Financial Services and Markets Bill

Baroness Penn Excerpts

3rd reading
Monday 19th June 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill do now pass.

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

My Lords, this Bill helps to deliver the Government’s vision for an open, sustainable and technologically advanced financial services sector. I thank all noble Lords for their valuable scrutiny and input, which has led to some important enhancements to this Bill. I formally thank the Opposition Front Benches, particularly the noble Baroness, Lady Chapman of Darlington, and the noble Lords, Lord Livermore and Lord Tunnicliffe, for their positive engagement and overall support for the Bill and its important aims. I also thank the noble Baroness, Lady Kramer, from the Liberal Democrats, supported by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles, for their thorough scrutiny and constructive debate. Finally, I thank the noble Lord, Lord Fox, for bringing his considerable expertise to the scrutiny of this Bill.

The Bill delivers the outcomes of the future regulatory framework review, giving the regulators significant new rule-making responsibilities while balancing that additional responsibility with clear accountability, appropriate democratic input and transparent oversight. Thanks to the positive engagement of this House, we can now be more confident that we have got that balance right.

I also thank my noble friends Lord Forsyth of Drumlean, Lord Bridges of Headley, Lord Holmes of Richmond and Lady Noakes, in particular, for their constructive challenge of the Government’s approach to the important issues that the Bill deals with. I hope that the package of amendments brought forward by the Government on Report demonstrates the open and collaborative way in which we have engaged with the important matters raised in this House.

The level of scrutiny and debate on the Bill rightly demonstrates the vital importance of the financial services sector to the UK economy. Financial and related professional services employ more than 2.5 million people across regional hubs in all four nations of the UK, and create £1 in every £10 of the UK’s economic output. Building on the strengths of our financial services sector is fundamental to its continued growth and to the wider economy. I am therefore pleased to see the Bill progress towards becoming law. It will allow us to begin the process of revoking EU law and replacing it with an approach that is guided by what is best for the UK.

Before the Bill returns to the Commons, I extend my thanks to the significant number of Treasury officials, in the Bill team and beyond, for their work in preparing such a substantial Bill and for their support in engaging fully with your Lordships’ scrutiny. I also recognise the work of the Office of the Parliamentary Counsel in drafting the Bill, and of House staff.

While the Bill is the culmination of a large amount of work over a number of years, it is also the foundation of much work still to come, and I look forward to continuing to discuss these important issues with noble Lords in the future. I beg to move.

[Baroness Chapman of Darlington (Lab)]

My Lords, I thank the Minister for her kind words as she introduced this Third Reading. The Bill leaves the House in a much better condition than when it arrived. We have made changes to the Bill on the treatment of politically exposed people, financial inclusion and the FCA’s accountability to Parliament, and through measures that help to protect the environment. I thank all Members of the House who contributed to our consideration of the Bill, from both sides, and from the Liberal Democrats and Cross Benches, especially those from Peers for the Planet. I also thank the doorkeepers and House staff teams, and everyone who enables us to do our work.

I thank the Minister for her open and welcoming approach to our discussions. I particularly thank my noble friend Lord Livermore for doing more than his fair share of the work from Report onwards, and of course my noble friend Lord Tunnicliffe who led the Labour Party—he did not lead the Labour Party but led for the Labour Party; that was quite a thought experiment—throughout the long Committee stage. His advice and support have been invaluable. Lastly, I thank the outstanding Dan Stevens for his impeccable advice, preparedness and thoughtfulness.

We hope that the Government accept the Bill as amended and do not feel the need to bring it back to the House for further amendments.

Co-operatives, Mutuals and Friendly Societies Bill

Baroness Penn Excerpts

3rd reading
Friday 16th June 2023 Lords Chamber

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

My Lords, I add my thanks to the noble Lord, Lord Kennedy, for guiding the Bill through your Lordships’ House and for lending his wealth of knowledge and experience to our debates. I also congratulate Sir Mark Kendrick as his Bill reaches this milestone today. In particular, I recognise the close work between Sir Mark and my honourable friends the Economic Secretary to the Treasury and his predecessor, Richard Fuller, who supported the Bill through the House of Commons on behalf of the Government.

At their core, mutuals give people a stake in how businesses and organisations should be run. They make up a diverse sector of commonly owned and democratically controlled enterprises that provide vital services to their members across all industries. That is why creating the right legal apparatus in which mutuals can thrive and grow is so important. The Bill is a contribution towards that. As noble Lords said, it aims to provide the sector with options to safeguard its businesses, have more control over their funds and ensure that they are better equipped to avoid demutualisation.

Hearing support for the sector in this brief debate, I reassure noble Lords that government support for mutuals goes far beyond the Bill. The Financial Services and Markets Bill includes amendments to the Credit Unions Act to allow them to offer a wider range of products and services, and we intend to amend the Building Societies Act as part of the Edinburgh reforms package to modernise legislation for building societies. I am also happy to confirm that the Government will launch reviews of the Co-operative and Community Benefit Societies Act 2014 and the Friendly Societies Act 1992, conducted by the Law Commission, with the aim of identifying essential updates to the legislation, allowing for a more modern legal structure in which mutuals can be supported to capitalise on new opportunities to grow. So the Bill is the start of more work to come to support this important sector, and I am glad that the Government can support it.

Bill passed.

Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023

Baroness Penn Excerpts

Thursday 15th June 2023 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023.

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

My Lords, as the Committee will be aware, Silicon Valley Bank UK Ltd—SVB UK—was sold on Monday 13 March to HSBC. The aim of this sale was to ensure that customers of SVB UK could access their deposits and banking services as normal; to limit risks to our tech and life sciences sector; and to safeguard some of the UK’s most promising companies.

We have achieved these outcomes—the best possible—in short order, without any taxpayer money or government guarantees. There has been no bailout, with SVB UK sold to a private sector purchaser. This solution is a win for taxpayers, customers and the banking system. The IMF has said that the UK’s response to SVB UK restored market confidence and contributed to the UK’s upgraded growth forecast. It now expects the UK to avoid a recession this year.

On Monday 13 March, the Economic Secretary to the Treasury laid in both Houses a statutory instrument, using the powers under the Banking Act 2009, to facilitate the sale of SVB UK to HSBC. That instrument has now been approved by both Houses. It granted HSBC’s ring-fenced bank an exemption so that it could provide liquidity on non-arm’s-length terms to SVB UK on an ongoing basis. This was needed to facilitate the sale of SVB UK to HSBC, because it ensured that HSBC was able to provide the necessary funds—over £2 billion in the immediate days after—to its new subsidiary. The exemption also ensures that HSBC UK can provide liquidity to SVB UK as needed.

The Economic Secretary to the Treasury has now laid this second statutory instrument, which we are debating today, to provide an ongoing exemption from ring-fencing requirements for SVB UK, beyond the existing four-year transition period. This exemption is subject to conditions relating to the size of SVB UK’s core deposits, and the type of business it can undertake.

The first condition is intended to ensure that SVB UK, or its subsidiaries, will not be able to hold core deposits—typically, retail and SME deposits—above the existing core deposits threshold in the ring-fencing regime; that is, £25 billion. The threshold is used to determine whether a bank becomes subject to the ring-fencing regime. The second and third conditions are intended to ensure that SVB UK, or its subsidiaries, will be allowed to undertake only new business activities similar to SVB UK’s existing business at the time of the acquisition by HSBC.

These conditions are intended to ensure that the exemptions from the regime are limited to what was needed to facilitate the sale of SVB UK. Together, they minimise risks to financial stability and limit any competitive distortion.

Indeed, Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, has confirmed the PRA’s support for the provisions in this instrument in a letter which the EST has laid in the Libraries of both Houses and which I sent to those who spoke in the debate on the first SI relating to SVB. It states that

“the statutory instrument and its conditions supports the PRA’s primary statutory objective of safety and soundness, and limits competitive distortion”.

The letter also confirms that the PRA has a range of tools to ensure the effective supervision of HSBC and SVB UK.

This amendment, along with the previous exemption, was crucial to the purchase of SVB UK by HSBC and protected taxpayers and depositors. The UK has a world-leading tech sector, with a dynamic start-up and scale-up ecosystem, and the Government are pleased that a private sector purchaser was found. I hope noble Lords will join me in supporting this legislation. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, I support the order, but it raises some issues that bear significant further thought. The exemption from the ring-fencing requirement is clearly an issue, so it was discussed in the Chamber earlier in the week. The Government have said that ring-fencing is a key part of their package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers—this was following the financial crisis. Clearly, it is important, and any decision to have some exemption needs careful consideration. I shall not deal with the issue in detail; I heard what the noble Baroness, Lady Kramer, said about it in the Chamber earlier in the week, so I can say in anticipation that I very much agree with her remarks.

I want to say something about the resolution process and what we learned about it during this episode. The Bank of England is responsible for taking action to manage the failure of financial institutions—the process known as resolution. The Bank said that the financial system needs an effective resolution framework, and that was one of the key lessons from the global financial crisis of 2008. Resolution reduces the risk to depositors, the financial system as a whole and the public finances which could arise following the failure of a bank. The object of resolution is to reduce the risk of bank failure as well as to limit its impact when it occurs. To be effective, a resolution authority needs powers that ensure that any losses will fall on a failed bank’s investors but without risk to financial stability or to the broader economy.

To achieve those objectives, the Bank has powers that affect the contractual rights of counterparties and investors in the failed firm, so there have to be statutory safeguards for creditors and counterparties. The requirement in general is that shareholders and creditors must absorb losses before public funds can be used. The Bank has a range of powers to enforce insolvency, which was the initial expectation in this case, or to transfer all or part of a firm’s business either to a private sector purchaser or to a temporary bridge bank established by the Bank pending a sale or transfer.

At the point of failure, Silicon Valley Bank UK had a total balance sheet size of about £8.8 billion and a deposit base of approximately £6.7 billion—that is, assets greater than liabilities to depositors. In that sense, it was solvent. However, the scale of the deterioration of liquidity and confidence meant that the Bank and the Prudential Regulatory Authority—PRA—concluded that the position was not recoverable. It is what the Governor of the Bank of England has described as “banking 101”.

Having consulted the Treasury, the PRA and the Financial Conduct Authority—the FCA—the Bank of England decided ultimately to use its resolution powers to transfer the bank to a private purchaser. My question for the Minister is: what lessons have the Government learned from this episode about the resolution process? The process is relatively new and untested, which means that each example must be explored in detail. The idea of testing the resolution regime is of course problematic; you would not want to test your home insurance by burning down your house, so we have to learn where we can.

Now, getting to the crux of what I am talking about, the example was discussed at the meeting that the House’s Economic Affairs Select Committee had with the Governor of the Bank of England on Tuesday, which I attended. Unfortunately, we do not yet have the official transcript, so I cannot quote what the governor said, but I can give the Committee my impressions of what issues need to be explored based on what was said at the meeting.

The first issue is whether the resolution regime worked. Was there a clear and predictable set of rules upon which depositors could rely or was it, in practice, totally ad hoc? It may be that what worked was the right approach in the circumstances, but we need to be clear about that. The governor appeared simply to rule out certain approaches—for example, a bridge bank—largely, it would seem, because of the impact on the public purse. Manifestly, the wish to avoid splitting the assets and liabilities led to the decision to break the ring-fence.

Another thing that was clear is that resolution is inevitably an intensely political process. When the bank said it consulted HMT, it certainly was not just officials. Certainly, the Chancellor but also the Prime Minister were involved in what in banking terms does not really count as a large institution but that on the face of it had wider financial implications. I do not want to downplay the significance of the event. It appeared that at one stage of the process it was suggested that a failure to resolve the matter satisfactorily would “really set back curing disease”—so no pressure.

Finally, the underlying question is whether we are heading in the direction that means that it will, in practice, never be acceptable to impose losses on uninsured deposits. We must remember that in this case the deposits were generally commercial, not personal, deposits. These issues are being discussed, and there is ongoing discussion about a digital currency, but it would be best if they were discussed clearly, openly and together.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, in our debates on Report of the Financial Services and Markets Bill we discussed at great length the wider issues around ring-fencing. I said then that we fully support the steps taken by the Treasury, the Bank and the regulators in relation to Silicon Valley Bank UK. The system worked at pace to ensure that SVB UK could continue its operations.

Silicon Valley Bank UK serves a high concentration of life sciences and tech companies in this country, and those firms play an indispensable role in driving growth and innovation across our economy. We therefore recognise that granting an exemption to the ring-fencing regime for HSBC was necessary to guarantee the sale of SVB UK in exceptional circumstances.

However, I have three questions for the Minister. First, although it is welcome news that SVB UK will continue lending, it is clear that tech and life sciences firms need more options. What plans do the Government have to ensure that SVB UK is not the only way that such firms can access capital?

Secondly, the three conditions on SVB UK that have made this ring-fencing exemption possible appear to be sensible, but are there are any circumstances that could lead to additional conditions being imposed or to a reopening of the exemption in future?

Finally, the Government previously indicated that if parliamentary committees were to undertake an inquiry on SVB UK’s collapse or on wider issues with the banking sector, they would co-operate with that inquiry. Has there been any interaction on this matter, beyond March’s exchange of correspondence with the Commons Treasury Select Committee?

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions. Although I think we all agree that the outcome reached with regard to Silicon Valley Bank UK was a good one, there are important questions about the process by which it was achieved and its implications.

The noble Lord, Lord Davies of Brixton, asked about lessons learned and, specifically, whether the regime worked as expected or as provided for when it was designed. Under the special resolution regime, various tools and powers are available to the Bank, the PRA and HMT to stabilise a failing institution. To deploy them, the authorities must be satisfied that: the bank is failing or likely to fail, by considering a number of factors, such as the value of assets and the ability to meet liabilities, as the noble Lord mentioned; outside the stabilisation powers, action will not be taken to prevent the bank failing; the exercise of the power is necessary, having regard to the public interest; and the objectives of the regime would not be better met by winding up the bank. Any use of the power that would entail risks to public funds must also be approved by His Majesty’s Treasury.

In the case of SVB UK, we can say that the powers were indeed used in a way provided for by the Banking Act 2009. The Bank of England, as the resolution authority, determined that the use of the private sector purchaser tool produced the best outcome, having regard to the special resolution objectives. In particular, it ensured that SVB UK’s customers were fully protected. As the noble Lord noted, the Treasury was consulted by the Bank of England before the private sector purchaser tool was exercised, as is also required by the Banking Act.

As I said, the authorities have a range of tools and options to choose from when deciding how best to manage a failing financial firm and contingency plan for a range of different scenarios. In choosing between the resolution tools set out in the Banking Act 2009, the Bank of England and the Treasury work closely together. The Bank is the UK’s resolution authority and is responsible for executing all stabilisation options provided for under the special resolution regime, with the exception of the temporary public ownership option, which is the responsibility of the Treasury.

--- Later in debate ---

[Baroness Kramer (LD)]

Just for clarification: HSBC could pass as many billions as it wishes through to Silicon Valley Bank UK to use for venture capital, private equity, structured derivatives and whatever other products Silicon Valley Bank provided to its customers on the date of its purchase—is that correct? So there is no constraint on the amount or where within that pool of activities the funding can go. It would be helpful for us to understand that.

[Baroness Penn (Con)]

If I might press on, I shall address at least part of the noble Baroness’s subsequent questions. Just to correct a perception: as the governor outlined to the Economic Affairs Committee yesterday, SVB UK typically provides corporate start-up banking services rather than investment banking. I think that difference is important in this context.

[Baroness Kramer (LD)]

I want to pick up on that “typically”. As far as I can see, there is nothing in this which says that the proportionality of commercial banking deposits with regard to the other activities has to stay constant. Carrying out one transaction in an area would bring it within the scope of future activities, would it not?

[Baroness Penn (Con)]

To answer the noble Baroness’s question about whether SVB UK will be permitted to use unlimited amounts of retail funding from HSBC’s ring-fenced bank, the ring-fencing exemptions are subject to conditions that restrict the amount of SVB UK’s core deposits and the type of business that it can operate, as I have set out and as is in the SI. In addition, the PRA has granted HSBC UK and SVB UK temporary waivers to remove constraints in the PRA Rulebook relating to the capital requirements regulation—CRR—on the intragroup lending and funding from HSBC to SVB UK. These waivers, along with the modification to the regime the Government made in the first SI, allowed HSBC to provide emergency liquidity to SVB UK.

As is usual practice with PRA waivers, they are time-limited. One of the waivers expires on 17 September 2023 and the other on 17 June. Whether these waivers are extended or modified is a matter for the independent regulator. The waivers are part of the range of tools that the PRA can use to ensure the effective supervision of HSBC UK and SVB UK. If these waivers lapse, the constraints in the PRA Rulebook regarding intragroup lending and funding from HSBC to SVB UK will come into effect, which would mean that SVB UK would not be able to be funded to an unlimited extent from HSBC UK’s retail deposits.

The noble Baroness, Lady Kramer, said that she took no comfort from either the provisions in this SI or the PRA’s wider supervisory and regulatory powers. What I would say is that the PRA has confirmed its support for provisions in this instrument. Sam Woods has stated that the SI and its conditions support the PRA’s primary statutory objective of safety and soundness and limits competitive distortion. He outlined that the PRA has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and SVB UK and ensure the protection of retail deposits. It will continue to supervise both HSBC UK and SVB UK in line with its usual supervisory approach.

The noble Baroness asked me about Section 55M of FiSMA. I suggest that I should perhaps write to the noble Baroness and the Committee on this point. I have the outlines of an answer, but I think that it might be better delivered in writing for complete clarity. To come back to her point, more broadly, about parliamentary scrutiny or control over the process around the ring-fence and changes to it, the actions in this case are entirely in line with powers granted to the regulators in terms of operating the resolution regime. What we should not do is to think that the powers used under the special resolution regime are indicative of the Government’s or regulators’ approach to reforming the ring-fence more broadly. Any fundamental reforms to that ring-fencing regime would require changes to primary legislation. There is nothing in this process that has changed that.

To turn to the question from the noble Lord, Lord Livermore, on lending to the sector, or sectors, that formed a large part of the customer base for SVB UK, he is absolutely right that it is essential that tech and life science firms have access to the capital that they need to start up and scale up. We support that through the British Business Bank, which has several programmes tailored specifically to the needs of the UK’s life science and technology companies, including the £200 million Life Sciences Investment Programme and the £375 million Future Fund Breakthrough programme, which is specifically aimed at increasing the supply of growth-stage venture capital to UK-based companies working in capital and R&D-intensive areas, such as quantum AI, life sciences and clean tech. There is the National Security Strategic Investment Fund, which invests commercially in advanced technology firms and aims to accelerate the adoption of the Government’s future national security and defence capabilities.

Further to that, at the Budget, the Government extended the British Patient Capital programme by a further 10 years. Alongside that, the Government launched the long-term investment for technology and science initiative to aim to spur the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes. The contribution of pension scheme capital in this area is something that we discussed quite a bit yesterday, and the Government have further intentions to take forward action in this area.

[Lord Davies of Brixton (Lab)]

Do we have a date for that?

[Baroness Penn (Con)]

I believe that at the Spring Budget the Chancellor said that he would report back in the autumn on the further work undertaken in that area—so quite soon, I would say.

I shall read through the transcript of this debate and look to ensure that where I have not fully answered the questions raised I write to noble Lords. Although it has been a short debate, it is an important area and I want to make sure that we get all the facts clearly on the record.

Motion agreed.

Mortgage Market

Baroness Penn Excerpts

Wednesday 14th June 2023 Lords Chamber

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

My Lords, the underlying causes of high inflation, as we all know, are driven by higher energy prices as a result of the war in Ukraine and a tight labour market. There are complex factors as that plays out but the Government are absolutely clear in their commitment to get inflation down. We have seen inflation begin to fall, and institutions such as the IMF have recognised the Government’s action in this area and that we are set on the right path to reduce inflation, which will help ease the pressure on not just mortgage holders but all people facing higher prices at the moment.

[Baroness Kramer (LD)]

My Lords, will the Government set up an emergency mortgage protection fund, potentially recouped by a bank levy, to ensure that those struggling the most will not lose their homes and face financial wreckage and wreckage of their lives?

[Baroness Penn (Con)]

My Lords, I hope the noble Baroness will take some comfort from the fact that mortgage arrears and repossessions remain below pre-pandemic levels. I reassure her that, if a borrower falls into financial difficulty, guidance from the FCA requires firms to offer tailored support and deal fairly with customers facing difficulties in meeting their payments. The Government also have a range of schemes in place to support borrowers, not least the support for mortgage interest scheme.

[Lord Naseby (Con)]

As my noble friend knows, the mortgage market is affected by interest rates, both the current rate and, even more importantly, the forecast rate. Is she aware that the pricing of housing is falling UK-wide, and falling extensively, partly because of mortgage costs but partly because of reasons that are nothing to do with mortgage cost: the policies of the Secretary of State, Mr Gove, which are very anti big builder? They are also causing difficulty in the rental market.

In that situation, with growth just showing the ability to come through, which is very encouraging, and with wages just beginning to show some positive response to the situation, is it not time that the Bank of England—although we are not responsible for it—recognise that rates should be held for the moment and allow the market to settle? Given the two factors I have mentioned—growth growing and inflation falling— I hope the interest rates recommended by the Bank of England will fall.

[Baroness Penn (Con)]

My Lords, interest rate decisions remain a matter for the independent Monetary Policy Committee of the Bank of England, but I say to my noble friend that high inflation is also bad for the economy. To have high growth we must first have low inflation, so we absolutely support the Bank of England in its task of pursuing the 2% inflation target and the difficult decisions it will have to take to achieve that.

[Lord Davies of Brixton (Lab)]

My Lords, I cannot resist the temptation to draw to the House’s attention the fact that this is the 278th anniversary of the Battle of Naseby—I am not picking a fight with the noble Lord.

My question concerns the fact that this is going to have a massive effect on the buy-to-let market. We are expecting further increases in interest rates, given recent news. A report in the Times last week showed the relationship between increases in the bank rate and the knock-on effect on “underwater” buy-to-let owners. This will cause severe damage to the buy-to-let market. I have mixed feelings about that market, but to the extent that owners of such properties cannot maintain their property properly, this will have a deleterious effect on the UK’s housing stock. The Government should be seized of this issue. To me, the solution is that the Government should provide funds to local authorities in order that they can take over these underwater buy-to-let properties—interestingly, a large proportion of them are ex-council properties anyway—so that local authorities can address the housing problems in their local areas.

[Baroness Penn (Con)]

My Lords, the noble Lord will know that the Government have given local authorities many more powers and more discretion in how they approach housebuilding and house supply in their area in recent years. He is right that the changes to interest rates will affect those in rented accommodation as well as those who have mortgages through channels such as he described. The Government are putting in place further support for renters. We have a series of reforms coming in through the Renters (Reform) Bill which will improve quality and security in the private rented sector. For those on benefits, the Government boosted investment in the local housing allowance in April 2020 by nearly £1 billion, and rates have been maintained at this increased level.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

Moved by

[Baroness Penn]

118: Clause 78, page 90, line 16, at end insert—
“(aa) Part 5 of Schedule 2, and section 2 so far as relating to that Part;”Member’s explanatory statement
This amendment would bring the amendments made in Part 5 of Schedule 2 to the Bill (which relate to the third country CCP run-off regime) into force on the day the Act is passed.

--- Later in debate ---

[Lord Moylan (Con)]

My Lords, I will speak only briefly in support of my noble friend Lord Trenchard. It was commonly known, and widely reported in the newspapers at the time, that following the financial crash of 2008, the EU, which has always had its doubts and scepticism—indeed, hostility—about what it referred to as Anglo-Saxon finance, withdrew the indulgence that it had previously shown towards the City of London as part of the European Union and started to enact legislation that was injurious to the City of London, and quite deliberately so, to the annoyance of the Chancellor of the Exchequer at the time, George Osborne, who was reasonably open about his opposition.

This instrument, the alternative funds directive, was the prime example of that, although there were others. It contributed significantly to the fact that there was much more support for Brexit in the City of London than people often wanted to admit at the time, or have admitted since, because they understood that that oppositional turn had taken place and the tide was now flowing against the City. So I agree with my noble friend that it is very difficult to see why, now that we have the opportunity to remove it, we continue not to do so year after year—and there are other examples of that.

I also support the remarks of my noble friend Lady Lawlor. There is a prevalent idea—and not just in financial legislation—that, as we get rid of European Union legislation that we no longer need, we need to replace it with legislation that almost replicates what the European Union was doing. A prime example of that outside the field of financial services is the Procurement Bill, a massively complicated piece of legislation replicating European Union legislation, almost in great detail. In fact, the procurement legislation of the European Union—which was obviously designed for 28 states, not simply for the United Kingdom—was there largely to deal with problems embedded in a history of municipal corruption, which were manifest in various European states but, I am glad to say, of which the United Kingdom has a long, proud history of being pretty free, with one or two exceptions. It was not necessary to replicate it in the detail in which it was done.

There are genuine concerns, certainly among those of us on this side of the House, that insufficient dispatch is being brought to getting rid of injurious legislation that we inherited from the European Union but can now get rid of, and that there is a mentality that the right way to get rid of something is, in effect, simply to re-enact something very similar after a period of consultation. I have great sympathy with what my two noble friends said, and I hope that the Minister, when she replies, will be able to give them some comfort.

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

My Lords, I am afraid that, as my noble friend Lord Trenchard set out, his amendment has not changed since Grand Committee and neither has the Government’s response, which he so adeptly summarised on my behalf. We are not able to support the amendment for those reasons.

While I recognise all three of my noble friends’ strength of feeling on this issue, it is important that we do not inadvertently damage the UK fund sector or its access to international markets. However, I reinforce the Government’s commitment to revoking all EU law in financial services—but with prioritisation and process. I hope that all three of my noble friends will take heart from the fact that we are on the last amendment on Report and near the end of the process by which we can see the Bill on the statute book. We can then begin the process of the revocation of EU law and its replacement—or perhaps not, depending on the individual circumstances—with an approach that is guided by what is best for the UK and our financial services sector, to support growth in that sector and across the whole country. That is something that we can all support as a result of the Bill. I hope that my noble friend is able to withdraw his amendment.

[Viscount Trenchard (Con)]

My Lords, I thank my noble friend for her reply. I am slightly more reassured than I was by her reply in Committee. I nevertheless do not feel that she yet recognises the very clear point that this regulation was hugely controversial and was opposed by everybody involved in the financial services industry—there were no supporters of it. I am afraid that we have become rather inured to operating under it, but I can assure her that there are still very large sectors of the asset management industry that would be delighted if the Government would show that this is a priority area for revocation when she gets going with the job of revoking EU law and replacing it with a more reasonable UK-friendly alternative regime.

I thank my noble friend for her response. I also thank all those still in the Chamber for their patience in sitting here right to the end and sharing in this final amendment. I beg leave to withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Livermore (Lab)]

My Lords, the Payment Systems Regulator is now putting in place requirements to ensure more consumers will receive a refund if they fall victim to authorised push payment scams. This is very welcome. Many banks have already taken steps to make customers aware of the risk of scams, but the sophisticated nature of many such scams means there is a need for even stronger efforts to prevent fraud occurring in the first place. Not all of the detail is yet settled, with consultation on key aspects of the new scheme to follow later in the year, but we hope the Minister can give an indication of the levels of protection likely to be offered.

We welcome the tabling of Amendment 94 by the noble Lord, Lord Vaux, which we understand to be a probing text. As the new system beds in, it will be vital for banks and other financial institutions to collect data and share that with the regulator, in order to inform future changes to guidance and regulation. The amendment also proposes public reporting of data to enable consumers to see which institutions have a good or bad track record. This is an interesting idea and we look forward to hearing the Minister’s response on this specific point.

While APP scams fall within the financial services realm, anti-fraud initiatives cut across departments and legislation. That is why one of our priorities for the Online Safety Bill is to ensure robust media literacy provisions, so internet users are able to better identify which articles, websites or emails are legitimate. With a significant amount of financial fraud taking place online but with the limited scope of that Bill, we hope the Minister and her department will engage with the Online Safety Bill as it approaches Report stage. Scams cause a significant amount of emotional distress, as well as coming with financial costs, so we hope that the Government and the regulators will do everything possible to keep ahead of the curve.

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

My Lords, the Government and the Payment Systems Regulator recognise the importance of regular, robust data collection. This is crucial for monitoring the effectiveness of the reimbursement requirement and ensuring that firms are held accountable. I am grateful to the noble Lord, Lord Vaux of Harrowden, for his considered engagement on this issue. I reassure noble Lords that the PSR has committed to half-yearly publication of data on authorised push payment scam rates and on the proportion of victims who are not fully reimbursed.

I can tell my noble friend Lord Naseby that a voluntary system is already in place and the PSR has already begun collecting data from the 14 largest banking and payment groups. The first round of transparency data is due for publication in October this year. The data that the PSR will publish includes the proportion of scam victims who are left out of pocket, fraud rates where the bank has sent customers’ money to a scammer, and fraud rates where the bank has hosted a scammer’s account. That means that, from October this year, the PSR will publish data for total fraud rates, both for sending money and receiving fraudulent funds, and reimbursement rates, on a twice-yearly basis for the 14 largest banking groups. This so-called league table will provide customers with the information they need to consider the relative performance of different banking groups on these metrics, and to factor that into their banking decisions.

Further to this data, once the reimbursement requirement is in place the PSR will use a range of metrics to monitor its effectiveness on an ongoing basis. These include the length of reimbursement investigations, the speed of reimbursements, the value of repatriated funds, the treatment of and reimbursement levels among vulnerable customers, and the number and value of APP scams. Data on appeals will be captured and reported by the Financial Ombudsman Service separately.

More broadly, the PSR will publish a full post-implementation review of the reimbursement requirement introduced by this Bill within two years of implementation. The review will assess the overall impact of the PSR’s measures for improving consumer outcomes. That does not mean it will not also consider the effectiveness of this measure on an ongoing basis. Indeed, more widely, the PSR will consider risks across different payment systems and, where necessary, address them with future action. This includes a commitment to work with the Bank of England to introduce similar reimbursement protections for CHAPS payments, and with the FCA in relation to on-us payments.

The PSR has been working closely with industry to develop effective data collection and reporting processes for its work on fraud. While the Government recognise the intention behind the noble Lord’s amendment, they do not consider it necessary or appropriate to prescribe specific metrics to be collected in primary legislation. I hope that, given the reassurance I have been able to provide today, he would agree with that point.

The noble Lord, Lord Livermore, spoke about the wider impacts of fraud and the duties that go beyond financial services companies or payment system providers in addressing those risks of fraud. That is being looked at through both the Government’s counter-fraud strategy and other Bills. He mentioned the Online Safety Bill. I disagree with his assessment of the measures in there. The measures that we have to tackle fraud in that Bill are a significant step-change in what we expect of companies in this space, and I think they will make a real difference. We are committed to working across all sectors to look at what more we could do in this space once we have implemented those measures and see how effective they are. I hope noble Lords are reassured by our commitments more broadly on this issue, and specifically by the fact that the PSR will be publishing data in this space once we have implemented the measures in the Bill.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank all those who have taken part in this debate, particularly the Minister for her constructive engagement on this and the reassurance she has just given. In fact, in one area, she has actually gone further than my amendment suggested, as the noble Lord, Lord Naseby, pointed out: the annual report is now to be six-monthly, which is hugely welcome. It is only for the top 14 payment service providers, which will cover the bulk of the market, but that is something that the Government and the PSR might want to keep under review, particularly as different players come in and out of the market. I thank her very much for her reassurances.

I will make one comment more generally, echoing some of the comments made by the noble Lord, Lord Livermore. It is not only the banks that are players within the fraud chain, it is all those other parties that enable or facilitate fraud, from the tech companies to social media companies, the web-hosting companies, the telecom companies, et cetera. This measure puts all of the liability on to the banks. While it is a simple solution for victims—and that is to be commended—we need to find some way of incentivising all those other players in the fraud chain to behave properly and to stamp down on their services being used by fraudsters. I am hoping that we will see progress on that in the Online Safety Bill, and also in the failure to prevent fraud clauses in the economic crime Bill that is coming forward. With that, I beg leave to withdraw my amendment.

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Moved by

[Baroness Penn]

95: After Clause 71, insert the following new Clause—
“Arrangements for the investigation of complaints
(1) The Financial Services Act 2012 is amended in accordance with subsections (2) and (3).(2) In section 84 (arrangements for the investigation of complaints)—(a) omit the “and” at the end of subsection (1)(a);(b) omit subsection (1)(b);(c) after subsection (1) insert—“(1A) The Treasury must appoint an independent person (“the investigator”) to be responsible for the conduct of investigations in accordance with the complaints scheme.”;(d) omit subsection (4);(e) in subsection (5), in the opening words, for “regulators” substitute “Treasury”.(3) In section 87 (investigation of complaints)—(a) in subsection (9A), after paragraph (b) insert—“(ba) for the regulator’s response under paragraph (b) to include a summary of—(i) the cases in which the regulator decided not to follow any relevant recommendations, and(ii) the reasons for not following those recommendations;”;(b) in subsection (9B), after paragraph (e) insert—“(f) such other matters as the Treasury may from time to time direct.”;(c) after subsection (9B) insert—“(9C) In subsection (9A)(ba) the reference to “relevant recommendations”, in relation to the regulator’s response in respect of an annual report, is a reference to—(a) any recommendations to the regulator contained in that annual report, and(b) any recommendations to the regulator contained in final reports relating to individual complaints given during the period to which that annual report relates.”Member’s explanatory statement
This new Clause would amend the Financial Services Act 2012 to make the Treasury, rather than the regulators, responsible for the appointment of the Complaints Commissioner and would impose additional reporting requirements.

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Moved by

[Baroness Penn]

96: After Clause 71, insert the following new Clause—
“Politically exposed persons: money laundering and terrorist financing
(1) The Treasury must exercise the power conferred by section 49 of the Sanctions and Anti-Money Laundering Act 2018 (power of appropriate Minister to make regulations about money laundering etc) for the purpose mentioned in subsection (2).(2) The purpose is to make provision amending Part 3 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”) (customer due diligence) so as to secure the result required by subsection (3).(3) The result required by this subsection is that, where a customer is a domestic PEP, or a family member or a known close associate of a domestic PEP—(a) the starting point for the relevant person’s assessment under regulation 35(3) of the 2017 Regulations is that the customer presents a lower level of risk than a non-domestic PEP, and(b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer is less than the extent to be applied in the case of a non- domestic PEP.(4) In this section—(a) “customer” includes a potential customer;(b) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(c) “enhanced risk factors”, in relation to a customer who is a domestic PEP or a family member or a known close associate of that domestic PEP, mean risk factors other than the customer’s position as a domestic PEP or as a family member or known close associate of that domestic PEP;(d) “non-domestic PEP” means a politically exposed person who is not a domestic PEP;(e) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.(5) Section 55 of the Sanctions and Anti-Money Laundering Act 2018 (Parliamentary procedure for regulations) does not apply to regulations made in compliance with the duty imposed by subsection (1).(6) Regulations made in compliance with the duty imposed by subsection (1)—(a) are subject to the negative procedure, and(b) must be laid before Parliament in accordance with paragraph (a) before the end of 12 months starting with the day on which this section comes into force.(7) The Treasury must, before the end of 6 months starting with the day on which this section comes into force, lay before Parliament a statement setting out what progress has been made towards making the regulations in compliance with the duty imposed by subsection (1).(8) The duty in subsection (7) does not apply where the regulations have been laid before Parliament in accordance with subsection (6)(a) before the end of 6 months starting with the day on which this section comes into force.”Member’s explanatory statement
This new Clause would impose a duty on the Treasury to amend the money laundering regulations with the effect of ensuring that a politically exposed person who is entrusted with a prominent public function by the UK (or their family members or known close associates) should be treated as representing a lower risk than a person so entrusted by a country other than the UK, and have lesser enhanced due diligence measures applied to them.

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[Baroness Penn (Con)]

My Lords, there has been significant discussion throughout the passage of this Bill, and more broadly in parliamentary debates, around the treatment of politically exposed persons—PEPs—under the money laundering regulations. Noble Lords have made many valuable contributions on this issue, sharing their personal experiences and those of their family members. I appreciate the concern expressed across this House that noble Lords and their family members can face disproportionate treatment as a result of their PEP status, including burdensome requests for information and even being prevented from accessing financial services. The Government are clear that action is needed to address this. In looking at this issue, we have sought to balance the need to maintain our adherence to the international standards in this area, as set by the Financial Action Task Force, with the need to ensure proportionate treatment of PEPs.

Therefore, the Government are tabling amendments to this Bill to achieve this in two areas. The Government are clear that domestic PEPs are lower-risk than foreign PEPs, and this must be reflected in both policy and practice. Noble Lords will be aware that while the money laundering regulations require all PEPs to undergo enhanced due diligence, the Government require the FCA to publish guidance on how banks and other financial institutions should meet this requirement. The FCA’s current guidance, published in 2017 following a provision introduced in the Bank of England and Financial Services Act 2016 with cross-party support, makes it clear that financial institutions should treat domestic PEPs as lower-risk than non-domestic PEPs in the absence of other high-risk factors.

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[Baroness Chapman of Darlington (Lab)]

My Lords, I accept that we are politically exposed people—of course we are—and we can be bribed, so it is right that there are rules around this. This topic has attracted a lot of interest throughout the passage of the Bill, along with a number of questions and debates. I completely understand why that is.

While the enhanced checks faced by politically exposed persons are often onerous, as we have heard—all power to the elbow of the noble Viscount, Lord Trenchard; well done to him for finding the names of two actual human beings to speak to at American Express, and I hope he gets his situation resolved—it is vital that this country maintains strong anti-money laundering regulations and acts in a manner consistent with international standards. Unfortunately, to an extent that involves us, but I think the Government’s amendments in this group do what is needed in making the distinction, as do many other jurisdictions, between domestic PEPs and those from other countries, which is consistent with the Financial Action Task Force guidelines.

We welcome the support for the amendments from the noble Lord, Lord Forsyth, and my noble friend Lady Hayter of Kentish Town, both of whom have raised this issue consistently for some time. Most of all, though, it is right that we thank the Minister for bringing the amendments forward. She has worked hard to try to resolve colleagues’ concerns on this issue, and we hope that those will be dealt with by the upcoming changes to the regulations and the accompanying guidance.

[Baroness Penn (Con)]

My Lords, I reiterate what the noble Baroness, Lady Chapman, has just said: our approach in this area has always been guided by ensuring that the rules in place in the UK maintain the international standards that are set in this area. That has been the guiding principle in looking at resolving this issue. Nevertheless, we felt that it was right that action be taken. Examples such as that from the noble Baroness, Lady Kramer, demonstrate clearly that the approach taken by institutions is not always proportionate, and we need to address that.

I have heard from noble Lords, including my noble friends Lord Forsyth and Lord Moylan, questions about the timescale for the two pieces of work that are committed to in the amendments. I understand that feeling, but we have engaged closely with the FCA on the review that it is committed to undertaking through the government amendment, and it is clear that if there is to be a thorough assessment of the treatment of domestic PEPs at a systemic level—we have already raised individual issues or individual institutions in response to previous debates—then it must be given adequate time to be conducted.

The 12-month timeframe will allow the review to benefit from fuller engagement with industry and with affected PEPs, and it will ensure that the FCA is able to develop a full understanding of the scale and extent of this issue. I think it gives the FCA time to address issues such as those raised by the noble Baroness, Lady Kramer. Included in that timeframe is the fact that, if it deems it necessary to update its guidance, it will produce the draft within that timeframe.

The Government have 12 months to amend the money laundering regulations. As I said, the distinction between domestic and foreign PEPs does not currently exist in law, and we want to make sure that we get the drafting right to ensure that it achieves the intended outcomes without unintended consequences. That will require us to consult with industry to ensure that the language in the amendment has the desired outcome of altering firms’ behaviour in how they treat low-risk domestic PEPs. These points relate to the questions posed by the noble Lord, Lord Sharkey, because this definition will come in part through the amendment of the regulations but in part from looking at the FCA’s guidance, and what needs to be set out more fully there when it has done its review.

Acknowledging the interest from parliamentarians—perhaps we should all have declared our interest as we stood up to speak, in respect of PEPs—we have committed to updates on progress both from the FCA and the Government in delivering on these amendments.

My noble friend Lord Moylan and the noble Earl, Lord Erroll, raised the interaction with tipping-off requirements and communication to customers. We have asked the FCA to consider this as part of its review. The noble Baroness, Lady Hayter, and others, mentioned the impact on family members. Again, we have asked the FCA to consider this in its review.

My noble friend Lord Moylan also asked if we need to wait for 12 months for action. The FCA remains committed to taking action where it identifies non-compliance with its current guidance on PEPs and will do so throughout the course of the review. I encourage noble Lords to use the contacts provided in my letter on this issue in November, if they encounter difficulties while the Government amendments are being implemented. I am sure that those in the FCA responsible for this area will look at this debate carefully.

The noble Lord, Lord Eatwell, raised a question on Crown dependencies, and my noble friend Lord Naseby asked about overseas territories. I will write to noble Lords on that. If it is right or appropriate that this should extend that far, there is nothing in the amendments to prevent the Government doing that, but I would want to double-check the right interaction and the right locus for addressing those concerns. With that, I beg to move.

Amendment 96 agreed.

Amendment 97

Moved by

[Baroness Penn]

97: After Clause 71, insert the following new Clause—
“Politically exposed persons: review of guidance
(1) The FCA must review its guidance on politically exposed persons (“PEPs”) given under section 139A of FSMA 2000 and in compliance with the requirements under regulation 48 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”).(2) The review required under subsection (1) must include—(a) an assessment of the extent to which the guidance is followed by those persons to whom it is given under regulation 48 of the 2017 Regulations, and(b) in the light of that assessment, consideration as to whether the guidance remains appropriate or whether it should be revised.(3) The FCA must—(a) before the end of 3 months beginning with the day on which this section comes into force, publish an update on the FCA’s plan for the review required under subsection (1), and(b) before the end of 12 months beginning with the day on which this section comes into force—(i) publish the conclusions of the review, and(ii) where the FCA concludes that the guidance should be revised, publish draft revised guidance for consultation.(4) Publication as required by subsection (3) must be in the way appearing to the FCA to be best calculated to bring the publication to the attention of persons likely to be affected by it.(5) The FCA is not required under this section to publish any information whose publication would be against the public interest.(6) In this section—(a) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(b) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.”Member’s explanatory statement
This new Clause would impose a duty on the FCA to review the guidance that the FCA produced in 2017 on the banks’ treatment of politically exposed persons, and publish draft guidance alongside the review, if the FCA concludes that the guidance should be revised.

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[Baroness Kramer (LD)]

My Lords, we should thank the noble Earl, Lord Attlee, for raising a set of significant issues. I have no specialist knowledge in this area, but I am very well aware that SMEs generally are disadvantaged under our current framework arrangements. As the Minister will know, individuals and micro businesses—usually a small sole trader or somebody of that ilk—fall within the FCA’s regulatory perimeter, but the SMEs that have just been described fall outside of it.

Therefore, where there are gaps or where their treatment is completely inappropriate, they have nowhere to turn. In those circumstances, they face significant disadvantage compared to their competitors across the globe. So I hope the Minister will understand that this is a reflection—I think “tip of an iceberg” was the correct term—of something that is quite systemic in many different ways, and an area where the Treasury, and the regulators, need to focus attention.

[Baroness Penn (Con)]

My Lords, as I set out previously in Grand Committee, I commend my noble friend Lord Attlee for his strong role in supporting Ukraine and bringing the value of his expertise in support of efforts to provide Ukraine with vital supplies. I understand that my noble friend wishes to ensure that the money laundering regulations do not hamper the private export of armoured vehicles or military vehicles to Ukraine. However, this cannot come at the expense of weakening the regulations in a way that would allow them to be circumvented by those wishing to launder money or finance terrorism.

The Government are committed to providing economic, humanitarian and military support to Ukraine. That is why the UK is proud to have pledged £6.5 billion in support of Ukraine, including £1 billion of World Bank guarantees to go towards closing Ukraine’s 2023 financing gap and £2.3 billion in military support for 2023. In 2022, 195 standard individual export licences and three open individual export licences were granted for the export of military items to Ukraine.

I recognise that my noble friend has concerns about a wider issue relating to provision of banking services to those involved in the defence industry and the refusal or withdrawal of services for other reasons connected with money laundering or ethical concerns. As I said in Committee, I am not aware that banks are taking a blanket approach to such customers. I am grateful to my noble friend for setting out some further specific cases today and I am glad that he had the opportunity to meet my noble friend the Defence Minister. The Treasury would be happy to look further into these cases with my noble friend and the Ministry of Defence. Equally, if the defence industry has wider concerns, I would encourage it to bring them to the attention of the Government and the regulators.

My noble friend made a comment on the Government’s ESG policy and its impact on defence companies. Our ESG policy is focused on delivering the net-zero commitment and there is nothing in that policy framework that prohibits or otherwise disadvantages defence companies and the war in Ukraine—

[Earl Attlee (Con)]

I am sorry to interrupt the Minister, but it was not the Government’s ESG policy that had caused me a problem but the banks’ ESG policies.

[Baroness Penn (Con)]

I understand the point that my noble friend makes, but I think that is rather a matter for the banks. Nevertheless, as I have said to my noble friend, if there are wider or more systemic issues in this area, I would encourage him to draw this to the attention of the Government and the regulators. The Government are clear that investment in the defence sector remains important.

My noble friend suggested again that I or another Treasury Minister write to the bank which withdrew services from his associate telling it to relax steps to be taken to comply with MLRs. However, it would be extraordinary and inappropriate to override the MLRs in this way. Further, banks would still be under obligations in relation to the Proceeds of Crime Act which relate to dealing with such money.

I thank my noble friend for raising this issue. I am glad that he has met the Ministry of Defence on it. If there are wider issues that he would like to highlight to the Government, the Treasury is committed to working with the MoD to look at them. None the less, I hope my noble friend does not press his amendments at this time.

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[Lord Livermore (Lab)]

My Lords, we welcome the amendment in the name of the noble Lord, Lord Forsyth, which has enabled this short and informative debate on the process for establishing a central bank digital currency. As technology develops and people’s habits change, it is vital that we keep pace. Therefore, the principle of a digital pound has much to commend it, although the arguments, implications and details clearly need to be properly worked through. The introduction of a digital pound would represent a significant step, and it is therefore right for the noble Lords, Lord Forsyth and Lord Bridges, to ask about the underlying processes, though it is a novel experience for the two noble Lords to be asking for commitments from this side of the House.

We very much welcome the clarification offered by the Chancellor in his letter to the noble Lord, Lord Bridges, and the Economic Affairs Committee that there would be primary legislation before a digital pound could be launched. We agree that this is an important safeguard.

[Baroness Penn (Con)]

My Lords, I thank my noble friends Lord Forsyth and Lord Bridges for their leadership in the House on this important topic. I do not intend to relitigate the debates around the question of a central bank digital currency; I was one of the five or so noble Lords who debated the Economic Affairs Committee report in February, and I enjoyed it very much.

As we set out then and in Grand Committee, the Government have not yet made a decision on whether the digital pound should be introduced, and that remains the case. But we also take the view that a digital pound may be needed in the future, so further preparatory work is justified. Therefore, the Treasury and the Bank of England issued a joint consultation on a potential digital pound on 7 February. As that consultation paper makes clear, the legal basis for a digital pound will be determined alongside the consideration of its design.

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[Lord Forsyth of Drumlean (Con)]

My noble friend has made valid arguments for not putting the amendment, as drafted, in the Bill. However, she and her very clever officials could get around this by tabling an amendment at Third Reading to that effect.

[Baroness Penn (Con)]

I am afraid that I am not in a position to commit to my noble friend’s suggestion. I hope that the reassurance he has heard from all Front-Benchers on this issue will persuade him not to press his amendment at this time.

[Lord Forsyth of Drumlean (Con)]

My Lords, once again, my noble friend has gone beyond what we might expect in responding to the debate, so it is a pleasure to beg leave to withdraw my amendment.

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[Baroness Kramer (LD)]

My Lords, I speak from these Benches on behalf of my party, as a group of realists. The current Government, and any future Government, look at the pools of money in pension funds, whether defined contribution or defined benefit, and see them as a tempting source of investment in the area of scale up and infrastructure, where we are desperate to find additional investment. I point out that pension funds are not disadvantaged in investing in investment-grade assets in any way. It is in investing in sub-investment grade assets where they carry a burden under the current arrangements.

These investments in scale up and infrastructure are, by definition, high risk and illiquid, and we have to face up to that. Some 40% of scale-ups fail and infrastructure projects run notoriously late, and well over budget. I challenge people to come up with a very long list of infrastructure projects that have come in on time and on budget. It is hard to identify virtually any project that meets that test. It means that pension obligations must be fully protected if we are to open up these funds to be able to invest in a far more illiquid and high-risk way.

That is why I am comfortable with this amendment, because proposed new subsection (2) insists:

“The review must consider how best to do this while protecting the safeness and soundness of pension funds”.


I was also pleased that the noble Baroness, Lady Chapman, introduced the additional consultee identified by my noble friend Baroness Bowles—the Pension Protection Fund—in this process, because that is clearly a mechanism which could provide the kind of protection for pensioners who may be exposed if we change the risk profile of pension fund investment.

I insist that the first responsibility of a pension fund is to pay out its obligations on time and in full. I suspect that everyone who is invested in a pension believes that that is, and must continue to be, true. Often when we discuss these issues the Canadian pensions funds are cited because they do indeed invest in illiquid and high-risk assets, but anyone reading the credit rating agencies discussing those pension funds will find that the pension funds are pretty much backstopped by the Canadian Government.

What I hope will come out of this review process are new opportunities to fund our economic growth but also protections commensurate—it may not be the same strategy but through some mechanism—with those that the Canadians have put in place, to make sure that our pensioners will still be paid on time and in full. If that no longer remains true, we end up in a very serious pickle but, having read through this set of amendments, I think they get us to the right place to be able to achieve that.

[Baroness Penn (Con)]

My Lords, the Government welcome the further discussions that this debate has given us the opportunity to have on the issue of unlocking pensions capital for long-term, productive investment where it is in the best interests of pension scheme members. Indeed, as I set out in Committee, the Government have a wide range of work under way to deliver the objectives set out by this review. While I was a little disappointed not to hear those initiatives referenced in this debate—apart from, perhaps, by my noble friend Lady Altmann—I will give it another go and set out for the House the work that is already under way in this area.

As previously set out, high-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that unlocking pension fund investment into the UK’s most innovative firms will help develop the next generation of globally competitive companies in the UK.

The Chancellor set out a number of initial measures in the Budget to signal a clear ambition in this area. These included: increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment in the UK’s key high-growth sectors, including life sciences, green industries and deep tech; spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes, by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative—noble Lords may have seen that the Government launched the LIFTS call for evidence on 26 May; and leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will come forward shortly with a consultation on this issue that will challenge the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets.

At Budget, the Chancellor committed the Government to undertaking further work with industry and regulators to bring forward an ambitious package of measures in the autumn. I reassure the noble Baroness opposite that this package aims to incentivise pension funds to invest in high-growth firms, and the Government will, of course, seek to ensure that the safety and soundness of pension funds are protected in taking this work forward, as in proposed new subsection (2). Savers’ interests will be central to any future government measures, as they have been to past ones. The Government want to see higher returns for pension holders in the context of strong regulatory safeguards.

In addition, the Government are already working with a wide range of interested stakeholders, including the DWP, the DBT, the Pensions Regulator, the FCA, the PRA and the Pension Protection Fund, as well as pension trustees and relevant financial services stake- holders. Proposed new subsection (3) in the amendment seeks to set out this list in legislation. I reassure the House that this is not necessary as the Treasury is actively engaging with them already, as appropriate. The Government would also be happy to engage with other interested stakeholders, as raised by my noble friend Lord Naseby and the noble Lord, Lord Davies of Brixton.

I note the specific areas of review outlined in subsection (4) of the proposed new clause, and I reassure noble Lords that the Government are considering all these issues as part of their work. In particular, proposed new subsection (4)(a) references the existing value-for-money framework. As I set out in Grand Committee, one area of focus for the Government’s work in this area is consolidation. To accelerate this, the Government have been working with the Financial Conduct Authority and the Pensions Regulator on a proposed new value-for-money framework setting required metrics and standards in key areas such as investment performance, costs and charges, and the quality of service that schemes must meet.

As part of this new framework, if these metrics and standards were not met, the Department for Work and Pensions has proposed giving the Pensions Regulator powers to take direct action to wind up consistently underperforming schemes. A consultation took place earlier this year, and the Government plan to set out next steps before the summer.

Turning to proposed new subsection (4)(b), I have already set out the forthcoming consultation to support increased investment in innovative companies and other productive assets by the Local Government Pension Scheme. Noble Lords may also be aware that the levelling up White Paper in 2022 included a commitment to invest 5% in levelling up. This consultation will go into more detail on how that will be implemented.

I turn to proposed new subsection (4)(c). The Government are committed to delivering high-quality infrastructure to boost growth across the country. We heard references in the debate to the UK Infrastructure Bank, which we will work with. The Treasury has provided it with £22 billion of capital. Since its establishment in 2021, it has done 15 deals, invested £1.4 billion and unlocked more than £6 billion in private capital. Furthermore, we have published our green finance strategy and Powering Up Britain, setting out the mechanisms by which the Government are mobilising private investment in the UK green economy and green infrastructure.

The Government wholeheartedly share the ambition of the amendment to see more pension schemes investing effectively in the UK’s high-growth companies for the benefit of the economy and pension savers. We agree with noble Lords on the importance of this issue. Where we disagree with noble Lords is on how crucial this amendment is to delivering it. Indeed, the Government are currently developing policies to meet these objectives, so legislating a review would pre-empt the outcome and might delay the speed at which the Government can make the changes necessary to incentivise investment in high-growth companies. Therefore, given all the work under way, I hope the noble Baroness feels able to withdraw her amendment.

[Baroness Chapman of Darlington (Lab)]

My Lords, I am grateful to everyone who has taken part in this debate. The Minister’s response was not awful. It was encouraging to hear some of the things that she had to say, and we recognise the work the Government are leading on this issue. However, the benefit of taking the approach outlined in the amendment, notwithstanding some of the comments that have been made about it, is that it would give focus and prominence to this issue and would bring together some of the threads that the Minister referred to. It is an important piece of work that, given everything the Minister said, ought to be not too onerous and is something that the Government ought to be a little more enthusiastic about starting—because it needs to start. This is something we would like to see proceed quickly. I think there has been sufficient support for the amendment from all sides of the House, and I wish to test the opinion of the House.

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[Lord Livermore (Lab)]

My Lords, we fully support the steps taken by the Treasury, the Bank and the regulators in relation to Silicon Valley Bank UK. The system worked at pace to ensure SVB UK could continue its operations. However, while we endorse the outcomes, legitimate questions have been asked about the ring-fencing exemption granted to HSBC and the potential long-term implications.

The arguments have been excellently outlined by the noble Baroness, Lady Kramer, the most reverend Primate the Archbishop of Canterbury and my noble friend Lord Eatwell, and I will not repeat them now. The financial system has experienced much volatility in recent months, so preventing major changes to ring- fencing being made by secondary legislation is a sensible step and one that we believe the Commons ought to consider before this Bill goes on to the statute book.

[Baroness Penn (Con)]

My Lords, it has been over 10 years since the Independent Commission on Banking recommended important structural changes, including the introduction of ring-fencing for the largest UK banks, and the Parliamentary Commission on Banking Standards recommended the introduction of the senior managers and certification regime, or SMCR, to embed a culture of greater accountability and personal responsibility in banking. I pay tribute to the important work of these commissions and their lasting legacy in improving the safety and soundness of the UK’s financial system. Amendment 106 from the noble Baroness, Lady Kramer, covers the ring-fencing and SMCR reforms.

In response to my noble friend Lord Trenchard, the legislation that introduced the ring-fencing regime required the Treasury to appoint an independent panel to review the regime after it had been in operation for two years. That independent review was chaired by Sir Keith Skeoch and concluded in March 2022. The review noted that the financial regulatory landscape has changed significantly since the last financial crisis. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can in future be managed in an orderly way, minimising risks to depositors and public funds.

In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the ring-fencing regime while maintaining financial stability safeguards. In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime that broadly follow the recommendations made by the independent review. The Treasury will consult later this year on those near-term reforms. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. In response, the Government published a call for evidence in March. This closed at the beginning of May and the Government are in the process of considering responses.

The noble Baroness, Lady Kramer, and other noble Lords referenced the resolution of Silicon Valley Bank UK, which was sold to HSBC on Monday 13 March. The Government and the Bank of England acted swiftly to facilitate the sale of SVB UK to HSBC after determining that action was necessary to protect depositors and taxpayers and to ensure that the UK’s world-leading tech sector could continue to thrive. To facilitate the sale, the Government made modifications to the ring-fencing regime that apply to HSBC only in relation to its acquisition of SVB UK.

It is critical that the Government have the necessary powers to act decisively to protect financial stability, depositors and taxpayers. The power under the Banking Act 2009 enables the Treasury to amend the law in resolution scenarios. Parliament gave the Treasury this power recognising the exceptional circumstances that can arise. However, I say to the noble Baroness that the changes made to the ring-fencing requirements are specifically in relation to the acquisition of SVB UK and should not be viewed as an indication of the future direction of government policy on ring-fencing. The Chancellor has been clear that, in taking any reforms forward, the Government will learn lessons from the crisis and will not undermine financial stability.

The core features of ring-fencing are set out in primary legislation, which generally may be amended only by primary legislation, so the Government are already constrained in one of the ways that this amendment seeks to ensure. In passing that legislation, Parliament delegated certain detailed elements of the regime to the Government to deliver through secondary legislation, given its technical nature and to allow it to evolve over time, where appropriate. Parliament also included clear statutory tests and objectives within the framework, which the Treasury and the PRA must satisfy when making changes to the regime. These statutory tests continue to reflect the underlying objectives and purposes of the regime. The Government are of the view that they remain appropriate and that no further constraints are necessary.

Turning to the SMCR, I can confirm to the House once more that the framework of the SMCR is set out in primary legislation, so it is already the case that significant amendments can be made only via primary legislation.

Let me also reassure the House that the Government continue to recognise the contribution of the SMCR in helping to drive improvements in culture and standards. The principles of accountability, clarity and senior responsibility that are emphasised by the PCBS report were reflected in the SMCR. We should take confidence from the findings of separate reports by UK Finance and the PRA, which both show that these principles are now more widely embedded in financial services than before the introduction of the regime.

The Economic Secretary made it clear to the Treasury Select Committee on 10 January that the purpose of the review was to seek views on the most effective ways in which the regime can deliver its core objectives. It is important to review significant regulation from time to time to ensure that rules remain relevant, effective in meeting their aims and proportionate to those aims. The Government are grateful to those who have submitted responses to the SMCR call for evidence. This information will help the Government, alongside the regulators, build a proper evidence base for identifying what, if any, reforms to the regime should be taken forward.

I hope that I have sufficiently reassured noble Lords that the Government remain committed to high standards of regulation, and to the important reforms introduced following the global financial crisis. Therefore, I ask the noble Lady, Baroness Kramer, to withdraw her amendment.

[Baroness Kramer (LD)]

I thank the Minister, but she has essentially repeated the speech she gave in Committee. At the time, I took her assurances at face value that primary legislation would be necessary to make a fundamental change to the structure of the ring-fence. I was therefore frankly shocked when, within a matter of days, the Government took a different point of view in the acquisition of Silicon Valley Bank UK by HSBC. There is no reason why HSBC should have used its ring-fenced arm to make the purchase of SVB; it chose to do so because it got, as a consequence, this opportunity to take that ring-fenced money and put in into non-ring-fenced activities, with no constraints whatever in terms of amount or activity.

The Government are bringing forward another statutory instrument to make that change permanent for HSBC. It is unconscionable that our largest bank should have a competitive advantage like that and other banks not be given it. I am extremely concerned about the way in which statutory instruments are being used to undermine the principle that changing the principles should be only by primary legislation. Therefore, I wish to test the opinion of the House.

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[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Lord, Lord Sharkey, for bringing back this amendment and for his persistence on this issue over many years. We are also grateful for the work of the APPG, particularly to Rachel Neale, who herself is a mortgage prisoner and has become a champion for those people who have been affected by this problem. I also want to mention my colleague in the Commons, Seema Malhotra, who is doing a lot of work on this issue.

We are hugely sympathetic towards mortgage prisoners, who have endured difficulties over so many years now, and wish that the Government had acted earlier to ease the burden on them. We were pleased to back this amendment during the passage of the Financial Services Bill in early 2021, when it passed by 273 votes to 235. However, we are mindful that at that point the House of Commons rejected that amendment, and did so at a time when a much larger proportion of the population was experiencing issues with mortgage affordability. In recent weeks, however, we have seen hundreds of mortgage products pulled and rates hiked on those that remain available. A number of major banks have even temporarily withdrawn offers for new customers, putting the brakes on the aspirations of many first-time buyers.

Of course, mortgage prisoners are in a different position, in that they have been facing problems for many years and are just not able to simply switch products in the way that others can. As the Minister will no doubt outline, while this amendment did not make it into the Financial Services Act 2021, it did prompt some new and welcome actions from the Treasury, regulators and banks. New advice was available and a number of lenders relaxed their criteria in certain cases. We know that the elected House has already rejected this proposal and, realistically, it is unlikely to reconsider in the current context, but more does need to be done. Can the Minister let us know whether the Government intend to respond to the recommendations that were made by the LSE in its report? If they are, when will that response be forthcoming? The Government urgently need to get a grip on the issues facing the mortgage market generally and, once that situation has calmed, we hope they will be able to do what they can to ease the difficulties faced by mortgage prisoners.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate, and in particular the noble Lord, Lord Sharkey, for tabling this amendment. I start by emphasising that the Government take this issue extremely seriously. We have a great deal of sympathy for affected mortgage borrowers and understand the stress they may be facing as a result of being unable to switch their mortgage. That is precisely why we, and the FCA, alongside the industry, have shown that we are willing to act, and have carried out so much work and analysis in this area, partly in response to prior interest from this House, as alluded to by the noble Baroness, Lady Chapman. This has included regulatory changes to enable customers who otherwise may have been unable to switch to access new products.

The Government remain committed to this issue and welcome the further input of stakeholders. For this reason, during Committee, the Government confirmed that they were carefully considering the proposals put forward in the latest report from the London School of Economics. Since then, as noted in the debate, I have met with the noble Lord and further members of the APPG and representatives of the Mortgage Prisoners Action Group to discuss the findings of the report and the issue of mortgage prisoners more widely.

The Economic Secretary to the Treasury has also written to the noble Lord, including to provide further clarity on the proceeds from the sale of UKAR assets. The LSE report recommends free comprehensive financial advice for all. That is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to £92.7 million this financial year.

The other proposals put forward by the London School of Economics are significant in scale and ambition. While the Treasury has been engaging with key stakeholders, including the LSE academics behind the report, for some time, including since Committee, we have concerns that these proposals may not be effective in addressing some of the major challenges that prevent mortgage prisoners being able to switch to an active lender. For example, the proposals would not assist those with an interest-only mortgage ultimately to pay off their balance at the end of their mortgage term.

We continue to examine the proposals against the criteria put forward originally by then Economic Secretary to the Treasury, John Glen, to establish whether there are further areas we can consider. I remind the House that those criteria are that any proposals must deliver value for money, be a fair use of taxpayer money and address any risk of moral hazard. This does not change the Government’s long-standing commitment to continue to examine this issue and what options there may be. However, it is important that we do not create false hope and that any further proposals deliver real benefit and are effective in enabling those affected to move to a new deal with an active lender, should they wish to.

I will not repeat the arguments against an SVR cap, as we discussed them at length previously in this House. An SVR cap would create an arbitrary division between different sets of consumers, and it would also have significant implications for the wider mortgage market that cannot be ignored. It is therefore not an appropriate solution, and I must be clear that there is no prospect of the Government changing this view in the near term. In the light of this, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey (LD)]

I thank all noble Lords who have spoken in this customarily brief debate on mortgage prisoners. I especially thank the noble Viscount, Lord Trenchard, for his contribution today and in Committee.

I am uncertain about what the Government’s response consists of. It seems to me that perhaps it consists of three things. The first is exculpatory—it was not our fault. It was the Government’s fault; it cannot be anybody else’s fault that these mortgage prisoners are in the position they find themselves in.

The second thing I am uncertain about is what the Government are actually going to do. I hear expressions of good will and care for mortgage prisoners but I do not hear anything at all that amounts to a plan, or the sight of a plan, or an objective, or something concrete that would help these people. I did not even hear whether we will get a response to the LSE report any time before the Summer Recess, or indeed whether there is a date by which response can be made—perhaps the Minister can enlighten us. I remind her again that by the Summer Recess it will be five months since the LSE report was presented, and the Treasury surely has had time to analyse it in some detail and to make a considered response.

It is quite clear that the real distress experienced by these mortgage prisoners is not understood or felt deeply within the Government or the Treasury. When we had a meeting with the Minister, we had a couple of the leaders of the Mortgage Prisoners group alongside us who told us some terrible stories about what has happened to their families over the past 10 years; 10 years of paying too much money—more than they should have done and more than they needed to in many ways—to these vulture funds.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

Moved by

[Baroness Penn]

11: After Clause 24, insert the following new Clause—
“Competitiveness and growth objective: reporting requirements
(1) Each regulator must make two reports to the Treasury on how it has complied with its duty to advance the competitiveness and growth objective.(2) The reports prepared by each regulator under subsection (1) must in particular explain—(a) the action taken by the regulator to ensure that the competitiveness and growth objective is embedded in its operations, processes and decision-making, and(b) how any rules and guidance that the regulator has made advance that objective.(3) The first report under this section must be made before the end of 12 months beginning with the first day on which section 24 of this Act comes into force, and must relate to that period.(4) The second report under this section must be made before the end of 24 months beginning with the first day on which section 24 of this Act comes into force, and must relate to the period beginning with the day on which the first report is published.(5) The Treasury must lay a copy of each report prepared under this section before Parliament.(6) Each regulator must publish its reports prepared under this section in such manner as it thinks fit.(7) In this section—(a) “regulator” means the FCA and the PRA;(b) references to the competitiveness and growth objective, and the duty to advance that objective, are—(i) in relation to the FCA, references to its objective in section 1EB of FSMA 2000 and to its duty to advance that objective under section 1B(4A) of that Act, and(ii) in relation to the PRA, references to its objective in section 2H(1B) of FSMA 2000 and to its duty to advance that objective under section 2H(1)(b) of that Act.”Member’s explanatory statement
This amendment would insert a new Clause to ensure that the FCA and the PRA, in addition to their annual reports, each provide for two consecutive years a report on the new competitiveness and growth objective, as inserted into the Financial Services and Markets Act 2000 by Clause 24 of the Bill.

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

My Lords, as your Lordships know, the Bill delivers the outcomes of the future regulatory framework, or FRF, review. It repeals hundreds of pieces of retained EU law relating to financial services and, as we have discussed, will give the regulators significant new rule-making responsibilities. The Government have been clear that these increased responsibilities must be balanced with clear accountability, appropriate democratic input and transparent oversight. The Bill therefore introduces substantial enhancements to the scrutiny and accountability framework for the regulators.

Following Grand Committee, the Government have brought forward a series of amendments which, taken together, seek to improve the Bill through further formalising the role of Parliamentary accountability, supporting Parliament through independent analysis and scrutiny, and increasing reporting and transparency to drive overall accountability. The group we are now debating covers proposals aimed at increasing reporting and transparency to drive overall accountability. I look forward to discussing the Government’s other amendments on accountability later today.

There has been significant interest in ensuring sufficient reporting, in particular of how the FCA and PRA are operationalising and advancing their new secondary competitiveness and growth objectives. The regulators are required to publish annual reports setting out how they have advanced their objectives, which are laid before Parliament. Clause 26 ensures that, in future, these reports must also set out how they have advanced the new secondary objectives.

Clause 37, introduced following the debate in Commons Committee, enables the Treasury to direct the FCA and PRA to report on performance where that is necessary for the scrutiny of their functions. To further support transparency, the Government published a call for proposals on 9 May, seeking views on what additional metrics the regulators should publish to support scrutiny of their work advancing their new objectives. This closes on 4 July.

The Government have been clear that they expect there will be a step change in the regulators’ approach to growth and competitiveness following the introduction of the new objectives, while maintaining high regulatory standards. It will therefore be important to have detailed information available to scrutinise how the regulators embed their new objectives into their day-to-day functions.

The Government have therefore tabled Amendment 11, which will require the FCA and the PRA to produce two reports within 12 and 24 months of the new objectives coming into force. These reports will set out how the new objectives have been embedded in their operations, and how they have been advanced. Once the new objectives have been embedded, it is appropriate that the regulators report on them in the same way as their other objectives, through their annual reports.

The Government have also heard the calls for further transparency to drive overall accountability in other areas of the regulators’ work. Clauses 27, 46 and Schedule 7 require the regulators to publish statements of policy on how they will review their rules. The Government’s response to the November 2021 FRF review consultation set out the regulators’ commitment to providing clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules in their rule review framework.

Reflecting representations made during my engagement with noble Lords between Grand Committee and Report, the Government have tabled Amendments 20, 52 and 56, which strengthen this commitment. The amendments will place a statutory requirement on the regulators to provide a clear process for stakeholders, including the statutory panels, to make representations in relation to rules and a statutory requirement to set out how they will respond.

I hope that noble Lords will support these amendments, which seek to provide Parliament, the Government and stakeholders with the relevant information to effectively scrutinise the regulators’ performance and drive overall accountability. I therefore beg to move Amendment 11, and I intend to move the remaining government amendments in this group when they are reached.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in the second day of Report. I declare my financial services interests as set out in the register. I thank my noble friend the Minister and all the Treasury officials for their engagement during and particularly after Committee with the issues in this group of amendments.

I will speak to Amendments 12, 19, 40, 41 and 92 in my name. Noble Lords with an eagle eye on the Marshalled List will note that there is more than a similarity between the amendments I tabled in Committee and in this group, and the government amendments. I thank the Government sincerely for taking on board not just the issues but also my wording.

Ultimately, as the Minister said, this is one of the most significant changes to financial services regulation in a generation. It is important that, in structuring the role of the regulator, we have at this stage the right level of scrutiny and the right requirements for the regulators to provide the information required at the right time to undertake that scrutiny.

The arrival of the international competitiveness objective is a positive thing within the Bill. These amendments give scrutiny the right opportunity to see how that objective is operationalised. Does the Minister agree that it is important to look at every element of information and the timeliness of all the elements being given to both financial services regulators to enable the right level of scrutiny to take place? To that extent, I ask her to comment particularly on Amendment 92, alongside my other amendments, because this seems like no more than the base level of detail that one would want to be able to form that crucial scrutiny function.

Having said that, I am incredibly grateful to the Minister, the Government and all the officials for taking on board so many of the issues and the wording from Committee, and bringing them forward in this group.

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[Lord Livermore (Lab)]

My Lords, I will be very brief so as not to detain the House further. Much of the substance of these issues was debated in the previous group on Tuesday evening, when I said that we strongly support the inclusion in the Bill of the new secondary objective for the regulators of international competitiveness and economic growth.

While the introduction of this secondary objective is a positive step, it is also important to ensure that it is meaningfully considered in the regulators’ decision-making. One of the main ways of doing this is by introducing some proven accountability measures to require the regulators to report on their performance against the objective. We therefore welcome the government amendments in this group, which will provide for initial reports on implementation of the competitiveness and growth objective, as well as other provisions that seek to improve regulatory accountability.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for that constructive debate and I seek to engage only with the points that have been raised.

I agree with the noble Lord, Lord Eatwell, that high regulatory standards are a key to London’s and the UK’s competitiveness as a financial centre. That is why the growth and competitiveness objective is a secondary objective to the primary objectives already in existence. However, high regulatory standards are not the only contributor to the growth and competitiveness of our economy or the sector. The new secondary objective, therefore, has an important role to play.

To address specifically the concern expressed by the noble Lord, Lord Eatwell, on day one of Report—the noble Baroness, Lady Kramer, reflected on that again today—that the government amendments in this area somehow seek to elevate the secondary objective from its position within the hierarchy, that is not the case. These amendments reflect the fact that they are new objectives for the regulators and it is right that we have a focus on new objectives being added through the Bill to understand how they are being embedded into the operation of the regulators.

The noble Lords, Lord Vaux and Lord Davies of Brixton, asked how the reporting will take into account the fact that the objectives are secondary and how they will impact on the primary objectives. It is in the structure of the objectives that the growth and competitiveness objective can be delivered only in the context of achieving the primary objectives. That is built into the system. Each year, in addition to these two reports provided for in our amendment, there will be the annual report from the regulators looking at their delivery across all their objectives.

Several noble Lords asked whether having a report on this specific objective for just two years was the right approach. We think it strikes the balance between reflecting the new nature of these objectives and, over time, integrating them into the working of the regulators and reporting them in future annual reports. However, I point out to noble Lords that the Government have the power to specify certain matters to be addressed in those annual reports if we think it necessary in future. Under Clause 37, we also have the power to require further reporting on certain matters, so if the Government felt that further focus on the embedding of these new objectives was needed, there are powers in the Bill that would allow that to be drawn out.

My noble friends Lord Trenchard and Lord Ashcombe, and others, raised concerns about the need for specific metrics for reporting the regulators’ delivery against their objectives, as set out in my noble friend’s amendment. As noble Lords recognise, that is exactly the purpose of the Government’s current call for proposals. We do not think it is right to have the metrics in the Bill, because that would hinder the objectives that my noble friends are talking about, in terms of having the best possible set of metrics that can be adapted and updated to ensure that Parliament, industry and the Government get the information that they need on the regulators’ performance.

My noble friends Lord Holmes and Lord Ashcombe also drew attention to Amendment 92 in this group. I am aware that the speed and effectiveness with which the regulators process applications for authorisation remains an area of concern for both Parliament and industry, and the Government share those concerns. In December, the Economic Secretary to the Treasury wrote to the CEOs of the PRA and the FCA, setting out the importance of ensuring that the UK has world-leading levels of regulatory operational effectiveness. Publishing more and better data detailing the FCA and PRA’s performance is critical to meeting these aims. That is why, in their reply to the Economic Secretary’s letter, both CEOs committed to publishing more detailed performance data in relation to authorisation processes on a quarterly basis.

On 19 May, both the FCA and the PRA published their first set of enhanced quarterly metrics relating to their authorisations performance, including the average time taken to process applications. The reports demonstrate that the regulators, particularly the FCA, are making progress towards meeting service-level targets, while recognising that there are further improvements to be made on some measures. The Government will continue to monitor this data to assess performance and discuss continuing efforts to improve operational efficiency with the regulators.

I am glad to have heard the general support for the Government’s amendments in this group. As my noble friend Lord Holmes said, we drew heavy inspiration from his contributions in Committee, and those of other noble Lords.

Amendment 11 agreed.

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[Baroness Penn (Con)]

My Lords, the Government are committed to ensuring that people, regardless of their background or income, have access to useful and affordable financial services and products. We work closely with the FCA in pursuit of that goal.

The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The FCA’s objectives are at the very core of its work, and it is its statutory remit to advance those objectives. While I therefore commend the intention behind Amendments 13 and 18, the FCA’s objectives should not be changed lightly and without detailed consultation, given the potential for unintended consequences for the way financial services are regulated in the UK.

Noble Lords will be aware that the new secondary growth and competitiveness objectives introduced by the Bill were the subject of in-depth consultation in several stages, to ensure that the legislation will have its intended effect. While some respondents to that consultation process raised the issue of requiring the regulators to have regard to financial inclusion, there was no consensus on this proposal in terms of approach or effect.

My noble friend invited me to take up the opportunity to consult further on this matter, anticipating what I might say. However, as I have just reflected, this was, in part, considered in the work that was done in the lead-up to the Bill, which took place over several years, and we have been considering the Bill before us for nearly a year. So, while I have heard the views raised in this debate, there has also been a strong feeling over the course of the Bill that there is a desire for the Government and regulators, once we have the Bill in place, to press ahead and use the powers in it to deliver regulatory reform. I do not think that further consultation on further changes to the objectives at this stage would be the right approach.

As I said, this was considered as part of the FRF review. Indeed, in its consideration of these matters, the Treasury Select Committee specified in its future of financial services regulation inquiry that it did not recommend that any changes related to financial inclusion should be made to the regulator’s objectives, noting that financial inclusion is a broader social issue and that the primary role of the FCA should not be to carry out social policy.

The FCA’s consumer protection objective requires it to protect consumers from poor conduct by financial services firms. Financial exclusion is driven by many factors which may not be attributable to firms’ conduct. Given this, the consumer protection objective is not the appropriate place to seek to address financial inclusion. Indeed, an objective to protect consumers from harm may, at times, be in tension with an objective to increase financial inclusion. For example, certain credit products or investments may not be appropriate in all circumstances and could be detrimental to a consumer’s financial situation and well-being. The FCA will already seek to balance this through developing its rules and interventions, but that means that adding a formal requirement to advance financial inclusion as part of the consumer protection objective risks adding complexity and uncertainty to one of the most important parts of the FCA’s work.

Where there are gaps in the market which mean that some consumers struggle to access appropriate products, it is right that the Government seek to tackle these. I hope that noble Lords will be reassured that we are taking, and will continue to take, action. The noble Lord, Lord Eatwell, spoke of the importance of cash to many. That is why the Government are taking unprecedented action in the Bill to protect access to cash.

The noble Baroness, Lady Kramer, referred to—

[Lord Eatwell (Lab)]

I actually said the opposite; access to cash will not be useful if the cash cannot be used to make a transaction. Increasingly, transactions cannot be made with cash but only electronically.

[Baroness Penn (Con)]

Some of the implications of the noble Lord’s contribution on potentially obliging people to use certain payment systems show that including financial inclusion under the consumer protection objective could have quite far-reaching consequences that we would want fully to think through and consult on before changing the objectives. That lies behind the Government’s concern about this approach.

As I was saying, this does not mean that there is no action to promote financial inclusion by the Government and the regulators. Major banks are required to provide basic bank accounts for those who would otherwise be unbanked. As of June last year, there were 7.4 million basic bank accounts open and during 2020-21 around 70,000 basic bank account customers were upgraded to standard personal current accounts, graduating to more mainstream financial services products. The FCA’s financial lives survey has shown that those aged over 75 are becoming more digitally included, with 64% digitally active in 2020 compared to 41% in 2017. However, we absolutely recognise that there is more work to be done in this area. The Government have allocated £100 million of dormant asset funding to Fair4All Finance, which is being used to improve access to affordable credit, with a further £45 million allocated recently to deliver initiatives to support those struggling with the increased cost of living.

While the FCA has an important role to play in supporting financial inclusion, it is already able to act where appropriate. For example, it has previously intervened in the travel insurance market to help consumers with pre-existing medical conditions access affordable credit. As the noble Baroness, Lady Chapman, recognised, the new consumer duty developed by the FCA is yet to come into force and we are yet to feel the full benefits of that. However, importantly, these issues cannot be solved through regulation alone. Where there are gaps in the provision of products to consumers, the Government will continue to work closely with the FCA and other key players across industry and the third sector to address them.

I turn to Amendment 14 from the noble Lord, Lord Davies of Brixton. I reassure him that the FCA is already well placed to take into account the protection of consumers’ mental health within its existing objectives. The regulator’s vulnerability guidance sets out a number of best practices for firms, from upskilling staff to product service and design, and specifically recognises poor mental health as a driver of consumer vulnerability. Where FCA-authorised firms fail to meet their obligations to treat customers fairly, including those in vulnerable circumstances, the FCA is already empowered to take further action. Since the publication of the vulnerability guidance, the FCA has engaged with firms that are not meeting their obligations and agreed remedial steps.

In summary, the Government believe that this is an incredibly important issue but consider that it is for the Government to lead on the broader issues of financial inclusion. Where necessary, in the existing framework the FCA is able to have the appropriate powers to support work on this important issue. While the Government do not support these amendments, I hope that I have set out how they are committed to making further progress in this area. I therefore hope that my noble friend Lord Holmes will withdraw his amendment and that the noble Lord, Lord Davies of Brixton, and the noble Baroness, Lady Chapman, will not press theirs when they are reached.

[Lord Holmes of Richmond (Con)]

My Lords, I thank everyone who has participated in this debate, and my noble friend the Minister for her response. This will continue to be a significant issue until we have something in the country which looks far more like financial inclusion for all those who are currently feeling the sharp end, or the wrong end, and who are shut out of so much of what passes for financial services today. However, having listened to my noble friend the Minister, I will not push this matter any further today. I beg leave to withdraw Amendment 13.

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Moved by

[Baroness Penn]

16: Clause 26, page 39, line 15, at end insert—
“(1A) In section 1JA (Treasury recommendations in connection with general duties), after subsection (1)(c) insert—“(ca) how to discharge the duty in section 1B(4A)(duty to advance competitiveness and growth objective),”.(1B) In section 1K (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the FCA’s operational objectives includes, in its application as a secondary objective, the competitiveness and growth objective (see section 1EB).”.(1C) In section 2I (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the PRA’s objectives includes, in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1D) In section 3B (regulatory principles to be applied by both regulators), for subsection (3) substitute—“(3) “Objectives”—(a) in relation to the FCA means— (i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1E) In section 3D (duty of FCA and PRA to ensure co-ordinated exercise of functions), for subsection (4) substitute—“(4) In this section, “objectives”—(a) in relation to the FCA means—(i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).(5) Where a regulator is proposing to exercise a function that is not one of its general functions, the reference to “objectives” in subsection (1)(a) does not include the secondary objectives mentioned in subsection (4)(a)(ii) and (b)(ii).(6) In this section, “general functions”—(a) in relation to the FCA, has the same meaning as in section 1B(6), and(b) in relation to the PRA, has the same meaning as in section 2J(1).”.(1F) In section 138I (consultation by the FCA), in subsection (2)(d) after “1B(1)” insert “, (4A)”.” Member’s explanatory statement
This amendment would ensure that provisions of the Financial Services and Markets Act 2000 that refer to the objectives of the FCA and the PRA also include a reference to the new competitiveness and growth objective, as inserted by Clause 24 of the Bill.

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Moved by

[Baroness Penn]

20: Clause 27, page 40, line 6, at end insert—
“(1A) The statement must provide information about—(a) how representations (including by a statutory panel) can be made to each regulator with respect to its review of rules under section 3RA, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the FCA and PRA to ensure that those regulators include in their statements of policy about the review of rules (required by section 3RB of the Financial Services and Markets Act 2000, as inserted by Clause 27) information about how representations (including by statutory panels) can be made and considered.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

Moved by

[Baroness Penn]

23: Clause 35, page 49, line 40, at end insert—
“(ic) how it has complied with the statement of policy on panel appointments prepared under section 1RA in relation to the process for making appointments and the matters considered in determining who is appointed, and”Member’s explanatory statement
This amendment would ensure that the FCA includes in its annual report under paragraph 11 of Schedule 1ZA to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 1RA as inserted into FSMA 2000 by Clause 43.

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

My Lords, I will speak to all the government amendments in this group, which are part of a package of changes that the Government have brought forward to support scrutiny and accountability of the financial services regulators.

This group of amendments focuses on supporting that work through independent analysis and scrutiny. The Government have listened to the view expressed by noble Lords that, for there to be effective scrutiny, it is critical that Parliament and others have access to accurate and impartial information to assist in assessing the performance of the regulators. The Government have carefully considered the proposal, put forward by my noble friend Lord Bridges in Grand Committee, to establish an office for financial regulatory accountability, or OFRA.

While the Government cannot accept the proposal to establish an OFRA, we have considered what more can be done to support the provision of independent analysis and scrutiny. FSMA already requires the regulators to consult on rule proposals and establish independent panels to act as a “critical friend” in the rule-making process. The regulators seek to engage the panels at an early stage of policy development and the panels voluntarily produce reports annually on their work.

Through the Bill, the Government are already enhancing the role of the statutory panels to support scrutiny and accountability. This includes Clause 43, which requires the regulators to publish a statement of policy on how they recruit members of their statutory panels. In addition, following the debate in Commons Committee the Government introduced Clause 44, which requires panel members to be external to the regulators and the Treasury.

However, the Government have heard the calls from across the House for further reassurance that the regulators’ approach to panel recruitment will ensure that panel members are drawn from a diverse range of stakeholders and are sufficiently independent of the regulators. The Government have therefore introduced Amendments 23, 24, and 57, which will require the FCA, the PRA and the PSR, as part of their annual reports, to set out how recruitment to their panels has been consistent with their statements of policy.

The Bill also already introduces measures to strengthen the quality of the regulators’ cost-benefit analysis, including the introduction of new, independent panels to support the production and development of CBA. It is important that CBA reflect as accurately as possible the costs and benefits to firms and consumers of implementing and following regulation. In assessing this, the experience of regulated firms themselves is vital.

The Government are grateful to my noble friend Lord Holmes for raising this issue in Grand Committee, and again through Amendments 44 and 47 today. The Government have reflected on that earlier debate and introduced Amendments 43 and 46, which will require both the FCA and the PRA to appoint at least two members to their CBA panels from authorised firms.

To ensure that Parliament has access to the important work of the panels, the Government have introduced Amendment 50, which provides a power for the Treasury to require the panels to produce annual reports. The Treasury will then be required to lay these reports before Parliament. I can confirm that, in the first instance, the Government will bring forward the necessary secondary legislation to require the CBA panels and the FCA Consumer Panel to publish an annual report to be laid before Parliament, reflecting the fact that the work of the Consumer Panel and the new CBA panels has been of keen interest to noble Lords in earlier debates. The Government will keep this under review, and the legislation will allow the Government to require other panels to publish annual reports and lay these before Parliament if they consider that appropriate in future.

Finally, Amendment 95 seeks to strengthen the independence of the complaints scheme through which anyone directly affected by how the regulators have arrived at their decisions can raise concerns. The scheme is overseen by the independent complaints commissioner, and Amendment 95 seeks to strengthen that independence further by making the Treasury responsible for the appointment of the commissioner, rather than the regulators.

Existing legislation requires the complaints commissioner to publish an annual report, including trends in complaints and recommendations for how the regulators can improve, which is to be laid before Parliament. Amendment 95 also enables the Treasury to direct the commissioner to include additional matters in the annual report. This will ensure that, where appropriate, the Government can make sure that the report covers issues which the Government consider are important to support scrutiny of. Amendment 95 also requires the regulators to include a summary of where they have disagreed with the commissioner’s recommendations, and their reasons for doing so, in their response to the commissioner’s annual report.

The Government have been clear that the regulators’ increased responsibilities as a result of the Bill must be balanced with clear accountability, appropriate democratic input and transparent oversight. The package of amendments we are debating in this group contribute to that and support Parliament through additional independent analysis and scrutiny.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in the debate on this group of amendments. I will speak to Amendments 42, 44, 45 and 47 in my name, and offer my support for all the amendments in the name of my noble friend Lord Bridges, to which I have added my name. I will leave him to set them out.

I again thank my noble friend the Minister, and the Treasury officials and team, for all the meetings and work done during Committee, and between Committee and Report, on the question of regulator scrutiny and accountability. I thank her particularly for adopting my Amendments 44 and 47 on the membership of the panels. On my Amendments 42 and 45, could she say a little more about the evidence base the panel will use to come to its recommendations? Would it be valuable to publish any dissenting opinions on the matters to be published? This would be extremely helpful for Parliament to scrutinise the panel’s decisions.

Finally, I ask a broader question around cost-benefit analysis. How will HMT and the regulator seek to ensure that the whole CBA process is meaningful, balanced, considers all majority and minority views, and does not fall into the potential trap of being a utilitarianist pursuit, which cost-benefit analysis can sometimes fall foul of?

That said, I thank again the Minister and the Treasury officials for their support for the amendments and for the discussions we had to come to this point, particularly on Amendments 44 and 47. I look forward to hearing in detail, particularly from my noble friend Lord Bridges and the Minister, the suggestion around the office for regulator accountability.

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[Baroness Chapman of Darlington (Lab)]

My Lords, I start by acknowledging the government amendments in this group, which make a number of changes that we think are sensible to ensure that the cost/benefit analysis panels have representatives from industry, to allow the Treasury to direct statutory panels to make annual reports and to make it the Treasury’s job to appoint the complaints commissioner. These all represent steps in the right direction—even if, as the noble Baroness, Lady Kramer, has just said, they are not necessarily the giant leaps that some would hope to see.

We tabled Amendment 39 in this group, which would require the FCA consumer panel to produce annual reports on the regulator’s fulfilment of its statutory consumer protection duties, and my noble friend Lady Hayter explained why we were backing this so firmly and spoke about the work with the British Steel pensioners, led by Nick Smith. She saved my blushes because Nick is my husband. I know that is not a declarable interest, but in the interests of transparency, I should probably let people know. We are pleased to see Amendment 50 and will not be pressing our Amendment 39 to a vote because of it. We believe that the government amendments go a significant way to addressing our concerns, so will not press our amendment, but that does not mean that we are convinced that consumer issues are by any means resolved, and we may have to revisit this topic in future.

The noble Baroness, Lady Bowles, helpfully introduced the amendments tabled by the noble Lord, Lord Bridges, and presented his proposal for an independent office for financial regulatory accountability. This is an interesting proposal but, when considering the Government’s numerous concessions on scrutiny and accountability, at this point we would not be minded to support it at a Division, because the creation of such a body needs significant work and amounts to a fundamental change in how we regulate the sector. We do not want to pre-empt what the Minister has to say, but it was not a core focus of the future regulatory framework review, the outcomes of which the Bill seeks to implement.

The amendments from the noble Lord, Lord Bridges, raise important questions about the capacity of parliamentary committees to scrutinise the regulators’ output, and this is something we have consistently raised with the Minister during our private discussions. When I say “we”, that is very much the royal “we”—I obviously mean my noble friend Lord Tunnicliffe. I am sure that he is grateful to the Minister for the time she has given to him, to my noble friend Lord Livermore and to me in recent weeks. While we understand that it is for Parliament to make its own arrangements, both now and in future, we hope that the Government will acknowledge the substantial workload that committees will have and remain open-minded about whether and how the regulators can better facilitate Parliament’s work.

I am especially grateful to my noble friend Lord Eatwell for his amendments to the OFRA texts, but I suppose this highlights in part the difficulties with supporting the detail of the proposal at a Division at this point. We see that many people agree with the principle, but there is probably a great deal more work to be done on the detail.

[Baroness Penn (Con)]

My Lords, let me respond briefly to the points raised in the debate. I take first the amendments from my noble friend Lord Bridges, well introduced by the noble Baroness, Lady Bowles: Amendments 64 to 66 and 68 to 71, which would establish an office for financial regulatory accountability. As I said in my opening remarks, the Government agree that the provision of accurate and impartial information is extremely important for assisting Parliament in its important scrutiny role—and, indeed, others.

However, as the noble Baroness opposite acknowledged, creating a new body raises questions about how it would interact with the existing accountability structures and the balance of responsibilities between government, Parliament and independent regulators. As I noted in Grand Committee, the provisions for the establishment of the Office for Budget Responsibility referred to in this debate, on which OFRA is, at least in part, modelled, were brought forward in a stand-alone Bill after public consultation, where there was sufficient time to consider carefully its role and remit in advance. The Government therefore do not think that establishing such a body through amendment to this Bill is the right way forward at this time. We acknowledge the strength of feeling and degree of consensus from different parts of the House on this idea, and noble Lords can rest assured that my noble friend Lord Bridges has made it very clear to me that this is not the last that the Government will be hearing from him on this subject.

I turn to the series of amendments from my noble friend Lord Holmes. Amendments 42 and 45 seek to make specific provision for the regulators’ new CBA panels to be provided with the information required to perform their functions. The Government support the intention of these amendments but consider that the requirement in legislation to establish and maintain the panel already requires the regulator to ensure that the panel has the appropriate information and data to perform its functions.

My noble friend Lord Holmes asked how we could ensure high-quality cost-benefit analysis work. As he and the noble Lord, Lord Eatwell, noted, key to this is the composition of the panels. Panels with members who have diverse backgrounds, expertise and thought will be better placed to ensure that the FCA, the PRA and the PSR receive the most comprehensive appraisal of their policy. That is part of the reason why we have Clause 43, which requires the FCA and the PRA to set out a clear and transparent process for appointing members.

The FCA has also recognised the importance of improving diversity in the membership of its statutory panels and is undertaking a review to identify ways in which it can boost diversity so that the composition of panels appropriately reflects the range of practitioners and stakeholders in financial services. The Government welcome the work that is being done to move recruitment to the panels in this direction.

Amendments 41 and 45 seek to require the new CBA panels to make public their meeting materials and recommendations. The Government are not able to support this as it could undermine the confidentiality of the panels’ contributions, which is crucial to their role as a critical friend to the regulators. The panels and the regulator will already be able to make public their deliberations and materials when they consider it appropriate, without undermining that confidentiality. Through an amendment in this group, the Government are taking a power to oblige the panels to publish their annual reports on their work and lay them before Parliament; we think that this will deliver sufficiently.

If a panel feels that its work or conclusions are being ignored by the regulator, or where there are issues on which the regulator and the panel differ, the Government expect that these will generally be resolved in the course of regular engagement between the regulator and the panel. However, as I have said, panels are able to express their views publicly, including through their annual reports or by publishing responses to consultations. For example, as it currently operates, the FCA’s consumer panel regularly publishes its responses to the regulator’s consultations.

I turn to Amendment 39 in the name of the noble Baroness, Lady Chapman. I am glad that she and the noble Baroness, Lady Hayter, feel that government Amendment 50 seeks the same outcome and should help to deliver that, although I note that, as the noble Baroness said, this is not the last word on consumer issues. However, at least when it comes to this particular focus, we have, I hope, delivered on that.

I know that not all noble Lords are satisfied with all of what the Government have put forward, but this is a step forward in the right direction. I expect to hear more from noble Lords in future on how the new system that we are establishing through this Bill is operating. For now, I commend the amendment.

Amendment 23 agreed.

Moved by

[Baroness Penn]

24: Clause 35, page 50, line 6, at end insert—
“(za) after paragraph (ba) insert—“(bb) how it has complied with the statement of policy on panel appointments prepared under section 2NA in relation to the process for making appointments and the matters considered in determining who is appointed,”Member’s explanatory statement
This amendment would ensure that the PRA includes in its annual report under paragraph 19 of Schedule 1ZB to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 2NA as inserted into FSMA 2000 by Clause 43.

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[Lord Livermore (Lab)]

My Lords, I join the noble Baroness, Lady Kramer, in congratulating the noble Lord, Lord Forsyth, on persuading the Government to adopt his amendments, albeit in a slightly different form. Given the amount of regulation coming forward in the months and years ahead, and with the expertise that your Lordships’ House can offer, it was crucial that the Government extended the Commons-only provisions to include a relevant Lords committee, and we very much welcome these government amendments.

We are also pleased that the Minister included the option of a Joint Committee, as this future-proofs the legislation in the event that colleagues in both Houses feel—as does my noble friend Lord Eatwell—that such a body would provide a better form of scrutiny of the regulator’s work. As my noble friend Lady Chapman mentioned in a previous group, and as the noble Lord, Lord Forsyth, stressed further, there are still significant outstanding questions about the level of staff resource and expertise that relevant parliamentary committees will be able to draw on. Although these questions cannot be adequately addressed through the Bill, these concessions will at least safeguard the role of your Lordships’ House and enable conversations on resourcing to now proceed.

[Baroness Penn (Con)]

My Lords, the amendments in this group focus on further formalising the role of parliamentary scrutiny of the regulators. The Government agree with noble Lords that effective parliamentary scrutiny, in particular through parliamentary committees, has a critical role to play in improving the quality of regulation, as the noble Baroness, Lady Kramer, said, and the performance of the regulators overall.

The Bill, through Clauses 36 and 47 and Schedule 7, seeks to ensure that the Treasury Select Committee has the information it needs to fulfil its role, by requiring the regulator to notify the TSC when publishing any relevant consultations. However, the Government have listened to the case made by noble Lords that the important role of this House was not adequately reflected by that approach. We have therefore tabled a series of amendments which will require the regulators to also notify the relevant Lords committee when they publish a consultation. These amendments will ensure parity between arrangements for the Commons and the Lords. They also provide that, if a Joint Committee is set up in future, the regulators will be required to notify it in the same way.

I am glad that my noble friend Lord Forsyth feels that these amendments fulfil the aims of his own; that is just as well, as his amendments in Committee and on Report formed the basis for the Government’s approach—that is no coincidence. I am grateful to him for the work that he has put in on this issue and for the time that he has taken to discuss these matters with the Government.

I am also grateful to my noble friend Lord Bridges and the noble Lord, Lord Hollick, for their engagement as the chairs of the current committees in this House that look at the work of the financial services regulators. When I spoke with them, they explained how the EAC and the IRC currently split some responsibility for financial services policy, an example of which was their recent work on LDI, where the EAC focused on the work of the Bank of England and the PRA and the IRC focused on that of the FCA. The Government’s amendments would allow for the two committees to continue with that approach if they wished to do so and for a different Lords committee to receive notifications of consultations from the FCA and the PRA. That structure would be for Parliament to decide.

I shall now pick up on the concern from noble Lords about having multiple committees looking at the same issues or the work of the same regulators. As I have said, the structure is a matter for Parliament, but currently we have the TSC in the Commons, and the Economic Affairs and the Industry and Regulators Committees in the Lords, which at the moment look at various aspects of the regulators’ work without duplicating each other or creating unnecessary burdens. Given the scale of powers for the regulators being established in this Bill, there will be more than sufficient work to go round different committees, and they have already proven themselves able to co-ordinate their work so that it is not duplicative.

We have heard, given the scale of the task before us, that there is concern about the resource made available to those committees. Committee structures and their resourcing will remain a matter for Parliament to decide and I have noted that noble Lords agree that that is the right approach. However, the Government recognise that the new model for financial services regulation will require a step change in this House’s scrutiny of the regulators and agree there must be suitable resource in place to support this. The Government will work with the usual channels and the House authorities in the appropriate way.

The Government have also heard concerns about the feedback loop when Parliament engages with regulatory proposals. There can often be a significant period of time between an initial consultation and the Bill’s existing provisions regarding the regulators’ engagement with parliamentary committees, and final rules being published. In particular, the Government recognise amendments tabled by the noble Baroness, Lady Bowles, in Grand Committee, seeking to require the regulators to explain how parliamentary recommendations have been considered. The Government have therefore tabled Amendments 61 to 63, which require the regulators, when publishing their final rules, to explain how they have considered representations from parliamentary committees. This will ensure that the regulators provide a public explanation of how the views of parliamentary committees have been considered at the point when rules are made. This complements the existing requirement in Clauses 36 and 47, and Schedule 7, for the regulators to respond in writing to the chairs of committees that have made representations. This will ensure not only that regulators appropriately consider Parliament’s representations but that they set out publicly how they have done so.

The debates so far have shown that there is no single silver bullet to solve the problem of accountability. However, the Government are committed to creating an effective, overarching ecosystem in which the various different actors all play their roles in holding the independent regulators to account, ensuring high-quality financial services regulation in the UK. I am therefore grateful that my noble friend Lord Forsyth has said that he will withdraw his amendments, and I intend to move the Government’s amendments, based on those amendments, when they are reached.

[Lord Forsyth of Drumlean (Con)]

My Lords, I am most grateful to my noble friend the Minister for the way in which she has responded to this. I entirely agree with her point, as a former chairman of the Economic Affairs Committee, on the way in which we have worked with the Treasury Select Committee. I agree also with the noble Lord, Lord Eatwell, that it is carefully drafted and—who knows?—it may very well lead to both Houses deciding to have a Joint Committee, which would certainly be the best possible option. But that is obviously not a matter for me and I beg leave to withdraw my amendment.

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Moved by

[Baroness Penn]

26: Clause 36, page 50, line 30, leave out “the Treasury Committee of the House of Commons” and insert “each relevant Parliamentary Committee”
Member’s explanatory statement
This amendment, together with the amendment at page 50, line 43, would extend the duties of the FCA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.

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Moved by

[Baroness Penn]

30: Clause 36, page 50, line 43, at end insert—
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 50, line 30.

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Moved by

[Baroness Penn]

33: Clause 36, page 51, line 42, leave out “the Treasury Committee of the House of Commons” and insert “each relevant Parliamentary Committee”
Member’s explanatory statement
This amendment, together with the amendment at page 52, line 11, would extend the duties of the PRA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.

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Moved by

[Baroness Penn]

37: Clause 36, page 52, line 11, at end insert—
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 51, line 42.

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Moved by

[Baroness Penn]

43: Clause 41, page 57, line 29, at end insert—
“(7A) The FCA must appoint to the FCA Cost Benefit Analysis Panel at least two individuals who are employed by persons authorised for the purposes of this Act by the FCA, with each one being employed by a different person.”Member’s explanatory statement
This amendment would impose a duty on the FCA to ensure that the FCA Cost Benefit Analysis Panel includes at least two members who are employed by persons authorised by the FCA under the Financial Services and Markets Act 2000.

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Moved by

[Baroness Penn]

46: Clause 41, page 58, line 22, at end insert—
“(7A) The PRA must appoint to the PRA Cost Benefit Analysis Panel at least two individuals who are employed by PRA-authorised persons, with each one being employed by a different person.” Member’s explanatory statement
This amendment would impose a duty on the PRA to ensure that the PRA Cost Benefit Analysis Panel includes at least two members who are employed by PRA-authorised persons.

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Moved by

[Baroness Penn]

49: Clause 41, page 58, line 31, leave out “paragraph 10(1)” insert “paragraphs 10(1) and 10A”
Member’s explanatory statement
This amendment ensures that the PRA Cost Benefit Analysis Panel (established under Clause 41) will be required to provide advice in relation to cost benefit analyses prepared for the purposes of consultation under the new paragraph 10A of Schedule 17A to FSMA 2000 (inserted by Clause 19).

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Moved by

[Baroness Penn]

50: After Clause 44, insert the following new Clause—
“Panel reports
(1) The Treasury may by regulations require specified statutory panels of the regulator to produce an annual report on their work and provide that report to the Treasury.(2) Regulations under subsection (1) may make provision about the content of the annual report.(3) The Treasury must lay a copy of each report prepared by virtue of this section before Parliament.(4) Each specified statutory panel of the regulator must publish its reports prepared by virtue of this section in such manner as it thinks fit.(5) In this section—(a) “statutory panels of the regulator” means—(i) in relation to the FCA, the panels mentioned in section 1RA(8) of FSMA 2000,(ii) in relation to the PRA, the panels mentioned in section 2NA(8) of FSMA 2000, and(iii) in relation to the Payment Systems Regulator, a panel established under section 103(3) of the Financial Services (Banking Reform) Act 2013;(b) “specified” means specified in regulations under this section.(6) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This new Clause would provide the Treasury with a power to make regulations to require annual reports to be produced by the statutory panels established under the Financial Services and Markets Act 2000 and the Financial Services (Banking Reform) Act 2013.

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Moved by

[Baroness Penn]

52: Clause 46, page 67, line 14, at end insert—
“(1A) The statement must provide information about— (a) how representations (including by a statutory panel) can be made to the Bank with respect to its review of rules under section 300I, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the Bank of England to ensure that the Bank includes in its statement of policy about the review of rules (required by section 300J of the Financial Services and Markets Act 2000, as inserted by Clause 46) information about how representations (including by statutory panels) can be made and considered.

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Moved by

[Baroness Penn]

54: Clause 47, page 72, line 32, at end insert “and the Bank’s secondary innovation objective (see section 30D(2) of the Bank of England Act 1998)”
Member’s explanatory statement
This amendment would ensure that new paragraph 33B of Schedule 17A to the Financial Services and Markets Act 2000, as inserted by Clause 47(14) of the Bill, includes a reference to the Bank’s secondary innovation objective, as inserted into the Bank of England Act 1998 by Clause 45 of the Bill.

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Moved by

[Baroness Penn]

56: Schedule 7, page 152, line 44, at end insert—
“(1A) The statement must provide information about—(a) how representations (including by a relevant panel) can be made to the Regulator with respect to its review of requirements under section 104B, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “relevant panel” means—(a) a panel of the Payment Systems Regulator established under section 103(3), (b) a panel of the FCA mentioned in section 1RA(8) of FSMA 2000, and(c) a panel of the PRA mentioned in section 2NA(8) of FSMA 2000.”Member’s explanatory statement
This amendment would impose a duty on the Payment Systems Regulator to ensure that the Regulator includes in its statement of policy about the review of requirements (required by section 104B of the Financial Services (Banking Reform) Act 2013, as inserted by paragraph 7 of Schedule 7 to the Bill) information about how representations (including by statutory panels) can be made and considered.

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Moved by

[Baroness Penn]

61: Clause 50, page 74, line 9, at end insert—
“(4D) Where representations are made to the FCA by a Committee of the House of Commons or the House of Lords or a Joint Committee of both Houses in accordance with subsection (2)(e), the FCA’s account mentioned in subsection (4) must also describe how the FCA has considered the representations made by that Committee in making the proposed rules.””Member’s explanatory statement
This amendment would impose a duty on the FCA to include in the account that the FCA must publish under section 138I(4) of the Financial Services and Markets Act 2000 details about representations made by Parliamentary Committees.

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Moved by

[Baroness Penn]

73: Schedule 8, page 160, line 17, after “service”” insert “, “free cash access service””
Member’s explanatory statement
This amendment is consequential on the amendment at page 160, line 29.

[Baroness Penn (Con)]

My Lords, the Government recognises that, while digital payments are increasingly present in our society, cash continues to play a vital role in many people’s everyday lives. That is why this Bill puts in place a framework to protect the ability of people and businesses across the UK to access cash withdrawal and deposit facilities for the first time in UK law and introduces new powers for the FCA.

It is important to recognise that, on the whole, cash access in the UK remains comprehensive. Industry is already funding a range of new and innovative services to support communities and ensure that they have easy access to cash. To date, LINK has recommended new shared cash access services in over 100 communities across the UK. This includes the introduction of over 50 shared banking hubs. While the opening of these facilities is taking time to get right, I welcome the recent openings of new hubs in Troon in Ayrshire and Acton in west London. I also understand that the pace of delivery is due to accelerate over the coming months.

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[Baroness Penn (Con)]

My Lords, I will first address the point made by the noble Baroness, Lady Chapman, on the change between Committee and Report. On a whole host of areas, we have reflected on the discussions we had in Committee. The Government have taken the time to do that work and were able to bring forward amendments at this stage, whereas we simply were not able to bring forward amendments on a whole host of topics in Committee. I do not think it is anything to do with differing powers of persuasion between the different stages.

My noble friend Lord Holmes has many of the amendments in this group. I am glad that he also welcomes the Government’s amendments in this area. He asked what reasonable access would look like; that further detail will be for the policy statement. It is important to recognise that currently, on the whole, cash access remains extensive. According to FCA analysis, over 96% of the population are within 2 kilometres of a free-to-use cash access point.

Turning to my noble friend’s amendments, I too acknowledge his persistent campaigning on the provision of access to cash across successive financial services Bills. However, the Government are not able to support the approach in Amendment 82. We do not consider it necessary or appropriate to place additional requirements on organisations to accept cash across the public and private sectors. This should be a decision for individual organisations as they decide how best to operate. What I can say to my noble friend is that the provisions in the Bill do not reflect access just to withdrawal facilities but to deposit facilities, which will support organisations to continue to accept cash.

On Amendment 83, again, this is an issue that my noble friend has raised previously. The designation of critical national infrastructure is sensitive and is not made public. I reassure my noble friend and all noble Lords that appropriate arrangements are in place to ensure the resilience of the UK’s financial system, including cash provision.

I turn to Amendment 80 from the noble Baroness, Lady Tyler, spoken to by the noble Baroness, Lady Kramer, and Amendments 84 and 111 from my noble friend Lord Holmes, which all relate to access to banking services. I acknowledge the strength of feeling on this topic and the perspectives that have been raised. As people acknowledge, it is clear that the nature of banking is changing, and the long-term trend is moving towards greater use of digital and telephone banking services over traditional branches. Of course, it is vital that those customers who rely on physical services are not left behind, which is why the FCA is taking an assertive approach to its guidance for firms on this issue.

Where firms are closing branches, the regulator expects them to put in place appropriate alternatives where reasonable. If firms fall short, the FCA can and will ask for closures to be paused or for other options to be put in place. Beyond digital access, several banks are rolling out community outreach initiatives when they close branches, maintaining key physical services in local libraries, shopping centres and roaming vans. Over 99% of personal and 95% of business customers can, and do, do their everyday banking at 11,500 Post Office branches.

On banking hubs, determining their location and the range of services provided is a commercial decision. My noble friend asked what would be a reasonable number of hubs to have open by the end of the year. As I said earlier, over 50 have been announced. We expect delivery on that commitment to pick up as this year progresses. Furthermore, since the last debate, several firms have made the commitment that, where a banking hub has been announced as a result of their branch closure, they will not close that branch until the hub is open, so we have a double lock of improving the speed of delivery but not losing services until we see improvement in the pace of delivery. That is welcome and shows that the industry is taking this issue seriously.

Regarding accessibility in my noble friend Lord Holmes’s Amendments 85 and 110, I absolutely share his ambition for financial services to be accessible to all. He spoke about some of the work that we discussed in Committee and asked for an update. Perhaps I can write to him after today’s debate with an update on that work.

I turn to the amendment on a review of digital inclusivity. Many financial services firms also support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks. The Government recognise that we need to be proactive in this space, and there is a range of work under way to ensure that financial services adapt to the needs of consumers in the digital age and to address the issues that my noble friend rightly raised. These include driving further progress on access to digital infrastructure, connectivity and skills to fully benefit from this transition.

I am grateful to my noble friend for his constructive challenge of the Government’s approach to this important issue. I assure him and all noble Lords that the Treasury will continue to consider where there may be gaps in the Government’s approach and ensure that no one is left behind as we evolve into new ways of managing our money. An example of this is that the Government recently held a call for evidence on the Payment Services Regulations, which invited views on this policy. We are currently considering responses, including where these are linked to financial inclusion.

I hope that, although the Government are not able to support the other amendments in this group, I have reassured noble Lords that the Government consider these issues very seriously through this work. I hope that noble Lords do not move their amendments when they are reached.

Amendment 73 agreed.

Moved by

[Baroness Penn]

74: Schedule 8, page 160, line 29, at end insert—
“(3A) A “free cash access service” is a cash access service that is—(a) a free of charge service which enables cash to be placed on a relevant personal current account, or(b) a free of charge service which enables cash to be withdrawn from a relevant personal current account.”Member’s explanatory statement
This amendment would provide a definition of “free cash access service” in new Part 8B of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill.

--- Later in debate ---

Moved by

[Baroness Penn]

79: Schedule 8, page 164, line 7, at end insert—
“(1A) In this section references to cash access services include references to free cash access services.”Member’s explanatory statement
This amendment would ensure that the FCA’s duty, in new section 131U of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill, of seeking to ensure reasonable provision of cash access services includes seeking to ensure reasonable provision of free cash access services.

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Moved by

[Baroness Penn]

86: Schedule 11, page 257, line 7, at end insert—
“(2A) Regulations under this paragraph may apply to partial property transfers generally or only to partial property transfers—(a) of a specified kind, or(b) made or applying in specified circumstances.”Member’s explanatory statement
This amendment would provide consistency with other parts of Schedule 11 on Central counterparties by clarifying that regulations made under paragraph 75 (restriction of partial transfers) may apply to transfers generally or only to transfers of a particular kind or in particular circumstances, as specified in the regulations.

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Moved by

[Baroness Penn]

87: Schedule 12, page 311, line 11, at end insert—
“(5A) A liability, to the extent of its reduction by a write-down order under this section, is to be treated as extinguished unless and until revived by section 377H or 377I.”Member’s explanatory statement
This amendment would clarify the effect of a write-down order under section 377A (to be inserted into FSMA 2000 by paragraph 1 of Schedule 12 to the Bill) on the treatment of liabilities reduced by the order.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Chapman of Darlington (Lab)]

My Lords, before I address the amendments, I want to acknowledge the work of my noble friend Lord Tunnicliffe, who had been leading for these Benches on this Bill until very recently, and thank him for his hard work and generosity in the way he has handed over custody of the Bill to me and my noble friend Lord Livermore. We are very grateful to my noble friend for everything he did, and he continues to advise and support—as noble Lords who know him can well imagine.

However, we are on Report, and this is the stage where we cut to the chase and pick our battles. I have been leading on the retained EU law Bill and am very familiar with the arguments raised in this debate, but we are treating this Bill slightly differently to the retained EU law Bill because our concerns on that Bill revolved around the lack of certainty created by the Government’s approach. There was no definitive list of the terms of retained EU law that would be revoked at the end of the year, and the absence of that list meant limited scope for meaningful engagement, scrutiny or consultation. That was our fundamental objection to that Bill.

The process set out in this Bill is different, with most of the retained law listed in the legislation and to be repealed and revoked only once replaced by regulations that are UK-specific. Fundamentally, we think that changing the process outlined in the Bill at this stage in a manner that the sector has not asked for—it is very different to the engagement that we had on the retained EU law Bill, where there was strong demand from various sectors for change—would introduce uncertainty.

The Lords were right to ask the Government to think again on the retained EU law Bill, but amendments to one Bill do not automatically work for another and, in any event— as I know from having worked on the retained EU law Bill—the version of the amendment we are considering today has already been convincingly overturned by the elected House and we have had to come back with another. As we need to pick our battles and to prioritise at this stage in our proceedings, we on these Benches will not be participating should the issue be put to a Division today.

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

My Lords, before turning to the amendments at hand, I add my thanks to those of the noble Baroness, Lady Chapman, for the contribution of the noble Lord, Lord Tunnicliffe, to this Bill and the Labour Front Bench on Treasury matters. The noble Baroness referred to the noble Lord’s generosity; I have definitely found that to be the case. He has always had a very constructive approach and approached his work with kindness and wisdom, which is a great combination to bring to this House.

The amendments before us from the noble Lord, Lord Sharkey, Amendments 1, 116 and 117, would introduce new parliamentary procedures when exercising the powers in the Bill. As noble Lords have noted, very similar amendments were proposed to the retained EU law Bill, passed and then reversed by the Commons. We have just had a debate this afternoon on a modified version of those amendments, to which I listened very carefully, although I am not as expert in the passage of that Bill as some other noble Lords in the Chamber.

Many of the arguments covered in that debate also apply here, so I do not intend to repeat them at length. I want to focus on some specific considerations in relation to this Bill, which, as the noble Baroness, Lady Chapman, noted, takes a different approach to repealing retained EU law for financial services. That is because it enables the Government to deliver fundamental structural reform to the way in which the financial services sector is regulated.

The Government are not asking for a blank cheque to rewrite EU law. This Bill repeals EU law and creates the necessary powers for it to be replaced in line with the UK’s existing Financial Services and Markets Act 2000—FSMA—model of regulation, which we are also enhancing through this Bill to ensure strong accountability and transparency. A list of retained EU law to be repealed in Schedule 1 was included in the Bill from its introduction in July 2022 to enable scrutiny of this proposal.

Going forward, our independent regulators will generally set the detailed provisions in their rulebooks instead of firms being required to follow EU law. The Bill includes a number of provisions to enable Parliament to scrutinise the regulators; the Government have brought forward amendments to go further on this, as we will discuss later on Report.

Amendments 1, 116 and 117 would introduce rare parliamentary procedures, including the super-affirmative procedure, and create a process to enable Parliament to amend SIs. As I said in Committee, those procedures are not justified by the limited role that secondary legislation will have in enabling the regulators to take up their new responsibilities. The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. As I noted in Committee, the DPRRC praised the Treasury for a

“thorough and helpful delegated powers memorandum”.

It did not recommend any changes to the procedures governing the repeal of EU law or any other power in this Bill.

The powers over retained EU law are governed by a set of purposes that draw on the regulators’ statutory objectives. They are limited in scope and can be used only to modify or restate retained EU law relating to financial services or markets, as captured by Schedule 1. However, of course, the Government understand noble Lords’ interest in how they intend to use the powers in this Bill and are committed to being as open and collaborative as possible when delivering these reforms.

The Government have consulted extensively on their approach to retained EU law relating to financial services and there is a broad consensus in the sector behind the Government’s plans. As part of the Edinburgh reforms, the Government published a document, Building a Smarter Financial Services Framework for the UK, which describes the Government’s approach, including how they expect to exercise some of the powers in this Bill. It also sets out the key areas of retained EU law that are priorities for reform. Alongside this publication, the Government published three illustrative statutory instruments using the powers in this Bill to facilitate scrutiny.

When replacing retained EU law, the Government expect that there will be a combination of formal consultation, including on draft statutory instruments, and informal engagement in cases where there is a material impact or policy change, such as where activities that are currently taking place in the UK would no longer be subject to a broadly equivalent level of regulation. The Government will continue to be proportionate and consultative during this process, just as we have been up to this point.

Through the retained EU law Bill, the Government have also committed to providing regular updates to Parliament on progress in repealing and reforming retained EU law. I am happy to confirm that these reports will also cover the financial services retained EU law listed in Schedule 1 to this Bill.

I hope that I have satisfied noble Lords that the Government are committed to an open, transparent and consultative approach to implementing the reforms enabled by this Bill. I ask the noble Lord, Lord Sharkey, to withdraw his Amendment 1.

[Lord Sharkey (LD)]

I thank all those who have spoken in this brief debate—some more warmly than others, perhaps. In my initial speech, I forgot to be especially nice about Denis, the noble Lord, Lord Tunnicliffe; I regret that. I am of course disappointed by both his absence and the response of his successors. I repeat: when it comes to the need for real parliamentary scrutiny, the contents of this Bill are quite as important as the contents of the REUL Bill. That seems to me to be the essence of the matter. All the other arguments about the need to focus and get on with it on Report seem mechanistic; indeed, they are close to being excuses, in some ways.

The essential problem is that Parliament will be unable to scrutinise revocation and replacement, as it is set out in this Bill. I accept that it is not likely that we will revolutionise the way we treat these things as a result of this intervention, but perseverance is the only way of making any progress towards making certain that Parliament recovers its ability to scrutinise properly and does not continue to lose that ability. Although on some occasions—this is one of them—the outcome may be unsatisfactory in the short term, I am convinced that, over time and with enough persistence, we can find a way to do what the DPRRC recommended, which is restoring the balance between Parliament and the Executive. Having said all that, I beg leave to withdraw my amendment.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Viscount, Lord Trenchard, for bringing these amendments forward and we ask him to pass on our very best wishes to the noble Baroness, Lady Noakes, and her husband. I am sure she will be impressed by the way he introduced her ideas this afternoon. I feel somewhat that we are intruding on a bit of a family squabble on the Government Benches with this group in that, in the retained EU law Bill, the amendment that she brought forward was as a consequence of her deeply felt disappointment—shared by the noble Baroness, Lady Lawlor, if I remember her speech at the time, and others—at the Government’s change of approach to that Bill. The change of approach was one that we had been calling for and very much welcomed, and we did not feel on that Bill and we do not feel on this Bill that there is an awful lot to be gained by these amendments. There is not a huge amount to be lost either, particularly with Amendment 3A. We are interested in what the Government have to say about them, but they are not amendments that we take a particularly firm view on either way because we think they are designed with a rather different purpose in mind, which is to hold the Government’s feet to the fire.

[Baroness Penn (Con)]

My Lords, I join noble Lords in wishing my noble friend Lady Noakes and her husband well, and I look forward to her return to this House. As my noble friend Lord Trenchard noted, she worked with our noble friend Lord Callanan on amendments to the retained EU law Bill to introduce similar reporting standards to those in Amendment 3A. I can confirm that the reporting requirements in the retained EU law Bill already apply to the retained EU law repealed through Schedule 1 to this Bill, so the reports that the Government prepare under that obligation will include the Treasury’s progress in repealing retained EU law in Schedule 1.

I reassure my noble friends that through the Bill the Government are asking Parliament to repeal all legislation in this area, and we expect to commence it fully. The revocation is subject to commencement, and each individual piece of legislation listed in the Bill will cease to have effect only once the Treasury makes an SI commencing the repeal. As I noted in Committee, this is being taken forward in a carefully phased and prioritised way to deal with retained EU law, splitting it into tranches and prioritising areas that will provide the most concrete benefits to the UK. The implementation will take place over a number of years, which means that we are prioritising those areas with the greatest potential benefits of reform. We have demonstrated intent and action in this area. We have conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale market review and the UK listings review by my noble friend Lord Hill of Oareford, which my noble friend Lord Trenchard referred to in his Amendment 3B. The whole- sale markets review reform in Schedule 2 demonstrates the Government’s pace and ambition for reforming retained EU law, and that is very much the case.

I turn to Amendment 3B. Of course the Government must think carefully before choosing to replace EU law, and understand the impact of any replacement. The Government have consulted extensively on their approach to retained EU law relating to financial services, and there is broad consensus in the sector behind the Government’s plans, as I have already noted. However, I do not believe that an explicit mandatory statutory obligation to consult impacted parties is required. The powers in the Bill to designate activities under the designated activities regime are closely modelled on the secondary powers which already exist in FiSMA, especially the power to specify regulated activities. This existing power does not have an explicit statutory obligation to consult. I think the Government have already demonstrated that they will always consult when appropriate and will always approach regulating a new activity carefully. We can see this in the Government’s consultation on the regulation of funeral plans in 2019, and in draft legislation related to “buy now, pay later” published in February.

My noble friend Lord Trenchard referred to the listings review and implementing its results but, again, the Government have already consulted extensively. They launched a consultation in July 2021 that ran until September this year, and the proposals on listing reforms received broad support across the industry. The Government have already published a draft statutory instrument to illustrate how the new powers in the Bill could be used to bring forward a new regime in this area, so I believe that the Government have already demonstrated that they will consult properly when using the regulated activities order power. Therefore further amendments in this area are not necessary, so I hope my noble friend is able to withdraw Amendment 3A and will not move Amendment 3B.

[Viscount Trenchard (Con)]

My Lords, I thank all noble Lords who have taken part in this debate. In particular, I thank my noble friend Lady Lawlor for her support, and I entirely agree with what she said about the need to move back to our former common law-based approach. The noble Baroness, Lady Kramer, suggested that this would mean not just common law but going back to a simple, light-touch regulatory system. I am advocating going back not to a light-touch regulatory system but to a system based on common-law principles which also maintains the high standards for which the City is renowned across the world. Such a system is pursued also in the United States, Australia and many other countries with which we are doing more and more in financial services, including many CPTPP countries.

I am nevertheless grateful for the noble Baroness’s support, at least on Amendment 3B. I was not sure about the noble Baroness, Lady Chapman, but she was at least interested in both amendments and, I think, supported the need for increased accountability to Parliament.

I speak to the financial services industry and know many people in it. I have some outside interests, which I have declared, which involve me in it. I simply do not agree that all participants in the industry blame Brexit for the difficulties it faces. Rather, there are large parts of the financial services industry—in banking, insurance and asset management—which are waiting for us to reap the benefit of the upside of being free to develop our own regulatory regime. We have suffered the downside, which we knew would happen; we believe that reaping the benefits of the upside will be necessary to ensure that London can maintain its leading position. I very much hope that we can rely on the support of the parties opposite, as well as my noble friends, in seeking to ensure that that happens.

I am to some extent reassured by my noble friend the Minister’s words and her response to these amendments. She went further than I have heard her go before in saying that it is the Government’s intention to repeal all the EU retained law in—I think—Schedule 1, and that she has prioritised some areas. However, there are other areas that she has not prioritised. One of the those is the alternative investment fund managers directive and all its associated legislation, which was opposed universally by practitioners and—at the time—by the Treasury as well as by the regulators. Nevertheless, it was foisted on us by the EU for political reasons. I am very disappointed that few people in the Treasury seem to recognise how many small investment management companies have gone out of business or not succeeded in introducing new products because of the cost and burden of complying with this regulation. This is why, later in the Bill—I will not speak to it today —I have again brought back my amendment dealing with that issue. It is just one example of bits of EU legislation that, six years after the Brexit vote, I believe this Bill should deal with immediately.

I thank my noble friend for her partial reassurance and, in the circumstances, I am happy to withdraw my amendment.

--- Later in debate ---

Moved by

[Baroness Penn]

4: After Clause 20, insert the following new Clause—
“Sustainability disclosure requirementsSustainability disclosure requirements
(1) FSMA 2000 is amended as follows.(2) After section 416 insert—“Sustainability disclosure requirements416A SDR policy statement(1) The Treasury may prepare an SDR policy statement.(2) An “SDR policy statement” is a statement of the policies of His Majesty’s Government concerning disclosure requirements in connection with matters relating to sustainability.(3) In preparing an SDR policy statement, the Treasury must consult the regulators.(4) The Treasury must publish any SDR policy statement in such manner as they consider appropriate.(5) The Treasury—(a) must keep any SDR policy statement under review;(b) may prepare a revised statement (and subsections (3) and (4) apply in relation to any revised statement);(c) may withdraw any SDR policy statement.(6) The Treasury may request a regulator to provide them with a report on any matter that the Treasury require in connection with the preparation of an SDR policy statement.(7) A request for a report under subsection (6)—(a) must be made in writing, and(b) may require a regulator to send the report to the Treasury within such reasonable period as may be specified in the request (or such other period as may be agreed).(8) A regulator must comply with a request under subsection (6).(9) Nothing in section 348, or in regulations made under section 349, is to be taken as preventing or restricting the ability of a regulator to disclose information to the Treasury for the purposes of this section.(10) Subsection (9) does not apply in relation to information provided to a regulator by a regulatory authority outside the United Kingdom.416B FCA and PRA rules etc(1) When making rules or issuing guidance in connection with disclosure concerning matters relating to sustainability, a regulator must have regard to any SDR policy statement (within the meaning of section 416A) that the Treasury have published and not withdrawn.(2) For the purposes of this section, matters relating to sustainability include matters relating to—(a) the environment, including climate change,(b) social, community and human rights issues,(c) tackling corruption and bribery, and(d) governance, so far as relevant to matters within paragraphs (a) to (c).”(3) In Schedule 1ZA (the Financial Conduct Authority), in paragraph 11 (annual report), in sub-paragraph (1)—(a) after paragraph (ha) insert—“(hc) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”; (b) after paragraph (ia) insert—“(ib) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury published and not withdrawn under section 416A (sustainability disclosure requirements: policy statement);”.(4) In Schedule 1ZB (the Prudential Regulation Authority), in paragraph 19 (annual report), in sub-paragraph (1)—(a) after paragraph (e) insert—“(ea) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”;(b) after paragraph (fa) insert—“(fb) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury under section 416A (sustainability disclosure requirements: policy statement), and”.”Member’s explanatory statement
This amendment would support the regulation of disclosure requirements relating to sustainability by requiring the FCA and the PRA to a.) comply with a request by the Treasury to provide a report in order to inform a policy statement by the Treasury on such requirements and b.) have regard to such a policy statement when making rules or issuing guidance about such requirements.

[Baroness Penn (Con)]

My Lords, the UK is a leading jurisdiction for sustainable finance, and the Government are proud of that record and determined to maintain and further that position. Since Committee stage, London has been ranked as the leading global green finance centre for the fourth consecutive time. Government effort, including on sustainability disclosure and reporting, has played a vital role.

The Government’s success in green finance has been down also to the responsiveness and technical capability of our independent regulators, who have collaborated to drive forward our policy on sustainability disclosures. The Government’s approach was established in the 2021 paper, Greening Finance: A Roadmap to Sustainable Investing, where we set out the foundations of sustainability disclosure requirements—or SDR—which build on our world-leading implementation of the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD. This includes taking forward an approach across the economy to implementing international standards, enabling firms to plan for the transition and ensuring that this information flows to investors and financial consumers. Credible, usable information is a core component of green finance that will allow us to reach our goals on sustainability. When this information is available, market participants can use it to take sustainability into account when making investment decisions. Our plan for SDR is central to delivering this.

In Committee, some noble Lords raised concerns about the Government’s ongoing commitment to implementing these important reforms, the legal basis for implementing them, and the timelines for doing so. I am therefore pleased to be able to update noble Lords on a number of substantive developments since then.

Significantly, the Government published an updated green finance strategy on 30 March. This set out next steps across core elements of SDR. The Government will consult on extending the transition planning requirements—a core component of SDR—to the largest private companies once the Transition Plan Taskforce has completed its work later this year. The Government will also set up a framework to assess the suitability of the IFRS International Sustainability Standards Board’s standards for adoption in the UK. The Government remain committed to delivering a usable and useful UK green taxonomy and expect to consult on this in autumn 2023. They are also committed to setting out further detail on SDR implementation and the timeline for it this summer to reflect the rapid development of international standards.

Alongside this, the Financial Conduct Authority continues to take forward SDR for authorised persons, including consumer-facing disclosure requirements, under its existing objectives and rulemaking powers, which are sufficiently broad for the purpose. The FCA intends to issue its policy statement on SDR and investment labels in the third quarter of this year.

However, the Government recognise that SDR policy has strong links to wider environmental policy and that they therefore have an important role to play in shaping SDR. That should be recognised in legislation. Parliament must be able effectively to scrutinise the actions of government and the regulators in this area.

Amendment 4 will therefore require the FCA and the PRA to have regard to any policy statement made by the Treasury on SDR when they make rules in connection to sustainability disclosures. The amendment obliges the regulators to consider the Government’s wider policy goals when bringing forward SDR rules, while still maintaining their independence.

Regulators will also be required to report on how they have satisfied the requirement to have regard to any such policy statement on an annual basis. This will support Parliament in scrutinising the regulator’s actions on SDRs. This ongoing reporting will support transparent, structured co-operation between the regulators, government and Parliament to achieve the UK’s objectives in this space.

We will be debating a number of other sustainable finance issues today, and disclosures are at the heart of some of the matters that they raise. The amendment is therefore an important measure in that context as well as in its own right. I beg to move.

[Baroness Wheatcroft (CB)]

My Lords, I thank the Minister for her introduction of Amendment 4 and her willingness to engage with Peers on the topic of sustainable disclosure requirements. However, while a government amendment on this important topic is welcome, what we have heard is yet more delay. A cynic might judge the amendment to have a whiff of green- washing about it. It does not do enough and does not do what is required. The amendment seeks to give regulators and Ministers the necessary powers to bring forward rules and regulations on SDRs in fulfilment of commitments that they made in 2019, 2021 and again in the green finance strategy in March this year.

Amendment 114 is an effort to be helpful because, despite making commitments for five years, the Government still do not have the powers to make sustainable disclosure requirements happen. Amendment 4 does not confer those powers. The noble Baroness, Lady Ritchie of Downpatrick, submitted a Parliamentary Question on this issue on 14 November last year, and the Government’s response was that:

“The FCA has extensive powers to … impose some of the Sustainability Disclosure Requirements”.


The noble Baroness also asked about the powers available to the Department for Work and Pensions, which would legislate for sustainability reporting by occupational pension schemes. An extensive search of the powers held by the DWP in relation to public reporting and sustainable reporting has found none that is suitable.

Amendment 4 gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against it, but it is not an obligation—the Treasury “may” prepare an SDR policy statement. As the Minister admitted in her response last year to the noble Baroness, Lady Ritchie, the FCA does not have the powers to actually implement SDRs. It seems that we are looking at a Whitehall paper trail that keeps everyone occupied but with no meaningful legislation.

I am in favour of easing unnecessary burdens on business. However, repeatedly indicating—as they have for five years—that the Government are planning to legislate but not actually doing it creates a burden in itself for business. Should it invest in data, in systems or in strategy? After so many reassurances but so little progress, and more reassurances today, no one really seems to know the answer.

I noted with interest that the Minister’s letter to Peers ahead of tabling this amendment said that

“the Financial Conduct Authority is taking forward Sustainable Disclosure Requirements (including consumer facing requirements) under its existing objectives and rulemaking powers which are sufficiently broad for the purpose”.

I would like to understand the misalignment between that statement and the earlier Answer to the Question from the noble Baroness, Lady Ritchie. Is it because there has been a change of heart and the Treasury has discovered that the powers exist after all? I would be grateful if the Minister could clarify that. Or has the Treasury limited its proposals from its original ones so, while it did not have the powers for the original proposal, it does for the new, limited proposals? Or—and it would be deeply disappointing if this were the case—is the reference in the Minister’s letter to the FCA to “taking forward” SDRs intended to mean that the FCA would be merely progressing the work but not actually implementing it? Again, I would be grateful for clarification. The FCA consultation on SDRs closed on 25 January. We are promised a policy statement in the third quarter but, without statutory powers, that would be pointless.

I hope the Minister will be able to answer those questions and now, if we are able to accept the amendment, I hope she will be able to go a little further. While the amendment sets the right tone, it does not do what is needed. It embraces the idea of SDRs but does not make them a reality. The same governmental reluctance to take real action lies behind my Amendment 7, concerning vote reporting. If investors are to make serious decisions on ensuring that their savings are put to work in a sustainable way, it is essential that they be able to see how those who manage the money choose to vote on corporate issues. That is a crucial part of being an engaged investor. The FCA itself acknowledges that. Earlier this year, its vote reporting group stated:

“Improving transparency of how asset managers vote on behalf of their clients will mean investors can better hold them to account on their stewardship”.


We would all want that, but currently it is not possible for investors always to learn how their investments are being voted. Yes, there is now an FCA requirement under the shareholder rights directive that fund managers and insurers produce an annual report on how they have voted, but it is only that they must comply or explain; and even then, the requirement is only that they should report on significant votes. The FCA gives no guidelines as to what should be deemed significant, and what one investor feels is significant may not concur with what a fund manager deems so.

The fund manager is required to report only at group level, so, in terms of the individual funds in which investors and pension funds might be invested, how their votes have been voted in the individual funds cannot be seen; it is only possible to see across the group, which is effectively meaningless for many people who want to find out how their money is being used. A report is required to be made only annually—a hopeless timescale in an industry that moves as fast as this one. Nor is there any standard form for vote reporting. It is not a lot to ask in a digital age. The SEC in the US certainly demands it.

For all those reasons, the current situation does not serve investors as well as it should. Amendment 7 would require FCA-regulated investment managers and insurers to provide clients and those investing with them with voting information that they requested in a standard format and within 30 days. In Committee the amendment on this topic included pension funds in the requirement to report but, mindful of the DWP review of pension fund reporting, the current amendment is much narrower and does not prejudge the review. However, in the meantime it should help pension funds to monitor the way their investments are being voted. It is true that the FCA vote reporting group has yet to reach conclusions, but there is no reason to wait for that. Parliament has the power to put demands on the FCA, and this is a case where it should.

The Government accept the need for good stewardship by investors, and transparency on voting aids that. It is important, indeed crucial, for good corporate governance that decisions taken on behalf of investors should be clear and easily ascertainable. Making voting records available speedily in a machine-readable way would be a service to investors that, thanks to digital innovation, should be easy and relatively cheap to implement. Why would the Government resist that? I beg to move.

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[Lord Livermore (Lab)]

My Lords, this has been a fascinating if somewhat disheartening debate, and I have learned much listening to the contributions from noble Lords on all sides of the House.

We welcome the tabling of government Amendment 4, which brings forward new provisions relating to sustainability disclosure requirements, but we agree with the views expressed across the House, particularly as set out by the noble Baroness, Lady Hayman, arguing that the Bill simply does not go far enough in supporting the country’s green ambitions.

We support many of the amendments in principle but particularly Amendment 15 in the name of the noble Baroness, Lady Hayman, and Amendment 91 in the name of the noble Baroness, Lady Boycott, the latter having been signed by my noble friend Lady Chapman.

The financial services sector touches many more aspects of our lives then we may sometimes realise, with firms’ investment decisions having a direct impact on virtually all sectors of the economy. This activity can, and often does, do much that is good. For example, if we are to secure the green jobs of the future, businesses will need investment. But, as we see in some cases, such as investment activity that leads to deforestation, there can be severe negative environmental impacts. In a recent poll cited by Global Witness, 77% of UK savers said they would be unhappy to discover that their pension was funding deforestation and habitat loss, with 14 million people estimated to switch pension provider if they made such a discovery. However, as Amendment 7 highlights, there is currently no way for the public, nor indeed the Government, to tell if their money is invested in that way, and therefore no way for consumers to exercise choice. That surely cannot be right.

Amendment 91 would implement recommendations from the Government’s own Global Resource Initiative taskforce in relation to deforestation, a practice which causes significant harm to global climate ambitions, as well as to indigenous peoples who are evicted from their ancestral homes. We are told by the Government that they are serious about achieving net zero and protecting nature, yet, at present, the net-zero regulatory principle still fails to mention nature, which is what Amendment 15 would correct. Indeed, nature is not even mentioned in the Bill. As the WWF rightly points out, by excluding nature from this key financial services legislation, the UK will fail to secure opportunities that could make the UK a leading green finance centre, while exposing the country to nature-related risks.

We should also give serious weight to the intervention of Professor Sir Partha Dasgupta, who led the Government’s review of the economics of biodiversity, when he urges the Government to support the amendment. He says:

“We need to empower those in charge of regulating our financial system to support the sector to arrive at a nature-positive destination by recognising the value of natural capital and the significant social and economic benefits restoring nature presents”.


We are losing nature at an alarming rate, and these issues are only going to become more urgent. We have missed opportunities to act in the past, and we cannot continue to make the same mistakes. We therefore urge the Government to think again on these important areas, but if they are not willing to do so, we will support the noble Baronesses, Lady Hayman and Lady Boycott, should they choose to push their amendments to a vote.

[Baroness Penn (Con)]

My Lords, let me first take Amendment 15, from the noble Baroness, Lady Hayman. I reassure noble Lords that the regulators already consider issues related to sustainability, and specifically nature, as part of their work under their existing objectives. For example, the Government and the regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosure, which we have heard about, which helps organisations to report and act on evolving nature-related risks; and the Bank of England is a key member of the Network for Greening the Financial System, which recently launched a task force on nature-related risks.

The noble Baroness listed the work that is happening and the various commitments, and I interpret that to mean that the lack of the reference to nature in the framework does not equal a lack of action by either the Government or the regulators. I understand the desire of noble Lords to see that reflected in the framework in the Bill. However, further work needs to take place to better understand the interaction between nature targets and the work of the financial services regulators when including it in regulation, and the conclusions of that work are not yet clear. Moreover, equivalent targets to those in the Environment Act for England and Wales in 2021 do not yet exist in the other devolved Administrations, so we remain of the view that it would not be appropriate to place a requirement within the FSMA regulatory principles without the clarity I spoke about, or to impose requirements that link to targets that do not yet exist; so unfortunately, the Government are unable to support the amendment.

Turning to Amendment 91 in the name of the noble Baroness, Lady Boycott, the Government are committed to working with UK financial institutions to further tackle deforestation-linked finance. As set out in the updated green finance strategy, we will begin this work with a series of government-convened round tables this year, and I am keen to work with noble Lords on this process.

As we discussed in Committee, the amendment we are considering today would involve imposing requirements on all regulated financial services firms, obliging them to undertake due diligence on practically all their client firms and their clients’ supply chains. In practice, this would amount to UK banks being required to check most of the world’s major companies and their supply chains for links to illegal deforestation, and stopping any finance to them until those companies can provide the data needed to do so. This is while the rest of the world’s banks carry on financing this activity with no global standard on deforestation in place.

Global due diligence is not something that can be legislated for by Parliament and the UK financial sector alone. In fact, trying to do so may make this problem harder to solve. Imposing this data requirement on UK financial firms alone where such data is lacking globally could lead to one of two things: firms trying to satisfy the requirement but failing due to a lack of data, leading to misreporting and misallocations of capital; or keeping that business outside the UK, with no chance of securing the type of environmental change we want and that is the aim of the amendment.

The Government therefore want to find a workable solution, and we are pursuing a number of different lines of action to do so, in addition to the commitment we made to work with UK financial institutions in the green finance strategy. First, we are directly addressing deforestation in situ by our partnerships approach. The Government launched the forest and climate leaders’ partnership at COP 27, and also fund the partnership for forests, which has channelled more than £1 billion of private investment into forests and sustainable land use, and brought more than 4 million hectares of critical landscapes under sustainable land use.

Secondly, the Government are working to address due diligence for illegal deforestation using the Environment Act. The most relevant UK businesses that use forest-risk commodities or products derived from them will be required to ensure those products are produced in compliance with relevant local laws. Thirdly, the Government are supporting the development of a coherent international approach on disclosure and management of nature-related risks and impact.

Since our debate in Committee, the Taskforce on Nature-related Financial Disclosure has published its latest draft framework. This now includes recommended metrics and associated governance strategies for businesses to understand and mitigate deforestation in areas of direct or indirect operational control. We committed in the green finance strategy to explore how the final TNFD framework should be incorporated into UK policy and legislative architecture, and we will start this work later this year, once the final framework is published.

I personally made the case to the International Sustainability Standards Board, while at COP 15 in Montreal, that such standards should be considered for integration into its work. If that happens, global standards are genuinely within reach. I acknowledge that TNFD or any subsequent global standards do not prohibit the financing of deforestation in itself but, as a disclosure framework, it is the bedrock for action, both by incentivising firms to take action on the risks that they identify and allowing the Government to consider taking further regulatory action after the establishment of such a disclosure framework. I hope, therefore, that I have explained why the Government cannot accept the amendments, but have also demonstrated that effective action is under way to address noble Lords’ concerns in these areas.

Turning to Amendments 93 and 113, also from the noble Baroness, Lady Hayman, in the updated green finance strategy, the Government have already recognised that decisions about investing in the context of systemic risks such as climate change and biodiversity loss are complicated, in particular for pension funds. The Law Commission’s 2014 report suggested that fiduciary duties mean that non-financial factors can be considered as part of investment decisions if trustees have good reasons to think their members share their concerns and if such decisions do not involve a risk of significant financial detriment to the fund.

However, the Government recognise that trustees would like further information and clarity on their fiduciary duties in the context of the transition to net zero, and that is why we are taking steps to ensure that such clarity is forthcoming. Later this year, DWP will examine how closely its stewardship guidance is being followed, including whether incorrect interpretations of fiduciary duties are playing a role in this area. The financial markets and law committee, which includes representatives from both DWP and the Treasury, is working to consider issues around fiduciary duties and sustainability and whether further action or clarity is needed.

--- Later in debate ---

Moved by

[Baroness Penn]

5: Schedule 5, page 137, line 32, leave out sub-paragraphs (3) to (5) and insert—
“(3) For subsection (4) substitute—“(4) If either regulator—(a) proposes to vary a Part 4A permission or to impose or vary a requirement,(b) varies a Part 4A permission, or imposes or varies a requirement, with immediate effect,(c) proposes to vary a permission under section 55NA, or(d) varies permission under section 55NA with immediate effect,it must give A written notice.””Member’s explanatory statement
This amendment would align the wording of new section 55Y(4A), being inserted by paragraph 10 of Schedule 5 to the Bill, with section 55Y(4) of the Financial Services and Markets Act 2000, by replacing both those provisions with a new section 55Y(4) which clarifies in a single subsection the circumstances in which a written notice must be given to a person.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we commend the noble Lord, Lord Tyrie, on his amendment and on using it to raise important questions. We understand that concerns have been raised about the perceived watering down of the RDC’s role within the FCA. While we know that the Government respect the operational independence of the FCA, we hope that the Minister is able to say something about the regulator’s recent decisions on the RDC, which are causing substantial concern.

The FCA believes that the current balance of responsibilities is correct and that the recent reforms were necessary to ensure quicker decision-making. However, it would help if the Minister could outline what steps, if any, the Treasury might take in future, should it come to the view, if it has not today, that the system is not quite working in the way that it should.

[Baroness Penn (Con)]

My Lords, I am also grateful to the noble Lord, Lord Tyrie, for raising this important issue through Amendment 8. The Regulatory Decisions Committee, or RDC, takes contested enforcement decisions on behalf of the FCA where the FCA has not been able to settle a case with the relevant firm. The Government recognise that the RDC performs a critical function within the regulatory framework. FSMA requires that decision-makers are independent, and the design of the RDC reflects this.

It is important that the RDC makes decisions fairly and transparently. To ensure this, the members of the RDC are wholly independent of the FCA’s executive. The RDC also has its own team of support staff and legal advisers. This structure ensures that FCA personnel involved in the investigation of the enforcement case are not involved in supporting the RDC in its final decision-making.

As noble Lords noted, the FCA has recently made a number of operational changes to transfer decision-making responsibilities in certain cases from the RDC to the FCA executive, which will increase the speed of decision-making. However, decisions in contested enforcement cases continue to be made by the RDC.

In addition, should a firm or senior manager disagree with the final enforcement decision taken against them by the RDC, they generally have the right to refer the case to the Upper Tribunal. Where decisions fall to FCA executives, the relevant parties retain the right to make representations in writing. The FCA will also consider taking oral representations in exceptional circumstances, when not doing so would be detrimental to the fairness of decision-making. As set out above, the decisions made by FCA executives can also be referred to the Upper Tribunal should a firm disagree with them.

Any proposed legislative changes to the structure of the FCA’s supervision and enforcement framework should be subject to appropriate public consultation. As we have discussed previously during the passage of the Bill, the Government sought views from stakeholders on the operation of the future regulatory framework through a review. However, we concluded during that review that the case had not been made for changes to the FCA’s enforcement and supervision functions given that these responsibilities were not increasing as a result of the UK’s departure from the EU, unlike the significant increase in its rule-making responsibilities, which was the focus of the review and the subsequent enhancements made by the Bill.

Nevertheless, I am grateful to the noble Lord for bringing the importance of the FCA’s supervisory and enforcement framework to the Government’s attention. The Government do not see the need for legislative change in this area at this time. However, we support the noble Lord’s aim to ensure greater independent scrutiny of and accountability within the regulatory framework. The Economic Secretary and I will look at this issue further, outside the passage of this Bill, to ensure that the FCA’s supervisory and enforcement framework remains appropriate as it takes on new powers. We will continue to listen to the views of the noble Lord and other stakeholders as we do so.

I have also raised the issue with the FCA, and will pass on the response with further detail on the decisions and changes made to the operation of the RDC to this House. Therefore, I hope, for the reasons I have set out, that at this stage the noble Lord is content to withdraw his amendment and continue this conversation further outside the passage of the Bill.

[Lord Tyrie (Non-Afl)]

I would be grateful for an opportunity to respond to a few of the points made there. Before I say anything more, I should say I have discussed this amendment on a couple of occasions with the Minister. If she does not mind my saying so, she makes a first-rate fist of doing an impossible job. I also hope she does not mind my saying that from time to time—and this was one of them—I had the impression that people in other places are pulling a number of the strings. That does give me cause for concern.

I will just make a few brief points. The Government have set great store by the Edinburgh reforms. They are designed to bolster business confidence and investment, and make sure that regulation and the threat of enforcement do not end up damaging the UK’s pre-eminence in financial services, among other things. But if the Edinburgh reforms mean anything, they must mean that measures such as this—which would give businesses, particularly smaller businesses, greater confidence that they would be protected from arbitrary enforcement—should be seriously considered. I regret that they are being dismissed somewhat peremptorily.

The Minister said that oral representation is still possible before the RDC. I will not read out the FCA’s response to the consultation, to which I referred earlier, in full, but if she were to go back and look at it, she will see that it has been effectively closed down for all but exceptional cases. It is that opportunity to have a private conversation with the RDC that is so greatly valued—I see the noble Lord who served on the RDC is agreeing—on both sides: on the RDC side and by firms. The RDC dose a very difficult job and does it very well, but it needs more empowerment. I regret that the Government are getting in the way of that.

My last substantive point takes us right back to where we started. Frankly, we have not heard a substantive argument against this proposal from the Front Bench just now, for the simple reason, I think, that there are not any. We have heard the suggestion that firms can still go to the Upper Tribunal, but there was no response to the points made that the Upper Tribunal is not a practical option for a very large proportion of the regulated community, both on grounds of cost and on reputational risk grounds, because it is held in public. I find the arguments adduced for not doing it to be frankly incomprehensible.

The only real opponent of this left is the FCA itself. I would like to end just by drawing one conclusion from that point. It is very concerning that, when a regulator has a vested interest in an issue such as this, it can succeed in knocking down a sensible proposal with scarcely any explanation, and can persuade the Treasury that it should be knocked down and that the advice of that regulator should be taken without challenge. At that point, we are into a self-reinforcing spiral of ever more powerful regulation. That is exactly why, in so many different ways, Members on all sides of the House have come to the conclusion that we must have better accountability of the regulators, particularly the financial regulators, if we are to carry on handing them more powers, as is intended in the Bill.

Having said all that, seeing as I do not have the troops just now, I will withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Lord Livermore (Lab)]

My Lords, we do not support this group of amendments. We strongly support the inclusion in this Bill of the new secondary objective for the regulators on international competitiveness and economic growth. Its position as secondary in the hierarchy of regulators’ objectives is of course key. As a secondary objective, economic growth and international competitiveness will remain subordinate to the regulators’ primary objectives of preserving financial stability and protecting consumers. The UK’s reputation and success as a leading international financial centre depend on high standards of regulation, and a stable and independent regulatory regime. These high regulatory standards are a key strength of the UK system and its global competitiveness, so we would not support any moves towards a regulatory race to the bottom. That would negatively impact international confidence in the UK, making the UK less attractive to international businesses and investment.

The UK’s financial services industry plays a vital role in boosting economic growth and delivering skilled jobs in every part of the UK. Almost 2.5 million people are employed in financial services, with two-thirds of those jobs based outside London, and the sector contributes more than £170 billion a year to GDP—8.3% of all economic output.

The City of London is one of only two global financial capitals and is at the very heart of the international monetary system. This is an enviable position, and it is vital that we support the sector across the UK to retain this competitiveness on the world stage post Brexit so that the UK can continue to be one of the world’s premier global financial centres. It is therefore crucial that the UK’s regulatory framework plays its part in supporting this positive contribution to the UK economy and society. To do this, it must enhance competitiveness and support the industry in trading with the world, including in new markets. It must attract investment into the UK and promote innovation and consumer choice.

A secondary growth and international competitiveness objective is a simple and internationally proven way to achieve this, helping to ensure that the UK remains a leading global financial centre by empowering regulators to make the UK a better place to do business and ensuring a more attractive market for international providers and consumers of financial services. The UK is, of course, in competition with other international financial centres, and many of them, including Australia, Hong Kong, Japan, Malaysia, Singapore, the United States and the European Union, have introduced a similar objective, which they balance against financial stability and consumer protection.

In future groups we will come to topics such as investment in high-growth firms, but it is precisely by having this secondary objective on competitiveness and growth that we will create an ecosystem that supports investment in new technologies, provides much-needed economic growth and secures new jobs.

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

My Lords, the new secondary growth and competitiveness objectives in the Bill will ensure that the regulators can act to facilitate medium to long-term growth and competitiveness for the first time, but a focus on competitiveness and long-term growth is not new. When the UK was part of the European Union and financial services legislation was negotiated in Brussels, UK Ministers went to great efforts to ensure that EU regulations appropriately considered the impact that regulation could have on economic growth and on the competitiveness of our financial services sector.

Now that we have left the EU, and as the regulators take on responsibility for setting new rules as we repeal retained EU law, it is right that their objectives reflect the financial services sector’s critical role in supporting the wider economy. We must ensure that growth and competitiveness can continue to be properly considered within a robust regulatory framework. As the noble Lord opposite said, a secondary competitiveness objective strikes the right balance. It ensures that the regulators have due regard to growth and competitiveness while maintaining their primary focus on their existing objectives. That is why the Government strongly reject Amendment 10, tabled by the noble Baroness, Lady Bennett of Manor Castle, which seeks to remove the secondary objectives from the Bill.

Turning to Amendment 9 from the noble Baroness, Lady Bowles of Berkhamsted, the Government agree that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The current drafting of the Bill seeks to reflect that but also recognises that the scope of the regulators’ responsibilities relates to the markets they regulate—the financial services sector—so it is growth of the wider economy and of the financial services sector, but not at the expense of the wider economy. I hope I can reassure her on that point.

On Amendment 115, also from the noble Baroness, Lady Bowles, as noble Lords know, the Bill repeals retained EU law in financial services, including the MiFID framework. Detailed firm-facing requirements, such as those that this amendment seeks to amend, are likely to become the responsibility of the FCA. As such, it will be for the FCA to determine whether such rules are appropriate. When doing so, the FCA will have to consider whether rules are in line with its statutory objectives, including the new secondary growth and competitiveness objective.

Parliament will be able to scrutinise any rules that the regulators make, including pressing them on the effectiveness of their rules, and how they deliver against their objectives. Industry will also be able to make representations to the regulators where they feel that their rules are not having their intended effect or are placing disproportionate burdens on firms. I hope the noble Baroness is therefore reassured that the appropriate mechanisms are in place for considering the issues that she has raised via that amendment.

[Baroness Bowles of Berkhamsted (LD)]

I understand that there are and will be mechanisms in place, but the point that I was trying to make—and the reason that I expounded at length on how we got into this mess—is that it is urgent action that is necessary. This is not something that waits for this great wheel of change that we are bringing in through this Bill to come along. This is something that should be on people’s desks tomorrow; it should have been on people’s desks a year ago. There will not be ongoing investments trusts if it is not fixed now.

[Baroness Penn (Con)]

I understand the case that the noble Baroness makes, but it is not for an amendment to this Bill but for regulator rules to address the issue that she raises.

I turn to Amendments 8A and 9A from my noble friend Lord Trenchard, which seek to remove the requirement for the FCA and the PRA to align with relevant international standards when facilitating the new secondary objectives and instead have regard to these standards. As we have heard, international standards are set by standard setting bodies, such as the Basel Committee on Banking Supervision. These standards are typically endorsed at political level through international fora such as the G7 and G20 but, given the need to enable implementation across multiple jurisdictions, they may not be specifically calibrated to the law or market of individual members. It is then for national Governments and regulators to decide how best to implement these standards in their jurisdictions. This includes considering which international standards are pertinent to the regulatory activity being undertaken and are therefore relevant.

Since we left the EU, the regulators have been generally responsible for making the judgment on how best to align with relevant standards when making detailed rules that apply to firms. This approach was taken in the Financial Services Act 2021, in relation to the UK’s approach to the implementation of Basel standards for bank regulation and the FCA’s implementation of the UK’s investment firms prudential regime. It was also reflected in the overarching approach set out in the two consultations as part of the future regulatory framework review.

Part of the regulators’ judgment involves considering how best to advance their statutory objectives. Following this Bill, this will include the new secondary competitiveness and growth objectives. The current drafting therefore provides sufficient flexibility for the regulators to tailor international standards appropriately to UK markets to facilitate growth and international competitiveness, while demonstrating the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards—which, as we have heard, the UK has often played a key part in developing. The Government consider that this drafting helps maintain the UK’s reputation as a global financial centre.

I turn finally to Amendment 112 from the noble Baroness, Lady Bennett. The Government consider the financial services sector to be of vital importance to the UK economy. The latest figures from industry reveal that financial and related professional services employ approximately 2.5 million people across the UK, with around two-thirds of those jobs being outside London. Together, these jobs account for an estimated 12% of the UK’s economy.

The financial services sector also makes a significant tax contribution, which amounted to more than £75 billion in 2019-20—more than a tenth of total UK tax receipts—and helps fund vital public services. It is not for the Government to determine the optimum size of the UK financial services sector, but in many of the areas that the noble Baroness calls for reporting on, the information would be largely duplicative of work already published by the Government, public sector bodies or other industry groups.

For example, the State of the Sector report, which was co-authored by the City of London Corporation and first published last year, covers talent, innovation, the wider financial services ecosystem, and international developments and comparisons. The Government will publish a second iteration of the report later this year. The Financial Stability Report—

[Baroness Bennett of Manor Castle (GP)]

The Minister said that was a City of London report, but then said it was a government report. Surely the City of London Corporation is not an independent source on the financial sector—it is the financial sector.

[Baroness Penn (Con)]

It is a joint report from the City of London and the Government that provides analysis of a number of the areas that the noble Baroness covers in her amendment.

I was just moving on to the Financial Stability Report, which is published twice a year by the Bank of England’s Financial Policy Committee, setting out the committee’s latest view on the stability of the UK financial system and what the committee is doing to remove or reduce any risks to it and make recommendations to relevant bodies to address systemic risks.

I hope that noble Lords will agree, although I am sure that not all do, that a well-regulated and internationally competitive financial services sector is a public good for the UK and something that we should continue to support. I therefore hope that my noble friend Lord Trenchard will withdraw his amendment and that other noble Lords will not move theirs when they are reached.

[Viscount Trenchard (Con)]

My Lords, I thank all noble Lords who have taken part in this short debate. The noble Baroness, Lady Bowles of Berkhamsted, talked about the senior managers and certification regime. Does she know that the Japanese banks have given up sending senior directors to London because they cannot get authorised, so they have to promote people who are already in London? All three main megabanks are now doing that because they are so exasperated with the difficulty of getting their senior officers approved by the FCA.

I entirely agree with what the noble Baroness said about the problem of the uneven playing field between listed companies and listed investment trusts. That is an urgent problem that needs to be addressed now. The FCA, with its current culture, is just not responsive to that type of situation. Everybody is aware of that, and it is why some of us are pushing so hard for a more determined effort to change things. I think that if the competitiveness and growth objective had been given equal status with the stability objectives and the other consumer protection objectives, we might have got somewhere nearer that, but I know that not all noble Lords agree.

The noble Baroness, Lady Bennett of Manor Castle, and the noble Lord, Lord Davies of Brixton, supported Amendment 10 to leave out the competitiveness objective and Amendment 112 to reduce the size of the financial services sector. If you leave out the competitiveness objective, you will not have much of a financial services sector, so we would not need both amendments.

The noble Lord, Lord Eatwell, always speaks with great authority. We served together on the original Joint Committee on Financial Services and Markets under the excellent chairmanship of the noble Lord, Lord Burns, in 1999, and it was hugely successful. I take the noble Lord’s point, but I still do not think that we should be bound to align to an international standard just because it is a Basel committee standard; we should have to have regard to it. I say to the noble Lord, Lord Livermore, that some of the other jurisdictions that he mentioned do not subordinate their competitiveness objective to the main stability objectives.

I am grateful for my noble friend’s reassurance and beg leave to withdraw my amendment.