Financial Services and Markets Bill [HL]

Baroness Lawlor Excerpts

Committee stage
Wednesday 8th July 2026 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, it has been an unusual experience to have had a debate with two sides to it on the Bill; the Minister must be pleased about that. I am afraid that I sit firmly on the fence—indeed, on the ring-fence. I am in two minds on this issue. Ring-fencing requirements were put in place after the financial crisis for very good reasons. You can argue that they went too far and that, to some extent, they have been overtaken by other regulations and that they perhaps overburden and create some restrictions on the banks. But, in the Bill, the Government recognise that.

On the other side of the equation, the economy and the banking system are currently facing a whole range of threats, which are arguably greater than have been faced at any time since the financial crisis in 2008. We have the private credit situation and the impacts of AI, to name just a few. Is it really the right time to remove ring-fencing entirely?

I am also not entirely convinced by the argument that removing ring-fencing would have that much impact on domestic lending. Domestic lending is inside the ring-fence. In fact, you could argue that it would have the opposite effect, as banks could then use deposits for more risky non-lending activities. Therefore, I confess that I find that argument unconvincing.

I am open-minded, but I am more minded to support the government proposals to loosen the ring-fencing rules and introduce some flexibility to them. I do not think I am ready to support complete removal at this stage. However, I am drawn to Amendment 159, which requires a consultation and assessment to take place before the proposed changes can be made.

[Baroness Lawlor (Con)]

My Lords, I am delighted to have the debate, and I am very grateful to the noble Lord, Lord Pitt-Watson, for raising questions which have encouraged debate, but I support my noble friend Lady Neville-Rolfe’s opposition to Clause 39 standing part of the Bill. I also support her Amendment 160A about ring-fencing.

Clause 39 gives the Treasury powers to loosen the ring-fencing scheme. It has been anticipated, as others have said in this debate, by a number of announcements and reports, not least the Skeoch report—I hope I have pronounced it rightly, in the Celtic way—and the announcements this year by the Treasury itself. All of these point to and address a real problem. The question before us today is whether the Government’s solution in their Clauses 39 and 40 is sufficient to deal with the problems raised by reviews and announcements going back to the 1 March 2022 independent review of the working of the scheme.

I have a concern. The clause may seem to be the answer to some of the serious questions raised in that review and other concerns, and allow for the mitigation of problems arising from the ring-fencing regime—to allow for “proportionate” changes, to use a word which continues to recur throughout the assessments of how the scheme is working. However, in essence, it protracts the dominance of the regime and the regulators in what should be business decisions under good law, which is the spirit of the common law. It is a law which is permissive of risk-taking rather than prohibitive of the spirit of enterprise, or looking over the shoulder to the precautionary principle.

Officials and regulators can be very intelligent, competent and talented people, but it is not part of their skill set to drive through an entrepreneurial idea from the drawing board to production, sale, expanding their markets, developing a business, taking risk, and hiring and training people—which is an additional cost—while all the time keeping on top of the services sector, one of the fastest growing sectors in the UK and a jewel in the crown. Enabling officials to decide which activities should or should not be prohibited, and under which circumstances, does not tackle the fundamental problem to which the ring-fenced regime has given rise: the artificial and contrived structure. We are dealing with a structural problem—an artificially separated structure.

This structure inhibits the financial services sector from functioning in the best possible way, as an enabling hub for the whole UK economy, to allow small businesses, in particular, to grow and credit to flow. It is unlikely to remedy what we are dealing with, the fundamental problem of risk aversion imposed by ring-fencing law on businesses and the endemic risk aversion in the operation of the law.

[Lord Pitt-Watson (Lab)]

I wonder whether there might be some confusion here. The thing about the ring-fence is that there are activities within it that the Government are promising to bail out. Those things are being insured. By the way, the move in the ring-fence proposed by the Government will extend these a little, but they include lending to the small businesses that the noble Baroness has talked about. The question is: are we going to be rid of that? Is it the case that the implicit guarantee that the Government are giving can go to any other activity that the bank decides that it wants to undertake? That could include, although Skeoch would say it is not a problem right now, the sort of proprietary trading that brought the American banks down in 2008—of course, they had been allowed to do that because Glass-Steagall had been removed 10 years earlier. What we are talking about here is: how much of bank activity will the Government stand behind? As Mervyn King said, we must make sure that it is just the very most important things.

[Baroness Lawlor (Con)]

I thank the noble Lord, but it is about where the line is drawn in law, so that businesses can be certain and have predictability, because activities change day by day.

[Lord Pitt-Watson (Lab)]

With respect, that is what Skeoch is recommending and what is being allowed in what we are being asked to accept here—there is an extension of the ring-fence. He is saying, “Look, there are other important activities that go beyond the ring-fence that are administratively complicated for the banks. Please can you move this? Also, can you move this in a way so that it doesn’t need to go to primary legislation any time it needs to change, because all these things are moving?” What we are trying to do here is recognise that the independent commission is run by a senior financial businessperson—he used to run Standard Life—whom we are going to back. He indeed said that, in the long term, you may want to think about how ring-fencing goes together with the resolution regime, but that is not for now. He certainly did not say that we should abandon it.

[Baroness Lawlor (Con)]

I thank the noble Lord, but he was speaking about 2022, which was light years away for the financial sector. Things have moved on and have changed. We have different regimes in place now. As my noble friend Lady Noakes has explained, the banks are now resolvable. There are other schemes that will avoid the problems for the taxpayer. That should be borne in mind.

I had better finish quickly. That is my objection. It is about who decides for businesses. If you have a ring-fence, ultimately, no matter how much you relax it, the Government are never going to have the knowledge of the sector, and the detailed tactical and strategic ability, to be ahead of the game and make businesses grow. They will always play slightly safe, but maybe they are over-safe.

I will finish on why we need to repeal the ring-fence, not just why Clause 39 is not good enough. In a sense, we are seeing the inhibition of risk-taking and a structure that inhibits it. As other noble Lords have pointed out, we do not have parallels in other economies. I know that there is the Volcker rule in the US, but Switzerland has solved its “too big to fail” problem without a ring-fence and it has a very instructive banking sector. France and Germany have it individually but not the EU, which rejected it. Australia reviewed it again in 2019 and rejected it on the grounds that noble Lords have mentioned. It is well worth going back to the famous Skeoch review, which contends that, in the longer term, we will not need the ring-fence and we will have resolution schemes in place. For those reasons, I support my noble friend’s opposition to the clause standing part of the Bill and her Amendment 160A.

[Baroness Altmann (Non-Afl)]

My Lords, I support Amendments 159 and 174 in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham. I would be concerned about abolishing the ring-fence for similar reasons and concerns as those expressed by the noble Lord, Lord Vaux. However, I believe that a review of the workings of the alternative protections, such as the higher capital cushions and the bail-in regimes, would be appropriate. I also think that consultation would be advisable rather than simply removing these clauses. We are talking about taxpayer risk; that is basically what the ring-fencing is designed to mitigate. When it comes to consumer deposits, we have done an awful lot for retail savings to make sure that there is protection.

I apologise that I have been unable to participate fully in Committee, but I would like to put on record that there is another risk to the taxpayer in the form of retail pensions. In particular, I have concerns about the lack of any underpinning for the Financial Services Compensation Scheme around annuities, which are assumed to be 100% protected. There is a risk to the taxpayer, which I hope the Minister may consider or take back to the department to ensure that some of those issues are addressed through this Bill. Currently the implicit 100% guarantee can be met only by the taxpayer, and offshore operators of bulk annuities pose a serious risk to the retail pension sector.

--- Later in debate ---

[Lord Massey of Hampstead (Con)]

I support this amendment and just raise the point of the First-tier Tribunal. I have experience of dealing with the FOS as a firm. At the moment, if you want to appeal the decision of the FOS, you have to go to judicial review. Therefore, whatever the cost of this First-tier Tribunal, it would be very substantially less than going through a process of judicial review, which firms are reluctant to go through, as noble Lords can imagine, because of its cumbersome nature.

[Baroness Lawlor (Con)]

Can I ask the noble Lord to clarify? Judicial review can determine a matter only if there is a matter of law involved, not a matter of adjudication; is that right?

[Lord Massey of Hampstead (Con)]

That is right.

--- Later in debate ---

[Lord Howard of Rising (Con)]

My Lords, I support Amendment 172E in the name of my noble friend Lady Neville-Rolfe. She expressed her support for it far more ably than I ever could, but I want to say that it would be unrealistic to think that sophisticated financial businesses with complex computer systems and programmes can continue to operate in this country if they cannot protect the secrecy of systems oh whose development they may have spent millions of pounds or dollars.

Whether this is carried out by non-compete clauses, which I imagine will be the easiest way to do it, or some other method, what must be achieved is the ability of financial companies to preserve the security of their systems—that is, if we wish these businesses to remain in this country and not go somewhere else where they will get security for what, as I say, may have cost them many millions to develop. In that context, they just do things that we do not know about. For example, the method of communication in the United States now is to bounce radio waves off the ionosphere. They do not want to come here and show everybody how to do it. So I urge the Minister to pay good attention to what my noble friend has said.

[Baroness Lawlor (Con)]

My Lords, I support my noble friend Lady Neville-Rolfe’s Amendment 172D. The problem of debanking has reached a serious level in the UK, with roughly half a million people reported to be affected last year alone. I welcome and recognise that the Government have moved on this and that the new rules require banks to give 90 days’ notice and provide a clear explanation. I also welcome the fact that there is a right to challenge unresolved disputes via the ombudsman.