Financial Services and Markets Bill [HL]

Debate between Baroness Neville-Rolfe and Lord Pitt-Watson

Committee stage
Wednesday 8th July 2026 Grand Committee

[Baroness Neville-Rolfe (Con)]

My Lords, our amendments in this group concern the future of the bank ring-fencing regime. I will start by setting out clearly the position that we have reached as the Official Opposition. Through our diagnostic work, we have found a consensus that the bank ring-fencing regime is no longer fit for purpose. It adds costs to banks and their customers and it has been superseded by other rules since its introduction. A regulatory regime should not be preserved simply because it exists. It must continue to justify itself against present-day risks, tools and costs. In our view, the ring-fencing regime no longer does so. The next Conservative Government would repeal the post-global financial crisis ring-fencing regime, bringing the United Kingdom more closely into line with other international jurisdictions. Amendment 160A reflects that policy.

It is worth reminding ourselves what ring-fencing is. The regime was created through the Financial Services (Banking Reform) Act 2013, which amended FSMA 2000. The implementing regulations and orders came into effect in 2019, more than 10 years after the onset of the global financial crisis. At its core, ring-fencing is the structural separation of certain retail banking activities from activities normally conducted by international wholesale investment banks. In practice, that means a separate legal entity, with restrictions on what it can do and how it can interact with the rest of the banking group. Retail and small business deposit-taking is placed inside the ring-fence, while certain other activities must be conducted outside it.

The regime was introduced for serious reasons. The Parliamentary Commission on Banking Standards, convened after the financial crisis, identified three broad objectives: to make it easier to deal with failing banks without taxpayer-funded solvency support; to insulate vital banking services used by households and SMEs from problems elsewhere in the financial system; and to curtail implicit government guarantees, thereby reducing risks to public finances and incentives for excessive risk-taking.

Since ring-fencing was designed, the wider regulatory landscape has changed profoundly. We now have a much more developed resolution regime. We have recovery and resolution planning. We have operational continuity arrangements in resolution. We have stronger capital and liquidity requirements. We have the leverage ratio, the liquidity coverage ratio and the net stable funding ratio. The Bank of England, the PRA and the FPC have a broad toolkit for reducing the risk of bank failure and dealing with failure if it occurs. Moreover, we have sounder management of banks as a result of the senior management regime.

That is precisely the point that we wish to highlight in our amendment. The risks that ring-fencing was designed to address are now addressed through other more modern, more targeted and more internationally coherent tools. The 2022 Independent Panel on Ring-fencing and Proprietary Trading, chaired by Sir Keith Skeoch, reported that the regime has an annual cost to the UK banking sector of around £1.5 billion, which comes from running multiple separate legal entities, duplicating governance systems and raising the cost of capital and lending conducted by non-ring-fenced bodies. This is because large retail deposits inside the ring-fence cannot be used as sources of finance elsewhere in a group to support lending and investment. That review also found that the reduction in the implicit government guarantee and progress in ending “too big to fail” were not attributable to ring-fencing but instead to the development of the UK resolution regime. Ring-fencing is therefore a good example of a broader problem in financial services regulation: rules that are introduced in response to a crisis which then remain in place long after the conditions that justified the change.

We are now left with two regimes that are not aligned in the way that they aim to address “too big to fail”. That adds complexity, cost and burden. It also risks making the United Kingdom less competitive than jurisdictions that rely on resolution, prudential supervision and capital frameworks, rather than structural separation of this kind. Clauses 39 and 40 show that the Government recognise that there is a problem. They seek to make changes to the ring-fencing regime and give the PRA more flexibility over ring-fencing arrangements, but in our view these reforms do not go far enough.

Amendment 160A would repeal Part 9B of FSMA and the core statutory ring-fencing provisions introduced after the financial crisis. It would require the Treasury, the PRA, the FCA and the Bank of England to take the necessary steps to unwind the related rules and guidance. It would require an orderly transition, with attention paid to financial stability, continuity of core banking services and the competitiveness of the United Kingdom. Consumer savings would continue to be protected. Banks would continue to be subject to prudential supervision. Resolution planning would remain in place.

This reform matters for competitiveness. Other major financial centres do not operate a UK-style ring-fencing regime. If UK banks are required to carry costs and structural constraints that their international competitors do not face, that affects the cost and availability of finance. It affects the ability of banks to deploy capital efficiently and it affects the attractiveness of the UK as a place to operate and invest in. It also matters for customers. Regulations that increase costs without delivering commensurate benefit feed through into pricing, service innovation and lending capacity.

If the Government believe that ring-fencing remains necessary, will the Minister explain precisely what financial stability objective it now achieves that is not already achieved through the resolution regime and other prudential rules? Ring-fencing was created in response to a particular crisis at a particular moment for reasons that were understandable at the time. But regulation must evolve. It must be reviewed against current conditions. It must be removed when it no longer serves its intended purpose.

Finally, I would add that whatever changes are made, it is right to have a proper process of consultation with business and stakeholders and a follow-up report to Parliament. That is the purpose of my Amendments 159 and 174.

[Lord Pitt-Watson (Lab)]

My Lords, if I may respond to that, I had thought until recently that what we were debating was a response to the Skeoch commission established by the last Government, but we have new amendments now, it seems—Amendment 160A and the abandonment of clauses—that are really throwing ring-fencing out. I guess that they are tabled in response to a speech by the leader of the Conservative Party, Kemi Badenoch—a speech underpinned by a policy document from her party. That speech, the policy document and this amendment are not asking to think things through further from the Skeoch report: they have made their minds up. Kemi Badenoch announced that a future Conservative Government will end ring-fencing—definitive end of discussion. That, I believe, would be a bad idea. So did the review by Keith Skeoch, who was commissioned by the Conservative Government to opine on this and whose recommendations we are now trying to take forward.

Worse still, the evidence for Mrs Badenoch’s statement is based on really questionable claims, numbers and Mickey Mouse logic. For example, the claim was that the Skeoch report reckoned that the cost of ring-fencing was £1.5 billion. In fact, the report notes that that figure was presented to the review and that

“it has not been possible to draw a strong conclusion based on aggregating these costs”.

The report recognises that there are some costs to ring-fencing, but notes that that was expected and acknowledged by the Independent Commission on Banking, which said that that would not be a cost to the economy, but rather

“a consequence of returning risk to where it should be—with bank investors, not taxpayers—and so would reflect the aim of removing government support and risk to public finances”.

The policy paper has a Mickey Mouse logic that costs should be placed on the taxpayer, when they should be paid by the banks and the investors in the banks.

We should of course be in favour of reviewing the ring-fencing regime to be sure that it is properly doing its job. This is what Skeoch did and, now, if this Bill follows that report, I ask the Minister to ensure that we are careful with definitions in the implementation. For example, we should ensure that, within the growth allowance, the definitions are very carefully drawn up. We do not in future want the taxpayer subsidising proprietary trading—what many refer to as “casino capitalism”.

Badenoch suggests that her reforms would release £450 billion in capital—another number from nowhere. I know that the noble Baroness, Lady Neville-Rolfe, will not have a lot of time to sum up, but I would be grateful if she might write afterwards on how these numbers have been derived and what reduction in bank equity capital they assume. If these numbers do not stack up, that pulls the rug from under the policy document and the speech that was made by the leader of the Conservative Party.

The policy paper suggests that we should abandon the Financial Ombudsman Service. In this industry, which represents 8% of GDP but attracts 42% of corporate fines, Mrs Badenoch has decided that the front-line institution that protects consumers should be abolished. We could say that this does not matter and that Kemi Badenoch is unlikely any time soon to be Prime Minister, but it should matter to us. As the noble Baroness, Lady Noakes, has pointed out, there is considerable expertise in financial services across all parties in the House. Although we have differences, we are united, I hope, in trying to set a framework for the industry that allows it better to serve its purpose: to serve the outside world; to help get money from point A, where it is, to point B, where it is needed; to keep our money safe; to help us transact; and to help us share risk.

If the Opposition Benches feel mandated to follow the policy documented last month, we have a problem. I could not find a single reference in that document to any input from any consumer group anywhere. It felt like a lobbyist document from the City, but I have talked to at least one lobbyist who said “No, it goes way further than we would ever suggest”.

Financial Services and Markets Bill [HL]

Debate between Baroness Neville-Rolfe and Lord Pitt-Watson

Committee stage
Wednesday 1st July 2026 Grand Committee

[Baroness Neville-Rolfe (Con)]

My Lords, my amendment concerns the impact of prudential capital requirements on lending capacity, borrowing costs, competition and growth. Since my amendment was tabled, His Majesty’s Opposition have announced a new policy position in this area, which I shall speak to now.

Our new policy is straightforward. The statutory basis for post-financial crisis bank capital requirements should be amended so that UK regulators are required to take proper account of equivalent capital regimes in competitor jurisdictions, and to identify, justify and, where not justified, remove any UK-specific overcapitalisation relative to equivalent international regimes. We want to consider the position in competitor jurisdictions, to benchmark equivalent regimes, to publish detailed analysis and to explain clearly where the UK is imposing requirements above international standards or above those imposed by comparable financial centres. That seems a basic requirement of a serious competitiveness agenda, on which the UK is particularly reliant. The UK is the world’s largest net exporter of financial services, whereas comparable jurisdictions, such as the US, rely much more on their domestic markets. It is therefore imperative that we remain competitive on the world stage.

Capital requirements matter, but there is a cost. Capital held solely for statutory compliance is capital that cannot otherwise be used to support lending, investment, home ownership, business expansion or economic activity. The central question is therefore not whether banks should hold capital but whether the UK requires materially more capital than comparable jurisdictions without a clear and evidenced stability justification. If we do, we are placing the UK at a competitive disadvantage: we are constraining lending, increasing borrowing costs, making it harder for firms to access finance and weakening growth, and doing so in a way that may not be required by international standards or by the actual risk profile of the system.

The analysis behind our policy suggests that the UK capital framework may materially exceed international Basel III requirements and competitor regimes. It has been suggested that the resulting constraint on UK banks’ lending and financing capacity could amount to £250 billion across overlapping capital requirements and £200 billion across leverage ratio constraints. Of course, not every pound of capital released would automatically translate into new lending—we understand that. Some may be used for business investment, dividends, buybacks or balance-sheet strengthening. The key point remains that capital deployed productively in the economy is preferable to capital trapped by a regulatory framework that is more restrictive than it needs to be.

We appreciate that the Government recognise this issue and have moved a little on it already. They have made the bank resolution regime more flexible, allowing the Bank of England to reduce or remove MREL for some firms where the new FSCS recapitalisation mechanism can substitute for pre-positioned loss-absorbing resources. Our proposal is a step to unlocking a lot more capital. We already require the PRA, in some contexts, to have regard to the UK’s relative standing against competitor jurisdictions, but that duty is incomplete. It does not apply across the whole capital framework and, in particular, it does not fully capture Pillar 2A, the PRA buffer or systemic buffers. The FPC has produced useful comparative analysis, but there is not yet a binding requirement for regular, systematic benchmarking against competitor jurisdictions.

Our proposed review is also about transparency. If regulators believe that the UK should impose higher requirements than comparable regimes then Parliament, industry and the public should be able to see the analysis behind that decision. That is how we preserve independence while improving accountability.

The amendment is part of a wider argument. Prudential regulation must be understood not only through the lens of stability but through the lens of growth, lending, and competitiveness. A capital framework that is more demanding than necessary does not make the economy stronger. It may make it less dynamic, less competitive and less able to support households and businesses, especially SMEs and scale-ups. I speak from experience as a director at a responsible and careful challenger bank, where the UK capital rules were a significant constraint on what we could do. They also consumed a great deal of management and board time.

I would like the Government to accept that the UK should not impose capital requirements above equivalent international competitor regimes, especially if there is no financial stability justification for doing so. The first step is to undertake the necessary analysis. Ours is a serious and responsible policy. It preserves regulatory independence and protects financial stability but recognises that excessive or unjustified capital requirements carry real economic costs. If we want growth, competitiveness and banks to support businesses and homebuyers, then we need a capital framework that is robust but not overrestrictive. That is the balance that our policy seeks to strike. I look forward to the Minister’s response.

[Lord Pitt-Watson (Lab)]

My Lords, both the amendment and the speech by the noble Baroness, Lady Neville-Rolfe, were sensible in terms of making us think about bank capital requirements and whether we have got them right. As she says, the first step is undertaking proper analysis to be able to work out whether that happens. I noticed she caveated everything that they may not be right. They may be right, but they may not.

My worry is that that is a sensible position to take but it did not sound like the position being taken by the Leader of the Opposition when she made her speech last week saying that she was going to reduce bank capital requirements to release £450 billion in capital. Where did the calculation that hundreds of billions are sitting idly on bank balance sheets come from? Where do those hundreds of billions come from? If we are going to release £450 billion, what is the calculation in the reduction of bank capital requirements that sits behind that calculation? While I feel quite supportive of the issues that the noble Baroness was raising, we need to be sure—I hope she will agree—that we do not jump the gun on this.