Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I have just one brief point. I agree with the comments so far made that this may not be the appropriate place to deal with the whole problem of delegation, because this deals with revocation, although the amendment sensibly deals with what is inevitable, which is the replacement. It seems to me that parliamentary scrutiny is essential. We need to come back to this time and time again.

It is essential because, unlike the position of a Minister or that of a Government, we have, first, the issue of the accountability of regulators and, secondly, we do not want to politicise regulators. That is Parliament’s job. Therefore, we have to scrutinise this whole area, where we are moving financial services to regulators and away from being dealt with largely through a political process in the European Union. We are hoping to make great improvements, but the one thing we are losing is the input of the political process. One cannot pretend that the direction of financial services policy is not a political question as well as a regulatory question. Politics should be for this House and, although I hate to use this word, we should not taint the regulators with politics.

[Baroness Kramer (LD)]

My Lords, I must agree with every word that the noble and learned Lord, Lord Thomas, has just said. I thank my colleague and noble friend Lord Sharkey for putting this amendment where it is, because the fundamental constitutional issue that underpins this Bill is probably one of the most crucial that we will address, not just in the next days of debate but, frankly, as a Parliament. I think that if the public had any sense of the authority that is now, in a sense, being passed to regulators without accountability—and to some extent to the Treasury without accountability—frankly, they would look at us and say to Parliament, “That is a dereliction of duty. We expect you to be responsible”.

This is not just a political process but part of a fundamental democratic process. As others, including the noble Lord, Lord Naseby, have said, what could be more fundamental than framing an industry that not only determines so much of our national economy but, when it goes badly wrong, can completely undermine that whole economy. I very much support the amendment brought by my noble friend. I know that it was tabled to trigger discussion and I look forward to the further debate that we will have later.

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[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I will speak first to Amendments 1, 244 and 245, before turning to the government amendments in this group.

With respect to Amendment 1, the Government are seeking the agreement of Parliament to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation, whereby the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.

As the noble Lord, Lord Sharkey, noted, it is not the Government’s intention to commence the repeal of retained EU law in financial services without ensuring appropriate replacement through UK law. That commitment was made by the Economic Secretary to the Treasury, including to the Treasury Select Committee and, as the noble Lord noted, in our memo to the DPRRC. His Majesty’s Treasury will commence a revocation only once appropriate secondary legislation and rules are in place.

Parliament will therefore play a key role in scrutinising any replacement secondary legislation. Where the Treasury replaces retained EU law through the powers in the Bill, this will almost always be subject to the affirmative procedure, with some limited exceptions specified in the Bill.

I recognise the wider debate in the House of Lords about secondary legislation and its scrutiny. I will resist the invitation from my noble friend Lord Naseby for this Bill to be the place where we address that wider debate. I point out to noble Lords that, in its report on the Bill, although the DPRRC did not bring to the attention of the House the delegated powers related to retained EU law, it did report on one specific issue regarding hybrid instruments, which I will respond to shortly. The committee commended the Treasury for

“a thorough and helpful delegated powers memorandum.”

That is not to say that the question of parliamentary scrutiny of the provisions in the Bill and the regulations that will be made under it is not important. I know that we will return to it many times during this Committee.

The Government have made efforts to set out how the framework provided by the Bill will work in practice. As part of the Edinburgh reforms, the Government published their approach in a document entitled Building a Smarter Financial Services Framework for the UK, which makes it clear that they will carefully sequence the repeal to avoid unnecessary disruption, and there will be no gaps in regulation. The Government have also recently published three illustrative statutory instruments under the powers in the Bill to facilitate scrutiny of the powers under which they will be made in Parliament.

It is also worth noting, as the noble and learned Lord, Lord Thomas of Cwmgiedd did, that large parts of retained EU law will be replaced by the regulators through their rules. The regulators have the tools and expertise to make rules at pace, in line with their statutory objectives, within a model of appropriate parliamentary scrutiny and oversight. Clause 36 of the Bill supports Parliament in that scrutiny and oversight, requiring the PRA and the FCA to notify the Treasury Select Committee when they consult on rules and to respond to any representations made by that Committee. That is a specific element of the provisions to which we will return at a later stage in Committee.

Ahead of considering the Bill, the Treasury Committee itself considered the appropriate model for parliamentary scrutiny of regulatory rules, concluding that effective scrutiny of regulatory proposals should be carried out through a targeted approach, with Parliament scrutinising proposals in more detail where there is a public interest in its doing so. The Government consider that the provisions of the Bill are consistent with the recommendations of the Treasury Committee.

I turn now to Amendments 244 and 245 tabled by my noble friend Lady Noakes. I can assure her that the Government intend to act at pace to complete the repeal and replacement of retained EU law, but we must also act in a way that allows everyone to adapt to the new model. That will often require the regulators to make replacement rules, which must be done in line with the appropriate procedures for consultation and engagement, as noble Lords have pointed out. As my noble friend Lady Altmann pointed out, there is a balance to be struck between the pace at which we undertake that work and the proper processes for consultation and scrutiny that that will need to be subject to.

[Baroness Kramer (LD)]

I am sorry to interrupt, but perhaps the Minister could clarify something we discussed before. What she describes puts Parliament in the position of a consultee, which I do not believe is the appropriate role for a democratically elected Parliament. Can she confirm that that is exactly what she is saying?

[Baroness Penn (Con)]

No, that is not what I am saying; I am saying that we will have procedures in place to allow Parliament to scrutinise legislation. We will also have procedures in place to ensure that, as part of that, relevant parliamentary committees can be notified of work by the regulators. That is just one aspect of how Parliament will conduct its role in the scrutiny of financial services, legislation and regulation. While the notification of consultations is one aspect, there are many others, such as the procedures for secondary legislation, the other procedures that Select Committees have to scrutinise the regulators’ work, the procedures for the provision of annual reports laid before Parliament, and others. So Parliament will be notified of consultations, but that does not imply that the Government view Parliament simply as a consultee in the process.

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[Baroness Penn (Con)]

No, it does not. This comes back to the point about prioritisation. It represents the Government’s initial prioritisation of the measures where they think that making amendments or using the powers under this Bill to repeal the retained EU law and put in place regulator rules under our new model would have the biggest or most important effect. There will be subsequent work to do after what is set out in that vision, but in sequencing it is important that we direct our efforts and resources to measures that will make the most difference.

My noble friend asked how the regulators and the Government can be incentivised to complete the replacement of EU law in a timely way. We are working closely with the regulators to co-ordinate the programme to deliver the rules and legislation that will be necessary to enact the repeal of retained EU law. Where necessary, the Treasury could use the power under Clause 28 of this Bill, which sets requirements on the regulators to make rules in specific areas of regulation. So there would be that option within the powers in the Bill.

The noble Lord, Lord Davies of Brixton, asked about the difference in approach in this Bill from that in the Retained EU Law (Revocation and Reform) Bill. Unlike the approach taken in that Bill, this Bill repeals retained EU law in financial services, as set out in Schedule 1. The Government will continue to repeal and replace the contents of Schedule 1 until we have an established a comprehensive FSMA model of regulation. It will take time for regulators to make, and for industry to adapt to, technical and less important rules, as well as delivering major reforms. The Treasury developed a bespoke approach to financial services, given the existing role of the regulations to preserve that and bring the regulatory regime into line with the FSMA model.

I hope I have addressed the points about the desire to complete this work in a timely way, the need to balance that with resources for regulators and, indeed, industry to adapt to this change, and the importance that the Government place on therefore prioritising the work so that those reforms that have the biggest impact will take place earliest.

I turn to the government amendments in this group, Amendments 20, 28, 29, 242 and 243, which are all in my name. The Treasury undertook an extensive exercise to identify retained EU law relating to financial services to be repealed by this Bill, listed in Schedule 1. Late last year, the National Archives identified additional pieces of retained EU law across the statute book, some of which relate to financial services. The Government have also, through their own work, become aware of a small number of additional pieces. Amendments 2 to 20 make changes to Schedule 1 as a result of this. Government Amendments 2 to 16 and 18 add a number of statutory instruments, and Amendments 19 and 20 place three provisions in FSMA into Schedule 1 to be repealed. Amendment 17 removes one statutory instrument from the schedule, which was included in error, due to containing a small amount of retained EU law alongside largely domestic legislation.

I reassure the noble Lord, Lord Tunnicliffe, that every effort has been made to identify all legislation that should be repealed though this process. If he looks at the balance of what we have identified and what is in these amendments, it was a comprehensive job. None the less, to be as transparent as possible, when we find further measures that would be provided for under this Bill, we have sought to include them by way of amendment.

Amendment 28 clarifies the legislative effect of Clause 3, ensuring that the Government have the necessary tools to create a comprehensive FSMA model of regulation. It does so by clarifying that the Treasury can use the powers in Clauses 3 and 4 to create powers to make further regulations. Under the FSMA model, the Government are responsible for setting the regulatory perimeter via secondary legislation. There may be times in future when, for example, the Treasury will need the ability to update key definitions that sit within legislation restated under Clause 4, to clarify what sits within the UK’s regulatory perimeter.

Amendment 29 makes a technical fix to the explanation requirement in Clause 6, requiring the Bank of England to explain how updates to its rules are compatible with its new regulatory principles, introduced by Clause 45.

[Baroness Kramer (LD)]

May I ask again for a bit more clarification, which I specifically asked for on Amendment 28? Is the Minister saying that this is a power for the Treasury to amend primary legislation outside the Bill through secondary legislation designed to enhance the powers of the regulators? Is that what this is? I tried reading the letter but it did not get me any further.

[Baroness Penn (Con)]

My understanding is that Amendment 28 contains powers to provide for amending secondary legislation, not primary legislation. I will seek a fuller explanation and I suggest that we briefly degroup that amendment, if we reach it today, to provide that explanation for the noble Baroness, so that she has further clarity. I do not think I will provide it for her at this point.

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It is not a matter of looking at whether there might be public interest. This Parliament knows that the public interest is in the lives of people—the heating in their homes, the food they eat, the materials that make the things in which they live, the vehicles in which they travel and the electric cars they hope to buy. All these things come down to commodities, and therefore we need to pay a lot more attention here. I hope that, by the time the Bill finishes its passage, we have made changes.

[Baroness Kramer (LD)]

My Lords, I will speak very briefly to the amendments tabled by the noble Baroness, Lady Worthington, because my noble friend Lady Bowles has set out the position very well.

I am concerned that we see, in parts of this new legislation, a very libertarian view of how financial markets should be structured. Even libertarians will say to me, “Look, it all works in the long run, but in the short run there are an awful lot of victims and collateral damage”. Because of that, we are asking the Government to go back and relook at the changes they are proposing. The developing world, including some of the poorest people, will suffer from the volatility of many commodity prices. Particularly where that volatility is artificially created, it seems to me that we ought to expect the regulators to play a disciplined and effective role.

While I must admit that most of this legislation is beyond my comprehension—the markets are extremely complex—I am rather concerned that regulators, whom the Minister herself has said have great expertise, knowledge and understanding, should not be in a position to apply those to ensure that there is no market abuse. I will leave it at that, because all that has been far better said by others.

My Amendment 27 in this group amends the Minister’s Amendment 26. It is another probing amendment, because I am not quite sure exactly what the Minister’s amendment says. My noble friend Lord Sharkey and I were both very involved in the Financial Services Act 2012, which set in place the framework for regulation of behaviour by central counterparties. That was after the 2007-08 crash, which was, as much as anything, a severe liquidity crisis. The chaotic nature of the derivatives market meant that no particular financial institution knew whether the financial institution with which it would normally do business was about to collapse, because, in turn, it had complex derivative products with yet another financial institution that was about to go under.

I am very supportive of the decision that was made, obviously at a global level, to channel virtually all financial derivatives, particularly the standard ones, through central counterparties. The largest of those central counterparties was of course the London Clearing House. I think we all recognise that, in doing that, a great deal of risk cumulated at the central counterparty. That is mitigated by the central counterparties themselves by requiring collateral.

However, to give the Committee a sense of the size of this market, I was looking at a typical number for outstanding financial derivatives on any one day. It is approximately $600 trillion, so it is vast, and a good part of that is now run through central counterparties. The problem is that there is not enough quality collateral in the whole wide world to meet margin calls from the various central counterparties, even after they have gone through a compression or netting process, which of course was led by London. Part of the reason that London is so dominant in this arena is that it has such a large market share.

The way in which the sort of fiction works—that collateral sits in place to cover risk—is that low-quality collateral can be used in these cases through a mechanism of discounting it for its embedded risk. Frankly, there is a point at which you can discount junk as much as you like but that does not turn it into high quality. It might do so on paper or by calculation, but it does not in reality, so there is always a weakness and high risk at the central counterparties.

In that 2012 legislation, we were attempting to put in place a resolution mechanism for the moment when central counterparties went sour. It is easy to put a resolution mechanism in place when a single member fails, because the other members of the central counterparty bloc are usually in a position and have sufficient financial strength to step in, and there are requirements under that resolution waterfall to be able to do so. But when the problem is at a systemic level, the waterfall does you no good at all. Most of the amendments here are meant to strengthen the waterfall, but the reality is that when there is a systemic problem, the waterfall collapses in a matter of seconds—and the ultimate backstop is, basically, the taxpayer. With the numbers that I am talking about, your Lordships can see that the exposure for the taxpayer is very significant.

All central counterparties across the globe, no matter where they are located and what rules they sit under, tend to have exactly the same membership. So if one CCP goes, you can pretty much count on all the rest of them going. In that environment, I am trying to understand the changes that the Minister is bringing forward under Amendment 26. I had understood that it was the Treasury that gave equivalence status to third-party central counterparties—I could be wrong because I am so out of date—if advised by the relevant regulator, which in this case would be the Bank of England. If I understand Amendment 26 correctly, it effectively extends the equivalence recognition to EU CCPs from one year to three years and six months. That is in primary legislation and we can make the decision whether we think that is appropriate.

I am rather troubled by proposed new paragraph (4), to be inserted by proposed new sub-paragraph (3) in Amendment 26, which says:

“The period determined by the Bank of England in a particular case”


under the rule I just described

“may be varied by the making of a subsequent determination.”

Can the Minister help me understand what on earth that means? Does it mean that equivalence can be extended by a decision of the Bank of England, say from three and a half years to 10 years? Does it mean only that the Bank of England could shorten the period of equivalence recognition and that it is limited by the three years and six months? I can see no way that there is any mechanism at all for scrutiny around this issue, even though it can represent a very serious chain of risk.

I just need some help to try to understand what power is being given to the Bank of England. It is a little like the previous question on the earlier amendment. What exactly is this power? What does it enable the Bank of England to do? What kind of scrutiny is there? Is there a sunset clause to it? How open-ended is this? I am just trying to understand those implications, so I would be very grateful if I could have the Minister’s help in doing that.

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[Baroness Penn (Con)]

It might be wise for me to write to the noble Baroness to address that specific point. Under the overall framework for the regulators, they need to make their rules in a way that is consistent with international standards, to which the noble Baroness referred. That would be the additional way in which one would have that reassurance, but it is worth writing to set out the point for her with more clarity.

The noble Baronesses, Lady Bowles and Lady Worthington, talked about whether the FCA, in acting to advance its objectives, would have sufficient grounds to intervene in these markets. The Treasury is confident that it would, and an example of humanitarian grounds for intervention was given. We are confident that the FCA could intervene on humanitarian grounds, acting in line with its objectives, but perhaps I will also write to the Committee to expand on that further.

The noble Lord, Lord Sikka, somewhat pre-empted me: I was just about to turn to Amendment 41. I am afraid that the Government will disagree with the noble Lord and the noble Baroness. Arguments were advanced by my noble friend on this point. Amendment 41 would require all listed companies to disclose how much revenue they make from trading commodity derivatives. However, listed companies are already required to publish comprehensive information about their operations and finances as part of their annual reports. The Government view that as sufficient.

It may be worth turning to the questions asked by the noble Baroness, Lady Kramer, on government Amendment 28, if the Committee is happy for them to be addressed here. Does the power in Clause 3 allow the Treasury to amend primary legislation to give us or the regulator new powers? The power in Clauses 3 and 4 to modify legislation, including to create new powers for the Treasury or regulators, is limited to retained EU law, as set out in Schedule 1. Clause 3 powers cannot amend primary legislation.

The powers in Clause 4 can be used to move provisions from retained EU law into primary legislation. The power in Amendment 28 applies where the Treasury is making transitional amendments to retained EU law or restating it. It is designed to allow, for example, the Treasury to give itself a power to update a definition or threshold in legislation. This mirrors delegated powers for the European Commission in retained EU law. While it would be possible to deliver the same outcome by reuse of the powers in Clauses 3 and 4, the Government consider it more appropriate to create a specific power to allow for such updates to be made, where they consider it appropriate. When creating such powers, His Majesty’s Treasury will have the ability to specify the procedure for any statutory instruments made using the new power. The Treasury will follow the same approach to determining the appropriate procedure as it has in the Bill. Where the Treasury exercises the power to create further powers, the instrument doing that will be subject to the procedure specified in Clause 3(9), which, in the vast majority of cases, will be the affirmative power.

[Baroness Kramer (LD)]

The Minister has been very helpful, but I will ask the question that I think the noble Lord, Lord Tyrie, would ask if he were still in his place: is there any kind of sunset clause on this?

[Baroness Penn (Con)]

There is no sunset clause on this power, just as there is no sunset clause on the powers in Clauses 3 and 4, so it is consistent with the approach we have taken with those other powers.

I thank the Committee for allowing me to address those points in this group. With that and the further information I shall deliver to the Committee on some of the questions from the noble Baroness, Lady Worthington, I hope that she will withdraw her Amendment 21 at this stage and will not move her other amendments.

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[Baroness Kramer (LD)]

My Lords, I fear that if we were to follow the amendment from the noble Viscount, Lord Trenchard, we would indeed permit naked short selling. Like most people, I have no problem with short selling in highly liquid markets.

[Viscount Trenchard (Con)]

I am a little surprised that the noble Baroness is taking my name in vain here. My amendment is not about short selling; it is about listing.

[Baroness Kramer (LD)]

I apologise; it was the noble Baroness, Lady Noakes. I have attacked the wrong conspirator, as it were. I say to her that my concern, from listening to various people argue for changes in the rules that govern short selling, is that that is exactly what they have in mind, the argument being that if we allow short selling then illiquid markets will suddenly become much more liquid because many more players will be attracted into that particular end of the market. There is a great deal of risk at play, so I am quite nervous about making that kind of change. We always assume that the investors who would engage in these products would be highly sophisticated and understand fully the risks they are involved in, but the practical reality that we see in everyday life is that many people get involved who, frankly, have insufficient understanding and find themselves very much at risk.

It is for a similar reason that I say to the noble Viscount —I think accurately this time—on ending regulatory criteria for listing, that the listing issue is quite complex. I was one of the people who agreed with the IoD—I do not agree with the IoD all that often—on the changes that the London Stock Exchange made to enable a secondary listing for Aramco. It did not end up with the business, but the IoD was very concerned that the LSE compromised its approach to corporate governance to get that listing, which would obviously have been a highly profitable activity. That issue made the IoD very irate. It described it as

“an opportunistic attempt at boosting short-term primary issuance which ignores the longer-term implications for the overall UK corporate governance regime.”

This is actually quite a contentious area, so removing it completely from the regulatory sphere strikes me as rather dangerous.

I will bring my comments to a halt, except to say to the noble Lord, Lord Stevenson, and to the Government that the noble Lord should not have to fight such a difficult battle to try to deal with such a potential abuse. I wonder whether the Minister might, on a very personal basis, take up the cudgels here, because Ministers sometimes are in a position to get the relevant action that has been sitting many pages back on the back burner. I remember the battles we had to get rid of payday lenders. In the end, the noble Lord, Lord Sassoon, working very closely with all parts of the House on a very personal basis, was able to bring in the legislation that brought an end to that kind of abuse of consumers. The Minister has a very good precedent in the noble Lord, Lord Sassoon, and his capacity to use financial services legislation to deal with an aberration that puts people at risk.

[Lord Tunnicliffe (Lab)]

I am not persuaded by the amendments in this group, apart from the one from my noble friend Lord Stevenson. Obviously, I shall listen to the debate and check Hansard before we come to Report. My noble friend’s amendment may not be the right way to address this problem, but, in all honesty, it has been five and a half years since this issue was spotted. There has been a perfectly good Law Commission report, as I understand it, which makes a very strong case. It is no good saying that we will cover this elsewhere, or that it has to be integrated. There is a solution to this problem, and it is important that the solution happens in this Bill. I strongly commend to the Minister that she “does a Sassoon” and comes up with an acceptable compromise so that an end is put to what I would call almost an evil practice.

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[Baroness Noakes (Con)]

My Lords, I understand regulators’ desire to have more insight into the risks that critical third parties present to the provision of financial services. The regulators have been fretting about the provision of cloud services for some time—not always with good cause, because cloud providers offer some significant benefits to financial services firms in a range of areas. The PRA and the FCA have already increased their focus on critical third party suppliers by way of operational resilience requirements on regulated firms, and they already have the ability to get information via the regulated firms.

I was not hugely surprised to find a regulatory power grab regarding critical third parties in this Bill, but I was genuinely shocked to find 10 whole pages of legislation giving the regulators huge powers over critical third parties: the power to make rules, a power of direction, information powers, censure and disciplinary powers, and so on. This is typical regulatory gold-plating of the kind that I hoped we had left behind when we exited the EU. The Treasury ought to be on the alert against this kind of thing, rather than being complicit in it.

The regulators will have to exercise real care when they use these new powers. It would be a very bad outcome if some—for example, the cloud providers or the major ICT providers—decided to exit the UK financial services market because of heavy-handed regulation. If that happened it would likely increase the concentration risk within the financial services sector, as well as reducing competition in the provider market.

My Amendment 37 is in fact extremely modest. TheCityUK has called for one of the regulators to be in the lead for any critical third party, so that the likelihood of duplicative requirements and other burdens between the regulators involved would be minimised. TheCityUK is not comforted by the co-ordinating duty in the new Section 312U of FSMA because just about everybody who has been involved in financial services has been on the receiving end of unco-ordinated regulator action, despite the existence of co-ordinating duties already in FSMA. Those duties have not been a resounding success, and I may return to the idea of a lead regulator on Report.

For today, my Amendment 37 would delete subsection (3) of new Section 312U and replace it with a more third-party friendly version. Subsection (3) says that the duty to co-ordinate

“applies only to the extent that compliance with the duty does not impose a burden on the relevant regulators that is disproportionate to the benefits of compliance.”

This is typical of regulation, in particular financial services regulation. It sees things through the prism of the regulators, not the persons impacted by the regulation. My amendment would replace this with a requirement to minimise the burden placed on critical third parties so far as is reasonably practicable.

I do not regard this rebalancing of the new rules as a radical proposition in the context of the radical new powers that are being taken. The impact on third parties really does need to be taken into account, and it is curiously absent from the 10 pages of the Bill dedicated to the new powers over critical third parties. The need for rebalancing of the new regulatory provisions ought to go wider than the duty to co-ordinate, and I should probably have drafted something broader to consider in our Committee today. My purpose is to probe how the Government see the new provisions impacting on third-party suppliers, not just on the regulators, and whether they even acknowledge that they might have created something of a monster in these new rules. I beg to move.

[Baroness Kramer (LD)]

My Lords, I shall speak only very briefly, because I have a great deal of sympathy with the proposition that the noble Baroness, Lady Noakes, puts before us. The resistance in the industry to rules is not to the principle of the rules but to the way in which they operate, and the cumbersome methodologies—the dotting of every i three times and crossing of every t four times—that drives people completely insane. It has undermined respect for both the regulator and its effectiveness. The noble Baroness, Lady Noakes, said she had something broader in mind, and she will find amendments coming forward later, particularly in the name of my noble friend Lady Bowles, focusing on the issue of efficiency. I think that is something we would all like to see.

There are those who would like to see less regulation per se, and those like me who are very cautious about having less regulation. Obviously, less regulation may release animal spirits and innovation, as the noble Lord, Lord Naseby, pointed out earlier; in fact, he did not talk about animal spirits, but he talked about innovation. The downside is that light-touch regulation could leave you with a financial crisis, an awful lot of victims and, potentially, an undermined economy. It is very asymmetric. But efficiency ought to be built into the very heart of this, and regulation ought to be designed to put a minimum operational burden on the various parties affected. If we can adopt that somewhere as a principle in the Bill, it would be exceedingly useful.

[Baroness Penn (Con)]

I thank my noble friend Lady Noakes for her amendment. It is a good opportunity to talk about the Government’s proposals for mitigating the systemic risk posed by critical third parties in the finance sector, such as cloud service providers. The Government agree with the spirit of what my noble friend and the noble Baroness, Lady Kramer, have said.

The critical third parties regime has been designed with the aim of minimising the burden placed on these parties, while mitigating the systemic risks that could be posed by the use of these services. Rather than bringing, for example, a whole cloud services provider into the financial regulators’ remit, the regime instead gives the regulators powers over only the services that a critical third party provides to the financial services sector. I believe that that approach contrasts with the EU approach known as DORA, which I thought was the name of my parents’ dog. DORA bears similarities to the UK’s approach, but I am told that it is less proportionate than our regime, which targets only the services provided to the finance sector and not whole firms.

Proportionality and resource-effectiveness are therefore built into the design of the regime. I draw all noble Lords’ attention to the obligations that the regulators already operate under, including those resulting from FSMA, and the Bank of England Act 1998. In addition to public law obligations to act reasonably and proportionally, the regulators must also have regard to their regulatory principles. These include the principle that burdens or restrictions imposed on a person should be proportionate to their expected benefits. As the noble Baroness, Lady Kramer, indicated, we will come back to this question of proportionality and effectiveness as we go through our debates in Committee.