Financial Services and Markets Bill [HL]

Baroness Noakes 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)]

My Lords, this will be the first of many groups where we discuss the frameworks that the regulators operate under, so I will say a few words about that framework before turning to the amendments.

Many of these amendments, and those in other groups we will take today, focus on the regulators and their accountability to Parliament. Parliament has enshrined the principle of regulatory independence into primary legislation through the Financial Services and Markets Act 2000, which obviously everyone in the Room knows as FSMA. The Government continue to believe that this model best serves the UK’s long-term interests by delivering effective regulation, informed by evidence and free of political interference. It is absolutely right that financial services markets, firms and activities are overseen by operationally independent, expert regulators. The FSMA model sets out clear roles and responsibilities for Parliament, the Government and the regulators. Parliament sets the objectives for the regulators and holds them to account for how they further those objectives when discharging the statutory functions that Parliament has given them.

The Government and Parliament must be able to scrutinise the work of the regulators to evaluate how effective they are and the impact that their rules are having. It is important that the regulators remain independent and accountable for their actions. The regulators are directly accountability to Parliament, and there are a range of mechanisms within FSMA to support that accountability and allow Parliament to effectively scrutinise the regulators.

A critical part of regulatory independence is the idea that the regulators listen to legitimate criticism and scrutiny—and the regulators do listen. For example, the FCA decided not to progress some changes to its proposed enforcement policy following scrutiny from the House of Lords Financial Services Regulation Committee. However, it is clear from the debate today and from outside the Room that there is room for improvement.

On the recent publication by the Financial Services Regulation Committee, chaired by the noble Baroness, Lady Noakes, I recognise the important work of that committee in its Growing Pains report and share its ambition to see a regulatory culture that is more proportionate, more responsive and more supportive of growth. The committee’s recommendations were directed principally at how regulators exercise their functions rather than at the statutory framework itself. The Bill provides greater legal clarity and certainty but it remains for regulators, through their leadership, judgment and accountability to Parliament, to deliver the cultural change that the committee rightly called for.

On the amendments in this group, Amendments 81, 83, 83A, 84, 84A and 85 each seek to address various aspects related to the principle of proportionality. I recognise the concerns and strength of feeling that I have heard today and I agree that the principle of proportionality is extremely important and must remain central within the regulatory framework.

The Bill’s approach is not to remove proportionality from meaningful consideration. Instead, the reforms will require the regulators to have regard to proportionality in the development of their long-term strategies, ensuring that they are applied in a more coherent and visible way at the strategic level. This would mean that, for example, rather than considering if an individual proposal is proportionate, the regulators will be required to set out clearly how they have considered whether their strategy and workplan as a whole results in burdens on firms that are proportionate to the outcomes they achieve. This change will support more meaningful scrutiny of how the regulators are considering and responding to the regulatory principles, and will support greater overall scrutiny of the regulators’ work.

Amending the framework to prescribe in detail how the regulators must recognise differences in the size, nature and objectives of the firms it regulates goes far beyond the current framework and risks adding unnecessary complexity to the framework. It is for these reasons that the Government cannot accept these amendments.

[Baroness Noakes (Con)]

I am afraid the noble Lord is going to be assailed from all sides. I was glad to hear the Minister refer to the work that the committee did in relation to the enforcement proposals, otherwise known as naming and shaming. Is he aware that if the proposals in Clause 17 go through, we will be unable to interrogate the FCA, in this case, on the proportionality of particular examples of what they are doing, in this case to change the enforcement rules? Proportionality there related very specifically to a set of proposals. For example, those proposals, which were to name people much earlier in the enforcement process, could have had the effect of wrecking the businesses of very small players in the financial services market. That is something that we were very keen to draw the attention to.

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[Baroness Noakes (Con)]

To return to the question of the 2006 Act, the Minister said that FSMA’s regulatory principles have been specially crafted for financial services. They have, over a period of time; they have changed rather a lot since they were first put into FSMA. However, when the 2006 Act was passed, there was a specific decision, by the Government, to include the FSA within its scope. They were all brought within scope by secondary legislation, just as the Government now propose to take them out by secondary legislation. Why do the Government take a different view from the Labour Government in 2006—who decided that those regulatory principles have, as I have explained, some important additional elements to those within Section 3B—and think that those additional principles are not now relevant?

[Lord Stockwood (Lab)]

It goes without saying that there are many things on which I do not agree with the Labour Government of 2006, but we will leave that for another day. We believe that this is already covered. I do not want to allow the noble Baroness’s expertise to be undermined by my relative inexpertise, so let me come back in writing on that. The advice I am getting is that we believe that it is already covered, but let me come back in writing before our meeting next week.

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[Lord Bridges of Headley (Con)]

My Lords, I will speak very briefly on this. I declare my interests as employee adviser to Banco Santander in Madrid and a shareholder in Santander. I also apologise to noble Lords, as I was unable to speak at Second Reading.

I will follow on from the noble Lord, Lord Eatwell. I think he and I may disagree on certain aspects of the regulatory and supervisory approach, but I fundamentally agree with every single syllable he has just said. I am very queasy about aspects of the Bill. Many of us spent some time in this Room several years ago trying to ensure that we can hold to account in Parliament, both in this House and the other place, the regulators and supervisors, who hold immense power. That was absolutely right. We put in place a number of measures, including the establishment of the new committee, so ably chaired by my noble friend Lady Noakes, to enable us to do that—just one measure. This clause goes very much in the wrong direction.

I read the letter, for which I am very grateful, from the noble Lord, Lord Stockwood, and I have to say that I am somewhat perplexed by it. My wife says that I have a very little brain, so I very much look forward to the noble Lord telling me that I am wrong—I am very used to it. Let me try to understand what it is saying.

It starts by saying—or, rather, several paragraphs in it says:

“Considering separate rules in isolation is not effective for assessing the cumulative effect of the regulators’ actions—both the benefits in terms of advancing their objectives, and the costs to affected businesses”.


It goes on to say, as noble Lords will no doubt have read, that the publication of the overall long-term strategy will somehow address this. It also says:

“Clause 16 is intended to address this feedback”


from the sector—I am not sure from whom—

“and improve transparency around the regulators’ long-term direction and focus”.

I am very happy to have a long-term strategy but we absolutely need to be able to call to account actions that the regulators take, case by case.

I have read the Explanatory Notes, which say that the long-term strategy will be once every five years. I see that as entirely insufficient. Furthermore, in paragraph 170, the Explanatory Notes go on to say:

“The Government expects that the strategies will be high level and focus on the FCA’s and PRA’s top priorities and the outcomes they aim to achieve over that time”.


I do not see this as anything like the accountability that we were looking for when we introduced the measures in the last Bill, now an Act, and in the new committee. As far as I can see, it is not the case that the Government dispute the need for this case-by-case analysis, for they say this three paragraphs down in the same letter that I quoted earlier:

“There appears to be broad agreement that, in some areas, regulatory requirements on firms have become overly prescriptive, in some cases duplicative, and that this results in high costs for firms, and means that they spend a large proportion of their time and resources focusing on regulatory requirements”.


I agree wholeheartedly. We need, therefore, to address these points case by case.

All these points tie up. We cannot see the regulatory oversight of this House and the other House diluted in the ways that these clauses do when you put them together. I therefore agree entirely with the noble Lord and those who back these two amendments. I will later press for other measures to tighten, not weaken, regulatory accountability.

[Baroness Noakes (Con)]

My Lords, I will be brief because much of what needs to be said on this topic has already been said. I will not detain the Committee for long but, as I have added my name to the clause stand part notice, I thought that it was worth me reiterating my strong opposition to Clause 17.

Picking up on what the noble Lord, Lord Eatwell, spoke about, in our debate on the first group, the Minister reiterated that the Government think that the FSMA model is the correct model. I do not think that any of us is seriously disputing that as a broad proposition. What we are focusing on is the detail of how the FSMA model can continue to work. When we left the EU, the huge amount of EU law that became assimilated law changed the name of the game around how financial services regulation is lived out in this country.

As we have heard, the 2023 Act tried to deal with that in part by increasing parliamentary accountability through the committees of each House, including the requirement for individual rules proposed by the PRA or the FCA to be accompanied by explanations of how the regulatory principles had been applied. I do not think that any of us clearly understood the scale of the problem back in 2022, when we were considering the Bill, but we thought that these were sensible moves in the right direction. The only thing that has changed is that, now, the Government are coming along and putting even more into the FCA by way of the consumer credit legislation, which is a good idea.

But this has seriously undermined what was still work in progress on how effective parliamentary accountability could be worked. There were never any discussions with either committee of the Houses of Parliament about how the arrangements for accountability following the 2023 Act worked. We suddenly got this decision by the Government to cut away the legs of the committee through its inability to engage with the individual regulations. It is clearly the case that looking at a five-year strategy will never replace the work that needs to be done at a granular level on some of the proposed regulations that come from the regulators. That is the time for interventions—not by looking back at whether actions have complied with a strategy.

We should use this Bill to refine the FSMA model, to make it workable for the scale of the task that is being given by Parliament to the regulators and to make sure that the strength of the accountability mechanisms matches the scale of that activity. That is all that we are trying to do. The direction of this Bill is the wrong direction.

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[Baroness Noakes (Con)]

I shall make a brief comment on why Parliament has not offered any guidance on risk metric. The committee was well aware that the FCA sought to get clarity about the risk appetite that it was taking. The PRA had not made that request; it regards it as its responsibility to judge the balance of risk. There is no unanimity in the regulator community on this, but we reported the issues as we found them in one of our reports.

The noble Baroness asks why Parliament has not given its answer. The straightforward answer is that the Government have not brought forward anything. Parliament gives an answer only when it approves something that the Government bring forward. When we asked the Financial Secretary to the Treasury whether she intended to operationalise the giving of a more specific risk appetite to the FCA, she said pretty clearly that she thought that the Government would not do that.

If the Government do not bring forward something for Parliament to approve, it is not going to happen. Parliament does not act in the way that the noble Baroness seemed to think that we would act, which is that a committee would somehow produce an answer on risk appetite. The committee can comment on the issue of risk appetite and has done so, but it is fundamentally for the Government to take any action that is to change the way in which the risk appetite is specified for any regulator.

[Baroness Neville-Rolfe (Con)]

My Lords, this is an important clause, and I understand why noble Lords wish to probe the Government’s approach to Clause 17. It is always right that we scrutinise carefully any change to the statutory framework governing our financial regulators, and the sponsors have set out their case well. I note that they were introduced into the 2023 Act for good reason: to try to ensure that financial regulation in the UK is proportionate, accountable, flexible and aligned with economic and market objectives.

As I said earlier, I am glad that a meeting with the Financial Services Regulation Committee will take place next week. Certainly, I would like to get to the bottom of whether the change neuters the committee, as has been suggested by the noble Lord, Lord Eatwell, and my noble friend Lady Noakes; indeed, I think that committee was unanimous that there was a problem. I thought it was interesting that my noble friend Lord Bridges echoed concerns that key, case-by-case analysis by the committee would disappear, and that the noble Baroness, Lady Donaghy, expressed concern about the way that her questions about cost-benefit analysis had been answered, presumably under the existing system.

These are all very legitimate questions, but there are other considerations—the noble Baroness, Lady Bi, touched on some of them. Our position is that we do not want to perpetuate overburdensome regulation. In discussions with industry, we have heard repeatedly that the regulatory principles in Section 3B of the 2000 Act can themselves lead to tick-box exercises. That is particularly true where the principles require regulators to consider wider public policy objectives, which may have only a very indirect connection with the firms being regulated or the activities in question. For example, Section 3B(1)(c) includes

“the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act”—

the net-zero target—

“and … the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution”.

My own experience of serving on a challenger bank’s board is that there is already a lot of climate-related activity required by the regulators that creeps into many aspects of governance. It is generally costly and sometimes of little worth. That was before the regulatory principles were added. That reflects, harking back to our earlier conversation, the extensive net-zero regulations that exist, the remit letters and the sustainability reporting network, all of which were cited earlier. Therefore, the real question is whether financial regulation is the right vehicle through which to pursue such goals and whether embedding such considerations produces better regulation or simply more process, as we suspect.

The Bill is meant to be deregulatory, and it is meant to simplify the regulatory environment and to support growth and competitiveness. I think the Government may be genuinely reducing a burden that has been identified by industry. We should be careful before assuming that every principle must remain in place. For me, the real tests are about what improvements are coming about here. I am interested in the detail. Does it make the FCA or the PRA more effective? Does it protect consumers? Does it support financial stability? Does it help growth? Alternatively, does it simply create another layer of process, the cost of which falls on firms?

I would be grateful if the Minister could explain more clearly the Government’s rationale for Clause 17. What burdens have been identified and what will the impact be of the changes proposed here? What evidence have the Government received from industry and regulators about the operation of the current Section 3B principles? How will the Government ensure that removing or amending such principles reduces unnecessary burdens, without weakening the core protections that consumers and markets expect?

As the Official Opposition, we are, in essence, in listening mode on this quite radical proposal. We would like to understand whether the “whereases” that are being partially abolished are a burden on only the regulators or whether that feeds through to industry and consumer protection—and, if so, how. I believe that, sometimes, a clearer, simpler and more focused framework is more effective. If Clause 17 helps move us in that direction, it may be needed in the Bill, as the noble Baroness, Lady Bi, suggested. However, it also seems very important to work out how the two parliamentary committees will exercise proper oversight going forward in a post-Brexit regulatory environment, and to ensure that any regulatory resistance, which we have been hearing about this evening, is minimised.

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[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.

[Baroness Neville-Rolfe (Con)]

My Lords, I am grateful to the noble Baroness, Lady Bowles, for bringing forward these amendments. They raise two very salient points about the accountability of the financial regulators and the mechanisms by which Parliament, the Treasury and the public can scrutinise how those regulators use their powers.

One of the core functions of the Bill is to increase the power and scope of the remit of the regulators, in particular the FCA. Across the Bill, more responsibility is being transferred, more detail is being left to rules and more of the practical operation of the regime will depend on regulatory judgment, rather than primary legislation. My concern is that although the Bill increases the power of the regulators, it does not always provide a corresponding increase in oversight or scrutiny of them; as an ex-Treasury Minister, I am slightly surprised that the Treasury is entirely happy with that.

To me, Amendment 88 seems a sensible and proportionate form of challenge. It would create a formal and transparent way for the Treasury to say that, in effect, a regulator may have gone beyond what Parliament intended or may have acted in a way that is not consistent with its statutory remit. This matters because the Treasury is directly accountable to Parliament in a way that independent regulators are not. If regulators are to exercise substantial powers delegated by Parliament, there must be some meaningful mechanism by which Ministers can challenge, explain and account for how these powers are being used. We will come back to this point again at a later stage in Committee; my noble friend Lord Bridges has tabled an amendment that speaks to this same broad issue.

The underlying point is simple: if regulators are powerful, they must also be accountable. How best to achieve this should be a key objective of our scrutiny in Committee and on Report. I would be grateful, therefore, if the Minister could set out the Government’s position on this wider issue. He wrote to us shortly before Committee—a little too shortly before Committee; I say that politely—but I am not sure whether what he sent us, including the Treasury memorandum, answers our outstanding questions. So do the Government accept that the Bill increases the powers and responsibilities of the FCA and PRA? If so, do they accept that stronger oversight mechanisms are called for? What formal routes currently exist for the Treasury to raise concerns about regulator rules or guidance that may not reflect Parliament’s intention?

Also, what is the Government’s objection, if any, to periodic independent reviews of regulator performance and burden? As a former Minister, I found that, although such requirements were unpopular with the department at the time they were put into law, they proved useful in helping me keep on top of the responsible regulators and their policies.

I very much hope that the Minister will engage constructively with the problem, answer my questions, on both the previous group and this group, and appraise in a constructive spirit the amendment tabled by the noble Baroness, Lady Bowles. Above all, we need reassurance that the Government recognise the importance of scrutiny, transparency and trust in the regulatory system.

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Moved by

[Baroness Noakes]

89: Clause 18, page 22, line 32, leave out subsections (2) and (3)
Member’s explanatory statement
This amendment, together with another in the name of Baroness Noakes, ensures that the FCA and the PRA continue to give guidance about how they intend to advance their objectives.

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[Baroness Noakes (Con)]

My Lords, we now come on to a bit of a ragbag group of amendments, which I should probably have split into more than one group. In moving Amendment 89, I shall also speak to Amendments 92, 93, 94, 96 and 98.

I will start with the FCA’s guidance. At present, the FCA has a power under Section 139A of FSMA to give guidance on, for example, the operation of specific parts of FSMA or its rules. Section 1K says that the guidance must—that is, must—

“include guidance about how it intends to advance its operational objectives … in relation to different categories of authorised person or regulated activity”,

and, inter alia, it has to consult on that guidance. What does this Bill do? Predictably, it eviscerates the provisions. Clause 18(2) removes Section 1K from FSMA, and Clause 18(8) takes all the substance out of Section 139A. This is part of the insidious pattern of this Bill, removing information that regulated persons might find useful—removing guidance about how a regulator would advance its objectives—and removing the requirement to consult on what is left of Section 139A. This is a Bill solely for the regulators’ convenience, regardless of the needs of those subject to regulation. Similarly, Section 2L of FSMA currently requires the PRA to consult those it regulates about how its general policies and practices are consistent with its general duties, and Clause 18(3) removes this. My Amendments 89 and 92 would remove these retrograde provisions from the Bill.

Amendments 96 and 98 are rather different. They concern statutory references to the Financial Services Regulation Committee, and I thank my noble friend Lady Neville-Rolfe and the noble Lord, Lord Vaux of Harrowden, for adding their names. The current FSMA wording about parliamentary committees derives from the 2023 Act, which, as initially drafted, referenced only the Treasury Select Committee in the other place, but that was amended during the passage of the Act to encompass any committee of your Lordships’ House set up to deal with financial services regulation or indeed any Joint Committee of both Houses. Following the passing of the Act, your Lordships’ House decided to set up the Financial Services Regulation Committee, to which I, like others, have referred several times in this Committee. Amendments 96 and 98 merely amend the 2023 wording inserted into FSMA to reflect the fact that your Lordships’ House now has a specific committee which should be referred to in legislation.

When the Bank Resolution (Recapitalisation) Act was passed last year, we managed to get it amended to incorporate a specific reference to the Financial Services Regulation Committee, and I am a bit disappointed that the Treasury, which agreed to those amendments last year, has already forgotten that the FSMA wording is out of date and needs to be amended. I therefore hope that Amendments 96 and 98 are non-controversial and that the Government will accept them. I should explain for those noble Lords who did not take part in the passage of the Bank Resolution (Recapitalisation) Act that the references in the amendments to the Chairman of Committees are in fact references to the Deputy Lord Speaker—when that role was created, it encompassed the function of the Chairman of Committees, but that nomenclature remains in statute. That is the Committee’s fun fact of the day.

My remaining two amendments in this group, Amendments 93 and 94, are pretty arcane for those who have not audited a bank or sat on a bank or insurer’s board. For my sins, I have done both. Following the Parliamentary Commission on Banking Standards, FSMA was amended to require meetings at least annually between the regulators and the auditors of PRA-regulated persons. This was definitely overkill, and I am pleased that the Government have decided to delete most of Section 339B of FSMA, through Clause 18(11). They have, however, retained the requirement for the PRA to do those meetings, even if it no longer has to report on them; my Amendment 93 would remove Section 339B in its entirety. This does not mean that the PRA will never meet the auditors of the bodies it regulates: it used to meet the auditors before Clause 339B was enacted in 2013 and can continue to do so if the clause is eliminated, but it would remove the obligation on the PRA to do so. Clause 339B has in fact spawned a small industry of the PRA thinking up questions to ask the auditors to report on. The auditors then go away and write a report, usually asking their client to produce a lot of information first, and then the auditors ask the client for a fat fee. It is not value-added activity. We should leave meeting auditors to the regulator’s discretion.

In a similar vein, my Amendment 94 would amend Section 340 of FSMA, which requires the PRA to make rules about auditor co-operation. It has a similar provision for the FCA, but that merely empowers the FCA to do so. My amendment is unlike most “may”/“must” amendments in your Lordships’ House. We normally seek to replace “may” with “must”. My Amendment 94 does the reverse, so that the PRA “may” make rules if it chooses to do so, and hence aligns with the FCA by giving discretion to the PRA, which is also what my Amendment 93 aims to do. I beg to move.

[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.

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[Lord Stockwood (Lab)]

My Lords, I begin by explaining the Government’s purpose behind Clause 18 and why it should stand part of the Bill. Over time many reporting and procedural requirements have been placed on the FCA and the PRA, increasing burdens, introducing duplication and in some cases complicating oversight, scrutiny and accountability. There is broad agreement that this dynamic is true for firms subject to regulation. I ask noble Lords to reflect on whether it might also be true for the regulators and on whether that is slowing them down and ultimately having a negative impact on firms and consumers.

These burdens are not without consequences. The regulators must follow the letter of these requirements, diverting time and resources away from other work. Ultimately the cost of that work is passed on to firms through the levy they pay and through their engagement with the asks of the regulator. The Government’s view is that there is scope to rationalise parts of this approach to enhance the effect of scrutiny and to help regulators become more agile and ultimately better support innovation and growth.

The Government sought feedback on which regulator publications stakeholders found most useful and then worked closely with the regulators to consider this feedback and further assess the range of requirements placed on them. Feedback to the regulatory environment consultation indicated very low engagement with certain types of regulator publications, and the regulators’ data confirms this. In recent years, the FCA and the PRA consulted on several proposals to which they received zero responses, although I accept that not all publications are created equal.

I have listened carefully to the concerns raised, particularly the argument that these provisions remove practical tools that help Parliament and stakeholders understand what the regulators are doing and why. I recognise that concern, and that is why the Government have approached this area carefully. Clause 18 is carefully targeted and relatively modest. The Government are retaining the vast majority of the existing transparency and reporting framework. Clause 18 is focused on removing a small number of requirements where the burden of complying is disproportionate to their value. These changes do not prevent the regulators undertaking any of these activities where they judge it useful to do so. Instead, they give the regulators greater flexibility to focus on delivering their strategic priorities.

This clause must also be read in the context of the wider framework. The Bill introduces new long-term strategies, maintains the requirement for regulators to respond annually to Treasury recommendation letters and provides for an additional annual report on how the FCA and the PRA have complied with their competitiveness and growth objectives. Taken together with the existing framework in FSMA, these measures are intended to strengthen overall transparency, not weaken it.

I turn to the amendments, starting with Amendment 89—

[Baroness Noakes (Con)]

Before the Minister moves on, can I just press him on the evidence of stakeholders that has been relied upon to sweep away so much stuff in Clause 18? Did the stakeholders specifically say they were not interested in guidance that was issued by the regulators or in the consultation on that guidance?

[Lord Stockwood (Lab)]

Unfortunately, the precise question was not asked in the consultation.

[Baroness Noakes (Con)]

So on what basis are the Government making the decision to remove the requirement under FSMA to issue the guidance, and obviously, therefore, to consult on it?

[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.

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[Lord Stockwood (Lab)]

I think there is a broad principle: we are trying to give the FCA the power to make those small changes in both directions.

[Baroness Noakes (Con)]

Where does that power begin and end? I can understand it when we are talking about hundreds of pounds; I am not sure I understand how much flexibility is now being given to the regulators to do things. We can probably recognise, at one end of the spectrum, something that is very significant, but who is the arbiter of what is so unimportant that it does not have to be consulted on? The regulator. Are the regulators the right people to make that decision? No, they are not, because they are not the people affected by the change.

[Lord Stockwood (Lab)]

Our overarching principle is that we are trying to show trust in the regulators while recognising the significant feedback from the debate today. We are hoping that minor changes will be in their gift and their expertise.

I will come back to my notes here. The measure is about giving the regulators the flexibility to gather industry input in more efficient ways. It is not about bypassing industry, but rather about recognising that the industry’s time is valuable and should be focused on engaging with consultations that genuinely have impact. Other channels, such as round tables with firms, supervisor interactions, meeting with trade bodies and engagement with statutory panels, can provide a more efficient route to understand industry’s issues on what are minor or technical changes. The Government’s view is that retaining these specific requirements in all cases would preserve unnecessary process, even where it adds little value in practice, and that the Bill preserves consultation requirements in most cases and where there is genuine value for the sector, as well as regulatory oversight.

Amendments 93 and 94 seek to remove all requirements on the PRA to meet the auditors or PRA-authorised persons. As the noble Baroness, Lady Noakes, noted, the Bill removes the requirement for the FCA to meet at least once a year with the auditor of any PRA-authorised firm that has been designated as important to the stability of the UK financial system. Requiring both the FCA and the PRA to meet PRA-authorised firms is duplicative and unnecessarily burdensome in terms of the effective use of resources. However, the Government’s view is that removing all requirements around engaging this important group of auditors would go too far. It is vital that the PRA continues to engage with these auditors and plan for meetings to take place at least annually, to ensure that the PRA can secure the valuable insights into the health of systemically important, regulated firms that auditors can provide. It is for this reason that the Government cannot accept these amendments.

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I hope that I have reassured noble Lords about the importance the Government place on accountability, transparency and Parliament’s access to useful information. The Government’s view is that these amendments or the removal of Clause 18 would not improve the Bill. Clause 18 removes the targeted subset of lower value requirements while preserving the broader transparency framework and complementing the new report in a strategic accountability measure elsewhere in the Bill. In the interests of time, I will respond in writing to the five questions from the noble Baroness, Lady Neville-Rolfe, and I therefore ask the noble Baroness to withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who have taken part in this debate. Clause 18, guidance, consultation and whether regulators can be trusted is unfinished business as far as this Committee is concerned. I look forward to getting the answers on questions that have been put, but my instinct is that the Government’s approach is going too far in favour of letting the regulators determine what their interactions will be with the regulated community. On the one hand, there are independent regulators which need forms of oversight, and this Bill is just chipping away all the time at those points at which there can be some interaction between those charged with the oversight of them. By constantly removing these points at which there can be some intervention, we end up with a weaker situation overall. I will need to think very carefully about what we do about Clause 18 in general when we get to Report. I think it is part of the issues that we have been developing. Clauses 16, 17 and 18 are all part of one picture that we need a more satisfactory answer to.

Turning to the auditors. I was not trying to stop auditor meetings—

[Lord Wilson of Sedgefield (Lab)]

I mentioned at the beginning of this afternoon that when an amendment is being pressed, noble Lords have to be short. The withdrawal of amendments is starting to take longer and longer, which eats into the time for the other groups.

[Baroness Noakes (Con)]

I hear what the noble Lord has said. I think it is important that we have the opportunity to comment before withdrawing amendments. It is not simply a case of getting up and saying, “I withdraw”.

[Lord Wilson of Sedgefield (Lab)]

I just say to the noble Baroness that it is clear in paragraph 8.82 of the Companion that noble Lords should

“be brief and need not respond to all the points made during the debate”.

[Baroness Noakes (Con)]

My Lords, I had no intention of responding to all points made in the debate. There are a number of different amendments in this group. They could have been degrouped into four or five separate groups, and we could have had a short winding-up on each one of them. We have effectively four groups here, so we are going to be talking about all of them.

On auditors, I was not trying to suggest that auditor meetings should not take place: of course, there is value in those meetings, which have taken place for decades. They were not invented when FSMA was being drafted; they were already part of the thing. The amendments are not that important; I was simply trying to give the PRA the same flexibility that the FCA has.

On the nomenclature in the Act and the Financial Services Regulation Committee, I give notice that I will return to that matter in Committee. My committee will think that it is important that, now that it exists, it is reflected in statute. I beg leave to withdraw my amendment.

Amendment 89 withdrawn.

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Moved by

[Baroness Noakes]

99: After Clause 19, insert the following new Clause—
“FCA and PRA secondary competitiveness and growth objectivesThe Financial Services and Markets Act 2000 is amended as follows—(a) in section 1EB (competitiveness and growth objective) for “aligning with” substitute “consideration of”;(b) in section 2H (secondary objectives and duty to have regard to regulatory principles) for “aligning with” substitute “consideration of”.”Member’s explanatory statement
This amendment modifies the secondary competitiveness and growth objectives of the FCA and the PRA by requiring international standards to be considered rather than aligned with.

[Baroness Noakes (Con)]

My Lords, I will speak also to Amendments 100 and 102 in this group. I thank my noble friend Lady Neville-Rolfe for adding her name to Amendments 99 and 102, and I thank the noble Lord, Lord Vaux of Harrowden, for adding his name to Amendments 99 and 100. My noble friend Lord Hunt of Wirral is unable to be with us today, as he is on our Front Bench in the Chamber dealing with the Steel Industry (Nationalisation) Bill, so I shall also speak briefly to his Amendment 101.

Amendment 99 concerns the secondary competitiveness and growth objective, which applies to both the FCA and the PRA. When it was introduced in the 2023 Act, it was no secret that the regulators were less than enthusiastic. Our regulators have always been heavily involved with the international financial institution community. They often act as chairmen, as is currently the case with the Governor of the Bank of England and the Financial Stability Board. They are members of as many committees as they can get on, and they are completely embedded in the international standards infrastructure. It was unsurprising, therefore, when they managed to convince the Treasury that it should make the secondary competitive and growth objective subject to alignment with international standards.

During the passage of the 2023 Act, I tried to get this watered down, because I had a real concern that the PRA and the FCA would hide behind international standards when making rules, in a way that does not optimise UK competitiveness and growth. International standards are a good thing, but only if all the major countries implement them. In fact, there is a history of patchy adoption—not least by the United States of America, which is, of course, one of our main competitors in financial services. Unfortunately, the Treasury supported the regulators and kept alignment in the 2023 Act.

I return to this theme with Amendment 99, which would change the words of the competitiveness and growth objective so that the regulators must consider international standards only, rather than automatically aligning with them. We have had three years of experience of the operation of the Act. It is time, I believe, that we made growth and competitiveness an unambiguous part of the regulators’ objectives.

In the past three years, we have seen the continuation of US exceptionalism. It has not implemented Basel III, and we have to remember that it never implemented Basel II. To be fair to the PRA, it has found reasons to follow what other countries are doing to delay certain aspects of Basel III and has performed contortions to justify implementing other aspects in a way that does not fully hit smaller UK banks, but the fact is that other countries are implementing Basel III in ways that suit them, and it would be more honest if our own regulators were given that freedom.

Another problem area in bank capital is the requirement to hold MREL, the minimum requirement for eligible liabilities. This started as a European requirement that went way beyond the international rules for total loss-absorbing capital for global systemically important banks. The UK has just three G-SIBs out of 29. Unfortunately, the UK sets MREL for many more banks than three. This is not set by the PRA, which might have a problem justifying it by reference to international standards, because the international standards are clearly less than the European model which we are sticking to. It is in fact set by the Bank of England, which does not have a competitiveness and growth objective. This shows what happens when regulation is detached from the interests of the UK economy.

I turn to the FCA. When the Financial Services Regulation Committee looked at stablecoins, we asked the FCA about its work on stablecoins aligning with the secondary competitiveness and growth objective. The director of payments and digital assets at the FCA was keen to tell us what the FCA did on committees at IOSCO, how it helped to draft the FSB’s paper on stablecoins and how it brought together regulators and standard-setting bodies in London. Although the executive director for payments said that the FCA was trying to find solutions right for the UK, it is clear that the instincts of the regulators’ staff is to look to international standards bodies rather than to think about what is best for UK competitiveness and growth. I do not think that the secondary objective’s potential will be maximised while the comfort blanket of international standards is reinforced by the FSMA requirement to align with them.

Amendment 100 is much more straightforward and I hope that it is uncontentious. I fully support Clause 20’s requirement for the regulators to report annually on the secondary objective. The two initial reports required by the 2023 Act make it clear that the competitiveness and growth objective is not a finite event but a continuing challenge. This was also one of the key findings of the first report by the Financial Services Regulation Committee. My amendment would merely require the Treasury to lay the annual reports before Parliament. It is customary to lay key accountability documents before Parliament. If this is not a key accountability document, I do not know what is. I hope that the Minister can accept this amendment.

I was going to go on to Amendment 101 in the name of my noble friend Lord Hunt of Wirral, in anticipation of his absence, but I see that he is with us, so I will not speak to his amendment but will conclude with my final amendment in this group, Amendment 102.

[Lord Wilson of Sedgefield (Lab)]

I am afraid that the noble Lord, Lord Hunt of Wirral, was not here at the start as he came into the Room two minutes late, so the noble Baroness may go ahead.

[Baroness Noakes (Con)]

I thank the noble Lord for telling me about my noble friend’s disqualification from speaking; I will now speak to his Amendment 101. I find that it would be a useful addition to Clause 20, by imposing some modest requirements such as making the reports comparable with previous reports and covering things such as the cumulative cost of regulation and an explanation of how proportionality has been applied, including for SMEs. I do not think that any part of this amendment should be controversial, and I hope that the Minister will be able to accept it.

[Lord Hunt of Wirral (Con)]

I thank my noble friend.

[Baroness Noakes (Con)]

My last amendment in this group, Amendment 102, is also about the secondary competitiveness and growth objective, but, this time, for the Financial Market Infrastructure Committee of the Bank of England. The FMIC was set up with a secondary innovation objective, and there is clearly a link between innovation and growth and competitiveness—but they are not synonymous. I am not sure why the FMIC was set up with innovation objectives rather than full competitiveness and growth objectives, and I do not recall a substantive debate on that during the passage of the 2023 Act.