for ever if we look at that kind of scale—there will always be somewhere where you can walk up to a person and say, “This is my problem. I need you to help me sort it out”. That person needs to have the resources, knowledge, skills and power to sort out that situation for you because, ultimately, only having a person who looks you in the eye, sees the problem and deals with it will really meet everybody’s needs.
I have one final thought. There is sometimes a feeling that we have to have maximum efficiency and meet the needs of the majority, and tough luck for the rest. If we have a system that meets the needs of the most vulnerable people in our society—this is often said about public transport systems but it applies far more broadly—we have a system that is good for everybody in our society.
Lord Blackwell (Con)
My Lords, since I have not spoken in Committee so far, I should remind noble Lords of my interest as a former chairman of a bank and a current shareholder. However, I am not going to defend the service levels of banks, which I recognise need improvement.
On these amendments, I point out that, while I understand the rationale behind the desire to maintain access to cash, everything has a cost. We need to consider the cost of what is proposed as well as the benefit. My noble friend Lady Noakes is right that the shift towards digital and away from cash has snowballed over the past few years. It is not just customers who prefer not having to carry cash around. Many small businesses, clubs, associations and societies find it much easier now to have a low-cost terminal with which they can process membership dues, fees or even small transactions. It makes the accounting so much easier and avoids having to deal with collecting and disbursing large amounts of cash.
The move towards digital is happening across the whole economy. People talk about keeping branches open but there are many branches where only a handful of people come in during the week. When you think about the cost of maintaining the building infrastructure, as well as the staffing, security and systems, the cost per transaction becomes astronomical. Those costs have to be borne by somebody; they are borne by the other bank customers in higher fees, charges and interest rates. Nothing comes without a cost so we have to consider what the appropriate cost-benefit answer is.
As many noble Lords have said, clearly there are people who find it difficult to use digital technology and need access to cash, but there are other ways of—
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, I apologise for interrupting the noble Lord but I am afraid that there is another Division in the Chamber. The Committee will adjourn for 10 minutes and we will resume with the noble Lord, Lord Blackwell, when the moment comes.
Lord Blackwell (Con)
I was making the point that maintaining open bank branches as a solution to this problem is potentially a very expensive way of solving the problem and that the cost would be borne by other bank customers. We need to accept that there may be better ways of serving the genuine needs of those who cannot cope well with the digital economy and may need access to cash. Clearly there are potential solutions using other shops or post offices in localities to provide access to cash where that can be done, but another solution that many banks are adopting is the development of mobile banking branches. A mobile branch that visits a village once week may not be as good as a permanently open branch but at least it gives access to cash and the costs become much more affordable and socially acceptable.
We need to be cautious about assuming that maintaining the structure of the past is the right way to meet the genuine needs of those who have difficulties. We need to avoid fossilising a structure that is no longer fit for purpose. If this debate had been happening 20 years ago about telecoms, we might have wanted a law that said there had to be a telephone box in every high street. If we had had this debate 100 years ago, we would be requiring there to be a horse trough in every high street. There have to be other ways in which we can meet the genuine needs of those who have special needs without the blanket approach of insisting that highly costly and inappropriate branches remain open in places where there is no demand for them.
Baroness Fox of Buckley (Non-Afl)
My Lords, I enthusiastically support Amendment 186. I thought that the noble Baroness, Lady Tyler of Enfield, spelled out extremely articulately the importance of banking hubs and how that name could often be prosecuted for mis-selling. Even banks themselves, in terms of the service that they offer when you go into the few that are still open, can be accused of having only the minimum service required.
The noble Lord, Lord Hunt of Kings Heath, told a heartbreaking story about a 91 year-old but you do not have to be 91 and have a heartbreaking story. Things can just go wrong; your card can stop working or whatever. When you try to solve it on your phone and it does not work, you then go into the bank and, to be honest, you are treated as though you are wasting the bank’s time and as though you have done something wrong. The staff often cannot solve the problem and ask, “Why don’t you solve it online or on your phone?” The answer is that I would have done so if I could have done. In other words, I do not think that it is necessarily a special needs problem, as the noble Lord just said. I think it can happen to anyone. Sometimes, you need human intervention to sort out your banking.
I am also interested in supporting those amendments that would allow access to cash, including Amendments 180 and 181 in the name of the noble Lord, Lord Tunnicliffe. I especially like Amendment 189 from the noble Lord, Lord Holmes of Richmond, and its attempt to make cash critical national infrastructure in the UK; I also support Amendment 189A, which is headed “Access to physical banking services”.
I suppose I am concerned about noting that the importance of cash relates not just to those who struggle with their phones or other technology. This discussion sometimes implies that some of us are just Luddites who cannot cope or do not want to embrace the full excitement of new technology and digital futures. I want to emphasise that I can see the advantages of a cashless society. Mainstream cashless transactions carry certain information about payment participants, what was purchased and when, which can be a huge barrier to money laundering and tax avoidance. That is genuinely important but, for individuals as consumers, it can also mean—this may be slightly different to what others have emphasised—that it helps people with budgeting because they have electronic receipts and can see both what is going in and what is going out. I am rather enthusiastic about those technological steps forward; I do not in any way want to hold back the march of progress, in the way that some have implied.
However, precisely because cashless transactions mean that information about payment participants is available to financial institutions and banks in a different kind of way, they can also give those organisations huge surveillance capability and invasive powers in ways that we did not see so much in the past. It is then not about you taking cash out but about everything having to be recorded. This means that people are not able to do the things you could with discretion. It should be noted—this is not entirely being paranoid—that, in China, financial surveillance is used to censor and restrict people’s freedom to express opinions against the state.
Noble Lords might think that that would never happen in a democracy but, in a later amendment in my name—when I say later, I mean if it ever arrives; it is Amendment 241B, should anyone like to note that, because I do not suppose that anyone will be here to listen to my speech on it—I was inspired by payment processing in fintech companies, such as PayPal, and the move towards everything being cashless, with a cashless society and everything being digitised. This has meant that PayPal, for example, can close down accounts on the basis of politics; in fact, it has done so, so I am not just being paranoid.
There also tends to be a casual assumption that those who want to keep their financial transactions private—that is, by using cash from time to time—might be up to something dodgy, as though the only reason someone might want to be free to choose to use cash is if they are involved in embezzlement or tax fraud. Today, it has been much friendlier than that; people just assume that you are technologically incompetent and old-fashioned, so cannot keep up. We just have to be a bit careful about this. I have also noticed a trend where financial services are judging how individuals are making their purchasing decisions—judging their use of money in a way that they may not have done if were not quite so detailed.
Recently, I was interested that HSBC—my bank—was involved in a report that condemned people’s decisions about how much they spent on gambling and was backing affordability checks. I know that I disagree with some noble Lords in the Room on gambling—I can already see them—as I think that is a legal leisure activity and that you should be able to do what you want. The idea that the bank is saying that it has customers who spend too much on gambling, a perfectly legal leisure activity, and then gives a breakdown of them, indicates that rather than being a dispassionate financial service it is getting involved in things in a way that it perhaps should not. I have never gambled, but my bank could well send me a note about how much I am spending in TK Maxx, saying that has all gone a bit mad.
When we had cash, we took the money out, we spent it on what we wanted and nobody could see. A cashless society creates a slightly different situation. Amendment 186 on accessibility and Amendment 184 on levels of cash acceptance, along with the whole issue of digital exclusion and financial inclusion, are very important but do not quite capture some of the broader political trends associated with this issue.
I am also very sympathetic to the notion of the noble Baroness, Lady Noakes. On the one hand, cash is not a human right—I do not want to get stuck on that, as I am never keen on regulations lasting for ever; a time-limited sunset clause is a good idea—but I am anxious that we do not forget the political trends surrounding this by simply treating it as a technical issue.
Baroness Lawlor (Con)
My Lords, if I may come in briefly, I am very sympathetic to the aims of noble Lords who wish to see cash access and banking services available to those who need them and do not use or rely on digital. However, I agree with the aims of the Bill: international competitiveness and growth. I do not think that this Bill’s powers regarding the financial markets and services sector should be used in a blanket way to impose an obligation on service providers to provide a service whose use, by all accounts and evidence, is on the decline.
Not only do I support the two amendments from my noble friend Lady Noakes, but I think we should pay attention to the overall aims for the regulators in this Bill, which are international competitiveness and growth. I urge the Minister to focus on the real problem of access to cash and banking services for many people, and, where there is a problem or gap, to focus the efforts and use the powers of government on trying to deal with the declining number of users in our society—albeit a real group—rather than use the law to impose obligations in a blanket way on the sector, contrary to the aims of competitiveness and growth. As noble Lords have explained, such a move could undermine the competitiveness of the banking sector.
Baroness Bennett of Manor Castle (GP)
The noble Baroness appeared to be suggesting that the provision of services, including the cost, should be done by the Government and that the private sector should collect the profits. Could she clarify whether she was saying that?
Baroness Lawlor (Con)
I thank the noble Baroness for her intervention. No, I was saying that, when we use the law, we should be very careful not to impose the costs on providers if the aim of the law is to encourage competition. There are reasonable aims which are agreed to by the whole of society. It is a reasonable aim for society to require and want cash access. My heart agreed with the noble Baroness, Lady Tyler, as she powerfully moved her amendment, but we should draw a line between a blanket restriction on providers of these services and finding how government can help and encourage other providers of services to do it. I was just talking to other noble Lords in the Lobby about this. I know of voluntary groups, market groups and social providers which are out there helping such groups and finding ingenious solutions to meet the gap, where there is one.
Lord Hunt of Kings Heath (Lab)
My Lords, surely we have a situation in which the market is failing. In essence, the banks are not interested because they take the same view as that of the noble Baroness, Lady Noakes: that this part of the market is dying. They do not want to be involved because they want to be in a dynamic, new market. Faced with that and the 7 million people who use cash each year—in the current cost of living crisis that many people face, cash is used as a budgetary tool—what can we do if the market is clearly not providing? From our point of view, legislation is the only lever we have because none of the regulators seems that interested. Government departments are not; they are engaged in removing cash as much as possible. What is the alternative?
Baroness Lawlor (Con)
I thank the noble Lord for his intervention. I do not have an answer—I am sorry to disappoint the noble Lord—but this Bill is not the place for that. Its aims and purposes are to make the UK sector more nimble and competitive internationally so that it can move ahead in a post-Brexit world and we can all benefit from a successful financial sector. Putting caveats, restrictions and obligations on a sector can add costs to customers, consumers and all who use these services. However, I think that that is a good aim and is good to do. We should have a special committee to see how we can encourage use, short of using the law as a big stick on one sector of providers. There are many ways that have opened up in the market that are already providing use, which I can discuss later.
Lord Tunnicliffe (Lab)
My Lords, this is a key group for the Labour Party politically; it contains four of our amendments. Amendment 180 would require His Majesty’s Treasury and the FCA to publish a review of the need for
“access to essential in-person banking services”
and to ensure
“a minimum level of access”
to them.
Amendment 181 would require HMT to
“publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including … support for online banking, and maximum distances people can expect to travel to access services.”
I would be interested to know the Minister’s view on the reasonable distance for an elderly or disabled customer to have to travel to speak to someone from their bank.
Amendment 182 is perhaps the most important. It would compel HMT to
“guarantee a minimum level of access to free of charge cash access”.
Amendment 184 would require the FCA to
“monitor and report on levels of cash acceptance across the UK.”
I set out the crucial importance of free access to cash at Second Reading so I will not do so at length a second time; well, that is what it says here. Nobody has more interest in being speedy than me, or perhaps the Minister, because we have to be here for every minute of this Committee. We are almost in our 27th hour but this group is different from anything else that we have discussed. The rest of it—I cannot think of a polite way of putting it—is about activity that takes place for people like us. Quite a number of people work in the finance industry; we are looking at the nuances of it and how politicians should be involved.
However, the issue of cash is about our society. It is about the poorest and least competent people in our society. Technology has been a substantial disruptor. It is a disruptor that particularly applies to finance. It has allowed financial transactions to become extraordinarily efficient and has created a whole new customer base of people who are comfortable with technology. They have access to a whole new marketplace. We know that the dynamics of that have probably been benign for society.
However, the other problem is that it has created a divide in our society. I ran an organisation that used to have a lot of cash; I am all too familiar with the tremendous impact of approaching a cashless society. In all the knowledge in the world, the last bits are the most expensive bits. Yes, the cost of transactions goes up and so on and so forth, but we cannot afford to create the divide in our society that is emerging. We must support all parts of our society seriously. We must recognise that, in their lives, people sometimes need all banking services. We must recognise that some people simply cannot envisage how to budget without physically seeing it in separate pots. It is clearly a natural reaction if you are running out of money. You can see it there and have confidence because you know that, if you go into the grey world of accounts, banks, overdrafts, loans and things like that, all sorts of horrible things happen. For that group in society—it is probably 10% of our society so it is a substantial number of people—we must find a way of maintaining the public service. We must achieve a minimum service.
The noble Lord, Lord Blackwell, said what all providers of service say: if you are not ultra-efficient, you load the inefficiency costs on to other customers. It so happens that being ultra-efficient does not do much harm to your profit line either. Big businesses such as banks pursue the maximisation of shareholder value. It is in the law. They are supposed to do it, for Christ’s sake. We should not be surprised when they do but I rarely see them turning into charities. We have got to find ways. We do not have to keep all the branches open; even I can work that out. We have to be much more inventive in how we service this need, which is still large, but the way we must do that is by creating duties on the purveyors of financial services as well as rights and constraints.
It is proper for the law to create duties to look after the poorer members of our society. That is why so many people have said that it is important for a variety of needs—resilience and so on—that we maintain it. The banks must play their part. They have enjoyed massive exploitation—I do not use that in a pejorative sense—of information technology, probably more so than any other section of our society. They must recognise that there has to be a cross-subsidy in this situation because we must restore financial equity to all our society.
Baroness Penn (Con)
My Lords, as we have heard in this debate, the nature of banking is changing. In 2021, 72% of people banked online, and 57% on their mobile phones. Meanwhile, 85% of payments were made without cash, up from 45% a decade earlier, and 86% of UK adults used contactless payments.
Lord Tunnicliffe (Lab)
Were 85% of the number of payments made without cash, or was it 85% of the value of payments?
Baroness Penn (Con)
I will check for the noble Lord because I do not have that level of detail in my notes. They say that “85% of payments” were made without cash, not “the value of payments”, but I should double-check to clarify for him.
In the light of these innovations in the way that we bank, the Government recognise that it is incredibly important that people are not left behind—we have heard that in today’s debate. Many people still rely on physical services: in particular, millions of people still rely on cash and need access to withdrawal and deposit services.
Working with industry, the Government are already undertaking positive action to support cash access in this context. For example, existing initiatives subsidise free-to-use ATMs in remote and deprived areas. Following changes in the Financial Services Act 2021, there is a new ability to have cashback without purchase services, enabling withdrawals to the penny that people request. Communities can ask LINK to assess whether additional cash services are needed, with several major banks and building societies funding new shared services. As a result of that initiative, over 70 communities are due to get new cash deposit facilities.
In that context, it is important not to underestimate the significance of the provisions contained in the Bill. It is the first time, in UK law, that we are protecting people’s ability to access cash. The Bill provides the FCA, as the independent regulator, with the responsibility and necessary powers to ensure reasonable provision of withdrawal and deposit services.
In evidence to Parliament, the regulator said that it anticipates taking account of reasonable access to free cash services for personal customers—subject to due process, which includes a requirement to consult on its rules. In using its powers, the FCA will utilise the wealth of data that it has collected, including on access at the regional level, and it must have regard to local deficiencies in cash access services and the Government’s policy statement.
The noble Baroness, Lady Tyler, asked about the policy statement. It is currently being developed, and we expect it to be published after the Bill completes its passage. It is important that it takes into account the latest available data and evidence ahead of its publication.
I have clarification for the noble Lord, Lord Tunnicliffe, on the statistic that I used, so I shall not need to write. I can confirm that 85% of the number, not the value, of payments were made without cash.
Lord Holmes of Richmond (Con)
While we are getting clarifications in flight, may I ask my noble friend the Minister about the 86% of people using contactless? Are 86% of people using contactless all the time or are they making one payment a year? If someone from the Box is able to answer that in flight, that would be helpful.
Baroness Penn (Con)
That request has been noted. Reading the statistic in my notes, I would say that 86% of adults have used contactless payments, rather than it being a comment on how much they use them as part of their payment mix. If I am wrong, I hope that the people supporting me will tell me.
I talked about the policy statement and the significance of the measure that we are taking in the Bill. We have heard from the Committee that not everyone agrees with that approach. In legislating to protect access to cash, the Government have sought to provide that reassurance for those who rely on cash for a number of different reasons.
We have heard why it can be important for accessibility and for people to manage their finances. We have also heard about privacy concerns. However, we have not sought for the legislation to be prescriptive on the cost, type of facility or range of services offered at facilities. We are seeking to ensure that this primary legislation allows for innovation and flexibility, as the needs of people and our communities evolve over time. I think those advocating for greater access to services also recognised the need for that flexibility and change in needs over time. It is for those reasons that the Government do not support Amendments 176, 178, 182 and 185 from the noble Baronesses, Lady Tyler and Lady Twycross, and the noble Lord, Lord Tunnicliffe.
The Deputy Chairman of Committees (Baroness Kennedy of Cradley) (Non-Afl)
There is a Division in the Chamber. We will resume with the noble Baroness, Lady Penn, in 10 minutes’ time.
Baroness Penn (Con)
My Lords, we were addressing the question of when alternative service provision is put in place and the accessibility of that service provision.
I have addressed the point made by the right reverend Prelate the Bishop of St Albans about connectivity. He also made a point about customers needing, for example, a smartphone to make payments or access online banking. The FCA has stated that it expects payment service providers to offer solutions that work for all groups of people. It encourages all firms to consider the impact of their solutions for customers. The regulators’ guidance recognises that not all customers will have mobile phones or a reliable signal and that viable alternatives should be provided in these situations.
All service providers, including banks and building societies, are bound under the Equality Act to make reasonable adjustments where necessary. Many of them support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks.
As my noble friend Lord Holmes highlighted, moving towards digital can create opportunities for accessibility but it can also create barriers. It is important that we embrace these technological changes in ways that reduce those barriers, so his point about ensuring that interfaces, including ATMs and point-of-sale terminals, are accessible is really important.
Lord Eatwell (Lab)
Would the Minister indulge me for a moment? I have been intrigued by her discussion of the role of digitisation. I refer to Amendment 184, tabled by my noble friend Lord Tunnicliffe, on the duty to collect data on cash acceptance.
When teaching monetary economics, the first thing that you ask students to understand is, “What is money?” Money is something that is generally accepted in discharge of a debt. That is the definition of money. The issue of cash acceptance is therefore vital as society develops in the way that the noble Baroness, Lady Noakes, outlined so clearly. What will happen is that, for the section of society who rely on cash—several million people—their cash will no longer be money. It will no longer be generally acceptable in payment of a debt. In those circumstances, the digital instrument will be crucial. However, if the digital instrument is issued only by companies, namely banks, to those who are customers of the banks, who have some basic criterion, it is surely the responsibility of the state to issue a digital instrument that is available to all citizens.
That being the case, to get to that stage, we need to know how cash is generally accepted. Therefore, the amendment, which contains a duty to collect data on cash acceptance, is vital for the development of future policy with respect to cash and digital instruments. The Minister rejected the amendment by saying that it is not the FCA’s responsibility. Can she tell me which department of government has this responsibility to collect data on cash acceptance?
Baroness Penn (Con)
My Lords, there are a number of ways to tackle the issues that the noble Lord referred to. There are various statistics around payment methods used by consumers in the UK; I quoted some at the start of my speech. The Government have not mandated service providers to accept certain forms of payment; that is not the approach we intend to take to ensure that people continue to have access to cash or money. I have said that, in supporting businesses’ access to deposit services, that will support people’s ability to use their cash as a form of payment.
The noble Lord also raised the question of a digital form of money. That is a question that the Government have looked at very carefully. We launched what I think was a joint consultation between the Government and the regulators, looking in more detail at the question of a central government digital currency and how to take forward that work, as well as considering questions such as those from the noble Baroness, Lady Fox, about privacy issues in a world of having a digital form of money versus having cash as a form of money.
I understand the importance of having a picture and the data that allows us to understand what is going on. I do not think that the data is necessarily the gap here; it is about how you provide for the ongoing use of cash in a society where rapid changes are being made. Our approach to that has been through legislating in this Bill on access to cash withdrawal and deposit facilities.
I was just talking about the importance of the accessibility of payment interfaces, including ATMs and point-of-sale terminals. I am pleased that UK Finance and the RNIB have developed accessibility guidelines for touch screen chip and PIN devices, as well as an approved list of accessible card terminals. The Government’s disability and access ambassador for banking, Kathryn Townsend, also encourages a consistent consumer experience and engagement with deaf advocacy groups.
Lord Hunt of Kings Heath (Lab)
My Lords, I do not want to delay the Committee or the Minister but, on ATMs, I referred rather incoherently to the interchange fee paid by LINK. Will the Minister take back the issue that this is having a big impact on the viability of providing free cash by the companies that do so? This partly seems to be down to the ownership of LINK and the influence of banks in relation to it, but does she accept that there can be very profound effects when you lose free access to cash and have to pay for it? I was told this morning at a meeting with NoteMachine —one of the companies that provide cash—that six out of 10 withdrawals are for £10 because people are using it to budget. The problem is, if you no longer have access to free cash, you then have to pay £1.50 for it. That is a huge rate. These are some of the practical issues that I hope the Minister will be prepared to take away between now and Report.
Even accepting that the Minister may not be prepared to accept any of these amendments, it seems that at the moment we do not, despite FCA guidance, have a guarantee that the financial sector as a whole is going to change the way it operates. This is the problem that we face. If anything, its policies are driving cash out without recognising the impact on some very vulnerable people.
Baroness Penn (Con)
On interchange fees, decisions regarding the operation and funding arrangements for an ATM network are taken by the parties involved. The noble Lord will know that LINK has commitments to protect the broad geographic spread of free-to-use ATMs and is held to account against those obligations and commitments by the Payment Systems Regulator. It has specifically committed to protect free-to-use ATMs more than one kilometre away from the next nearest free ATM or Post Office and free access to cash on high streets, and it supports free-to-use ATMs in deprived areas through its financial inclusion programme.
I recognise the point that the noble Lord has made. Coming back to the provision in the Bill, while I understand that different amendments have been tabled to look at how it could be enhanced or altered, it is important to acknowledge that legislating to protect access to cash is the Government recognising the point that the Committee made and taking action to address it. We want to have flexibility in how that is delivered, but we are providing for it in primary legislation and I hope that principle is welcomed, even though there are different opinions about how it could best be delivered.
Drawing towards the end of my remarks, I was going to note specifically on accessibility that that question was considered by the most recent Financial Inclusion Policy Forum. As I was saying to the noble Lord, Lord Hunt, while the Government do not support these amendments, I hope that noble Lords recognise the action that is being taken through the Bill and elsewhere, because the Government take these issues seriously. It is right to consider the outcome that we are all trying to deliver in a changing world: accessible financial services. That can mean a range of things, such as for people on low incomes being able to budget their money or for accessibility when it comes to disability, age or other factors. The way we have tried to approach access to cash in the Bill is by looking at delivering those outcomes in a flexible way, so I hope that at the moment the noble Baroness, Lady Tyler, is able to withdraw her amendment and that other noble Lords do not press their amendments.
Baroness Tyler of Enfield (LD)
My Lords, it feels some time now since we started this group of amendments. I thank the Minister for her measured response in which she tried hard to reflect quite a wide range of views on the issues we have been talking about. I also thank all other noble Lords who have contributed. This has been a fascinating debate. There has been a reasonable degree on consensus in places, but by no means full consensus, and I certainly understand that.
I want to refer to a very important comment made by the noble Lord, Lord Tunnicliffe. He said that this group is different and is about whether we want a divided society. Another noble Lord said—I am sorry but I cannot remember who it was—that banks are not charities. I think we all understand that but it is for us as legislators, a point I made in my opening speech, to decide on the sort of society that we want. That is actually what this group of amendments is about.
I listened to the noble Baroness, Lady Noakes, and others, and I assure your Lordships that I am not stuck in the past. I make most of my payments by holding out my phone. However, a very helpful point was made by the noble Baroness, Lady Fox, which was that there are times when I do not want to pay like that. I still want to use cash sometimes, even though I can hold my phone out, and it is rather important that I have that choice.
Baroness Penn
Member’s explanatory statement
This amendment would enable the Bank to direct a central counterparty’s parent company to establish a separate holding company as a parent of the subsidiary, rather than requiring that holding company to be a separate financial holding company.
Member’s explanatory statement
This amendment is consequential on the amendment at page 213, line 3 and omits the definition of “financial holding company” as it is no longer required.
“(ia) paragraph 34(6)(d),”Member’s explanatory statement
This amendment would ensure that paragraph 34(6)(d) of Schedule 11 is read as including onward bridge central counterparties for the purpose of being able to convert liabilities owed by a central counterparty into securities issued by an onward bridge central counterparty.
Member’s explanatory statement
This amendment would correct the definition of “initial margin requirements” so that it refers to the counterparty exposure that would arise if the clearing member lodging the initial margin defaulted.
Member’s explanatory statement
This amendment would ensure that paragraph 127 of Schedule 11, regarding the admissibility of statements made to investigators, applies to statements made to investigators appointed under paragraph 121 of Schedule 11 as well as to those appointed under paragraph 122.
Financial Services and Markets Bill
Monday 13th March 2023
(1 year, 8 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-VIII Eighth marshalled list for Grand Committee - (9 Mar 2023)
The Deputy Chairman of Committees (Baroness Bull) (CB)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Amendment 197
Lord Sharkey
“Duty of the FCA with regard to interest rates for mortgage prisoners
After section 137FD of FSMA 2000 insert—
“137FE FCA general rules: interest rate for mortgage prisoners
(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the standard variable rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)—“mortgage prisoner” means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following types of firms—(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending, and(b) unregulated entities, or firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years;“standard variable rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the standard variable rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) must make new fixed interest rate deals available to mortgage prisoners who—(a) are up to date with payments or have aggregate arrears of no more than one monthly payment in the past 12 months,(b) have a remaining term of 2 years or more,(c) have an outstanding loan amount of at least £10,000, and(d) have not received consent to let the property. (5) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA must specify rates for a range of loan-to-valuation ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(6) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made no later than six months after this Act is passed.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and, under specified circumstances, ensure their access to fixed rate interest deals.
Lord Sharkey (LD)
My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. I thank the noble Viscount, Lord Trenchard, for adding his name to my Amendment 197, which is a probing amendment to allow debate on the issue of mortgage prisoners. There are getting on for 200,000 mortgage prisoners in the UK, who are trapped with their current lenders. For eight years or so they have paid very high standard variable rates, now of around 7%, 8% or even more.
Mortgage prisoners exist because the Government sold their mortgages to vulture funds, which have been increasing their standard variable interest rates and refusing to offer mortgage prisoners new deals or access to fixed rates. The harm being caused to these mortgage prisoners is the direct responsibility of the Government; when the time came for the mortgages of Northern Rock and Bradford & Bingley customers to be sold back to the private sector, the Government could have pursued an approach that ensured that these customers were protected. They could have sold them to active lenders or secured a cast-iron commitment from purchasers to offer these customers new deals.
The risk to these customers was clearly identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to highlight that many of those affected by the sales were mortgage prisoners who would be unable to switch lender. He warned:
“Given the prospect of rising interest rates it is important that all mortgage customers are given the opportunity to achieve certainty over their payments by accessing a fixed rate. I am concerned that some customers affected by these mortgage sales … will not be offered reasonable fixed mortgage rates.”
UKAR responded that, in returning these mortgages to the private sector,
“the option to be offered new deals, extra lending and fixed rates should become available”.
However, this requirement was not written into the contract when mortgages were sold to the vulture fund Cerberus, with the BBC reporting that UKAR is now claiming to have been misled by it.
Consumer champion Martin Lewis, about whose work I will have more to say in a moment, lays the responsibility for the treatment of mortgage prisoners with the Government. He said that they have
“sold these loans to professional debt buyers that don’t offer mortgages, and left these people with these types of mortgages that have been too expensive and crippled their finances and destroyed their wellbeing.”
The Government are directly responsible; they chose to sell the mortgages to vulture funds.
In 2021, the House of Lords passed an amendment that would have capped standard variable rates for mortgage prisoners. This would have provided immediate, practical help for the 200,000 mortgage prisoners and their families. When the Government rejected this amendment in the Commons in April 2021, the Minister claimed that
“the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers.”—[Official Report, Commons, 26/4/21; col. 85.]
The FCA published an update in November 2021; this review confirmed that its interventions have, so far, had only a tiny impact. Only 2,200 of the almost 200,000 mortgage prisoners have been able to switch, just over 1% of the total. It turned out that lenders had only a limited appetite to offer options to switch using the modified affordability test devised by the FCA.
The FCA and the Government show little understanding of how vulnerable many mortgage prisoners really are or what stress and financial hardship they have endured and continue to endure. They certainly have not done anything practical to help. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or provide any help. At the moment, they and the FCA propose no further action.
This is deeply unfair and more than slightly ironic. A recent LSE report found evidence that the Treasury has not only made back the cost of managing the sales of these mortgages but has made a £2.4 billion surplus. However, there has been one significant development. Last Wednesday, my co-chair of the APPG on Mortgage Prisoners, Seema Malhotra MP, and Martin Lewis, chaired a meeting in Parliament to examine and explain new research conducted by the LSE, generously funded by Martin Lewis. The Treasury and the FCA were in attendance. This research contains concrete and costed proposals for a solution to this long-standing and continuing injustice.
Martin Lewis told the meeting:
“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations. When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.”
Therefore, there should be no more excuses. He went on:
“The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”
The APPG has sent copies of the LSE report to the Treasury, the FCA and other interested parties.
Will the Minister and her Treasury colleagues meet the APPG and its supporters to discuss the solutions proposed in the LSE report? Can she arrange this meeting urgently—certainly well before Report? Thanks to the support, generosity and persistence of Martin Lewis, and the work of the LSE and the APPG, we now have a clear and costed plan finally to bring relief to the nearly 200,000 mortgage prisoners. There can be no excuse for further delay. If we cannot set a course to free these prisoners, we will want to return to the issue on Report. I beg to move.
Viscount Trenchard (Con)
My Lords, I am delighted to support Amendment 197, moved by the noble Lord, Lord Sharkey, and to which I have added my name. I served on the former Services Sub-Committee of the former European Union Committee with the noble Lord and have been impressed by his accurate understanding of, and thoughtful approach to, this and other financial issues.
The noble Lord explained the reasons for his amendment with his customary clear logic. I will not take up the Committee’s time by repeating them. I particularly endorse the introduction of a cap of 2% over the standard variable rate for mortgage prisoners. UK Finance has identified 195,000 borrowers from inactive lenders, of whom 47,000 have been identified as mortgage prisoners.
I welcome the FCA’s recent review of this problem and its review of the effectiveness of its regulatory interventions to remove barriers to switching. Recently, only a small number of borrowers have been able to switch from an inactive lender to a new deal with an active lender. I share the FCA’s hope that more mortgage prisoners will be able to switch their mortgage and I hope that the Minister will support this amendment.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.
The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.
Baroness Noakes (Con)
My Lords, like the noble Baroness, Lady Bennett of Manor Castle, I recall our debates on this subject in 2021. Indeed, I think the amendment that the noble Lord, Lord Sharkey, has tabled is word for word the amendment he tabled on Report during the passage of what became the Financial Services Act 2021. It will not surprise the noble Lord that familiarity with it has not made me any warmer to the amendment.
As the noble Lord, Lord Sharkey, reminded us, mortgage prisoners derive from lending practices before the financial crisis. These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still have relatively high loan-to-value ratios, and they often have unsecured debt as well. Many of them have interest-only mortgages, with no repayment plan. Put simply, they typically have higher-risk characteristics than borrowers with active lenders.
The noble Lord, Lord Sharkey, has correctly excluded 50,000 or so of the population of mortgage prisoners from his amendment, because they are in arrears or within the last 12 months of their mortgage term, but I think he intends the remaining 143,000 to benefit from the largesse provided by this amendment. This is notwithstanding that the FCA estimates that 66,000 of them could, in fact, switch to active lenders because the active lenders in the market have changed their risk appetite, with the encouragement of the FCA, and they would now be able to remortgage. I do not believe that it is right to legislate to give preferential financial terms to those who choose not to take advantage of the opportunities available to them in the market.
The FCA’s last review found that around 30,000 of the remaining 47,000 would be unlikely to benefit from switching, because if they did find a deal it would cost them more than the interest rates that they are currently paying. High-risk borrowers do not get the best rates in the market, however much they might wish to. Amendment 197 would give these borrowers a rate that did not reflect the market for them, and I do not believe that it is fair to give them a special advantage by legislating for them.
The FCA has proposed some practical steps to assist the remaining population, but it does not propose anything like that which is contained in Amendment 197. That is not surprising because the LSE in its earlier, independent study—I have yet to see the study that the noble Lord, Lord Sharkey, referred to—concluded that market interventions were not justified and could cause markets harms.
We all have sympathy for those stuck with debt that they struggle to afford, but the problem is not confined to mortgage prisoners, and it is just not fair to single out this group of problem borrowers for special treatment. It is also an extraordinary departure from regulatory norms. The FCA does not tell lenders to whom they must lend money; that is not how regulation works. Under this amendment, the FCA would be telling lenders what their risk appetite should be, which raises big issues of moral hazard and fails to deal with the prudential consequences in terms of capital, on which the PRA is the arbiter.
Furthermore, the FCA is required to set interest rate caps, but only by reference to LTVs. This ignores the other key driver of interest rates—namely, the credit risk of the borrower. Whatever rate the FCA comes up with, it will be the wrong answer for some borrowers, and it would be plainly unfair if the FCA set the rate assuming high credit quality, because that is very likely to be at odds with the facts. In addition, requiring the standard variable rates to be no more than two percentage points above base rate ignores any evidence about the correct uplift for the particular type of loan and borrower characteristics, which can produce outcomes that do not reflect objective market realities. I hope that the noble Lord, Lord Sharkey, does not pursue this amendment, as he did in the 2021 Bill; it really does not make sense.
Lord Naseby (Con)
My Lords, I take issue with my noble friend, as I have spent most of my political life involved in housing. We have a situation in the country, which is relevant to this amendment, of huge pressure on local authorities to help families who are homeless. The numbers are going up every month at the moment, and this amendment would at least ensure provision for a small section of society—possibly younger people or single-parent families—who find themselves in a situation that is nothing to do with their own original arrangement with the mortgage lender. It is entirely appropriate for our society to say that there is a means of helping them in a transitory manner to get them settled.
The most worrying aspect is in proposed new paragraph (b), which the noble Lord highlighted. This is not a new problem but a growing one, with unregulated entities on the fringe of the mortgage market. Any of us who has done any work in this area knows that it is quite a difficult area to control, but the FCA has not got a handle on it yet and it needs to.
I am not going to say any more, but I very much hope that my noble friend on the Front Bench will take this issue away, think about it and recognise that, if we do not take action, the local authorities where these people live will have even more pressure on them to find a home for the relevant family.
Baroness Bowles of Berkhamsted (LD)
My Lords, I rise to say a word in support of my noble friend Lord Sharkey. There are some more generalised and wider issues around this problem. We have the situation quite often—in fact, it is perhaps the norm nowadays—that whoever extends credit, whether for a mortgage or another thing, is not necessarily the same organisation that ends up holding it later on. It may be securitised, sliced, diced and sold on, or it may be sold on to a vulture fund because they are in trouble. The same sort of thing has happened with student loans, which have essentially been sold to vulture companies.
This raises the issue of what the Government’s terms are when they are doing the selling. I fully understand that they say they have to get the best value for the taxpayer, or whatever it is, but you cannot have value for the taxpayer at the cost of usury on a minority, and that is the situation that has arisen. It could impact on some with student loans, if the pressure to pay is different from how it was when the loans were elsewhere.
I have two questions. First, what are the Government going to do along the lines outlined by my noble friend to assist mortgage prisoners? More generally, what are they going to do when looking at mortgage terms that allow it to be sold on to anybody without any safeguards and other types of selling on, whether in distress or otherwise, that likewise essentially dispense with any kind of consumer credit or similar kinds of protections?
I am sure the Minister will recall that when we were talking about bounce-back loans and we had to dispense with some consumer credit protections, I warned that we might get bad behaviour as a consequence. This is part of the same picture and why we have such protections there in the first place, yet nowadays they are being seriously circumvented.
Lord Tunnicliffe (Lab)
My Lords, I do not come to this debate with a predetermined position but to listen and take a view after we have looked at the circumstances and listened to the Minister’s response. I would value a copy of the report that the noble Lord, Lord Sharkey, spoke about. I have a lot of sympathy for these individuals and note that their problems are undoubtedly exacerbated by—I do not know how to describe it—the Truss impact on loan rates in the UK, which must fall particularly heavily on those individuals. I await the Minister’s response.
Lord Harlech (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment, and all noble Lords for their contributions.
The Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and the Treasury has already worked extensively with regulators and industry to act where possible to support borrowers. For example, we have worked with the FCA to implement changes to its mortgage lending rules, removing the regulatory barrier that prevented some customers, who otherwise may have been able to switch, accessing new products.
However, we do not believe there are further practical and proportionate universal options than those already taken to reduce the rates paid by these consumers. Extensive work has been done to look into this issue, partly as a result of prior interest from this House, which has emphasised the complex and varied circumstances that consumers are in. Specifically, following commitments made during the passage of the Financial Services Act 2021, the Government worked with the FCA to conduct a report into mortgage prisoners, which was completed and laid before Parliament in November 2021. This report found that the vast majority of those with the 195,000 mortgages held by inactive firms are not mortgage prisoners, as they are already paying competitive rates for their circumstances or they would be able to switch if they took action to do so—if, of course, they met the risk appetite of active lenders, a point raised by my noble friend Lady Noakes. Others had different factors that might prevent them being able to switch, such as being close to the end of their mortgage term or having an account in arrears. The report found that only 47,000 were truly mortgage prisoners—that is, customers who are up to date with their mortgage payments and unable to switch to a new mortgage deal, but who could potentially benefit from lower rates if they were able to switch.
While I understand the difficulty that many of these customers are facing, capping the standard variable rates charged on mortgages with inactive lenders to help this limited group of customers would have significant implications for the wider mortgage market which cannot be ignored. Any action we take must also be fair to other borrowers in the active market, particularly those with similar characteristics and paying similar rates, who may be unable to access fixed-rate deals.
A cap for mortgage prisoners would therefore create an arbitrary division between one set of consumers and another. Capping rates would also restrict lenders’ ability to vary rates in line with market conditions—a key part of responsible lending. This is a material risk, which, as Ministers set out during the passage of the Financial Services Act 2021, could have financial stability implications. Those concerns were also raised by the London School of Economics in its November 2020 report on mortgage prisoners, which argued against the introduction of a standard variable rate cap. In view of these risks and the proportionate steps that the Government and the FCA have already taken to support mortgage prisoners, it is clear that an SVR cap is not an appropriate solution.
However, borrowers who have switched have seen significant savings. The FCA’s review found that take-up was affected by consumer inertia and limited lender risk appetite. Some 140,000 letters were sent to borrowers about the rule change, which resulted in only 700 calls to brokers.
The noble Lord, Lord Sharkey, raised the new report from the London School of Economics and Martin Lewis. The Government will of course carefully consider the proposals put forward in this report. I note that it recommends free, comprehensive financial advice for all, but I would like to provide reassurance that the Government are committed to helping people in financial difficulty. We recognise the important role that debt advice providers play in assisting people, including mortgage prisoners, who are in problem debt, especially with the increasing cost of living pressures that were raised by the noble Baroness, Lady Bennett.
This is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to more than £90 million this financial year. Furthermore, the Government have made a number of interventions, as a result of the financial crisis, to protect the economy and ordinary savers and businesses from the negative impacts of economic and financial instability. These include the interventions in Northern Rock and Bradford & Bingley, with their loan and mortgage assets ultimately held in the government-owned company UK Asset Resolution. It is right that the Government seek to achieve value for money for taxpayers as we exit the interventions made as a result of the financial crisis. The proceeds from these sales are not hypothecated and go towards supporting wider public finances.
The noble Baroness, Lady Bowles, sought to draw out the wider case of the Government selling on. I can say only that UK Asset Resolution sales met or exceeded best practice for customer protections. Firms had to agree to robust protections before their bids were considered. Inactive firms have and use a range of forbearance options for borrowers in payment difficulty, and many borrowers with inactive firms pay competitive rates.
However, the Government are consistently committed to looking for practical and proportionate options where they will deliver genuine benefits for affected mortgage borrowers, and where interventions are fair to borrowers in the active market and to taxpayers. In light of the request, we will be happy to facilitate a meeting with Treasury officials before Report. We will co-ordinate with Members’ offices to agree a time and place suitable for everyone.
While it is important that we do not create false hope, the Government will carefully consider the proposals from the LSE/Martin Lewis report. In light of this, I ask the noble Lord to withdraw this amendment.
Lord Sharkey (LD)
I thank all noble Lords who spoke in this brief debate. There was a sense of déjà vu in all this. I recognise the arguments of the noble Baroness, Lady Noakes, because it is not so long since we heard them last time. It would be indelicate of me to remind the Committee that, having heard all those arguments last time around, and mine, we voted fairly massively in favour of the amendment in front of us again today.
As I said in my opening remarks, at the moment this is not about the amendment as it is down on the page. This is a probing amendment to make sure that the initiative of Martin Lewis, the LSE and the APPG is taken seriously by the Government. I am grateful for the Minister’s promise—if that is what it was—to arrange a meeting with the APPG and other interested parties. It would be wrong if, after all this work and effort, we were simply to get a note from the Treasury passed under the door saying, “No, it doesn’t work”. We want an interactive process to discuss the proposals that Martin Lewis and the APPG are putting forward. I do not think the Minister talked about timing, but we need to do that urgently and before Report.
Baroness Noakes
“Financial Ombudsman Service
(1) FSMA 2000 is amended as follows.(2) After section 229 insert—“229A Power of FCA to require Financial Ombudsman Service to refrain from specified action (1) Where the first, second and third conditions are met, the FCA may give a direction under this section to the Financial Ombudsman Service.(2) The first condition is that the Financial Ombudsman Service is proposing to exercise any of its powers in relation to the determination of a complaint.(3) The second condition is that the FCA is of the opinion that the exercise of the power in the manner proposed may have implications beyond the specifics of the complaint in question.(4) The third condition is that the FCA is of the opinion that the giving of the direction is necessary in order to avoid the possible consequence described in subsection (3).(5) A direction under this section is a direction requiring the Financial Ombudsman Service not to exercise the power or not to exercise it in a specified manner.(6) The FCA must consult the Financial Ombudsman Service before giving a direction under this section.”(3) In paragraph 15(1) of Schedule 17 (fees) after “respondent” insert “or relevant party”.”Member’s explanatory statement
This amendment gives power to the FCA to overrule a decision of the FOS where this would have implications which would affect the FCA’s ability to regulate effectively and to allow the FOS to make persons other than the complainant make a payment towards the costs of a case.
Baroness Noakes (Con)
My Lords, this amendment concerns the Financial Ombudsman Service. It is in fact two amendments in one; I should have separated them. The amendments were suggested by UK Finance and I will speak to each leg separately.
The first two subsections of proposed new Section 229A of FSMA, which my amendment would insert, would establish that, in certain circumstances, the FCA can direct the FOS in a particular complaint determination. I should say that I welcome Clause 38, which will set up a new duty of co-operation and consultation between the FCA, the FOS and the Financial Services Compensation Scheme. It was curious that FSMA provided for co-operation and consultation for the FCA and the PRA but the FOS was left out. In practice, I understand that Clause 38 would do little more than formalise what has already been happening in practice as part of the FOS’s wider implications framework, although that is entirely voluntary and Clause 38 would make it mandatory.
In the past, there have been problems with regulated firms having acted in a way that they believed was wholly in accordance with the FCA rulebook, including the principles that should guide how firms act. Firms believed that their actions were in accordance with the FCA’s expectations as well, although those are notoriously hard to pin down. Then, following a complaint, the FOS took a different view. As we know, the FOS is required to determine each complaint individually and makes its determinations using the FSMA formula of what is fair and reasonable in the circumstances of the individual complaint. That can and does result in outcomes that are, at best, frustrating for the firms involved when they believe that they have been doing exactly what was expected of them. A particular source of concern has been fraud cases, where the FOS has often gone beyond the requirements of the banking protocol, which was supposed to set out agreed expectations of what banks need to do in relation to suspicious transactions.
In addition, the FCA handbook requires firms to apply the outcome of FOS determinations to future complaints, so individual FOS decisions in effect become precedents, even though they were determined on the facts of individual cases. Another frustration can be that FOS decisions are not always internally coherent, so a confusing pattern of precedents can be created. In effect, a parallel rulebook grows up, but one created out of specific cases without underlying principles—certainly without any underlying principles that have been consulted on.
I think it fair to say that, although the financial services sector values the fact that the FOS represents a low-cost dispute-resolution service, it has for some time had concerns about how it operates and how its decisions become quasi-law. These concerns are now amplified, with the advent of the new consumer duty, which rests on the principle of delivering good outcomes for consumers. This adds a layer of complexity and uncertainty into an already challenging environment. There are concerns about precisely what firms are expected to do in the case of closed products and whether new vectors are being opened up for claims management companies. There will be an ongoing tension between the consumer principle, which is not intended to operate at the level of individual consumers, and the FOS, which is unambiguously focused on individual cases.
My amendment does not give the FCA an unconstrained ability to override the FOS; it is drafted to apply only where there are implications beyond the specifics of the particular complaint. The PRA has long had the power to overrule the FCA where it thinks it will have an adverse impact, as specified in Section 31 of FSMA. Similarly, the banking reform Act of 2013 gave powers to the Bank of England, the PRA and the FCA to intervene against the payment services regulator. It is genuinely puzzling that a similar power in relation to the FOS was not granted to the FCA when it was set up, or to the FSA under FSMA. This is a modest provision designed to ensure that the activities covered by both the FOS and the FCA are dealt with in a coherent way.
The second leg of my amendment is on a slightly different subject: it is a minor amendment to paragraph 15 of Schedule 17 to FSMA. Under this paragraph, the financial services firms complained about pay fees to the FOS—there is no problem with that. My amendment adds “or relevant party” to this, so that firms or individuals other than the firm complained about could be required to pay fees. This is obviously not intended to enable the FOS to charge fees to complainants, which I am sure it would never do, even if it had the power. Instead, it is intended to give some flexibility to the FOS so that, for example, claims management companies might be asked to pay fees if they have been responsible for unmeritorious complaints. That in turn could help disrupt the business model of the worst offenders in this parasitic industry. I hope this will be seen as a modest change that will give greater flexibility to the FOS. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I was waiting to hear what the noble Baroness, Lady Noakes, said on this amendment. I am afraid I cannot support her this time, although we agree on a lot of things. I accept that this is a hard call. The way I look at it, this goes back to our discussion about whether you follow rigid rules or you want people to think about what they are doing. Ultimately, there has to be a desire for people operating in financial services to think about what they are doing in all circumstances. Therefore, I see that as a proper override.
What has been portrayed as the ultra-right wing libertarian approach of just doing things and then being for the high jump if you get it wrong—that is a caricature, I accept—relies on your having done what is right in principle. Some things will not be fair if you merely follow a rigid set of rules. Therefore, it is right that there is a “fair and reasonable in the circumstances” backstop. It is right that if such things happen, there should be discussions about what it means for the generality.
However, it is not right for the FCA to have an automatic override and say, “We’re right, and our rigid rules derived from principles”—because they abandon principles once we have rules—“can never be wrong”, and that people should not have been thinking actively about these things, particularly while they were dealing with customers and individuals. I understand where the noble Baroness is coming from, but I cannot support this. I plug again that we should expect that extra level of thought. This again goes to the heart of having a duty of care. It is the same argument. A duty of care does not mean, “I just do what I’ve always done and got away with” or “I just do what everybody else appears to have done, turn the handle and don’t think about it.” It is a fundamental principle of caring for the consumer that at least the ombudsman can continue with. I heartily think that we need a dash more of it in the Financial Conduct Authority.
Viscount Trenchard (Con)
My Lords, I support my noble friend Lady Noakes in her amendment. As she has explained well, Clause 38 requires the FCA, the FOS and the FSCS to co-operate and to consult with each other in exercising their statutory functions. However, it is important that FOS decisions with wider implications do not diverge from FCA rules, or there may be unintended consequences, and predictability and consistency may be negatively affected.
As my noble friend just said, this does not mean that the FCA or the FOS should act without thinking very carefully about what they are doing. Her amendment takes account of that and would be likely to encourage real thought about the consequences of making a particular decision in any case. Besides, Parliament never intended the FOS to be a quasi-regulator. UK Finance has recommended that the FCA should be given a power to overrule a decision by the FOS where it believes that the decision could have wider and perhaps unforeseen implications. My noble friend’s amendment would deal effectively with this potential problem.
Of course, the granting of additional powers to the FCA strengthens further the case that the FCA must be properly accountable to Parliament, and I regret that I have not yet heard my noble friend the Minister acknowledge that, as drafted, the Bill does not provide adequate arrangements for this. I firmly believe that a properly resourced joint committee is how to achieve that.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government agree that, where there are wider implications, it is critical that the bodies within the financial services regulatory framework, including the FCA and the FOS, co-operate effectively.
As my noble friend Lady Noakes noted, that is why Clause 38 of this Bill introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues which have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, FOS and FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications.
As my noble friend also noted, these organisations already co-operate on a voluntary basis through the existing wider implications framework. The voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.
Baroness Noakes (Con)
My Lords, I thank my noble friend Lord Trenchard for his support; I was not expecting the noble Baroness, Lady Bowles, to support my amendment, because she and I have discussed the FOS in the past.
There is a potential problem in the relationship between the FCA and the FOS with the introduction of the new consumer duty. I think that is particularly concerning people: we are going a little into the unknown. We know that if regulatory pressures get too difficult for firms, their natural response is, ultimately, to leave or severely curtail the elements of the market that they are prepared to operate in. We need look only at the availability of advised investment to see what can be the consequence of heavy-handed regulatory action. If the new consumer duty becomes a nightmare, with individual cases being settled on particular circumstances but then having to be read across because of the FCA handbook, which requires cases to then be followed by firms, we could end up with a very confused understanding of what the consumer duty involves. That was the main burden of my tabling the amendment, but we may just need to see what happens when the consumer duty operates in practice to see whether those harms genuinely emerge.
As for the second leg of my amendment, which should have been a separate amendment, I was very interested to hear what my noble friend said about the case having been made. What I am not quite clear about, which she may be able to clarify, is on what timescale she believes the Government will be looking at this, because not many financial services Bills come along to get things done in.
Baroness Penn (Con)
I will have to write to the Committee to clarify the timescale for the noble Baroness.
Baroness Noakes (Con)
My Lords, I look forward to that letter with great anticipation. With that, I beg leave to withdraw the amendment.
Lord Vaux of Harrowden
Member’s explanatory statement
This amendment would remove the limitation that APP mandatory reimbursement is limited to APP scams made via the Faster Payments system, so that all APP scams must be covered regardless of payment system used.
Lord Vaux of Harrowden (CB)
My Lords, it is an unexpected feeling to be zapping through groups at some speed. In moving my Amendment 202, I will speak to the various other related amendments in my name in this group. I am very grateful to the noble Baroness, Lady Bowles, for her support.
I greatly welcome the introduction of the requirement in Clause 68 to improve the current voluntary arrangements under the contingent reimbursement model, or CRM, for the reimbursement of losses resulting from authorised push payment, or APP, fraud. My amendments attempt to apply some of what we learned during the inquiry by the Fraud Act 2006 and Digital Fraud Committee, which reported at the end of last year, but I should stress that these are my amendments, not those of the committee.
The committee’s inquiry heard that the current voluntary system has led to a wide range of inconsistent outcomes for victims. In fact, the very process of claiming can add to the trauma for victims, especially when they are not applied consistently or fairly. At one extreme we have TSB, which has chosen to reimburse all fraud victims; at the other, we heard of banks that, because they are not signed up to the CRM at all and do not reimburse victims, have no incentive to try to prevent fraud going through their systems. We heard that some banks are now seen by fraudsters as a soft touch.
Levels of reimbursement vary widely even within the CRM and the scheme does not publish league tables, so consumers cannot see which banks are more likely to reimburse and which are not. That lack of consistency and of clarity over the circumstances in which reimbursement will be made leads to greater uncertainty and trauma for victims. Importantly, the lack of consistency also leads to different levels of incentivisation for banks to take the steps necessary to protect their customers. Any new mandatory scheme needs to address that and make things fairer for victims, but at the same time it needs to be balanced against the risk of unintended consequences. That is what my amendments try to achieve and I turn to them specifically.
As currently drafted, the rules will apply only in respect of fraud carried out using the Faster Payments scheme. I am sure the Minister will explain that this is because this will cover the majority of frauds by number. She is quite right; that is true. However, other payment methods are often used by fraudsters, such as CHAPS. Although smaller in volume, those other payment methods often involve larger, more life-changing sums. CHAPS is used for large payments, such as house purchases. Many frauds involve overseas payments.
Amendment 202, together with Amendment 207, would widen the scope of the reimbursement provisions so that all payments are covered, regardless of the method. I am sure the Minister will tell us that the Bill does not prevent the scheme being widened to other payment methods, but I am concerned by this statement on the PSR website:
“We are working with Pay.UK—the operator of the Faster Payments system which is how APP scams are carried out”.
That shows no recognition that the problem is wider than just Faster Payments. APP scams are carried out using all payment methods, not just Faster Payments. I wonder whether the real reason for restricting the changes to Faster Payments is because it allows the PSR to subcontract its responsibilities under Clause 68 to Pay.UK, the operator of the Faster Payments system. The Minister will be aware that concerns have been raised by the Treasury Select Committee in the other place about this approach. What are her thoughts on the PSR subcontracting its responsibilities to Pay.UK?
The Bill leaves the details of the reimbursement scheme entirely to the PSR, so Amendment 204 sets out some matters that it should consider when creating the new compulsory requirement. First, the key problem with the current situation is the lack of clarity for victims in how reimbursement decisions are made and the inconsistency of those decisions. Proposed new paragraph (a) of Amendment 204 therefore says that the PSR must consider
“how to ensure that the parameters used to determine whether or not reimbursement should be made are transparent and applied consistently”.
If that does not happen, we will not have moved much further forward, so that key point should be stated in the Bill.
I turn to proposed new paragraph (b) of Amendment 204. I have long felt that the bank that is more in the wrong in a fraud situation is the receiving bank—the one that, in effect, processed the stolen money on behalf of the fraudster. Although it is not in the Bill, the PSR apparently intends that the liability for reimbursement should be split 50:50 between the paying and receiving banks, with a mechanism to change that split in certain circumstances. I am content with that proposed approach as a starting point. Proposed new paragraph (b) of Amendment 204 simply puts in the Bill that the split must be considered but, as we move forward, the PSR and the industry should look to refine this. Importantly, discussion of how to split the reimbursement between the banks must not make things more difficult for victims.
Proposed new paragraph (c) of Amendment 204 says that the PSR should consider how
“mandatory reimbursement is likely to affect the behaviour of consumers”.
Our fraud committee deliberated long and hard on whether to recommend blanket reimbursement; in fact, we were criticised for not doing so. We recognised that there is a case for mandatory blanket reimbursement but concluded that such a policy could fall foul of moral hazard and lead to increased levels of fraud, including, potentially, directly to new avenues for APP reimbursement fraud. Our recommendation therefore was that this needed to be explored further and a solution should be found that creates a level playing field for all consumers.
I do not often disagree with the noble Baroness, Lady Kramer, but I am a little concerned by her Amendment 203, which says that
“reimbursement … cannot be refused on the basis that a victim … ought to have known that the payment order was executed subsequent to fraud or dishonesty.”
If someone really should have known but went ahead anyway, this feels reckless to me. We need people to take some basic level of precaution and we need to help them do that.
Proposed new paragraph (c) of my Amendment 204 tries to address this difficult area by saying that the PSR must consider how the reimbursement policy might alter the behaviour of potential victims. If the effect is that people stop taking any care to avoid fraud, because they are going to be reimbursed anyway, the policy might make it easier for the fraudsters; it might increase fraud, which would be an extremely undesirable unintended consequence. At the same time, we need to move away from victim blaming and ensure that, unless consumers have acted irresponsibly, they are reimbursed. There is a delicate balance here and it is something that the PSR should consider carefully and keep under review.
Finally, proposed new paragraph (d) of Amendment 204 says that the PSR must consider how appeals can be made. I hope this is self-explanatory.
Amendments 205 and 206 attempt to bring some transparency to the process. Amendment 205 would enable consumers to see which banks are most susceptible to fraud; in other words, which are doing less to protect their customers in the first place and which are better at reimbursing customers who become victims. This is important. If we want to incentivise banks to do the right thing and behave well, shedding daylight on how they perform is the best way to ensure it. Customers will be able to vote with their feet.
There is also a danger that banks might react to mandatory reimbursement by changing their behaviour in a way that disadvantages vulnerable consumers—deciding that it is too risky or expensive to provide services to those seen as more vulnerable to fraud, if the reimbursement process is seen as too one-sided. Later today, we shall talk about PEPs, which are a good example of how the banks are reacting to overzealous regulation.
Similarly, we need to avoid a situation in which the reimbursement process puts off new entrants into the system or innovation in payments. Amendment 206 requires the PSR to keep the situation under review and to report annually on the impact that the requirement is having, including whether it is causing any change in the behaviour of the payment service providers. Fraud is constantly changing—fraudsters are constantly finding new ways to get around rules and find victims—so the amendment requires the PSR to make changes to the requirement as it considers necessary, taking account of the actual impacts to keep protecting consumers better.
I will finish with a couple of general points. First, it is critical that people are properly and fully informed and educated about the changes. Clause 68(3)(b) mentions that, which is welcome, but in relation only to the draft requirement, not the final requirement. UK Finance and others have raised concerns about whether the full six-month timeframe is sufficient to ensure that that information and education process happens.
Lord Sharkey (LD)
My Lords, I will speak briefly to Amendment 203 in the name of my noble friend Lady Kramer, who cannot be with us today. She is making good progress but is still recovering from surgery. On her behalf, I gently disagree with the noble Lord, Lord Vaux. The amendment is straightforward: it would simply prevent financial services from using the “You should have known it was fraud” excuse to deny restitution. In effect, in many sectors this allows the banks to decide whether to refund.
It seems to me that it is impossible to design a fair test for “You should have known” when talking of retail customers, especially vulnerable ones. How on earth do we devise a fair test under those circumstances? It is true that most consumers will not have the ability to challenge a bank’s classification of an event as “You should have known”, because they do not have the resource or the means to do so. Effectively, without Amendment 203, banks can decide for themselves which cases to allow, and that does not seem to be a good idea.
Lord Naseby (Con)
My Lords, I will speak broadly in support of these amendments, starting with Amendment 202. The incidence of fraud is growing almost daily. It is a huge worry and, unfortunately, it rests on His Majesty’s Government to try to find an answer to it. I accept that it is not an easy problem, but we cannot shy away from it. Over lunch today I was having some discussions with Transparency Task Force, a certified social enterprise. Certainly, some of the evidence it has is quite extraordinary and deeply worrying. I do not know whether there are other types of scams not covered in the Bill. I have not given any notice to my noble friend on that, but we would certainly like an answer.
On Amendment 203 on qualifying cases, I have spoken to only about half a dozen people who have had scams, but none of them knew anything about who was behind it. It is not very likely, is it? Having watched “The Gold” on television on Sunday, I can see how creative some people can be. It does not seem realistic, which is why Amendment 203 is important.
I have had a chat with members of the All-Party Group on Personal Banking and Fairer Financial Services. The only way to get a grip of these problems is to know what is happening on the ground. The noble Lord, Lord Vaux, asked for a six-monthly report, which is quite right. A quarterly report would probably be better, though it might be too tedious. At this point in time, His Majesty’s Government do not have a handle on the rate of growth, which is deeply worrying. I do not know whether these amendments are exactly right, but the problem is there, and it is the responsibility of His Majesty’s Government to get a grip on them.
Baroness Bennett of Manor Castle (GP)
My Lords, like the noble Lord, Lord Naseby, I broadly support this group of amendments. I particularly want to address Amendment 205 in the names of the noble Lord, Lord Vaux, and the noble Baroness, Lady Bowles.
As the noble Lord, Lord Vaux, said, it is worth highlighting uncertainty and trauma. We have a society in which every time people pick up their phones or emails to look at a message, many of them think, “I’m worried. Is this right or wrong? Is this official-looking email something I should click or not?” That is where we are. These amendments seek to address some of this, although even with them we would not get far enough. In the other place, the Treasury Select Committee last month expressed concerns about the Payment Systems Regulator dealing with push payment scams regarding the banks handing out the money and controlling the Pay.UK body that would be doing that. There is a concern that this needs to be seen as fair and rapid; to take away some of that fear is the key issue.
Amendment 205 is particularly interesting because we are talking here about a league table for how fairly banks treat victims of fraud. I could not help thinking of the comparison with schools. We have intensely scrutinised and detailed league tables for schools; surely we can manage similar league tables for banks. We had a lot of debate on earlier days in Committee on whether we wish to encourage competitiveness. But however much we might debate competitiveness, surely we all agree that competition between banks to see who is fairest towards victims of crime would be good.
This may not go far enough, but there are amendments here that the Government should certainly consider, particularly Amendment 205 concerning the league table.
Baroness Bowles of Berkhamsted (LD)
My Lords, I signed all the amendments in the name of the noble Lord, Lord Vaux. We were both members of the committee looking at the Fraud Act 2006 and digital fraud. Although these amendments are not exactly what we recommended, they fairly represent the mood after what we had heard. We could not make them all exact recommendations. Some of them are difficult; there is difficulty between my noble friend Lady Kramer’s amendment and this set of amendments. I did not weigh them up beforehand, but it will be very difficult if you just allow a broad, “Well, you ought to have known” provision for the bank.
It is not a question of who you are and what you know. Some pretty intelligent people have been defrauded and you can be caught at a bad moment, but how do you prove that it was a bad moment, if you are being scammed? Say the scammer claims that a child is in trouble and says, “Send money now, mum.” Every now and then, the scammer is going to be lucky, and the message is going to arrive to a mum whose kid is off somewhere doing something, and it will look genuine. You might have been very worried about the circumstance in the first place. How do you prove that kind of thing, if the provision is going to assume that you are a sensible, intelligent person and you ought to have known? How do you discriminate against those who are not intelligent and sensible and who are vulnerable for whatever reason?
There is a lot to be said for my noble friend’s amendment, but at the same time there is the issue, which we discussed in the committee, whereby you do not want everybody to think that it is all right and that they are covered. Do you need some kind of hurdle? How do you encourage people? We need to see whether we can in some way nuance that, to make it clear that we are protecting the most vulnerable, including those with a circumstance that they might find themselves in, even though they would not have been vulnerable at other times—but then you do not want to make it even easier for scammers. People can think that it is a victimless crime, but it is not a victimless crime at all. Even if people get compensation, collectively we are all going to pay for it.
We also talked in the committee about why the proposal is just for Faster Payments. Yes, it is an easy target, because of the instantaneous nature of it. But what if, when you go into a bank to make a transfer by CHAPS—and a mortgage is the obvious kind of payment in that regard—somebody comes in with you and coerces you? What steps are taken at the counter? I have been in with someone who was doing a big CHAPS transfer for the purpose of a mortgage—it happened to be my son—and nobody questioned what I was doing there. There may have been a familial resemblance, and they may have thought that it was okay, but there was no one saying, “Would you mind just stepping aside?” No one asked him who I was, what the relationship was and why I was with him. It would be good to have some more checks to make sure what is happening, checking that the money is going to a genuine solicitor’s account and those kinds of thing. To have other payment methods included is not unreasonable, although I accept that these are big chunks of money. We also discussed in the committee the culpability of the receiving banks, if they have dodgy accounts that they have not checked out thoroughly, and have not joined up two systems to check the nature of the account and whether it is right.
As we go forward, it would be nice if we could agree that there was some kind of flavour of these amendments that the Government could bring forward so that we do not have to do anything on Report. Perhaps there could be assurances that that kind of balance, and the sorts of things that have been said in the report from the committee, are taken on board. A lot of work went into that issue. There are many ways in which we can do things—it does not always have to be through legislation—but all these points are very valid ones for what needs to be done. I think that is probably all that I need to say, but I recommend that the sense of these amendments is taken forward.
Lord Tunnicliffe (Lab)
My Lords, this group of amendments has a general direction which may be supported. It would be much better if the Government were to come forward with proposals in that general direction and improve the situation.
I, too, however, feel that there is some moral hazard. The extent to which victims are compensated draws attention from the fact that this is serious crime which, as I understand it, is growing exponentially. I hope that in looking after victims, which I am broadly in favour of, we massively increase our efforts to prevent fraud in the first place. I do not have a simple solution to that, but it is my understanding that the relationship between a preventive resource in the police and the banks is, compared to the general application to prevent crime, disproportionately low. More resource has to be put into combating this frightening industry. There is a sense of almost moral decay that allows this virulent industry to continue to grow. I hope that, while responding to the concerns of victims, there is also feedback to the Government as a whole that we must find a way to get on top of this very unpleasant crime.
Baroness Penn (Con)
My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.
Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.
I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.
None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.
Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.
In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.
On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.
Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.
On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.
None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.
We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.
Lord Vaux of Harrowden (CB)
Can the Minister comment on the Treasury Select Committee’s recommendation on the PSR, effectively subcontracting its responsibilities to Pay.UK?
Baroness Penn (Con)
I apologise to the noble Lord; I did have an answer for him on that. The Bill is clear that the Payment Systems Regulator has the duty to act on mandatory reimbursement. The PSR has the relevant powers and expertise, as well as the appropriate discretion, to determine the most effective approach in that area.
Lord Vaux of Harrowden (CB)
I thank all noble Lords who have taken part in this short debate. I think the comments from the noble Lord, Lord Sharkey, set out the difficulty in finding the right balance to ensure that victims are not blamed and are reimbursed, unless they have really been irresponsible, versus the question of moral hazard and the issue of potentially making fraud worse. That will just have to be kept under review.
While I am reassured by a lot of what the Minister said and what the PSR has said publicly, the Government might want to think more seriously about Amendments 205 and 206 on transparency and review. The PSR may say that it will do a post-implementation review, but this has to be consistent and carry on happening, because fraud keeps on moving and changing. It is similar to the statistic that 85% of fraud, by value, is Faster Payments, but what we are doing now may change that. This will hopefully incentivise the banks to lock down the ability to carry out fraud over Faster Payments.
There is nothing specifically in here to prevent fraud, but we are providing an incentive to do that. Fraudsters are very good at moving, and if they move on to CHAPS or overseas payments—the Bill itself introduces stablecoins as a new method of payment—we can see that the situation will move. This has to be not just a one-off, post-implementation review; it has to happen regularly and be reported on. We must see which banks are doing better and which are doing worse. It is a question of not just who is reimbursing better but how many frauds they are suffering. If a bank is suffering greater levels of fraud, it is a clear sign that it is not taking as strong action to prevent it as other banks are. The only way to see that is for it to be reported on.
While I am unlikely to chase the other amendments, we might want to return on Report to Amendments 205 and 206 on transparency, reporting and review. With that, I beg leave to withdraw Amendment 202.
The Deputy Chairman of Committees (Baroness Bull) (CB)
My Lords, as Amendment 209 has not been moved, I cannot call Amendments 210 and 211.
Lord Sharkey
“Access to Sharia-compliant financial services including student finance
(1) Within six months of the passing of this Act, the Treasury must make provision by regulations to facilitate the availability of Sharia-compliant financial services in the United Kingdom, including availability to students who are eligible for the Government’s student finance provision of Sharia-compliant finance products for paying tuition fees and for student maintenance on equitable terms with students accessing the Government’s student finance provision.(2) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This is a probing amendment to allow debate on the progress towards provision of Sharia-compliant student funding.
Lord Sharkey (LD)
My Lords, Amendment 213 addresses the provision of sharia-compliant student finance, of which there is currently none. This matters because Islam forbids interest-bearing loans and that prohibition can be a barrier to our Muslim students going on to attend our universities.
This is not a new problem, nor the first time the issue has been raised in this House. The problem became clear in 2012 when tuition fees were significantly increased and it became worse when maintenance grants were replaced by maintenance loans. In 2014, the Government published a report on the consultation they had undertaken. It attracted 20,000 responses, a record at the time. The Government acknowledged that the lack of an alternative finance product to the conventional interest-bearing student loan was a matter of major concern to many Muslims.
The report also identified a solution: a takaful, a well-known and frequently used non-interest-bearing, sharia-compliant financial product. The Government explicitly supported the introduction of such a product. That was nine years ago, and we still have no takaful. In 2013, Prime Minister Cameron promised action. He said:
“Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan—simply because of their religion.”
But nothing has changed. There is still no available sharia-compliant student finance. In fact, it now looks further away than ever.
The Muslim community and parliamentarians in both Houses have continued to press. Last September, the right honourable Sir Stephen Timms wrote to the then Secretary of State for Education to ask whether delivering sharia-compliant student finance was still a government commitment. He got a reply saying that it was. Sir Stephen wrote again in October to the new Secretary of State, the right honourable Gillian Keegan MP, asking whether government policy had changed—there was quite a lot of change around at the time.
Ms Keegan confirmed that the provision of a sharia-compliant student finance product remained a government commitment and that the Government were considering whether and how the ASF could be delivered as part of the lifelong learning entitlement. She noted that the consultation on the LLE had concluded last May and promised to provide a further update on ASF as part of the Government’s response to that consultation.
The Government published their response to the LLE consultation last Tuesday. The whole response runs to 71 pages, yet ASF gets no mention in the document’s ministerial foreword and only two substantive paragraphs right at the end of the response. This does not seem a proportionate reaction, either to the gravity of the issue or to the overwhelming number of individual respondents who asked for sharia-compliant student finance, by far the largest group of respondents. The question about sharia-compliant student finance attracted 851 unique individual responses; the average number of unique individual responses to all the other questions in the consultation was 30.
The first substantive paragraph confirms the Government’s commitment to the ASF but says, without any explanation, that it will not be delivered with the 2025-26 launch of the LLE. The second paragraph says:
“The Government is procuring advice from experts in Islamic finance and will be working with the Student Loans Company … to better understand timescales for delivery of an ASF product under the LLE. Our aim is that learners will be able to access ASF as part of the LLE as soon as possible after 2025. An update on ASF will be provided by late 2023.”
This is miserable stuff. It makes it clear that, in the past nine years, there has been no serious thinking or planning for ASF. It does not explain why ASF has to be linked to the LLE at all or why it cannot be launched simultaneously with it. It also makes no hint of an apology to the Muslim community for condemning at least four more cohorts of Muslim students to choose between faith and education.
If we interpret the Government’s vague timings generously, the ASF will arrive in the academic year 2026-27. That is four academic years away and means an additional 16,000 qualified Muslim students not going on to university. It will have taken 16 years for the Government’s firm, clear and repeated commitment to be realised. The problem remains as it was 11 years ago. This is deeply unsatisfactory and obviously has gravely disadvantaged our Muslim community. It is easy to see how the Government’s inaction over such a serious issue over such a very long timescale could look like discrimination against our Muslim community, especially since the Government seem not to have engaged with the community or explained the very long delay and lack of a target date.
Before last Tuesday, Universities UK and 68 Muslim organisations and prominent individuals had written to the Minister, pressing for speedy action and a firm date for ASF. Since then, there has been widespread disappointment and dismay at the very long further delay and the continuing lack of a firm date. The Muslim Council of Britain, UUK, the CEO of Islamic Finance Guru, the NUS and others have all written to me expressing their disappointment at the Government’s response. It is deeply distressing and shameful that the Government, despite their firm promises, should continue to treat our Muslim community in this offhand, almost contemptuous way.
It is very hard to avoid the conclusion that the Government are making a fundamental error—moral, social and political—in putting Muslim students right at the back of the queue. Will the Minister talk to her colleagues in the Department for Education to ask them to arrange an urgent meeting with interested parliamentarians and Muslim community groups? This would allow explanation of the further delay and of the work programme, and an exploration of the possibility of setting an earlier and firmer date for the introduction of the ASF.
All this has gone on for far too long. I hope the Minister will be able to give a substantive and encouraging reply. I beg to move.
Baroness Sheehan (LD)
My Lords, I support my noble friend Lord Sharkey’s amendment. I should declare that, as a Muslim woman, I have a number of relatives who will be, and are being, affected by this. Not every Muslim feels unable to take out student loans as they are currently structured but there is a significant minority. It is usually women affected because they always come at the bottom of the list of who will be financed without a loan through private means. I urge the Minister, particularly given all the conversations we had last week about International Women’s Day, to consider this.
I will not detain the Committee long; my noble friend Lord Sharkey gave us chapter and verse on the Government’s position and prevarication on this issue, which, we are told, they have been able and willing to support for over a decade now. The Higher Education and Research Act 2017 allows the Government to introduce a student finance product consistent with Muslim beliefs regarding interest-bearing loans. However, as my noble friend said, the Government have yet to launch such a product. In February last year, as part of the conclusion of their review of post-18 education and funding, the Government said that they were still considering whether and how to deliver sharia-compliant alternative student finance and whether they would do so as part of the lifelong loan entitlement.
We have a situation where, not only are 18 and 19 year- old Muslims—predominantly girls—unable to access higher education but it now looks as though, with the LLE, they will not be able to access post-18 further education either. That will curtail their life chances, their ability to contribute to the life of this country and the financial contribution that they make to their families.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, who has highlighted the gender aspects of this debate, and the noble Lord, Lord Sharkey, who has been a consistent champion on this issue in your Lordships’ House. I wish to make a couple of comments additional to what has already been said, while offering support for this amendment to push the Government to take action.
It was Green Party conference at the weekend, and I found myself discussing again and again how the public, who once thought that when the Government announced something that meant it would happen, are increasingly aware of the legislative process, and even the role of your Lordships’ House, because it is taking so long between government announcements and something actually happening. That is true of the announcement of a bottle deposit scheme for England, but there has been an even longer stretch between the promise of sharia-compliant finance, particularly for student loans, and the delivery.
The last figures that I saw showed that 9% of higher education students in the UK were Muslim. Extending loans for lifelong learning into further education makes it very likely that the percentage of students affected by the lack of sharia-compliant loans will increase. It is not as though the Government have not been reminded of this again and again. I note, again, that it was in July 2021, during the passage of what became the Skills and Post-16 Education Act, that we debated this. We were promised, “Yes, it’s going to happen; it’ll come”, but, yet again, we have just had a report from the Government which shows that there has been no progress. That is simply not good enough.
We often debate in your Lordships’ House how to get trust in government and the system. One way is to deliver on your promises in a reasonable and timely manner, particularly the things that really should not be that difficult, of which sharia-compliant loans is a case in point.
Lord Carrington of Fulham (Con)
My Lords, I support the noble Lord, Lord Sharkey, in this. There is no question that there are a large number of Muslims, both students and others, who have the very strong belief that their religion forbids them from engaging in normal financial practices as recognised in the West. It is about time we did something about it; it has taken far too long to get to where we are now, and we need to find a solution, particularly for student finance, where it is urgently indeed.
I can entirely understand why there is a problem. I understand why His Majesty’s Treasury is finding it difficult to find a solution. I spent a considerable part of my banking career devising means of meeting the religious requirements of Muslim communities to access financial services, often in conjunction with the Islamic Development Bank. It is an extraordinarily complex business. There are many different ways of doing it, but one of the problems is that there is no universal agreement as to what is an acceptable form of finance under the sharia. That is partly because of the difficulties between the various types of Islam—Sunni or Shia—and the various interpretations within the various branches of Islam itself, which also impact the nature of the financial products that are capable of being used. Indeed, Islamic scholars, particularly in the Sunni version of Islam, cannot agree among themselves what is acceptable and what is not. All this leads to considerable problems in devising a universally acceptable product.
Of course, the additional problem that the Treasury will have is that there is considerable scepticism among the conventional financial markets, particularly the western ones, about the credibility of Islamic finance altogether. To put it bluntly, there is scepticism about whether it is not just a con. In some cases, it is: the market is full of rogues, charlatans and crooks who will try to put up products that do not, in fact, meet the sharia requirements. So there is no great agreement on what should be done.
Lord Tunnicliffe (Lab)
My Lords, there has been a series of powerful speeches. The Government really ought to react to this: either they believe what they have said they will do, or they do not. If they do believe in it, surely action could take place more quickly. The community concerned is now a very important part of our society, and it is crucial that we create an environment where its needs are taken seriously. It is particularly crucial that we do not create a situation where it is disadvantaged. I take the point about the gender issue, which is even more worrying, in many ways. I urge the Government to find some way of assuring us that they will act quickly.
Lord Harlech (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment on access to sharia-compliant financial services, including student finance. The UK is widely considered the leading western hub for Islamic finance. Institutions across the UK have been providing sharia-compliant retail and wholesale financial services for nearly 40 years, offering a range of products, including bank accounts, mortgages and insurance.
Last year, the Government expanded the scope of the alternative finance rules, which support equal treatment for sharia-compliant finance products, to include home-purchase plan providers and arrangements made through peer-to-peer platforms. This allowed for these products to be treated in the same way as conventional mortgages and loans for tax purposes, contributing to a level playing field for Islamic and conventional finance products. The Treasury is currently consulting on reform of the Consumer Credit Act, which will consider ways to make it easier to provide sharia-compliant consumer finance.
Within this context, the Government want to help ensure that higher education remains accessible to all those with the desire and ability to benefit from it. They remain committed to delivering an alternative student finance product compatible with Islamic finance principles and, more broadly, to ensuring equitable regulatory and tax treatment when compared to conventional finance. The Government legislated at the first opportunity to make a system of alternative student finance possible, taking the necessary powers in the Higher Education and Research Act 2017. However, a range of complex policy, legal and operational issues need to be resolved before a sharia-compatible product can be launched.
When noble Lords discussed this matter during consideration of the Financial Services Act 2021, my noble friend Lord True stated that the Government would provide an update alongside the Government’s response to the post-18 education funding review. As a result of that review, the Government have been progressing plans for introducing a lifelong loan entitlement, which will provide an individual entitlement equivalent to four years of post-18 education. This will significantly change the ways that students can access learning and financial support.
It is important that an alternative student finance product mirrors the mainstream student finance offer; therefore, it cannot be delivered until the LLE regulations and delivery specification are finalised. The Department for Education consulted on the LLE in February 2022 and sought views on barriers that learners might face in accessing their entitlement, including consideration of an ASF product. The Government’s response to that consultation was published last week; it provided an update on ASF and set out the Government’s aim to deliver an alternative student finance product as soon as possible after 2025.
Several Members, including the noble Lords, Lord Sharkey and Lord Tunnicliffe, and the noble Baronesses, Lady Sheehan and Lady Bennett, spoke about timespans—in particular, harking back to 2013. In September 2014, the Government published their consultation on a potential model that could form the basis of a new student finance product. The Government signalled in the consultation response that they would need to take new primary powers to enable the Secretary of State for Education to make alternative payments in addition to grants and loans. These were secured in the Higher Education and Research Act, which received Royal Assent in April 2017. Specialist consultants were appointed in October 2017 to provide advice on the range of issues that would need to be resolved for a new system of alternative student finance to be implemented.
Work has started to assess how the Department for Education can ultimately deliver an ASF product alongside the LLE. Our aim is that students will be able to access alternative student finance as soon as possible after 2025. The reason for that timespan is that a range of complex policy, legal and system issues will need to be resolved to launch an alternative student finance product. Most importantly, that includes procuring advice from experts in Islamic finance, who will be working with the Student Loans Company to better understand timescales for delivery of such a product. The Government are introducing the LLE, which will significantly change the ways students can access learning and financial support. The scale and complexity here should not be underestimated. The DfE is trying to replicate a system of student finance that delivers the same results as now and whereby students do not receive any advantage, or suffer any disadvantage, through applying for alternative student finance.
Furthermore, the ASF product will need to mirror the mainstream student finance offer to ensure that access to finance and the repayments expected from borrowers are the same. From the 2025-26 academic year, new students studying at level 6 seeking government financial support will do so using the Student Loans Company’s systems under new LLE regulations. The LLE regulations and delivery specification therefore need to be finalised before an ASF equivalent can be delivered. Finally, every “touch point” for students at the SLC—that is, marketing and information materials, application forms, online portals and correspondence—will need to be reviewed and modified to ensure sharia compliance.
The Department for Education is procuring advice from experts in Islamic finance to support delivery and planning of this product, and launched an expression of interest advertisement, which closed on 20 February, to understand the market capability to deliver this advice. The department is currently considering responses and next steps. The noble Lord, Lord Sharkey, raised the takaful. The advice will support the next phase of delivery of alternative student finance on the detailed design of an ASF takaful product, as part of the LLE, and on the delivery of ASF by the Student Loans Company.
In response to the request for a meeting, this is obviously something that will need to be done in joint consideration with the Department for Education. I cannot make promises for both departments but I will take the request back. As per the request in the previous group, I note that this would ideally be before Report.
I hope I have reassured noble Lords that the Government are committed to ensuring that sharia-compliant financial products are accessible. I therefore request that the noble Lord withdraws his amendment.
Lord Sharkey (LD)
I regret to say that the noble Lord has not convinced me at all that any progress is likely to be made and has not really explained why we are in the position we are in. I have talked to Islamic finance experts quite frequently over the last 11 years that this has been going on. They have always told me that it should take up to 18 months or so to have some kind of ASF product available on the market. They point to the Islamic version of the Help to Buy scheme, which I think the Minister mentioned. From a standing start, that was sold in the marketplace 18 months later. If that can be done, why can we not move faster? The basic question of why this is taking so long has not been answered by anybody here today.
I return to the 71-page report on the LLE. Why was the delay in ASF not explained? There was no attempt to explain why it was put back. It is quite obvious that no preliminary work of any standing was being done for the last 11 years. That in itself is deeply shocking.
It is also true that there has been no significant engagement with the Muslim community throughout this whole period. Why is that? That does not seem sensible, reasonable or honest.
I get no sense that the Government are embarrassed by their position, that they intend to move faster than they have over the past 11 years or that they understand the moral nature of this issue. I will withdraw the amendment but, unless we get the meeting that we talked about so we can sit down together to talk about this with members of the community as well as parliamentarians, when it comes to Report we will find a way, if we can, to encourage the Government to do more faster than they currently plan to do. With that, I beg leave to withdraw the amendment.
Lord Moylan
“Politically exposed persons: UK taxpayers
(1) Within six months of this Act being passed, the Treasury must take all reasonable steps to make regulations to amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692) so as to secure that, for the purposes of the regulation of financial services, individuals who are ordinarily resident for tax purposes in the United Kingdom are not treated as politically exposed persons, or as family members or close associates of a politically exposed person.(2) Regulations under this section are subject to the affirmative procedure.”
Lord Moylan (Con)
My Lords, I move Amendment 215 in my name and speak in general support of the other amendments in this group, all of which tend in a similar direction. I am very grateful to the noble Baroness, Lady Hayter of Kentish Town, and the noble Lords, Lord Hunt of Kings Heath and Lord Sharkey, for adding their names to my amendment.
Noble Lords will have many personal experiences of the harm and damage being done by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 in their own lives and in those of their families and what are described as their close contacts, so I will not begin this short speech by giving a long list of examples; I will give only one. But I hope others will arise later, because while we in the Committee understand the damage done, members of the public who might be observing this debate will not necessarily know what we are talking about or why it matters so much to us.
Baroness Hayter of Kentish Town (Lab)
My Lords, I will speak to my Amendment 224 and to others in the group, including the ably moved Amendment 215, to which I have added my name.
I thought that this had been going on for a long time, but the 11 years on the sharia law amendment was even longer. This started only a decade ago, when the noble Lord, Lord Flight, raised it in 2013. Then the noble Lord, Lord Clement-Jones, raised it in 2014 and the noble Lord, Lord Flight, and my noble friend Lord Harris raised it in July 2015. I had a Question for short debate on it later in 2015, at which point the Minister at the time, who subsequently became Chief Whip—although he is no longer—completely understood it, partly because it had affected him, as he said in the debate. It was also covered in the Mail on Sunday, because Charles Walker had raised it in a debate in the Commons in January 2016. I also had a Written Question in March 2016. If we say that we are doing this quickly, I just remind everyone that this has been going on a very long time.
The problem is that neither the FCA, to which I wrote back in 2016, nor the Treasury has actually moved to lift the burden on us normal PEPs, despite the FCA’s July 2017 guidance which, if it was complied with, would solve the problem—but it has never been complied with. Since that guidance, which is FG 17/6, we have continued to raise the issue in the House—on 6 September 2021, 22 February 2021, 3 March 2021, 24 and 25 November 2021, 5 July 2022 and 28 November 2022. So there should be no surprise at anything that is being said today.
Baroness Noakes (Con)
My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.
I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.
Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.
I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.
My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.
In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.
I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.
Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.
Lord Sharkey (LD)
My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.
I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.
Lord Kirkhope of Harrogate (Con)
My Lords, I rise for a moment to support the amendments from my noble friends Lord Moylan and Lady Noakes. I spent much of my political career in Brussels, where I used to complain regularly that various directives and regulations were gold-plated when they came back to this country. We were always very stern in the implementation of just about everything that came from the European Union. I and others in this Room played some part in preparing these things, including the anti-money laundering regulations. In fact, for a long time, when I went places I endured the description, “Here’s the expert on money laundering”. This was not very nice, but it got even worse with the PEP issue.
My noble friend Lady Noakes is right to say that we should not dwell too much on our personal problems with this. I will not, although I have had problems—more particularly, one of my sons, when he tried to open an account with an emerging bank. Everything was going swimmingly until someone contacted him and said, “Are you by any chance related to a Lord Kirkhope?” He said yes, presumably thinking that it would help him get a better deal, “That’s my father—thank you very much”. That was that. He then received a communication some two weeks later telling him that his application for an account had been declined, but they would not give him a reason and apparently could not do so under our regulations in this country. It was obvious why he was declined; that information had been enough to make them use some kind of prescriptive arrangement whereby everybody is looked into not individually but under a general approach, subject to having a PEP in your family.
Again, I will not get into the point from my noble friend Lord Moylan that we can now ignore the anti-money laundering regulations or do something different. That might well be the case but I do not want to revive discussions on Europe in this debate. However, we were very careful when we drew up the regulations. It was very much a British component that insisted on the regulations being employed or deployed proportionately. The word “proportionate”, which has been referred to already, was conveyed with those regulations to us in this country. The problem was that, when we entrusted the implementation of the regulations into the hands of the FCA we failed to oblige it to follow a proportionate approach in the way we should have done, although the word “require” is set out in its instructions. It did not do so, has not done so and appears not to be willing to do so.
I simply want to make it clear that consultations, which I think my noble friend Lady Noakes mentioned a moment ago, seemed to take place, particularly in 2017. It was perfectly clearly stated how these things should be implemented. It was not expected that those holding politically exposed positions in the UK should be regarded as anything other than a low risk, rather than the enhanced risk that we seem to be stuck with. I suggest that it is too late for consultation and that it must be done by way of legislation. Very strict instructions must then follow to the financial institutions, past, present and future, that they must not deploy the draconian measures and inquiries that are totally unnecessary and unjustified.
Viscount Trenchard (Con)
My Lords, I apologise that, in the earlier group of amendments, I omitted to declare my interests as a director of two investment companies.
All four amendments in this group seek in different ways to find a solution to the problem that all noble Lords, and members of their families, suffer as a result of being designated as politically exposed persons. Regulation 35 of the 2017 regulations provides that a regulated person must “manage the enhanced risks” arising from having a business relationship or conducting a transaction with a PEP. It assumes that such a business relationship always carries a higher risk than a business relationship with a person who is not a PEP. From my experience, I suggest that the reverse is the case—in other words, entering into a business relationship with a Member of your Lordships’ House carries, in general at least, a lower degree of risk than the average risk posed by a customer of a relevant person.
However, the regulation requires more personal KYC information to be provided in respect of PEPs than for other customers. As noble Lords are well aware, it is currently hard enough for anybody to open a bank account or an account with any financial institution. Long-standing customers with active accounts with banks who fail to answer emailed requests for proof of address or the like find their account summarily closed, without any appeal. It is very difficult and time consuming to speak to anyone with responsibility for such decisions. Quite extraordinarily, when a credit card operator obtains KYC information for a customer with regard to one account, it does not automatically regard that information as being equally relevant to other accounts held with it by the same customer. The situation for PEPs is disproportionately worse.
My son, who was resident in Taiwan, was nominated by his employer as a signatory on his corporate bank accounts but was subjected to entirely disproportionate questioning which caused a considerable degree of irritation. He experienced the same thing when proposed by his employer as a signatory on a Singapore bank account. He has now had to agree with his employer not to be nominated on the corporate bank accounts in Korea, where he now resides, and in several other jurisdictions.
I have put my name to Amendment 227, well introduced by my noble friend Lady Noakes, which sensibly seeks to disapply the application of PEP status for this purpose by the FCA in respect of UK citizens. Amendment 215, in the name of my noble friend Lord Moylan and others, would place an obligation on the Treasury to achieve the same thing. But these amendments do not solve the problem for overseas relevant persons. I hope that the adoption of more proportionate and reasonable guidance, as proposed by my noble friend Lord Kirkhope in his Amendment 234, to which I have also added my name, might eventually be copied by overseas regulators too.
In any event, I ask my noble friend the Minister to respond positively and to commit to take action on these proposals. It really is time that something was done about the expensive waste of time caused by the current regulations.
Baroness Fox of Buckley (Non-Afl)
My Lords, I will be brief. The noble Baroness, Lady Noakes, made the point that this should not be just about us and anecdotes about ourselves. That is true, but the fact that family members are caught up in it leads you to think, “Maybe I could cope with it, but why should innocent members of my family be affected in this way?”
However, I am falling into my own trap because I am saying “innocent family members” as though we are not innocent. One of the most disconcerting aspects of this whole discussion is that this is about the law of unintended consequences. We all know who these regulations should be aimed at, and none of us would advocate being soft on money laundering or not having the kind of regulatory framework necessary to deal with money used for terrorism and so on. But can you imagine what it would say to the public were they to find out that the PEPs on that list that the noble Lord, Lord Moylan, read out are considered to be dodgy people who are not to be trusted? We are telling the public that political figures in this country are what some of the more cynical and nihilistic commentariat might have us believe—that everybody is on the brink of money laundering. It sends a terrible message, but I feel as though it is just the law of unintended consequences.
As noble Lords know, if you ask whether this is happening because you are a politically exposed person, the person you are talking to goes through the most extreme example of gaslighting, where they kind of glower at you and, as one noble Lord said, either imply that it is happening to everyone all around the country or that you are making it up. You are made to feel completely paranoid, even though you know that that is probably the cause. Without telling anecdotes, I can say that I am met with a certain amount of aggression.
On lots of aspects of the Bill—certainly the parts that I was involved in the other day—we have talked about the public’s frustration that banks are closing all the time. Barclays has just announced a whole set of closures. We are worried about the consequences of not being able to go into a bank and talk to a manager and about what kind of lives we will have if everything is overly removed from people’s interactions. Here we have the most unnecessary example of risk-averse, bureaucratic time wasting from banks which should be spending their time serving the public and working for society’s financial services as we face an economic crisis. Can you imagine how much time they waste checking on us? I know how much time I have wasted during their completely unnecessarily and spuriously checking on us.
I do not know which of the amendments I prefer but, for once, I just want the law to change. I shall go with whichever is likely to win and pass. We are not doing the public any favours at all by worrying that they might think that we are just talking about ourselves in this instance, because the public are having their financial services wasting time on something that is not due diligence but a complete distraction from attacking the real problem.
Baroness Bowles of Berkhamsted (LD)
My Lords, I may have had the unique experience among us here of having to chair the committees that did some of the anti-money laundering directives. It is right that the noble Lord, Lord Moylan, points at the origins and the fact that we have carried through some things that were not necessary.
We have to go back to where it all began. He was quite right that it was with the Financial Action Task Force, which related to foreign nationals. We had a problem in the EU with what that meant—foreign vis-à-vis the EU—and tried hard to construct ways in which we could exempt the whole of the EU. There were words that would do that, but they did not get past the civil liberties committee people. We kept running up against being told that we could not discriminate. It was very difficult, because two committees were involved—my committee, the Committee on Economic and Monetary Affairs, and the civil liberties committee. Most of the time, because we were a bigger committee, we managed to outvote the civil liberties people, but there were one or two places where they had unique responsibility and, unfortunately, things such as discrimination were theirs, not ours.
I am telling this story because, if we want to solve this problem—if we say, “Okay, now we’ve had Brexit, we don’t need to stick to the rules that were made in the EU”—what can we do? Can we actually do what FATF said and discriminate within the UK against people who are in the UK but foreign? Where does that leave us with our discrimination laws? I cannot solve that, but I wonder whether the Minister knows the answer—because if the answer is that we are not hidebound and can do what FATF said, let us do that and put the focus where it should be.
It is very difficult to do a risk-based approach. I am all for it, and I think that the banks should do more of it. However, as the noble Baroness, Lady Noakes, has explained, it is costly. In fact, these things are outsourced; you fill in all the forms, somebody somewhere else ticks the boxes and the bank jolly well does not know its client any better. Then two or three years later, they ask you for all the same forms again, and they do not notice if you have done it exactly the same.
When the anti-money laundering regulations first came out, we seemed to get up to speed in the UK very quickly, and we started getting all this rubbish very quickly. I got the Belgian versions, because I still had Belgian bank accounts. I got a nice little form with tick-boxes on, so I photocopied that and started sending it to some UK banks, asking them why they could not do the same thing, although it did not get me anywhere. Recently, all the EU banks have stepped up, and my son has had a lot of trouble with the Irish banks, because he was working in Ireland—and he had even more trouble once he was no longer working in Ireland and came back to the UK, even though he has Irish nationality. He has had to close his accounts, because he just could not operate them.
So there are some issues here that need to be handled. I thought, going through this and trying to remember the discussions we had, that the noble Lord, Lord Moylan, got the closest by saying that if they are already having some check, such as through the tax authority, then that is a proper and non-discriminatory way to take people out of it. It is hard to think of anything better than that, other than just taking everybody out.
It is true that these regulations were really meant for catching politicians in dodgy countries who had access to ways to bypass the normal systems and checks for moving large sums of money between countries—for pilfering it. It is very difficult to talk about who they might have been without having carefully prepared your notes—although I know we have parliamentary privilege. They were not meant to affect ordinary people. Under the FATFA provisions, it was never meant to be ordinary people or ordinary politicians in generally law-abiding countries, shall we say, where politicians are not given extraordinary access to start siphoning off money from the central bank and suchlike. I do not think there is anyone in our central bank who can do that—perhaps the chief cashier; I have not thought about that—but that is who they were meant for.
Like others, I do not have confidence that our regulators will necessarily break cover and do something dramatically new if we ask them to revise this. It will be a problem that they are entrenched in the rules they have and the thinking of the other regulators who they keep meeting when they go places. It needs something very clear in legislation—something like the amendment from the noble Lord, Lord Moylan, if we can check out the point about discrimination. It is very difficult for us, as PEPs, to vote on things such as this, but it is causing a lot of distress to a lot of people. It is potentially devastating when you cannot complete on your house purchase and such things, and when things are happening randomly. It needs to be attended to. I really do not see why the Government cannot put their foot down and say to the banks and regulators that this must be done in a way that truly reflects who the targets are.
Lord Jackson of Peterborough (Con)
I will speak very briefly in support of the amendment moved by my noble friend Lord Moylan and those spoken to by my noble friend Lady Noakes. All noble Lords have spoken very well, and there is clearly consensus here. The specific issue here has trundled on for 10 years. I remember that when I served as treasurer of the 1922 Committee, this was an issue taken up by both the then chairman and, as mentioned by the noble Baroness, Lady Hayter, by Sir Charles Walker. I naively believed that we had resolved this issue by about 2017-18; obviously, that is not what happened.
This is about the limits of a permissive regulatory regime. It is clear that the Treasury and the regulatory bodies involved have not taken a blind bit of notice of the cross-party support in Parliament. This is not a niche issue that affects just us. In my case, I was affected because I was told by my mortgage provider that I was not going to be permitted to make mortgage payments, let alone make any withdrawals from a bank account. But this is also an issue of the civil liberties of our family members and extended family members. On that basis, we must take a very tough stance.
I come back to the particular point from the noble Baroness, Lady Bowles, about what we have the ability to do now that we are outside the EU—although my noble friend Lord Kirkhope is right that we must not recapitulate the arguments about Brexit. The noble Baroness’s point was astute, in that there is no proper risk analysis and risk assessment of all of these individual cases. A generic policy is applied across all individuals.
Frankly, let us be honest: the UK is one of the most open and transparent political systems in the western world. The noble Baroness, Lady Fox, is absolutely right that people are not attracted to public service if the fallback position is, “You’re a liar, a cheat, a crook and a thief if you go into public service”. It is important that, after 10 years, we make that appropriate point.
If we do not adopt my noble friend Lord Moylan’s rather benign amendment, a future Government may well take a much more draconian approach to this, both for the regulators and for the individual financial institutions. On that basis, they have a vested interest in sorting this situation out because, when the Financial Action Task Force proposals were published in 2012, they were not about asking people like the noble Baroness, Lady Hayter, to produce a premium bond certificate from 1957—I scarcely believe that it was 1957; I thought it might be a lot later.
This is an opportunity, and I hope that my noble friend the Minister makes, or at least commits to, those changes. This is not the first time that I have been compared to a brothel keeper—although that is normally in the other House—but my noble friend Lord Moylan makes a good point. This is an opportunity to right this wrong. This is not about us and it is not a niche issue: it is about civil liberties, decency, honesty, openness and transparency. We need action from Ministers on this.
Lord Tunnicliffe (Lab)
My Lords, after so many very good speeches, I will be short. My personal experiences vary wildly. I remember a four or five-page document for a credit card, and I remember the bank that most of my money is in ringing me up and saying, “What’s this extraordinarily large amount of money that has just come into your account?” I said, “You’re not going to believe this, but it is my son paying me back a loan”, which he had. I heard nothing more from the bank. That gives an insight into the disproportionate ways in which various institutions react to this, and much of the problem is in that behaviour.
Let us not get away from the problem: money laundering is serious. If you believe all of the thoughtful reports on it, it is serious in our City. It is absolutely valid that we take it very seriously. I understand from the professionals who regulate us that it is very subtle: a lot of it is done with seemingly innocent accounts moving relatively modest amounts of money in a highly managed way. It is a profession that is, sadly and unfortunately, probably absorbing some good brains in an evil trade.
One has to accept that getting the regulations right is very challenging. I take the general view I hear today that the regulations need further improvement. Clearly, that has to go in law. Therefore, I urge those who have put forward amendments to try to address the problem and put together a common amendment that may attract support across this House and the other place. Of course, it would be much better if the Minister came forward with her own solution.
We have to think about the other agents here: the banks and financial institutions. Sadly, they seem to work like many large institutions do. They take views about spending money and about their duties; frankly, all too often their duties are not to their customers. The moment a piece of complexity is built in, they end up with algorithmic solutions and basic statements that some algorithm has been offended here or there, and they take draconian solutions: they close or block accounts. This is absolutely unreasonable.
Baroness Penn (Con)
My Lords, the Government have a lot of sympathy with noble Lords who feel that they or their families have been subject to unreasonable treatment due to their status as politically exposed persons, or PEPs. As noble Lords have mentioned, I have engaged with noble Lords to understand this issue and I am aware that the difficulties faced can range from seemingly disproportionate requests for information to accounts being blocked, leaving Peers and their family members at risk of being unable to effectively manage their financial affairs.
The Treasury and the FCA will continue to work to address this issue and to ensure that those subject to these rules are treated fairly and proportionately. Before discussing that work further, I will set out the importance of the PEPs regime to UK security and the fight against economic crime.
Enhanced due diligence by banks is a key component of the UK’s anti-money laundering and anti-corruption measures, and ensures that any suspicious activity is identified and reported to law enforcement. Given the potential for the positions of influence held by those subject to the PEPs regime to make them targets for serious and organised criminals and hostile state actors, law enforcement agencies have strongly favoured maintaining these requirements on domestic PEPs. The enhanced due diligence measures are a crucial part of the UK’s anti-money laundering regime and contribute to a coherent, systemwide approach to tackling economic crime, providing law enforcement with valuable and actionable intelligence to help protect the UK’s political system from hostile state actors, for instance.
However, the Government of course recognise that domestic PEPs often represent a lower risk than overseas PEPs. This is already explicit in FCA guidance, which states that domestic PEPs should be treated as lower risk by financial institutions unless other risk factors are present. The FCA remains committed to monitoring banks’ compliance with its guidance on PEPs, and will take action where it identifies systemic issues. The FCA did so last year, resulting in one financial institution apologising to all PEP customers after its failure to adhere to FCA guidance.
In last year’s review of the money laundering regulations, the Government committed to an assessment of the risk profile of domestic PEPs and made it clear that we would consider removing the requirement for mandatory enhanced due diligence if they were found to be sufficiently low risk. The Government’s assessment of the risk profile of domestic PEPs has concluded. As part of that work, they engaged with law enforcement and other operational partners to develop their under-standing of the risk posed by domestic PEPs. In light of that review, the Government consider that the existing requirements remain appropriate.
However, given the concerns raised, the Government will continue to work with the FCA to ensure that banks and other financial institutions appropriately and proportionately implement the guidance set out by the FCA regarding the treatment of domestic PEPs, that it is taken forward in a way that is proportionate to their individual risk and that adjustments are made to enhanced due diligence measures as necessary. I would like to reassure noble Lords that the Treasury continues to engage with the FCA on this issue and stress the importance of taking a proportionate, risk-based approach to the application of enhanced measures on domestic PEPs.
I turn to the specifics of the amendments. Amendment 215 from my noble friend Lord Moylan would remove those politically exposed persons who are tax residents from the regime entirely. As I have set out, including domestic PEPs in the regime is important because of the risks presented by their positions of influence. Such a proposal would weaken the UK’s protection from money laundering and corruption and leave us non-compliant with international standards. International standards for domestic PEPs, as my noble friend set out, are set by the Financial Action Task Force. They require countries to implement a legal framework that compels regulated firms to identify whether their customers are domestic PEPs and make an assessment of which due diligence measures to apply based on the risk presented.
Amendment 215 would remove the requirement for financial institutions to identify and treat those resident in the UK for tax purposes as PEPs, making the UK non-compliant with those international standards. The UK is a leading member of the Financial Action Task Force and was recognised in its mutual evaluation report in 2018 as having the most effective anti-money laundering regime of well over 100 countries assessed to date. The UK remains committed to ensuring that its anti-money laundering regime is compliant with these international standards. While I appreciate that, in drafting their amendments, noble Lords may have sought to remain compliant with those standards, I am afraid it is not possible to remove domestic PEPs from identification altogether and remain compliant.
Baroness Hayter of Kentish Town (Lab)
Why is it therefore possible to exclude councillors, as the guidance does, but not Peers?
Baroness Penn (Con)
That is a question of who is classed as a domestic PEP, not of the need to have a regime in place to identify domestic PEPs and then look at what enhanced due diligence measures should be applied to them.
Baroness Hayter of Kentish Town (Lab)
Does the Minister accept that we could therefore exclude all Members of Parliament?
Baroness Penn (Con)
I do not think that would be consistent with the Financial Action Task Force guidance that is interpreted at a UK level.
Baroness Hayter of Kentish Town (Lab)
I am sorry, but the Minister said that we are a leading member of the Financial Action Task Force. It has been enabled to take councillors out; it is very hard to imagine that Members of this House could not be.
Lord Moylan (Con)
I know the answer to this. It is because the FCA said in 2017 that a council was not a parliament or similar body. Those words appear in the task force recommendation. By declaring that a council was not a parliament or a similar body, members of councils immediately fell out of the regulatory scope by virtue of the guidance as it was changed at that time.
Baroness Bowles of Berkhamsted (LD)
This may not be something that the Minister can answer straightaway, but she has just finished by saying that the law enforcement agencies still wanted to keep the provisions. It would be good if she could tell me which and why, and on the basis of what evidence. How many parliamentarians have been done for money laundering, for example, and how many have featured seriously in inquiries? If that information is not to hand, I should be very happy to have it explained in detail in writing. I am still a bit perplexed, because my understanding of FATF was the same as that of the noble Lord, Lord Moylan: that is to do with foreign politicians, not our domestic politicians, or has FATF been updated? Oh, the noble Lord has it on his iPad.
Lord Moylan (Con)
It is the website with the 2021 version of the recommendations.
Baroness Bowles of Berkhamsted (LD)
So I cannot reconcile what the Minister has just told us with what is in FATF. If it needs detailed and arduous explanation, I am quite happy to have it in writing, but on the face of it, it is irreconcilable.
Earl Attlee (Con)
Further to the questions of the noble Baroness, Lady Bowles, can the Minister point to any illegal activity on the part of a parliamentary PEP that has been detected as result of the money laundering regulations?
Baroness Penn (Con)
My Lords, to deal with the question of the risk assessment undertaken as part of this work, as I have already said, the Government have engaged closely with law enforcement and the intelligence community to inform our understanding of the risk in this area. It is a difficult area, and it is not particularly appropriate to go into detail on the contents of the risk assessment, given the sensitive nature of the information. As I also set out, the context is that there is potential for those in positions of influence to make domestic PEPs targets for influencing behaviour by serious and organised criminals and hostile state actors. The potential links between domestic PEPs and criminal activity vary, including abuse of political position for personal gain or links to overseas corruption.
I very much understand the desire by those directed by the regulation to hear more about that risk assessment. It was a question that I anticipated and to which I sought to get as full an answer as possible for the Committee. I am under constraints, but I shall none the less take away the requests from noble Lords to see whether there is any more I can do to provide more information on that point.
Lord Kirkhope of Harrogate (Con)
I follow up the inquiry of my noble friend Lord Attlee about statistics—whether parliamentarians have actually fallen foul—and take it one stage further. With regard to the particularly appalling way in which family members are implicated here, do we have statistics on how many family members of parliamentarians have fallen foul? Surely, they are implicated simply because they are related to someone who is classified as a PEP. We have mentioned human rights, but this provision cannot be fair or proper and should surely be removed.
Baroness Penn (Con)
As I said, I shall take away the point about what further I can say about the work on the risk assessment. The focus has been on looking at risk, and my understanding is that, in considering that, the question of close associates or family members—I believe that is the terminology in the regulations—has also been considered.
Baroness Hayter of Kentish Town (Lab)
I am sorry about this, but the Minister will not be surprised, because we have had 10 years of this issue. There was a review last year, which she reported on in the House, which said that no change was needed, which is extraordinary. She referred to the case where we all got an apology, but that was only because we kept on standing up and asking for it, otherwise it would never have happened.
The important thing that I wanted to raise is that this somehow is going further than anti-money laundering—it is about general corruption. Some of us have been debating the National Security Bill, where it is being dealt with in another way. I do not think that the Minister has been following that Bill, but I can understand that she has not because she has been involved with this one. We now have the FIRS scheme, which will be set up when the Bill becomes an Act and which is about the other things—the approach to politicians by malign forces trying to corrupt us, or whatever. So can we take out corruption and that sort of thing, because the National Security Bill will deal with that? This is simply to be simply about anti-money laundering—in other words, dirty money.
A lot of what the Minister has said goes beyond that, and the fact that she cannot tell us means that the spooks—who tell us that they do not want it, by the way—want it for some other cause. That is not the purpose of the provisions on anti-money laundering; it is about dirty money. Perhaps the Minister could talk to the Home Office and Tom Tugendhat about how much is covered now on the approach to any of us as politicians by malign forces, because this is separate.
Baroness Penn (Con)
My Lords, although I have not been following the detail of that Bill, I am aware of the provisions in it. As part of looking at this question, one question asked is, in our broader ecosystem of the checks and balances that we have on our politicians and people defined as PEPs—the other requirements of disclosure that they are held to and the other tools that we have at our disposal—how they influence the risk assessment has been done. I reassure noble Lords that that question has been asked. I should also reassure noble Lords that I am seeing the Security Minister tomorrow to discuss economic crime, but also that issue. We are seeking wherever possible to ensure that there is join-up across government in our assessment of the risks and the tools available to deal with them, ensuring that where we have measures in place they remain proportionate. That is something that I continue to engage with, with the Security Minister and others across government.
I shall just try to answer the point on the Financial Action Task Force, the difference between domestic and foreign PEPs, and the requirements within that, as I understand it. I commit to following up in writing if it remains unclear or if anything I say is not correct. The requirement for automatic enhanced due diligence applies to foreign PEPs. However, within the FATF guidance on recommendations 12 and 22—I think that this is particularly around 12—there is still the need to take steps to identify whether someone is a domestic politically exposed person and then review the relevant risk factors. So they need to determine whether a customer or beneficial owner is a domestic PEP, then determine the risk of the business relationship in that context—and then, in low-risk cases, there are no further steps to determine whether a customer is a PEP. In other words, there is still a requirement to identify whether someone is a domestic PEP or not and to look at the risk around that.
Where there is a difference, in my understanding, from the Financial Action Task Force requirements, is that for foreign PEPs you need to apply automatic enhanced due diligence. Under the EU regulations, that also applied to domestic PEPs—and we therefore ensured that automatic enhanced due diligence applied to domestic as well as foreign PEPs was a system in our regulations. The review we did last year into all of our anti-money laundering regulations did not conclude that on this matter no further action was to be taken but that we needed to look at the risk profile and risks associated with domestic PEPs before determining whether those requirements of automatic enhanced due diligence remained appropriate, now that we had the ability to vary our money laundering regulations, having left the EU. So that was a further piece of work that needed to be done after the review was published last summer of our money laundering regulations overall. That further piece of work has been undertaken, and I have undertaken to write to noble Lords with further details if I can provide them on that risk assessment, but that concluded that it was appropriate to maintain automatic enhanced due diligence for domestic PEPs.
Baroness Noakes (Con)
Did this review involve the FCA? When the FCA reissued its guidance in 2017 it was very clear about domestic PEPs being low risk, but it was constrained by the regulations, which said that you had to do enhanced due diligence. It was within that context. There seems to have been a shift between the FCA’s apparent position on the risk profile of UK PEPs and what my noble friend the Minister is now saying that she is being told by the security services, which will always try to find things that can go wrong. It is quite easy to construct a case that we are potentially capable of being corrupted by whoever and involved in money laundering, but they are not involved in the money laundering processes; the FCA is. I am getting a bit confused about how robust this risk assessment is in the context of money laundering.
Baroness Penn (Con)
I believe that it aimed to get relevant information from all those involved and take a holistic view. I appreciate and agree that we need to ensure that, when these measures are put in place, they are proportionate to the risk faced, so it is entirely right to interrogate that risk assessment. I also appreciate that it is a slightly frustrating process when the sensitive nature of some of these issues means that we cannot always go into all the details noble Lords want at this time. I have tried to explain the context as to why domestic PEPs are viewed as having sufficiently high risk so that enhanced due diligence should still apply. I have the FCA guidance in my pack but I will not go through it, but it is also true to say—this is another point that I checked—that although the risk is sufficient to have enhanced due diligence measures, it is lower for domestic PEPs than for foreign PEPs. That assessment still applies.
Lord Jackson of Peterborough (Con)
The Minister is doing a very good job on a very sticky wicket. I am not surprised. Notwithstanding what she said about risk assessments and how that has to be, of necessity, a discretionary issue, the problem we are identifying, which the Government should address if they come forward with an amendment at Report, is the opaque nature of identifying these individuals and the offence against natural justice, because when people have accounts closed they are often not told why, who made the decision, on what basis and using what methodology. That is a serious issue and, after 10 years, one that the Government should address, if necessary by a government amendment.
Baroness Penn (Con)
I absolutely take that point. It comes back to the appropriate and proportionate enforcement of these regulations. I know that that is something noble Lords have raised previously, but we need to continue to work to ensure that it takes place.
Baroness Bowles of Berkhamsted (LD)
This goes back to when the Minister mentioned the FATF provisions. I thought she mentioned the risks in business relationships. All the stuff we get as PEPs is our personal stuff; it is nothing to do with business relationships. I have not been interrogated about anything to do with the London Stock Exchange, of which I am a non-executive director; I am interrogated about my father’s will and that kind of stuff.
Again, I am happy—in fact I would almost prefer—for the Minister to write the replies because it is hard to put together quoted bits and pieces, even when we get them back in Hansard. It seems that the whole risk assessment business is being set aside at the behest of the security agencies, which just like the idea that they have another captive load of people and that they may be able to track something with money—which I doubt, because these forms go to an outsourced place, they are filed, and nobody ever looks at them. There is no “know your client” going on. They may look at one or two, but I do not see how it adds up at all, even taking that security aspect into account, because if anybody was really a security threat, there are other ways of vetting.
Baroness Fox of Buckley (Non-Afl)
I am confused. I always encourage people to find out what is happening in this House by telling them to look at the speeches and follow Hansard, but now I am dreading anyone watching this because we have a government Minister implying that the security services at looking at us, particularly our private financial affairs, because we are high risk. Why? I do not think that is true. I want to denounce the notion that because you are in the House of Lords you are more likely to be doing something such as that.
I do not think the Minister can answer my second point, but I think we would all feel that it is a generalised accusation rather than specifically going after individuals who might be doing things that are wrong based on evidence, which nobody here objects to. Never mind the families; I have got to the point now where it is not just the families. I am sitting here feeling embarrassed, thinking, “Oh god, somebody is basically saying that the security forces think that we are all up to no good”. If the public find that out, it is said by a Minister and it is the general atmosphere, that is not good, is it? I usually put my speeches up on social media; I am not putting this one on. I do not want anyone to know about this conversation, because it will discredit the reputation of this House far more than anything else.
Baroness Penn (Con)
My Lords, I have already set out for the Committee, and I repeat now, the reasons why UK domestic PEPs may be at greater risk of money laundering. For example, in the general sense, the positions of influence that we have can put us at greater risk. I have also tried to set out—and will set out in writing for noble Lords—the approach that we are taking to look at risk in this area. I will share any further details that I am able to.
Baroness Bowles of Berkhamsted (LD)
Following on from what has just been said, I would quite like the Minister to rephrase what she said: that we are at greater risk of money laundering. I cannot let that stand on the record.
Baroness Bowles of Berkhamsted (LD)
I can let stand that we might, in some instances, be at greater risk of being targeted for various things, and I hope that we also have a greater capacity for repelling such actions, given the experience of people in the House and having done the sorts of things that we have done throughout our lives. I am not prepared to accept that kind of statement with any acquiescence whatever on my behalf or, by the sound of it, on behalf of colleagues here.
Baroness Penn (Con)
I am very happy to clarify for the Committee and anyone who may be reading our proceedings, that we, due to our positions of influence, are at greater risk of being targeted by those who may seek to engage in money laundering.
Earl Attlee (Con)
My Lords, I say to the Committee that if someone tried to target me in any inappropriate way, I would report it to the appropriate authorities immediately.
Baroness Penn (Con)
I am sure that many of us in this Committee would do so—
Baroness Penn (Con)
I am sure we all would. The noble Baroness, Lady Bowles, asked me to set out in writing the position of the Financial Action Task Force in terms of the requirements for foreign and domestic PEPs. I will also set out in writing the position on the risk assessment that has been undertaken, so that everyone has it and it is not just in the toing and froing of the exchanges in this Committee. I will clearly set out for the Committee the Government’s position on this.
Baroness Noakes (Con)
This is a risk of money laundering, not anything else. What wider implications should be taken into account? The FCA knows about money laundering and its risks. How could there be wider considerations than money laundering?
Baroness Penn (Con)
Others are involved in looking at the risks of money laundering in counterterrorist and proliferation financing, which I believe are subject to these regulations.
Baroness Noakes (Con)
As far as financial institutions are concerned, all of those are dealt with by the FCA, not the security services or any other shadowy agencies that seem to be involved in this latest risk assessment, so I am struggling to see what wider issues could possibly have been taken into account.
Baroness Penn (Con)
The Government believe that the decision about the scope of the money laundering regulations is best taken by, and should remain with, the Government, rather than being delegated to the FCA.
I turn to Amendment 224 from the noble Baroness, Lady Hayter of Kentish Town. This would require the FCA to consult with consumers with regard to its functions relating to PEPs. In the discussion—
Baroness Hayter of Kentish Town (Lab)
The noble Baroness does not need to respond on this; it was a placeholder.
Baroness Penn (Con)
Okay—I was going to talk about the engagement that we have conducted so far and will continue.
My noble friend Lord Trenchard touched on my noble friend Lord Forsyth’s Amendment 234, but I am not sure whether anyone spoke to it specifically. In my response, I addressed the Committee’s desire to focus its attention on the statutory changes, and I am not sure we had a detailed discussion on the other proposals put forward here.
Noble Lords have made their position on the issue very clear. I hope that, to some extent, they have also heard the rationale for the Government’s approach and would agree with the desire to be in line with international standards in any action that we take in this area. As the noble Lord, Lord Tunnicliffe, said at the start of his remarks, we should bear in mind the context of the Government’s efforts, very much supported by this House—we are often pushed to go further by this House—in tackling issues of economic crime, which include money laundering. We have to recognise that London and the UK being such a centre for financial services, and the great benefits that that brings, also brings greater risks. It is right that we make sure that we have a regime that manages those risks as effectively as possible.
I shall write to noble Lords on the matters that I have mentioned, and any other matters in looking at this debate again, on which I can provide further clarity. I am sure that I will engage with noble Lords further on this issue ahead of Report.
Lord Tunnicliffe (Lab)
Would the Minister also engage with the banks and financial institutions to see whether they can improve their performance in being reasonable?
Baroness Penn (Con)
The noble Lord is absolutely right to say that. This Government are committed to do that with the regulator. I understand this Committee’s desire to look at legislative change, but I have also heard from the Committee that the guidance is clear on the lower risks of PEPs, and the challenge really lies in the effective implementation of that guidance. We should not take our eye off that work. It is something that the Government are absolutely committed to doing.
I know that noble Lords have raised the challenges of engaging with the FOS on this issue, but I remind them of that route. I have also said to noble Lords, as the FCA has said, that in the list of contacts that we have provided to parliamentarians with issues with their status as politically exposed persons, the FCA will monitor any of those points of contact in terms of complaints to look more systematically at whether there are issues in individual institutions so that further action can be taken on that basis. The Treasury will continue to engage with the FCA on how we can ensure that that takes place.
Baroness Hayter of Kentish Town (Lab)
I think that we have already mentioned why the FOS is so inappropriate. To expect a judge to take a complaint to the FOS is frankly out of order. It is no way for this issue to be raised. It is a very small number—but it is not appropriate to ask very senior judiciary to go via FOS, if their children are being affected. That is really not the right way forward.
Baroness Penn (Con)
I appreciate that it will not be the right route of recourse in many circumstances, but I do not agree that it is never the right form of recourse for people. It is important for people to know that that route is there. For particular cases, it may be appropriate. The noble Baroness has set out why, in many other cases, that is not the form of recourse that people want, which is why we have also set out other points of contact and ways in which to try to resolve these issues, which also act as a data point for the FCA as the regulator to look at issues in particular banks or institutions that are not applying the guidance appropriately.
Lord Moylan (Con)
My Lords, we have had a very valuable debate. I am grateful to all noble Lords who spoke in it and, if I do not thank them individually, I hope that they will forgive me, given the length of the debate so far. It is unusual, at the end of such a long debate, to be able to summarise the arguments made in one or two sentences—but I can, because everybody, in effect, said the same thing. That is that we want to see change, and the majority of us want to see legislative change.
Having said that I am not going to refer to individuals, there are two speeches to which I will briefly refer, because they were important. The first was the winding-up speech from the Labour Party Front Bench by the noble Lord, Lord Tunnicliffe. He spoke very briefly, but his words were very pregnant and important as we approach Report.
The second, which I will deal with at greater length, was the speech made by the noble Baroness, Lady Bowles of Berkhamsted, who acutely put her finger on a key issue that must be addressed if we are to achieve the legislative change that we want to see. That is about the definition that we choose. When I spoke earlier, I said that there must be a way in which to distinguish satisfactorily between domestic and foreign. In doing this, I will not use the term “non-discriminatory”, because that has legal implications, but we want to do it in a way that is fair and is seen to be fair by everybody who might be affected. At least a couple of suggestions have been made, and they both have merits. This is something to which we need to return as we approach Report, to make sure that we are comfortable with it—but I thought that the noble Baroness put her finger on that very acutely.
Normally, at this stage in a speech of reply, I would turn to a lengthy and careful analysis of the remarks made by the Minister, but she has been subject to a lengthy and careful analysis by practically everybody else in the course of her winding-up speech. So perhaps I will spare her that, and congratulate and thank her for taking, with such good grace, the questions and points that were put to her.
However, I shall refer to two points, the first being the security services. Frankly, I have never come across a case where the police or security services have given up a right to scrutiny that they already have. There is always some excuse for why it is necessary. I find that unconvincing—and the reasons are not, per se, on the grounds that it is the security services, but because of the arguments made here. It is astonishing that there is a special list of people in scope of suspicion of money laundering and terrorism, who happen to be the list in Regulation 35(14), when all of us could supply—even a five year-old could supply—a list of people much more likely to be in scope, who are not being subject to the same scrutiny.
On my second point, I do not think that I am in the wrong here, and suspect that my noble friend has not quite got it right, but am happy to be corrected. What are our international obligations to the FATF, insofar as we have legal obligations to it in a legal sense, given that it is not a legal body?
From this little iPad, I read out and referred very carefully to the current version of recommendation 12. It quite clearly says “foreign”; it places no obligation on the parties to the agreement to do anything about domestic PEPs. Clearly—this is where there may be a degree of confusion—in deciding who is a foreign PEP, you have to make a decision, if you like, that they are not a domestic PEP. Naturally, a sift is therefore required to get to the point of identifying that this is a foreign PEP, but I suspect that too much has been built on that, and there is some suggestion that that sift—are they foreign or are they domestic?—involves some obligation to scrutinise them. However, it simply is not there, so I referred in the course of my noble friend’s speech to the interpretative notes, and there is an interpretative note to recommendation 12, but it deals entirely with life assurance policies.
I think I also heard my noble friend say that recommendation 22 was relevant. That may have been a mishearing on my part but, looking at recommendation 22, it deals almost entirely with casinos, real estate managers and trusts. I do not know why they are all in the same recommendation, but there we are.
Financial Services and Markets Bill
Tuesday 21st March 2023
(1 year, 8 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-X Tenth marshalled list for Grand Committee - (21 Mar 2023)
Baroness Kramer
“Limitation on the powers of the PRA
The PRA may not accept an application from any insurance undertaking, reinsurance undertaking or third-country insurance undertaking for the application of a matching adjustment to a risk-free interest rate term structure for a portfolio of assets with a rating of less than BBB by Standard and Poors Global Ratings or its equivalent.”Member’s explanatory statement
This amendment seeks to prevent a matching adjustment being applied to a portfolio of high-risk and/or illiquid assets.
Baroness Kramer (LD)
My Lords, I start by thanking your Lordships for your patience in putting up with me being gone over the past few weeks following surgery. Noble Lords from all sides of the House have been so kind; I have appreciated it very much. It is lovely to be back in this company today. Special thanks go to my colleagues who have carried the burden that I should have been here to carry.
In a way, it is almost ironic that the three amendments in this group are all in my name. Amendment 216 deals with insurance and matching adjustments; Amendment 241C deals with the ring-fencing brought in following the 2008 financial crash; and Amendment 241D deals with the senior managers and certification regime, which is also a feature of the remedies proposed after the financial crash. When I tabled these amendments, a number of people pointed out to me that they did not seem particularly pertinent to the time—what a difference two weeks make. We have had three mid-sized banks fail in the United States and HSBC has had to step in and take over Silicon Valley Bank’s UK arm. Of course, we have also had the debacle of Credit Suisse, now part of UBS.
All that underpins the consistent jeopardy and risk that exists in the financial services industry and, to my mind, underlines the importance of having proper regulatory mechanisms in place to remove that risk in the first place, deter risky behaviour and provide a resolution mechanism for when things go wrong, as they always will. I regard the three amendments in my name in this group as rather crucial.
Earlier in Committee, we discussed the concern that the new secondary objective of international competitiveness could compromise the primary objective of financial stability. However, in many ways, that was an abstract discussion. These amendments in these three crucial areas of the financial services sector—all are areas where the Government have clearly signalled both their intention to allow, indeed incentivise, a significant increase in risk and their determination to use the law to prevent regulators limiting that risk—provide us with something much closer to real-life examples.
I start with Amendment 216, which addresses the insurance industry. Of course, this also encompasses many people’s pensions; in a sense, that was clarified in the Budget by the Chancellor, who talked about, in essence, opening up defined benefit pension plans to holding illiquid high-risk assets, in the same way as he anticipates Solvency UK opening up insurance companies to holding a far greater portfolio of illiquid high-risk assets. Under the EU regime, Solvency II, insurance companies are required to build a capital buffer based on the risks in their investments—their asset portfolio. The provision is designed to provide a safeguard if an insurance company fails, protecting both policyholders and the taxpayer. Solvency II allows an insurer to reduce its buffer where the insurance company is holding long-term assets that match the cash flows of its life and annuity insurance and its reinsurance obligations. That relief is called the matching adjustment. It allows adjustment to the discount rate that the firm is required to use to value its cash flows in order to determine the size of the buffer.
With Brexit, Solvency II is being replaced by Solvency UK. No one, including me, denies that Solvency II is probably overly restrictive and requires a degree of reform. I have not objected that Solvency UK is reducing the level of capital—the sort of raw capital buffer—by 65% for life insurers and 35% for general insurers. But the Government are now choosing to go much further. At present, the matching adjustment, which, as I said, has the effect of reducing the buffer even further, applies only to long-term assets held by the insurance company that qualify as investment grade. The change now proposed allows long-term, high-risk, illiquid, sub-investment grade assets—subprime is another word that is often used—to get the benefit of the matching adjustment. There is nothing that the regulator can do about it.
Why would the Government take such a risk? I think the answer is sheer desperation. They are hoping that the insurance companies and the defined benefit pension funds, to which we now know that this will extend, if they do not need to hold much of a buffer, will invest much more in the scale-up of innovative businesses, because scale-up money is hard to find in the UK. Unfortunately, scale-up is the phase at which many companies fail. The standard rule of thumb is that 40% of companies scaling up fail.
The Government are also hoping that the money will go into infrastructure. I should explain that many infrastructure projects are investment grade. TfL bonds, for example, are investment grade, as are the bonds for the M6 toll road; they qualify for the matching adjustment. But many infrastructure projects are high-risk and the bonds they issue are very illiquid. Just look at the pattern for most major infrastructure projects, and small ones as well. There have been delays and overruns in Crossrail, HS2 and pretty much every nuclear power project anywhere in the world. The worst part with infrastructure is that you rarely know that it is in trouble until it is very close to its official completion date. The matching adjustment would apply a far more extensive range of sub-investment grade investments. I know from talking to many companies that they see this as their way to get back into subprime mortgages and subprime property arrangements.
I am very old-fashioned. I believe that the primary purpose of an insurance company is to pay its policyholders on time and in full, and the primary purpose of a defined benefit plan is to pay its pensioners on time and in full. As I said at Second Reading, many people point out that these are pools of money and that the equivalent pension funds in Canada invest heavily in global infrastructure. I point out yet again that, if anyone reads the comments of the rating agencies on those Canadian pension funds, they will become very aware that the Canadian Government are regarded as a backstop should those funds collapse.
That is very different from the situation that we have in the UK, unless the Minister is about to tell me that the UK taxpayer is now willing to become a backstop for pension funds and insurance companies in the UK. The only example that I know about is one that we discussed earlier—Equitable Life. We know that nearly a million policyholders lost more than three-quarters of their investments when Equitable Life failed and that the Government did not bring them back to full recovery, even though the financial ombudsman found serial maladministration by both the Treasury and the regulator. I would very much like to know from the Minister, as we look at Solvency UK, which is enabled by the Bill, whether the Government now propose to give an equivalent backstop to that provided by the Canadian Government.
My amendment basically says that:
“The PRA may not accept an application from any insurance undertaking”—
I will not give you the rest of the details—
“of a matching adjustment to a risk-free interest rate term structure for a portfolio of assets with a rating of less than BBB by Standard and Poors … or its equivalent.”
This is my attempt to stop that reduction in the capital buffer for illiquid, high-risk investments.
I will try to be briefer in dealing with the other two amendments in this group. I shall take Amendments 241C and 241D together. These amendments sprang from the Chancellor’s speech on the Edinburgh reforms. I have referenced before my concerns, which are shared by many who, like me, sat on the Parliamentary Commission on Banking Standards, that we are seeing the rollback of the safeguards that followed our commission’s report Changing Banking for Good. Let me quote from it:
“An important lesson of history is that bankers, regulators and politicians alike fail to learn the lessons of history … measures that are implemented while memories are fresh will be at risk of being weakened once the economic outlook improves, memories fade, and new, innovative and lucrative approaches to global finance emerge.”
That is exactly what we are seeing today, and the past two weeks have illustrated it in spades. The failure of three significant mid-sized banks in the United States was enabled by the rollback of regulation, a rollback that had been sought by the siren voices of the industry. Those same siren voices are currently extremely influential in the Treasury, and I am hoping that we will hear from the Minister that she will go back and look at the decisions to weaken that regulation in the light of the reality that we have seen over the past two weeks and the experience in the United States. Many of these regimes, particularly the senior managers regime, are now to be carried over into the shadow banking world. I am sure that is a good thing, but it is very concerning if those projects are watered down before they are carried over.
I am very concerned about the watering down of ring-fencing. Today, I asked some questions in the Economic Affairs Committee, and it is clear that the Chancellor intends to make changes to the ring-fencing regime. I accept that there are times when one could claim that ring-fencing has been overzealous with small and medium-sized banks and there are some arguments for the need to change MREL, but it is shocking to see that the Government are backing the recommendation of the Ring-fencing and Proprietary Trading Independent Review that if a bank is deemed “resolvable” its ring-fencing features can be removed.
The proposition behind ring-fencing was that retail banking is an entirely different animal from the casino banking of investment banking. It is essentially in many ways a utility, and it needs to be kept safe and separated by the virtues of the ring-fence. On the commission we also saw constant cross-contamination—in other words, risks being taken within the retail bank because of the impact in the universal banking model of their investment banking colleagues. Things such as PPI and various other forms of general abuse of customers clearly sprang from the internal pressures that were created by the overall culture of the combined firm. We could also see that many of the risks that the investment bankers tended to take were fuelled by their access to retail bank accounts that paid no or very little interest and were protected by insurance and which almost, in a sense, provided a honeypot that incentivised the taking of undue risks and played a very significant role in the kind of failures that led to the crash.
To quote Paul Volcker,
“it is the damage that it does to the culture of the whole institution … Trading operations and impersonal proprietary trading operations are simply different from a continual banking relationship.”
In other words—of which there were many—the linkage between retail banking and investment banking contributes fundamentally to all kinds of abuse of customers and small businesses, from PPI, the asset stripping of RBS GRG and the mis-selling of interest rate swaps. It also lay behind the complete collapse in credit standards and the short-term funding strategies that sank HBOS. Ring-fencing is a vital tool to provide for financial stability. With the plans to remove the cap on bankers’ bonuses, which the Government and industry treat as one of their highest priorities, it is even more important that this protection stays in place. My Amendment 241C would prevent any such destruction of the ring-fence without a decision by Parliament in primary legislation.
Baroness Noakes (Con)
My Lords, the banking commission did sterling work in the years after the banking crisis, helping shape the content of the banking reform legislation. However, I cannot support these amendments because they are trying to set the findings of that conclusion in concrete, to apply for all time. One thing we know is that times change—sometimes for the better, sometimes for the worse. Having constantly to hark back to what the banking commission said before any sensible changes can be made under the existing available rules seems the wrong direction of travel.
If there was one thing that the HSBC/Silicon Valley Bank episode showed, it was the rigidity of the ring-fencing rules, which were effectively one of the great successes of the banking commission in making sure that rigid rules were set in statute. What had to happen to facilitate HSBC’s acquisition and takeover of Silicon Valley Bank were special statutory exemptions via a statutory instrument. The result was that HSBC now has permanent changes to the ring-fencing regime for it alone, which may well end up with it having permanent competitive advantage over its other rival ring-fenced banks in the UK.
We need to learn lessons from what has happened over recent weeks; the noble Baroness, Lady Kramer, is absolutely right about that. I would be interested if my noble friend the Minister could give more of an idea on the timing of when we might get a lessons-learned report—I think she spoke about that when she first spoke at the Dispatch Box about the HSBC takeover. The answer is not necessarily that we should be taking less risk and making things more difficult to happen, as that is not necessarily the right conclusion from what went wrong.
I hope that the Government will not be frightened by the recent events into not carrying out some reforms of ring-fencing. They have shown themselves willing to consider some sensible reforms to make sure that ring-fencing works well, particularly with regard to small and medium-sized banks. Only a few weeks ago in Committee the noble Baroness, Lady Kramer, agreed that the MREL rules caused a particular problem in the UK; indeed, she said that she constantly reminded the chief executive of the PRA about that. There is an issue about how the rules apply to small and medium-sized banks in the UK. We have to remember that the thresholds used to establish what is a small and medium-sized bank in the UK are way below the thresholds which were increased by the Republicans and which may well have contributed to the problems with Silicon Valley Bank in the US.
I hope that the Government will press on with their consultation on ring-fencing and on the senior managers regime. Having been on the receiving end of the senior managers and certification regime for the nine years that I was on the board of what is now NatWest, I know that it is very bureaucratic and inefficient, and it does not necessarily target the kind of things that people thought it was going to be targeting at the time. It is therefore time to step back and ask whether this is the best way of achieving the objectives, which are to ensure that people take responsibility for their actions. What this has ensured is that there is a whole industry of chopping down forests, in order to fill files of evidence that you have taken reasonable steps to carry out your responsibilities, and I do not think that was the intended outcome of the reforms at the time.
I therefore make a plea: let us not get panicked by what has happened in recent weeks into not accepting that there is a good case for reviewing both the ring-fencing and the SMCR rules. I have nothing to say on insurance because it is not my specialist subject.
The Archbishop of Canterbury
My Lords, I have added my name to Amendments 241C and 241D tabled by the noble Baroness, Lady Kramer, and wish to speak briefly in support of them here. I am particularly grateful to the noble Baroness, Lady Noakes, who made some very helpful and powerful points.
As the noble Baroness, Lady Kramer, said, this marks 10 years since the publication of the Changing Banking for Good report from the parliamentary commission, on which I sat with her. The two amendments to which I have added my name are probing amendments to stress the importance of not forgetting the lessons of 2008-09, because people and sectors entirely can have very short memories.
As the noble Baroness has explained, the amendments seek to prevent alteration to two elements of the banking reform Act 2013 by statutory instrument without proper debate in Parliament, and to prevent changes which go against the recommendations of the parliamentary commission. Our memories have certainly been refreshed this week. If the debate on this group had been held when it was first scheduled two or three weeks ago, I think we would have had a very different reception. If one is grateful for anything in the present crisis, it is that we have been so warmly reminded of why we need a clear memory.
The ring-fence was first recommended by the Vickers commission in 2012, and it was “electrified”—in the words of the noble Lord, Lord Tyrie, in the Parliamentary Commission on Banking Standards report—to address the issue of banks seeking to test it. In our first report in 2012, we commended the coalition Government’s intention to introduce the ring-fence but said, as has been quoted, that it would be worn down in time, and that it had to be
“sufficiently robust and durable to withstand the pressures of a future banking cycle.”
After 10 years, we are now in a future banking cycle. We have gone through a long period of very easy money in which the banks have been able to make a great deal of money and to recover and increase their capital to much better standards than were around in 2008.
The very rapid increase in interest rates right across the western economies—particularly in the United States, which has the fastest increase for 50 years—has resulted in, as usual, the exposure of risks being taken that had not been foreseen. It is the “had not been foreseen” and possibly the “unforeseeable” that are important to stress when looking at this.
Electrification gives banks a disincentive to test the limits of the ring-fence. It is human nature—especially in a corporate entity—to test the limits of any regulation and see if they hurt when you hit them. But 2008-09 hurt far more people than simply the banks. It caused a global recession, and it hurt the poorest in the land more than anyone else. At that time, I was working in Liverpool and living in Toxteth, and we saw the impact on those who were least able to live with it. It is still hurting the whole economy, because for at least a generation after a financial crisis, as opposed to a normal economic recession, there is a deep fragility in confidence. The ring-fence and the other regulation of banks and higher capital are all about maintaining confidence, not about making it impossible for people to go bust.
The recent failure of SVB in the US, and the ease with which what is by global standards a major bank was reclassified as a systemically important bank and thus eligible to be rescued—even though there is a system for resolving banks which is meant to be robust—demonstrates that the issues of systemically important banks are very difficult to handle. Again, the problem is one of confidence: we are talking about the contagion of a lack of confidence, and not simply about the failure to observe rules and regulations.
The resolution of banks is part of the system in the USA. It applied to SVB and to Credit Suisse, but it was not enough to protect the taxpayers of the US or Switzerland from having to put in significant implicit and explicit support. This is all about confidence. If we go on bailing out the system as it is, one of the unintended consequences is likely to be further damage to confidence.
For me, one of the most memorable moments of the banking standards commission was hearing the very broken and tragic testimony of a former head of a global bank outside this country. He was a man of absolute integrity who had been brought to the point of complete breakdown—I suspect my colleagues remember it—by the impact of the failure of the bank he led. Right at the end of his testimony, I asked him, “When you wake in the night, what do you remember and wish you had done differently, because we all do that over events in our past?” He said, basically, “That’s easy. I remember that you can run a small, complicated bank safely, or a big, simple bank safely, but you cannot run safely a big, complicated bank”.
The Archbishop of Canterbury
Going back to the fiscal event, a lot of the pension funds almost went bust. We learned a lesson from that, quite rightly, and I think it is a lesson that will be kept.
The ring-fence and the SMCR have been important for encouraging—not solving—improved standards and culture in the banking sector and for protecting the public from bearing the brunt of future banking failures. We cannot forget the lessons learned with such pain for so many outside the banking sector, who had no idea what goes on in banking but found that life suddenly just did not work any more.
I hope that the Government take a further look, certainly through the consultation, at the lessons of the last few weeks, and that the ring-fence is strengthened, not weakened, and improved. I agree with the noble Baroness, Lady Noakes, about both the ring-fence and the SMCR. Both are cumbersome and need rethinking, but not abolishing.
When asked why he had changed his mind, John Maynard Keynes—apocryphally, I think—replied:
“When the facts change, I change my mind. What do you do, sir?”
Given that the facts have changed over the last few weeks, the Government need to ask themselves whether they are going to change their minds and think harder about adequate protection for the basic financial structures that protect the weakest in our society.
Lord Eatwell (Lab)
My Lords, these three amendments project a peculiar background, which is an issue that this Committee debated in an earlier session—that of accountability. The first amendment of the noble Baroness, Lady Kramer, Amendment 216, is too detailed for primary legislation. On the other hand, I sympathise entirely with the noble Baroness’s goals. In a principles-based system, I would have expected these goals to be expressed in the principles and achieved by the rule-making regulator but, given the lack of accountability with which the Government seem so comfortable—I was impressed by the noble Baroness’s argument on Amendment 216—we cannot be confident that changes will be made at the necessary points. There is no vehicle for Parliament to ensure or inspect the rule-making of the regulators.
I think Amendment 216 is necessary because the Government are so weak on accountability. If we had strong accountability, whereby we could hold the rule-makers to account—both positively, in the sense that you are doing something that you should not be, and negatively, in the sense that you are not doing something that you should be—amendments such as this would not be necessary. Amendment 216 is necessary in the way so carefully described by the noble Baroness, Lady Kramer, simply because of the lack of accountability in the system.
This also applies to the other two amendments in this group. The noble Baroness, Lady Noakes, powerfully pointed out that, because of the peculiar circumstances in which it took place, the resolution of SVB UK required a relaxation of the ring-fence. I am entirely sympathetic with the goals of these amendments, which address the overall structure of the industry and therefore the overall risk appetite of this country for banking and financial services. That is what the ring-fence and the senior managers and certification regime are about.
The “but” is the important case highlighted by the noble Baroness, Lady Noakes, where some modification was necessary. If we had proper accountability, this could come to Parliament, which could then examine this example of relaxation to discuss whether it is appropriate to extend it to other banks, so that there is this mythical level playing field in the competitive relationships between them.
I am enormously sympathetic to the goals of these amendments: to the first because it is a practical issue of excessive risk-taking by insurance companies and, as we have seen, pension funds; and to the other two because they refer to the structure of risk which Parliament has decided is appropriate in this country’s financial services industry. It should not be modified wilfully—I am thinking of the marriage ceremony—and without due consideration of the consequences. Therefore, the Government would once again be well advised to reconsider the issue of accountability, which they have brushed away so casually, because it would provide the flexibility for Parliament to be involved in changing the risk appetite of the country as a whole.
Viscount Trenchard (Con)
My Lords, I again declare my interest as a director of two investment companies, as stated in the register. I will speak about all three amendments.
In Amendment 216 the noble Baroness, Lady Kramer, seeks to prevent a matching adjustment being applied to a portfolio of assets with a Standard & Poor’s rating of BBB or less. Does this mean a portfolio of assets comprising at least one holding of BBB paper, or a portfolio consisting exclusively of holdings rated BBB or worse? Either way, I welcome the Government’s proposal to remove the disproportionately severe treatment of assets with a credit rating of BBB or below, which will reduce the incentives for insurers to sell BBB assets in a market downturn. These reforms would encourage insurers to revise their investment strategies and risk appetites for investing in sub-investment grade assets, increasing funds available for investment in beneficial infrastructure projects, for example.
In any case—here I agree with the noble Lord, Lord Eatwell—is this attempt to constrain the powers of the PRA not too specific, and the kind of very precise regulation that we want to get out of primary legislation so that we can give discretion on this kind of thing to the regulators? I therefore cannot support this amendment.
I tremble in my shoes to disagree with the good intentions expressed by the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the most reverend Primate the Archbishop of Canterbury in seeking, in their Amendments 241C and 241D, to make it very difficult to weaken the ring-fencing provisions or change the senior managers and certification regime. It is clear that she and her co-signatories are among those who believe that the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed and that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way.
Baroness Bennett of Manor Castle (GP)
My Lords, in rising to follow the noble Viscount, Lord Trenchard, I have to comment on a couple of the points that he made. When he referred to Amendment 216 and suggested that we could rely on the discretion of the regulators, I regretted that the noble Lord, Lord Sikka, was not here, because I am sure that he could have given some extensive account on that basis. We have cause for concern about the actions of the regulators. The noble Viscount also suggested that the relaxation of the ring-fence in the case of SVB, allowing its purchase by HSBC, was not important or significant. Of course, relaxation of rules under emergency weekend conditions is reminiscent of stopping contagion—rather like the kind of emergency steps we took in the face of the Covid-19 pandemic, where lots of things were done that would not be seen as viable under normal conditions.
On Amendment 216, I confess that I can see the arguments for why this should be considered too technical. However, the points made by the noble Lord, Lord Eatwell, about the fact that we do not have sufficient controls otherwise make the case for it.
On the points made by the noble Baroness, Lady Kramer, we have a problem where the primary purpose of insurance companies and pension managers has been chasing after massive profits, not looking to long-term security. While we are in that situation, we need find rules to manage it.
Responding to the comments of the noble Baroness, Lady Noakes, again suggesting that what has happened in recent weeks suggests that the ring-fence is not working, I think that a military analogy might be quite useful here. If you are in a city under attack and your walls are very nearly overtopped by the enemy, you do not at that point pull the walls down and start reconstructing them. You reinforce those walls. The events of the past couple of weeks have demonstrated that what we have now is not enough of a security system—that is patently obvious—but the answer is reinforcement rather than pulling everything down and starting again, because we saw fit to take actions after 2007-08 which we are hoping will make those defensive walls hold this time.
I would have attached my name to Amendments 241C and 241D had I been able to keep up with the flood of legislation we have before us. In reflecting on them, I want to quote an economist on the New York Times, Ezra Klein:
“Banking is a critical form of public infrastructure that we pretend is a private act of risk management.”
That is the context in which I hope the Minister can today reassure us that, as we come towards the end of Committee and in the new environment in which we find ourselves, the Government will seriously rethink this Bill, particularly key elements of it such as competition and ring-fencing, before we get to Report. I have to borrow from a letter in the Financial Times this weekend —I am relying on this as a source—the fact that apparently the correct name for a group of black swans gathered on the ground is a bank.
Baroness Bowles of Berkhamsted (LD)
My Lords, I did not prepare a speech on this, but recent events and the speeches have moved round to what a fundamental issue we are approaching here. One important issue, which underlines the Government’s changes on Solvency II, is how to get investment into our economy. That is a fundamental need that we have. It is possibly intertwined with how much national risk we are prepared to take. I do not intend to try to solve that now.
If we look at recent events and the responses to them, we see that we have different risk appetites in different countries, in how they will accept failure and what, in essence, they are prepared to bail out. As my noble friend Lady Kramer said, it appears to be the assumption that the Canadians would bail out the pension fund. Maybe they think that is a decent quid pro quo for getting a large amount of infrastructure investment and other investments. That is a balance that it is legitimate for a country to make, but I do not think it is one that we have made here in the UK. We have said “No more bailouts”. That may be something that can never be absolutely held to, as we know, but we do not operate on a principle that it is going to be the case.
Let us look at what happened with Silicon Valley Bank in the UK, where there was not really a great deal wrong other than it suffering the repercussions of what happened in the US and a bank run through co-ordination and a loss of confidence. What does that say about our challenger banks, if people are not prepared to rely on the amount of the deposit guarantees that we have? For industry, we have next to nothing. The Americans are talking about raising their amounts of guaranteed deposits because they realise that businesses will not trust smaller banks with large deposits if there are not higher guarantees. That worries people in the United States, because they do not want to lose their regional banks and to have everything go into large systemic banks. It should worry us that we have lost a challenger bank and that it has gone into a large systemic bank.
We may have to re-examine what our risk appetite is around things such as deposit guarantees. It is not pertinent to these amendments, but we have the same kind of risk issues when we expand and try to get insurance money into more risky investments. The same can be applied to what we want to do with pension funds. I suppose I had better declare my financial services interests as in the register again, just for the record. The recent history is that our institutions are not very good at investing in UK assets. Of the fallout from LDI, one of the things that is already under way is that pension funds will invest less in gilts. They will want to invest in something else—something that they can repo. They will therefore invest in corporate bonds but, to get the liquidity to be able to repo, they will be US corporate bonds. We will have yet another shift from investing in something in the UK. Even if that was the systemic risk concentrations of gilts, nevertheless it is a shift away from investment in UK assets, or not taking an opportunity for a switch in assets to be able to invest in those in the UK. Some of this is to do with our size. Maybe the Canadians have thought about that; I do not know. I am just sort of tossing these thoughts in. They are not hugely relevant to these amendments, but they are hugely relevant to the big issue that underlies the change on the matching adjustment —that is, how do we get investment into the UK economy? I should think absolutely every person in this Room wants that. It is hard to do it in a piecemeal way by changing the eligibility to the matching adjustment.
I do not fully trust the consultation process that we have in this country, because the pre-consultation process is dominated by an industrial lobby which knows what it wants. The consultation responses are weighed, and they are inevitably heavy with what the industry wants and why, and there is much less that comes in to counteract that. Therefore, we go down the track of accepting the proposals of the Government and getting what the industry says—but where is the backstop? This is where we come to the backstop that my noble friend has put in. The backstop is that it is for Parliament, through primary legislation. She does not say in her amendment, “Thou shalt never amend ring-fencing” or, “Thou shalt never amend the things that the Parliamentary Commission on Banking Standards did”. It says that it requires primary legislation. It says that this should go back to the body—albeit different people at a different time—and that there should be that analysis. This is the same sort of thing that the noble Lord, Lord Eatwell, was saying. Maybe you could get legitimacy from Parliament through a better accountability mechanism but, absent that, the only one we have is that it has to come back to primary legislation. With a Whip system and a government majority, that does not necessarily guarantee anything, but it will get at least a thorough airing and, in normal circumstances, you would get some toing and froing and some reasonable amendments if necessary.
Lord Tunnicliffe (Lab)
My Lords, I thank His Majesty’s Treasury for sharing its policy on the Edinburgh reforms last month. This Government, following their initial floating of the HMT intervention powers, have given parliamentarians serious cause for concern regarding their judgment. We should be slow to trust that they have the judgment and operational competence to implement the changes in the Edinburgh reforms safely and effectively. Could the Minister give an indication of the Government’s intentions and/or direction of travel concerning both ring-fencing and the senior managers and certification regime?
We heard from the Bank of England governor this week that the Government’s version of Solvency II reform increases risks for insurance firms by 200% more than the Bank’s preferred option. I think we are vindicated in our general concern about the Government’s gung-ho approach to financial stability. Sweeping changes to ring-fencing and the senior managers and certification regime are too important to be left to statutory instrument. The amendments from the noble Baroness, Lady Kramer, are sensible safeguards that the Government should consider thoroughly.
We have seen chaos in two banks this week—Silicon Valley Bank and Credit Suisse. What is the Government’s assessment of whether other systemically important banks are safe and sound? Did we see SVB and Credit Suisse coming? Did the regulators? What are they proactively doing to protect UK consumers and investors?
My view on Amendment 216 is not yet fully formed; I want further discussions with colleagues. I agree with the general view on Amendments 241C and 241D that the issue is really about scrutiny and accountability. In my view, it is impossible to argue that a relaxation of either ring-fencing or the senior managers and certification regime is other than very significant. The present method of accountability through an affirmative instrument is clearly insufficient and I commend the device of the noble Baroness, Lady Kramer, which she has included in these two amendments. The Government should support them.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I will speak first to Amendment 216, which pertains to the Government’s announced reforms to Solvency II, made possible through the Bill’s revocation of retained EU law.
The Government are reforming Solvency II, the rules for prudential regulation of the insurance industry currently set by the EU, to reflect the UK insurance market’s unique features. These reforms will provide incentives for insurers to increase investment in long-term productive assets by more than £100 billion. They will also benefit consumers by increasing insurers’ ability to provide a broader range of more affordable products.
The Government have committed to make changes to the matching adjustment, an accounting mechanism whereby insurers can match their long-term liabilities with long-term assets and hold less money to pay out claims. These reforms will incentivise firms to invest significantly more in long-term productive assets such as infrastructure. This investment will support growth across the UK and the Government’s climate change objectives.
The noble Baroness’s amendment would instead result in a stricter treatment for some assets than under current rules. I reassure noble Lords that the Government’s reforms to Solvency II strike a careful balance between boosting growth across the economy and maintaining high standards of policyholder protection. Insurers will still be required to hold extra capital to safeguard against unexpected shocks, they will still have to adhere to high standards of risk management, and they will still be subject to comprehensive supervision from the PRA, our world-class independent regulator.
The noble Baroness, Lady Kramer, asked whether we would replicate the Canadian Government’s position with regard to pensions and insurance firms in this context. She referred to statements in the Budget about pension funds—although I think they were focused more on defined contribution pension funds than defined benefit pension funds. I do not know the detail of the specific Canadian regime, but the reforms proposed here do not pose risks to financial stability. As I said, each insurer must still hold enough capital to survive a 1-in-200-year shock over one year. Insurers will still have to adhere to the high standards of risk management. The Government and the PRA have announced a series of additional supervisory measures that the PRA will take forward to ensure that policyholders remain protected. For example, the PRA will now require insurers to take part in regular stress-testing exercises.
Lord Eatwell (Lab)
May I comment on the issue of stress tests, which the Minister also raised during Questions this afternoon? You can stress test only risks that you know are there. It depends on the underlying model that you create to examine in your stress tests. Thus stress tests did not pick up the LDI problem at all because it was not there in the models that were used. In financial services, risks appear in entirely unexpected places, and relying on stress tests is, and has been demonstrated to be, a very weak answer. She should reconsider her reliance on this argument.
Baroness Bennett of Manor Castle (GP)
Since it is related, I also question the readiness for a 1-in-200-year shock. We have seen very similar kinds of mathematical approaches, if you like, taken to issues such as flood risk and other climate risks, and they have been found to be very ineffective in dealing with problems. They only increase the failure to understand risks.
Baroness Penn (Con)
I would point to stress tests as one of the tools that the Bank of England, including the FCA and the PRA, has in its toolbox for securing financial stability. It is not the only tool that it uses. The noble Lord is right that it tests against certain scenarios, which are updated each year to take into account the changing picture around the world and look at different risks, but it can test for only the risks that we have thought about. It is a tool in the toolbox, not a solution to everything.
The noble Lord mentioned LDI. The picture there is mixed. It was identified as a source of risk by the Financial Policy Committee but the extent of movement in gilt prices that it was then stress-tested against was far greater in the scenario that we saw unfold. It may be a good example of the benefits of being able to horizon-scan and look for risk—risk was identified—but also of the limits of some of that work. I completely acknowledge that. The same applies to the point made by the noble Baroness, Lady Bennett.
Amendments 241C and 241D relate to important regulatory reforms introduced following the global financial crisis and the recommendations by the Parliamentary Commission on Banking Standards. I pay tribute to the important work of that commission and to its members who are here today. It has had a lasting legacy in improving the safety and soundness of the UK’s financial system.
Amendment 241C relates to the ring-fencing regime, which, as we have heard, is a major post-crisis reform separating retail activities from investment banking activities in large banking groups. As required by the Financial Services (Banking Reform) Act 2013, the Treasury appointed an independent panel, chaired by Sir Keith Skeoch, to review the ring-fencing regime. The legislation required this review to take place after the regime had been in operation for two years; that review concluded in March 2022. I say to my noble friend Lord Trenchard that the Skeoch review looked at the questions about the effectiveness of the ring-fencing regime, and it is in the context of that review that we are discussing the way forward.
In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime. These broadly follow the recommendations made by the independent review. It concluded that the financial regulatory landscape has changed significantly since the last financial crisis—a point made by my noble friend Lady Noakes. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can be managed in an orderly way in future, minimising risks to depositors and public funds.
In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the regime. Crucially, the panel stressed that these could be made while maintaining financial stability safeguards. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. I assure noble Lords that the Government remain firmly committed to the objectives of the ring-fencing regime: to protect core banking services, such as retail deposits, from risks elsewhere in the financial system while minimising risks to taxpayers in the case of a bank failure. As recent events have shown, it is critical that the Government and regulators have the necessary powers to act decisively in pursuit of these objectives.
In response to the review, the Government have announced their intention to consult later this year on a series of near-term reforms to the ring-fencing regime to implement the independent review’s recommendations. The proposed reforms will make the regime more adaptable, simpler and better placed to serve customers, while maintaining important protections for depositors and financial stability. Alongside this, and in response to the review’s longer-term recommendations, the Government recently published a call for evidence that explores how better to align the ring-fencing regime with the resolution regime. I assure all noble Lords that, in the context of that longer-term call for evidence, no decisions have been made on the longer-term future of ring-fencing. The call for evidence is seeking views on a wide range of options including the possibility of disapplying the regime where banks are deemed resolvable, which was one of the Skeoch review’s recommendations. It also seeks views on retaining or further alternative options for reforming the regime.
Baroness Kramer (LD)
My Lords, I thank everyone who has spoken. When I originally drafted these amendments, they were genuinely probing amendments. I felt that I had stumbled on some issues that, if I was correct, would surely be of such significance that they would have been brought before the House and widely discussed. They changed two of the absolute pillars of our financial regulatory regime: ring-fencing and the senior managers regime. It is evident to me that this is a relatively new topic for most noble Lords here, who are the core of those in this House who engage on these issues. I am therefore very troubled that this has not been part of a broad, in-depth discussion between the Government and Parliament.
I very much agree with the noble Lord, Lord Eatwell. If we had a working accountability system, there would be a mechanism to help deal with all this, but we do not have one. Frankly, I do not want to wait until we do, unless we agree something on that in this Bill, because these fundamental changes have such a possibility of putting our financial stability in jeopardy that we cannot simply sit back and treat them as if they are fairly minor adjustments. They are fundamental to changing the guard-rails that have protected us for the past several years.
I very much agree with the noble Lord, Lord Eatwell. Stress testing is not a litmus test; it is simply a tool to try to expand one’s thinking and to try to identify potential possibilities. The Government have treated it as if it was some kind of litmus test: if it comes up red or blue, or whatever else it is, you have passed and everything is fine. That is not what it is about—in fact that is an abuse of the whole concept of stress testing.
I am extremely worried about the changes to Solvency II as it moves to become Solvency UK. I should say to the noble Baroness, Lady Bennett, that I do not have a quibble with the regulator—the regulator has been shut out of this process. This is a government decision that the matching adjustment will be allowed to apply to illiquid high-risk investments because those are the kind that the Government wish to see increased in our economy. I am happy to see them too but, frankly, I would like somebody in the financial capital market who understands the risk and is willing to take the risks to put money in, whether it is scale-up or infrastructure. The idea that this will now become the norm for pension funds, where basically the policyholders will have absolutely no say and I suspect very little understanding of the level of jeopardy in the fund to which they are contributing on a regular basis, bothers me hugely.
I will be very glad if someone else can come up with some mechanisms. The mechanisms that I used here of parliamentary accountability have been my attempt to deal with what seemed like a problem that was not being discussed. However, the excellent speeches that we have heard today, and indeed the Minister’s reply—it did not suggest that we have been exaggerating the situation, but confirmed the problems—mean that we will have to try to find some mechanism, and quickly, to deal with this range of issues. The last two weeks have made it clear that it is complacency to think that we have in place the kind of structure that genuinely protects us from financial risk, and complacency is exceedingly dangerous. I beg leave to withdraw the amendment.
Lord Holmes of Richmond
“Digital identification
(1) Within six months of the passing of this Act, the Secretary of State must publish the Government’s plans for the development and deployment of a distributed digital identification (“Digital ID”) for individuals and corporate entities in the financial sector.(2) The digital IDs should be—(a) scalable,(b) flexible, and(c) inclusive.(3) The Secretary of State must also undertake a public engagement campaign around Digital IDs to raise awareness and participation in the process with regard to the financial sector.(4) In this section—“digital ID” means a set of attributes related to an entity, as according to the International Organization for Standardization and International Electrotechnical Commission framework 24760-1;“flexible” means capable of resilience and workable as technologies develop and evolve;“inclusive” means capable of including all entities and individuals, not least, in respect of their protected characteristics as set out in the Equality Act 2010;“scalable” means capable of national deployment.”
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to move Amendment 218 in my name and to speak to this group of amendments. In doing so, I declare my financial services and technology interests as set out in the register. I will speak to Amendments 218, 220 and 221 in my name and will also speak briefly to the remaining amendments in the names of my noble friends Lord Bridges and Lord Forsyth respectively.
Amendment 218 is about perhaps one of the most significant things that we could do to transform financial services in the United Kingdom. Whether we are talking about fraud, operational efficiency or whatever measure or element of financial services we are considering, to have a form of digital ID would transform the current situation. It is vital that the Government strongly consider and move forward with such a system of ID and, in doing so, fully engage the public on this. Understandably, if the public one day wake up and find that they need a digital ID to access their banking services, why would they think that is a good thing if they had not been involved at any stage in the creation and the deployment of such an ID?
To put it in a non-financial services frame, if I wanted to have a pint—not now, obviously, although the previous group perhaps took longer than we were expecting—I might be asked for a passport. What is the purpose of that? Why should the bartender see my name, my date of birth, my passport number, where I was born, et cetera? All that is required for that pint to be put in front of and consumed by me is that, at the point when I order and consume the pint, I am over the age of 18. Nothing more needs to be known.
The same credential-led approach is what we require in financial services—not a huge giveaway of data with the potential for businesses to grab everything about us, as has happened in other sectors of the economy. Put simply, we need a particular credential that is within an individual’s control and can be put across to enable a transaction or inquiry, whatever it may be, to take place. I ask my noble friend the Minister to comment on the need for the Government urgently to engage and to increase the work that is happening in other departments on a general digital ID to be particularly applicable to the financial services sector.
Amendments 220 and 221 concern artificial intelligence. It is worth me making a few preliminary points before I go into the specific elements of the amendments. A helpful Bank of England paper on this subject was put out on 11 October last year, lest anybody think that AI is something for the future and not for us to worry about in the Bill. In the paper, 72% of financial services businesses said that they already use, or are about to use, AI. None of them said that they believed that the current way in which they used AI was high-risk, while more than half said that they were currently constrained in their ability to deploy AI fully because of current regulations on the PRA and FCA approach to the subject. That is some of the backdrop. To put my own cards on the table, lest anybody think otherwise, I am neither Panglossian nor po-faced about AI or, indeed, any of the other new technologies that we have in our hands. Yes, they are incredibly powerful technologies, but they are in our human hands in terms of how we design and deploy them. Thus I describe myself as rationally optimistic about their potential.
Amendment 220 brings this to life, I hope. It is a real opportunity for the UK, not just in financial services but across the whole of our economy and society, if we have an approach to ethical AI. The UK could be world-leading in the deployment of ethical AI; financial services is as good a place as any to have such an approach. I reference the Centre for Data Ethics and Innovation in this amendment; I am not wedded to it. Other organisations, such as the Alan Turing Institute, also have a role to play but the key is that there is an agreed underpinning.
For example, when we did the Lords Select Committee AI report in 2018, we set out five ethical principles; I do not want to give them any more concretion, to reference a previous group, but I say to my noble friend the Minister that one of the key architects of those ethical principles was the right reverend Prelate the Bishop of Oxford, who was a member of the committee. One therefore understands that they have behind them more than just the weight of the mere mortals here today.
Amendment 221 seeks to build on the ethical AI deployed in financial services institutions, and to have in every such institution a member with a responsibility for AI, in the same way that we have a money laundering reporting officer. Obviously, specific to the size of the organisation, it does not need to be an individual who performs only that role, but somebody in every financial services institution in the UK needs to be a designated AI officer. Does my noble friend the Minister agree?
Lord Forsyth of Drumlean (Con)
I apologise for not being able to attend the Committee last week because I was not in the Lords. I have been asked to speak to Amendment 241F, which was tabled by the noble Lord, Lord Bridges, who is currently in the Economic Affairs Committee interviewing the Chancellor. I shall speak also to my Amendment 241FD. I am grateful for the support of my noble friend Lord Holmes for the idea that there should be primary legislation in respect of any CBDC.
The Committee might be relieved to know that I am not proposing to go through the merits of CBDCs. I am very happy to do so if the Minister would like it, but the arguments are well set out in the paper, which was produced by the Economic Affairs Committee that I chaired, published on 13 January 2022 and entitled Central Bank Digital Currencies: a Solution in Search of a Problem? That might give noble Lords an idea of the conclusions of the committee.
The Government and the Bank of England are not convinced. They are still in search of the problem and the solution and a lot of work is being carried out on this. I do not propose to get into whether they are right or wrong about that, but I commend the committee’s report and the Government’s response, which was a letter to me dated 9 March 2022 which ran to all of seven pages—a commendable example of brevity from the Treasury.
On the first page of the letter, the then City Minister, John Glen, said:
“No decision has been taken by the government and the Bank of England as to whether to issue a UK CBDC, which would be a major infrastructure project.”
Indeed, it would. He went on:
“A decision will be based on a rigorous assessment of the overall case for a UK CBDC and will be informed by extensive stakeholder engagement and consultation. Exploring and delivering a UK CBDC, if there were a decision to proceed, would require carefully sequenced phases of work, which will span several years.”
Noble Lords will note that there is no mention whatever of Parliament in those considerations.
In their response, the Government acknowledged that there was
“a broad range of opportunities and risks, which require careful evaluation.”
In response to the committee’s request to get a commitment from the Government that this would require parliamentary approval, the sentence which stands out is:
“The government expects to fully engage Parliament—including through any possible legislation—in an open and transparent manner to ensure that there is a full and proper scrutiny of any proposals over the coming years.”
I am prepared to bet any Member of the Committee a bottle of champagne that, when the Minister replies, we will hear exactly the same words.
The problem with those words is that they are not a commitment to parliamentary scrutiny; they are not a commitment even to secondary legislation, which my noble friend Lord Bridges’s amendment calls for. They are certainly not a commitment to introduce primary legislation to implement something of this scale and importance, which is what my amendment calls for.
My noble friend Lord Holmes mentioned that the Chinese were keen on CBDCs. I am not surprised: they are a means of controlling and knowing what every citizen is doing with their money and how much of it they have. Although the Bank of England will say that its system would be devised in a way which acknowledges the privacy issues arising from CBDCs, I do not for a moment imagine that there will be any such undertakings in China. I can see the attractions of it; there are huge civil liberty and privacy issues at stake here.
There are also substantial risks to financial stability arising from a CBDC and how it is constructed. On the one hand, if you go the whole hog and everyone’s cash holdings are held digitally by the central bank, that clearly has all kinds of implications for privacy and stability. If, on the other hand, it is argued that the commercial banks will carry this out and you would be allowed to hold only a certain amount in a central bank digital currency, it rather defeats the object of doing it in the first place.
If there is the ability to move money into your CBDC account on any scale, in circumstances such as those that have occurred in recent days with some banks, where people fear stability, they will move their money out of the banks into the central bank digital currency, which is clearly a safer haven. That could create huge liquidity problems for the banks. Depending on how it is designed and operates, we could see ourselves moving towards the nationalisation of credit. At this point, I should declare that I have an interest as chairman of Secure Trust Bank.
All of this, we are told, is going to take a lot of time and require a lot of consultation. However, it seems to me that something as fundamental as this cannot be left for the Bank of England and the Treasury to cook up without proper consideration by Parliament, given the issues that are involved.
In paragraph 13 of its equally lightweight response to the committee’s report, the Bank of England states:
“The Committee cites privacy and identity as key considerations related to CBDC and points out potential reputational risk to the Bank of being drawn into controversial debates on these issues. The Bank recognises that these are important topics for the design of any CBDC system and that appropriate safeguards must be ensured if CBDC is to command users’ trust and confidence. These matters are being looked at as part of the Taskforce’s exploratory work and will be taken forward in the Consultation Paper.”
Then there is the important part:
“The Bank also recognises that these issues extend beyond the remit of the central bank. As such the Bank will closely support the work being undertaken by, and take its lead from, HMG”,
not Parliament. Once again, as with the previous set of amendments and as so often in this Committee, we are wrestling with the question of accountability and accountability to Parliament. Here, we are looking at a major change with huge risks to personal privacy, financial stability and the cost and availability of credit. The notion is that this can all be done without proper consultation by Parliament.
In speaking to these amendments, I am a reasonable person. My noble friend Lord Bridges’ Amendment 241F simply requires a vote in Parliament and looks to secondary legislation. I would support that, but I would prefer that if the Bank of England and the Treasury decide, having carried out their consultations, that they wish to proceed with this it should be the subject of primary legislation and subject to extensive debate.
Again, we have not made a lot of progress today, so all I ask of the Minister is for her to fill in the blanks in the undertaking that was given to the committee of this House. It was an all-party report, supported by the members of the committee. They included the noble Lord, Lord King of Lothbury, who knows a certain amount about central banking, and several members of the committee have great experience. I hope that the Minister will be able to say that she can give an undertaking on behalf of the Government—if not at this stage, certainly at a later stage, but ideally at this stage so that we will not have to discuss it again later—that there will be primary legislation and that the Government will instruct the various committees of the Treasury and the Bank of England to proceed on the basis that it will require primary legislation, a draft Bill and an undertaking to deal with the many issues that arise from a central bank digital currency, which I will not bore the Committee with now.
There has been a lot of talk about what caused the financial crisis in 2008 and the risks that occur. In my experience, the really dangerous thing in financial services is groupthink and belief in models. This is an absolutely classic example of thinking, “The Chinese are doing it and others are doing it so perhaps we need to do it as well. What is going to happen in future?” That is fair enough—have an eye to the future—but just because everyone else is going to do something that might increase risk is not a reason to copy them.
I have a simple request for the Minister: will she please give an undertaking that we will have legislation should the Government decide to go down this course in future?
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly out of a sense of obligation and with a sense of déjà vu because on the previous financial services Bill I recall that I was the only Back-Bench speaker addressing a group of amendments from the noble Lord, Lord Holmes of Richmond, on digital issues associated with the financial sector. As then—having written a thesis on artificial intelligence 20 years ago, when we were said to be almost reaching it—I argue that we are no closer now than we were 20 years ago. We now have big data, not genuine, rich artificial intelligence. If noble Lords do not believe me, they should try putting mathematical questions into ChatGPT and see how far they get. What they will get is plagiarism and statistics, not understanding.
Lord Sharkey (LD)
My Lords, I will speak briefly to the amendments in the names of the noble Lords, Lord Bridges and Lord Forsyth. I agree with the analysis by the noble Lord, Lord Forsyth, of the dangers of having Parliament bypassed in the creation of a CBDC, but I will mention two things to which he may not have given enough weight.
The danger crystallises in the possibility of the disintermediation of the retail banking system, which would have incalculable consequences. Given the difficulties people have in dealing with their own banks at the moment, imagine the difficulty of trying to deal with the Bank of England about your personal account when things go wrong or you do not understand what things are doing. Given banks’ habit nowadays of closing people’s accounts without notice or reason, I wonder whether the Bank of England would take the same view if it had that power.
Like the noble Lord, Lord Forsyth, I would prefer any such creation—although I am not sure that I want one—to be via an Act of Parliament rather than regulation. However, regulation is tempting because I notice that proposed new subsection (3) of the amendment tabled by the noble Lord, Lord Bridges, finds a way of amending secondary legislation. With a bit of luck, we will deal with my amendment tomorrow, which does exactly the same thing in exactly the same kind of words but with broader application.
It is dangerous in the extreme to have Parliament excluded on the central bank digital currency, as the Government clearly intend at the moment. We ought to be very careful about that. When it comes to Report, where we need to think about what amendments we press, I would be very tempted to suggest to the noble Lord, Lord Forsyth, that he presses his amendment.
Lord Eatwell (Lab)
My Lords, I will make two general comments about these amendments—first, on Amendment 218 in the name of the noble Lord, Lord Holmes.
When I was chairman of the Jersey Financial Services Commission and therefore the regulator in Jersey, I was continually lobbied about the issue of digital identification simply because of the high cost of repetitive KYC investigations that institutions had to go through. It seems that the possibility of having a system of digital identification which would be generally acceptable and generally accepted within financial services would significantly reduce the costs of KYC and would provide a much sounder foundation for the credibility and respectability of the individuals attempting to transact within financial services. So this is broadly a good idea. It is very complicated, as I discovered when I tried to introduce it in Jersey, and it raises very important privacy issues, but, none the less, this is the way that the world is going and we need to think this through extremely carefully. It could be of great benefit to the whole KYC problem.
With respect to digital currencies, the one comment I will make is to remind the Committee of the debate that we had about the decline in the acceptance of cash and the fact that a significant number of people in our country are being deprived of money, since cash no longer works as money—it is no longer generally acceptable in discharge of a debt, which is the definition of money. Therefore, there will be a responsibility for the state to provide a digital form of money, because digital payment, as the noble Baroness, Lady Noakes, argued strongly at the time, will become the standard form of payment and cash is basically going to disappear —apart, perhaps, from the Tooth Fairy.
The issues of digital currency and digital identification are both hugely important for our future and, as the noble Lord, Lord Forsyth, argued—I agree with him most strongly—they require very careful parliamentary consideration.
Lord Tunnicliffe (Lab)
My Lords, on the digital pound, we support the Bank of England’s work exploring the potential benefits of a safe and stable central bank digital currency, but the Government’s overall approach to crypto remains unclear.
With the collapse of FTX, it is clear that crypto can pose a real threat to normal people in the real economy and therefore may pose a systemic risk in future. The approach HMT has taken to the digital pound is a welcome contrast to this Administration’s eagerness to lean into a crypto Wild West in the recent past. We need to get serious about attracting innovative fintech companies to the UK by safely harnessing the potential of new technologies. How will the Government do this?
On the amendments in general, the issue of accountability has come up once again. The concept of using primary legislation to have a check on these ideas is clearly practical and therefore very attractive, but it will have problems. If the Government would only embrace our concerns about accountability and come forward with a proper and comprehensive accountability structure, perhaps we would be able to develop a more sophisticated approach than the rather raw power of primary legislation. However, as a fallback it is very attractive.
Baroness Penn (Con)
My Lords, the Government have been transparent about their plans to enable the use of digital identities in the private sector, including in financial services, and we are committed to ensuring the scalability, flexibility and inclusivity of secure digital identities.
The Government initiated their digital identity programme following industry calls for the Government to take the lead in developing common standards for digital identity across the whole economy. We continue to believe that a whole-economy approach is the right way forward, and we are working with stakeholders to deliver this at pace.
For example, the UK digital identity and attributes trust framework has already enabled right to work, right to rent and criminal record-checking processes to be digitised, making these checks quicker and more secure. In addition, measures in the Government’s Data Protection and Digital Information (No. 2) Bill, which was introduced to Parliament on 8 March, go further by securing the reliability of digital identity services across the economy for those businesses and consumers who wish to use them. The Government also recognise that greater clarity with respect to how digital identity services certified against the digital identity and attributes trust framework support requirements under the Money Laundering Regulations will be key for market uptake. As set out in the Government’s 2022 Money Laundering Regulations review response, we have committed to considering this too.
I hope that I have reassured my noble friend Lord Holmes that the Government remain committed to enabling the use of secure, reusable digital identity products across the UK economy and that Amendment 218 is therefore not necessary.
Turning to Amendments 220 and 221, also from my noble friend, the Centre for Data Ethics and Innovation guidance has not been designed to form the basis of regulatory requirements relevant to financial services and is unlikely to address AI risks specific to that sector. Appropriating CDEI guidance for the basis of regulation that is aimed at the wider governance of AI through non-regulatory tools and industry-led techniques is therefore likely to lead to unintended consequences; however, I appreciate my noble friend’s point that he used the CDEI for illustrative purposes.
I assure my noble friend that the newly created Department for Science, Innovation and Technology is already developing a cross-economy, pro-innovation framework for AI regulation, underpinned by a number of cross-sectoral principles to strengthen the current patchwork approach to regulating AI directly. Further proposals for the new regulatory framework will be published in a White Paper in the coming weeks. Through our proposals for a new AI regulatory framework, we are building the foundations for an adaptable approach that can be adjusted to respond quickly to emerging developments. The vast majority of industry stakeholders we have engaged with agree that this strikes the right balance between supporting innovation in AI while addressing the risks.
Furthermore, the FCA, the PRA and the Bank of England recently published a discussion paper on how regulation can support the safe and responsible adoption of AI in financial services. Therefore, to avoid unintended complications with the use of digital identities and artificial intelligence in the financial services sector, I hope that my noble friend will not press his amendments.
Finally, I turn to the important topic of central bank digital currencies and Amendments 241F and 241FD, both ably introduced by my noble friend Lord Forsyth. The Government have been clear that they consider that Parliament will have a vital role to play in the future of any digital pound. As I set out to my noble friend Lord Bridges in a previous debate in the Chamber, when we discussed the findings of the report to which my noble friend referred, the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint Treasury and Bank of England consultation paper published on 7 February set out, the legal basis for the digital pound will be determined alongside consideration of its design; this is the subject of ongoing work.
Lord Forsyth of Drumlean (Con)
Could my noble friend the Minister just define what “vital” means? Does it mean primary legislation?
Baroness Penn (Con)
As I said, the approach we take will be determined alongside the consideration of any design of a central bank digital currency. The decision to move ahead with a CBDC has not yet been taken; however, we do believe that it is likely to be needed in future. Although it is too early to commit to build the infrastructure for one, we are convinced that further preparatory work is justified. Therefore, that definition will become clearer as the design of the approach also becomes clearer—but the commitment at the outset to parliamentary engagement is there.
Lord Vaux of Harrowden (CB)
The Minister just made a statement that it is likely to be needed in future. Can I ask a very simple question: why? Why is a CBDC likely to be needed in future? That seems a fairly bald statement.
Baroness Penn (Con)
My Lords, we may not wish to repeat the debate that we had in the Chamber earlier this year, but I was going to address my noble friend’s question about retail versus wholesale and the point from the noble Lord, Lord Vaux, about the use case for a CBDC.
The noble Lord, Lord Eatwell, made one of the points in relation to a CBDC. We want to ensure that central bank money, which is currently available to the public only as cash, remains useful and accessible to the public in an ever more digitalised economy. We have heard about access to cash in our debates earlier in Committee.
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, I am sorry to interrupt the Minister but there is a Division in the Chamber. The Committee will adjourn for 10 minutes, after which we will resume and allow the Minister to finish what she had to say.
Baroness Penn (Con)
My Lords, I was explaining why we think that the UK may need a digital pound in future. The central point is that we want central bank money, which is currently available to the public only as cash, to remain as useful and accessible as ever in an ever more digitalised economy.
I was going to address my noble friend Lord Holmes’s question about whether the work we are taking forward is focused on a wholesale or retail central bank currency. The proposal being considered is potentially to introduce a retail CBDC at some point in the future. With regard to a wholesale CBDC, banks have access to electronic central bank money in the form of reserves; we are open to exploring innovative ways in which wholesale firms could use reserves. There is a programme for reform under way on electronic central bank money in the form of reserves that will bring similar benefits to those that we see for CBDCs in the retail space.
Lord Forsyth of Drumlean (Con)
Is there going to be a limit on the amount that people can hold in this retail central bank digital currency? Does the Minister accept that, if there is no limit, that will have major implications for financial stability?
Baroness Penn (Con)
These are some of the questions that we want to consider through the consultation that is currently open and any further work. That consultation recognises the financial stability implications of developing such a proposal; we will want to consider them as we take this work forward.
Lord Tunnicliffe (Lab)
I hope that the Minister anticipates consultation and research. To me, “consultation” means coming back to the industry. The industry comes from a perfectly respectable position but it is one position. We need basic research, modelling and all the various techniques to explore the potential risks.
Baroness Penn (Con)
The noble Lord is right that the public consultation phases of this work are one element of the work that will be done by the Treasury and the Bank of England in developing this concept. There are many other strands of work that will also be undertaken. As we discussed in the previous debate, any such project would be a significant infrastructure project with significant financial implications so we would need an appropriate approach acknowledging that.
We are at an early stage of this work. As I said, we have not taken the decision to go ahead with a CBDC but we think that there is sufficient evidence to justify further exploratory work. At this stage, it would be premature to include any provision in the Bill. I reiterate my previous statement that the Government expect to keep Parliament fully engaged in this work as it progresses. I therefore hope that my noble friend Lord Holmes will withdraw his Amendment 218.
Lord Tunnicliffe (Lab)
That word, “engaged”, flummoxes us all. We do not see a mechanism in our system. Will the Minister write to us and spell out what “engaged” means?
Baroness Penn (Con)
I can look to write to noble Lords on this question but I am not sure that I would be able to add more to my response at this stage, which is that the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint consultation paper set out, the legal basis for the digital pound will be determined alongside consideration of its design; that is subject to ongoing work. If I wrote to noble Lords at this stage, I think I would be saying exactly that but, if there is anything further to add, I would be happy to do so.
Lord Sharkey (LD)
I just want to make sure that I understand exactly what the Minister is saying. If the Government decide to bring in the digital pound, will they commit to bringing it in via legislation?
Baroness Penn (Con)
I am afraid that I have gone as far as I can in detailing the approach that we would take to Parliament. We expect to engage Parliament fully. However, the legal basis for the digital pound will be determined alongside consideration of its design. Work is not yet at the stage where we can provide that further clarity.
Lord Holmes of Richmond (Con)
I thank all noble Lords who have participated in this debate and my noble friend the Minister for her response. At this stage, I beg leave to withdraw the amendment.
Earl Attlee
“Money laundering regulations: exports to Ukraine
(1) Within three months of this Act being passed, the Treasury must take all reasonable steps to make regulations to amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692) so as to secure that they do not prevent a supplier of financial services to a relevant person from supplying financial services in the relevant conditions.(2) For the purposes of this section, a relevant person is a small or medium-sized enterprise which exports armoured vehicles or other military equipment to Ukraine for the use of Ukrainian defence forces, or the agent of such an exporter.(3) For the purposes of this section, the relevant conditions are that an export licence has been granted to a relevant person under the Export Control Act 2002 for the export of items on the United Kingdom Military List of controlled goods to Ukraine for the use of Ukrainian defence forces, and the relevant person is in the process of supporting the export of those items for which the licence has been granted.(4) Regulations under this section are subject to the affirmative procedure.”
Earl Attlee (Con)
My Lords, in moving my Amendment 223, I will speak to my Amendment 241FB. They both deal with the unintended and undesirable effects of the anti-money laundering regime in the UK. I do not profess to have any expertise here; my relevant experience is in defence and security.
I fear that I am obliged to weary the Committee with a little detail. Russia has launched an unprovoked attack on Ukraine and, presumably, HMG have an absolute minimum strategic objective of preventing Ukraine being defeated. Failure to achieve this would result in significantly increased world insecurity and the need at least to double UK defence expenditure. EU and NATO Governments have been providing Ukraine with a range of armoured fighting vehicles—AFVs—through Government-to-Government arrangements. Armoured personnel carriers and armoured reconnaissance vehicles allow troops to move around the battlefield without unnecessarily falling victim to artillery or small arms fire.
To supplement Government-to-Government arrangements, the Ukrainians, through commercial agents and UK SMEs, have also been buying up privately and commercially owned AFVs in the UK. There are only a few businesses and individuals in the UK who can efficiently acquire and export these privately owned AFVs. They are generally small. To undertake this activity, they need to have the necessary technical knowledge, workshop facilities, ingenuity, innovation and contacts; have finance and premises; be seen as a fit and proper person to be granted an export licence for controlled goods on the military list; and, most importantly, be trusted by both Ukrainian buyers and UK private sellers.
The Committee needs to understand the facts of the real world. These small businesses simply do not have the resources to perform due diligence on Ukrainian businessmen and their intermediaries. Even if they could, the Committee will recognise that they would soon find red flags galore. However, the Government have the ability to check that the export of these AFVs is in line with their overall strategic objective.
The Export Control Joint Unit at the Department for International Trade grants export licences for controlled goods on the military list, among other things. So far as I can discern, it is doing a very good job. It is important to note that the Export Control Joint Unit has all the facilities of HMG at its disposal to determine whether military equipment should be exported to a certain customer or not. The money laundering regulations add nothing useful to this process.
I now turn to the mischief which my amendment seeks to address. During our debate on Ukraine on 9 February, I explained the problems that “Peter”—not his real name—is experiencing with the provision of banking services in the context of his exporting AFVs to Ukraine. I will continue to use his pseudonym for continuity reasons. I understand that Peter has export licences for around 100 AFVs and has already delivered a considerable number. Although the high street bank’s name is in the public domain, I will not name it, as it has done nothing wrong and has been extremely helpful. Apparently, in these circumstances, MPs will just get stonewalled by the banks, but I have very good relations with Peter’s bank.
On 20 December 2022, Peter’s bank wrote to him, closing his accounts with the bank without any explanation why. Peter was going to completely lose his banking services on 20 February. This would have put him out of business, as he cannot secure banking services from any other provider, and he would not be able to export any more AFVs to Ukraine. Other banks will not step in because they will have the same difficulties as Peter’s current bank. Peter’s bank made it clear to him that it was not prepared to discuss the matter further. This is standard practice, and I understand why. However, I have found out that the problem is that Peter’s current bank cannot accept the regulatory risk of supplying banking services involving large sums of money when Peter does not have the correct anti-money laundering systems in place. But even if he did, he would surely find red flags, as I have already mentioned, because he is dealing with Ukrainian businessmen. Fortunately, I managed to negotiate with the bank an extension to 20 March, which was yesterday.
Initially, I thought that the problem lay with an overzealous junior bank official and that a quick engagement at a senior level in the bank would get it sorted. I then discovered that it was a money laundering problem, as described, but the problem could be solved if a Treasury Minister wrote to the bank relaxing the money laundering regulations in a specific and minor way. I thought all this could be done discreetly and behind the scenes. How wrong I was. Ministers have refused to relax the money laundering regulations because, as I understand it, they believe that the complete integrity of the regulations is more important than facilitating the export of armoured fighting vehicles to Ukraine.
I repeat the question that I asked my good and noble friend Lord Ahmad on 9 February. Is it settled Government policy that the complete integrity of the money laundering regulations is more important than facilitating the export of armoured fighting vehicles to Ukraine? I look forward to the Minister’s reply. The reality is this: each and every additional armoured fighting vehicle that we send to Ukraine will give another group of Ukrainian soldiers protected mobility on the battlefield. Conversely, stopping the export of AFVs will result in avoidable loss of Ukrainian lives, which is quite immoral.
My Amendment 223 works by requiring Ministers quickly to amend the money laundering regulations so that banks do not have to suspend provision of banking services to SMEs that are exporting AFVs or other military equipment to Ukraine under a relevant export licence granted by the Export Control Joint Unit—in other words, a relaxation under very limited circumstances. Of course, my amendment is unnecessary because Ministers can simply write to the bank asking it to relax the money laundering regulations in the way that I suggest.
On my Amendment 241FB, during my investigations it became apparent that there is a wider problem with banks withdrawing provisions of financial services from aerospace and defence SMEs, for two reasons. The most important reason is again the money laundering regulations. In addition, there is a reluctance within some banks to have anything to do with the defence industry, particularly with things that go bang. However, these are highly regulated businesses, and they are dealing with other businesses and Governments, often outside the OECD. Thus the regulatory risk is far too high for the banks when the potential income is often quite small. It is simply not worth the bank’s while to accept the regulatory risk. I accept that my Amendment 241FB is imperfect and does not necessarily solve the problem. At this stage, it is only a probing amendment. I have been briefed by ADS Group, the relevant trade association, on this problem, and it is clear that it is a growing problem that will not go away.
On my Amendment 223, this is a serious and urgent matter. Clearly, the Minister intends to resist, or she would already have relaxed the regulations and saved a lot of the Committee’s time. I am afraid that thus far, I have not been able to generate much interest in this issue. His Majesty’s Opposition in your Lordships’ House do not appear to be very interested, and neither are the media. It does not currently look as if I will be able to win any Division at Report. In view of these circumstances, I was not in a position, nor was it my role, to seek a further extension of service from Peter’s bank when I could not offer any evidence that the policy was likely to be changed. As a result, Peter lost his banking facilities yesterday and will have to stop exporting AFVs to Ukraine. No one can step in, because they will experience the same problems.
The sense of the Committee will be unusually important on this occasion. Your Lordships can merely listen to an interesting debate or make it very clear to my noble friend the Minister that the Committee will not tolerate the money laundering regulations that are causing avoidable loss of Ukrainian lives by preventing the export of AFVs to Ukraine. I beg to move.
Viscount Trenchard (Con)
My Lords, I support my noble friend Lord Attlee in his amendment. His story about Peter reminded me that I have had considerable time-consuming discussions—not with my noble friend’s Peter, whose acquaintance I have not had the pleasure of making, but with another Peter. He is a person like Peter, a former military officer in the British Armed Forces of some distinction who now operates an SME and is closely connected with manufacturers of arms that the Ukrainians are importing from other sources and which they badly need, arms which our own Ministry of Defence is happy to assist in the Ukrainians receiving.
I have listened to my Peter—he is not called Peter; let us call him Jonathan—who has had a nightmare time. He is approved and holds an export licence with the SPIRE system in what is now the Department for Business and Trade; I think that the SPIRE system is the same as the export control system.
Viscount Trenchard (Con)
Thank you. So, Jonathan is licensed—and has been for many years—with the SPIRE system, formerly under DIT. This means that the security services have carried out a considerable amount of due diligence on him. Nevertheless, he found it completely impossible to persuade any bank to open an account to handle the funds necessary to enable him to assist the Ukrainians in this way, not just at the working level. The moment you fill in a form that suggests any military connection in the goods, red flags fly and bells ring all over the place.
However, these anti-money laundering regulations are considered so important that it is difficult to find any way of obtaining exemptions to go round them, even in situations such as this. It is just a pity that, even at the senior director level, banks are completely prevented under any circumstances—even when the individual is approved under the SPIRE system, as my noble friend Lord Attlee explained. I have sympathy with and support his amendment.
Lord Holmes of Richmond (Con)
My Lords, I will speak to Amendment 238 in my name. Does my noble friend the Minister agree that “know your customer” and anti-money laundering—KYC and AML—are not working optimally? There is a plethora of examples that we could look at; I will not do so. The simple truth is that they are not fit for purpose and are not achieving their aims. They are not providing the environment that we would want to conduct our financial services in. Does my noble friend the Minister not agree, therefore, that it is high time we had a thorough review of the regulations to put in place a system that works and is inclusive, efficient and effective?
If we look at some of the practical elements, to put it in terms, is it not time that we stopped messing about with gas bills? That takes us to an amendment in a previous group on digital ID, which would go far in resolving many of the issues around KYC and AML. Does my noble friend the Minister not agree? The difficulties that we have heard about and which many members of the Committee may have experienced in all areas of the financial services landscape could be effectively resolved if we resolved the current situation with KYC and AML. It is resolvable; when she comes to respond, my noble friend the Minister could simply say, “I will resolve it”.
Lord Eatwell (Lab)
My Lords, on the point made by the noble Lord, Lord Holmes, surely these regulations are derived from the Financial Action Task Force. We would usurp international agreements if we modified our regulations in a way that was outwith the positions established by the FATF.
Baroness Noakes (Con)
I completely accept that we need to comply with the Financial Action Task Force regulations but, as we discovered the other day when we were discussing PEPs, the regulations we have in the UK have in some instances gone beyond what is actually required by the Financial Action Task Force. The issue with the KYC regulations is one of immense bureaucracy and great irritation for people to no particular end. It is worth looking again at whether the way we have drafted our regulations, to the extent they go beyond what we are required to do, has in turn led to more problems for individuals.
I am sure we have all had problems but I will share one with the Committee. My husband had a very small investment—way below the level at which it would have to be declared as one of my interests in your Lordships’ House—and there was periodic updating of the know your client regulations. Because of the way that firm’s forms were comprised, it refused to accept my noble friend Lady Neville-Rolfe’s signature attesting that the document was a fair copy, because she could not tick a particular box on the form. It was completely ludicrous.
That permeates the way many financial service institutions have come to apply these rules in practice. They have become highly bureaucratic, operated by people who probably have no common sense and possibly not even a brain. To go back to the regulations and see what is absolutely required and then follow it on through the FCA seems a really important thing.
Earl Attlee (Con)
My Lords, although I agree with everything my noble friend Lady Noakes said, I point out that I have discussed Peter’s case at a very senior level with his bank and I can absolutely understand the decision the bank made. It looked at it very carefully, but it cannot take the risk because it is dealing with Ukrainian businessmen of whom it knows very little.
Lord Tunnicliffe (Lab)
There is no official Labour Party position on this, but I feel enormous sympathy for the position of the noble Earl, Lord Attlee. I hope the Minister will take this away, not as a legislative proposal but as a problem to be solved, and ensure that it is considered at a very senior level in the Treasury.
Baroness Penn (Con)
My Lords, before I speak to his Amendments 223 and 241FB, I first thank my noble friend Lord Attlee for his engagement and for bringing to my attention the specific example he has raised today as context for his amendments. I commend his staunch support for Ukraine, and the Government remain fully committed to supporting Ukraine in the face of the relentless Russian bombardment.
I reiterate to the Committee that the money laundering regulations are a vital part of the UK’s comprehensive economic crime response. The regulations are designed to combat illicit finance but should not be barriers to legitimate customers, including those connected with the export of military equipment to the Ukrainian defence forces.
As the Prime Minister has set out, the Government are fully committed to helping Ukraine emerge from the war with a modernised economy that is resilient to Russian threats. Of course it is important that those contributing towards this are not prevented unnecessarily from carrying out their business, but this needs to be balanced with the existing controls which protect this country, and international partners, from risks of money laundering.
It is important that we do not take steps that might allow the money laundering regulations to be circumvented by bad actors, even in circumstances such as this. It is therefore right that financial services firms continue to be empowered to carry out their own, risk-based due diligence when financing the export of armoured vehicles or military equipment, or individuals who are engaged in the international defence industry.
The money laundering regulations are purposefully not prescriptive and are designed to allow firms to make their own decisions about how to comply, balancing their understanding of the risk with proportionality. The Government do not and will not involve themselves in commercial decisions of individual firms but we can be clear that, where all the correct licences are in place, the money laundering regulations should not be a barrier to the financing of legitimate export activity.
Earl Attlee (Con)
I am sorry to interrupt my noble friend, but I would like to make it clear that Peter does not need any financing. The other cases that I have come across in the aerospace and defence sector are very well financed; that is why their businesses are not very attractive to the banks, which can withdraw financial services because there is no money in it. Peter does not need finance; all he needs is the bank to process the money, but the bank has a real difficulty processing money from Ukrainian businessmen.
Baroness Penn (Con)
My Lords, I was making the point that there is a wider context here that there should be no barrier to the financing of legitimate export activity.
Turning to the point made by my noble friends Lord Attlee and Lord Trenchard, the government process for the granting of export control licences focuses on the end use of goods rather than the source of funds paying for them. It is therefore distinct from the due diligence checks that a bank would carry out before conducting the transaction. I assure noble Lords that, through the Government’s engagement with my noble friend on this, we have engaged with the Export Control Joint Unit, the Financial Conduct Authority and other partners on this issue. While I appreciate the frustrations of individual cases, we are not aware of a systemic issue. The Government will continue to monitor reports of similar problems; if we identify a systemic problem, we will act to address it.
I turn to the solutions suggested by my noble friend. The noble Lord, Lord Eatwell, and my noble friend Lady Noakes are right that our obligations around anti-money laundering regulations stem from our international obligations to the Financial Action Task Force. The approach set out in these proposals would very likely be in contravention of those obligations. My noble friend Lady Noakes is right that the current version of our anti-money laundering regulations reflects our membership of the EU, which is consistent with those obligations from the Financial Action Task Force, but in some areas goes beyond them.
I turn to Amendment 238, tabled by my noble friend Lord Holmes of Richmond. The Government undertook a review of the money laundering regulations, which was published last year. This was a comprehensive assessment of the effectiveness of their implementation and whether they had led to unintended consequences for businesses or consumers. It explicitly assessed whether aspects of the money laundering regulations remain appropriate and proportionate in light of the UK’s exit from the EU and the additional flexibilities that affords us. It identified a number of areas for reform to make the regulations more proportionate and reduce unnecessary burdens on legitimate customers, which we will take forward through future updates to the regulations. These reforms will further tailor the regime to the UK’s risk profile, following the removal of specific European requirements from the money laundering regulations last year.
While the Government remain committed to ensuring the proportionality and effectiveness of anti-money laundering regulations and the regime around it, and monitor the effects on financial inclusion, the review required by Amendment 238 would largely repeat the exercise conducted last year, of which we are still to implement the full results.
My noble friend referred to the previous group on digital identity. He is absolutely right; we recognise that greater clarity on how digital identity services are certified against the Government’s digital identity and attributes trust framework would support requirements under money laundering regulations that will be key for market uptake, so we see the opportunity there and the role for government in providing assurance on that process of uptake as a potential technical solution to make some of these processes easier. As set out in our 2022 money laundering regulations review response, we have committed to consider this fact too.
For the reasons I have set out, I hope that my noble friend Lord Attlee can withdraw his amendment and that my noble friend Lord Holmes will not move his when reached.
Earl Attlee (Con)
My Lords, I am grateful for the attention that my noble friend the Minister has paid to my concerns. One thing I would like to pick her up on is that she seems to have been briefed that there is not a systemic problem with the money laundering regulations. I have found out very quickly that there is, and have been briefed by the ADS, which is the aerospace and defence sector trade association and was the Defence Manufacturers Association.
The problem is that where they are exporting around the world, especially outside the OECD, they are immediately coming into contact with money laundering problems. In fact, I had a meeting with a gentleman in Portsmouth who deals in helicopter parts and helicopters. What tends to happen is that he might spend 24 months organising a deal, and then he suddenly gets a cheque for quite a large sum of money from some far-flung part of the world; that is a huge risk for the banks. When we come to Report, I will come back with further examples from the ADS briefing, where sadly this is a systemic problem that is not going away.
I am particularly grateful for the support from the noble Lord, Lord Tunnicliffe, and do hope that the Minister pays attention to what he said. In the meantime, subject to the usual caveats, I beg leave to withdraw my amendment.
Baroness Fox of Buckley
“Freedom of expression protections for payment service users
(1) Within six months of this Act being passed, the Secretary of State must, by regulations, make provision preventing payment service providers from refusing or discontinuing access to payment services on account of a person exercising their freedom of expression.(2) In this section—a “payment service provider” and a “payment service” have the meanings given by regulation 2(1) of the Payment Services Regulations 2017 (S.I. 2017/752), anda “person” means a payment service user as defined by regulation 2(1) of those Regulations.”
Baroness Fox of Buckley (Non-Afl)
My Lords, I rise to speak to Amendment 241B in my name. After the US fintech company PayPal’s deplatforming of UK political campaigns—the Daily Sceptic, the Free Speech Union and UsforThem—last September, there was a debate about payment processing and censorship associated with this Bill. There was an amendment in the other place that received quite a lot of attention, and it led the Minister, Andrew Griffith, to note that he shared the concerns of the principal issue and potential risks of protecting customers’ freedom of expression when it came to payment providers. He assured us that it should not be possible for service providers, especially those with significant market position, to terminate customer relationships based on those customers’ views.
I was delighted when the Government confirmed that they will include this issue about the role of payment service providers in delivering services without censorship in their consultation about financial regulations enforced by the FCA. However, as I argued at Second Reading, I am not convinced that this is enough. Rather unusually for me, I would like to see more legislative guarantees.
The definition in this amendment is deliberately expansive. It goes beyond the likes of PayPal in order to cover banks and payment processers, whether they are card providers such as Mastercard and Visa or companies such as PayPal and Stripe. There are several reasons for this. The first relates back to important discussions on earlier amendments that I have sat in on and participated in. The ubiquity of electronic systems in an increasingly cashless society, and the emergence of the ubiquity of online payment, means that someone being deprived of those services or cut off from any source of funds would be akin to British Gas refusing services to a household on account of their beliefs or views or free speech that they had exhibited. We would not accept that.
Of course companies can make their own policies and contracts, and that would allow them to remove users without explanation. I understand that, but I am trying to explore whether the law can be used to prevent payment providers closing accounts on the basis of political beliefs. If we do not, global firms are likely to put their own interests—financial, reputational and political—before any moral duty to act fairly or without discrimination. I do not think we can have global tech firms, online payment services or banks deciding who they can censure or cut off from financial services because of the views they express.
This is a matter of some concern, not least because—this is the other focus that I want your Lordships to consider—at the moment, environmental, social and governance, or ESG, targets and equality, diversity and inclusion, or EDI, policies have been embraced zealously by many financial services companies. We have seen from recent controversies around failing banks that they were arguably far more concerned about ESG than whether they were banking well. We have a situation in which corporates have taken to moralising about how their customers should behave and think, which is a real and present danger.
Currently, the big tech companies in the US that deal in financial services have adopted political positions and are regulating the speech of their customers. That is considered a growing problem, as identified by a wide range of civil liberties organisations that I reeled off at Second Reading. Sadly, we know from broader cultural trends—for example, the way that cancel culture at universities started in the US—that what happens in the US should often be seen as a warning of what is likely to come.
Here in the UK, under current law, ESG has become a vehicle for companies to baldly state their right to block the accounts of those whose politics clash with their corporate values. Payment providers such as PayPal, but also high street banks, may terminate the accounts of groups on the basis of lawful speech—as long as they give adequate notice—according to the law. They can terminate accounts where views they deem unpalatable clash with those values if they include such provisions in their terms of service. Acceptable use policy often proclaims, “We will take action when we deem that individuals or organisations are involved in promoting hate or intolerance”, but “hate or intolerance” is increasingly seen as and understood to be a rather vague tagline which can be interpreted in a wide range of ways.
This was illustrated last year when Halifax was involved in a controversy after announcing its staff pronoun policy on social media—I do not know whether your Lordships remember this. We were shown a picture of Gemma wearing a “she/her/hers” staff badge; the idea was that this was a campaign that would stop any “misgendering” by the customers of Halifax. There was something of a customer backlash online, which led to Andy, the person who seemed to be in charge of Halifax’s online communications at the time, berating critics with the rather shrill
“If you disagree with our values, you’re welcome to close your account.”
As it happens, lots of people did close their accounts, because they were so outraged at being talked to in that fashion. Telling customers where to go is an unusual policy for growth for any financial service provider.
However, I think this was more than an overzealous EDI employee, because on its website Halifax says that any customers it deems to be transphobic could have their accounts closed down. Indeed, underneath the page entitled “What we stand for” it says:
“We stand against discrimination and inappropriate behaviour in all forms, whether racist, sexist, homophobic, transphobic or ableist”—
and, wait for it—
“regardless of whether this happens in our branches, offices, over the phone or online on our social media channels.”
The actions that it threatens customers with include account closure or contacting the police. Note that HSBC shared the Halifax post and tweeted it out to its 101,000 followers, saying:
“We stand with and support any bank or organisation that joins us in taking this positive step forward for equality and inclusion.”
Customers, it seems, are the target of political campaigning by financial organisations, rather than being seen as those who need to be given the very best financial services. We should also note that in 2022, when that tweet went out, Halifax cut 27 branches across the country. Never mind encountering Halifax staff wearing pronoun badges; the problem is that you would be lucky to encounter a Halifax staff member at all, badgeless or not, and there is certainly very little in the way of physical branches.
In a recent report Matthew Goodwin, politics professor at Kent University, noted that a growing number of companies and corporations are now “adrift” from the wider public by
“lecturing them about political issues and being seen to stifle their free speech and expression.”
Professor Goodwin also warns against potential discrimination against consumers and customers in this context, and account holders
“deemed to hold ‘controversial’ beliefs.”
However, as one Halifax customer noted:
“I don’t want to be having conversations about gender when I go into my bank. Frankly, I’d rather they be focused on lowering interest rates.”
Of course, we need to respect the right of private companies to choose whom they do business with, as I said. However, this rather modest amendment seeks to ensure that they are not free to discriminate because of political, philosophical or religious beliefs within the law any more than banks or online service providers would be allowed to discriminate against people on the basis of the colour of their skin. We therefore need robust measures in place to protect organisations and individuals from being punished by being cut off by those financial service providers whose EDI or ESG commitments have made them rather cavalier about going far beyond their financial remit. They should be prevented from acting against people for otherwise legal speech. Remember, we have laws in this country such as the equality law, which should not be undermined by the terms and conditions and values designed in Silicon Valley—which in many instances is what we are talking about and is exactly what happened when PayPal punished the Free Speech Union by removing any financial services from it.
I hope that this amendment urges the Government not to kick this regulatory duty into the long grass or suggest that some other piece of legislation would be appropriate. I put it forward in the spirit in which the Minister in the other place spoke about the importance of this issue, rather than it being trivial. I hope the Minister will consider accepting the terms of this amendment in any amended Bill that is brought back on Report.
Lord Jackson of Peterborough (Con)
My Lords, I rise briefly to support Amendment 241B, moved by the noble Baroness, Lady Fox of Buckley. I declare at the outset for full transparency that I am a paid-up member of the Free Speech Union. To be fully topical, I am also a graduate of Royal Holloway, which has been in the news today along with the noble Baroness on similar free speech issues. We debated this matter in the Chamber earlier.
This is a very gentle nudge by way of an amendment. Like the debate we had earlier this month on politically exposed persons, in this case, we see that a regulatory regime does not work and that we sometimes need a legislative nudge by way of something like this amendment. We could have a sterile debate about EDI/ESG and woke and cancel culture, but that is perhaps for another day. My concern is that untrammelled free speech should not be a monopoly; it is a relative concept because we have laws in this country to prevent egregious offence against certain people who have protected characteristics under the Equality Act 2010. Free speech within the law cannot be the preserve of a plutocratic, wealthy elite as represented by big financial institutions and big tech companies.
I never thought I would quote the comedian Jack Dee but, when the decision was taken by PayPal on 15 September last year to throw off the Free Speech Union, the Daily Sceptic blog and UsforThem, he quite rightly said:
“Big Tech companies that feel they can bully people for questioning mainstream groupthink don’t deserve anyone’s business.”
The offence of UsforThem was to question the efficacy of a policy of the teaching unions and, by inference, the Government not to force or even encourage children to go back to school. UsforThem felt that there was a serious public policy issue around that; it was well within its rights to debate that on the basis of empirical evidence and a well-argued case but PayPal took against it and threw it off the platform for breaching its rather Orwellian-sounding “acceptable use policy”. I do not think that is at all right.
The point that the noble Baroness, Lady Fox, made is right. In a competitive market where you have perfect competition—that is, lots of participants and allowing people to enter and leave the market—people can pick and choose which banks and tech companies they go to. However, when there is an oligopoly, as in this case, with a small number of providers of technical applications, perfect competition falls down. There is effectively a situation where people have no choice. That is why people who are not exactly conspiracy theorists, including me, worry about the idea of a cashless society because it puts absolute power in terms of business into the hands of the powerful, the influential, the wealthy, the well-connected and those who believe in and articulate groupthink.
The other thing that slightly worries me is not necessarily the overt idea of censorship, which is itself very worrying in an advanced liberal democracy such as the UK and the United States, but the concept of self-censorship—that is, you do not debate these important issues of public policy that might push against vested interests because you know that the battlefield is so asymmetrical that you do not have the funds to fight big tech or to engage civil litigation, and you run the risk of criminal penalty and sanctions should you do so. That is important. You cannot afford to take the risk so we get into this cul-de-sac of self-fulfilling beliefs and views, which were represented by PayPal.
I am glad that PayPal capitulated and surrendered, and said that it was wrong, but it did a lot of damage to the Free Speech Union, its membership base and its cash flow. Not surprisingly, Toby Young, the founder and CEO of the Free Speech Union, made it absolutely clear that he would not go back to PayPal because it had egregiously ruined his business model.
However, that is not as important as the general principle that, unless you have a bit of stick with these tech companies, they will not voluntarily eschew the concept of EDI and their fixed beliefs. Only the power of legislation can force them to comply with the basic tenets of a decent, liberal society: that free speech should be available to everyone; and that people should be able to voice unfashionable opinions. The mark of a mature and sensible society is that we allow people with whom we vehemently disagree to have a say in the public square.
To an extent, this a probing amendment, but my noble friend the Minister—incidentally, she has done extremely well in a very long and difficult Bill; I give her that plaudit, having given her a hard time the last time I was before this Committee—should reflect on it and come back with some sanction to defend the long-standing commitment that all of us, as parliamentarians and legislators, should have to the concept and practice of free speech.
Lord Harlech (Con)
My Lords, I thank the noble Baroness, Lady Fox, and my noble friend Lord Jackson of Peterborough for raising the important issue of freedom of expression and, within that, the role of payment providers.
Following PayPal’s temporary suspension of some accounts in autumn last year, to which both the noble Baroness and my noble friend referred, the Economic Secretary met PayPal and the FCA, as well as interested Members of Parliament. He subsequently set out the Government’s position on this matter on Report during this Bill’s passage through the Commons.
The Government fully recognise the importance of protecting free speech and the crucial role of payment providers in delivering services without censorship. The Government are committed to ensuring that the regulatory regime respects the balance of rights between users’ and service providers’ obligations, including in relation to protecting freedom of expression for anyone expressing lawful views. My noble friend made that distinction in his remarks.
I draw noble Lords’ attention to the letters from the Economic Secretary, the Financial Conduct Authority and PayPal regarding this issue, copies of which have been deposited in the Commons Library. The letter from PayPal explains that it re-evaluated and reversed its decision in a number of the specific cases raised. It made clear that it was never its intention to be an arbiter of free speech and that none of its actions were based on its customers’ political views.
While welcoming this clarification, the Economic Secretary expressed his concern about the importance of protecting free speech and recognising the crucial role of payment service providers in delivering payment services without censorship. As a result, he pledged to take evidence on the adequacy of the existing legislative framework through the statutory review of the Payment Services Regulations. This was published on 13 January 2023; the Government look forward to responses from all interested parties. I note for the Committee that that consultation is open for 12 weeks, meaning that it will close on 7 April. The Economic Secretary will promptly update Parliament through a Written Ministerial Statement following this review. He has committed that, if it emerges that there is a problem with the existing regime, the Government will act swiftly to address it.
In terms of going further to protect the importance of free speech, we have to understand that the Government do not believe there is evidence of a potential issue with payment services regulation beyond these few PayPal cases. The existing legal regime includes statutory minimum notice periods, rights of appeal to the Financial Ombudsman Service and the FCA’s principles on fair treatment. Users of payment services, in common with all UK citizens, benefit from a safety net of legislation such as the Human Rights Act, criminal law and court decisions, which balance the rights of people to express their ideas in a public space with the necessary limits of a democratic society, for example, to protect people from hate speech. More specifically, the Equality Act 2010 prohibits service providers in the UK denying services to users on the basis of their beliefs, including philosophical as well as religious beliefs.
Noble Lords talked about going further in this Bill. The Government’s view is that making legislative change just for payment services would not be proportionate or correspond with the requirements placed on other essential service sectors. The Government need evidence if there is a problem given the existing protections in the current legal regime for payment service users. Today I am aware of the concerns raised in relation only to PayPal, which re-evaluated and reversed its actions in several cases. The FCA has explained that it has the tools to regulate in a further specific way through its authorisation processes if there is a problem.
Lord Jackson of Peterborough (Con)
When the Minister analyses the results of the review which is concluding next month, will he also look at the slightly wider issue of barriers to entry and the possible oligopoly behaviour of payment services? That is a linked issue which is pertinent to the debate we have had today.
Lord Harlech (Con)
My noble friend makes an excellent point. I will certainly feed that back to the department in terms of the review.
To conclude, the Government already have the means to act on this issue and have made a clear commitment to do so if necessary. We are clear that we first need public consultation and an evidence base before determining the right course of action on this matter. I therefore request that the noble Baroness withdraws her amendment.
Baroness Fox of Buckley (Non-Afl)
I thank the noble Lord, Lord Jackson, and the Minister for that response. I will not keep noble Lords long. What the noble Lord, Lord Jackson, said about self-censorship was important. I mention that because I am worried that the Government are underestimating the climate that financial services providers are embroiled in relating to ESG and EDI. This is a warning shot that we recognised around PayPal, but I did not confine it to PayPal. It is just one example. There are sadly lots of recent examples, with organisations such as GoFundMe refusing to accept certain people because of their views and so on. I know that is not strictly within the remit of this Bill, but I know that the Government understand that there are tensions here. I do not want them to be too narrow and technocratic in the way they approach it by saying “Oh, there are only three examples, so what is there to worry about?” We have seen this internationally. I note that the Chinese social credit system lurks around this debate as something we want to be careful of. Big tech financial companies do not have regard for free speech as their terms and conditions will often cut against what is required in equality legislation here. That was the point I was making.
I hope that this short debate will be taken note of in that consultation. I also hope the Government do not feel that they can just deal with it simply through the consultation but will keep a close eye on what could be a dangerous and nasty situation of financially powerful organisations having an impact on individuals, frightening them into thinking that if they say the wrong thing they will not get banking. That is not the sort of society that we would like to end up with. I beg leave to withdraw the amendment.
Lord Leong
“Regulation of factoring companies
(1) Within one year of the passing of this Act, the Secretary of State must by regulations make provision for factoring companies to be regulated by the FCA.(2) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This new clause would bring factoring companies, those which provide, arrange or facilitate invoice discounting or factoring, into FCA regulation.
Lord Leong (Lab)
My Lords, I rise to speak to Amendment 241E in my name. Start-up and scale-up businesses, especially small and medium-sized business, occasionally face the issue of managing their cashflow, especially when expanding. Traditional funding through banks has diminished since the 2008 financial crisis and often, in looking for a more flexible, less onerous solution, businesses look to factoring or invoice-discounting companies. I used many factoring companies when I started my businesses and when we ran into a bit of a cashflow situation.
The model for this is straightforward: the factoring or discounting company pays the client typically 80% to 90% of the value of invoices they have raised for goods or services supplied and then either assumes responsibility for the debt itself or bills the client for the amount given, plus a percentage fee, when the invoice is settled by the customer. This enables the client company to operate and expand with limited capital. It effectively does not have to wait for the normal 30, 45 or, in some cases, 60 to 90 days settlement period, which is typical for larger companies and many public sector organisations. This model is typically used in sectors with long payment cycles that require the purchase of goods or raw materials to create products and in international transactions.
However, there has been considerable growth in this sector in recent years due to the uncertainties and disruptions caused by the pandemic, Brexit and the war in Ukraine. Like any well-run financial services, when times are good, such arrangements are mutually beneficial, but if the financial crisis of 2008 has taught us anything—and I hope it has—it is that the money ultimately must come from somewhere, and problems with financial instruments often become apparent only when things go wrong.
Factoring as a concept has existed for a very long time, but its use has grown rapidly in recent years. UK Finance, the collective voice for the banking and finance industry, maintains an independent standards framework setting out and enforcing standards for its members that clients can expect from providers of invoice finance or asset-based lending. However, companies do not have to become members to operate in this sector. This is why I have tabled Amendment 241E as a probing amendment. There are concerns that factoring and invoice discounting risk becoming a scandal for small businesses equivalent to the payday loans rip-off for consumers. Unscrupulous companies can obfuscate fees, and interest rate charges of 2% to 4% for a period of 45 to 60 days seem low but equate to 18% to 24% per annum, which is a relatively expensive way to finance a business in the medium to long term.
Many companies offer their service “with recourse”, which asserts the lender’s right to be paid their fee even if the customer defaults on their invoice. This means that small companies could become liable for fees and interest charges on invoices that they have never been paid if, for example, their customer goes bankrupt. This is a rising concern, as there has been a sharp rise in insolvencies in the past 18 months and we are approaching levels not seen since the 7,000 insolvencies per quarter at the peak of the 2008 financial crisis, with almost 5,995 declarations of insolvency in the quarter ending January this year.
Dependency on the factoring model can develop; debts which have been purchased by a factoring company cannot be counted in the company’s balance sheet when applying for other financial products such as a bank loan. There is a danger that a company may find it difficult to move on to cheaper and long-term finance. There are a lot of companies operating in this space and, while many are entirely credible and reputable, we must recognise that, without FCA regulation, small businesses particularly are at risk of being exploited or taking on excessive fees or risks in their eagerness to survive and grow.
Of course, we cannot mitigate against all risks. As the very well-known fellow book publisher and former Member of this House observed, “Events, dear boy, events.” We know from recent history that clear, strong and effective regulation, such as that which can be provided and enforced by the FCA, can prevent excess and exploitation, and help us build a stronger economy in turn, with the passion, flexibility and innovation of SMEs at its heart. I beg to move.
Lord Eatwell (Lab)
My Lords, I support the amendment from my noble friend Lord Leong. I was a bit shocked to discover that factoring companies are not regulated through the FCA. My discovery of this through my noble friend’s initiative reinforces my view, which he very clearly expressed, that this is the business equivalent for SMEs of payday loans in the consumer retail sector. Given the importance of small and medium-sized enterprises to the growth of the UK economy, which he quite rightly pointed out, one of the most important elements of public policy is to ensure that they receive the best, most appropriate and well-regulated financial services, which provide them with a firm financial platform on which to grow. I hope that the Minister takes this amendment away and has a serious think about it, because this is a serious gap in the regulatory framework.
Lord Sharkey (LD)
I rise briefly to support this amendment. It was with some surprise that we also discovered that this sector is unregulated, but we entirely understand how important it is to the small business community. In that respect, it is hard to see why it is not regulated and why it should not be regulated. It is hard to see how any Government could resist the force of the noble Lord’s amendment—but we may see a demonstration of that in a moment or two.
Lord Tunnicliffe (Lab)
My Lords, I first welcome my noble friend Lord Leong to this very special club, the Financial Services and Markets Bill club. I am sorry that it is a little thin on the ground. I will say no more than that the case, as presented and supported, seems strong.
One of the sad things about occupying this position is that, every time credit comes up, you get abusers. The large companies are frequently the abusers, and payday loans are a classic example of that. Anywhere there is credit, you end up with pockets of abuse. I unashamedly believe in regulation. I do not believe in bad regulation; I believe in good regulation and I think it should enter this field. But that is not a formal position, so we will listen to the Minister before concluding our point of view.
Lord Harlech (Con)
My Lords, I thank the noble Lord, Lord Leong, and others noble Lords for their contributions on this amendment headed “Regulation of factoring companies”.
As noble Lords know, invoice factoring is a type of invoice finance where suppliers effectively sell their invoices at a discount to a finance provider in exchange for an advance. This means that suppliers can receive payments sooner, helping them to manage cash flow. Invoice factoring is an important product for British businesses, helping them to grow sustainably when they might otherwise struggle to do so. It is a relatively standardised product designed to help businesses manage their cash flow and support growth.
Businesses benefit from a diverse finance market made up of high street banks, smaller banks and a range of non-banks to ensure that they can continue to access suitable finance. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. We have discussed the approach to regulating small businesses in an earlier debate but, as noble Lords know, invoice factoring is not considered credit, because it is an advance on invoices already generated; therefore, any small businesses using these products do not benefit from protections such as those under the Consumer Credit Act, which apply to the smallest businesses taking out loans.
However, invoice factoring is generally used by larger SMEs that would not benefit from protections under the Consumer Credit Act in any case. UK Finance estimates that its members advanced invoice finance and asset-based lending facilities to just 35,000 firms in 2022, representing less than 1% of all UK businesses; in comparison, according to the SME Finance Monitor, 36% of SMEs—nearly 2 million of them—were using external finance in 2022.
However, the Government believe that businesses using invoice finance are well protected in other ways. The banking and finance industry has recognised that businesses should be able to use invoice factoring with confidence, so has taken steps to ensure that businesses have adequate protections. UK Finance members, representing between 90% and 95% of invoice factoring by volume, are subject to a standards framework and code, which set the standards that firms should meet when supplying invoice factoring facilities. They include an independent complaints process focusing on the requirements of those smaller businesses using invoice factoring, which might otherwise be reluctant to raise concerns about their treatment. For invoice factoring among larger firms, these businesses will have the financial and legal resource available to take action through the courts.
Bringing invoice factoring into regulation would likely increase costs for businesses. This would negatively impact the ability of these businesses to manage their cash flow in a flexible, cost-effective way at a time when it is important that they have the confidence to invest and expand. There is a fine balance between the costs and benefits when bringing activities into the regulatory perimeter. It requires careful consideration to ensure that there is an appropriate balance between several factors, including ensuring that consumer protection is in place and that businesses are allowed to innovate.
Overall, the Government believe that the current approach—enforcing standards through industry bodies and voluntary codes while facilitating innovation and competition—is more likely than new regulation to drive positive outcomes for businesses that rely on invoice factoring. I therefore ask the noble Lord, Lord Leong, to withdraw his amendment.
Lord Leong (Lab)
I thank all noble Lords who have kindly supported this amendment. Access to finance is vital to start-ups and small companies; it is one way in which they can easily get money without any security. The number of small companies that have to resort to factoring invoice discounting is on the rise because banks are becoming more and more demanding as far as security is concerned. As I said in my speech earlier, my amendment is a probing one. I want to take this opportunity to ask the Minister this: can we do some more work to see how many companies access this form of finance and how many companies go bust because they cannot afford to pay some of the rates that are being asked by these companies?
On that basis, I beg leave to withdraw my amendment.
Lord Tunnicliffe
“Defined contribution and defined benefit pension funds investment review
(1) The Treasury must publish a review of how to incentivise defined contribution (DC) and defined benefit (DB) pension funds to invest in high-growth firms and a diverse range of long-term assets in the United Kingdom, which must include green infrastructure.(2) In carrying out the review, the Treasury must consult—(a) the Department for Work and Pensions,(b) the Department for Business and Trade,(c) the Pensions Regulator,(d) the FCA,(e) the PRA,(f) pension trustees, and(g) relevant financial services stakeholders.(3) The review must consider the merits of—(a) amending the definition of “specified scheme” within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (S.I. 1996/1715) so as to increase the threshold of such DC schemes in respect of which trustees and managers are required to produce a value for members assessment under regulation 25 of those Regulations;(b) adjusting the terms of reference for DB Local Government Pension Schemes (LGPS) funds to consider regional development as an investment factor;(c) establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank.(4) The Treasury must prepare a report on the outcome of the review, and lay it before Parliament within one year of the passing of this Act.”Member’s explanatory statement
This amendment would compel the Treasury to publish a review within a year of Royal Assent on how to incentivise pension fund schemes to invest in high-growth firms and green infrastructure. The review would have to consider requiring DC schemes to assess the merits of: consolidation, establishing frameworks for British Business Bank investments (so that DB pension schemes will be able to invest alongside them), and adjusting the terms of reference for Local Government Pension Schemes (so they consider regional development as an investment factor).
Lord Tunnicliffe (Lab)
Before I start, would the Government Whip like to give us some indication as to how we are going to end this session?
Lord Harlech (Con)
The Grand Committee is scheduled to run until 7.45 pm, which gives us half an hour. However, in the usual way, if the debate has not concluded by that point, the debate on this group will continue into the next day of Committee.
Lord Tunnicliffe (Lab)
Thank you. I rise to move Amendment 241FA. Patient, long-term capital is crucial for both the growth of innovative companies and investment in green infrastructure to support the transition to net zero. One of the key sources of patient and venture capital is institutional investors, in particular pension funds in the City. Compared with our peers, such as Canada, the Netherlands and Denmark, the UK sees relatively little patient capital funding coming from pension funds; while around 70% of venture capital funding in the US comes from pension funds, in the UK, the figure is under 20%. The Government must do more to enable pension funds to invest in the British economy.
I have tabled Amendment 241FA, which would compel the Government to review how to incentivise defined contribution and defined benefit pension funds to invest more in high-growth firms and diverse long-term assets in the UK. The review would cover three areas. First, we know that a significant barrier to increasing DC pension fund investment is the relatively small size of many UK DC funds. The Government could raise the threshold at which schemes are required to produce a value for members’ assessment; they previously legislated to do this for schemes smaller than £100 million but a review could explore raising the threshold significantly —up to £5 billion, for example—to deliver real change. I would appreciate the Minister replying to the merits of this particular point, if possible, but this figure is something that the review could explore.
Secondly, we know that Local Government Pension Scheme funds have around £340 billion of assets under management, of which £30 billion is already invested in alternative asset classes such as VC. In order to mobilise some of this capital into regional green infrastructure and business, a review should look at adjusting the terms of reference for LGPS funds so that they could consider regional development as an investment factor.
Thirdly, a review should explore how the British Business Bank could put the necessary framework in place to allow DB pension funds to invest alongside it. DB pension funds have nearly £3 trillion in assets under management; unlocking even a small proportion of this would be a substantial boost to the amount of additional financing available to British companies and projects.
It is helpful that the Chancellor referenced exploring unlocking pension funds’ potential in his Budget speech. I would appreciate an update from the Minister on HMT’s work in this area. I am aware that the FCA is currently consulting on the value for money framework for DC pension schemes, for example, but does that work fit into a wider government strategy to incentivise DC schemes to invest in UK firms and green infrastructure?
I beg to move.
Baroness Bennett of Manor Castle (GP)
My Lords, I thank the noble Lord, Lord Tunnicliffe, for introducing this amendment. I have chosen to address simply the green infrastructure parts, and at this time of the evening I shall park the high-growth debate in the interests of not sidelining the main issue.
The idea of a review is useful here, because the evidence we have of other measures the Government have tried to take to encourage green investment is perhaps mixed—that is the charitable description. I refer to a survey published this month by Pensions for Purpose, which looked at the first wave of obligatory reporting of the scheme introduced in October 2021 based on the Task Force on Climate-Related Financial Disclosures being done by the larger occupational pension schemes and authorised master trusts. That study found that this introduction by the Government was having very limited effects and that it was, to a large degree, being treated as a tick-box exercise. Where it was having an impact on investments, it was not driving towards green investment but rather to a portfolio decarbonisation—a stepping away from things rather than into the kinds of investments we need. This is something we are also seeing implicitly, in that the pension regulator is about to launch a publicity campaign for pension trustees, stressing the need to look at ESG responsibilities, particularly around climate issues—that has been its responsibility since 2019. It is clearly thought necessary to have a publicity campaign about this.
We really need to see steps forward and to see things joined up here. I am reminded of a debate last week with the same Minister, when we finally finalised the UK Infrastructure Bank Bill, which, of course, is looking at another source of investment going into green. I am very encouraged by the Government’s decision to include nature-based solutions there, which is obviously a cross-reference to our need to see much more private investment in nature-based solutions as well. Dare I say it, it would be nice to see some circular economy as well—if I can just put that in there.
On the idea of a review, we desperately need to see money going into green infrastructure. All the evidence we have says that is simply not happening. I also note that the Government need to create the frameworks in other areas of policy to make this happen. I was sitting here, thinking of when I was in this very same Room a few weeks ago with the Energy Bill. One of the things that could be a very good target for investment would be that if we are to get community energy schemes up and down the land—if we get delivery of the widely-backed Local Electricity Bill, as it is in the other place—that would be a great area to see pension funds investing in and supporting. I was at an event this morning debating social value and the importance of that in procurement.
We need to tie all these things together. All these things are running off at different angles, but we are still not creating an environment where people who are putting money into their pensions, seeking to invest in their own future, will have a liveable future for that pension to pay out in.
Lord Eatwell (Lab)
My Lords, it is obvious that the issue of pension funds investing in equities and longer-term growth prospects was highlighted by the LDI crisis in the autumn. I hope that, when the Government come to consider the consequences of that crisis, they will look at the letter that your Lordships’ Industry and Regulators Committee sent to Andrew Griffith MP, the Economic Secretary to the Treasury, setting out the reasons it saw for the peculiar financial structures that led to the LDI crisis and the lack of long-term investment in equities and growth stocks by British pension funds. They traced this to the accounting regulations that are imposed on British pension funds—particularly the way in which liabilities are assessed—and noted that, since those regulations were introduced maybe 15 years ago, there has been a dramatic reduction in the investment by British pension funds in long-term equity assets and a focus mostly on rather low-yielding government securities instead.
The LDI scandal was produced by the development of a peculiar financial device using repos, which were then used to make some investment in equities. There is clearly a fundamental problem in the regulation of British pension funds, which has both reduced the returns on their investment and limited the sort of investments they might be able to make in growth assets to their benefit and that of the economy as a whole. There needs to be a major review on the regulation of pension funds, both to make them more secure—to avoid them resorting to very unstable financial constructions to try to increase their returns—and for the overall benefit of the economy.
Lord Sharkey (LD)
My Lords, I agree with everything that the noble Lord, Lord Eatwell, has said. We are happy to support this amendment. I simply have two questions and one observation about it.
The amendment says that we must include “green infrastructure”. Is there a practical, generally agreed working definition of what that actually means? I also notice that, in carrying out the review, the Treasury must consult a list of organisations. The final group of organisations is “relevant financial services stakeholders”. Is the intention also to include professional advisers? They would be a vital addition; perhaps that should be made explicit as we go forward.
My observation is that proposed new subsection (3)(c), which talks about
“establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank”,
is an extremely good idea. We should make sure that this happens as soon as we can.
Baroness Penn (Con)
My Lords, the Government remain fully committed to the objective of unlocking pensions capital for long-term, productive investment, where it is in the best interests of members. High-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that developing the next generation of globally competitive companies in the UK will require unlocking defined contribution pension fund investment into the UK’s most innovative firms.
That is why, in the Spring Budget last week, the Chancellor committed the Government to working with industry and regulators to bring forward an ambitious package of measures by this autumn. He also set out a number of initial measures to signal the Government’s clear ambition in this area. They included increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment; spurring on the creation of new vehicles for investment into science and tech companies tailored to the needs of UK defined contribution pension schemes by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative; and leading by example by pursuing the accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will shortly come forward with a consultation on this issue.
Lord Tunnicliffe (Lab)
My Lords, I thank all noble Lords who have spoken in this debate.
The noble Baroness, Lady Bennett, went banging on about the green issue again. In many ways, I cannot think of a better day to do so, with the report from the United Nations that came out yesterday. This is the challenge not particularly of my lifetime but of the community’s lifetime and younger people’s lifetimes—our children, grandchildren and so on. This green issue is not optional. It is central to our survival and the survival of our civilisation as we know it.
I thank my noble friend Lord Eatwell for his support. Getting this right is not trivial; you have to get the balance right. The LDI issue, as I understand it, was essentially about pension schemes wanting to nudge in this direction, discovering that they could not do it in a straightforward way then finding a way around the back without actually realising how destabilising that scheme was. We need good-quality thought in moving this forward so that we get growth, yield and safety all in the same package.
I agree with the noble Lord, Lord Sharkey, particularly on the definition of “green”. This brings me to an adjacent issue, which is the whole concept of the green taxonomy. I hope that this will develop and grow and that it will become an international standard; it will provide a basis for the development of this type of initiative and, of course, all sorts of other initiatives.
As for the Minister, I cannot see why she is not accepting my amendment. I know that the Government like to chew them up so I am looking forward to a government amendment coming forward on Report to embrace this useful and sensible thrust. I beg leave to withdraw Amendment 241FA.
Financial Services and Markets Bill
Thursday 23rd March 2023
(1 year, 8 months ago)
Grand CommitteeRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 80-X Tenth marshalled list for Grand Committee - (21 Mar 2023)
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Amendment 241FC
Baroness Worthington
“Climate and nature offsets
In Schedule 2 to FSMA 2000 (regulated activities) after paragraph 9 insert—“Climate and nature offsets(9ZA) Selling, or offering or agreeing to sell, climate and nature offsets.””
Baroness Worthington (CB)
My Lords, I am grateful to the noble Baroness, Lady Sheehan, for lending her name to this amendment. I am not at all wedded to the exact wording of it. I would welcome discussions with the Government about approaches to this issue; however, I stress that this is a really important issue that needs regulatory approaches.
Currently, my amendment would add these activities to Schedule 2 to the Financial Services and Markets Act 2000:
“Selling, or offering or agreeing to sell, climate and nature offsets”.
This would make them regulated activities and enable the setting of minimum standards by the FCA, the regulator. By “off-sets”, I have in mind the voluntary carbon market and the nascent market in biodiversity, where an entity voluntarily seeks to compensate for the greenhouse gas emissions or loss of biodiversity arising from its activities by reporting an equivalent amount of emissions reduction or removal, or biodiversity gains, outside of its boundary that it has purchased through a credit or a financial mechanism.
There are more formal markets, particularly in carbon, where participants are required to participate. These are compliance markets. It is not my intention to focus on those, although there have been incidents in such markets, where there may well also be a need for more oversight. Despite the mandatory nature of the market, there have been examples of fraud and mis-selling. There is a lack of transparency even in these markets.
I return to the voluntary market. By making the trade in climate and nature off-sets a regulated activity, the FCA could make rules setting out principles, standards or regulated guidance that off-sets must then meet. I am not seeking to tie the FCA’s hands by setting out what rules it should make; it is a complex issue. It will need to invest in relevant expertise and be led by evidence, but it does need to invest in that expertise.
This amendment is supported by financial market participants. I put on record my thanks to Scottish Widows; Railpen—the Railways Pension Scheme; the Brunel Pension Partnership, which manages the assets for local government pension schemes in the south-west; and employees of the Environment Agency and the Church of England Pensions Board. These organisations collectively are responsible for more than £250 billion in assets; they have written to me in support of this amendment, and I am sure would welcome a meeting with government to discuss it further. They tell me that it is widely known that this market is not functioning well at the moment, and that the voluntary certifications and quality codes are not delivering the transparency, reliability and quality of off-sets for financing to flow freely into projects that could make a real difference in the fight against climate change and nature loss.
Given that, to achieve net zero, the majority of firms will have to rely on some form of tradable off-set or tradable credits for their residual emissions, which could be impossible to eliminate through actual investments, regulation of this market would serve the purpose of building trust for firms to allocate finance in this area—and I agree with them. Currently the market is relatively small, but it is growing and has increased fivefold since 2018, and many have called for it to scale further, including the former Bank of England Governor, Mark Carney. The Climate Change Committee estimates it to be a $2 billion a year market, accounting for 300 megatonnes of carbon dioxide per year—around 1% of global emissions and not far from the total contribution of the UK to the climate change problem, so it is not insignificant.
However, this market in climate mitigation or activities will not scale or endure without better regulated standards that can underpin confidence in the market. As the need to demonstrate a response to the growing climate risks increases, more and more companies and individuals will be tempted to buy their way to a cleaner carbon footprint or a cleaner reputation. Already, one-third of FTSE 350 companies include off-sets in their emissions reduction plans. Off-sets account for between 35% and 80% of their pledged emissions reductions—so it is a significant piece of financial architecture that people are relying on to get to net zero.
Companies will want to be seen to do the right thing, but this will be challenging. It is extremely difficult to assess whether emissions reductions being purchased are both real and durable. This offers an opportunity to unscrupulous providers to market poor-quality products to unsuspecting companies and investors. As I said, even the regulated carbon markets have seen examples of fraud and poor-quality off-sets entering markets. In the EU Emissions Trading Scheme, the Europe-wide carbon market, the market had to be closed to overseas investments in credits, partly in response to an oversupplied market but also partly due to persistent questions about the quality of the credits entering the market.
The potential for mis-selling in this market is high. Some noble Lords may remember that, in 2011, a listed company on the Canadian stock exchange, the Sino-Forest Corporation, went bankrupt after an investigation revealed that the company’s claims were vastly out of line with reality on the ground. The case related to a standard forestry offering; it is far easier to verify whether the land has been purchased and the trees are there than it is to verify whether those forests are actually absorbing or storing carbon—an invisible commodity that we are essentially turning into a tradeable commodity. Similarly, how much biodiversity the forest may hold is a far harder thing to verify.
The difficulties of verifying this market make it very attractive for unscrupulous actors and, as excitement and financial flows increase in this market, that attractiveness to potentially rogue actors will only grow. One UK-based carbon market ratings agency has already reported that it believes that only 30% of offsets on the market are high quality, and 25%—one-quarter—could effectively be classed as having junk status. The Swiss-registered offset provider, South Pole, one of the largest in the market, had the integrity of its offering called into question by an article in Tages-Anzeiger in February this year. This sent shock waves through the industry, and a lot of attention has now been placed on the question of integrity.
Most of the focus of the carbon market quality checks is on credits generated in the biosphere—so-called nature-based solutions. Trees are the most common product to which you will find financial instruments attached, but carbon is stored in other ways, too, and it is even more difficult to verify some of those other sources of carbon store because they are far harder to count and track. Below-ground carbon in soils is one example: it is notoriously difficult to get a handle on exactly what is happening in the carbon cycle in soils. It is even harder with below-water carbon—blue carbon—stored in sea grasses and other marine ecosystems, where you cannot even see the commodity being sold. These difficulties are pronounced.
The Minister may say, “Don’t worry; normal regulations against fraud and corruption will be sufficient to protect against outright fraud and corruption”, but these markets are uniquely complex. Often the problem is not that actors are wilfully seeking to do wrong but rather that there is an unhelpful lack of independent standards in the market to help determine what constitutes an additional or biodiversity benefit. In that uncertainty, it is not just investors who will potentially find that their investments are not delivering what they expected; the whole planet is being short-changed. This is because the sale of an offset permits the continued emission of greenhouse gases, minus the guilt; and, if the offset purchase is not genuine, atmospheric concentrations, already at dangerously high levels, will continue to rise. As we saw in the latest assessment report from the IPCC, this is starting to imperil us all.
Independent observers of the integrity of this market have highlighted concerns. A report published on this topic by IOSCO, the International Organization of Securities Commissions—the global standard-setter for investment securities—explains in detail the issues with the quality of carbon credits and the lack of a uniform definition of what constitutes high quality. I will not run through them; there are at least 10 reasons why this market is complicated.
At the top line, there are questions about additionality—whether this action is genuinely additional to what would have happened anyway—and about permanence and the risk of reversal. There are risks of leakage: you may be protecting something in one area, but that activity is just displaced to somewhere else and the emissions still occur. There are concerns about double counting, registry and transparency. There are potential conflicts in the market, and there is a lack of legal clarity, no standardisation, poor data and, overwhelmingly, a very large risk of greenwashing and, from that, legal risks and potential litigation cases. We are not in a good situation today. The market is small now, but it will grow, and it is really timely to be considering whether the Government should take powers now to regulate it.
This is a volatile market, as you can imagine, such is the uncertainty, with the mis-selling of fraud and the mistaken assumptions. There have been plenty of studies into why that might be the case. I will touch on an example of why regulations are needed: pension funds. In the UK, they are now investing in forest carbon offsets for the long term. This relates to both defined benefit offerings, where there are some protections for savers, but defined contribution schemes are increasingly entering this market too.
The long-term future of the biosphere in a changed climate is deeply uncertain and pension fund advisers and managers need better guidance. They simply should not have to determine whether something they are being sold is correct with no guidance from government and no regulation. There could be risks from litigation, as I mentioned: should vendors of these products be hit with legal claims or go bankrupt, savers will be hit by that outcome.
Baroness Sheehan (LD)
My Lords, I thank the noble Baroness, Lady Worthington, for tabling this amendment. I totally agree with its necessity, which is why I have added my name to it. If we are to meet our statutory net-zero targets, carbon offsetting will become ever more important as we decarbonise and reach those emissions that are so hard to abate and the residual emissions that the noble Baroness spoke about.
Let me say at the outset, however, that carbon offsetting is not a solution to climate change. There is only one way to avoid catastrophic climate change, and that is to stop adding to the blanket of greenhouse gases in the upper atmosphere that is already at a higher concentration than at any time since records began. Just for the record, the May peak of carbon dioxide in 2022 was a record 421 parts per million. The highest recorded over the previous 800,000 years for which we have records was just under 300 parts per million. This increase has happened in a blink of a geological eye, over just the last 150 years since the start of the Industrial Revolution. This Committee is not the time or place to go into the impact on our planet, save to say that catastrophic events are happening at a faster pace than even the most pessimistic predictions by scientists.
As we know, the biggest contributor to greenhouse gases is the burning of fossil fuels. The second biggest is deforestation. Putting an end to both these practices is well under way but is not going fast enough. I hope that more will be done through this Bill before it becomes an Act, because it deals with the money that fuels the release of those greenhouse gas emissions.
Until decarbonisation measures bite—and resistance to them is strong; we have seen that in some of the contributions to this Committee—carbon off-sets are one tool we have to mitigate the harm of climate chaos and the destruction of nature. The market demand for off-sets is exponential and the scope for fraud in the voluntary carbon market is massive. Greenwashing is rife. I will give one example: the recent chastisement of HSBC by the Advertising Standards Authority for misleading people with some of its claims to be carbon neutral. However, we need a functioning market to off-set hard-to-eliminate sources of greenhouse gases, which will leave residual emissions. It is the role of government to enable regulators to act, which is why this amendment is necessary and why I added my name to it.
Industry is also asking government to play its part. I will quote a substantial part of the recent report by Scottish Widows, Nature and Biodiversity: the Pensions Imperative, because it says it far better than I can:
“With companies potentially needing to put billions of pounds into offsets to meet their net zero commitments, the biggest barrier to date is the opacity of the voluntary carbon market. This breeds mistrust, particularly as a number of bad actors have been exposed in the past. What could really shift the dial here is the establishment of a UK regulator for carbon offsets. This could set quality standards that corporations looking to do the right thing could trust, enabling them to allocate money with confidence in these offsets having additionality and really delivering on those climate and nature goals”.
Finally, when I was a member of the Lords Select Committee on Science and Technology, we produced a report entitled Nature-Based Solutions. The committee heard evidence from a cross-section of practitioners in the carbon credits sector, from both the science and financial communities. As the noble Baroness, Lady Worthington, said, we heard from the science community how difficult it is to quantify and monetise nature-based solutions. From the financial community, we heard that it needs a regulatory framework so that everyone can work on a level playing field and so that the market is less like the wild west—which it currently is.
I will conclude by quoting a conclusion of that report:
“We recommend that the Government provides clear regulatory standards for emerging carbon markets to ensure that any off-sets that are claimed are genuine”.
However,
“these markets will only deliver the desired results if they are properly regulated and verified to prevent inaccurate claims of carbon off-setting. Carbon and nature credits must be for benefits that are additional, measurable, and permanent”.
For carbon credits to have the impact we all want, they must have good governance backed by government.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to follow the noble Baronesses, Lady Worthington and Lady Sheehan, and to offer Green support for this amendment, which is obviously urgently needed. I essentially agree with everything that the two noble Baronesses said, particularly the point made by the noble Baroness, Lady Sheehan, that off-sets are essentially a con that should not be used to trade off against continuing fossil fuel emissions. None the less, we are where we are and they are certainly going to happen.
The complexity is really well illustrated by a recent report by HSBC, which found that $246 billion-worth of hydroelectricity depends on water provided by threatened tropical cloud forests. We think about where the funding, support and credits should go, but to maintain that electricity supply, surely the people producing the electricity should fund that. This is also a carbon store. It is a real demonstration of the way that, as the Treasury’s own Dasgupta report illustrated, the economy is a complete subset of and entirely dependent on the environment, which we are fast trashing.
The problems with the current “wild west” system have been clearly demonstrated already. In a paper this week in the journal, Frontiers in Forests and Global Change, the Berkeley Carbon Trading Project presented a study of nearly 300 carbon off-set projects, representing nearly 11% of global carbon off-set projects to date. It found that the projects were systematically overcrediting their results and delivering extremely dubious carbon off-sets. Apparently respected registries did not follow standards to make sure that projects were having a real and tangible impact on carbon levels. A particular area of difficulty was whether the projects would have happened anyway, whether or not the extra carbon credit was claimed.
I will make one final point. The noble Baroness, Lady Worthington, sought ways in which the Government might see this as an advantage. In this wild west, there is a need for extensive due diligence for any financial body to be able to claim that it has genuine, honest carbon credits that will deliver over the long term—because the climate emergency is of course a long-term project and not just for one year or five years. There is a significant cost for any company going into this and wishing to protect its reputation. If it is a regulated sector, that will make it a great deal easier for people to do due diligence and to rely on it, and not to have to do the work themselves at considerable cost, facing considerable complexity and carrying considerable risk.
The need for this amendment is obvious. The problems with off-setting both carbon and biodiversity are very clear. We should not be where we are, but we are where we are, and the amendment offers one way forward that would be good for the financial sector as well as for the planet.
Lord Tunnicliffe (Lab)
We do not have a fixed view on this proposal and therefore will listen to the response of the Government. At an individual level, when invited to pay my off-sets to British Airways, I am deeply suspicious of them making any useful contribution. My general view on this Bill is that good regulation is important, because the problem with the financial services industry is that any areas of weakness can escalate into a significant wider impact. I take the point that this area of activity will almost certainly expand and there is a good prima facie case that it should be regulated.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government recognise the potential for off-setting to enable businesses to address emissions that cannot be reduced through decarbonisation strategies. As the Climate Change Committee has set out, they can play an important role in the transition to net zero.
Done well, and centred around high integrity, climate and nature off-sets through voluntary carbon credits can increase climate ambition, help mobilise finance to developing countries and provide a credible tool for the 1.5 degree transition. Done badly, and without integrity at their core, the potential for “greenwashing” clearly exists. Therefore, it is important that the voluntary carbon credits used by companies reflect genuinely additional removal of or reduction in greenhouse gas emissions.
The Government recognise that it is important to ensure the integrity of these markets if they are to play a role in mobilising investment. Concerns around the integrity of carbon and nature markets, from the supply of voluntary credits, their trading and green claims made by buyers through offsetting, must be addressed.
Baroness Worthington (CB)
I thank the Minister for her response and I am encouraged and reassured to know that those powers already exist. I will go away and consider that.
I am going to come back on a couple of points. It is true that some initiatives have been launched—I was involved in one—but they have no statutory basis at all. It is a group of individuals—business leaders and some academics—fighting it out with no governance or democratic representation. It will come out with standards, but the quality control over that process is not being led by sovereign nations. It was launched at COP 26, but there was absolutely no involvement of negotiators, member states or anything with public sector status. Although we look forward to their outcomes, something in that process may lead to less than favourable outcomes.
I ask the Minister: if we are to proceed internationally, which part of the architecture of the UN or any multilateral fora does she see acting as the holder of this important set of regulations? It cannot be left to industry to mark its own homework, nor to the voluntary sector, with its general lack of resources or certainty of funding. It needs to be led truly internationally, through member states and a multilateral process.
Perhaps the Minister would agree to write to me, because I am interested to understand how this can be done internationally. Individual member states have to lead; one or two progressive countries have to start the process, as we have seen with the green taxonomy: Europe started and now the UK has done ours. You do not always have to wait for a UN or international process, but can move forward and take leadership, especially if you are trying to make the City of London the centre of green finance.
Although I am encouraged, there are still some large questions to be answered about how we ensure quality, get the right standards, and involve democratic processes and member states—but I am pleased to withdraw my amendment.
Lord Sharkey
“(3A) For each statutory instrument laid before Parliament in draft under this Act, if each House of Parliament passes a resolution that the regulations have effect with a specified amendment, the regulations have effect as amended.”Member’s explanatory statement
This would allow affirmative SIs generated by this Act to be amended by agreement of both Houses.
Lord Sharkey (LD)
My Lords, in moving Amendment 241G, I will also speak to Amendments 243A and 243B. The noble Baroness, Lady Noakes, has added her name to the last two; I am grateful for her support. I will speak first to Amendments 243A and 243B, then to Amendment 241G.
At Second Reading, I estimated—as did the noble Lord, Lord Hodgson of Astley Abbotts—that this Bill would generate at least 250 SIs. Many, if not all, of them would bring or have the potential to bring significant policy changes to the regulatory structures of our financial services industries. They would be able to do this without any significant scrutiny by Parliament. The parent Bill—this Bill—rarely sets out explicit policy changes; rather, it gives the Treasury powers to make policy changes when it has decided what those policies might be. Of course, this bypasses parliamentary scrutiny; it also, yet again, ignores the proper purpose and province of delegated legislation.
Amendments 243A and 243B propose a partial remedy. They would allow either House to insist on an enhanced form of scrutiny for SIs that it deems likely to benefit from more detailed examination and debate, as well as from recommendations to Ministers for revision. The usual SI procedures do not allow this. I think we would all accept—perhaps with the dutiful exception of the Minister—that neither the negative nor the affirmative procedure allows for proper and effective scrutiny. This is obviously true for the negative procedure but is also obviously true for the affirmative procedure. We cannot amend them and we do not vote them down.
The super-affirmative SI procedure, as set out in Amendment 243B, would allow a measure of real, detailed scrutiny; a means of hearing evidence; and a means of making recommendations to Ministers for revision. I should emphasise that the super-affirmative procedure does not produce a power to amend SIs; that remains exclusively with the Government. Paragraph 31.14 in part 4 of Erskine May characterises the procedure as follows:
“The super-affirmative procedure provides both Houses with opportunities to comment on proposals for secondary legislation and to recommend amendments before orders for affirmative approval are brought forward in their final form … the power to amend the proposed instrument remains with the Minister: the two Houses and their committees can only recommend changes, not make them.”
During the recent passage of the Medicines and Medical Devices Bill, the noble Baroness, Lady Penn, helpfully summarised the super-affirmative procedure, saying that
“that procedure would require an initial draft of the regulations to be laid before Parliament alongside an explanatory statement and that a committee must be convened to report on those draft regulations within 30 days of publication. Only after a minimum of 30 days following the publication of the initial draft regulations may the Secretary of State lay regulations, accompanied by a further published statement on any changes to the regulations. They must then be debated as normal in both Houses and approved by resolution.”—[Official Report, 19/10/20; col. GC 376.]
That is quite a good précis but it omits reference to the requirement to take account of any representations or recommendations made by a committee and of any resolution of either House. It also omits the requirement to say what these representations, resolutions or recommendations were and explain any changes made in any revised draft of the regulations.
It was during the passage of that Bill—the Medicines and Medical Devices Bill—that this House last voted to insert a super-affirmative procedure. Prior to that, according to the Library, the last recorded insertion was by the Government themselves in October 2017 in what became the Financial Guidance and Claims Act.
When not doing it themselves, the Government traditionally put forward any or all of three routine objections to the use of the super-affirmative procedure. The first is that it is unnecessary because the affirmative procedure provides sufficient parliamentary scrutiny. That is obviously not the case. The second is that the super-affirmative procedure is cumbersome. I take this to mean only that it is more elaborate than the affirmative procedure but that is precisely the point of it: it is necessarily more elaborate because it provides for actual scrutiny where the affirmative procedure does not. The third is that it all takes too long. This has force only if there is some imminent and necessary deadline but there is none in this case.
In a debate on the then UK Infrastructure Bank Bill, speaking about the super-affirmative procedure, the noble Baroness, Lady Penn, said:
“This procedure has rarely been considered the appropriate one to prescribe in primary legislation; where it has, the relevant instances have tended to be of a particularly substantive and wide-ranging sort.”—[Official Report, 4/7/22; col. 905.]
I am not sure that I entirely understand the Minister’s first point about prescribing in primary legislation, because that is the only place it can be prescribed, but I understand her second point. However, “particularly substantive and wide-ranging” exactly characterises the changes that SIs could produce in our financial services regime. That is why we propose the super-affirmative procedure.
Amendment 243B sets out the procedure for a super-affirmative SI. Amendment 243A simply says that either House may by resolution require any provision that may be made by the affirmative procedure to be made instead by the super-affirmative procedure. It is left to Parliament to decide which SIs merit the additional scrutiny.
On my Amendment 241G, 18 months ago, the SLSC and the DPRRC published simultaneous and powerful reports setting out in detail concerns that the balance of power has moved significantly from Parliament to the Executive. Part of the reason for this shift has been the abuse of delegated legislation. Cabinet Office guidance explicitly states that delegated legislation is not to be used for policy-making but is to be reserved for detailed proposals about how policy agreed in Parliament can in fact be made to work. This is not what happens. Skeleton Bills, their dependent SIs and Henry VIII provisions all essentially bypass parliamentary scrutiny.
The best current example of this kind of abuse of secondary legislation is probably the REUL Bill, which has been described as “hyper-skeletal”. It allows Ministers, via SIs and other mechanisms, to make, change or revoke policy without any meaningful parliamentary scrutiny. The Bill is a direct assault on Parliament’s interests and its constitutional role.
How could Parliament regain at least some element of effective scrutiny? Absolute rejection of SIs would probably not be desirable or workable but the ability to amend them in critical circumstances, where at issue was the whole notion of parliamentary sovereignty and effective scrutiny, may well be desirable. The SLSC report of February this year, Losing Control?: The Implications for Parliament of the Retained EU Law (Revocation and Reform) Bill, has this to say in its executive summary:
“We call for the Bill to contain an enhanced scrutiny mechanism that enables Parliament to decide that an instrument makes changes of such policy significance that the usual ‘take it or leave it’ procedures—even if affirmative—relating to statutory instruments should not apply but that a further option should be available, namely a procedure by which the Houses can either amend, or recommend amendments to, the instrument.”
What applies in the case of the REUL Bill applies to this Bill, too.
Amendments 243A and 243B, which I have discussed, would provide the powers to recommend amendments to the SIs generated by this Bill. The question of the ability to amend SIs is a bit more complicated. I asked the Library why it is that SIs are not currently amendable. There are two reasons. The first is that almost all Acts that provide for secondary legislation-making powers do not contain provisions that would enable associated instruments to be amended. In other words, to amend SIs, you would have to have the power to amend written into the parent Act. The House of Commons Information Office publication Statutory Instruments, revised in May 2008, explains this on page 5 in some detail.
The second reason is the absence of relevant parliamentary procedures that could enable amendment to take place. It is clear that it would be a nonsense to replicate all or any of the procedures used in amending primary legislation to amend secondary legislation. However, there is already a simple method for amending SIs that avoids this problem. It is set out in Section 27(3) of the Civil Contingencies Act 2004, which states:
“If each House of Parliament passes a resolution that emergency regulations shall have effect with a specified amendment, the regulations shall have effect as amended”.
Amendment 241G takes its text from the language of that Act. It simply says:
“For each statutory instrument laid before Parliament in draft under this Act, if each House … passes a resolution that the regulations have effect with a specified amendment, the regulations have effect as amended.”
The noble Lords, Lord Bridges and Lord Forsyth, used almost identical language in their Amendment 241F, which we debated on, I think, day 9.
Baroness Noakes (Con)
My Lords, I have put my name to two of the amendments tabled by the noble Lord, Lord Sharkey, in this group: Amendments 243A and 243B, which would require the super-affirmative procedure to be used. I have not added my name to Amendment 241G. I am in complete sympathy with the call for Parliament to be able to amend statutory instruments; I pay tribute to the work done by the committees chaired by my noble friends Lord Blencathra and Lord Hodgson of Astley Abbotts. They have highlighted the dangerous shift to skeleton legislation with the resultant reliance on secondary legislation, which has inflicted great harm on Parliament’s ability to scrutinise and hold the Executive to account.
On the other hand, I recognise that this is a large issue that needs to be taken forward at a high level within both Houses of Parliament, and also of course with the Government. I do not believe that this Bill is the right place to start that process, although I do believe that we need to find a way of progressing the dialogue to find a way forward. I am of course concerned about the parliamentary processes around the many statutory instruments that will come under the powers in this Bill. The super-affirmative procedure is certainly better than the ordinary affirmative procedure, which is why it has my support.
In adding my name to these amendments, I am in fact hitching a ride on them in order to raise some wider issues about the statutory instruments that will come forward once this Bill is made law. This is an issue that should probably have been debated earlier in Committee but I have only recently been made aware of it. I have given my noble friend the Minister only a very small amount of notice of the nature of my concerns; I accept that she may not be able fully to answer at the Dispatch Box today.
The amendments focus on parliamentary oversight of legislation being brought in by statutory instrument. What I think we have not focused on is whether there will be adequate consultation by the Treasury before the statutory instruments are laid in Parliament. Many of the statutory instruments will of course be uncontroversial in the sense that they will merely recreate the EU law in a UK-based framework for the rules that will then be made by regulators.
However, it is entirely possible, as the noble Lord, Lord Sharkey, said, that the statutory instruments will contain significant changes from EU law. Clause 4, which allows the restatement of EU law, can be used to incorporate changes to the law within the huge range of possibilities that are allowed for by Clause 2(3). There is no requirement in Clause 4 for the Treasury to consult anyone at all before laying these statutory instruments. This is in stark contrast to the regulators, who have very clear statutory obligations to consult in respect of any rules they will be laying under the terms of the statutory instruments that give them the power.
In addition to Clause 4—this is the actual example that has come to my attention—the Treasury might choose to use the new designated activities power in Clause 8 to set up the replacement regulatory regime under UK law. As with Clause 4, the use of the Clause 8 power does not require the Treasury to consult anyone at all. The example that has been brought to my attention concerns the prospectus regime. I am indebted to the briefing provided to me by a partner in one of the Magic Circle law firms.
As part of the Edinburgh package, the Government published a policy note and a draft statutory instrument on how they intended to replace the EU prospectus rules. Put simply, the designated activities regime will be used to create the new prospectus regime when the existing EU law is repealed. The publication of the draft statutory instrument and the policy note was well received because it allowed those who specialise in this territory to get to grips with the proposed legal framework. Although the policy note was clear that the drafting was not final, it was not clear whether there would be a proper consultation on the new regime.
By way of background, there was a policy intent to deal with the issue of mini-bonds in the light of the London Capital & Finance scandal; that policy is, of course, uncontroversial. The Government were clear in their policy note that they intended to affect retail investors only and did not intend to cover things that were regulated elsewhere. It appears, however, that the chosen vehicle of relevant securities, as defined in the draft statutory instrument, also captures things with no likely impact on the retail market, including—somewhat incredibly—over-the-counter derivates and some loans, securities and financial transactions. I believe that this analysis has been made available to the Treasury via various players in the wholesale financial markets.
Although I understand that communications are constructive, there is a fundamental problem emerging: the so-called illustrative statutory instrument now seems to have morphed into a pre-final document on which no formal consultation will be held. This is important, given the significant widening of the reach of the proposals, well beyond the existing prospectus regime. I would be grateful if my noble friend the Minister could set out how the Government see the next steps for the prospectus statutory instrument and whether formal consultation will occur. I hope that she will be able to respond not only on the particular issue of the prospectus statutory instrument but, more broadly, on the extent to which the Treasury will consult across the range of replacement EU law when it brings that law forward.
Viscount Trenchard (Con)
My Lords, I declare my interest as stated in the register.
I congratulate the noble Lord, Lord Sharkey, on finding a way to amend statutory instruments. If it really is possible to change what noble Lords have always believed about SIs, that is welcome news indeed. As the noble Lord says, this procedure would be used only on the rare occasions when your Lordships’ House or another place considered it vital.
I support the noble Lord’s Amendments 243A and 243B, to which my noble friend Lady Noakes has added her name. These would create a super-affirmative category of approval process, introducing a higher bar but only after a resolution is made by either House of Parliament. I also agree with the points made by my noble friend on the prospectus directive and other matters. I support all these amendments.
Lord Thomas of Cwmgiedd (CB)
My Lords, I too support these amendments. I cannot usefully add anything in relation to the super-affirmative procedure. It seems that this an admirable proposal—but I want to say a few words about the proposed new subsection in Amendment 241G, introduced by the noble Lord, Lord Sharkey.
To begin with, it seems that, if Parliament authorises the alteration, as Parliament can do anything—as one is taught from one’s earliest days—it must be able to do something as minor, in theory, as this. Furthermore, as she always does, the noble Baroness, Lady Noakes, made a very good point that this is a very important step, but why is this not the Bill to start? There are three reasons. First, the financial services industry is of vital concern to the UK. Secondly, these instruments are drafted not by parliamentary counsel but by no doubt very competent lawyers in the Treasury—but there is a difference. Thirdly, it seems that, if the draftsman knows that bits can be corrected, that is a very good supervision of the drafting process.
However, although this is in theory a minor step, it is surprising to say that Parliament can amend statutory instruments and there are obviously consequences for our procedures. It might be appropriate for this Committee or someone—I am not sure how it is done—to say, “The appropriate committees and the clerkly authorities in this House should report on the practicality of doing this”. If it is a procedure, how likely is it to be used? More importantly, we can always find an excuse to say, “Let’s push it down the road”. This is the admirable place to start an important reform for our most important industry.
Lord Tunnicliffe (Lab)
My Lords, I do not formally have a view on these amendments. It seems that they would have wide-ranging implications, and I shall consult with colleagues throughout Parliament about how we should come back to this issue. If a piece of legislation is proposed and supported by the noble Lord, Lord Sharkey, the noble Baroness, Lady Noakes, and the noble Viscount, Lord Trenchard, you have to think that it is pretty wide-ranging—in fact, close to impossible. Whether this is the right place to address this issue is a much bigger question than whether it is a good idea. It seems a pretty good idea, but I shall listen to the Minister’s response to the key point about the right place and the right mechanism.
Baroness Penn (Con)
My Lords, these amendments would introduce new parliamentary procedures when exercising the powers in the Bill, and the Government do not believe that they are necessary.
The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. This was recognised by the DPRRC, which praised the Treasury for
“a thorough and helpful delegated powers memorandum.”
The DPRRC has not recommended any changes to the procedures governing the powers in the Bill. That may, in part, answer the question from the noble Lord, Lord Tunnicliffe, about the right place. I have worked on enough Bills to know that that is not a frequent conclusion from the Delegated Powers Committee.
This includes the powers in relation to retained EU law. While they are necessarily broad, they are restricted in a number of important ways. First, they are governed by a set of principles that are based on the regulators’ statutory objectives. Secondly, they are limited in what they can be used for. For example, they cannot be used to create new offences. Thirdly, the powers over retained EU law are strictly limited to a subset of legislation. They can be used only to modify or restate retained EU law in financial services legislation, as set out in Schedule 1. Finally, only a small amount of primary legislation is included in the scope of this power, and it is all listed in Schedule 1, Part 4.
Baroness Kramer (LD)
Could I ask a clarification of the Minister—I know that I have not participated? Has she just confirmed that in the Government’s view statutory instruments will indeed be making policy change? That would be important for us to understand. I believe that is what she has just said, but I thought I should confirm it.
Baroness Penn (Con)
I can only repeat to the noble Baroness my words, which were that consultation and informal engagement, including on draft statutory instruments, will take place where there is a material impact or policy change.
Lord Deben (Con)
If my noble friend is saying what the noble Baroness asked, she is making a very serious change. To object to the changes being recommended on the basis that this is the wrong place seems to me to be quite difficult to uphold.
Baroness Penn (Con)
The Government will make those changes only within the agreed scope set out in the Bill. That is perhaps why the DPRRC was content with the approach that they were taking.
Baroness Noakes (Con)
Does my noble friend accept that the specification in Clause 3 allows for very significant changes to be made? There are many heads under which the Government could fit a change in policy, and that policy change could be significant in the context of the restatement of EU law.
Baroness Penn (Con)
The intention is to allow for the restatement within EU law or to adapt it to a situation or circumstances within the UK. As I have said, in undertaking that work the Government will seek to undertake a combination of formal consultation and informal engagement appropriate to the changes being made. As set out in the Government’s policy statement on the repeal of retained EU law in financial services, the Government aim to balance the need to deliver much-needed reforms with the need to consult industry and stakeholders. They will take the decision on the approach to this on a case-by-case basis.
I wanted to address my noble friend’s specific question on the prospectus regime. The Government intend—
Lord Tunnicliffe (Lab)
Would the noble Baroness accept that we have heard that speech before? With every complex Bill where we have sought ways to have more control over statutory instruments, we get the same speech—that it has all been worked through, that the constraints are there and so on. Those of us who have to sit through statutory instruments are growing more and more uncomfortable at the increasing number of occasions when we want more involvement and commitment. We want a situation where some variation in the instruments would be possible and this is a way forward. It may not be the right way, but this is an area of powerful area in the House—the relationship between Parliament and the Executive.
Baroness Penn (Con)
The noble Lord, Lord Sharkey, I believe, referred to two pieces of work that looked at the wider concern around procedures when it comes to statutory instruments and the House’s involvement and ability to respond to them. I can talk only in relation to the Bill before us. Our approach is consistent with the policy approach to the regulation of financial services that the Government have set out and consulted on—the FSMA model. That delegates some policy-making both to the Treasury and then, significantly, to the regulators. In the context of the Bill, we are comfortable that our approach is appropriate to the model of regulation that we are advocating in these circumstances. I recognise the wider debate but, in the context of the Bill, we are confident that our approach is right and appropriate.
Coming to my noble friend’s specific question, I think the concern is around the definition of “securities” in the prospectus regime. The Government intend to include certain non-transferrable securities within the scope of the new public offer regime that is being developed as part of the review of the prospectus regime, which delivers on a recommendation of Dame Elizabeth Gloster’s review of the collapse of London Capital & Finance. We intend to capture mini-bonds and other similar non-transferable securities that may cause harm to investors if their offer is not subject to greater regulation.
The Government are keen to ensure that business that does not affect retail investors or is already regulated elsewhere, such as trading in over-the-counter derivatives, is not unintentionally disrupted by the reformed regime. We have been engaging with stakeholders on this point to understand the concerns of industry, and we are considering what changes we can make to the statutory instrument to address them.
The Government do not agree that the use of the super-affirmative procedure in this case is appropriate. Examples where it has been used include legislative reform orders made under the Regulatory Reform Act 2001 and remedial orders made under the Human Rights Act 1998. In both cases, the powers in question can be used very broadly over any primary legislation, due to the nature of the situations that they are intended to address. The delegated powers in this Bill are not comparable with these powers, and I have already explained how the powers over retained EU law are restricted and appropriately scoped. Therefore, in the case of the Financial Services and Markets Bill, we are confident that normal parliamentary procedures remain appropriate. I therefore ask the noble Lord, Lord Sharkey, to withdraw his amendment.
Lord Sharkey (LD)
My Lords, I am grateful to all noble Lords who have spoken in this short debate. I agree with the noble Baroness, Lady Noakes, about being able to amend SIs. It is a complicated and far-reaching issue and necessarily involves the House of Commons, but we need to find a mechanism for consulting all the interested parties and formulating a plan for reform. The Minister has not mentioned this, but, as I mentioned in my speech, this is to do with the balance of power between the Executive and Parliament. Many of our committees’ reports tell us in dramatic terms that the balance of power has recently shifted very significantly towards the Executive. To change that, we need to do something about our ability to scrutinise work that comes before us. That includes being able to amend it and not relying on a toothless system of negative and affirmative SIs, and it relies on being able to amend constructively regulations that might come before us.
As the SLSC said, it is clear that there is a need for such a mechanism to amend SIs and that finding a path to this fairly quickly is important. I agree with the suggestion by the noble and learned Lord, Lord Thomas, that here and now is a pretty good place to start thinking hard about what we do before we get to Report. It is true that the volume of skeleton Bills continues to increase, as does the abuse of delegated powers in a more general sense, and I cannot see it spontaneously decreasing, unless we do something about it.
As to Amendments 243A and 243B—the super-affirmative amendments—the case for them has been accepted by all speakers, except the Minister. We shall definitely want to revisit the issue on Report. In the meantime, I beg leave to withdraw the amendment.
Baroness Penn
Member’s explanatory statement
This amendment and the amendment at page 89, line 37, would allow any provision that may be made by regulations subject to the negative procedure under this Act, or under any other enactment, to be made in regulations under this Act subject to the affirmative procedure.
Member’s explanatory statement
See the explanatory statement for the amendment at page 89, line 36.
Viscount Trenchard
“(4A) The Treasury must make regulations under subsection (3) so as to bring section 1 and Schedule 1 into force for the purposes of revoking, within the period of two months beginning with the day on which this Act is passed, the provisions mentioned in that Schedule connected with Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.”Member’s explanatory statement
This amendment ensures that the retained EU Law which replaced the Alternative Investment Fund Managers Directive and associated legislation will cease to have effect no later than two months after the passage of the Bill.
Viscount Trenchard (Con)
I have tabled Amendment 246 to explore the Government’s willingness to move more quickly to take advantage of our new regulatory freedoms. I am grateful to my noble friend Lady Lawlor for her support as she added her name to the amendment. The alternative investment fund managers directive is perhaps the most striking example of an EU regulation that was imposed on this country in the face of strong opposition from the City, the Government and industry at the time. In 2008, Charlie McCreevy, then the EU’s internal market commissioner, assured the industry that the EU would not regulate the alternative investment funds industry, which should be left to member states to regulate or not as they chose. A 2014 report by Dr Scott James for King’s College London, sponsored by the British Private Equity and Venture Capital Association, tells the story of AIFMD very well.
Contrary to Mr McCreevy’s intention, Manuel Barroso, then president of the EU Commission, intervened in 2009 to push for an alternative investment fund managers directive in order to secure support, principally from France and Germany, for his reappointment as Commission president. The initial draft was therefore prepared without the usual preparatory work and led to harmonised regulations covering disparate organisations from the venture capital, private equity, hedge fund and property fund sectors, lumped together by the Commission as alternative investment funds. The Treasury’s initial response was weak, and the FSA was suffering from a lack of confidence and brain drain in anticipation of being broken up.
Baroness Lawlor (Con)
My Lords, I support the noble Viscount’s amendment, to which I have added my name. My noble friend referred to the political background of the EU at the time of the AIFMD; he spoke about its impact on the industry, with great knowledge and experience, and about the opposition encountered at the time. I shall say a few words about each, beginning with the policy background, noting other differences between the UK sector and the EU sector, and other concerns raised by the House of Lords European Union Committee at the time.
Although businesses may have learned to live with the directive, as one person in the industry told me, it is not exactly something that helps competition or helps the sector to do as well as it might do—nor has it. At the time, the directive had a policy background. It was portrayed as a response to the financial crisis, but in fact it was already on the cards in the European Parliament in 2008. Discussions took place again in April 2009 at the G7. I see it, in terms of policy, as part of Michel Barnier’s commissionership for Internal Markets and Services between 2010 and 2014, when it was driven through as part of a raft of measures designed to promote EU monetary and banking union, including, for instance, the single supervisory mechanism. Monsieur Barnier’s overall approach was to have a centrally controlled and directed policy for the sector, reflecting the traditional approach of the French state to the economy and brought into the EU at its inception.
So, AIFMD should be considered in that context, rather than as suitable for the UK, which was outside the single currency and the economic union. Our financial model is based on markets, freedom and competition under UK law. Indeed, even in the context of the global direction of the sector leading to cross-border regulatory systems, it was seen from the European legal perspective as potentially having “undesirable effects”, with the need highlighted there to find the right balance between rules and freedom, according to the co-authors of a section in the Alternative Fund Managers Investment Directive, a multi-volume assessment, from a legal perspective particularly, published by Kluwer Law in the Netherlands in 2012. The co-authors of the chapter “Challenges from the Supervisor’s Perspective” were concerned about finding the right balance between rules and freedom.
Here in the UK, that balance has traditionally been struck by domestic law and regulation, which has accommodated innovation, competition and regulated risk in a diverse range of businesses. My noble friend Lord Trenchard spoke about those: hedge funds, private equity and, indeed, property. It has not been under a rule of law with a “one size fits all” approach, such as that of the EU, which reflected a different approach—a precautionary and code-based system of the law—that is ill equipped for our diverse sector.
My noble friend mentioned the differences between the UK and EU sectors. I would just add that, overall, when we look at the context, the UK sector is different in proportion, in size and in composition. Our financial services sector accounts for 8% of the UK economy—the same proportion as that of Canada and the US. By contrast, in the European states—in Germany and France—as well as in Japan, it accounts for just 4%, so half of ours.
Within the sector, the UK AIFs have a particular profile. According to the figures from ESMA collected for 2019—the last year when they were collected—before leaving the EU, the UK’s AIFs accounted for a net asset value of €1,338 billion, compared with €5,468 billion for the EEA 30, so about 20% of the net asset value. As my noble friend Lord Trenchard said, he puts the percentage of UK AIFs as a proportion of the EU at 85%. Other figures suggest slightly less, such as 75%, but it is not worth fiddling over the percentage—it is very significant.
That brings me to my third point. My noble friend mentioned many concerns at the time. I would just raise the concerns of the House of Lords EU Committee in February 2010. Commenting on the alleged or apparent aims to increase the stability of the financial sector and facilitate the single market in alternative investment funds, it noted that the discussions about hedge funds and private equity funds regulation had taken place at the EU level in 2008, with reports by MEPs in the EU Parliament, and before the G20 summit. The committee’s balanced report broadly welcomed and acknowledged the potential for risk and welcomed the co-ordination and supervision of fund managers, which would benefit the single market and the UK economy, as well as the co-ordination and supervision of arrangements. It also welcomed the introduction of passports for the sector.
None the less, it had serious concerns about a number of rather major points. It said that this was a directive designed to cover all non-UCIT funds. It said that there was a failure to acknowledge the differences in how AIFs are structured and operate, as well as a failure of proposed disclosure by managers to supervisors to take account of the different types of AIFs and the fact that the requirements should be proportionate and relevant. Above all, the committee was concerned that the directive should be
“in line with, and complement, global arrangements”.
It added:
“Coordination with the US regulatory regime … is essential to avoid a situation in which the EU alternative investment fund industry loses competitiveness at a global level as a result of regulatory arbitrage.”
To conclude, the AIFMD was designed for a different economic and legal system and is not suitable for the UK’s approach. It was seen at the outset to be unsuitable for our sector—one that is different in proportionate size and composition. It is ill suited to the supervision of individual firms and the diverse composition of the sector. It is also ill equipped for a market system under UK law; rather, UK arrangements should be in line with and complement global arrangements. As was explained by the House of Lords EU Committee in 2010, co-ordination with the US regime is essential.
Baroness Penn (Con)
My Lords, through this Bill, the Government are seeking gradually to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation. Under this model, the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.
It is not the Government’s intention to commence the repeal of retained EU law without ensuring appropriate replacement through UK law when a replacement is needed. The Government set out their approach to the repeal of retained EU law in the document that I referred to earlier, Building a Smarter Financial Services Framework for the UK, which was published in December last year as part of the Edinburgh reforms. It makes it clear that the Government will carefully sequence the repeal to avoid unnecessary disruption and ensure that there are no gaps in regulation.
The Government are prioritising those areas that offer the greatest potential benefits of reform. They have already conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale markets review and my noble friend Lord Hill’s UK listing review. By setting out these priorities, the Government are enabling industry and the regulators to focus their work on the areas that will be reformed first.
My noble friend Lord Trenchard’s Amendment 246 relates to legislation implementing the Alternative Investment Fund Managers Directive in the UK. As has been noted, the UK is the second-largest global asset management hub, with £11.6 trillion of assets under management; this represents a 27% growth in the past five years. The sector also supports 122,000 jobs across the UK and represents around 1% of GDP. These statistics demonstrate the huge value of this industry to the UK and, while the Government would never be complacent, also suggest that the sector is in good health.
The health of the sector is underpinned by proportionate and effective regulation. The Government believe that this must include an appropriate regulatory regime for Alternative Investment Fund managers. These funds are major participants in wholesale markets; they take influential decisions about how capital is allocated, and it is vital that they are held to standards that protect and enhance the integrity of the UK financial system. Moving simply to repeal the legislation that currently regulates this sector without consideration of replacement could open the UK up to unknown competitiveness and financial stability risks. It could undermine the UK’s reputation as a responsible global financial centre committed to high standards of regulation, which could have significant ramifications for the UK’s relationships with other jurisdictions.
I understand that my noble friend Lord Trenchard has some concerns that the legislation deriving from the Alternative Investment Fund Managers Directive creates unnecessary burdens on innovative UK firms serving professional investors. The Government have not to date seen evidence that the reform of that directive is a widely shared priority across the sector.
Baroness Lawlor (Con)
Does my noble friend the Minister agree that UK law would be a better arrangement for supervising the sector than inherited EU law?
Baroness Penn (Con)
As I said at the start of my contribution, it is the Government’s intention to move all retained EU law when it comes to financial services into the FSMA model of regulation. That will apply to this area, too, but it is a question of sequencing and priorities. As I referenced before, we have set out our first wave of priorities and are seeking to look at those areas where the greatest potential benefits of reform lie. I am happy to confirm for my noble friend that it is our intention to move all areas of retained EU law on to a UK law basis.
Baroness Lawlor (Con)
Just for clarification, will that involve moving away from the precautionary, code-based approach of the EU, which very much influenced the sector post the 1990s and the thinking of our regulators? Will my noble friend confirm that, when the Government review the corpus of retained EU law for this sector, in line with their objects as has been stated, they will pay special attention to the need to rethink the framework of approach rather than simply adopting it? These are different ways of thinking.
Baroness Penn (Con)
My Lords, I would not want to pre-empt the approach for any specific area of regulation, but the principles on which we are seeking take forward this work are about looking at regulation and ensuring that we use the opportunities outside the EU to take the right approach to that regulation for the UK. My noble friend talked about the different perspectives taken by regulators in the different jurisdictions. That is right. The aim of moving from retained EU law is not simply to transcribe it into UK law but to ensure that it is well adapted to our own circumstances, too. However, I do not think that I can helpfully pre-empt the approach in each area in this debate, but only talk about some of those wider principles.
I was talking about the intention to move all retained EU law into the FSMA model. We have set out our priorities for the first areas in which we are seeking to do this. The Government have not to date seen evidence that the reform of the Alternative Investment Fund Managers Directive is a widely shared priority across the sector. However, the Treasury would of course welcome representations on this point. We are keen to engage further with industry and understand the sector’s priorities as we work to repeal retained EU law associated with alternative investment fund managers over the medium term.
The FCA also recently issued a discussion paper to consider whether wider changes to the asset management regime should be undertaken in future to boost UK competitiveness using the Brexit freedoms introduced by this Bill. This will allow the Government and the regulators to consider what replacement is appropriate for the legislation before commencing its repeal. For these reasons, I ask my noble friend to withdraw his amendment.
Viscount Trenchard (Con)
My Lords, I thank my noble friend the Minister for her reply, but I confess that I find it rather disappointing. I am grateful for the support that I received from my noble friend Lady Lawlor, who talked more than I had and expanded on what I had said about the emergence of the directive and the reasoning behind it at the EU level at the time. As she so well explained, the AIFMD system was always seen, not only at the outset but since then, to be unsuitable for the UK system.
My noble friend the Minister said that the Government have decided gradually to approach the question of repeal and reform of EU law—certainly, very gradually, I would suggest. As she rightly pointed out, this sector is hugely important and of huge value—she mentioned the figure of 122,000 jobs—to the City and the economy as a whole.
However, the Minister said that the financial services industry is underpinned by healthy and proportionate regulation, which I cannot agree with. I tried hard to explain the reasoning, as I understood it, for the introduction of this directive, and I tried to argue that it is not proportionate at all; it is widely regarded as being disproportionate.
The Minister said that there is no evidence of a widely held belief that the regulation underpinning this sector needs reform or revocation. I strongly question who she has been speaking to. In the last week, I have spoken to a very senior regulator of one of the Crown dependencies, who completely endorsed what I said: it is just not true to argue that this regulation is proportionate. The City has been hugely damaged over the years that the AIFMD regime has been in force. The Minister talked about 122,000 jobs, but how many more would there have been had we not, wrongly and unnecessarily, shackled this innovative sector of our financial services industry with this unnecessary, bureaucratic, cumbersome regulation, introduced entirely for political reasons?
I do not accept what the Minister said: that this would undermine the UK’s reputation. The UK’s present reputation, in the IOSCO and among other financial services markets, is that it has become steadily more bureaucratic. I talk to a number of other regulators, and I have technically been a regulator: I was the first non-Japanese to be appointed to the board of the Japan Securities Dealers Association, which has statutory, regulatory powers.
I very much hoped that the Minister would at least say that this is one sector where the Government recognise that there is disproportionate regulation, rather than argue that it is proportionately regulated, which I am convinced it is not. This would have been an opportunity to improve the City’s competitiveness. The listings review recently conducted by my noble friend Lord Hill of Oareford contains many instances of areas where the Government should move quickly. It is a pity that the Government are not using this Bill to move ahead immediately in areas where the case for further consultations is rather weak.
I hope that the Minister will bring back some better news when we next discuss matters such as this. In the meantime, I beg leave to withdraw my amendment.
Financial Services and Markets Bill
Tuesday 6th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-II Second marshalled list for Report - (6 Jun 2023)
Lord Sharkey
“(1) A Minister of the Crown may by regulation revoke or replace any legislation referred to in Schedule 1 provided that—(a) a document containing a proposal for those regulations has been laid before each House of Parliament,(b) the document has been referred to a Joint Committee of both Houses, and(c) a period of at least 40 days has elapsed after that referral, not including any period during which Parliament is dissolved or prorogued or either House is adjourned for more than four days.(2) If the Joint Committee, after considering any regulations laid under this paragraph, finds that—(a) the regulations represent a substantial change to the preceding retained EU law, or(b) the Government have not carried out sufficient public consultation lasting at least six weeks before laying the draft before Parliament, a Minister of the Crown must arrange for the instrument to be debated on the floor of each House and voted on before the period in sub-paragraph (1)(c) elapses.(3) If any amendments to the regulations, whether or not proposed by the Joint Committee, are agreed by both Houses of Parliament the regulations must be made in the form so amended.(4) If one House agrees amendments to the regulations under sub-paragraph (3) the Minister may not make the relevant statutory instrument until the other House has debated and voted on a motion to agree or disagree with those amendments.”
Lord Sharkey (LD)
My Lords, I shall speak first to Amendment 1 and then to Amendments 116 and 117. The Bill gives the Ministers and regulators power to shape our financial services regimes, but it does not allow for any meaningful parliamentary scrutiny of the changes that Ministers and regulators may introduce into law. This is another very clear example of what the noble Lords, Lord Hodgson of Astley Abbotts and Lord Blencathra, and their committees, warned about—the significant and continuing shift of power from Parliament to the Executive. The DPRRC report says in its introduction:
“We have concluded that it is now a matter of urgency that Parliament should take stock and consider how the balance of power can be re-set”.
It goes on to highlight the problem of what it calls
“Legislative sub-delegation of power: where ministers can confer powers on themselves or other bodies”,
which is precisely what this Bill is about. The report, called Democracy Denied?, goes on to say:
“we conclude that conferring legislative sub-delegation of power is potentially a more egregious erosion of democratic accountability than a simple delegation to a minister”.
The Minister is aware of these concerns. In our previous discussions, she has noted, by way of compensation no doubt, that there will be opportunities for Parliament to be consulted and for post-hoc accountability reviews. Neither of those things, desirable though they may well be, is a substitute for meaningful legislative scrutiny. This scrutiny is what Amendment 1 proposes to introduce, and I am very grateful to the noble Lords, Lord Hodgson of Astley Abbotts and Lord Lisvane, and the noble and learned Lord, Lord Thomas of Cwmgiedd, for adding their names to the amendment.
The amendment is based on the Amendment 76 of the noble and learned Lord, Lord Hope, to the REUL Bill, which your Lordships agreed to on 17 May by 231 votes to 167. This amendment was discussed at ping-pong in the Commons 10 days ago, and was rejected by the Government on three grounds. The first was that the Government do not accept the principle that Parliament should be able to amend statutory instruments. The second was that the scrutiny proposed would take up too much parliamentary time. The third is the really rather astonishing and disappointing view of the reach and capability of our Joint Committees. I shall not comment on that last point, except to say that it is obviously mistaken, as many of us here could attest.
The objection against taking up too much parliamentary time seems pretty odd, as scrutiny is obviously the essence of our role. In any case, that objection may, if one is charitable, have some force in the case of the monster that is the REUL Bill, but surely has none in the case of this much shorter and more coherent Bill.
As for the Government’s not accepting the principle that Parliament should be able to amend statutory instruments, that surely needs qualification. We have heard that qualification discussed in the preceding business. There are two examples of Acts of Parliament containing provisions for the statutory instruments that they generate to be amended—the Census Act 1920 and the Civil Contingencies Act 2004. Both those Acts allow for SIs to be amendable in the way that our Amendment 1 proposes, only by agreement of both Houses. There are no free-standing or wide-ranging powers.
The Government seem to be sticking to this rather confected set of objections to parliamentary scrutiny. Noble Lords who were here for the preceding ping-pong on the REUL amendments from the noble Lord, Lord Anderson, will have heard the repeated resistance to parliamentary scrutiny. That is despite the SLSC’s calling for the REUL Bill to contain
“an enhanced scrutiny mechanism that enables Parliament to decide that an instrument makes changes of such policy significance that the usual ‘take it or leave it’ procedures—even if affirmative—relating to statutory instruments should not apply but that a further option should be available, namely a procedure by which the Houses can either amend, or recommend amendments to, the instrument”.
The Bill before us is essentially a financial services carve-out from the REUL Bill and it suffers from the same lack of effective scrutiny provisions. What was necessary for parliamentary scrutiny of the REUL Bill is also necessary for this. Our Amendment 1 responds to the SLSC’s call. It brings in a sifting process. It allows a Joint Committee discretion over what constitutes substantial change to preceding retained EU law. It requires a debate on the Floor of each House if the Joint Committee makes a finding of substantial change or that there has been insufficient public consultation. It also allows SIs generated by the Bill to be amended if, and only if, both Houses agree. This is not a prescription for frequent and casual intervention but a narrowly drawn means of altering SIs on those rare occasions when both Houses find the case compelling.
The amendment returns a measure of meaningful parliamentary scrutiny to the Bill. It allows careful parliamentary scrutiny of proposed changes to our critically important financial services regime. Without it, there would be none; Ministers and regulators would decide, and Parliament would be bypassed yet again.
I turn to Amendments 116 and 117. These amendments, taken together, would allow either House to insist on an enhanced form of scrutiny for SIs it deemed likely to benefit from more detailed examination and debate, as well as from recommendations for revision. The usual SI procedures, as we all know, do not allow this and do not constitute parliamentary scrutiny in any meaningful sense: we cannot amend and we do not reject. The super-affirmative procedure set out in Amendment 117 would allow a measure of real, detailed scrutiny, a means of hearing evidence and a means of making recommendations to Ministers. It would not allow the amendment of SIs: that power remains exclusively with the Minister.
Identical amendments were debated in Committee. The noble Baroness, Lady Noakes, who is not in her place, added her name to the amendments and spoke in support; so did the noble Viscount, Lord Trenchard, and the noble and learned Lord, Lord Thomas of Cwmgiedd. The noble Lord, Lord Tunnicliffe, also not in his place, commented:
“If a piece of legislation is proposed and supported by the noble Lord, Lord Sharkey, the noble Baroness, Lady Noakes, and the noble Viscount, Lord Trenchard, you have to think that it is pretty wide-ranging—in fact, close to impossible”.—[Official Report, 23/3/23; col. GC 329.]
I think he meant that as a compliment, but it is not entirely clear.
The super-affirmative procedure is appropriate here because, for example, Clause 3 allows for very significant policy changes to be made that could be significant in the context of the restatement of EU law, as the noble Baroness, Lady Noakes, noted in the debate. The Minister thinks that the super-affirmative procedure is unnecessary and promises instead that
“the Government will seek to undertake a combination of formal consultation and informal engagement appropriate to the changes being made”.—[Official Report, 23/3/23; col. GC 331.]
That is not even a real commitment, with the phrase “will seek to undertake”, and it is certainly nothing close to meaningful parliamentary scrutiny. We need the super-affirmative procedure, and I commend these amendments to the House. I beg to move Amendment 1.
Viscount Trenchard (Con)
My Lords, I declare my interests as a director of two investment companies as stated in the register. I listened with interest to the noble Lord, Lord Sharkey, in bringing forward his Amendment 1 and other amendments. I feel strongly, as he has suggested, that what has been agreed for the REUL Bill should also be acceptable for this Bill. Indeed, one of my later amendments makes the same point. As he said, the Bill is in some sense a carve-out from the REUL Bill dealing exclusively with financial services. As for his other amendments, I will not repeat the arguments I made in Committee, but I look forward to hearing whether the Minister can give any greater assurance to the House today than she did at that time.
Lord Hamilton of Epsom (Con)
My Lords, I support Amendment 1. My noble friend Lord Hodgson of Astley Abbotts does not seem to be with us, but I have collaborated with him over the retained EU law Bill, and I know his views are that Parliament has been collectively losing control of its agenda and that parliamentary sovereignty has been undermined. He has been chairman of the Secondary Legislation Scrutiny Committee, and he notices that more and more business goes through both Houses under statutory instruments. That is not really what we should be going along with in either House, and it is disappointing that the other House does not seem to worry too much about the fact that it is losing its sovereignty and its power to control legislation. That seems to be a fact we have to deal with.
I have repeated this very often, but unlike most people in your Lordships’ House, I campaigned to leave the EU. I often wonder what would have happened if the people who were really concerned about the fact that we were getting all this legislation from the EU—inevitably, I accept—which we could neither amend nor reject knew that we would substitute it with stuff in respect of which the Executive are given all the power that had previously lain in Brussels. If we had campaigned in the country and told people that that was what was going to happen, I am not at all certain that the referendum would have been won by the leave campaign.
It strikes me as very odd that when we talk about taking back control, it seems to exclude Parliament. It does not seem to have a desire—particularly the other place—to actually take back control of legislation, which is what I think we should be doing. It is time we brought this to a halt. I do not have any great optimism that that is going to happen, but I would be more than happy to support the noble Lord’s amendment if he presses it to a Division.
Lord Lisvane (CB)
My Lords, I am a signatory to this amendment, although some quirk of technology has meant that my name does not appear on the Marshalled List today. I am delighted to join other noble Lords whose names are on the amendment. This is déjà vu all over again, as they say, because this amendment is very similar to one proposed to the retained EU law Bill by the noble and learned Lord, Lord Hope of Craighead, which was approved by this House, sent to the Commons, sent back to us and returned in a slightly different form in the Motion moved by the noble Lord, Lord Anderson of Ipswich, and agreed today.
Perhaps I may very briefly recall what I said on that Motion, because it applies equally to this amendment. This would not set up an entirely new category of amendable SIs which form a new legislative family, as it were. To suggest that it does as a reason for opposing the amendment is to be frighted with false fire, to borrow Hamlet’s phrase. There are two statutes, as referred to by the noble Lord, Lord Sharkey, that have the power to amend SIs where the amendments are immediately effective. In my view, this is much more like the super-affirmative procedure, which is set out in some detail in the proposal contained in Amendment 117. The difference is that Ministers would not have the discretion to refuse the amendment which is suggested. It does not seem to me outrageous that Ministers should be subject to the will of Parliament, especially if a proposal might seriously disadvantage businesses or individuals. I commend the amendment to your Lordships.
Lord Naseby (Con)
My Lords, I would just like to refer back to the fact that from 1992 to 1997, I had the privilege in the other place of being Chairman of Ways and Means and Deputy Speaker. At that time, I received considerable briefing from the Officers of the House and other senior parliamentarians, and the procedure we have in Amendments 116 and 117 is, in my judgment, entirely appropriate in instances where a Bill of what I might refer to as super-national importance is going through. I cannot think of any Bill at this stage in a Parliament that is more important than this one. We have the whole of the City of London in favour of the principle of the Bill. That is absolutely fundamental to the success and growth of our nation, and to have the financial sector behind it, alongside His Majesty’s Government, seems to me entirely appropriate. Here, we have a situation that may occur—I hope it does not. However, if it is felt strongly by parliamentarians that something that His Majesty’s Government and Ministers are bringing forward should go through the super-affirmative procedure, that is to be welcomed and recognised. If it does—and I assume it would go through—all that does is strengthen the Government of the day, which is why I very much support this amendment.
Lord Thomas of Cwmgiedd (CB)
My Lords, I had the privilege of adding my name to this amendment because it seems to me, as has just been said, that this is such an important Bill for our nations. It also has this distinguishing feature. Regulation of financial services and matters of this kind is extremely complicated; it is very easy to get them wrong. Why do the Government not feel that they need the expertise of this House, which was so evident during the Grand Committee hearing on aspects of financial services? That completely defeats my understanding of the way in which we should have good government.
Baroness Altmann (Con)
My Lords, I add my support to the amendment so excellently moved by the noble Lord, Lord Sharkey, and I thank my noble friends Lord Hamilton and Lord Naseby, who have spoken about the dangers that are entailed if we do not introduce measures such as this amendment into the Bill. There is a risk of executive power-grab. I am not at all saying that that is the intention, but the possibility of that would be opened and surely, as we have just argued in the previous legislative discussion, it is so important that we ensure that Parliament has control, not a few Ministers. That is what I hoped we were going to do when we were revising the laws that had been adopted from the EU.
Baroness Kramer (LD)
My Lords, I can add very little to the extraordinary speeches we just heard, many of them quite brief but absolutely targeted and to the point. I simply want to add just two more issues that perhaps have been mentioned but not stressed.
The first is that a carve-out of financial services from the REUL Bill is not the carve-out of some minor area of insignificant interest. Financial services are in effect our largest and most significant industry at this point in time in the UK and will be for many years in the future, and indeed the products that come from financial services are the lifeblood of our economy, both for businesses and for ordinary people. Therefore, scrutiny of decisions that are made within this arena surely has to be a central and significant responsibility of Parliament.
I say to the Minister, who always prays in aid consultation, both formal and informal, in the process of making change, when did consultation replace scrutiny in the mind of this Government? Parliament is not a consultee but the body that is democratically elected to make the key legislative decisions about the future of our country. Its relegation to the role of a consultee, which in effect happens and which this legislation would in some ways counter, is, I believe, completely unacceptable to most people when they have the opportunity to face up to it and think through this issue. Therefore, we on these Benches are very much in support of these amendments, and if necessary we will go through the Lobbies if the Minister is unable to accept at least a significant one of them.
Baroness Chapman of Darlington (Lab)
My Lords, before I address the amendments, I want to acknowledge the work of my noble friend Lord Tunnicliffe, who had been leading for these Benches on this Bill until very recently, and thank him for his hard work and generosity in the way he has handed over custody of the Bill to me and my noble friend Lord Livermore. We are very grateful to my noble friend for everything he did, and he continues to advise and support—as noble Lords who know him can well imagine.
However, we are on Report, and this is the stage where we cut to the chase and pick our battles. I have been leading on the retained EU law Bill and am very familiar with the arguments raised in this debate, but we are treating this Bill slightly differently to the retained EU law Bill because our concerns on that Bill revolved around the lack of certainty created by the Government’s approach. There was no definitive list of the terms of retained EU law that would be revoked at the end of the year, and the absence of that list meant limited scope for meaningful engagement, scrutiny or consultation. That was our fundamental objection to that Bill.
The process set out in this Bill is different, with most of the retained law listed in the legislation and to be repealed and revoked only once replaced by regulations that are UK-specific. Fundamentally, we think that changing the process outlined in the Bill at this stage in a manner that the sector has not asked for—it is very different to the engagement that we had on the retained EU law Bill, where there was strong demand from various sectors for change—would introduce uncertainty.
The Lords were right to ask the Government to think again on the retained EU law Bill, but amendments to one Bill do not automatically work for another and, in any event— as I know from having worked on the retained EU law Bill—the version of the amendment we are considering today has already been convincingly overturned by the elected House and we have had to come back with another. As we need to pick our battles and to prioritise at this stage in our proceedings, we on these Benches will not be participating should the issue be put to a Division today.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, before turning to the amendments at hand, I add my thanks to those of the noble Baroness, Lady Chapman, for the contribution of the noble Lord, Lord Tunnicliffe, to this Bill and the Labour Front Bench on Treasury matters. The noble Baroness referred to the noble Lord’s generosity; I have definitely found that to be the case. He has always had a very constructive approach and approached his work with kindness and wisdom, which is a great combination to bring to this House.
The amendments before us from the noble Lord, Lord Sharkey, Amendments 1, 116 and 117, would introduce new parliamentary procedures when exercising the powers in the Bill. As noble Lords have noted, very similar amendments were proposed to the retained EU law Bill, passed and then reversed by the Commons. We have just had a debate this afternoon on a modified version of those amendments, to which I listened very carefully, although I am not as expert in the passage of that Bill as some other noble Lords in the Chamber.
Many of the arguments covered in that debate also apply here, so I do not intend to repeat them at length. I want to focus on some specific considerations in relation to this Bill, which, as the noble Baroness, Lady Chapman, noted, takes a different approach to repealing retained EU law for financial services. That is because it enables the Government to deliver fundamental structural reform to the way in which the financial services sector is regulated.
The Government are not asking for a blank cheque to rewrite EU law. This Bill repeals EU law and creates the necessary powers for it to be replaced in line with the UK’s existing Financial Services and Markets Act 2000—FSMA—model of regulation, which we are also enhancing through this Bill to ensure strong accountability and transparency. A list of retained EU law to be repealed in Schedule 1 was included in the Bill from its introduction in July 2022 to enable scrutiny of this proposal.
Going forward, our independent regulators will generally set the detailed provisions in their rulebooks instead of firms being required to follow EU law. The Bill includes a number of provisions to enable Parliament to scrutinise the regulators; the Government have brought forward amendments to go further on this, as we will discuss later on Report.
Amendments 1, 116 and 117 would introduce rare parliamentary procedures, including the super-affirmative procedure, and create a process to enable Parliament to amend SIs. As I said in Committee, those procedures are not justified by the limited role that secondary legislation will have in enabling the regulators to take up their new responsibilities. The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. As I noted in Committee, the DPRRC praised the Treasury for a
“thorough and helpful delegated powers memorandum”.
It did not recommend any changes to the procedures governing the repeal of EU law or any other power in this Bill.
The powers over retained EU law are governed by a set of purposes that draw on the regulators’ statutory objectives. They are limited in scope and can be used only to modify or restate retained EU law relating to financial services or markets, as captured by Schedule 1. However, of course, the Government understand noble Lords’ interest in how they intend to use the powers in this Bill and are committed to being as open and collaborative as possible when delivering these reforms.
The Government have consulted extensively on their approach to retained EU law relating to financial services and there is a broad consensus in the sector behind the Government’s plans. As part of the Edinburgh reforms, the Government published a document, Building a Smarter Financial Services Framework for the UK, which describes the Government’s approach, including how they expect to exercise some of the powers in this Bill. It also sets out the key areas of retained EU law that are priorities for reform. Alongside this publication, the Government published three illustrative statutory instruments using the powers in this Bill to facilitate scrutiny.
When replacing retained EU law, the Government expect that there will be a combination of formal consultation, including on draft statutory instruments, and informal engagement in cases where there is a material impact or policy change, such as where activities that are currently taking place in the UK would no longer be subject to a broadly equivalent level of regulation. The Government will continue to be proportionate and consultative during this process, just as we have been up to this point.
Through the retained EU law Bill, the Government have also committed to providing regular updates to Parliament on progress in repealing and reforming retained EU law. I am happy to confirm that these reports will also cover the financial services retained EU law listed in Schedule 1 to this Bill.
I hope that I have satisfied noble Lords that the Government are committed to an open, transparent and consultative approach to implementing the reforms enabled by this Bill. I ask the noble Lord, Lord Sharkey, to withdraw his Amendment 1.
Lord Sharkey (LD)
I thank all those who have spoken in this brief debate—some more warmly than others, perhaps. In my initial speech, I forgot to be especially nice about Denis, the noble Lord, Lord Tunnicliffe; I regret that. I am of course disappointed by both his absence and the response of his successors. I repeat: when it comes to the need for real parliamentary scrutiny, the contents of this Bill are quite as important as the contents of the REUL Bill. That seems to me to be the essence of the matter. All the other arguments about the need to focus and get on with it on Report seem mechanistic; indeed, they are close to being excuses, in some ways.
The essential problem is that Parliament will be unable to scrutinise revocation and replacement, as it is set out in this Bill. I accept that it is not likely that we will revolutionise the way we treat these things as a result of this intervention, but perseverance is the only way of making any progress towards making certain that Parliament recovers its ability to scrutinise properly and does not continue to lose that ability. Although on some occasions—this is one of them—the outcome may be unsatisfactory in the short term, I am convinced that, over time and with enough persistence, we can find a way to do what the DPRRC recommended, which is restoring the balance between Parliament and the Executive. Having said all that, I beg leave to withdraw my amendment.
Lord Harlech
“(5) Paragraph (6) applies where—(a) a central counterparty (A) was taken to be recognised pursuant to Article 25 of the EMIR regulation in accordance with regulation 19A(3), and(b) A ceased to be taken to be so recognised by virtue of the relevant period in the case of A having expired before the commencement day.(6) The Bank of England— (a) may determine that the relevant period in the case of A is (in spite of its expiry) to be treated, as from the making of the determination, as not having expired, and(b) may accordingly exercise its power under this regulation to vary the relevant period on or after the commencement day.(7) In paragraphs (5) and (6) “the commencement day” means the day on which Part 5 of Schedule 2 to the Financial Services and Markets Act 2023 comes into force.(8) Paragraphs (5) to (7) expire at the end of 31 December 2025 (but without affecting any variation of a relevant period made under this regulation by virtue of paragraph (6)(b) before that time).”Member’s explanatory statement
This amendment would enable the Bank of England to restore a third country CCP to the run-off regime in cases where the regime has ended in the case of that CCP before the coming into force of the amendment made by paragraph 51 of Schedule 2 to the Bill.
Lord Harlech (Con)
My Lords, I beg to move government Amendment 2 and will also speak to the other amendments in this group. These are a set of minor amendments that the Government have tabled to ensure that all provisions of the Bill and the Financial Services and Markets Act 2000 operate effectively and fully achieve their intended policy effect.
Turning first to Amendments 2 and 118, central counterparties, or CCPs, are a type of financial market infrastructure and are crucial to global financial stability. Following the UK’s exit from the EU, the Treasury established a temporary recognition regime to enable eligible non-UK CCPs to continue providing important clearing services to UK firms while equivalence and recognition decisions were ongoing. To allow CCPs exiting the temporary recognition regime without recognition time to wind-down exposures to UK firms, a run-off regime was also established. The length of the run-off is determined by the Bank of England for each CCP, with a current maximum period of one year. As a result of provisions in this Bill tabled in Committee, the Bank of England will have the ability to extend the maximum run-off period for CCPs from one year to three years and six months. This would allow overseas CCPs currently due to exit the run-off regime at the end of June 2023 further time to apply for recognition if desired, and to remain able to offer services to UK firms during that period.
Amendments 2 and 118 seek to facilitate continuity of services under the run-off regime in the event that Royal Assent of this Bill occurs very close to or after 30 June. Amendment 118 provides that the Bill provision that gives the Bank the power to extend the run-off period comes into force on Royal Assent. This will allow the Bank of England to extend the run-off for those CCPs that wish to continue providing services to UK firms but need more time to apply for recognition, as was set out in Committee. However, if Royal Assent is secured after relevant CCPs have exited the run-off, government Amendment 2 will give the Bank of England the ability to reinsert a CCP into the run-off regime by determining that a CCP’s run-off is to be treated as not having expired. This will allow the Bank of England to extend the length of a CCP’s run-off period even in cases where a CCP has already exited the run-off. This will avoid any potential disruption that could otherwise arise if CCPs exited the run-off period before the Committee stage amendment had come into force.
Amendments 3, 16, 17, 21, 22, 34, 53 and 54 ensure that the references to the regulators’ objectives in the Bill and the Financial Services and Markets Act 2000 include the new competitiveness and growth secondary objectives for the PRA and the FCA, and the Bank of England’s new secondary innovation objective.
Turning to Amendments 5 and 6, Schedule 5 to the Bill makes amendments to FSMA to ensure that the regulatory gateway for financial promotions legislated for in this Bill can be implemented and operated. One way that it does this is by applying other relevant parts of FSMA to ensure that the FCA can oversee the gateway effectively. Amendment 5 aligns the wording between a provision introduced by Schedule 5 and a similar existing provision within FSMA. These provisions relate to the issuance of notices to vary permissions or to impose requirements. The amendment will ensure that the regulator is required to provide notice when they propose to vary a permission in all cases, and to avoid any potential duplicatory requirements to provide notices. Amendment 5 replaces the relevant provisions in Schedule 5 and in FSMA with a single new provision. This will help to ensure that these similar provisions are interpreted consistently and achieve the intended policy effect. Amendment 6 is consequential on Amendment 5.
Amendment 49 ensures that the CBA panel’s statutory remit includes cost-benefit analyses for rules for critical third parties, and that it is therefore able to provide advice to the Bank in relation to this. Amendment 86 corrects a drafting error, ensuring that Schedule 11, regarding the central counterparties resolution regime, functions as intended. It provides clarity over the Treasury’s power to lay regulations restricting the making of partial property transfers. Amendments 87, 88 and 89 make technical corrections and clarifications to the insurer insolvency provisions in Schedule 12 to the Bill. Amendment 89 provides a clarification to make clearer the amount of FSCS top-up compensation that policyholders will be eligible to receive following a write-down order, meeting the stated policy intent. Amendment 87 clarifies that a liability is, to the extent of its reduction by a write-down order, to be treated as extinguished unless and until revived by the variation or revocation of the order. This helps to ensure that the intent of the provisions is achieved by increasing legal certainty about the treatment of written-down liabilities.
All these amendments seek to ensure that the provisions in this Bill achieve the policy intent and minimise potential disruption to the UK financial services sector. Therefore, I beg to move Amendment 2 and intend to move the remaining amendments when they are reached.
Baroness Kramer (LD)
My Lords, I will make very few comments on this group of amendments. I accept that they are technical. I find some of them distasteful, particularly those that enhance the scope of the competitiveness and economic growth agendas. I fear very much that the underlying concept and construct will lead us back in the direction of the kind of risk taking that created the crisis that we went through so badly in 2008 and 2009. However, given that our attempts to turn around those objectives have not won support from other parts of the House, there is no sensible reason for me to object to these more technical amendments, other than to say that it is a sad day and that many of us will be revisiting this, if we live long enough, when we hit the next financial crisis.
Lord Eatwell (Lab)
My Lords, I will make two points on these technical amendments. As the Minister said, central counterparties are fundamental institutions in maintaining the stability of financial markets. This measure, to continue the role of overseas-based central counterparties, is enormously sensible. But there is an issue that has not been addressed. What if the overseas central counterparties decide not to provide services to UK firms—if they decide, following the UK exit from the European Union, that they will withdraw from providing such a service? What provision has His Majesty’s Government made for providing those services in those circumstances?
Secondly, I echo the point that the noble Baroness, Lady Kramer, made about the competitiveness and economic growth objective that is being incorporated as a subsidiary objective. As a subsidiary objective, it is unobjectionable. What is striking in the government amendments that we will debate is the way in which it is continuously privileged, such that it no longer remains subsidiary; extra reports and consideration will now be required, all focused on one objective. This is a serious mistake, because the statutory objectives of the regulatory authorities will change with circumstance over time. Writing into law that one objective should be privileged is a significant error. The primary and secondary objectives make sense, but overegging the position of a subsidiary objective is a mistake.
My main point at this time is to ask the Minister what measures provide central counterparty provision in those areas where overseas central counterparties decide not to act for UK firms.
Lord Harlech (Con)
My Lords, I am grateful for both contributions to this short debate. The noble Lord, Lord Eatwell, brought up the competitiveness issue, which is something we will come on to at a later stage in the proceedings on the Bill. In answer to his point about overseas CCPs, that would be a commercial decision for that institution to make. However, the idea of the run-off regime is to provide time for UK firms to wind down their operations and make alternative arrangements.
Lord Harlech
Member’s explanatory statement
This amendment would ensure that Clause 6(10)(a) of the Bill includes a reference to the duty relating to the competitiveness and growth objective, as inserted into section 1B of the Financial Services and Markets Act 2000 by Clause 24.
Viscount Trenchard
“Report on retained EU law
(1) Within six months of the passing of this Act and every six months thereafter the Treasury must prepare a report containing, for each of the items of retained EU law listed in Schedule 1, whether it has been revoked and, if not, when it is expected that it will be revoked.(2) The report must be laid before each House of Parliament.(3) This section ceases to have effect after a report showing that all the items of retained EU law listed in Schedule 1 have been revoked.”Member’s explanatory statement
This amendment requires a progress report on the revocation of EU law covered by the Bill.
Viscount Trenchard (Con)
My Lords, Amendment 3A requires the Treasury to report every six months on the progress it is making in its challenging task of revoking, improving or retaining each of the items of retained EU law listed in Schedule 1 to the Bill.
This amendment and my other amendment in this group were originally tabled by my noble friend Lady Noakes, who is not in her place today. She is providing support to her husband, who is to undergo an operation this week, and she is unable to participate in our Report debates. Noble Lords on all sides of the House will miss her wise counsel and informed contributions to the Bill and to other Bills before your Lordships’ House. I am sure all will join me in sending our very best wishes to my noble friend’s husband for a successful procedure and a full recovery, and we look forward to welcoming her renewed participation in our work when she is able to resume her attendance.
In Grand Committee my noble friend moved an amendment that would, on 31 December 2026, have activated an automatic revocation of the legislation listed in Schedule 1 in order to incentivise the Treasury and the regulators to get on with the job. This would have been more consistent with the scheme of the retained EU law Bill as it was then drafted. Needless to say, my noble friend the Minister rejected the sunset clause and, during that debate, we learned that, while the Government have identified some priority areas, they have absolutely no plan or timetable for completing the task.
Noble Lords will be aware that my noble friend Lord Callanan indicated the Government’s support for my noble friend Lady Noakes’s recent amendment to the REUL Bill, which was adopted by your Lordships’ House at Third Reading. This requires reports on progress and future plans for retained EU law, until the Bill’s powers expire—at which point anything left remains on the statute book as assimilated law. The amendment also requires the Government to keep the retained EU law dashboard to be updated until 2026. These requirements seem to cover financial services legislation, so we shall have visibility of the status of that legislation and the Government’s plans until the last report under the retained EU law Bill, the report to 23 June 2026. In addition, there will be no obligation to update the dashboard after that date.
Baroness Lawlor (Con)
My Lords, I support Amendment 3A of my noble friend Lord Trenchard. It is important to keep track of retained, revoked or modified EU law for this important sector. Businesses must know where they stand. Unlike the initial intention behind the REUL Bill to revoke all retained secondary legislation identified on the dashboard—some 4,000 or so laws before the Government changed course— financial regulation will be under the Treasury, and will not necessarily be revoked or retained. It may be modified; it may be revoked; it may be retained, but it will be for the Treasury and the regulators to decide.
I approach the amendment, as I did in Committee, in the hope that the Treasury will move rapidly to restore UK law for the sector, which has helped this very important sector to lead in the world over 200 years, rivalled only, as my noble friend Lord Trenchard said, by New York. But since leaving the EU, the UK has been burdened by the complications and costs of dealing with two different legal systems, something I have touched on in the REUL discussions. That is the code-based EU law and its precautionary approach, and common law which is, for want of a better word, an enabling law, under the jurisdiction of and tested by UK courts, and capable of being both precise and nimble to accommodate our entrepreneurs.
In Committee, there were amendments to encourage greater openness by the Treasury and the regulators. My concern is that Treasury thinking is in danger of slipping into the EU approach to legal thinking: that code-based precautionary approach, on which my noble friend Lord Trenchard has touched. Not only does that approach lack transparency, but it is not necessarily clear how it will be operated by the regulators. It is unequal to the fast-moving, innovative markets in the UK, and it is at odds with the competitiveness objective in this Bill. As a result, not only may businesses suffer from a lack of clarity about where they stand and how a regulation will be enforced, but they may feel it best to avoid an activity that could grow their business, increase trade and benefit consumers and indeed the wider economy.
Baroness Kramer (LD)
My Lords, I will be very brief. I have no objection to either of these amendments, although for very different reasons from the previous two speakers. On the first, which is about the report on retained EU law, it seems sensible to have a proper and lasting reporting requirement to Parliament, although I point out to those who are very worried about additional burdens that the report itself generates a huge amount of effort, energy and paperwork, so I doubt it goes very far in reducing any burden on anybody.
I am more interested in the second amendment tabled by the noble Viscount, Lord Trenchard, Amendment 3B, because it embeds the principle of accountability to Parliament and the wider world and states that, where changes are made in regulation, other than in situations of genuine urgency—I underscore “genuine” because we have seen that flex a great deal, with things said to be very urgent that seem to have no urgency whatever attached to them—the Treasury should carry out consultations.
I say to both previous speakers that if they speak to the industry they will find that the struggles that the financial sector has been facing in the UK—the decline in listings, virtually the complete loss of the European swaps market, our gradual exclusion from a significant range of activities that are international and certainly pan-European and fintech outsourcing extensively into Europe—are post-Brexit consequences. Frankly, I do not think that amendments such as this, in the hope that there will be much lighter-touch regulation, which is what common law really means, are going to remedy that problem. We built our reputation on quality and consistency and, like it or not, those are quite demanding standards that light-touch standards do not achieve.
Baroness Chapman of Darlington (Lab)
My Lords, we are grateful to the noble Viscount, Lord Trenchard, for bringing these amendments forward and we ask him to pass on our very best wishes to the noble Baroness, Lady Noakes, and her husband. I am sure she will be impressed by the way he introduced her ideas this afternoon. I feel somewhat that we are intruding on a bit of a family squabble on the Government Benches with this group in that, in the retained EU law Bill, the amendment that she brought forward was as a consequence of her deeply felt disappointment—shared by the noble Baroness, Lady Lawlor, if I remember her speech at the time, and others—at the Government’s change of approach to that Bill. The change of approach was one that we had been calling for and very much welcomed, and we did not feel on that Bill and we do not feel on this Bill that there is an awful lot to be gained by these amendments. There is not a huge amount to be lost either, particularly with Amendment 3A. We are interested in what the Government have to say about them, but they are not amendments that we take a particularly firm view on either way because we think they are designed with a rather different purpose in mind, which is to hold the Government’s feet to the fire.
Baroness Penn (Con)
My Lords, I join noble Lords in wishing my noble friend Lady Noakes and her husband well, and I look forward to her return to this House. As my noble friend Lord Trenchard noted, she worked with our noble friend Lord Callanan on amendments to the retained EU law Bill to introduce similar reporting standards to those in Amendment 3A. I can confirm that the reporting requirements in the retained EU law Bill already apply to the retained EU law repealed through Schedule 1 to this Bill, so the reports that the Government prepare under that obligation will include the Treasury’s progress in repealing retained EU law in Schedule 1.
I reassure my noble friends that through the Bill the Government are asking Parliament to repeal all legislation in this area, and we expect to commence it fully. The revocation is subject to commencement, and each individual piece of legislation listed in the Bill will cease to have effect only once the Treasury makes an SI commencing the repeal. As I noted in Committee, this is being taken forward in a carefully phased and prioritised way to deal with retained EU law, splitting it into tranches and prioritising areas that will provide the most concrete benefits to the UK. The implementation will take place over a number of years, which means that we are prioritising those areas with the greatest potential benefits of reform. We have demonstrated intent and action in this area. We have conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale market review and the UK listings review by my noble friend Lord Hill of Oareford, which my noble friend Lord Trenchard referred to in his Amendment 3B. The whole- sale markets review reform in Schedule 2 demonstrates the Government’s pace and ambition for reforming retained EU law, and that is very much the case.
I turn to Amendment 3B. Of course the Government must think carefully before choosing to replace EU law, and understand the impact of any replacement. The Government have consulted extensively on their approach to retained EU law relating to financial services, and there is broad consensus in the sector behind the Government’s plans, as I have already noted. However, I do not believe that an explicit mandatory statutory obligation to consult impacted parties is required. The powers in the Bill to designate activities under the designated activities regime are closely modelled on the secondary powers which already exist in FiSMA, especially the power to specify regulated activities. This existing power does not have an explicit statutory obligation to consult. I think the Government have already demonstrated that they will always consult when appropriate and will always approach regulating a new activity carefully. We can see this in the Government’s consultation on the regulation of funeral plans in 2019, and in draft legislation related to “buy now, pay later” published in February.
My noble friend Lord Trenchard referred to the listings review and implementing its results but, again, the Government have already consulted extensively. They launched a consultation in July 2021 that ran until September this year, and the proposals on listing reforms received broad support across the industry. The Government have already published a draft statutory instrument to illustrate how the new powers in the Bill could be used to bring forward a new regime in this area, so I believe that the Government have already demonstrated that they will consult properly when using the regulated activities order power. Therefore further amendments in this area are not necessary, so I hope my noble friend is able to withdraw Amendment 3A and will not move Amendment 3B.
Viscount Trenchard (Con)
My Lords, I thank all noble Lords who have taken part in this debate. In particular, I thank my noble friend Lady Lawlor for her support, and I entirely agree with what she said about the need to move back to our former common law-based approach. The noble Baroness, Lady Kramer, suggested that this would mean not just common law but going back to a simple, light-touch regulatory system. I am advocating going back not to a light-touch regulatory system but to a system based on common-law principles which also maintains the high standards for which the City is renowned across the world. Such a system is pursued also in the United States, Australia and many other countries with which we are doing more and more in financial services, including many CPTPP countries.
I am nevertheless grateful for the noble Baroness’s support, at least on Amendment 3B. I was not sure about the noble Baroness, Lady Chapman, but she was at least interested in both amendments and, I think, supported the need for increased accountability to Parliament.
I speak to the financial services industry and know many people in it. I have some outside interests, which I have declared, which involve me in it. I simply do not agree that all participants in the industry blame Brexit for the difficulties it faces. Rather, there are large parts of the financial services industry—in banking, insurance and asset management—which are waiting for us to reap the benefit of the upside of being free to develop our own regulatory regime. We have suffered the downside, which we knew would happen; we believe that reaping the benefits of the upside will be necessary to ensure that London can maintain its leading position. I very much hope that we can rely on the support of the parties opposite, as well as my noble friends, in seeking to ensure that that happens.
I am to some extent reassured by my noble friend the Minister’s words and her response to these amendments. She went further than I have heard her go before in saying that it is the Government’s intention to repeal all the EU retained law in—I think—Schedule 1, and that she has prioritised some areas. However, there are other areas that she has not prioritised. One of the those is the alternative investment fund managers directive and all its associated legislation, which was opposed universally by practitioners and—at the time—by the Treasury as well as by the regulators. Nevertheless, it was foisted on us by the EU for political reasons. I am very disappointed that few people in the Treasury seem to recognise how many small investment management companies have gone out of business or not succeeded in introducing new products because of the cost and burden of complying with this regulation. This is why, later in the Bill—I will not speak to it today —I have again brought back my amendment dealing with that issue. It is just one example of bits of EU legislation that, six years after the Brexit vote, I believe this Bill should deal with immediately.
I thank my noble friend for her partial reassurance and, in the circumstances, I am happy to withdraw my amendment.
Baroness Penn
“Sustainability disclosure requirementsSustainability disclosure requirements
(1) FSMA 2000 is amended as follows.(2) After section 416 insert—“Sustainability disclosure requirements416A SDR policy statement(1) The Treasury may prepare an SDR policy statement.(2) An “SDR policy statement” is a statement of the policies of His Majesty’s Government concerning disclosure requirements in connection with matters relating to sustainability.(3) In preparing an SDR policy statement, the Treasury must consult the regulators.(4) The Treasury must publish any SDR policy statement in such manner as they consider appropriate.(5) The Treasury—(a) must keep any SDR policy statement under review;(b) may prepare a revised statement (and subsections (3) and (4) apply in relation to any revised statement);(c) may withdraw any SDR policy statement.(6) The Treasury may request a regulator to provide them with a report on any matter that the Treasury require in connection with the preparation of an SDR policy statement.(7) A request for a report under subsection (6)—(a) must be made in writing, and(b) may require a regulator to send the report to the Treasury within such reasonable period as may be specified in the request (or such other period as may be agreed).(8) A regulator must comply with a request under subsection (6).(9) Nothing in section 348, or in regulations made under section 349, is to be taken as preventing or restricting the ability of a regulator to disclose information to the Treasury for the purposes of this section.(10) Subsection (9) does not apply in relation to information provided to a regulator by a regulatory authority outside the United Kingdom.416B FCA and PRA rules etc(1) When making rules or issuing guidance in connection with disclosure concerning matters relating to sustainability, a regulator must have regard to any SDR policy statement (within the meaning of section 416A) that the Treasury have published and not withdrawn.(2) For the purposes of this section, matters relating to sustainability include matters relating to—(a) the environment, including climate change,(b) social, community and human rights issues,(c) tackling corruption and bribery, and(d) governance, so far as relevant to matters within paragraphs (a) to (c).”(3) In Schedule 1ZA (the Financial Conduct Authority), in paragraph 11 (annual report), in sub-paragraph (1)—(a) after paragraph (ha) insert—“(hc) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”; (b) after paragraph (ia) insert—“(ib) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury published and not withdrawn under section 416A (sustainability disclosure requirements: policy statement);”.(4) In Schedule 1ZB (the Prudential Regulation Authority), in paragraph 19 (annual report), in sub-paragraph (1)—(a) after paragraph (e) insert—“(ea) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”;(b) after paragraph (fa) insert—“(fb) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury under section 416A (sustainability disclosure requirements: policy statement), and”.”Member’s explanatory statement
This amendment would support the regulation of disclosure requirements relating to sustainability by requiring the FCA and the PRA to a.) comply with a request by the Treasury to provide a report in order to inform a policy statement by the Treasury on such requirements and b.) have regard to such a policy statement when making rules or issuing guidance about such requirements.
Baroness Penn (Con)
My Lords, the UK is a leading jurisdiction for sustainable finance, and the Government are proud of that record and determined to maintain and further that position. Since Committee stage, London has been ranked as the leading global green finance centre for the fourth consecutive time. Government effort, including on sustainability disclosure and reporting, has played a vital role.
The Government’s success in green finance has been down also to the responsiveness and technical capability of our independent regulators, who have collaborated to drive forward our policy on sustainability disclosures. The Government’s approach was established in the 2021 paper, Greening Finance: A Roadmap to Sustainable Investing, where we set out the foundations of sustainability disclosure requirements—or SDR—which build on our world-leading implementation of the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD. This includes taking forward an approach across the economy to implementing international standards, enabling firms to plan for the transition and ensuring that this information flows to investors and financial consumers. Credible, usable information is a core component of green finance that will allow us to reach our goals on sustainability. When this information is available, market participants can use it to take sustainability into account when making investment decisions. Our plan for SDR is central to delivering this.
In Committee, some noble Lords raised concerns about the Government’s ongoing commitment to implementing these important reforms, the legal basis for implementing them, and the timelines for doing so. I am therefore pleased to be able to update noble Lords on a number of substantive developments since then.
Significantly, the Government published an updated green finance strategy on 30 March. This set out next steps across core elements of SDR. The Government will consult on extending the transition planning requirements—a core component of SDR—to the largest private companies once the Transition Plan Taskforce has completed its work later this year. The Government will also set up a framework to assess the suitability of the IFRS International Sustainability Standards Board’s standards for adoption in the UK. The Government remain committed to delivering a usable and useful UK green taxonomy and expect to consult on this in autumn 2023. They are also committed to setting out further detail on SDR implementation and the timeline for it this summer to reflect the rapid development of international standards.
Alongside this, the Financial Conduct Authority continues to take forward SDR for authorised persons, including consumer-facing disclosure requirements, under its existing objectives and rulemaking powers, which are sufficiently broad for the purpose. The FCA intends to issue its policy statement on SDR and investment labels in the third quarter of this year.
However, the Government recognise that SDR policy has strong links to wider environmental policy and that they therefore have an important role to play in shaping SDR. That should be recognised in legislation. Parliament must be able effectively to scrutinise the actions of government and the regulators in this area.
Amendment 4 will therefore require the FCA and the PRA to have regard to any policy statement made by the Treasury on SDR when they make rules in connection to sustainability disclosures. The amendment obliges the regulators to consider the Government’s wider policy goals when bringing forward SDR rules, while still maintaining their independence.
Regulators will also be required to report on how they have satisfied the requirement to have regard to any such policy statement on an annual basis. This will support Parliament in scrutinising the regulator’s actions on SDRs. This ongoing reporting will support transparent, structured co-operation between the regulators, government and Parliament to achieve the UK’s objectives in this space.
We will be debating a number of other sustainable finance issues today, and disclosures are at the heart of some of the matters that they raise. The amendment is therefore an important measure in that context as well as in its own right. I beg to move.
Baroness Wheatcroft (CB)
My Lords, I thank the Minister for her introduction of Amendment 4 and her willingness to engage with Peers on the topic of sustainable disclosure requirements. However, while a government amendment on this important topic is welcome, what we have heard is yet more delay. A cynic might judge the amendment to have a whiff of green- washing about it. It does not do enough and does not do what is required. The amendment seeks to give regulators and Ministers the necessary powers to bring forward rules and regulations on SDRs in fulfilment of commitments that they made in 2019, 2021 and again in the green finance strategy in March this year.
Amendment 114 is an effort to be helpful because, despite making commitments for five years, the Government still do not have the powers to make sustainable disclosure requirements happen. Amendment 4 does not confer those powers. The noble Baroness, Lady Ritchie of Downpatrick, submitted a Parliamentary Question on this issue on 14 November last year, and the Government’s response was that:
“The FCA has extensive powers to … impose some of the Sustainability Disclosure Requirements”.
The noble Baroness also asked about the powers available to the Department for Work and Pensions, which would legislate for sustainability reporting by occupational pension schemes. An extensive search of the powers held by the DWP in relation to public reporting and sustainable reporting has found none that is suitable.
Amendment 4 gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against it, but it is not an obligation—the Treasury “may” prepare an SDR policy statement. As the Minister admitted in her response last year to the noble Baroness, Lady Ritchie, the FCA does not have the powers to actually implement SDRs. It seems that we are looking at a Whitehall paper trail that keeps everyone occupied but with no meaningful legislation.
I am in favour of easing unnecessary burdens on business. However, repeatedly indicating—as they have for five years—that the Government are planning to legislate but not actually doing it creates a burden in itself for business. Should it invest in data, in systems or in strategy? After so many reassurances but so little progress, and more reassurances today, no one really seems to know the answer.
I noted with interest that the Minister’s letter to Peers ahead of tabling this amendment said that
“the Financial Conduct Authority is taking forward Sustainable Disclosure Requirements (including consumer facing requirements) under its existing objectives and rulemaking powers which are sufficiently broad for the purpose”.
I would like to understand the misalignment between that statement and the earlier Answer to the Question from the noble Baroness, Lady Ritchie. Is it because there has been a change of heart and the Treasury has discovered that the powers exist after all? I would be grateful if the Minister could clarify that. Or has the Treasury limited its proposals from its original ones so, while it did not have the powers for the original proposal, it does for the new, limited proposals? Or—and it would be deeply disappointing if this were the case—is the reference in the Minister’s letter to the FCA to “taking forward” SDRs intended to mean that the FCA would be merely progressing the work but not actually implementing it? Again, I would be grateful for clarification. The FCA consultation on SDRs closed on 25 January. We are promised a policy statement in the third quarter but, without statutory powers, that would be pointless.
I hope the Minister will be able to answer those questions and now, if we are able to accept the amendment, I hope she will be able to go a little further. While the amendment sets the right tone, it does not do what is needed. It embraces the idea of SDRs but does not make them a reality. The same governmental reluctance to take real action lies behind my Amendment 7, concerning vote reporting. If investors are to make serious decisions on ensuring that their savings are put to work in a sustainable way, it is essential that they be able to see how those who manage the money choose to vote on corporate issues. That is a crucial part of being an engaged investor. The FCA itself acknowledges that. Earlier this year, its vote reporting group stated:
“Improving transparency of how asset managers vote on behalf of their clients will mean investors can better hold them to account on their stewardship”.
We would all want that, but currently it is not possible for investors always to learn how their investments are being voted. Yes, there is now an FCA requirement under the shareholder rights directive that fund managers and insurers produce an annual report on how they have voted, but it is only that they must comply or explain; and even then, the requirement is only that they should report on significant votes. The FCA gives no guidelines as to what should be deemed significant, and what one investor feels is significant may not concur with what a fund manager deems so.
The fund manager is required to report only at group level, so, in terms of the individual funds in which investors and pension funds might be invested, how their votes have been voted in the individual funds cannot be seen; it is only possible to see across the group, which is effectively meaningless for many people who want to find out how their money is being used. A report is required to be made only annually—a hopeless timescale in an industry that moves as fast as this one. Nor is there any standard form for vote reporting. It is not a lot to ask in a digital age. The SEC in the US certainly demands it.
For all those reasons, the current situation does not serve investors as well as it should. Amendment 7 would require FCA-regulated investment managers and insurers to provide clients and those investing with them with voting information that they requested in a standard format and within 30 days. In Committee the amendment on this topic included pension funds in the requirement to report but, mindful of the DWP review of pension fund reporting, the current amendment is much narrower and does not prejudge the review. However, in the meantime it should help pension funds to monitor the way their investments are being voted. It is true that the FCA vote reporting group has yet to reach conclusions, but there is no reason to wait for that. Parliament has the power to put demands on the FCA, and this is a case where it should.
The Government accept the need for good stewardship by investors, and transparency on voting aids that. It is important, indeed crucial, for good corporate governance that decisions taken on behalf of investors should be clear and easily ascertainable. Making voting records available speedily in a machine-readable way would be a service to investors that, thanks to digital innovation, should be easy and relatively cheap to implement. Why would the Government resist that? I beg to move.
Baroness Hayman (CB)
My Lords, I declare my interest as chair of Peers for the Planet and apologise for the fact that I may need to speak a little longer than I normally would on Report. This is a very diverse group of amendments on different subjects, some of which are quite technical, but I can be brief in relation to Amendments 4, 7 and 114, which the noble Baroness, Lady Wheatcroft, has just so ably described. I appreciate that the Minister has done what she said she would on SDRs and tried to make some progress, but I fear there is still a legislative gap there—a gap that we could, on this Bill, usefully fill for her. I support what the noble Baroness has said and look forward to the debate on Amendment 91, on forest risk commodities, to which I equally give my support.
Baroness Boycott (CB)
My Lords, I declare my interests and will speak to Amendment 91, which is in my name. I also express my absolute support for the other amendments, particularly Amendment 15, which was so brilliantly introduced by the noble Baroness, Lady Hayman, and accompanied by the quotes from Professor Dasgupta. It underlines everything that this group is trying to achieve.
I very much thank the noble Lord, Lord Randall of Uxbridge, and the noble Baronesses, Lady Chapman of Darlington and Lady Sheehan, for their support on Amendment 91. This amendment specifically introduces due diligence obligations for UK financial institutions to prevent the financing of illegal deforestation. Research I found last week stated that February 2023 had the highest rate of deforestation of the Amazon ever recorded, despite the conferences and the world’s agreement. Clearly, this is out of control and needs much more tough regulation. That is what this amendment seeks to introduce.
Baroness Drake (Lab)
My Lords, I declare my interests as trustee of DB and master trusts. I will speak to Amendment 93. Government Amendment 4 is welcome because it recognises the necessary direction of travel on disclosure requirements on sustainability, but the problem is that it is not sufficient. It gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against this, but the FCA does not have the powers to actually implement SDRs. As Amendment 93 proposes, there is a need to give the FCA the power to publish guidance on how asset managers must consider the long-term consequences of any decision; consider the impact of climate, nature and society on their investments; consider the impact of their investments on climate and nature; and publicly report on their considerations.
It is interesting that the explanatory statement accompanying the published government amendment states that it supports
“the regulation of disclosure requirements relating to sustainability”
by requiring the FCA not only to have regard to Treasury policy but to inform a policy statement by the Treasury. It is difficult to see how the FCA could optimally inform Treasury policy if it does not set guidance on expected content and open reporting by asset managers on the impact of their investment decision-making.
Confusion among fiduciaries about the extent of their duty to consider such impacts is not limited to occupational pension schemes; it runs across the length of the investment chain. The FCA has broad powers to issue guidance under Section 139A of the Financial Services and Markets Act 2000, but there is still an ambiguity. Amendment 93 gives the FCA the explicit power to issue guidance on the disclosure of considerations of sustainability impacts as a core part of the investment managers’ duties. This is not inconsistent with the existing duty on trustees, in Regulation 2 of the occupational pensions investment regulations, to report on how they have complied with the Section 35 duties of the Pensions Act 1995.
The proposed FCA guidance is not legally binding: regulated firms would be free to diverge from it, but there is an expectation that they would need to explain why they have done so. There is a need to apply the guidance to contract-based personal pension schemes as well, to avoid the risk of regulatory arbitrage between a weaker FCA regime and a more robust TPR disclosure regime.
The concept of fiduciary duty borne by those responsible for the best interests of pension scheme members is evolving, and, as we heard, the Government’s updated green finance strategy of 2023 includes a commitment to review pension trustees’ fiduciary duties and stewardship activities. That trustees must act in the best interests of scheme members must not be a principle in doubt or, indeed, overridden. The key issue is what “acting in savers’ best interests” means in law for fiduciaries, and the extent to which it includes stewardship and ESG engagement. If fiduciaries ignore the impacts of investment strategies on society, climate and nature, or vice versa, those major externalities will eventually impact them at a later date.
In seeking more productive investment by the finance sector, the Government should acknowledge that pension funds are not the only decision-maker or the beginning and end of the problem; asset managers have an equally key role to play in managing impacts and considering the long-term consequences. Amending FCA regulation powers to guide open reporting on these matters will encourage investment away from environmentally and socially damaging activities, and towards supporting efficient transition to net zero, nature protection and healthy societies, in a way that is in the savers’ best interests and that supports the successful transition of the wider economy.
Guidance from regulators is required along the length of the investment chains as risks become more acute. Pension schemes contract with fund managers to manage assets. If schemes are expected to consider the sustainability of their investments, they need fund managers to support them by undertaking that activity too. Trustees’ ability to discharge their ESG and stewardship responsibilities to greatest effect has a dependency on how regulators expect asset managers to discharge their duties. Expectations placed on pension funds and asset managers are a complement to, not a substitute for, government policies on efficient transition to a sustainable economic future. Government regulations that perversely drive greenwashing or green asset bubble risk are equally unsustainable.
The Government want to see more productive investment by the financial sector, but mandating how citizens’ private assets are invested would displace trustee fiduciary duty with state control of private assets, inviting litigation and risking impacting public attitudes to private saving. But, in giving the FCA power to guide the content and require open reporting on sustainability, Amendment 93 can assist confidence in aligning members’ best interests with increasing productive investment. I commend it to the House.
Lord Naseby (Con)
My Lords, I welcome Amendment 4. Having listened to my noble friend on the Front Bench in Committee and subsequently, I know that she played a major role in this absolutely vital amendment coming forward.
The noble Baroness, Lady Wheatcroft, was quite right. Let us reflect on two key areas where we desperately need the SDR policy statement. First, in terms of the energy market, is the national grid. Today, all sorts of decisions have to be made by the energy market, whether on nuclear, solar or whatever else. People in that market want to know at what point the national grid will be in a position to be connected to them—that is absolutely key to sustainability.
Secondly, in my judgment, the public in general are confused and have no understanding of what they should do about making their contribution to net zero with the condition of their property. Some of us had a good briefing on that situation from the building society movement today. We must address this. But the principle is here, and I thank my noble friend on the Front Bench for how it has come forward.
I declare an interest as a trustee of the Parliamentary Contributory Pension Fund. Noble colleagues will not be members of it unless they have been in the other place or are ministerial colleagues. Nevertheless, I can assure anybody who knows anything about that particular area that, in my judgment, our fund—given the care and attention paid by its chairman and the members in terms of the time put in freely and the trouble that is taken to ensure that we listen to asset managers, question asset management and challenge the advisers we have—is aware of government policy, whatever it may be. Yes, we welcome guidance and particular in- depth information. But—and this is a very big “but” in capital letters—our primary duty is to the membership and the beneficiaries, and we must never forget that. We are not there to take risks, unless we really have to take them, and we debate these issues.
All I will say in relation to the forestry dimension is that I do not welcome that particular one more than any other. I want concrete material that is of benefit to those who are the beneficiaries. With that, I do not think that I need to say any more.
Lord Davies of Brixton (Lab)
My Lords, I support the amendments in this group, particularly Amendment 93. It is always a pleasure to follow my noble friend Baroness Drake, who has said it all. I will join on the back of her comments to say that I strongly support the approach she has taken.
I also support Amendment 113 from the noble Baroness, Lady Hayman. I respect the extent to which some concerns have been taken into account to make it clear that the interests of the members are paramount in the amendment—that is crucial. On the idea that pension funds should have a more active role in growing our economy, obviously its time has come. It is not new—people have been making suggestions about it; I have been involved in it in the past—but there now seems to be a confluence of views that something must be done. However, it has to be done in a way that respects the fiduciary duty to put the interests of members front and centre in the decisions that are taken. I take a fairly broad view of what constitutes members’ interests, but it is the members and their trustees acting on their behalf who have to take that decision, rather than bodies which do not have the direct results inflicted on them if they get it wrong.
It is important to stress that any ideas have to be practical and effective. I have some doubt as to whether the problem we face is about the supply of money; rather, it is about how the money will be used. Putting these proposals forward without having the other side of the bargain improved will be a problem. It is also important to stress that there are very different types of schemes, and they all have different investment needs. Again, whatever guidance is given has to respect the particular types of schemes.
I have one concern, which I would like the Minister to address, about the phrase “have regard to” in relation to guidance. It appears in the government amendment and in Amendment 113 put forward and supported by my noble colleagues. The problem with the “have regard to” is that it is a legal lottery. It is very difficult to know in advance what exactly it means, so it would be very helpful to me, and I hope the House, if the Minister could say something about that. Is it, as is sometimes suggested, like the accounting requirement—you comply or explain—or do you have to, in some way or another, follow the requirements as they are set out? What does “have regard to” mean in this legislation? It would be good to have clarification during the progress of the Bill, because the phrase appears several times.
Baroness Altmann (Con)
My Lords, I congratulate my noble friend the Minister on her Amendment 4. I am sure that it is very well-intentioned, and it meets some of the concerns that were clearly expressed in Committee. I welcome the update that will be coming from her on the green taxonomy; I believe that there will be a consultation on that. There is also the new green finance strategy, which has been published. They are all welcome.
Amendment 4 is welcome, but, as the noble Baroness, Lady Hayman, explained, although it will ensure that the Treasury produces guidance or requirements for sustainable investing by pension schemes and others, it would appear that the FCA and the PRA may not have the powers to issue that guidance. So, once the Treasury has produced its recommendations, we will still need to legislate. Can my noble friend the Minister confirm that that is the case, and that we will need further legislation if we want to implement the impacts of Amendment 4 through to pension schemes?
I have added my name to Amendments 93 and 113 in the name of the noble Baroness, Lady Hayman. Amendment 93 deals with the investment duties of pension providers and investment managers, and Amendment 113 deals with the investment duties of occupational pension trustees and managers. Clearly, if we are to make progress in line with the Government’s laudable objectives—and I congratulate them on all the work they have been doing, including some of their world-leading work on trying to ensure that pension schemes invest more in line with green objectives and sustainable investments for the long term—the amendments will ensure that the FCA and the PRA can make those rules. The amendments are very reasonably drafted; the FCA and the PRA may make these rules, but they do not require them at this stage to do so. The trustees and investment managers must then have regard to the rules, but, as the noble Baroness explained, they can explain why they are not going to implement the rules. However, at least we can set up a system where the trillions of pounds of long-term investment money in pension schemes can assuredly do more to protect the planet and provide investment opportunities that will help with social objectives for this country.
I do not have a problem with the concept of government directing pension schemes to invest a certain proportion of their assets, if necessary, in green, sustainable and socially desirable projects, including infrastructure, forestation, nature preservation and so on. At least 25% of all pension schemes—we are talking about hundreds of billions of pounds—has come from the taxpayer in the first place in the form of tax relief. Given that 25% of everyone’s pension is tax free, that is money that was spent by taxpayers. Given the budget circumstances that the country faces, and as taxpayers would otherwise be funding these projects outside pension schemes, I do not think that it is impossible to justify the idea that, should the private sector not be forthcoming with its investments in these vital elements for future growth and for a sustainable future for us all, the Government might themselves decide to require it.
These amendments will at least pave the way to ensure that there is more chance of these huge amounts of money, which are put aside for millions of people’s retirement income later in life, being invested in a way that will benefit them and the economy, as well as ensuring that there is much more and better protection for the planet, which I know that the Government wish to achieve. So I support Amendments 93 and 113, and I have added my name to Amendment 114, so excellently explained by the noble Baroness, Lady Wheatcroft, again facilitating rules that it will be necessary for schemes to follow, should the Government desire that—which is the indication that I have had from my noble friend the Minister and which is implied in the Government’s Amendment 4.
Baroness Meacher (CB)
My Lords, I shall speak to Amendment 91—this is a somewhat variegated group. The amendment was very ably introduced by the noble Baroness, Lady Boycott, and I am privileged to be asked to speak to it—it has widespread support across the political parties and within the public, as well as from key figures such as Sir Ian Cheshire and financial institutions representing no less than £1.18 trillion in assets under management and advice.
The UK is in the invidious position of being a leading financier of global deforestation and linked human rights abuses. This country provided an estimated $16.6 billion to businesses implicated in deforestation over five years to 2020. How many of us have money in pension funds contributing to the £300 billion of UK pension fund money supporting high deforestation risk companies and financial institutions? The Government claim that the answer to this problem—if you like—is the Taskforce on Nature-Related Financial Disclosures. However, the Government’s own expert Global Resource Initiative task force has already explicitly rejected the TNFD’s disclosure-based model as a solution. It has told the Government that new due diligence laws are needed to stop UK finance flowing to deforestation —and that is precisely what this amendment does.
I am aware of the noble Lord, Lord Field’s rather wonderful Cool Earth charity, which finances indigenous tribes in the great forests to retain the trees and live within them. Amendment 91 is vital to prevent all Cool Earth’s good work being undermined by UK financial institutions investing in high deforestation risk companies. The UK led the Glasgow leaders’ declaration on forests and land use at COP 26, making a commitment to halt and reverse deforestation and land degradation by 2030, including by realigning financial flows. This amendment begins to meet that commitment; surely, this should not be neglected. My only regret is that the amendment allows for a 24-month delay before due diligence obligations come into force to allow the sector to prepare—and, of course, I understand that sectors need to prepare. But this issue has been debated in Parliament for some months. I wonder how far the sector has reached in its preparations and whether it would support a reduced delay. How does such a delay fit with the view of experts that commodity-driven deforestation must end by 2025 at the latest to limit global warming to 1.5 degrees centigrade? A 24-month delay takes us right into 2025. I understand that agricultural expansion drives more than 90% of tropical deforestation. Again, the amendment is business friendly and widely supported, and I hope that the Government will support it and accept it.
Lord Vaux of Harrowden (CB)
My Lords, I have added my name to Amendment 15, tabbed by the noble Baroness, Lady Hayman. It aims to ensure that the conservation and enhancement of the natural environment are included in the regulatory principles of the regulators. Like the noble Baroness, I would have preferred another secondary—what is the word?
Lord Vaux of Harrowden (CB)
Yes, objective, thank you. But we are where we are.
The noble Baroness has already explained this with her usual skill, so I shall not repeat what she has said. However, I am sure that I am not alone in experiencing a feeling of déjà vu in even having a debate on this subject. The noble Baroness, Lady Hayman, has given similar excellent speeches on multiple occasions now— I am really quite amazed by her patience. All this amendment tries to do is ensure that government policy is embedded in the activities of the regulators, yet we seem to have the same debate on so many Bills. Each time, generally, the Government give way—and rightly so. I think that the most recent occasion might have been on the UK Infrastructure Bank Act. Frankly, if it makes sense to accept this for that bank, how much more sense does it make to accept it in respect of the entire financial services industry? Surely, it is time that all Bills to which the impacts of environmental change and risk are relevant should include these clauses by default. It really should not be up to this House to ensure that the Government apply their own policies. So I hope that the Minister will follow the multiple precedents and accept Amendment 15.
The Minister introduced Amendment 4 on SDRs, which is extremely welcome, but it is only a “may prepare” clause, not an obligation, and there is no timeframe included. Frankly, it could have gone an awful lot further.
I add my support to Amendment 91, which seeks to introduce a new due diligence requirement for regulated persons to ensure that the forest risk activities that they wish to finance or otherwise support are in compliance with local laws. I am sure that the Minister will refer to creating undue burdens on regulated persons, which seems to be the usual argument in these things—but the amendment leaves the level of required due diligence for the Government to decide and regulate, so I am not going to be terribly impressed by that argument. To put it simply, our financial services industry should not be financing illegal deforestation activities.
I also strongly support Amendments 93 and 113, which seek to ensure that the impacts on climate, nature and society are properly considered by occupational pension scheme trustees, and that the FCA may publish guidance in that respect. Noble Lords with much more experience in this area than myself have spoken to that at length. Pension funds are by their nature long-term investments and systemic in size, so it is especially important that these issues of sustainability are considered fully by pension schemes. I hope, perhaps forlornly, that the Minister will look favourably on these amendments, but particularly on Amendment 15, which seems self-evident to me.
Baroness Northover (LD)
There have been a number of powerful contributions in this group. I add my voice as a signatory to Amendment 114. My noble friend Lady Sheehan will speak to others in this group, which we also support from these Benches.
The noble Baroness, Lady Wheatcroft, very ably made the case for Amendment 114, which seeks to give the powers to Ministers and regulators to legislate for sustainability disclosure requirements along the whole length of the investment chain. As she indicated, although we obviously welcome the fact that the Minister has brought forward Amendment 4, this simply does not match up to what needs to be done and what the Government, as others have said, say that they wish to do. We know that some change is already being driven—for example by the disclosures that are now required under the task force on climate-related disclosures. We know that the International Sustainability Standards Board continues its important work, with the involvement of Mark Carney, and we hope that the Government will adopt its recommendations—they are currently equivocal about that.
We urgently need the guardrails that Chris Skidmore recommended were required to reach net zero by 2050. The Government have made repeated commitments, as we have heard, to legislate for sustainability disclosure requirements and in these other areas to which noble Lords have referred. Amendment 114 and all the others help to deliver what the Government say that they wish to do. The noble Baroness, Lady Hayman, beautifully outlined how the other amendments also help to deliver for the Government on what they say that they wish to do. Therefore, I support this amendment and the others.
Baroness Young of Old Scone (Lab)
My Lords, I support Amendment 15 in the name of the noble Baroness, Lady Hayman, who introduced it very powerfully. I want to talk to the House about the real relationship between nature conservation and climate change and the need to bring those together in the regulatory process. Nature restoration is essential for our reaching of net zero—we cannot do net zero without restoring nature; I think that is globally accepted now—but nature restoration is important to economic prosperity in several other ways. More than half of global GDP is considered moderately or highly dependent on natural assets and half the world’s population is completely dependent on biodiversity for their livelihoods. That means that biodiversity is as important as climate change.
Biodiversity is also highly material in assessing risk, including financial and economic risk, and it is pretty clear that if biodiversity is going down the tubes, so is the economy and, indeed, so are we. So, it is a bit of a no-brainer, in my view, that financial services regulators should have, as a regulatory principle, net zero and nature recovery together: the two are absolutely indissolubly linked. I hope the Minister will not say that the provisions that are in the Bill for net zero will act as a proxy for biodiversity restoration. It does not work that way: net zero is a necessary condition but not a sufficient condition for biodiversity recovery.
The noble Baroness, Lady Hayman, threatened the House with simply reading out all the commitments that have already been made that are encapsulated in her Amendment 15. I want to add another one that no one has mentioned so far. The Environmental Audit Committee, in its report on biodiversity in June 2021, highlighted the fact that, although some progress had been made in transforming the financial system to reflect the pressures of climate change, the whole accompanying handshake with biodiversity was way down the line and much slower and needed to accelerate. It called on the Government to play a part in creating a narrative that there is a lot of international commitment to biodiversity recovery linked with climate change that we are going to have to respond to in this country, because we have signed up to it globally, and that it is therefore important to get the financial services industry and its regulation up to speed soon in order to cope with that global pressure. The noble Baroness’s Amendment 15 would do that and, more importantly, it would secure this through a legislative approach and not be overly reliant on voluntary action.
Without delaying the House any longer, I also support Amendment 91 on deforestation. I will not repeat what the noble Baroness, Lady Boycott, said, but it was the bee’s knees. I end with a note of distress at the comments made by the noble Lords, Lord Davies and Lord Naseby, about pension scheme investments and investors and pension committees and pension advisers’ responsibility and duty to pensioners. I declare an interest, having set up the Environment Agency pension scheme some 25 years ago to be, at that stage, the only really green pension scheme and now probably the foremost green pension scheme in the world.
Let us not be in any doubt: there is not a dichotomy about responsibility to pensioners and taking action on climate change and biodiversity. They are absolutely one and the same thing. If climate change and biodiversity decline continue, there will be irreparable harm to the economics that pensioners and pension schemes depend on. Let us not be in any doubt about that: pension scheme trustees and their advisers—and I hope, if the Minister will accept Amendment 15, their regulators—have a responsibility towards climate change and biodiversity recovery, because it is absolutely in the economic interests of their beneficiaries.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise very briefly to express Green support for the non- government amendments in this group and acknowledge the way in which the weakness of the government amendment has already been acknowledged. Noble Lords will note that the explicitly environmental amendments, from Amendment 15 onwards, do not have a Green name on them. I am delighted about that because there was not space for one, because the amendments have cross-party support from right across the House, which really shows how far we have come in these debates.
I shall make four brief points, because I am very aware of the time. They are building on the points just made by the noble Baroness, Lady Young, and reflecting on an article published last week in Nature, which demonstrated that in seven of eight key measures, including climate, biodiversity and water, we are outside the safe and just operating space of this planet. We are absolutely at crisis point and I pick up the point made by the noble Baroness, Lady Hayman, that we cannot afford to wait. We cannot wait for the next Bill, the Bill after that and the Bill after that. I very much agree with the point just made by the noble Lord, Lord Vaux, that the country should not have to wait for the House of Lords to insert these things into Bills; they should be there in government Bills as a matter of absolute, basic course.
I have a particular point about Amendments 93 and 113, which strengthen the fiduciary duty of pension funds to ensure investors consider the impact of their investments on environment and society. The case has already been made that there is no finance on a dead planet and there are no pensions on a dead planet, but the society element also deserves to be noted. We have had a huge amount of discussion of the problem of the large number of people of apparently working age who are not engaged in our labour force at the moment, and the public health crisis that is associated with that. It is the kind of thing that Green councillors have been going on about, as members of governing boards of pension funds for years: such things as tobacco and the kinds of food products that are being supported are all issues that have an impact on pension returns.
On deforestation, the noble Baronesses, Lady Meacher and Lady Boycott, among others, have already made points about this, but there is £300 billion of UK pension money in high deforestation risk companies and financial institutions—that is a figure from Make My Money Matter. Again, there is a point about risk. The financial sector in the UK faces up to £200 billion of risk in Brazilian beef and soya and Indonesian palm oil supplies alone.
Finally, there is another risk in terms of our international reputation. We are of course enthusiastic signatories of the global biodiversity framework, which promises, under target 14, that the UK will align
“all relevant public and private activities, [fiscal] and financial flows with the goals and targets of this framework”.
How could the Government not be accepting all the amendments in this group?
The Earl of Caithness (Con)
My Lords, I have my name to Amendment 15, so ably introduced by the noble Baroness, Lady Hayman. I thank her for her very clear exposition of it and I thank the noble Baroness, Lady Young, for her little additions just to fill in some of the other parts of this important subject. I thank the Minister for her time yesterday when I came to discuss this amendment with her: it makes a lot of difference that a Minister is so receptive to a discussion, even though we did not part any closer than when I walked through the door.
I congratulate the Government on their world-leading position on green finance. That is a nice position to be in, but we need to work very hard on that if we are to retain it.
Lord Randall of Uxbridge (Con)
My Lords, I strongly support Amendment 15, so ably introduced and supported by others. I will speak principally to Amendment 91, to which I added my name. I tabled a similar amendment in Committee, but unfortunately ill health prevented me speaking then. I was grateful to the noble Baroness, Lady Boycott, for taking over the reins then and I am very happy to support her now.
I support the Government’s amendment in as far as it goes. As we have heard, the Government have made a lot of strides in this area through public finance commitments. Only last month the Prime Minister met with the President of Brazil, pledging £80 million to the Amazon Fund to help stop deforestation. There is more money coming through; at least £3 billion of our international climate finance is devoted to nature protection and restoration.
The question we must ask ourselves is: are we turning a blind eye to the private finance undoing all this good? Preventing private finance doing harm is just as important as the aid we provide. As we have heard, the Government have endorsed this conclusion by pioneering the Glasgow declaration on forests and land use, which includes a commitment to:
“Facilitate the alignment of financial flows with international goals to reverse forest loss and degradation”.
Now is the very time to make good on this pledge and get our own house in order.
This is a sensible proposal rooted in Schedule 17 to the Environment Act and limited to illegal deforestation for that very reason. The amendment itself has been publicly endorsed, as we have heard, by Sir Ian Cheshire, as well as financial institutions representing more than £1 trillion in assets under management and advice, including Rathbone Greenbank Investments, Federated Hermes Ltd and the Local Government Pension Scheme Central Ltd—so it is not just the usual suspects.
At the G7 last month, the UK committed to take steps to redirect finance away from activities causing biodiversity loss “without delay”. I am very grateful to the Minister. As we heard from my noble friend Lord Caithness, she has bent over backwards to try to help and is committed to this. She has not quite convinced me that the Government should not accept this sensible amendment. I hope that it will be accepted and that the Government will follow through here. As I have got older, I may have got mellower but I have got more impatient. I am fed up with hearing every time that it will be in the next Bill.
Baroness Sheehan (LD)
My Lords, I rise on behalf of our Benches in support of these amendments. In doing so, I declare my interest as a director of Peers for the Planet.
Before I move on to the bulk of the amendments in this group, I will address government Amendment 4. I agree with noble Lords across the House who have welcomed it but feel that it is deflective and a little weak. The policy statements required from the Treasury may be followed by the regulators, but it just does not go far enough. It certainly does not fulfil the spirit of Amendment 114 on SDRs, spoken to so ably by the noble Baroness, Lady Wheatcroft.
In the briefings I have received on this Bill to make provision about the regulation of financial services and markets, it struck me that the phrase “systemic risk” appears frequently. According to the Systemic Risk Centre, part of the London School of Economics and Political Science:
“Systemic risk refers to the risk of a breakdown of an entire system rather than simply the failure of individual parts. In a financial context, it captures the risk of a cascading failure in the financial sector, caused by interlinkages within the financial system, resulting in a severe economic downturn”.
I think we all recognise that scenario.
Therefore, the amendments in this group all aim to strengthen the Government’s hand either by aiming for better governance in financial services and markets or by pre-empting disastrous practices as financial services and markets transform and orientate towards a future that encompasses our net-zero ambitions. Deep change of this nature is a risky undertaking for the sector that the Government can act to mitigate. Indeed, the Government can act to enforce their own policy statements, as so many noble Lords across the Chamber have already mentioned.
I will briefly address the amendments to which I have added my name. Amendment 7 addresses an essential element of openness and transparency and would require the FCA to make rules to mandate fund managers and insurers to give information to clients and beneficiaries on the exercise of all voting rights on their behalf by appointed investment managers. The noble Baroness, Lady Wheatcroft, in whose name the amendment appears, has already given us chapter and verse on why this would be a sensible move by the Government. Currently, it is difficult for underlying fund managers and insurers to access information about how voting rights in investee companies are being exercised on their behalf in a consistent and comparable format. I will give just two examples and, I hope, not repeat too much of what the noble Baroness, Lady Wheatcroft, has already said. This is very important.
Reporting is currently voluntary and contained in a single dense report across the whole of the fund manager or insurer’s operations. That is problematic, because in practice it means that pension funds will find it difficult or impossible to identify whether their pension fund is invested in that share. They cannot get at the information they need. That is one shortcoming; the other is that the reporting is non-standardised. Many investment managers disclose votes in a non-standardised way in long PDF reports—sometimes up to 10,000 pages—which makes it extremely difficult for pension funds to extract the data they need out of it.
The aim of Amendment 7 is to rectify these shortcomings and others that have already been mentioned, and requires the FCA to make rules requiring information on the exercise of voting rights to be disclosed on request and in a standard format. The US Securities and Exchange Commission has a regularly updated standard reporting template which managers must follow. The FCA should achieve parity with the USA on voter reporting and enable consistent and comprehensive vote disclosure. Voting at AGMs is a key tool in ensuring good corporate governance, good long-term investor returns and good economic outcomes more broadly, and is key to government realising its policy ambitions, not least its net-zero ambitions. Indeed, HMT has publicly acknowledged that good voting and good vote reporting are crucial to meeting net zero. Finally, as the Aldersgate Group identifies in its 2022 report, it is critical that financial institutions engage with systemic risks via stewardship—such as exercising voting rights—rather than managing portfolios by divesting from high-carbon assets.
Amendment 15, which adds nature to the new regulatory principle on net-zero emissions, is in the name of the noble Baroness, Lady Hayman, and was spoken to ably by her. We have only to gaze and wonder at the efficiency of bees and other pollinators in their role in providing us with good food. Various estimates have put a figure verging on £1 billion to pollinators’ contribution to the UK economy in terms of worth of crops they produce. However, if one inputs human labour in their stead, we know that their value is far greater than that.
The Government’s own green finance strategy, published just a few weeks ago, stated:
“Nature sustains economies and livelihoods, and protecting and restoring nature is inseparable from addressing climate change”,
which completely echoes what the noble Baroness, Lady Young of Old Scone, said. The funny thing is that those are the Government’s own words, so why do the Government balk at this amendment? In their response to the seminal Dasgupta review, The Economics of Biodiversity, which has already been mentioned, the Government committed to delivering a nature-positive future by reversing nature loss, and to
“leave the environment in a better state than we found it”.
This amendment is urgently needed. Current investments are working against nature and driving nature’s depletion. We have heard these figures before but they are worth reiterating. In 2019, financial institutions provided $2.6 trillion in loans and underwriting services to sectors identified as primary drivers of biodiversity loss and ecosystem disruption. Globally, Governments spend $500 billion per year that is potentially harmful to biodiversity.
Nature loss can be massively detrimental to investments and must be considered in assessing risks. I will give a couple of examples. First, shareholders lost billions when the European pharmaceutical company Bayer lost near 40% of its market capitalisation in less than a year after acquiring an agrochemical company accused of adversely affecting honeybee populations. Secondly, company shares in the Canadian gold-mining company Infinito Gold fell 50% when in 2012 the Costa Rican Government denied permission to develop a mine due to potential impacts on forests and endangered species.
In conclusion, we need investment in nature restoration to be commensurate with investment in net zero—here I disagree a little with what the noble Earl, Lord Caithness, said. In having similar amounts and similar resources deployed on net zero and climate change, we are able to protect our natural capital, which we must do if we are to meet our net-zero targets. Nature and climate change are two sides of the same coin. I hope that when the time comes, noble Lords will give this worthy amendment their full support, as we will from these Benches.
The Lord Privy Seal (Lord True) (Con)
This has been a 13-minute speech on Report—
Baroness Sheehan (LD)
I am just about to conclude.
Global Witness, for example, recently launched a “Brazil Big Beef Watch” Twitter bot to show how simple and effective supply-chain traceability can be. Therefore, due diligence requirements are not an onerous ask and are long overdue. It is deplorable that indigenous people are on the front line in defending against deforestation. Some 40 people per week are killed in the process. This must stop. I think I speak for our Benches when I say that should the noble Baroness, Lady Boycott, seek the opinion of the House on her amendment—we hope that she will—we will give it our wholehearted support.
Amendments 93 and 113 on fiduciary duty have been covered extensively by the noble Baronesses, Lady Hayman and Lady Drake, and by other noble Lords across the House, so I need say very little other than that we are in full support of them.
Lord Livermore (Lab)
My Lords, this has been a fascinating if somewhat disheartening debate, and I have learned much listening to the contributions from noble Lords on all sides of the House.
We welcome the tabling of government Amendment 4, which brings forward new provisions relating to sustainability disclosure requirements, but we agree with the views expressed across the House, particularly as set out by the noble Baroness, Lady Hayman, arguing that the Bill simply does not go far enough in supporting the country’s green ambitions.
We support many of the amendments in principle but particularly Amendment 15 in the name of the noble Baroness, Lady Hayman, and Amendment 91 in the name of the noble Baroness, Lady Boycott, the latter having been signed by my noble friend Lady Chapman.
The financial services sector touches many more aspects of our lives then we may sometimes realise, with firms’ investment decisions having a direct impact on virtually all sectors of the economy. This activity can, and often does, do much that is good. For example, if we are to secure the green jobs of the future, businesses will need investment. But, as we see in some cases, such as investment activity that leads to deforestation, there can be severe negative environmental impacts. In a recent poll cited by Global Witness, 77% of UK savers said they would be unhappy to discover that their pension was funding deforestation and habitat loss, with 14 million people estimated to switch pension provider if they made such a discovery. However, as Amendment 7 highlights, there is currently no way for the public, nor indeed the Government, to tell if their money is invested in that way, and therefore no way for consumers to exercise choice. That surely cannot be right.
Amendment 91 would implement recommendations from the Government’s own Global Resource Initiative taskforce in relation to deforestation, a practice which causes significant harm to global climate ambitions, as well as to indigenous peoples who are evicted from their ancestral homes. We are told by the Government that they are serious about achieving net zero and protecting nature, yet, at present, the net-zero regulatory principle still fails to mention nature, which is what Amendment 15 would correct. Indeed, nature is not even mentioned in the Bill. As the WWF rightly points out, by excluding nature from this key financial services legislation, the UK will fail to secure opportunities that could make the UK a leading green finance centre, while exposing the country to nature-related risks.
We should also give serious weight to the intervention of Professor Sir Partha Dasgupta, who led the Government’s review of the economics of biodiversity, when he urges the Government to support the amendment. He says:
“We need to empower those in charge of regulating our financial system to support the sector to arrive at a nature-positive destination by recognising the value of natural capital and the significant social and economic benefits restoring nature presents”.
We are losing nature at an alarming rate, and these issues are only going to become more urgent. We have missed opportunities to act in the past, and we cannot continue to make the same mistakes. We therefore urge the Government to think again on these important areas, but if they are not willing to do so, we will support the noble Baronesses, Lady Hayman and Lady Boycott, should they choose to push their amendments to a vote.
Baroness Penn (Con)
My Lords, let me first take Amendment 15, from the noble Baroness, Lady Hayman. I reassure noble Lords that the regulators already consider issues related to sustainability, and specifically nature, as part of their work under their existing objectives. For example, the Government and the regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosure, which we have heard about, which helps organisations to report and act on evolving nature-related risks; and the Bank of England is a key member of the Network for Greening the Financial System, which recently launched a task force on nature-related risks.
The noble Baroness listed the work that is happening and the various commitments, and I interpret that to mean that the lack of the reference to nature in the framework does not equal a lack of action by either the Government or the regulators. I understand the desire of noble Lords to see that reflected in the framework in the Bill. However, further work needs to take place to better understand the interaction between nature targets and the work of the financial services regulators when including it in regulation, and the conclusions of that work are not yet clear. Moreover, equivalent targets to those in the Environment Act for England and Wales in 2021 do not yet exist in the other devolved Administrations, so we remain of the view that it would not be appropriate to place a requirement within the FSMA regulatory principles without the clarity I spoke about, or to impose requirements that link to targets that do not yet exist; so unfortunately, the Government are unable to support the amendment.
Turning to Amendment 91 in the name of the noble Baroness, Lady Boycott, the Government are committed to working with UK financial institutions to further tackle deforestation-linked finance. As set out in the updated green finance strategy, we will begin this work with a series of government-convened round tables this year, and I am keen to work with noble Lords on this process.
As we discussed in Committee, the amendment we are considering today would involve imposing requirements on all regulated financial services firms, obliging them to undertake due diligence on practically all their client firms and their clients’ supply chains. In practice, this would amount to UK banks being required to check most of the world’s major companies and their supply chains for links to illegal deforestation, and stopping any finance to them until those companies can provide the data needed to do so. This is while the rest of the world’s banks carry on financing this activity with no global standard on deforestation in place.
Global due diligence is not something that can be legislated for by Parliament and the UK financial sector alone. In fact, trying to do so may make this problem harder to solve. Imposing this data requirement on UK financial firms alone where such data is lacking globally could lead to one of two things: firms trying to satisfy the requirement but failing due to a lack of data, leading to misreporting and misallocations of capital; or keeping that business outside the UK, with no chance of securing the type of environmental change we want and that is the aim of the amendment.
The Government therefore want to find a workable solution, and we are pursuing a number of different lines of action to do so, in addition to the commitment we made to work with UK financial institutions in the green finance strategy. First, we are directly addressing deforestation in situ by our partnerships approach. The Government launched the forest and climate leaders’ partnership at COP 27, and also fund the partnership for forests, which has channelled more than £1 billion of private investment into forests and sustainable land use, and brought more than 4 million hectares of critical landscapes under sustainable land use.
Secondly, the Government are working to address due diligence for illegal deforestation using the Environment Act. The most relevant UK businesses that use forest-risk commodities or products derived from them will be required to ensure those products are produced in compliance with relevant local laws. Thirdly, the Government are supporting the development of a coherent international approach on disclosure and management of nature-related risks and impact.
Since our debate in Committee, the Taskforce on Nature-related Financial Disclosure has published its latest draft framework. This now includes recommended metrics and associated governance strategies for businesses to understand and mitigate deforestation in areas of direct or indirect operational control. We committed in the green finance strategy to explore how the final TNFD framework should be incorporated into UK policy and legislative architecture, and we will start this work later this year, once the final framework is published.
I personally made the case to the International Sustainability Standards Board, while at COP 15 in Montreal, that such standards should be considered for integration into its work. If that happens, global standards are genuinely within reach. I acknowledge that TNFD or any subsequent global standards do not prohibit the financing of deforestation in itself but, as a disclosure framework, it is the bedrock for action, both by incentivising firms to take action on the risks that they identify and allowing the Government to consider taking further regulatory action after the establishment of such a disclosure framework. I hope, therefore, that I have explained why the Government cannot accept the amendments, but have also demonstrated that effective action is under way to address noble Lords’ concerns in these areas.
Turning to Amendments 93 and 113, also from the noble Baroness, Lady Hayman, in the updated green finance strategy, the Government have already recognised that decisions about investing in the context of systemic risks such as climate change and biodiversity loss are complicated, in particular for pension funds. The Law Commission’s 2014 report suggested that fiduciary duties mean that non-financial factors can be considered as part of investment decisions if trustees have good reasons to think their members share their concerns and if such decisions do not involve a risk of significant financial detriment to the fund.
However, the Government recognise that trustees would like further information and clarity on their fiduciary duties in the context of the transition to net zero, and that is why we are taking steps to ensure that such clarity is forthcoming. Later this year, DWP will examine how closely its stewardship guidance is being followed, including whether incorrect interpretations of fiduciary duties are playing a role in this area. The financial markets and law committee, which includes representatives from both DWP and the Treasury, is working to consider issues around fiduciary duties and sustainability and whether further action or clarity is needed.
Baroness Penn
“(3) For subsection (4) substitute—“(4) If either regulator—(a) proposes to vary a Part 4A permission or to impose or vary a requirement,(b) varies a Part 4A permission, or imposes or varies a requirement, with immediate effect,(c) proposes to vary a permission under section 55NA, or(d) varies permission under section 55NA with immediate effect,it must give A written notice.””Member’s explanatory statement
This amendment would align the wording of new section 55Y(4A), being inserted by paragraph 10 of Schedule 5 to the Bill, with section 55Y(4) of the Financial Services and Markets Act 2000, by replacing both those provisions with a new section 55Y(4) which clarifies in a single subsection the circumstances in which a written notice must be given to a person.
Member’s explanatory statement
This amendment is consequential on the amendment at page 137, line 32.
Lord Tyrie
“Regulatory Decisions Committee
(1) The FCA must establish and maintain a committee to be known as the Regulatory Decisions Committee (the RDC). (2) The purpose of the RDC will be to take contested enforcement decisions on behalf of the FCA.(3) The RDC must, in its decision-making function, be operationally independent of the FCA.(4) The chair of the RDC must be nominated by the Chancellor of the Exchequer, and such nomination only has effect if confirmed by the Treasury Select Committee in the House of Commons.(5) All other members of the RDC must be nominated by the FCA Board, and such nominations only have effect if approved by the chair.(6) Members’ appointment must be for a fixed term to be determined by the FCA, with such term to be no more than five years.(7) Members of the RDC may be appointed for up to two terms.(8) The FCA Board may remove a member of the RDC, but only in the event of that member's misconduct or incapacity.(9) All members of the RDC including its chairman and deputy chairs, must be operationally independent.(10) For the purpose of subsection (9), a person is not operationally independent if they are an employee of the FCA or any other UK financial regulator.(11) Other than those for purely administrative purposes, all interactions between the FCA and members of the RDC relating to any specific potential enforcement actions must be minuted and disclosed to any person potentially subject to that action.(12) The FCA must make available to the RDC sufficient resources, including legal advisers and support staff, to enable it to perform its function of determining fairly and expeditiously the matters which it is required to consider.(13) Such staff may be employees of the FCA but must be operationally independent of FCA staff involved in conducting investigations and presenting cases to the RDC.(14) The Chair of the RDC must, at least once per year, deliver a report to the FCA, His Majesty’s Treasury, and the Treasury Select Committee in the House of Commons. Such report must address at least—(a) the extent to which the RDC was able, in the period under review, to determine fairly and expeditiously the matters which it was required to consider,(b) the resourcing of the RDC, and the extent to which the resources available to it have been sufficient to enable it to perform its functions, and(c) the independence of the RDC, and in particular any circumstances or events where any impression of partiality, bias or undue access by the FCA to the RDC may have arisen.”
Lord Tyrie (Non-Afl)
I declare my interest as a consultant to DLA Piper, which helped me with drafting the amendment.
The need to provide the RDC with statutory autonomy was a recommendation of the Parliamentary Commission on Banking Standards, which I chaired in 2013. The purpose of my amendment is to give the FCA’s internal watchdog, the Regulatory Decisions Committee, greater independence by putting it on a statutory footing. I set out why this is necessary in Committee so I will not repeat all those arguments now but, in a nutshell, the benefit will be greater fairness for firms and individuals; it can be accomplished without compromising high-quality enforcement.
The case for this is pretty straightforward. The RDC was created to act as a check on what would otherwise be the FCA’s almost untrammelled power of enforcement. The RDC is the FCA’s in-house watchdog —a second pair of eyes—which can stop an enforcement action. In theory, firms could go to the Upper Tribunal, the equivalent of the High Court, but that is very costly and the fact that its proceedings are in public creates huge reputational risk for a firm or individual going there. For many of them, that can be terminal. So, the RDC is often the only practical safeguard they have against overly zealous enforcement by the FCA.
The problem for the RDC is that it does not have enough statutory authority to do the job as well as it should. At the moment, the RDC’s operational independence is wafer-thin. For a start, the RDC is subordinate to the FCA board. The board can and does decide what type of cases the RDC looks at, what resources are available to it and what procedures it should follow. The RDC also sits down the corridor from the enforcement team in the FCA. So it is small wonder that firms think it is much less than fully independent.
The price of the perception that the RDC is not fully independent is not just a sense of unfairness among some in the regulated community; it also carries a significant economic cost. It acts as a deterrent to activity and investment to many who do not want to take a risk of being on the wrong side of the enforcers. It is for these reasons, among others, that the Parliamentary Banking Commission, which I chaired, concluded that the RDC should be provided with statutory autonomy for its operations.
No doubt the Minister will have been briefed by the FCA, via her Treasury officials, that all these changes that I have set out are unnecessary—but they are necessary. The dangers that come with lack of independence have recently been vividly illustrated by the FCA board’s decision significantly to limit the scope of the RDC’s activities. There was very little public discussion. As of 2021, it no longer supervises the FCA’s decisions relating to a firm’s licensing, authorisations—the specific activities permitted under its licence—or an individual’s approval: that is, whether people are suitable for senior appointments under the senior managers’ regime. It also leaves firms and individuals unable to make oral representations in front of the RDC for many decisions that are crucial to their future. For many cases, those oral representations have now been closed down under the 2021 reforms.
So the narrowing of the remit will matter a lot, particularly for smaller firms. What is more, it will drive a coach and horses through the RDC’s already fragile independence and certainly through the perception of it. The fact that such a change could have been pushed through by the FCA board, after a consultation exercise which did not even support it, illustrates the need for much greater accountability and much better explanations from the regulator. Something was already needed in 2013 when we looked at this, to boost the RDC’s operational independence, but this 2021 reform shows that it is even more badly needed now. The modest amendment on the Marshalled List will entrench the RDC’s independence in statute. It will give the RDC the jurisdiction to challenge—publicly, if necessary —FCA board decisions that are relevant to its work, and it will create a direct statutory line of accountability to Parliament for everything it does.
Since 2013, I have scarcely heard any arguments against the banking commission’s proposal and, since I raised these issues in early March, I have been flooded with support from all sides of the financial services industry, and from a number of Peers and several former senior regulators. Two former Cabinet Secretaries have contacted me to tell me they strongly support it, as has the right reverend Primate the Archbishop of Canterbury. This is quite a large collection of varied support for a relatively small but sensible measure. They have done this, I think, because it has clear upsides, and neither they nor I can think of any downsides. It does not even carry an Exchequer cost.
I very much hope that the Minister will not be the last opponent standing when she stands up, but, if she is unpersuaded, I very much hope that she will at least agree to a consultation taking place on whether something should be done to boost the RDC’s independence, with an open mind on what should be needed. In that conciliatory frame of mind, I beg to move.
Baroness Kramer (LD)
My Lords, I had the privilege of adding my name to this amendment, and of serving with the noble Lord, Lord Tyrie, in his pre-Lordship days, when he chaired the Parliamentary Commission on Banking Standards. Like virtually everyone else who was on that committee and had spent two years taking evidence across the full range of issues that underpinned the crisis of 2008 and 2009, we were very surprised that the Government did not seize upon the recommendations for a body such as the RDC to have the kind of statutory independence that is described in this amendment. The amendment is extremely well drafted, as anybody reading it can recognise. It is not one of those where people say that the idea is good but there is a problem with the language. In this instance, there is not.
I have always thought that the regulator benefits as much as anybody else from oversight and challenge by an independent body with the requisite expertise. I also have the privilege of sitting in the Economic Affairs Committee. We have had discussions in the context of the independence of the Bank of England, but this has far broader implications. The problems of groupthink are becoming extraordinarily evident. Creating independence in a body such as the RDC is a mechanism for breaking down some of that groupthink. It is not because people are bad, incompetent or inadequate, but because, if there is not a process of challenge with sufficient gusto, groupthink begins to take hold. There begins to be a measure of complacency, people become less inclined to challenge and that benefits none of us.
I see no downside to the Government accepting this amendment. I hope that they take it extremely seriously and recognise that the quality of the language is here, meaning that they can run with this amendment as it sits, and that the regulator will benefit, the industry will benefit and individuals will benefit. There are very few occasions when one can look at a measure and say that this is true on all those fronts.
Lord Forsyth of Drumlean (Con)
My Lords, it is late, so I will not repeat the arguments which have been made by the noble Lord, Lord Tyrie, and the noble Baroness, Lady Kramer. The amendment seems to be a very sensible measure, and if my noble friend cannot accept it, the noble Lord suggested a compromise of at least consulting on this. However, I am not sure that many people would say that this was not a sensible proposal. The amendment has certainly been very carefully drafted. We are on Report, and I have some sympathy with my noble friend on the Front Bench being faced with this, but it merits very serious consideration and would be very much welcomed in the City.
Lord Eatwell (Lab)
My Lords, I apologise for missing the introduction from the noble Lord, Lord Tyrie; I was caught out by the Whips’ rearrangement of business. Fortunately, I read his pamphlet on this matter, so I have a good idea what he said.
Lord Harlech (Con)
My Lords, I am afraid that the noble Lord, Lord Eatwell, was not here for the opening comments from the noble Lord, Lord Tyrie.
Lord Eatwell (Lab)
I am probably the only Member of this House who has been a member of the Regulatory Decisions Committee and I might have some observations to make.
Lord Harlech (Con)
Clearly, the House wants to hear the noble Lord’s remarks, so please continue.
Lord Eatwell (Lab)
If the Whips had not rearranged the business so peremptorily, one would not have been caught out.
Lord Harlech (Con)
The business has not been rearranged; the Order Paper says,
“at a convenient time after 7.30pm”.
Lord Eatwell (Lab)
My Lords, as a founding member of the Regulatory Decisions Committee of the Financial Services Authority who served from 2001 to 2006, I reflect on the fact that at that time the FSA took extraordinary care in preparing the documentation that was submitted to the RDC. This clearly had an effect on the way in which the RDC prepared itself. This is an important element in ensuring that our regulatory system is not only fair but seen to be fair. Having read with care the pamphlet from the noble Lord, Lord Tyrie, I support the arguments that he made there, which I am sure he recently repeated in the House.
Baroness Altmann (Con)
My Lords, I support all the work that the noble Lord, Lord Tyrie, has put into this amendment. He has worked for so many years and has so much knowledge on this subject. If my noble friend cannot accept the amendment today, I urge her to come back at Third Reading if possible, perhaps with the Government’s own proposals for at least a consultation, which would be a reasonable compromise. There is a strength of feeling on this issue.
As the noble Lord said, the FCA has already been clipping the RDC’s wings. We can see dangers and that there is huge support for proper independence on a statutory basis. We do not want the City to become an oligopoly; we need to protect some of these smaller firms for healthy competition. What is the Government’s objection to this proposal?
Baroness Chapman of Darlington (Lab)
My Lords, we commend the noble Lord, Lord Tyrie, on his amendment and on using it to raise important questions. We understand that concerns have been raised about the perceived watering down of the RDC’s role within the FCA. While we know that the Government respect the operational independence of the FCA, we hope that the Minister is able to say something about the regulator’s recent decisions on the RDC, which are causing substantial concern.
The FCA believes that the current balance of responsibilities is correct and that the recent reforms were necessary to ensure quicker decision-making. However, it would help if the Minister could outline what steps, if any, the Treasury might take in future, should it come to the view, if it has not today, that the system is not quite working in the way that it should.
Baroness Penn (Con)
My Lords, I am also grateful to the noble Lord, Lord Tyrie, for raising this important issue through Amendment 8. The Regulatory Decisions Committee, or RDC, takes contested enforcement decisions on behalf of the FCA where the FCA has not been able to settle a case with the relevant firm. The Government recognise that the RDC performs a critical function within the regulatory framework. FSMA requires that decision-makers are independent, and the design of the RDC reflects this.
It is important that the RDC makes decisions fairly and transparently. To ensure this, the members of the RDC are wholly independent of the FCA’s executive. The RDC also has its own team of support staff and legal advisers. This structure ensures that FCA personnel involved in the investigation of the enforcement case are not involved in supporting the RDC in its final decision-making.
As noble Lords noted, the FCA has recently made a number of operational changes to transfer decision-making responsibilities in certain cases from the RDC to the FCA executive, which will increase the speed of decision-making. However, decisions in contested enforcement cases continue to be made by the RDC.
In addition, should a firm or senior manager disagree with the final enforcement decision taken against them by the RDC, they generally have the right to refer the case to the Upper Tribunal. Where decisions fall to FCA executives, the relevant parties retain the right to make representations in writing. The FCA will also consider taking oral representations in exceptional circumstances, when not doing so would be detrimental to the fairness of decision-making. As set out above, the decisions made by FCA executives can also be referred to the Upper Tribunal should a firm disagree with them.
Any proposed legislative changes to the structure of the FCA’s supervision and enforcement framework should be subject to appropriate public consultation. As we have discussed previously during the passage of the Bill, the Government sought views from stakeholders on the operation of the future regulatory framework through a review. However, we concluded during that review that the case had not been made for changes to the FCA’s enforcement and supervision functions given that these responsibilities were not increasing as a result of the UK’s departure from the EU, unlike the significant increase in its rule-making responsibilities, which was the focus of the review and the subsequent enhancements made by the Bill.
Nevertheless, I am grateful to the noble Lord for bringing the importance of the FCA’s supervisory and enforcement framework to the Government’s attention. The Government do not see the need for legislative change in this area at this time. However, we support the noble Lord’s aim to ensure greater independent scrutiny of and accountability within the regulatory framework. The Economic Secretary and I will look at this issue further, outside the passage of this Bill, to ensure that the FCA’s supervisory and enforcement framework remains appropriate as it takes on new powers. We will continue to listen to the views of the noble Lord and other stakeholders as we do so.
I have also raised the issue with the FCA, and will pass on the response with further detail on the decisions and changes made to the operation of the RDC to this House. Therefore, I hope, for the reasons I have set out, that at this stage the noble Lord is content to withdraw his amendment and continue this conversation further outside the passage of the Bill.
Lord Tyrie (Non-Afl)
I would be grateful for an opportunity to respond to a few of the points made there. Before I say anything more, I should say I have discussed this amendment on a couple of occasions with the Minister. If she does not mind my saying so, she makes a first-rate fist of doing an impossible job. I also hope she does not mind my saying that from time to time—and this was one of them—I had the impression that people in other places are pulling a number of the strings. That does give me cause for concern.
I will just make a few brief points. The Government have set great store by the Edinburgh reforms. They are designed to bolster business confidence and investment, and make sure that regulation and the threat of enforcement do not end up damaging the UK’s pre-eminence in financial services, among other things. But if the Edinburgh reforms mean anything, they must mean that measures such as this—which would give businesses, particularly smaller businesses, greater confidence that they would be protected from arbitrary enforcement—should be seriously considered. I regret that they are being dismissed somewhat peremptorily.
The Minister said that oral representation is still possible before the RDC. I will not read out the FCA’s response to the consultation, to which I referred earlier, in full, but if she were to go back and look at it, she will see that it has been effectively closed down for all but exceptional cases. It is that opportunity to have a private conversation with the RDC that is so greatly valued—I see the noble Lord who served on the RDC is agreeing—on both sides: on the RDC side and by firms. The RDC dose a very difficult job and does it very well, but it needs more empowerment. I regret that the Government are getting in the way of that.
My last substantive point takes us right back to where we started. Frankly, we have not heard a substantive argument against this proposal from the Front Bench just now, for the simple reason, I think, that there are not any. We have heard the suggestion that firms can still go to the Upper Tribunal, but there was no response to the points made that the Upper Tribunal is not a practical option for a very large proportion of the regulated community, both on grounds of cost and on reputational risk grounds, because it is held in public. I find the arguments adduced for not doing it to be frankly incomprehensible.
The only real opponent of this left is the FCA itself. I would like to end just by drawing one conclusion from that point. It is very concerning that, when a regulator has a vested interest in an issue such as this, it can succeed in knocking down a sensible proposal with scarcely any explanation, and can persuade the Treasury that it should be knocked down and that the advice of that regulator should be taken without challenge. At that point, we are into a self-reinforcing spiral of ever more powerful regulation. That is exactly why, in so many different ways, Members on all sides of the House have come to the conclusion that we must have better accountability of the regulators, particularly the financial regulators, if we are to carry on handing them more powers, as is intended in the Bill.
Having said all that, seeing as I do not have the troops just now, I will withdraw my amendment.
Financial Services and Markets Bill
Tuesday 6th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-II Second marshalled list for Report - (6 Jun 2023)
Viscount Trenchard
Member’s explanatory statement
This amendment, and the amendment to Clause 24, page 39, line 2, in the name of Viscount Trenchard, amends the role of international standards in relation to the growth and competitiveness objective.
Viscount Trenchard (Con)
My Lords, Amendments 8A and 8B were originally tabled by my noble friend Lady Noakes. In moving Amendment 8A, I remind your Lordships of the interesting debate on this matter in Committee on 1 February. I repeat that we are, in many fields, especially financial services, a leader in the formulation of international standards and best practice. The FCA says on its website:
“We contribute to and implement international standards, and supervise and enforce rules based on them in the UK”.
I believe that the UK’s influence in IOSCO, the recognised standard setter for securities regulation, has been enhanced now that we sit at the table in our own right, rather than as a member state of the EU. The same is surely true with regard to our influence within the International Association of Insurance Supervisors.
I support the new competitiveness and growth objective—although I think it should have been of equal importance with the regulators’ primary and operational objectives—but I continue to believe that it is rather curiously drafted. I am still not sure what the Government mean by
“aligning with relevant international standards”.
First, the word “relevant” is very subjective. We all know that there is often a lack of consistency as to what different people consider relevant. I already worry that the competitiveness and growth objective will be subjugated to the primary objectives, depending on which standards the regulators may choose to exempt them from the need to have regard to.
Secondly, surely the amendment is drafted in a way that gives too much weight to policies developed outside the UK, which are claimed by some to be international standards. Does my noble friend want to see a position where the PRA, for example, can ignore the secondary objective on the grounds that it is following international standards, where those standards are not core to the primary objective? International standards are a highly subjective concept and it is not at all desirable for the UK to have to adhere to everything that claims to be an international standard. The competitiveness and growth objective is already circumscribed by its status as a secondary objective. Using the PRA as an example, this means that it has only to,
“so far as reasonably possible, act in a way which … advances the competitiveness and growth objective”.
If the PRA considers that adherence to certain international standards is necessary, they are already covered by its primary objective. However, if an international standard is not necessary for the primary objective, why should such an international standard crowd out the competitiveness and growth objective?
Baroness Bowles of Berkhamsted (LD)
My Lords, I have two amendments in this group. Amendment 9 is similar to one I tabled in Committee and is intended to focus the secondary objective on the advancement of the UK economy through fair and efficient operation of financial markets.
It still concerns me that the Government’s wording can be interpreted as more about general profitability of financial services, rather than the positive nature of their operation on the economy. We got into a bit of a tangle about this in Committee when the Minister focused on how financial services made money out of clients. I hope the Minister can now appreciate the nuance and at least confirm that the primary intention of the secondary objective is benefit to the economy that is served by financial services, and not maximum income generation from financial services to the extent that it is of detriment to the economy.
A great deal of attention has gone into asking what regulatory issues have risked competitiveness. A key example is how the London market lost out in new insurance products when the regulator was too slow. Criticism has been levied about delays in SMCR approval of new staff. My Amendment 115 concerns an alarming example of harm to the economy and proposes a solution through a specific legislative amendment. It aims to fix a competitiveness and investment issue with listed closed-ended investment funds. As such, I declare my interests as both a director of the London Stock Exchange plc and a director of Valloop Holdings Ltd, which has potential interest in such listings.
For the last 14 months, a dire situation has been seriously affecting the UK economy and should have been resolved but has not. It has its origins in a face-value interpretation of an EU regulation that is part of the MiFID family, relating to how ongoing charges should be presented in collective investment schemes that invest in other funds and a desire to create a consistent cost disclosure framework in a somewhat inconsistent EU framework.
As part of reviewing what should be included in cost redisclosures, the FCA asked the Investment Association —the principal trade body for the asset management industry in the UK—to provide new guidance. That guidance now requires that when a fund holds shares in listed closed-ended investment funds—also known as investment trusts—it should aggregate with the investing fund’s own charges all the underlying running costs that are incurred within the investment trust, including the listing and corporate costs, in the same way as it would were it to hold units in an unlisted open-ended fund. The IA took this line because the investment trust is regarded as a collective investment undertaking, and the EU regulation refers to collective investment undertakings.
At first sight, the cost disclosure might look reasonable, but it ignores the nature of investment trusts, which have publicly traded shares with a price set by the market: an investment trust is essentially like any other publicly traded company from an investment perspective. If a fund invests in the ordinary shares of a listed commercial company, the internal costs of that commercial company do not have to be shown in aggregated charges. For both listed commercial companies and listed investment trust companies, everyday running costs are disclosed in accounts, reflected in profit and ultimately in the share price, which embodies investors’ assessment of the company, including its underlying costs. However, the IA guidance instead equates investment trusts with open-ended funds, requiring internal running costs incurred at the investee investment trust level to be aggregated as a cost, setting aside the fact that, unlike with units of open-ended funds, investors have already factored such changes into the price that they are prepared to pay for the shares of the investment. Thus, for example, directors’ fees of an investment trust aggregate as an ongoing charge of the investing fund; the directors’ fees of a commercial company that is similarly invested in do not have to be aggregated. Likewise, various other corporate costs receive dissimilar treatment.
Therefore, that is an unfairness, but why does it matter beyond being anti-competitive, as if that is not enough? It matters because those corporate costs being in effect almost duplicated and put under the headline of “ongoing charges” suddenly elevated the ongoing charges of the fund investing into the investment trust, sometimes to levels where they hit cost ceilings put in place by various pension funds and other collective investment funds, or simply made fund managers cringe when the headline of accumulated charges suddenly looked more expensive and people started to think that they were doing something wrong. Hence, there became a disincentive to invest in investment trusts to avoid these unexpected changes, questions about them or hitting cost ceilings. A great deal of investment choice follows the headline and not deeper analysis, which separates and explains the varying nature of costs.
To make the point again, an ordinary listed commercial company, such as SEGRO plc, which invests in property, might now be deemed investable while the exact same property investments with the exact same costs, held for example by the investment trust Tritax Big Box fund, might be deemed not investable because one does not have to have its corporate costs regarded as ongoing charges and the other does.
I do not think it is a coincidence that, since the new guidance, there has been no real asset IPO and just a couple of small equity IPOs of investment trusts. At a stroke, something that has at times been regarded as a jewel in the London funding ecosystem—an expanding sector of listed funds investing into long term illiquid alternative assets such as renewable energy and other infrastructure—has been abandoned.
I just gave an example of two companies investing in property, with no intention to impugn either, but there are some sectors of the economy where using an investment trust to raise funds is the only route to capital—notably for new and innovative business in the environmental and social sectors: businesses such as HydrogenOne, which is leading investment into UK’s alternative energy, directly linked with our net-zero commitments.
It is also the case that investment trust exposures are typically more diversified and real than exposures via commercial corporates, which investors appreciate but now cannot access as they have been dropped from portfolios. This is a real loss to the UK economy that has been going on for 14 months. We have all read the news about companies switching listing from London for valuation reasons—and that is another story—but here it is not switching, it is simply regulatory asphyxiation.
Both the FCA and the Investment Association know and understand the problem. The IA thinks it should be fixed and has publicly written about it to the FCA. On the face of it, given that inherited EU legislation is the mix, I think it is more up to government and the FCA to fix it than the IA, even though it came up with the guidance. In any event, you go up the power chain to fix a disaster. It is also worth noting that there is no actual legislative EU definition of collective investment undertaking, only ESMA guidance, from which the FCA could distance itself, if only for this specific purpose.
The Government have been informed of this issue and, while dreaming up ways to help more investment in the productive economy is important for the Chancellor, all he has to do here is stop this extinction event. It is not about undermining transparency; it is about understanding what is and is not like-for-like. There are those who have been getting around it in some EU countries by saying that for cost disclosure purposes, an investment trust is a company not a fund, but investment trusts are not mainstream in EU countries; they use other channels for investment, so the issue is not really pursued.
The UK situation now is that we have essentially just clarified our law using definitions originating in soon-to-be-discarded PRHPs and non-legislative EU guidance, front-running a wider-reaching FCA review and achieving nothing but harm. My amendment shows one way to fix it by amending the regulation so that all listed companies are treated the same for the assessment of accumulated ongoing charges. Investment trusts would then not be discriminated against by being improperly lumped together with open-ended funds whose value is not set through share price, nor by having a cost label attached, compared with competing commercial companies or funds in other countries, and the UK businesses reliant on the investment trust route could again raise the capital they need.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to speak to Amendments 10 and 112 in my name; I gratefully acknowledge the support of the noble Lord, Lord Sikka. This is a bit of a diverse group, but Amendment 10 in particular heads in a similar direction to Amendment 9 in the name of the noble Baroness, Lady Bowles of Berkhamsted—a direction that seeks to lead towards a financial sector that meets the needs of the real economy rather than swallowing up the scarce human and capital resources that could be used to far better effect than creating complex financial instruments that, when they go down, threaten to take the rest of us with them.
Had it not been for events between Committee and Report, I might have chosen to sign the noble Baroness’s amendment instead of tabling my Amendment 10, which states that Clause 24—the growth and competitiveness clause to which the noble Viscount, Lord Trenchard, referred—should not be deleted from the Bill. It mirrors exactly the amendment tabled in Committee by the noble Lord, Lord Sikka, signed then by myself. However, in the light of events, I thought it really important that we tackle the “growth at any cost” foundation that underlies Clause 24: “Growth is infinite; let’s chase as much growth as we can”—which is, of course, the ideology of the cancer cell.
In Committee, the noble Lord, Lord Sikka, said:
“The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection”.—[Official Report, 1/2/23; col. GC 242.]
This is a position that we both hold. However, it was clear in Committee that there was no support from the Front Benches, and the issue might have been allowed to lapse. But then there were events that highlighted the many dangers of chasing growth in the financial sector. After several weekends of financial panic, emergency meetings and sudden bank rescues, parts of the real economy—in particular, the digital sector—were left highly uncertain of their financing. I am referring, of course, to the collapse and rescue of Silicon Valley Bank, Credit Suisse and Signature Bank, the first and last of those being mid-sized US banks and the middle one being a former European banking colossus.
These US events came after President Trump watered down the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act, in 2018, reducing the supervisory oversight of banks with assets between $50 billion and $250 billion; the noble Viscount, Lord Trenchard, referred to this watering down in his introduction to this group. However, just because someone else is doing the wrong thing and reducing controls and protections, it does not mean that we should chase after and try to compete with them. As David Enrich from the New York Times put it, this was a
“crisis that has revealed the extent to which the banking industry and other opponents of government oversight have chipped away at the robust regulatory protections that were erected after the 2008 financial meltdown”.
What happened is that competitiveness had been advanced while security was lost and risk increased. A great many people had sleepless weekends as a result of that.
What has also become clear since Committee is how Credit Suisse clients withdrew nearly $69 billion from the bank in the first quarter of this year before its fire sale rescue by UBS in March. Of course, Credit Suisse had been hit by the insolvency of Greensill Capital—something that is rather close to home in your Lordships’ House—and the collapse of family office of Archegos Capital Management, which caused huge trading losses. However, the end came very quickly.
Clearly, in the digital age which SVB helped to fund, financial events can occur at a speed that was unimaginable even in 2007-08. I wonder whether, when wrapping up, any of the Front Benches are prepared to say that they believe that regulators today are truly prepared for the world in which they operate, a world that also faces the risks of other substantial shocks, as we have seen highlighted today with the Russian attack on the Kakhovka dam, geopolitical risks and, of course, environmental risks, since as we speak, Canada is essentially ablaze. That will undoubtably have enormous impacts on the insurance sector.
The IMF’s Global Financial Stability Report from April reflects on the challenges posed by the interaction between tighter monetary and financial conditions, and the build-up of vulnerabilities since the global financial crash. It says that:
“The emergence of stress in financial markets complicates the task of central banks at a time when inflationary pressures are proving to be more persistent than anticipated”—
a statement which is particularly true within the UK. There are stresses from the shadow banking sector, the effect of geopolitical tensions on financial fragmentation, the risk of potential capital flow reversals, disruption of cross-border payments, impacts on bank funding costs, profitability and credit provision, and more limited opportunities for international risk diversification. The IMF concludes that there is a need to “Strengthen financial oversight”. This is all referring to events since we were in Committee. That is my case for Amendment 10.
My Amendment 112 is much more modest and addresses in a different way a point that I raised in Committee. I discussed the growing body of literature around too much finance, but in this amendment I am not asking the Government to agree with me on that; I am asking for them to prepare a report to consider the ideal size of the financial sector. What is the Goldilocks range for a financial sector, where we can afford the risks and supply the human resources and it serves the needs of the real economy?
As the House has heard before, I approach this question in the light of the Sheffield Political Economy Research Institute’s study from 2018, which found that the UK had lost £4.5 trillion over two decades because of its oversized financial sector—£67,500 per person. To bring this right up to the present day, in a study published last week, the global hiring website Climatebase has posted more than 46,000 jobs from over 1,500 organisations in the past two years. Of these, data science and analytics were the hardest to fill, taking an average of nearly four months to fill posts compared with three months for engineering roles.
This brings me back to Amendment 10, which would delete Clause 24. I did not have a chance to speak in Committee, but I suggest that Clause 24 as it stands is internally contradictory. It gives the FCA the duty of facilitating the international competitiveness and medium to long-term growth of the economy of the UK,
“including in particular the financial services sector”.
This clause talks of growing the economy of the UK and growing the financial sector. I posit that those two objectives are mutually contradictory. I refer to a Bank for International Settlements working paper from 2018, Why Does Financial Sector Growth Crowd Out Real Economic Growth? It is actually impossible to promote growth both in the real economy and in the financial sector. It comes back to—probably the easiest part of this to understand—the need to think about human resources. We all know the labour shortages and skills shortages that so many sectors of the UK economy are suffering, and we know that many skills are going into the financial sector when they could be going into other areas.
Tomorrow, your Lordships’ House will debate the report of our Science and Technology Committee titled “Science and Technology Superpower”: More Than a Slogan? I am not asking any Front-Benchers or the Government to agree with the claims that I am making here; what Amendment 112 asks for is a report to look at the evidence, so that the Government and the country can make considered judgments about what size financial sector we both need and can afford.
Lord Eatwell (Lab)
My Lords, I will address the amendments proposed by the noble Viscount, Lord Trenchard. In some way, they are part of the whole privileging of the competitiveness objective, but I do not want to talk about that. I will talk specifically about his concern about aligning with international standards.
I suggest that the success of the development of international financial markets since the 1970s has been predicated entirely on the development of an international regulatory system. It was first stimulated by the Herstatt Bank crisis in the summer of 1974, which led to the establishment of the Basel committee on settlement risk. Since then, we have developed a whole international financial infrastructure of regulation—the Basel committees, IOSCO and, most importantly today, the Financial Stability Board. That, by the way, was a British idea that has greatly aided the stabilising of international financial markets.
These committees, as the noble Viscount, Lord Trenchard, pointed out, are not part of any form of international law or treaty. They are what is known in the trade as “soft law”. They are laws that countries agree it is in their mutual benefit to align with, and failing to align is against the benefit of individual countries as well as of the system as a whole. It has been the judgment of His Majesty’s Government that it is in the best interests of the United Kingdom to align with international standards.
But there are other international standards with which we align. Take the Paris-based Financial Action Task Force. Would the noble Viscount, Lord Trenchard, suggest that we do not align with the international anti-money laundering police? It is essential that we agree to align with this framework of international financial regulation, which we have been such an important element in creating.
Viscount Trenchard (Con)
My Lords, I am grateful to the noble Lord for giving way, but I want to correct him for criticising me for opposing all international standards. The ones he has chosen to mention are not ones that I objected to specifically. I was just saying that in general international standards are not defined.
Lord Eatwell (Lab)
I suggest to the noble Viscount that, in fact, the whole corpus of international soft law on finance is generally known in the trade as the international standards, and those who work in the regulatory community would immediately relate to the proposals of those particular institutions. As the noble Lord pointed out, occasionally Basel standards have not been followed. This is true in the United States, where only international competitive banks follow Basel committee standards. The US has learned painful lessons over the last year or so with the collapse of Silicon Valley Bank and others that did not follow Basel standards. The relaxation of standards was one of the elements that led to that particular collapse. Alignment with international standards and the institutions which—I say again—Britain has done so much to help develop is an important part of the maintenance of financial stability in this country.
Lord Davies of Brixton (Lab)
My Lords, I will make an argument that the idea that greater competition is a public benefit is simply wrong, if you think it is inevitable. Now, I spoke about this at length in Grand Committee a couple of weeks ago, and the Minister had the benefit of my views on the matter at the time, so I am not going to repeat them at length; one or two other Members present did as well.
Lord Livermore (Lab)
My Lords, we do not support this group of amendments. We strongly support the inclusion in this Bill of the new secondary objective for the regulators on international competitiveness and economic growth. Its position as secondary in the hierarchy of regulators’ objectives is of course key. As a secondary objective, economic growth and international competitiveness will remain subordinate to the regulators’ primary objectives of preserving financial stability and protecting consumers. The UK’s reputation and success as a leading international financial centre depend on high standards of regulation, and a stable and independent regulatory regime. These high regulatory standards are a key strength of the UK system and its global competitiveness, so we would not support any moves towards a regulatory race to the bottom. That would negatively impact international confidence in the UK, making the UK less attractive to international businesses and investment.
The UK’s financial services industry plays a vital role in boosting economic growth and delivering skilled jobs in every part of the UK. Almost 2.5 million people are employed in financial services, with two-thirds of those jobs based outside London, and the sector contributes more than £170 billion a year to GDP—8.3% of all economic output.
The City of London is one of only two global financial capitals and is at the very heart of the international monetary system. This is an enviable position, and it is vital that we support the sector across the UK to retain this competitiveness on the world stage post Brexit so that the UK can continue to be one of the world’s premier global financial centres. It is therefore crucial that the UK’s regulatory framework plays its part in supporting this positive contribution to the UK economy and society. To do this, it must enhance competitiveness and support the industry in trading with the world, including in new markets. It must attract investment into the UK and promote innovation and consumer choice.
A secondary growth and international competitiveness objective is a simple and internationally proven way to achieve this, helping to ensure that the UK remains a leading global financial centre by empowering regulators to make the UK a better place to do business and ensuring a more attractive market for international providers and consumers of financial services. The UK is, of course, in competition with other international financial centres, and many of them, including Australia, Hong Kong, Japan, Malaysia, Singapore, the United States and the European Union, have introduced a similar objective, which they balance against financial stability and consumer protection.
In future groups we will come to topics such as investment in high-growth firms, but it is precisely by having this secondary objective on competitiveness and growth that we will create an ecosystem that supports investment in new technologies, provides much-needed economic growth and secures new jobs.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the new secondary growth and competitiveness objectives in the Bill will ensure that the regulators can act to facilitate medium to long-term growth and competitiveness for the first time, but a focus on competitiveness and long-term growth is not new. When the UK was part of the European Union and financial services legislation was negotiated in Brussels, UK Ministers went to great efforts to ensure that EU regulations appropriately considered the impact that regulation could have on economic growth and on the competitiveness of our financial services sector.
Now that we have left the EU, and as the regulators take on responsibility for setting new rules as we repeal retained EU law, it is right that their objectives reflect the financial services sector’s critical role in supporting the wider economy. We must ensure that growth and competitiveness can continue to be properly considered within a robust regulatory framework. As the noble Lord opposite said, a secondary competitiveness objective strikes the right balance. It ensures that the regulators have due regard to growth and competitiveness while maintaining their primary focus on their existing objectives. That is why the Government strongly reject Amendment 10, tabled by the noble Baroness, Lady Bennett of Manor Castle, which seeks to remove the secondary objectives from the Bill.
Turning to Amendment 9 from the noble Baroness, Lady Bowles of Berkhamsted, the Government agree that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The current drafting of the Bill seeks to reflect that but also recognises that the scope of the regulators’ responsibilities relates to the markets they regulate—the financial services sector—so it is growth of the wider economy and of the financial services sector, but not at the expense of the wider economy. I hope I can reassure her on that point.
On Amendment 115, also from the noble Baroness, Lady Bowles, as noble Lords know, the Bill repeals retained EU law in financial services, including the MiFID framework. Detailed firm-facing requirements, such as those that this amendment seeks to amend, are likely to become the responsibility of the FCA. As such, it will be for the FCA to determine whether such rules are appropriate. When doing so, the FCA will have to consider whether rules are in line with its statutory objectives, including the new secondary growth and competitiveness objective.
Parliament will be able to scrutinise any rules that the regulators make, including pressing them on the effectiveness of their rules, and how they deliver against their objectives. Industry will also be able to make representations to the regulators where they feel that their rules are not having their intended effect or are placing disproportionate burdens on firms. I hope the noble Baroness is therefore reassured that the appropriate mechanisms are in place for considering the issues that she has raised via that amendment.
Baroness Bowles of Berkhamsted (LD)
I understand that there are and will be mechanisms in place, but the point that I was trying to make—and the reason that I expounded at length on how we got into this mess—is that it is urgent action that is necessary. This is not something that waits for this great wheel of change that we are bringing in through this Bill to come along. This is something that should be on people’s desks tomorrow; it should have been on people’s desks a year ago. There will not be ongoing investments trusts if it is not fixed now.
Baroness Penn (Con)
I understand the case that the noble Baroness makes, but it is not for an amendment to this Bill but for regulator rules to address the issue that she raises.
I turn to Amendments 8A and 9A from my noble friend Lord Trenchard, which seek to remove the requirement for the FCA and the PRA to align with relevant international standards when facilitating the new secondary objectives and instead have regard to these standards. As we have heard, international standards are set by standard setting bodies, such as the Basel Committee on Banking Supervision. These standards are typically endorsed at political level through international fora such as the G7 and G20 but, given the need to enable implementation across multiple jurisdictions, they may not be specifically calibrated to the law or market of individual members. It is then for national Governments and regulators to decide how best to implement these standards in their jurisdictions. This includes considering which international standards are pertinent to the regulatory activity being undertaken and are therefore relevant.
Since we left the EU, the regulators have been generally responsible for making the judgment on how best to align with relevant standards when making detailed rules that apply to firms. This approach was taken in the Financial Services Act 2021, in relation to the UK’s approach to the implementation of Basel standards for bank regulation and the FCA’s implementation of the UK’s investment firms prudential regime. It was also reflected in the overarching approach set out in the two consultations as part of the future regulatory framework review.
Part of the regulators’ judgment involves considering how best to advance their statutory objectives. Following this Bill, this will include the new secondary competitiveness and growth objectives. The current drafting therefore provides sufficient flexibility for the regulators to tailor international standards appropriately to UK markets to facilitate growth and international competitiveness, while demonstrating the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards—which, as we have heard, the UK has often played a key part in developing. The Government consider that this drafting helps maintain the UK’s reputation as a global financial centre.
I turn finally to Amendment 112 from the noble Baroness, Lady Bennett. The Government consider the financial services sector to be of vital importance to the UK economy. The latest figures from industry reveal that financial and related professional services employ approximately 2.5 million people across the UK, with around two-thirds of those jobs being outside London. Together, these jobs account for an estimated 12% of the UK’s economy.
The financial services sector also makes a significant tax contribution, which amounted to more than £75 billion in 2019-20—more than a tenth of total UK tax receipts—and helps fund vital public services. It is not for the Government to determine the optimum size of the UK financial services sector, but in many of the areas that the noble Baroness calls for reporting on, the information would be largely duplicative of work already published by the Government, public sector bodies or other industry groups.
For example, the State of the Sector report, which was co-authored by the City of London Corporation and first published last year, covers talent, innovation, the wider financial services ecosystem, and international developments and comparisons. The Government will publish a second iteration of the report later this year. The Financial Stability Report—
Baroness Bennett of Manor Castle (GP)
The Minister said that was a City of London report, but then said it was a government report. Surely the City of London Corporation is not an independent source on the financial sector—it is the financial sector.
Baroness Penn (Con)
It is a joint report from the City of London and the Government that provides analysis of a number of the areas that the noble Baroness covers in her amendment.
I was just moving on to the Financial Stability Report, which is published twice a year by the Bank of England’s Financial Policy Committee, setting out the committee’s latest view on the stability of the UK financial system and what the committee is doing to remove or reduce any risks to it and make recommendations to relevant bodies to address systemic risks.
I hope that noble Lords will agree, although I am sure that not all do, that a well-regulated and internationally competitive financial services sector is a public good for the UK and something that we should continue to support. I therefore hope that my noble friend Lord Trenchard will withdraw his amendment and that other noble Lords will not move theirs when they are reached.
Viscount Trenchard (Con)
My Lords, I thank all noble Lords who have taken part in this short debate. The noble Baroness, Lady Bowles of Berkhamsted, talked about the senior managers and certification regime. Does she know that the Japanese banks have given up sending senior directors to London because they cannot get authorised, so they have to promote people who are already in London? All three main megabanks are now doing that because they are so exasperated with the difficulty of getting their senior officers approved by the FCA.
I entirely agree with what the noble Baroness said about the problem of the uneven playing field between listed companies and listed investment trusts. That is an urgent problem that needs to be addressed now. The FCA, with its current culture, is just not responsive to that type of situation. Everybody is aware of that, and it is why some of us are pushing so hard for a more determined effort to change things. I think that if the competitiveness and growth objective had been given equal status with the stability objectives and the other consumer protection objectives, we might have got somewhere nearer that, but I know that not all noble Lords agree.
The noble Baroness, Lady Bennett of Manor Castle, and the noble Lord, Lord Davies of Brixton, supported Amendment 10 to leave out the competitiveness objective and Amendment 112 to reduce the size of the financial services sector. If you leave out the competitiveness objective, you will not have much of a financial services sector, so we would not need both amendments.
The noble Lord, Lord Eatwell, always speaks with great authority. We served together on the original Joint Committee on Financial Services and Markets under the excellent chairmanship of the noble Lord, Lord Burns, in 1999, and it was hugely successful. I take the noble Lord’s point, but I still do not think that we should be bound to align to an international standard just because it is a Basel committee standard; we should have to have regard to it. I say to the noble Lord, Lord Livermore, that some of the other jurisdictions that he mentioned do not subordinate their competitiveness objective to the main stability objectives.
I am grateful for my noble friend’s reassurance and beg leave to withdraw my amendment.
Financial Services and Markets Bill
Thursday 8th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-II Second marshalled list for Report - (6 Jun 2023)
13:06 - Division on Amendment 15 - Ayes: 193 / Noes: 159 - Amendment 15 agreed.
13:19 - Division on Amendment 18 - Ayes: 191 / Noes: 154 - Amendment 18 agreed.
Baroness Penn
“Competitiveness and growth objective: reporting requirements
(1) Each regulator must make two reports to the Treasury on how it has complied with its duty to advance the competitiveness and growth objective.(2) The reports prepared by each regulator under subsection (1) must in particular explain—(a) the action taken by the regulator to ensure that the competitiveness and growth objective is embedded in its operations, processes and decision-making, and(b) how any rules and guidance that the regulator has made advance that objective.(3) The first report under this section must be made before the end of 12 months beginning with the first day on which section 24 of this Act comes into force, and must relate to that period.(4) The second report under this section must be made before the end of 24 months beginning with the first day on which section 24 of this Act comes into force, and must relate to the period beginning with the day on which the first report is published.(5) The Treasury must lay a copy of each report prepared under this section before Parliament.(6) Each regulator must publish its reports prepared under this section in such manner as it thinks fit.(7) In this section—(a) “regulator” means the FCA and the PRA;(b) references to the competitiveness and growth objective, and the duty to advance that objective, are—(i) in relation to the FCA, references to its objective in section 1EB of FSMA 2000 and to its duty to advance that objective under section 1B(4A) of that Act, and(ii) in relation to the PRA, references to its objective in section 2H(1B) of FSMA 2000 and to its duty to advance that objective under section 2H(1)(b) of that Act.”Member’s explanatory statement
This amendment would insert a new Clause to ensure that the FCA and the PRA, in addition to their annual reports, each provide for two consecutive years a report on the new competitiveness and growth objective, as inserted into the Financial Services and Markets Act 2000 by Clause 24 of the Bill.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, as your Lordships know, the Bill delivers the outcomes of the future regulatory framework, or FRF, review. It repeals hundreds of pieces of retained EU law relating to financial services and, as we have discussed, will give the regulators significant new rule-making responsibilities. The Government have been clear that these increased responsibilities must be balanced with clear accountability, appropriate democratic input and transparent oversight. The Bill therefore introduces substantial enhancements to the scrutiny and accountability framework for the regulators.
Following Grand Committee, the Government have brought forward a series of amendments which, taken together, seek to improve the Bill through further formalising the role of Parliamentary accountability, supporting Parliament through independent analysis and scrutiny, and increasing reporting and transparency to drive overall accountability. The group we are now debating covers proposals aimed at increasing reporting and transparency to drive overall accountability. I look forward to discussing the Government’s other amendments on accountability later today.
There has been significant interest in ensuring sufficient reporting, in particular of how the FCA and PRA are operationalising and advancing their new secondary competitiveness and growth objectives. The regulators are required to publish annual reports setting out how they have advanced their objectives, which are laid before Parliament. Clause 26 ensures that, in future, these reports must also set out how they have advanced the new secondary objectives.
Clause 37, introduced following the debate in Commons Committee, enables the Treasury to direct the FCA and PRA to report on performance where that is necessary for the scrutiny of their functions. To further support transparency, the Government published a call for proposals on 9 May, seeking views on what additional metrics the regulators should publish to support scrutiny of their work advancing their new objectives. This closes on 4 July.
The Government have been clear that they expect there will be a step change in the regulators’ approach to growth and competitiveness following the introduction of the new objectives, while maintaining high regulatory standards. It will therefore be important to have detailed information available to scrutinise how the regulators embed their new objectives into their day-to-day functions.
The Government have therefore tabled Amendment 11, which will require the FCA and the PRA to produce two reports within 12 and 24 months of the new objectives coming into force. These reports will set out how the new objectives have been embedded in their operations, and how they have been advanced. Once the new objectives have been embedded, it is appropriate that the regulators report on them in the same way as their other objectives, through their annual reports.
The Government have also heard the calls for further transparency to drive overall accountability in other areas of the regulators’ work. Clauses 27, 46 and Schedule 7 require the regulators to publish statements of policy on how they will review their rules. The Government’s response to the November 2021 FRF review consultation set out the regulators’ commitment to providing clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules in their rule review framework.
Reflecting representations made during my engagement with noble Lords between Grand Committee and Report, the Government have tabled Amendments 20, 52 and 56, which strengthen this commitment. The amendments will place a statutory requirement on the regulators to provide a clear process for stakeholders, including the statutory panels, to make representations in relation to rules and a statutory requirement to set out how they will respond.
I hope that noble Lords will support these amendments, which seek to provide Parliament, the Government and stakeholders with the relevant information to effectively scrutinise the regulators’ performance and drive overall accountability. I therefore beg to move Amendment 11, and I intend to move the remaining government amendments in this group when they are reached.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in the second day of Report. I declare my financial services interests as set out in the register. I thank my noble friend the Minister and all the Treasury officials for their engagement during and particularly after Committee with the issues in this group of amendments.
I will speak to Amendments 12, 19, 40, 41 and 92 in my name. Noble Lords with an eagle eye on the Marshalled List will note that there is more than a similarity between the amendments I tabled in Committee and in this group, and the government amendments. I thank the Government sincerely for taking on board not just the issues but also my wording.
Ultimately, as the Minister said, this is one of the most significant changes to financial services regulation in a generation. It is important that, in structuring the role of the regulator, we have at this stage the right level of scrutiny and the right requirements for the regulators to provide the information required at the right time to undertake that scrutiny.
The arrival of the international competitiveness objective is a positive thing within the Bill. These amendments give scrutiny the right opportunity to see how that objective is operationalised. Does the Minister agree that it is important to look at every element of information and the timeliness of all the elements being given to both financial services regulators to enable the right level of scrutiny to take place? To that extent, I ask her to comment particularly on Amendment 92, alongside my other amendments, because this seems like no more than the base level of detail that one would want to be able to form that crucial scrutiny function.
Having said that, I am incredibly grateful to the Minister, the Government and all the officials for taking on board so many of the issues and the wording from Committee, and bringing them forward in this group.
Lord Forsyth of Drumlean (Con)
My Lords, I find myself in the very odd position of having to say that the Government have handled Committee stage consideration of the Bill brilliantly. The Minister listened to a lot of quite robust criticism of the Bill, some of it from me, on the issue of accountability. It is fair to say that, across all sides of the Committee, there was a feeling that it was essential that there be proper accountability and scrutiny, given that we are, in effect, giving the regulators all our financial services legislation. She spent a great deal of time talking to all noble Lords in Committee and listening to those concerns. I therefore support the government amendments and thank her and her colleagues for the brilliant way in which they responded to what was a very robust Committee.
Lord Eatwell (Lab)
My Lords, there is a certain amount of confusion about the competitiveness objective and it is important to clarify it in discussion on Report. To illustrate this point, we have to understand that London is a rather peculiar financial centre, because it has a very limited hinterland of domestic savings. It is unlike the United States, where New York has a huge hinterland of domestic savings. It is therefore necessary for London to attract savings and funding from around the world, and it does that brilliantly well.
An important component of that is that London is seen as a well-regulated and efficiently regulated centre. The primary objectives set out in FSMA of maintaining market confidence, financial stability, public awareness, protection of consumers and the reduction of financial crimes are competitiveness goals in and of themselves. They make London more competitive and are a crucial component of the success of London at attracting funds from around the world.
The competitiveness objective that was introduced as a subsidiary objective is rather different, because there competitiveness means being allowed to take more risk. As everyone knows, in financial affairs the balance of risk and return is one of the key elements in making sensible decisions. This is true as much in regulation as it is in the operation of financial services business. It is particularly true in regulation when it applies to systemic risks, which only the regulator can understand and deal with.
It is therefore important that we do not overegg the competitiveness objective. It is important—it has introduced an important element in discussing the relationship between risk and return—but we should recognise that the primary objectives are the key to London’s competitiveness as a financial centre.
Lord Vaux of Harrowden (CB)
My Lords, I will comment briefly on government Amendment 11. The competitiveness and growth objective is a long-term, ongoing objective and, with the best will in the world, it is highly unlikely that we will see any discernible change in measurable competitiveness or growth in just two years. The objective does not end in two years and yet the amendment put forward by the Government has only two years’ worth of reporting.
As usual, the noble Lord, Lord Holmes of Richmond, has put together an elegant solution in Amendment 12, which would create an ongoing annual reporting requirement, as well as being a bit more specific about what should be included within the reports. I understand from the Minister’s earlier speech that she expects this to be covered off in the normal annual reporting thereafter, and I think we can probably live with that.
I will add to the comments made by noble Lord, Lord Eatwell, with this caveat: I support the competitiveness and growth objective, but only as a secondary objective. The primary objective of stability must remain paramount. Can the Minister confirm that, as part of the reporting on the competitiveness and growth objective that is expected, the regulators will consider and report on the impact it is having on the primary stability objective? The two are not unconnected, as we have just heard, and it is really important that when we report on one, we also report on its impact on the other.
Viscount Trenchard (Con)
My Lords, I declare my interests as a director of two investment companies, as stated in the register. I agree to some extent with what the noble Lord, Lord Eatwell, said, but I am not sure I can agree that the United Kingdom’s financial markets are uniquely peculiar in any sense. It is true that we do not have such a large domestic hinterland as the United States, but compared with financial centres such as Switzerland and Singapore, we have a rather larger domestic hinterland. I do not think what he said is therefore so relevant as he perhaps believes.
Furthermore, I agree that our high standards and what used to be called “my word is my bond”, which was what I was taught on day one when I went to work for Kleinwort Benson in the City, are very relevant. We have always been proud, and rightly so, of the very high standards and honourable way, in the main, in which our financial institutions have conducted their business. Indeed, competitiveness of the market depends, to a degree, on maintaining those high standards. But competitiveness also depends on having clear, comprehensible and proportionate regulation, and in recent years our regulation has become too cumbersome, particularly after the FSA was split into two regulators. If you are a dual-regulated company, it is a nightmare to have to report much the same information but in different formats to the two regulators. This is why the time spent by executive committees of operating financial companies in the City is so greatly taken up by compliance, reporting and regulatory matters, rather than innovation and the development of new businesses to attract more international companies to do their business in London, thus providing more revenue for the Exchequer and more jobs for British people, and indeed for non-British people to come and work here.
I support the Government’s amendments to strengthen the reporting requirements of the regulators, and Amendments 40 and 41 tabled by my noble friend Lord Holmes of Richmond. I agree with those noble Lords who have thanked the Minister most sincerely for her response to concerns expressed across the House about accountability and scrutiny. However, the British Insurance Brokers’ Association has expressed concern that the Bill, as drafted at present, largely allows the regulators to decide how to fulfil the reporting requirements for the competitiveness and growth objective.
Clause 37 acts as a backstop that allows the Treasury to compel additional reporting. What assurances can the Minister give that the Government’s response to the ongoing consultation on the appropriate metrics for the regulators to publish will lead to concrete changes to which metrics are published, given that the Bill will have been passed by the time the Government respond to the consultation? Given that it will not be possible to include any details of specific metrics or how the Treasury will exercise its powers in Clause 37 in primary legislation, how can the Government ensure that the consultation will lead to a sufficient challenge to the regulators, allaying concerns about them marking their own homework in their reporting? Will the Minister also give assurances that the Government’s response to the consultation will reflect the parliamentary debate in this area, where noble Lords have consistently stressed the need for extensive metrics to be published by the regulators with regard to the new objectives?
Lord Davies of Brixton (Lab)
My Lords, I do not want to run the risk of repeating myself, but I have made plain in previous debates my concern about the inclusion of the competitiveness objective in this legislation. Just to be clear, I think it has no place, but I welcome these provisions that there should be a report on the competitiveness objective. My concern is that the wording does not get to the heart of the problem that I believe exists, which is the interaction between the competitiveness objective and the other objectives. My reading of the way this is worded is that the report just has to talk about the competitiveness objective and does not have to say how it affected the other objectives. Maybe the Minister in her reply could allay my concerns and make it clear that the regulatory bodies are required to look across the whole gamut of their obligations when reporting on the competitiveness objective.
Lord Ashcombe (Con)
My Lords, I remind the House of my interest as an employee of Marsh Ltd, the insurance broker. I offer my support to the amendments in this group, so thoughtfully proposed by my noble friend Lord Holmes of Richmond. My noble friend the Minister has indeed made improvements since Grand Committee, and for that I thank her, but I wonder whether the Government have gone quite far enough. I particularly thank the Minister for the generous amount of time she spent with me the other evening.
My noble friend the Minister’s amendment proposes two reports, 12 months apart, as has been mentioned, but I believe that it is important that reports from the regulators should become an annual occurrence concerning the competitiveness and growth objectives. The financial sector of the United Kingdom is a major driver of revenue for the country and we must ensure consistency over time, not just the immediate future. In turn, this suggests the need for consistent metrics on which to report, allowing for the proper comparisons.
Amendment 19 concerns the principle of proportionality, recognising that not all financial services are the same. Again, I will look at the insurance market in particular, but I suspect there are similarities in other financial lines. I am all for keeping individual retail and small business customers safe when working with insurance companies, but there are significant differences to be found between them, users of the London wholesale insurance market—which is used by knowledgeable buyers, using one of many potential advisers—and captive insurance entities. Smaller customers need a level of protection not required by either of these other two groups.
In the debate on this amendment, I wish to refer particularly to captive insurance companies. Captives are wholly owned subsidiaries set up to provide risk mitigation services—insurance—for their parent company and/or related entities. The parent is inevitably a sophisticated entity, almost certainly hiring advisers. They should require a very different approach from the retail customer.
There currently seems to be a one-size-fits-all approach by the regulators when reviewing insurance companies that does not take into account the nature of the purchaser. This is not only time consuming but costly in comparison with other overseas regimes. Captives provide low risk to the financial system and the buyer of their services requires a significantly different level of regulation from an insurance company trading with individuals. They are fundamentally different.
There is no captive company authorised in the UK and even those of our major companies, including UK public bodies, are located in overseas jurisdictions. The captive insurance business generates in excess of $50 billion annually, and here lies a significant opportunity for growth in the insurance sector which, should the regulator alter its stance and act with proportionality, could, as an example, add significant additional capital into the country.
Amendments 40 and 41 refer to the requirements to publish regulatory performance on authorised firms and new authorisations. The Government certainly recognise in Clause 37 the need to improve the regulatory culture, but we need more teeth in terms of reporting metrics so it becomes standard practice within the regulators. This culture needs to become ingrained.
The metrics being proposed in Amendment 40 are granular concerning timing and would bring some needed haste to the system. In business, time is often of the essence and being held up disproportionately by a UK regulator, as opposed those in other jurisdictions, acts as a deterrent to trade in this country. The metrics being proposed in Amendment 41 link together to give a consistent window into the activities of the regulators. With quarterly reporting it will be possible to gain some comparative statistics that will tell a story.
Lastly, Amendment 92 concerns determination of application. London remains one of the world centres of insurance and we must do all we can to preserve its status, but there are for sure a number of other locations that can attract capital more easily and so challenge it. Unfortunately, regulatory burden is regularly raised as an issue damaging London’s ability to attract additional capital and support the market.
Concerns have been raised about the overall performance of the regulators in terms of timing, with authorisations and approvals taking longer they should. It is recognised that they are falling behind their KPIs. Insurance companies here have experienced delays in case handler assignment, which is the beginning of a domino effect. In addition, concerns have been expressed over some of the questions asked and the appropriateness of the data being requested, leading to additional time and expense. The regulators need to streamline their activities by being relevant.
These amendments refer to a great extent to measures designed to bring some more accountability to the reporting by the regulators. I realise there is a consultation with the financial markets, but I believe that the measures being proposed are the bare minimum that should be required and included in the Bill. These sets of metrics will prevent the regulators deciding which of their own sets of data to publish. Certainly, from an insurance perspective, this will allow life to proceed way more freely. This will ensure transparency from the regulators, which is surely what is being strived for.
Baroness Kramer (LD)
My Lords, the amendments in this group fall essentially into two categories. Those that improve communication and representation to statutory panels are small but positive improvements and, although I remain of the view that these panels should be given proper independence, I am glad to see that at least there is some improvement in the regime.
The other amendments I view very differently, and I will pick up the issues raised by the noble Lords, Lord Vaux and Lord Davies of Brixton, that if the reporting requirements included a proper consideration of how the competitiveness and growth objectives as they became operational were also impacting on financial stability, systemic risk and consumer protection, I would find myself very much in favour of them. But actually I regard them as a sort of slightly disguised mechanism to enhance the status of the secondary objectives to something which I think the noble Lord, Lord Eatwell, described on Monday as “secondary plus”, or even “secondary plus plus”. I think that is exactly what these various amendments are intended to do.
This House knows well that I join Sir Paul Tucker, Sir John Vickers, pretty much every former Governor of the Bank of England and many others in regretting the introduction of these objectives because, for exactly the reason that others have said, they will incentivise and drive risky behaviour and we will come to rue that. So this further enhancement of these secondary objectives, very much driven by the industry—we heard from the noble Lord, Lord Ashcombe, how strong the feeling was that we try and get towards making these objectives either primary or close to primary—should be a warning to all of us. So I cannot give these amendments my support, although we are obviously not going to vote on them today. However, it is necessary that the House takes note of some degree of warning.
Lord Forsyth of Drumlean (Con)
My Lords, I realise that we are on Report, but I should have declared my interest as chairman of Secure Trust Bank. I understand that it is not enough to have done so in Committee; it needs to be done at each stage.
Lord Livermore (Lab)
My Lords, I will be very brief so as not to detain the House further. Much of the substance of these issues was debated in the previous group on Tuesday evening, when I said that we strongly support the inclusion in the Bill of the new secondary objective for the regulators of international competitiveness and economic growth.
While the introduction of this secondary objective is a positive step, it is also important to ensure that it is meaningfully considered in the regulators’ decision-making. One of the main ways of doing this is by introducing some proven accountability measures to require the regulators to report on their performance against the objective. We therefore welcome the government amendments in this group, which will provide for initial reports on implementation of the competitiveness and growth objective, as well as other provisions that seek to improve regulatory accountability.
Baroness Penn (Con)
My Lords, I thank all noble Lords for that constructive debate and I seek to engage only with the points that have been raised.
I agree with the noble Lord, Lord Eatwell, that high regulatory standards are a key to London’s and the UK’s competitiveness as a financial centre. That is why the growth and competitiveness objective is a secondary objective to the primary objectives already in existence. However, high regulatory standards are not the only contributor to the growth and competitiveness of our economy or the sector. The new secondary objective, therefore, has an important role to play.
To address specifically the concern expressed by the noble Lord, Lord Eatwell, on day one of Report—the noble Baroness, Lady Kramer, reflected on that again today—that the government amendments in this area somehow seek to elevate the secondary objective from its position within the hierarchy, that is not the case. These amendments reflect the fact that they are new objectives for the regulators and it is right that we have a focus on new objectives being added through the Bill to understand how they are being embedded into the operation of the regulators.
The noble Lords, Lord Vaux and Lord Davies of Brixton, asked how the reporting will take into account the fact that the objectives are secondary and how they will impact on the primary objectives. It is in the structure of the objectives that the growth and competitiveness objective can be delivered only in the context of achieving the primary objectives. That is built into the system. Each year, in addition to these two reports provided for in our amendment, there will be the annual report from the regulators looking at their delivery across all their objectives.
Several noble Lords asked whether having a report on this specific objective for just two years was the right approach. We think it strikes the balance between reflecting the new nature of these objectives and, over time, integrating them into the working of the regulators and reporting them in future annual reports. However, I point out to noble Lords that the Government have the power to specify certain matters to be addressed in those annual reports if we think it necessary in future. Under Clause 37, we also have the power to require further reporting on certain matters, so if the Government felt that further focus on the embedding of these new objectives was needed, there are powers in the Bill that would allow that to be drawn out.
My noble friends Lord Trenchard and Lord Ashcombe, and others, raised concerns about the need for specific metrics for reporting the regulators’ delivery against their objectives, as set out in my noble friend’s amendment. As noble Lords recognise, that is exactly the purpose of the Government’s current call for proposals. We do not think it is right to have the metrics in the Bill, because that would hinder the objectives that my noble friends are talking about, in terms of having the best possible set of metrics that can be adapted and updated to ensure that Parliament, industry and the Government get the information that they need on the regulators’ performance.
My noble friends Lord Holmes and Lord Ashcombe also drew attention to Amendment 92 in this group. I am aware that the speed and effectiveness with which the regulators process applications for authorisation remains an area of concern for both Parliament and industry, and the Government share those concerns. In December, the Economic Secretary to the Treasury wrote to the CEOs of the PRA and the FCA, setting out the importance of ensuring that the UK has world-leading levels of regulatory operational effectiveness. Publishing more and better data detailing the FCA and PRA’s performance is critical to meeting these aims. That is why, in their reply to the Economic Secretary’s letter, both CEOs committed to publishing more detailed performance data in relation to authorisation processes on a quarterly basis.
On 19 May, both the FCA and the PRA published their first set of enhanced quarterly metrics relating to their authorisations performance, including the average time taken to process applications. The reports demonstrate that the regulators, particularly the FCA, are making progress towards meeting service-level targets, while recognising that there are further improvements to be made on some measures. The Government will continue to monitor this data to assess performance and discuss continuing efforts to improve operational efficiency with the regulators.
I am glad to have heard the general support for the Government’s amendments in this group. As my noble friend Lord Holmes said, we drew heavy inspiration from his contributions in Committee, and those of other noble Lords.
Lord Holmes of Richmond
“Financial Inclusion Objective for the FCA
(1) FSMA 2000 is amended as follows.(2) In section 1B (FCA’s general duties), after subsection (4A) insert—“(4B) When discharging its general functions in the way mentioned in subsection (1) the FCA must, so far as reasonably possible, act in a way which, as a secondary objective, advances the financial inclusion objective (see section 1EC).”(3) After section 1EB insert— “1ECFinancial Inclusion ObjectiveThe financial inclusion objective is: facilitating as far as is practical, the inclusivity of the UK’s financial system.””
Lord Holmes of Richmond (Con)
My Lords, there are currently quite a few difficulties with the UK economy, but one that seldom gets the focus, attention and commentary that it requires is the lack of financial inclusion for so many people right across the United Kingdom. At its extreme, it is best summed up as: those who have the least are often forced to pay the most for financial services and products. However, it is a question not just for individuals but for micro and small businesses, which can find themselves effectively financially excluded.
Amendment 13 simply seeks to introduce a secondary objective for the FCA on financial inclusion. It would not in any sense fetter any of the other objectives, not least the primary objectives. It could operate effectively and efficiently within that current stream of objectives for the regulator.
Without in any sense seeking to pre-empt my noble friend when she comes to wind up, I think that she may well say that it is not the right approach to introduce a new objective for the financial service regulators without first undertaking a significant and serious consultation. That is a fair point. If she is unable to accept my Amendment 13, would she agree to take away the opportunity and possibility to launch the consultation into a secondary objective for our financial service regulators on financial inclusion? I beg to move.
Lord Davies of Brixton (Lab)
My Lords, my Amendment 14 proposes a new clause to the objectives, adding the principle of protecting the mental health of consumers. I set this out at some length in Committee, and I think it is worth repeating the point. I should perhaps say at the beginning that I support the other two amendments, although I prefer the one from my Front Bench. I would like to see an explicit statement that the concept of financial inclusion extends to people who have problems dealing with financial services because of problems with their mental health.
Financial services have to understand and recognise the nature and scale of the mental health problems faced by some people. They need to be placed under an explicit duty of care to their customers who suffer from these problems, and they should be required to take explicit additional steps to minimise the potential difficulties faced by those who have or are at risk of having mental health problems associated with their finances.
I am sure that all noble Lords accept the principle that financial regulation should pay regard to the problems faced by people who have problems with mental health. It goes almost without saying. The issue is not about the principle but about whether it should be referred to explicitly in this bit of the legislation. I think that it should, but I am willing to take small mercies if the Minister can make clear the explicit and implicit responsibilities on the regulators to undertake to provide this sort of support and explanation for people who have mental health problems.
The experience works both ways: financial problems lead to mental health problems, and people with mental health problems have difficulty in handling their finances. That is an established fact. I ask for general support for the principle and an indication that, one way or another, the legislation will provide these people with the support they require.
Baroness Chapman of Darlington (Lab)
My Lords, I thought it might be useful to speak at this point to introduce Amendment 18, the amendment in my name in this group. I have taken part in many discussions in this House on financial inclusion. It is to this House’s credit that such a keen interest is taken by Members on all sides on this topic. Financial exclusion is a priority concern for the Labour Party. It is often caused by the way that financial products are designed and marketed. Of course, poverty and the cost of living crisis plays a huge part in this: they mean that the poorest often pay more in fees for products, but there are even things like mobile phones not being available on a contract unless you have a bank account. We know that all these issues can make life more expensive for people who can least afford it.
Baroness Bennett of Manor Castle (GP)
My Lords, I have attached my name to Amendment 14 in the name of the noble Lord, Lord Davies of Brixton, who very powerfully introduced it. I associate myself with all his comments. Essentially, he was talking about reasonable adjustments for people with mental health conditions in dealing with the financial sector.
I will briefly address this consumer protection objective from the other side, which is that the financial sector should not make people ill. I am sure the Minister will recall the meeting we had a couple of months ago with mortgage prisoners. At that meeting, we heard some testimony about the impacts of how people had been trapped in the system and suffered enormously as a result.
I want to reflect on two things. The first is the figures that have come out since Committee and the fact that the head of UK Finance has labelled the UK the fraud capital of the world, with fraud last year estimated at £1.2 billion. That reflects the fact that very many people now approach any interaction with the financial sector with a sense of fear, asking, “Is this true?”, “Is this right?”, “Is this a proper email?” This is something that the financial sector needs to do more to address so that people are not suffering that stress and pressure.
The second thing is that I know some individuals who are somewhat older than me who find that there is an inability to walk into a branch and deal with an issue by having a person solving your problems face to face. People spend weeks and weeks trapped in cycles of emails and phone calls. No one can ever solve your problem and you never speak to the same person twice. That has serious impacts on people’s lives and well-being. We need to acknowledge that and say to the banks that this is not acceptable and not good enough.
On the financial inclusion amendments, I have spoken about this at some length so I will not go over the same ground. However, it is clear, in all the amendments in this group, that the financial sector is not meeting the needs of our society. As a Parliament, we need to ensure we do more to make sure that it does.
Lord Eatwell (Lab)
My Lords, I support Amendment 18 in the name of my noble friend Lady Chapman, while also recognising the contribution made in the amendments tabled by the noble Lord, Lord Holmes, and my noble friend Lord Davies.
This is an extremely urgent matter because between 6 million and 7 million of our fellow citizens conduct all their financial affairs in cash. Cash is becoming increasingly unacceptable in a whole series of financial transactions that are conducted by electronic means. This means that cash is ceasing to be money, because money is something which is generally accepted in payment of a debt. If you cannot use cash to buy things, it is no longer money.
It is therefore necessary for both the Bank of England and the Treasury to consider making available to all citizens in this country a means of electronic payment. That is a big challenge, but it is urgent because we are all aware that, over the next decade, virtually everything will be entirely electronic and cash will be unacceptable in most transactions. My noble friend Lady Chapman has hit the nail right on the head by saying that this is a consumer protection objective. That 10% of our fellow citizens needs to be protected by financial inclusion in this way. This is an urgent matter which should not be postponed.
Baroness Kramer (LD)
My Lords, in speaking to this group I am channelling my colleague, my noble friend Lady Tyler of Enfield, who is unwell and, to her distress, cannot be here. I will focus on Amendment 18, which she has signed, which would require the FCA to have regard to financial inclusion within the consumer protection objective. My noble friend Lady Tyler chaired the Select Committee on Financial Exclusion in 2017 and this was a cornerstone recommendation. A further Lords review in 2020 came to the same conclusion, as did the Treasury Select Committee in 2022.
My noble friend Lady Tyler made a powerful speech in Committee so I will not repeat the detail, but I will cite the briefing I have received from Fair4All Finance, which finds that more than 17 million people—I previously used the number the noble Lord, Lord Eatwell, used of between 6 million and 7 million people who are under stress for this—in the UK are in financially vulnerable circumstances, with access to credit being increasingly difficult. We will discuss access to cash later.
Endless years of discussion on this topic have failed to significantly move the dial. Basic bank accounts are a little improved but still limited. The hopes for credit unions or fintech solutions have faded. Frankly, nothing will change unless the FCA puts its shoulder to the wheel. Amendment 18, if noble Lords look at it in detail, is not the introduction of a new objective; it is a clarification of the consumer objective through a “have regard” duty. In that way, it is different from the amendment proposed by the noble Lord, Lord Holmes—which I do not object to, but the Government have frequently said that we cannot have additional objectives. This is not an additional objective; it is clarification and emphasis of a key aspect of an objective.
Amendment 18 does not ask the FCA to step into territory which the Government have said is theirs—to close the gap on financial inclusion—but to use powers within its existing scope, which it has shown us it will not do without this emphasis from Parliament. I very much support Amendment 18 and consequently hope that the noble Baroness, Lady Chapman, will ensure that it is tested in the House if the Government do not accept it—although government acceptance is of course the preferred route for us all.
Baroness Penn (Con)
My Lords, the Government are committed to ensuring that people, regardless of their background or income, have access to useful and affordable financial services and products. We work closely with the FCA in pursuit of that goal.
The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The FCA’s objectives are at the very core of its work, and it is its statutory remit to advance those objectives. While I therefore commend the intention behind Amendments 13 and 18, the FCA’s objectives should not be changed lightly and without detailed consultation, given the potential for unintended consequences for the way financial services are regulated in the UK.
Noble Lords will be aware that the new secondary growth and competitiveness objectives introduced by the Bill were the subject of in-depth consultation in several stages, to ensure that the legislation will have its intended effect. While some respondents to that consultation process raised the issue of requiring the regulators to have regard to financial inclusion, there was no consensus on this proposal in terms of approach or effect.
My noble friend invited me to take up the opportunity to consult further on this matter, anticipating what I might say. However, as I have just reflected, this was, in part, considered in the work that was done in the lead-up to the Bill, which took place over several years, and we have been considering the Bill before us for nearly a year. So, while I have heard the views raised in this debate, there has also been a strong feeling over the course of the Bill that there is a desire for the Government and regulators, once we have the Bill in place, to press ahead and use the powers in it to deliver regulatory reform. I do not think that further consultation on further changes to the objectives at this stage would be the right approach.
As I said, this was considered as part of the FRF review. Indeed, in its consideration of these matters, the Treasury Select Committee specified in its future of financial services regulation inquiry that it did not recommend that any changes related to financial inclusion should be made to the regulator’s objectives, noting that financial inclusion is a broader social issue and that the primary role of the FCA should not be to carry out social policy.
The FCA’s consumer protection objective requires it to protect consumers from poor conduct by financial services firms. Financial exclusion is driven by many factors which may not be attributable to firms’ conduct. Given this, the consumer protection objective is not the appropriate place to seek to address financial inclusion. Indeed, an objective to protect consumers from harm may, at times, be in tension with an objective to increase financial inclusion. For example, certain credit products or investments may not be appropriate in all circumstances and could be detrimental to a consumer’s financial situation and well-being. The FCA will already seek to balance this through developing its rules and interventions, but that means that adding a formal requirement to advance financial inclusion as part of the consumer protection objective risks adding complexity and uncertainty to one of the most important parts of the FCA’s work.
Where there are gaps in the market which mean that some consumers struggle to access appropriate products, it is right that the Government seek to tackle these. I hope that noble Lords will be reassured that we are taking, and will continue to take, action. The noble Lord, Lord Eatwell, spoke of the importance of cash to many. That is why the Government are taking unprecedented action in the Bill to protect access to cash.
The noble Baroness, Lady Kramer, referred to—
Lord Eatwell (Lab)
I actually said the opposite; access to cash will not be useful if the cash cannot be used to make a transaction. Increasingly, transactions cannot be made with cash but only electronically.
Baroness Penn (Con)
Some of the implications of the noble Lord’s contribution on potentially obliging people to use certain payment systems show that including financial inclusion under the consumer protection objective could have quite far-reaching consequences that we would want fully to think through and consult on before changing the objectives. That lies behind the Government’s concern about this approach.
As I was saying, this does not mean that there is no action to promote financial inclusion by the Government and the regulators. Major banks are required to provide basic bank accounts for those who would otherwise be unbanked. As of June last year, there were 7.4 million basic bank accounts open and during 2020-21 around 70,000 basic bank account customers were upgraded to standard personal current accounts, graduating to more mainstream financial services products. The FCA’s financial lives survey has shown that those aged over 75 are becoming more digitally included, with 64% digitally active in 2020 compared to 41% in 2017. However, we absolutely recognise that there is more work to be done in this area. The Government have allocated £100 million of dormant asset funding to Fair4All Finance, which is being used to improve access to affordable credit, with a further £45 million allocated recently to deliver initiatives to support those struggling with the increased cost of living.
While the FCA has an important role to play in supporting financial inclusion, it is already able to act where appropriate. For example, it has previously intervened in the travel insurance market to help consumers with pre-existing medical conditions access affordable credit. As the noble Baroness, Lady Chapman, recognised, the new consumer duty developed by the FCA is yet to come into force and we are yet to feel the full benefits of that. However, importantly, these issues cannot be solved through regulation alone. Where there are gaps in the provision of products to consumers, the Government will continue to work closely with the FCA and other key players across industry and the third sector to address them.
I turn to Amendment 14 from the noble Lord, Lord Davies of Brixton. I reassure him that the FCA is already well placed to take into account the protection of consumers’ mental health within its existing objectives. The regulator’s vulnerability guidance sets out a number of best practices for firms, from upskilling staff to product service and design, and specifically recognises poor mental health as a driver of consumer vulnerability. Where FCA-authorised firms fail to meet their obligations to treat customers fairly, including those in vulnerable circumstances, the FCA is already empowered to take further action. Since the publication of the vulnerability guidance, the FCA has engaged with firms that are not meeting their obligations and agreed remedial steps.
In summary, the Government believe that this is an incredibly important issue but consider that it is for the Government to lead on the broader issues of financial inclusion. Where necessary, in the existing framework the FCA is able to have the appropriate powers to support work on this important issue. While the Government do not support these amendments, I hope that I have set out how they are committed to making further progress in this area. I therefore hope that my noble friend Lord Holmes will withdraw his amendment and that the noble Lord, Lord Davies of Brixton, and the noble Baroness, Lady Chapman, will not press theirs when they are reached.
Lord Holmes of Richmond (Con)
My Lords, I thank everyone who has participated in this debate, and my noble friend the Minister for her response. This will continue to be a significant issue until we have something in the country which looks far more like financial inclusion for all those who are currently feeling the sharp end, or the wrong end, and who are shut out of so much of what passes for financial services today. However, having listened to my noble friend the Minister, I will not push this matter any further today. I beg leave to withdraw Amendment 13.
Baroness Hayman
“(c) the need to contribute towards achieving compliance with sections 1 (the target for 2050) and 4(1)(b) (net UK carbon account) of the Climate Change Act 2008, and the conservation and enhancement of the natural environment, including compliance with relevant targets approved by Parliament, the Scottish Parliament, Senedd Cymru, and the Northern Ireland Assembly.”Member’s explanatory statement
This amendment adds nature to the new regulatory principle on net zero emissions.
Baroness Hayman (CB)
My Lords, when we debated this on Tuesday evening I was greatly encouraged by the support from all sides of the House for adding nature, alongside net zero, to the regulatory principles in the Bill. We also had support externally, particularly from Professor Dasgupta himself. I am afraid that I did not find the Minister’s arguments compelling, and therefore I would like to test the opinion of the House.
Baroness Penn
“(1A) In section 1JA (Treasury recommendations in connection with general duties), after subsection (1)(c) insert—“(ca) how to discharge the duty in section 1B(4A)(duty to advance competitiveness and growth objective),”.(1B) In section 1K (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the FCA’s operational objectives includes, in its application as a secondary objective, the competitiveness and growth objective (see section 1EB).”.(1C) In section 2I (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the PRA’s objectives includes, in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1D) In section 3B (regulatory principles to be applied by both regulators), for subsection (3) substitute—“(3) “Objectives”—(a) in relation to the FCA means— (i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1E) In section 3D (duty of FCA and PRA to ensure co-ordinated exercise of functions), for subsection (4) substitute—“(4) In this section, “objectives”—(a) in relation to the FCA means—(i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).(5) Where a regulator is proposing to exercise a function that is not one of its general functions, the reference to “objectives” in subsection (1)(a) does not include the secondary objectives mentioned in subsection (4)(a)(ii) and (b)(ii).(6) In this section, “general functions”—(a) in relation to the FCA, has the same meaning as in section 1B(6), and(b) in relation to the PRA, has the same meaning as in section 2J(1).”.(1F) In section 138I (consultation by the FCA), in subsection (2)(d) after “1B(1)” insert “, (4A)”.” Member’s explanatory statement
This amendment would ensure that provisions of the Financial Services and Markets Act 2000 that refer to the objectives of the FCA and the PRA also include a reference to the new competitiveness and growth objective, as inserted by Clause 24 of the Bill.
“(2A) In section 232A (scheme operator’s duty to provide information to FCA)—(a) the existing words become subsection (1), and(b) after that subsection insert—“(2) The reference in subsection (1) to the FCA’s operational objectives includes, in its application as a secondary objective, the competitiveness and growth objective (see section 1EB).””Member’s explanatory statement
This amendment would ensure that section 232A of the Financial Services and Markets Act 2000 includes a reference to the competitiveness and growth objective, as inserted by Clause 24 of the Bill.
“FCA to have regard to financial inclusion within consumer protection objective
(1) FSMA 2000 is amended as follows.(2) In section 1C (the consumer protection objective), after subsection (2)(c) insert—“(ca) financial inclusion;”.”
Baroness Chapman of Darlington (Lab)
My Lords, we are very disappointed with the Government’s response on this matter so far. They are wilfully not engaging with this topic in the way that we would like. Financial inclusion is relevant to the regulation of financial services. How products are designed, marketed and administered and how advice is provided are all of concern to the FCA and directly important to financial inclusion. There have been piecemeal interventions, which the Government say are welcome, but we would like to see more at this stage. I wish to test the will of the House.
Baroness Penn
“(1A) The statement must provide information about—(a) how representations (including by a statutory panel) can be made to each regulator with respect to its review of rules under section 3RA, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the FCA and PRA to ensure that those regulators include in their statements of policy about the review of rules (required by section 3RB of the Financial Services and Markets Act 2000, as inserted by Clause 27) information about how representations (including by statutory panels) can be made and considered.
(iii) advance the competitiveness and growth objective;”
Member’s explanatory statement
This amendment would ensure that new section 3RD of the Financial Services and Markets Act 2000, as inserted by Clause 27 of the Bill, includes, for the purposes of the FCA’s report, a reference to the competitiveness and growth objective, as inserted by Clause 24 of the Bill.
(ii) advance the PRA’s competition objective and the PRA’s competitiveness and growth objective;”Member’s explanatory statement
This amendment would ensure that new section 3RD of the Financial Services and Markets Act 2000, as inserted by Clause 27 of the Bill, includes, for the purposes of the PRA’s report, a reference to the competition objective and the competitiveness and growth objective, as inserted by Clause 24 of the Bill. (The words after “review” in section 3RD(2)(b) would become sub-paragraph (i)).
Financial Services and Markets Bill
Thursday 8th June 2023
(1 year, 5 months ago)
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Baroness Penn
“(ic) how it has complied with the statement of policy on panel appointments prepared under section 1RA in relation to the process for making appointments and the matters considered in determining who is appointed, and”Member’s explanatory statement
This amendment would ensure that the FCA includes in its annual report under paragraph 11 of Schedule 1ZA to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 1RA as inserted into FSMA 2000 by Clause 43.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I will speak to all the government amendments in this group, which are part of a package of changes that the Government have brought forward to support scrutiny and accountability of the financial services regulators.
This group of amendments focuses on supporting that work through independent analysis and scrutiny. The Government have listened to the view expressed by noble Lords that, for there to be effective scrutiny, it is critical that Parliament and others have access to accurate and impartial information to assist in assessing the performance of the regulators. The Government have carefully considered the proposal, put forward by my noble friend Lord Bridges in Grand Committee, to establish an office for financial regulatory accountability, or OFRA.
While the Government cannot accept the proposal to establish an OFRA, we have considered what more can be done to support the provision of independent analysis and scrutiny. FSMA already requires the regulators to consult on rule proposals and establish independent panels to act as a “critical friend” in the rule-making process. The regulators seek to engage the panels at an early stage of policy development and the panels voluntarily produce reports annually on their work.
Through the Bill, the Government are already enhancing the role of the statutory panels to support scrutiny and accountability. This includes Clause 43, which requires the regulators to publish a statement of policy on how they recruit members of their statutory panels. In addition, following the debate in Commons Committee the Government introduced Clause 44, which requires panel members to be external to the regulators and the Treasury.
However, the Government have heard the calls from across the House for further reassurance that the regulators’ approach to panel recruitment will ensure that panel members are drawn from a diverse range of stakeholders and are sufficiently independent of the regulators. The Government have therefore introduced Amendments 23, 24, and 57, which will require the FCA, the PRA and the PSR, as part of their annual reports, to set out how recruitment to their panels has been consistent with their statements of policy.
The Bill also already introduces measures to strengthen the quality of the regulators’ cost-benefit analysis, including the introduction of new, independent panels to support the production and development of CBA. It is important that CBA reflect as accurately as possible the costs and benefits to firms and consumers of implementing and following regulation. In assessing this, the experience of regulated firms themselves is vital.
The Government are grateful to my noble friend Lord Holmes for raising this issue in Grand Committee, and again through Amendments 44 and 47 today. The Government have reflected on that earlier debate and introduced Amendments 43 and 46, which will require both the FCA and the PRA to appoint at least two members to their CBA panels from authorised firms.
To ensure that Parliament has access to the important work of the panels, the Government have introduced Amendment 50, which provides a power for the Treasury to require the panels to produce annual reports. The Treasury will then be required to lay these reports before Parliament. I can confirm that, in the first instance, the Government will bring forward the necessary secondary legislation to require the CBA panels and the FCA Consumer Panel to publish an annual report to be laid before Parliament, reflecting the fact that the work of the Consumer Panel and the new CBA panels has been of keen interest to noble Lords in earlier debates. The Government will keep this under review, and the legislation will allow the Government to require other panels to publish annual reports and lay these before Parliament if they consider that appropriate in future.
Finally, Amendment 95 seeks to strengthen the independence of the complaints scheme through which anyone directly affected by how the regulators have arrived at their decisions can raise concerns. The scheme is overseen by the independent complaints commissioner, and Amendment 95 seeks to strengthen that independence further by making the Treasury responsible for the appointment of the commissioner, rather than the regulators.
Existing legislation requires the complaints commissioner to publish an annual report, including trends in complaints and recommendations for how the regulators can improve, which is to be laid before Parliament. Amendment 95 also enables the Treasury to direct the commissioner to include additional matters in the annual report. This will ensure that, where appropriate, the Government can make sure that the report covers issues which the Government consider are important to support scrutiny of. Amendment 95 also requires the regulators to include a summary of where they have disagreed with the commissioner’s recommendations, and their reasons for doing so, in their response to the commissioner’s annual report.
The Government have been clear that the regulators’ increased responsibilities as a result of the Bill must be balanced with clear accountability, appropriate democratic input and transparent oversight. The package of amendments we are debating in this group contribute to that and support Parliament through additional independent analysis and scrutiny.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in the debate on this group of amendments. I will speak to Amendments 42, 44, 45 and 47 in my name, and offer my support for all the amendments in the name of my noble friend Lord Bridges, to which I have added my name. I will leave him to set them out.
I again thank my noble friend the Minister, and the Treasury officials and team, for all the meetings and work done during Committee, and between Committee and Report, on the question of regulator scrutiny and accountability. I thank her particularly for adopting my Amendments 44 and 47 on the membership of the panels. On my Amendments 42 and 45, could she say a little more about the evidence base the panel will use to come to its recommendations? Would it be valuable to publish any dissenting opinions on the matters to be published? This would be extremely helpful for Parliament to scrutinise the panel’s decisions.
Finally, I ask a broader question around cost-benefit analysis. How will HMT and the regulator seek to ensure that the whole CBA process is meaningful, balanced, considers all majority and minority views, and does not fall into the potential trap of being a utilitarianist pursuit, which cost-benefit analysis can sometimes fall foul of?
That said, I thank again the Minister and the Treasury officials for their support for the amendments and for the discussions we had to come to this point, particularly on Amendments 44 and 47. I look forward to hearing in detail, particularly from my noble friend Lord Bridges and the Minister, the suggestion around the office for regulator accountability.
Baroness Hayter of Kentish Town (Lab)
My Lords, I will briefly speak to Amendment 39, to which I have added my name, and government Amendment 50. I declare that I am on the board of the ABI. More relevantly, as the amendments are about the Consumer Panel, I speak as a former vice-chair of one of the statutory panels, the Financial Services Consumer Panel. It was some time ago and our focus then was on the FSA rather than the present FCA, but our role was essentially the same.
I was on the panel before the events of 2007 and 2008. As a panel, we were warning about the risk to consumers of interest-only mortgages, high loan to value mortgages—which were really unacceptable to us—and high mortgages relevant to income. It was just before the crash, but I am not pretending that we foresaw what would happen, even though we were worried about those things. We did not anticipate what was happening in the financial sector, starting with Fannie Mae and Freddie Mac and Northern Rock. Our concern was about how consumers would fare should house prices tumble and their incomes not rise—or, indeed, if interest rates should increase. We saw them as a very vulnerable group of consumers.
What is interesting and relevant to Amendments 39 and 50 is that our role was only to advise the then FSA. Sadly, it did not pay enough attention to what we were saying. It might have given it a little bit more on its dashboard had it done so. Had our report been to Parliament and the Treasury perhaps someone might have noticed and taken an interest. That lives in the “What if?” category of history, but it explains my support of any report made by people who represent consumers being brought to public attention.
Amendment 39, to which I have added my name, was so brilliantly written and argued for in the Commons by my honourable friend Nick Smith. I should say that a long time ago we worked together when he was the Labour Party agent in Holborn and St Pancras and I was the CLP chair. Quite a bit seems to have happened since then to both of us. I knew at the time that he was able to take an issue with which he was dealing and see the broader context, which is how we come to the amendment he has essentially developed and which is in front of the House today.
My honourable friend’s interest was sparked when he was campaigning on behalf of members of the British Steel pension scheme—a scandal which led the NAO and the PAC to conclude that the FCA fell drastically short of its proper role in protecting consumers of financial services. His interest in that brings me to where we are today.
In my time, we have witnessed nearly £40 billion being paid in compensation to consumers who were mis-sold PPI, although the full costs were paid much later. Again, as consumer reps, we flagged up that this was not an appropriate product for most of those it was being sold to. Just occasionally, listening to consumers is good not just for them but for the industry and the whole economy. The voice of consumers is worth listening to.
The Government’s Amendment 50 is very welcome. It requires the statutory panels—I am particularly interested in the Consumer Panel—to report to the Treasury and for their reports to be laid before Parliament. This will bring consumer interest to the heart of our public discourse, which will be good for all concerned. I thank the Government for their amendment on this. I am happy that this trumps, or at least meets, Amendment 39.
Baroness Bowles of Berkhamsted (LD)
My Lords, in general I support all the amendments in this group. I am particularly pleased to see government Amendment 50 on the panel reports, assuming that they are implemented, and government Amendment 63 and its companions in the next group to require the regulators to state how they have taken account of parliamentary committee reports in rulemaking. I thank the Minister and the Bill team for covering some of the amendments that I tabled in Committee and similar ones from other noble Lords.
In this group, I have added my name to the amendments tabled by the noble Lord, Lord Bridges, which concern the setting up of an office for financial regulatory accountability, as I did in Committee. The noble Lord is unable to be here today and has asked me to give his apologies and to introduce his amendments.
There is no need to go through the debate that we had in Committee, except to say that since FSMA 2022 there has been a growth in voices calling for an independent oversight body, including the main industry bodies. Those bodies were somewhat disappointed by the Minister’s suggestion in Committee that there was no industry support or suggestion along those lines, because they have made their views clear. I have received emails assuring me that they put points in the consultation responses as well as in published industry papers, although I acknowledge that those were early days and they may not have got as far as formulating ideas in the same way that I had in my consultation response.
There has also been a growth in support in this House. As has been said, if we had campaigned during the Brexit referendum that there would be this massive amount of power going to government, which would then be pressed onwards to unelected regulators, maybe some people would have had different thoughts, but that is water under the bridge. Going back to the amendments tabled by the noble Lord, Lord Bridges, the suite of amendments that cover the office for financial regulatory accountability—Amendments 64 to 72—includes some useful amendments from the noble Lord, Lord Eatwell, with which the noble Lord, Lord Bridges, agrees.
Viscount Trenchard (Con)
My Lords, I too thank my noble friend the Minister for again responding to the strong views expressed within your Lordships’ House and for introducing the amendments that she has. I also agree with what my noble friend Lord Holmes said.
I also thank the noble Baroness, Lady Bowles of Berkhamsted, for the introduction of my noble friend Lord Bridges’ Amendment 64 and the others in that group. I supported his amendments in Grand Committee and am pleased to do so again today. My noble friend set out with his usual clarity, as did the noble Baroness, why we should support these amendments, and I will not waste your Lordships’ time in repeating them.
As my noble friend Lord Forsyth of Drumlean said in Committee, in order for Parliament to be able to hold the Treasury and the regulators to account, it is necessary to have an independent source of information. The proposed office would provide that. It is also welcome that the main duties of the office will include a duty to prioritise the analysis of regulations that restrict competition, negatively affect competitiveness and add compliance costs.
I do not believe that the new office would be a regulator of the regulators. Rather, it would be a means to ensure that the regulators really do get on with the job on which they are behind schedule—the promise made in 2016, in the general election manifesto and many times since that we will take advantage of our regulatory freedoms to eliminate or simplify those regulations which do not suit our markets and which place a disproportionate burden on market participants. We should not do this at the expense of standards, but to recast the rulebook in common law style will make it much easier for firms to maintain the high standards on which the regulators, the Treasury and noble Lords will all insist. The proposed office would greatly assist in ensuring that this will happen.
I also note—although we will discuss this in the next group—that, ideally, the office would deal principally with a Joint Committee of both Houses rather than two separate committees which might compete with each other. That would double the work and the costs that the office and the regulators would have to bear in carrying out their duties.
I believe the creation of an independent office such as the one proposed would be more helpful than the creation of a multiplicity of panels, which may be set up by statute but remain panels of the entities of which they form part. These are also duplicated between the two regulators, which doubles the cost and time taken by the regulators, and by the relevant committees of your Lordships’ House, in discussing with them.
I hope my noble friend the Minister is prepared to consider further the creation of something which is truly independent of the regulators. I think we have too much legislation by statute to require entities to negotiate with panels of which they are a part, which conceptually I find rather odd in any case.
Lord Vaux of Harrowden (CB)
My Lords, this is the first of two groups that seek to improve the level of parliamentary scrutiny and accountability. Arguably, I think the groups are the wrong way around from a logical point of view, but we are where we are. We had long debates on this in Committee, and it was clear that accountability and parliamentary scrutiny was probably the single biggest issue on which Members from across the House felt that the Bill fell woefully short, particularly given the huge amount that is being transferred to the responsibility of the regulators by the Bill.
We heard in Committee of the need for three legs to the whole process of scrutiny and accountability: reporting, independent analysis and the parliamentary accountability elements. This group is about the second leg—the independent analysis that will support the parliamentary scrutiny and accountability. The Government have listened, and that is welcome, but I am sure I am not alone in finding what they have proposed to be rather thin gruel.
The Government have introduced a number of amendments which enhance the role of the various policy panels, in particular the cost-benefit analysis panel. These are welcome, but I am afraid they really do not go far enough. Other noble Lords, especially the noble Lord, Lord Holmes of Richmond, have tabled further amendments to enhance and support the role of the panels. Again, that is very welcome but not, I think, sufficient. Despite these improvements, the panels remain appointed by the regulators and are not genuinely independent.
I remain strongly drawn to the amendments in the name of the noble Lord, Lord Bridges of Headley, introduced by the noble Baroness, Lady Bowles, to which I have added my name, to create a genuinely independent office for financial regulatory accountability. As I said, so much responsibility is being handed to the regulators that it must make sense to have a genuinely robust system of oversight over the regulators, not just responding to consultations about proposed changes to regulations that the Government have put into the Bill but a much more holistic oversight of the whole regulatory direction—something that deals with what the noble Viscount, Lord Trenchard, referred to as the multiplicity of panels. We need to draw this all together, and we need to be much more forward-looking about the direction of regulation, rather than backward-looking as to what is proposed.
This is such an important matter and such a huge volume of work that, if we are to scrutinise it effectively, we need to have something such as the proposed office for financial accountability to enable parliamentary committees and others to carry out the meaningful scrutiny. The noble Baroness, Lady Bowles, talked about the need for resources; we will come on to that in the next group, but she is quite right. This would really help because, if the independent information were available to the committees, it would save them the job of doing all the sifting and all the rest of it, and they would be able to concentrate on the bits that really matter.
Even with the amendments proposed by the Government, I do not think that we get anywhere near that real scrutiny. I am sorry to hear that the noble Lord, Lord Bridges, does not intend to push these amendments; I would have liked him to do so and would have supported him if he had. I hope that he will continue to use his influence as the chair of the Economic Affairs Committee to push for a similar approach.
Lord Eatwell (Lab)
My Lords, I totally agree with what the noble Lord has just said and therefore I will not repeat his words. The office for financial regulatory accountability proposed by the noble Lord, Lord Bridges, would become an important part of the whole regulatory architecture in this country. The reason why I have proposed a couple of amendments—I am delighted to hear that the noble Lord, Lord Bridges, actually likes my amendments to his amendments—is to enhance the position of the office within that architecture.
We have to recognise that there will be virulent opposition to this in the Treasury. The Treasury’s darkest day in recent years was the day that the Office for Budget Responsibility was established as an independent entity evaluating the performance of the economy. In the same way, having gone through that dark day, I can imagine the horror with which the Treasury observes the possibility of an independent entity evaluating the performance of regulators and the performance of the Treasury in its activity in guiding regulation. It is no surprise at all that we have what the noble Lord has quite appropriately called “thin gruel”, instead of something that would be truly effective and would create both an independent assessor and a sounding board for the industry, consumers and others who have an interest to express in regulation to get their views on to the front line.
With my Amendments 67 and 72 I am again in slight opposition to the noble Viscount, Lord Trenchard, in the sense that I want to remove the lines in the amendment from the noble Lord, Lord Bridges, that specifically focus on the competition objective, because I do not want to second-guess what the office might do. The office could choose to travel over any part of the regulatory countryside. I regard my Amendment 72 as much more important because, as part of the architecture, the office should be funded through the levy in the same way as other parts of the regulatory system; the FCA, the Financial Services Compensation Scheme and so on are all financed via the standard levy on the industry. After all, this would be a trivial amount of money because—as has been pointed out—it would be only a relatively small entity. I am delighted that the noble Lord, Lord Bridges, liked my amendment to his amendment. I hope that he will be able to carry forward these proposals in the way that the noble Lord, Lord Vaux, suggested.
I will comment on Amendments 44 and 47 from the noble Lord, Lord Holmes, on the membership of panels at the FCA and the PRA. I support his view that placing practitioners on panels can have a very positive effect. I say this because I was an independent member of the board of the old Securities and Futures Authority, which was a practitioner-run regulatory authority with independent members, of which I was one. I was very impressed by the way that practitioners, when required to be regulators and placed in a regulatory role, assumed the role of regulators—they were not just representatives of their special interests. In fact, their special interests were left at the door; what came in with them was their specialist knowledge. I was sceptical when I first joined the board of the SFA but was won over by the performance of practitioners there. The proposal from the noble Lord, Lord Holmes, for practitioners will add to the regulatory effectiveness and knowledge of these panels.
Lord Forsyth of Drumlean (Con)
My Lords, I agree with everything that has been said by everyone in the debate so far and support all these amendments. I know that my noble friend Lord Bridges is mortified that he cannot be here today. We discussed the arguments and I supported them in Committee. The noble Lord, Lord Eatwell, is absolutely right about how this would have gone down in the Treasury. But I do not want to be grudging, given the amount of movement that the Minister has been able to achieve as a result of the debate, and the government amendments in this group will make a difference. We are dealing with the old “Quis custodiet ipsos custodes?” problem here. This group of amendments would have taken it a lot further forward, although the government amendments are helpful.
I do not want to anticipate the next debate, but the key question will be, as a number of noble Lords have pointed out, the resource that is made available. If it is not to be through a body such as the OBR, as my noble friend Lord Bridges was suggesting, it will have to be provided by the parliamentary authorities. Whether that will work, and how effective it will be, will depend on the extent to which the Government give a clear indication that they would welcome it, although it would be a matter for the House. I suspect that would be helpful.
I thank the Minister for having listened to the debate in Committee, which we are in danger of repeating, and having taken some measures, if not going perhaps as far as my noble friend Lord Bridges’s Amendment 64 would require. I also thank the noble Baroness, Lady Bowles, for so ably making the case for it.
Baroness Kramer (LD)
My Lords, I will speak very briefly. It will be evident to the House by now that, as was true in Committee, essentially every speaker takes one position, other than the Government. Maybe one or two support the Government’s position, but overwhelmingly there has been a common feeling across political ideologies and views. People from different perspectives, including those who are independent in this House, all share the same set of concerns.
We all particularly welcomed the amendment from the noble Lord, Lord Bridges, because it was a piece of completely new thinking—a way to break the conundrum very effectively by making sure that an office of financial regulatory accountability would change the game by providing Parliament and anyone else responsible for scrutiny and accountability with the analysis, information and data they need to do that effectively. I very much hope that the Government will take it away and consider it.
I join all other noble Lords in finding not only the amendments from the noble Lord, Lord Bridges, but those from the noble Lord, Lord Eatwell, and the others in this group extremely constructive. I vary slightly from the noble Lord, Lord Forsyth; I understand that the Government have moved a little in the amendments they have brought forward in this group but, my goodness, it is a baby step. This issue is far too big to be dealt with only by baby steps.
Baroness Chapman of Darlington (Lab)
My Lords, I start by acknowledging the government amendments in this group, which make a number of changes that we think are sensible to ensure that the cost/benefit analysis panels have representatives from industry, to allow the Treasury to direct statutory panels to make annual reports and to make it the Treasury’s job to appoint the complaints commissioner. These all represent steps in the right direction—even if, as the noble Baroness, Lady Kramer, has just said, they are not necessarily the giant leaps that some would hope to see.
We tabled Amendment 39 in this group, which would require the FCA consumer panel to produce annual reports on the regulator’s fulfilment of its statutory consumer protection duties, and my noble friend Lady Hayter explained why we were backing this so firmly and spoke about the work with the British Steel pensioners, led by Nick Smith. She saved my blushes because Nick is my husband. I know that is not a declarable interest, but in the interests of transparency, I should probably let people know. We are pleased to see Amendment 50 and will not be pressing our Amendment 39 to a vote because of it. We believe that the government amendments go a significant way to addressing our concerns, so will not press our amendment, but that does not mean that we are convinced that consumer issues are by any means resolved, and we may have to revisit this topic in future.
The noble Baroness, Lady Bowles, helpfully introduced the amendments tabled by the noble Lord, Lord Bridges, and presented his proposal for an independent office for financial regulatory accountability. This is an interesting proposal but, when considering the Government’s numerous concessions on scrutiny and accountability, at this point we would not be minded to support it at a Division, because the creation of such a body needs significant work and amounts to a fundamental change in how we regulate the sector. We do not want to pre-empt what the Minister has to say, but it was not a core focus of the future regulatory framework review, the outcomes of which the Bill seeks to implement.
The amendments from the noble Lord, Lord Bridges, raise important questions about the capacity of parliamentary committees to scrutinise the regulators’ output, and this is something we have consistently raised with the Minister during our private discussions. When I say “we”, that is very much the royal “we”—I obviously mean my noble friend Lord Tunnicliffe. I am sure that he is grateful to the Minister for the time she has given to him, to my noble friend Lord Livermore and to me in recent weeks. While we understand that it is for Parliament to make its own arrangements, both now and in future, we hope that the Government will acknowledge the substantial workload that committees will have and remain open-minded about whether and how the regulators can better facilitate Parliament’s work.
I am especially grateful to my noble friend Lord Eatwell for his amendments to the OFRA texts, but I suppose this highlights in part the difficulties with supporting the detail of the proposal at a Division at this point. We see that many people agree with the principle, but there is probably a great deal more work to be done on the detail.
Baroness Penn (Con)
My Lords, let me respond briefly to the points raised in the debate. I take first the amendments from my noble friend Lord Bridges, well introduced by the noble Baroness, Lady Bowles: Amendments 64 to 66 and 68 to 71, which would establish an office for financial regulatory accountability. As I said in my opening remarks, the Government agree that the provision of accurate and impartial information is extremely important for assisting Parliament in its important scrutiny role—and, indeed, others.
However, as the noble Baroness opposite acknowledged, creating a new body raises questions about how it would interact with the existing accountability structures and the balance of responsibilities between government, Parliament and independent regulators. As I noted in Grand Committee, the provisions for the establishment of the Office for Budget Responsibility referred to in this debate, on which OFRA is, at least in part, modelled, were brought forward in a stand-alone Bill after public consultation, where there was sufficient time to consider carefully its role and remit in advance. The Government therefore do not think that establishing such a body through amendment to this Bill is the right way forward at this time. We acknowledge the strength of feeling and degree of consensus from different parts of the House on this idea, and noble Lords can rest assured that my noble friend Lord Bridges has made it very clear to me that this is not the last that the Government will be hearing from him on this subject.
I turn to the series of amendments from my noble friend Lord Holmes. Amendments 42 and 45 seek to make specific provision for the regulators’ new CBA panels to be provided with the information required to perform their functions. The Government support the intention of these amendments but consider that the requirement in legislation to establish and maintain the panel already requires the regulator to ensure that the panel has the appropriate information and data to perform its functions.
My noble friend Lord Holmes asked how we could ensure high-quality cost-benefit analysis work. As he and the noble Lord, Lord Eatwell, noted, key to this is the composition of the panels. Panels with members who have diverse backgrounds, expertise and thought will be better placed to ensure that the FCA, the PRA and the PSR receive the most comprehensive appraisal of their policy. That is part of the reason why we have Clause 43, which requires the FCA and the PRA to set out a clear and transparent process for appointing members.
The FCA has also recognised the importance of improving diversity in the membership of its statutory panels and is undertaking a review to identify ways in which it can boost diversity so that the composition of panels appropriately reflects the range of practitioners and stakeholders in financial services. The Government welcome the work that is being done to move recruitment to the panels in this direction.
Amendments 41 and 45 seek to require the new CBA panels to make public their meeting materials and recommendations. The Government are not able to support this as it could undermine the confidentiality of the panels’ contributions, which is crucial to their role as a critical friend to the regulators. The panels and the regulator will already be able to make public their deliberations and materials when they consider it appropriate, without undermining that confidentiality. Through an amendment in this group, the Government are taking a power to oblige the panels to publish their annual reports on their work and lay them before Parliament; we think that this will deliver sufficiently.
If a panel feels that its work or conclusions are being ignored by the regulator, or where there are issues on which the regulator and the panel differ, the Government expect that these will generally be resolved in the course of regular engagement between the regulator and the panel. However, as I have said, panels are able to express their views publicly, including through their annual reports or by publishing responses to consultations. For example, as it currently operates, the FCA’s consumer panel regularly publishes its responses to the regulator’s consultations.
I turn to Amendment 39 in the name of the noble Baroness, Lady Chapman. I am glad that she and the noble Baroness, Lady Hayter, feel that government Amendment 50 seeks the same outcome and should help to deliver that, although I note that, as the noble Baroness said, this is not the last word on consumer issues. However, at least when it comes to this particular focus, we have, I hope, delivered on that.
I know that not all noble Lords are satisfied with all of what the Government have put forward, but this is a step forward in the right direction. I expect to hear more from noble Lords in future on how the new system that we are establishing through this Bill is operating. For now, I commend the amendment.
Baroness Penn
“(za) after paragraph (ba) insert—“(bb) how it has complied with the statement of policy on panel appointments prepared under section 2NA in relation to the process for making appointments and the matters considered in determining who is appointed,”Member’s explanatory statement
This amendment would ensure that the PRA includes in its annual report under paragraph 19 of Schedule 1ZB to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 2NA as inserted into FSMA 2000 by Clause 43.
Lord Forsyth of Drumlean
Lord Forsyth of Drumlean (Con)
My Lords, I fear that the Minister has stolen my clothes. In speaking to Amendments 25, 29, 31, 36 and 38, which are in my name, and in looking at the government amendments, including Amendment 30, I find myself saying that the government amendments are far more effective and do a better job. They achieve the same purpose, so I say a big thank you to the Minister for having taken this on board. But, just reflecting on the debate we have had, I say that this will work only if very substantial resources are made available to any committee, whether that is a committee of this House or a Joint Committee.
I entirely understand the autonomy of this House, and the Government are to be commended in respecting it. It is up to this House and the other place to decide what committees they will establish, but here we have a statutory opportunity for us to set up a Joint Committee of both Houses, which my noble friend Lord Trenchard has made strong representations for, or indeed another committee of this House. But be in no doubt that any committee, whether joint or single, is going to have to look at the entire financial regulatory structure that has been taken from the European Union and given to the regulators. That is an enormous task. Although in this House we have many able people with expertise in this area, they have a finite amount of time and will absolutely need to be supported by people with technical expertise and knowledge, of the kind which the noble Baroness, Lady Bowles, would have been quite used to when she was in the European Parliament, so ably chairing a committee with similar responsibilities.
I very much support the government amendments and certainly do not feel the need to press any of mine to the vote in this House. I thank the Minister for having listened so carefully, and for the time that she and her officials have given to considering the arguments and points, which have been made pretty well with a degree of consensus across the Committee and the House. I beg to move.
The Deputy Speaker (Lord Faulkner of Worcester) (Lab)
I must advise the House—this will not surprise the noble Lord, Lord Forsyth—that, if this amendment is agreed to, I will be unable to call Amendment 26.
Lord Eatwell (Lab)
My Lords, I will comment briefly on the proposal which has emerged and is contained in Amendment 30 in the name of the noble Baroness, Lady Penn. It refers to the possibility of parliamentary committees being
“the Treasury Committee of the House of Commons … the Committee of the House of Lords”
or a Joint Committee. It says “and” but I presume that they would be mutually exclusive.
What is extraordinary about this amendment is that it contains a seriously bad idea which might lead to an extremely good outcome. The seriously bad idea is that the two committees, one in the other place and one here in the Lords, would be sitting at the same time and looking at the same material, requiring the same levels of expertise to advise them and the same commitment of time by the regulators—and, perhaps, producing divergent opinions which would lead to regulatory uncertainty. That is a very bad outcome. Why I fully support these amendments, however, is that the seriously bad idea will lead to an extremely good outcome, because people will see that the possibility of having a committee in the other place and a committee here doing the same thing, with all the negative connotations that I have just discussed, will lead to the rational outcome of a Joint Committee of both Houses.
Lord Vaux of Harrowden (CB)
My Lords, I added my name to the amendments by the noble Lord, Lord Forsyth, so I thought I would stand and associate myself completely with his comments. I am delighted that the noble Baroness has effectively accepted the proposal. I will add my voice to say this: the subject of financial services is so huge, complex and important that it really requires a dedicated committee, whether a Joint Committee or committee of this House, not just to be part of, say, the Industry and Regulators Committee or the Economic Affairs Committee. It is much too big a subject to be covered by a committee that is not dedicated to the subject—and, if you have a dedicated committee, it must be properly resourced.
The Government rightly say that this is a matter for Parliament, but let us be realistic: they have huge influence on what happens there. I really hope that the Government and whoever the powers-that-be in this House who make these decisions are—even as the chair of the Finance Committee, this is still slightly opaque to me—are listening. This is so important. We must go ahead and must resource it properly.
Viscount Trenchard (Con)
My Lords, I strongly agree with what my noble friend Lord Forsyth has said. I also put my name to his Amendment 25 and other amendments, and I think that he is entirely right.
I also thank the Minister for responding to the concerns expressed on all sides of the House and for recognising that the parliamentary oversight of the regulators may need to be done by a Joint Committee of both Houses. Like the noble Lord, Lord Eatwell, I had also noticed that the amendment says not “or” but “and”, so there is a danger that there might be three committees doing the same thing, which would treble the work required by the regulator and, presumably, by the witnesses and experts who would be called to assist.
Also like the noble Lord, Lord Eatwell, I had the experience of serving on the 1999 Joint Committee of both Houses. This was established by resolution of your Lordships’ House and another place separately but was effectively driven, or at least strongly encouraged, by the Government at the time. The noble Lord, Lord Burns, was a most effective chairman of the Joint Committee, and it was a pleasure to serve on it under his leadership. An added benefit of that Joint Committee was that it enabled noble Lords with an interest in financial services to work much more closely with Members of the other place and concentrated the expertise of both Houses in one committee. I agree with the noble Lord, Lord Eatwell, that it would be a seriously bad outcome were there to be two committees tasked with this huge job.
I also refer to what the noble Baroness, Lady Bowles, said. I was in Brussels at the same time that she was chairman of the ECON, the economic affairs committee of the European Parliament. I often visited the European Parliament at that time. I was struck by the large number of staff and the great facilities available to the committees to carry out their role of scrutinising the legislative proposals brought by the Commission. We have not experienced that burdensome type of work: in the past, under the European model, all our financial services regulation was in primary legislation. It will now be given to the regulators. We therefore need more resources than have been available to us to scrutinise and supervise them properly. This is really important.
Noble Lords should also be grateful to the Minister for restoring equality of involvement between another place and your Lordships’ House. I thought that this was an unfortunate precedent for this type of legislation, particularly as many noble Lords have recent and continuing involvement with financial services firms. I look forward to the Minister’s winding up.
Lord Carrington of Fulham (Con)
My Lords, I will add my two cents’ worth to encourage the establishment of a Joint Committee. I cannot believe that having a committee in each House of this Parliament would work effectively, for all the reasons that the noble Lord, Lord Eatwell, has suggested. The committees of this House and the other place are grossly underresourced in any case. We need a committee looking at something as detailed and complex as this which operates in the way that the Public Accounts Committee in the other place is set up, is dedicated to look at regulation and has the resourcing to double-guess not only the regulators but the advisers who advise them, so that it can stand up and come to its own opinion. In the small time that the members of those committees are able to dedicate to the committee, with all the other duties they have as parliamentarians, it should be able to analyse the evidence and come up with sensible, and inevitably highly technical, solutions.
I have some experience of the committees of both Houses. I chaired the Treasury Select Committee, donkey’s years ago, and I served on the Economic Affairs Committee here for some time. Neither of those committees has the resources to be able to undertake this kind of task. It needs a completely new structure. Possibly the only model we can look at is the PAC, which has the National Audit Office advising it very closely. I am not suggesting we should set up a national audit office for regulation, although I know my noble friend Lord Bridges has suggested such a thing. We need to make sure that whatever is set up is properly resourced. I recognise that it is a matter for both Houses to decide how they do that, but we have to be absolutely clear that both Houses can do that only if the financial resources are made available by His Majesty’s Treasury and the Government to enable them to do so. It will be a decision to be taken by His Majesty’s Government and my noble friend the Minister to ensure that the resourcing is available.
It is a necessary step. However, it is a step and almost certainly not the conclusion. Once we have experience of regulating the regulators, we will be able to judge what other changes are needed to make sure that the regulation is effective and that financial markets in London are regulated in a way that is effective and convincing for participants in those markets on a global basis.
Baroness Kramer (LD)
I congratulate the noble Lord, Lord Forsyth, on being so persuasive. The Government have listened carefully to his advice and have come forward with amendments that are identical in their outcome, even if perhaps they have found a more effective or legally acceptable way to set out the wording. I am sure that that is a step forward, but I want to join the chorus.
I had the privilege of being on the Parliamentary Commission on Banking Standards, which in effect was a Joint Committee of both Houses. It was very much driven by the Government, who set it up in the first place, and it was properly resourced. From the work we did over the two years, there are two lessons to be drawn. One is that, with that resource, you can genuinely produce the evidence and go into the detailed questioning that is necessary to expose what may not have been obvious from a superficial or limited inspection; in-depth was possible because of the resource that was made available. The second lesson is that as a Joint Committee—I am very attracted to Joint Committees, as they avoid the duplication that others have talked of—that commission received a degree of respect and significance that is probably not available to a committee that is the creature of one House but not the other. The joining together of the forces of both Houses was meaningful.
Lord Livermore (Lab)
My Lords, I join the noble Baroness, Lady Kramer, in congratulating the noble Lord, Lord Forsyth, on persuading the Government to adopt his amendments, albeit in a slightly different form. Given the amount of regulation coming forward in the months and years ahead, and with the expertise that your Lordships’ House can offer, it was crucial that the Government extended the Commons-only provisions to include a relevant Lords committee, and we very much welcome these government amendments.
We are also pleased that the Minister included the option of a Joint Committee, as this future-proofs the legislation in the event that colleagues in both Houses feel—as does my noble friend Lord Eatwell—that such a body would provide a better form of scrutiny of the regulator’s work. As my noble friend Lady Chapman mentioned in a previous group, and as the noble Lord, Lord Forsyth, stressed further, there are still significant outstanding questions about the level of staff resource and expertise that relevant parliamentary committees will be able to draw on. Although these questions cannot be adequately addressed through the Bill, these concessions will at least safeguard the role of your Lordships’ House and enable conversations on resourcing to now proceed.
Baroness Penn (Con)
My Lords, the amendments in this group focus on further formalising the role of parliamentary scrutiny of the regulators. The Government agree with noble Lords that effective parliamentary scrutiny, in particular through parliamentary committees, has a critical role to play in improving the quality of regulation, as the noble Baroness, Lady Kramer, said, and the performance of the regulators overall.
The Bill, through Clauses 36 and 47 and Schedule 7, seeks to ensure that the Treasury Select Committee has the information it needs to fulfil its role, by requiring the regulator to notify the TSC when publishing any relevant consultations. However, the Government have listened to the case made by noble Lords that the important role of this House was not adequately reflected by that approach. We have therefore tabled a series of amendments which will require the regulators to also notify the relevant Lords committee when they publish a consultation. These amendments will ensure parity between arrangements for the Commons and the Lords. They also provide that, if a Joint Committee is set up in future, the regulators will be required to notify it in the same way.
I am glad that my noble friend Lord Forsyth feels that these amendments fulfil the aims of his own; that is just as well, as his amendments in Committee and on Report formed the basis for the Government’s approach—that is no coincidence. I am grateful to him for the work that he has put in on this issue and for the time that he has taken to discuss these matters with the Government.
I am also grateful to my noble friend Lord Bridges and the noble Lord, Lord Hollick, for their engagement as the chairs of the current committees in this House that look at the work of the financial services regulators. When I spoke with them, they explained how the EAC and the IRC currently split some responsibility for financial services policy, an example of which was their recent work on LDI, where the EAC focused on the work of the Bank of England and the PRA and the IRC focused on that of the FCA. The Government’s amendments would allow for the two committees to continue with that approach if they wished to do so and for a different Lords committee to receive notifications of consultations from the FCA and the PRA. That structure would be for Parliament to decide.
I shall now pick up on the concern from noble Lords about having multiple committees looking at the same issues or the work of the same regulators. As I have said, the structure is a matter for Parliament, but currently we have the TSC in the Commons, and the Economic Affairs and the Industry and Regulators Committees in the Lords, which at the moment look at various aspects of the regulators’ work without duplicating each other or creating unnecessary burdens. Given the scale of powers for the regulators being established in this Bill, there will be more than sufficient work to go round different committees, and they have already proven themselves able to co-ordinate their work so that it is not duplicative.
We have heard, given the scale of the task before us, that there is concern about the resource made available to those committees. Committee structures and their resourcing will remain a matter for Parliament to decide and I have noted that noble Lords agree that that is the right approach. However, the Government recognise that the new model for financial services regulation will require a step change in this House’s scrutiny of the regulators and agree there must be suitable resource in place to support this. The Government will work with the usual channels and the House authorities in the appropriate way.
The Government have also heard concerns about the feedback loop when Parliament engages with regulatory proposals. There can often be a significant period of time between an initial consultation and the Bill’s existing provisions regarding the regulators’ engagement with parliamentary committees, and final rules being published. In particular, the Government recognise amendments tabled by the noble Baroness, Lady Bowles, in Grand Committee, seeking to require the regulators to explain how parliamentary recommendations have been considered. The Government have therefore tabled Amendments 61 to 63, which require the regulators, when publishing their final rules, to explain how they have considered representations from parliamentary committees. This will ensure that the regulators provide a public explanation of how the views of parliamentary committees have been considered at the point when rules are made. This complements the existing requirement in Clauses 36 and 47, and Schedule 7, for the regulators to respond in writing to the chairs of committees that have made representations. This will ensure not only that regulators appropriately consider Parliament’s representations but that they set out publicly how they have done so.
The debates so far have shown that there is no single silver bullet to solve the problem of accountability. However, the Government are committed to creating an effective, overarching ecosystem in which the various different actors all play their roles in holding the independent regulators to account, ensuring high-quality financial services regulation in the UK. I am therefore grateful that my noble friend Lord Forsyth has said that he will withdraw his amendments, and I intend to move the Government’s amendments, based on those amendments, when they are reached.
Lord Forsyth of Drumlean (Con)
My Lords, I am most grateful to my noble friend the Minister for the way in which she has responded to this. I entirely agree with her point, as a former chairman of the Economic Affairs Committee, on the way in which we have worked with the Treasury Select Committee. I agree also with the noble Lord, Lord Eatwell, that it is carefully drafted and—who knows?—it may very well lead to both Houses deciding to have a Joint Committee, which would certainly be the best possible option. But that is obviously not a matter for me and I beg leave to withdraw my amendment.
Baroness Penn
Member’s explanatory statement
This amendment, together with the amendment at page 50, line 43, would extend the duties of the FCA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.
“(4A) The reference in sub-paragraph (4)(a) to the FCA’s operational objectives includes, in its application as a secondary objective, the competitiveness and growth objective (see section 1EB).” Member’s explanatory statement
This amendment would ensure that the references to the FCA’s operational objectives in new paragraph 28 of Schedule 1ZA to the Financial Services and Markets Act 2000, as inserted by Clause 36 of the Bill, includes a reference to the competitiveness and growth objective, as inserted by Clause 24 of the Bill.
Member’s explanatory statement
See the explanatory statement for the amendment at page 50, line 30.
Baroness Penn
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 50, line 30.
Baroness Penn
Member’s explanatory statement
This amendment, together with the amendment at page 52, line 11, would extend the duties of the PRA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.
“(4A) The reference in sub-paragraph (4)(a) to the PRA’s objectives includes, in their application as secondary objectives, the competition objective and the competitiveness and growth objective (see section 2H).”Member’s explanatory statement
This amendment would ensure that the references to the PRA’s objectives in new paragraph 36 of Schedule 1ZB to the Financial Services and Markets Act 2000, as inserted by Clause 36 of the Bill, includes a reference to the competition objective and the competitiveness and growth objective, as inserted by Clause 24 of the Bill.
Member’s explanatory statement
See the explanatory statement for the amendment at page 51, line 42.
Baroness Penn
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 51, line 42.
Baroness Penn
“(7A) The FCA must appoint to the FCA Cost Benefit Analysis Panel at least two individuals who are employed by persons authorised for the purposes of this Act by the FCA, with each one being employed by a different person.”Member’s explanatory statement
This amendment would impose a duty on the FCA to ensure that the FCA Cost Benefit Analysis Panel includes at least two members who are employed by persons authorised by the FCA under the Financial Services and Markets Act 2000.
Baroness Penn
“(7A) The PRA must appoint to the PRA Cost Benefit Analysis Panel at least two individuals who are employed by PRA-authorised persons, with each one being employed by a different person.” Member’s explanatory statement
This amendment would impose a duty on the PRA to ensure that the PRA Cost Benefit Analysis Panel includes at least two members who are employed by PRA-authorised persons.
Baroness Penn
Member’s explanatory statement
This amendment ensures that the PRA Cost Benefit Analysis Panel (established under Clause 41) will be required to provide advice in relation to cost benefit analyses prepared for the purposes of consultation under the new paragraph 10A of Schedule 17A to FSMA 2000 (inserted by Clause 19).
Baroness Penn
“Panel reports
(1) The Treasury may by regulations require specified statutory panels of the regulator to produce an annual report on their work and provide that report to the Treasury.(2) Regulations under subsection (1) may make provision about the content of the annual report.(3) The Treasury must lay a copy of each report prepared by virtue of this section before Parliament.(4) Each specified statutory panel of the regulator must publish its reports prepared by virtue of this section in such manner as it thinks fit.(5) In this section—(a) “statutory panels of the regulator” means—(i) in relation to the FCA, the panels mentioned in section 1RA(8) of FSMA 2000,(ii) in relation to the PRA, the panels mentioned in section 2NA(8) of FSMA 2000, and(iii) in relation to the Payment Systems Regulator, a panel established under section 103(3) of the Financial Services (Banking Reform) Act 2013;(b) “specified” means specified in regulations under this section.(6) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This new Clause would provide the Treasury with a power to make regulations to require annual reports to be produced by the statutory panels established under the Financial Services and Markets Act 2000 and the Financial Services (Banking Reform) Act 2013.
Baroness Penn
“(1A) The statement must provide information about— (a) how representations (including by a statutory panel) can be made to the Bank with respect to its review of rules under section 300I, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the Bank of England to ensure that the Bank includes in its statement of policy about the review of rules (required by section 300J of the Financial Services and Markets Act 2000, as inserted by Clause 46) information about how representations (including by statutory panels) can be made and considered.
(ii) the Bank’s secondary innovation objective (see section 30D(2) of the Bank of England Act 1998);”Member’s explanatory statement
This amendment would ensure that new section 300L of the Financial Services and Markets Act 2000, as inserted by Clause 46 of the Bill, includes, for the purposes of the Bank’s report, a reference to the Bank’s secondary innovation objective, as inserted by Clause 45 of the Bill.(The words after “advance” in section 300L(2)(a) would become sub- paragraph (i)).
Baroness Penn
Member’s explanatory statement
This amendment would ensure that new paragraph 33B of Schedule 17A to the Financial Services and Markets Act 2000, as inserted by Clause 47(14) of the Bill, includes a reference to the Bank’s secondary innovation objective, as inserted into the Bank of England Act 1998 by Clause 45 of the Bill.
“(g) in sub-paragraph (5A)(b)(ii) and (c)(ii), the references to the PRA being notified were references to the Bank being notified.”Member’s explanatory statement
This amendment would extend the duties of the Bank of England to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.
Baroness Penn
“(1A) The statement must provide information about—(a) how representations (including by a relevant panel) can be made to the Regulator with respect to its review of requirements under section 104B, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “relevant panel” means—(a) a panel of the Payment Systems Regulator established under section 103(3), (b) a panel of the FCA mentioned in section 1RA(8) of FSMA 2000, and(c) a panel of the PRA mentioned in section 2NA(8) of FSMA 2000.”Member’s explanatory statement
This amendment would impose a duty on the Payment Systems Regulator to ensure that the Regulator includes in its statement of policy about the review of requirements (required by section 104B of the Financial Services (Banking Reform) Act 2013, as inserted by paragraph 7 of Schedule 7 to the Bill) information about how representations (including by statutory panels) can be made and considered.
“(bb) set out how the Regulator has complied with the statement of policy on panel appointments prepared under section 104I in relation to the process for making appointments and the matters considered in determining who is appointed,”Member’s explanatory statement
This amendment would ensure that the Payment Systems Regulator includes in its annual report under paragraph 7 of Schedule 4 to the Financial Services (Banking Reform) Act 2013 a summary of how it has complied with the statement of policy on panel appointments in section 104I as inserted into the 2013 Act by paragraph 7 of Schedule 7.
Member’s explanatory statement
This amendment, together with the amendment at page 159, line 5, would extend the duties of the Payment Systems Regulator to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.
Member’s explanatory statement
See the explanatory statement for the amendment at page 158, line 36.
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the Regulator that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the Regulator that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 158, line 36.
Baroness Penn
“(4D) Where representations are made to the FCA by a Committee of the House of Commons or the House of Lords or a Joint Committee of both Houses in accordance with subsection (2)(e), the FCA’s account mentioned in subsection (4) must also describe how the FCA has considered the representations made by that Committee in making the proposed rules.””Member’s explanatory statement
This amendment would impose a duty on the FCA to include in the account that the FCA must publish under section 138I(4) of the Financial Services and Markets Act 2000 details about representations made by Parliamentary Committees.
“(4D) Where representations are made to the PRA by a Committee of the House of Commons or the House of Lords or a Joint Committee of both Houses in accordance with subsection (2)(e), the PRA’s account mentioned in subsection (4) must also describe how the PRA has considered the representations made by that Committee in making the proposed rules.””Member’s explanatory statement
This amendment would impose a duty on the PRA to include in the account that the PRA must publish under section 138J(4) of the Financial Services and Markets Act 2000 details about representations made by Parliamentary Committees.
“(5D) Where representations are made to the Payment Systems Regulator by a Committee of the House of Commons or the House of Lords or a Joint Committee of both Houses in accordance with subsection (3)(d), the Payment Systems Regulator’s account mentioned in subsection (5) must also describe how the Payment Systems Regulator has considered the representations made by that Committee in making the proposed requirement.”Member’s explanatory statement
This amendment would impose a duty on the Payment Systems Regulator to include in the account that the Payment Systems Regulator must publish under section 104(5) of the Financial Services (Banking Reform) Act 2013 details about representations made by Parliamentary Committees.
Baroness Penn
Member’s explanatory statement
This amendment is consequential on the amendment at page 160, line 29.
Baroness Penn (Con)
My Lords, the Government recognises that, while digital payments are increasingly present in our society, cash continues to play a vital role in many people’s everyday lives. That is why this Bill puts in place a framework to protect the ability of people and businesses across the UK to access cash withdrawal and deposit facilities for the first time in UK law and introduces new powers for the FCA.
It is important to recognise that, on the whole, cash access in the UK remains comprehensive. Industry is already funding a range of new and innovative services to support communities and ensure that they have easy access to cash. To date, LINK has recommended new shared cash access services in over 100 communities across the UK. This includes the introduction of over 50 shared banking hubs. While the opening of these facilities is taking time to get right, I welcome the recent openings of new hubs in Troon in Ayrshire and Acton in west London. I also understand that the pace of delivery is due to accelerate over the coming months.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in this debate and I will speak to Amendments 82 to 85 and 110 and 111 in my name. I start by thanking the Minister and Treasury officials for all the work they have done around access to cash and, indeed, the moves they have taken. It is great testament to all those organisations which have campaigned on cash for so many years, and will make a real difference to people up and down the country.
Without in any sense pre-empting the work that the regulator and others will do on this, I ask my noble friend the Minister to set out some thoughts on what reasonable access might look like. What are the Government expecting? Allied to that, while I join her in welcoming the increase in the number of shared banking hubs that are coming online, what do the Government see as a reasonable number of hubs to be open by the end of this year?
My Amendment 82 seeks to go further and is really predicated on a very simple belief: what point is access to cash if there are no places to spend it? What currency does cash have in those circumstances? The start point would be really to have all businesses with a physical presence mandated to accept cash. Stepping back from that, as my amendment does, does my noble friend the Minister not agree that any government service, be it central or local, and any public service, particularly that which involves a payment, must accept cash? Similarly, any third party acting on behalf of national or local government in performing a public service should be mandated to accept cash. Does my noble friend see it as reasonable for any business, private though it may be, with a turnover of £100,000—as set out in my Amendment 82—to have to continue to accept cash while we move and transition towards a more digital financial services system?
Amendment 83 seeks to make our cash network part of the critical national infrastructure. There are two key reasons for this. First, it would enable cash usage, enable the economy to work and enable financial inclusion. Secondly, does my noble friend the Minister not agree that, when one looks at the current geopolitical state of the world, making the cash network part of the critical national infrastructure would provide a good second and third line of resilience if the digital systems should go down or suffer an attack? As things stand, that is not beyond the realms of possibility.
Amendment 84 addresses banking services specifically and would enable the Treasury to determine that such services must be available on a high street with a certain number of shops and premises. Banking services would include withdrawals and deposits and must cover both individuals and businesses. Indeed, as the amendment sets out, if there is a last branch standing, that branch should not be allowed to close unless alternative provisions are already in place, such as a banking hub.
Amendment 85 addresses the accessibility of financial services and products. This is differentiated from access to financial services, although there are some obvious overlaps. The amendment points out the difficulties with the accessibility of certain financial services and products. The obvious and most easy example to understand is card payment machines where the buttons are removed and there is merely a flat screen. They are completely inaccessible for me and thousands of people.
In Committee, my noble friend the Minister talked about discussions between the Government, the RNIB and other organisations. Can she update the House on where those discussions have got to? How will the Government ensure that, whether one is paying for a meal or a bicycle, the means of payment is accessible for all those seeking to use it?
Amendment 110 addresses the need for a review of access to digital financial services and products. I raised this in Committee and do so again because it seems highly necessary and a logical next step from the Access to Cash Review, which was completed in 2019. Although I am a staunch supporter of cash and people’s access to and acceptance of it, the future is digital. However, we must ensure not only that that future is accessible but, equally crucially, that the transition to it is accessible. Does my noble friend the Minister agree that further work by HMT in this area would not only make sense following the Access to Cash Review but do a great service in addressing issues which will be felt sharply if we do not address them at this stage?
I will give just one brief example. I could have on my handheld device the best mobile banking app ever created, but if I do not have the digital skills and the confidence to use that app, no payment will be made. Similarly, if, in those same circumstances, I have those digital skills but no mobile connectivity or broadband, that payment will not be made. We need this review of access to digital financial services, before these problems become acute and they affect not only people’s finances but all elements of their lives.
Finally, Amendment 111 addresses the issue of the last branch standing in any particular location but seeks to push a bit further. If there is a remaining branch on a town high street, that is a good thing. However, if that branch does not offer a full banking service, particularly to small and medium-sized businesses and micro-businesses, and if it does not serve more than 20% of the local community, does my noble friend the Minister not agree that we should change the regulations to enable a shared banking hub to be opened in that area?
I look forward to my noble friend the Minister’s response. I hope she will respond fully to all my amendments, but particularly to Amendment 111. A very simple change between Report and Third Reading would make such a potential difference for many of the areas in those circumstances.
Baroness Kramer (LD)
My Lords, I will be exceedingly brief because we took, as we should have, a lot of time on this issue during Committee. We have also discussed financial exclusion already. Once again, I am channelling my noble friend Lady Tyler of Enfield, who wishes that she were not ill and could be here today. I will focus my remarks on Amendment 80 in the name of my noble friend Lady Tyler, and which is signed by me.
The numbers that have been provided to any parliamentarian of interest by LINK on the rate of bank branch closures are frankly scary. The number of bank branches is now below 5,000 across the country and is expected to fall to around 1,000 in the next few years. Amendment 80 gives the FCA power, where certain conditions are met, to direct the establishment of a banking hub. Banking hubs are the solution proposed by the banking industry, in association with LINK, to provide a physical banking facility which is essentially a collective of the relevant banks and the Post Office, in locations where bank branches have disappeared. I am very sympathetic to the idea that the noble Lord, Lord Holmes, proposed, where a branch in name but not in practice because its services are so limited would qualify as well.
LINK has recommended 100 of these shared hubs, but so far only six have opened. Quite often, that is because of the resistance of the banking institutions, which, in effect under the current scheme, have a veto on whether these hubs happen. The gap is yawning and the FCA needs to step in. Because this was raised in Committee, I say that anyone who thinks that online banking is a substitute for face-to-face banking can live only a very vanilla life. I found out the hard way that the systems online and the telephone constantly get it wrong. Often, the only way to resolve a complex issue is face to face. As others have said, including the noble Lord, Lord Holmes, the 5 million people who find digital difficult are even more disadvantaged.
I seriously hope that the Government will accept Amendment 80 because it is the missing mechanism to deliver the project—the Government themselves back the project—of banking hubs and shared banking. To get it delivered we need Amendment 80 to put powers into the hands of the FCA to make sure that it happens. This is a project, I repeat, that the Government themselves have sponsored, in a sense. We need the enablement and delivery to take place rapidly.
Baroness Chapman of Darlington (Lab)
My Lords, I congratulate the noble Lord, Lord Holmes, on tabling his amendments and his tenacity in raising these issues on a very regular basis. He is absolutely right to do so. We were pleased to table Amendment 81 in Committee, and we re-signed it when retabled by the noble Baroness, Lady Altmann, on Report.
We strongly welcome the Government finally bringing forward meaningful protections for cash access. Just in case the noble Lord, Lord Tunnicliffe, starts to doubt his powers of persuasion, we wonder if the Minister could explain why the noble Lord did not seem to have the magic touch when it came to getting him to accept it. The position seems to have changed somewhat now.
It is good that organisations such as Which? have welcomed this concession, noting that cash continues to be hugely important for many households, particularly those which need to keep track of their spending during the cost of living crisis. People should not have to pay fees to access their own money. While we welcomed the Government’s previous move to offer cashback at some retailers without a purchase, cashback services are not available anywhere near widely enough for that to be a substitute.
We welcome the progress made, but there is obviously a lot more to be done. An increasing number of people are finding themselves with little or no access to face-to-face banking services. While the banking hub initiative has promise, its coverage is too limited for it to be anything like a viable solution at this point. We welcome the fact that the noble Lord, Lord Holmes, has tabled several amendments on this. We hope that the Minister is able to go beyond previous assurances, and we look forward to her reply.
Baroness Penn (Con)
My Lords, I will first address the point made by the noble Baroness, Lady Chapman, on the change between Committee and Report. On a whole host of areas, we have reflected on the discussions we had in Committee. The Government have taken the time to do that work and were able to bring forward amendments at this stage, whereas we simply were not able to bring forward amendments on a whole host of topics in Committee. I do not think it is anything to do with differing powers of persuasion between the different stages.
My noble friend Lord Holmes has many of the amendments in this group. I am glad that he also welcomes the Government’s amendments in this area. He asked what reasonable access would look like; that further detail will be for the policy statement. It is important to recognise that currently, on the whole, cash access remains extensive. According to FCA analysis, over 96% of the population are within 2 kilometres of a free-to-use cash access point.
Turning to my noble friend’s amendments, I too acknowledge his persistent campaigning on the provision of access to cash across successive financial services Bills. However, the Government are not able to support the approach in Amendment 82. We do not consider it necessary or appropriate to place additional requirements on organisations to accept cash across the public and private sectors. This should be a decision for individual organisations as they decide how best to operate. What I can say to my noble friend is that the provisions in the Bill do not reflect access just to withdrawal facilities but to deposit facilities, which will support organisations to continue to accept cash.
On Amendment 83, again, this is an issue that my noble friend has raised previously. The designation of critical national infrastructure is sensitive and is not made public. I reassure my noble friend and all noble Lords that appropriate arrangements are in place to ensure the resilience of the UK’s financial system, including cash provision.
I turn to Amendment 80 from the noble Baroness, Lady Tyler, spoken to by the noble Baroness, Lady Kramer, and Amendments 84 and 111 from my noble friend Lord Holmes, which all relate to access to banking services. I acknowledge the strength of feeling on this topic and the perspectives that have been raised. As people acknowledge, it is clear that the nature of banking is changing, and the long-term trend is moving towards greater use of digital and telephone banking services over traditional branches. Of course, it is vital that those customers who rely on physical services are not left behind, which is why the FCA is taking an assertive approach to its guidance for firms on this issue.
Where firms are closing branches, the regulator expects them to put in place appropriate alternatives where reasonable. If firms fall short, the FCA can and will ask for closures to be paused or for other options to be put in place. Beyond digital access, several banks are rolling out community outreach initiatives when they close branches, maintaining key physical services in local libraries, shopping centres and roaming vans. Over 99% of personal and 95% of business customers can, and do, do their everyday banking at 11,500 Post Office branches.
On banking hubs, determining their location and the range of services provided is a commercial decision. My noble friend asked what would be a reasonable number of hubs to have open by the end of the year. As I said earlier, over 50 have been announced. We expect delivery on that commitment to pick up as this year progresses. Furthermore, since the last debate, several firms have made the commitment that, where a banking hub has been announced as a result of their branch closure, they will not close that branch until the hub is open, so we have a double lock of improving the speed of delivery but not losing services until we see improvement in the pace of delivery. That is welcome and shows that the industry is taking this issue seriously.
Regarding accessibility in my noble friend Lord Holmes’s Amendments 85 and 110, I absolutely share his ambition for financial services to be accessible to all. He spoke about some of the work that we discussed in Committee and asked for an update. Perhaps I can write to him after today’s debate with an update on that work.
I turn to the amendment on a review of digital inclusivity. Many financial services firms also support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks. The Government recognise that we need to be proactive in this space, and there is a range of work under way to ensure that financial services adapt to the needs of consumers in the digital age and to address the issues that my noble friend rightly raised. These include driving further progress on access to digital infrastructure, connectivity and skills to fully benefit from this transition.
I am grateful to my noble friend for his constructive challenge of the Government’s approach to this important issue. I assure him and all noble Lords that the Treasury will continue to consider where there may be gaps in the Government’s approach and ensure that no one is left behind as we evolve into new ways of managing our money. An example of this is that the Government recently held a call for evidence on the Payment Services Regulations, which invited views on this policy. We are currently considering responses, including where these are linked to financial inclusion.
I hope that, although the Government are not able to support the other amendments in this group, I have reassured noble Lords that the Government consider these issues very seriously through this work. I hope that noble Lords do not move their amendments when they are reached.
Baroness Penn
“(3A) A “free cash access service” is a cash access service that is—(a) a free of charge service which enables cash to be placed on a relevant personal current account, or(b) a free of charge service which enables cash to be withdrawn from a relevant personal current account.”Member’s explanatory statement
This amendment would provide a definition of “free cash access service” in new Part 8B of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill.
Member’s explanatory statement
This amendment is consequential on the amendment at page 161, line 15.
“(3A) A “relevant personal current account” means a relevant current account held by one or more individuals for purposes outside any business, trade, craft or profession of that individual or those individuals.”Member’s explanatory statement
This amendment would provide a definition of “relevant personal current account” in new Part 8B of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill.
“(2A) The reference to cash access services in subsection (2) includes free cash access services.”Member’s explanatory statement
This amendment would clarify that the cash access policy statement that the Treasury must prepare under new Part 8B of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill, includes policies concerning free cash access services.
Baroness Penn
“(1A) In this section references to cash access services include references to free cash access services.”Member’s explanatory statement
This amendment would ensure that the FCA’s duty, in new section 131U of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill, of seeking to ensure reasonable provision of cash access services includes seeking to ensure reasonable provision of free cash access services.
Baroness Penn
“(2A) Regulations under this paragraph may apply to partial property transfers generally or only to partial property transfers—(a) of a specified kind, or(b) made or applying in specified circumstances.”Member’s explanatory statement
This amendment would provide consistency with other parts of Schedule 11 on Central counterparties by clarifying that regulations made under paragraph 75 (restriction of partial transfers) may apply to transfers generally or only to transfers of a particular kind or in particular circumstances, as specified in the regulations.
Baroness Penn
“(5A) A liability, to the extent of its reduction by a write-down order under this section, is to be treated as extinguished unless and until revived by section 377H or 377I.”Member’s explanatory statement
This amendment would clarify the effect of a write-down order under section 377A (to be inserted into FSMA 2000 by paragraph 1 of Schedule 12 to the Bill) on the treatment of liabilities reduced by the order.
Member’s explanatory statement
This amendment would correct a reference in the table of termination events in the context of describing when a write-down order regarding the value of an insurer’s liabilities ceases to have effect.
Member’s explanatory statement
This amendment would provide a drafting clarification to ensure that the effect of a write- down order is more clearly reflected in this provision concerning compensation to policyholders where insurers are in financial difficulties.
Lord Harlech
“The Ombudsman scheme
(1) FSMA 2000 is amended as follows.(2) In section 429 (Parliamentary control of statutory instruments), in subsection (2B) after paragraph (c) insert—“(d) provision made under paragraph 15(3) of Schedule 17.”(3) Paragraph 15 of Schedule 17 (the Ombudsman scheme: power of scheme operator to charge fees) is amended as set out in subsections (4) and (5).(4) In sub-paragraph (1) after “respondent” insert “or other persons of a specified description”.(5) After sub-paragraph (2) insert—“(3) The reference in sub-paragraph (1) to persons of a specified description is a reference to such descriptions of persons as may be specified in regulations made by the Treasury.(4) The power conferred by sub-paragraph (3) to specify descriptions of persons may not be exercised so as to provide for eligible complainants to fall within a specified description of persons.(5) The reference in sub-paragraph (4) to “eligible complainants” is a reference to complainants who are eligible in relation to the compulsory or voluntary jurisdiction of the ombudsman scheme (see section 226(6) and 227(7)).(6) Before making regulations under sub-paragraph (3) the Treasury must consult the scheme operator.””Member’s explanatory statement
This new Clause would enable the scheme operator of the Financial Ombudsman Scheme to make rules requiring persons of a description specified in regulations, other than eligible complainants, to pay fees in connection with the investigation of complaints (in addition to the existing power to impose fees on persons who are the subject of complaints).
Lord Harlech (Con)
My Lords, the Financial Ombudsman Service was established through the Financial Services and Markets Act 2000 to provide for the proportionate, prompt and informal resolution of disputes between consumers and financial services firms. The FOS offers a cost-free service for consumers, which is fundamental to its purpose.
The FOS is funded by a combination of an annual levy on regulated firms and case fees. Under the current framework, it is responsible for setting its case fee rules and can charge case fees only to firms that are subject to complaints. This means that claims management companies—or CMCs—and other professional representatives cannot be charged for bringing cases to the FOS. The Government heard the concerns raised by noble Lords, particularly by my noble friend Lady Noakes during Grand Committee, about CMCs bringing large numbers of vexatious claims against firms to the FOS.
Amendment 90 therefore addresses those concerns by amending FSMA 2000 to give the Treasury the power to make regulations specifying categories of persons to whom the FOS can charge case fees. The Treasury intends to add CMCs and other professional representatives such as law firms to this list. This will enable the FOS to amend its rules to charge case fees to CMCs and other professional representatives for bringing complaints, subject to its usual consultation processes. By specifying who can be charged by the FOS in regulations, the Government can ensure that the full range of claims management models can be effectively captured. It also allows flexibility to amend this list in future if different models emerge.
The Government are clear that all consumers should be able to access the FOS free of charge and without the need for any CMC support. The FOS remaining a cost-free service for consumers is fundamental to its purpose. The amendment therefore expressly prevents the Treasury adding consumers to the categories of persons who can be included in the regulations.
In summary, Amendment 90 will ensure that the Treasury is able to empower the FOS to charge case fees to CMCs while ensuring that the FOS remains cost-free for consumers. I beg to move.
Baroness Kramer (LD)
From these Benches, the amendment makes sense to us.
Baroness Chapman of Darlington (Lab)
Happily, it makes sense to us as well. Without wishing to delay anybody—remembering the exchanges we had before this debate started today—I wonder whether the Minister could indicate the level of fees. He said that consumers would be excluded, which is very important. Are the Government confident that this will not in any way suppress the use of this service? Do they have anything in mind to improve awareness of the service among consumers?
Lord Harlech (Con)
My Lords, I am grateful for the contributions in this short debate and thank both noble Baronesses for them.
On case fees, the amendment follows the existing approach under FSMA to allow the FOS to charge fees to respondents. Under this approach, the Government set out through legislation who the FOS is able to charge fees to and it will be for the FOS to set the detail of those case fee rules. This may include when firms should be charged; for example, from the first case or after a certain number of cases. Similarly, the amendment will not prescribe the specific approach the FOS will have to take in charging CMCs—it will be for the FOS to look at those fees. The FOS highlighted concerns from industry about this issue in its feedback statement following its recent consultation on its funding framework, and it acknowledged examples of poor behaviour by CMCs.
The Government agree that there are wider implications and it is critical that the bodies in the financial services regulatory framework, including the FCA and the FOS, co-operate effectively. That is why Clause 38 introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues that have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, the FOS and the FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications. These organisations already co-operate on a voluntary basis through the existing wider implications framework. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.
As I have set out, the Government are clear that all consumers should be able to access the FOS free of charge, without the need of any CMC support. Amendment 90 will enable this.
Financial Services and Markets Bill
Tuesday 13th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-III Third marshalled list for Report - (9 Jun 2023)
15:26 - Division on Amendment 91 - Ayes: 212 / Noes: 203 - Amendment 91 agreed.
18:13 - Division on Amendment 104 - Ayes: 192 / Noes: 210 - Amendment 104 disagreed.
18:56 - Division on Amendment 106 - Ayes: 184 / Noes: 188 - Amendment 106 disagreed.
Baroness Boycott
“Forest risk commodities
(1) FSMA 2000 is amended in accordance with subsection (2).(2) After section 410 insert—“Forest risk commodities410ZA Forest risk commodities(1) A person must not carry on a regulated activity in the United Kingdom that may directly or indirectly support a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity unless relevant local laws were complied with in relation to that commodity.(2) A person that intends to carry on a regulated activity that may directly or indirectly support a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity must establish and implement a due diligence system in relation to that regulated activity to ensure compliance with relevant local laws.(3) The due diligence system referred to in subsection (2) must be in place within 24 months of the day on which the Financial Services and Markets Act 2023 is passed.(4) Within the period of one year beginning with the day on which the Financial Services and Markets Act 2023 is passed, the Secretary of State must by regulations made by statutory instrument make provision about the details of the due diligence system referred to in subsection (2).(5) A statutory instrument containing regulations under subsection (4) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.(6) In this section, “due diligence system” means a system for—(a) identifying and obtaining information about the commercial activities of any beneficiary of the regulated activity and of their group regarding the use of a forest risk commodity,(b) assessing the risk that relevant local laws were not complied with, or that free, prior and informed consent was not obtained from local communities, or from indigenous people in accordance with their rights under international law, in relation to that commodity, and(c) mitigating that risk.(7) A person that carries on a regulated activity in the United Kingdom that directly or indirectly supports a commercial activity in relation to a forest risk commodity or a product derived from a forest risk commodity is subject to—(a) the reporting requirements under paragraph 4 of Schedule 17 to the Environment Act 2021 (“the Environment Act”) in relation to the due diligence system required under subsection (2), and(b) Part 2 of Schedule 17 to the Environment Act as though they are a person to whom Part 1 of that Schedule applies.(8) Terms used in this section that are defined in Schedule 17 to the Environment Act have the meanings given in that Schedule.”(3) In paragraph 17(1) of Schedule 17 to the Environment Act 2021 (use of forest risk commodities in commercial activity), for “and any Part 2 regulations (“relevant provisions”)” substitute “, any Part 2 regulations (“relevant provisions”) and section 410ZA of the Financial Services and Markets Act 2000”.”
Baroness Boycott (CB)
We debated this amendment last Tuesday but it has taken until today to get to the vote. Needless to say, its importance has not diminished. The Amazon is the lungs of the world, and this is a straightforward amendment that aims to clamp down on illegal deforestation. While I thank the noble Baroness for her response last week and much appreciate all the points that she made, we need to move faster in this direction, and so I would like to test the opinion of the House.
Lord Vaux of Harrowden
“(8A) At least annually after the Payment Systems Regulator has imposed the requirement set out in subsection (5), it must publish a report on the impact of the requirement, including its assessment of the impact on the protection of consumers and the behaviour of payment service providers in relation to consumer protection.(8B) Reports published under subsection (8A) must provide at least the following information for each payment service provider subject to the requirement—(a) the number and value of authorised push payment (APP) scams notified to them;(b) the percentage by number and value of APP scams that have been reimbursed;(c) the percentage by number and value of APP scams initially rejected and subsequently appealed and the results of such appeals;(d) the percentage by number and value of APP scams that have been finally rejected;(e) the shortest, longest and average time from notification to decision about reimbursement.”Member’s explanatory statement
This amendment aims to ensure that the impact of the APP reimbursement requirement is assessed and reported on regularly and to ensure that consumers can see whether the rules are being applied consistently and which institutions are better and worse at reimbursing victims fairly and promptly.
Lord Vaux of Harrowden (CB)
My Lords, I introduced a number of amendments on the subject of authorised push payments fraud in Committee. At the time I said I was broadly happy with the Minister’s responses but would look to return to the reporting question again, which is what Amendment 94 does. I should say at the outset that I support what the Bill is trying to do in respect of APP fraud to make it easier, and in particular fairer, for victims of APP fraud to get their money back. Before I go any further, I remind the House of my interest as a shareholder of Fidelity National Information Services, Inc., which owns Worldpay.
My new Amendment 94 has two elements to it. First, it would introduce requirements on the PSR to report annually on the impact that the reimbursement requirement had had on consumer protection and on the behaviour of payment service providers. Secondly, it would effectively create a league table to enable consumers to see how each bank is actually performing both in preventing fraud and in reimbursing victims.
On the first point, the annual impact report is necessary because the mandatory reimbursement requirement could have unintended consequences that might damage consumer protection. I shall give a couple of possible examples of that. First, there is the possibility of moral hazard. If the mandatory requirement means that consumers start to take less care about protecting themselves because they will be repaid anyway, that could have the undesirable consequence of actually making it easier for the fraudsters to commit fraud and so actually increase levels of fraud. While, as we discussed in Committee, we must not put the blame on the victims, there is a balance to find in this area to avoid making it easier for the fraudsters while improving consumer protection and outcomes. We will know whether we have found the right balance only when we start to see the results.
A second example might be that the banks change their behaviour in an undesirable way. Rather than improving their fraud detection and prevention processes, they might simply decide that the easiest thing to do would be to stop providing services to people whom they see as being at the highest risks of fraud in order to reduce their potential reimbursement liability. I think many Members of this House have seen similar behaviour in respect of PEPs—politically exposed persons—where, rather than undertaking sensible risk-based steps, banks have on occasion just decided that it is too difficult or expensive to deal with PEPs and have refused to open accounts or have even closed accounts. We will come to that later today, but it is a good example of a well- intentioned risk measure having undesirable consequences. In the case of APP fraud, if the banks see it as too great a financial risk to provide banking services to those deemed to be at a higher risk of fraud, then we might see a whole swathe of more vulnerable people unable to obtain banking services.
These are just two examples, but I hope that they demonstrate the importance of the PSR keeping the impact of the requirement for mandatory reimbursement under regular review and amending it if it turns out to have unintended negative consequences. Reporting on this regularly and publicly will ensure that the impact assessment is robust.
Turning now to the second element of the amendment, the requirement to report annually on the performance of the banks, a major criticism of the current voluntary reimbursement code is that it is completely non-transparent. While numbers are published, they are anonymous. Consumers cannot see which banks are behaving best, and which are behaving worst, unless, as TSB does, they tell us voluntarily. The TSB example is encouraging—it is using its 100% reimbursement policy as a selling point. Introducing competitive good behaviour is highly desirable, and this amendment would help achieve that.
The amendment would effectively create an annual league table that would enable consumers to see which banks have the lowest levels of fraud—which will give an indication of how good they are at detecting and preventing fraud—which banks are better and quicker at reimbursing victims when fraud occurs, and, by including the appeal information, which banks make it more difficult for victims. That would allow consumers to take this information into consideration when deciding whether to stay with their existing bank or when considering opening a new account—something that would otherwise not be possible. That would, I hope, provide a real competitive incentive for banks to change their behaviour both in detecting and preventing fraud and in treating victims promptly and fairly.
This would not introduce a significant additional burden; the PSR will have all this information anyway, so reporting it is not a significant job. However, the benefits to consumers of making this information public are potentially significant.
When we discussed this in Committee on 13 March, the Minister stated in relation to the impact assessment that the PSR
“has committed … to a post-implementation review”
and that the Government would also
“monitor the impacts of the PSR’s action and consider the case for further action where necessary”.
That does not go far enough. Fraudsters keep changing their business models in reaction to actions by industry and the authorities, so it is essential that this is kept under continual review rather than only a one-off, post-implementation review. It is also important that the impact assessments are published. Can the noble Baroness provide any greater comfort in those respects?
On the league table, the noble Baroness said on 13 March that the PSR
“is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data”.—[Official Report, 13/3/23; col. GC 166.]
It is now nearly three months later, so can the noble Baroness provide an update on whether this consultation has progressed and whether the data will in fact be published? It would be better if such data was published by a single source such as the PSR rather than piecemeal by payment service providers. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I support this amendment and I can be relatively brief. It is important not only to collect the statistics but also at times to dig underneath to see how they might be being gamed. From personal experience, I know of instances where banks are treating microbusinesses more strictly than they are treating consumers, saying that a business should know and therefore rejecting them out of hand at the first time of asking, if I can put it that way. I have heard, in a similar case, stories of someone making contact by telephone repeatedly, their inquiry getting lost and the person having to go through the whole story with a case handler multiple times, the strategy obviously being, “Let’s try and make them give up”. That was with a very large bank; I will not name it because I do not have absolutely all the detail. Therefore it is quite important that different criteria are not being used between sole traders and individuals when it has already been determined via the ombudsman that both have a route.
Lord Naseby (Con)
My Lords, this amendment has to be seen in the context of the statement by the Payment Systems Regulator on 7 June, which was only a few days ago. It seems to me that that is the key starting point. I say to my noble friend on the Front Bench that that statement is enormously welcome. It states clearly that:
“For the first time, our new reimbursement requirement will introduce consistent minimum standards to reimburse victims of APP fraud”.
I do not want to detain the House by going through some of the detail of that because that is not what we are doing here today, but it seems to me that that is a significant step forward.
Secondly the PSR says quite clearly:
“We are increasing protections within Faster Payments”,
and that is also a key issue. There is a timeline in the statement which states that there will be consultation on:
“The allowable claim excess that Payment Service Providers can charge”.
That is to be done in August and the whole lot will be finished by October. I wish it were to be done a little quicker, but it seems an excellent start.
The only part of the amendment which I think is extremely valuable is the one-year report. Frankly, with the volume of illegal activity that there is at the moment, if it were me—and I was the marketing director at a couple of the companies I used to work for—I would not wait a year; I would like to see what happens within the first six months of the new regime being in place. Later on, you can decide if there is some consistent reason that you move to a six-month situation.
Finally, I would like to know exactly what the starting point was before the new regulations came in. At the moment, I do not know that we have any official statistics. We may do and, if so, it would be very helpful to the House to know, not necessarily at this moment but in the near future, the starting point for the number of these terrible situations that people are being faced with today.
Lord Livermore (Lab)
My Lords, the Payment Systems Regulator is now putting in place requirements to ensure more consumers will receive a refund if they fall victim to authorised push payment scams. This is very welcome. Many banks have already taken steps to make customers aware of the risk of scams, but the sophisticated nature of many such scams means there is a need for even stronger efforts to prevent fraud occurring in the first place. Not all of the detail is yet settled, with consultation on key aspects of the new scheme to follow later in the year, but we hope the Minister can give an indication of the levels of protection likely to be offered.
We welcome the tabling of Amendment 94 by the noble Lord, Lord Vaux, which we understand to be a probing text. As the new system beds in, it will be vital for banks and other financial institutions to collect data and share that with the regulator, in order to inform future changes to guidance and regulation. The amendment also proposes public reporting of data to enable consumers to see which institutions have a good or bad track record. This is an interesting idea and we look forward to hearing the Minister’s response on this specific point.
While APP scams fall within the financial services realm, anti-fraud initiatives cut across departments and legislation. That is why one of our priorities for the Online Safety Bill is to ensure robust media literacy provisions, so internet users are able to better identify which articles, websites or emails are legitimate. With a significant amount of financial fraud taking place online but with the limited scope of that Bill, we hope the Minister and her department will engage with the Online Safety Bill as it approaches Report stage. Scams cause a significant amount of emotional distress, as well as coming with financial costs, so we hope that the Government and the regulators will do everything possible to keep ahead of the curve.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government and the Payment Systems Regulator recognise the importance of regular, robust data collection. This is crucial for monitoring the effectiveness of the reimbursement requirement and ensuring that firms are held accountable. I am grateful to the noble Lord, Lord Vaux of Harrowden, for his considered engagement on this issue. I reassure noble Lords that the PSR has committed to half-yearly publication of data on authorised push payment scam rates and on the proportion of victims who are not fully reimbursed.
I can tell my noble friend Lord Naseby that a voluntary system is already in place and the PSR has already begun collecting data from the 14 largest banking and payment groups. The first round of transparency data is due for publication in October this year. The data that the PSR will publish includes the proportion of scam victims who are left out of pocket, fraud rates where the bank has sent customers’ money to a scammer, and fraud rates where the bank has hosted a scammer’s account. That means that, from October this year, the PSR will publish data for total fraud rates, both for sending money and receiving fraudulent funds, and reimbursement rates, on a twice-yearly basis for the 14 largest banking groups. This so-called league table will provide customers with the information they need to consider the relative performance of different banking groups on these metrics, and to factor that into their banking decisions.
Further to this data, once the reimbursement requirement is in place the PSR will use a range of metrics to monitor its effectiveness on an ongoing basis. These include the length of reimbursement investigations, the speed of reimbursements, the value of repatriated funds, the treatment of and reimbursement levels among vulnerable customers, and the number and value of APP scams. Data on appeals will be captured and reported by the Financial Ombudsman Service separately.
More broadly, the PSR will publish a full post-implementation review of the reimbursement requirement introduced by this Bill within two years of implementation. The review will assess the overall impact of the PSR’s measures for improving consumer outcomes. That does not mean it will not also consider the effectiveness of this measure on an ongoing basis. Indeed, more widely, the PSR will consider risks across different payment systems and, where necessary, address them with future action. This includes a commitment to work with the Bank of England to introduce similar reimbursement protections for CHAPS payments, and with the FCA in relation to on-us payments.
The PSR has been working closely with industry to develop effective data collection and reporting processes for its work on fraud. While the Government recognise the intention behind the noble Lord’s amendment, they do not consider it necessary or appropriate to prescribe specific metrics to be collected in primary legislation. I hope that, given the reassurance I have been able to provide today, he would agree with that point.
The noble Lord, Lord Livermore, spoke about the wider impacts of fraud and the duties that go beyond financial services companies or payment system providers in addressing those risks of fraud. That is being looked at through both the Government’s counter-fraud strategy and other Bills. He mentioned the Online Safety Bill. I disagree with his assessment of the measures in there. The measures that we have to tackle fraud in that Bill are a significant step-change in what we expect of companies in this space, and I think they will make a real difference. We are committed to working across all sectors to look at what more we could do in this space once we have implemented those measures and see how effective they are. I hope noble Lords are reassured by our commitments more broadly on this issue, and specifically by the fact that the PSR will be publishing data in this space once we have implemented the measures in the Bill.
Lord Vaux of Harrowden (CB)
My Lords, I thank all those who have taken part in this debate, particularly the Minister for her constructive engagement on this and the reassurance she has just given. In fact, in one area, she has actually gone further than my amendment suggested, as the noble Lord, Lord Naseby, pointed out: the annual report is now to be six-monthly, which is hugely welcome. It is only for the top 14 payment service providers, which will cover the bulk of the market, but that is something that the Government and the PSR might want to keep under review, particularly as different players come in and out of the market. I thank her very much for her reassurances.
I will make one comment more generally, echoing some of the comments made by the noble Lord, Lord Livermore. It is not only the banks that are players within the fraud chain, it is all those other parties that enable or facilitate fraud, from the tech companies to social media companies, the web-hosting companies, the telecom companies, et cetera. This measure puts all of the liability on to the banks. While it is a simple solution for victims—and that is to be commended—we need to find some way of incentivising all those other players in the fraud chain to behave properly and to stamp down on their services being used by fraudsters. I am hoping that we will see progress on that in the Online Safety Bill, and also in the failure to prevent fraud clauses in the economic crime Bill that is coming forward. With that, I beg leave to withdraw my amendment.
Baroness Penn
“Arrangements for the investigation of complaints
(1) The Financial Services Act 2012 is amended in accordance with subsections (2) and (3).(2) In section 84 (arrangements for the investigation of complaints)—(a) omit the “and” at the end of subsection (1)(a);(b) omit subsection (1)(b);(c) after subsection (1) insert—“(1A) The Treasury must appoint an independent person (“the investigator”) to be responsible for the conduct of investigations in accordance with the complaints scheme.”;(d) omit subsection (4);(e) in subsection (5), in the opening words, for “regulators” substitute “Treasury”.(3) In section 87 (investigation of complaints)—(a) in subsection (9A), after paragraph (b) insert—“(ba) for the regulator’s response under paragraph (b) to include a summary of—(i) the cases in which the regulator decided not to follow any relevant recommendations, and(ii) the reasons for not following those recommendations;”;(b) in subsection (9B), after paragraph (e) insert—“(f) such other matters as the Treasury may from time to time direct.”;(c) after subsection (9B) insert—“(9C) In subsection (9A)(ba) the reference to “relevant recommendations”, in relation to the regulator’s response in respect of an annual report, is a reference to—(a) any recommendations to the regulator contained in that annual report, and(b) any recommendations to the regulator contained in final reports relating to individual complaints given during the period to which that annual report relates.”Member’s explanatory statement
This new Clause would amend the Financial Services Act 2012 to make the Treasury, rather than the regulators, responsible for the appointment of the Complaints Commissioner and would impose additional reporting requirements.
Baroness Penn
“Politically exposed persons: money laundering and terrorist financing
(1) The Treasury must exercise the power conferred by section 49 of the Sanctions and Anti-Money Laundering Act 2018 (power of appropriate Minister to make regulations about money laundering etc) for the purpose mentioned in subsection (2).(2) The purpose is to make provision amending Part 3 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”) (customer due diligence) so as to secure the result required by subsection (3).(3) The result required by this subsection is that, where a customer is a domestic PEP, or a family member or a known close associate of a domestic PEP—(a) the starting point for the relevant person’s assessment under regulation 35(3) of the 2017 Regulations is that the customer presents a lower level of risk than a non-domestic PEP, and(b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer is less than the extent to be applied in the case of a non- domestic PEP.(4) In this section—(a) “customer” includes a potential customer;(b) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(c) “enhanced risk factors”, in relation to a customer who is a domestic PEP or a family member or a known close associate of that domestic PEP, mean risk factors other than the customer’s position as a domestic PEP or as a family member or known close associate of that domestic PEP;(d) “non-domestic PEP” means a politically exposed person who is not a domestic PEP;(e) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.(5) Section 55 of the Sanctions and Anti-Money Laundering Act 2018 (Parliamentary procedure for regulations) does not apply to regulations made in compliance with the duty imposed by subsection (1).(6) Regulations made in compliance with the duty imposed by subsection (1)—(a) are subject to the negative procedure, and(b) must be laid before Parliament in accordance with paragraph (a) before the end of 12 months starting with the day on which this section comes into force.(7) The Treasury must, before the end of 6 months starting with the day on which this section comes into force, lay before Parliament a statement setting out what progress has been made towards making the regulations in compliance with the duty imposed by subsection (1).(8) The duty in subsection (7) does not apply where the regulations have been laid before Parliament in accordance with subsection (6)(a) before the end of 6 months starting with the day on which this section comes into force.”Member’s explanatory statement
This new Clause would impose a duty on the Treasury to amend the money laundering regulations with the effect of ensuring that a politically exposed person who is entrusted with a prominent public function by the UK (or their family members or known close associates) should be treated as representing a lower risk than a person so entrusted by a country other than the UK, and have lesser enhanced due diligence measures applied to them.
Baroness Penn (Con)
My Lords, there has been significant discussion throughout the passage of this Bill, and more broadly in parliamentary debates, around the treatment of politically exposed persons—PEPs—under the money laundering regulations. Noble Lords have made many valuable contributions on this issue, sharing their personal experiences and those of their family members. I appreciate the concern expressed across this House that noble Lords and their family members can face disproportionate treatment as a result of their PEP status, including burdensome requests for information and even being prevented from accessing financial services. The Government are clear that action is needed to address this. In looking at this issue, we have sought to balance the need to maintain our adherence to the international standards in this area, as set by the Financial Action Task Force, with the need to ensure proportionate treatment of PEPs.
Therefore, the Government are tabling amendments to this Bill to achieve this in two areas. The Government are clear that domestic PEPs are lower-risk than foreign PEPs, and this must be reflected in both policy and practice. Noble Lords will be aware that while the money laundering regulations require all PEPs to undergo enhanced due diligence, the Government require the FCA to publish guidance on how banks and other financial institutions should meet this requirement. The FCA’s current guidance, published in 2017 following a provision introduced in the Bank of England and Financial Services Act 2016 with cross-party support, makes it clear that financial institutions should treat domestic PEPs as lower-risk than non-domestic PEPs in the absence of other high-risk factors.
Lord Forsyth of Drumlean (Con)
My Lords, when I went home after the last time we discussed accountability of the regulators to Parliament, my wife said to me, “I was watching you speaking on TV and, very unusually, you were praising the Minister to the skies”. Here I am having to do it again. My noble friend Lady Penn, the Minister, has listened very carefully to all the points that have been made and has come forward in these amendments with a package that makes my Amendment 101 look rather feeble, for which I am extremely grateful.
I do not propose to spend much time talking about Amendment 101 but want to make just a couple of points. First, I declare my interest as a chairman of Secure Trust Bank. Secondly, it is not just the banks causing difficulty here; it is also credit card providers such as American Express, which seems to have been particularly heavy handed.
I have had an American Express card since 1979 and yet, only recently, I got an email which I assumed was a spoof that said I had to provide copies of my passport and bank statements, details of my investments and income, and my payslips—such as they are—to American Express within a certain number of days. I assumed this was some fraudster. Then I got another email telling me that my card had been suspended because I had failed to produce this material. When I rang American Express and said: “What is going on here?”, they said: “Unless you produce it, your card will remain suspended”. Of course, there were a number of payments on my card, which caused me some embarrassment.
That is a completely disproportionate use of the regulations. I am not even sure that some of the financial institutions are even looking at this work themselves. They may be contracting it out to other people who are simply involved in box ticking.
I will give another example from some years ago. My daughter had an account at the same bank as me, Coutts, and the manager said to her: “Is there any chance that you could move to another bank because you are such a pain to look after because your dad is a politically exposed person?”. In my view, that is an absolute disgrace. Our children find it difficult to get mortgages. People find it difficult on probate. What my noble friend is proposing today goes further than my amendment and I hope it will result in change.
There is a problem, however, in that the regulator is judge and jury in their own court on this matter, although I appreciate the measures which my noble friend has put in place to hold them to account. Of course, if we set up a committee of this House or a Joint Committee, I think this will be very high on the agenda if they have not actually dealt with it.
I have one slight niggle with Amendment 97 in my noble friend’s name, which is that she gives the FCA 12 months to publish. That seems an inordinate length of time. In the previous amendment we discussed today, my noble friend reduced the time to six months from 12 months. Perhaps she might reflect on whether it really needs 12 months to carry this out. At first, I thought it might be a move in the hope that perhaps there might be a general election and it might get lost in that and there might be a change of government and it might not happen. But one thing is clear: everyone on all sides of this House feels very strongly about this issue and I commend my noble friend for having taken this action, which I know has not been easy, and for the care with which she has listened to colleagues in coming forward with these proposed changes.
Lord Moylan (Con)
My Lords, I shall speak to my Amendment 105 in this group. I express enormous gratitude to my noble friend the Minister for all the effort she has put in to resolving this problem in the last couple of years and now in this Bill. I have had a number of meetings with her, for which I am grateful. I have learnt much from her in the course of those meetings and in Committee. I think this is also an appropriate occasion for me to apologise for the fact that in Committee I insisted on one particular point of detail that I was right and, of course, it turned out on closer inspection afterwards that she was 100% right and I had got it wrong, so I apologise for that.
She has made sterling efforts, and what she is proposing today is welcome. None the less, those efforts—at least until we came to this debate today—have not been successful in scrapping a system which is cruel, capricious and unjust. In part, that is because of resistance in parts of the Civil Service. While I accept her proposal today, it worries me—I am wary—that 12 months is being sought in which to come forward with proposals which will resolve it definitively.
I would prefer, in principle, my Amendment 105. I am grateful for the support given to it by the noble Baroness, Lady Hayter of Kentish Town, the noble Lord, Lord Sharkey, and my noble friend Lord Forsyth of Drumlean—which I think pretty well represents most sides of the House.
The legal background, which my noble friend explained to some extent, is that this all originates with the Financial Action Task Force—an international group in which British officials play an important part. It is not binding. It is not law, but it is like a standard of good behaviour, if you like. I can understand why my noble friend and the Government at large wish to continue to adhere to those standards. I have no problem with that.
However, it is clear that the FATF—I am afraid that is the expression I am going to use for the Financial Action Task Force—recommendations make a distinction between domestic and foreign PEPs. It is difficult for the European Union to make such a distinction internally— I think the noble Baroness, Lady Bowles, who was involved with the European Union at the time, will confirm this—so when the FATF recommendations were incorporated into a European Union directive, that distinction between domestic and foreign PEPs was lost. So, as it was then transposed into UK law through the money laundering regulations, that distinction no longer appeared. However, it is clearly there in the FATF recommendations.
Since we are no longer obliged to adhere to the European Union directive, it is entirely possible for us, and entirely consistent with any sense of international obligation we have, to restore that original distinction. That is what my amendment would do in law straightaway. The FATF recommendation is that domestic PEPs should not be subject to the money laundering regulations unless they are in what is described as a “higher risk business relationship”. I have stuck very closely to that wording in my amendment.
It is also my view that when the Government come back in a year’s time, or maybe sooner—I hope it will be sooner; it does not have to be a year—they will end up more or less with my amendment. If they want to stick to the FATF recommendations and yet alleviate some of the burden on domestic PEPs, this is more or less where they will have to be. That is what I would prefer, but I am clearly not going to see it today.
I will add a few other points. As I say, I think my amendment is the standard against which within a year we will be judging what the Government come back with. There are a few other points not captured in the amendment that I think the Government have to address in the course of the review. First, at the moment, banks claim that the tipping-off provisions in the money laundering regulations mean that they cannot tell us when they are investigating us as PEPs. So, one gets these bizarre requests, as described by my noble friend Lord Forsyth, but if you try to have an intelligent conversation with them about what is going on, you are completely blanked and no explanation whatever is forthcoming. They claim that this is mandated upon them. I think that is possibly a misinterpretation, but in either event, it has to go. We have to be able to talk sensibly to people who are trying to make such inquiries if we are indeed within scope of them at the end of this process.
Secondly, it must be made clear to the banks that the closing or freezing of accounts should be very much a last-resort action, and only if there is already evidence of a suspicious transaction. It cannot be resorted to in the way that some banks have been doing. It is simply unconscionable that perfectly ordinary people who are family members—not necessarily Members of this House—are having their accounts closed down or frozen while investigations take place, when there is no evidential basis for doing so. It is simply, “Your turn has come round on the agenda to be inquired into”. Can my noble friend say whether we can look forward to any alleviation in practice during the next 12 months while we are waiting for this to happen, or is the full rigour of this unjust system to be persisted with while we are waiting?
Baroness Hayter of Kentish Town (Lab)
My Lords, it is exactly three months ago today that we debated this issue in Committee, when the Minister heard many examples of what had been going on. She has done rather more than any of her predecessors in acknowledging that there is a problem with how the AML rules are applied to PEPs and that change needs to happen—but she has gone even further and done something about it. I will not say that it is simply because she is a woman and that is what we do, but it is interesting that she has done it. As we heard, she has tabled Amendments 96, 97, 118 and 119, which she has outlined.
I have added my name, as the noble Lord, Lord Moylan, said, to Amendment 105, which goes a bit further and is more specific than the Government’s amendment. Ideally, they might have accepted it and made a carve-out for our family members; as we have heard, we may be guilty because we are here, but they have done nothing wrong and it is awful that they are caught by it. So I welcome the Minister saying in her introduction that the review will specifically look at whether it is possible to tweak that somewhat.
As I said in Committee, this has been going on for rather a long time. The noble Lord, Lord Flight, was the first noble Lord to raise it that I could find, in 2013, and I have been on about it since 2015, as the House knows. We have had Written Questions, Oral Questions, meetings, press coverage and all of that. In addition to the inconvenience for us, this has also meant that all these banks and others are wasting their time looking at our business instead of, as we have heard, at some other people. It is not just Amex and others; it is car purchase firms and everybody else inconveniencing us and wasting their time.
The Minister has acknowledged that it is time for legislation. The key part of her proposal is distinguishing between domestic and foreign PEPs and a requirement both on HMT and the FCA to do something. What the Government have done may not be perfect, but it is a real step forward. I think the Minister is well aware that we will keep a rather beady eye on what is happening, and we will be back here if nothing changes.
In the meantime, we should thank the Minister for what she has done. We have made a big step forward and I am delighted that the noble Lord, Lord Moylan, will not be pressing his amendment. It is right that we accept where we have got to with the Minister, and we will watch that being implemented.
Lord Sharkey (LD)
My Lords, I have added my name to Amendment 105 in the name of the noble Lord, Lord Moylan, and I congratulate him on his determination and persistence. I do not quite understand his dislike of Turkish barbers, but we can deal with that some other time.
His amendment’s simplicity and its direct modification of the regulation is an appealing approach, as is the absence of the word “review”. I was very pleased to see the government amendments in this group, chiefly because, of course, they are government amendments. I am very grateful for the Minister’s clear and long-standing commitment to resolving, or at least ameliorating, the problem. I have only a couple of observations about the government amendments.
The explanatory statement to Amendment 96 says that UK PEPs
“should be treated as representing a lower risk than a person so entrusted by a country other than the UK, and have lesser enhanced due diligence measures applied to them”.
The amendment itself, in proposed new subsection (3)(b), states that
“if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer is less than the extent to be applied in the case of a non-domestic PEP”.
Neither of those offers a definition or sets an upper limit to what this lesser form of due diligence should be. Is that decision to be left entirely to the financial services companies? If it is, can we reasonably expect uniformity of definition and behaviour?
Why would we expect the banks to significantly change their current behaviour? Would it not be more likely that they will simply water down some minor aspect of the diligence they currently feel is due and carry on otherwise much as they do now? In a way, that is what is happening anyway. The banks mostly ignore the FCA’s current guidance, as set out in paragraph 2.35 of FG17/6. The FCA, in response to that, applies no sanctions. Nowhere in the government amendments is there mention of sanctions for non-compliance with the new arrangements.
Given the rather cavalier disregard some banks have displayed towards the current guidance, do we not need some sanction for future non-compliance, or a way of making the FCA properly enforce its own guide- lines? What use are guidelines if they are not enforced? I would be very grateful if the Minister could say how a workable definition of “lesser due diligence” is to be arrived at and how the new regime may be enforced.
Viscount Trenchard (Con)
My Lords, I declare my interest as a director of two investment companies, as stated in the register. I was interested to hear the remarks of my noble friend Lord Forsyth of Drumlean about American Express. He said that he had had a gold credit card with that company since 1979. Well, I had a gold card issued by American Express in 1978. I was very proud of having that card. I did not use it often, but it is one of those cards that clears automatically every month so there is no danger of running up unpaid debts and paying 20% or 30% interest.
In November 2021, I missed an email from them asking me for KYC information, including my passport details, proof of address and a utility bill, and I omitted to reply. I then got another email a month later—with no telephone call or letter through the post—saying that my account will be closed down. I telephoned them and, after waiting for three-quarters of an hour or so, I spoke to someone who agreed that they did not really need KYC information on me, but if I supplied it and uploaded it to their website, my account would not be cancelled, and all would be fine. I duly did that, but the account was still cancelled in about February 2022. I was not happy about this, because, as I said, I rather liked my gold card issued in 1978, so I took issue with them.
Over the past 15 months, I have spoken with them about six times; I have been on the chat function about six times. I now have two names of individuals and an email address I have been corresponding with, but my account is still cancelled—although they still send me a monthly statement through the post giving me a credit balance. I will print out the Hansard report of this debate and attach it to my next email to American Express, because I am not giving up on this.
Lord Clarke of Nottingham (Con)
I will not make a speech giving my experience of American Express, but it is remarkably like that of my noble friends Lord Trenchard and Lord Forsyth. I decided that I could not be bothered with such outrageous burdens being placed on me. Having had my card from some time in the 1970s, I have allowed them to cancel it. Having heard of my noble friend’s experience, I am rather glad that I just let it go and reverted to using my Barclays visa card on all occasions.
Lord Naseby (Con)
I will take my noble friends’ points further. My experience was identical to that of my noble friend Lord Forsyth. Frankly, I have cancelled the whole thing; Barclaycard does a far better job.
Viscount Trenchard (Con)
Both my noble friends have a much more sensible approach to this matter.
I echo the other remarks of my noble friend Lord Forsyth, whose Amendment 101 I was minded to support. I too am most grateful to my noble friend the Minister for listening to the opinions of your Lordships expressed in Grand Committee. I added my name to Amendment 227 in Grand Committee, tabled by my noble friend Lady Noakes. Her amendment was debated on 13 March alongside Amendment 215, tabled by my noble friend Lord Moylan and other noble Lords. I would have added my support to my noble friend Lord Moylan’s Amendment 105, but it was too popular and there was no room.
My noble friend the Minister will recognise the disproportionate difficulties which UK PEPs must endure as a result of the money laundering regulations 2017. On balance, I would have preferred to be excluded by virtue of being a UK citizen, but my noble friend has decided that exclusions will apply to domestic PEPs, which does not sound so nice, but will achieve the same outcome.
Unfortunately, it will take years for British citizens resident abroad who are connected to UK PEPs to be released from similar regulations in many different jurisdictions. For example, my son has found it impossible to be appointed as a bank account signatory in Taiwan and South Korea. However, my noble friend the Minister’s amendment should make the life of UK PEPs easier. I am interested to see whether, in a year’s time, the amendment proposed by my noble friend Lord Moylan will be the triumphant, most successful and best one of these. In any event, I am most grateful to her for taking up this point, as she said she would.
Lord Eatwell (Lab)
My Lords, we seem to be predominantly discussing personal experiences at the moment, so I declare an interest as the former chairman of the Jersey Financial Services Commission.
The definition of a politically exposed person in Amendment 96 refers to persons
“entrusted with prominent public functions by the United Kingdom”.
Presumably, that would not apply to the Crown dependencies, since they are not part of the United Kingdom. I think that this is a mistake; it should be corrected by the Government, given the important role many UK citizens play in the Crown dependencies and in the financial services industry in the Crown dependencies. Would the Minister agree to take this away and see whether the omission of the Crown dependencies is just an error that has been made in drafting this amendment.
Baroness Kramer (LD)
My Lords I rise because this amendment allows me to do two things that I do not do very often. One is to thank the Minister because the amendments that she has brought forward are constructive, as others have described. The second is to say to the noble Lord, Lord Moylan: finally, a benefit from Brexit. One down, which pleases me, I have to say.
I want to ask the Minister if, in the course of the review, she will look at the industry that has mushroomed from the vetting of PEPs. I dealt with the American Express problem that others have described. I filled in my forms and still have my card—I am afraid that the BA miles win me over. I decided that I would open a savings account at Chase Bank as they were offering some good rates but discovered that I was caught up in this PEP process and the bank asked for a raft of information that, frankly, I should have never been asked for. The breaking point was a phone call asking me for payslips for my husband. On his death, I had inherited from him and therefore the bank wanted historical payslips. My husband died 17 years ago and I do not know how many people still have their payslips from 17 years ago, never mind those of a dead spouse.
To me, that was typical of the overstepping and exaggeration—gold-plating is almost an understatement —that has been going on in this process. It caused me to go on to the web and discover that there is a raft of consultants, advisers and legal entities that have become engaged in this process and taken straightforward guidelines from the FCA and blown them up into something extraordinary and complex. I am furious with the FCA because it does not enforce the guidelines; I hope the Minister will convey that and that the Government will become furious with the FCA for not enforcing its own guidelines. I hope that she will also encourage it to use the review to look at the vast industry that has burgeoned and makes its profits from making life an absolute misery for anybody it can catch in the system.
The Earl of Erroll (CB)
My Lords, I should like to add to this because I have had enough trouble with the PEPs issue for a long time. First, I thank the noble Lord, Lord Moylan, for explaining an important point about why I can get no information from Northern Trust on administering an investment trust in which my wife owned shares in Ireland. We had to get probity in Ireland, but the trust will still not release the money and will not say why. I am getting an absolute blind spot. Even Barclays, which wants money over here to pay off something does not seem to be getting any joy. I suspect that it is because the trust is not allowed to tell us that we are under investigation. That is wrong. If there is a problem, we could unlock it if the trust could just say, “We are trying to investigate this because we think we have to”.
I personally find it offensive that I am deemed to be a risk and a crook. I thought that in this country we were innocent until proven guilty. Actually, this is the other way around. Just because I happen to be a Member of the House of Lords, it is assumed that I am corrupt. This has caused a lot of problems for me and my family, but I am not going any further into detail. We have heard good stories from others, but I do not understand why we are PEPs. I have no access to government contracts and there is no reason to bribe me, sadly. I do not understand the logic behind that, and something should be done. The classification of PEPs should be looked at and revised because a lot of other people who are not PEPs are in places handling government contracts. As far as I know, they are not under permanent scrutiny, so I think you have got the wrong people and it is a nightmare.
Lord Naseby (Con)
My Lords, the noble Lord, Lord Eatwell, mentioned the Crown dependencies. I want to ask my noble friend on the Front Bench about the position of the British Overseas Territories.
Baroness Chapman of Darlington (Lab)
My Lords, I accept that we are politically exposed people—of course we are—and we can be bribed, so it is right that there are rules around this. This topic has attracted a lot of interest throughout the passage of the Bill, along with a number of questions and debates. I completely understand why that is.
While the enhanced checks faced by politically exposed persons are often onerous, as we have heard—all power to the elbow of the noble Viscount, Lord Trenchard; well done to him for finding the names of two actual human beings to speak to at American Express, and I hope he gets his situation resolved—it is vital that this country maintains strong anti-money laundering regulations and acts in a manner consistent with international standards. Unfortunately, to an extent that involves us, but I think the Government’s amendments in this group do what is needed in making the distinction, as do many other jurisdictions, between domestic PEPs and those from other countries, which is consistent with the Financial Action Task Force guidelines.
We welcome the support for the amendments from the noble Lord, Lord Forsyth, and my noble friend Lady Hayter of Kentish Town, both of whom have raised this issue consistently for some time. Most of all, though, it is right that we thank the Minister for bringing the amendments forward. She has worked hard to try to resolve colleagues’ concerns on this issue, and we hope that those will be dealt with by the upcoming changes to the regulations and the accompanying guidance.
Baroness Penn (Con)
My Lords, I reiterate what the noble Baroness, Lady Chapman, has just said: our approach in this area has always been guided by ensuring that the rules in place in the UK maintain the international standards that are set in this area. That has been the guiding principle in looking at resolving this issue. Nevertheless, we felt that it was right that action be taken. Examples such as that from the noble Baroness, Lady Kramer, demonstrate clearly that the approach taken by institutions is not always proportionate, and we need to address that.
I have heard from noble Lords, including my noble friends Lord Forsyth and Lord Moylan, questions about the timescale for the two pieces of work that are committed to in the amendments. I understand that feeling, but we have engaged closely with the FCA on the review that it is committed to undertaking through the government amendment, and it is clear that if there is to be a thorough assessment of the treatment of domestic PEPs at a systemic level—we have already raised individual issues or individual institutions in response to previous debates—then it must be given adequate time to be conducted.
The 12-month timeframe will allow the review to benefit from fuller engagement with industry and with affected PEPs, and it will ensure that the FCA is able to develop a full understanding of the scale and extent of this issue. I think it gives the FCA time to address issues such as those raised by the noble Baroness, Lady Kramer. Included in that timeframe is the fact that, if it deems it necessary to update its guidance, it will produce the draft within that timeframe.
The Government have 12 months to amend the money laundering regulations. As I said, the distinction between domestic and foreign PEPs does not currently exist in law, and we want to make sure that we get the drafting right to ensure that it achieves the intended outcomes without unintended consequences. That will require us to consult with industry to ensure that the language in the amendment has the desired outcome of altering firms’ behaviour in how they treat low-risk domestic PEPs. These points relate to the questions posed by the noble Lord, Lord Sharkey, because this definition will come in part through the amendment of the regulations but in part from looking at the FCA’s guidance, and what needs to be set out more fully there when it has done its review.
Acknowledging the interest from parliamentarians—perhaps we should all have declared our interest as we stood up to speak, in respect of PEPs—we have committed to updates on progress both from the FCA and the Government in delivering on these amendments.
My noble friend Lord Moylan and the noble Earl, Lord Erroll, raised the interaction with tipping-off requirements and communication to customers. We have asked the FCA to consider this as part of its review. The noble Baroness, Lady Hayter, and others, mentioned the impact on family members. Again, we have asked the FCA to consider this in its review.
My noble friend Lord Moylan also asked if we need to wait for 12 months for action. The FCA remains committed to taking action where it identifies non-compliance with its current guidance on PEPs and will do so throughout the course of the review. I encourage noble Lords to use the contacts provided in my letter on this issue in November, if they encounter difficulties while the Government amendments are being implemented. I am sure that those in the FCA responsible for this area will look at this debate carefully.
The noble Lord, Lord Eatwell, raised a question on Crown dependencies, and my noble friend Lord Naseby asked about overseas territories. I will write to noble Lords on that. If it is right or appropriate that this should extend that far, there is nothing in the amendments to prevent the Government doing that, but I would want to double-check the right interaction and the right locus for addressing those concerns. With that, I beg to move.
Amendment 96 agreed.
Amendment 97
Baroness Penn
“Politically exposed persons: review of guidance
(1) The FCA must review its guidance on politically exposed persons (“PEPs”) given under section 139A of FSMA 2000 and in compliance with the requirements under regulation 48 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”).(2) The review required under subsection (1) must include—(a) an assessment of the extent to which the guidance is followed by those persons to whom it is given under regulation 48 of the 2017 Regulations, and(b) in the light of that assessment, consideration as to whether the guidance remains appropriate or whether it should be revised.(3) The FCA must—(a) before the end of 3 months beginning with the day on which this section comes into force, publish an update on the FCA’s plan for the review required under subsection (1), and(b) before the end of 12 months beginning with the day on which this section comes into force—(i) publish the conclusions of the review, and(ii) where the FCA concludes that the guidance should be revised, publish draft revised guidance for consultation.(4) Publication as required by subsection (3) must be in the way appearing to the FCA to be best calculated to bring the publication to the attention of persons likely to be affected by it.(5) The FCA is not required under this section to publish any information whose publication would be against the public interest.(6) In this section—(a) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(b) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.”Member’s explanatory statement
This new Clause would impose a duty on the FCA to review the guidance that the FCA produced in 2017 on the banks’ treatment of politically exposed persons, and publish draft guidance alongside the review, if the FCA concludes that the guidance should be revised.
Earl Attlee
“Withdrawal of banking services
(1) When a provider of banking services in the United Kingdom decides to cease to provide banking services to an existing customer, or decides not to offer banking services to a specific prospective customer, because of one or more of the reasons specified in subsection (2), the bank is required to inform the FCA about that decision within the period of 4 weeks after the decision is taken. (2) The specified reasons are—(a) there is a reasonable suspicion that the customer is, or has, engaged in money laundering;(b) there is a record or specific instance of the customer not complying with requirements under money laundering regulations in a significant and easily-avoidable manner;(c) the provider cannot accept the regulatory risk of providing banking services to the customer despite the reasons set out in paragraphs (a) and (b) not applying;(d) ethical reasons;(e) the customer is in the defence industry.(3) The FCA must maintain a record of decisions notified to it under subsection (1).”
Earl Attlee (Con)
My Lords, I will also speak to my Amendments 99 and 100. In Committee, I moved an amendment similar to Amendment 99. I will not weary the House with the arguments I made in Committee in detail. Suffice it to say that, in the new year, I became aware of a small business that was exporting armoured fighting vehicles to Ukraine under export licences granted by His Majesty’s Government’s Export Control Joint Unit. I will call the businessman in question “Peter” for reasons of security.
Peter’s major high street bank has withdrawn provision of banking facilities and will give Peter no reason—exactly the problem discussed in the previous group. In these circumstances, I understand that the banks will generally stonewall a Member of another place. However, the bank in question was very helpful to me, and explained that the problem was the money laundering regulations and the attendant unacceptable regulatory risk. I tried as hard as possible to resolve this problem discreetly and behind the scenes. The bank indicated that it could continue to provide financial services if it received a suitable letter from a Treasury Minister. Sadly, Ministers would not provide one. I am grateful to the Minister for meeting with me many weeks ago, but she was unable to change her position, which is why I moved a suitable amendment in Committee.
All export licences for lethal military equipment are very carefully considered. In Committee, the Minister correctly made the point that the export licensing machinery tests whether or not the equipment should be exported, while the money laundering regulations are a different test to check for, and counter, illicit finance. The reason I drew the export licence point to the attention of the Committee was that it proves that it is within the defence and security policy of His Majesty’s Government for these vehicles to be exported to Ukraine. If it was thought undesirable, or even just unhelpful, a licence would not be granted. I therefore contend that the money laundering regulations are thwarting the intent of His Majesty’s Government.
Viscount Trenchard (Con)
My Lords, I declare an additional interest as stated in the register as a provider of geostrategic advice to Safe Security (SSL) Ltd. I will not repeat the arguments so well put by my noble friend Lord Attlee, who has given much voluntary military service over the years. I have added my name to my noble friend’s Amendment 98, but I also support both Amendments 99 and 100.
The Export Control Organisation at the former Department for International Trade grants export licences for controlled goods for military purposes. Its online export licensing system is called SPIRE. The organisation’s website states:
“We advise that you register your company on SPIRE, benefits include: More Control … Time Saving”.
I understand that it takes much time to obtain a SPIRE licence, but I am not convinced that it saves any time in carrying out this control business. It is of course right that companies wishing to receive licences to conduct this kind of business should be properly vetted and undergo the most stringent checks. However, once they have done that and been granted SPIRE accounts, why do they then find that the money laundering regulations prevent banks opening accounts in order to execute this kind of business under any circumstances?
In Committee, my noble friend the Minister acknowledged that
“the government process for the granting of export control licences focuses on the end use of goods rather than the source of funds paying for them”.
She told the Committee that the Treasury has
“engaged with the Export Control Joint Unit, the Financial Conduct Authority and other partners on this issue”.
She said that she was
“not aware of a systemic issue”,—[Official Report, 21/3/23; col. GC 297.]
but would “act to address it” if the Government identified one. I rather think there is a systemic issue here, because banks run a mile when anyone, particularly an SME, tries to open a bank account to do this kind of business. Banks are not aware of the SPIRE system and give absolutely no recognition to any licence granted under it to a prospective customer. The result of this, at least in some cases, is that the business is being carried out in other jurisdictions, such as Finland, that do not apply these regulations in such a stringent manner. This obviously deprives the Exchequer of corporation tax revenues and results in the official statistics understating the extent of British support for Ukraine.
This does not apply only to military equipment but includes the provision of vehicles to be used as field ambulances. I want to ask the same question of my noble friend the Minister as that asked by my noble friend Lord Attlee: do the Government think that absolute observation of the money laundering regulations is more important than permitting those who are licensed to do this business to do so?
Baroness Kramer (LD)
My Lords, we should thank the noble Earl, Lord Attlee, for raising a set of significant issues. I have no specialist knowledge in this area, but I am very well aware that SMEs generally are disadvantaged under our current framework arrangements. As the Minister will know, individuals and micro businesses—usually a small sole trader or somebody of that ilk—fall within the FCA’s regulatory perimeter, but the SMEs that have just been described fall outside of it.
Therefore, where there are gaps or where their treatment is completely inappropriate, they have nowhere to turn. In those circumstances, they face significant disadvantage compared to their competitors across the globe. So I hope the Minister will understand that this is a reflection—I think “tip of an iceberg” was the correct term—of something that is quite systemic in many different ways, and an area where the Treasury, and the regulators, need to focus attention.
Baroness Penn (Con)
My Lords, as I set out previously in Grand Committee, I commend my noble friend Lord Attlee for his strong role in supporting Ukraine and bringing the value of his expertise in support of efforts to provide Ukraine with vital supplies. I understand that my noble friend wishes to ensure that the money laundering regulations do not hamper the private export of armoured vehicles or military vehicles to Ukraine. However, this cannot come at the expense of weakening the regulations in a way that would allow them to be circumvented by those wishing to launder money or finance terrorism.
The Government are committed to providing economic, humanitarian and military support to Ukraine. That is why the UK is proud to have pledged £6.5 billion in support of Ukraine, including £1 billion of World Bank guarantees to go towards closing Ukraine’s 2023 financing gap and £2.3 billion in military support for 2023. In 2022, 195 standard individual export licences and three open individual export licences were granted for the export of military items to Ukraine.
I recognise that my noble friend has concerns about a wider issue relating to provision of banking services to those involved in the defence industry and the refusal or withdrawal of services for other reasons connected with money laundering or ethical concerns. As I said in Committee, I am not aware that banks are taking a blanket approach to such customers. I am grateful to my noble friend for setting out some further specific cases today and I am glad that he had the opportunity to meet my noble friend the Defence Minister. The Treasury would be happy to look further into these cases with my noble friend and the Ministry of Defence. Equally, if the defence industry has wider concerns, I would encourage it to bring them to the attention of the Government and the regulators.
My noble friend made a comment on the Government’s ESG policy and its impact on defence companies. Our ESG policy is focused on delivering the net-zero commitment and there is nothing in that policy framework that prohibits or otherwise disadvantages defence companies and the war in Ukraine—
Earl Attlee (Con)
I am sorry to interrupt the Minister, but it was not the Government’s ESG policy that had caused me a problem but the banks’ ESG policies.
Baroness Penn (Con)
I understand the point that my noble friend makes, but I think that is rather a matter for the banks. Nevertheless, as I have said to my noble friend, if there are wider or more systemic issues in this area, I would encourage him to draw this to the attention of the Government and the regulators. The Government are clear that investment in the defence sector remains important.
My noble friend suggested again that I or another Treasury Minister write to the bank which withdrew services from his associate telling it to relax steps to be taken to comply with MLRs. However, it would be extraordinary and inappropriate to override the MLRs in this way. Further, banks would still be under obligations in relation to the Proceeds of Crime Act which relate to dealing with such money.
I thank my noble friend for raising this issue. I am glad that he has met the Ministry of Defence on it. If there are wider issues that he would like to highlight to the Government, the Treasury is committed to working with the MoD to look at them. None the less, I hope my noble friend does not press his amendments at this time.
Earl Attlee (Con)
My Lords, I am grateful for the response of my noble friend the Minister. I detect a little bit of movement, but I am not surprised at her response. Of course, I am very happy to withdraw my amendment.
Earl Attlee
“Performance bonds for small or medium-sized enterprises
(1) Within six months of the passing of this Act, the Secretary of State must lay before each House of Parliament a report on the availability of performance bonds to small and medium-sized enterprises from the financial markets to cover stage payments in capital projects.(2) The report must, among other things, cover collateral requirements.”
Earl Attlee (Con)
My Lords, during my research into the money laundering problems identified in the previous group, I identified another problem for SMEs: the availability of performance bonds from the financial markets to cover stage payments in capital projects. I do not need to explain to your Lordships what stage payments are or how bonds work, and it is certainly something that I do not have any expertise in. The difficulties are that the banks require so much collateral that the system is intractable. It is not a problem for large firms with correspondingly large balance sheets; this problem affects only SMEs and tends to keep them small. I talked to a manufacturer of hovercraft, and if all their current enquiries came to fruition, they would simply not be able to secure the necessary bonds to finance the work. I beg to move.
Baroness Kramer (LD)
My Lords, this is an issue that I have raised in the House before, having run into the same set of issues—I suspect with some of the same companies down in the West Country involved particularly in large-scale exports which require performance bonds to be able to meet their contractual obligations. In these instances, performance bonds were denied by the banks unless the collateral included the homes and personal possessions of the directors and senior managers of the company. This was despite the fact that the firms had long-standing records of being able to deliver on the projects they engaged in and indeed the customers at the far end had reputations, again, of being excellent payers.
It is a real weakness in the system that we have no one who deals with market gaps, particularly when it applies to SMEs. I attribute part of this to the regulatory perimeter, but regardless of where the fault lies, there needs to be a remedy if we are to build a future economy which will be based very largely on SMEs and, hopefully, very significantly on exports.
Lord Harlech (Con)
My Lords, the Government recognise the importance of ensuring that SMEs are able to access appropriate financial products, including performance bonds, and of ensuring the availability of useful information on such products. As noble Lords are aware, performance bonds are a type of financing product that provides a financial guarantee to one party in a contract in the event of the failure of the other party to fulfil its obligations.
More broadly, SMEs already benefit from a diverse financial market, made up of high-street banks, smaller banks and a range of non-banks, to ensure they can continue to access suitable finance. The Government support SMEs’ access to finance through a variety of debt and equity finance programmes through the British Business Bank. These programmes were supporting more than £12 billion of finance to more than 94,000 smaller businesses as of June 2022.
The British Business Bank also produces several reports on access to finance on an annual basis, including the Small Business Finance Markets report, providing expert and independent assessment of the availability and options within the wider funding landscape for SMEs. Fundamentally, the commercial terms that banks and insurers offer, including the collateral they require for performance bonds, are a matter for the firms, subject to meeting the relevant regulatory requirements.
The Government remain committed to maintaining the highest international standards of regulation, and the Financial Services Act 2021 granted the PRA the powers to implement the latest international standards, known as Basel III.1. These include revised capital requirements for performance bonds for banks. The PRA recently consulted on its proposals and specifically requested comments and data from firms and wider stakeholders on its proposals for capital requirements for products such as performance bonds, and it will be considering feedback provided by respondents in formulating its final proposals. For insurers providing performance bonds, the Government are reforming one of the capital requirements, the risk margin, removing a barrier to lower product pricing.
As noble Lords are aware, under the provisions in the Bill, our independent regulators will take on new responsibilities. This means that the PRA will take on responsibility for setting the relevant regulatory requirements that are currently set through retained EU law, acting within the framework set by the Government and Parliament.
As we have discussed a number of times in relation to the Bill, when making rules designed to ensure the safety and soundness of financial services firms it is also important to consider how those firms can support the wider UK economy. That is why the Government have introduced the new secondary growth and competitiveness objectives, which will require the regulators to act to facilitate the competitiveness of the UK economy and its growth in the medium to long term. The PRA’s current consultation has been undertaken before the provisions in the Bill will come into effect. However, the Financial Services Act 2021 requires the PRA to “have regard” to the Government’s economic policy, including investment in SMEs and infrastructure, as well as the effect of its requirements on the UK’s international standing and the provision of finance to businesses and consumers in the United Kingdom on a sustainable basis.
Measures in the Bill also allow for parliamentary scrutiny of the regulators’ performance, including how they have advanced their new secondary competitiveness and growth objective. In addition, the Bill requires the regulators to produce statements of policy on how they will review their rules. Recent government amendments will require these statements to include information on how stakeholders can make representations to review rules, and on the arrangements for ensuring that these representations are considered.
In conclusion, the Government are committed to ensuring that SMEs have access to suitable financial products which are subject to suitable prudential safeguards to appropriately manage any risks. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. I therefore ask my noble friend to withdraw his amendment.
Earl Attlee (Con)
My Lords, I am particularly grateful to the noble Baroness, Lady Kramer, for her intervention, which showed how much more she knows about finance than I do. She did a great job. I am not convinced that industry will be cracking open the champagne after listening to my noble friend’s response to my amendment; nevertheless, I am grateful for it. In the meantime, I beg leave to withdraw my amendment.
Lord Forsyth of Drumlean
“Bank of England digital currency: legislation
The Bank of England may not issue digital currency unless authority to do so is granted by an Act of Parliament which is passed after this Act.”
Lord Forsyth of Drumlean (Con)
My Lords, I will speak to Amendment 103 in my name. It is supported by my noble friend Lord Bridges of Headley, who is currently chairing the Economic Affairs Committee, where the Governor of the Bank of England is before the committee. I hope he is giving him a good roasting on the issue of central bank digital currencies, which is the subject of this amendment.
I shall not bore the House by explaining what central bank digital currencies are and why they represent a threat as well as an opportunity, because all that was well set out in the Economic Affairs Committee’s report Central Bank Digital Currencies: A Solution in Search of a Problem? which was published in January 2022. The report was debated in the House in February this year. In the report’s recommendations was a simple suggestion that the Government give a clear indication that, should they decide to go forward with introducing a digital currency, it would be subject to primary legislation. To the astonishment of the committee, the Government have consistently refused to do so. They are arguing that they have not yet decided whether they think a central bank digital currency would be appropriate.
More recently, the Chancellor wrote a letter addressed to the chairman of the Treasury Select Committee and my noble friend Lord Bridges, addressing him as “Dear James” rather than “Dear George”. Ah—my noble friend is now in his place, so I do not need to elaborate too much. My noble friend Lord Bridges has been a vigorous champion of the need to have parliamentary accountability concerning this matter.
A main theme in Committee and throughout consideration of the Bill has been accountability. I have on several occasions now paid tribute to the Minister for responding to that. There are real issues about having a central bank digital currency. The first point is it is not a currency; it is simply a means of having digital banknotes. However, the fact that people are able to have an account in which their money is in digital form through a clearing bank with the central bank has huge implications for financial stability, depending on how much can be held in a digital account. The ability to move money from a conventional bank account to a digital wallet instantly would mean people would be able to react to financial events almost instantaneously. The fact that people could move their money to a central bank digital wallet would mean there would be less money—I should declare my interest as chairman of Secure Trust Bank—available to be lent, which would have huge implications for credit and, if taken to the extreme, would amount to the nationalisation of credit in our country, although no one is suggesting that.
There are also huge implications for privacy. If a digital currency is to operate effectively and not be prey to crooks and organised crime, it is essential that it is organised in a way that will monitor people’s transactions, and that, plus the ability to limit transactions, has big implications for civil liberties. For the first time in my life, I have had left-wing libertarian organisations writing to me saying how much they appreciate what I have been saying on this subject.
I will not take up the time of the House—and by the way, this Report stage is the very model of how Report on a Bill should be conducted. I will simply say to my noble friend that the notion that the Treasury and the Bank of England could get together and introduce a central bank digital currency without having proper parliamentary scrutiny and debate about these issues is utterly ridiculous in my view and I do not understand why the Government have been resisting doing so.
Lord Bridges of Headley (Con)
My Lords, I will speak very briefly and I apologise for being late.
The Governor of the Bank of England was just in front of the Economic Affairs Committee and our final question was on CBDCs. He gave an answer that I thought was lukewarm at best in his support for them, which was very interesting in and of itself. Before going any further, I remind the House of my interest as an adviser to Banco Santander.
The last time I debated a CBDC, I think there were five of us in the Chamber. Just as I was summing up my speech, suddenly the Chamber filled up, and I thought: “My God! Everyone is suddenly interested in my thoughts on CBDCs”. Only then did I realise that there was just about to be a debate on Brexit for the 231st time, and my views on CBDCs were completely and utterly irrelevant.
As my noble friend has just so eloquently summarised, this is an issue that we really need to focus on a lot more in Parliament as a whole. You may be a fan of CBDCs—here I am looking at my friend the noble Baroness, Lady Kramer, who I think is more persuaded by the merits of them and may see them as the best thing since sliced bread, or perhaps in this case one should say decimalisation—or, like me and my noble friend Lord Forsyth, you may be of a more conservative disposition and need to be convinced of the need for change. Whichever view you have, as my noble friend has just said, it is imperative that Parliament has the chance to debate, scrutinise and vote on primary legislation before a CBDC is introduced.
My noble friend has summarised many of the most important points, including privacy, financial stability and the impact of bank disintermediation. There is also the entire issue of how a CBDC might affect the operational independence of the bank, as my noble friend pointed out. One estimate is that a CBDC could—I stress “could”—increase its balance sheet by £400 billion, and it would obviously give the bank entirely new tools in monetary policy.
Then there is the entire issue of cost. I have to say that the words “IT infrastructure project” are possibly the most expensive three words that you can put together. I am very concerned about how much this will cost. No one seems to be able to say how much it will cost or who will pay.
Then there are issues of cybersecurity. The Bank states that new infrastructure needed to support a digital pound would make
“an attractive target for hackers and fraudsters who wish to steal funds”
and
“may become a target for hostile attacks with the aim of disrupting the system and, potentially, the wider economy”.
According to GCHQ, while a digital currency presents “a great opportunity”, it goes on to say:
“If wrongly implemented, it gives a hostile state the ability to surveil transactions”.
Those are just some of the enormous issues that a CBDC raises, and why we must have primary legislation to be able to scrutinise and vote on all this. I am very grateful to my noble friend the Minister, her colleague the City Minister, Mr Griffith, and the Chancellor for focusing on this.
I should actually say that the Chancellor may be forgiven: I am christened James George, so he might have just been signing this late at night, even though I have known him for 20 years. I will put that to one side. I got a very nice letter from the Chancellor, as did Harriett Baldwin. The problem is that, although it is signed by Jeremy Hunt, I feel that it is almost signed by Lewis Carroll because it gives you the feeling that it comes from Alice in Wonderland at a certain point.
If I may, I will detain your Lordships by reading two paragraphs:
“The Government and the Bank of England are at an early stage of policy development and have not made a decision on whether or not to introduce the digital pound”—
that we all know. It goes on:
“As a result, we do not yet know whether a digital pound will require primary legislation”.
When you read that back a few times, it begs a question, and I would be grateful if my noble friend the Minister, when she sums up, could answer it. Could a digital pound be introduced without primary legislation? This seems to suggest that potentially you could have one and it would not require primary legislation.
Be that as it may, the letter then goes on to say:
“However, in recognition of the potential significance of a digital pound, and the views of Parliamentarians, the Government commits to introducing primary legislation before launching a digital pound”.
So even though one might not need primary legislation, the Government are committing that there would be primary legislation.
Obviously, that is a great step forward. My problem is that it is still is not watertight. Much as I would like to say that my noble friend, Mr Griffith and the Chancellor are going to be there for years to come, I somehow do not know whether that is going to be the case. That is why I very much echo what my noble friend has said, and would like the Minister to go as far as possible in saying why it is not the case that they are not willing to put this into primary legislation. Moreover, I would be very interested to know the view of the Labour Party and the Liberal Democrats on this, and whether they too would say that they will commit not to introduce a CBDC without primary legislation.
I end by echoing my noble friend. The introduction of a digital pound—a “Britcoin”, as you might call it —would be an enormous undertaking. We cannot and we must not leave it to be passed by statutory instrument one wet Wednesday afternoon in the Moses Room. That would be an absolute disaster. It needs to be debated on the Floors of both Houses and voted on.
Baroness Altmann (Con)
My Lords, I too apologise to the House for being late.
I have added my name to my noble friend’s amendment. I urge my noble friend the Minister and the House to think very carefully about what possible advantages there could be relative to the disadvantages of having a central bank digital currency. We have seen so many people lose so much money, and so many money launderers, thieves and so on make so much money from digital currencies. This may be one of the biggest scams of the century.
It is very difficult to see why we need digital currencies at all. The risks for money laundering and economic crime, the lack of transparency and security for anyone putting money in, and the opportunity that this would offer to rogue states and actors to try to undermine our entire financial system require significant warning. The possibility that this could be introduced without primary legislation seems to me to be unconscionable and a dereliction of our duty to make sure that we are looking after the currency of this country.
Baroness Kramer (LD)
My Lords, I had the privilege of serving on the Economic Affairs Committee, with the noble Lord, Lord Forsyth, as chair, when it produced the report. Your Lordships will gather that my views on whether we adopt a digital currency are distinctive somewhat from others who have spoken today. It is not that I am some enthusiast for it; I recognise all the issues and disadvantages that have been named today, particularly financial stability and privacy. However, 18 countries will be adopting a central bank digital currency this year—including China, initially for its domestic market. It has been piloting it in 12 cities, but eventually it will become an offering that it takes to the many other countries where it expects to exercise influence, in both Asia and Africa.
I am afraid that we are facing potentially a King Canute situation: we may not particularly want such a currency but might simply have to accept that to remain in the forefront and in play within financial services and as a major exporter and participant in global trade, we may have no choice but to go down this route. But I absolutely share with every other speaker the view that this should be determined by Parliament in primary legislation. The issues are sufficiently fundamental and far-reaching. They carry risk, and they require judgment and perspective—and it is in debates in the other place and here that that can happen.
It seems to me that something so fundamental as currency surely is the responsibility of a democratic Parliament. It cannot be transferred, in effect, to either the Treasury to run through an SI, or to the regulators to not even bother with an SI but largely to put it in place through various regulatory changes. So, here we have absolute common ground; this should be on the face of the Bill. I am concerned that this may be the last piece of legislation coming forward where we have the opportunity to put it in the Bill. There might be a further opportunity in a year’s time, but it depends on the speed of change that we experience.
Guarantees from the Government would be good. I am glad that a letter has been written to Harriett Baldwin and the noble Lord, Lord Bridges, but we need something that recognises the significance and importance of doing this through primary legislation.
Lord Livermore (Lab)
My Lords, we welcome the amendment in the name of the noble Lord, Lord Forsyth, which has enabled this short and informative debate on the process for establishing a central bank digital currency. As technology develops and people’s habits change, it is vital that we keep pace. Therefore, the principle of a digital pound has much to commend it, although the arguments, implications and details clearly need to be properly worked through. The introduction of a digital pound would represent a significant step, and it is therefore right for the noble Lords, Lord Forsyth and Lord Bridges, to ask about the underlying processes, though it is a novel experience for the two noble Lords to be asking for commitments from this side of the House.
We very much welcome the clarification offered by the Chancellor in his letter to the noble Lord, Lord Bridges, and the Economic Affairs Committee that there would be primary legislation before a digital pound could be launched. We agree that this is an important safeguard.
Baroness Penn (Con)
My Lords, I thank my noble friends Lord Forsyth and Lord Bridges for their leadership in the House on this important topic. I do not intend to relitigate the debates around the question of a central bank digital currency; I was one of the five or so noble Lords who debated the Economic Affairs Committee report in February, and I enjoyed it very much.
As we set out then and in Grand Committee, the Government have not yet made a decision on whether the digital pound should be introduced, and that remains the case. But we also take the view that a digital pound may be needed in the future, so further preparatory work is justified. Therefore, the Treasury and the Bank of England issued a joint consultation on a potential digital pound on 7 February. As that consultation paper makes clear, the legal basis for a digital pound will be determined alongside the consideration of its design.
Lord Forsyth of Drumlean (Con)
My noble friend has made valid arguments for not putting the amendment, as drafted, in the Bill. However, she and her very clever officials could get around this by tabling an amendment at Third Reading to that effect.
Baroness Penn (Con)
I am afraid that I am not in a position to commit to my noble friend’s suggestion. I hope that the reassurance he has heard from all Front-Benchers on this issue will persuade him not to press his amendment at this time.
Lord Forsyth of Drumlean (Con)
My Lords, once again, my noble friend has gone beyond what we might expect in responding to the debate, so it is a pleasure to beg leave to withdraw my amendment.
“Defined contribution and defined benefit pension funds investment review
(1) The Treasury must publish a review of how to incentivise defined contribution (DC) and defined benefit (DB) pension funds to invest in high-growth firms and a diverse range of long-term assets in the United Kingdom, which must include green infrastructure.(2) The review must consider how best to do this while protecting the safeness and soundness of pension funds.(3) In carrying out the review, the Treasury must consult—(a) the Department for Work and Pensions,(b) the Department for Business and Trade,(c) the Pensions Regulator,(d) the FCA,(e) the PRA,(f) the Pension Protection Fund,(g) pension trustees, and(h) relevant financial services stakeholders.(4) The review must consider the merits of—(a) amending the definition of “specified scheme” within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (S.I. 1996/1715) so as to increase the threshold of such DC schemes in respect of which trustees and managers are required to produce a value for members assessment under regulation 25 of those Regulations;(b) adjusting the terms of reference for DB Local Government Pension Schemes (LGPS) funds to consider regional development as an investment factor;(c) establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank.(5) The Treasury must prepare a report on the outcome of the review, and lay it before Parliament within one year of the passing of this Act.”Member’s explanatory statement
This amendment would compel the Treasury to publish a review within a year of Royal Assent on how to incentivise pension fund schemes to invest in high-growth firms and green infrastructure. The review would have to consider requiring DC schemes to assess the merits of: consolidation, establishing frameworks for British Business Bank investments (so that DB pension schemes will be able to invest alongside them), and adjusting the terms of reference for Local Government Pension Schemes (so they consider regional development as an investment factor).
Baroness Chapman of Darlington (Lab)
My Lords, we are pleased to bring back Amendment 104. I am grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for signing the amendment.
Since Committee, and following the suggestion from the noble Lady Bowles, we have incorporated an additional consultee in the form of the Pension Protection Fund. If we are looking at different and better ways to utilise pension funds, it is only right that that body be formally involved in the process. It is important to note that the amendment would not directly lead to changes in how defined contribution and defined benefit pension funds are invested; it merely seeks consideration via a formal review of a number of potential ways forward.
I draw colleagues’ attention to subsection (2) of the proposed new clause in the amendment, which puts
“the safeness and soundness of pension funds”
front and centre. While no investment fund is risk-free, this is about identifying how funds could be used to support high-growth firms and long-term assets, including green infrastructure.
In 2019, the British Business Bank and Oliver Wyman published research which found that the UK’s defined contribution firms are not investing in fast-growing and innovating companies. It is a problem because the UK is home to incredible tech start-ups and life science companies. They are Great British success stories, but their growth potential is sometimes limited by a lack of access to finance. The research found that retirement savings could be increased by a significant amount with just a modest investment in these firms. For example, a 22 year-old whose defined contribution scheme made 5% of investments in the UK’s fastest-growing companies could see an increase in their retirement pot of 7% to 12%.
Having amended the Bill to include a nature target, we must also consider how pension funds can do their bit to help the environment. This review would look at investments to the types of green infrastructure which will fuel our future economic growth and help deliver the transition to a net-zero economy. The Government recently included nature-based solutions as part of the definition of infrastructure in the UK Infrastructure Bank Act. If investment in nature is a suitable purpose for a Government-backed investment bank, we should harness the power of pension funds as well. This review would be timely, with the recent collapse of Silicon Valley Bank and its UK subsidiary and the demise of Credit Suisse sparking panic in the financial markets and hitting the value of pension funds.
The world is changing. More people shop online and work from home, meaning that investment in things like shopping centres and office blocks no longer produces the returns it did in the past. If done properly, small changes to how pensions are invested could have a significant impact on UK economic growth and, more importantly, a significant impact for the scheme members themselves. I beg to move.
Lord Naseby (Con)
I declare an interest as trustee of the Parliamentary Contributory Pension Fund. As a trustee, but also on my own behalf, I have no concern about pension funds being incentivised. We are there, as trustees, to look after our pensions in the future. Incentives are one thing, but, as a trustee, I am not sure I want to be dictated to and told I have to consider high-growth funds in particular.
When I look at proposals from our fund managers, I look at the return expected over a period of time. Obviously, we are long-term investors, and it may be that a firm has the potential to be one that produces excellent returns. I do not think, on the whole, that pension funds are there to help smaller and newly created firms grow. On the other hand, I can say quite honestly that proposals are in front of us in relation to infrastructure which have considerable merit. I suspect that positive decisions will follow in due course. I ask my noble friend and the Opposition to bear that in mind.
I will also comment on the proposed new subsection (3) on consultation. In addition to the parties listed, I would like to see the trade associations of, for instance, investment trusts, the associations of fund managers and a number of other organisations in the financial world which group together. If we are going to help our country in terms of growth, consultation should be with those at the coalface and those varying funds, et cetera.
I have reservations. I understand the driving force behind the amendment, but it does need some refinement before it is considered as a possible way forward.
Baroness Hayman (CB)
My Lords, I support this amendment, which fits very well alongside the discussions we had on the fiduciary duty of pension fund trustees. I will not push those amendments to a vote, but the work being done, as the Minister described, on having a clear and close look at the fiduciary duty for pension fund trustees would complement this amendment. I do not think it is threatening in any way to pension fund trustees; it is very carefully framed and asks the Treasury to publish a review on incentivisation. It is perfectly possible, in the words of the noble Lord, Lord Naseby, to fine-tune it after the review—that is the purpose of the consultation.
This amendment is worth while. The noble Baroness, Lady Chapman, referred to the UK Infrastructure Bank and its recognition of nature-based projects and types of infrastructure as assets that could be invested in. I was involved in that amendment, on which the Minister, in her usual helpful style, listened and took action. I hope that she will similarly recognise the virtues of this proposed new clause and I support the amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I added my name to this amendment and suggested the inclusion of the Pension Protection Fund, partly because there is already quite a big conversation around how we will incentivise investment and be prepared to take a bit more risk, because the UK seems to have become very risk-averse. There has been regulatory encouragement, if you like, for pension funds to be somewhat risk-averse; I am not sure it is actually risk- averse to end up in a situation where you invest everything in sovereign bonds and have a systemic risk but, setting that conversation aside, gilts have always been regarded as a very steady investment. It has perhaps been forgotten how to invest for reward.
The fiduciary duty is important and we need to look at it, because there are implications if you suggest in any way to trustees what they ought to do. Of course, that does not mean that you have to take zero risk as a trustee—you must understand the risk and reward dynamic—but, if we move through legislative steps, we would have to add to the list of consultees a whole load of lawyers to help sort out how we deal with the common-law fiduciary duty. Overall, this is a good amendment, making the Government part of this conversation and drawing in more consultation so that more people can input with common purpose, instead of there being lots of consultations all over the place.
Of course, there is work being done by parliamentary committees and I hope notice will be taken of those, and maybe care taken, looking at proposed new subsection (4)(b) and
“adjusting the terms of reference for DB Local Government Pension Schemes (LGPS) funds to consider regional development as an investment factor”.
To some extent they can do that already, especially in the amounts that are retained where the local authorities are investing directly rather than through the pooled funds—and I have to declare an interest here in potentially listing a fund.
Lord Eatwell (Lab)
My Lords, this is not just a good amendment, it is a very important and timely one. Noble Lords will recall that after the death of Robert Maxwell and the exposure of the way in which he had looted the Mirror Group pension funds, the Government introduced a new pensions structure to protect defined benefits pensions, as well as new accounting standards which needed to be obeyed by pension funds. The effect of this protective barrier placed around defined benefits funds has been that they have adopted extremely conservative investment strategies and the return on investments has correspondingly been extremely low compared with what could be achieved by quite modest amendments of investment strategy.
These issues are now a matter of widespread discussion where the unfortunate unintended consequences of the post-Maxwell legislation have been revealed. It is necessary quite rapidly to take account of the discussions, to assess the performance of pension funds since the last significant pensions legislation, and to come up with sensible proposals for reform. That is why this amendment is crucial, for both the pensions funds industry and the wider economy. I encourage the Minister to support this amendment because by doing so the Government would make a major contribution to the future prosperity of a whole raft of pensioners in this country and to the success of pension funds as investment vehicles within the UK economy.
Lord Blackwell (Con)
My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.
I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.
Lord Davies of Brixton (Lab)
My Lords, I support the amendment. I still think of myself as a relatively new Member of the House, so it is useful to remind the House of my lifetime spent working in the pensions industry, broadly in support of scheme members. I have been a scheme trustee, I have chaired the Greater London Council investment panel and I have advised trustees of pension schemes as the scheme actuary. I am just stating my expertise here.
I support the amendment because I think a review is required. I take on board the remarks about the thin end of the wedge, but unless we have the review those concerns cannot be addressed. As the noble Baroness, Lady Bowles, said, there is now a big conversation about using pension scheme money to promote the British economy. There is actually a long history of that sort of proposal going back over many years, but it seems to have reached a crescendo over the last year or so.
It is essential that we have a review. What is also essential, of course, is that the review is undertaken by those who know what they are talking about, but that has not necessarily been true about all the comments made so far. For example, I draw the attention of the House to the recent useful report produced by the Pensions and Lifetime Savings Association—not a body that I consistently agree with—on supporting pension investment in UK growth and thinking up quicker and simpler ways to promote pension fund investment in our economy.
I was going to raise two issues. One has already been explained clearly by my noble friend Lord Eatwell: the funding standards that have been established work against the principles that I am sure we all support. Another problem that we have is the Conservative Government’s introduction of freedom and choice. It is difficult to oppose freedom and choice but, when you come to pensions, which are long-term arrangements depending on long-term investment, giving people freedom of choice weakens the very basis upon which they are being organised. It is all very well saying to pension funds, “You’ve got to invest in infrastructure”, but if the members of that scheme have the right to pull their money out at any time, it is very difficult to take the long-term view. That is a fundamental incoherence behind the so-called policy of freedom and choice. Those issues need to be addressed in the review.
I also hope that the list of consultees for the review is not a complete list; to the extent that it is possible to consult the scheme members, they should be consulted as well. I also hope that the issues can go somewhat broader than those listed in the amendment.
In general terms, a review is needed, and I hope it will lead to the objective being clearly set out of promoting the UK economy.
Baroness Altmann (Con)
My Lords, I fully support and have added my name to this amendment. It is a pleasure to follow the noble Lord, Lord Davies. We both go back a long way in the pensions industry. My entire career has been in pensions—examining occupational pension schemes as an academic, then managing occupational pension investments in the City, then advising schemes and Governments. I have also been a trustee on investment committees for pension schemes.
I have to say that the current position that members of pension schemes find themselves in—both members of defined benefit schemes and members of too-often-forgotten defined contribution schemes—has not been positive in terms of the experience of the 2022 markets. As we have heard, trustees and managers of pension schemes have been encouraged to believe that the right way in which to invest a pension fund is in supposedly low-risk—which actually also means relatively low-return —investments, rather than in the traditional and older-fashioned way of managing schemes that persisted until the noughties, which was to try and maximise returns.
We have now moved to a position whereby we were supposed to be minimising risk, but I argue that that entire movement away from supporting the British economy and away from supporting UK equities and UK growth assets has been underpinned and misled somewhat by quantitative easing. The Bank of England’s policy, which effectively offered a natural large buyer that underwrote and underpinned the government bond market, perhaps led people to believe that that was the best or safest way in which to invest pension funds. That was partly because the long-term value of the liabilities, as well as their present value, is discounted and measured as of today by using the gilt yield or bond yield measure. In corporate reporting it is double-A corporates; in actuarial valuations it is typically gilt yields.
In 2022, conventional gilts lost 20% and index-linked gilts 30% of their value. The FTSE 100 rose a little. Yes, smaller companies did not do so well, but the idea that pension schemes were investing in a low-risk manner was actually confounded last year, and I would argue that, as we move into a post-QE world and as we have recognised and I have been warning since 2011, or even earlier than that, the policy of quantitative easing is a significant danger for pension scheme investments and members.
We must recognise that we do not fully understand what investment risk means any more. The capital asset pricing model is based fundamentally on the idea that gilt yields are the lowest-risk assets and all assets are more risky—even if they offer more returns, potentially they are more risky—and may need to be considered with a little more circumspection.
That leads on to the idea that, if we do not quite know whether gilts and fixed income are indeed low risk in the way that we thought they were and they have been in the past—because central banks are going to need to offload at some point and are certainly no longer underpinning the markets—diversifying investments and supporting the domestic economy in the way that this review would be investigating must come into the public debate.
Baroness Kramer (LD)
My Lords, I speak from these Benches on behalf of my party, as a group of realists. The current Government, and any future Government, look at the pools of money in pension funds, whether defined contribution or defined benefit, and see them as a tempting source of investment in the area of scale up and infrastructure, where we are desperate to find additional investment. I point out that pension funds are not disadvantaged in investing in investment-grade assets in any way. It is in investing in sub-investment grade assets where they carry a burden under the current arrangements.
These investments in scale up and infrastructure are, by definition, high risk and illiquid, and we have to face up to that. Some 40% of scale-ups fail and infrastructure projects run notoriously late, and well over budget. I challenge people to come up with a very long list of infrastructure projects that have come in on time and on budget. It is hard to identify virtually any project that meets that test. It means that pension obligations must be fully protected if we are to open up these funds to be able to invest in a far more illiquid and high-risk way.
That is why I am comfortable with this amendment, because proposed new subsection (2) insists:
“The review must consider how best to do this while protecting the safeness and soundness of pension funds”.
I was also pleased that the noble Baroness, Lady Chapman, introduced the additional consultee identified by my noble friend Baroness Bowles—the Pension Protection Fund—in this process, because that is clearly a mechanism which could provide the kind of protection for pensioners who may be exposed if we change the risk profile of pension fund investment.
I insist that the first responsibility of a pension fund is to pay out its obligations on time and in full. I suspect that everyone who is invested in a pension believes that that is, and must continue to be, true. Often when we discuss these issues the Canadian pensions funds are cited because they do indeed invest in illiquid and high-risk assets, but anyone reading the credit rating agencies discussing those pension funds will find that the pension funds are pretty much backstopped by the Canadian Government.
What I hope will come out of this review process are new opportunities to fund our economic growth but also protections commensurate—it may not be the same strategy but through some mechanism—with those that the Canadians have put in place, to make sure that our pensioners will still be paid on time and in full. If that no longer remains true, we end up in a very serious pickle but, having read through this set of amendments, I think they get us to the right place to be able to achieve that.
Baroness Penn (Con)
My Lords, the Government welcome the further discussions that this debate has given us the opportunity to have on the issue of unlocking pensions capital for long-term, productive investment where it is in the best interests of pension scheme members. Indeed, as I set out in Committee, the Government have a wide range of work under way to deliver the objectives set out by this review. While I was a little disappointed not to hear those initiatives referenced in this debate—apart from, perhaps, by my noble friend Lady Altmann—I will give it another go and set out for the House the work that is already under way in this area.
As previously set out, high-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that unlocking pension fund investment into the UK’s most innovative firms will help develop the next generation of globally competitive companies in the UK.
The Chancellor set out a number of initial measures in the Budget to signal a clear ambition in this area. These included: increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment in the UK’s key high-growth sectors, including life sciences, green industries and deep tech; spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes, by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative—noble Lords may have seen that the Government launched the LIFTS call for evidence on 26 May; and leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will come forward shortly with a consultation on this issue that will challenge the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets.
At Budget, the Chancellor committed the Government to undertaking further work with industry and regulators to bring forward an ambitious package of measures in the autumn. I reassure the noble Baroness opposite that this package aims to incentivise pension funds to invest in high-growth firms, and the Government will, of course, seek to ensure that the safety and soundness of pension funds are protected in taking this work forward, as in proposed new subsection (2). Savers’ interests will be central to any future government measures, as they have been to past ones. The Government want to see higher returns for pension holders in the context of strong regulatory safeguards.
In addition, the Government are already working with a wide range of interested stakeholders, including the DWP, the DBT, the Pensions Regulator, the FCA, the PRA and the Pension Protection Fund, as well as pension trustees and relevant financial services stake- holders. Proposed new subsection (3) in the amendment seeks to set out this list in legislation. I reassure the House that this is not necessary as the Treasury is actively engaging with them already, as appropriate. The Government would also be happy to engage with other interested stakeholders, as raised by my noble friend Lord Naseby and the noble Lord, Lord Davies of Brixton.
I note the specific areas of review outlined in subsection (4) of the proposed new clause, and I reassure noble Lords that the Government are considering all these issues as part of their work. In particular, proposed new subsection (4)(a) references the existing value-for-money framework. As I set out in Grand Committee, one area of focus for the Government’s work in this area is consolidation. To accelerate this, the Government have been working with the Financial Conduct Authority and the Pensions Regulator on a proposed new value-for-money framework setting required metrics and standards in key areas such as investment performance, costs and charges, and the quality of service that schemes must meet.
As part of this new framework, if these metrics and standards were not met, the Department for Work and Pensions has proposed giving the Pensions Regulator powers to take direct action to wind up consistently underperforming schemes. A consultation took place earlier this year, and the Government plan to set out next steps before the summer.
Turning to proposed new subsection (4)(b), I have already set out the forthcoming consultation to support increased investment in innovative companies and other productive assets by the Local Government Pension Scheme. Noble Lords may also be aware that the levelling up White Paper in 2022 included a commitment to invest 5% in levelling up. This consultation will go into more detail on how that will be implemented.
I turn to proposed new subsection (4)(c). The Government are committed to delivering high-quality infrastructure to boost growth across the country. We heard references in the debate to the UK Infrastructure Bank, which we will work with. The Treasury has provided it with £22 billion of capital. Since its establishment in 2021, it has done 15 deals, invested £1.4 billion and unlocked more than £6 billion in private capital. Furthermore, we have published our green finance strategy and Powering Up Britain, setting out the mechanisms by which the Government are mobilising private investment in the UK green economy and green infrastructure.
The Government wholeheartedly share the ambition of the amendment to see more pension schemes investing effectively in the UK’s high-growth companies for the benefit of the economy and pension savers. We agree with noble Lords on the importance of this issue. Where we disagree with noble Lords is on how crucial this amendment is to delivering it. Indeed, the Government are currently developing policies to meet these objectives, so legislating a review would pre-empt the outcome and might delay the speed at which the Government can make the changes necessary to incentivise investment in high-growth companies. Therefore, given all the work under way, I hope the noble Baroness feels able to withdraw her amendment.
Baroness Chapman of Darlington (Lab)
My Lords, I am grateful to everyone who has taken part in this debate. The Minister’s response was not awful. It was encouraging to hear some of the things that she had to say, and we recognise the work the Government are leading on this issue. However, the benefit of taking the approach outlined in the amendment, notwithstanding some of the comments that have been made about it, is that it would give focus and prominence to this issue and would bring together some of the threads that the Minister referred to. It is an important piece of work that, given everything the Minister said, ought to be not too onerous and is something that the Government ought to be a little more enthusiastic about starting—because it needs to start. This is something we would like to see proceed quickly. I think there has been sufficient support for the amendment from all sides of the House, and I wish to test the opinion of the House.
Baroness Kramer
“Protection of banking reform: ring-fencing and SMCR
(1) Parts 1 (ring-fencing) and 4 (conduct of persons working in financial services sector) of the Financial Services (Banking Reform) Act 2013 and amendments made by them to FSMA 2000 may not be modified or revoked except by an Act of Parliament.(2) No change or revocation may be made by secondary legislation, including by the PRA and FCA, to—(a) the requirements for ring-fenced bodies, and(b) the senior managers and certification regime, or other rules for the conduct of persons working in the financial services sector,that departs from the principles set out in the final report of the Parliamentary Commission on Banking Standards.(3) For the avoidance of doubt, subsection (2) includes secondary legislation that would allow ring-fenced bodies permanently to carry out excluded activities.(4) This section may not be amended except by an Act of Parliament.”Member’s explanatory statement
This amendment would prevent the Government from making substantive changes to the policy on ring-fencing and SMCR by statutory instrument, and would prevent policy from being amended in a way that departs from the report from the Parliamentary Commission on Banking Standards.
Baroness Kramer (LD)
My Lords, in Committee the Minister reassured the House that the principles of ring-fencing and the senior managers regime which protect our banking system could be changed only by primary legislation. Then came the Silicon Valley Bank UK crisis and we discovered that breaking down the ring-fence in particular can be done by simply using statutory instruments and without the full engagement of Parliament. My Amendment 106, which is written from the two tabled in Committee, is intended to reassert the fundamental principle that change has to be driven by primary legislation and it removes the loophole which we experienced with Silicon Valley Bank.
I shall explain very briefly the Silicon Valley Bank issue. As part of their agreement with HSBC to acquire SVB UK, the Government permitted HSBC to transfer funds from its ring-fenced retail bank into SVB UK, which is outside the ring-fence. The transferred funds can now be used for activities which the HSBC retail bank would be prohibited from, including high-risk and speculative transactions.
If this was a temporary state of affairs, I could understand this awkward response to an emergency, but on Thursday the Minister will bring a statutory instrument to this House to make that breach of the ring-fence for HSBC permanent and notably with no limits on the amount of funds that can be transferred from ring-fenced to unring-fenced. Unless I misunderstand the SI, there are no conditions on the use of those funds, even though last month the Minister seemed to imply that we could expect conditions or limits. In effect, the ring-fence is now fully breached for HSBC. Its rival banks, not surprisingly, expect further government action soon to give them exemptions in order to level the playing field. We have in effect destroyed the ring- fence.
Ring-fencing and the SMCR, I would argue, are vital protections against another 2007 banking crisis. They limit the incentives and mechanisms for banks to mingle the culture and capital behind retail banking with the very different and high-risk world of investment banking, with the SMCR establishing individual responsibility for bad or abusive management. The Government have posited in discussion that these protections can be safely weakened because banks now have resolution plans to protect the taxpayer from a bank failure. But that presumption, frankly, has been blown out of the water. Both the Swiss and the US regulators in the last few months facing bank failures—one Credit Suisse and the other the three regional banks in the US—decided that, in the circumstances, resolution would be far more damaging to their economies than seeking taxpayer support to extract those banks from their predicaments and failure.
We have had an illustration that makes it clear that the resolution plans that we have in place for banks may work in certain limited circumstances but very often, particularly when there is high risk in the economy, may indeed not work and are more damaging to use than to discard. In that situation, it is absolutely crucial that we return to the protections provided by ring-fencing and the SMCR.
That is my view. If the Government disagree with me and believe this is time for weakening the ring-fence or diluting the SMCR, I argue they have to come to Parliament and do it under primary legislation, not through the backdoor that we experienced over the last couple of months through the mechanism of the purchase agreement for Silicon Valley Bank UK.
I am not asking this House to make the decision on whether we keep ring-fencing or the SMCR. What I am saying is that it is this House and the other place that need to actively understand and make the determination if that change is to happen. It is fundamental to the financial stability of our country and therefore that is the way this issue would be addressed. My Amendment 106 combines into one the two amendments from Committee and adds a clause to require primary legislation for any permanent exclusions from ring-fencing rules, closing the loophole used by the Government and reasserting the original intent of the law. I beg to move.
The Archbishop of Canterbury
My Lords, I have joined the noble Baroness in supporting her Amendment 106, as I did her two amendments on this topic in Committee. This amendment seeks to prevent change which goes against the two years of work of the Parliamentary Commission on Banking Standards, which looked in detail at both issues and produced its final report, Changing Banking for Good, 10 years ago. I declare an interest: I sat on the commission along with the noble Baroness.
As I said in Committee on 21 March, the underlying motivation of this amendment is to ask us not to forget the hard lessons learned after the 2008-09 financial crash, for which the whole country, especially the poorest, paid, then and to this day. Recent events show that the memory in the markets is strong, even if it is not in the Government. Alarm spreads easily.
Both the ring-fence and the SMCR were designed to better align the incentives and risk calculations of the financial sector to avoid the privatisation of profits and the socialisation of losses, and to force the financial sector to be conscious of the cost its action has, not only on itself but on the wider economy. The SMCR enables us to make sure that those individuals who are making decisions which have significant consequences are held accountable. It goes some way to bringing individual incentives in line with high collective standards.
The electrification of the ring-fence, which the Parliamentary Commission on Banking Standards recommended, was designed to deter banks from the inevitable temptation to test it. The commission’s first report said:
“any ring-fence risks being tested and eroded over time”
and the new framework at that time
“will need to be sufficiently robust and durable to withstand the pressures of a future banking cycle”.
SVB showed that the concept of a non-systemic bank is a very dubious one, as even banks with good resolution plans, and of very moderate size in the global context and systemically, create a sense of contagious alarm. Banking, as we know—and some noble Lords know very well indeed—is not based on logic but on confidence. There is logic there somewhere, but the confidence is that the bank is secure, despite the fact that its equity is a very small part of its total balance sheet. The contagion caused by the failure of SVB is not yet over among US regional banks, which continue to fail or need rescuing. That moment may come, but let us wait and see.
The Swiss taxpayer is on the hook for Credit Suisse and the US taxpayer for several regional banks that were meant to be non-systemic. Not to learn from the past or the present is, frankly, reckless. Reform may come—there are good arguments for it—but it should not come outside a proper parliamentary process of primary legislation. People and sectors can have short memories. I urge the Government to accept this amendment, which would go some way to making sure that we remember the hard and bitter lessons learned and do not repeat the same mistakes.
Baroness Bennett of Manor Castle (GP)
I will speak very briefly to offer Green support for the amendment in the name of the noble Baroness, Lady Kramer, and the most reverend Primate. The amendment, in a way, is a smaller and lighter version of my attempt to strike out the competition clause, on setting a competitiveness objective, which has sadly remained in the Bill.
In November last year, City Minister Andrew Griffith told the Financial Times:
“The overall thrust of things is to allow more risk … you shouldn’t be risk”
averse;
“we just need to manage that in an appropriate way”.
He went on to say that the aim of reducing ring-fencing was
“to release some of that trapped capital over time”.
I acknowledge that the Minister said that before the collapse of SVB and Credit Suisse, and the other crunches in the American banking system.
In an April piece in the Financial Times, Martin Wolf said:
“A shock like this should make mindless deregulation less appealing to politicians”.
As has been clearly outlined already, the amendment does not actually make anything happen; it just ensures parliamentary oversight. When we get to the dinner break business, my noble friend will seek to ensure that parliamentary oversight is included there. Surely, this is what democracy is supposed to be about.
Lord Davies of Brixton (Lab)
My Lords, I support the amendment. We will return to these issues on Thursday, when we discuss the regulations in Grand Committee. However, it is worth mentioning to the House the clash today between this Bill and a meeting of the Economic Affairs Committee, of which the noble Baroness, Lady Kramer, and I are members. By chance, the committee was interviewing the Governor of the Bank of England. The issue of this arrangement arose, and the governor was quizzed on these very issues. It will be useful on Thursday to explore further why and how this action was taken. The governor provided a justification, but, in the light of his remarks, it will be worth while exploring these issues in more detail when we get the regulations.
Viscount Trenchard (Con)
My Lords, the noble Baroness, Lady Kramer, and the most reverend Primate have retabled as a single amendment—Amendment 106 —the two amendments that were debated in Grand Committee: Amendment 241C on ring-fencing, and Amendment 241D on the senior managers and certification regime.
As my noble friend Lady Noakes said during that debate, these amendments are trying to set in stone for all time the conclusions of the report of the Parliamentary Commission on Banking Standards. Times change, and I cannot support this amendment because it introduces an inappropriate degree of rigidity.
As my noble friend also pointed out, the lesson of the HSBC and Silicon Valley Bank episode was that the ring-fencing rules were not, after all, considered inviolable. It was necessary to provide HSBC with special statutory exemptions from the ring-fencing rules to enable it to acquire Silicon Valley Bank. That exemption has brought permanent changes to the ring-fencing regime for HSBC which affect it alone. Can my noble friend say whether that means it has a permanent competitive advantage over rival ring-fenced banks in the UK?
In any case, I rather doubt whether the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed. I disagree that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way. As I said in Committee, I worked for Kleinwort Benson for 23 years, for a further 12 years for Robert Fleming and then for Mizuho. All three banks operated both commercial and investment banking businesses. Internal Chinese walls between departments made it quite impossible for customers’ commercial banking deposits to be diverted to risky investment banking activities. As I said in Grand Committee, there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. There is little global evidence that splitting up the banks has made them less likely to get into trouble.
Following the Lehman shock, is it not interesting that the US Government did not go for the reintroduction of a kind of Glass-Steagall Act? I am not convinced that ring-fencing is a good thing, and in general I am opposed to market distortions of this kind, which actually make the consumer less safe rather than safer. Ring-fencing also makes it harder for smaller banks to grow, because they must compete for a small pool of permitted assets against the capital of the larger banks. Will the Government conduct a review of the effectiveness of ring-fencing?
As for the senior managers and certification regime, I am sceptical as to whether it has been effective, because there is no hard evidence that it has been used as the stick that was originally intended. Most well-run banks operate in a collegiate manner, and I think it rather odd to attempt to attribute personal responsibility to managers and directors of banks for the decisions and actions of those banks, beyond the responsibilities that the directors carry in any event.
The SMCR has especially inconvenienced foreign banks operating in London. As an example, I refer to the Japanese megabanks. It used to be their practice to assign a very senior executive to London to take responsibility for all the bank’s activities in the UK and in most cases the whole EMIR region. Often, this might be the executive’s last major management position before retirement, and would typically be for two to three years leading up to his retirement date. Such executives have typically worked for 40 years or more for that bank and have managed regulated financial businesses in Japan for many years. However, the FCA has consistently been extraordinarily slow in approving those executives under the SMCR.
Therefore, the Japanese banks have given up on this strategy and feel compelled to appoint as head of their UK and EMIR operations not the person most appropriate for the job, but the most senior person who has already been working in London for three years or so, merely in order to meet the criteria of the SMCR regime. This has caused considerable inconvenience, because it is unreasonable to send a trusted senior executive overseas for five or six years in the last years of his active career, rather than a more reasonable stretch of two to three years. I know that the SMCR is much resented by Japanese and other foreign banks and I ask my noble friend if she will agree to conduct a review of how it is being implemented by the FCA.
Lord Eatwell (Lab)
My Lords, I must say that, listening to the noble Viscount, Lord Trenchard, just now, I think he has given strong arguments in favour of this amendment—strong because what the amendment asks for is accountability to Parliament on the performance of the ring-fence and the SMCR. If that accountability existed, the noble Viscount would have the opportunity to present his views in a framework, which might then have greater effect than, I am afraid, his speech had without such a mechanism.
Lord Livermore (Lab)
My Lords, we fully support the steps taken by the Treasury, the Bank and the regulators in relation to Silicon Valley Bank UK. The system worked at pace to ensure SVB UK could continue its operations. However, while we endorse the outcomes, legitimate questions have been asked about the ring-fencing exemption granted to HSBC and the potential long-term implications.
The arguments have been excellently outlined by the noble Baroness, Lady Kramer, the most reverend Primate the Archbishop of Canterbury and my noble friend Lord Eatwell, and I will not repeat them now. The financial system has experienced much volatility in recent months, so preventing major changes to ring- fencing being made by secondary legislation is a sensible step and one that we believe the Commons ought to consider before this Bill goes on to the statute book.
Baroness Penn (Con)
My Lords, it has been over 10 years since the Independent Commission on Banking recommended important structural changes, including the introduction of ring-fencing for the largest UK banks, and the Parliamentary Commission on Banking Standards recommended the introduction of the senior managers and certification regime, or SMCR, to embed a culture of greater accountability and personal responsibility in banking. I pay tribute to the important work of these commissions and their lasting legacy in improving the safety and soundness of the UK’s financial system. Amendment 106 from the noble Baroness, Lady Kramer, covers the ring-fencing and SMCR reforms.
In response to my noble friend Lord Trenchard, the legislation that introduced the ring-fencing regime required the Treasury to appoint an independent panel to review the regime after it had been in operation for two years. That independent review was chaired by Sir Keith Skeoch and concluded in March 2022. The review noted that the financial regulatory landscape has changed significantly since the last financial crisis. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can in future be managed in an orderly way, minimising risks to depositors and public funds.
In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the ring-fencing regime while maintaining financial stability safeguards. In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime that broadly follow the recommendations made by the independent review. The Treasury will consult later this year on those near-term reforms. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. In response, the Government published a call for evidence in March. This closed at the beginning of May and the Government are in the process of considering responses.
The noble Baroness, Lady Kramer, and other noble Lords referenced the resolution of Silicon Valley Bank UK, which was sold to HSBC on Monday 13 March. The Government and the Bank of England acted swiftly to facilitate the sale of SVB UK to HSBC after determining that action was necessary to protect depositors and taxpayers and to ensure that the UK’s world-leading tech sector could continue to thrive. To facilitate the sale, the Government made modifications to the ring-fencing regime that apply to HSBC only in relation to its acquisition of SVB UK.
It is critical that the Government have the necessary powers to act decisively to protect financial stability, depositors and taxpayers. The power under the Banking Act 2009 enables the Treasury to amend the law in resolution scenarios. Parliament gave the Treasury this power recognising the exceptional circumstances that can arise. However, I say to the noble Baroness that the changes made to the ring-fencing requirements are specifically in relation to the acquisition of SVB UK and should not be viewed as an indication of the future direction of government policy on ring-fencing. The Chancellor has been clear that, in taking any reforms forward, the Government will learn lessons from the crisis and will not undermine financial stability.
The core features of ring-fencing are set out in primary legislation, which generally may be amended only by primary legislation, so the Government are already constrained in one of the ways that this amendment seeks to ensure. In passing that legislation, Parliament delegated certain detailed elements of the regime to the Government to deliver through secondary legislation, given its technical nature and to allow it to evolve over time, where appropriate. Parliament also included clear statutory tests and objectives within the framework, which the Treasury and the PRA must satisfy when making changes to the regime. These statutory tests continue to reflect the underlying objectives and purposes of the regime. The Government are of the view that they remain appropriate and that no further constraints are necessary.
Turning to the SMCR, I can confirm to the House once more that the framework of the SMCR is set out in primary legislation, so it is already the case that significant amendments can be made only via primary legislation.
Let me also reassure the House that the Government continue to recognise the contribution of the SMCR in helping to drive improvements in culture and standards. The principles of accountability, clarity and senior responsibility that are emphasised by the PCBS report were reflected in the SMCR. We should take confidence from the findings of separate reports by UK Finance and the PRA, which both show that these principles are now more widely embedded in financial services than before the introduction of the regime.
The Economic Secretary made it clear to the Treasury Select Committee on 10 January that the purpose of the review was to seek views on the most effective ways in which the regime can deliver its core objectives. It is important to review significant regulation from time to time to ensure that rules remain relevant, effective in meeting their aims and proportionate to those aims. The Government are grateful to those who have submitted responses to the SMCR call for evidence. This information will help the Government, alongside the regulators, build a proper evidence base for identifying what, if any, reforms to the regime should be taken forward.
I hope that I have sufficiently reassured noble Lords that the Government remain committed to high standards of regulation, and to the important reforms introduced following the global financial crisis. Therefore, I ask the noble Lady, Baroness Kramer, to withdraw her amendment.
Baroness Kramer (LD)
I thank the Minister, but she has essentially repeated the speech she gave in Committee. At the time, I took her assurances at face value that primary legislation would be necessary to make a fundamental change to the structure of the ring-fence. I was therefore frankly shocked when, within a matter of days, the Government took a different point of view in the acquisition of Silicon Valley Bank UK by HSBC. There is no reason why HSBC should have used its ring-fenced arm to make the purchase of SVB; it chose to do so because it got, as a consequence, this opportunity to take that ring-fenced money and put in into non-ring-fenced activities, with no constraints whatever in terms of amount or activity.
The Government are bringing forward another statutory instrument to make that change permanent for HSBC. It is unconscionable that our largest bank should have a competitive advantage like that and other banks not be given it. I am extremely concerned about the way in which statutory instruments are being used to undermine the principle that changing the principles should be only by primary legislation. Therefore, I wish to test the opinion of the House.
Lord Sharkey
“Interest rates for mortgage prisoners
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137FD insert—“137FE FCA general rules: interest rate for mortgage prisoners(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)—“mortgage prisoner” means a consumer who cannot switch to a new mortgage deal (with a new lender or with their existing lender) and includes—(a) all 195,000 mortgages identified in CP576 Mortgage Prisoners Review, and(b) those who have a regulated mortgage contract with one of the following types of firms—(i) inactive lenders: firms authorised for mortgage lending that are no longer lending;(ii) unregulated entities: firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration; or(iii) closed mortgage books within larger financial groups: a closed mortgage book that is within a larger financial group but in a different entity to an active lender;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years with their existing lender;“Standard Variable Rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the Standard Variable Rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) should make new fixed interest rate deals available to mortgage prisoners who meet criteria determined by the FCA.(5) When specifying the criteria which mortgage prisoners need to meet to access the new fixed interest rate deals required by subsection (1) the FCA should take into account the criteria used by active lenders to enable their existing customers to access product transfers and ensure that similar criteria apply in the rules required by subsection (1).(6) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA should specify rates for a range of Loan-To-Value (LTV) ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(7) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made not later than six months after this Act is passed.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and ensure their access to fixed rate interest deals.
Lord Sharkey (LD)
My Lords, I declare an interest as co-chair of the APPG on mortgage prisoners and I thank the noble Viscount, Lord Trenchard, for adding his name to this amendment.
The amendment is similar to the one we debated in Committee: the only difference is that it gives the FCA the power to determine which mortgage prisoners may qualify for new fixed interest rate deals. The Committee amendment was more prescriptive. Its chief purpose was to allow discussion of the new Martin Lewis-funded LSE report on resolving the plight of mortgage prisoners. I said then that we would bring back the amendment on Report if no discernible progress had been made. No discernible progress has been made. The LSE report contains detailed and costed proposals and was published on 8 March this year. HMT officials were present at the launch and copies of the report were made available. When we debated the amendment in Committee on 13 March, the Minister committed to arranging an urgent meeting to discuss the report.
That urgent meeting with HMT, interested Peers, Seema Malhotra MP, researchers and representatives of the mortgage prisoners finally took place on 26 April, six weeks after the Minister had promised to arrange it. I am pretty sure that that long delay was not the fault of the Minister but simply a clear indication of the very low priority that HMT gives to the matter. In fact, the Minister had written to me to say that he was extremely disappointed that HMT had made no contact, and that his team had called for the meeting to be organised on multiple occasions and had stressed the urgency of the situation.
The Minister was absolutely right to stress the urgency. We stressed it again in our letter of 17 May to the noble Baroness, Lady Penn, asking HMT to make a full response to the LSE proposals before Report. We have had no response to the letter or to the LSE report.
Interest rates are rising significantly and the already intolerable burden on mortgage prisoners is growing steeply, increasing their misery, despair and uncertainty. HMT seems not to understand that or even to care much about it. We know that HMT officials have recently had contact with the academic authors of the LSE report. We also know that those officials told the academics that they hoped to have a response to the report before the Summer Recess. That would be five months since HMT first had sight of the report—an intolerable and unjustifiable delay and a clear indication of the low priority the Treasury is giving the matter.
The treatment of mortgage prisoners is certainly uncaring and at times almost contemptuous. Whatever the outcome of today’s debate on this amendment, I urge the Minister to galvanise the Treasury team and replace what seems to be a leisurely approach with real urgency. After all, in February 2020 the then Economic Secretary to the Treasury said in a letter to Martin Lewis:
“My officials … will take any new proposals under full consideration if they meet our strict requirements that they a) deliver value for money for government (not just individuals), b) are a fair use of taxpayer spending, and c) address any risks of moral hazard”.
The LSE report explains how its proposals satisfy those requirements. I ask the Minister to deliver urgently on John Glen’s promise.
Mortgage prisoners are not to blame for the very high SVRs that are ruining or have ruined their lives; the Government are to blame. HMT sold mortgages to vulture funds without protection for the mortgagees. It later claimed to have been misled by those funds but in fact, research funded by Martin Lewis found that the Treasury was aware of the potential problems as early as 2009, when it recognised that the sale of closed books to investors had the potential to harm borrowers. Martin Lewis’s report went on to say:
“It has subsequently become clear that many prisoners did suffer harm; our first report detailed negative effects including paying high interest rates and difficulty in remortgaging, leading in some cases to anxiety, depression, physical and mental ill health and the prospect of losing the family home”.
Interventions by the Government to date have helped at most 2,200 of the 195,000 mortgage prisoners, and in fact only 200 borrowers have been directly helped to switch as a result of the modified affordability tests run by the FCA. As things now stand, the Government and the FCA are not proposing any further action to help mortgage prisoners. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or to provide any help.
The amendment would provide immediate and practical support to mortgage prisoners. It would introduce a cap on the standard variable rates paid by mortgage prisoners. Capping at 2% over the base rate would return the margins to what they were prior to the financial crisis. That should stop firms exploiting their captive customers but would have no impact on the wider market.
To ensure that mortgage prisoners can gain some certainty over their mortgage payments, the amendment would also require mortgage prisoners who meet FCA criteria to be offered fixed rates. These fixed rates would vary according to the loan-to-value of the mortgage prisoner, so would be reflective of risk.
The amendment does not single out mortgage prisoners for help that is not available to other borrowers in the active market. It just ensures that mortgage prisoners are able to access fixed-rate deals on the same terms as others in the active market. It stops mortgage prisoners being exploited by vulture funds and inactive lenders and it ensures that they are treated fairly. The amendment requires the FCA to set the criteria for accessing new fixed-rate deals and interest rates based on those in the active market so that mortgage prisoners are treated the same as those in the active market and can access new deals with their existing lender.
Viscount Trenchard (Con)
My Lords, I am pleased again to support the noble Lord, Lord Sharkey, in his noble quest to protect mortgage prisoners, as I did when he tabled a similar amendment in Grand Committee.
I appreciated the commitment of my noble friend Lord Harlech in his winding up that the Government would consider the proposals of Martin Lewis, the LSE and the APPG on Mortgage Prisoners that have been put forward. As he said, mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. Furthermore, the margins between the Bank of England base rate and typical standard variable rates have expanded by more than double.
The problem is that the unlicensed lenders that bought the mortgage books of this group of borrowers do not offer the fixed-rate products that are available to borrowers in the active market. I stress that my motive in supporting the noble Lord’s amendment is to support this group of genuine mortgage prisoners, who are unable to switch to a new fixed-rate mortgage despite having been up to date and not missed any payments.
The Government have acknowledged the detriment caused to mortgage prisoners. This Bill offers an opportunity to provide them with some relief from the difficulties that they are trying to cope with. I hope to hear from my noble friend some concrete plan to assist them as the Government have done for many disadvantaged groups—as a result of the Covid pandemic, for example. I look forward to the Minister’s reply.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly, having spoken on this issue both in Committee and back in the last financial services Bill, just to put a human face on this. In doing that, I remind the Minister of the representatives of the mortgage prisoners whom we heard from at the meeting in the Treasury a couple of months ago.
The face I have chosen to put on is that of 63 year- old Jacqueline Burns, who spoke to the I newspaper in April about what her life is like now that she is a mortgage prisoner. She said:
“I am cutting back on food because I can’t afford to eat … I am so stressed out right now, I am at the end of my tether”.
The story, as Ms Burns told the I, was that she bought her home in Cambridgeshire for £69,000 in 2006 from SPML, which was an arm of Lehman Brothers. Ms Burns remembers that the broker “was really nice” and “pushed me … towards SPML”. We can all probably imagine why that was. The situation in which Ms Burns now finds herself is that she is on the standard variable rate and owes £109,000; remember that she paid £69,000 for the house. Because of the rise in interest rates, her mortgage payments have gone up from £333 a month to nearly £700 a month. She simply cannot pay.
She is in this situation because of a failure of government regulation, and because of arrangements made by the Government that made a significant profit. There is a huge moral responsibility. If we think about the costs that must be being imposed on the NHS by people who eventually become homeless and need council homes et cetera, it is clear that the Government should look not just at their moral responsibility; they also need to ensure that people get a fair deal and do not end up—even if the Government are not thinking of anything else—costing the taxpayer a great deal.
Baroness Chapman of Darlington (Lab)
My Lords, we are grateful to the noble Lord, Lord Sharkey, for bringing back this amendment and for his persistence on this issue over many years. We are also grateful for the work of the APPG, particularly to Rachel Neale, who herself is a mortgage prisoner and has become a champion for those people who have been affected by this problem. I also want to mention my colleague in the Commons, Seema Malhotra, who is doing a lot of work on this issue.
We are hugely sympathetic towards mortgage prisoners, who have endured difficulties over so many years now, and wish that the Government had acted earlier to ease the burden on them. We were pleased to back this amendment during the passage of the Financial Services Bill in early 2021, when it passed by 273 votes to 235. However, we are mindful that at that point the House of Commons rejected that amendment, and did so at a time when a much larger proportion of the population was experiencing issues with mortgage affordability. In recent weeks, however, we have seen hundreds of mortgage products pulled and rates hiked on those that remain available. A number of major banks have even temporarily withdrawn offers for new customers, putting the brakes on the aspirations of many first-time buyers.
Of course, mortgage prisoners are in a different position, in that they have been facing problems for many years and are just not able to simply switch products in the way that others can. As the Minister will no doubt outline, while this amendment did not make it into the Financial Services Act 2021, it did prompt some new and welcome actions from the Treasury, regulators and banks. New advice was available and a number of lenders relaxed their criteria in certain cases. We know that the elected House has already rejected this proposal and, realistically, it is unlikely to reconsider in the current context, but more does need to be done. Can the Minister let us know whether the Government intend to respond to the recommendations that were made by the LSE in its report? If they are, when will that response be forthcoming? The Government urgently need to get a grip on the issues facing the mortgage market generally and, once that situation has calmed, we hope they will be able to do what they can to ease the difficulties faced by mortgage prisoners.
Baroness Penn (Con)
My Lords, I thank all noble Lords who have spoken in this debate, and in particular the noble Lord, Lord Sharkey, for tabling this amendment. I start by emphasising that the Government take this issue extremely seriously. We have a great deal of sympathy for affected mortgage borrowers and understand the stress they may be facing as a result of being unable to switch their mortgage. That is precisely why we, and the FCA, alongside the industry, have shown that we are willing to act, and have carried out so much work and analysis in this area, partly in response to prior interest from this House, as alluded to by the noble Baroness, Lady Chapman. This has included regulatory changes to enable customers who otherwise may have been unable to switch to access new products.
The Government remain committed to this issue and welcome the further input of stakeholders. For this reason, during Committee, the Government confirmed that they were carefully considering the proposals put forward in the latest report from the London School of Economics. Since then, as noted in the debate, I have met with the noble Lord and further members of the APPG and representatives of the Mortgage Prisoners Action Group to discuss the findings of the report and the issue of mortgage prisoners more widely.
The Economic Secretary to the Treasury has also written to the noble Lord, including to provide further clarity on the proceeds from the sale of UKAR assets. The LSE report recommends free comprehensive financial advice for all. That is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to £92.7 million this financial year.
The other proposals put forward by the London School of Economics are significant in scale and ambition. While the Treasury has been engaging with key stakeholders, including the LSE academics behind the report, for some time, including since Committee, we have concerns that these proposals may not be effective in addressing some of the major challenges that prevent mortgage prisoners being able to switch to an active lender. For example, the proposals would not assist those with an interest-only mortgage ultimately to pay off their balance at the end of their mortgage term.
We continue to examine the proposals against the criteria put forward originally by then Economic Secretary to the Treasury, John Glen, to establish whether there are further areas we can consider. I remind the House that those criteria are that any proposals must deliver value for money, be a fair use of taxpayer money and address any risk of moral hazard. This does not change the Government’s long-standing commitment to continue to examine this issue and what options there may be. However, it is important that we do not create false hope and that any further proposals deliver real benefit and are effective in enabling those affected to move to a new deal with an active lender, should they wish to.
I will not repeat the arguments against an SVR cap, as we discussed them at length previously in this House. An SVR cap would create an arbitrary division between different sets of consumers, and it would also have significant implications for the wider mortgage market that cannot be ignored. It is therefore not an appropriate solution, and I must be clear that there is no prospect of the Government changing this view in the near term. In the light of this, I ask the noble Lord to withdraw his amendment.
Lord Sharkey (LD)
I thank all noble Lords who have spoken in this customarily brief debate on mortgage prisoners. I especially thank the noble Viscount, Lord Trenchard, for his contribution today and in Committee.
I am uncertain about what the Government’s response consists of. It seems to me that perhaps it consists of three things. The first is exculpatory—it was not our fault. It was the Government’s fault; it cannot be anybody else’s fault that these mortgage prisoners are in the position they find themselves in.
The second thing I am uncertain about is what the Government are actually going to do. I hear expressions of good will and care for mortgage prisoners but I do not hear anything at all that amounts to a plan, or the sight of a plan, or an objective, or something concrete that would help these people. I did not even hear whether we will get a response to the LSE report any time before the Summer Recess, or indeed whether there is a date by which response can be made—perhaps the Minister can enlighten us. I remind her again that by the Summer Recess it will be five months since the LSE report was presented, and the Treasury surely has had time to analyse it in some detail and to make a considered response.
It is quite clear that the real distress experienced by these mortgage prisoners is not understood or felt deeply within the Government or the Treasury. When we had a meeting with the Minister, we had a couple of the leaders of the Mortgage Prisoners group alongside us who told us some terrible stories about what has happened to their families over the past 10 years; 10 years of paying too much money—more than they should have done and more than they needed to in many ways—to these vulture funds.
Lord Harlech (Con)
My Lords, I beg to move that further consideration on Report be now adjourned until 8.31 pm.
Lord Kennedy of Southwark (Lab Co-op)
My Lords, I do not think that the debate on our regret amendment is time-limited.
Lord Harlech (Con)
My mistake. I did not mean to imply that it was time-limited. I meant to say that Report stage on the Bill would resume not before 8.31 pm.
Financial Services and Markets Bill
Tuesday 13th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-III Third marshalled list for Report - (9 Jun 2023)
Lord Holmes of Richmond
“Designated artificial intelligence officer
(1) The Secretary of State must by regulations provide that companies operating in the financial services sector who use artificial intelligence (“AI”) must have a designated AI officer.(2) The AI officer under subsection (1) has responsibility for ensuring the—(a) safe,(b) ethical,(c) unbiased, and(d) non-discriminatoryuse of AI.(3) The AI officer under subsection (1) also has responsibility to ensure that data used in any AI technology is unbiased.(4) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This amendment would require firms in the financial services sector that use AI to have a designated AI officer.
Lord Holmes of Richmond (Con)
My Lords, in moving Amendment 108 I will speak also to Amendment 109 in my name and, in doing so, I declare my technology interests as set out in the register. The purpose of both amendments is predicated on the fundamental truth that AI is already extraordinarily powerful and pervasive across our financial services, impacting so many elements of people’s experience and ability to access and avail themselves of financial services. If AI is to human intellect what steam was to human strength, we see the extent of the issue.
In Committee, the Minister perhaps rightly suggested that it would be wrong from a policy perspective to have an AI reporting officer in financial services and not consider this across the whole of the economy. If so, will my noble friend take back to the Treasury the need to work across departments—with the Business Department and the newly formed DSIT—to consider an approach where an AI-responsible officer on the boards of all companies would be considered, for the benefit of all those involved in the provision of those services; in this context, financial services? Perhaps this would be a good topic to work up for the AI summit which will be taking place in London later this year. Similarly, the UK has an extraordinary opportunity to be a leader in ethical AI, and I ask my noble friend whether it would make sense, with colleagues across government, to expand the specificity of these amendments in financial services and look at how they might be implemented, coming off the back of the AI summit in the autumn.
The Bill provides an opportunity to raise the whole question of AI. I bring these amendments to do just that. I believe that it would make a real difference to financial services—consumers, businesses and regulators alike—if these amendments were considered in that context, but I completely accept that there is a broader context and would welcome my noble friend’s comments on both the specific and the broader context. I beg to move.
Lord Harlech (Con)
My Lords, I thank my noble friend Lord Holmes of Richmond for tabling these amendments for discussion. The Government are firmly of the view that artificial intelligence has the opportunity to revolutionise every aspect of our lives, and we are committed to unlocking the enormous benefits that it can bring, in a way that is fair and allows everyone in society to benefit.
In March 2023, the Department for Science, Innovation and Technology published proposals for a new regulatory framework for AI regulation in the government’s AI regulation White Paper. This sets out a proportionate, adaptable framework for AI regulation, underpinned by five potential cross-sectoral principles, which include concepts such as fairness, safety and transparency, to strengthen the current patchwork approach to regulating AI indirectly.
Through the proposals for the new AI regulatory framework, we are building the foundations for an adaptable approach that can be adjusted to respond quickly to emerging developments. The vast majority of industry stakeholders we have engaged with so far agree that this strikes the right balance between supporting innovation in AI while addressing the risks it presents. We are committed to a proportionate approach to AI regulation that allows us to maximise the benefits that AI can bring to the economy and society and can effectively respond to the fast-moving risks presented by AI.
The White Paper is currently undergoing public consultation until 21 June 2023. We will continue to work with experts and stakeholders across the AI economy during the consultation period and beyond in order to identify emerging opportunities and risks and ensure that the regulatory framework can adapt to them. Furthermore, the FCA, the PRA and the Bank of England recently published a discussion paper on how regulation can support the safe and responsible adoption of AI in financial services. Last week, the Government announced that the UK will host the first major global summit on AI safety this autumn.
While I am very sympathetic to the intentions behind my noble friend’s Amendments 108 and 109, the Government believe that they could result in unintended complications in the use of artificial intelligence in the financial services sector. I hope that I have sufficiently reassured noble Lords that the Government remain committed to an effective and consultative approach to the use of artificial intelligence within the financial services sector. Noble Lords can be reassured that the Government will continue actively to involve Parliament in decisions in this area, particularly in relation to the future creation of a digital pound. Therefore, I ask my noble friend to withdraw his amendment.
Lord Holmes of Richmond (Con)
My Lords, I thank the Minister for his full response, which is appreciated. It is a thoroughly good thing that, particularly this year, we have heard more conversations and considered thought around AI, both in this place and in wider society, than we probably had in preceding years. I hope that we can have increasing public engagement and public debate around AI to ensure that everybody is enabled to take the benefits, understand the risks and understand that they are mitigated, managed and eradicated by regulators and legislators so that the UK can be the place where ethical AI is championed for the benefit of businesses, consumers and communities alike. I very much look forward to the global summit later this year. I beg leave to withdraw the amendment.
Baroness Penn
“(aa) Part 5 of Schedule 2, and section 2 so far as relating to that Part;”Member’s explanatory statement
This amendment would bring the amendments made in Part 5 of Schedule 2 to the Bill (which relate to the third country CCP run-off regime) into force on the day the Act is passed.
“(e) section (Politically exposed persons: money laundering and terrorist financing);(f) section (Politically exposed persons: review of guidance).”Member’s explanatory statement
This amendment would ensure that the new Clauses on politically exposed persons to be inserted after Clause 71 would come into force on the day the Act is passed.
Viscount Trenchard
“(4A) The Treasury must make regulations under subsection (3) so as to bring section 1 and Schedule 1 into force for the purposes of revoking, within the period of two months beginning with the day on which this Act is passed, the provisions mentioned in that Schedule connected with Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.”Member’s explanatory statement
This amendment ensures that the retained EU Law which replaced the Alternative Investment Fund Managers Directive and associated legislation will cease to have effect no later than two months after the passage of the Bill.
Viscount Trenchard (Con)
My Lords, I have tabled Amendment 120 in the same form as I tabled Amendment 246 in Grand Committee, and I am again grateful to my noble friend Lady Lawlor for adding her name in support of it.
I confess to having been rather disappointed by my noble friend the Minister’s response when she replied to that debate. She started by reminding the Committee that throughout this Bill the Government are seeking gradually to replace all retained EU law in financial services,
“so that the UK can move to a comprehensive FSMA model of regulation”.—[Official Report, 25/1/23; col. GC 68.]
She said that the Government were prioritising those areas that offer the greatest potential benefits of reform and mentioned three such areas: the Solvency II review, the wholesale markets review, and the listings review undertaken by my noble friend Lord Hill of Oareford. She provided some statistics which show that the UK is the world’s second-largest global asset management centre, with $11.6 trillion of assets under management, representing a 27% increase in the past five years. My noble friend rightly suggested that the asset management sector is in good health. However, I am bemused that she and the Treasury officials who advise her have already forgotten the controversy over the introduction of AIFMD. She suggested that the Government were not aware of any evidence that reform of the alternative fund sector is a widely shared priority across the sector. She specifically said that it is the Government’s intention to move all retained EU law in the financial services field into the FSMA model and that this will apply to this area too, but not as one of the first wave of priorities.
I agree that reform in the three areas that the Minister recognises as priorities is also a priority, but all of them are more complicated and I do not believe that any of them are candidates for complete revocation without partial replacement. She may remember that I have long advocated the abolition of the unbundling provisions for research contained within MiFID II and have argued for many of the recommendations made by my noble friend Lord Hill with regard to listings. From the beginning, the Solvency II regulations were inappropriate and disproportionately severe for the UK insurance market, many of whose participants believed that they were a deliberate attempt by the EU to damage the London insurance markets. However, none of those pieces of legislation are, in their entireties, candidates for revocation without partial replacement. But AIFMD is such a candidate.
My point is that this Bill is principally an enabling Bill, and it hardly revokes any EU law right away. However, AIFMD was universally resisted by the industry, the regulators, the Treasury and the Bank. It was foisted on us. It is unnecessary, so why do we not get rid of it now? We do not need further consultations on it. It has diverted many small asset managers away from the UK over the years, and the costs and burdens involved in compliance with it are completely disproportionate. Many innovative, so-called alternative strategies are developed by small companies, and I am aware of many that have failed to bring their ideas to market or have been forced to merge with another firm because of these regulations. As I explained in Committee, the motivation for the unexpected introduction of AIFMD was political, driven by French and German allies of Mr Manuel Barroso, who was seeking reappointment as Commission President. Charlie McCreevy, the Internal Market Commissioner at the time, was opposed to the measure.
I wish the Bill had been designed to abolish without delay not just AIFMD but parts of MiFID II, EMIR, et cetera. But AIFMD is the one piece of anti-UK bureaucratic red tape foisted on us by the EU, and more than two years have passed since the end of the transition period. It is depressing that my noble friend suggested that it will, in due course, be replaced rather than revoked. Those who are interested in the story should read A Report on Lessons Learnt from the Negotiation of the Alternative Investment Fund Managers’ Directive by Dr Scott James of King’s College London, prepared for the British Venture Capital Association.
Baroness Lawlor (Con)
My Lords, I support my noble friend Lord Trenchard’s Amendment 120, to which I have added my name and which I spoke in favour of in Committee. He then spoke of the history of this legislation, which was unintended by one EU commissioner and then pushed through, for matters of politics, by his successor under José Manuel Barroso: Michel Barnier, who saw it as part of the plan for a banking and monetary union for the EU—a plan that the UK was and is not part of and has no intention of joining.
The whole UK financial sector accounts for 8% of our economy—the same proportion as in the US and Canada—whereas financial services account for only 4% of the two major economies of the EU. The ironic thing about this legislation is that 75% of alternative funds were in UK businesses then, and the funds account for that sort of proportion in our own sector today.
My main concern is that this diverse sector, which has flourished in the UK under UK law, remains under an opaque legislative system. EU regulation is unpredictable and the EU’s system, with the precautionary approach, seems to cover every eventuality but in practice it can fall short. It often favours big players over small and nimble entrepreneurs and the challengers. There is little certainty about transactions in advance, and little predictability as to how the regulators will judge.
We spoke about this in respect of the whole sector in Committee, but it is important for the alternative funds industry in particular. If we move, we need to move away from the way of thinking into which our regulators have crept. They have absorbed this precautionary approach to regulation from the EU—as well they might, after two decades.
I was glad my noble friend suggested that the hope —the intention—is that we will end EU law, but I stressed then, and would like to stress again, the importance of ending the thinking about precaution and hesitation in grasping the opportunities once we are out. That is very important for the regulators in this sector.
I shall just give a few examples. We have in English law an approach to business which, given the principle of contractual autonomy, means that the law honours contracts and contractual arrangements. It does not rely on the subjective principle of good faith, which creates uncertainty for practitioners about the expected moral and other standards of behaviour. In German civil code, parties must observe good faith in both negotiation and in performance of contracts but, without a definition of good faith in German contract law, things are uncertain.
The other aspect of UK law that I think is good for the sector is that it is flexible. This is a very flexible sector, and the judiciary’s ruling, interpreting and developing of law through its application to specific cases in different sectors moves with the times and adapts to innovation—the new structures and transactions of a fast-moving business. But that cannot happen under the rule books or their architects, the courts, or indeed in the thinking, because courts, by contrast, are not subject to the constraints of the legislative process and can react and achieve change more effectively, and this judiciary is recognised globally to be wise, deeply knowledgeable and authoritative.
I took heart from the Minister’s assurance in Committee, and again during the first day of Report, about the intention to revoke all EU laws and replace those that were considered necessary with—I use her words—an “appropriate replacement” before eliminating any aspect of the legacy. But perhaps I could ask her to think again about AIFMD. Waiting for an “appropriate replacement” sounds more like Whitehall-speak for regulation of the type that has been absorbed and reflected by our regulators under the Treasury in recent decades. Perhaps this piece of legislation could be used as a pilot for ending something that, as the noble Viscount said, was not wanted by the sector, and which the Committee warned could have dangerous repercussions for the UK’s role in global markets and in dealing with America. Because of that, there are very good reasons to let it go, because it is not a consumer-facing industry; it is for the sector itself. It can only be to the good if this sector is set free without any replacement, so that it can benefit under the benefits of UK law.
Lord Moylan (Con)
My Lords, I will speak only briefly in support of my noble friend Lord Trenchard. It was commonly known, and widely reported in the newspapers at the time, that following the financial crash of 2008, the EU, which has always had its doubts and scepticism—indeed, hostility—about what it referred to as Anglo-Saxon finance, withdrew the indulgence that it had previously shown towards the City of London as part of the European Union and started to enact legislation that was injurious to the City of London, and quite deliberately so, to the annoyance of the Chancellor of the Exchequer at the time, George Osborne, who was reasonably open about his opposition.
This instrument, the alternative funds directive, was the prime example of that, although there were others. It contributed significantly to the fact that there was much more support for Brexit in the City of London than people often wanted to admit at the time, or have admitted since, because they understood that that oppositional turn had taken place and the tide was now flowing against the City. So I agree with my noble friend that it is very difficult to see why, now that we have the opportunity to remove it, we continue not to do so year after year—and there are other examples of that.
I also support the remarks of my noble friend Lady Lawlor. There is a prevalent idea—and not just in financial legislation—that, as we get rid of European Union legislation that we no longer need, we need to replace it with legislation that almost replicates what the European Union was doing. A prime example of that outside the field of financial services is the Procurement Bill, a massively complicated piece of legislation replicating European Union legislation, almost in great detail. In fact, the procurement legislation of the European Union—which was obviously designed for 28 states, not simply for the United Kingdom—was there largely to deal with problems embedded in a history of municipal corruption, which were manifest in various European states but, I am glad to say, of which the United Kingdom has a long, proud history of being pretty free, with one or two exceptions. It was not necessary to replicate it in the detail in which it was done.
There are genuine concerns, certainly among those of us on this side of the House, that insufficient dispatch is being brought to getting rid of injurious legislation that we inherited from the European Union but can now get rid of, and that there is a mentality that the right way to get rid of something is, in effect, simply to re-enact something very similar after a period of consultation. I have great sympathy with what my two noble friends said, and I hope that the Minister, when she replies, will be able to give them some comfort.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I am afraid that, as my noble friend Lord Trenchard set out, his amendment has not changed since Grand Committee and neither has the Government’s response, which he so adeptly summarised on my behalf. We are not able to support the amendment for those reasons.
While I recognise all three of my noble friends’ strength of feeling on this issue, it is important that we do not inadvertently damage the UK fund sector or its access to international markets. However, I reinforce the Government’s commitment to revoking all EU law in financial services—but with prioritisation and process. I hope that all three of my noble friends will take heart from the fact that we are on the last amendment on Report and near the end of the process by which we can see the Bill on the statute book. We can then begin the process of the revocation of EU law and its replacement—or perhaps not, depending on the individual circumstances—with an approach that is guided by what is best for the UK and our financial services sector, to support growth in that sector and across the whole country. That is something that we can all support as a result of the Bill. I hope that my noble friend is able to withdraw his amendment.
Viscount Trenchard (Con)
My Lords, I thank my noble friend for her reply. I am slightly more reassured than I was by her reply in Committee. I nevertheless do not feel that she yet recognises the very clear point that this regulation was hugely controversial and was opposed by everybody involved in the financial services industry—there were no supporters of it. I am afraid that we have become rather inured to operating under it, but I can assure her that there are still very large sectors of the asset management industry that would be delighted if the Government would show that this is a priority area for revocation when she gets going with the job of revoking EU law and replacing it with a more reasonable UK-friendly alternative regime.
I thank my noble friend for her response. I also thank all those still in the Chamber for their patience in sitting here right to the end and sharing in this final amendment. I beg leave to withdraw my amendment.
Financial Services and Markets Bill
Monday 19th June 2023
(1 year, 5 months ago)
Lords ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: HL Bill 124-III Third marshalled list for Report - (9 Jun 2023)
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this Bill helps to deliver the Government’s vision for an open, sustainable and technologically advanced financial services sector. I thank all noble Lords for their valuable scrutiny and input, which has led to some important enhancements to this Bill. I formally thank the Opposition Front Benches, particularly the noble Baroness, Lady Chapman of Darlington, and the noble Lords, Lord Livermore and Lord Tunnicliffe, for their positive engagement and overall support for the Bill and its important aims. I also thank the noble Baroness, Lady Kramer, from the Liberal Democrats, supported by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles, for their thorough scrutiny and constructive debate. Finally, I thank the noble Lord, Lord Fox, for bringing his considerable expertise to the scrutiny of this Bill.
The Bill delivers the outcomes of the future regulatory framework review, giving the regulators significant new rule-making responsibilities while balancing that additional responsibility with clear accountability, appropriate democratic input and transparent oversight. Thanks to the positive engagement of this House, we can now be more confident that we have got that balance right.
I also thank my noble friends Lord Forsyth of Drumlean, Lord Bridges of Headley, Lord Holmes of Richmond and Lady Noakes, in particular, for their constructive challenge of the Government’s approach to the important issues that the Bill deals with. I hope that the package of amendments brought forward by the Government on Report demonstrates the open and collaborative way in which we have engaged with the important matters raised in this House.
The level of scrutiny and debate on the Bill rightly demonstrates the vital importance of the financial services sector to the UK economy. Financial and related professional services employ more than 2.5 million people across regional hubs in all four nations of the UK, and create £1 in every £10 of the UK’s economic output. Building on the strengths of our financial services sector is fundamental to its continued growth and to the wider economy. I am therefore pleased to see the Bill progress towards becoming law. It will allow us to begin the process of revoking EU law and replacing it with an approach that is guided by what is best for the UK.
Before the Bill returns to the Commons, I extend my thanks to the significant number of Treasury officials, in the Bill team and beyond, for their work in preparing such a substantial Bill and for their support in engaging fully with your Lordships’ scrutiny. I also recognise the work of the Office of the Parliamentary Counsel in drafting the Bill, and of House staff.
While the Bill is the culmination of a large amount of work over a number of years, it is also the foundation of much work still to come, and I look forward to continuing to discuss these important issues with noble Lords in the future. I beg to move.
Baroness Chapman of Darlington (Lab)
My Lords, I thank the Minister for her kind words as she introduced this Third Reading. The Bill leaves the House in a much better condition than when it arrived. We have made changes to the Bill on the treatment of politically exposed people, financial inclusion and the FCA’s accountability to Parliament, and through measures that help to protect the environment. I thank all Members of the House who contributed to our consideration of the Bill, from both sides, and from the Liberal Democrats and Cross Benches, especially those from Peers for the Planet. I also thank the doorkeepers and House staff teams, and everyone who enables us to do our work.
I thank the Minister for her open and welcoming approach to our discussions. I particularly thank my noble friend Lord Livermore for doing more than his fair share of the work from Report onwards, and of course my noble friend Lord Tunnicliffe who led the Labour Party—he did not lead the Labour Party but led for the Labour Party; that was quite a thought experiment—throughout the long Committee stage. His advice and support have been invaluable. Lastly, I thank the outstanding Dan Stevens for his impeccable advice, preparedness and thoughtfulness.
We hope that the Government accept the Bill as amended and do not feel the need to bring it back to the House for further amendments.
Baroness Kramer (LD)
My Lords, I join in the thanks to the Minister, who has been very generous with her time, as has the Bill team, and who provided us with explanations and listened to our issues and concerns. I also give particular thanks to my noble friends Lord Sharkey and Lady Bowles on my Benches, who bring extraordinary expertise and analysis to all these issues. They covered for me while I was recovering from surgery, and I very much appreciate their willingness to pick up and carry that burden.
I join in the good words about the noble Lord, Lord Tunnicliffe. He has been an absolute stalwart on this entire portfolio. He is phenomenal in dealing with statutory instruments especially—an area that most of us avoid. I will miss the opportunity to be with him on these Benches, as it were, when these issues come forward again. He might have made a very good leader of the Labour Party, I should say. I also thank the noble Baroness, Lady Chapman, and the noble Lord, Lord Livermore, for the final stages and their close working. The Cross Benches have been quite exceptional on this Bill, as, frankly, have some on the Back Benches of the Conservative Party. It has been an excellent example of cross-party working in the interests of better governance.
A striking feature of the Bill has been that common concern, particularly focused on the issues of parliamentary scrutiny and the accountability of regulators to Parliament. There have been modest steps to improve the Bill on those issues, but there is a great deal more to be done. I remain concerned, as do my Benches, about the risk being injected back into the financial services sector, but again, that is business for another day. We hope that the Bill will go through unamended in the other House. The improvements that come particularly from Peers for the Planet and from those involved in financial inclusion have been important. Again, my thanks to the attendants and the others who have supported us so well throughout this entire process.
Baroness Hayman (CB)
I join in the gratitude expressed to the Minister, who has been her usual courteous and committed self in discussing the considerable amendments that were needed to this Bill, bringing through something far better than we had at the start of the process. The noble Lord, Lord Vaux, and the noble Baronesses, Lady Wheatcroft and Lady Boycott, were all highly involved in the process. Like others, I believe we made some important changes in terms of forest risk and making certain that nature as well as climate are involved in this Bill. My only plea, the Minister will not be surprised to hear, is that I hope very much that when the Bill is considered in the other place, those amendments hold and we do not have to have the argument all over again in this House.
Financial Services and Markets Bill
Monday 26th June 2023
(1 year, 4 months ago)
Commons ChamberRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Commons Consideration of Lords Amendments as at 26 June 2023 - (26 Jun 2023)
19:23 - The House divided: - Ayes: 301 / Noes: 48 - Question accordingly agreed to.
19:38 - The House divided: - Ayes: 303 / Noes: 201 - Question accordingly agreed to.
19:50 - The House divided: - Ayes: 303 / Noes: 36 - Question accordingly agreed to.
Madam Deputy Speaker (Dame Eleanor Laing)
I must draw the House’s attention to the fact that financial privilege is engaged by Lords amendment 35. If Lords amendment 35 is agreed to, I will cause the customary entry waiving Commons financial privilege to be entered in the Journal.
Clause 25
Regulatory principles: Net Zero emissions target
The Economic Secretary to the Treasury (Andrew Griffith)
I beg to move, That this House disagrees with Lords amendment 7.
Madam Deputy Speaker (Dame Eleanor Laing)
With this it will be convenient to discuss:
Government amendments (a) to (c) in lieu of Lords amendment 7.
Lords amendment 10, and Government motion to disagree.
Lords amendment 36, Government motion to disagree, and Government amendment (a) in lieu of Lords amendment 36.
Lords amendments 1 to 6, 8, 9, 11 to 35 and 37 to 86.
Andrew Griffith
I am delighted to speak again to the Bill, following its passage through the other place. I thank my colleagues, Baroness Penn and Lord Harlech, for their expert stewardship of the Bill, as well as the Opposition spokespeople for their generally constructive tone.
Hon. and right hon. Members will be aware that the Bill is a crucial next step in delivering the Government’s vision of an open, sustainable and technologically advanced financial services sector. Members will also recall that this sector is one of the crown jewels of our economy, generating 12% of the UK’s economic activity and employing 2.5 million people in financial and related professional services. Few constituencies will be untouched by those jobs and economic benefits. For example, Scotland benefits from £13.9 billion of gross value added and an estimated 136,000 jobs.
The Bill seizes the opportunities of Brexit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses.
The Bill repeals hundreds of pieces of retained EU law relating to financial services and gives the regulators significant new rule-making responsibilities. These increased responsibilities must be balanced with clear accountability, appropriate democratic input, and transparent oversight. There has been much debate in this House and in the other place about how to get that balance right. As a result of the considered scrutiny, the Government introduced a number of amendments in the Lords that improved the Bill in this regard.
Lords amendments 32 to 34 require the regulators to set out how they have considered representations from Parliament when publishing their final rules. Lords amendments introduced by the Government require the regulators to report annually on their recruitment to the statutory panels, including the new cost-benefit analysis panels created by the Bill. The amendments also require the Financial Conduct Authority and the Prudential Regulation Authority to appoint at least two members of authorised firms to their CBA panels. This will ensure that their work is informed by practical experience of how regulatory requirements impact on firms. My hon. Friends the Members for North East Bedfordshire (Richard Fuller), for North Warwickshire (Craig Tracey) and for Wimbledon (Stephen Hammond) may recognise that amendment and I thank them for their efforts to ensure that the Bill delivers proper accountability.
Amendments from the Government also provide a power from the Treasury to require statutory panels to produce annual reports. The Treasury intends to use this power in the first instance to direct the publication of annual reports by the CBA panels and the FCA consumer panel. I hope the hon. Member for Blaenau Gwent (Nick Smith) will welcome this as he tabled a similar amendment on Report.
Lords amendment 37 will enhance the role of the Financial Regulators Complaints Commission, which is an important mechanism for raising concerns about how the FCA, the PRA and the Bank of England carry out their functions. The amendment requires the Treasury, rather than the regulators themselves, to appoint the complaints commissioner, significantly strengthening the independence of the role.
In response to a debate in this House, the Government amended the Bill to introduce a power in clause 37 for the Treasury to direct the regulators to report on various performance metrics. On 9 May, I published a call for proposals, seeking views on what additional metrics the regulators should publish to support scrutiny of their work, focused on embedding their new secondary growth and competitiveness objectives. We have already had a number of helpful responses and we will come forward with proposals at pace following the expiry of the deadline next week. To further support that, Lords amendment 6 requires the FCA and the PRA to publish two reports on how they have embedded those new objectives within 12 and 24 months of the objectives coming into force. Taken together, these are a significant package of improvements to hold the regulators to account.
I know that access to cash is an issue of huge importance to many Members on both sides of the House. Representing the rural constituency of Arundel and South Downs, where the constituents are older than the UK average, this has always been at the forefront of my mind during the passage of the Bill. I also pay tribute to the campaigning work done by the Daily Mail and the Daily Telegraph on behalf of their readers as well as by groups such as Age UK and the Royal National Institute of Blind People.
Let me be clear: the Government’s position is that cash is here to stay for the long term. It provides a reliable back-up to digital payments, can be more convenient in some circumstances, and many, particularly the vulnerable, rely on cash as a means to manage their finances. The Bill already takes significant steps forward in protecting the ability of people and businesses across the UK to access cash deposit and withdrawal facilities for the first time in UK law. I am pleased to report that we have gone even further and introduced Lords amendments 72 to 77, which will protect people’s ability to withdraw and deposit cash for free. The amendments will require the FCA to seek to ensure reasonable provision of free cash access services for current accounts of personal customers. This will be informed by regard to a Government policy statement, which I expect to publish no later than the end of September.
Many Members are concerned about the separate issue of face-to-face banking. The FCA already has guidance to firms around the closure of bank branches and I hope that they and the industry will listen to the concerns of Members on behalf of their constituents on that issue.
Many Members across the House will have experienced the disproportionate application of rules requiring enhanced due diligence for politically exposed persons— PEPs. They and their families should not face some of the challenges and behaviours by banks that I have heard about. The Government are taking action to ensure that PEPs are treated in a proportionate manner. Lords amendment 38 requires the Treasury to amend the money laundering regulations to explicitly distinguish between domestic and foreign PEPs in law.
Peter Grant (Glenrothes) (SNP)
Will the Minister be more explicit as to what the close associates of domestic PEPs might include? Will it include, for example, somebody who has been elevated to the Lords by a former Prime Minister against the advice of the security services?
Andrew Griffith
In the interests of making progress on this substantial Bill, I shall not be tempted to comment on this further other than to say that I undertake, as I have to many other Members, to look very closely at that issue. For example, if by “associates” we mean either the adult children of people who have no real connection to the business that happens in this House, or family businesses that, again, are not directly connected to those who have put themselves forward for public service, I shall look closely at that. That is why we have tabled the amendments.
Lords amendment 39 requires the FCA to conduct a review into whether financial institutions are adhering to its guidance on the treatment of PEPs, and to assess the appropriateness of its guidance in light of its findings. Together, the amendments will lead to a change in how parliamentarians and their families experience the regime, and I am confident that they will be welcomed by all.
I will now set out the Government’s response to the non-Government amendments made in the Lords. The Bill introduces a new regulatory principle requiring the regulators to have regard to the Government’s net zero emissions target. Lords amendment 7 seeks to add conservation and the enhancement of the natural environment and other targets to this regulatory principle. The Government cannot accept the amendment as drafted, which is very broad and open to interpretation. The regulators must balance their objectives carefully, and they have a very important job to do. At a time when the Bank of England is rightly occupied by getting a grip on inflation, and the FCA is dealing with a range of challenges including working with lenders to ensure that there is support in place for those experiencing increases in mortgage interest rates, we must not overburden them with other considerations, particularly when they are vague or of uncertain relevance.
Philip Dunne (Ludlow) (Con)
My hon. Friend is making a very clear exposition of the Government’s position on the Lords amendments. On replacing Lords amendment 7 with a Government amendment, will he make it clear, for the benefit of the House and the other place, that his proposal is both effective in law and will give effect to the substance of what their lordships were seeking, which is that nature should be a key responsibility under the Bill?
Andrew Griffith
I give my right hon. Friend that assurance. This is not about a different destination; the Government have a proud record of action on net zero, on nature and, as we will come on to talk about, on deforestation. This is simply the best mechanism by which we can get from here to there. It builds upon the well-defined targets set in the groundbreaking Environment Act 2021, and in so doing produces something that we think regulators can advance while giving the right clarity to those objectives.
Lords amendment 36 seeks, laudably, to require financial services firms to introduce a due diligence regime to ensure that they do not support illegal deforestation in their activities. I see no fundamental conflict between having a vibrant, competitive, world-leading financial services sector and taking the very toughest approach on deforestation. The House considered a similar amendment from my right hon. Friend the Member for Epsom and Ewell (Chris Grayling) on Report. As I set out then, the Government fully support the intention behind the amendment, but further work is needed to ensure that a practical regulatory framework can adequately address this important topic.
I am grateful for the work of the Global Resource Initiative and in particular for its May 2022 finance report, which directly addresses these issues. The GRI talked about the need to take a staged approach and said that further work would be needed to come forward with a set of detailed standards and due diligence requirements to prevent the financing of forest risk commodities. Any intervention must therefore be scoped in detail and ensure that the UK moves in lockstep with international partners to ensure the true effectiveness of the regime in tackling the scourge of financing illegal deforestation.
The GRI report acknowledged that the well-developed work of the task force for nature-related financial disclosures, TNFD, will be increasingly important, especially as it has now included recommendations on deforestation in its draft standards. That is an organisation that the UK Government support and have provided finance to, and it is supported by the finance leaders of both the G7 and G20.
Philip Dunne
My hon. Friend is being very generous with his time. Without wanting to pre-empt the work of the Environmental Audit Committee, which is doing an inquiry into the whole subject of financing deforestation and what this country can do, I congratulate him on the amendment he has tabled in lieu of the Lords amendment. I think his amendment will do precisely what our Committee is likely to call for when we report in a few weeks’ time.
Andrew Griffith
I thank my right hon. Friend for his work and the work of his Committee, and for being so kind as to suggest that we may be anticipating his conclusions—not that I had prior knowledge of them. The important thing, a point made well by my right hon. Friend the Member for Epsom and Ewell, is that we get on and do this from a practical perspective. We have committed to convening a series of roundtables during the remainder of 2023, which will form the basis of a taskforce to drive forward the work of that important review and support the development of clear due diligence standards.
Chris Grayling (Epsom and Ewell) (Con)
I am grateful for how my hon. Friend the Minister has picked up the agenda and moved forward, following pressure both in this House and in the other place. The key to the taskforce that he is establishing is that it delivers not just a direction of travel but tangible recommendations on monitoring a system of due diligence, in a form that is actionable by the Government and by Parliament. Will he give that mandate to those he puts in to the taskforce for the job that he expects them to do?
Andrew Griffith
I would love if it “Action” were my middle name. Certainly, my right hon. Friend has that commitment from me and from Baroness Penn, who leads on green finance. The whole purpose of the taskforce is to drive forward action and support the development of clear due diligence standards. That is the important unlocking that we seek. We commit to doing that against a genuinely ambitious timeframe of just nine months following the first relevant regulations under the Environment Act 2021 being made. Those are important, as they are the starting point, but we will not sit idly by; once the Bill receives Royal Assent, that work can happen quickly. I pay tribute to him for his consistent work in this area and for raising the matter throughout these debates, and I hope he recognises the Government’s dedication to tackling illegal deforestation through our amendment.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
I thank the Lords for their work in considering this important Bill. In particular, I thank Lord Tunnicliffe, Lord Livermore and Baroness Chapman, who led for the Opposition in the relevant debates. I also put on record my thanks to the Minister and his office for briefing me and my office in good time on the Government amendments.
The Labour Party supports the various amendments tabled by the Government in the other place; they represent an important step in supporting the City to take advantage of opportunities outside the EU, whether that is creating a welcoming environment for fintech or unlocking capital in the insurance industry for investment in infrastructure through the reform of Solvency II. In particular, we welcome Lords amendments 6, 11 and 16 to 25, which strengthen the accountability of the FCA and the PRA.
This Bill facilitates an unprecedented transfer of responsibilities and powers from retained EU law to the regulators. We recognise that in this new context it has never been more important that the FCA and the PRA are appropriately held to account by democratically elected politicians. That is why Lords amendments 16 to 23 are so important to ensure that Parliament can take full advantage of the expertise in the other place when assessing the effectiveness of regulators.
However, accountability cannot be left to Parliament alone. That is why we support the principle behind Lords amendment 11, which will require the regulators to set out the process for how consumer groups and industry can make representation to review a rule that they believe is not working. We must ensure that regulation works for both consumers and the financial services sector. We also support Lords amendment 6, which will require the FCA and the PRA to report after 12 and 24 months on how they have complied with their duty to advance the secondary competitiveness and growth objective. However, as I am sure the Minister will agree, that new requirement must not detract from the regulator’s primary duties of promoting financial stability and consumer protection. As the banking turbulence of recent months has reminded us all, the success of the City depends on the UK’s reputation for strong regulatory standards.
I turn now to Lords amendments 72 to 77. I am delighted that, after months of voting against Labour’s amendments to protect free access to cash, the Government have finally U-turned. I congratulate in particular my hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh) on all her tireless campaigning on that topic. It was her determination that got us over the line.
If you will indulge me for a minute, Madam Deputy Speaker, I wish to send my condolences to my hon. Friend. I pay tribute to her sister, who was the first female secretary-general of the Labour party and an inspiration to many young women across the party.
Lords amendments 72 to 77 are especially important because they will ensure that millions of people across the country who rely on free access to cash will not be cut off from the goods and services that they need. However—the Minister will have anticipated this—I am disappointed that the amendments will do nothing to protect essential face-to-face services. Analysis published by consumer group Which? found that over half of the UK’s bank and building society branches have closed since January 2015—a shocking rate of about 54 closures each month—which risks excluding millions of people who rely on in-person services for help with opening new accounts, applying for loans, making or receiving payments, and standing orders.
Alison Thewliss (Glasgow Central) (SNP)
The hon. Lady is making an excellent point on bank closures. Even in urban constituencies such as mine, banking closures are forcing people into the city centre to get their cash. The Albert Drive branch in Pollokshields is the latest closure proposed by the Bank of Scotland. Does she agree that such closures are very difficult for many communities to bear?
Tulip Siddiq
It is a similar story across my constituency. A Labour Government would give the FCA the powers it needs to protect essential in-person banking services, which would help a lot of the constituents the hon. Lady is talking about.
To be clear to the Minister, Labour is not calling for banks to be prevented from closing branches that are no longer needed. We recognise that access to face-to-face services could and should be provided increasingly through banking hubs, be they delivered at the post office, in shared bank branches or by other models of community provision. But so far, only four hubs—I repeat: only four—have been delivered. [Interruption.] The Minister is indicating that there are six, which I do not think is a massive improvement, but I will take it. Six banking hubs have been delivered, about which he seems very proud. Figures from LINK reveal that only a further 52 hubs are in the pipeline. On top of that, many of those planned banking hubs will not even provide the essential in-person services that I am speaking about, so although we welcome the progress made in Lords amendments 72 to 77, there is a lot more to do to ensure that no one is left behind.
I am disappointed that the Government have decided not to back Lords amendment 10 on financial inclusion, for which my hon. Friend the Member for Kingston upon Hull West and Hessle (Emma Hardy) has been a powerful advocate. The amendment is an important opportunity to rethink fundamentally how financial resilience, inclusion and wellbeing issues are tackled in the UK, and to empower the FCA to confront issues such as the poverty premium—the extra costs that poorer people pay for essential services such as insurance, loans or credit cards.
Although I agree with the Minister that financial inclusion is a broader social policy issue, I do not believe that that is a legitimate argument for rejecting the Lords amendment fully. As the Treasury Committee found it its report last year:
“The regulations made by the FCA, and the manner in which it supervises and enforces those regulations, could have a significant impact on financial inclusion”,
such as restricting the practice of charging the poorest in society more for paying insurance in monthly instalments. That is why the Labour party will vote for Lords amendment 10.
Finally, I will address Lords amendment 5 on sustainability disclosure requirements, and the Government amendments tabled in lieu of Lords amendment 7 on expanding the regulatory principle on net zero emissions, and in lieu of Lords amendment 36 on forest risk commodities. We welcome once again that the Government have finally U-turned and acknowledged concerns that our regulatory system must play a role in protecting nature and ending deforestation. However, as I am sure the Minister will agree, that can only be the first step in ensuring that the transition to net zero and the protection of nature are primary considerations across the financial system. The Treasury’s review of deforestation must be meaningful and put forward concrete proposals. The Government cannot continue to kick the can down the road.
Similarly, although we welcome the new requirements in Lords amendment 5 for the FCA and PRA to have regard to the Treasury’s sustainability and disclosure requirements policy statement, we have been calling on the Government to move on that for months. Even now, the Government have yet to confirm the date on which the sustainability disclosure requirements will be introduced. We need clear timing and direction so that we give businesses the confidence to invest and do not undermine their certainty.
The Labour party will support the amendments. As I am sure the Minister knows, I will continue to hold him to account on his actions regarding green finance, financial inclusion and in-person banking services.
Dame Andrea Leadsom (South Northamptonshire) (Con)
May I start by sending my condolences to my fellow Treasury Committee member, the hon. Member for Mitcham and Morden (Siobhain McDonagh)? Her sister will be greatly missed by Members across all parties.
I am delighted at the Bill’s progress. I congratulate my hon. Friend the Minister on all his work in taking into account the views expressed across the House. Of course, the existence of the Bill is a huge Brexit dividend in itself, enabling us to deregulate while strengthening financial services in the UK, which is in the top two financial services sectors in the world and creates up to 2 million jobs right across the UK.
So far, the Treasury Committee has proven to be a good overview body for the financial services and markets regulation that is coming back to the UK. That Committee has done a great job, and I can say that without appearing to boast because I was not on the Committee when it did that scrutiny. We have done a good job, and the Treasury Committee will continue to be the right place to provide the scrutiny and checks and balances that will always be needed in the financial services sector.
I point out, however, that their lordships need carefully to consider their approach to the Bill. Far from enabling us to seize the opportunity and recapture the initiative, they seem to be trying to over-burden the regulators, pinning them down with reports and further obligations and duties that would militate against the UK continuing to be one of the most successful places on earth for financial services.
Peter Grant
As a counter to that point, is the right hon. Lady as concerned as I am about the fact that, as well as being a successful breeding ground for financial services businesses, the United Kingdom is now seen worldwide as one of the best places to commit financial fraud?
Dame Andrea Leadsom
The hon. Gentleman raises an extremely important issue. He will know that huge efforts are being made to clamp down on financial fraud. It has been an insoluble issue over many decades, and of course, with advances with technology and so on, scammers and financial fraud continue to be a big problem, but that does not detract from the fact that the UK is hugely successful in financial services. I predict that the UK will also be hugely successful in green financial services around the world, enabling the net zero transition to take place using UK expertise and exports in that crucial area.
I was delighted to see the new competitiveness and growth objective, and that the PRA and FCA will be required to provide reports on how well it is being addressed. The Treasury Committee has taken evidence from both organisations, which welcome the opportunity to focus not just on stability but on how it affects our competitiveness around the world. That is important and represents a big opportunity for UK plc.
The complaints function is a great initiative that will definitely address the absolutely valid concerns of so many constituents across the UK about the poor behaviour in some of the responses to inquiries led by the FCA or the PRA. That independent, Treasury-led complaints function will be very important.
It is vital that my constituents in South Northamptonshire can have access to cash, so I am delighted that an obligation to ensure that that remains the case will be enshrined in this legislation. I share the concerns of the hon. Member for Hampstead and Kilburn (Tulip Siddiq) about the closure of banks. The Government initiative to create a new arrangement for post offices to provide “the last bank in town” services was a good one. I wonder whether over time we can expand that, because the loss of banks continues to be a big issue.
Peter Grant
As has been said throughout the passage of the Bill, our chief concern has always been that too many provisions in it do not go far enough. I am pleased to say that the other place has tightened up some aspects of the Bill. It is disappointing that this evening the Government seem determined to oppose some amendments that could have addressed more of our concerns and, in at least one case, seem determined to make an amendment that makes things even worse.
In the interests of brevity, I will not go through all the Lords amendments that the Government are happy to accept; I ask Members to take those as read. The first Government proposal that I have some concern about is their motion to disagree with Lords amendment 7. I appreciate that they have tabled alternative amendments, which they might think say pretty much the same thing or better, but Lords amendment 7 explicitly refers to targets set by any of the UK’s national Parliaments. They are not mentioned anywhere in the Government’s amendment (a) in lieu. I hope the Minister can explain why the Government are opposed to giving targets set by the devolved nations of this Union of equals the same status as those set in this place, because some of those targets and activities will relate to responsibilities that are explicitly devolved to one or more of the other nations of the United Kingdom. It does not seem very equal that some Parliaments can have their targets effectively regulated and others cannot.
I do not have any issue with Government amendments (b) and (c) in lieu of Lords amendment 7, although it seems strange that they have been tabled as alternatives, because they are entirely compatible with it. In fact, the Government could quite easily have tabled them in the Lords at the time.
As was said by the Opposition spokesperson, the hon. Member for Hampstead and Kilburn (Tulip Siddiq), Lords amendment 10 is a good amendment. I do not understand why the Government want to take it out. Are they against financial inclusion? If they think that financial inclusion is a good idea but that this amendment is not best way to pursue it, I would remind them that they have had months to come up with a better amendment. “Take it back, don’t agree it just now, and we promise to bring something back in the near future.” However, we have been promised effective measures on financial inclusion since before I was a Member of this place, but it has not happened yet, and the problem is getting worse all the time.
To answer the right hon. Member for South Northamptonshire (Dame Andrea Leadsom), it is all very well for the Government to find ways to make post offices the last bank in town, but they are being shut left, right and centre as well, so there is no long-term protection for access to cash, especially in our poorest and most deprived communities, of which I represent more than my fair share. It is no comfort to them to be told, “The bank has closed, but you can use the post office,” if, as I have seen happen literally at the same time, the Post Office is saying, “We’re going shut the post office, but you can still use the bank.” That does not give any protection or comfort whatsoever.
Lords Amendment 36, on illegal deforestation and so on, is also a good amendment that we would have supported. We are willing to accept the Government alternative as an improvement in some regards. The biggest concern we have—it is one on which we would very much want the opportunity to give the House the chance to express its will this evening—is about one of the crazy ways in which this place deals with things, especially once legislation has been back and forth between here and the Lords. If this House wanted to disagree with Lords amendment 38, as I think quite a few of us will, we will not be allowed to do that unless the debate finishes within three hours. The ability of the democratically elected House of Commons to scrutinise and perhaps overturn a decision taken by the undemocratic, unelected House of Lords along the corridor therefore depends on how many people want to speak, how long they want to speak for, and how fast they want to talk.
Lords amendment 38 is about politically exposed persons and the way they are risk-assessed in relation to money laundering. It makes a very broad assumption about the amount of due diligence that needs to be exercised to prevent money laundering in the case of a politically exposed person from the UK—someone who, in the words of the amendment, is
“entrusted with prominent public functions by the United Kingdom”.
The assumption is that they are always less of a potential money laundering risk, as are their family and “close associates”, whatever that means. That is far too broad and sweeping an assumption.
I do not have an issue with any regulation being worded in a way that is proportionate to the risk, and I can understand the attraction of being able to designate some individuals as less of a risk than others, but this exemption is far too sweeping. What do we mean by “entrusted with prominent public functions”? As we all know, we have had very recent examples of people who were entrusted with the most prominent public function of all—the office of Prime Minister—turning out to be totally untrustworthy. How do we define a “close associate”? Would, for example, Evgeny Lebedev have been regarded as low risk simply because he could accurately have been described as a close associate of the then Prime Minister, who himself has turned out, as the House now agrees, to have been untrustworthy? When is a close associate not a close associate?
Chris Grayling
I want to probe a little on this. Would the hon. Gentleman classify somebody who, for example, gave a parking space to a camper van as a close associate?
Peter Grant
I think that both that intervention and the muttering from a sedentary position on the Treasury Bench give an indication of just how seriously this Government take money laundering. Perhaps we can all speculate as to the reasons why.
We are not against the idea that any regulation should be applied proportionately, but it is too sweeping a generalisation to say that, because of someone’s job or who they know, they somehow become less of a risk. Let me give just one example. Would Baroness Mone of PPE Medpro have been regarded as being at low risk of anything because she was a Member of the House of Lords and a one-time Government envoy?
Mr Deputy Speaker (Mr Nigel Evans)
Order. I gently remind the hon. Member that we are not allowed to directly criticise Members of the House of Lords by name.
Peter Grant
I stand corrected, Mr Deputy Speaker. Unless I said more than I intended to, I think I was asking a question; I was not expressing an opinion.
Let us not forget that over the last 10 to 15 years a huge amount of dirty money from Russia and other former Soviet republics has been laundered into the United Kingdom by people who, at least financially and in terms of their donations, were very closely associated indeed with leading politicians. It has to be said that, had Putin not carried out a second invasion of Ukraine last year—if he had been satisfied with the original illegal activity in Ukraine 2014—that money would probably still be coming in, because the Government only moved in a big way on dirty Russian money after the second invasion of Ukraine. They did not do anything, or anything like enough, in 2014 or afterwards, so we have to ask whether they are really serious about cutting off this dirty Russian money at source and handing it back to the people that it was originally stolen from.
I thought it was quite interesting that the Minister said that it was a bad idea to agree Lords amendment 10, to improve financial inclusion, at such a late stage, when the Government are happy to accept Lords amendment 38, to weaken our defences against money laundering, at the same late stage. That may give an indication of what the priorities might be of people who wield a lot of influence over the Government—maybe not the Minister’s own priorities.
As I have said, we in the SNP continue to support the Bill. Our concerns on almost all counts have been in areas that did not go far enough, such as the accountability of the regulators—the Financial Conduct Authority, for example. My issue is that the regulators have not been held properly to account for the myriad times they have failed to regulate and have simply not protected the public and investors. Other authorities have not protected pensioners. We can look at Blackmore Bond, London Capital and Finance, Premier FX, the British Steel pension scheme, the AEA Technology pension scheme, and hundreds of other financial scandals that were allowed to happen—or certainly allowed to happen as badly as they did—because the regulators did not do the job they were set up to do. They should be held accountable to this place and to the public for their failures to regulate. I am concerned that if we tie them up with too much regulation about how they regulate, and if they are worried about being dragged into Parliament or politically overruled when they do regulate, there is a danger that they will start to lose their independence from political interference, without which no regulator on these islands can ever be effective.
It is disappointing that the Government seem determined to reject some Lords amendments that would have made the Bill better, and to push through at least one that will significantly weaken it. It would be sad indeed if this elected Chamber were not allowed to express its will on whether amendment 38 makes the Bill better or worse. I for one believe that it makes it worse, and I hope we will be able to divide the House on it tonight.
Chris Grayling
I find it slightly ironic that I am following an SNP spokesman demanding more action on financial fraud, but there is always a place for a bit of amusement in the House. I will focus my remarks on the issue of deforestation.
Peter Grant
I am absolutely confident that the Scottish National party Westminster group will submit clean audited accounts to the Electoral Commission before the deadline. Is the right hon. Gentleman aware that the Conservative party parliamentary group will not?
Chris Grayling
I think I may have touched a slightly raw nerve there, Mr Deputy Speaker.
First, I am personally grateful to the Minister, who has been extremely responsive on an issue that is crucially important, not just to the future of this country but the future of our planet. The loss of forest cover around the world—cleared for the growing of soy, the planting of palm oil plantations and beef cattle ranching—has been ecologically disastrous for the planet. Of course, in many of those areas, it has not created sustained agricultural land, but land that has been used for a few years and is now lying semi-derelict.
One of the great challenges for us as a planet is to restore some of the land that has been lost and replant some of the forest that has been lost, but we cannot tackle this problem unless we bring it to a halt now, and in many parts of the world, there are still real issues with illegal deforestation to produce those products. As a Government, we have already taken steps that I think are pathfinders: the introduction of the Environment Act 2021 has set a path for dealing with forest risk products, particularly in the supply chain and our retailers. That was a positive step that I think will make a real difference, and I look forward to seeing that process completed through the secondary legislation that identifies the individual products we are tackling. Through his amendments, the Minister has clearly set that as a starting point for financial services as well.
However, there is now a broadening consensus about the need to extend the due diligence provisions that we have introduced for the retail sector to financial services. The financial sector is lending money to, investing in, and doing bond issues for international businesses that have sometimes done a good job of monitoring their supply chains, but other times simply do not do enough to protect the products they are sourcing from the risk of illegal deforestation. The Minister may reference the Global Resource Initiative work led by Sir Ian Cheshire, who has been a great champion of this issue, and the Minister was very right to have been willing to pick up the initiatives set out in that report.
It is also something that is increasingly backed by the financial sector itself. I do not believe there is any contradiction between a successful financial services sector and proper responsibility in key areas such as deforestation, and we now see that the GRI report and the direction of travel set out in Lords amendment 7 is attracting support from institutions, including well-known ones such as Aviva, that amount to nearly £3 trillion of funds under management. The support is there, and I am grateful to the Minister for picking up that initiative and being willing to run with it. My request of him is not simply that we get on with it; we need to ensure that what he has announced today does not end up as just another review. Governments have review after review—not all lead to action. I take the Minister at his word that he will make this a process of action, rather than simply a further stage of looking at the issues again.
Nick Smith (Blaenau Gwent) (Lab)
I rise in support of Lords amendment 27. First, I thank the Ministers in this House and the other place for this important concession. I also express gratitude to those Members from all parties in this House and the other place who supported my campaign on this matter. We are all glad that there will be a mechanism for greater parliamentary oversight of our financial services regulators. The specialist insight from statutory panels on the performance of regulators will be invaluable, particularly on the Financial Conduct Authority’s fulfilment of its all-important consumer protection objective.
To help take things further, I hope to meet the chair of the FCA consumer panel shortly. I will explain why the FCA’s handling of the British Steel pension scheme in 2017 was so very disappointing. It is simple: the FCA faced the City of London, not the homes of vulnerable steelworkers in Ebbw Vale, Port Talbot and Scunthorpe. As parliamentarians, we found it hard to influence the dilatory regulator in support of our steelworker constituents, who deserved much better protection against the financial sharks.
Having said that, amendment 27—in addition to the FCA’s new consumer duty—makes me a little bit hopeful that we will encourage the FCA to become more outward looking and capable of adapting to the changing needs of Britain’s consumers. I am more optimistic that there will be a different way of working; that oversight and scrutiny will be embraced; and that scandals such as the British Steel pension scheme will not happen so easily again.
However, our fight for the proper protection of consumers does not stop there. I declare an interest: the Labour Treasury spokesperson in the other place is my wife, Baroness Chapman. I will speak in support of Lords amendment 10, which she moved in the other place. Financial inclusion is crucial to the regulation of financial services, so I urge the Government to reconsider their opposition to that amendment. The design, marketing and administration of financial products and the quality of financial advice have a direct impact on whether vulnerable groups are properly included in our financial system.
Just last week, I met steelworkers who, once bitten, were twice shy about what to do next with their pension pots. They are smart and highly skilled, yet understandably they do not have the financial knowledge nor the right impartial support on their investment needs. Across our country, there is still the danger of millions like them being at risk of exploitation by bad actors in the financial sector. Financial inclusion should therefore be at the forefront of our regulatory framework. After all, consumers are our financial services sector. They need to have confidence in a regulatory framework that prioritises them and faith in our financial sector.
Duncan Baker (North Norfolk) (Con)
I rise to support the Bill, and primarily to speak about access to cash and, therefore, my support for Lords amendments 72 to 77.
I have spoken many times in this place about banking provisions. I brought in a ten-minute rule Bill, the Banking Services (Post Offices) Bill, which the Government did not in the end take up. I have said time and again in this place that the UK is not ready to go cashless. That is why I am particularly pleased with the provisions in this Bill. The reasons for that are manifold. The elderly, the vulnerable and particularly those living in rural locations such as mine of North Norfolk simply rely on cash, and I think I can speak for many Members in the Chamber on that. If Members do not believe me, they have only to look at what the access to cash group said in its research, which is that 5 million adults would struggle without access to cash, and those are often the people on the lowest incomes and the tightest budgets.
Robin Millar (Aberconwy) (Con)
My hon. Friend can add to that list residents in my constituency of Aberconwy who have seen the banks withdraw, first from the market towns and towards the coast, and then from coastal towns along the coast—a withdrawal only matched by their move online. Does he agree that this is a good move by the Government, and that it will be welcomed by many people specifically because it retains access to cash for those in societies, communities and demographics for whom cash is a crucial part of their everyday lives?
Duncan Baker
I am very happy to agree with my hon. Friend, but I want to go even further. Particularly in the rural and coastal areas he mentions, which is indeed the case with North Norfolk, access to cash is just not good enough. Yes, there are the provisions in the Bill, but we have to go even further. That is why I want to talk about the disgraceful attitude of the banks and what we can do about this through the advent of banking hubs.
Since 1988, some 14,000 bank branches have shut across the United Kingdom. There are only approximately 6,000 left, and what is even more worrying is the acceleration with which they are being shut. We heard the shadow Minister, the hon. Member for Hampstead and Kilburn (Tulip Siddiq), say that 54 branches continue to be closed every single month, and that accelerating trend is a particular worry. In my view, there is an absolute lack of corporate social responsibility from the big banks. Given that the UK taxpayer bailed them out in 2008 with such a high number that it is extremely difficult to ascertain what it is—in some cases, it was up to £1 trillion—I think it is particularly poor not to give a hoot about the people affected in these communities.
In my constituency, Lloyds bank, which announced about a month ago that it was going to embark on another wave of closures, is going to close not just one bank branch, but two. I cannot even begin to put into words how upset my constituents are about that, and I have had countless emails. Both at Cromer, which is on the north Norfolk coast and is visited by many thousands of tourists, and further inland at North Walsham, people will suffer a Lloyds bank closure and be left with one bank in the town.
Sara Britcliffe (Hyndburn) (Con)
Does my hon. Friend agree that when we question why the banks are closing and ask them for evidence, some banks supply evidence from during the pandemic, when obviously banks were closed and not many people were able to access them?
Duncan Baker
My hon. Friend makes an extremely important point. So much of this research has been conducted during a window when, of course, footfall was incredibly low because the pandemic meant we were not able to go out and use our high streets in the same way. I think they have used that data to help extrapolate the views and opinions they want, and they then go on and close branches. That goes to the root of what they are doing.
These branches are simply saying, “Don’t worry. You can go online. Oh, there’ll be a community banker to help you. Of course, you can then go and use your local post office.” We know that, in so many communities up and down the land, that just is not appropriate. To take my constituency, I have the oldest cohort of individuals in the entire country: one third of people are over the age of 65. In some coastal towns, the vast majority of my constituents cannot go online, because in many cases they are in their 70s or older and such suggestions are just not appropriate. How can communities of 8,000 people in Cromer and of 13,000 people in North Walsham be left with one bank? The other point not taken into consideration is the expansion of these towns. Under the local plan, North Walsham will see at least another 2,500 homes built over the next decade. The banks take no account whatsoever of the increase in population, and therefore do not factor that into their numbers.
Banking hubs are often given as one answer. Of course, there are others. There is a notable case in Frome in Somerset, which is a similar scheme to a banking hub but is slightly different, and that was also reasonably successful. The big issue with all of this is the regulations on how to get a banking hub. I think we can already see that this is not working as well as it should if only six have opened so far. The criteria include that people have to wait until the last bank in town shuts before they are eligible to have a hub. To me, the rigidity of that structure does not work. We have different sized towns, different sized populations, different age cohorts and towns that are miles away from the nearest bank, so how on earth can certain towns be using that rigid structure? It does not seem right to me. I ask the Minister to keep under review how the banking hub solution, which is being run in conjunction with Link, is being operated. It seems that it is not working well.
The Minister is a really good man. He has met me many times to talk about this issue, and he is certainly in listening mode. He could do a lot worse than dusting off my old Banking Services (Post Offices) Bill and having a look at it. The principle in that Bill was to look at the post office network—it has an 11,500-strong footprint—which I do not think we invest in enough. Instead of having a sweetheart deal between the Government and the banking institutions, let us regulate this with proper legislation saying that we will use our post office network and invest in it as the real future for banking. So many post offices could be banking hubs. It would give real solidity to the market and help many hard-working postmasters know what their future will be.
Finally, the Department for Levelling Up, Housing and Communities is sitting on £150 million in the community ownership fund. Why can we not have a special provision as part of that to give planning permission to buildings that can be used as banking hubs? Again, we could further accelerate the roll-out of these hubs. There is a bit of food for thought there, but I now want to close my remarks. I thank the Minister for listening, but please will he look at our banking hubs and the way they are working? I think we can do a much better job of it.
Sara Britcliffe
I agree with everything my hon. Friend the Member for North Norfolk (Duncan Baker) said.
I rise to speak in favour of amendments 72 to 77 on provision for access to cash. I, like many of my colleagues in this Chamber, understand the need of my constituents to have continued access to cash. This demand is concentrated in, although not exclusively restricted to, more disadvantaged groups who may still use cash for budgeting reasons or because they are not technologically literate.
That is why I have campaigned on this. In my constituency of Hyndburn and Haslingden, the number of free-to-use ATMs has fallen by nearly 40% since January 2021. Also, some towns in my constituency, including Great Harwood, have seen all their high street banks close, severely limiting access to cash compared with even a few years ago.
7 pm
We all understand the challenges. I have met with banks in my constituency and companies like LINK, and I am well aware that the long-term trends in digital payments and card payments are only going one way. But I strongly believe that even in the face of that evidence, we need to protect those individuals and businesses that still use cash.
I was a local business owner in Oswaldtwistle and we had to run between local businesses just to make sure we had the change we needed to run them. This is therefore very important, especially when the post offices close, which happened in Oswaldtwistle. We must make sure that provision is still in place and is easily accessible, especially for the older residents who live in all our constituencies.
Recently, I have been talking to businesses in Great Harwood, where all the high street banks have closed and the impact of the lack of ATMs is severe, especially if a business is cash-only or its card facilities are down. I am speaking to LINK and trying to get a banking hub in Great Harwood, and I am feeding in the issues facing local businesses, some of whom must travel out of the constituency to Blackburn or to Mr Deputy Speaker’s patch of wonderful Ribble Valley.
That is why I welcome the Chancellor accepting the Lords amendments on free access to cash. Having spoken to people across my constituency, I know how important that is. It is great to see the Government standing up for those who would struggle were the stark decline in cash access to continue.
I thank the Minister for his engagement throughout the process. I warmly welcome Lords amendments 72 to 77.
Alun Cairns (Vale of Glamorgan) (Con)
It is a privilege to have an opportunity to contribute on the amendments made in the other place. I want to speak briefly about the accountability and scrutiny of the regulators, and the crypto and digital assets recognition in the Bill.
Chapter 3 refers in general to the accountability of the regulators and amendments 6 to 9 refer to the obligation to promote growth. The amendments are extremely important and I welcome the Government’s response to them and their setting the tone in accepting and working with such changes early on. International competitiveness is important for all our constituents. As Members have said, it is inevitable that consumer-focused elements in social media drive campaigns that rightly receive attention in the broader media, forcing change from regulators and established institutions, but the regulator must also strike a balance to ensure that businesses and the industry itself are internationally competitive. This is an important sector to the UK economy. As the Minister said in his introductory remarks, all constituencies will be affected by the Bill. There will be hardly a constituency that does not have someone employed in the sector, so amendments 6 to 9 on international competitiveness are important in striking the right balance between consumer demands for cash and ensuring that the sector is competitive so as to be sustainable over the long term.
Scrutiny and accountability of the regulators are also important. My right hon. Friend the Member for South Northamptonshire (Dame Andrea Leadsom) complimented the Treasury Committee, and it is important to do so, but Select Committees have limited capacity to scrutinise the role of all regulators on all occasions. I should probably declare an interest as a member of the regulatory reform group that is working to reform the approach that regulators take, hence my comments on the international competitiveness of sectors in general. The regulatory reform group has highlighted that there could be a role within Parliament for a Joint Committee to scrutinise the activities of regulators, to ensure that measures such as the clauses on international competitiveness are lived up to and met.
Has the Minister formed a view about how the scrutiny referred to in the Bill can best be achieved, because clearly that will be not in the Bill but in regulations thereafter? It is up to the House to decide on how best to scrutinise this, but the Joint Committee as suggested by the regulatory reform group is a good starting point for the debate. Does the Minister recognise that there is a strong need for additional parliamentary scrutiny of the regulators, and not only in financial services, although this Bill enables him to comment on that sector? It is good to see that my hon. Friend the Member for Wimbledon (Stephen Hammond), who also sits on the regulatory reform group, is present. Brexit has provided a great opportunity to deliver for many of our constituents, but it can only do so if the regulators take a different, more proactive and positive approach to supporting industries, rather than, as some might say, restricting them, in addition to the excellent work done by the Treasury Committee and other Select Committees thereafter.
I turn to chapter 2 generally and clauses 21 and 22 and clause 65 referring to cryptoassets and digital assets and distributed ledger technology, or stablecoins as others would refer to them. The Minister will be aware that I have raised cryptoassets and digital assets on a number of occasions and called for strong direction. I pay tribute to the Government, as the Bill gives the framework for a clear policy direction so that regulators can rightly support and offer confidence to those getting involved in the sector. This is also an opportunity to start delivering on some of the calls made in the Kalifa review and to provide the certainty that many seek as they research cryptoassets, digital assets and distributed ledger technology. When can we look forward to the strong policy direction that we need to ensure that the UK is ahead of the curve in this sector and repeats the fantastic success that the fintech sector has had as a result of the clear policy direction and framework given in the past?
Stephen Hammond (Wimbledon) (Con)
As many colleagues across the House have said, the Bill addresses one of our most important industries and therefore is one of the most important Bills we will be considering in this Session. At the outset the Government said their aim with the Bill was to make UK regulation appropriate and proportionate, to be internationally competitive, to boost growth and to enable better outcomes for consumers and business, and those themes come through strongly in the Lords amendments. I should have said at the outset that I refer the House to my entry in the Register of Members’ Financial Interests.
It was a pleasure to serve on the Bill Committee, which the Minister conducted in a constructive way, listening to a number of comments about accountability and transparency, which I shall come on to later. In Committee we spent a lot of time discussing financial inclusion, and the hon. Member for Glenrothes (Peter Grant) was critical of the Minister and rejected the proposal for having arrived late. Actually, that guard for financial inclusion is already in the substance of the consumer duty being digested and implemented by the FCA. Much as I am sometimes cautious about what a regulator says, the fact of the matter is that the regulator says that it has those powers already.
I will not detain the House on the work that the Minister has done on deforestation, because my right hon. Friend the Member for Epsom and Ewell (Chris Grayling) has spoken about that more eloquently. I ask the House to think carefully and to support the Government’s amendments in lieu on the net zero objective, because the amendments in lieu sensibly ensure not only that the Bill builds on the Climate Change Act 2008 and the Environment Act 2021, but that regulators consider the exercise of their functions “relevant” to the making of such contributions. At I said at the outset, the Government intended the Bill to be both appropriate and proportionate, and for regulators conducting functions in this area, “relevant” seems to be a key point.
The Minister will know that throughout Committee, I was keen to discuss the secondary competitive objective and ensuring transparency and accountability. Throughout Committee, my hon. Friend the Member for North Warwickshire (Craig Tracey) and I raised issues about membership of panels, metrics and the need for reports, and I congratulate the Minister on listening, because, with some of the amendments that he proposed on Report and the tranche of Government amendments coming from the Lords, the Bill has a lot of good. Much as I agree with my right hon. Friend the Member for Vale of Glamorgan (Alun Cairns) that a Joint Committee of the House to scrutinise and hold the regulator transparent would be the perfect solution, I do not think we should let perfect get in the way of good, and there is a lot of good in this Bill, particularly with a number of the amendments that create a need for a report. I also congratulate the Minister on looking at the membership of panels. Far too often, there is a temptation of regulators to mark their own homework, and we must ensure that does not happen if the regulator is to be accountable and, therefore, regarded as effective.
It is clear that the secondary objective is a secondary objective, but if we are to have a thriving financial services industry in the future, this jurisdiction must enjoy international confidence and be internationally competitive. It has been said any number of times, but the costs of becoming a new entrant—with new applications, in some cases—are 14 times more than in other jurisdictions. That cannot be right. The movement in this Bill to sort that out and place a burden on the regulator for international competitiveness is key.
My final point, the Minister will not be surprised to hear, is that I am pleased to see what amendments 37 and 38 do. They seem utterly sensible and in line with the need, first, to be transparent, as in amendment 37, and secondly, to be appropriate and proportionate, as in amendment 38. When the Government produce the secondary legislation, I am keen that they define carefully the metrics for how the reports that the regulator produces are judged, to consist of operational effectiveness, the health of the market and the regulatory burden, as well as international comparisons, because that will be the key test of the Bill. I know he will take those things on board in future discussions. I look forward to supporting the Government this evening.
Anna Firth (Southend West) (Con)
I rise to speak in support of Lords amendments 72 to 77, which seek to protect the right to free cash access services for customers. I thank the Minister very much for his hard work in preserving this valuable resource and also for listening to and engaging with Back Benchers from all parts of the House.
Andrew Griffith
I am grateful to all hon. and right hon. Members who have contributed to this debate. I welcome my hon. Friend the Member for North East Bedfordshire (Richard Fuller), who together with my right hon. Friend the Member for Salisbury (John Glen) started this Bill’s progress through the House. I spoke at length and tried to cover as many topics as possible in my opening remarks, so I will be brief.
I extend my thoughts to the hon. Member for Mitcham and Morden (Siobhain McDonagh). I have never actually made it to the cash machine promised in her constituency, but her words echo whenever we talk about access to cash. I did make it to the constituency of the hon. Member for Ealing Central and Acton (Dr Huq), one of the lucky constituencies to have one of the six hubs, of which we seek to see many more.
I welcome hon. Members’ acknowledgement of the substantial steps that the Government have taken to further enhance regulatory accountability through the passage of the Bill. The hon. Members for Blaenau Gwent (Nick Smith) and for Glenrothes (Peter Grant), my hon. Friend the Member for Wimbledon (Stephen Hammond) and my right hon. Friends the Members for South Northamptonshire (Dame Andrea Leadsom) and for Vale of Glamorgan (Alun Cairns) all talked about that.
The largest part of the debate was about the importance of access to cash, and the Government have introduced Lords amendments for precisely that. I wish my hon. Friend the Member for Hyndburn (Sara Britcliffe) good luck with procuring a hub for Great Harwood. My hon. Friend the Member for Aberconwy (Robin Millar) spoke about access to cash, as did the Member with the most formidable knowledge of the important role played by the Post Office, my hon. Friend the Member for North Norfolk (Duncan Baker), and my hon. Friend the Member for Southend West (Anna Firth). I and, I hope, the banks have heard the debate. It is important that they have been listening to the strong points made about not just access to cash but access to face-to-face branch facilities.
We heard from the hon. Member for Glenrothes about why Lords amendment 7 does not cover the devolved Administrations. I understand that this is not necessarily his desired outcome, but financial services legislation is a reserved matter. As an outcome, I hope to deliver a Brexit dividend—he may not particularly welcome that—for citizens in all parts of the country to protect those 140,000 jobs that, as we heard, Scotland relies on.
Peter Grant
Just to be clear, the Minister is saying that if the Scottish Government set a higher target for something than the UK Government do on behalf of England, the regulators will go with the UK Government’s low target, and if the UK Government set a higher target than the Scottish Government feel comfortable with, the regulator will go with the UK Government’s higher target, even in areas where an activity is devolved.
Andrew Griffith
We are always happy to listen to the hon. Member, but we are in danger of repeating ourselves.
Let me briefly give my right hon. Friend the Member for Epsom and Ewell (Chris Grayling) the assurance he seeks that we will not just have another review. We seek action. We will be looking for a framework for due diligence and for how we can hold the financial sector to account. Both he and my right hon. Friend the Member for South Northamptonshire talked about how we can make the UK financial sector an exemplar on deforestation and support for nature. That is my aspiration, and I believe that it is shared across the House. The Government’s amendment in lieu of Lords amendment 36 will do that.
Government amendments made throughout the passage of the Bill reflect the comprehensive scrutiny and engagement of both sides of the House, just as we have heard tonight, and the Bill is the better for it as a result. I hope that their lordships will listen to the voice of this House. It is now time to pass the Bill and begin the really important work of tailoring our financial services regulation to serve the interests of the UK, bolster our competitiveness as a global financial centre, power growth in every part of the country and every part of the economy and, above all else, deliver better outcomes for the consumers and residents we represent.
Question put, That this House disagrees with Lords amendment 7.
Financial Services and Markets Bill
Tuesday 27th June 2023
(1 year, 4 months ago)
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Baroness Penn
That this House do not insist on its Amendment 7 and do agree with the Commons in their Amendments 7A, 7B and 7C in lieu.
“(c) the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution;”
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I beg to move Motion A and, with the leave of the House, will also speak to Motions B and C. I am grateful to all noble Lords for their considered scrutiny of the remaining issues in front of us today and throughout the Bill’s passage.
I will speak first to Lords Amendments 7 and 36, and I thank the noble Baronesses, Lady Hayman and Lady Boycott, in particular, for their leadership on these issues during the passage of the Bill.
The UK is a global leader in sustainable finance. The Government’s ambition to support the growth of this important area is demonstrated by the amendment relating to sustainability disclosure requirements made on Report, and the amendments in lieu of Amendments 7 and 36 introduced during Commons consideration.
I turn first to Lords Amendment 7. The regulators have an important part to play in supporting the Government’s ambitions, which was demonstrated by the inclusion of the net-zero regulatory principle at introduction. The Government have reflected carefully on the calls to ensure that the regulatory framework also reflects the Government’s nature targets.
While I welcome the intention behind Amendment 7, the Government cannot accept this amendment because it is too broad and therefore too open to interpretation. We have therefore brought forward Amendments 7A, 7B and 7C in lieu of Amendment 7, which add the relevant and well-defined targets made under the Environment Act 2021 to the new regulatory principle. It is important to recognise that addressing climate change and nature issues is not the regulators’ primary function, which is, broadly, to advance their objectives, including to protect the integrity of the financial markets and the safety and soundness of firms within the financial system and to deliver appropriate protection for consumers. Most of the levers for reaching our net- zero and environmental targets sit outside the regulators’ remit and control.
The amendments in lieu will ensure that, when acting to advance their objectives, the regulators will be required to consider the Government’s commitments to achieve the net-zero emissions target and the environment targets. I assure noble Lords that the amendments do not weaken the requirement for the regulators to consider the Government’s net-zero target. FSMA requires the regulators to act in a way that advances their statutory objectives when carrying out their general functions. When advancing their objectives, the regulators must also have regard to the regulatory principles, which aim to promote good regulatory practice.
It is for the independent regulators to decide how best to meet the requirements placed on them in legislation when discharging their general functions. The drafting of the amendments in lieu makes this clear: the regulators are required to have regard to the regulatory principle only in so far as it is relevant to advancing their objectives. This does not change the effect of the net-zero requirement, but the Government considered that this additional language was needed, alongside expanding the principle, to make this point clear and to ensure consistency. I am confident that the Government’s approach meets the intended effect of Amendment 7, and I hope noble Lords will acknowledge it as a significant step to further support the growth of sustainable finance in the UK.
I turn to Lords Amendment 36 on deforestation-linked financing. As I set out on Report, the Government again support the intention behind this amendment. The policy considerations for tackling the financing of deforestation risk commodities are complex. We are grateful for the work of the Global Resource Initiative and in particular its report on this issue from May 2022. This emphasised the need to take a staged approach and that further exploratory work would be needed to investigate the implementation of a prohibition on the financing of the use of prohibited forest risk commodities.
The Government have therefore brought forward Amendment 36A in lieu of Amendment 36, which commits the Treasury to undertake a review to assess whether the financial regulatory framework is adequate for the purpose of eliminating the financing of illegal deforestation and to consider what changes to the regulatory framework may be appropriate. This will ensure that any intervention is scoped appropriately and that the UK moves in lockstep with our international partners to ensure the effectiveness of any regime in tackling the financing of illegal deforestation.
The Treasury will be required to undertake this review within nine months of the first relevant regulations under Schedule 17 to the Environment Act being made. This will enable the Government to reflect those regulations in the review, which is essential if we are to have a joined-up and effective approach.
As the Government set out in the updated green finance strategy, we will convene a series of round tables this year. These will form the basis of a taskforce to drive forward the work of this important review and support the development of clear conclusions. This will complement the Government’s existing commitment to explore how best the final Taskforce on Nature-related Financial Disclosures—or TNFD—framework should be incorporated into the UK policy and legislative architecture. As the GRI report acknowledged, the developing work of the TNFD is increasingly important, especially as it has now included recommendations relating to deforestation in its draft standards.
Following the review, the Government will consider what further action is appropriate to progress the goal of eliminating the financing of illegal deforestation. The Bill and the existing provisions in FSMA provide the Treasury with extensive powers, including through the regulated activities order or the designated activities regime, to bring new activities into the scope of regulation if needed.
Finally, I turn to Lords Amendment 10. As the Economic Secretary set out yesterday, and as I set out on Report, the Government cannot accept this amendment. While I acknowledge the intention behind it, I reiterate the point that financial inclusion is a complex societal issue that cannot be solved through financial regulation alone. The Government are committed to the aim of ensuring that people, regardless of their background or income, have access to useful and affordable financial products and services. The Government’s view is that the FCA’s current and ongoing initiatives around financial inclusion demonstrate that it can already effectively support the Government’s leadership on this agenda through its existing operational objectives and regulatory principles.
Parliamentary scrutiny of the introduction of the new secondary growth and competitiveness objectives for the regulators comes after two consultations on the Future Regulatory Framework Review and extensive engagement with industry and other stakeholders. It is not appropriate to amend the regulators’ objectives, which are crucial to the effective regulation of financial services in the UK, at this late stage of the Bill’s passage without due consultation. Furthermore, the FCA’s new consumer duty, which comes into force on 31 July, seeks to set a higher and clearer standard of care that firms owe to their customers, and includes a new principle requiring firms to act to deliver good outcomes for consumers. It is important that the sector is given the opportunity to embed these important new requirements before considering further action of a similar nature.
I ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C, and 36A in lieu. I beg to move.
Baroness Hayman (CB)
My Lords, I declare my interests as set out in the register, and will speak to Amendment 7A. I thank the Minister and her team for the considerable efforts that have been put in, since the Bill left this House, to find a way to respond positively to the issues raised in my original amendment, which was supported from all sides of the House. As the Minister knows, the central issue was that of providing a clear legislative basis for financial regulators to act, not only on our climate change duties, which the Government themselves recognised and included in the original Bill, but in relation to our duties relating to the natural environment.
This issue is seen as important in Parliament but also outside it. The inclusion of nature was supported both by Professor Sir Partha Dasgupta and, in a statement last week, by a group of eight leading financial firms. I am extremely pleased that the Government decided not to try to completely overturn the amendment but to introduce the amendment we have before us now, the basis of which the Minister has just explained. It recognises that the importance of climate should go alongside the importance of nature, which was not there originally.
Baroness Boycott (CB)
My Lords, I will speak to Amendment 36, which was in my name and those of the noble Baronesses, Lady Sheehan and Lady Chapman, and the noble Lord, Lord Randall. I echo the words of the noble Baroness, Lady Hayman, by thanking the Minister very much for the time she spent working with us on this amendment and trying to lay out exactly why it has not quite passed. I am super grateful for the efforts that were made. I support everything that the noble Baroness, Lady Hayman, just said. We have to make sure that nature runs through everything we do like a stick of Brighton rock. It is extremely important. We cannot survive without it.
Amendment 36 would have introduced mandatory checks to protect the UK financial sector from lending to or investing in companies that engage in illegal deforestation and land grabs against indigenous peoples. It passed a vote in our House, which was wonderful, but sadly it was defeated in the other place, so instead of a new law to stop finance flowing to companies that plunder the environment, I am afraid we have ended up with another review.
I say that with sadness, because we have only just finished the last review into how to stop deforestation finance. That was the three-year inquiry by the Government’s expert body, the Global Resource Initiative —GRI—task force. I suppose many people have said this, but I will say it again: just to commission another review until one of them churns out an acceptable policy is not great governing. The GRI task force was composed of finance and business leaders, as well as civil society. It was excellently put together. It was tasked to provide a cross-sector blueprint to reduce the UK’s contribution to deforestation. In May last year—just over a year ago—it recommended that UK financial services firms should be obliged to check for the risk of any deforestation, legal and illegal, as well as any human rights abuses. The GRI recommended a due diligence regime much more far reaching than the one we proposed under Amendment 36, which, I hasten to emphasise, was limited to illegal deforestation only. Even the financial sector itself does not want this approach, as evidenced by the fact that investors representing £2.7 trillion publicly supported our amendment.
I will not push this Motion to another vote but, given the strength of support we have seen and the consensus behind the introduction of mandatory due diligence, I will ask the Minister for three clarifications. First, can she confirm that the Treasury’s review will put forward a specific proposal for a comprehensive due diligence system to prevent the financing of deforestation rather than another re-evaluation of what type of intervention is needed? It is vital that we do not waste any more time or money repeating the work of Sir Ian Cheshire and his GRI task force. This is not an excuse to wriggle out of due diligence and derogate to more reporting under frameworks such as the TNFD, which we discussed extensively at our meeting last week. I really hope to see a much more ambitious plan.
Secondly, can the Minister confirm that all forest risk commodities will be regulated under Schedule 17 to the Environment Act? Thirdly and finally, can she confirm here today a final date for when the now extremely delayed secondary regulations under Schedule 17 to the Environment Act will be made? The Treasury’s review will be limited at the moment to an investigation of how the UK finances prohibited commodities. This is fraught with problems, not least the fact that these regulations are nearly two years delayed. It also means that if the Government choose not to cover all forest risk commodities in that regime, the review will not be worth anything. For example, Defra’s June 2022 consultation proposed covering only two commodities. There were 14,000 respondents, and 99% of responses said that the law should cover all forest risk commodities, including cattle, palm oil, soy, rubber, cocoa, coffee and maize. This is the approach that the EU has taken. We risk becoming a laughing stock if our apparently world-leading secondary regulations cover only cocoa and soy, for instance.
To sum up, I am thankful that the Minister and the Economic Secretary have adopted a sensible proposal to allow the country’s financial regulators to address the threat of biodiversity loss. Our regulators should pay attention to nature because it is the bedrock of all our systems, but there is an irony to accept that an amendment merely commissioning a review into deforestation is all we are going to do. I spoke last week to the head of science at Kew, Alex Antonelli, and asked him to give me the up-to-date data from Kew about the state of deforestation across the world. He told me that illegal logging is the most important resource crime in the world and is valued at between $52 billion and $157 billion a year. Illegally obtained timber accounts for between 10% and 30% of all global timber that we all use, but in south-east Asia, central Africa and South America, between 50% and 90% is illegally obtained, so I think that the Government’s efforts need to be speeded up. But I will not oppose Motion C, and I thank the Minister for her considerations.
Lord Randall of Uxbridge (Con)
My Lords, it is a great privilege to follow the noble Baronesses, Lady Boycott and Lady Hayman. I congratulate my noble friend the Minister on her diligence in trying to come to some solution to our demands. As we have just heard, it is not quite what we wanted but it is getting there, pretty much. Personally, I am sure that the Minister shares our concerns, but sometimes the Treasury is a bit like one’s parents in saying, “You can’t have it all at once; you have to wait and be ready for it”.
I reiterate the questions asked by the noble Baroness, Lady Boycott, regarding regulating all forest risk commodities under the secondary regulations, and ask also for a firm date. I am delighted that we have got as far as we have but I would say, not just to my noble friend the Minister but to all other noble friends and Ministers, that we will not rest here. As we have heard, deforestation is one of the biggest crimes going on in the world and a threat to us all. We shall continue with this.
Baroness Bowles of Berkhamsted (LD)
My Lords, I first pass on the apologies of my colleague and noble friend Lady Kramer, who is unable to be in her place; hence, you have me instead. I identify with the comments made by the noble Baronesses, Lady Hayman and Lady Boycott, and will not repeat them. Although the Government have given some territory, I do not feel that it is substantial enough.
Two points in particular worry me. The first is with regard to the climate change targets and the wording that
“each regulator considers the exercise of its functions to be relevant to the making of such a contribution”.
The Minister emphasised in her introduction that the regulators have to consider that it fits in squarely with their major objectives. That is quite a discouragement to them to pursue these matters. The regulators do not have to follow every objective and principle anyway; so they do not have an objective or principle and this has now been further diluted by that wording. So, while it is good that there is something on the face of the Bill, a lot of following up will be needed to make sure that something happens.
When it comes to the forestry issues, yes, there will be another consultation—another delay—but why do we have to be in lockstep with our partners? I thought we wanted to be leaders. That means you have to be prepared to go out there and, if you are a leading financial centre, show that it can be done. To always tie ourselves down, to be in lockstep, means that there is a fear to move, there is trepidation, and that does not mark us out or distinguish us as a financial centre. I therefore hope for better, and I hope that comes out of the Treasury’s review.
Overall, the Bill has seen issues raised on all sides of the House and a lot of common thinking. Yes, there has been some yielding by the Government as a consequence—though in general I would say not enough —but this shows that the mood and understanding of this House and of the industry are that the size and momentum of what we are doing in delegating everything to regulators need to have a little more beefing up when it comes to accountability and how matters can be pursued if the regulators do not do things, if they do not do them quickly enough, and so on. In quite a lot of our amendments we have tried to pursue those issues but we have got nowhere. I think that means we will be coming back.
Lord Leigh of Hurley (Con)
My Lords, I want to comment on Motion B, which no one has addressed. I congratulate the Minister, her colleagues, the Bill team and all the Peers who have contributed to this 337-page whopper of a Bill, which has been broadly welcomed by all. I remind your Lordships of my declaration of interests, which includes the fact that I am an employee of an FCA-regulated business that is currently seeking to merge with another FCA-regulated business.
That takes me to Amendment 10. Within the Bill are the important amendments to Sections 1B and 1E of FSMA 2000. Amendment 10 seeks to add subsection (2)(ca) to the already strong provisions for consumer protection in Section 1C(2)(a) to (h). I agree with my noble friend the Minister that we should not push through Amendment 10.
I can tell my noble friend the Minister and fellow Peers that in the market the Bill is desperately sought. There is still huge frustration at the FCA about the time taken to progress and execute transactions. That has been a significant block on economic growth, which is one of the objectives that the FCA will now have. I ask the Minister to ensure that the FCA is aware of its new objectives and requirements and that this actually takes place in practice.
Baroness Chapman of Darlington (Lab)
My Lords, we on these Benches supported all three of the amendments that we are discussing today when we looked at them last time, including Amendment 7, which would expand the regulatory principle on net-zero emissions to include conservation and nature. We also voted for Amendment 36, imposing a duty on those conducting regulated activity to conduct due diligence with the aim of preventing illegal deforestation.
We have listened carefully to what the Minister has said and will be listening to what she says in response to this debate, particularly to the questions asked by the noble Baroness, Lady Boycott. However, I thank the Minister for her openness in engaging with these issues and for the amendments in lieu, which demonstrate an agreement with your Lordships that these are issues that the Government need to address urgently. They may not be doing so in a way that we would have preferred today, but it is right that we acknowledge the moves that the Government have made.
Amendment 10 in my name would require the FCA to take financial inclusion into account when advancing its consumer protection objective of securing an appropriate degree of protection for consumers. The Government disagree with that amendment, saying they consider that the FCA is already able to tackle issues of financial inclusion within its remit. We argue that the problem is that the Government have failed to address our key concern in tabling the amendment, which is about the poverty premium—that is, the extra costs that poorer people pay for essential services such as insurance, loans or credit cards.
We see this Bill as something of a missed opportunity to build a strong future for our financial services and rethink financial resilience, including how some of the wider well-being issues are tackled by the regulator in the future. Everybody should be able to access the financial services they need, regardless of their income or circumstances. Although we do not intend to push this to another vote today, I can assure noble Lords that we will be returning to this subject at every opportunity—especially if that opportunity arrives in the form of a Labour Government.
For now, I place on the record our sincere thanks, particularly to the noble Baronesses, Lady Hayman and Lady Boycott, who have been highly effective in raising nature and deforestation issues. I also thank my noble friends Lord Livermore and Lord Tunnicliffe for their work on this Bill. We are probably at the end of it now. I note what the noble Lord, Lord Leigh, said about the need to get this Bill through and on to the statute books for the benefit of this important sector.
Baroness Penn (Con)
My Lords, I am grateful to noble Lords for the debate today, and I would like to address some of the points raised.
On the addition of the obligations under the Environment Act to the principle on climate change, I intended in my opening speech to clarify some of the language in that amendment. I am very happy to emphasise again the Government’s intention that the legal effect of the new provisions will be the same as the original climate principle, with the addition of the targets under the Environment Act. The intention is that it will be at least as strong as the provisions in the Financial Services Act 2021. I explained in opening the reasons for amending the language. It is not about diluting the principles or commitments, but further clarifying them, given that these are new areas.
I accept the noble Baroness’s point that often, these issues can be two sides of the same coin. We had the debate on whether the issues were sufficiently covered by just mentioning climate. Adding the explicit reference to the Environment Act targets led to a desire to be even clearer about the effect of that principle, but it has not changed in the wording of our amendment.
On Lords Amendment 36, there were questions on the timing of the provisions under Schedule 17 to the Environment Act. I am afraid that, as hard as I have tried, I cannot provide a definitive date, but I reassure noble Lords that I have met the Minister leading on this at Defra. Work is under way to bring forward those regulations, and we are seeking to do it at the earliest opportunity.
The noble Baroness, Lady Boycott, and my noble friend Lord Randall of Uxbridge asked what commodities those provisions will cover, and the noble Baroness mentioned a consultation on two forest risk commodities. My understanding is that the consultation and impact assessment covered a variety of policy options across three different turnover thresholds and seven different commodities. While I cannot pre-judge the outcome of the regulations under Schedule 17, our approach to this review will mirror the approach taken forward under Schedule 17.
On the point about the outcomes of this review, I am sure that the noble Baroness will understand that I cannot prejudge that, but I can say that it is not intended to duplicate work already being done; it should build on it. I am happy to make sure that noble Lords and other parliamentarians are involved in the progress of that review as we take it forward, so that they can see that it is heading in the right direction.
I thank the noble Baroness, Lady Chapman of Darlington, for the constructive way she has approach the Bill in its latter stages. She raised the issue of the poverty premium that can be placed in financial services. We are progressing work in areas where the poverty premium can occur. For example, we are working with Fair4All Finance, the organisation set up to use funding from dormant assets for financial inclusion, to improve access to affordable and appropriate financial products, including a package of tailored support to scale affordable credit in order to help the sector develop a sustainable model for serving people in vulnerable circumstances. We also looked at issues in the insurance industry in a number of areas, in terms of outcomes and access. We will continue to look at the areas where the poverty premium occurs, the factors that are driving it and the right levers we should think about to address it. It is different for different sectors, services and products, but that work will continue, despite our not being able to accept the noble Baroness’s amendment.
I therefore ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C and 36A in lieu.
Baroness Penn
That this House do not insist on its Amendment 10, to which the Commons have disagreed for their Reason 10A.
Baroness Penn
That this House do not insist on its Amendment 36 and do agree with the Commons in their Amendment 36A in lieu.
“Forest risk commodities: review
(1) The Treasury must carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
(2) In subsection (1) the reference to “prohibited” forest risk commodities is a reference to forest risk commodities, or products derived from forest risk commodities, the use of which is prohibited by paragraph 2 of Schedule 17 to the Environment Act 2021.
(3) Having carried out a review the Treasury must lay before Parliament, and publish, a report stating—
(a) the conclusions of the review, and
(b) the steps the Treasury considers it appropriate to take to improve the effectiveness of the regulation of the UK financial system for the purpose stated in subsection (1).
(4) Subsection (3) must be complied with before the end of 9 months beginning with the day on which the first regulations under paragraph 1 of Schedule 17 to the Environment Act 2021 are made.
(5) In this section—
“forest risk commodities” has the same meaning as in Schedule 17 to the Environment Act 2021;
“UK financial system” has the same meaning as in FSMA 2000 (see section 1I of that Act).”
Royal Assent
Thursday 29th June 2023
(1 year, 4 months ago)
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