Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

Lord Tunnicliffe Excerpts

Tuesday 2nd May 2023 Grand Committee

[Lord Naseby (Con)]

My Lords, I am going to talk to the crypto assets SI only. This is a vital SI at this point in time. I am delighted that the objectives are,

“improving consumers’ understanding of the risks associated … and ensuring that cryptoasset promotions are held to the same standards as for broader financial services”.

The taskforce reported way back in 2018 and, my goodness, the world has changed dramatically since then. Paragraph 7.3 of the Explanatory Memorandum records what happened to the market a few months ago. Recent failures happened in November and, for all we know, there may be some just around the corner.

My noble friend and those who decide these things are absolutely right that the FCA should now be involved. However, I, too, question whether the four-month gap after the SI is passed is really necessary. In today’s modern world, I would have thought three months would be the absolute maximum—if even that long is needed. We also know, as highlighted in paragraph 10.3, that since the publication of this SI, the Government have recognised

“that risks to consumers have increased”

and they are still increasing.

I am no longer involved in the world of advertising and promotion, but I was in a previous incarnation. People are extraordinarily creative when it comes to financial promotion. Direct mail, in all its varying forms, and telephonic communications, in all their current sophisticated manners, are a very difficult area to control and to have a regime for. Therefore, His Majesty’s Government must look at this very carefully, take the best advice of those doing the communicating—I hope my noble friend has access to the genuine people who are communicating—and look at what developments are happening in communication. In paragraph 13.4 the Government quite rightly say that they do

“not have an estimate of the number of small or micro businesses in the UK that are liable to be affected by this measure”.

I know from experience that number is growing. Therefore, this is needed urgently. Again, I emphasise that four months is a little too generous.

Finally, I see in paragraph 14.3 that the Minister with responsibility for small business, enterprise and employment has claimed that this SI does not need a review clause. If there is a market that really needs a review clause, this one is a wonderful case history. I cannot believe that we really believe that. It is up to His Majesty’s Government to decide at what stage there should be a review, which is entirely right, but this is a market that needs to be kept in total focus, otherwise things will go wrong again.

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Minister for introducing these orders. Let me also express thanks to the Secondary Legislation Scrutiny Committee for flagging the orders as instruments of interest in its 36th report of the Session. As the Minister outlined, the first order brings crypto assets into the regulatory regime for financial promotions. This is not the first time we have debated the risks associated with crypto assets, and I doubt it will be the last.

As the Explanatory Memorandum notes, crypto assets have been subject to severe market instability in recent years. Some assets have seen significant reductions in their value, and we have also witnessed the failure of several high-profile firms, including the bankruptcy of FTX late last year. With that instability in mind, we welcome any steps to reduce the risk posed to consumers, particularly through the misleading advertising which seems to have become commonplace as crypto popularity has soared.

However, this order is only one piece in an increasingly complex regulatory puzzle, with supplementary steps being taken through other vehicles, including the ongoing Financial Services and Markets Bill. I hope the Minister can provide assurance that the Treasury and the regulators are moving as quickly as they can in this area. Financial regulation is iterative and new measures need to be properly consulted on, but the Minister will understand concerns that remaining regulatory gaps will continue to be exploited. The implementation period for this measure has been shortened, which appears to be a sensible step. Can the Minister comment on the likely implementation period for related future measures?

The Explanatory Memorandum helpfully explains the exemptions granted to UK-based businesses on the FCA’s anti-money laundering register. However, the SLSC’s comments on the exemption raise an important question: if it is intended to be temporary, why has no end date been specified? I appreciate that this order is part of a bigger package but, in the interests of good legislating, can the Minister identify at what point a review of the exemption is likely to be carried out?

Finally on this topic, the Minister will be familiar with the suggestion that the Government regulate stablecoins in a similar way to bank deposits—that is, protect funds under the Financial Services Compensation Scheme. What consideration, if any, is the Treasury giving to that proposal? If the Government do not plan to take that approach, how will the Treasury and the FCA ensure that consumers are aware that their stablecoins holdings are not protected?

The second order relates to commodity derivatives and emission allowances, specifically when relevant firms will need to be authorised as investment firms. The Explanatory Memorandum promises

“a simpler and therefore lower cost regime”,

with the EU-derived markets in financial legislation regulations rolled back in favour of a new principles-based approach, to be implemented by the FCA. Again, this is part of a broader reform package being undertaken by the Treasury, with part of that package contained in the Financial Services and Markets Bill.

We recognise that the current ancillary activities test is too complicated and burdensome. However, can the Minister outline the proposed timelines associated with these changes, with a particular focus on the FCA’s creation of the new regime? As with crypto assets and many other areas of financial regulation, the FCA is being left to do a lot of heavy lifting but questions remain as to whether current parliamentary oversight of the financial regulators is sufficient. I realise that there are ongoing discussions on this subject between the Minister and interested colleagues across the House, but does she feel that we are getting any closer to a satisfactory outcome? While the risks associated with changes to these elements of financial regulation might be low, that should be as much a judgment for legislators as it is for Ministers and regulators. I hope that we will be able to achieve consensus on that matter as the aforesaid Bill proceeds to Report.

We support the passage of these orders but, as I am sure the Minister will acknowledge, they do not offer the final word on either subject. These are small pieces of a much bigger, more complicated puzzle. I hope that she will be able to speak to that bigger picture in her response and provide both answers and reassurance around some of the issues raised in this debate.