Financial Services and Markets Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Monday 29th June 2026 Grand Committee

[Baroness Noakes (Con)]

My Lords, I have Amendments 83, 84, 85 and 86 in this group, and I thank my noble friend Lady Neville-Rolfe for adding her name to the first three of them. We are continuing our examination of the role of the regulatory principles, which we debated to some extent on previous Committee days. To recap, Clause 17 proposes to downgrade the regulatory principles in Section 3B of FSMA so that instead of guiding the everyday work of the regulators, they will now feature in only an element of the regulators’ new five-year plans. Some of us have tried, but so far failed, to convince the Minister that this represents a constitutional assault on the effectiveness of your Lordships’ Financial Services and Regulation Committee. I am pleased that a meeting has now been arranged for the committee to discuss this in more detail with the Minister, together with the Financial Secretary, and I hope we can make some progress there.

On the previous day in Committee, I moved an amendment which called for the Treasury to undertake a review of the regulatory principles, because they are a mixture of important things concerning how regulations should be conducted, some duplicated areas and some special interest items. The Government resisted my amendment, with the Minister saying that they had already reviewed them and found them to be fine, which was a completely bizarre judgment.

My Amendments 83, 84 and 85 take a different approach. If Clause 17 is to remain in its present form—that is to say, downgrading the Section 3B principles to abstracts, to be wordsmithed into five-year plans—it is important to rescue the most important element of them: proportionality. Amendment 83 places the proportionality principle, using the rather wordy parent formulation in Section 3B(1)(b), into Section 1B of FSMA, which is about how the FCA should discharge its general functions. This achieves for proportionality the effect of ensuring that when the FCA draws up rules or guidance or does anything else, it will conform to the proportionality principle. That would allow the rest of Section 3B to head into strategic oblivion, but it would preserve proportionality as a matter that should guide the FCA’s work on a daily basis—for example, when drawing up rules or guidance. That, in turn, would allow the Financial Services Regulation Committee to focus on whether the FCA is indeed reflecting the principle of proportionality in its rules. Amendment 84 seeks to do much the same for the PRA. Lastly, Amendment 85 removes proportionality from Section 3B to avoid yet more duplication cluttering up FSMA.

The Financial Services and Regulation Committee received a lot of evidence for its first inquiry into the secondary competitiveness and growth objective. One of the enduring themes was that neither regulator lived out the requirement for proportionality. For example, the confidential round table that we held with mid-market and specialist banks, which are very diverse and very different from the big banks, reported that regulations are substantially similar for all sizes of banks. The confidential round table with insurers and reinsurers found that there were disproportionate responses to consumer issues, failing to differentiate between different business models or different types of firms.

As an aside, the committee had to hold these round tables on a confidential basis because of a widespread fear of regulatory repercussions if attendees articulated views that did not reflect well on the regulators. This is a serious cultural issue that cannot be dealt with directly in this Bill, but it underlines the need for parliamentary accountability mechanisms to be made stronger rather than weaker. We should make these mechanisms as effective as we possibly can.

As well as finding disproportionate regulations and supervision, the committee’s report also highlighted how thresholds, which can aid proportionality, were often used in a way that in practice impacted the willingness and ability of financial services businesses to grow. The proportionality is a very big ongoing issue in financial services regulation and has real-world consequences.

The noble Baroness, Lady Bowles, has tabled similar amendments to mine, which also include the regulatory principle currently found in Section 3B(1)(f). My own view is that paragraph (f) is a restatement of proportionality from a different angle. I agree that the things in it are important, but I hope that we can work to get some kind of streamlined definition of proportionality that incorporates both strands.

My other amendment in this group is Amendment 86, which seeks to import the regulatory principles of the Legislative and Regulatory Reform Act 2006 into the regulatory principles in FSMA. I did this in response to a statement in the Explanatory Notes that the Government intended to use secondary legislation to take the financial regulators out of the ambit of the 2006 Act, which I regard as a bad decision.

It is true that some elements of the very succinct expression of regulatory principles set out in the 2006 Act are already found in Section 3B, but not all of them. The 2006 Act requires all regulators to carry out their regulatory activities

“in a way which is transparent, accountable, proportionate and consistent”.

It also says that regulated activities should be taken only for

“cases in which action is needed”.

This goes beyond Section 3B in requiring accountability and consistency, and I cannot find anywhere in FSMA that says that the FCA and the PRA should regulate only when action is needed.

I cannot think that it is right to dilute the FCA’s and the PRA’s regulatory obligations. They are probably the most important regulators in the land; to let them off the regulatory principles in the 2006 Act is just plain wrong. Since Parliament is, in effect, powerless against secondary legislation, the only way to ensure that the FCA and the PRA remain subject to the 2006 Act principles is to hard-wire them into FSMA, which is what Amendment 86 seeks to do. It may well then be downgraded if the Government have their way on the regulatory principles and Clause 17, but it will not disappear completely from the requirements to which the FCA and the PRA will, in some measure, have to have regard.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, before turning directly to proportionality, I will touch briefly on sustainable growth, because its meaning has drifted over time. Sustainable growth was not part of FSMA 2000. It was introduced later, in the post-crisis reforms, as a macroeconomic guardrail. Its purpose was to ensure that regulators did not focus solely on narrow consumer protection or market integrity but had regard to the wider economy. It was intended to counteract over-regulation, pro-cyclical rule-making and, in effect, to avoid killing the golden goose of financial services. It was, in fact, a pro-growth statement. Later, maybe since 2018-19, sustainability has expanded in understanding to include environmental concerns, although, of course, they now have their own place and, as debated earlier, will maybe have some further places in legislation.

I do not want the original macroeconomic point to be lost. It was designed as a counterpart to proportionality, a reminder that regulation must support durable long-term economic stability, not contribute to boom-and-bust cycles. In that sense, both proportionality and macroeconomic sustainable growth sit in the same family of “have regards”. They are deregulatory principles intended to prevent unnecessary burden and to ensure that regulation does not itself become a source of economic harm. Of course, climate change has macroeconomic effects, but they are of a different character and should not obscure the original boom-and-bust prevention purpose of this duty.

I turn to proportionality and Amendments 83 to 84A. I congratulate the noble Baroness, Lady Noakes, on Amendments 83 and 84, which would restore the proportionality duties to the regulators’ general functions, and Amendment 86, which would import the principles of the Legislative and Regulatory Reform Act into FSMA. These are thoughtful and constructive amendments, which would save something, but there is a great deal they cannot save—we will discuss that later. In particular, they do not save the second proportionality duty: the duty to have regard to the nature and objectives of businesses carried on by different persons. That is the proportionality principle that protects smaller firms, sole traders, mutuals, benefit companies and individuals. It is not just about cost-benefit or even size; it is about recognising that different types of firms have different objectives and experience regulation differently. To some extent, as the noble Baroness, Lady Noakes, said, this should all be understood within proportionality, but if we leave it out when it is still separately listed in the current regulatory principles, even when they are largely disregarded, that might lead to the wrong conclusions.

That is why I tabled Amendments 83A and 84A, which build on the formulation of the noble Baroness, Lady Noakes, and would restore the smaller and different business protections. As has been explained, these would be inserted into clauses that relate to the discharging of the regulators’ general functions so that they restore these duties to the operational level of rules and supervision. But this limb of proportionality does more than protect smaller firms; it may also protect firms whose objectives legitimately involve taking more risk in the interests of growth and innovation. Parliament’s role is not to eliminate risk but to ensure that it is understood, calibrated and supervised fairly. That is why this proportionality duty matters: it is one of the few operational tools that give Parliament visibility into how regulators weigh those differences in practice.

However, even with these amendments, we still would not save the principle of sustainable growth—growth that is durable, predictable and not a flash in the pan. As I have explained, that was a partner “have regard” to proportionality. I hope that during these proceedings I can persuade noble Lords and the Minister that sustainable growth should also be included. It chimes with competitiveness and growth, but it, too, needs to have a place in the real business part of these clauses, in the general functions. To echo my earlier comment, macroeconomic sustainable growth belongs alongside proportionality, as part of the deregulatory family of “have regards”.

These duties were originally conceived as guardrails to ensure that regulation supports the economy rather than constrains it. That operational balance is worth preserving. All the “have regard” duties were carefully designed and each has a purpose, and some of the others work together, as I have explained.

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[Lord Stockwood (Lab)]

I understand it, and I think I have demonstrated in the debate today and outside—I am looking forward to the meeting next week—that we remain open-minded. We are trying to achieve the balance between the regulatory oversight that we believe already exists and the feedback that we have had from the committee. I remain open to those conversations. We believe that the framework tries to keep that balance between the oversight that exists in Parliament and the independence of the regulators, but we genuinely look forward to that constructive discussion.

I turn to Amendment 87, which seeks to expand the regulatory principles and make them more detailed and directive. The Government’s view is that FSMA should provide a principled framework within which the regulators exercise expert judgment. This amendment goes far beyond refining the existing principles and would, instead, replace them with a highly prescriptive set of instructions that risks legal complexity, rigidity and dispute over interpretation.

The concepts highlighted in the amendment are important, but the Government do not believe they should be hardwired into primary legislation in this level of detail via the regulatory principles. The issue is not whether compliance costs, innovation, competition or post-implementation review matter—they clearly do—but whether it is right to place these requirements in primary legislation. The Government’s view is that it is not. It is not a sensible approach to grant the regulators significant powers and responsibilities, and to then overprescribe with how they must fulfil them.

[Baroness Bowles of Berkhamsted (LD)]

The Minister keeps saying that these things should not be in primary legislation, but they are in primary legislation, and they stay in primary legislation. Even if you try to take the effectiveness away by Clause 17, everything that I referred to in my speech, and that the noble Baroness, Lady Noakes, referred to in hers, is about the existing regulatory principles that are in the Act already. Therefore, I do not understand saying that they should not be in primary legislation—they are.

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[Baroness Scott of Needham Market (LD)]

I remind the Committee that when a group is led by a clause stand part debate, after the noble Baroness, Lady Bowles, has spoken, there is no second intervention from me at that point.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, oppose Clause 17 standing part of the Bill. Before turning to the detail, I will explain how Clauses 16, 17 and 18 fit together. They are not independent clauses. They operate as a single, interlocking structural package—an unholy trinity. Clause 16, which we have already debated, starts the move of day-to-day statutory principles out of operational decision-making and into a five-year strategy document. Clause 17 is the moment where it cuts. It removes the operational duty to apply the principles and the duty to explain how they have been applied. The principles remain in the abstract, but the visibility of their application disappears. Clause 18 then seals the trio by removing the remaining statutory mechanisms through which Parliament once saw how those principles were applied.

I said in Committee last week that deregulation of regulators inherently increases the regulation of markets. A regulator’s default setting is caution, not proportionality. That is precisely why Nikhil Rathi asked Parliament for political cover to take on more risk, because he knows that the system will not shift itself.

However, removing the operational “have regards” does not reduce that institutional caution. It simply removes the focus that keeps it directed at the right things. It removes accountability and removes Parliament from the role or possibility of providing support or cover with its eyes open, a direction of travel that Clause 18 then completes. The result is that Parliament loses operational visibility at the very moment when regulators are being asked to take on more risk. This is the context in which Clause 17 must be understood.

By deleting the principles from their operational position, the Government remove the statutory reporting loop. That deletes the audit trail that allows us to test what the regulators have done and why. Crucially, it also removes the only lever of accountability we have. We do not possess direction powers or hold budgetary levers. We do not have judicial review that bites on the substance of expert rules. All Parliament has is the ability to see, to question and, ultimately, to embarrass. An embarrassment card is a fragile card, but it is the final line of democratic accountability in the UK’s financial regulatory system. Clause 17 strips even that card from our hands. This is not simplification. It is a cultural turnabout that systematically switches off operational accountability.

Parliament is not trying to run the regulators. Our role is that of a critical friend: the only body that can speak openly what industry dares not, and test whether the principles that Parliament set are being applied in practice. Under the current framework, regulators must have regard to statutory principles in consultations, rules and supervision. Have they done this perfectly? No. They adopted a tick-box matrix that has become tedious and uninformative, but nothing prevents them shifting to thematic reporting, highlighting where specific principles matter most. Where the system has fallen down most is on the supervisory side, with an explosion of excess communications, overbearing information requests and a proliferation of Section 166 investigations.

Explanations around the “have regards” are the audit trail of how Parliament understands how a regulator weighed proportionality, firm size and sustainability of growth, or where climate change held relevance. A thoughtful narrative is far more informative than a boilerplate matrix, yet Clause 17 removes all requirements to explain or to show the rationale. In its place, the principles are relocated to a five-year strategy document that cannot be specific or enforced by the courts, and cannot be used to test an individual rule or a heavy-handed supervisory decision. This is not simplification; it is opacity. I pose the question: is the role of Parliament wanted?

At the Treasury Committee on 24 March 2026, the FCA’s CEO, Mr Nikhil Rathi, was asked how the system would handle the blistering speed of financial innovation. His answer was striking. He said:

“That is why I asked for a risk appetite from the Government and Ministers and Parliament so that we all know … what guardrails we are operating within, with appropriate democratic input and oversight”.


He also told the committee during the Sexism in the City inquiry that if the FCA were to set thresholds below that which Parliament had established in employment law, it would need a degree of political cover and agreement through Parliament. This is two sides of the same coin. The FCA is actively asking Parliament for guardrails, oversight, democratic accountability and cover because it is being pushed to accept more risk, and with more risk comes more failure or challenge.

However, Parliament cannot share responsibility if we are blinded from seeing how the principles are applied, and we cannot endorse greater risk-taking if we are denied information on where those choices bite in practice. When scandals happen, what angers Parliament most is when the writing was on the wall for a long time. Woodford funds is a textbook example, and London Capital and Finance is another.

The Minister may point to strategies, outcomes reporting, cost-benefit panels and annual reports, but the FCA itself has conceded that these are visibility tools, not accountability tools. Reports describe outcomes after the event, long after the harm has occurred. A strategy document can say all the right, glossy things, while the actual rules produce disastrous outcomes. We have seen before how FCA high-level assurance, even on specific cases, can look immaculate, while operational reality goes badly wrong. We saw that with British Steel pensions, with motor finance and with Woodford. Clause 17 remains the only operational hook that Parliament has to test whether the principles guided the procedure.

Last week, the Minister indicated that perhaps proportionality would be restored. If so, that is welcome, but a verbal concession is not an amendment and patching one leak does not fix a broken hull. If proportionality cannot be functional in a five-year strategy document, how can other principles survive, exiled there? Clause 17 still deletes the operational requirement that regulators must consider the desirability of sustainable growth. Removing this is nonsensical. The Government cannot possibly want unsustainable growth—growth that does not last.

Let us not forget the legal hierarchy. The secondary objective of competitiveness and growth sits higher up the statutory ladder. Precisely because that objective sits higher, there is all the more need to keep the sustainable growth consideration anchored in the operational functions. Right now, we see a political dash to deploy capital productively. If we encourage a reckless sprint when the underlying assets are not yet created, we are building not prosperity but a bubble, creating systemic fragility. So, restoring proportionality but deleting sustainable growth from sight collapses the government logic. It says that an audit trail for a firm’s compliance cost matters but an audit trail for long-term stability of the economy does not.

The consultation spoke about rationalising the number of “have regards”. It did not propose removing them from rule-making. It did not propose isolating them in a five-year strategy. It did not propose weakening the basis on which the courts can test whether regulators have properly considered Parliament’s intent. It did not analyse the interaction with the secondary competitiveness objective. When the Government consult on one minor administrative tweak but legislate for a far-reaching structural overhaul, that raises serious questions of fairness and due process.

I can see what the Government thought they were doing here. They believed that, by removing the operational “have regards”, they would free the regulators from excessive caution and allow the system to move more quickly. But, in practice, this clause disturbs the balance in a way that the Government have not accounted for. It removes not the caution but the focus and visibility that allow Parliament to understand how risk is being taken, to understand where it is being borne and to play its part in the structural balance of the system, which includes giving cover to the regulators when appropriate. That is the constitutional gap at the heart of this clause and why it represents not a simplification but a weakening of the framework of accountability on which our financial regulatory system depends.

This clause, along with Clause 18, has a serious impact on parliamentary scrutiny, as has been raised by the noble Baroness, Lady Noakes—so I will not go further into that. But these things collectively are why I oppose that Clause 17 stands part.

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Moved by

[Baroness Bowles of Berkhamsted]

88: After Clause 17, insert the following new Clause—
“Treasury statement of concern(1) Where the Treasury considers that rules or guidance made by the Financial Conduct Authority or the Prudential Regulation Authority are inconsistent with primary legislation or statutory objectives, the Treasury may publish a statement of concern.(2) Where a statement of concern is published under subsection (1), the Financial Conduct Authority or the Prudential Regulation Authority must, within 60 days, publish a response explaining—(a) whether it agrees with the concern, and(b) what action it proposes to take.(3) The Treasury must lay before Parliament any statement of concern published under this section, together with any response received from the Financial Conduct Authority or the Prudential Regulation Authority.”Member’s explanatory statement
This new Clause would enable the Treasury to publish a statement of concern where regulator rules or guidance appear inconsistent with primary legislation or statutory objectives, requiring a published response and Parliamentary transparency.

[Baroness Bowles of Berkhamsted (LD)]

In a way, it is a pity that I tabled this amendment, because it would probably be a whole lot more informative for us to go straight on to Clause 18. However, Amendment 88 would introduce a new mechanism that was suggested to me: a formal Treasury statement of concern. The idea is that it would fill a gap that has always existed—one that becomes all the more glaring alongside the opacity created by the Bill.

The FSMA 2000 settlement imagined a world in which Ministers were hands off and regulators were left to get on with it. That world has long gone. The Government are now highly interventionist in the name of growth. More generally, they signal priorities, express expectations and raise concerns, but almost all of that happens privately or through speeches and press releases that are approximate and not subject to parliamentary scrutiny.

My amendment would formally put the record straight. If the Treasury considers that

“rules or guidance … are inconsistent with primary legislation or statutory objectives, the Treasury may publish a statement of concern”

and the regulators must respond publicly within 60 days. That is all. It is not a direction, and it is not interference; it is a constitutional signalling mechanism. It would simply show that the Government have taken action on a concern, which otherwise might be unknown. The Government may say that they do not wish for such a mechanism—they do not have to use it—but legislation is not written for the preferences of a particular Minister at a particular moment in time; it is written for the system. The truth is that the Government already intervene with regulators, only informally, privately and without transparency. Why not have a formal system as part of escalation or as a pre-legislative tool?

There is also a practical point. Parliamentary time is limited, and correcting regulatory inconsistencies through statutory instruments can take months, if it happens at all. A statement of concern is a stage earlier. It would allow the Treasury to flag a potential inconsistency without immediately reaching for legislation. It would also allow the regulators to respond and, where appropriate, adjust course. It could also help resolve issues that arise when different things are said or interpreted differently in different places.

In that sense, this mechanism’s greatest strength may lie in its quiet deterrent effect: it would rarely need to be used because its existence would encourage early correction and avoid the need for statutory intervention later. A statement of concern provides exactly that. It would allow the elected arm of government to say transparently, on the record, “We see a potential inconsistency. We are not directing you, but we expect a reasoned response, and we think that this needs to be done publicly”. It would also have the benefit to the Government of them showing formally that they have taken a concern forward.

As I say, this was proposed to me, and I think that there is a point to it. There is a missing link. The Treasury often says that it does not interfere, but there has been an awful lot of correspondence and hugger-mugger between regulators and the Treasury recently in order to come forward with the growth strategy. This is a missing link. The power of Parliament has been eroded. I did not recognise a lot of the things that the noble Baroness, Lady Bi, said about how the system works. There is a missing link in terms of what the Treasury is able to do. I beg to move.

[Baroness Noakes (Con)]

My Lords, I will speak briefly in support of Amendment 88 in the name of the noble Baroness, Lady Bowles. It would be a useful addition to FSMA to have a specific power for the Treasury to issue a statement of concern; I particularly like the fact that it could be used without the full parliamentary process of regulations. As the noble Baroness may recall, when we debated the then Bill in 2023, the Treasury took a power to tell regulators to make rules. However, that power has to be exercised via regulation, so it needs to go through the whole statutory instrument procedure. It has not yet been used, as far as I am aware, but it is a useful backstop that the Treasury has if it wants to direct the work of the regulators, which is a perfectly reasonable thing for it to do in certain important areas.

The existence of the Treasury’s ability to issue a statement of concern would be particularly useful when interested parties were trying to get a point about things that were not working heard by the regulators. The ability to engage the Treasury in that would be very helpful, although I am sure that it would be used more as a background factor in the relationship than as an active part of the Treasury’s relationship with the regulators. I applaud the noble Baroness on her ingenuity in bringing this amendment forward.

[Lord Stockwood (Lab)]

My Lords, the accountability of our financial regulators is a serious matter, and Parliament rightly takes a close interest in how the FCA and PRA exercise their powers. We have extensively discussed the FSMA model of regulation today. It is the foundation of a system of regulation under which Parliament sets the regulators’ objectives, invests them with the powers that they need to further those objectives and sets out a clear system of governance and accountability under which the regulators are required to account for their actions and effectiveness in furthering the objectives that Parliament has set for them. As I said before, the Government remain of the view that this is the most appropriate and effective model of regulation available. It has served us well and is internationally respected.

The difficulty with this amendment, therefore, is that it would cut across the foundational principle of our regulatory architecture. The FCA and PRA are operationally independent bodies. That independence is not incidental; it is the source of their authority and credibility and, ultimately, their value to the consumers and markets they serve. Under the FSMA model, it is the responsibility of the regulators to interpret their statutory objectives. It is not the role of HM Treasury to do so. This amendment would, over time, erode precisely the independence that makes those regulators effective. Markets, firms and consumers need to know that regulatory decisions are made on the merits, free from political pressure. This amendment, however well-intentioned, risks compromising that assurance.

Of course, Parliament can and does challenge the regulators where it thinks they have done something wrong. Given that their authority ultimately flows from Parliament, the regulators take that incredibly seriously. Parliament can and does make its views known to the regulators on key issues. For example, after a highly critical report from the House of Lords’ Financial Services Regulation Committee, and in recognising the lack of consensus among the stakeholders, in 2024 the FCA dropped plans to change the way that it publicised ongoing enforcement cases.

The noble Baroness, Lady Neville-Rolfe, asked whether the Government are satisfied with the current framework. There is an appropriate requirement already set out in FSMA that is designed to support scrutiny and oversight and, in certain circumstances, to allow the Government to give the regulators some level of direction. For example, the Government can require a regulator to review one of its rules or to appoint an independent person to review those rules where they consider this would be in the public interest. The Government can also require the regulators to make rules but cannot direct their content or purpose.

The regulators have a statutory duty to keep their existing rules under active review. This is contained in Section 3RA of FSMA. Furthermore, the Treasury has an ability to direct regulators to launch an independent review of specified rules, with the outcome laid before Parliament. The regulators are also subject to robust wider parliamentary accountability, including through the information they are required to provide to relevant committees and the vital role those committees play in questioning the regulators and critiquing their work. Those are the appropriate channels for testing the consistency of regulators’ actions with legislation or statutory objectives, not a ministerial statement of concern, which starts to undermine the principles of independent regulation. I therefore ask the noble Baroness to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I still think that there is a missing link here, but I heard what the Minister said and it is what I was expecting: the Government are frightened that this would look as if they were going to undermine independence in some way. I fully understand that. There are other regulatory interventions that Ministers make with other regulators, so it is not an entirely off-the-wall idea. It certainly was not meant to be part of the routine kind of application of day-to-day accountability. A “very rare or never” kind of application is what was envisaged, but we have given it an airing. It is not going anywhere. With that, I beg leave to withdraw the amendment.

Amendment 88 withdrawn.

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[Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)]

My Lords, before we continue the debate, we have started group 6 and we have one more complete group to do. We are going to finish at 8.45 pm and I would hate to think that we would finish mid-group, but I am in your Lordships’ hands as to whether we do that.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, this is the third of the trio. Clause 18 is a deletion clause, the final clause in the trio that removes consideration of the regulatory principles from the context of actual rule-making. It strips out the guidance duties, reporting duties and consultation hooks that once gave Parliament visibility into how the regulators applied their objectives and principles. Let us look at what is being systematically dismantled here. There is some overlap here with some of the things that the noble Baroness, Lady Noakes, has addressed.

Clauses 18(1) and (2) delete the FCA’s and PRA’s guidance about their objectives—the very provisions which, as the Explanatory Notes admit, required the regulators to explain how they advanced those objectives. It is not a question that they still have to explain now; that has gone. Clauses 18(3) and (4) remove the explanations required on directions on consolidated supervision and authorised decisions. Clause 18(7) removes the FCA’s obligation to notify, consult or explain when issuing guidance relating to its objectives. Clauses 18(9) and (10) delete large parts of the FCA’s and PRA’s annual reporting requirements, one of the most sensible and accessible ways for Parliament to understand how objectives were dealt with in practice and would ideally be built upon. Clauses 18(12) to (14) remove linkages to other Acts of Parliament, including the auditor engagement duties that once provided an additional source of supervisory insight.

What is left? Guidance? Gone. Explanations? Gone. Participation? Gone. Annual reporting? Gone. Audit? Gone. These were the exact mechanisms through which Parliament and others scrutinised how the regulators applied their objectives and principles. Clause 18 removes them all. It is the inevitable consequence of the Clause 16 and 17 shift: the practical reality of decoupling principles from operational effectiveness and removing Parliament’s line of sight. It leaves us with no checks and absolutely no balances. For these reasons, I oppose Clause 18 standing part of the Bill.

[Lord Pitt-Watson (Lab)]

My Lords, I will speak to Amendments 93 and 94. I have not audited a bank or sat on a bank board, but I was a member of the Sharman committee that looked at the problems with auditing following the global financial crisis. I sat on the board of one of the big four auditors, chairing its public interest committee, and I talked to a number of partners who audited the banks.

I think that we agree that audit is absolutely a foundation stone for the integrity of the capital markets. For those who are interested, it was part of the settlement following the collapse of the City of Glasgow Bank in 1878 that we would have audits of limited liability banks. It is particularly critical where entities are highly geared or where there is a considerable element of judgment in determining their value. If we look at the banks, they are hugely geared. People like to talk about the common equity tier 1 ratio, but if we look at the gearing that most companies use, it is the equity versus the liabilities. For a typical bank, equity is about 6%: on the back of that, you can borrow £94 and lend £100. That means that, if you have overvalued your assets by 3% and undervalued your liabilities by 3%, you end up with no equity whatever.

This is a really sensitive calculation and, historically, it would have been made with a degree of prudence and conservatism. Prudence and conservatism have now gone as guiding principles, and valuations are done neutrally. For example, this would allow a bank to declare a profit on a zero-interest credit card, on the grounds that it can bring forward the profits it thinks it will make in future. The noble Baroness, Lady Bowles, has been great in raising these issues for some time.

There are of course huge temptations to optimism. Indeed, it is surely testament to the professionalism of our bankers, and the independent agents we employ to monitor and control bank behaviour, that banks have not got into greater trouble. There are four such agents: the independent non-executive directors; the auditors; the investors and the regulators. Many more resources are devoted to auditing banks than to regulating them, and vastly more than fund managers devote to their role as stewards. The auditors have inside knowledge and huge expertise, and it is precisely that insight, given independently, that regulators need in order to play their role.

I think that that was recognised by the noble Baroness, Lady Noakes, when she suggested that the PRA “may” ask to speak to the auditors. The problem is that the auditors have a delicate job: they are referees. The report is done for the investors, but they need the trust of the audited entity. Indeed, they are, in effect, appointed by the audited entity, and they even sometimes describe the audited entity as a client. They are unlikely to go to the regulator without having profound concerns.

Regulators may find it helpful to call in the auditors because of problems that are visible to them: the known knowns. Under those circumstances, this amendment would of course work. However, what the regulator really needs to know is the unknown knowns: something that is known by the auditor, who has gone inside, but not known by the regulator. That is why it makes sense to mandate that the regulator “must” talk to the auditor to hear their concerns, to pick up potential emerging problems before they become critical, and to understand how the auditor judged the numbers to be true and fair.

The audit is the foundation of the integrity of our capital markets. For auditors to have material knowledge of a bank’s position that is relevant to the stability of the system and for that not to be known by the regulator seems to be completely perverse and potentially very dangerous. With that perspective, I wonder whether the noble Baroness, Lady Noakes, might be content with Clause 18, on audit reporting, to remain as it stands.

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[Lord Stockwood (Lab)]

I will have to come back to the noble Baroness. The broader requirement is that we are trying to streamline the process to take the regulatory burdens away. We recognise that we need to give a precise answer on that.

[Baroness Bowles of Berkhamsted (LD)]

The Minister mentioned taking away regulatory burdens, but the Government are actually taking away regulator burdens. They are not the same thing.

[Lord Stockwood (Lab)]

They are not the same thing. The approach we are trying to take is to streamline duplication while not in any way detracting from the overall process. That is the principle we are trying to follow here.

Amendment 89 would preserve the statutory requirements on the FCA and the PRA to give guidance about how they intend to advance their objectives. This requirement was introduced by the Financial Services Act 2012, and since it came into force, both the FCA and the PRA have published guidance fulfilling this requirement, which is updated when necessary. For example, most recently the PRA updated this approach to policy statements in February 2025. Removing these statutory requirements will not prevent the regulators giving such guidance where they consider it beneficial to do so. These requirements would also be duplicative with the new long-term strategies, which will set out the regulators’ approach and priorities for advancing their objectives, as well as other statutory publications, such as the regulators’ annual reports.