Data Reporting Services Regulations 2023

Baroness Vere of Norbiton Excerpts

Wednesday 10th January 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Data Reporting Services Regulations 2023.

Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, both these instruments are made under powers in the Financial Services and Markets Act 2023, which I will refer to as FiSMA 2023. The regulations form part of the Government’s ambitious programme to deliver a smarter regulatory framework for financial services. As highlighted by the SLSC, these SIs replace areas of assimilated law—formerly known as retained EU law—in financial services with an approach to regulation that is tailored to the UK. Under this programme, the Government are delivering a regulatory framework that is logical, consistent and conducive to economic growth, while preserving the robust regulatory standards that are the cornerstone of the attractiveness of the UK markets.

I turn to the Data Reporting Services Regulations 2023. This instrument establishes a new legislative framework for the regulation of data reporting service providers—which I will now refer to as DRSPs—replacing the framework we inherited from the EU.

DRSPs are a type of financial market infrastructure that report trade data to either the public or the FCA. They are commercial entities that allow investment firms to fulfil their regulatory reporting obligations.

The appropriate reporting and dissemination of market data is key for markets to be supervised effectively, and for them to function properly. Information on trades and prices is essential for markets to properly value shares and other traded instruments, and therefore allow trades at the most effective price. More broadly, universal information is key in helping market participants to identify investment opportunities and evaluate positions.

There are three types of DRSPs. First, there are approved reporting mechanisms, which report details about transactions in financial markets to the FCA on behalf of investment firms. Secondly, there are approved publication arrangements, which publish trade reports to the public. Thirdly, there are consolidated tape providers, which collate trading data from a variety of sources and publish it in a single live data stream. All three of these types of DRSPs are vital to our financial services ecosystem and this instrument establishes a proportionate framework for their regulation, tailored to UK markets.

Under this new framework, the UK’s expert financial markets regulator, the FCA, will make detailed firm-facing requirements in its rulebook, making regulation for DRSPs more agile and more able to respond quickly to market developments and emerging technologies. This instrument also delivers on the Government’s Edinburgh reforms commitment to set up a regulatory framework for a UK consolidated tape. Currently there are no consolidated tape providers in the UK. This means that market participants must purchase market data from individual trading venues or data vendors to get a cross-market view, which is burdensome and costly.

It is the Government’s view that a UK consolidated tape will improve market transparency and facilitate data access, making it easier and cheaper for market participants to meet best execution requirements and manage risk. That is why the Government consulted on a number of legislative changes to facilitate the emergence of a consolidated tape as part of the wholesale markets review. There was broad support for the Government’s proposals which this instrument delivers. Most notably, this instrument introduces a power for the FCA to run a tender process to select one or more consolidated tape providers per asset class, and removes requirements which previously made running a tape in the UK commercially unattractive. These reforms will facilitate the emergence of a UK consolidated tape for any asset class. This will improve market efficiency, lower costs for firms and investors and make UK markets more attractive and competitive.

I will now move on to the second instrument, the Securitisation Regulations 2023. This instrument also forms part of the Government’s programme to deliver a smarter regulatory framework for financial services, by establishing a new legislative framework that replaces the assimilated law on securitisation. Securitisation is the process of packaging loans to form instruments that can be marketed to investors. It allows firms to transfer the risk of their loans or assets to other investors. This in turn allows lenders to free up their balance sheets, to provide further lending to the real economy.

The introduction of the securitisation regulation in 2019 kickstarted high-quality securitisation activity after a decline in the market following the global financial crisis. The securitisation regulation did this by introducing robust regulatory standards which addressed financial stability deficiencies which arose after the financial crisis. The securitisation regulation also encouraged investors to invest in safer, simpler, transparent, and standardised securitisations, by granting this form of securitisation beneficial regulatory treatment.

The Treasury conducted a review of the securitisation regulation in 2021. This review aimed to bolster securitisation standards to increase market transparency and investor protections, and to develop securitisation markets, to facilitate increased real economy lending. The new framework that this instrument establishes will allow the independent financial services regulators—the FCA and PRA—to make and further reform most firm-facing rules for securitisation with more agility and proportionality.

These regulators will consider taking forward reforms in line with the outcomes of their own consultations and the review of the securitisation regulation in 2021. All of these were received positively by the industry.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, I am grateful to the Minister for introducing these two grouped SIs, both of which we support.

The Explanatory Memoranda accompanying these regulations note that the repeal of retained EU law remains subject to the entry into force of commencement regulations in order to ensure that there is no overlap or gap between the two different regimes. How soon is commencement expected once this package of SIs has been debated and passed?

I note that the consultations and reviews underpinning these regulations were held in 2021. Although the industry has commented on drafts of the SIs, not all feedback was incorporated and, in some specific areas, the regulators’ rules are still being finalised. Is the Minister satisfied that the changes in timelines have been communicated adequately to the relevant entities? Does she believe that any further communication needs to take place before commencement?

The Explanatory Memorandum for the first of these SIs notes, as did the Minister in her introduction, that

“there is no consolidated tape provider in the UK”.

Apparently, the MiFID II framework “attempted” to bring one about but the requirements for running a tape were thought to have made it “commercially unattractive”. The EM goes on to outline new measures contained in the SI aimed at facilitating a UK consolidated tape, including giving the FCA the power to run a tender exercise based on revised governance arrangements.

I wish to ask the Minister three related questions. First, what practical impact is the lack of a UK tape having and what alternative data sources are being used? Secondly, what is the timescale for the tender process? Thirdly, what will the Government do should there be no suitable bids or if concerns around the governance of a tape remain?

The Explanatory Memorandum for the second of these SIs notes that the FCA will have the power to review and modify its securitisation rules for specific purposes. When is the next overall review of securitisation expected?

[Baroness Vere of Norbiton (Con)]

My Lords, I am grateful to both noble Lords for their consideration. I will definitely have to write. I am grateful to the noble Lord, Lord Sharkey, for all his questions; I am just not clever enough to listen, write them all down and come up with a response at the same time. Had he given me fair warning, I would have come very well prepared and been able to answer all his questions. I am sure I can, but I will have to do so in writing.

I take issue with the premise behind many of the noble Lord’s comments about where Parliament sits in all this. He asked why we are not discussing the very detailed rules around what sits at what is in essence the back end of the market, to ensure that it functions in an appropriate way. Independent regulators fulfil many different roles within our society. Obviously, the FCA and PRA do many of those within the financial services sector. We entrust to them the role of making the detailed rules. That was agreed when FiSMA was passed by your Lordships’ House last year.

I reflect on my recent experience as Aviation Minister, when I worked with the Civil Aviation Authority all the time. I did not expect to take to Parliament detailed rules about how to build a safe aircraft. It was agreed with FiSMA that we hand over certain elements to the independent regulators. Part of the reason for handing over the regulation of the back end is to improve the agility and proportionality of regulation and to respond to changes to the market. There is a feeling that we are not particularly agile at the moment, and we could do much better. Clearly, we want UK financial services to maintain their place at the very top of the global financial services sector. That is my overarching response to some of the questions raised by the noble Lord in regard to both SIs.

I turn to the tender process for the consolidated tape. I mentioned in my opening remarks that we intend to remove the 15-minute requirement and the requirement to have a per-user charge. However, we have given the FCA the power to run a tender process for a consolidated tape. It has chosen the bond markets first, and the process for developing that is now well under way. We expect the tape to be in place by 2025, if all goes well. Between now and a tape being in place, it will be for the FCA to decide what the tender looks like, given the data in the market now, the market players, what the technology looks like and what information is required by whom, at what price and when. The FCA will do that detail; it is certainly not within my skill set to be able to scrutinise that.

That is the power we are giving the FCA. It may well be—who knows?—that all sorts of things are included as part of that tender process. We have taken out the requirement to make data free after 15 minutes, but that does not necessarily mean that this would not be in the final tender or the winning bid. It is all about providing agility. Previously, people tried to set up or thought about doing consolidated tapes on a commercial basis, and it just does not work. As it has not worked, the industry feels that the best way to do it is via the FCA process. We have now given the FCA the powers to do that. It will move from bonds on to equities next.

The noble Lord mentioned some issues around enforcement powers, and I will have to write to him about that. Indeed, on many of the other questions, I will probably write with further information.

On the issues raised by the noble Lord, Lord Livermore, the industry has been extensively consulted on both of these instruments. Draft SIs have been published. We believe that the industry is fully aware of where things currently stand, and we communicate regularly with it. Of all the industries that I have worked with, financial services are fairly on the ball about what is happening in government and do not necessarily always need to be nudged into responding to consultations or looking at draft statutory instruments. I am content with the amount of interaction that we have had with the financial services sector.

Returning to the impact of the consolidated tape, the practical impact of not having one would be very difficult to quantify, but one might imagine that it would cause our markets to be slightly less efficient and, as all good economists know, efficient markets are happy markets. That is why we think it would be a positive step for the UK to start to have consolidated tapes—we expect there to be one for each asset class.

I feel that was a slightly substandard response, but I will write with more information.

Motion agreed.

Securitisation Regulations 2023

Baroness Vere of Norbiton Excerpts

Wednesday 10th January 2024 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Securitisation Regulations 2023.

Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee

Motion agreed.

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023

Baroness Vere of Norbiton Excerpts

Monday 18th December 2023 Lords Chamber

Moved by

[Baroness Vere of Norbiton]

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

Relevant document: 3rd Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 13 December.

Motions agreed.

Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023

Baroness Vere of Norbiton Excerpts

Wednesday 13th December 2023 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023.

Relevant document: 3rd Report from the Secondary Legislation Scrutiny Committee

Motion agreed.

Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023

Baroness Vere of Norbiton Excerpts

Wednesday 13th December 2023 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, these two instruments make updates to financial services regulation to ensure that it remains effective following the passage of the Financial Services and Markets Act 2023, which I will refer to as FSMA 2023.

The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 make two targeted changes to financial services retained EU law or REUL. FSMA 2023 repeals REUL in financial services, allowing the Government to deliver a smarter regulatory framework for the UK with regulation designed specifically for UK markets and consumers.

The repeal of each individual piece of REUL will be commenced once the Government and the regulators have made appropriate arrangements to replace it with UK rules or determined that no replacement is needed. Until financial services REUL has been fully replaced, FSMA 2023 ensures that it can be kept up to date through a power to modify REUL before its repeal takes effect.

The first change made by the instrument reintroduces a discount factor into the UK Capital Requirements Regulations. The discount factor reduces the amount of capital that small and medium-sized financial services firms are required to hold for certain derivatives activity.

The Secondary Legislation Scrutiny Committee raised this SI as an instrument of interest, noting the timeline of the original removal of the discount factor from UK legislation and the Government’s policy on mirroring changes in EU law. The Government removed the discount factor in April 2021 through the Financial Services Act 2021. The EU also removed the discount factor from its version of the Capital Requirements Regulations at that stage before reintroducing it later that year. The Government do not have a policy of mirroring EU law and, through the smarter regulatory framework, will tailor regulation to the UK. After industry raised concerns with the Government about the removal of the discount factor, we acted swiftly to reinstate it through this instrument. This will provide certainty to firms and align regulation to best practice globally.

The instrument also amends Article 51(5) of the benchmarks regulation to extend the transitional period for the third-country benchmarks regime to the end of 2030. Thanks to the transitional period currently in effect, UK users of benchmarks have access to non-UK benchmarks. The third-country regime, once it takes effect, would require administrators of those benchmarks to pass through one of the three access routes—equivalence, recognition or endorsement—for UK users to rely on them. There is a variety of issues with the third-country regime as originally drafted in the EU. For example, some third-country benchmarks are provided on a non-commercial basis, and administrators may therefore lack the economic incentives to come through these access routes. If the transitional period were to end with the third-country regime in its current form, many administrators may be unable or unwilling to use this regime for continued UK market access. Losing access to these third-country benchmarks could undermine the UK’s position as the centre for global foreign exchange and derivatives markets and have further repercussions given the widespread use of third-country benchmarks by UK firms.

This instrument therefore extends the transitional period from the end of 2025 to the end of 2030. This extension will provide time to review the UK’s third-country benchmarks regime and implement any changes in time for industry to take the necessary steps to comply with the regime before it comes into force.

The Secondary Legislation Scrutiny Committee asked about any risks posed by this extension. Although extending the transitional period entails some risk by allowing the continued use of lower-quality third-country benchmarks in the UK, those risks are outweighed by the risks that would arise from allowing the transitional period to end with the third-country regime in its current form. Risks arising from the use of third-country benchmarks during the transitional period can be mitigated through regulation in the home jurisdiction of those benchmarks and through international co-operation for jurisdictions where specific benchmarks regimes are not in place.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, overall, we agree with these regulations. When the first of these two grouped SIs was debated in the House of Commons, my honourable friend Tulip Siddiq, the shadow Economic Secretary, posed two questions to the Minister. Unfortunately, he did not address either of them in his response, so I will ask them again today. Of course, the noble Baroness is welcome to write with an answer, if that is preferable.

The two questions are on changes to capital requirements. First, given that the Prudential Regulation Authority is proposing to remove the SME supporting factor when it confirms its final rule, are the Government not reintroducing a measure that the PRA plans subsequently to abolish? Secondly, if the PRA goes ahead with its plan, what reassurance can the Government provide that the UK’s SME lending market will not be left at a significant competitive disadvantage against its European counterparts due to the increased cost of capital?

The noble Lord, Lord Sharkey, asked about the reintroduction of a discount factor, which was mentioned by the Minister in her opening remarks. I note that the discount factor was previously “unintentionally” removed from the relevant regulation in both the UK and the EU. I also note that the discount factor was removed from UK law in January 2022, and that this was identified as an issue only 18 months later, in July 2023. However, apparently, the factor was reinstated by the EU into its own laws four months prior to it being unintentionally removed from UK law back in September 2021. As the noble Lord, Lord Sharkey, observed, it is odd that a mistake was introduced in the UK after it had already been corrected in the EU. The Minister is clearly correct to note that the UK does not mirror changes to EU law post Brexit, but does she think that keeping up to date with developments in the EU, where parallel measures remain part of UK legislation, could help to ensure that avoidable errors such as this do not occur?

[Baroness Vere of Norbiton (Con)]

Once again, I am grateful to both noble Lords for their contributions to this short debate. I will write further on what the noble Lord, Lord Sharkey, said about the formula—it is not that complicated; I am an engineer by training, and it is not beyond the wit of man to understand this. But we might provide a little more explanation in due course.

I am not sure I can say much more about the timing of the removal and reintroduction of the discount factor. It is not a particularly widely used element within the system, and therefore the industry took a while to notice that the change had happened. Obviously, there are lessons to be learned in these circumstances, and we moved to reintroduce it as quickly as we could. Of course, the regulators are well aware of what happened. I am grateful to noble Lords that we are able to get it back on to the statute book today.

That brings me on to the various discussions we have with the EU, as close trading partners. The noble Lord, Lord Sharkey, asked what changes will be next. There will be potential changes to the third-country benchmarks regime, but that is in the context of much wider changes within the smarter regulatory framework, so the repeal of each piece of retained EU law will be commenced once appropriate arrangements are in place with the UK rules—or, as I said in my opening remarks, when the Treasury has determined that no replacement is needed. Alongside that, we are delivering our smarter regulatory framework in order to replace retained EU law as necessary.

It will be a carefully planned and phased approach. We believe that we have given ourselves sufficient breathing room by making the transitional period last until 2030. It may be that we need all that time, or it may not, but we want to make sure that it fits into the wider reform of the programme to ensure that we prioritise those things that we feel are needed first in order to benefit our very successful financial services sector. Of course, we continue to have enduring and sensible dialogue and co-operation with other jurisdictions, including the EU. For example, on 19 October, the Treasury hosted the first joint EU-UK financial regulatory forum, which welcomed participants from not only the European Commission but UK and EU regulators to discuss common issues. It is clear that the UK and the EU regulatory frameworks will change over time and ultimately remain the autonomous concern of the respective parties, but it is also important that we discuss changes for the benefit of sharing our understanding.

The noble Lord, Lord Sharkey, asked about the risks from the benchmark extensions. It should be noted that systemically used benchmarks pose the greatest risk. These benchmarks are subject to UK benchmark regulation because they are administered in the UK. They might be subject to another jurisdiction’s benchmark regime or be created by a third country’s central bank. That also means that there are some benchmarks that do not fall into those categories—these are possibly the lesser-used ones. But it is the case that UK benchmark regulation places additional requirements on the users of benchmarks that continue to apply where they use third-country and domestic benchmarks. These requirements include, for example, robust fallback provisions in the contract should the benchmark become unavailable for whatever reason, or fail—so there are protections there. As I noted in my opening remarks, we recognise the risks and also the benefits that those benchmarks have in underpinning a very significant part of our financial services sector.

The noble Lord, Lord Livermore, asked about the questions raised by his colleague in the other place. I will write with more information. I have lines here on the Prudential Regulatory Authority, Basel III et cetera, but his question deserves a fuller answer about how we see this transitioning into that regime.

Motion agreed.

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023

Baroness Vere of Norbiton Excerpts

Wednesday 13th December 2023 Grand Committee

Moved by

[Baroness Vere of Norbiton]

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023.

Relevant document: 3rd Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, these regulations amend the exemptions from the financial promotion regime for high net worth individuals and self-certified sophisticated investors. I note that this statutory instrument was raised as an instrument of interest by the Secondary Legislation Scrutiny Committee. I will address the SLSC’s comments in the course of my remarks.

The exemptions that the Grand Committee is considering are designed to help small and medium-sized businesses raise finance from high net worth individuals and sophisticated private investors, or “business angels”, without the cost of having to comply with the financial promotion regime. These exemptions allow businesses to make financial promotions related to unlisted companies without being authorised by the FCA or having to follow FCA rules on financial promotions.

The existence of these exemptions reflects the important role that private individuals play in enabling SMEs to raise finance. However, as financial promotions made under the exemptions are not subject to the stringent safeguards of the financial promotion regime, the scope of the exemptions must be designed carefully to reduce the risk of consumer detriment.

These exemptions were last substantively updated in 2005. Since then, there have been significant economic, social and technological changes to the context in which they operate. For example, we have seen the development of an online retail investment market, which has made it easier for individuals to invest in unlisted companies. There has also been significant price inflation over the past two decades. Together, this means that many more consumers will fall within the eligibility criteria to use the exemptions than in the past.

In addition, there are concerns about misuse of the exemptions. They includes the risk of businesses seeking to use the exemptions to market investments inappropriately to less sophisticated ordinary retail investors. This risk was recognised in a report by the Treasury Committee in the other place, and it led to a recommendation for the Government to re-evaluate the exemptions to

“determine their appropriateness and consider what changes need to be made to protect consumers”.

In light of this changing context and that committee’s recommendation, the Government reviewed the exemptions and consulted on a set of reforms. Having considered the feedback to the consultation, the Government are bringing forward a set of amendments to the exemptions to address the risks that have been identified.

I now turn briefly to the substance of the statutory instrument. These regulations raise the financial thresholds to be eligible for the high net worth individual exemption to require an income of at least £170,000 in the last financial year or net assets of at least £430,000 throughout the last financial year. For the purposes of this exemption, net assets do not include an individual’s primary residence or their pension.

The regulations also amend the criteria to be eligible for the self-certified sophisticated investor exemption. They do this in two ways. First, they remove the criterion of having made more than one investment in an unlisted company in the previous two years. Following the rise of online investing, it is much easier for individuals to invest in unlisted companies than it was in 2005 when this exemption was introduced. The Government are of the view that this criterion is no longer an indicator of investor sophistication and that it should be removed. Secondly, the regulations increase the company turnover required to satisfy the criterion related to being a company director from £1 million to £1.6 million. This will mean that directors of companies with at least £1.6 million of turnover will remain eligible for the self-certified sophisticated investor exemption.

These regulations also improve the statements that investors are required to sign when using the exemptions. This should ensure that investors have a better understanding of the protections they lose when receiving financial promotions under these exemptions. The regulations will make minor and consequential changes, including applying these changes to promotions of collective investment schemes that invest in unlisted companies.

Further, the instrument amends the separate exemptions to the regulatory gateway for financial promotions, ensuring that those exemptions apply as intended. This is a rather technical area of policy, and I hope noble Lords will forgive me for taking a moment to explain the effects of these changes. First, the instrument amends the exemption that applies to authorised persons approving financial promotions of unauthorised entities that are part of the same group. Secondly, it amends the exemption that applies to authorised persons approving financial promotions of their appointed representatives in relation to regulated activities for which the authorised person, as principal, has accepted responsibility. The effect of these changes is to allow onward communication of the promotion by any unauthorised person. This brings the scope of those exemptions into line with the approach for the exemption that applies to authorised persons approving financial promotions that they have prepared themselves. This correction intends to ensure that any unauthorised person will be able to communicate a financial promotion where that financial promotion has been approved by an authorised person within the scope of any of the exemptions to the gateway.

I turn to the comments made by the SLSC. In its third report of this Session, the committee highlighted this statutory instrument as an instrument of interest. It encouraged the Treasury to reassess the financial thresholds more regularly in future, and the committee is right to note that these thresholds have not been updated in quite some time. The Government will keep the financial thresholds under review to ensure that they remain fit for purpose into the future.

The changes being introduced through these regulations take account of inflation over the past two decades and amend other eligibility criteria to reduce the risk of capturing ordinary consumers. Overall, these regulations are designed to reduce the risk of consumer detriment while ensuring that SMEs can continue to raise capital as a result of financial promotions made under these exemptions. I beg to move.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I am grateful to both noble Lords for their contributions to this short debate. The noble Lord, Lord Sharkey, asked why we are doing this in two debates rather than one. I do not know, but I think it was probably decided by the business managers—whoever they may be. If one looks at the two SIs, they are substantially different and deal with different parts of the financial services market, so potentially that is why. Anyway, I for one am delighted to have the opportunity to get up twice and introduce two SIs, because I will be able to focus very much on the questions the noble Lord raised, and indeed the follow-up question from the noble Lord, Lord Livermore.

I only partially agree with the charge made by the noble Lord, Lord Sharkey, that the Government were too slow in addressing the TSC recommendation. The Government did take action: we launched a consultation in December 2021 and then took the time to consider the feedback we received. It is fair to say that we received a range of feedback, so we needed to think about the proposals and how we would take them forward. We reflected very carefully on that feedback. There was a balance to strike between better protection for consumers and being able to get much-needed capital into the SME sector. The noble Lord will know there is then that period during which nothing appears to be happening, but lots of lawyers are working very hard and drafting and preparing all the relevant legal and associated documents. So we are in a good place now and I am relatively content with the speed of progress.

The noble Lord asked whether the Government feel that there would be a reduction in investment in angel networks and SMEs. Again, we considered very carefully the various views shared by respondents on the financial thresholds to qualify for the high net worth individual exemption, because we recognise the importance of the angel investment community. We considered the responses and decided to increase the thresholds only in line with inflation, rather than bring forward a more substantial rise—which was advocated by some; obviously, others would not have wanted such a significant rise.

The exemptions will continue to facilitate angel investment in early-stage businesses and enable a broadening of angel network participation. This is the important point: where a person has been a member of a network of business angels for more than six months, they will still qualify for the self-certified sophisticated investor exemption. So there is a route through, provided that an investor joins the angel network, attends it and ensures that they fully understand what they are doing with their hard-earned cash.

The noble Lord, Lord Sharkey, then talked about investor statements; he felt that we had not gone far enough. However, the regulations make significant changes to the investor statements. First, the format of the investor statement is being updated, including making changes to the conditions to be considered a high net worth or self-certified sophisticated investor more prominent, and making it clearer to investors that promotions made under these exemptions may not be accompanied by any protections. So there will be change in what the statements look like.

Secondly, the language in the statements is being simplified: we are removing references to other pieces of financial services legislation, as that is unhelpful. We need to make it more consumer-friendly, such that all the information is in one place in plain English. Lastly, the statements will require greater investor engagement. The updated statements will require a prospective investor to select which criterion they meet. So they cannot just sign it; they will have to say that they meet a certain, specific criterion to be either a high net worth or sophisticated investor.

There has been much discussion about the updating of the thresholds, and I accept that 18 years is probably too long. However, I will not commit the Treasury to a particular date in the future for when the thresholds should be looked at again, because that will depend on what happens to inflation. There will be periods of very low inflation, when one would not want to update the thresholds, because, on the flip side, there would be an awful lot of familiarisation from investors and investee companies to ensure that they are keeping track with the exemptions. There is a balance, but I accept that we should—and we will—keep these financial thresholds under review, such that there is not a significant disconnect in future.

The noble Lord, Lord Livermore, asked why we used January 2023 inflation data. This is not rocket science. When we did the consultation, there were people who wanted the thresholds to be higher and those who wanted them to be lower. To a certain extent, that is why we came up with an approximation of the past 18 years’ inflation. Whether we chose January or a slightly later date for inflation probably would not have made a significant difference. It was necessary to choose a moment in time to make the revised calculation and we chose January to provide that certainty. We will watch inflation and review the limits and thresholds again in due course.

Motion agreed.

Payment and Electronic Money Institution Insolvency (Amendment) Regulations 2023

Baroness Vere of Norbiton Excerpts

Wednesday 13th December 2023 Lords Chamber

Moved by

[Baroness Vere of Norbiton]

That the draft Regulations laid before the House on 25 October be approved.

Considered in Grand Committee on 6 December.

Motion agreed.

Financial Stability: Private Equity Firms

Baroness Vere of Norbiton Excerpts

Wednesday 13th December 2023 Lords Chamber

[Baroness Bennett of Manor Castle]

To ask His Majesty’s Government what assessment they have made of risks to financial stability from private equity firms experiencing difficulty in the current high interest rate environment.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Bank of England’s Financial Policy Committee is responsible for identifying and addressing risks to the stability of the UK’s financial system. The committee’s most recent judgment is that the system of market-based finance, which includes private equity, has so far been able to absorb recent changes in macroeconomic conditions.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I thank the Minister for her Answer; I think the key words in it may have been “so far”. If multiple private equity companies experience financial stress simultaneously, it could have systemic implications. This is especially true if those companies operate in interconnected industries, leading to a potential domino effect of financial distress that could spread to the broader economy. The UK is the second largest private equity market in the world, with nearly £80 billion of private equity going in in the last five years. Are the Government really assessing the situation and considering whether there need to be restrictions on the role of private equity in our economy and society, given how many companies have been taken over by private equity and subsequently closed down?

[Baroness Vere of Norbiton (Con)]

I am afraid I do not recognise the picture the noble Baroness paints, nor do I agree that private equity needs to be closed down. The Bank of England monitors the situation across the entire market-based financial system. The noble Baroness may be interested to know that the Bank of England is conducting a system-wide exploratory scenario, which will be a world first and will look at all the elements of the financial system and stress-test them in quite severe circumstances to ensure that there is no contagion. The noble Baroness is not right to say that there is a massive risk of contagion. The private equity sector is a very small part of our financial system.

[Lord Leigh of Hurley (Con)]

I agree with my noble friend’s comments in respect of the private equity industry. I am sure she is aware that the private equity industry raised £70 billion last year but has £145 billion in dry-powder capacity in case of financial instability. Is not the real possible instability for companies in the UK the threatened changes to employment laws, which currently allow firms to respond to market conditions? I refer your Lordships to my registered interests.

[Baroness Vere of Norbiton (Con)]

My noble friend is absolutely right. We need the right flexible employment laws to ensure that private equity can continue to steward companies that employ millions of people. Indeed, the British Private Equity & Venture Capital Association estimates that private equity-related companies employ 2.2 million workers.

[Baroness Kramer (LD)]

My Lords, the Minister should take the Question from the noble Baroness, Lady Bennett, very seriously. A very large part of the private equity market is heavily overleveraged, although that is often disguised through complex financial engineering; it is not just Thames Water. At the same time, there are serious questions about the condition of the public debt market, with gilt rates so dependent on volatile foreign buyers for their gilt sales. Has the Treasury looked again at the stress tests being used by the Bank of England to see if they encompass potential issues in these two markets? There is a real risk that not just one but both could have serious problems at the same time, with systemic consequences.

[Baroness Vere of Norbiton (Con)]

I reassure the noble Baroness that the Treasury works with the Bank of England and other regulators to monitor the system.

[Lord Sikka (Lab)]

My Lords, private equity is part of the £131 trillion shadow banking system, which is largely unregulated even though it is much bigger than the regulated retail banking sector. Recently, IOSCO has said that the high leverage of private equity poses a threat to the world economy, so it is hard to see why the Minister is dismissing that. I ask the Minister to do two things: first, apply the banking prudential regulations to private equity; and secondly, end tax relief on corporate interest payments and thereby reduce private equity’s capacity to increase leverage and cause the next financial crash, which will inevitably be caused by private equity.

[Baroness Vere of Norbiton (Con)]

My Lords, there are £250 billion of private equity assets under management in the UK, versus £10.3 trillion of total assets under management. It is a smaller part of the financial system. The noble Lord is not right to say that it is unregulated: UK private equity managers are regulated under the alternative investment fund managers regime. They must also comply with the senior managers and certification regime.

[Lord Londesborough (CB)]

My Lords, I declare my interests as set out in the register. It is hardly surprising that private equity is struggling to do deals and sell its portfolio companies in a climate of high interest rates and low growth. In fact, it is zero growth, as October’s dismal GDP figures show that we have seen no growth at all in the last quarter. In view of capital’s recent flight to quality, does the Minister agree that our lack of an economic growth strategy is the biggest drag on private equity in this country?

[Baroness Vere of Norbiton (Con)]

I do not agree with the noble Lord. As he will have seen in the Autumn Statement, the Chancellor set out significant tax cuts to encourage growth. That is where we are focusing our firepower at the moment.

[Lord Young of Cookham (Con)]

My Lords, further to the original Question about high interest rates, at the last general election the Green Party was committed to borrowing an extra £95 billion to pay for its commitments. What would this have done to interest rates?

[Baroness Vere of Norbiton (Con)]

I would not wish to speculate; however, I am not sure it would have been good things.

[Lord Rooker (Lab)]

If private equity is so keen on employing people in this country, how come it is not so keen on paying the pensions? The private equity owners of Boots have just got rid of the pension responsibilities.

[Baroness Vere of Norbiton (Con)]

The noble Lord mentions a situation I am not aware of, but I will say that all owners of UK companies must abide by the Companies Act and their obligations therein.

[Lord Forsyth of Drumlean (Con)]

My Lords, has my noble friend been following the speeches and articles written by the noble Lord, Lord King, the former Governor of the Bank of England, in which he suggests that it is so important for the Bank to concentrate on inflation and the price mechanism that it does not make sense to add to those responsibilities a green agenda, which will distract it and draw it into political activity?

[Baroness Vere of Norbiton (Con)]

I have not been following those interventions from the former governor, the noble Lord, Lord King, but I shall certainly look at them.

[Lord Livermore (Lab)]

My Lords, the Bank of England has recently warned of the risks to financial stability posed by artificial intelligence and machine learning, with the bank’s Financial Policy Committee identifying the potential for system-wide risk, herding behaviour and increased cyber risk. Does the Minister believe that regulators have sufficient powers, and that existing powers are sufficiently future-proofed, to deal with emerging risks to financial stability from rapid technological advances, including but not limited to AI?

[Baroness Vere of Norbiton (Con)]

I accept that the AI regulatory system is still in development, but that is not unique to the United Kingdom. The AI summit convened by the Prime Minister made good steps in the right direction.

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

Can we send our deepest sympathies to Sir Jacob Rees-Mogg on the demise of Somerset Capital Management, and hope that this will now enable him to spend more time looking after his constituency?

[Baroness Vere of Norbiton (Con)]

I am not aware that there was a question there—but if the noble Lord wants to send his sympathies, I am sure they will have been heard.

[Lord Watts (Lab)]

Given the recent problems with the Truss Budget, was the Bank of England informed of the Budget before it was announced—and if not, why not?

[Baroness Vere of Norbiton (Con)]

I am afraid that the noble Lord speaks about things I have no knowledge of.

[Lord Hodgson of Astley Abbotts (Con)]

I declare an interest in that I am involved in the private equity industry. If we in the industry do not calculate the risks properly, build into our modelling the necessary degree of leverage and allow for it, is it not right that we should be allowed to fail? We should not just be kept alive when we have shown incompetence.

[Baroness Vere of Norbiton (Con)]

I completely agree with my noble friend. Private equity is all about risk and returns, and not all firms will succeed in perpetuity. That is the way of a capitalist market, and it allows the correct allocation of capital within the system.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I am glad that the noble Lord, Lord Young, pays such attention to the Green Party manifesto; it is pleasing to see. On the reference to so-called green environmental investments, does the Minister agree with me that it is essential for the future of the British economy, in meeting the needs of British society, that we invest in renewable energy and warm, comfortable, affordable-to-heat homes in order to effect the transformation we need for a healthy society?

[Baroness Vere of Norbiton (Con)]

Actually, I would flip that around the other way. I had a long conversation with the head of ESG at the FCA about this, and it is the public and investors in pension schemes who want to see investments in higher rated ESG organisations. That is the key driver: it is ensuring that the capital goes to the places the investors want to invest it in.

National Insurance Contributions (Reduction in Rates) Bill

Baroness Vere of Norbiton Excerpts

3rd reading
Tuesday 12th December 2023 Lords Chamber

Moved by

[Baroness Vere of Norbiton]

That the Bill do now pass.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, I am grateful to all noble Lords who have participated in the passage of the Bill. It delivers on the Government’s long-term plan to grow the economy and reform the tax system. It achieves this by cutting taxes for 29 million workers through three measures: a reduction in the main rate of employee class 1 national insurance contributions, or NICs, from 6 January 2024; a reduction in the main rate of self-employed class 4 NICs, from 6 April 2024; and the removal of the requirement to pay self-employed class 2 NICs, also from April 2024. Those who choose to pay class 2 voluntarily will still be able to do so. This simplifies the system for self-employed taxpayers, so that it is more closely aligned with the treatment of employees. The Government intend to fully abolish class 2 NICs, and further details about this reform will be set out next year.

Although this is a relatively small Bill, it has a big impact. It is an integral part of the Government’s long- term plan to grow the economy and reform the tax system but, most importantly, it is fair and it is right, because it stands by working people.

I would especially like to take the opportunity to thank all the Treasury officials for their enormous hard work in bringing the Bill to your Lordships’ House so quickly, such that it will deliver the benefit to workers from January 2024. I beg to move.

[Baroness Kramer (LD)]

My Lords, it is customary at this point to thank all those who have helped us with the Bill. The arduous task of taking it through has perhaps been one of the lighter moments of our parliamentary lives, but there was still a lot of hard work by the Bill team to prepare it. I would thank my staff, except that none of them worked on it. This is just to say a formal thank you to everyone who contributed to this process. We appreciate it.

National Insurance Contributions (Reduction in Rates) Bill

Baroness Vere of Norbiton Excerpts

2nd reading
Tuesday 12th December 2023 Lords Chamber

Moved by

[Baroness Vere of Norbiton]

That the Bill be now read a second time.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the past few years have been a somewhat unhappy lesson in living through history, be that the impact of a once-in-a-generation pandemic or the shock waves of the largest conflict in Europe since World War II. Covid and Putin’s illegal invasion of Ukraine have forced this Government to take tough decisions to protect the public purse. Thankfully, the choices we have made are paying off: inflation is falling, this year’s growth is more resilient than expected and debt is forecast to reduce. This makes it possible to pay back working people while ensuring that public money remains sound.

Thanks to this Government’s long-term plan, this Bill will slash taxes for 29 million working people. It has three measures: the reduction of the national insurance contributions—or NICs—class 1 primary main rate; the reduction of the NICs class 4 main rate; and the removal of the requirement to pay class 2 NICs. The measures all fundamentally deliver on a core priority for this Government: allowing working people to hold on to their hard-earned cash. I shall explain each of the measures in more detail.

First, the Government’s changes to the employee class 1 NICs main rate will reduce it by two percentage points to 10% on earnings between £12,570 and £50,270, from 6 January 2024. This is a change that puts working people first. For example, the average worker on £35,400 will see and feel an annual improvement of £450 to their payslip at the start of the new year. An average full-time nurse will see an annual gain of over £520. Families with two earners on the average income will be £900 better off, because this Government believe that hard work should be rewarded.

Our remaining two measures focus on NICs for the self-employed. The Chancellor highlighted the importance of the self-employed in his Autumn Statement speech, commenting that:

“These are the people who literally kept our country running during the pandemic: the plumbers who fixed our boilers in lockdowns, the delivery drivers who brought us our shopping and the farmers who kept food on our plates”.—[Official Report, Commons, 22/11/23; col. 333.]


This fantastic workforce also deserves to be recognised. Of course, to be self-employed you need to be organised, efficient and responsible, and the Government should not get in the way of that. The self-employed want to stand on their own two feet, and the Chancellor stands ready to support this with two tailored interventions. The first is a cut in the class 4 rate by one percentage point, from 9% to 8%. The second removes the requirement for the self-employed with annual profits above the income tax personal allowance to pay class 2 NICs. Those who wish to pay voluntarily will still be able to do so. Both measures will be in force from 6 April 2024.

These changes simplify the system for self-employed taxpayers, bringing it closer to the system for employees. These measures mean that a typical self-employed plumber will gain £410 a year. The Government intend to fully abolish class 2 NICs, reducing needless complexity and freeing up valuable time. Further detail about this reform will be set out next year. As a result of changes in the Bill, a self-employed person who is currently required to pay class 2 NICs every week will save at least £192 per year. Taken together with the cut to class 4 NICs, this will benefit around 2 million people. Importantly, those with profits under the small profits threshold of £6,725, and others who pay class 2 voluntarily to get access to contributory benefits, including the state pension, will continue to be able to do so. No low-income, self-employed people who pay voluntary NICs will be asked to pay more.

The Government are committed to tax cuts that reward and incentivise work, and which grow the economy in a sustainable way. The tax cuts in this Bill will be worth over £9 billion a year—the largest ever cut to employee and self-employed national insurance. These measures will give 29 million working people an average yearly saving of over £450. That is fair and that is right. Nor will these measures benefit only those already in work. According to the Office for Budget Responsibility, these reductions in tax will lead to an additional 28,000 people entering work, because ensuring that work pays will encourage more people to seek employment. Be in no doubt that we are doing the right thing by standing with the hard-working people of this country and ensuring that their contributions are recognised and fairly rewarded.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

My Lords, I am enormously grateful to all noble Lords who have taken part in this relatively short debate. As your Lordships might expect, I did not agree with all the points, statistics and bits of data that were shared, and I will obviously have my own, but I will try to stick within my wheelhouse and stay within the realms of national insurance today.

However, I want to comment on the general thrust from the noble Lords, Lord Sikka and Lord Livermore, and the noble Baroness, Lady Kramer. It was just extraordinary. I feel really pleased that everybody has now come round to the Conservatives’ way of thinking that taxes are too high, and we need to think about reducing them and we must do so responsibly. I am grateful for that vindication of the Conservatives’ policy when it comes to personal taxes. We agree that they are too high, but of course many of the tax rises that are forecast to come into place—I absolutely accept that taxes will go up, although this national insurance cut reduces them—are already announced and baked into the figures.

I did not hear many noble Lords recognising the reasons why we needed to put taxes up—

[Baroness Kramer (LD)]

I was very tactful not to point out that the Minister, as with all Conservatives— I think they have probably signed an oath somewhere—did not mention Brexit and the economic damage it has done, which is a fundamental part of all this. In giving the history of the things that have gone wrong, it is best not to lecture the House when the Government are deliberately leaving out one of the key culprits.

[Baroness Vere of Norbiton (Con)]

My Lords, I definitely was not lecturing the House—far be it from me to do so. However, it would obviously not be a debate without a Liberal Democrat mentioning Brexit.

I am going to move on from that general observation that I am pleased that there is this political groundswell now back behind the Conservatives for lower taxes, which is excellent—

[Lord Sikka (Lab)]

My Lords, I apologise for intervening, but just to back up the Liberal Democrats, it is not just Brexit. As the Minister will know, since 2010, between £450 billion and £1,500 billion of taxes have not been collected due to avoidance, evasion, fraud and error. If only a fraction of that had been collected, the Minister can imagine how the whole country would have been transformed. If the Minister is looking to expand the debate, here is a point to talk about.

[Baroness Vere of Norbiton (Con)]

The Minister is definitely not looking to expand the debate but is trying to make progress. I hear what the noble Lord says, and if he has read the Autumn Statement, which I am sure he has, he will have seen the announcements made in it about tax avoidance.

Moving on to comments made by noble Lords, I think it is probably not worth rehearsing and rehashing the elements around fiscal drag. Again, I want to put some numbers on record, because there is an opportunity to do so. Thanks to the cut in employee national insurance contributions announced at the Autumn Statement and to above-average increases to starting thresholds since 2010, an average worker in 2024-25 will pay more than £1,000 less in personal taxes than they would otherwise have done. That statement has attracted some interest, and I reassure noble Lords that the calculations underlying this statistic are based on public information, including a published estimate of average earnings. They are robust and could be replicated by an external analyst. This goes back to what I was trying to say about data. Lots of people will do calculations on different bases, but at the end of the day, from the Government’s perspective, we want taxes to come down—this is a start—but of course we will do it only in a responsible manner. However, personal taxes for somebody on an average salary of £35,400 have come down since 2010.

The noble Lord, Lord Sikka, asked about distribution analysis, and the national insurance cuts will of course benefit everybody who pays national insurance. That includes 2.4 million people in Scotland, 1.2 million in Wales, 800,000 in Northern Ireland, et cetera. The latest published HMRC data for 2021 shows that the largest proportion of income tax payers reside in the south-east, followed by London. It will be the case when one has a tax cut that those who pay the largest amount, and the numbers of people who pay tax if they are located in certain areas, are therefore going to see the largest reductions.

However, we have also looked at the impact on women—again, an issue raised by the noble Lord, Lord Sikka. NIC charges apply regardless of personal circumstances or protected characteristics. The equalities impact will reflect the composition of the NIC-paying population. Of course, that feeds into whether we would like women to be paid more. Of course we would. That is why rewarding work will see 28,000 people come into jobs—and I very much hope that they will be well- paid jobs and will be taken up by women.

The noble Lord, Lord Sikka, talked about better-off households. Distribution analysis published at the Autumn Statement shows that a typical household at any income level will see a net benefit in 2023-24 and 2024-25, following government decisions made from the Autumn Statement 2022 onwards. Low-income households will see the largest benefit as a percentage of income. Furthermore, looking across all tax, welfare and spending decisions since the 2019 spending round, the impact of government action continues to be progressive, with the poorest households receiving the largest benefit as a percentage of income in 2024-25. I know that the noble Lord feels that we do not focus on those on the lowest incomes, but he is not correct in that regard.

[Baroness Kramer (LD)]

You cannot eat a percentage of income. Going out and buying a loaf of bread costs you just the same whether you are a high earner or a low earner. So, using the percentage of income comparator to understand the cost of living pressures that people are living under and who is getting the most benefit is not the appropriate measure. If you use the cash number, you realise how much purchasing power arrives for people at the bottom end and how much more purchasing power arrives for people at the top end. That is the appropriate benchmark.

[Baroness Vere of Norbiton (Con)]

I absolutely accept that the noble Baroness is right to say that you can look at it in a different fashion but, in terms of whether what the Government are doing is progressive, it is fair to say that people on lower incomes are benefiting, as a proportion, to a greater degree. Of course, the Government have intervened when it comes to cost of living. That has been cash and that is not about percentage of income. It is all around our energy price guarantee, increases to the national living wage and looking at the uprating of benefits, which will rise by much more than inflation is forecast to be next year. So there are lots of different factors to take into account and sometimes one can be quite blunt when dealing with a tax cut that is, frankly, going to benefit 29 million people.

The noble Lord, Lord Sikka, asked why national insurance contributions do not apply on unearned income. National insurance contributions are part of the UK social security system, which is based on a long-standing contributory principle centred on paid employment and self-employment. ‘Twas ever thus. Of course, a future Government may make substantial changes to that which would again increase the tax burden—but this Government are content that we will maintain the contributory principle.

[Lord Sikka (Lab)]

I thank the Minister for giving way. I hear what she says, but people who have what the Minister calls unearned income—some people may call it “rentier income”, which is perhaps a clearer expression—can still use the National Health Service. If there was an accident, an ambulance would arrive, even though they had not paid any national insurance. If the need arises, they can still get social care. So why are they not required to pay? They simply are free riders. If they paid, the Government could have made an even bigger cut in national insurance.

[Baroness Vere of Norbiton (Con)]

This potentially leads on to the next question from the noble Baroness, Lady Primarolo, about the percentage of mixed receipts that goes to the NHS. It is about 20%; 80% comes from elsewhere. Those people who pay taxes on their unearned income will, of course, pay into the general fund.

[Lord Sikka (Lab)]

As the Minister knows, the taxes levied on dividends and capital gains are lower than the taxes on wages. If she wants her point to stand, can she explain why capital gains and dividends are taxed at a lower rate than wages? What is the justification for that?

[Baroness Vere of Norbiton (Con)]

I suspect that we are now moving into an area of debate where is not appropriate to go today, because there is business still to come in the House; I know that my noble friend is desperately waiting to get up.

I go back to the point made by the noble Baroness, Lady Primarolo. Obviously, the balance of the national insurance fund is monitored closely. The most recent report from the Government Actuary’s Department—GAD—forecast that the fund will be able to self-finance for at least the next five years. But, of course, the Treasury has the ability to top up the NIF from the consolidated fund when needed. Indeed, this has been done in the past—it was routinely done in the 1990s—so it is not right to say that the cut in NICs puts any pressure at all on any payment to the NHS or otherwise; that is set independently from the national insurance fund.

[Baroness Primarolo (Lab)]

I do not wish to detain the House but, frankly, that is not the question I was asking. I was asking the Minister about something that she has confirmed: 20% of the 100% that the NHS gets comes from the national insurance fund and it is equated to a cash value. If there is less in the national insurance fund, less cash goes to the NHS. The simple question I asked was not about whether the NHS will still get the 100%; it was about whether the 80% will become 81% or 82%. It is quite a techy point and I do not want to delay the House, but it makes quite a difference to the cash that the NHS receives. I was just asking the Minister to confirm and clarify that; I am not seeking to score any points off her.

[Baroness Vere of Norbiton (Con)]

I am grateful to be able to clarify that it is not set on a percentage basis at all. The amount of money that goes to the NHS is set in actual terms; for example, it is £160 billion in 2023-24 and will be £162.5 billion in 2024-25. It has nothing to do with the percentage of anything.

I will write to the noble Baroness, Lady Kramer, on the Taylor review and everything that she raised. That would probably be the most appropriate thing to do.

For the time being, I am grateful to all noble Lords who have taken part in the debate and I beg to move.

Bill read a second time and committed to a Committee of the Whole House.