Tuesday 27th June 2023
(1 year, 5 months ago)
Lords ChamberFinancial Services and Markets Act 2023 View all Financial Services and Markets Act 2023 Debates Read Hansard Text Watch Debate Amendment Paper: HL Bill 154-I Marshalled list for Consideration of Commons Reason and Amendments - (27 Jun 2023)
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 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).”