Grand Committee

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Tuesday 17 December 2024
15:45

Arrangement of Business

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Announcement
15:46
Baroness Watkins of Tavistock Portrait The Deputy Chairman of Committees (Baroness Watkins of Tavistock) (CB)
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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.

Recognition of Professional Qualifications and Implementation of International Recognition Agreements (Amendment) (Extension to Switzerland etc.) Regulations 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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15:47
Moved by
Lord Leong Portrait Lord Leong
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That the Grand Committee do consider the Recognition of Professional Qualifications and Implementation of International Recognition Agreements (Amendment) (Extension to Switzerland etc.) Regulations 2024.

Lord Leong Portrait Lord Leong (Lab)
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My Lords, these regulations were laid before the House on 4 November 2024. Before I turn to my opening comments, I draw the Committee’s attention to the correction slip issued in relation to the draft regulations as they were originally laid. This corrects a minor error in the date of a statutory instrument referred to in the Explanatory Note. It also provides an update to a footnote on page 4 to refer to the Welsh statutory instrument that was made on 18 November 2024.

These regulations implement the agreement on the recognition of professional qualifications that the UK and Switzerland signed in June 2023. Switzerland is the UK’s 10th-largest trading partner. Implementing this agreement boosts UK exports and encourages Swiss investment into the UK. In 2023, services trade with Switzerland was worth £27 billion. The professional and business services sector, which relies heavily on regulated professions, accounted for £13.8 billion of that total.

These regulations place a legal duty on UK regulators to recognise comparable Swiss professional qualifications and provide regulators with the necessary legal powers to do so. In parallel, Switzerland is passing legislation requiring Swiss regulators to recognise UK qualifications, meaning that UK professionals also benefit from reduced barriers to working in Switzerland.

The Government are using powers in Section 3 of the Professional Qualifications Act 2022 to make these regulations. These powers were first used in December 2023, when the Government implemented the recognition of professional qualifications provisions of the UK’s free trade agreement with Norway, Iceland and Liechtenstein through the Recognition of Professional Qualifications and Implementation of International Recognition Agreements (Amendment) Regulations 2023; I will hereafter refer to these as the EEA EFTA regulations.

The provisions under the Swiss agreement are very similar to those in the UK’s free trade agreement with EEA EFTA. Therefore, these regulations add Switzerland as a specified state to the EEA EFTA regulations. The Swiss agreement also contains an annexe that provides certain Swiss and UK lawyers with a bespoke route to recognition of their professional qualifications between Switzerland and the UK. These regulations amend the EEA EFTA regulations to implement these additional provisions for Swiss legal professionals. The regulations will come into force on 1 January 2025, when the existing recognition of professional qualifications provisions in the UK-Switzerland citizens’ rights agreement expire. This will ensure continuity in recognition provisions and a smooth transition for UK regulators and Swiss professionals.

I will now provide details about the regulations. They place a legal duty on regulators to recognise comparable Swiss qualifications; they prescribe the procedure that regulators must follow in recognising Swiss qualifications; they enable regulators to refuse to recognise Swiss professional qualifications where certain conditions are met; they prescribe compensatory measures that regulators can require a Swiss professional to take in certain circumstances; and they amend sectoral legislation to enable regulators to meet those requirements where they do not currently have the power to do so. The regulations include specific provisions that apply to the regulators of advocates, barristers and solicitors.

The Department of Health and Social Care has separately taken forward legislation to regulate anaesthesia associates and physician associates. Therefore, the regulations extend the obligation on the regulator of anaesthesia associates and physician associates to comply with both agreements.

I reassure the Committee that under these regulations it remains the responsibility of independent regulators to set standards for their profession and decide who meets those standards. Regulators will need to decide whether a qualification from Switzerland is comparable to a UK qualification and can refuse to recognise the qualification where certain conditions are met, and can prescribe compensatory measures which a professional can be required to take.

In accordance with Section 15 of the Professional Qualifications Act, the Department for Business and Trade consulted regulators about the implementation of this agreement. A formal consultation ran from February to April 2024 and sought regulator views on the implementation approach and the regulations. Respondents were supportive and officials from my department engaged with regulators on the feedback.

The regulations cover professions that are regulated by the UK Government and professions that are regulated at a devolved level by Scotland and Northern Ireland. This approach has been taken after extensive engagement with the devolved Governments. The regulations do not apply to Welsh regulated professions. The Welsh Senedd made regulations implementing the agreement for Welsh-regulated professions on 18 November 2024. These regulations will come into force on 1 January 2025.

In accordance with Section 17 of the Professional Qualifications Act 2022, the Department for Business and Trade ran a consultation with the Scottish Government and the Northern Ireland Executive from August to September 2024. The Welsh Government were not formally consulted, but the consultation was shared with them. The consultation sought views on the implementation approach and requested that the Scottish Government and the Northern Ireland Executive identify any amendments to devolved government legislation.

The Scottish Government and the Northern Ireland Executive agreed that the regulations were sufficient to meet the obligations of the agreement, and confirmed that the regulations were workable in practice and that their regulators could meet the obligations under the regulations. The Scottish Government submitted minor amendments, which have been incorporated into the regulations. The Northern Ireland Executive are making amendments to their devolved legislation. A UK government response to this consultation was published on GOV.UK.

To conclude, these regulations bring into effect the recognition of professional qualifications system contained in the Swiss agreement. They ensure that the UK is meeting its obligations under international law and provide certainty for regulators. They also ensure a smooth and transparent system for Swiss professionals to have their qualifications recognised, once the provisions in the Swiss citizens’ rights agreement expire. This brings tangible, long-term benefits to the United Kingdom.

Baroness Garden of Frognal Portrait Baroness Garden of Frognal (LD)
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My Lords, in the absence of anybody else, I thank the Minister very much for setting out so clearly these regulations. Over the years, I have been involved in all manner of discussions about recognition of vocational and professional qualifications. I have never come across a regulation as clearly good as this one. It seems to be totally uncontroversial. It is broad, is it not? It covers Lords, pilots, osteoporosis people and all sorts of interesting professions. My briefing said that no speech was required but I cannot resist saying that we on these Benches fully support this measure.

Lord Jones Portrait Lord Jones (Lab)
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My Lords, I thank the Minister for his informative remarks, made in the most clear and precise tones imaginable. I acknowledge also my appreciation of the manner in which these regulations have been drawn up and the helpfulness of the Explanatory Memorandum.

With regard to the Explanatory Memorandum, at paragraph 4.2 there is reference to aptitude tests. Do the Minister’s officials have any idea how many such aptitude tests are taken annually, and what has been the situation on those tests in Wales? Is there a record in the department?

Do these regulations particularly apply to medicine? It is clearly of importance when the NHS and private medicine are considered. What are the major professions that come under these regulations, not simply medicine?

I should like to ask about Wales specifically. At paragraph 4.5, I am looking at the “territorial scope” and it is clear that Wales is separate. Is that the case for other nations? How many regulations are undertaken by the Welsh Government? Is there assistance to Wales in the making of regulations of this kind and if there is, what is the nature of that assistance? Is it by officials only? Do Ministers meet face to face, from one Parliament to another? Is it otherwise down the line, or is it simply a set of regulations totally made in Wales by Welsh Senators and Welsh Ministers?

Lord Leong Portrait Lord Leong (Lab)
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My Lords, I am grateful for the support from the noble Baroness, Lady Garden of Frognal, and for the contribution made by my noble friend Lord Jones. I will come to my noble friend’s questions. I will try to answer everything but if I do not cover all his questions, I will definitely write to him.

As regards the aptitude test, most of the regulators operate autonomously, so it is up to individual regulators to manage the various assessments. The aptitude test will be covered by the respective regulators themselves. Currently, these regulations cover over 200 profession but some of the royal-chartered professions, such as accountancy and engineering, are not covered by them. My noble friend Lord Jones asked how many people had taken the aptitude test in Wales and how they managed it. I am afraid I do not have the answer and will have to write to him.

As I have set out, the regulations implement the UK-Switzerland recognition of professional qualifications agreement. They require regulators to operate routes to recognition for comparable Swiss professional qualifications, in accordance with the agreement. They give powers to regulators to recognise comparable qualifications where necessary. The regulations provide certainty for professionals and UK service sectors, allowing them to continue to access smooth and transparent routes to recognition once the citizens’ rights agreement provisions expire at the end of this year. As Switzerland is also passing legislation requiring Swiss regulators to recognise UK qualifications, these benefits are reciprocal.

As I have emphasised, these regulations continue to uphold the principle of regulator autonomy as set out in the Professional Qualifications Act 2022. Departmental officials have also engaged extensively with regulators and the devolved Governments throughout the implementation of this agreement. I trust that noble Lords understand and recognise the need for these regulations and the benefits that they will bring to the UK’s services trade. Once again, I thank all noble Lords for their contributions, and commend these draft regulations to the Committee.

Motion agreed.

Information Sharing (Disclosure by the Registrar) Regulations 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
16:01
Moved by
Lord Leong Portrait Lord Leong
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That the Grand Committee do consider the Information Sharing (Disclosure by the Registrar) Regulations 2024.

Lord Leong Portrait Lord Leong (Lab)
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My Lords, in speaking to the information-sharing regulations, I shall also speak to the Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024. These regulations are part of a series of statutory instruments designed to implement the reforms introduced by the Economic Crime and Corporate Transparency Act 2023, which I will refer to as the 2023 Act.

This Government are committed to holding accountable those who exploit our open economy. For instance, in the past few weeks, we have outlined our new anti-corruption agenda and our goal to make the UK a hostile environment for all forms of corruption. Corporate transparency is vital in tackling such corruption and economic crime. The 2023 Act enhances corporate transparency in the UK by reforming Companies House, granting it greater powers to verify information, tackle economic crime and improve the reliability of the companies register. At the same time, the Act introduces reforms to Companies House processes and increases protections for individuals at risk of fraud and other harms.

Work to implement the changes at Companies House is well under way. Since March, stronger checks on company information have allowed the organisation to cleanse the register of false and suspicious information. In parallel, Companies House is undergoing a significant organisational transformation to support the delivery of these reforms. Although considerable progress has been made, there is still much to do. We are here today to consider the next set of regulations to the Companies House reform programme. I will start with the Information Sharing (Disclosure by the Registrar) Regulations 2024.

The 2023 Act enhanced the registrar’s ability to share non-public information with enforcement agencies and other public authorities to support their functions. Additionally, the 2023 Act empowered the Secretary of State to make regulations enabling the registrar to share information with designated persons for specified purposes. For example, there may be situations where it would be advantageous for the registrar to share information with certain officeholders tasked with managing insolvency proceedings. These officeholders are typically insolvency practitioners but could also include the official receiver or, in Scotland, the Accountant in Bankruptcy.

While the Companies Act 2006 permits the registrar to share information with agencies when carrying out a public function, the work of these officeholders generally pertains to private matters. These include identifying and recovering assets during insolvency proceedings. Therefore, the registrar currently lacks the power to share information with officeholders for such purposes.

These responsibilities often extend beyond asset sales to legal actions. They could involve applying to the court to reverse transactions made before the insolvency took place that disadvantaged creditors. Where a director has allowed a company to continue trading while insolvent, this could also involve seeking an order making that director liable for the additional losses incurred by creditors. The information-sharing regulations will enable the registrar to share crucial information with insolvency officeholders, enhancing insolvency processes and helping to maximise returns for creditors.

I turn to the Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024. It is key that individuals running companies and other entities register their details so that they can be held accountable for the entity’s affairs. However, having one’s personal information publicly displayed can increase the risk of harm, such as fraud, identity theft or cases of domestic abuse.

Currently, an individual can already apply to protect their residential address from the public register in certain cases. Protection means that the address is not publicly visible. However, the law does not allow protection of a residential address that was previously used as a company’s registered office address. Companies House regularly receives requests for protection of these residential addresses from many individuals. These include those at risk of harm because of the public availability of their residential address as a registered office address—for example, those in witness protection, judges and parliamentarians. These regulations are the first of several reforms to enhance the protection of personal information. They will allow applications to protect a residential address where it was previously used as a company’s registered office address.

The regulations also make specific provisions for the scenario of dissolved companies. There are a number of reasons why a party would want to apply to court to restore a dissolved company to the register: for instance, to claim assets or pursue legal claims. To do this, the applicant requires the company’s former registered office address. To support this, these regulations ensure that an application to protect a residential address that was a dissolved company’s last registered office address can be made only from six months after the company’s dissolution. The registrar will also be able to disclose a protected residential address to certain persons who require the dissolved company’s registered office address to make a restoration application.

Lastly, the instrument amends legislation that applies company law to limited liability partnerships, following changes to company law made by the 2023 Act and this instrument.

In conclusion, these regulations strike the right balance between privacy and transparency. Individuals will benefit from greater protection of their personal information, while protected information will be available for law enforcement, public authorities and others with a legitimate reason to access it. Together, these instruments build on the 2023 Act, strengthening our commitment to support legitimate business and tackle economic crime. I hope the regulations will be supported, and I beg to move.

Lord Sharkey Portrait Lord Sharkey (LD)
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My Lords, we will support both of these instruments, and I will be brief. The first instrument is a straightforward and necessary increase in the disclosure powers of Companies House and, as the Minister has made clear, the SI extends disclosure powers to cover non-public organisations and specifies to whom information may be disclosed and under what circumstances. All this seems clear and with obvious benefits, although I confess that I am not at all clear what a “judicial factor”, mentioned in Regulation 3(g), is or does. Perhaps the Minister could enlighten us.

We are generally happy with measures that improve the utility or performance of Companies House. Appropriately increased and targeted disclosure powers are definitely a good thing, but arguably more important is the ID-checking regime at Companies House. In that context, it was good to see Companies House quoted in last Wednesday’s Times, saying:

“We take fraud seriously and all allegations are fully investigated. We are preparing to introduce compulsory identity verification checks. This will provide greater assurance about who is setting up, running, owning, and controlling companies”.


That is welcome news, if a little overdue. Can the Minister say when Parliament will see these new and obviously vital proposals?

The second SI essentially, as the Minister said, deals with the disclosure of residential addresses on the public companies register. It proposes new circumstances in which these addresses may be protected from exposure via Companies House registration details. Here, I declare a kind of interest: I have, for the past nine years, benefited from a Companies House exemption, under the existing regime, from disclosure of my residential address. The circumstances surrounding my exemption were clear and compelling enough to qualify for non-disclosure, but they would not serve to protect from exposure any address currently or formerly used as a company’s registered office.

This instrument will allow an application to protect a residential address when it was previously the registered address for the company, and this will apply, mutatis mutandis, to LLPs. There are appropriate protections against using this new power to frustrate challenges to the dissolution of a company, as the Minister mentioned. This all seems very sensible, and the EM notes in paragraph 5.8:

“Companies House has for a long time been inundated with requests for this kind of protection, as the previous law prevented many people from protecting publicly available address information that put them at risk, for example in cases of domestic abuse”.


In paragraph 6.5, the EM says:

“Further regulations will be made in due course to introduce additional measures preventing the abuse of personal information on the companies register”.


I encourage the Minister to make rapid progress on these new proposals. Companies House needs all the help it can get.

Lord Sharpe of Epsom Portrait Lord Sharpe of Epsom (Con)
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My Lords, I apologise for missing the first SI. I meant no discourtesy; it was an administrative error entirely of my own making, and I particularly apologise to the noble Lord, Lord Leong. However, I would have welcomed the regulations because, as Conservatives, we believe in good governance, personal responsibility and safeguarding our economy from exploitation. We believe that the measure delivers exactly that.

On information-sharing and companies, we welcome the Information Sharing (Disclosure by the Registrar) Regulations 2024. This legislation is a clear and necessary step in strengthening the integrity, transparency and security of our systems. At its core, these regulations empower the registrar to share critical information with designated bodies. This will enhance co-operation between government departments, regulatory agencies and enforcement authorities, ensuring a more joined-up approach to tackling crime, fraud and misconduct.

For too long, bad actors have exploited the gaps in our information-sharing framework, hiding behind outdated systems and fragmented oversight. The result has been criminal networks, fraudulent companies and rogue entities syphoning off resources, undermining fair competition and eroding public trust. We owe it to law-abiding businesses and citizens to level the playing field and close these loopholes.

Furthermore, these regulations are proportionate and pragmatic. They strike the right balance between enabling necessary disclosures and protecting sensitive data. Conservatives have always championed individual freedom and privacy, and this legislation respects those values while enhancing national security and economic resilience. This is not just a technical reform; it is about ensuring confidence in our institutions, trust in the free market and the rule of law. By empowering the registrar, we are sending a clear message that the UK will not be a haven for those who flout our laws and/or exploit our systems.

I also welcome the draft Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations. This legislation marks an important step in safeguarding our economic landscape, while enhancing the transparency and integrity of our corporate structures. These regulations are critical for addressing two fundamental challenges: the protection of sensitive information and the facilitation of responsible disclosure.

By ensuring that data held by companies and limited liability partnerships is appropriately safeguarded, we are protecting businesses, individuals and the integrity of the UK’s economic infrastructure. At the same time, targeted and necessary disclosures will empower regulators, enforcement bodies and government agencies to act decisively in identifying wrongdoing and preventing abuse.

16:15
As Conservatives, we have always supported the free market, but we know that with freedom comes responsibility. When loopholes exist, they are exploited by those who seek to manipulate our systems, to evade accountability and to engage in criminality. This legislation tackles that head-on. It provides a balanced framework that protects honest enterprise, improves trust in our corporate sector and ensures that those who break the law cannot hide behind anonymity or inadequate oversight.
Moreover, these regulations address emerging challenges in our globalised and digitised economy. They bring clarity and modernisation to the way information is handled, ensuring that the UK remains a trusted place to do business. This not only strengthens our economic reputation but reinforces the principle that integrity is non-negotiable.
In conclusion, I commend this draft legislation. Let me ask: can we allow our businesses and partnerships to remain vulnerable to exploitation, and do we not have a duty to ensure that the UK remains the gold standard for transparency, integrity and fair competition?
Lord Leong Portrait Lord Leong (Lab)
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My Lords, I am very grateful for all contributions and I thank especially the noble Lord, Lord Sharpe, for supporting these regulations. As he knows, the work was undertaken by the previous Government and we have made it a legal entity and brought forward the power to implement the legislation. I am sure there is common ground here. We all want to fight economic crime and ensure that privacy and transparency are balanced.

I will respond to the questions from the noble Lord, Lord Sharpe. On the use of the judicial factor, this basically relates to Scotland. The judicial factor is an officer of the court whose role is to protect the estate itself. This applies only in Scotland. On the issue of identity verification, work is being done and we hope to see proposals at some point next year.

On the wider question of Companies House reform, let me share with noble Lords what has been done so far. From March 2024, the registrar has to be able to query a request for information, remove material from a register of their own volition or on application in a more timely way, analyse information for the purpose of crime prevention or detection, disclose information from anyone for the purpose of the exercise of the registrar’s function, and move the registered office address, service address, and principal office address to default addresses.

Companies now have to comply with the new rules about company and business names. A company must not be registered by a name that is intended to facilitate criminal purposes and Companies House has greater powers to direct a company to change its name or to change the name if the company is not compliant, to declare its lawful purpose, notify and maintain an appropriate registered office address and registered email addresses and confirm new information in annual confirmation statements.

Companies House has commenced a process to remove names and addresses used without consent. This includes the removal of officers and people with significant control, where previously those wishing to have their details removed would have had to apply to the courts. So far, Companies House has removed 50,400 registered office addresses, 39,600 office addresses and 36,700 PSC addresses, redacted 37,100 incorporation documents to remove personal data used without consent and removed 7,800 documents from the register, including 800 false mortgage satisfaction filings that would have previously required a court order. So Companies House has done a lot, but there is further to go. The reform of Companies House is ongoing and more instruments will be brought to the House, I hope, next year.

In summary, today’s debate has highlighted the importance of getting the Companies House reforms in the 2023 Act right. These regulations mark another vital step towards realising these goals and I commend them to the Committee.

Motion agreed.

Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
16:20
Moved by
Lord Leong Portrait Lord Leong
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That the Grand Committee do consider the Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024.

Motion agreed.

Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
16:20
Moved by
Lord Livermore Portrait Lord Livermore
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That the Grand Committee do consider the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024.

Lord Livermore Portrait The Financial Secretary to the Treasury (Lord Livermore) (Lab)
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My Lords, with the leave of the Committee, in moving this instrument, I shall speak also to the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024 and the Short Selling Regulations 2024. Noble Lords may be aware that the Secondary Legislation Scrutiny Committee raised the ring-fencing and short selling regulations as instruments of interest in its secondary legislation report, published last month.

The regulations being introduced today will ensure effective, proportionate regulation for the financial services sector in three ways: first, by reforming the ring-fencing regime to be more flexible while upholding financial stability safeguards; secondly, by creating a new framework for the regulation of short selling; and, thirdly, by enabling better supervision and enforcement of designated activities under the Financial Services and Markets Act 2023.

I will first address the reforms to the ring-fencing regime for banks. As noble Lords will know, ring-fencing was introduced following the global financial crisis, on the recommendation of the Independent Commission on Banking, and came into full force in 2019. It requires large complex banks to separate the services that they provide to households and small and medium enterprises from investment banking activity.

In 2022, an independent statutory review of the regime recommended updates to ensure that it operates as intended and is proportionate. This statutory instrument improves the regime and implements changes from the review. The reforms that it contains will improve competition in the banking sector, reduce costs and support economic growth. They have been developed with the Prudential Regulation Authority, which is content that they also maintain appropriate financial stability protections.

The reforms will ensure that, in future, only the largest and most complex banks are subject to the regime, with two key changes. The first of these is an increase in the primary deposit threshold—the amount of core deposits a bank can hold before it is required to ring-fence—from £25 billion to £35 billion. This accounts for growth in the deposit base and other relevant economic indicators since ring-fencing was introduced, and supports competition. The second is the introduction of a new secondary threshold that exempts retail-focused banking groups from the regime where investment banking activity accounts for less than 10% of common equity tier 1 capital.

This statutory instrument also makes changes to the way in which banks within the regime can operate. It introduces measures to encourage more investment by ring-fenced banks in UK small and medium enterprises and to reduce the compliance burden associated with the regime. It also creates significant new flexibilities to allow ring-fenced banks to operate globally, subject to Prudential Regulation Authority rules, as well as to provide a wider range of goods and services to their customers.

I turn now to the Short Selling Regulations 2024. Short selling is the practice of selling a security that is borrowed or not owned by the seller with the intention of buying it back later at a lower price to make a profit. Short selling plays a role in the proper functioning of financial markets. It provides essential liquidity to markets, which drives investment in British companies; it helps drive economic growth; and it helps ensure that investors pay the right price when investing in shares.

This statutory instrument introduces a more streamlined UK short selling regime, which focuses on equities rather than both equities and sovereign debt. The new regime also includes a reformed public disclosure regime for short selling to ensure that there is transparency over short selling activity, without the issues identified with the current regime through the 2022 call for evidence.

There can, however, be risks associated with short selling. As such, it is important for the Financial Conduct Authority to have the tools necessary to monitor short selling activity effectively and to intervene. This statutory instrument provides the Financial Conduct Authority with broad rule-making powers in relation to short selling. This will allow the Financial Conduct Authority, in effect, to oversee short selling in UK markets. It will also mean that the UK’s short selling rules can be adapted and updated by the Financial Conduct Authority in a more agile way in the future—for example, to better adapt to new global standards or to take account of market innovation and new business models.

This instrument also retains the Financial Conduct Authority’s powers to intervene in short selling activity in UK markets in exceptional circumstances—an important feature of the current regime.

Finally, the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024 give the Financial Conduct Authority the broad rule-making power for short selling that I have just mentioned. The new short selling regime operates under the designated activities regime introduced into the Financial Services and Markets Act 2000 by the Financial Services and Markets Act 2023.

The designated activities regime allows the Treasury to designate certain activities to be regulated by the Financial Conduct Authority without the requirement for those carrying on the activities to become full authorised persons, such as banks or insurers. This enables proportionate regulation of activities where it would be inappropriate to require full authorisation.

The designated activities supervision and enforcement regulations enable the Financial Conduct Authority to supervise and enforce rules that it makes under the designated activities regime. They do this by extending the Financial Conduct Authority’s existing supervision and enforcement powers under the Financial Services and Markets Act 2000, so that they can be used in relation to designated activities, even where those carrying out the activities are not authorised persons. The extension of these powers applies, in the first instance, to designated activities covered by the Consumer Composite Investments (Designated Activities) Regulations 2024 and the Short Selling Regulations 2024. This will enable effective supervision of the regimes that those regulations introduce.

In closing, these SIs ensure that our financial services industry is subject to a rule book that is fit for purpose, more proportionate and tailored to UK markets. I beg to move.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD)
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My Lords, first I declare my interests in financial services, as in the register—just in case. I will speak to the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations and then to the Short Selling Regulations.

The set of rules and provisions under which the FCA can give directions is important. Every time something is the subject of such a direction or supervisory action, there is an opportunity to go to a tribunal. I wonder whether the Minister has any statistics, from looking at the FCA’s present powers and at when tribunals can be invoked, on how frequent that is. I am trying to get at one of the things that has irritated me, which, as the Minister knows, is that the FCA seems quite slow to respond when something is going on in the market. One’s instinct, if we know that something is going wrong, is to want quick action. These provisions allow that, but they could always be subject to challenge. So how might that interfere? The question is a little theoretical, but is anything already being done in that way with which we might compare it? I realise that that information might not be to hand; if it is not, I would be happy to have a letter.

16:30
The particular instances when these directions can be given—they are not sort of day-to-day things—are laid out separately in the statutory instruments relating to that subject matter. So, we have the short selling one before us today and a few weeks ago we dealt with the CCI one. I noticed that the consumer composite investments regulations say:
“The FCA may give a direction only if it appears to the FCA—
(a) in the case of a direction given to a person, that in carrying on the activity the person is failing, or is likely to fail, to comply with a requirement imposed on the person by designated activity rules made by virtue of regulation 6, or
(b) in the case of a direction given to a person or a description of persons, that it is desirable to exercise the power for the purposes of advancing any of the FCA’s operational objectives set out in section 1B(3) of FSMA 2000”.
Two of those are to do with consumers and the other one is basically to do with the integrity of markets. But the provisions for short selling are different. It still has the first one about failing, but it does not have the one about the FCA’s operational objectives, and then it has a list of other things that are relevant vis-à-vis short selling—I do not need to read them out.
So I am slightly puzzled as to why the one to do with the operational objectives does not appear as a routine. It seems that the two that were put into the consumer composite investments regulations seem to be two fundamental points: that you are failing or that it is not in line with the FCA’s operational objectives. I would have expected those to be replicated in every statutory instrument that comes along as they go into the designated activities regime. So I am curious about why it is left out.
I can see that it might have been thought that the consumer side does not apply quite so much to things such as short selling, but I think that would be wrong and, in any case, there are still others. But, apart from that, I am relatively happy with the proposals, as long as they are not so tribunal-bound that they cannot act, and we have not missed out on putting in other occasions when they might want to be able to intervene.
With that, I turn to the short selling regulations. I am well aware of the history of those regulations, which were a spinoff from AIFMD and extraordinarily difficult to negotiate to get into anything halfway sensible. So, it is quite nice to see that actually most of it has now been kept and that, of the things that the UK objected to most and we could not get out of, two have been have taken out—and for the most part, that is reasonable. I think some people say, “Well, why can’t you short sell sovereign debt and have sovereign CDSs?” I think that the liquidity is such that you do not have to worry about whether you are going to be able to get hold of them, but experience has shown that, if you cannot short the sovereign, the markets will find a way to do the equivalent, which means shorting those people who are holding the sovereign, which happens to be banks–and it is probably a worse thing to be shorting banks than it is to be shorting the sovereign. So it is a reasonable provision to not have those in any more.
The other one was to do with how much transparency there should be over short selling provisions. We went round and round this argument at the time, and everybody was very cross about all the short selling that had been done against Greece and during the financial crisis. They wanted to know who the culprits were but, generally speaking, the aggregated numbers are what really matters. If you have too much transparency, you can expose the strategies of other financial organisations, so I agree that going back to where we used to be is correct in that sense.
In reading through the response on short selling, I noticed that there were more than 800 consumer respondents, most of whom responded in a standard way—I think online. In their response, the Government explained that a lot of the things said by consumer respondents were more relevant to the US situation. That was probably a fair statement, although I obviously do not have access to the consultation documents. However, this again shows that people are interested in what goes on in short selling. They are concerned, even if they do not know exactly what the legislation is. To some extent, that reinforces my thinking that it is necessary to consider how consumers view things. Apart from that, there were only about 25 respondents, which is not very many.
I have to say, on my favourite subject of consumer collective investments, that there was a substantial response to that consultation, which the Government not only ignored and said very little about but then did precisely the opposite of what was said. There is an interesting contrast between the way in which that was dealt with—I know that the noble Lord was not necessarily the Minister at that time—and the more sympathetic way in which the consumers were dealt with. That is all I have to say at the moment.
Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, I shall speak to these three statutory instruments in the order in which they appear on the Order Paper. I know the Minister spoke to them in a different order—three, one, two—but I am much more simple-minded, I am afraid, so will go with one, two, three. I am also speaking without the professional experience of my colleague and others who are present in this debate, even if not participating, so there is an element of “man-on-the-street reaction” to some of the questions I have around these various statutory instruments.

I will start with the designated activities regulations. I would like to understand much better the circumstances under which this first of the three SIs allows the FCA to exempt businesses or persons from being an authorised person when they are carrying out activities such as short selling and credit default swaps. Indeed, the language is quite loose, so it may well include other complex financial structuring and sales.

The reason that I would like to understand those circumstances is that I remain very exercised by the 2008 financial crash. It is an experience from which we all have to learn, and which we must be careful not to forget, but it was, to a significant extent, triggered by the ignorance and negligence of businesses and people who were carrying out structured finance. Indeed, credit default swaps in particular were at the heart of much of the crisis. Short selling, which is wrapped into this SI, particularly uncovered short selling, is definitely a risky activity. Why should these risky activities be carried out by people who have not been through an authorisation—in effect, an approval process?

I understand that the industry often says that this is an onerous process but, having been on the committee that first recommended that process, the heart of the authorisation process is to verify that the person carrying out the activity meets the test of being fit and proper. Indeed, the core of the process is a criminal records check and a process to verify that the expertise and experience that has been claimed by the individual or the business is actually true. Neither of those can ever be taken for granted. People who have been involved in financial mis-selling over and over again turn out to be serial offenders whose history was never checked and who are shown to have been involved in previous mis-selling practices. We saw that extensively with the mini-bond scandal but it has a much wider history than that.

Firms have told me that, since they have had to go through the authorisation process, they have been shocked to find how many of their decision-makers were hired not on the basis of their expertise or CVs but because they were a friend of somebody who was important in the organisation who had highly recommended them. When they started checking the CVs, as the Minister may be aware, they discovered that many people had gravely exaggerated; the experience and expertise that they had claimed turned out not to have a whole lot of substance behind it.

In an industry where there is so much at stake and so much capacity to manoeuvre and do the wrong thing, why are we limiting the authorisation process? I want to understand better the circumstances in which the FCA will make the decision that the authorisation process need not apply. It is a pretty significant decision. I understand the industry push-back; all the organisations feel that they are virtuous, so why should anybody look over their shoulders?

On the whole I am comfortable with the second SI, which focuses on short selling, but I do not understand—here, I am in a different position from my colleague, my noble friend Lady Bowles—why individual firms will no longer be required to publish net short positions above 0.5% of issued capital. I should have thought that investors would like to have this information, but I understand that, from a systemic perspective, an aggregate number may be sufficient for the regulator. However, it concerns me that we are reducing transparency in this area and I should like to understand much more clearly why transparency has been such a problem that it has to be removed. It does not take a lot of activity for this information to be public, so it cannot be particularly onerous to publish it. What are the harms that the industry feels exist because of publication? Perhaps we could have some examples of where a firm has been harmed. Presumably, that evidence has been put before the FCA or we would not have the drafting of this SI.

Why can the Treasury arbitrarily change the threshold for reporting net positions to the FCA? To me, the Treasury does not need to be accountable to anybody for changing that threshold and I just do not understand why that is and what the circumstances are.

I am also concerned that the financial services industry has been playing the growth mantra in order to move to a lighter-touch regulation environment. Whenever there is a debate on short selling on the Floor of the House, many people stand up and argue for uncovered short selling to be allowed far more extensively on the grounds that it will bring more players to invest in high-risk projects. The argument is made continuously that uncovered short selling will increase the liquidity in the market and offset any increased risk. I regard uncovered short selling as a risky activity, and I am not clear how this SI impacts on the FCA’s scope—without reference to Parliament, scope increases to allow a much greater range of uncovered short selling. As I was reading the language, I could certainly see that interpretation as possible.

16:45
The third of the SIs—the one that the Minister focused on at the beginning—is on ring-fencing. I feel pretty strongly about this issue, having gone through the experience of listening for two years to our banks describing the actions that created the crises of 2007 and 2008. Among that evidence, one of the most important conclusions that we as a committee came to was that the lure of the free money from retail deposits, and the lure of putting that into risky investments, was irresistible to what some people call the “casino” side —the investment side—of banking. The Government and the regulator have already lifted the bankers’ bonus cap, and they have weakened the clawback for bonuses received on deals that go badly wrong. I start to worry when those two changes are combined with amendments that provide easier access to that so-called free money—the retail deposit money.
The changes in this SI are restricted: they largely change the size of the banks that have to obey ring-fencing rules. Can the Minister tell me how many banks are affected by that change? It would be nice to know the identity of the current set of banks that would be affected by the change because that would give us a sense of how much risk is being added into the market.
I understand that the Government are hopeful that money from deposits—the free money—will go into UK SMEs. I say to the Minister that I think he is an optimist, as I do not think a lot of it will happen, but we must recognise that, as UK SMEs scale up, they have a high failure rate—it is about 49%—so there is a real impact in fuelling those kinds of investments. We must be careful not to take financial stability for granted but to understand that it requires constant vigilance. If the Minister could help me with those issues, I would be grateful.
Baroness Neville-Rolfe Portrait Baroness Neville-Rolfe (Con)
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My Lords, I rise to address these three significant pieces of legislation, which collectively aim to refine and enhance the regulation of our financial services sector. The measures come at a pivotal time for not only our financial services industry but the broader economy, as we navigate the challenges and opportunities presented by our post-Brexit regulatory autonomy.

My overall concern is that we are moving too slowly and too modestly to reduce the constraints that existed in the EU regime, and to encourage the competition and dynamism that we need for growth. This means that the US financial services industry and the industry in newer markets, such as Singapore, are eroding our prime position despite our dual advantage of time zone and the English language. Questions have been asked about the effectiveness of our stock market; indeed, that was highlighted today by the reaction to the Canal+ listing in London, which, obviously, we all welcomed. We look forward to debating the reforms announced in the Mansion House speech.

In the light of all this, the instruments demand careful scrutiny. I will also follow the sequence on the Order Paper. The first measure under consideration deals with the supervision and enforcement of designated activities. This legislation builds on the regulatory framework of the Financial Services and Markets Act 2000, empowering regulators to oversee specific activities that pose systemic or consumer risks. From our perspective, this is a necessary and prudent step. By focusing regulatory attention on designated activities rather than institutions alone, we can ensure that oversight remains targeted and proportionate.

Yet it is vital that this power is exercised judiciously. Overzealous enforcement could stifle innovation and deter smaller players and start-ups from entering the market at all. We would like to see a regulatory approach that provides clarity and certainty, enabling businesses to thrive while protecting consumers and market integrity. We also want to keep compliance costs down for business, especially smaller business. Historically, that has not always been the way of the financial regulators—nor, I am afraid to say, of the Treasury. Does the Minister agree that financial regulation should be more careful about the costs that it imposes? I know from the Mansion House speech that the Chancellor wants to be more competitive; I would like to see that reflected in financial regulation.

Incidentally, I was surprised to see this in paragraph 9.1 of the Explanatory Memorandum:

“The government does not generally assess successful enforcement action—such as fines levied after a breach of rules—as a cost to firms”.


From my experience, enforcement can be very costly to a firm: in legal fees, to fight any unfairness and possible reputational damage; in diversion of management time and talent; and in finding money from tight budgets for any fine. That is a good reason for a firm to comply with the established rules but it is also a reason for our regulators to work hard, in order to make compliance with the law easy, and not to judge themselves on the amount of fines they levy.

There is a related point on which I would very much welcome a response. The Minister may be aware of the huge concerns raised by the financial services sector about the FCA’s proposals earlier this year to name and shame firms involved in FCA enforcement action. It is consulting again, I am glad to say, on modified proposals. Can the Minister say whether the FCA intends to apply these new rules to the persons who are within the designated activities regime, which is at issue today, rather than, or as well as, the authorised persons regime? I know that the Chancellor, like her predecessor, has expressed concerns about naming and shaming. Clearly, we need to tread with great care in this area.

I look forward to hearing the answers to the questions from the noble Baroness, Lady Bowles of Berkhamsted, about tribunals and speed. I should like to say that her grasp of technical aspects of financial services law is extremely helpful to this Committee in the scrutiny of complex SIs such as these; we owe her a great deal. However, I have to say, I am not sure that I completely agree with her on FCA objectives, as I think that responsible growth and dynamism need also to come through in the way the FCA behaves.

That brings me to the second measure, which addresses short selling—an activity that has long been a point of contention in financial markets. Short selling, when responsibly undertaken, contributes to market liquidity and price discovery, as the Minister explained. Personally, I would have been more radical in moving away from the EU regulation, and perhaps in giving the FCA narrower rule-making powers. However, the proposed regulations seek to establish a robust framework for managing the risks of short selling while preserving its legitimate role, for example in times of crisis; I think that “exceptional circumstances” was the term the Minister used.

Moreover, on public disclosure, I welcome the move to a list of securities that are within the scope of the rules—this is in paragraph 5.11 of the second SI’s Explanatory Memorandum—rather than having a list of shares the FCA considered to be exempt. This will be clearer and easier. However, I urge the Government to ensure that the reporting and compliance burdens on market participants arising from this new instrument remain proportionate. Excessive red tape hinders the competitiveness of our financial markets, and I believe that we still have too much of it.

I say in response to the noble Baroness, Lady Kramer, that I, too, have learned a lot from history. She mentioned what I think she called “casino banking” but, as a former bank non-executive director—long after the financial crisis—I can vouch for the thoroughness of the checks that are made on personnel with responsibilities. My only concern is that this might be a less leisurely process because, obviously, personnel changes are often needed to run organisations well.

The third and final measure relates to amendments to the ring-fencing framework established in the wake of the global financial crisis. Ring-fencing was designed to protect retail banking operations from the risks associated with investment banking. Although this principle remains sound, the financial landscape has evolved considerably since the original provisions were enacted.

The proposed amendments rightly seek to introduce greater flexibility into the ring-fencing regime. This is a sensible response to changing market dynamics and the need for regulatory frameworks to evolve. Having said that, I think that increasing the limit from £25 billion to just £35 billion is timid, especially given recent inflation. Like the noble Baroness, Lady Kramer, I would like the Minister to remind the Grand Committee which of our banks will need to be ring-fenced going forward and to name some of those that will escape and be able to grow and diversify, both here and overseas, more easily.

In other respects, I say to the Minister and his officials that the Explanatory Memorandum and de minimis assessment on this instrument were very thorough and helpful.

As Conservatives, we understand the critical importance of maintaining the UK’s status as a global financial hub. This requires not only robust regulatory frameworks but a willingness to adapt and innovate in response to new challenges and opportunities, such as AI. I urge the Government to continue the processes of dealing with retained EU law and of engaging with industry stakeholders in order to ensure that domestic measures are implemented effectively and without unnecessary burdens or delays. In doing so, it should be possible to foster a competitive financial services sector that drives economic growth and innovation, creates jobs and enhances our nation’s global standing.

Lord Livermore Portrait Lord Livermore (Lab)
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My Lords, I am extremely grateful to all noble Lords who have spoken—specifically, the noble Baronesses, Lady Bowles, Lady Kramer and Lady Neville-Rolfe—for their comments and questions and for, as others have observed, the extraordinary level of expertise that they bring to this debate and, as a result, the level of scrutiny that they are able to provide. I apologise for speaking to the instruments in an order other than that on the Order Paper.

The noble Baroness, Lady Bowles, began by focusing on the designated activities SI. She asked about the direction power. The designated activities regime provides a power of direction to the Financial Conduct Authority. The Treasury can, by regulations, switch on that direction power for the Financial Conduct Authority’s supervision of any given designated activity. This statutory instrument sets out additional procedure for how that power may be exercised, but it does not create or switch on the direction power itself.

The noble Baroness, Lady Bowles, also asked for some statistics on the frequency of tribunals. I will write to her on that, as she requested. If she does not mind, I will also write to her on her second question, which was about the differences in the power of direction between CCIs and short selling.

The noble Baroness then went on to focus on the short selling SI. She asked how the views of consumers were considered. These reforms were informed by extensive industry engagement, taking into account views from a wide range of market participants, including consumers. The new UK regime will ensure that the regulation works effectively to protect against the risks of short selling while improving UK competitiveness.

17:00
The noble Baroness, Lady Kramer, asked about the Government’s view on uncovered short selling. The ability to settle is an essential aspect of any financial transaction. The Government are of the view that restrictions on uncovered short selling must continue to be a core part of the regulation of short selling; they also form part of international standards for short selling. This statutory instrument gives the FCA a broad rule-making power in relation to this; this includes the ability to maintain the current prohibition on uncovered short selling. On the noble Baroness’s question on designated activities, I will write to her with more detail on the authorisation of specific people.
She also asked about transparency. Public disclosure of short selling is important to provide investors with information and transparency on how it affects the price of shares. This, in turn, provides certainty and confidence to the market. Feedback to the call for evidence on the Short Selling Regulations highlighted significant issues with the current public disclosure regime. This new aggregated net short position disclosure regime will continue to provide transparency on short selling activity, while avoiding the potential distortive impacts of the current public disclosure regime. The Financial Conduct Authority will continue to have access to data on individual net short positions to monitor short selling activity effectively. I will also write to the noble Baroness on why the Treasury has control of the disclosure threshold.
Baroness Kramer Portrait Baroness Kramer (LD)
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Can I ask the Minister for clarification? It would seem that, if individual entities are disclosing their net short position, it is possible for an investor to understand whether the price is being affected by one institution that is making a very big play or by a series of institutions that are making a similar play. That is important information, and I have no idea how you can get it once everything is aggregated —unless I have misunderstood all of this completely, which is perfectly possible.

Lord Livermore Portrait Lord Livermore (Lab)
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Since I am going to write to the noble Baroness on those other two points, it is probably best that I write to her on that one, so that we can be absolutely clear.

In the meantime, I move on to the questions on the ring-fence from the noble Baroness, Lady Kramer. She spoke about a return to casino banking, but she will understand that I disagree with her on that point. These are sensible, technical reforms on which the Treasury has undertaken detailed work with the PRA. The PRA is satisfied that they maintain the appropriate financial stability safeguards. The Treasury has considered the combined overall risk of reforms to the sector, alongside detailed cost-benefit analysis through an impact assessment. That impact assessment concluded that the reforms will improve outcomes for banks and their customers by making the ring-fencing regime more flexible and proportionate, while maintaining appropriate financial stability safeguards and minimising risks to public funds.

The noble Baronesses, Lady Kramer and Lady Neville- Rolfe, asked which specific banks will be removed from the ring-fence as a result of these measures. The reforms create significant new optionality for banks, with the eventual benefits depending on their commercial decisions. It is for the banks to announce how they will utilise the new flexibilities created in the regime and the Government do not comment on specific firms.

The noble Baroness, Lady Kramer, also asked about firms being taken out of the ring-fence as a result of the primary threshold. No firms will leave the regime as a result of increasing the core deposit threshold.

The noble Baroness, Lady Neville-Rolfe, in contrast to other noble Lords, spoke of these reforms being too slow and modest. She also asked what assessment the Government had done on the impact of these SIs. We published impact assessments alongside both the ring-fencing and short selling statutory instruments, which set out their estimated impacts on firms. Both these statutory instruments are estimated to result in a net cost saving for industry.

The noble Baroness also asked how these SIs will deliver growth. There are several measures in the ring-fencing SI that have an impact on growth. We are increasing the core deposit threshold at which banks become subject to the regime, allowing them to grow, as well as exempting retail-focused banks from the regime. We have also introduced new flexibilities for ring-fenced banks to invest in UK small and medium enterprises. The Short Selling Regulations introduce a streamlined short selling regime, which reduces costs for firms and improves UK competitiveness, while still effectively protecting against the risks of short selling.

The noble Baroness also asked about the powers that the supervision and enforcement statutory instrument provides. Those regulations extend the normal powers that the Financial Conduct Authority already has over designated activities. They will allow the Financial Conduct Authority to supervise designated activities even where those carrying on the activities are not authorised persons. They mean that it will be able to gather information on and launch investigations into persons carrying on designated activities, and to enforce its designated activity rules, by publicly censuring or imposing financial penalties on persons who breach them. The Financial Conduct Authority will also be able to restrict or prohibit persons from carrying on the activity if necessary. I will write to the noble Baroness, Lady Neville-Rolfe, on the broader FCA enforcement approach.

Baroness Neville-Rolfe Portrait Baroness Neville-Rolfe (Con)
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Before the Minister goes on, I want to ask about naming and shaming. Is it to be done at the stage when enforcement becomes public? Can we be clear when the naming and shaming will take place? The Government are still considering exactly what they are going to do on naming and shaming, I think. It would be good to have confirmation on that because this area is of particular concern to the industry, for an obvious reason: the reputational hit of naming and shaming is substantial.

Lord Livermore Portrait Lord Livermore (Lab)
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If there is anything more that I can usefully add, I will include it in the letter that I will write to the noble Baroness.

A final question was asked about why we have increased the limit by just £10 billion. It was recognised when the ring-fencing regime was originally designed that the threshold would need to be adjusted over time to reflect the evolution of banking practices and growth in the deposit base. The Treasury considered several metrics, as well as financial stability and competition considerations, in proposing the £10 billion increase.

Increasing the deposit threshold will provide smaller banks with more headroom to grow before being subject to the requirements and costs of ring-fencing. This will support domestic competition in the retail banking market. A competitive and dynamic market improves outcomes for depositors. The reforms may also encourage inward investment in the UK, as new entrants to the UK banking market will have more room to grow and develop economies of scale before becoming subject to the regime.

I hope that I have covered all noble Lords’ questions. As I say, I will write on the points that I indicated.

Motion agreed.

Short Selling Regulations 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
17:07
Moved by
Lord Livermore Portrait Lord Livermore
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That the Grand Committee do consider the Short Selling Regulations 2024.

Relevant document: 9th Report from the Secondary Legislation Scrutiny Committee

Motion agreed.

Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
17:07
Moved by
Lord Livermore Portrait Lord Livermore
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That the Grand Committee do consider the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024.

Relevant document: 9th Report from the Secondary Legislation Scrutiny Committee

Motion agreed.

Silicon Valley Bank UK Limited Compensation Scheme Order 2024

Tuesday 17th December 2024

(1 day, 11 hours ago)

Grand Committee
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Considered in Grand Committee
17:08
Moved by
Lord Livermore Portrait Lord Livermore
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That the Grand Committee do consider the Silicon Valley Bank UK Limited Compensation Scheme Order 2024.

Lord Livermore Portrait The Financial Secretary to the Treasury (Lord Livermore) (Lab)
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My Lords, I beg to move that the Committee do consider this order, which is related to the 2023 resolution of Silicon Valley Bank UK Limited. This order confirms that the former shareholder of SVB UK is not entitled to compensation following the transfer of the bank’s shares to HSBC UK Bank plc.

As noble Lords know, in early March 2023, SVB UK experienced severe financial distress, resulting in rapid deposit outflows. This crisis, originating from its US parent entity, quickly spread to its UK subsidiary. By Friday 10 March, the Bank of England, acting as the resolution authority, declared its intention to place SVB UK into a bank insolvency procedure, absent any meaningful new information.

Over the subsequent weekend, a private sector purchaser was identified. On Monday 13 March, the Bank of England exercised its power under the Banking Act 2009 to transfer the shares of SVB UK to HSBC UK Bank plc. This action was taken following consultation, with the Prudential Regulation Authority, the Financial Conduct Authority, the Treasury and the Bank of England reaching the judgment that the resolution conditions set out in the Banking Act had been met.

The Banking Act requires the Treasury to make a compensation scheme order when the private sector purchaser power is exercised. This order is a mechanism to establish in law what compensation, if any, is due to former shareholders of the resolved firm. The Bank of England undertook a provisional valuation when placing SVB UK into resolution. That valuation found that SVB UK’s shareholder would not have made any recoveries had the firm been placed into a bank insolvency procedure, and therefore no compensation is due to SVB UK’s former shareholder. The Bank of England then commissioned an independent valuation of SVB UK, which confirmed that no compensation is due to the previous shareholder of SVB UK. The order before us today confirms in law the findings of these valuations: that the former shareholder of SVB UK is not due any compensation.

The compensation scheme order for SVB UK is a necessary step to formalise and conclude the resolution process and confirm that no compensation is due to the former shareholder. This decision is based on thorough valuations and adheres to the legal framework established by the Banking Act 2009. I beg to move.

Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, the Minister may be pleased to hear that I have very little to say on this SI. It makes sense to me. The Bank of England report on the transfer of Silicon Valley Bank UK to HSBC argues clearly and logically that, in any reasonable scenario, SVB’s UK tier 1 and tier 2 capital would have been wiped out, so there are no grounds to compensate the former US parent.

However, the fact that this SI is needed raises a question. The resolution of large banks that fail would require wiping out shareholders and calling in bail-in bonds under the MREL procedures without compensation. Would those processes all require a report and an SI to be laid in order for action by the Bank of England to be legal? If that is what the legislation currently says, is there a flaw in the resolution legislation? If there is a flaw, does it need to be rectified? In other words, it seems extraordinary that we need an SI under these circumstances at all.

Baroness Neville-Rolfe Portrait Baroness Neville-Rolfe (Con)
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I also welcome the draft Silicon Valley Bank UK Limited Compensation Scheme Order 2024. It rightly confirms in law that no compensation is due to shareholders of Silicon Valley Bank UK Ltd on the transfer of shares to HSBC UK Bank plc in March 2023, when, as the Minister explained, the former experienced rapid deposit outflows.

The swift action that the last Government took to facilitate the sale averted a potential catastrophe for tech start-ups and small businesses dependent on that bank—precisely the kind of enterprises that can help to drive Britain’s growth and innovation in the decades to come. The special resolution regime reinforced trust in the financial system while reminding us that stability is the foundation upon which innovation thrives.

Although I welcome this order, can the Minister clarify how the lessons learned from this well-handled crisis will inform future regulation of mid-sized banks? Further, can he elaborate on how the scheme aligns with our wider growth agenda? To my mind, the tech sector is critical to Britain’s global competitiveness, and maintaining its trust in the financial system is key to sustaining our position as a world-leading hub for innovation—an ambition that is under some challenge, as I mentioned earlier. But I am very happy with this order.

Lord Livermore Portrait Lord Livermore (Lab)
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My Lords, I am grateful to the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, for their support for the compensation scheme order.

The noble Baroness, Lady Kramer, asked whether this SI was genuinely needed. In terms of the specifics, I can assure her that I would not be standing here if it was not, but I will write to her about the hypothetical that she raises.

I am grateful to the noble Baroness, Lady Neville-Rolfe, for the points that she made. I agree very much with what she said about the importance of the action that was taken. She asked whether we have learned the lessons from that for future regulation. I point to the bank resolution Bill that I have just taken through the House. It is absolutely informed by the experience of the Silicon Valley Bank episode and directly flows from it.

The noble Baroness also asked how this order relates to the growth agenda. As I always say, stability is the first pillar of the growth agenda. Financial stability is as important as economic stability and I believe that this order will help to ensure financial stability as that platform for growth. With that, I commend it to the Committee.

Motion agreed.
Committee adjourned at 5.15 pm.