Financial Services and Markets Bill [HL]

Lord Vaux of Harrowden Excerpts

Committee stage
Wednesday 24th June 2026 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I have a number of amendments in this group that relate to the PSR. Before I run through those, I want to comment on Amendment 47A, moved by the noble Lord, Lord Holmes of Richmond. I must say that I am attracted by the idea of a payment systems panel. Payment systems are such a critical part of our financial services structure. They are used more often by more people and more businesses than any other financial service. If they go wrong, or become too expensive, or fail to prevent fraud or error effectively, the impact on individuals and businesses would be very significant. The abolition of the PSR risks dilution of attention to payment systems, so the creation of a panel has very real merit, and I will listen to the Minister’s answer with interest. I will also be interested to hear why the payment systems competition objective in the Bill is missing elements originally included in the Financial Services (Banking Reform) Act 2013, as the noble Lord, Lord Holmes, has pointed out.

I move on to my Amendment 49, which is simply a request for clarification and understanding. I have read new subsection 131Z3(2)(d)(ii), inserted by Schedule 2, a number of times, but have been struggling to understand the double negative in it. I think I now understand that it means that any system that includes any arrangements using digital settlement assets may be a payment system even if that system’s primary purpose is not that of enabling persons to transfer funds. Is that correct? If so, why is that? Why do we treat systems not primarily intended to be used for the transfer of funds, but which include digital settlement assets, differently from systems that do not include digital settlement assets?

Amendments 50 to 53 are all related and designed to reduce the discretion of the Treasury to designate or not designate a payment system as a regulated payment system. As it stands, the Bill gives the Treasury complete discretion. The Bill sets out when the Treasury may designate a payment system to be regulated, but whether it does so is entirely at its discretion, subject only to some consultations. If it does not wish to designate a payment system as a regulated payment system, it does not even need to consult. Similarly, new Section 131Z6 gives it complete discretion to withdraw any designation at will at any time. Why does that matter? That might be best illustrated by a completely hypothetical and obviously completely made-up example. Stablecoins are generally recognised as being primarily a payment system. Let us imagine that there might be a politician who has received a donation of, shall we say, £5 million from an overseas billionaire who is a major shareholder in the world’s leading stablecoin issuer. Perhaps that politician may not have registered such a donation. Let us imagine that that politician gains a position of influence over the Treasury and feels that the interests of his benefactor might be assisted if stablecoins, or indeed a particular stablecoin, were not designated as a regulated payment system. The Bill, as drafted, would allow exactly that to happen. Does the Minister agree that this feels somewhat inappropriate and open to potential abuse?

My amendments would reduce that discretion so that the Treasury must—“must”, not “may”—designate a payment system as a regulated payment system if it is satisfied that any deficiency in the design of the system, or any disruption of its operation, would likely have serious consequences for those who use or are likely to use the services provided by participants in the system. It would have to withdraw a designation if satisfied that those grounds are no longer met.

My Amendment 55 is another request for clarification; I recognise that it may not be required. Prior to being abolished, the PSR does not have a secondary competitiveness and growth objective such as that of the FCA. It has an objective to promote effective competition in the market for payment systems and services and an innovation objective, but those are different things. It was not clear to me when I read this whether, as the PSR becomes part of the FCA, the regulation of payment systems will become subject to the FCA’s wider set of objectives or not. This amendment aims to put that beyond doubt, but perhaps the Minister could confirm the position.

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Amendments 55A, 55B and 55C seek to amend the FCA’s payment systems competition objective. I agree that the FCA must be able to consider user access and market entry by infrastructure—

[Lord Vaux of Harrowden (CB)]

I am not sure I fully understood the Minister’s response to Amendment 55. Does the FCA’s secondary growth and competitiveness objective apply to payment service systems under the Bill? That was the clarity I sought.

[Lord Stockwood (Lab)]

It does indeed. Returning to Amendments 55A, 55B and 55C, I agree that the FCA must be able to consider user access and market entry by infrastructure and payment service providers. The Bill already achieves that. The FCA’s payment systems objectives are intended to be equivalent in substance and scope to the PSR’s existing objectives.

The noble Lords, Lord Holmes and Lord Vaux, asked about drafting differences between the FCA and the PSR objectives. Changes in drafting of the FCA’s payment systems objectives are for simplification only. The FCA’s payment systems objectives retain the substance of the PSR’s objectives.

Turning to Amendment 57, the Government are committed to improving financial inclusion, but a new levy on payment system participants is not the right mechanism. The better course is targeted and proportionate action, including through the Government’s financial inclusion strategy and the recent allocation of £132.5 million in dormant assets funding to Fair4All Finance.

On Amendment 101A, the Bill already provides for the secondary competitiveness and growth objective to apply to the payment systems’ general functions. Any reporting on that secondary objective would include its application to payment systems’ regulation, as appropriate. Therefore, the Government consider the amendment unnecessary and are satisfied that the Bill already gives the FCA the right objectives to support innovation, competition and growth.

Finally, Amendment 48 seeks to introduce maximum and minimum lengths for the consultations undertaken by the FCA and PRA. I understand the desire to ensure that, where regulators consult on proposed rule changes, stakeholders have a fair opportunity to consider the proposals and respond properly. However, this amendment would impose a rigid statutory timetable on consultations, which will cover a very wide range of issues that vary considerably in complexity, urgency and market impact. The Government’s view is that it is appropriate to allow the regulators to determine the appropriate consultation period, rather than being bound to timings set in primary legislation.

The noble Lord, Lord Vaux, is right on how we describe the interpretation of the drafting; I commend him for his skill in reading a very technical provision that I have had difficulty reading. He asked why payment systems that involve digital settlement assets are treated differently. This reflects the particular characteristics of digital settlement assets and the way the market is developing. It also reflects the existing arrangements under the PSR framework.

The Bill preserves flexibility to bring relevant systems within the scope of payment systems regulation, where they support payment activity. That does not mean automatic regulation. The system must still be designated by HMT before the FCA’s main powers apply. This approach ensures that the new framework is both future-proofed and proportionate. The noble Baroness, Lady Neville-Rolfe, raised the issue of consultations with industry. The FCA works closely with industry, and the Bill sets out clear consultation requirements on the FCA to support this as it takes on this new role.

As I said at the start, I cannot accept these amendments, but I appreciate the spirit of where they come from. The Bill is aimed at ensuring that we have the right institutional framework for this part of the sector, while ensuring that we do not weaken those consumer protections. I therefore ask the noble Lord to withdraw his amendment.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak to Amendments 72 and 75 and to my opposition to Clause 16 standing part of the Bill. I also support the other amendments in this group and their intentions: I think we could talk quite a lot longer about them all.

My Amendments 72 and 75 would require the regulators’ long-term strategies to include a review of their rulebooks, with the aim of identifying outdated or unnecessary requirements. That is a sensible and uncontroversial idea. No one disputes that the regulatory rulebook should be kept under review or that unnecessary or duplicative requirements should not be removed. Indeed, the FCA’s own handbook review consultation acknowledges that parts of the rulebook are outdated, unclear or internally inconsistent. I hope that this review idea can be taken up.

However, these amendments presently sit within Clause 16, which is where the problem lies. Clause 16 creates a statutory duty for the FCA and the PRA to produce long-term strategies. In principle, that is not objectionable; regulators have produced strategy documents before, and it is entirely proper that Ministers should be able to input as long as it is transparent, but there are other problems that have been elaborated on by the noble Baroness, Lady Noakes, which I do not need to repeat. In practice, however, Clause 16 is the delegation engine for Clause 17. It is part of a process of downgrading the day-to-day requirements, the regulatory principles on rule-making, into a commentary in a five-year strategy document. This is a profound change in the constitutional architecture of financial regulation. What were once operational regulatory principles, enforceable by judicial review—even if that route is rarely pursued—become strategic aspirations, influenced by Ministers, unchallengeable by others and reviewed only every five years. The long-term strategy is being used as a vehicle to downgrade regulatory principles and apply them in a minimalist, non-operational way—just talk, no walk. If Clause 16 is to remain, it must be made significantly better and not simply operate as a Trojan horse.

The key thing about regulatory principles is how to make them sensibly relate to operational matters— I say sensibly because that has not happened. That is the problem. It may work for some of them to be dealt with more thematically and rather more regularly than five-year intervals, but others need consideration at the rule-making and supervisory level. While Ministers are meant to stay clear of day-to-day operational interference, like the noble Baroness, Lady Noakes, I query whether Clause 16 overly restricts ministerial input. FSMA 2000 has always had a difficult settlement to keep government away from day-to-day decisions, but—as the financial crisis showed—it is inescapable that the buck stops with government. Clause 16 does not strike the right balance there.

My Amendments 72 and 75 point to rulebook review. As I said in a previous group, and as noted by the Lords Financial Services Regulation Committee, it is effectively the regulators’ system that is cluttered, fragmented and difficult to navigate. It is a lot harder to navigate than a few regulatory principles that the regulators complain about, but which are the only way to challenge that regulatory clutter. In the Lords committee report, a central finding was that culture change, not structural tinkering, is what is needed. Regulators must be clearer, more predictable and more proportionate in how they exercise their powers. The Clause 16 regulatory strategy does not deliver that; it substitutes what were enforceable operational requirements about proportionality with unenforceable talk.

It rather looks as though the regulators will avoid having to step up to the mark. They did not much like the committee’s report or its suggestions of culture change, and, as we will discuss when we get to Clause 17, in the words of one City commentator, it looks like the regulators have done a job on Parliament. Clause 16 is not about transparency, nor is it new in suggesting a strategy document. It is just a vehicle to diminish the accountability and effectiveness of the regulatory principles, and I oppose it.

[Lord Vaux of Harrowden (CB)]

I have added my name to three of the amendments tabled by the noble Baroness, Lady Noakes, in this group. To be honest, I am not quite sure why I did not add my name to her other two; I should have done, so I apologise. The noble Baroness has already explained those with her usual clarity, so I will try hard not to repeat what she said.

Briefly, on Amendment 70, I was going to say that I assumed that the omission from the FCA’s strategic priorities of its secondary objective was an oversight. The noble Baroness, Lady Noakes, has kindly shared with me an email she has received from the Minister that effectively confirms that, and that it will be sorted out at a later stage. Can I very gently say to the Minister that when he writes to noble Lords, it should be copied to all who have signed an amendment? On Amendments 73 and 76, I will listen with interest as to why the Treasury should be able to make recommendations to the FCA and the PRA only in relation to the long-term strategies—that is, every five years. I suspect that the Treasury will come to regret that restriction.

I have also added my support to Amendments 72 and 75 in the name of the noble Baroness, Lady Bowles, both of which would require the FCA and PRA to carry out a review of their regulations as part of the five-year strategy process, with a view to eliminating any unnecessary regulations. Rulebooks have a habit of growing—being added to—and scope has a tendency to creep, so a five-year spring clean must be a good thing and would be a good discipline that I would wholeheartedly support. I finish by saying that I share the reservations that have already been raised about the whole of Clause 16.

[Lord Massey of Hampstead (Con)]

My Lords, the Bill reflects the very substantial transfer of power, as mentioned by my noble friend Lady Neville-Rolfe, from Parliament and from existing regulators, such as the PSR and the 22 professional bodies with specialised knowledge of the sectors, as we discussed earlier. This reflects a high degree of centralisation of regulatory supervision, which may lead to a lack of clarity and, in some cases, as my noble friend Lord Mackinlay mentioned, double regulation for small firms. As the noble Baroness, Lady Bowles, said earlier, the system is also already overloaded. In that context, given the extensive proposed changes and the real possibility of unintended consequences, it seems that the Government should consider the setting of strategy for the future as an important component of the Bill.

Although I support all the amendments in this group, I emphasise the need for consultation with regulated firms and the regular review of the rulebooks as provided for in Amendments 71, 72, 74 and 75. The Bill indeed provides for the publication of a document and consultation with one party—the Court of Directors of the Bank of England is specifically mentioned as a party that will be consulted—but seemingly not with any regulated firm, despite the fact that regulated firms could clearly be very helpful in the setting of long-term strategy. Amendments 71 and 74, proposed by my noble friend Lady Noakes, therefore seem essential additions to the Bill, as would Amendments 72 and 75, proposed by the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux.

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I have much sympathy for the regulators who must navigate an array of “have regards” as they do their work. The whole “have regard” area could do with a review, which is what I initially thought the Government’s Leeds reform was going to do. That is clearly outstanding business. My amendment, as I said earlier, starts with the regulatory principles, but that is not by any means the whole of the problem. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I hope to keep the noble Lord, Lord Wilson, happy by being very brief. One of the things that came out of the committee’s report was the proliferation of principles and “have regards”, et cetera. It is ripe for a review and an overhaul, and I agree with the noble Baroness, Lady Noakes.

[Baroness Kramer (LD)]

My Lords, I very much suspect that the noble Baroness, Lady Noakes, and I would find significant differences in our ideal list of the regulatory principles in Section 3B(1) of FSMA. I will argue in the next group for a “have regard” to the risks of the private credit market to financial stability. In group 8, my colleagues will argue for a “have regard” on sustainability and in group 10 for a “have regard” on financial inclusion.

These are all probing amendments, but they reflect the need for principles to be reviewed, debated and potentially changed by Parliament, so that a review would have input from the regulators and from the Government, but the final decision would rest with Parliament, as it has always done in primary legislation.

To pick up one of the issues that the noble Baroness, Lady Noakes, made about durability, constant churn is unacceptable and would leave the regulators and the financial sector in confusion, and none of us wishes for that. But I think that on the whole, we can look back and say that Parliament has behaved responsibly. Not everybody likes all the principles, but the financial system and the regulators have not had difficulty in delivering, or considering and making sure it is having regard to, those particular principles, particularly when financial stability is at stake.

To me, what underlies all this is the democratic process. I do not believe that principles can be abdicated to a regulator, which is what happens with the Bill—they go off into the long-term strategy. I believe this is for Parliament, and I would very much always support a review. Parliament has that right and that responsibility.

Some of us rather suspect that the removal of the principles to the five-year strategy has been to provide a covert way to diminish the climate change principles. The noble Baroness, Lady Noakes, whom I respect, would move them through the front door, but for many of us there is a strong suspicion that this is removing them through the back door so that the Government do not get the opprobrium that would follow from groups that are concerned about net zero and climate change. Some in the financial services sector are actually very dedicated to achieving climate change targets, but there are also plenty of voices that regard every climate change target and every net zero as a cost and a regulatory burden, and it seems to me that those voices have had very strong sway with the Government.

I suspect, frankly, that we would never have had climate change in among the principles had it not been for Mark Carney, and I very much doubt they will survive in any substance as part of the long-term strategy unless there is something of a volte- face in attitudes as we keep going through very extreme weather conditions and it becomes apparent that there is a huge financial cost and a huge risk to financial stability from the extreme weather conditions and the consequence damage to our overall economic circumstances.

As I say, if the Government wish to change the principles, they should do it through the front door in the way that the noble Baroness, Lady Noakes, proposes: raise the issues, tell Parliament that they wish to make changes and argue in favour of those changes. But that is a fundamentally different approach from taking principles, which I suspect they dislike, and moving them to a long-term strategy so that they will, over time, dwindle but without visibility or any parliamentary input.