Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.

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

My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.

As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.

As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.

[Baroness Kramer (LD)]

I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.

[Baroness Penn (Con)]

In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.

[Baroness Kramer (LD)]

May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?

[Baroness Penn (Con)]

No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.

Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I accept that the Minister is, essentially, responding in the narrow terms of the amendment before us, but she will be aware that our Lordships’ Select Committee looked into the whole issue of financial fraud and crime. The Minister mentioned the FCA, but the committee found that there are so many agencies involved that their collective effort is a total lack of integration and co-ordination, and that thousands of people are left completely unsupported. Less than 1% of police resources are spent on tackling a huge sector. The Government have now stopped publishing statistics in relation to crime that includes financial crime. I wonder why.

[Baroness Penn (Con)]

I opened my remarks by acknowledging that fraud needs a co-ordinated response from government, law enforcement and the private sector. That is at the heart of our approach, and it is why the Government established the Joint Fraud Taskforce to bring all those actors together. I attended it towards the end of last year, and it meets regularly. There are many different actors that need to take action in this space, including the regulators but also law enforcement, industry and companies—not just the financial services sector. Measures in the Online Safety Bill look at online platforms, for example.

[Lord Vaux of Harrowden (CB)]

I apologise for interrupting, but all this would be a lot easier if we had the national fraud strategy. When can we expect it?

[Baroness Penn (Con)]

I agree with the noble Lord. We can expect it soon—or imminently; I could use a variety of different descriptors, but it will be sooner than “in due course”.

[Lord Tunnicliffe (Lab)]

I hope the Minister will appreciate the utility of publishing it before Report.

[Baroness Penn (Con)]

I note the noble Lord’s point about the timing of that.

The noble Lord, Lord Hunt, mentioned resources. I repeat that additional resources have gone into tackling economic crime—£400 million during the spending review period, including £100 million dedicated specifically to fraud.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud, and recognised the important role it plays in tackling this issue. This existing remit allows the FCA to take proactive steps to tackle fraud and wider financial crime while driving a whole-system approach with relevant stakeholders.

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[Lord Tunnicliffe (Lab)]

My Lords, once again, the arguments for these amendments seem quite persuasive, and I look forward to the Minister’s reply. Having probably been responsible for this legislation in the past—since I failed to duck most of it—I cannot remember for the life of me why SMEs are excluded. Before addressing the amendments, I would be grateful if the Minister could explain the thinking behind the law as it stands.

[Baroness Penn (Con)]

My Lords, Amendment 40 intends to offer additional regulatory protections for businesses taking out finance. I hope this, in part, addresses the question of the noble Lord, Lord Tunnicliffe: the Government are committed to regulating business lending only where there is a clear case for doing so. Bringing SME lending into regulation would risk increasing costs for banks and alternative finance providers, which would in turn be passed on to businesses in the form of higher fees and interest rates. This could negatively impact the price and availability of credit for small businesses.

However, the Government see a case for regulation where that asymmetry which we have talked about is at its greatest. At the moment, loans of £25,000 or less to the smallest businesses are already regulated as consumer credit agreements under the Financial Services and Markets Act 2000. This captures over 60% of all UK businesses and aims to protect them where there is the potential for detriment in their dealings with banks and alternative finance providers.

Even for medium and larger firms outside the perimeter, multiple protections are already in place which, in some instances, act as a de facto extension to the regulatory perimeter, without the associated costs that formal regulation would bring. Over 99% of UK businesses can access independent dispute resolution through either the Financial Ombudsman Service or the Business Banking Resolution Service. I note the comments from the noble and learned Lord, Lord Thomas of Cwmgiedd. Alternative dispute resolution services provide a form of access to businesses that can be less costly to them. On his specific question about the views of regulators on the regulatory perimeter, I will write to both the noble and learned Lord and the Committee.

Furthermore, a recent FCA investigation found that many lenders, particularly large banks, extend regulatory protections to many or all of their unregulated business relationships. All the major bank lenders are signed up to a voluntary industry code, the Standards of Lending Practice, which contains clear guidance on best practice and can be considered by the Financial Ombudsman Service when adjudicating a business’s complaint against a financial institution. This achieves many of the same outcomes as extending the regulatory perimeter, so many loans that are not captured by consumer credit regulation nevertheless benefit from effective protections.

Given these factors, at this time, the Government do not believe that there is a clear and proportionate case for bringing business lending into regulation. I should be clear that we are open to considered, evidenced arguments on specific regulatory questions related to SME lending. That is why we have invited views on it as part of our ongoing consultation on the reform of the Consumer Credit Act.

Amendment 219 seeks to ensure that SMEs are given rights of action against firms that breach the FCA handbook. Currently, a breach of the FCA handbook may not be actionable by an SME in court—as noted by my noble friend. However, as I have already said, the Financial Ombudsman Service provides consumers and small businesses with a route to raise complaints against firms. This is an alternative to going through the courts, which can be expensive for the parties involved and delay redress. The Financial Ombudsman Service is required to decide cases on the basis of what it considers is fair and reasonable, in all the circumstances of the case, including whether there has been a breach of FCA rules.

Since 2019, SMEs with an annual turnover of up to £6.5 million and fewer than 50 employees have been able to take cases against financial services firms to the Financial Ombudsman Service. All firms regulated by the FCA are required under the FCA’s rules to co-operate with the ombudsman, which includes complying with any decision that it may make.

Since 2021, SMEs with a turnover of between £6.5 million and £10 million can also raise complaints about firms to the British Banking Resolution Service. This is a voluntary body set up and funded by banks to provide an alternative dispute resolution service without the need for litigation or external legal support. Given that more than 99% of UK businesses can access independent dispute resolution through either the FOS or the British Banking Resolution Service, it is unnecessary to provide for a right to take civil action in the courts for a breach of the FCA handbook.

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[Lord Tunnicliffe (Lab)]

The Minister’s argument seems to be about the cost of introducing regulation—that there is a big black cloud that means they cannot do it—but I have not heard any figures. Can she find an estimate of the cost of introducing the sort of regulation envisaged under the amendments and send us all a letter when she has?

[Baroness Penn (Con)]

I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.

Those were all the points—

[Lord Sharkey (LD)]

The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?

[Baroness Penn (Con)]

I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—

[Baroness Kramer (LD)]

Perhaps the Minister would confirm that the only cases in which the BBRS will intervene is where the bank complained against is Barclays, Danske, HSBC, Lloyds, NatWest, Santander or Virgin Money and that any institution outside that group—and there is a great range of new banks, challenger banks and others—is not included in its activities? Is that correct?

[Baroness Penn (Con)]

I note that it is a voluntary body. I do not have the list of those who have signed up to it to hand. If it differs from those outlined by the noble Baroness, I will write to the Committee, but she may well have listed those who have signed up to it. I note, however, that the combination of that service, and the scale of those involved in it, with the ability to go to the Financial Ombudsman Service means that research suggests that more than 99% of UK businesses can access independent dispute resolution. We should look at the size of the customer base as well as the number of organisations signed up to such dispute resolution mechanisms. I will write to the noble Lord, Lord Sharkey, on the number of cases taken by the organisation.

[Baroness Altmann (Con)]

I thank my noble friend for giving way, but perhaps I could press her a little more on the effectiveness of the Financial Ombudsman Service in providing a deterrent against poor practice in the areas where we have seen it in the past. The noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Sharkey, have outlined instances of banks not treating their customers well. Does my noble friend agree that having a statutory duty written into the legislation would be much more of a deterrent against the behaviour we have seen than the potential threat of someone going to the Financial Ombudsman Service?

[Baroness Penn (Con)]

That is one element to be considered. I was pointing in particular to the combined role of the FOS and the Business Banking Resolution Service in providing a route of redress for over 99% of businesses. In part, it comes back to my question in relation to Amendment 40 from the noble Lord, Lord Sharkey, on the Government’s commitment to regulating business lending only where there is a clear case for doing so, given some of the increased costs that bringing SME lending into regulation would bring. I return to the point that we currently have a consultation out on the Consumer Credit Act in which there is a question on business lending; the Government are considering this through that consultation.

With that, I hope that the noble Lord, Lord Sharkey, will withdraw Amendment 40 at this stage—

[Baroness Bennett of Manor Castle (GP)]

I think the whole thrust of the noble Baroness’s argument is that the non-statutory protection effectively offered to SMEs through the ombudsman and independent dispute resolution procedures is essentially the same as having statutory protection. She suggested that statutory protection would cost more, but if the protection is equal through these other mechanisms, surely the costs of the banks providing the documentation and the system to enforce those mechanisms would be very similar to the statutory costs.

[Baroness Penn (Con)]

The noble Baroness touches on one possible difference in documentation needing to be provided where something is regulated versus where it is voluntary. That comes back to the question of SME lending having increased costs for banks and alternative finance providers. This can be passed on to businesses in the form of higher fees and interest rates, and it can affect the availability of credit for small businesses. The noble Baroness, Lady Kramer, mentioned start-up banks and challenger banks. When we have discussions elsewhere on other issues related to financial services regulation, we also discuss how we create a more competitive environment in the banking sector, as smaller banks can struggle to deal with regulations. This is a general point about balance.

[Baroness Bowles of Berkhamsted (LD)]

I am sorry to intervene again, but I am also intrigued about what the extra cost is of this coming into regulation. We are not suggesting that there should be great big oversight mechanisms which mean that the FCA would have to do a lot more—until problems occur, when there must be a route to justice. Is the Minister saying that banks will make less profit when they cannot cheat their customers, and that is where the cost comes from? I do not understand it. The suggestion was that it might be documentation, but the cost of that is the same wherever the documents go. What is this extra cost other than banks having to behave responsibly?

[Baroness Penn (Con)]

In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.

On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.

[Baroness Kramer (LD)]

I will add one more piece to the response from the Minister—one more request. I just want to double-check what she said. She said that small businesses could go to the FOS and that they have to employ fewer than 50 people. The definition of a small business seems to encompass something much larger than that. Can she help us understand what happens to the businesses that are still considered small but have more than 50 employees? I would imagine that they are pretty easy targets. As I say, one of the things that is always noticeable is that those who decide to exploit are very clear about where the perimeters are and who they can freely approach, so they get away with it.

[Baroness Penn (Con)]

As I hope I was setting out for the noble Lord, Lord Sharkey, there are different definitions of businesses that can have different protections and routes of redress within a system of small business lending. The system that we have is aimed to be proportionate, focusing on the smallest SMEs which are at the most risk. On the difference between the voluntary measures that are in place and bringing it within the regulatory perimeter, we are not saying that those are entirely equivalent protections but that they are proportionate protections to the risks faced by those firms. I set out different thresholds in my answer in relation to both those businesses that are protected under the Consumer Credit Act, which are sole traders, loans under £25,000 and a few others there, and businesses that are able to access either the FOS or the Business Banking Resolution Service. There are other thresholds too. Therefore I appreciate the point that that is different from the definition of a SME that the noble Lord asked about. The system is designed to be proportionate to the size of the SME and the protections it affords to them as regards business lending.

[Baroness Altmann (Con)]

I thank my noble friend for giving way once again. This is an important area for the whole financial services framework that we have in this country. I think that the noble Baroness, Lady Bowles, the noble Lord, Lord Sharkey, and my noble friend Lord Holmes are all trying to press the Minister on the issue of protection before scandals happen so that our system can be trusted more. The point here is about deterring financial institutions from even trying to undertake these actions by having stronger regulatory protection upfront, rather than this or that right of redress after the event has happened.

[Baroness Penn (Con)]

I understand my noble friend’s point, and of course the Government also consider that when we look at what to bring into the regulatory perimeter or the right of redress, both as a route of redress and as a point of deterrence. The Government take all those factors into account when considering this question.

[Baroness Bowles of Berkhamsted (LD)]

If I may ask one more question, one area that might be interesting for comparison, especially if we are looking at the Consumer Credit Act, is what the difference is between the loans of £25,000 to small businesses and bounce-back loans, where the conditions of the Consumer Credit Act were dispensed with. Can we have a comparison to see whether they have fared better or worse? That will perhaps show us where the true costs of regulation and lack of regulation lie.

[Baroness Penn (Con)]

The noble Baroness makes an interesting point. However, bounce-back loans were designed for a specific set of circumstances, and the aim of disapplying the Consumer Credit Act provisions was to do with the speed of being able to get bounce-back loans out to customers. The noble Baroness has indicated that there can then be some regulatory cost to having those protections in place. That is an interesting point, which I am sure people will want to think about in the consultation that is under way on the Consumer Credit Act and the direction of travel there.

[Baroness Bowles of Berkhamsted (LD)]

I must point out that I was fearing that the true cost was with the small businesses.

[Baroness Penn (Con)]

The true cost of the protections afforded under the Consumer Credit Act—

[Baroness Bowles of Berkhamsted (LD)]

It is about the lack of protection.

[Baroness Penn (Con)]

To be honest, I am not sure that I totally follow the noble Baroness’s point.

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[Lord Mitchell (Lab)]

My Lords, I thank the noble Baroness, Lady Kramer, for drawing your Lordships’ attention to the three-year campaign we had on payday lending, which in the end won. We removed a great scourge from consumer credit in this country. I apologise for not speaking at Second Reading; I intended to, then Covid got me.

I will make a couple of general points before getting into buy now, pay later. When I was 16, I was asked to leave school. One mock GCE pass out of seven subjects at O-level led to my marching orders. I got a job at Hoover selling vacuum cleaners and washing machines door to door. That truly was the school of hard knocks. It was 1959. We were sent to sales training school to learn how to complete a sale. They told us, “Wear a dark suit, white shirt, firm handshake, and at all costs, get your foot in the door. Demonstrate the product to the lady of the house and then present her”—it was always her—“with the dual positive suggestion: ‘Will madam like to pay cash, or would she prefer hire purchase?’ Whatever the outcome, you’ve got the deal.”

So, I know about deferred payments, which in those days were also called “the never-never”. I emphasise to noble Lords that I am not against buy now, pay later. In fact, I think it is a good thing. People’s budgets are squeezed, and if a financial mechanism can be devised to make purchasing easier, it surely must be applauded. The problem is when it gets out of control, as many noble Lords have said.

Buy now, pay later has no interest component, and because of this, it is not regulated by the FCA, it is not protected by Section 75 of the Consumer Credit Act and individuals do not have recourse to the Financial Ombudsman Service. This loophole was surely never intended and ought to be closed.

It is currently too easy for consumers to acquire debt beyond their affordability, and therein lies the danger. Plus, of course, consumers can acquire payment liabilities through a host of different providers, each of whom has no knowledge of the existence of the other. We saw that in payday lending, whereby you got to your limit with one payday lender, so you went to another and then another, you got the money from here to repay this one, and so it went, until people got into terrible situations.

I do not have the foggiest why the Government have said that they want to regulate that but are telling us that it is not appropriate. I ask the Minister: why are the Government dragging their feet on something that seems so dangerous, obvious and uncontentious?

I have one further point to make. Buy now, pay later is growing exponentially and we now have a measure of just how big it is. Half the population use this unregulated form of finance. Casting our minds back to the financial collapse of 2008, we cannot ignore the subprime mortgage crisis in the US that triggered all the turmoil. We are not there yet, but massive and increasingly unaffordable debt is simmering below the radar, and it is a huge potential danger. Can the Minster assure the Committee that the Government are tracking this sector and are aware of the risk?

[Baroness Penn (Con)]

My Lords, I shall turn first to Amendment 43, tabled by my noble friend Lady Noakes, before dealing with buy now, pay later. The Government fully support the intention behind this amendment to facilitate the swift reform of the Consumer Credit Act, and work is under way to do just that. There is no doubt that this legislation needs updating. The Act is becoming increasingly outdated, and its prescriptive nature means that it is unable to keep pace with advances in the market without modernising reform.

However, we must appreciate that the Act is complex, and any work to review it requires careful consideration to ensure that any future approach is fit for purpose. For this reason, a first public consultation on this reform was published in December, which will close for responses in March. As part of the review, the Government are seeking views on how to rectify the complex split of regulation currently contained in primary legislation, secondary legislation and FCA rules which is hard for consumers and businesses to navigate.

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[Baroness Penn (Con)]

My Lords, as I was saying, we can also simplify the way in which information is provided to consumers throughout the lending process, which can be both inefficient and ineffective. This reform will also allow us to review retained EU law in the Act and amend regulation to better suit UK businesses and consumers.

Given that this work is at an early stage of policy development, the Government believe that it would be premature to consider legislative changes at this stage. I heard what my noble friend said about introducing more parliamentary scrutiny into her amendment but I am not sure that that would be sufficient to address the fact that we are not yet at the stage where we can bring forward our proposals and legislate on this issue.

On Amendment 212, the Government are working at pace to regulate buy now, pay later products, recognising the risks they may pose to consumers. We are now drafting secondary legislation and intend to consult on it very shortly. Subject to the outcome of the consultation, the Government aim to lay regulations later this year.

[Lord Tunnicliffe (Lab)]

I just point out to the Minister that “later this year” could be December. I hope the Government have a rather more optimistic view than that.

[Baroness Penn (Con)]

I would like to share the noble Lord’s optimism. We need to have the consultation on the secondary legislation, which we are expecting very shortly, and then progress as quickly as we can to lay the regulations after we have completed that consultation. I completely accept the point from the noble Lord and the Committee more widely that there is a desire for swift action in this area. We understand that there are concerns about the pace of the delivery of this secondary legislation. This is a new and developing market, and it is important to get the regulation right. We need to ensure that it is proportionate and that lenders can continue to offer a useful form of interest-free credit to consumers responsibly.

While work continues to bring this fully into regulation, I should stress that buy now, pay later borrowers already benefit from wider consumer protection regulation. This includes standards on advertising, rights concerning the fairness of contracts and regulations to protect consumers from unfair commercial practices. However, to reiterate, I reassure the noble Lord, Lord Tunnicliffe, and other noble Lords in the Committee that they can expect to see draft legislation very soon and that we are committed to progressing this as quickly as we can.

I therefore hope my noble friend Lady Noakes will withdraw her amendment and that the noble Lord, Lord Tunnicliffe, will not move his when it is reached.

[Baroness Noakes (Con)]

Will my noble friend say how she sees the timetable going forward? I think she said that the Treasury is at the first stage of consultation, but it would be interesting to see the outline timetable that my noble friend thinks the Government will work to on this. It has taken a long time even to get to this stage, and it would be very useful to have an idea of when something tangible might be expected.

[Baroness Penn (Con)]

I will do my best, but I am afraid it will disappoint my noble friend. We expect to publish a second-stage consultation in due course, and it is likely that the FCA will also consult. Implementation of the final approach will require primary legislation, which will be brought forward when parliamentary time allows. I hope she draws some comfort from the fact that this process has started and that this reform is under way. We heard from everyone that this legislation is long overdue for reform, but we also heard a desire from the Committee that appropriate parliamentary scrutiny be applied when the Government bring forward proposals for reform.

[Baroness Noakes (Con)]

I thank all noble Lords who spoke in this debate, especially those who supported my amendment. I freely concede that, as I said in my introductory remarks, more parliamentary involvement would be required before any proposals were finalised.

Consumer groups have already been heavily involved. There are problems because the Consumer Credit Act focuses on paperwork and processes and not on whether it produces good outcomes. For example, it has no concept of vulnerable customers. There are real, good reasons for progressing this into law.

I was not surprised but somewhat disappointed by my noble friend’s response; it is a big step to take a big Henry VIII power when dealing with anything other than EU law. Normally, of course, the Committee would be criticising such a power, but I was particularly disappointed not to get a sense of the real urgency from my noble friend. Having a secondary consultation in due course is the kind of timetable beloved by Governments who do not really want to do anything. I hope that my noble friend will go back to her department, the Treasury, and say that this issue must be progressed. With that, I beg leave to withdraw the amendment.

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[Lord Tunnicliffe (Lab)]

My Lords, the debate this afternoon, not just on this group, has been around how this Bill will influence the future. One of the advantages of being old is that you do not have to look too far, because you know where you are going to be. That is not true for our grandchildren. The present progress on the environment is painfully, frightfully slow. All the stuff I read says that, if there is not a change—if not in direction, then in the commitment and energy we put in—the future for our grandchildren will be very grim.

The other thing that has come out of this debate is the recognition that we have to move beyond carbon. If we crack net-zero carbon by 2050 and do nothing else for all the parts of the green world—the world that should be green—then we will live on a virtually lifeless planet, and we will have lost so many things. There are so many other issues that have to be taken into account in shaping the world of the future.

What does that have to do with financial services? Some may argue that financial services are just about making money and so on, but the way in which people in the past have chosen to make money has had a profound effect on societies—some good, some pretty frighteningly bad—and financial services and the way society develops are intertwined.

I do not support all the amendments in detail in this group, but their direction surely speaks to the fact that financial services will influence the future. The hopeful thing about financial services is that they will be provided by young people. They will not be young when they get around to doing it, but they are young now, and young people grasp this crisis much better than we do. One or two of us in this Room are young but, in general, it is the teenagers and the 20 and 30 year-olds who are really taking this issue on board. They will be the investors and shareholders of the future, so it is right that, in this Bill, we give them the best possible basis for their desire to create a greener world. It has to be a global solution—they will want that to happen.

Our effort, Amendment 208, may be a good vehicle. The Government said that they will publish an updated green finance strategy, relating in particular to a green taxonomy and sustainability disclosure requirements. The concept of a green taxonomy will have the same impact that universal financial reporting standards have had in improving the clarity with which you can look at enterprises. While it remains unregulated, the statements that companies make—especially those that are true—are diluted by the fact that nobody understands the terminology. Only when we bring the descriptions together—at least nationally and ideally internationally—will we start to shape the way that society develops and allow finance, which is so important in creating direction, to play its part.

I commend Amendment 208 to the Committee. Ideally, we should be going with the grain, because Ministers are committed to producing a financial strategy. We are told over and over again in some places—including, I believe, in the other place—that we might expect it imminently. Can we have some clarity about the Government’s commitment? I hope that in doing that, they will see the importance of a green taxonomy and that we can get this in hand and play our small part in what it is not overstating it to call saving the planet.

[Baroness Penn (Con)]

My Lords, the Government recognise and understand the importance of supporting the growth of sustainable finance in the UK. Indeed, it is because of the importance that Parliament, the Government, the regulators and industry have collectively applied to these issues that London ranks, once again, as one of the leading centres in the world for green finance in the Z/Yen global green finance index. The Government are committed to further strengthening the UK’s financial services regulatory regime relating to climate, which is why Clause 25 introduces a new net-zero regulatory principle for the FCA and the PRA.

Amendments 44, 53, 56, 62 and 68 seek to go further by introducing a secondary objective for the regulators to facilitate alignment of the UK economy with commitments outlined in the Climate Change Act and the Environment Act 2021. Similarly, Amendment 69 seeks to extend the new net-zero regulatory principle to also include nature, and Amendment 69A seeks to oblige the financial services regulators to have regard to a range of environmental concerns beyond the net-zero commitment.

It is important that we consider the regulators’ objectives, secondary objectives and regulatory principles in the round. The FCA and the PRA are required to advance their objectives when discharging their general functions. 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 PRA’s general objective is promoting the safety and soundness of PRA-authorised persons. It also has an insurance-specific objective of contributing to the securing of an appropriate degree of protection for those who are, or may become, policyholders. The PRA also has a secondary objective to facilitate effective competition.

As we have discussed, the Bill provides a secondary growth and competitiveness objective for both the FCA and the PRA. The Government consider that alongside these core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. This proposal received broad support through the FRF review consultation.

These objectives are underpinned by a set of regulatory principles which aim to promote regulatory good practice and set out the considerations that the FCA and the PRA are required to take into account when discharging their functions. The regulators’ primary focus must be to ensure the safety, soundness and integrity of the markets they regulate. While the Government expect that regulators will play a crucial role in supporting the achievement of the Government’s net-zero target, it is not their primary responsibility given that many of the levers for change sit outside financial services regulation.

Having said that, we should not underestimate the significance of Clause 25, which will embed in statute consideration of the UK’s climate target across the full breadth of the regulators’ rule-making and therefore support the Government’s action and ambition to transform the UK economy in line with their net zero strategy and vision.

As noble Lords have noted, the legislation creates a clear hierarchy. However, it is not simply the case that issues relating to climate change will be addressed only through the new regulatory principle. The Government’s view is that consideration of climate is already core to the regulators existing objectives: both safety and soundness for the PRA and market integrity for the FCA.

The Government expect that this will also be the case for their new secondary growth and competitiveness objective. Indeed, the recent recommendation letters from the Chancellor to the FCA and the PRA, published as part of the Edinburgh reforms, set out the Government’s view that delivering net zero is part of the wider economic policy objective of achieving strong, sustainable and balanced growth. This means that the new regulatory principle will ensure that where there are broader issues relating to climate change that are not captured within their existing objectives, the regulators will be required to give them specific consideration, where appropriate, in taking forward their general functions.

Regarding consideration of nature issues, the Environment Act 2021 provides a framework for setting the definitions of the Government’s future targets in this space. Noble Lords will recognise that work is ongoing to understand the interaction between these targets and the work of the financial services regulators, which is not yet clear. The Government consider that it would therefore not be appropriate to place such a requirement within the FiSMA regulatory principles without this clarity. However, I reassure noble Lords that there are clear examples of how the FCA and the PRA are supporting the Government’s work on nature under their existing objectives.

The Government and the financial services regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosures, which aims to help organisations to report and act on evolving nature-related risks. The UK is its largest financial backer. We are also committed to the International Sustainability Standards Board process, which will deliver a global baseline of sustainability disclosures that meet capital market needs, while working to decrease systemic environmental risk. These standards are expected to address aspects of the natural world beyond greenhouse gas emissions. The Government will continue to consider bringing these standards into any UK disclosure framework as they achieve global market consensus.

Wagner Group: Sanctions Regime

Baroness Penn Excerpts

Thursday 26th January 2023 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I will not refer to the particular case in the Question because it is clear that I would get the unhelpful answers tendered in the other place. However, we have two evils and a question of process. First, while it may be right for sanctioned individuals to use frozen funds to defend themselves, it cannot be right to use such funds to attack the free speech of others. Secondly, it cannot be right that if you have enough money you can, through the courts, suppress the free speech of others. What are the Government doing urgently to address these issues? Finally, in the other place the Minister said that decisions on legal fees are “largely taken by … officials”. Largely but not wholly means that there must have been others. Who are they?

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

My Lords, to try to take the noble Lord’s questions on directly, the Government condemn the use of strategic lawsuits against public participation, commonly known as SLAPPs. The Prigozhin case can be characterised as a SLAPP, which is an abuse of the UK legal system. We are committed to introducing targeted anti-SLAPP legislation to stop Russian oligarchs corrupting our legal system. The reforms will include a statutory definition of SLAPPs, an early dismissal mechanism and costs protection for SLAPPs cases.

When it comes to the sanctions and licensing regimes, where there are derogations set out in the sanctions regime and the conditions of those derogations have been met, licences may be authorised. There is a specific derogation for legal expenses which is judged on the cost of those expenses, not the merits of any legal case. None the less, I agree with the point that the noble Lord has made: we need to take action in these cases, and the Government are committed to doing so.

On other licences for legal fees, this is a derogation that applies across the sanctions regime so there will be multiple licences issued. There is a general licence available for legal fees and that decision is, on the whole, taken by officials rather than Ministers.

[Lord Purvis of Tweed (LD)]

My Lords, I have seen Wagner operatives with my own eyes in Sudan. I was the first in Parliament to call for that group’s proscription. I did so to Ministers in this Chamber on 25 April; I did so again on 23 May, 9 June, 7 July, 15 November and, most recently, 21 December. It is an outrage that a licence from the Treasury has allowed this group to launder money through the English legal system on palpably malicious legal activities. As the Minister has just said, it is an abuse of the system. Why are the Government procrastinating on national security grounds? This group is a threat to our security and our safety, to British nationals abroad and to our allies. Why is this group not being proscribed?

[Baroness Penn (Con)]

My Lords, it is worth clarifying a number of points. In this case, we are talking about a designated person and the derogations under the sanctions regime allow for legal fees. That is clearly provided for within the sanctions regime. I understand that the Wagner Group is subject to sanctions under the Russia sanctions. On the question of proscription, I will have to write to the noble Lord.

[Lord Stirrup (CB)]

My Lords, Russia’s war in Ukraine is being spearheaded by a mercenary organisation which has terror, torture, murder, rape and all other forms of brutality at the heart of its activities. Does the Minister agree that, quite aside from the illegality of Russia’s actions in Ukraine, we should be doing all we can to ensure that such a group is unable to operate anywhere in what we would refer to as our civilised world and that we have made a less than glorious start in this regard?

[Baroness Penn (Con)]

I join the noble and gallant Lord in completely condemning the actions of this group. I know we have had the basis to sanction the group under the Russian sanction regime. I am sure we are looking at all the tools we have available to us to take further action. Proscription was one avenue raised by the noble Lord, Lord Purvis, and I will write to noble Lords to set out the Government’s position on that.

[Lord Cormack (Con)]

My Lords, having heard these powerful pleas from our two colleagues, proscription is the only answer. The noble Lord, Lord Purvis, pointed out that he raised this subject for the first time months ago. The noble and gallant Lord, Lord Stirrup, has given a graphic brief description of the evil that is being perpetrated. We should not be dilly-dallying. We should get on with it and proscribe the wretched organisation.

[Baroness Penn (Con)]

My Lords, I am not sure I can add to that at this time. What I would say to my noble friend is that when it comes to the illegal invasion of Ukraine by Russia, the steps that this Government have taken are unprecedented in terms of sanctioning individuals and entities. Nothing is off the table when it comes to further action we are looking to take. For example, we introduced the oil price cap at the end of last year as a new way to try to squeeze the revenues Russia can get from oil to fund this illegal war.

[Lord Alton of Liverpool (CB)]

My Lords, when the Minister responds to the points made by the noble Lord, Lord Purvis, and my noble and gallant friend Lord Stirrup about proscription, which was also touched on by the noble Lord, Lord Cormack, will she particularly take into account the views of the former Africa Minister Vicky Ford? In another place, she has called for this organisation to be designated as a terrorist organisation. Given her experience—she is now chair of the All-Party Parliamentary Group on Sudan and South Sudan—will the Minister particularly look at what Vicky Ford has said about the use of diamonds and gold from mines in Sudan and neighbouring countries such as CAR which are used to circumvent the currency problems? This enables the breaking of sanctions by the kleptocrats, oligarchs and militias which commit such appalling, outrageous crimes in places such as Ukraine.

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[Baroness Penn (Con)]

The Government of course listen carefully to the views of all parliamentarians on this matter. Any decisions on these cases are taken within the legal framework that they need to be taken within.

[Lord Howell of Guildford (Con)]

My Lords, I am sure that my noble friend will appreciate the strength of feeling she has heard from the interventions so far. I think we are coming across our old friend non-joined-up government. It seems incredible that the departments concerned were not able to co-ordinate against a clearly identified enemy—the Wagner Group. Would the Minister accept that we are, in a sense, on a sort of war footing? It is a modern kind of war, a different kind of war, but in the past this would never have been allowed. Can she take back that message and make sure we do not do anything further to succour our enemies?

[Baroness Penn (Con)]

I absolutely agree with my noble friend on the need for co-ordination across government. Obviously different regimes, such as the sanction regime and the proscription regime, have different legal frameworks. I am sure that across government we are working to look at all the tools we have available to ensure that groups supporting the atrocities we see in Ukraine are stopped and that we use the powers we have to intervene on their actions.

[Lord Rooker (Lab)]

What was the specific rank of the civil servants who took this decision?

[Baroness Penn (Con)]

I do not have that information and I would not comment on that. It is important to understand that this decision was clearly taken within the legal framework for sanctions that we have, which has been approved by this Parliament.

[Earl Attlee (Con)]

My Lords, will my noble friend take the views of this House directly to her right honourable friend the Chancellor of the Exchequer?

[Baroness Penn (Con)]

I can undertake to do that and to include the strength of feeling around the question of other tools that we have at our disposal. As my noble friend noted, this would also need to be drawn to the attention of other government Ministers.

[Lord Scriven (LD)]

My Lords, my noble friend Lord Purvis said that he raised this organisation months ago. Once it was raised, did any government department do an assessment on this organisation? What was the outcome of that particular assessment, which stopped the organisation to date being banned?

[Baroness Penn (Con)]

As I said, the Government have taken action against the organisation. For example, it is subject to sanctions under the Russian sanctions regime. I have said I will need to write to noble Lords on wider matters. I undertake to do that.

[Lord Bellingham (Con)]

My Lords, the Minister will be aware that some of the West’s sanctions are being undermined by a key NATO ally, Turkey, where a number of oligarch’s yachts have been diverted to and a number of trust funds set up for their assets. Are the Government going to tackle this problem with our NATO counterparts?

[Baroness Penn (Con)]

One of the key aims of the Government’s sanctions policy is to co-ordinate with our allies to ensure that sanctions are as effective as possible and are not circumvented. We will continue to take action to do so.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I too thank the noble Lord, Lord Sharkey, for tabling his amendment and provoking this discussion. It is interesting to find such a wide consensus on the general direction. I support the general direction which has emerged in the debate, but I question whether this is the right solution.

Nobody could be more sensitive to the meaningless process of the scrutiny of affirmative SIs; I have done hundreds over the years. It is a very nice little club. It is usually me and the Minister—and, I have to admit, the Liberals often provide the third person in the room, as it were. It is ridiculous at that level. There is a great attraction in saying that the House should consider secondary legislation as a whole and produce some solutions, but the problem is that that would take for ever.

We have a particular issue with secondary legislation in this Bill. As those of us who ploughed our way through the last financial services Bill will remember, there is a big chunk of EU legislation which, whether we like it or not, went through the democratic process in Brussels and was then put into UK law. That has been, effectively, removed and in this Bill we are creating the processes to substitute it. We are pretty well agreed that substituting 500,000 pieces of law—whatever the figure is; I do not know—through primary legislation is impossible, and that it has to be done by secondary legislation. However, because that intermediate level of legislation is so important, we must, for the purposes of financial services regulation, have a better scrutiny process than we do at the moment.

As the noble Baroness, Lady Noakes, pointed out, she, a number of other noble Lords and I have tabled a lot of amendments and we will have a good discussion. I see myself working with others, both in this Room and further afield, to see whether we can produce a consensual set of amendments to improve scrutiny in this area. In the meantime, I hope the Minister will listen to this debate and those that will follow and see whether the Government can come up with their own proposals to address this problem of scrutiny. Whether we like it or not, it is unfortunate that when the amendments we pass in this House get to the other end, they get chopped. If we can achieve some sort of consensus with the Government, that would be the best way through. If we cannot, I think we have to send something pretty powerful back to the other place, saying that this scrutiny process must be improved.

As an aside, I think it was yesterday when my colleagues at the other end said they had done an SI. I asked, “How long did you take?”, and of course the answer was, “Under 10 minutes”. Their level of scrutiny is worse than ours. At least we make useful points—not that anybody really listens to them.

I am pretty agnostic about the amendments in the name of the noble Baroness, Lady Noakes. My experience of deadlines is that they are real only in retrospect: you know of a deadline for real only when you have passed it. If you motor up to an impossible deadline—which is what these amendments may produce—you introduce a law to change it. I can see the benign nature of her intent but not what good it would do, in practice, somehow to punish an organisation that has missed a deadline by saying, “You won’t be able to make the rules, but we have to make the rules because we need the rules,” and so on. I am not going to get carried away about it, but I am not that seized of it.

The Minister will no doubt give us an appropriate assurance about her bucketful of amendments—that they are technical, minor and all that sort of thing—and I will listen. One is left wondering how many amendments will emerge from down the side of the sofa between now and Report, and even perhaps thereafter, because it seems there has been a failure to find all these amendments by the due date for the original procedures in the Commons. It is unfortunate that so many were missed that they have to be introduced now, but we will have no opposition to them.

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

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

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

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

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

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

“a thorough and helpful delegated powers memorandum.”

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

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

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

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

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

[Lord Tyrie (Non-Afl)]

The Minister has said that the use of Treasury powers under this Clause will normally be subject to affirmative resolution by Parliament. In the Minister’s experience—she could offer her personal view if she feels unable to offer a government view—does she think that that scrutiny is usually relatively effective or ineffective?

[Baroness Penn (Con)]

My Lords, standing here at this Dispatch Box, I would offer only a government view. I view it as entirely appropriate for the model we have set out today. I acknowledged the wider debate being had within the House of Lords on different mechanisms of scrutiny and lawmaking. As I have noted, the approach we have taken in this Bill has not been drawn to the House’s attention by the Delegated Powers and Regulatory Reform Committee.

In the model of financial services regulation that we seek to put in place, a large number of the rule-making powers flow to the regulators. We are delegating that further to the independent regulators that have the expertise to make rules in this area. This is the right model for the UK. We have consulted on it carefully and extensively, and we received broad support in that consultation. It reflects the careful approach we have taken and the choice we have made as to the model for the regulation of our financial services.

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[Baroness Noakes (Con)]

I was interested in what my noble friend said about a forward look. Can she explain a little more what this forward look is and where one might find it?

[Baroness Penn (Con)]

In short, the approach is set out in Building a Smarter Financial Services Framework for the UK, which was published alongside the Edinburgh reforms. A number of those reforms set out where our priorities are. They set out where we have already done consultations and will be ready to move forward with new secondary legislation or regulator rules. They set out where we are starting consultations or calls for evidence in a number of areas where we seek to make changes. They also give a forward look at some of those other areas where we seek to make changes but have not yet published our consultation or call for evidence.

[Baroness Noakes (Con)]

Does that represent a comprehensive analysis of what the Government expect to happen to all the retained EU law covered by the powers in this Bill?

[Baroness Penn (Con)]

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

[Lord Tyrie (Non-Afl)]

That would be very helpful. Before the Minister leaves Amendment 28, can she say whether she discussed with officials whether to add a sunset clause to what otherwise will be a very open and extensive power in the hands of the Treasury?

[Baroness Penn (Con)]

No, that discussion was not had. The powers are constrained in that they relate to the provisions in place to transition away from and replace retained EU law, rather than going beyond that.

Amendments 242 and 243, put together, enable provisions subject to the negative procedure under an Act other than this Bill to be included in affirmative regulations made under the Bill. This is a procedural change with well-established precedent. Where any element of a statutory instrument is subject to the affirmative procedure, the combined instrument would also be subject to the affirmative procedure, so there will be no reduction in parliamentary scrutiny.

To conclude, the Bill will repeal retained EU law to establish a model of regulation based on FSMA. It will do so in a way that prioritises growth while moving in a sequenced and measured way, and through scrutiny, engagement and consultation. At this stage, I hope the noble Lord, Lord Sharkey, will feel able to withdraw his amendment and that other noble Lords will not move theirs when they are reached. Subject to providing that extra clarification to the noble Baroness, Lady Kramer, I intend to move the government amendments when they are reached.

[Lord Sharkey (LD)]

I thank all noble Lords who have spoken. I did ask the Minister about the Treasury’s assertion, or guarantee, that it will have replacements where necessary for the stuff that gets repealed, and about the tests for what is “necessary” and what is “appropriate”, how they will be applied and how transparently. I would be grateful if the Minister could write to tell me the answer to my question.

If we are to rely on SIs as a means of scrutiny of the measures in the Bill, that is the practical equivalent of having Parliament largely bypassed in this discussion. We need two fundamental mechanisms for effective parliamentary scrutiny: an effective means of triage and an effective means of revision. I am sure we will return to those issues either later in Committee or on Report. In the meantime, I beg leave to withdraw the amendment.

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Moved by

[Baroness Penn]

2: Schedule 1, page 94, line 12, at end insert—
“Official Listing of Securities (Change of Competent Authority) Regulations 1991 (S.I. 1991/2000)”Member’s explanatory statement
This amendment and the Minister’s other amendments to Schedule 1 (except for the amendment at page 100, lines 45 and 46) would add various instruments containing retained EU law relating to financial services to the list of subordinate legislation to be revoked in Part 2 of Schedule 1 to the Bill.

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[Baroness Penn (Con)]

My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.

Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.

While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.

The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.

Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.

Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.

The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.

Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.

On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.

However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.

To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.

The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.

I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.

On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.

The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.

I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.

[Lord Sikka (Lab)]

I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.

[Baroness Bowles of Berkhamsted (LD)]

If I may drag the Minister back to where she was just finishing off, in her response to me and the noble Baroness, Lady Worthington, she said that the UK would continue to observe its G20 commitments, which I do not doubt, and that various agricultural products and so on would definitely still be within scope. However, it says here in legislation that the FCA “may”. It does not say, “Apart from the fact that we are observing G20, and agriculture is still in”—it just says “may”. Where does it say in primary legislation that there will be guidance—or whatever the appropriate word is—as to how these things will be dealt with by the exchanges in the circumstances that give rise to concern? Otherwise, looking at our legislation—at least, our primary legislation —I see that we would not have that certainty, and it is proper that we have it.

[Baroness Penn (Con)]

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

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

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

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

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

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

[Baroness Worthington (CB)]

My Lords, I am genuinely grateful to the Minister for her response, which was very helpful and contained information about which I was not aware—I thank her for that. I will read Hansard in great detail. In her letter, can she explain a little more about those 18 contracts that will be covered and the retained powers? I would find that very interesting, although I am sure I can also google it.

I will now sum up. I am very grateful to the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. Returning to the statements by the noble Baroness, Lady Noakes, I am sure it is seen as a great success that we have this $600 trillion market in stuff that exists in the future, which is hugely complex and can crash the global economy. Some people will have benefited hugely from it; I have no doubt that some of those people may be in this Room. The point is that there is someone paying at the other end of that profit, and often it is the people at the very end of the chain who are trying to buy food in supermarkets or heat their homes. If a bubble in that market is definitely benefiting some—even maybe benefiting the Government, if they are receiving revenues from it—it comes at a cost, so we should be very mindful of the need to regulate that market. There is evidence after evidence of these bubbles forming because, quite frankly, the incentives to make cheap money are huge. Compared with the real economy, where you actually have to do things, build things, sell things and employ people, the desire to make money fast is overwhelming, and I do not want the UK to become the home of ever more exotic derivatives that allow us to make money the quick and easy way. Let us make banking and the financial markets boring again by getting them back to basics: using money to further society’s aims. If we cannot do that individually, we should do it collectively. I do not want to get on my soapbox, but the fact that we are exiting Europe makes that more difficult, so even more scrutiny needs to be applied now that we are setting our own rules.

I am grateful for the responses. I will end by saying that I had the pleasure of meeting a gentleman who worked in a bank that was more than 500 years old. I asked him about its ESG policies, and he listed them. They started with, “We will make no profit at all from soft commodities”, then went on to the usual checklist about arms and whatever else. I asked him where that came from, and he said, “Oh, we can’t remember”. Because it was such an old-fashioned concept—that we should take a moral position that we will not engage in profiteering from soft commodities—it sort of lapsed into the history of time.

Banking was moral once. I am not saying it is immoral now, but it is incredibly complicated. The incentives to make money in ever more novel ways are always there. Even the noble Baroness, Lady Noakes, alluded to the fact that systemic risks exist. They have existed in my lifetime and I am sure they will come again.

I am glad that we are here to do this scrutiny and very glad of the Minister’s offer to write. I hope that we will revisit some of these questions, and I will end on Amendment 41. I have personal experience of how energy companies are loath to disclose how much of their profits rest on trading. If that is the case, the markets should care about it and disclosure is the most obvious step to address it. With that, I beg leave to withdraw.

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Moved by

[Baroness Penn]

26: Schedule 2, page 126, line 39, at end insert—
“PART 4AAMENDMENTS TO THE CENTRAL COUNTERPARTIES (AMENDMENT, ETC., AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 201850A (1) Regulation 19B of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184) is amended as follows.(2) In paragraph (2) for “one year” substitute “3 years and 6 months”.(3) After paragraph (3) insert—“(4) The period determined by the Bank of England in a particular case under paragraph (2) (whenever determined) may be varied by the making of a subsequent determination.””Member’s explanatory statement
This amendment would allow the Bank of England to extend the period during which third country central counterparties that have fallen out of the temporary recognition regime following IP completion day can continue to offer services to firms in the United Kingdom, from a maximum period of one year to a maximum period of 3 years and 6 months.

[Baroness Penn (Con)]

I beg to move.

Amendment 27 (to Amendment 26) not moved.

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Moved by

[Baroness Penn]

28: Clause 3, page 3, line 15, at end insert—
“(aa) authorise the making of subordinate legislation by the Treasury;”Member’s explanatory statement
This amendment would ensure that the powers in clauses 3 and 4 of the Bill to make transitional amendments or saving provision in relation to the retained EU law listed in Schedule 1 for revocation, also include the power to confer new regulation-making powers on the Treasury.

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Moved by

[Baroness Penn]

29: Clause 6, page 6, line 39, at end insert “, and
“(ii) the Bank’s duties under section 30D(1)(a) of that Act;”Member’s explanatory statement
This amendment would ensure that when the Bank of England makes material changes to rules where consultation exemptions apply under clause 6, the Bank must publish a statement explaining how the rules are compatible with the Bank’s duties relating to the regulatory principles inserted by clause 45 of the Bill. (The words after “with” in line 38 become sub-paragraph (i)).

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[Baroness Penn (Con)]

My Lords, I shall briefly address government Amendment 33 in this group before I turn to the other amendments.

Government Amendment 33 fixes a minor drafting error in Clause 8, which introduces the designated activities regime, or DAR. Subsection (2)(a) of new Section 71P of FSMA states that contravention of a DAR rule does not constitute an offence except as provided under regulations made under Section 71R. These provisions allow the Treasury, when designating an activity, to apply existing criminal offences within FSMA to that activity. This amendment inserts a cross-reference to new Section 71Q, as it too makes provision for DAR regulations to apply existing criminal offences in FSMA.

Amendments 30 and 31 together seek to prevent the Treasury designating, and therefore bringing into regulation through the DAR, any activity unless the regulation of that activity is necessary for the FCA to further its operational objectives. I assure my noble friend that the FCA will be required to make rules relating to designated activities in a way which, as far as is reasonably possible, furthers one or more of its operational objectives. Simply put, the FCA will not be able to make rules about a designated activity unless doing so is in line with its objectives under FSMA. This approach is modelled on the way activities are currently regulated under FSMA, whereby the Government determine the regulatory perimeter by specifying which activities are regulated, and the regulators then make rules to advance their objectives.

Amendments 34 and 35 seek to remove short selling and the admission of securities to trading from the list of activities in Schedule 3. That schedule inserts new Schedule 6B into FSMA; Schedule 6B is designed to give noble Lords a sense of the types of activity that Treasury may designate under the DAR. However, my noble friend is absolutely right that this is an indicative list and does not mean that Treasury will designate that activity in future, or that it will do so in the way described in the schedule. Should the Treasury decide to designate short selling or the admission of securities to trading in future, it will be through a statutory instrument subject to the affirmative procedure, so that Parliament can fully consider and debate the implications.

I should say to my noble friend that the list included in Schedule 6B is not an FCA wish list: it is a set of activities currently regulated through retained EU law that may be appropriate for the designated activity regime. I should also be clear to my noble friend and to the Committee that the Government believe that there should be a regulatory regime for short selling in the UK.

My noble friend set out that short selling can play a role in the healthy functioning of financial markets. It provides essential liquidity to markets, helps to ensure that investors pay the right price when investing in shares, and allows investors to manage risks in their portfolios. However, there can also be risks associated with short selling. For this reason, all major financial services jurisdictions, including the UK, have some form of short selling regime. Noble Lords will know that the losses that short sellers can incur if prices increase rather than fall have no upper bound, making it riskier than a traditional investment. In exceptional periods, markets can be dysfunctional, and there is a risk that short selling can exacerbate volatility and undermine market integrity.

The UK intends to regulate in this area, and, as the noble Baroness, Lady Bowles, notes, the UK has a history of regulating short selling which predates the introduction of the EU’s short selling regulation. Parliament legislated to give the FSA specific powers over short selling in 2010 and, prior to that, the FSA took action to address instances of short selling in the financial crisis. The powers in the Bill will allow the Government to put in place a proportionate and appropriate short selling regime that is tailored to the needs of UK markets, companies and investors. The Treasury has issued a call for evidence to support this work, which will close in March.

To answer the question asked by the noble Baroness, Lady Bowles, on how you do just one simple thing, the DAR has been designed to be flexible and proportionate and would allow the Treasury to do something very targeted if appropriate. It removes the need to introduce a Bill every time something small but important arises, and it removes the need as potentially an alternative form of regulation for it to make a regulated activities order and for it to be regulated under that regime with the associated regulations of the authorised persons that come along with it rather than just the activity itself.

On regulation for companies listing on a stock market, the Government are in the process of a fundamental overhaul of the prospectus regime. There is clear scope to make this simpler and more effective and enhance the competitiveness of UK capital markets. I reassure my noble friend Lord Trenchard that the Government have committed to deliver the outcomes of the UK Listing Review from the noble Lord, Lord Hill. We published an illustrative statutory instrument in December showing how the Government plan to use the DAR to put in place a simpler, more agile and more effective listing regime. I therefore reassure my noble friend that the Government are fully committed to improving the attractiveness of UK markets, and that the powers in the Bill will be used to deliver on that objective.

My noble friend also asked whether the FCA is the only regulator able to make rules under the DAR. I can confirm that it is the only regulator that would have powers under this regime.

Amendment 32 from the noble Lord, Lord Stevenson, seeks to enable the DAR to regulate currently unregulated credit agreements secured by bills of sale. As the noble Lord set out for the Committee, the Bills of Sale Acts allow borrowers to use goods which they already own as security for a loan, while retaining possession of those goods. Today, they are most commonly used for logbook loans. Logbook loans are a type of high-cost credit regulated by the FCA in which a consumer uses their car as security, while allowing the consumer to keep using their vehicle. However, bills of sale are also used for other unregulated secured lending, such as businesses which wish to borrow against their assets, such as machinery.

I understand that the noble Lord would like to see the framework for these products modernised, and we have discussed this during the passage of previous Financial Services Acts, although his work on it predates that. He has suggested that the DAR might be the way to achieve this.

As the noble Lord noted, the Government previously considered repealing the Bills of Sales Acts and replacing them with a new goods mortgages Act. While there was support for this approach by many stakeholders, others raised significant concerns about the degree of consumer protection afforded by the proposed regime. The Government were also concerned that a modernised and streamlined regime could lead to more consumers using goods that they already owned as security for a loan, which is inherently a higher-risk form of borrowing.

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Moved by

[Baroness Penn]

33: Clause 8, page 10, line 31, after “provided” insert “by designated activity regulations under section 71Q or”
Member’s explanatory statement
This amendment would insert a cross-reference to section 71Q to ensure that the exception in section 71P(2)(a) of the Financial Services and Markets Act 2000 as inserted by clause 8 of the Bill (on liability in connection with designated activities) also refers to designated activity regulations under section 71Q.

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[Baroness Noakes (Con)]

My Lords, Amendment 36 would delete some subsections from Section 4 of the Bank of England Act 1946, the only nationalisation legislation that made any sense. Indeed, it was surprising that the Bank of England existed outside the public sector for as long as it did—the best part of 250 years. Section 4(3) says:

“The Bank, if they think it necessary in the public interest, may request information from and make recommendations to bankers, and may, if so authorised by the Treasury, issue directions to any banker for the purpose of securing that effect is given to any such request or recommendation”.


Subsection (6) says that a banker is any banking undertaking that the Treasury declares to be a banker for the purpose of Section 4. That is quite a sweeping power in relation to all kinds of banks: retail banks, commercial banks, investment banks and so on.

This is a probing amendment to find out why on earth this power is still on the statute book, given that we have a highly defined system of prudential regulation laid out in extensive detail in FSMA. In addition, the various Bank of England Acts deal with the Bank’s other functions. Collectively, the legislation gives extensive powers to the PRA, the Monetary Policy Committee, the Financial Policy Committee and the Bank of England itself. There is no deficit in powers related to bankers, as anyone operating in the financial services sector will attest.

Why does Section 4 retain these powers? How often have they been used? When was the last time they were used? If my noble friend cannot make a case for these powers still being needed—if they were ever needed—I invite her to agree to their removal from the 1946 Act. I beg to move.

[Baroness Penn (Con)]

My Lords, my noble friend has just described what Amendment 36 probes and the power it is seeking to look at, so I will not repeat that. What I will say is that the power is designed to be used only when it is necessary to do so in the public interest, such as in an unexpected or emergency scenario.

The Government looked at some of my noble friend’s questions. We are not aware that the Bank has ever used this power, but it could be useful in some scenarios—for example, for the Bank to require certain actions from troubled firms during a period of financial crisis. As we saw in 2007-08, such crises can develop quickly and create novel policy challenges that may not be anticipated in advance. As such, the Government consider the power to be a useful potential backstop. Any changes to this power would require careful consideration and consultation before acting.

I have been brief, but I hope that I have answered my noble friend’s questions, at least in part, and that she feels able to withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I rather thought I would get that answer—that the power has never been used—because I certainly could not recall any situation when it could have been used. My noble friend the Minister has put up a good case for keeping something that has been there since 1946—which is rather a long time—and has never been used but might be needed in an emergency, notwithstanding that, certainly for the last 20 years, we have been legislating on financial services and banks in extenso and there exists a range of powers that any intelligent person involved in this area thought that the Bank or the PRA would ever need to use. I think the case for removing these powers is unanswerable. I hope that my noble friend the Minister might think a little more about that between now and Report. It would be a good thing for the Government to bring forward something that would clean up our statute book. I beg leave to withdraw.

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[Baroness Kramer (LD)]

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

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

[Baroness Penn (Con)]

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

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

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

Wales: Additional Financial Resources

Baroness Penn Excerpts

Wednesday 18th January 2023 Lords Chamber

[Lord Wigley]

To ask His Majesty’s Government what additional financial resources they have made available to the government of Wales, over and above the Barnett formula consequential provisions, to meet unforeseen financial needs for which no provision was made in Wales 2022-23 expenditure plans.

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

The Welsh Government are well funded to meet their devolved responsibilities. The 2021 spending review set out the largest annual settlement in real terms since the devolution Act. This is still growing in real terms this year. The Welsh Government also have their own tax and borrowing powers. On top of this, the UK Government are supporting households UK-wide with the cost of living, and supporting businesses, charities and the public sector with their energy bills.

[Lord Wigley (PC)]

My Lords, is the Minister aware that Wales Fiscal Analysis, at Cardiff University, has shown that, even after taking into account the additional allocations made to the Welsh Government, the higher levels of inflation since the coming year’s budget was set could amount to an impact of £800 million in 2023-24, and that, consequently, real-terms spending on public services in Wales will fall by that amount? Will the Government now allocate an additional £800 million to the Welsh Government for the coming year, to avoid real cuts in essential services in Wales?

[Baroness Penn (Con)]

My Lords, we have a difference of opinion on the figures. That might be because government budgets are routinely translated into real terms using the GDP deflator, by both the Treasury and independent bodies such as the OBR and the IFS. Using those figures, we see that the Welsh spending settlement is still growing in real terms this year and over the spending review period, even after the higher costs, and we believe that the Welsh Government are well funded to meet their obligations.

[Lord Morris of Aberavon (Lab)]

My Lords, have the Government any intention at all of reforming the Barnett formula in this Parliament? Would such a reform not be a levelling up that the Government aspire to?

[Baroness Penn (Con)]

My Lords, the fiscal framework between the UK and the Welsh Governments was agreed in 2016; that added a needs-based factor into the Barnett formula to ensure that Wales receives fair funding. It receives at least 15% more funding per person than the equivalent UK government spending in the rest of the UK. In fact, in the current spending review period, that additional amount is 20%.

[Baroness Randerson (LD)]

My Lords, the lack of Barnett consequentials from the HS2 rail project—a railway not a foot of which will be built in Wales—is a glaring injustice. The recently confirmed extension of the project means that additional Barnett formula funding was confirmed for Scotland and Northern Ireland. Why not Wales?

[Baroness Penn (Con)]

As the noble Baroness will know, the Welsh Government do not receive Barnett on HS2 spending because rail infrastructure in Wales is a reserved matter and the UK Government continue to invest in rail infrastructure in both England and Wales.

[Lord Touhig (Lab)]

My Lords, perhaps I can help the Minister. She might care to suggest to her right honourable friend the Secretary of State for Wales that he has a word with my noble friend Lord Murphy of Torfaen, who, when Secretary of State for Wales, working with the then Chancellor Gordon Brown, invented something called “Barnett-plus”. In truth, with a little imagination you can put as much money in as you want with Barnett.

[Baroness Penn (Con)]

My Lords, I believe that the fiscal framework agreed in 2016 does that, and I am sure the noble Lord will welcome the fact that the latest spending review set the largest annual block grant in real terms of any spending review since the devolution Act of 1998.

[Lord Forsyth of Drumlean (Con)]

My Lords, has the time not come to get rid of the Barnett formula and to fund the devolved Administrations on the basis of need, which is how they distribute the money themselves? I know my noble friend is very busy, but could she read the report of the Select Committee of this House, which was initiated by the late Lord Barnett, which showed clearly that Wales lost out as a result? I say that as a Scot, and Scotland benefits in addition to parts of the north of England, Wales and other devolved parts of the United Kingdom.

[Baroness Penn (Con)]

My Lords, I am aware of the views of Lord Barnett, to whom the formula’s name relates. The point my noble friend makes about needs is exactly what we tried to build into the fiscal framework in 2016. There was an assessment of additional needs in Wales. It said that, on a needs basis, it should be at least 15 % more than the equivalent in the UK. That was recommended by the independent Holtham commission, and that is something that the UK is taking forward.

[Baroness Wilcox of Newport (Lab)]

My Lords, while I would not wish necessarily to disagree with the Minister, I got my figures directly from the Welsh Government. Their overall budget this year, and in 2024-25, will be no higher in real terms than it was in 2022. Their capital budget will be 8.1% lower. With post-EU funding arrangements, Wales has been left with a £1.1 billion shortfall, and it is no longer able to fund three key areas: apprenticeships—Wales used to fund 5,000 apprenticeship places every year; practical support for those furthest from work through the communities for work scheme and ReAct for those in need of redundancy support; and higher education has been shut out of the levelling-up process, and hundreds of jobs are now at risk. Why is Wales being underfunded by the UK Government?

[Baroness Penn (Con)]

I have to disagree with the noble Baroness on most of the points in her question. As I have set out to this House, Wales receives 20% more funding per head than the UK equivalent, and that is over its needs-based assessment as recommended by the independent Holtham commission. The spending review set out the largest annual settlement in real terms since the devolution Act and the Welsh Government also have their own tax and borrowing powers. It is important that the Welsh Government are well funded, and that is what the Government have done.

[Lord Shipley (LD)]

My Lords, are the Government going to keep their promise to Wales to match EU funding through the shared prosperity fund?

[Baroness Penn (Con)]

My Lords, the Government have set out their plans for the shared prosperity fund and how they intend to keep that commitment. Taking into account the tail of EU contributions and then the UK top-up, the levels of funding remain those we committed to in the election manifesto.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I am following on from my noble friend Lord Forsyth’s point. While we are discussing the Barnett formula, a considerable number of people in England, particularly in parts of England quite close to the Scottish border, have always been concerned about the preferential treatment given to Scotland through the Barnett formula in terms of public spending. Does the Minister not think it is time for the Government to review that, but also look at other areas of England, when they look at improving expenditure?

[Baroness Penn (Con)]

I do think it is important that, when we look at our public spending, we take into account the needs of the various areas. I have described how we do that when it comes to the Welsh Government. We also have that process when we look at, for example, funding for local government. That is a principle that the UK Government will continue to support in our approach.

[Lord Morgan (Lab)]

My Lords, in addition to the excellent financial points that have been made on both sides of the House, would the Welsh Labour Government not benefit from having greater powers, of the kind of “devo-max” proposed in Gordon Brown’s excellent proposals on the constitutional settlement?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, there was a considerable extension to the Welsh Government’s powers relatively recently, and I would put the emphasis on those powers being used to their fullest effect before we return to this question again.

[Lord Watts (Lab)]

My Lords, is it not the case that the allocations to Scotland, Wales and Northern Ireland were made before the Tory Government wrecked the economy? Is it not time that we reviewed those allocations and, at the same time, the pay issue, which was also set before the Government wrecked the economy? That has had a dramatic effect on both.

[Baroness Penn (Con)]

My Lords, if the noble Lord is talking about levels of inflation, they have been largely driven by external factors such as Russia’s invasion of Ukraine. As I have already reassured the House, in addition to the fact that the 2021 spending review settlement was the largest since the devolution Act, it is also growing in real terms this year and over the spending review period, even taking into account that higher level of inflation.

[Lord Howell of Guildford (Con)]

My Lords, the late Lord Barnett of course disliked the Barnett formula intensely; he realised it had many faults and clearly needed improving. How do the Government feel about suggestions from some quarters that there should be much more fiscal devolution and that the devolved nations and areas should raise their own funds through new taxation? Is that a good idea?

[Baroness Penn (Con)]

My Lords, in the latest round of devolution to the Welsh Government, I believe they were given greater powers to raise taxes than previously. As I said to noble Lords, making use of those existing powers before looking to extend them further would be a sensible way forward.

Stamp Duty Land Tax (Temporary Relief) Bill

Baroness Penn Excerpts

2nd reading & 3rd reading & Committee negatived
Wednesday 18th January 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

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

My Lords, the aim of the Bill before us today is to support the property market and reduce costs for first-time buyers and home movers during a difficult period for the economy. The Government have a long commitment to supporting home ownership. Since 2010, we have helped more than 800,000 households purchase a home through government-backed schemes such as Help to Buy and the right to buy. We have made sure that the UK is building the high-quality homes that we need. In 2019-20, more than 242,000 homes were built, the highest number of net additional homes in 30 years, but we need to do more, and remain committed to the 300,000 new homes target. We have invested in the affordable homes programme, with an £11.5 billion commitment through this Parliament leading to 180,000 affordable homes, including thousands for social rent. We have removed the housing revenue account cap for local authorities to support them to build more social homes. This Government also supported social renters at the Autumn Statement by limiting social rent increases to 7% in 2023-24, saving the average social renter £200 next year, and we remain committed to abolishing Section 21 evictions.

However, the tax system needs to work for those looking to get on to or move up the housing ladder, and the Government have previously made changes to support their objectives on home ownership and the property market. Stamp duty land tax must work for all. In April 2016, the Government introduced higher rates of stamp duty for purchases of additional dwellings and recognised the impact that buy-to-let investors and purchasers of second homes were having on the ability of first-time buyers to get on the housing ladder. The following year, in the Autumn Budget 2017, the Government permanently introduced first-time buyers’ relief. This increased the threshold before which those buying their first home started paying stamp duty to £300,000. It was under this Government that first-time buyers gained a permanent comparative advantage over other purchasers, and this relief has supported almost 700,000 purchases since its introduction.

The Stamp Duty Land Tax (Temporary Relief) Bill builds upon this context. First, it will increase the nil-rate threshold for stamp duty land tax for all purchases from £125,000 to £250,000 until 31 March 2025. Secondly, it will increase the nil-rate threshold for first-time buyers from £300,000 to £425,000. A first-time buyer couple in the south-east buying an average new-build property worth £490,000 will see their bill reduced from £9,500 to £3,250—a saving of £6,250 which they can put towards their deposit or new furniture. Thirdly, the Bill will raise the maximum purchase value for first-time buyers’ relief from £500,000 to £625,000, something which will help those in places where affordability problems are most acute. Together, these measures mean that around 43% of all purchasers will pay no stamp duty whatever.

As part of this Government’s commitment to fiscal responsibility and to getting debt falling in the medium term, these changes to stamp duty will end on 31 March 2025. The tax cut will remain in place until then to support the property market through difficult times and to continue our support for first-time buyers. Hundreds of thousands of jobs and businesses rely on the property market, and the Government are committed to supporting them with these measures.

The stamp duty cuts will mean that more than half of all transactions in the east Midlands, the north-west, and Yorkshire and the Humber will pay no stamp duty until 31 March 2025, with six in 10 transactions in the north-east having no SDLT liability. A pensioner in the east Midlands downsizing to an average-priced semi-detached house worth around £230,000 will now save £2,100 in stamp duty costs. They will pay nothing because of the Government’s actions.

The Government are lifting families, home movers and first-time buyers out of stamp duty and continuing their record of support for home ownership. They are supporting the market and ensuring that this support remains responsible. This is a significant reduction in the cost of moving home for many in the country and will make getting on the ladder far easier.

Importantly, while it is right that people should be free to invest in or buy a second home, the Government believe it is right that those buyers pay higher rates of stamp duty. The higher rates for additional dwellings introduced in 2016 apply three percentage points above standard residential rates of stamp duty. This 3% surcharge will remain in place. It is important to note that no one purchasing an additional property will be taken out of paying stamp duty.

To conclude, the Government believe that stability is the bedrock on which we build growth. The Bill is a fiscally responsible way to support the property market through challenging times and open up the dream of home ownership to more people, to give them a stake in the success of the British economy. Some 90% of those claiming first-time buyers’ relief will no longer pay any stamp duty until 31 March 2025—a significant and meaningful addition to the Government’s record on home ownership. For those reasons, I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to this short debate on the Bill today. In particular I thank my noble friend Lord Greenhalgh as the only Back-Bench speaker in the debate. My noble friend asked a number of questions. First, he talked about the need for mobility in the housing market. That is something I agree with him on. That can be delivered in a number of ways. Having better and more suitable homes for people to downsize to is one element of it; supporting Build to Rent and having longer-term tenancies is another. My noble friend is far more of an expert in these areas than I am.

While we support mobility overall, and there are a number of government measures aiming to do that—stamp duty is part of it—we have to balance action in that area against the fact that it is also an important source of government revenue. We think the action we have taken in this Bill strikes the right balance, providing temporary support during a difficult time for the economy, in particular the housing market as we see higher interest rates, with the need for fiscal responsibility too.

We made some other reforms to stamp duty. For example, in 2014 there was the move from slab to slice. This aimed to improve the fairness and efficiency of the tax system, as each new SDLT rate is payable only on the portion of the property value falling within each band. That removes some of the cliff edges from the system.

My noble friend also spoke about the higher property values in London meaning that it disproportionately contributes in terms of stamp duty land tax, and I acknowledge that. In the temporary reforms we have put in place, increasing the threshold at which you can claim first-time buyers’ relief helps first-time buyers in the capital facing those higher rates.

My noble friend also asked a specific question about shared ownership. First-time buyers’ relief is available on shared ownership purchases. Relief would then not be available on subsequent purchases. However, where someone intends to staircase up the shared ownership ladder, the option is available to them to pay 100% of the stamp duty up front and therefore claim the first-time buyers’ relief and not pay it again as they staircase up. I think that is a useful element of the system.

Turning to some of the points made by the Chartered Institute of Taxation and raised by the noble Baroness, Lady Kramer, the Government are aware of those points and the ones raised by the Stamp Taxes Practitioners Group, which relate to the technical detail of the existing first-time buyers’ relief legislation. We have asked officials in HMRC and the Treasury to work with those groups to discuss their comments.

More broadly, both the noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, made points about mortgage costs, interest rates and housing supply in general. As a Government, we are doing everything we can to hold increases in mortgage rates down as much as possible, in so far as we have an influence on them through our actions. That is why we have taken very strong steps to demonstrate Government’s commitment to fiscal balance and sound money. There is a longer-term trend of interest rates and mortgage rates rising since last autumn in response to global trends, including the illegal invasion of Ukraine. Interest rates are not rising solely in the UK; the US Federal Reserve has been raising its base rate since March 2022. The pricing of mortgage products is a commercial decision for lenders, and interest rate decisions are taken by the independent Bank of England.

On the noble Baroness’s and the noble Lord’s point about where there are existing mortgage borrowers who may now move on to higher rates, we have more resilience built into the system through the affordability assessments, but the Financial Conduct Authority regulations are already also very clear on the requirement that firms must deal fairly with customers and consider a variety of tailored forbearance options, including measures such as a payment holiday, partial payment or an extension of mortgage terms. Before Christmas, the Chancellor met with, I think, the regulator and banks to discuss the issue around higher mortgage rates and customers who may fall into difficulty as a result.

More broadly on housing, yes, we must do more to build more homes; that has been a consistent theme throughout this Government’s tenure. We have been doing more to build more homes: as I said in my opening speech, the figure for 2019-20 of 243,000 net additional dwellings was the highest in nearly 30 years, but we have a target of 300,000 and need to do more. I talked in my opening speech about some of the measures we took. Other areas are on SME housebuilders, which are an indispensable part of the housebuilding sector, and we have put in place a range of financial measures to support SMEs and to encourage systemic change in the lending environment, including over £2 billion of development finance under the home building fund, which will deliver approximately 60,000 new homes, and the £1 billion ENABLE Build guarantee scheme. I will not go into further detail on what the Government are doing to support further housebuilding, suffice it to say that we are committed in that area and that it will take a number of different initiatives to deliver it.

The noble Baroness, Lady Kramer, also raised the issue of second homes. We have the additional rate of stamp duty for people to pay on any additional homes they buy. We think that that is right, in recognition of some of the issues that she raised, but we also need to be cognisant of the impact that that has—or may have had—on the buy-to-let market and on the availability and affordability of homes to rent. We think that that was the right measure and that it has struck the right balance. We are also taking action in the Levelling-up and Regeneration Bill with the new 100% council tax premium on second homes and by strengthening the existing premium on empty homes.

To conclude, there is a lot to do to support home ownership and housebuilding more generally. We need to support more mobility in the market, as my noble friend pointed out, and the measures before us will support those wishing to buy or to move home in the current economic climate and the housing sector more widely. That is balanced against the need to ensure fiscal responsibility and to acknowledge that stamp duty is a source of revenue for the Government. We have struck the right balance in the measures, so I beg to move.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.

Alcohol Duty Bands

Baroness Penn Excerpts

Thursday 12th January 2023 Lords Chamber

[Lord Brooke of Alverthorpe]

To ask His Majesty’s Government whether they have any plans to increase the top rate of the new alcohol duty bands, forecasted to take effect from August 2023.

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

We aim to keep alcohol duty rates under review during the yearly budget process and to balance the impact on businesses with public health objectives. In December we announced that the freeze to UK alcohol duty rates had been extended for six months, to 1 August 2023, providing businesses with certainty and aligning with the implementation date for our historic alcohol duty reforms. The Chancellor will reserve his decision on future duty rates for the Spring Budget 2023.

[Lord Brooke of Alverthorpe (Lab)]

My Lords, I am grateful to the Minister for her reply but she seems to have missed the Question; the Question is about the top band, and she made no mention at all of that. The reality is that a new system is coming in, which I generally welcome, that will actually yield less tax to the Government—which is a surprise, given that we cannot pay nurses enough but are not taking the taxes that we should be. We should be increasing taxes there, not reducing them, which is the case with the top band; in relative terms, it is going down. Would the Government please review this, and change it and increase it, so that alcohol such as vodka is taxed at a higher level than is presently proposed?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, the Answer that the Chancellor will reserve his decision on future duty rates applies to all bands. I take the noble Lord’s point, but the reforms that we announced in the alcohol duty bands are broadly cost-neutral, and they make an important move to taxing all alcohol by strength rather than the fragmented system that we had before. That is an approach that has public health at its heart, and I hope it will be welcomed.

[Baroness Finlay of Llandaff (CB)]

My Lords, given that alcohol deaths have risen by over 27% in 2021 compared with 2019, and that in the under-50s alcohol is a leading risk factor for ill health and death, have the Government costed what these changes being delayed are incurring as costs to the nation in lost work, lost productivity and cost to the health service? Will all those costs be considered in the review that she has already spoken about in answer to the noble Lord, Lord Brooke of Alverthorpe?

[Baroness Penn (Con)]

My Lords, as I have said, in keeping alcohol duty rates under review we aim to balance the impact on businesses with public health objectives. The reforms we have made to alcohol duty rates are the biggest reforms that we have had in 140 years. It is right that businesses have the time that they need to adjust to those changes.

[Baroness McIntosh of Pickering (Con)]

Is my noble friend able to tell the House today what position the Government have taken on the public health aspect of reducing alcohol consumption between higher and variable rates of alcohol, depending on the strength of the alcohol, as opposed to minimum-unit pricing?

[Baroness Penn (Con)]

My noble friend is right that the Government’s preferred approach has been to reform alcohol duties and align them all based on the strength of alcohol. As I have said to other noble Lords, that is an approach that has public health at its heart.

[Lord Rennard (LD)]

My Lords, alcohol has become 72% more affordable than it was 35 years ago. Increasing alcohol duties in line with inflation, as was planned last October but cancelled last December, would bring in approximately £1.4 billion annually. Would this not help to pay for the costs to the NHS of alcohol-related harm, and for people such as the nurses who have to treat people with alcohol-related issues, including the many victims of alcohol-related crime?

[Baroness Penn (Con)]

My Lords, one of the big changes that we are making to alcohol duties is to ensure that higher-strength alcohol is taxed at a higher rate. This puts the points that the noble Lord makes at the heart of our approach. The normal process is to review alcohol duties on a yearly basis and take a decision in the round, and that will continue.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, what discussions have the Treasury and the UK Government had with the Scottish Government, who clearly have an interest in this in relation to two aspects—one being minimum-unit pricing, which has not had the desired effect that the Scottish Government expected, and the other being their consideration of implementing a tax on whisky producers in Scotland to raise money to cover some of the expenditure of the Scottish Government?

[Baroness Penn (Con)]

My Lords, the Government have regular dialogue with the Scottish Government—indeed, the Prime Minister is there today. I agree with the noble Lord that the minimum-unit pricing approach has not always had the desired effect. The UK Government’s position is to address this through the level of duties, and relating that to the strength of alcohol. That is the better approach, and one that we can take now that we have left the EU.

[Lord Kamall (Con)]

Can my noble friend the Minister tell us whether the Treasury, or indeed any other government department, has done any modelling on the effect of the new rates and whether they would lead or incentivise drinkers to drink lower-alcohol drinks and reduce their overall consumption of alcohol?

[Baroness Penn (Con)]

My Lords, I am sure we have taken that into account in looking at this work, and that we work closely with the Department of Health and Social Care on it. Another aspect of the reforms we are bringing forward is to provide draught relief to allow pubs and other venues to be more competitive with off-licences and supermarkets selling alcohol.

[Lord Tunnicliffe (Lab)]

My Lords, I am sympathetic to the Minister answering this Question: she is the victim of a bizarre system of government. Surely this is at least 50% a health issue. The decision-making should certainly rest within the Department of Health, and the Chancellor of the Exchequer should not be deciding what sin and health are about—he should be worried just about the Exchequer.

[Baroness Penn (Con)]

I reassure the noble Lord that if he looks at the consultation we did on the new duty rates, he will see that public health is at the heart of our approach. However, we need to balance public health objectives with, for example, the impact on businesses. For instance, Scotch whisky is an incredibly important industry in Scotland, and there are new breweries all across the country which are big economic success stories. We need to have a balance between those two approaches.

[Lord Fox (LD)]

My Lords, I am pleased that the Minister talked about business. Leaving aside the level of taxation—I have sympathy with my noble friend—this system is quite complicated. It is a sophisticated solution but it also makes it complicated for businesses to respond. So I ask that the Treasury, as well as looking at the level of taxation, looks at the number of different levels of taxation, because the more there are, the harder it is for small and medium-sized businesses to administer.

[Baroness Penn (Con)]

I appreciate the noble Lord’s point, but the reforms we have introduced simplify, for example, the number of different bands of duties that businesses pay. We have taken significant steps in that direction, and this Government always seek to simplify things for businesses where possible.

[Lord Walney (CB)]

Low-alcohol beers and spirits obviously have a lower duty, but the price to consumers is often comparative or even higher than that of other alcohols. What can the Government do to incentivise lower prices for alcohol-free products, which can have significant health benefits?

[Baroness Penn (Con)]

The noble Lord is right to point to the fact that, under these reforms, lower-alcohol products—regardless of the type of alcohol product they are—will have a lower duty. That is a significant incentive to people. I am not sure about the other drivers of the higher prices that he referred to; that would have to be looked at more carefully.

[Lord Touhig (Lab)]

My Lords, alcohol misuse is one of the prime causes of domestic violence of men against women. Surely increasing the duty should be part of the overall package of trying to reduce that kind of action; making alcohol more expensive might contribute to that reduction.

[Baroness Penn (Con)]

Through making higher-strength drinks subject to higher duty, we are making alcohol more expensive in that way.

[Lord Harris of Haringey (Lab)]

My Lords, surely it is about the proportion of the cost. I am not clear that the noble Baroness has answered the Question. She has repeatedly said that this is to allow businesses time to adjust. I remember the days when the most eagerly awaited bit of any Budget Statement was the announcement of duties on alcohol. As I understand it, it was always then rushed through the House of Commons that day so that the increases could come in overnight. What is this period for businesses to adjust all about?

[Baroness Penn (Con)]

My Lords, in addition to the annual level of the duties paid by businesses, we are introducing the biggest reform to alcohol duties in 140 years—for example, as I have said, by reducing the number of bands operating by linking very clearly the level of duty to the level of alcohol in a product. That is a significant reform, and one that businesses need time to adjust to. That is why we have aligned the introduction of the new duty rates with the new system.

Financial Services

Baroness Penn Excerpts

Wednesday 11th January 2023 Lords Chamber

[Lord Holmes of Richmond]

To ask His Majesty’s Government what steps they are taking to ensure that all financial services are accessible and inclusive, including ATMs and point of sale terminals.

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

My Lords, the Government work closely with regulators, industry and consumer groups to promote financial inclusion. We are currently legislating to protect access to cash and many firms offer services to make everyday banking and payment interfaces, including ATMs and point-of-sale terminals, more accessible for consumers. Importantly, all service providers, including banks and building societies, are bound under the Equality Act 2010 to make reasonable adjustments where necessary in the way they deliver their services.

[Lord Holmes of Richmond (Con)]

My Lords, if we are to ensure financial inclusion, we need not just to have such financial services and products but to ensure that those services and products are accessible. Does my noble friend agree that the worrying rise in inaccessible point-of-sale terminals and card payment machines—for example, accessible keyboards being replaced with inaccessible flat screens—marks three things: a prima facie breach of equalities legislation, a complete failure of inclusion by design, and just bad business?

[Baroness Penn (Con)]

My noble friend is absolutely right that it is really important that innovation aid inclusion, rather than hinder it. I was really pleased to hear about the work the Royal National Institute of Blind People has done with manufacturers to create an accessible solution for card payments, and that these devices are starting to appear in some shops. That is excellent work that we would like to see replicated to ensure that the aims he rightly referred to are met.

[Lord Hunt of Kings Heath (Lab)]

My Lords, the noble Baroness will be aware from our debate yesterday of the real concern about loss of banking facilities for people with disadvantages, and that there is a great risk that many currently free cash machines are going to be converted, so that people will have to pay commission on the cash they take out. Will she look very carefully at last night’s debate and come back with amendments to safeguard financial inclusion?

[Baroness Penn (Con)]

I will absolutely be looking very carefully at all the details of yesterday’s debate. I do not think it necessary to amend the Bill to achieve what the noble Lord talks about. On face-to-face services and bank branch closures, there is already FCA regulation on banks seeking to close branches. That guidance has recently been strengthened and is very clear about the expectations for the provision of alternative services; also, the impact of branch closures on customers must be considered very carefully.

[Baroness Tyler of Enfield (LD)]

My Lords, recent research shows that blind and partially sighted people are twice as likely to be digitally excluded—and, by extension, financially excluded—as the general public. Does the Minister agree that the Financial Services and Markets Bill, which we discussed only last night, must give the FCA a “have regard to financial inclusion” statutory duty to ensure that financial inclusion is protected and advanced for blind and partially sighted people and other vulnerable groups?

[Baroness Penn (Con)]

My Lords, I recognise the strong interest in this area. As we debated last night, the previous Financial Services and Markets Act put an obligation on the FCA to look at it. It has brought forward its new consumer duty and believes that that fulfils the same function. I am sure that we will discuss this further in Committee.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I declare a partial interest in that a member of my family is involved in designing, constructing and introducing ATMs and other retail technology. Does my noble friend think that enough is being done on the relationship and connection between organisations that represent those with disabilities, the Government and the manufacturers and designers of this equipment?

[Baroness Penn (Con)]

I would certainly be interested to hear what more could be done in that area. On ensuring that everyday banking is accessible to customers, LINK, for example, publishes on its cash locator information on ATMs with audio assistance and those that are wheelchair-accessible, so that consumers are aware of what locations are suitable for them. We are always interested to hear about what further work we can do to promote financial inclusion.

[Baroness Bull (CB)]

My Lords, the Minister mentioned the FCA consumer duty. As I understand it, that duty and the consumer vulnerability guidance deal primarily with existing customers and do not help with the issue of the poverty premium, which excludes vulnerable people and those with the least access to resources from financial products and services. Can she say how that new consumer duty will address the issue mentioned by the noble Baroness, Lady Tyler, because I do not believe they are the same thing?

--- Later in debate ---

[Baroness Penn (Con)]

The noble Baroness is right to mention the poverty premium. It can take different forms; it may be financial exclusion or being charged more for particular services. The Government progress their work on this area through the Financial Inclusion Policy Forum. For example, we are working with Fair4All Finance, which was set up using funding from dormant assets and seeks to provide more access to fair, affordable and appropriate financial products and services. It has an affordable credit scale-up challenge that seeks to address this area.

[Baroness Hoey (Non-Afl)]

Does the Minister share my concern at the increasing number of shops refusing to take cash? Obviously, they have the right to make that decision, but does she share my concern at the difficulty this poses for many people, particularly the elderly and vulnerable, who do not have bank accounts?

[Baroness Penn (Con)]

We absolutely recognise the importance of cash to the people the noble Baroness mentions. As she says, it is for shops and other service providers to determine how they accept payments, but we are legislating to protect access to cash through the Financial Services and Markets Bill. That should help those shops and service providers which wish to continue to accept cash to do so, because we are focusing on this from both a consumer and a wholesale perspective.

[Lord Sikka (Lab)]

My Lords, if I understood the Minister correctly, she said that the consultation, or the rules, on bank branch closures are being strengthened. May I ask her to consider three facts? First, there is absolutely no consultation between banks and customers before a branch is closed. Secondly, banks do not publish details of their financial calculations to show whether a branch should be closed or not. Thirdly, people do not have the opportunity to object and vote against a bank’s decision. In light of that, what is any guidance worth?

[Baroness Penn (Con)]

My Lords, what I actually said is that the FCA guidance on bank branch closures has recently been strengthened. I do not recognise the picture the noble Lord paints. Firms are expected carefully to consider the impact of planned closure on their customers’ everyday banking and cash access needs and to consider alternative arrangements. The strengthened FCA guidance has specifically looked at enhancing protections for consumers who rely on those branch services. For instance, there are examples of banks placing people in those branches to ensure that they can help their customers to access banking through digital means such as mobile or online banking. There is also the rollout of Post Office banking hubs to provide more in-person services to customers.

[Baroness McIntosh of Pickering (Con)]

What consideration have the Government given to the ability of residents in rural areas to continue to draw cash from ATM machines, and to the security implications of rural businesses not being able to bank their cash at peak times?

--- Later in debate ---

[Baroness Penn (Con)]

The access-to-cash provisions in the Bill will require the FCA to consider access to cash at both a local and national level, so it will take geographic factors into account. That is also taken into account through LINK’s maintenance of the ATM network, which considers how far people might have to travel to access cash and what is reasonable.

[Lord Tunnicliffe (Lab)]

My Lords, is the Minister claiming that progress on this matter is rapid enough? It seems to me that the general view in the House today is that it is not. If she is saying that the legislation is sufficient, surely, the implication is that the regulator is not doing its job well enough.

[Baroness Penn (Con)]

My Lords, there is always more to do. For example, I referred to the rollout of Post Office banking hubs. They may have been slower than expected to get off the ground, but just recently we have seen a large number of new hubs announced. That is an example of improvement in these areas. As I have referred to, we think we need more legislation, so we have measures in the Bill on access to cash to further strengthen that.

Financial Services and Markets Bill

Baroness Penn Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

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

My Lords, this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years. Perhaps it is a signal of the significance of this legislation that we have the pleasure of three maiden speeches during this debate. I welcome my noble friends Lady Lawlor, Lord Remnant and Lord Ashcombe to the House. I very much look forward to hearing their contributions.

I also pay tribute to the former Chancellor and Financial Secretary to the Treasury, my noble friend Lord Lawson, who has recently retired, having served Parliament in both Chambers for nearly half a century. While serving as Chancellor he transformed the tax system, unleashed the City and revolutionised the approach to macroeconomic policy, setting the economy on the path of growth. His voice, reason and perspective will be sorely missed in this Chamber, and I thank him for all his service.

The Bill represents the platform upon which much of this Government’s vision for financial services will be delivered—a vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across all four nations of the United Kingdom.

Effective, efficient and easily accessible financial services are a foundation for people’s everyday lives and the bedrock upon which our economy is built. They also make their own direct contribution to our economic growth, with financial and related professional services employing more than 2.3 million people across the UK and, in 2020, contributing nearly £100 billion in taxes. In recent decades, the UK has become a leading global centre for financial services and, as the Chancellor highlighted in the Autumn Statement, the sector is one of the UK’s five key areas of growth for the future. Our exit from the EU creates the opportunity to ensure that continues by implementing a more agile and internationally competitive set of rules, better tailored to the UK market, while ensuring the sector remains well-regulated and effectively supervised.

The Bill has five overarching aims. First, it implements the outcomes of the future regulatory framework review. Secondly, it bolsters the competitiveness of UK markets and promotes the effective use of capital. Thirdly, it takes steps to make the UK an even more open and global financial hub. Fourthly, it harnesses the opportunities of innovative technologies, enabling their safe adoption in the UK. Lastly, but by no means least, it promotes financial inclusion and enhances consumer protection.

I turn to the first aim, to implement the future regulatory framework or FRS review. Clause 1 revokes retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This approach builds on the existing model established by the Financial Services and Markets Act 2000 which empowers our independent regulators to set the detailed rules that apply to firms operating within the framework set by the Government and Parliament. The Government consulted extensively on how the UK’s approach to financial services regulation should be adapted following EU exit, and there was widespread support for the approach taken in this Bill. Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. These instruments will cease to have effect when the Treasury and the regulators have put into place the necessary secondary legislation or regulator rules to replace them as appropriate.

It is important for the House to recognise that putting this into effect will require a significant programme of secondary legislation to modify and restate retained EU law. As part of the Edinburgh reforms announced on 9 December the Treasury published Building a Smarter Financial Services Framework for the UK, which set out how the Treasury intends to use these powers. Alongside this we published several illustrative draft statutory instruments demonstrating how the powers in the Bill can be used to replace retained EU law.

As the regulators take on greater responsibility for setting rules following the repeal of retained EU law, the Bill makes changes to the regulators’ objectives to ensure that they consider the sector’s critical role in supporting the UK economy. For the first time the Prudential Regulation Authority and the Financial Conduct Authority will be given new secondary objectives to facilitate the international competitiveness of the UK economy and its growth in the medium and long term. The status as a secondary objective strikes the right balance and sets a clear hierarchy by ensuring that the FCA and the PRA must work to advance growth and competitiveness while maintaining their focus on their existing objectives.

The Bill also ensures that the regulatory principles of the financial services regulators require them to have regard to the UK’s statutory net-zero emissions target. This will embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the Government’s long-term commitment to transform the UK economy in line with their net-zero strategy and vision.

It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators. There are already a number of provisions in this regard, and the Bill makes further provision to support Parliament in carrying out this important role. It introduces new requirements for the regulators to notify the Treasury Select Committee of a consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee. In addition, the regulators will need to be transparent about all respondents to a consultation, subject to their consent. These measures were strongly informed by the views of this House, as expressed during the passage of the Financial Services Act 2021. The Bill also gives the Treasury the power to require the financial services regulators—or, where appropriate, an independent person—to review their rules where it is in the public interest.

I turn now to the Bill’s second aim of bolstering the competitiveness of UK markets and promoting the effective use of capital. The measures in Schedule 2 make important changes to the MiFID framework, which regulates secondary capital markets. They do away with burdensome rules such as the double volume cap and share trading obligation while maintaining high standards and protecting the smooth functioning of markets. High regulatory standards are an essential element of competitiveness in UK markets, and the Bill introduces a senior managers and certification regime for key financial market infrastructure firms, ensuring high standards of governance in these systemically important firms. The Bill also expands the resolution regime for central counterparties to align with international standards and enhances powers to manage insurers in financial distress.

The Bill’s third aim is to strengthen the UK’s leadership as an open and global financial centre. The UK is now able to negotiate its own international agreements, and the Government are currently negotiating an ambitious financial services mutual recognition agreement, or MRA, with Switzerland. While the MRA itself will be scrutinised under the procedures in the Constitutional Reform and Governance Act 2010, Clause 23 enables the Treasury to amend existing legislation to give effect to this and any future financial services MRAs once finalised. Schedule 2 will enable the UK to recognise overseas jurisdictions that have the equivalent regulatory systems for securitisations classed as simple, transparent and standardised, or STS, providing more choice for UK investors.

As its fourth aim, the Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure sandboxes, allowing firms to test the use of new and potentially transformative technologies and practices in the infra- structures that underpin financial markets.

The Bill’s final aim is promoting financial inclusion and consumer protection. The Government are committed to fostering a financial services sector that supports everyone, with appropriate consumer protections and measures to ensure that no one is left behind by the rapid advancement in financial technology. There is an extensive programme of work ongoing related to consumer protection, particularly in areas raised by noble Lords during the passage of the Financial Services Act 2021 such as buy now, pay later and the FCA’s new consumer duty. That Act also made legislative changes to support the widespread offering of cashback without purchase in shops and other businesses, following a proposal by my noble friend Lord Holmes of Richmond.

Clause 51 and Schedule 8 of this Bill go further and give the FCA responsibility for seeking to ensure reasonable access to cash across the UK. The Treasury will designate banks, building societies and operators of cash access co-ordination arrangements to be subject to FCA oversight on this matter. Clause 52 and Schedule 9 give the Bank of England new powers to oversee the wholesale cash infrastructure to ensure its ongoing effectiveness, resilience and sustainability.

Finally, the credit union sector plays a crucial role in providing access to affordable credit to its members. Clause 69 will allow credit unions in Great Britain to offer a wider range of products and services to their members. The Bill also strengthens the rules around financial promotions, requiring all authorised firms to undergo a new FCA assessment before they can approve financial promotions by unauthorised firms. This will reduce the risk of consumer harm. Additionally, Clause 68 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers for all payment systems it regulates. It also places a duty on the PSR to mandate reimbursement in relation to the Faster Payments system specifically.

This is a substantive Bill; in opening this Second Reading debate I have been able to touch only briefly on many of its main measures. I have no doubt that, when we enter Committee, noble Lords will subject the Bill to the level of scrutiny that it deserves.

As I conclude, I think it is worth reflecting on the journey that we have taken to the production of the Bill. It is the result of several years of consultation with industry, regulators and the public. The Government first consulted on the future regulatory review in October 2020, with a further consultation in November 2021 setting out detailed proposals for reform. It will enable a programme of essential reforms that will help drive our economy, including reforms to Solvency II and the prospectus regime and changes resulting from the wholesale markets review. So, as we conduct the important work of scrutinising this Bill, I hope that the Government’s broad approach will draw support from across the House and that many noble Lords share the Government’s ambition to ensure that the UK’s financial services continue to be an engine of growth for our economy. I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate for their valuable contributions, which reflect the breadth and significance of this Bill. I will try to get through as many points as possible but, looking at the stack of papers before me, I think I have been overambitious—so I will dive straight in.

Turning first to the future regulatory framework review, which is a once in a generation opportunity to update our rulebook and tailor it to UK markets, as I have said before, the Bill revokes retained EU law relating to financial services so it can be replaced by a coherent and agile approach designed for the UK, building on the FiSMA model. I reassure my noble friend Lord Hodgson that, when the repeal of retained EU law commences and the Government lay secondary legislation to replace it, the Treasury will fully assess the impacts of the exercise of these powers in secondary legislation. We will conduct impact assessments and post-implementation reviews in line with the Cabinet Office guidance and the Government’s Better Regulation Framework.

My noble friend and the noble Lord, Lord Sharkey, probed further on the process for replacing the different regulations and Clause 4 and the procedures associated with it. The affirmative procedure applies to statutory instruments made under Clause 4, except where the power is used to restate either EU tertiary legislation or legislation which was originally made under the negative procedure, or where there is no modification of retained EU law. In this case, it is appropriate to follow previous precedent and apply the negative procedure. EU tertiary legislation is technically complex and the same is true where the negative procedure was used for UK statutory instruments—these were technical SIs. Given the thousands of pages of retained EU law to deal with, as has been referenced in this debate, it is important that we ensure that Parliament can focus on potential policy implications from the changes we may make to retained EU law.

I turn now to the debate on the objectives for the regulators which are the starting point for the framework we will be taking forward. Those objectives are set out in FSMA and are amended in this Bill in two key ways: the introduction of the secondary objective on international competitiveness and medium and long-term growth, and a new regulatory principle to have regard to the Government’s net-zero commitment. The noble Lords, Lord Sharkey and Lord Tunnicliffe, the noble Baronesses, Lady Kramer and Lady Bryan of Partick, and others raised concerns about ensuring that the secondary objective does not dilute the regulators’ focus on the primary objective, whereas many other noble Lords spoke in favour of the new secondary objective. Noble Lords such as my noble friend Lord Bridges were perhaps concerned that it may not go far enough. The Government believe that having growth and competitiveness as a secondary objective strikes the right balance between providing a new focus on advancing medium to long-term growth and competitiveness while maintaining the regulators’ focus on their existing objectives. It provides a clear hierarchy of objectives to consider, and the regulators will need to balance those objectives and consider them in a way which respects that hierarchy.

The PRA’s existing secondary competition objective provides the model for how that hierarchy operates: the regulators must advance their secondary objectives in so far as that is compatible with their primary objective. However, with the introduction of the secondary objective, the Government expect that it will fulfil the expectations of many of those who have spoken in this House in support of delivering a step change in how the regulators approach growth and competitiveness, resulting in more proportionate rule-making while still ensuring high regulatory standards. As my noble friend Lord Remnant said in his excellent maiden speech, the UK is not unique in giving its regulators such an additional objective. He demonstrated the expertise that he will bring to this House, particularly in debates on this Bill.

The noble Lords, Lord Sharkey and Lord Butler, and the noble Baroness, Lady Kramer, spoke of the context for some of their concern around the introduction of the secondary objective and the previous structure we had for regulating financial services prior to the financial crisis. The FSA’s objectives prior to the financial crisis were market confidence, public awareness, consumer protection and the reduction of financial crime. The FSA did not have a financial stability objective. Noble Lords are right that one of the regulatory principles that the FSA had to take into account was the international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom. However, the post-crisis reforms focused on the institutional design and allocation of responsibilities, with the FSA abolished and replaced by both the PRA, which focuses on the safety and soundness of the financial sector, and the FCA, which focuses on market integrity, consumer protection and competition. The Government’s view is that those post-crisis structural reforms, along with the regulators’ existing primary objectives, mean that the environment in which the regulators are considering competitiveness is very different from that which has gone before.

The noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and the noble Lord, Lord Vaux of Harrowden, questioned the Government’s decision to make the net-zero commitment a regulatory principle rather than an objective. The noble Lord, Lord Vaux, asked about the difference between the two, while my noble friend Lord Bridges asked what would happen if objectives and principles are in tension with each other. On the question of objectives versus principles, the FCA and the PRA are required to advance their objectives when discharging their functions. The regulatory principles, on the other hand, are principles that the FCA and the PRA are required to take into account when discharging their functions. Having the net-zero target as a regulatory principle ensures that the Government’s commitment to achieve net zero will be embedded across the FCA’s and the PRA’s considerations when they discharge their general functions. The net-zero target is a cross-cutting government policy that we have seen in many different pieces of legislation that we have taken forward through this House. On the specific goal, many of the levers sit outside financial services regulation, so it is appropriately progressed by the FCA and the PRA as a regulatory principle, which means that they will consider it in advancing their own objectives.

Another significant focus of today’s debate has been, rightly, on how we hold the regulators to account for their progress in furthering their objectives and regulatory principles and their broader approach to regulation. Any Minister would be wise to listen carefully when an issue draws such a diverse set of voices from across the House as we have heard today.

It is worth setting out the parliamentary scrutiny and oversight procedures that are already a key part of the FiSMA process and how the Bill builds on those. There are already robust mechanisms to ensure appropriate parliamentary scrutiny of the regulators. Select Committees play an extremely important role in this process, as we have heard. As noble Lords know and have pointed out, they have the power to call for persons, papers and records that they consider relevant, and committees in both Houses regularly exercise this power to hold the regulators to account. Senior officials from the regulators attend general accountability hearings. For example, the FCA chair and chief executive appear before the Treasury Select Committee, or TSC, twice a year, and the chief executive of the PRA appears before the TSC after the publication of each annual report.

Parliament, through the TSC, conducts the pre-commencement hearings following the appointment of the chair and chief executive of the FCA, and the chief executive of the PRA. Most recently, the TSC held a pre-commencement hearing for the new FCA chair on 14 December before he takes up his role next month. FiSMA requires the Treasury to lay the regulators’ annual reports before Parliament.

The Bill builds on and strengthens these existing mechanisms of parliamentary scrutiny. First, the Bill requires the regulators to notify the Treasury Select Committee when they publish a consultation. Secondly, the Bill requires the regulators to respond formally to representations made by any parliamentary committee. I note the suggestion from the noble Lord, Lord Tunnicliffe, that the Economic Affairs Committee of the House of Lords should also be notified, and I am happy to discuss that proposal with him as the Bill progresses. I note that the noble Lord, along with many other noble Lords, proposed alternative committee structures, including Joint Committee structures, to scrutinise the work of the regulators. But here it is Parliament’s responsibility to determine the best structure for its ongoing scrutiny of the regulators, and the Government do not intend to make any recommendations to Parliament on this matter. In response to the noble Lord, Lord Blackwell, and others, I am sure that those responsible for determining those structures in Parliament will follow our debate on this question very carefully.

However, I would add that the additional accountability and reporting mechanisms provided by this Bill are designed to assist Parliament and government in holding the regulators to account. For example, when the regulators make rules using the powers that FiSMA gives them, they are required to do so in a way that advances their objectives. When notifying the TSC of a consultation, the regulators will be required to set out the ways in which their proposals advance the objectives and are compatible with their regulatory principles. This will support ex ante scrutiny of proposed rules at a point in the process where there is scope to influence the final outcome.

The changes that the Bill makes regarding cost-benefit analysis, including the additional challenge provided through the formation of a new cost-benefit analysis panel, will ensure that Parliament has access to high-quality information on the expected costs and benefits of new regulatory proposals to inform their scrutiny. The Treasury may also make recommendations to the regulators on aspects of the Government’s economic policy to which the regulators should have regard, known as remit letters. The new provisions in Clause 33, with equivalent provision made elsewhere in the Bill for the Bank of England and the Payment Systems Regulator, will require the regulators to respond in writing to these recommendations and the Treasury to lay the responses before Parliament. Clause 37 enables the Treasury to require the regulators to publish relevant information on a more frequent basis than in their annual reports, or in greater detail. This can also be used to support parliamentary scrutiny and oversight. For example, it could be used to publish further information on authorisation decisions, as highlighted by my noble friend Lord Hill.

These changes are designed to support Parliament in fulfilling its existing role in scrutinising the work of regulators. If there is a concern that any of the regulators’ rules are not operating effectively, the Bill gives the Treasury a power to require the regulator to review its rules when this is in the public interest. When appropriate, the Treasury may specify that the review should be carried out by an independent person rather than the regulator.

I reassure the noble Lord, Lord Tunnicliffe, that the Government expect that this power will be used only exceptionally, and that any such direction must be laid before Parliament, but I think noble Lords will agree that it is an important element of these reforms. I also expect that, in considering the exercise of this power, the Treasury will consider representations from relevant parties, including within Parliament.

The provisions we have put forward in the Bill seek to balance the operational independence of the regulators with clear accountability mechanisms and appropriate democratic input. We have heard a range of views on where that balance should lie, and the Government are confident that we have struck it in an appropriate way. We will continue to listen and will discuss further ideas in Committee in a thoughtful and constructive way, and will welcome suggestions from noble Lords in this area, including from my noble friend Lord Ashcombe, who I congratulate on his maiden speech, as I do my noble friend Lady Lawlor on her contribution to the debate today.

More broadly, on the regulators’ capacity to take on their further responsibilities, my noble friend Lord Grimstone asked about the FCA board. The Government believe that the board comprises members with extensive and broad experience in financial services, consumer advocacy and governance, among other things. The Government are further strengthening the FCA board this year, with Ashley Alder starting as the new FCA chair, as I already referenced. The Government are also running a campaign to appoint at least two new non-executive directors.

The noble Lords, Lord Sikka and Lord Mountevans, asked about FCA capacity more broadly. As noble Lords will be aware, the FCA is part-way through a transformation programme designed to make it a more innovative, assertive and adaptive regulator. Among other things, it aims to ensure that the FCA can make fast and effective decisions and prioritise the right outcomes for consumers, markets and firms. The Government continue to engage the regulator on its work here.

On innovation more broadly, many noble Lords asked about the Government’s strategic approach to crypto assets. We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin. My understanding is that it is still the intention for the Royal Mint to create a new NFT, and an update on this work will be provided in due course. It will be the regulations under the Bill that will allow for the regulation of stablecoins, backed by fiat currency. I can say in response to the noble Lord, Lord Cromwell, that specific definitions will be provided for that in secondary legislation.

The noble Lord, Lord Vaux, asked about the operation of regulatory sandboxes. The Government have emphasised that the testing of technology and practices in an FMI sandbox should not compromise existing regulatory outcomes, including market integrity and financial stability. The Treasury and regulators will very carefully consider what sort of investors should be able to use platforms in a sandbox. If consumers are allowed to use a platform participating in a sandbox, it is essential that the platform operates in a way that is consistent with existing regulatory objectives relating to consumer protection.

I turn to consumer protection and financial inclusion, an issue raised by a number of noble Lords, many of whom have done very important work in this area, and I am grateful to them for that. The noble Baronesses, Lady Twycross, Lady Bryan and Lady Tyler, the noble Lord, Lord Tunnicliffe, my noble friend Lord Holmes and others highlighted the important role that cash continues to play for many. The Government are committed to ensuring through the Bill reasonable access to cash across the UK. The FCA is best placed to deliver an effective, agile and evidence-based approach to regulating access to cash that can endure over time, and the Bill will allow for that. In approaching the policy statement that will inform this, the Government will consider how effective industry schemes have been in ensuring reasonable, free access to cash for individuals, and the policy statement is the right place to consider this matter further. The Government will reflect on the views of parliamentarians when crafting that statement.

The right reverend Prelate the Bishop of St Albans asked how rurality will be considered in that process. The FCA will be obliged to consider local as well as national deficiencies in cash, which would be relevant in rural areas; even if it is not subject to the same rural-proofing guidance, it will be subject to the equality duties around protected characteristics in undertaking that work. Where closure of bank branches affects access to cash, intervening in a closure would be within the scope of the FCA’s new powers in the Bill, provided that this fulfilled the purpose of seeking to ensure reasonable provision of cash access services. More broadly, decisions on in-person banking services are made by the providers of those services. However, that is still governed by the FCA’s existing powers and recently strengthened guidance on actions that must be taken when people seek to close branches to ensure that customers are treated fairly.

Financial fraud was raised by the noble Lords, Lord Hunt and Lord Tunnicliffe, my noble friend Lord Northbrook and many others. In financial services specifically, this Bill takes a crucial step forward in protecting victims of APP fraud. I emphasise that the measure enables the Payment Systems Regulator to take action in relation to any payment system that it regulates, not just faster payments. However, the initial focus is on faster payments because that is where the vast majority of APP fraud currently takes place. The Government expect protections for consumers in other payment systems to keep pace with those established for faster payments.

More broadly, noble Lords are right that tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector. I attended a meeting of the Joint Fraud Taskforce, which brings those different players together, just before the end of last year. The Government are committed to publishing their national fraud strategy later this year.

The consumer duty versus the duty of care was raised by many noble Lords. The FCA’s consumer duty consultation paper explains that there is a lack of consensus on exactly what constitutes a duty of care in this context. It cannot be exhaustively defined, but the FCA’s view is that a duty of care is a positive obligation on a person to ensure that their conduct towards others meets a set standard. It believes the consumer duty meets that definition.

The noble Lord, Lord Davies of Brixton, rightly and powerfully raised the challenges those with mental health issues can face when accessing or using financial services. The Government have taken quite a bit of action in this area, such as the introduction of the breathing space scheme for problem debt. The FCA has also been clear about the need for firms to respond flexibly to the needs of customers with characteristics of vulnerability, which includes mental health.

Buy now, pay later was raised by the noble Lords, Lord Hunt and Lord Balfe. We committed to bring this into regulation and will publish a consultation on draft legislation very soon. We intend to lay secondary legislation in mid-2023, so action on that is under way.

Finally, I am conscious of time, but I must turn more broadly to sustainability and green finance issues, as raised by the noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and many others. They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.

I will not dwell on that any further, except to respond to a point made by the noble Baroness, Lady Hayman, on the French and German regulators having climate change objectives. The codes and objectives for French and German regulators focus on instances of financial risk and greenwashing; the FCA can already consider these issues through advancing its operational objectives to ensure appropriate consumer protection and protect market integrity, and the PRA can similarly consider climate-related financial risks under its existing objective to ensure the safety and soundness of its regulated firms.

More broadly, noble Lords asked about measures that go beyond those in this Bill. I reassure them that work continues on taking forward the policies in the Greening Finance road map, including introducing economy-wide sustainability disclosure requirements—the FCA has launched its consultation on this already—and introducing transition planning requirements. We have also launched the transition plan task force, which has published its consultation, which will close next month. We are committed to updating our Green Finance Strategy early this year, setting out our approach on the green taxonomy and having a net-zero aligned financial sector. I am sure we will have many more discussions on this topic in Committee, which I look forward to, including on deforestation, which was raised by the noble Baroness, Lady Sheehan, and my noble friend Lord Randall.

On deforestation, financial institutions rely on the information disclosed by companies trading in these forest-risk commodities in order to take action, so a global framework for this disclosure is needed to make any action by UK financial services and firms overseas workable. That is exactly why we are a leading backer on the Taskforce on Nature-related Financial Disclosures. I was really happy to meet the task force in Montreal at COP 15 to discuss its work and how we are taking it forward.

I am out of time. I will pick up further questions from the debate in writing; I have not been able to cover them all here. To conclude, this is a landmark Bill, which I think many of the speakers in this debate have recognised, and the most ambitious reform of our regulatory framework in over 20 years. The Government are committed to building an open, green and technologically advanced financial services sector to deliver better outcomes for consumers and businesses. I am confident that the Financial Services and Markets Bill delivers on this commitment.

Bill read a second time.

Moved by

[Baroness Penn]

That the Bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the Bill in the following order: Clause 1, Schedule, Clause 2, Schedule 2, Clauses 3 to 8, Schedule 3, Clauses 9 to 13, Schedule 4, Clauses 14 to 20, Schedule 5, Clause 21, Schedule 6, Clauses 22 to 48, Schedule 7, Clauses 49 to 51, Schedule 8, Clause 52, Schedule 9, Clause 53, Schedule 10, Clause 54, Schedule 11, Clause 55, Schedules 12 and 13, Clauses 56 to 69, Schedule 14, Clauses 70 to 79, Title.

Motion agreed.

Russia: UK Companies

Baroness Penn Excerpts

Thursday 8th December 2022 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, having reviewed the record of the exchange in another place on this issue, I was struck by the near unanimous condemnation of the Government’s position on this matter. The Minister’s refusal to comment on or act in response to British businesses that continue to operate in Russia is unacceptable. As Russian missiles continue to rain down on Ukraine’s energy infrastructure, an already cold winter is becoming even more difficult for the Ukrainian people to endure. With the Prime Minister seemingly in listening mode these days, will the Minister and her Treasury colleagues go to Mr Sunak and encourage him to speak out against British businesses that have opted to profit from Putin’s war?

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

My Lords, my right honourable friend the Prime Minister, when Chancellor, called on and welcomed UK firms who had taken the decision to divest from Russia in the wake of the invasion of Ukraine and said that we would welcome further such decisions from those companies. In terms of the Government’s actions, we have imposed the widest set of sanctions in our history against Russia, which limits the space for companies to operate in Russia, targeted at degrading the Russian war machine and also more broadly degrading its economic ability to continue this war. The noble Lord mentioned the condition of Ukraine’s infrastructure and the attacks on it by Russia in recent weeks. My right honourable friend the Foreign Secretary announced that we are looking to support energy generation in Ukraine in response to those attacks.

[Lord Fox (LD)]

It is good to hear the Minister talk about strong sanctions. I ask her to direct her department to look at the relationship between OneWeb and Eutelsat. OneWeb was absorbed into Eutelsat in an all-share deal, except for one share, the special share that the Government retain. Eutelsat continues to broadcast Russian channels, including two of the largest Russian pay-for television channels. Is it appropriate, given the Government’s special shareholding in OneWeb, which is a part of Eutelsat, for this relationship to continue?

[Baroness Penn (Con)]

I hope the noble Lord will understand if I do not comment on the specific case in the Chamber, but if he writes to me, I will look at Hansard and get back to him in writing on that point.

[Baroness Kramer (LD)]

My Lords, do the Government agree that private citizens in the UK should follow the example that is being urged on British businesses and sell any shares they have in businesses that still operate in Russia?

[Baroness Penn (Con)]

My Lords, that is an individual decision for people to take. Where individuals have found themselves invested in companies that are subject to sanctions, the Office of Financial Sanctions Implementation has issued some general licences to facilitate the divestment of those shares where individuals need to do so.

[Lord Anderson of Swansea (Lab)]

My Lords, British companies are able to call on the very best professional advice to conceal their relationships with Russian companies, both direct and indirect, in Russia and outside Russia. Are we totally confident we have the best intelligence to bring to light those relationships?

--- Later in debate ---

[Baroness Penn (Con)]

If British companies were seeking to circumvent the sanctions that we have put in place, that is something that we would take extremely seriously. The noble Lord is right that the scale and range of sanctions that we have now put in place against Russia need to be matched with increased efforts to ensure that those sanctions are properly enforced.

[Lord Bellingham (Con)]

My Lords, is it the case that there are still a number of Russian oligarchs with assets in this country and the Channel Islands who have not yet been fully sanctioned? What other discussions has the Minister been having in the Treasury with the Channel Islands authorities?

[Baroness Penn (Con)]

As I have said to the House, the UK has undertaken the largest-scale sanctions programme that we have ever had in our history. We continue to look at new sanctions, and obviously that has to be done within the legal framework that we have set. We amended elements of that framework early on after the invasion to ensure that we could take the widest possible range of action. We continue to look at what we can do, and we continue to speak to our Ukrainian partners about where they would find our efforts most effectively directed.

[Lord Griffiths of Burry Port (Lab)]

And what about the Channel Islands?

[Baroness Penn (Con)]

The UK operates its sanctions regime and will continue to have conversations with all Crown dependencies, overseas territories and others.

[Baroness Kramer (LD)]

My Lords, the Minister will be well aware that one of the ways in which members of the Russian oligarchy became resident in Britain was through the use of the “golden visa” mechanism. The Government have undertaken a review of that but, as I understand it, Parliament has not seen it. Could she tell us when we can expect that report to be published?

[Baroness Penn (Con)]

I do not have that information with me, but I can take it back to the department and write to all noble Lords.

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

My Lords, it appears there are no further questions on that Urgent Question.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022

Baroness Penn Excerpts

Wednesday 7th December 2022 Lords Chamber

Moved by

[Baroness Penn]

That the draft Regulations laid before the House on 7 and 14 November be approved.

Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 6 December

Motions agreed.