Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025

Debate between Lord Jones and Lord Wilson of Sedgefield

Monday 8th December 2025 Grand Committee

[Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)]

My Lords, I will also speak to the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025. That order, which the Secondary Legislation Committee has identified as an instrument of interest in its 41st report, will bring the provision of environmental, social and governance ratings, commonly referred to as ESG, within the regulatory parameters of the FCA. Regulation will raise standards, enhance investor confidence and reduce the risk of greenwashing. It has strong support from across the financial sector.

I will outline the importance of ESG ratings and their role. ESG ratings encompass a range of products that seek to assess the ESG profile, characteristics, risk exposures or impacts associated with the company, fund or other financial instrument. ESG ratings are widely relied upon by investors to guide investment decisions, in line with sustainability risks, opportunities and preferences. Of the £10 trillion-worth of assets under management in the UK in 2024, half had integrated ESG factors into the investment process. More than 5,400 firms were using ESG ratings during that period.

Work with the ESG ratings market has developed rapidly and without formal oversight. This has prompted concerns among stakeholders regarding transparency, governance, internal control and potential conflicts of interest within ESG ratings providers. In response to these concerns, the International Organization of Securities Commissions published recommendations for ESG ratings and data providers, emphasising the need for higher standards and appropriate oversight. The Government have acted swiftly to deliver progress on this important agenda. The consultation was issued by the previous Government in June 2023, and this Government ensured that the consultation response and draft legislation were published for technical comments as part of the Chancellor’s first Mansion House speech in November 2024. That draft has since been refined into the instrument before the Committee today.

I now turn to the instrument itself. It establishes a new regulated activity: the provision of an ESG rating where that rating is likely to influence the decision to make a specified investment. Providers of ESG ratings will therefore be required to obtain authorisation and will be subject to supervision by the Financial Conduct Authority. Recognising that ESG ratings are provided by a range of different persons, the scope of the regulated activity is designed to be proportionate to the risk of harm to avoid dual regulation and to maintain consistency within the existing regulatory framework.

The regulation contains specific exclusions to give effect to this—for example, where a firm provides ESG ratings as part of another regulated activity. To uphold the integrity of the UK market and ensure a level playing field, the ESG ratings provided to a UK customer by an overseas provider will fall within the scope of the regulated activity, except where such ratings are provided without remuneration or financial incentive.

The Government remain committed to open, competitive and internationally connected financial markets. In that context, further consideration will be given to market access arrangements for overseas ESG ratings providers. To allow sufficient time for industry engagement while ensuring timely implementation, the FCA launched its consultation on the specific regulations for ESG ratings providers on 1 December following the laying of this instrument on 27 October. The FCA’s consultation has been welcomed by industry, and its rules will be designed to be proportionate and tailored to address harms while protecting innovation, in line with the regulator’s secondary growth and competitiveness objective.

This legislation forms a central element of the Government’s agenda to promote growth in the UK sustainable financial market—one of the priority areas identified in the Financial Services Growth and Competitiveness Strategy.

I turn to the Financial Services and Markets Act 2023 (Prudential Regulation of Credit Institutions) (Consequential Amendments) Regulations 2025. This technical instrument makes changes to support reforms to UK banking regulation. It will keep our legislation on financial services effective and assist the Treasury in applying the FSMA model of regulation to set a prudential framework for banks. The instrument does not introduce any new regulatory requirements for firms.

Noble Lords will be aware that banks are required to follow a set of prudential regulations to manage their risk appropriately and maintain adequate levels of capital to protect against any losses. In addition, the biggest banks are required to hold additional loss-absorbing debt to ensure that they can be allowed to fail without the need for taxpayer-funded bailouts, as we saw in the global financial crisis.

A significant amount of prudential regulation is set out in the Capital Requirements Regulation, or CRR, which formed part of domestic law during our time as an EU member state. Following our exit from the EU, the Government have been tailoring the existing financial services framework to the UK’s needs. This includes the CRR, which will be removed from the statute book and largely restated in the Prudential Regulation Authority’s rulebook, providing more flexibility and allowing the PRA to set the relevant requirements. To do this, legislation has been passed to revoke the CRR, notably the Financial Services Act 2021 and the Financial Services and Markets Act 2023. Subsequently, this July the Government made commencement regulations to revoke certain articles of the CRR, with effect from 1 January 2026.

In that context, the Government have brought forward these technical regulations to make a small number of consequential amendments to pieces of legislation that refer to specific CRR articles, to ensure that the broader legislative framework remains coherent. Specifically, they amend the Banking Act 2009 to ensure that definitions relating to share capital instruments in banks’ own funds reflect the revocation of certain CRR articles. They also make changes to secondary legislation concerning bank resolution, the bank levy and financial conglomerates to reflect the revocation of certain CRR articles.

In summary, while this statutory instrument is technical in nature and does not introduce any new rules, it is nevertheless a necessary step in continuing the reforms to our banking regulation and ensuring that our regulatory framework remains coherent. I beg to move.

[Lord Jones (Lab)]

My Lords, surely these instruments must be welcomed, and surely we all want a smarter regulatory framework. I thank the Minister for his helpful and concise outlining of the regulations and the order. There is a lot of business ahead and time is of the essence, so my brevity is guaranteed.

One can only welcome the policy context as stated at paragraph 5 of the helpful Explanatory Memorandum. Can my noble friend the Minister or his department say what the Prudential Regulation Authority is? In particular, can he perhaps give some detail on how big it is and who sits on it? Who chairs it and, on the presumption that the chair is full-time or part-time, is he or she salaried and how much are they paid? Are all the PRA membership paid or are they voluntary? How often does the PRA meet? The department may not give answers now but if not, might the Minister reply by letter?