Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025
(Limited Text - Ministerial Extracts only)
Read Full debate
Baroness Neville-Rolfe (Con)
My Lords, I, too, rise to speak to the two statutory instruments: the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025, and the Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025.
I am content with the second of these instruments, but I have some broader questions which it may be helpful to address first. My first question is a repeat of one posed in the summer. How is the Treasury getting on with the post-Brexit regulatory changes for which it is responsible? The answer in the summer was that 51% of assimilated law from the retained EU law and assimilated law dashboard had been dealt with. It seems extraordinary not to have completed this task more than nine years after the vote on Brexit. A second question is, now that we are no longer bound to match the EU, have we taken advantage of the obvious opportunities? I highlight helping smaller financial service providers and banks, addressing the perennial problem of finance for SMEs, and encouraging innovation. I look forward to hearing from the Minister on this, and on the progress of the Government’s financial services growth and competitiveness strategy, including the welcome announcement on 4 December on plans to lower barriers to authorisation for new firms.
That brings me to how our onshored EU law is being replaced by regulator rules, and how Parliament can maintain proper oversight of it. Can the Minister tell us how the Treasury and the regulators are co-ordinating the mapping exercise from the EU’s capital requirements regulation provisions into our PRA rulebook? In particular, how are the Government assuring themselves, and by extension this House, that the cumulative effect of these changes will preserve and enhance the safety and soundness of firms—a concern of the noble Baroness, Lady Kramer—and the competitiveness of the UK as a financial sector, which, given its sheer scale, is critical to the future of our country? The noble Baroness explained the importance of continued parliamentary involvement, rather than leaving everything to the regulators and their rule books. Does our Financial Services Regulation Committee, with its distinguished membership, perhaps have a role to play?
As we move further into the FSMA 2023 framework, what is the Government’s plan for post-implementation review? I know from my business experience that for success, implementation far outweighs strategy. Will the Treasury undertake a structured evaluation of whether the shift from detailed retained law to rules made by the regulator is delivering the outcomes envisaged by Parliament: high standards of prudential regulation, clear and accessible rules for firms, and a regime that supports innovation and growth? The noble Lord, Lord Jones, said he wanted to see a smarter regulatory framework, and I will be interested in the Minister’s reply. These are, I hope, constructive and broadly supportive questions.
I turn to the instrument on ESG ratings. As the Minister has said, this market has grown rapidly in recent years without formal regulatory oversight. That has inevitably led to concerns being raised around transparency, governance arrangements, internal controls and potential conflicts of interest for ESG rating providers. Both the International Organization of Securities Commissions and the OECD have recommended that national authorities bring greater scrutiny to bear on this part of the market, and I suppose that the UK was bound to fall into line. I understand the need to ensure that ratings are given in a proper way for market integrity, although I regret that the market has not sorted itself out voluntarily—though that may be difficult, given that so many territories are involved.
I am not convinced about the evidence base for intervention, in terms of harms caused by incorrect ESG ratings. I also question why the Government have defaulted to bringing organisations into the FCA’s sphere using the Financial Services and Markets Act 2000 rather than the simpler and less costly designated activities route, which the 2023 Act created. Why have the Government not started with making ESG ratings a designated activity to see whether that could cope with the issues satisfactorily? The Explanatory Memorandum simply asserts that full regulatory oversight is necessary. This is against a background of an
“entrenched culture of risk aversion”
and regulatory complexity, in the words of the House of Lords Financial Services Regulation Committee. I believe that the FCA route on ESG risks adding such needless complexity. I am sure that the Minister will want to answer this point. The Prime Minister has focused as recently as last week on the importance of growth and lighter regulation, which, as the Minister knows, I welcome. Is there a left hand/right hand issue underlying today’s apparently technical discussion? Is this use of the 2000 Act rather than the 2023 Act the direction of travel for the future? Will that deliver the simpler, smarter regulation that many of us crave?
For similar reasons, I am cautious about the state telling the market whether such ratings ought to be used at all. Companies and investors must remain at liberty to make a business decision on whether ESG ratings add value to their processes. In my view, it is not the role of government or regulators to favour particular investment philosophies or to promote one set of metrics over another. Against that background, can the Minister confirm that it is not the Government’s intention that the FCA, through its supervisory expectations or guidance, should in practice encourage or pressure firms into using ESG ratings or into favouring particular ESG ratings providers or methodologies? In other words, can the Minister assure the Committee that the regime is about the integrity of the ratings, where they are used, rather than about mandating or promoting their use?
In the same vein, can the Minister say what safeguards will be in place to ensure that ESG ratings are not indirectly hard-wired into other parts of the regulatory framework—for example, into prudential rules, disclosure regimes or stewardship expectations—in a way that would amount to de facto regulatory endorsement of specific ESG approaches without further and explicit parliamentary scrutiny? The Minister mentioned that this ESG instrument has been supported by business. Which businesses? Did they include SMEs and their representatives?
I end with a thank you. It is helpful that the Government regularly come to the House and explain the purpose of the panoply of financial regulations that are being made. This is a major constitutional and regulatory transition—hence it is right that we have the chance to examine carefully each step in the process, its progress and its broader impact. The sunlight of transparency makes for better government and better regulators.
Lord Wilson of Sedgefield (Lab)
My Lords, I thank noble Lords and noble Baronesses for the one or two questions that I have been asked. I will do my best to get through them all; I very much doubt that I will, as they came thick and fast, but, obviously, we will scour Hansard and respond by letter to anything to which I do not respond.
First, I thank my noble friend Lord Jones for his questions about the PRA. There were some questions about its consistency and how it works institutionally; I can write to him about that. The PRA produces an annual report in which all the costs and everything else that my noble friend asked about are laid out, but, if the answer is not in there, I am sure that we can come back with an answer to his question. I am pleased that he welcomes the statutory instruments that we have here.
The noble Baroness, Lady Kramer, asked a lot of precise questions, which I will try to answer. The main thing I took away from what she said was partly to do with parliamentary oversight: whether we have forgotten what happened in 2008 and why we are essentially allowing the regulators to take over on prudential regulation. Basically, we are revoking the capital requirements regulations, allowing the PRA and FCA to set rules relating to the prudential regulation of banks. Parts of the CRA were revoked in July 2025 and this will come into force on 1 January next year. This SI makes consequential amendments relating to the parts of the CRA revoked in July. This is necessary to ensure that the statute book functions properly, and there is nothing in this SI that is additional to what was there before. Obviously, the Leeds reforms and the Basel 3.1 reforms will ensure that these transitional measures will work into the future.
I turn to the questions from the noble Baroness, Lady Neville-Rolfe. On adjusting to being outside the EU, it has been nine years since the referendum; we have been in power for just over one of those years, so the question is what happened in the previous eight years to get us to the position where the noble Baroness thinks we should be.
There were also questions about cutting regulation on firms by 25%. This Government are committed to cutting administration. The Financial Services Growth and Competitiveness Strategy set out the Government’s plans to stabilise the streamlined regulatory framework for sustainable finance, prioritising policies that will have the greatest impact. This SI is one of those priorities. It improves clarity around the ESG rating methodology, giving investors greater confidence in their decisions. It will also promote more accurate understanding of how companies are evaluated. That is why the sector itself has been strongly supportive of the proposed regulations: 95% of those consulted supported them. In the Mansion House speech in November 2024, the Government published the consultation response and draft legislation, and we are now following on from that. Some 5,400 UK financial services firms now use ESG ratings.
As far as the international context is concerned, the EU will regulate ESG rating providers from July 2026. I believe that two or three other countries—Japan, Hong Kong and Singapore—have a code of conduct on this, and I think India is taking a similar approach.
Both noble Baronesses raised the Government’s delegation to the FCA of rules about transparency. What we have done is in line with the UK’s general approach to financial services regulation. This is founded on the Financial Services and Markets Act 2000, under which Parliament sets the overall policy framework, with the detailed regulatory requirements set by the expert independent regulators. The regulators are required to conduct an open and transparent consultation process, which includes undertaking a rigorous cost-benefit analysis before introducing new rules. The regulators are also required to keep their rules under review and to provide clarity and transparency to stakeholders now and when the rules are reviewed. They must also stay within the parameters of the statutory requirements.
As far as parliamentary scrutiny is concerned, the FCA is an independent body. It is a non-governmental public body and its independence as a statutory regulator is vital to its role. However, it is fully accountable to the Government and Parliament as to how it exercises its functions. This accountability is critical in ensuring that the FCA is advancing the objectives that are given to it by Parliament. Senior representatives of the FCA regularly give evidence to parliamentary committees. The Financial Services and Markets Act 2023 introduced secondary growth and competitiveness objectives for the FCA. This creates a clear legislative framework for the regulator to follow.
Baroness Neville-Rolfe (Con)
I thank the Minister so much for saying that he will look at the details—we asked a lot of detailed questions—and follow up, as he has done on previous occasions. That is extremely helpful and much appreciated.
I want to come back on a couple of points which might be the subject of correspondence. First, on the pace of change, this 51% and how we are getting on, I appreciate that we were in power for a lot of the time. However, there is a common wish that the regulatory regime should be up to date. We did a lot of work and some of that the Government have, fortunately, moved forward with. How are we getting on?
Secondly, I focused on small business because smart regulation is so important to small business. The Minister did not talk much about that. Could he follow up a little more on the good things that I think are planned? On ESG, he mentioned the number of firms. Does that mean that there is a de minimis rule with ESG? If so, I would be interested to know whether small companies are not covered by this regulation—or will they get a lot of extra burdens as a result of rules that are not that relevant?
The Minister did not really answer on why we are using the 2000 Act rather than the 2023 Act. The Treasury has done it this way for this instrument, and I understand that. I am interested to understand why it is being done that way and whether there would be a quicker, smarter approach using the powers in the 2023 Act as well. But with that, I thank the Minister for his full and helpful reply.
Lord Wilson of Sedgefield (Lab)
In response to that, we are using the legislation that we are using essentially because it is the appropriate piece of legislation that we need for what we are introducing today, but I will obviously give her a fuller answer on why that is. As far as small businesses are concerned, 5,400 UK financial service firms used the ESG ratings in 2024. The FCA analysis said circa 80 providers are active in the UK ESG ratings market, with potential growth of up to 150 providers. Globally, the top five providers represent 75% of the market. That is the make-up of the industry. As to whether the small companies were consulted, we can get that information to her.
Baroness Neville-Rolfe (Con)
I am interested in the impact of the regulations on the financial services people less than on the ESG companies themselves. The ESG companies are providing services. Some of them will be small firms; that is fine. In terms of growth and innovation—the sort of objectives that are rightly set out in the strategy—is that holding back London in an inappropriate way?
Lord Wilson of Sedgefield (Lab)
I do not think that it is holding back London and the City of London in any way whatsoever. What is important is that we have the right regulation on this. The consultation that we took part in was not just among the regulators; it was with trade bodies et cetera. It was a wide consultation. I am sure that I can get a more detailed response on the consultation to the noble Baroness.