Financial Services and Markets Bill

Lord Forsyth of Drumlean Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

If we have an effective system of digital ID and ethical AI deployed to drive operational efficiency and effectiveness, consumer protection, reduced fraud and a true, personalised, enabling, financially including agenda, that could be a key pillar within this Bill. I beg to move.

[Lord Forsyth of Drumlean (Con)]

I apologise for not being able to attend the Committee last week because I was not in the Lords. I have been asked to speak to Amendment 241F, which was tabled by the noble Lord, Lord Bridges, who is currently in the Economic Affairs Committee interviewing the Chancellor. I shall speak also to my Amendment 241FD. I am grateful for the support of my noble friend Lord Holmes for the idea that there should be primary legislation in respect of any CBDC.

The Committee might be relieved to know that I am not proposing to go through the merits of CBDCs. I am very happy to do so if the Minister would like it, but the arguments are well set out in the paper, which was produced by the Economic Affairs Committee that I chaired, published on 13 January 2022 and entitled Central Bank Digital Currencies: a Solution in Search of a Problem? That might give noble Lords an idea of the conclusions of the committee.

The Government and the Bank of England are not convinced. They are still in search of the problem and the solution and a lot of work is being carried out on this. I do not propose to get into whether they are right or wrong about that, but I commend the committee’s report and the Government’s response, which was a letter to me dated 9 March 2022 which ran to all of seven pages—a commendable example of brevity from the Treasury.

On the first page of the letter, the then City Minister, John Glen, said:

“No decision has been taken by the government and the Bank of England as to whether to issue a UK CBDC, which would be a major infrastructure project.”


Indeed, it would. He went on:

“A decision will be based on a rigorous assessment of the overall case for a UK CBDC and will be informed by extensive stakeholder engagement and consultation. Exploring and delivering a UK CBDC, if there were a decision to proceed, would require carefully sequenced phases of work, which will span several years.”


Noble Lords will note that there is no mention whatever of Parliament in those considerations.

In their response, the Government acknowledged that there was

“a broad range of opportunities and risks, which require careful evaluation.”

In response to the committee’s request to get a commitment from the Government that this would require parliamentary approval, the sentence which stands out is:

“The government expects to fully engage Parliament—including through any possible legislation—in an open and transparent manner to ensure that there is a full and proper scrutiny of any proposals over the coming years.”


I am prepared to bet any Member of the Committee a bottle of champagne that, when the Minister replies, we will hear exactly the same words.

The problem with those words is that they are not a commitment to parliamentary scrutiny; they are not a commitment even to secondary legislation, which my noble friend Lord Bridges’s amendment calls for. They are certainly not a commitment to introduce primary legislation to implement something of this scale and importance, which is what my amendment calls for.

My noble friend Lord Holmes mentioned that the Chinese were keen on CBDCs. I am not surprised: they are a means of controlling and knowing what every citizen is doing with their money and how much of it they have. Although the Bank of England will say that its system would be devised in a way which acknowledges the privacy issues arising from CBDCs, I do not for a moment imagine that there will be any such undertakings in China. I can see the attractions of it; there are huge civil liberty and privacy issues at stake here.

There are also substantial risks to financial stability arising from a CBDC and how it is constructed. On the one hand, if you go the whole hog and everyone’s cash holdings are held digitally by the central bank, that clearly has all kinds of implications for privacy and stability. If, on the other hand, it is argued that the commercial banks will carry this out and you would be allowed to hold only a certain amount in a central bank digital currency, it rather defeats the object of doing it in the first place.

If there is the ability to move money into your CBDC account on any scale, in circumstances such as those that have occurred in recent days with some banks, where people fear stability, they will move their money out of the banks into the central bank digital currency, which is clearly a safer haven. That could create huge liquidity problems for the banks. Depending on how it is designed and operates, we could see ourselves moving towards the nationalisation of credit. At this point, I should declare that I have an interest as chairman of Secure Trust Bank.

All of this, we are told, is going to take a lot of time and require a lot of consultation. However, it seems to me that something as fundamental as this cannot be left for the Bank of England and the Treasury to cook up without proper consideration by Parliament, given the issues that are involved.

In paragraph 13 of its equally lightweight response to the committee’s report, the Bank of England states:

“The Committee cites privacy and identity as key considerations related to CBDC and points out potential reputational risk to the Bank of being drawn into controversial debates on these issues. The Bank recognises that these are important topics for the design of any CBDC system and that appropriate safeguards must be ensured if CBDC is to command users’ trust and confidence. These matters are being looked at as part of the Taskforce’s exploratory work and will be taken forward in the Consultation Paper.”


Then there is the important part:

“The Bank also recognises that these issues extend beyond the remit of the central bank. As such the Bank will closely support the work being undertaken by, and take its lead from, HMG”,


not Parliament. Once again, as with the previous set of amendments and as so often in this Committee, we are wrestling with the question of accountability and accountability to Parliament. Here, we are looking at a major change with huge risks to personal privacy, financial stability and the cost and availability of credit. The notion is that this can all be done without proper consultation by Parliament.

In speaking to these amendments, I am a reasonable person. My noble friend Lord Bridges’ Amendment 241F simply requires a vote in Parliament and looks to secondary legislation. I would support that, but I would prefer that if the Bank of England and the Treasury decide, having carried out their consultations, that they wish to proceed with this it should be the subject of primary legislation and subject to extensive debate.

Again, we have not made a lot of progress today, so all I ask of the Minister is for her to fill in the blanks in the undertaking that was given to the committee of this House. It was an all-party report, supported by the members of the committee. They included the noble Lord, Lord King of Lothbury, who knows a certain amount about central banking, and several members of the committee have great experience. I hope that the Minister will be able to say that she can give an undertaking on behalf of the Government—if not at this stage, certainly at a later stage, but ideally at this stage so that we will not have to discuss it again later—that there will be primary legislation and that the Government will instruct the various committees of the Treasury and the Bank of England to proceed on the basis that it will require primary legislation, a draft Bill and an undertaking to deal with the many issues that arise from a central bank digital currency, which I will not bore the Committee with now.

There has been a lot of talk about what caused the financial crisis in 2008 and the risks that occur. In my experience, the really dangerous thing in financial services is groupthink and belief in models. This is an absolutely classic example of thinking, “The Chinese are doing it and others are doing it so perhaps we need to do it as well. What is going to happen in future?” That is fair enough—have an eye to the future—but just because everyone else is going to do something that might increase risk is not a reason to copy them.

I have a simple request for the Minister: will she please give an undertaking that we will have legislation should the Government decide to go down this course in future?

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly out of a sense of obligation and with a sense of déjà vu because on the previous financial services Bill I recall that I was the only Back-Bench speaker addressing a group of amendments from the noble Lord, Lord Holmes of Richmond, on digital issues associated with the financial sector. As then—having written a thesis on artificial intelligence 20 years ago, when we were said to be almost reaching it—I argue that we are no closer now than we were 20 years ago. We now have big data, not genuine, rich artificial intelligence. If noble Lords do not believe me, they should try putting mathematical questions into ChatGPT and see how far they get. What they will get is plagiarism and statistics, not understanding.

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[Baroness Penn (Con)]

My Lords, the Government have been transparent about their plans to enable the use of digital identities in the private sector, including in financial services, and we are committed to ensuring the scalability, flexibility and inclusivity of secure digital identities.

The Government initiated their digital identity programme following industry calls for the Government to take the lead in developing common standards for digital identity across the whole economy. We continue to believe that a whole-economy approach is the right way forward, and we are working with stakeholders to deliver this at pace.

For example, the UK digital identity and attributes trust framework has already enabled right to work, right to rent and criminal record-checking processes to be digitised, making these checks quicker and more secure. In addition, measures in the Government’s Data Protection and Digital Information (No. 2) Bill, which was introduced to Parliament on 8 March, go further by securing the reliability of digital identity services across the economy for those businesses and consumers who wish to use them. The Government also recognise that greater clarity with respect to how digital identity services certified against the digital identity and attributes trust framework support requirements under the Money Laundering Regulations will be key for market uptake. As set out in the Government’s 2022 Money Laundering Regulations review response, we have committed to considering this too.

I hope that I have reassured my noble friend Lord Holmes that the Government remain committed to enabling the use of secure, reusable digital identity products across the UK economy and that Amendment 218 is therefore not necessary.

Turning to Amendments 220 and 221, also from my noble friend, the Centre for Data Ethics and Innovation guidance has not been designed to form the basis of regulatory requirements relevant to financial services and is unlikely to address AI risks specific to that sector. Appropriating CDEI guidance for the basis of regulation that is aimed at the wider governance of AI through non-regulatory tools and industry-led techniques is therefore likely to lead to unintended consequences; however, I appreciate my noble friend’s point that he used the CDEI for illustrative purposes.

I assure my noble friend that the newly created Department for Science, Innovation and Technology is already developing a cross-economy, pro-innovation framework for AI regulation, underpinned by a number of cross-sectoral principles to strengthen the current patchwork approach to regulating AI directly. Further proposals for the new regulatory framework will be published in a White Paper in the coming weeks. Through our proposals for a new AI regulatory framework, we are building the foundations for an adaptable approach that can be adjusted to respond quickly to emerging developments. The vast majority of industry stakeholders we have engaged with agree that this strikes the right balance between supporting innovation in AI while addressing the risks.

Furthermore, the FCA, the PRA and the Bank of England recently published a discussion paper on how regulation can support the safe and responsible adoption of AI in financial services. Therefore, to avoid unintended complications with the use of digital identities and artificial intelligence in the financial services sector, I hope that my noble friend will not press his amendments.

Finally, I turn to the important topic of central bank digital currencies and Amendments 241F and 241FD, both ably introduced by my noble friend Lord Forsyth. The Government have been clear that they consider that Parliament will have a vital role to play in the future of any digital pound. As I set out to my noble friend Lord Bridges in a previous debate in the Chamber, when we discussed the findings of the report to which my noble friend referred, the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint Treasury and Bank of England consultation paper published on 7 February set out, the legal basis for the digital pound will be determined alongside consideration of its design; this is the subject of ongoing work.

[Lord Forsyth of Drumlean (Con)]

Could my noble friend the Minister just define what “vital” means? Does it mean primary legislation?

[Baroness Penn (Con)]

As I said, the approach we take will be determined alongside the consideration of any design of a central bank digital currency. The decision to move ahead with a CBDC has not yet been taken; however, we do believe that it is likely to be needed in future. Although it is too early to commit to build the infrastructure for one, we are convinced that further preparatory work is justified. Therefore, that definition will become clearer as the design of the approach also becomes clearer—but the commitment at the outset to parliamentary engagement is there.

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[Baroness Penn (Con)]

My Lords, I was explaining why we think that the UK may need a digital pound in future. The central point is that we want central bank money, which is currently available to the public only as cash, to remain as useful and accessible as ever in an ever more digitalised economy.

I was going to address my noble friend Lord Holmes’s question about whether the work we are taking forward is focused on a wholesale or retail central bank currency. The proposal being considered is potentially to introduce a retail CBDC at some point in the future. With regard to a wholesale CBDC, banks have access to electronic central bank money in the form of reserves; we are open to exploring innovative ways in which wholesale firms could use reserves. There is a programme for reform under way on electronic central bank money in the form of reserves that will bring similar benefits to those that we see for CBDCs in the retail space.

[Lord Forsyth of Drumlean (Con)]

Is there going to be a limit on the amount that people can hold in this retail central bank digital currency? Does the Minister accept that, if there is no limit, that will have major implications for financial stability?

[Baroness Penn (Con)]

These are some of the questions that we want to consider through the consultation that is currently open and any further work. That consultation recognises the financial stability implications of developing such a proposal; we will want to consider them as we take this work forward.