(4 months, 1 week ago)
General CommitteesI beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024.
The regulations form part of the Government’s programme to deliver a smarter regulatory framework for financial services, using an approach to regulation that is tailored to the needs of the United Kingdom. Under this programme, the Government are delivering a regulatory framework that is logical, consistent and conducive to economic growth—rather like the Government as a whole—while preserving the robust regulatory standards that are the cornerstone of the attractiveness of UK markets.
The ability of a regulator to flex the application of its rules for individual firms is a useful regulatory tool that can enable a regulator to take into account a firm’s specific circumstances to ensure that rules are applied in ways that achieve the best regulatory outcome. That flexibility is not new; it has long been a feature of the UK’s regulatory regime and is supported by our regulators and the financial services industry as a whole.
Since it was introduced over 20 years ago, the Financial Services and Markets Act 2000, known as FSMA, has included such a tool. However, as part of our work to adapt our regulatory regime for the UK’s new position outside the European Union, the existing tool for flexing the application of rules was reviewed, and it was concluded that, while useful, it was not as effective as it could be.
The existing tool is provided by section 138A of FSMA, which provides that the Prudential Regulation Authority and the Financial Conduct Authority can disapply or modify a rule made under FSMA if a firm has requested it or if the regulator has the consent of the firm. However, section 138A contains a test that must be met before a regulator can do that. The regulator must be satisfied that the rules in question
“would be unduly burdensome or would not achieve the purpose for which the rules were made”.
That requirement in section 138A does not always allow for rules to be flexed, even where appropriate disapplication or modification of such rules would provide a better regulatory outcome.
The Government addressed that issue by introducing a new tool for regulators to flex their rules in a wider range of circumstances, which was legislated for through the Financial Services and Markets Act 2023 and is now set out in section 138BA of FSMA. Under section 138BA, the Treasury may specify regulatory rules that the relevant regulator can then permit a firm to disapply or indeed modify in some way. Section 138BA retains the approach by which a regulator can permit a firm to disapply or modify rules only if the firm requests it or the firm consents.
On a point of clarity, I chair the all-party parliamentary group on financial technology, and I am conscious that many firms have been very firmly nudged to request the removal of licences, particularly around payments and onboarding of new customers. Just to be clear, are these regulations needed retrospectively to cover a lot of those voluntary submissions of licences, or is this purely a tidying-up exercise for the future?
I thank my hon. Friend for that point, and I will respond to him in two ways. First, this is typically about looking prospectively forward, so it is not envisaged that this power will be used retrospectively. However, I will write to him if the position is in any way more nuanced than I have just described. Secondly—I was going to come to this point later in my speech, but I may as well answer it now—it is very important that firms have appropriate dispute resolution mechanisms. Those are set out to make sure that no firm, under any circumstances, will be forced—or nudged—to do anything that it does not think is in its interest.
The regulations do two key things. First, they enable the PRA to permit a firm to disapply or modify any PRA rule. After careful consideration, the Government have concluded that the PRA should have the ability to permit a firm to disapply or modify any rule under section 138BA. That is because flexibility in the application of these rules is particularly important for banks, large investment firms and insurers that are regulated by the PRA. These complex institutions, with highly specialised business models, often require a highly tailored approach to ensure that they are appropriately regulated.
Secondly, the regulations apply certain procedural safeguards to PRA decisions under section 138BA, and this may address my hon. Friend’s point to some extent. When the PRA refuses a firm’s application or imposes conditions on a firm’s permission to disapply or modify rules, the PRA must issue a notice explaining its decision. When a permission to disapply or modify rules is given, the decision notice that the PRA publishes must be clear so that it is public knowledge that a particular firm is subject to tailored regulatory requirements. If an affected firm is aggrieved or somehow disagrees with a PRA decision, the firm may appeal by referring the decision to the upper tribunal, which is part of His Majesty’s Courts and Tribunals Service responsible for hearing appeals against decisions made by various public sector bodies, including the PRA.
In closing, these regulations make use of an important regulatory tool approved by Parliament in FSMA 2023. They provide the PRA with the flexibility needed to ensure that the application of prudential rules to banks, investment firms and insurers can be flexed only where appropriate to ensure that regulation of these large and complex firms is effective. They also ensure that the PRA is appropriately accountable and transparent. I hope the Committee will join me in supporting the regulations, and I commend them to the House.
It is a pleasure to serve with you in the Chair, Mrs Cummins. The Opposition are supportive of the proposed changes, which would enact section 138BA to enable the PRA to more easily adapt, disapply or modify its rules for individual firms.
The greater flexibility the Minister outlined is welcome, but could a similar approach be used to clear the logjam of mid-tier banks wanting to use the internal ratings-based approach? The PRA has helpfully provided some flexibility in relation to IRB model approvals, which could narrow the capital requirements gap between mid-tier and large banks, therefore improving competition in UK banking markets. However, as the Minister may have seen in the Financial Times last August, UK challenger banks have faced multi-year delays to regulatory approvals, which has undermined the potential boost to competition in the market. Has the Treasury given any thought to whether section 138BA could be used to speed up the IRB model approval process for mid-tier banks currently on the standardised approach? I believe—and the Minister may agree—that that could dramatically improve competition in the banking market.
I thank the hon. Lady for her points. In essence, the regulations give the PRA much more flexibility around the entire rulebook to apply to any specific firm. If the question is whether they will give the PRA the ability to change rules in relation to a particular subset of firms, the answer, of course, is yes. However, if the question—she also mentioned this in her remarks—is whether they will somehow speed up or change the pace at which the rules will be made or applied, that is not what they are meant for. So, yes, the regulations will give much more flexibility—and it is a policy question as to whether that is desirable in any particular circumstance—but they do not necessarily increase or decrease the speed at which such rules change.
I thank the Minister for that answer, and I understand what he is trying to say, but I would like to push this point. If we could speed up the IRB model approvals process for mid-tier banks currently on the standardised approach, that would help our country and the banking market generally, and both sides of the House obviously want to boost competition. I understand that that is not what this particular legislation will do, but have the Minister or the Treasury given any thought to the issue? In the long run, such a change would benefit the financial services sector.
In terms of where I agree with the hon. Lady, I did not just read about this in the Financial Times last year; I have met mid-tier banks, and I understand their challenges. Their concerns are valid, and we need to do everything we can to support that part of the sector. The regulations allow the banks to apply to the FCA in the way that the hon. Lady outlines. That is something that, if appropriate, I would be very happy to support. Yes, it is important that we have competition, but it is also important that we enable every type of business and every type of individual to be appropriately served by our financial services industry, and more firms offering more services in a way that is prudentially safe is positive to that.
Question put and agreed to.