Financial Services and Markets Bill (First sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Department Debates - View all Andrew Griffith's debates with the HM Treasury
Financial Services and Markets Bill (First sitting)
Andrew Griffith ExcerptsWednesday 19th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2022 - (19 Oct 2022)
The Chair
Anybody else? No.
We will now hear oral evidence from Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority; Sarah Pritchard, executive director of markets at the Financial Conduct Authority; and Victoria Saporta, executive director of prudential policy at the Prudential Regulation Authority. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme order that the Committee agreed. For this panel, we have until 10.10 am. Will the witnesses please introduce themselves for the record?
Sarah Pritchard: I am Sarah Pritchard, the executive director of markets at the Financial Conduct Authority.
Sheldon Mills: I am Sheldon Mills, the executive director for consumers and competition at the Financial Conduct Authority.
Victoria Saporta: I am Vicky Saporta, the executive director of prudential policy at the Prudential Regulation Authority.
The Financial Secretary to the Treasury (Andrew Griffith)
Q
The opportunity of the Bill, which will be the first piece of ab initio legislation for 23 years in the financial services domain, is to help the effective functioning of financial markets in society and to help the economic prosperity on which we all depend. Will you talk a little about how you see the opportunities in the Bill? How do you think about the competitiveness of the UK regulatory corpus? How would you advise the Committee on making the best advantage of changes in technology—such as digital ledger technology, but that is just one—and of the opportunity to pare back the corpus of inherited European legislation to those purposes?
Victoria Saporta: Thank you, Minister. I very much agree with your comment that the Bill presents a unique opportunity to set a framework for financial services that is world leading and the best in practice internationally. In my view, the Bill as introduced on First and Second Reading achieves that.
I will pull out a couple of things that I think are particularly important. Best international practice, as set out by international standards setters and the IMF, is for operationally independent regulators to pursue technical rule making based on the framework and objectives set by Government. That is because there is plenty of empirical evidence that the operational independence of regulators is associated with better financial stability and economic stability outcomes. That is very much recognised among the financial regulatory community internationally, and it supports competitiveness.
That is important, particularly for a global financial centre, which we have the pleasure to have here in London and the UK, because, as the IMF said in its recent FSAP of the UK, financial stability is a global public good within the UK. Our actions over here, as we have seen in recent events, can spill over to other markets. It is therefore very important that we have this high international standing so that regulators who allow firms to come to London to be regulated by us can have trust in that.
The Bill achieves all of that, but it gives us greater powers, and with greater powers must come greater accountability. We at the PRA and the Bank really welcome that greater accountability. We always have seen our policy frameworks as being supported by accountability to Parliament, and the various provisions and amendments support that.
On competitiveness, there is a new secondary objective that did not exist before, which says that we must pursue competitiveness and growth in the medium and long term as a secondary objective. That is, as long as we are advancing safety, soundness and financial stability within the PRA’s remit, we should look at the options that advance competitiveness and growth in the medium and long term.
We think that is the correct balance. It will allow us to take a very proactive approach to competitiveness. The PRA issued our approach to the Bill, as it currently stands, to aid accountability to you. In that discussion paper, we set out some thoughts about how we would go about doing that. The Bill also has certain areas that would help fintech in the UK.
Andrew Griffith
Q
Sheldon Mills: I will be brief, in the interests of time. Clearly, the Bill represents a significant opportunity—almost a once-in-a-generation opportunity—to transform financial services regulation. There are a few components to that. The first is the fact that the regulators will be given the powers to transpose the retained EU law into UK law. That provides an opportunity for us to think in terms of the UK financial services system and what we need to support UK financial services and ensure that we are a leading centre, worldwide, for financial services.
We welcome the other opportunity in the Bill—the secondary competitiveness objective—on the basis that it provides a spur to us to think about growth and competitiveness as we pursue our primary objectives of competition, consumer protection and market integrity.
The final point, which goes to your point about the corpus of rules, is that I think some of the powers, and some of the exhortations in the Bill for us to review our rules, are important. It is important for us always to have an efficient rule book and system so that we do not place as much burden on business as we otherwise would, and so that the system is certain, consistent and effective. There are genuine opportunities in the Bill.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
Q
Sheldon Mills: Of course. It is a matter for Government as to what amendments they put to Parliament, and it is then a matter for Parliament as to what you do with them. You always have to be careful as a regulator not to tell Parliament what to do, but I will put some thoughts forward.
Independence needs to be at the heart of the regulatory system, so I think it will be important, if and when that amendment is put forward, to think about how the independence of the regulators is sustained. I understand from Government pronouncements that there is a commitment to the independence of the regulators, and that the proposed amendment, which I have not seen, is meant to ensure that where a public interest mechanism is needed—where the Government wish to think about the public interest—there is one to bring forward.
I have worked in regimes with public interest tests. I ran the mergers division at the Office of Fair Trading and the Competition and Markets Authority, and my learning from that is that, if put in place, such a test should be used exceptionally and with care, and that there should be specificity about the matters of public interest—in this case, financial services—on which it would be used.
We are working constructively with HMT in relation to this, and we would do so if such a power were introduced. The only point I would make—Vicky may come to this—is that the standing of the UK financial system is also built on its independence and its consistency of regulation, and it is important that we think through that as we design this regime.
Victoria Saporta: I very much agree with what Sheldon said. We have not yet seen the amendment, so we have to reserve judgment on it, but it will depend on the formulation.
A formulation whereby the Government can force or direct us to make or amend rules that we have already made, and that fall squarely within the statutory objectives that Parliament has given us, may be perceived as undermining operational independence and all the benefits that I talked about earlier. That could have adverse implications for our international standing and, ultimately, our competitiveness.
A formulation that is squarely outside our objectives—for matters of national security, for example—and does not have to do with safety and soundness, or the other objectives and “have regards”, could be a different matter if it is tightly done.
Finally, sometimes I have read in the press and in previous ministerial comments that it makes sense in a parliamentary democracy to ask the regulators to take another look. I just want to say that in clause 27 there is a review power that gives the Treasury powers to force us—to direct us—to take another look and, indeed, to appoint a third party to do so.
The Chair
We will now hear oral evidence from David Postings, chief executive officer of UK Finance, and Emma Reynolds, managing director of public affairs, policy and research for TheCityUK. We have until 10.40 am for this panel. Will the witnesses please introduce themselves for the record?
Emma Reynolds: Emma Reynolds, managing director of public affairs, policy and economic research at TheCityUK.
David Postings: David Postings, chief executive of UK Finance.
Andrew Griffith
Q
David Postings: Thank you, Minister. The UK is an extremely competitive financial services centre, and has been for decades. The exit from the EU provides us with some challenges and some opportunities. The Bill has been worked on by my team in conjunction with HMT and the regulators, and we are very pleased with the content, particularly with regard to wholesale and capital markets. The amendments to EU legislation that it contains are quite detailed and technical, but they help with the competitiveness of the market and of the UK in that market.
Andrew Griffith
Q
David Postings: They welcome it. I think it is really important. It gives us balance and the opportunity to make sure that the regulator has regard to that. Ultimately, being a more competitive financial services centre will generate greater tax revenues for the UK and growth—which are really important—as well as stability.
Andrew Griffith
Q
Emma Reynolds: Thank you, Minister. I reiterate that the UK is one of the world’s leading international financial centres. I agree with David that exiting the EU has brought both challenges and opportunities. On the opportunities that the Bill presents, we absolutely welcome the new secondary objective on international competitiveness and economic growth. The industry has been calling for that for some time. The Bill is a result of many years of the Treasury consulting our industry, and overall we are very supportive of it.
If the objective is done properly and the regulators meet it, it gives us an opportunity to tailor the UK’s regulation to our market. Obviously, we do not have 27 member states to negotiate with any more, so we have an opportunity to tailor to our market. However, we want high standards, not low standards. We want the benefits of regulation, and any changes to regulation, to outweigh the costs. We want regulation to be proportionate to the risk involved. Obviously, all that will be rooted in many international agreements to which we have signed up as a country.
We think there are great opportunities here to enhance our competitiveness, but the proof will be in the pudding, rather than the Bill itself. The Bill enables that to happen, but it is very important that the Treasury and Parliament hold the regulators to account on their new secondary objective.
Andrew Griffith
Q
David Postings: If it is true, it should worry us —absolutely. I think the Bill is a good first step in addressing some of those issues. We have had the Lord Hill review, and its recommendations are contained in the Bill. The changes to the double volume cap and the share trading obligation will help the UK’s competitiveness and our ability to grow that share.
Emma Reynolds: We are in a very competitive environment, and I think the UK is losing out to New York, when it comes to listings. We need to focus on that. We should not be complacent. Obviously, there is very big competition from the Asian international financial centres, too.
Tulip Siddiq
Q
Emma Reynolds: First, let me say that we have discussed this power with Treasury officials, and we have submitted a paper to the Treasury and this Committee about how it could be defined. As one of the regulators said earlier, with greater power—obviously, this Bill and the exit from the EU confer a lot of new powers on the regulators—comes greater accountability.
There is a balance to be struck between enhanced regulatory accountability and maintaining the day-to-day independence of the regulators, which is something that international investors and businesses appreciate, because it leads to a stable regulatory environment. If the intervention power is tightly defined and used as a matter of last resort, you can minimise the risks. We think it could be a very reasonable instrument and power to take, given the circumstances and the transfer of power.
David Postings: The EU regulation was constructed through primary legislation in the main, with the agreement of a number of countries in the EU. That is now being put into the rulebook in the UK, so the regulators have tremendous capability to amend those regulations. It is not unreasonable to have a power that allows Parliament to scrutinise that kind of thing. We have not seen a draft clause, but we have talked to the Treasury and the regulators about this.
The most important thing is that it is used sparingly and drawn tightly. The best overseas example that we could come up with was the Australian example. I believe that it has never been used, but it is there in extremis. It should be something that is very rarely used and not politicised. We need to get the balance between the scrutiny of the regulators and not politicising it. That is a very difficult trick to pull off, but we should be able to do it.
Sally-Ann Hart
Q
Emma Reynolds: And our competitiveness. If that can be done more quickly in another jurisdiction, business might well go there to set up or expand.
David Postings: Fundamentally, what we want is a competitive UK. We are only a small island off the mainland of Europe, but we want to generate big tax revenues to support growth in the economy. Anything we can do to help that is vital. Good, strong regulation is a key aspect of that. A nimble, commercially minded set of regulators to set that stronger regulation is vital.
Andrew Griffith
Q
Emma Reynolds: Sure. We represent the financial and related professional services industry, which employs 2.2 million people, and two thirds are outside London, contrary the characterisation that financial services are mainly in the City of London. We are the biggest net exporting industry, and more than 40% of our exports come from outside London.
David Postings: Yes, we produce higher-paid jobs, and there are big concentrations in Glasgow, Belfast, the north-east, the north-west and down on the south coast. It is a thriving industry and one that we need to support and nurture.
The Chair
We will now hear oral evidence from Chris Hemsley, managing director of the Payment Systems Regulator. For this panel we have until 10.55. Could the witness please introduce himself for the record?
Chris Hemsley: I am Chris Hemsley, managing director of the Payment Systems Regulator.
Andrew Griffith
Q
Chris Hemsley: First off, I agree with your premise. The payment systems sit behind our day-to-day lives. They underpin what our businesses can do and our daily experiences as individuals paying and receiving. They genuinely underpin our productivity, economy and society. I absolutely agree.
In terms of the opportunity in the Bill, one of the key things that we will no doubt pick up is that it provides an opportunity to correct a specific problem that we have today. Some of the powers in the original financial services banking reform framework that the PSR was created under were turned off by some European legislation, and that prevents us from acting with that full suite of powers. That is really important for competitiveness, because if we can get the rules in the system right, that allows us to build trust in digital payments, which will support the economy and growth.
The other issue that I would pull out is that there are some quite important definitional clarifications in the Bill that ensure that the payment systems regulatory framework works for cryptopayments—stablecoin. We are now a regulator of the sterling finality system, which is a distributed ledger system. That bit of future-proofing, again, allows us to seize that opportunity of new technologies and new ways of payment and to make sure that they are appropriately regulated.
The Chair
We will now hear oral evidence from Charlotte Clark CBE and Karen Northey. We have until 11.25 am for this panel. Would the witnesses please introduce themselves for the record?
Charlotte Clark: I am Charlotte Clark, director of regulation at the Association of British Insurers.
Karen Northey: I am Karen Northey, director of corporate affairs at the Investment Association.
Andrew Griffith
Q
Charlotte Clark: Like all the other witnesses, we welcome the Bill. A lot of work has obviously gone into trying to get the right structure. That is really key in terms of how this works for the next generation. I think it was you who said that it had been 23 years since our last Financial Services and Markets Bill, so the legislation needs to work for a very long time.
On the specifics that you talked about, the competitiveness objective is key. Financial services regulation has been made in Europe for the last however many decades. As we onshore it, getting the structure right and making sure that the regulators balance different objectives is really key. We have argued for a primary, rather than secondary, objective around sustainable economic growth, partly because—as today’s debate has probably shown—competitiveness is quite a difficult thing to articulate, whereas for sustainable economic growth, it feels to me a bit easier to say how you are doing, why you are doing it and whether or not you are successful.
Culture change—I cannot remember who mentioned it—is important as regulators take on greater responsibility, particularly around policymaking. That comes to your point about the call-in power. None of us has seen it—I certainly have not seen it; I do not know whether Karen has—but nobody wants to undermine the independence of the regulators. It is incredibly important that they have their independence, particularly in their roles as supervisors and regulators. Political interference in that is not something that benefits the UK economy.
Policymaking, to me, is about trade-offs. If you are trading off economic growth against stability—we have mentioned financial inclusion and net zero—it is about balance. Sometimes, the regulator is not going to be all-knowing, and sometimes it is the role of Government and Parliament to step in and say, “Actually, we have a slightly different opinion.” I don’t think that is about undermining the independence of the regulators, though.
Karen Northey: I will focus on competitiveness and international competitiveness. The Investment Association represents investment managers in the UK who manage £10 trillion-worth of assets on behalf of clients. Of those assets, £4.6 trillion are from overseas investors. The investment management industry in the UK is truly global, and a global success story.
Our industry has two parts: the fund domicile and the activities that go behind the fund, and then the management of those assets—so the investment management side. We are a world leader in investment management, second only to the US, but the US is a very domestic market, whereas London—London and the UK; I must not forget my colleagues, particularly up in Edinburgh—is international. The international competitiveness is absolutely key to our industry.
We support the Bill. We support the secondary objective of international competitiveness; we think it is really important for our industry. Our position as an international global leader is at risk. We are the second largest and the most international, but we cannot be complacent about it. More can definitely be done to support our industry in continuing to be that world leader. That brings investment decisions closer to home. It enables greater opportunities, in terms of products and services for the wider economy, for investors, and for pension funds and so on in the UK.
Andrew Griffith
Q
Charlotte Clark: It is the United States, Bermuda, and Singapore—Europe as well, but particularly for reinsurance.
Karen Northey: For investment management, I mentioned before that the US is the largest investment management centre. We are seeing growth in other centres, close to home in Europe, but there is also a very significant China and Asia investment management centre. On fund domicile, which is more the back office where the funds are registered, Ireland and Luxembourg are obviously the key places where funds are often established.
Tulip Siddiq
Q
Charlotte Clark: I do not think that there is anything in the Bill specifically around net zero. I understand the debate about whether there should be an additional objective for the regulators around it. Obviously, net zero is incredibly important for the insurance sector. We bear the cost of climate events. The incentive on us to think about and support the transition, particularly financially, is very apparent.
I think our regulators do a pretty good job when it comes to net zero. If you think about the things they are doing, such as the stress test, the establishment of the climate financial risk forum and the work they are doing on disclosure, they are pretty much ahead of most other regulatory organisations on net zero. I guess one of the questions is: what would you want to do differently? This comes back to whether they have an objective. One of the concerns about them having an objective is whether it would be their responsibility to direct investment. Again, that comes back to what the role of the regulators in this is. In some ways, put bluntly, I think it is the Government’s responsibility to deliver net zero. We all have accountability in that, but I would not necessarily say that giving an objective to the regulator should change what they are currently doing, so I would question why you would do it.
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Financial Services and Markets Bill (Second sitting)
Andrew Griffith ExcerptsWednesday 19th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 19 October 2022 - (19 Oct 2022)
The Chair
We are now sitting in public and the proceedings are being broadcast. We will now hear oral evidence from Sir Jon Cunliffe, deputy governor of the Bank of England. For this panel, we have until 2.25 pm. Could the witness please introduce themselves for the record?
Sir Jon Cunliffe: I am Jon Cunliffe. I am the deputy governor for financial stability at the Bank of England.
The Financial Secretary to the Treasury (Andrew Griffith)
Q
I do not reach a conclusion on those matters myself, but I thought it would be helpful if we could start with your evaluation of the United Kingdom’s competitiveness in financial regulation, which is one of the core purposes of the Bill, and how well you think the Bill achieves that objective of improving our competitiveness. The other thing a number of our previous witnesses talked about was which markets in the world they consider to be our competitor set.
Sir Jon Cunliffe: I thank the Committee for allowing us to give some evidence on the Bill. This matters hugely to us. I will say at the outset—this goes to your questions, Financial Secretary—that the Bill is hugely important and it is hugely important for a number of reasons. This is relevant to the competitiveness question. The system we have at the moment is basically that we have onshored the European Union system. That system—I worked in it for many years in different jobs and have been involved in much of the legislation—is designed for, now, 27 member states. It needs to ensure the single market and, although the national competent authorities do the supervision, there is always concern in the single market that you will get differences among them. A huge amount of what in other jurisdictions’ best practice is done in regulators’ rules is hardwired in primary law, and you can see that if you look at the onshored law. That system is justified by the needs of the single market and the need to bring all these jurisdictions together. As a single jurisdiction, as the UK is now, we will have much more flexibility, and the ability to act nimbly and design regulation for our particular needs, than we had in the European Union.
I can give you some examples of that. For example, my colleague Sam Woods at the PRA has put forward ideas for a strong and simple prudential regulation framework for banking. We could not do that under the European Union because we were all locked in a maximum harmonisation phase. In the parts of the Bill that are more relevant to me, around payment systems, there is a schedule that deals with digital settlement assets, more generally known as stablecoins, where we can now develop a regulatory framework that is nimble and flexible on the financial market infrastructure side, where we will see huge technological changes brought about by some of the technology we now see around encryption and tokenisation. Again, we are developing a sandbox with the FCA and the Treasury, but we can bring those much more nimbly into rule. This is a much more flexible and adaptable system, which will help in competitiveness.
It will also help because many of the requirements and the processes in the legislation we have were designed for 27 or 28 countries, and not for one. We report on things—I was there when they were put into the legislation—that were important to other countries but not to us, so there is an on-cost in process. Things that are important to us are not always fully reflected, because all European legislation is a compromise. That flexibility and nimbleness will take time, because the European acquis is very large, but it is a huge advantage for us in designing the regulatory framework that we need.
But—and that is a very important “but”. I might not agree with all the people that have given evidence, and I know the Financial Secretary would probably not expect me to either, but this needs to be underpinned by a strong, credible, regulatory system, and the independence of regulators is a key part of that. It is best international practice, but I think it is particularly important for the UK in two respects.
You can measure our financial system in different ways. The last IMF measure was £23 trillion—that is about 10 times GDP. When that system goes wrong, the cost to the nation is huge. That is not theoretical; we saw that in the financial crisis over 10 years ago. The recovery from the financial crisis, in terms of growth, was slower than our recovery from the great depression in the 1920s. The objective of sustainable growth in the medium and long term is entirely right, but strong, credible regulation is a necessity for sustainable medium and long-term growth. In the short term, there might be trade-offs, but in the long term, we can see what happens to growth if you get a financial sector of the size of ours wrong.
I might touch on the question of a call-in power, because I know you asked my colleague, Vicky Saporta, about that this morning. We have seen the power or the proposed amendment the Government intend to bring forward. Of course, we are subject to Parliament and the framework that Parliament sets for us, and we will work within that framework. However, for the two reasons I gave, I think a power to call in and rewrite veto rules that the regulator had made would, frankly, give us—me, anyway—serious concern given the history I have seen over 30 years in the UK financial sector.
Actually, it goes to competitiveness. We are—I gave you my £23 trillion number—probably the largest international financial centre in the world and we are one of the largest exporters of financial services. Regulators and regulatory authorities of other jurisdictions need assurance and need to be comfortable; they need assurance that they will not import risk from the UK or by their firms using UK financial services. That credibility of the institutional framework is very important to the competitiveness of London as a financial centre.
Of course, it is also important to the firms that locate here. They want to ensure that if they use our infrastructure—I am responsible for clearing houses and settlement systems—and if their banks locate here or trade with our banks cross-border on financial services, then they can be assured of the robustness of the underlying system.
I beg your indulgence, Mr Sharma, as I have one last point. All of that—the nimbleness, flexibility and, on the other side, robustness of the framework—needs to be fully, publicly accountable and accountable to Parliament. We welcome what is in the Bill in this area.
To the question of where our competitors are, I think the US is a large competitor in wholesale financial services. We have competitors in Asia as well, but that is more niche. A lot of particular products, asset management and the like, are located in Ireland and Luxembourg and are used by the UK.
Financial services are not linear. A service will very often be a bundling of products that come from different jurisdictions. That is very important for competition. People need to be assured that they will not import risks by dealing with the UK, and that when financial services are put together with elements from different jurisdictions or when we are competing, we actually are in line with international standards.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
Q
Sir Jon Cunliffe: I have not seen the proposed amendment. I have only seen the Financial Secretary’s comments to the Treasury Committee and comments from the previous Economic Secretary at the Treasury, so I would need to look to see. I would say that the Bill as drafted gives the regulator primary and secondary objectives to make the difficult decisions that some of the witnesses this morning were complaining about. It requires us to balance different things before we come to a decision, but underlying that is the primary objective of financial stability and the safety of the system.
I do not know how often a call-in power or an intervention power would be used, and I do not know what frameworks would be around it. Of course, one cannot always assume that the intention when introduced is actually what happens five or 10 years down the line with different Governments. It is something that gives Ministers the ability to take a second judgment on the judgment the regulator has made in line with everything in the “have regards”—the secondary objective—so it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.
The Chair
We will now hear oral evidence from Paddy Greene, head of money policy at Which?. For this panel, we have until 2.45 pm. Will the witness please introduce himself for the record?
Paddy Greene: Good afternoon. I am Paddy Greene, the head of money policy at Which?. I welcome the opportunity to speak today. What is probably pertinent is that we have had some long-standing campaigns on access to cash and authorised push payment fraud.
Andrew Griffith
Q
Paddy Greene: I do accept there is a balance to be struck, so thank you very much. The simple thing is that we need to make sure, when we are talking about the financial services sector and consumer protection, that we have the appropriate consumer protection baked in, so that we have a basic level that means all consumers can participate with confidence and they know that whatever they are transacting in they are looked after and they have a form of redress. Then, once we acknowledge that we have that basic consumer protection, we obviously have some judgment to make on how far the other regulations go. I must add that when we are talking about consumer protections we mean that a protected consumer is confident, has trust in markets and will participate well, and that can lead to a competitive market, an innovative market and a market that can help with growth.
Andrew Griffith
Q
Paddy Greene: The trade-off between protections and consumer credit?
Andrew Griffith
Between putting in place—I am not making a point; I am just trying to open this up for the Committee—good, valuable seatbelts and protections versus over-protecting consumers to the degree that large numbers of participants exit the market and then consumers are left with door-to-door, unregulated providers of credit.
Paddy Greene: Affordable credit is absolutely essential for consumers, but we need to make sure that, first of all, access to credit is regulated. We do have a particular form of credit that people are accessing now with buy now, pay later, which is not regulated at all, but consumers presume that it is. There are some basic protections we need to build in. One is to ensure that the parts of credit that people access are regulated themselves and that it is clear that consumers understand what is regulated and what is not. Then there is some basic information, such as key terms and conditions.
I am aware that some of the details in the Consumer Credit Act 1974, which is exceptionally old, are onerous, and there will be a chance to review that—I think later this year. It is about making sure we have efficient information presented to consumers. There is a balance there, but there is key information that we must provide them and there are key protections that must be baked in.
Tulip Siddiq
Q
Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.
The Chair
We will now hear oral evidence from Natalie Ceeney, chair of the Cash Action Group, and Martin Coppack, director of Fair by Design. We have until 3.10 pm for this panel. Could the witnesses please introduce themselves for the record?
Natalie Ceeney: I am Natalie Ceeney. I authored the independent access to cash review four years ago. I now chair the Cash Action Group, which is leading the industry’s work to provide a voluntary solution, prior to legislation, for providing access to cash.
Martin Coppack: I am Martin Coppack. I am the director of Fair by Design at the Barrow Cadbury Trust. We exist to eliminate the poverty premium—that is, the extra costs that poorer people pay for essential services. I am also a commissioner on the Financial Inclusion Commission. Previously, I was a regulator, responsible for setting up the FCA’s approach to consumer vulnerability and its engagement with third sector organisations.
Andrew Griffith
Q
Natalie Ceeney: We very much modelled the voluntary scheme that we set up as if the Bill, as currently drafted, were implemented. The model starts with a community need base. The premise is that all banks will have a responsibility to serve their business and retail customers, and if they are not doing it through their own branches, they have to do it through another means.
The mechanism we set up is that anyone—any MP, any member of the public—can request that their community’s needs are reviewed. That is done independently by LINK. The form is very simple, free to fill out and on LINK’s website. LINK is already getting applications. Equally, every time a branch or an ATM is closed, LINK will review the needs of that community. If those needs are not being met, it will consider a new solution. Since 1 January, that has already led to 25 new hubs being announced and 13 communities where we are going to explore pilot services, including deposit services. LINK has also set up a significant number of ATMs; I do not have that number at my fingertips.
Andrew Griffith
Q
Natalie Ceeney: To be honest, we need both. There is a real competitive challenge for any bank that wants to go beyond what is necessary, because if it does that, it could be accused by its shareholders of wasting their money, unless all its competitors do the same. To be fair, it is the threat of legislation that has made everyone say, “Why don’t we work together?”. We do need this legislation for the industry scheme to continue in a viable way, but I am pleased that the industry has stepped up in advance of legislation.
We have worked hard not just with banks, but with consumer and small business groups, so the scheme we have designed truly has the input of everybody. We have run pilots for the last two years in communities to test that our models work, with really high satisfaction rates. We need both, but I think the scheme we have designed means that when the legislation is passed, we are ready to go; there will not be a gap.
Andrew Griffith
Thank you. I think you may get an invitation to some parts of the country.
Tulip Siddiq
Q
Natalie Ceeney: That is a very good question, and I am conscious that every time this issue is debated in Parliament or, frankly, every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population. If somebody needs face-to-face support with their money, which might be about getting money out, paying money in, a standing order or the fact that a payment they expected has not arrived, it is the same demographic group. We have recognised that in the voluntary scheme. When we set up a banking hub, it does not just have a counter where you deposit cash and get cash. There is also a private space where the banks provide a community banker to do basic banking services. As far as the legislation is concerned, the voluntary scheme we set up will cover that need on a voluntary basis.
There is one challenge that you might want to include in the legislation. I am going to stay neutral because of my members. The consumer groups and small business associations would say it should be included and the banks would say it should not, but if you do want to go there, defining what you mean by face-to-face banking services and particularly essential services is really important. I do not think anyone would expect you to offer wealth management or buy-to-let mortgage advice on every high street, but helping someone when they are stuck because a payment has not arrived or they have got locked out of their account feels different. Keeping that definition tight is important.
There is also a question about whether the FCA has the powers that it needs already. Those are the factors I would consider.
The Chair
We will now hear from William Wright. We have until 3.25 pm for this panel. Would the witness please introduce himself for the record?
William Wright: My name is William Wright. I am the founder and managing director of New Financial, a capital markets think-tank.
Andrew Griffith
Q
William Wright: Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.
Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.
On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.
Tulip Siddiq
Q
William Wright: Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.
We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.
We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.
There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.
The Chair
Q
Robin Fieth: My name is Robin Fieth and I am chief executive of the Building Societies Association. We represent the UK’s 43 mutual building societies and seven of the large credit unions.
Robert Kelly: Good afternoon, everyone. My name is Robert Kelly and I am CEO of the Association of British Credit Unions Ltd. We represent 157 credit unions across Great Britain—roughly 62% of the market.
Andrew Griffith
Q
I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.
Robin Fieth: Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.
On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.
On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.
Robert Kelly: Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.
In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.
There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.
There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.
Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.
I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.
Tulip Siddiq
Q
Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.
As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.
The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.
Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.
We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.
Andrew Griffith
Q
Mike Haley: Yes, I think we have seen in the past that regulators have not moved quick enough when there has been widespread harm. We might look at payment protection insurance, for example, where consumers brought plenty of reports into MPs’ and Government in-trays, and yet the regulator was rather slow in intervening in a market—a market that had been abused. I think that an intervention power could be very powerful.
Martin Docherty-Hughes
Q
Mike Haley: I think one of the problems of all legislation is how quickly it keeps up with changes in technology, and it being broad around principles. As I mentioned, with the authorisation of anyone who becomes a regulated entity dealing with digital settlement assets, it is important to have clear criteria for the onboarding—know your customer—and to know who the accounts are opened by. I find that already we are looking at money laundering through coin swap services, for which you do not need an account and may not be under this regulation. There are cross-chain bridges, where someone can move from one blockchain to another. I am not an expert on whether clauses 21 and 22 cover some of those services that have been created, which were probably not in the thinking when the Bill was starting to be drafted.
The Chair
Q
Adam Jackson: I am Adam Jackson, director of policy and regulatory affairs at Innovate Finance. We are the trade association for fintech in the UK, representing, if you like, all of the new technology-based financial services that have emerged, maybe in the past 10 to 12 years, including payments, challenger banks, consumer credit and personal management tools—and crypto are part of that.
Andrew Griffith
Q
Adam Jackson: I think that is a good phrasing, Minister, of looking ahead. I think we have in the UK a great 10 years. We are No. 2 for investment in fintech in the world, and have been consistently. The question is, how do we maintain that at a time when we are on the cusp or in the middle of a new wave of financial technology?
The first wave of fintech was very much about consumer interfaces. I think what we are then seeing, and will see over the next 10 years, is the application of technology to the whole of financial services—to the financial systems—to the plumbing, if you like, of financial markets, not just that consumer interface. The question is, how do we build on our superb record until now to ensure that we are at the forefront of what will be digital financial markets? That then becomes not just, “How do we maintain our lead in fintech?” but “How do we ensure that we are a global leader in finance?”
If I then look at the Bill and think about what is needed, I tend to categorise it in three ways. First, is there regulation that needs updating? Is the regulatory rules system fit for purpose? Does it enable—or actually open up—innovation? Is how we regulate agile enough, particularly as technology and the economy move quickly?
Looking at the Bill and “fit for purpose”, the proposals, particularly on stablecoin, are really welcome. They tackle an issue that we have seen in the market this year and bring into scope that new technology.
Does it enable innovation? I think, there, the financial markets infrastructure sandbox is important for looking at how we support different ways of regulating. That gets into the agile regulators as well. Then, when we look at systemic stablecoin, that is about enabling innovation. We will only see stablecoin really developing as a fundamental part of payments systems, and therefore only see the UK maintain its lead in payment innovation, if we have new provisions around systemic stablecoins. The Bill covers all those.
Are there other areas that we would like to see? In terms of the regulatory behaviours, the competitiveness objective is very welcome. On the secondary objective, we would love to see it extended to the Payment Systems Regulator. We have heard quite a bit today about the Bill providing new powers to the PSR so there is a strong case for applying the competitiveness objective to them, as well as some of the other bits of the financial future regulatory framework.
On the question whether we could apply a competition objective to the Bank of England, when we think about things such as central bank digital currency, how that is implemented—as well as if—becomes really important. Central bank digital currency could crowd out innovation and stablecoin unless it is designed in a way that promotes competition. Sir Jon Cunliffe talked about how he absolutely sees a place for stablecoin and a CBDC alongside, but is thinking about some protections around that.
Then, two final pieces would be looking at whether there is scope to strengthen the competitiveness objective, moving from facilitate to promote, and finally, thinking about the Financial Ombudsman Service. A lot of our members raise concerns with us that they have agreed approaches with the FCA, only to find that FOS caselaw rules against things that they have already agreed with the FCA. So more to ensure that consistency, and if there is a way of ensuring that the FOS refers to the FCA for rulings on certain issues, that would help.
Tulip Siddiq
Q
The other thing I wanted to ask about is investment in the UK fintech industry, which was down to £9.6 billion in the first six months of this year, which is three times less than exactly the same period last year. Do you want to comment on the reason for that decline? What should we be doing as politicians to try and help with that?
Adam Jackson: Taking your first question, it is worth looking at the EU MiCA regulation and possibly the approach of a territory such as Singapore. It links a bit to the investment. We did some analysis of investment in just crypto alone, looking at that as a vertical within fintech, and again, the UK has always been the second location for crypto investment in the world, after the US, until the first half of this year, when we fell behind to Singapore. That might be a blip, but when you then look at regulatory mapping, you will see that Singapore possibly has the most forward regulatory system, particularly for stablecoin. The EU has a very comprehensive approach, but is has not come into force yet. Singapore has an established system, so I think that shows that if you get it right and have a proportionate regime, you attract the industry and the investment.
Is the EU approach right? There are strong arguments to say that it is possibly too comprehensive, and we come back to the notion that trying to find something that works for all 27 does not fit our circumstances. The UK is right to take a more iterative approach. We obviously have a common law approach as well, which means there are certain things we can do through case law. It is absolutely right that we are focusing on stablecoin and that is where some of the biggest volatility in the market was this year. The Bill addresses that, which will be really important in providing confidence for consumers and, critically, for investors in technology firms in that space.
The EU rule applies to not just stablecoin but cryptocurrencies more generally and exchanges, so should we also have a regulatory regime for other cryptoassets? I think the answer is yes. The question is how it fits within the Bill. The Government have said that they will introduce proposals for wider regulation of other cryptoassets. We expect something at some point, possibly soon.
That begs the question whether the Bill already enables the introduction of regulations. We probably need to ask Treasury counsel about the definition of a digital settlement asset. The Bill allows for the definition to be changed. Do the rules enable it to cover other cryptoassets? If it does, the powers are there to enable regulators to introduce systems subject to the proposals. If not, will we have to wait another 20 years before regulators are given the powers to regulate cryptoassets?
On cryptoassets, the important things that our members, including exchanges and cryptoasset firms, emphasise are an authorisations regime, a set of rules for initial coin offering—essentially, clear guidance on what information should be provided to consumers about individual assets—and custody. The Bill provides for applying rules on custody for stablecoin. If we do not have a parallel system, we will start to see some question marks over why those custody rules do not apply to cryptoassets as well.
On investment, there are different ways of looking at the figures from the first half of this year. Some investment, particularly VC, has really held up, but we know that globally we can expect a fall in investment, and we are just starting to see that trickle through. It is therefore a question of how the UK holds up against other countries. We might even see more mergers and acquisitions. At the moment, the pound makes the UK a nice place to come to buy fintech firms, so there may be a bit of difference there. It comes back to maintaining that competitiveness. Our members tell us that the most important thing is to get the Bill through. It provides important powers. If we can strengthen it in some of the areas that I mentioned to the Minister, that is also critical.
The other thing that I would flag is that there are two other pieces of legislation that are either before the House or slightly in limbo. They are also important for the competitiveness of fintech. One is the Data Protection and Digital Information Bill, introducing digital ID and open data, which will really transform the open banking we have into open finance. Australia already has that, so there is a risk of us falling behind. That Bill is also really important.
We have heard a lot about fraud. The provisions in the Online Safety Bill around making the places where frauds are advertised—the social media platforms and search engines—responsible for fraud, as well as requiring banks to reimburse, are critical. That is starting to be a factor in investment decisions. Whatever happens to that Bill, ensuring that those provisions are introduced as soon as possible is key.
Andrew Griffith
Q
Martin Taylor: None.
Andrew Griffith
Q
Martin Taylor: I have acted as an adviser to Gordon Brown, Alistair Darling and George Osborne—eclectic, you might say.
Tulip Siddiq
Q
Martin Taylor: Let me speak plainly, because it is late in the afternoon. I think this is a shockingly bad idea. I think it will certainly undermine regulatory independence —without any doubt—simply because regulators who are subject to the whim of Treasury officials or Ministers are not independent. It is a major erosion of the institutional framework. One could even say it is a corruption of the framework. For me, the institutional framework is hard-won and very precious. I can only suppose that those proposing the powers either do not understand it or do not care about it.
Financial Services and Markets Bill (Third sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Department Debates - View all Andrew Griffith's debates with the HM Treasury
Financial Services and Markets Bill (Third sitting)
Andrew Griffith ExcerptsTuesday 25th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 25 October 2022 - (25 Oct 2022)
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to serve with you in the Chair, Dame Maria, especially after our time together on the Women and Equalities Committee.
The Opposition recognise that enabling the City to the thrive will be fundamental to support the country and to help people through the cost of living crisis. We need a regulatory framework that allows our country to take advantage of opportunities outside the EU, whether by unlocking capital in the insurance sector for investment in green infrastructure or supporting the vibrant UK fintech sector to thrive.
The Minister knows that the Opposition are broadly supportive of the Bill. We welcome clause 1, which will empower the UK to tailor regulation to meet our needs outside the EU, but my questions are similar to those posed by my hon. Friend the Member for Wallasey. What reassurance can the Minister provide that clause 1 will not result in the Government diverging for divergence’s sake and, in the process, unnecessarily revoking rules that might boost the competitiveness of the City or protect consumers from harm? As my hon. Friend said, we want a bit more detail on clause 1.
I also have a few technical questions. Will the Minister confirm whether his Government still plan to revoke all retained EU law by the end of 2023? What assessment has he made of the impact of that date on UK financial services? The date seems a bit arbitrary and we want to know how much thought went into coming up with it. Does the Minister think there is a risk of creating uncertainty and extra costs for the sector by forcing financial services businesses to unnecessarily adapt their business models by the end of next year? A bit of information would help us gain clarity on the clause.
The Financial Secretary to the Treasury (Andrew Griffith)
It is a pleasure to serve under your chairmanship, Dame Maria. The Bill is central to delivering the Government’s vision for the future of the financial services sector. The hon. Member for Hampstead and Kilburn talked about some of the great opportunities that it unlocks. It seizes the opportunities of EU exit, although it is not exclusively about that. It tailors financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and to deliver better outcomes for consumers.
Clause 1 revokes retained EU law on financial services. That clears the way to regulate financial services in a way that works for the UK, building on the model established by the Financial Services and Markets Act 2000. In response to hon. Members who asked how it will operate in practice, the settled position for some time has been that the FSMA model delegates the setting of regulatory standards to operationally independent financial services regulators, within the framework that Parliament sets. That is an internationally respected approach that historically has had support from all sides of the House, and I hope that continues.
As a result of our membership of the EU, the UK has been left with a patchwork—the hon. Member for Wallasey talked about her assessing role as that corpus of law was brought into the UK.
Dame Angela Eagle
I wonder about the sequencing. There is a list in schedule 1 of all the legislation that applies to financial services, lock, stock and barrel. The sifting Committee had oversight of that when we onshored it. Once the schedule is law, it does not all disappear at once, does it? Surely, we keep it there and have a look at things that might cause difficulty and at where we may wish to diverge.
Andrew Griffith
I am coming to the point where I will address the hon. Lady’s comments, but that is the substance of the position. The Bill enables the powers to do that, but we do not seek divergence for divergence’s sake. The whole purpose of the Bill and of giving the Treasury and regulators the necessary powers is to allow a thoughtful process that provides continued certainty to the sector—so no arbitrary retirement—and that allows time for those regulatory rules to be put on the UK rulebook in a way that is appropriate for the UK. That is the substance of what we are trying to do in the clause.
As to the question asked by the hon. Member for Hampstead and Kilburn, there is no arbitrary backstop date. The technical repeal is in the Bill, but the rules will sit on the rulebook, providing valuable certainty and continuity to the sector until such time as the operationally independent regulators decide that it is appropriate to revisit the rules and tailor them to UK circumstances. That is what the clause is intended to do.
Liz Twist (Blaydon) (Lab)
As a member of the European Statutory Instruments Committee, I wonder whether the Minister can offer any assurance that there will be parliamentary scrutiny of the clause in the future. Can he offer any suggestions as to how we might be able to ensure that that takes place?
Andrew Griffith
The hon. Lady is right to talk about the important role of Parliament. We are giving regulators a great deal more power because we are importing a large body of European laws into the UK rulebook, which is one of the reasons why the Government have contemplated the public interest intervention power in the past. The large number of rules—the hon. Member for Wallasey talked about how large that body is, and painted a graphic picture of all that sifting work—does not lend itself to Parliament being the rule setter in each case. Again, that is at odds with the approach to rule setting in the UK historically, but Parliament will continue to have a voice where it feels the need to.
Dame Angela Eagle
I apologise for intervening, but Standing Committee is the time when we can ask detailed questions, so I hope the Minister does not mind my coming back in. [Interruption.] I think there was a Siri outburst there.
Dame Angela Eagle
As a member of the Treasury Committee, I can say that we are trying to get a handle on the scrutiny that will be applied as regulators come to look at these things. One assumes that they will announce that they are reviewing a particular area, and they may come up with some divergences. Regulators have their way of doing things, Government Ministers want particular things, and sometimes Parliament has a different view, particularly if something affects our constituents in unanticipated ways. Given the structure that the Bill sets out, I am trying to get a handle on how Parliament’s view on an issue would be put forward.
Andrew Griffith
I will try one more time, Dame Maria, but I want to emphasise that the approach that the Government envisage being taken is exactly the approach embedded in FSMA 2000. We should not be debating these points ab initio simply by virtue of the work that the Bill does in importing the EU rulebook into UK law. The Treasury Committee, of which the hon. Lady is a member, does valuable oversight work and spends a disproportionate amount of time interviewing the regulators. All the regulatory rules are required by statute to have a period of consultation.
We are straying off the clause, but the role of the Treasury Committee and its Sub-Committee is codified in the Bill to enhance the level of scrutiny. There is a Government proposal—it would be interesting to hear the views of the official Opposition on this—for a public interest intervention power, which would cover precisely the sorts of issues that the hon. Lady’s constituents may be concerned about relating to regulations. I say again that there is no substantive change to the way Parliament scrutinises the independence of financial services regulation, and I hope that is something on which we can all agree on both sides of the House.
In the interest of time, I turn to amendment 44, which would, as the hon. Member for Glenrothes said, mean that retained EU law relating to financial services could not be repealed, other than where it is prejudicial to the interests of consumers, unless replacement legislation is already in place. It is not the Government’s desire to sweep away retained EU law in financial services without ensuring that it is adequately replaced in UK law. I can assure the Committee that there is no arbitrary sunset—
Tulip Siddiq
I watched every minute of the Minister’s appearance before the Treasury Committee. He specifically said that the Government would revoke the retained law by the end of next year, in line with the previous Prime Minister’s policy. Is there now a change in that policy?
Andrew Griffith
That is not the position in the Bill, which does not contain that date. Whether or not the Government’s intention at the time was different, nothing in the Bill says that that will happen. The Government will not diverge for divergence’s sake, because we understand the need for continuity to give financial services companies the confidence that they seek.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
It is good to see you in the Chair, Dame Maria. Does that also apply to financial organisations based in Northern Ireland, Minister?
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Will the Minister give way?
Andrew Griffith
One more time. I am being generous in giving way because we are at the early stages of the Bill, Chair.
Emma Hardy
The Minister is being generous, but as my hon. Friend the Member for Wallasey pointed out, we use Committee stage to scrutinise, question and ask for lots of detail that we would not ask for on the Floor of the House.
The Library briefing states that there is to be
“a ‘transitional period’ of undefined length…for each provision that is to be revoked.”
How will the decision be made on which provisions are to be revoked and when? What is the justification for revoking some at a different time from others?
Andrew Griffith
The Committee will indulge me if this sounds repetitive, but the thrust of the questions is the same: there is no change in the fundamental approach to UK financial services regulation, which is that the pen is held by the operationally independent regulators—primarily under the scrutiny of the Treasury Committee, to which they regularly give evidence—and they use the established statutory consultation procedure. That is the position, and will be the position going forward.
If the hon. Member for Kingston upon Hull West and Hessle would like to table an amendment that would dispense with operationally independent regulators in the UK, so that Parliament holds the pen on rule making, the Government will consider it. That is not the Government’s view of what should happen, however, and I do not believe that it is the view of the official Opposition. I understand the important role of parliamentary scrutiny, but an embedded feature, and one that I hear hon. Members pushing back on or challenging, is that regulators—in consultation with industry, following the statutory consultation process—are that ones that make the rules.
I will make some progress. To address a point made by a number of hon. Members, the Treasury will, as it does now, work closely with the Financial Conduct Authority and other regulators to ensure that the transition from retained EU law to UK regulations is orderly and meets the need of UK consumers, and that there is no gap in protections or relevant rules. As I have said, that work will be subject to the statutory consultation process in the normal way.
Amendment 44, tabled by the hon. Member for Glenrothes, is about consumer protection. I can assure the Committee that clause 3(2)(f)—we are getting ahead of ourselves—specifically enables the Treasury to modify retained EU law to protect consumers and insurance policyholders. Clause 4 enables the Government to restate retained EU law in domestic legislation for the same purpose. Consumers of financial services are already assured of appropriate protections under the UK framework for financial services regulation. Parliament has given the FCA a consumer protection objective—one of its core objectives—to ensure an appropriate degree of protection for consumers, which the FCA is required to advance when discharging its general functions. As evidence of that, the FCA has, among other things, recently introduced a new consumer duty. I hope that assures the Committee that there are already adequate consumer protections, both in the Bill and in the wider body of regulation. I therefore ask the hon. Member for Glenrothes to withdraw his amendment.
I will now explain the approach that clause 1 and schedule 1 take to repealing retained EU law. Retained EU law is revoked by clause 1. Schedule 1 lists the retained EU law revoked by clause 1. Part 1 of the schedule captures retained direct principal EU legislation, which means EU regulations such as the prospectus regulation. Part 2 captures secondary legislation that was made to implement EU directives or other obligations. That includes statutory instruments made under the European Communities Act 1972, which implemented significant pieces of EU law, such as Solvency II and the markets in financial instruments directive, known as MiFID.
Part 3 captures EU tertiary legislation, including delegated regulations, implementing Acts and EU decisions. Part 4 repeals part of primary legislation that relates to retained EU law, in particular part 9D of FSMA 2000, which relates to rules defined in relation to the EU capital requirements regulation, and chapter 2A of part 9A of FSMA, which governs technical standards. Those parts of FSMA will not be necessary following the repeal of the retained EU law to which they relate. Part 5 acts as a sweeper provision: it revokes all EU derived legislation relating to financial services that is not directly listed in the schedule. That does not capture any domestic primary legislation; it simply captures the kinds of EU law covered by parts 1 to 3 but not specifically listed. I therefore recommend that clause 1 and schedule 1 stand part of the Bill.
Peter Grant
I thank all the hon. Members who contributed to the debate. I notice that the Minister did not explain why amendment 44 is a bad idea. He has not given any reason why it would make things worse. He has argued that it would not make things better, would make them only slightly better or would make them better in a way that is not needed.
I take the Minister’s point that later parts of the Bill give the Treasury the power to act in the interest of consumer protection. I want to go further than allowing the Treasury to protect my constituents; I want Parliament to force the Treasury to protect my constituents. We do that by not allowing the Treasury to revoke consumer protection legislation until we, the House of Commons, are on behalf of our constituents satisfied that there is a suitable replacement for it.
I draw the Committee’s attention to part 5 of schedule 1, on page 96 of the Bill. It essentially states, “We have listed 200 bits of legislation that we are going to revoke. There are probably lots of other ones that we have not found yet, so we are going to put in a catch-all clause, so that they will all be revoked as well.” That does not strike me as a good way for the House of Commons to revoke legislation. The Minister has repeatedly said that the Government do not expect all the legislation to be revoked overnight. In fact, the explanatory notes to the Bill point out that the Government think that changing all that EU law will take several years. What happened to, “We got Brexit done”? We have hardly even started on the financial services part of Brexit.
As I said in my opening remarks, although I was against the suggestion that that law needs to be changed, I accept that the United Kingdom has to start to change parts of EU law. The wholesale nature of the change intended in clause 1 is not necessary and is extremely dangerous to the interests of our constituents. Amendment 44 would not necessarily remove all of that danger, and I am still concerned about what we would be left with. I have nothing but respect for the Minister as an individual, but let us face it: if recent history is anything to go by, he will not be there when decisions on revoking legislation are actually taken. Who knows? Maybe he has his phone on just now, and is waiting for that call.
Let us be honest: over the summer, this has not been a Government who have honoured their promises. They have not honoured the assurances made to their own party members so that one Member could become Prime Minister—the Prime Minister who recently resigned. Promises made at the Dispatch Box have been unmade almost before the Minister making them sat down. This Government have severely damaged the tradition that assurances given by a Minister, either here in Committee or in the Chamber, will always be honoured. That does not happen any more. I am afraid the House is entitled to ask for a bit more than might have been accepted a few years ago, when the traditions of this House were actually respected by each and every member of the Government.
The Chair
With this it will be convenient to discuss the following:
Clause 4 stand part.
Government amendment 2.
Clause 5 stand part.
Andrew Griffith
Clauses 3, 4 and 5 create the necessary powers to replace retained EU law, which we have just been talking about, when it is repealed through clause 1. While the Government will act quickly to repeal and reform those areas that offer the greatest potential benefits, some of the retained EU law listed in schedule 1 —this may give comfort to hon. Members—will remain in force for a period following Royal Assent.
Clause 3 creates a power for the Treasury to modify the retained EU law in schedule 1 during the transitional period—that is, the period from the Bill’s receipt of Royal Assent to the point at which the revocation of the instrument is commenced, whenever that is. That allows the Government to make proportionate and targeted—Members might like to note those words—modifications to retained EU law before it is repealed. That ensures that financial services regulation continues to function appropriately for UK markets, and that UK firms are not required to comply with outdated regulations while we put in place the new UK-designed rules.
Clause 4 allows the Treasury to modify and restate the retained EU law listed in schedule 1 of the Bill. The clause gives the Government the necessary tools to move, over time, to a comprehensive FSMA model of regulation. Under that model, the UK’s expert and operationally independent regulators will generally make the detailed rules for firms to follow, within a wider framework set by Parliament and Government. Under the FSMA model, the Treasury sets the regulatory perimeter through secondary legislation by specifying which activities should be regulated. Some elements of retained EU law perform a similar function and should therefore be maintained in domestic legislation. That includes provisions that set the perimeter of financial services regulation in which the regulators will operate, enforcement powers for the regulators, and the ability of the Treasury to make and give effect to equivalence decisions in respect of overseas jurisdictions.
The clause also allows the Treasury to modify the retained EU law that it restates. That is essential for the UK to seize the opportunities of Brexit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and to deliver better outcomes for consumers and businesses. The exercise of that power will almost always be subject to the affirmative procedure. The only exception is where the power is used to make transitional modifications to either EU tertiary legislation or legislation that was originally made under the negative procedure. In this case, it is appropriate to follow previous precedent and apply the same negative procedure.
Clause 5 empowers the Treasury to replace references to EU directives in domestic legislation through a statutory instrument. EU directives are EU legislative acts that do not directly have effect in the UK; however, there are various references to EU directives in domestic legislation, and those should be removed as we move to a comprehensive FSMA model of regulation. That is why the clause gives the Treasury the power to modify UK domestic legislation to replace references to EU directives. Sometimes, however, no replacement will be necessary, and amendment 2 simply clarifies that the power can be used to remove such references without replacement.
The Government will be able to exercise the powers given to them in clauses 3, 4 5 and in amendment 2 only in line with the purposes listed in clause 3(2). Those purposes have been drafted to be similar to the objectives of the FCA, the Prudential Regulation Authority, the financial stability objective of the Bank of England, and the special resolution objectives. That will ensure that, while retained EU law remains in place and constrains the action that regulators can take to further their objectives, the Government can act as appropriate.
I acknowledge that these are relatively broad powers, but they are appropriately constrained by reference to existing objectives, with appropriate parliamentary scrutiny and in relation to retained EU law. It is proportionate to the task ahead of us, which is to seize the opportunity of the EU exit to build a comprehensive model of financial services regulation tailored specifically to UK markets. I commend clauses 3, 4 and 5 to the Committee.
Emma Hardy
If I am correct, there was significant questioning of clause 3 and the powers during transition in the oral evidence sessions, particularly with Martin Taylor, who was the last person to give evidence. As the Minister may recall, he spoke about how this extra power that the Treasury will have could undermine the trust of the markets in the independence of the regulators. I was just looking to see if there was a copy of the Hansard of those oral evidence sessions, but I cannot seem to see one—[Interruption.] I have one now.
Martin Taylor’s significant concerns were, as we have recently, that when the markets believe there is not independence of the regulators, they react accordingly. Has the Minister reflected on that evidence, and what reassurance can he give the markets and others that the Treasury will not exert undue influence over the regulators?
One of the points that stuck in my mind, though I cannot remember who made it, was about the Treasury having the power to intervene when something is in the public interest. One of the witnesses said that that implies that sometimes the regulators will act not in the public interest, given that the Treasury have to intervene in the public interest and exert power and control over them. I wonder if the Minister has reflected further on some of those concerns that were raised during the oral evidence session.
Shaun Bailey
I shall be brief. Broadly speaking, I support the three clauses and particularly clause three on the qualifications it puts on how the Treasury will utilise those powers. I do not know the inner machinations of the Treasury. I know there are people in this room, particularly the hon. Member for Wallasey, who probably know it better than me, but the practical reality needs to be an important part of this as we debate the clauses too.
I hope my hon. Friend the Minister will say to me that the Treasury will not fly solo without consultation with the regulator. Clearly, the Treasury has built a partnership with the regulators, which forms a key part of any sort of work within the scope of these three clauses, particularly amendments of regulation and the qualifications under clause three. I am just keen to stress the point to my hon. Friend that as the Bill progresses and is practically applied, that discourse with regulators is a key part of its implementation.
The hon. Member for Wallasey made a fair point about the loosening of restraints. The assurances we seek from my hon. Friend are just to ensure that the frameworks that in place are robustly monitored and maintained. That will be the key to ensuring that the constraints under which my hon. Friend’s Department is placed as he executes the provisions of these clauses are properly maintained.
Andrew Griffith
I welcome the contributions from the hon. Members for Kingston upon Hull West and Hessle and for Wallasey, and my hon. Friend the Member for West Bromwich West. Both sides of the House are wrestling with exactly the same issue, which is taking what is acknowledged to be an unprecedented corpus of European law, which the Westminster Parliament had no opportunity to have oversight of or change—
Andrew Griffith
I will not give way at the moment. The issue is therefore about docking that corpus into an established framework of operationally independent regulators, with Parliament establishing the perimeter and ultimately having the right degree of scrutiny. That may be through the public interest intervention power that the hon. Member for Kingston upon Hull West and Hessle talked about, but which is not tabled in the Bill at the moment and is subject to continuing debate. That was the main thrust of the witness in the final session of last week’s sitting.
As currently written, clause three does not interfere with regulatory independence. Repealing retained EU law means the regulators will generally, as the default position, take over setting the detailed requirements, replacing the function of the European Commission and the European Parliament. However, that will take time and so we will not repeal those rules immediately. The regulators, under direction and intervention, as currently, from the Treasury Committee, will decide on the areas of most focus.
Emma Hardy
When will the details on those intervention powers be published so we can have a good look at them?
Andrew Griffith
I have previously given the assurance to the Treasury Committee that they will be tabled during the course of the Committee stage of the Bill. That remains the intention.
I have broadly addressed the points. I do not think Hon. Members oppose the Bill’s wording. I understand probing and I welcome the scrutiny of Parliament; we are here to provide precisely that function. However, I hope that I have been able to set out to the Committee’s satisfaction why these powers are necessary, but also the wider context in which they will be operated.
Dame Angela Eagle
I wonder whether the Minister could be a bit more forthcoming about when the amendment will be available, because that will give us a fuller picture of the Government’s decisions on the delicate balance that must be struck. Bearing in mind that the Committee sits for two weeks and at the end of today we will have had 25% of the Public Bill Committee proceedings on this Bill, I hope that the Minister will not publish the amendment at the end of next week.
Andrew Griffith
I am afraid that the hon. Lady will have to accept my previous commitment to the Committee. I also observe that mixed messages have come from the Opposition side of the House, because a lot of the thrust today is that Parliament should have greater ability to scrutinise or to intervene; previously, we have heard the opposite. But I have nothing further to add in terms of the timing.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4 ordered to stand part of the Bill.
Clause 5
Power to replace references to EU directives
Amendment made: 2, in clause 5, page 4, line 37, after “provision” insert “(if any)”.—(Andrew Griffith.)
This amendment clarifies that the power conferred by clause 5(1) to remove references to EU directives can be exercised so as to remove such references without replacement.
Clause 5, as amended, ordered to stand part of the Bill.
Clause 6
Restatement in rules: exemption from consultation requirements etc
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 6 supports the efficient transfer of financial services regulation from retained EU law to the regulators’ rulebooks. As retained EU law is revoked, the regulators will take on significant new responsibilities for making rules in areas where EU law currently exists, within the framework set by the Treasury and Parliament through FSMA and enhanced by this Bill. Part of that wider framework sets out the processes that the FCA, the PRA, the Bank of England and the Payment Systems Regulator must follow when they make rules. Those processes rightly include requirements to conduct cost-benefit analysis, to carry out a public consultation and, in some cases, to consult other regulators. Such provisions are crucial to the functioning of our regulatory system and ensure that the impact of new rules on individuals and businesses is appropriately assessed and considered.
However, there are likely to be occasions when existing rules under retained EU law do not need to be materially altered and so, when the regulators bring forward new rules, they may remain broadly similar to the retained EU law that they replace. In those cases, the rules would not require any real changes for firms, compared with the existing retained EU law. The clause therefore enables the Treasury to exempt the regulators from cost-benefit analysis and consultation in those circumstances where they make rules that are “materially similar” to those currently in retained EU law. That will ensure proportionality and will therefore enable the regulators to focus their resources on those areas where reform will unlock the benefits that arise from tailoring regulation to UK markets.
I should reassure the Committee that the clause is framed as a power rather than a blanket exemption. Even when a regulator is proposing to make rules that are “materially similar” to existing requirements, a full consultation and a cost-benefit analysis may be appropriate.
Clause 7 is a technical provision that defines several terms used in clauses 1 to 6 and schedule 1. It governs how those other provisions should be interpreted. I will briefly set out the major elements of interpretation. First, the clause defines the word “regulator” as referring to the Prudential Regulation Authority, the Financial Conduct Authority, the Bank of England and the Payment Systems Regulator. Secondly, it excludes regulator rules from the definition of EU-derived legislation, meaning that where regulator rules implemented EU directives, they will not be revoked by the Bill. That is a necessary exclusion because many parts of the regulatory rulebook would otherwise meet the definition of retained EU law, but it would not be appropriate to repeal them as they are for the regulators to determine. The regulators already have the necessary powers to delete or modify them as appropriate. I therefore commend the clauses to the Committee.
Dame Angela Eagle
Could the Minister spend a bit of time explaining what “materially similar” means?
Martin Docherty-Hughes
I asked the Minister earlier about Northern Ireland, and SNP and Labour Members would be interested to hear what he means by “proportionality” when it comes to services, EU-derived legislation and what differences there will be between the UK and Northern Ireland. He never mentions Northern Ireland—he keeps talking about the United Kingdom.
Andrew Griffith
To the question asked by the hon. Lady, my understanding is that the terms will have the common law usage. It would be inappropriate for me to try to insert my own definition.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7 ordered to stand part of the Bill.
The Chair
Members will have noted that we now come to clause 2, which the Government requested we debate in this order.
Clause 2
Transitional amendments
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 2 be the Second schedule to the Bill.
Andrew Griffith
We have already discussed the provisions the Bill delivers to allow us to replace the entirety of financial services retained EU law with domestic legislation that is in line with the established FSMA model. The Government will use the powers in the Bill and work closely with the regulators to give effect to that. However, it is important that we act now, where we can, to tailor our regulations to seize the benefits of EU exit and support our world-leading financial services sector. Clause 2 and schedule 2 do just that, making two sets of important and immediate transitional amendments to retained EU law. These are technical and important changes, so forgive me for taking some time to set them out.
First, schedule 2 makes a series of priority reforms to the UK’s regulatory regime for wholesale capital markets as identified through the Government’s wholesale markets review. The regime is predominantly set out in EU-derived legislation collectively known as the markets in financial instruments directive—MiFID—framework. The resilience, effectiveness and competitiveness of the UK’s capital markets rest on strong and effective regulation.
However, the MiFID framework was designed for the EU and intended to ensure detailed, harmonised rules across 28 jurisdictions. Many of the rules are therefore not calibrated optimally for the UK and, in a number of areas, have not delivered the intended benefits. This has led, for example, to duplication and excessive administrative burdens for firms or has stifled innovation. Such rules clearly do not work for a global financial centre such as the UK.
Parts 1, 2 and 4 of schedule 2 deliver the most urgent reforms identified through that process. The reforms will result in a simpler and less prescriptive regime that meets the needs of UK markets while still maintaining the highest regulatory standards. Part 1 of schedule 2 removes unnecessary restrictions on firms’ ability to execute transactions, deleting the share trading obligation and double volume cap. The EU argued that these restrictions would increase transparency in share trading, but evidence suggests that they have prevented firms from accessing the most liquid markets and therefore achieving the best price for investors.
Tulip Siddiq
Has the Minister picked up any feedback from the sector about the Government’s proposed reform to the position limits—a regulation under MiFID II—and the fact that they have not been adequately assessed for commodity market speculation risks? How does he plan to keep that issue under review? If he has heard of concerns, is he planning to address them?
Andrew Griffith
I am happy to stand corrected by the hon. Member for Glenrothes, but I am not happy to relitigate matters that the British people settled, given the chance in a referendum. I hope the hon. Member will reciprocate by looking forwards, not backwards, so that we can go forward with the best financial services regulation for the UK.
The matters raised by the hon. Members for Wallasey and for Hampstead and Kilburn are precisely within the scope of the regulators, and they have been consulted on. The hon. Member for Hampstead and Kilburn raised important points about the commodity market. The regulators are aware of those, and they will remain under constant review. Parliament itself has the ability, as always, to set the perimeter within which the regulators operate. Having addressed those points, I have no further comments.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Schedule 2 agreed to.
Clause 8
Designated activities
Peter Grant
I beg to move amendment 34, in clause 8, page 7, line 4, after “activity” insert—
“(c) the extent to which the activity has the effect of raising finance for any business purpose by means of soliciting financial contributions other than by—
(i) an authorised issue of shares, or
(ii) borrowing from an authorised financial institution.”
This amendment would allow the Treasury to designate and regulate businesses which seek to raise finance by soliciting contributions from the general public other than by an authorised share issue.
First, I welcome the intention behind the clause, because it seeks to close a number of loopholes that have become evident in the way financial regulators are allowed to regulate and in the way that activities come within or fall beyond their scope. Far too often we see dodgy operators deliberately choosing to operate in empty spaces between the remits of different regulators. Too often the regulators seem more concerned about arguing that something is someone else’s responsibility than about taking responsibility themselves.
It is not clear whether the amendment falls within the scope of this Bill or that of the Economic Crime and Corporate Transparency Bill, which is about to start its Committee proceedings, so I am pleased that it has been ruled competent. Essentially, the problem that the amendment is designed to address is what Blackmore Bond and Safe Hands Funeral Plans became. Quite possibly, it was always the intention of the directors that they would move away from being businesses carrying out particular business activities, and towards being businesses of which the main purpose in life was to get the general public to fund those activities. Although Safe Hands was a funeral plan business on the face of it—that was how it was set up—it became a way for the director, who took over a few years before the company collapsed completely, to take money from people who thought their money would be kept safe to pay for their funeral when the time came. The director then used that money to speculate on wildly high-risk and potentially high-profit investments.
Stephen Hammond
It is a great pleasure to serve under your chairmanship, Dame Maria. Will the Minister clarify quickly proposed new section 71S? The power in subsections (3) to (7) is an exceptional power, rather than a regular power.
Andrew Griffith
The amendment seeks to make it clear that offers of non-equity securities to retail investors—for example, as cited, retail bonds—can be brought into regulation through the designated activities regime. That is the important subject we are talking about. That regime—the DAR—has been designed to allow for the proportionate regulation of activities involving interactions with financial markets in the UK and conducted by many that are not traditional financial services firms. In essence, it is the core scope of regulation. The DAR includes a range of activities, such as an activity connected to the financial markets or exchanges of the UK, or an activity connected to financial instruments, financial products or financial investments issued or sold in the UK. Any of those can be designated under the DAR. Our contention is that it is therefore already sufficiently broad in scope. We will discuss that further when we consider clause stand part later.
Offers of non-equity securities to retail investors as proposed by the amendment would fall within the definition of the DAR should the Government wish to designate that activity in future. Indeed, proposed new schedule 6B of the Financial Services and Markets Act 2000, which is to be inserted by the Bill and which provides illustrative examples of the types of activities that His Majesty’s Treasury may designate, includes
“Offering securities to the public.”
I can therefore give my hon. Friend the Member for Wimbledon the comfort that he seeks, in that the provision does extend to crowdfunding, which was his specific point.
Peter Grant
I am grateful for that assurance, but does the Minister take my point that in the examples of abuses that I mentioned, people did not say that they were offering any kind of securities? They said that they were selling funeral plans. Next time, they will be selling school or university fees plans or Christmas hamper plans; it will not be presented as the selling of equities as he and I would understand it.
Andrew Griffith
We will refer to that in more detail when we return to the DAR this afternoon. The DAR is the important establishment of the perimeter. I hear the hon. Gentleman on how we set the scope and those definitions, but the position of the Government is that the Bill already enables the Government to take action to ensure that offers of retail bonds are appropriately captured by regulation.
In April 2021, the Government consulted on the future regulation of non-transferable debt securities such as mini-bonds. In response to the consultation, the Government decided to bring certain non-transferable securities, including but importantly not limited to mini-bonds, within the scope of the reformed prospectus regime. The Government confirmed that we would bring forward our reforms to the UK prospectus regime using the powers in the Bill to replace retained EU law—following commencement. I am therefore confident that the Bill as drafted can achieve what is needed to regulate such activities. I ask the hon. Gentleman to withdraw his amendment.
Peter Grant
I am still not sure that the Minister gets this. I will not push the amendment to a vote, but I sincerely hope that he will see the need for such a measure in financial services legislation or, more appropriately, in the Economic Crime and Corporate Transparency Bill on its way through the House. If the clause as worded had been in place 20 years ago, Blackmore Bond would still have happened, Safe Hands would still have happened, and my constituents and all others would still have been scammed out of hundreds of millions of pounds.
A couple of years ago, when I spoke about Blackmore Bond, I said that I had a horrible feeling—an almost certain feeling—that it was already happening again somewhere else; six months later, Safe Hands collapsed and tens of thousands of people lost all their funeral plan money. I do not know the nature of the business that is being used as a cover for the latest scam, but deep in my guts I know that it is happening now, and that it will happen again next year and the year after. Nothing in this legislation as framed adequately clamps down on that.
I will not push the amendment to a vote, not because I do not think it is important but because I would rather not put it to a vote to see it voted down, which would be a serious mistake by the Committee. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Financial Services and Markets Bill (Fourth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Department Debates - View all Andrew Griffith's debates with the HM Treasury
Financial Services and Markets Bill (Fourth sitting)
Andrew Griffith ExcerptsTuesday 25th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 25 October 2022 - (25 Oct 2022)
The Chair
Before we continue with consideration of the Bill, I have a correction to announce to an earlier Division result. In this morning’s sitting, the Committee divided on amendment 44. The result of the Division was incorrectly announced as two Ayes and 11 Noes. The Noes were, in fact, 10. Apologies for that. Although it does not change the substantive outcome of the Division, I wanted to notify the Committee. The correction will be reflected in the Official Report.
Clause 8
Designated Activities
The Financial Secretary to the Treasury (Andrew Griffith)
I beg to move amendment 22, in clause 8, page 7, line 7, at end insert—
“(7) The financial instruments, financial products and financial investments mentioned in subsection (3)(b) may include cryptoassets.”
This amendment clarifies that cryptoassets may be regulated using the new power in Part 5A of the Financial Services and Markets Act 2000 (designated activities) which is inserted by clause 8 of the Bill. The new provision relies on the definition of cryptoasset inserted by NC14.
The Chair
With this it will be convenient to discuss Government new clause 14—Cryptoassets.
Andrew Griffith
It is a pleasure to serve under your chairmanship, Dame Maria. Cryptoassets and blockchain could have a profound impact across all forms of the financial services sector. We are still on the cusp of this breakthrough technology, and its uses are continuing to evolve. Clauses 21, 22 and schedule 6 will enable the Treasury to establish an effective regulatory regime for digital settlement assets. Those include cryptoassets referred to as stablecoins. The Committee will consider those clauses in a later session.
Following engagement with industry, the Government recognise the need to move ahead with regulating a broader set of crypto activities beyond stablecoins; that includes activities relating to the trading and investment of cryptoassets such as Bitcoin and Ethereum. Through the Bill, we want to ensure that HM Treasury has the necessary powers to deliver that. The Government believe that creating an effective comprehensive regulatory framework for cryptoassets has the potential to unlock innovation in the UK’s crypto sector and to boost growth.
Martin Docherty-Hughes (West Dunbartonshire) (SNP)
What do the Government mean by “innovation” in a piece of legislation? I wonder why such a term is used, because it is so broad. What does the Minister actually mean?
Andrew Griffith
If the hon. Gentleman will let me continue, I can offer some clarification. It is vital that the Government have the flexibility to develop a world-leading regime for cryptoassets in an agile way. The innovation itself comes from emerging new technologies or new uses for those technologies. The role of the Government and the Treasury in this respect will be to create regulatory frameworks that enable their safe deployment, which I hope all Members of the House agree with. Together, amendment 22 and new clause 14 will ensure that that happens.
Dame Angela Eagle (Wallasey) (Lab)
The Minister is quite right that all Governments have to think about how to deal with the emergence of cryptocurrencies, but using that phrase is a bit like using the phrase “genetically modified”. We would certainly want any coin that the Bank of England decided to back to be treated very differently from Bitcoin. Could the Minister say a bit more about how regulating for a piece of electronic money backed by the Bank of England would be different from regulating in a way that would make Bitcoin seem almost reasonable? We know that it is a gigantic gamble that no one in their right mind would want to invest in.
Andrew Griffith
I am cautious of time; this issue would be apt for a debate in itself rather than being discussed as part of the Bill’s technical clauses. Aspects of Bitcoin are already within the perimeter of the regulatory regime. As I said at the beginning of my remarks, that is an emerging area. The hon. Member for Wallasey is quite right that there are trade-offs, and we want to protect consumers while not shutting the regulatory regime off from an emerging set of technologies.
Andrew Griffith
I give way again, but I do not want to turn this into a debate about the underlying societal challenges of an emerging technology; I want us to confine ourselves as much as possible to the Bill.
Martin Docherty-Hughes
I am grateful to the Minister. I disagree that crypto is emerging; it has been around for quite a long time. In terms of parity of regulation and consumers, there are also the producers. It seems that there would be a halo effect: for example, larger companies would control stablecoin, but small or medium-sized companies that could produce stablecoin might be excluded. Will the Minister assure us of the Government’s intention to create equity in the stablecoin market?
Andrew Griffith
It is certainly not the Government’s intention to create anything other than opportunities for different participants to emerge and bring forward products in the sector. Those could include stablecoins, which are asset-backed cryptoassets. Over time, they could include central bank-issued currencies. The Government have indicated a desire to explore that, but have not yet confirmed that the Bank of England or the Treasury intend to issue.
Of course, we must ensure that products already out there being advertised to our consumers are appropriately regulated within the regulatory perimeter. We are not preferring or advantaging one or other part of that, but without the amendment and new clause we would not be able to bring forward the appropriate regulations, which the regulators will consult on with industry in due course. I hope that clarifies the Government’s thinking. Outwith the Committee, it will be appropriate in due course for the Government to update their set of policy objectives for this space. The subject that we are discussing today is somewhat narrower; it is just the remit of the Bill.
Amendment 22 clarifies that cryptoassets are within scope of the designated activities regime introduced by clause 8. We talked earlier about the designated activities regime—the DAR. By bringing cryptoassets within its perimeter for the first time, some of the societal outcomes and concerns that hon. Members have raised can be addressed. If we do not bring them within the perimeter, those concerns cannot be addressed.
New clause 14 clarifies that cryptoassets could be brought within the scope of the existing provisions of the Financial Services and Markets Act 2000 relating to the regulated activities order. The substance is that cryptoassets will be treated like other forms of financial asset: not preferred, but brought within the scope of regulation for the first time. That is the aim of the new clause. It will ensure that the Treasury is equipped to respond to developments in the crypto sector more quickly and deliver regulation in an agile, risk-based way that is consistent with our approach to the broader financial services sector.
The Treasury will consult on its approach with industry and stakeholders ahead of using the powers, to ensure that the framework reflects the unique features, benefits and risks posed by crypto activities. I think that is the assurance that hon. Members seek: that the Government will consult before seeking to use the powers. Any secondary legislation made to bring new cryptoasset activities into the regulatory perimeter would be subject to the affirmative procedure, so each House will have an opportunity to debate the legislation. That gives Parliament the appropriate oversight.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
We welcome Government amendment 22 and Government new clause 14, which we recognise would extend financial protection to cryptoassets. It is a welcome and important move that will help to prevent high-risk cryptoassets from being falsely advertised to the public.
Does the Minister believe that the definition of cryptoassets is broad enough to capture financial promotions of as yet non-existent cryptoassets? I also wanted to ask him how the broad-ranging definition of “crypto” used in clause 8 takes account of the fact that the Bill only brings stablecoins into payment regulation.
Martin Docherty-Hughes
I draw the Minister and his Department’s attention to the work of Dr Robert Herian, who is one of the primary academics on regulation. I am mindful that he says it is the technology that underpins stablecoin and other related cryptoassets that we seek to regulate through the legislation. I welcome that—it is a step forward—but he has also said that the technology
“may offer an opportunity to recalibrate the powerplay between those who would engage in aggressive tax strategies and planning, and those charged with regulating them”.
Can the Minister advise Members whether he believes that this approach to stablecoin and future innovative technologies, which are already there, will enable a recalibration, so that finance is not utilised in some type of tax dodge? Could he reinforce that point? Every time we hear a discussion about stablecoin and cryptoassets, there is a certain element of finance that I do not think anyone here would really support.
Andrew Griffith
On the question posed by the hon. Member for Hampstead and Kilburn, I do believe that the definition is broad enough. If there are specific concerns or use cases that the hon. Member feels are not encompassed, I am happy to take that back offline or to write to her with advice. The intention is clearly to allow sufficient flexibility to broaden the perimeter.
I am not fully familiar with the works that the hon. Member for West Dunbartonshire talks about, but I am happy to become more familiar with them over time. It is clearly not part of the Government’s intention to legitimise what would not otherwise be legitimate or to create the opportunity for issuers to evade responsibility to society. That is not the Government’s aim and objective.
Amendment 22 agreed to.
Peter Grant (Glenrothes) (SNP)
I beg to move amendment 35, in clause 8, page 9, line 25, at end insert—
“(ba) in cases where the regulations make provision for liability, make provision for nominated representatives of organisations against whom liability has been found to be held personally liable for actions undertaken in relation to carrying out a designated activity,”.
This amendment would allow for nominated representatives to be held personally liable for the carrying out of a designated activity when an organisation has been found liable.
This is another amendment that attempts to improve the protection of consumers, small investors and others who in the past have been far too easy prey for unscrupulous company directors and other people in charge of companies. In a number of the recent financial services scams, we have seen that even once the investigatory regulatory process has been completed, which in itself can take five, even 10 years, any attempt to recover money from where it should be recovered from—the pockets of criminals—is frustrated by the fact that the companies at the centre of the scam have at best no money left in their books. Most of the time, they have been placed into liquidation long ago.
Part of that liquidation process is always moving the money into other companies, very often hidden in offshore anonymous companies owned by the exact same person. Effectively, the person who works the scam takes steps to get their money well out of the reach of the UK regulators and enforcers long before the liability of the company is established. Amendment 35 seeks not to require but to allow the designated activity regulations in specific circumstances to make regulations that say, “There will be occasions when individuals who have carried out the misconduct will be held personally liable to people who have suffered.” That means that those who have been scammed in a way that is not covered by the financial services compensation scheme at least have a chance of getting their money back. Possibly more importantly, the amendment would be a further deterrent to those who would carry out such scams, because it will at least partially close down the option of their hiding their ill-gotten gains in a different company, where they are no longer within reach of the regulator.
I appreciate that anything that starts to blur the distinction between a shareholder, a director and the legal personality that is a limited company should be used with caution. I fully understand why, in UK law, a company is its own person with its own legal identity, but there are times when we cannot allow the director of a company to hide behind that—times when natural justice says that if we know who is responsible for people losing their money, and know that they have buckets full of money sitting in a company somewhere, it is perfectly reasonable to say to them, “We will have that money to compensate the people you scammed.”
The victims of Blackmore Bond will never see their money again. I understand that one of its directors is now bankrupt, but the other definitely is not. Most of the victims of Safe Hands Plans will probably not see their money again. Remember, its director bought the company at a time when he knew that it would have to wind up in a year or two; we have to ask why he was so keen to buy it. He is not a poor person; he is extremely wealthy. He just managed to move his money out of that company and into others.
Clearly, the amendment could not be retrospective, but if it was agreed to, it would mean that if any person tried the same dodge in future, their victims could, in court, try to get their money back from the person who stole from them, rather than from the company, which will often no longer exist.
Tulip Siddiq
Later, I will come to my amendment on the Bill’s fraud provisions, but I want to express my support for the intentions behind amendment 35. Does the Minister oppose in principle the idea of nominated representatives being held liable for the carrying out of a designated activity when an organisation has been found liable?
Andrew Griffith
I thank my hon. Friend the Member for West Bromwich West for his reasoned response; I make common cause with him. The issue of liability compensation vexes the sector, and a huge number of regulatory interventions and compensation schemes are concerned with that. I say to all hon. Members that the battle against fraud and for recompense goes much wider than the Bill. It includes the Government’s fraud strategy, our endeavours on economic crime and the activities of various regulators, but I associate myself with colleagues’ remarks.
It is said that hard cases make bad law, and regrettably the Government feel that the amendment cannot be supported. We need to be conscious that limited liability is an important principle in UK law. Measures elsewhere in the Bill—we will come to them later in our discussions on clause 8—allow the Treasury to make regulations concerning liability and compensation in relation to designated activities. That goes some way to answering the question raised by the hon. Member for Hampstead and Kilburn. In principle, the Government are absolutely on the side of victims; sometimes it is just a question of bringing forward the appropriate regulations that will not have unintended consequences.
Given the breadth and variety of activities that can fall within the designated activities regime, we need a tailored supervision and enforcement framework for each type of activity, rather than over-generalising. The Treasury can use powers in the DAR to design and create separate supervision and enforcement frameworks.
Proposed new section 71P, which will be inserted into the Financial Services and Markets Act 2000 by clause 8, allows the Treasury to make regulations concerning liability and compensation in relation to designated activities. That means that the Treasury can make provision in secondary legislation for the Financial Conduct Authority to hold liable individuals—this answers the question—working for a company that is carrying out designated activity, where appropriate. We support that in principle, but it is for the FCA to bring forward the regulations for a particular type of activity.
Proposed new section 71Q to FSMA provides that designated activity regulations—
The Chair
Order. The Minister might want to pause his comments on clause 8 and focus for the moment on amendment 35. We will come to clause 8 stand part shortly.
Andrew Griffith
Thank you, Dame Maria. You are right: many of these matters fall within the domain of clause 8, which we shall discuss shortly.
Peter Grant
I thank Members on both sides of the Committee who have supported the intention behind the amendment. As I said in my opening remarks, I accept that it does not sit particularly comfortably in a financial services Bill under the Treasury, because the Treasury is not usually responsible for the general regulation of businesses. Nor does it sit comfortably in the Economic Crime and Corporate Transparency Bill, which I understand is shared between the Department for Business, Energy and Industrial Strategy and the Home Office. BEIS, through Companies House, is not responsible for the regulation of financial services and will not be responsible for the regulation of designated activities. Nobody is entirely responsible, and that is the problem.
To those who say, “Yes, we agree with you, but this is not the time,” I say, “If not us, then who, and if not now, then when?”. Tomorrow, some of our constituents will be scammed, and more will be scammed the next day. Every day that we delay, waiting for the Government to introduce the perfect clause that has no unintended consequences, causes unintended consequences for our constituents. I accept that the amendment might have unintended consequences, but the Government’s inexcusable delay in closing the loopholes once and for all has already led to unintended consequences. I intend to press the amendment to a vote for that reason.
Question put, That the amendment be made.
Andrew Griffith
I hope that we can dispense with the amendments quickly. They are meant simply to prevent the Government from making amendments to devolved legislation. The clause deals with matters that are reserved to the UK Government. We consider new section 71R in clause 8 as an essential power that gives the Treasury the ability to ensure that legislation works consistently and effectively when changes are brought about by virtue of the DAR. It also permits the Treasury to amend legislation made by the devolved legislations. The position of the hon. Member for Glenrothes on that is clear, but it is not shared by the Government. Although we do not expect to amend legislation from the devolved Administrations, this is a precautionary power.
Let me reply to the hon. Member for Kingston upon Hull West and Hessle. There is no current legislation that we expect to be amended in such a way, but it is possible that legislation made by the devolved Administrations has some references buried within it to aspects of financial services and markets legislation, which is why the power is needed. There is precedent for that approach. Section 144F of FSMA contains a similar power that can be used for legislation made by the devolved Administrations. I hope that that reassures the hon. Member for Glenrothes—although I fear it does not—and ask him to withdraw his amendment.
Emma Hardy
I fear that the Minister did not fully address my point, which is that the clause contains Henry VIII powers. I do not think he clearly outlined exactly when those powers would be used. He has mentioned that there are similar powers in a different piece of legislation, but has not said specifically when the Government would use these incredibly powerful Henry VIII powers to overrule primary legislation.
Peter Grant
I hope that the record of the sitting will clearly indicate that the Minister was given the chance to reply to the hon. Lady’s question—twice, in fact—but chose not to.
It is a fundamental principle of the devolved settlement that the Conservative party insists that it wants to protect that if a decision is made by a devolved Parliament under its devolved powers, nobody should have the right to overturn or amend that decision other than that Parliament. The Minister has said that he is not aware of any circumstances when he would want to use the power, so why not wait until the circumstance arises? Why not speak to the devolved Parliaments then—or, indeed, why have the Government not spoken to them already—to say that devolved legislation is causing problems, and to ask whether they can agree, cross-party and cross-nation, to change it, rather than pushing aside the devolved nations and the devolution settlement, and imposing rules on our people against the devolution settlement? Let us not forget that 75% of our people voted for the establishment of the Scottish Parliament.
I do not agree with everything Senedd Cymru does. It is not my party that is in government in Wales; it will never be my party that is in government in Northern Ireland. I will not agree with everything they do, but I utterly respect the rights of those Parliaments to legislate in the best interests of their people. If the Minister is saying that he does not think that he will be able to trust the devolved Parliaments to make a sensible decision if and when that becomes necessary, we have a big problem.
The Chair
With this it will be convenient to discuss that schedule 3 be the Third schedule to the Bill.
Andrew Griffith
Clause 8 inserts a new regulatory regime into FSMA called the designated assets regime. I feel that it is already becoming an old friend; we have referred to it a number of times this sitting. Once retained EU law relating to financial services is revoked, the UK’s regulatory framework must be capable of regulating activities that are currently subject to retained EU law in a proportionate manner suited to UK markets. Under the FSMA model, firms must be authorised in order to conduct regulated activities. The Treasury determines, with Parliament’s consent, which activities are regulated by adding them to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the RAO. The type of activities in the RAO are those carried out by banks, and by insurance and investment firms, such as accepting deposits or offering investment services. Authorised firms are regulated as a whole entity. That means that regulators can make rules relating not only to the regulated activity, but to the wider activities of the firm.
Where retained EU law relates to activities covered by the RAO, the regulators already have sufficient powers under FSMA to replace any rules as appropriate. However, there are activities regulated under provisions in retained EU law that are quite different. For example, in retained EU law, there are rules relating to entering into certain types of derivatives contracts. A car manufacturer may enter into a metals derivative contract to protect itself from price fluctuations in the metal that it requires for manufacturing. It would be hugely disproportionate to regulate the car manufacturer entering into that contract in the same way as a bank that offers current accounts or mortgages to customers. However, there is no mechanism in FSMA for regulating these activities in a proportionate way. That is why the Bill introduces the DAR. Under the DAR, the Treasury can designate these activities and make regulations in relation to them, or prohibit them where appropriate.
The Government expect that activities will be designated for regulation under the DAR through the affirmative procedure in the vast majority of cases. However, there is an exemption where, for reasons of urgency, the Treasury must act quickly. The Government are content that this is the appropriate procedure. It is similar to the procedure for adding activities to the RAO. The FCA is already responsible for ensuring compliance with the rules set out in retained EU law, and the clause will ensure that the FCA can also determine what rules are appropriate in future. As the DAR will be a new part of FSMA, the FCA will be required to exercise its responsibilities under the DAR in line with its statutory objectives, which include the new growth and competitiveness objective. The FCA will need to be able to supervise and enforce designated activity regulations and rules.
Emma Hardy
I refer the Minister back to a point I made about the DAR and the response to the consultation by His Majesty’s Treasury. Some of the respondents asked for clarity on exactly what activities would be regulated by the DAR. Can the Minister provide that in writing during today’s sitting, or bring further details to another sitting?
Andrew Griffith
I will do my very best to respond to that question. It is a point of detail. Today we are putting frameworks in place to try to legislate for as many outcomes as possible. By definition, that means that there is not a definitive list, but I will write to the hon. Lady and share the letter with the Committee.
To that point, given the breadth and variety of activities that may be designated under the DAR, a tailored supervision and enforcement framework will be needed for each one. We all recognise that we might want to regulate insurance in a different way from investment banking.
Proposed new section 71Q of FSMA therefore gives the Treasury the power to confer appropriate powers on the FCA for the purpose of supervising and enforcing regulations and rules relating to designated activities. Some activities that the Treasury may designate already have criminal offences attached to them under FSMA—for example, part 6 of FSMA contains two offences related to the offering of securities. Proposed new section 71Q will allow HM Treasury to maintain an existing criminal offence of offering securities and to modify it, including by adjusting the scope of the offence to reflect the scope of the new designated activity. I imagine from comments made that that would get broad support.
The Government will be able to apply and modify only criminal offences that already exist in FSMA. The provisions will not enable the Treasury to create a wholly new criminal offence relating to this activity. Schedule 3 sets out proposed new schedule 6B to FSMA. The schedule is inserted by clause 8 and lists examples of the types of activity that the Treasury may designate using the power introduced by clause 8. That may be the source of my response to the hon. Member for Kingston upon Hull West and Hessle. At this stage, schedule 3 is indicative only. The Government intend that a number of market activities currently regulated under retained EU law will be designated for inclusion in DAR. It is anticipated that a wider range of activities will be designated in future to ensure that the regime supports an agile and proportionate approach in the UK.
Martin Docherty-Hughes
Will the Minister help with a quick clarification on proposed new section 71Q? It refers to “conferring powers of entry”. Would that be on His Majesty’s Revenue and Customs? It has UK-wide powers of entry. Does that refer solely and wholly to HMRC, or does it refer to others who might require entry under the legislation?
Andrew Griffith
I will write to the hon. Gentleman to confirm that. It is important that our model of financial services regulation be responsive to emerging opportunities and challenges, and that includes those that can be regulated in future but are as yet unknown. Hon. Members can understand the thrust of what we are trying to do through clause 8 and schedule 3.
Andrew Griffith
That is not the intent of the Bill. Its intent is essentially to future-proof existing criminal law under FSMA, but to modify its scope as new activities fall within the designated regime.
Question put and agreed to.
Clause 8, as amended, accordingly ordered to stand part of the Bill.
Schedule 3 agreed to.
Clause 9
Rules relating to central counterparties and central securities depositories
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Retained EU law contains frameworks to regulate a number of entities that facilitate the proper functioning of financial markets. These entities are collectively referred to as financial market infrastructure, or FMI.
FMI helps to maintain stability in the financial services sector and performs critical functions that help make markets safer and more efficient. To establish a comprehensive FSMA model, the regulators will need the power, when retained EU law is revoked, to make rules to appropriately supervise and oversee FMI. That is provided for in the clauses that we are considering.
Clause 9 gives the Bank of England, which I will refer to as the Bank, a general rule-making power over central counterparties and central securities depositories, or CCPs and CSDs. CCPs sit between two parties to a trade and ensure that if either firm defaults on its obligations, the CCP can fulfil the firm’s trade. This reduces the possibility of contagion to the wider financial system. CSDs settle securities trades—that is, they complete the trade by transferring ownership of the assets, such as shares or bonds, between two parties.
The clause delegates the setting of regulatory standards to the Bank as the expert, operationally independent regulator. That is in line with the overall approach taken to the financial services regulators in the Bill. With the new rule-making powers provided for in the clause, the Bank will be able to adapt the regulatory regime in an agile and responsive way—for example, to take account of changing market conditions, address emerging risks or facilitate innovation. This will be accompanied by appropriate accountability arrangements that will apply to the Bank when it is exercising these new powers; we will discuss those when we get to new clauses 43 to 45.
The clause also enables the Bank to apply some or all of the domestic rulebook to overseas CCPs that are systemically important to the UK.
Peter Grant
Can the Minister give us an indication of whether there are existing institutions that he believes would be regarded as CCPs that are systemically important to this country? Apart from the obvious factor of the amount of business that a body does with the UK, what other factors will be taken into account when deciding whether to designate an institution in that way?
Andrew Griffith
That is a matter on which we would consult and be advised by the Bank. The Bank is the body with the expertise in this space. It would not be appropriate to try to pre-empt its views. This is an emerging area, and we have to be cognisant of how global clearing houses are developing. The UK hosts a number of the most systemic, but that market share cannot always be assured. This provision allows the regulation to follow the market share, or indeed follow the emergence of new CCPs and new clearing houses. The provision reforms the overseas framework so that the Bank has the power to apply domestic rules to CSDs and non-systemic CCPs as well.
Clause 10 provides the Bank of England with the power to direct individual CCPs and CSDs, requiring them to take action to comply with their obligations or to protect financial stability. Using this power, the Bank may either impose a new requirement or vary or cancel an existing one. The power is equivalent to those that the FCA and the Prudential Regulation Authority have under FSMA in relation to authorised firms, and it contains the same procedural safeguards. That includes, for example, a right of appeal.
Clause 12 ensures that the Bank’s regulation of CCPs and CSDs is undertaken in a way that is consistent with the wider financial services regulatory framework under FSMA. It does this by restricting the general power of direction, which the Treasury currently has over the Bank, to provide that it does not apply to its regulation of CCPs and CSDs. That is in line with the existing exemption that covers the exercise by the Bank of its functions as the prudential regulatory authority, in line with the PRA’s position as an independent regulator.
Turning to clause 11, the FCA is responsible for the supervision of certain other entities that help underpin the proper functioning of markets. Clause 11 gives the FCA general rule-making powers over two types of entity: data reporting service providers and recognised investment exchanges. Recognised investment exchanges are bodies such as the London stock exchange that are recognised by the FCA to facilitate the buying and selling of financial instruments and so help drive investment. Data reporting service providers make trade information public to help market participants make informed investment decisions. They also ensure that the FCA has the information it needs to monitor financial markets and protect against insider dealing and other forms of market abuse.
Despite their importance, both data reporting service providers and recognised investment exchanges currently sit outside the core FSMA regime, as they are largely regulated under retained EU law. To ensure that the FCA has sufficient powers to effectively regulate these entities once retained EU law is repealed, clause 11 brings them into the FSMA framework, in line with the approach taken for CCPs and CSDs in clause 9.
Tulip Siddiq
On clause 9, how does the Minister think third country central counterparties and CSDs will be adequately assessed by the Bank of England for the risks they pose to the UK’s financial stability?
I also have questions on clause 12. I am not sure if the Minister wants to answer those now or to come back to them.
Dame Angela Eagle
My questions seek some reassurance from the Minister, since I think these clauses are broadly welcome and, indeed, vital in the context of the Bill. One would not want to have this system without giving extra powers to the Bank, the Prudential Regulation Authority and the Treasury.
Problems in some of these markets can erupt suddenly and pose substantial, systemic problems. We saw it happen just a couple of weeks ago in the pensions industry with the sudden increase in gilt prices, which suddenly made a lot of the investment strategies of our defined benefit pension fund managers quite perilous. We can all commend the Bank and the regulatory authorities for taking action to try to stabilise the situation with liquidity in the pension funds. I am sure that all of us want to be content that the structures in place for dealing with these kinds of eruptions will be as implied in these three clauses.
Given the extra powers for the regulatory authorities in the Bill, will the Minister give the Committee some comfort about the extra resources that will be made available to the regulators for their extra oversight? The Bill implies that there is much more work for regulators to do across the piece, and it is very important in the vast majority of cases. I worry that they will not be given enough resource to keep a proper eye on the very fast-moving, complex, interactive system that they will be charged with regulating, keeping an eye on and, if required, intervening in, for reasons of contagion or systemic threats to that very interrelated system. If they do not catch that early enough, we know where it can end. I would appreciate some comfort from the Minister, if he can provide it, on the resourcing implications of the powers. Is he satisfied that the resources are there to do the job adequately and properly?
Andrew Griffith
I will try to respond to all the points in turn. First, in answer to the hon. Member for Kingston upon Hull West and Hessle, clause 12 is not an intervention power. It clarifies that the power to direct is effectively removed in respect of the new regulations around CCPs. In many ways, it will give the Bank of England the independence and autonomy that the witnesses she cited sought, although in a more general context. There is a separate point, which is probably not in order for today, about the intervention power, as and when that is tabled. However, that is not the purpose of clause 12, which is a clarifying point in respect of the Bank of England.
The hon. Member for Wallasey raised the issue of resources. The Bill gives the regulators, including the Bank, powers to fund themselves using a levy. That is a stronger financial position than they are in today. The hon. Member knows that I am relatively new—that could change during the sittings of this Committee—but in all my interactions with the regulators, they have expressed themselves satisfied with the resources available to them, but we must be collectively careful about the burdens that we place on them and ensure that those are appropriate.
On the question of what is systemic and whether it is right to regulate overseas CCPs and CSDs, the thrust of what the Bill tries to achieve, and the broad thrust of the debate, is that those are precisely matters that should be decided by the operationally independent regulators in this domain. Although I and others may have views, it will be for the Bank to use its new powers—as now, and as in other domains that are in scope—in consultation with the Treasury, Parliament and others.
Peter Grant
To clarify, if the Bill is enacted as it stands, does the Bank have the option to create a different regulatory regime for overseas parties than it has for those that are based in the UK, or is the intention that the same set of rules will apply regardless of where the organisation is based?
Andrew Griffith
If an organisation is overseas, the approach will be that the Bank, in using those powers, will defer to the overseas regulator where that is appropriate, as it does now. I would not want us to fetter the Bank. It is for the Bank to lay out how it proposes to use the powers that the Bill enables, so as to be able to make the appropriate regulation that it feels comfortable with. I think we can all agree that this is a prudent enhancement of its powers. It broadens their scope, and allows the Bank to follow the risks to this country in a CCP, wherever those may lead it.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clauses 10 to 12 ordered to stand part of the Bill.
The Chair
Before we come to the next group, could I ask the Parliamentary Private Secretary to remove the brown paper bag? It is not appropriate to have our lunch out on the side.
Clause 13
Testing of FMI technologies or practices
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 4 be the Fourth schedule to the Bill.
Amendment 38, in clause 14, page 19, line 35, at end insert—
“(d) the views of the appropriate regulator in response to the consultation mentioned in subsection (5).”
This amendment would ensure that the views of the relevant regulator are included in any Treasury reports on FMI sandbox arrangements.
Clauses 14 to 17 stand part.
Andrew Griffith
Clauses 13 to 17, along with schedule 4, enable the Treasury to set up financial market infrastructure sandboxes. One of the objectives of the Bill is to harness the opportunities of innovative technologies that could disrupt financial services. This is especially important for FMIs, which play an important role in providing the networks and services that underpin financial markets. However, there are currently barriers and ambiguities in legislation that prevent firms from using certain new technologies in FMIs or that prevent the benefit of new technologies from being fully realised.
An FMI sandbox is a safe testing environment that will help address this issue by providing temporary modifications to legislation to participating firms where existing legislation does not accommodate a new technology or practice. Those firms can then test and adopt innovative new FMI propositions while being subject to restrictions on their activities and close oversight from regulators. The provision in these clauses will allow the Treasury to set up FMI sandboxes, and I will now set out what each clause does specifically.
Clause 13 will allow the Treasury to set up an FMI sandbox via a negative statutory instrument that will set out the type of firms that are allowed to participate in a sandbox, the activities they can conduct, the temporary modifications to legislation that will be applied to participants, and the duration of the sandbox. Schedule 4 includes an illustrative list of provisions that could be included in a statutory instrument setting up an FMI sandbox, in order to provide guidance regarding how the powers are intended to be used.
To facilitate parliamentary scrutiny, clause 14 requires the Treasury to prepare and publish a report to be laid before Parliament on the arrangements for each FMI sandbox that is created under clause 13, having consulted the regulators. This will include an assessment of the effectiveness and/or efficiency of the FMI sandbox and how the Treasury intends to make permanent changes to the legislation.
Amendment 38 would explicitly require the Treasury to publish the detailed views given by the FCA and the Bank in response to the consultation. The Treasury is committed to ensuring that the regulator’s views are fully taken into account and represented fairly when any permanent changes are intended to be made to legislation. However, it is essential that during this engagement, regulators are able to express their views candidly, particularly about specific participants, and share commercially or market-sensitive information. It would not be appropriate for that to be published. I therefore hope that the hon. Members for Glenrothes and for West Dunbartonshire will not press their amendment to a vote.
Clause 15 will allow the Treasury to make permanent changes to the relevant legislation based on the outcomes of a sandbox on an ongoing basis. Clause 17 sets out the relevant legislation in more detail. As an FMI sandbox will be designed to test the right regulatory approach to new technologies, clause 15 enables the Treasury to legislate to set different requirements from those within the sandbox. This will ensure that if risks or unintended consequences are identified during the sandbox, these can be appropriately reflected in ongoing legislative changes. Where the Treasury proposes amending primary legislation, the Bill requires that the affirmative procedure is used. Where the legislation being amended is not itself primary, a negative procedure will be used instead. This is to ensure that Parliament gives the greatest scrutiny to the legislative changes that are the most significant—in other words, those that fall within primary legislation.
Clause 16 is intended to enable the Treasury to confer powers on the regulators as part of any statutory instrument setting up a sandbox, so that they are able to operate a sandbox effectively. It also sets out who the Treasury needs to consult before exercising the powers in clauses 13 and 15.
Finally, clause 17 sets out how the various terms and concepts used in the FMI sandbox clauses are to be interpreted. It includes a list of legislation that the Treasury is able to temporarily modify for firms participating in a sandbox, which provides an important constraint on the scope of the Treasury’s powers in relation to the FMI sandbox in the Bill. The Treasury is able to add to the list of legislation via a statutory instrument by using the affirmative procedure to ensure parliamentary scrutiny if the Treasury wishes to bring further legislation into the scope of a sandbox. To summarise, the measure will be a hugely valuable way for financial markets to innovate and enable industry regulators and the Government to learn and change in response to practical experience. For those reasons, I recommend that clauses 13 to 17, and schedule 4, stand part of the Bill.
Emma Hardy
In relation to the sandboxes, and particularly in relation to clause 14, I draw hon. Members’ attention to the written evidence submitted by Spotlight on Corruption—in particular, if anyone wants to read along with me, paragraph 12. The recommendation from Spotlight on Corruption is that the Government should update their regulatory impact assessment
“to ensure that an analysis of the economic crime risks is included as part of the evidence base in each assessment.”
That seems incredibly good and sensible advice. As part of the way someone assesses how effective these sandboxes are, they could look at the potential economic crime risks. Spotlight on Corruption goes on to say that the RIAs should
“include a standalone ‘economic crime risks associated with this intervention’ section based on both quantitative and qualitative indicators. It should also include an assessment of the costs/benefits, and wider impacts as well as establishing how the Treasury intends to monitor and evaluate risks after the regulations come into place.”
If we are going to produce a report on how effective this measure is, one of the key things that I think we can all agree on is the need to look at economic crime. Although I have not tabled an amendment to that effect today, I hope that the Minister will look at the issue seriously and perhaps it is something we can return to on Report.
Andrew Griffith
I thank the hon. Member for Hampstead and Kilburn for her party’s support for these measures, which I hope will be a useful addition to the financial services industry.
I will try to answer some of the questions. By their very nature, there is a discomforting element to trying to create safe spaces for innovation. Let me reassure the Committee that all the existing safeguards, whether they relate to economic crime or to consumer protection duties, relate to any changes that are, as it were, released into the wild after the period of experimentation. There is no attempt to create a back door or any diminution in the high quality of financial regulation throughout.
The overall level of scrutiny for this House was raised by the hon. Member for Wallasey. The statutory instrument would be laid in respect of each potential use of the sandbox. It would not be right for me to fetter whether that will be used in serial or in parallel, so we have to contemplate that there could be multiple sandboxes operating in some really quite separate domains at any one point in time. I do not think that would be a bad thing. In many ways, the test of this legislation’s success is that the sandbox is indeed used, and within that process we should contemplate that many of those pilots should fail, just as many should succeed; that is the nature of risk and innovation.
That statutory instrument would set out what categories are in scope of the sandbox, what sort of securities or products are included within it, traded or settled, the platform involved and what limitations there would be. There was a question about the minimum period of time. That would all be laid out in response to the individual applicant to use the sandbox, so that would be determined, and it would be reviewed by the regulators as part of the process of the Treasury laying the statutory instrument. It could well include any additional regulatory oversight, and the important issue of economic crime and prevention. However, to be clear, that is not the Government’s intention, nor would it be looked on favourably if anyone attempted to use that to create back doors for economic crime. The level of scrutiny of any pilot in a sandbox is generally higher than the level of scrutiny intervention from regulators in general.
Emma Hardy
I do not think that the evidence submitted by Spotlight on Corruption in any way implied that it would be the Government’s intention for these sandboxes to bring about economic crime. However, I think we all accept that economic crime is on the rise. Spotlight on Corruption specifically asks for it to be stipulated that the associated economic crime risks are looked at as part of the report into sandboxes. I would be grateful if the Minister could take that point away to consider further.
Andrew Griffith
I am very happy to take that point away and, if appropriate, I will write to the hon. Lady in response. The construct of regulation in this space is that we have a level of trust in our operationally independent regulators, and prevention of crime and of harm to consumers is at the core of the regulatory structure. She should have some comfort that that issue would not be overlooked.
I will try to give a little bit of colour regarding the intention to use the sandbox. It is the Government’s intention that the sandboxes be used rapidly after Royal Assent; indeed, consultations on the matter have already indicated a strong appetite for things such as the use of distributed ledger technology, both for settlement and for other aspects of the financial regime. Those things would be seen by the Government as an enhancement in many respects—whether dealing with settlement risk, credit risk or the speed of transactions. That is an example of the sort of use case that we would expect to be brought forward.
We talked about the regulatory outcome. The relationship with regulators was one of the first points raised. The Bill contains a provision to ensure that the regulators’ views are taken into account. The regulators will, de facto, have a very strong level of scope. Although we would not want to cut off participants by virtue of not being authorised—that would be to cut ourselves off from a source of potential innovation—it is expected that any participant would have had interaction with the regulators prior to entering a sandbox. As some hon. Members know, the regulators interact intensively with bodies such as the Treasury Committee, which we would expect to have a heightened level of interest in these matters.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Schedule 4 agreed to.
Clauses 14 to 17 ordered to stand part of the Bill.
Clause 18
Critical third parties: designation and powers
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Financial services firms increasingly rely on a small number of critical third parties to provide services, such as cloud computing providers. Although outsourcing can have many benefits, the growing dependence of financial services firms on this small pool of critical third parties also carries risks. A failure or disruption at a critical third party could have systemic impacts affecting market confidence and threatening the stability of our financial system. To mitigate that risk, the Bill grants the financial regulators powers to oversee the services that critical third parties supply to the financial sector.
Clause 18 gives the Treasury the power to designate a third party to the finance sector as critical, bringing the services provided by that third party into the regulator’s oversight. Only third parties whose failure could have a systemic impact on the sector can be designated in that way. Designations will be done in consultation with the regulators, taking into account a clear set of criteria. The first is materiality—that is, how important the services are to the delivery of essential services, such as making payments. The second is concentration—the number and type of firms that rely on that provider. The clause provides the FCA, the PRA and the Bank of England with new rule-making powers to ensure the resilience of services provided by critical third parties. The regulators have published a discussion paper setting out how they may use the powers.
Clause 18 also grants the regulators a power of direction and targeted enforcement powers. As an ultimate sanction, the financial regulators may prevent or limit a critical third party from providing services to the financial services sector. Clause 19 then makes the necessary consequential changes to FSMA to ensure that the regime functions properly, in particular in relation to the Bank of England’s ability to make rules. This approach is flexible and proportionate, addressing the systemic risk posed by outsourcing to keep the UK’s financial system safe, while targeting only the services that critical third parties provide to the finance sector. I therefore recommend that clauses 18 and 19 stand part of the Bill.
Tulip Siddiq
On clause 18, could the Minister set out the range of disciplinary powers that the Bank of England, the FCA and the PRA have at their disposal short of preventing a critical third party from providing new or current services to the financial services sectors? I want some reassurance from him that the clause will not produce an all or nothing approach.
Peter Grant
Again, I do not oppose the clauses, but I do have a couple of questions. First, the Minister pointed out that the ultimate sanction that the regulator can take is to prevent somebody from carrying out the actions of a critical third party. However, given that it becomes a critical third party because the system would collapse without it, is that not the nuclear button that can never be used? Simply trying to enforce the protective regulation could cause more damage than allowing the issue to continue. I understand that it is a difficult issue to square, but is there any proposal to, for example, introduce new criminal offences? Rather than being placed in a position where we would have to damage a system in order to protect it, are there proposals at least to give the option of taking criminal action against the individuals concerned?
I understand why the Bill does not go into detail about the kind of directions and requirements that might be appropriate, but will the Minister reassure us that there is no intention to use the powers to restrict the rights of people working for critical third parties to take industrial action, should they consider it to be important? That would take us into a completely different area of legislation, but the Bill does not say that the Government cannot do that. I would appreciate an assurance from the Minister that that will not happen as a result of the Bill.
Finally, proposed new section 312N refers to immunity. Certainly we must ensure that, if an organisation acts in accordance with the requirements of the regulator, they cannot be sued simply for doing what they were required to do. Is there a potential issue that they could be sued by an overseas party in an overseas court? Has the Minister considered how we might prevent that from becoming an issue? Clearly, this Parliament cannot legislate to give anybody immunity from being sued elsewhere, and there are people who will tout around the jurisdictions all over the world to find somewhere they can lodge a legal action. Is the Minister concerned that the inability to give international immunity might mean that some of the provisions become less effective than we might have hoped?
Andrew Griffith
Let me try to answer hon. Members’ questions. Nothing in the clause restricts people’s ability to take industrial action. That is not in scope. The powers are not anticipated as analogous to existing ones elsewhere, and the provision is not intended to be all or nothing. The powers are in essence an extension of scope into this domain and would relate to activities such as reviewing the senior manager regime, the ability to compel the requirement of information and looking at things such as resilience. They are not designed to be binary in that respect.
The hon. Member for Glenrothes made a point about the fact that the functions have been designated as critical, but that does not necessarily mean that they are monopolistic. With respect, while that is an important consideration, which we would expect the Bank, in this case, to take into consideration, it is also perfectly possible that, in the case of cloud providers, for example, a number of providers offer identical services. If one was not able to demonstrate a degree of resilience but another was, it would be possible to direct that one ceases to be used without causing the sort of systemic risk that the Bill seeks to prevent. I will write to the hon. Member in respect of what is a complex question about international immunity in law. I hope that he will respect the fact that I should not answer that on my feet this afternoon.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Clause 19 ordered to stand part of the Bill.
Clause 20
Financial promotion
Peter Grant
I beg to move amendment 39, in clause 20, page 31, line 37, at end insert—
“(1A) Where the content of a communication for the purposes of section 21 has not in the first instance been approved by an authorised person, approval by another authorised person may only be sought the FCA’s approval for the other authorised person to do so being provided in writing.”.
This amendment would prevent operators from “shopping around” for approval from an authorised person where one authorised person has not given approval, unless the Financial Conduct Authority permits this.
Dame Angela Eagle
Obviously this is an extremely important part of the Bill because it creates a regulatory gateway for financial promotions. We know from what the FCA has reported that there is an issue with misleading financial promotions. We all know it from our constituency casework; we know it from some of the scandals that have been carried out successfully.
Part of the trouble is the closeness to the perimeter of regulation. A firm can have part of itself in the perimeter, while other parts are outside the perimeter, but in the promotions, it gives the impression that all the firm is regulated and all of what it is doing is within the perimeter, while advertising in a very misleading way things that are actually unregulated and therefore much riskier. We know that a lot of scams have happened that way. The way in which the FCA tries to deal with this situation is like trying to hold back the tide. The fact that so many of the promotions that it has managed to get a handle on—4,226 of them—have been withdrawn or amended to make them less misleading demonstrates that the FCA is doing its best. However, members of the Committee know that there is a constant battle with scammers, who constantly change how they present information to consumers and potential consumers through an ever-increasing number of gateways, even on things like TikTok. It is difficult for any regulator to get a handle on that, so anything that helps to battle the problem more effectively will be welcomed by all of us.
Will the Minister explain in more detail why he thinks that this is the right way to proceed, and how effective he thinks the powers in clause 20 will be in tackling the problem? We know—I think we will come on to this later in our proceedings—that cracking down on fraud more effectively will also be important. With the financial promotions and unauthorised third parties that deal with granting permissions, we know that the current regime can cause problems. We know that it is failing and that the FCA cannot be expected to do all this work with the resources it has, so will the Minister go into detail about how effective he thinks the measures will be, and say how he will be assessing this approach’s effectiveness? Clearly we want a reduction in the amount of scamming and fraud, and the number of promotions that are misleading or downright lie about the nature of the products they are pushing, so I will be interested to hear how the Minister sees clause 20 as the solution to this difficult problem.
Andrew Griffith
I thank the hon. Member for Glenrothes for raising the issue, which I understand is of concern to Members on both sides of the Committee. I also thank him for indicating that he will not press the amendment to a vote. I think the reason for that is that clause 20 is a genuine enhancement of the regulatory infrastructure. It creates a new, two-tier regulatory structure that speaks directly to the issue of those who have been authorising harmful financial promotions. It does so by introducing a new assessment by the FCA that requires that they be assessed as fit to do so. I will come on to what that could look like in a moment.
We understand what financial promotions are. They are inducements or invitations to engage in investment activity in its broadest form.
Peter Grant
The Minister says that we all understand what financial promotions are, but do we really? Is the existing definition agile enough? One of the dodgy directors I mentioned earlier has now set himself up on TikTok as a lifestyle guru. Everybody knows he is doing this to groom people. He will say to someone, “I’ve got this brilliant investment plan that nobody else knows about. Why don’t you do it?” Does that sort of thing count as a financial promotion or not? Quite clearly it is an inducement and an attempt to get someone to sign up to an investment that may or may not be legitimate.
Andrew Griffith
I am not familiar with the precise incident that the hon. Gentleman talks about. We have to reflect that there will be a continuum from someone being a lifestyle guru to someone promoting a financial product. Our job as legislators is to understand where those cliff edges lie and to bring forward procedures that mean that the scope is laid in the right place, so that cliff edges are legislated for appropriately.
Financial Services and Markets Bill (Fifth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Department Debates - View all Andrew Griffith's debates with the HM Treasury
Financial Services and Markets Bill (Fifth sitting)
Andrew Griffith ExcerptsThursday 27th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 27 October 2022 - (27 Oct 2022)
The Chair
With this it will be convenient to discuss the following:
That schedule 6 be the Sixth schedule to the Bill.
Clause 22 stand part.
The Financial Secretary to the Treasury (Andrew Griffith)
Good morning, Dame Maria. It is a pleasure to serve under your chairmanship once again. I thank all hon. Members who are with us again today.
The Government believe that certain cryptoassets and distributed ledger technology could drive transformational changes in financial markets, offering consumers new ways to transact and invest, and that such technology could pose risks to consumers and financial stability. The Bill therefore allows the Government to bring digital settlement assets inside the regulatory perimeter.
In the first instance, the Government are focusing on fiat currency-backed stablecoins used primarily for payment. These are a type of digital settlement asset that could develop into a widespread means of payment and potentially deliver efficiencies in payments. Clause 21 extends the scope of payment systems legislation so that digital settlement asset payment systems and service providers are subject to regulation by the Bank of England and the Payment Systems Regulator.
Today, the Bank of England regulates systemic payment systems and service providers to those systems, where the Treasury makes an order recognising a particular payment system. That is subject to a high bar. Among other criteria, the Treasury must be satisfied that a system’s potential failure may cause disruption to the stability of the financial system.
Clause 21 also extends the scope of the Financial Services (Banking Reform) Act 2013 to ensure that relevant digital settlement asset payment systems are subject to regulation by the Payment Systems Regulator. That will help to protect user interests, promote competition and encourage innovation.
The changes made by clause 21 and schedule 6 will ensure that digital settlement asset payment systems and service providers are regulated to the same high standards as traditional payment systems.
Clause 22 allows the Government to bring digital settlement assets into the UK regulatory perimeter where they are used for payments. Secondary legislation under this clause could give the regulators powers over payment systems and service providers in order to mitigate conduct, prudential and market integrity risks. It could also allow the regulators to place requirements on firms in relation to appropriate backing assets and capital requirements to manage potential stability risks.
Given the nascent and rapidly evolving nature of the cryptoasset market, these provisions give the Treasury powers to amend the definition of “digital settlement asset” through secondary legislation. That is necessary to ensure that regulation can keep pace with the fast-moving nature of the market. The affirmative procedure will apply to any statutory instrument that seeks to amend the definition.
Clause 22 will also allow the Government to apply existing administration or insolvency regimes to digital settlement asset systemic payment systems and service providers to manage potential failures. The clause therefore provides the Government with the necessary powers to ensure that our legislative approach to digital settlement assets is flexible and responsive, and fosters competition and innovation in this fast-evolving sector. I recommend that the clauses and schedule stand part of the Bill.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to see the Minister still in his place. I speak to clauses 21 and 22 and schedule 6 together.
Properly regulated innovations that have emerged in the crypto space, such as distributed ledger technology, have the potential to transform our economy and the financial services sector. As the Minister will know, many innovative companies are embracing different forms of blockchain to improve transparency in finance and create high-skilled, high-productivity jobs across the UK. However, I draw his attention to the recent collapse in the value of cryptoassets, including several stablecoins, which has put millions of pounds of UK consumer savings at risk. I am sure he is aware that the crypto trading platform Gemini estimated that as many as one in five people in the UK could have lost money in the crash. Do the Government agree with Gemini’s estimate? If so, does the Minister agree that the recent crisis in crypto markets demonstrates that so-called stablecoins are not necessarily stable, and that their instability can pose a significant risk to the public? How did the recent collapse in the value of cryptocurrencies inform the Treasury’s approach to clauses 21 and 22?
The Opposition have yet to be convinced that Ministers have acknowledged the scale of the threat that cryptoassets can pose to consumers and our constituents. In our Public Bill Committee evidence session, Adam Jackson of Innovate Finance, which is the trade body for UK fintech businesses, pointed out that the Bill has failed to set out how regulated stablecoins will interact with a future central bank digital currency. Can the Minister shed some light on that interaction? I also hope he can explain why the Government have opted to bring only stablecoins within the regulation. I am sure he is aware that the EU has just agreed to a comprehensive regime for regulating crypto exchanges and cryptoassets more broadly, and Joe Biden has said that he is looking to do something similar, but the UK will not even be consulting on a comprehensive regime until later this year. Does the Minister agree that this risks leaving our country behind in the fintech and blockchain race?
Even more importantly, does the Minister agree that in the absence of a comprehensive regulatory regime, the UK risks becoming a centre for illicit finance and crypto activity? I looked at the analysis from Chainalysis—a global leader in blockchain research—which pointed out that cryptocurrency-based crime, such as terrorist financing, money laundering, fraud and scams, hit an all-time high in 2021, with illicit finance in the UK estimated to be worth more than £500 million. In the absence of a comprehensive regulatory regime, how do the Government think they are going to protect our consumers from such threats?
Will the Minister shed a bit more light on his strategy? Does he believe that the definition of “digital settlement assets” in clauses 21 and 22 is broad enough for regulations on a wide range of cryptocurrencies, other cryptoassets and crypto exchanges? Finally, on pacing this work, I want to know his intention. How long will the public and the fintech sector have to wait until the regulators are given the power that they need to regulate the types of cryptoassets that I have referred to?
Andrew Griffith
I thank the hon. Lady for her comments. In truth, I agree with the assessment that she has set out. The approach taken in the Bill is to start with stablecoins and those that are most likely to be used as a means of settlement. That is what the Government are taking powers for in the Bill. As she says, we have committed to come back and consult on the issue before the end of the year. The nights are getting darker, so she will not have long to wait.
I am mindful of the opportunities and threats that the hon. Lady set out well when citing the evidence that the Committee heard, and it is my intention that the Government now move at a greater pace than is currently provided for in the Bill, which has been in gestation for some time. We will come forward with the consultation, which will happen before Parliament rises for Christmas. It will be a really good opportunity for us to continue to discuss how we can address some of the issues.
The reason we have started with stablecoins is that there are challenges in bringing them into regulation for the first time. The hon. Lady would not want us to rush, because by bringing them into the regulatory perimeter, we confer a status on them that may lead to some of the consumer harms she mentioned. The Government’s position is to start with the most stable, least volatile coins, which are likely to be used by intermediaries as settlement currencies, and then to go forward and consult from there.
I think I have addressed most of the hon. Lady’s comments. I do not disagree with her about the scale of the threat. There are other measures, including those that regulate the online promotion of cryptoassets, that will help to protect consumers who suffer harm.
Dame Angela Eagle (Wallasey) (Lab)
Will the Minister give us a little more flavour on how he sees the evolution of this area? Does the clause give him enough powers to go with that evolution, or will we need to legislate again as the landscape changes? It is clear that we have to avoid the potential harm of allowing consumers to think that all digital coins are somehow the same. We know what Bitcoin is, and do not need to spend much time talking about it. We would not want to give people the impression that it is safe to indulge in investing in it.
At the same time, both sides of the Committee realise that digital payment systems and coins are a huge and rapidly developing area that national Governments must get a grip on. That is why we all welcome the fact that the Bank of England is looking at launching its own non-fungible token, or whatever we want to call it. We have to keep a very close eye and watch this space to see how it evolves. Will the Minister give us an impression of whether the clause is evolutionary enough for his purposes in that rapidly changing environment? Might he want to change it through some later piece of legislation?
Finally, we all know how much energy is used in the creation of Bitcoin. I confess myself ignorant about whether the creation of other non-fungible tokens is as energy intensive as the creation of Bitcoin. Perhaps the Minister can enlighten us. There is a green side to the issue as well.
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
My point is further to those made by my hon. Friends the Members for Hampstead and Kilburn, and for Wallasey. My hon. Friend the Member for Wallasey asked whether the definition was evolutionary enough, and I want to pin down the Minister’s response. Does he believe that the definition of “digital settlement assets” is broad enough to allow for regulation to cover the wide range of cryptocurrency, other cryptoassets and exchanges?
Andrew Griffith
I thank hon. Members for their contributions. As currently envisaged, the definition successfully encompasses what it intends to today. The definition starts with the most safe, least volatile domain, which is the use of digital settlement assets. The Bill confers secondary powers, which are subject to the affirmative procedure, that allow the definition to change elastically over time. It is right that Parliament should have the opportunity to look at such changes. That achieves the balance that Members on both sides of the Committee seek. It does not rush headlong to confer legitimacy.
The hon. Member for Wallasey rightly raised the point about the energy used. The truth is that we do not know, but we all suspect that the activity is highly energy intensive. Partly due to the lack of regulation, there is no real data other than anecdotes that one hears that suggest the process is very intensive—even getting into whole percentages of world energy consumption, according to some anecdotes. That is the process of mining that things like Bitcoin and Ethereum are associated with.
Andrew Griffith
Stablecoins and central bank currencies are both new forms of money. They differ in the issuer: a central bank versus a private issuer. It is likely that a central bank digital currency would simply exist and be regulated alongside that. This is an area where the Government’s thinking continues to evolve. It is something that we will do in conjunction with the Bank of England, and therefore the hon. Lady will appreciate that I would not make commitments unilaterally, but we have committed to publishing a consultation later this year. The Government’s stance can fairly be described as forward leaning in this space, but there is more work to do. It is not a trivial exercise to create a new central bank digital currency. My own hope is that it is a “when”, not an “if”, but the hon. Lady will indulge me if I say, “Let’s wait for the joint Government and Bank of England consultation,” which she will not have to wait that many weeks for.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Schedule 6 agreed to.
Clause 22 ordered to stand part of the Bill.
Clause 23
Implementation of mutual recognition agreements
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Having left the EU, we have a unique opportunity to take the approach to the UK regulatory framework that most suits our markets. The Financial Services and Markets Bill is delivering on that and will support efforts to build on our historic strengths as a global financial centre. That includes developing our relationships with jurisdictions around the world, attracting investment and increasing opportunities for cross-border trade.
Mutual recognition agreements are one of the tools that the Treasury has to support the openness of the UK’s international financial services, alongside free trade agreements, financial dialogues and equivalence regimes. MRAs are international agreements that provide for recognition that the UK and another country have equivalent laws and practices in relation to particular areas of financial services and markets regulation. They are designed to reduce barriers to trade and market access between the UK and other countries. The UK is currently negotiating its first financial services mutual recognition agreement, with Switzerland.
Giving effect to MRAs, including the agreement being negotiated with Switzerland, is likely to require amendments to domestic regulation. Clause 23 therefore enables changes to be made through secondary legislation to give effect to that agreement and future financial services MRAs. That secondary legislation will be subject to the affirmative procedure, to ensure parliamentary scrutiny of the proposed changes. That will be in addition to the parliamentary scrutiny of the mutual recognition agreement that Members will be familiar with under the Constitutional Reform and Governance Act 2010, known as CRaG. Parliament will, therefore—I am anticipating questions that hon. Members may raise—be able to scrutinise MRAs in the usual way before this power is used to implement the ratified agreements.
Clause 23 can be used only to implement MRAs relating to financial services, not to make broader changes to legislation or to implement any other form of international agreement. Each financial services MRA will be different, but it is anticipated that clause 23 will allow the Treasury to confer the necessary powers or impose duties on the financial services regulators to give effect to the MRA. That could include a duty to make rules on a particular matter—for example, rules governing cross-border provision of particular financial services by overseas firms.
The clause requires the Treasury to consult the relevant regulator before imposing any duties. In financial services regulation, market access between the UK and other jurisdictions is generally delivered through the UK’s equivalence framework for financial services, and the mechanisms under that framework are primarily found in retained EU law and based on the EU model of equivalence. The MRAs negotiated by the Government may in some cases go further than, or simply function differently from, those equivalent mechanisms. The clause therefore includes the power to modify the application of existing equivalence mechanisms, or to create new mechanisms to reflect what has been agreed in the relevant MRA.
Together, those provisions ensure that the UK can negotiate and deliver ambitious MRAs and implement the agreements in a timely manner that maintains the UK’s credibility in negotiating future MRAs. I therefore recommend that the clause stand part of the Bill.
Tulip Siddiq
We support clause 23, but how does the Minister think it will help the UK to secure international trade agreements that are favourable to the UK’s financial services sector? I ask because the Government have made very little progress on securing trade deals for the City, including with the EU, which remains, as I am sure he will agree, one of our most important export markets.
We completely recognise that regulatory divergence with the EU on areas such as fintech and Solvency II will help boost our competitiveness on the world stage. However, we cannot ignore the fact that Europe will always remain an important market for our financial services sector. Last year, exports of financial services to the EU were worth more than £20 billion—I am sure that the Minister knows that—which was 33% of all UK financial services exports. I have been speaking to the sector and it is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory corporation, or to negotiate mutual recognition with the EU of professional qualifications for our service sectors. I want to hear more about that from the Minister.
Since 2018, the value of UK financial services exports to the EU has fallen by 19% in cash terms, and very little progress has been made in securing trade deals around the world for our financial services. Will the Minister tell us how the clause will help secure important agreements with the EU? I also want to hear more from him about how he hopes it will turn around the Government’s record on boosting financial services exports.
Emma Hardy
I want to probe the Minister a little further. Obviously, it is a huge disappointment that we do not yet have a memorandum of understanding with the EU. Will the Minister indicate when we will have one?
Andrew Griffith
The hon. Member for Hampstead and Kilburn is right about the significance of the European Union member states as trading partners for our financial services. It remains the Government’s intention to form the closest possible relationship with those partners, and to help our financial services businesses access those markets in the most frictionless way. Both sides will have to be involved in reaching any agreement. I do not want to stray too far off the point, Dame Maria, but yesterday I met my German counterpart; Germany is probably the state with the biggest market for financial services. I hope the Committee will take that as a statement of our intent to negotiate as many agreements as possible, whether at national or EU level.
As I said, it is not the Government’s position to diverge for divergence’s sake. The hon. Members for Hampstead and Kilburn, and for Wallasey, accurately identified some of the provisions on which there may be opportunities to diverge, based simply on a different fact pattern in our financial services industries.
Emma Hardy
It is positive news that the Minister has met his German counterparts. Could he give any indication of the progress made towards a memorandum of understanding, and of when we might see one with the EU?
Andrew Griffith
The hon. Lady will forgive me, but I cannot give an indication of timing. However, I will undertake to engage with the Treasury Committee, whose acting Chair is with us today, as we go through that process. To speak to the point made by the hon. Member for Wallasey, we have a diligent Treasury Committee that exercises oversight of this area. I consider it unlikely that we will suddenly procure an MRA that blindsides that Committee, and I certainly undertake to keep it informed, so that the detailed parliamentary scrutiny provided for in the Bill is adequately exercised.
Dame Angela Eagle
I thank the Minister for giving way. Flattery will, of course, get him everywhere. Given the nature of that complex negotiation, might it be possible for him to undertake to give the Treasury Committee a heads-up on progress before agreements are made, so that we can try to ensure that we can encompass appropriate consideration in our heavy workload?
Andrew Griffith
I will not fully bind the Government on that, but the hon. Lady makes a reasonable point. These are not matters of overly partisan division between us, and it would certainly be our intention to do that, so that the scrutiny under CraG, and the scrutiny required by the affirmative procedure, can be carried out, and so that the right resources can be dedicated to it.
The hon. Member for Wallasey talked about these MRAs being a struggle for advantage. There is that element to them, but another key element is that they are mutual. It is certainly not the Government’s position that they are a zero-sum game. The objective is to procure such agreements with as many different jurisdictions as possible, so that, as the hon. Member for Hampstead and Kilburn mentioned, we can grow our sector and boost exports of not just financial services but related professional services, which the UK is extremely fortunate to have.
Question put and agreed to.
Clause 23 accordingly ordered to stand part of the Bill.
The Chair
We now come to amendments 43 and 45, in the name of Peter Grant. Would any member of the Committee like to move them? If not, we will move on to amendment 46.
Clause 24
Competitiveness and growth objective
Andrew Griffith
I thank my hon. Friends the Members for Wimbledon and for North Warwickshire for raising some important matters, and those on the Opposition Front Bench for their support for clause 24. They clearly speak with a great deal of authority from their own experience, and the Government will take away their points and consider them further. Let me describe the clause, and then I will try to come back to the points that have been made.
The Bill asserts our domestic model of financial services regulation, whereby the Government and Parliament set a policy framework within which the regulators are generally responsible for setting the detailed rules. It is therefore necessary to ensure that the regulators’ objectives, as set out in the Financial Services and Markets Act 2000, are appropriate, given their expanded responsibility and the UK’s position outside the EU. The Government believe that the regulators’ current objectives set broadly the right strategic considerations, but we also consider it right that the regulators’ objectives reflect the need to support the growth and international competitive-ness of the UK economy, particularly the financial services sector. I welcome Members’ support for that.
The clause introduces new secondary objectives for the FCA and PRA in relation to growth and competitiveness. The new objectives will require the FCA and PRA to act in a way that, subject to aligning with relevant international standards, facilitates the international competitiveness of the UK economy, including the financial services sector, and its growth in the medium to long term. For the FCA, that objective will be secondary to its strategic objective to ensure that markets function well—I believe the hon. Member for Wallasey mentioned the importance of that, which is clearly paramount—and to its three operational objectives, which sit below the strategic objective, to ensure that consumers receive appropriate protection, to protect and enhance the integrity of the financial system, and to promote effective competition. Again, the hon. Member for Wallasey mentioned financial inclusion, and we will talk about that when we debate later clauses. For the PRA, the growth and competitiveness objective will be secondary to the PRA’s general objective to ensure that UK firms remain safe and sound, and to its insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders.
The new objectives do not require or authorise the FCA or PRA to take any action inconsistent with the existing objectives. I will come back to the hon. Member for Wallasey on that, but they are subordinate objectives and secondary to their financial stability and prudential objectives, which they talk about. The new objectives will give the regulators a legal basis for advancing growth and international competitiveness for the first time. It does not go quite as far as my hon. Friends the Members for Wimbledon and for North Warwickshire have suggested in the amendment. Nevertheless, it is a significant enhancement in that respect on the status quo. As they said, it moves us in line with other international jurisdictions. That is a balanced approach. By making those objectives secondary, we are nevertheless giving the regulators an unambiguous hierarchy of objectives that prioritises safety and soundness, and market integrity. I therefore commend clause 24 to the Committee.
Amendments 46 and 47 seek to amend the new secondary objectives and require the regulators to promote, rather than facilitate, the international competitiveness of the UK economy and its growth in the medium to long term. The wording of the objectives in clause 24 aligns with the PRA’s existing secondary objective, which is to facilitate effective competition. The vast majority of respondents to the November 2021 future regulatory framework review consultation supported the Government’s proposal to introduce new secondary objectives for the FCA and the PRA to facilitate growth and competitiveness.
I reassure my hon. Friends about the importance of the Government’s plans on growth and competitiveness. We expect that there will be a step change in the regulators’ approach to the issue that will be similar to the change that took place following the introduction of the PRA’s secondary competition objective in 2014, which led to a significant number of new policies to facilitate effective competition. I therefore ask my hon. Friend the Member for Wimbledon to withdraw the amendment.
In responding to the hon. Member for Wallasey, I will not assume to myself a degree of expertise about the energy market or any failings in that market. However, I completely agree about the need to avoid an overly binary or unbalanced approach to competition in any market. I think we all agree that we need to get the right balance. On how the regulators can safely advance the objectives, my response is as follows: with a balanced approach; with the right level and volume of resources, in terms of both the quality of expertise and the people they attract and retain; and with good governance. The hon. Lady herself, like all Members of Parliament, is also part of the regulators’ governance model.
Tulip Siddiq
The Minister sounds like he is closing his speech, and I have not heard what he thinks about TheCityUK’s suggestion of asking regulators to report their performance against criteria and metrics. Before he finishes, will he give us his opinion?
Andrew Griffith
The hon. Lady is right to pull me up on my failure to address her point, although later clauses and amendments also address it. I am familiar with TheCityUK’s proposal, and the Government are prepared to look at that area. She gave an example of the regulators helping the real economy through sustainable investments, and potentially reporting some metrics against that. That is worthy of consideration.
Stephen Hammond
I should have said at the beginning that I warmly welcome clause 24. The purpose of the amendments was to tease out the Minister’s exact thoughts. I was pleased to hear that he thinks there is regulatory step forward. I was also pleased to hear that the Government may look again at some of the wording in chapter 3. Will he meet me and colleagues, perhaps next week, or some time in the future? With that, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 24 ordered to stand part of the Bill.
Clause 25
Regulatory principles: net zero emissions target
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
I will speak to clauses 25 and 26 in order. As I set out in previous comments, the Government remain committed to reaching net zero greenhouse gas emissions by 2050, as set out in section 1 of the Climate Change Act 2008. Clause 25 reflects the Government’s commitment by introducing a new regulatory principle for the FCA and the PRA to contribute towards achieving compliance with the net zero emissions target. FSMA 2000 sets out eight regulatory principles that the FCA and the PRA must have regard to when discharging their functions. These existing principles aim to promote regulatory good practice across the regulators’ policy-making. The principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the United Kingdom economy in the medium or long term.
The November 2021 future regulatory framework review consultation proposed amending the sustainable growth principle to explicitly incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the Bill introduces new secondary objectives for the FCA and the PRA to facilitate international competitiveness and growth in the medium to long term, clause 25 removes the sustainable growth principle for the FCA and the PRA to avoid unnecessary duplication.
Clause 25 replaces the sustainable growth principle with a new regulatory principle to require the FCA and PRA to have regard to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008. This new regulatory principle will cement the Government’s long-term commitment to transform the economy in line with our net zero strategy and vision to make the UK a net zero financial centre by ensuring that the FCA and the PRA must have regard to these considerations when discharging their functions. A similar requirement will be introduced for the Bank of England and the Payment Systems Regulator, which we will cover in more detail later.
Clause 26 makes consequential amendments to FSMA 2000 to take account of the new regulatory principle in clause 25, and the new growth and competitiveness objective for the FCA and PRA in clause 24. Clause 26 also requires the FCA and PRA to explain how they have advanced the new growth and competitiveness objectives, as well as their existing statutory objectives, in their annual reports to the Treasury, which are laid before Parliament. This requirement aligns with the PRA’s current reporting requirement for its secondary competition objective. I therefore commend clauses 25 and 26 to the Committee.
Emma Hardy
I have not tabled an amendment to the clause, but the Minister will be aware that on Second Reading there was a huge amount of support across the House for strengthening these proposals on net zero and nature. I hope we will see some movement on these issues as the Bill progresses through Parliament.
I want to start by saying why net zero and nature matter and looking at the situation in France and Germany. The German regulator already has a sustainability objective, with a focus on combatting greenwashing. The French regulator already looks at overseeing the quality of information and has set up the Climate and Sustainable Finance Commission. I want the Minister to note that our competitors are already moving ahead in this area.
One thing that came out of the written evidence, which I have just been re-reading, was the need for net zero transition plans and the establishment of a transition plan taskforce. The Minister has not really mentioned that. The purpose of the transition plan taskforce was to look at a gold standard for climate transition plans, but it is not stipulated in the Bill that companies will be expected to develop these and move them forward.
Disappointingly, although the Bill talks about net zero, it says nothing about nature. I wish I could recall who from the Bank of England came to give evidence to the Treasury Committee, but it was incredibly interesting to hear that, in looking at the risks to our country and our future financial sustainability, it is starting to look at the risk to nature and what the decline in nature will cost us all. We have heard much about climate change and the obvious risks it poses to our country and our financial sector, but people are starting internationally to look at the impact that a decline in nature has on our economic wellbeing. Again, nature is not mentioned in the Bill at all.
Tulip Siddiq
We welcome clause 25 and the new regulatory principles for the FCA and the PRA, which will require the regulators, when discharging their general functions, to have regard to the need to contribute towards compliance with the Climate Change Act 2008—legislation that, I remind the Minister, was brought in by a Labour Government.
However, we think that the Bill lacks ambition on green finance. The Government promised much more radical action. We were promised that the UK would become the world’s first net zero financial centre, but we are falling behind global competitors. In the evidence session, William Wright, the managing director of the New Financial think-tank, stated that the UK is a long way behind the EU on both the share and the penetration of green finance in capital markets. Research by the think-tank has suggested that green finance penetration in the UK is at half the level of the EU and roughly where the EU was four years ago.
I will discuss what the Opposition would like to see in the Bill on green finance when we discuss new clause 9. For now, will the Minister set out what assessment he has made of the impact that clause 25 will have on investment decisions and other financial service activities in the sector?
In the evidence session, William Wright suggested that there is “a disconnect” between the Government’s stated position that the UK is already a global leader in green finance and the ambition for the UK to become the leading international green finance centre. Does the Minister really believe that the provisions in clause 25 are sufficient to close that gap? How much further will the Government go on this agenda? Does the Minister think we have been as ambitious as possible in the Bill, considering that the problem is on our doorstep and is so important for future generations?
Andrew Griffith
A lot of valuable points have been raised by Members on both sides of the Committee. This is the right moment for colleagues to make those points, and I hope it is acceptable to the Committee if I take some of those points away and follow up with further information later, rather than dismissing them trivially here.
The hon. Member for Kingston upon Hull West and Hessle raised something that is close to many of our hearts: nature. She is quite right that the Bill is focused on net zero and climate. She is absolutely right that we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem. I will take her points away to see whether there is anything else that can be done. I hope she will accept that the datasets and the maturity with which some aspects can be measured are not as sophisticated as in the science of climate change. That might be one impediment to the Government moving forward and baking it into statute, but I will take it away and follow up with the hon. Lady.
The hon. Member for Wallasey is absolutely right about the transformative scale of moving to a low-carbon economy. It will change every single aspect of how we generate energy, the activities we engage in, the homes we live in and our financial centre. We are at one on that. I believe that the wording of the clause and the replacement of the “have regard” achieves that objective, combined with the legislative commitment—by the Labour Government, if the hon. Member for Hampstead and Kilburn so wishes—that is being incorporated into the duty by reference. It does do that. There is an ambition there, and we should seek to satisfy it.
Andrew Griffith
I will. I look forward to writing to the hon. Lady to set out my case.
The hon. Member for Kingston upon Hull West and Hessle mentioned transition plans. Our progress on those is absolutely on track and I look forward to that being another area in which the UK is leading.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26 ordered to stand part of the Bill.
Clause 27
Review of rules
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 27 inserts four new sections into FSMA 2000 to ensure that the FCA and the PRA review their rules regularly, so that they remain fit for purpose. It is important for the FCA and the PRA to regularly review their rules after implementation to ensure that they remain appropriate and continue to have the desired effect.
Regular reviews improve ongoing policy development by providing the evidence to make better decisions and helping to develop a better understanding of what works, for whom and when. There is currently no formal requirement for the PRA or the FCA to conduct reviews of their existing rules. Proposed new section 3RA will introduce a requirement for the two regulators to keep their rules under review. There are a range of approaches for assessing the effect of rules, from monitoring a set of indicators to an in-depth assessment of the effect of a rule from both a qualitative and quantitative standpoint.
The Government expect that, under this new requirement, the regulator will decide on the most appropriate approach on a case-by-case basis. The requirement to keep their rules under review should lead to a more systematic approach by the FCA and the PRA, in turn improving regulation, as any ineffective or outdated rules will be removed or revised more consistently.
Alongside that requirement, proposed new section 3RB requires the regulators to publish a statement of policy on how they intend to conduct rule reviews. That will provide clarity and transparency for stakeholders on how and when rules are reviewed, thereby increasing confidence in the regulation of financial services. Under these new requirements, how and when the two regulators review their rules to assess whether they function as intended will be an operational decision for the regulators.
In addition to the new legislative requirements, the regulators have confirmed that they will consult publicly on the statement of policy to ensure that stakeholders have an opportunity to contribute views as the regulators consider their approach.
I reiterate that, as set out in the Government response to the November 2021 FRF review consultation, and in response to calls from industry, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels through which industry and other stakeholders can raise concerns about rules. Those channels will be set out in policy statements in due course. However, without further provision, there will be no formal mechanism for the Treasury to require the regulators to conduct reviews of their existing rules.
As the FCA and the PRA take on increased regulatory policy-making responsibilities following the implementation of the FRF review, there may be occasions when the Treasury considers that it in the public interest for the regulators to review their rules—for example, when there has been a significant change in market conditions or other evidence suggests that the relevant rules are no longer acting as intended.
Proposed new section 3RC of FSMA provides for more effective regulation by allowing the Treasury to direct the regulator to review its rules when the Treasury considers that to be in the public interest. Proposed new section 3RD requires the regulator to report on the outcome of the review and the Treasury to lay that report before Parliament. Any reviews initiated under the power will be conducted by the regulator or, where appropriate, an independent person. The regulator will be responsible for deciding what action to take, if any, in response to any recommendations arising from the review. This measure offers a new avenue for challenge of the regulators’ rule making, where that is required, while maintaining their operational independence.
Respondents to the November 2021 FRF review consultation felt that there should be further measures on accountability, although there was no consensus on what they should be. The Government considered the responses and decided that, while we must still uphold our commitment to independent regulation, the accountability framework needs further strengthening, so on Second Reading the Government announced our intention to bring forward an intervention power to enable the Treasury to direct the regulator to make, amend or revoke rules when there are matters of significant public interest. The Government will provide a further update on that power in due course. With that in mind, I recommend that the clause stand part of the Bill.
Dame Angela Eagle
I have a few questions. The measure is sensible, but at the same time, it can be read as being quite sinister. Perhaps it depends on how the power will be used. The past is not filled with massive numbers of examples of the regulator falling out with the Treasury or the Bank of England, so the measure seems rather like a sledgehammer to crack a nut. The powers are to be used in exceptional circumstances, but those circumstances are not really defined; the Minister’s comment on that would be interesting.
If the measure is a sledgehammer to crack a nut, does it risk giving the impression that regulation in this country is not independent and can be overridden when that suits a Government, rather than when that is in the public interest? Might this compromise outsiders’ views of how our system is regulated? In other words, the cost-benefit analysis of whether the measure is an appropriate reaction might be in the balance. Will the Minister say a little more about how he perceives the power being used and what “exceptional circumstances” are?
We would still like to see what the intervention power that the Minister keeps talking about would actually look like. He has not come forward with the wording of it. Today, we will be halfway through the Committee proceedings on the Bill, and past the time when it may be relevant. Will he bring that wording back on Report, or will we see it while we are still in Committee?
Tulip Siddiq
We support the powers granted to the Treasury in clause 27 to require the regulator to conduct reviews of existing rules. We think that is a proportionate and sensible approach. We agree that mechanisms should be available to allow Ministers to ask a regulator to think again about a rule that may not be working in the public interest. However, while it is important that regulators are held to account, does the Minister agree that the operational independence of regulators must be paramount? Does he therefore agree that, with the powers to direct rule making already included in the Bill, a so-called intervention power would be unnecessary and dangerous?
During the evidence session, the deputy governor of the Bank of England, Sir Jon Cunliffe, said that an “intervention power” risked undermining perceptions of the central bank’s 25-year-long independence. He warned that, in turn, it would undermine the global reputation of our financial services sector. Even though the Minister was there, I will quote him:
“That credibility of the institutional framework is very important to the competitiveness”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 39, Q76.]
of the UK. Martin Taylor, a former Bank of England regulator and chief executive of Barclays said that, while it would not necessarily turn us into “Argentina or Turkey overnight”, that would be the direction of travel if such a power were introduced. I ask the Minister once again, echoing what my hon. Friend the Member for Wallasey said: why does he believe that the powers in clause 27 are not sufficient, and why do the Government continue to ignore the advice of the Bank of England?
Andrew Griffith
We have debated this matter under a number of clauses already. My commitment to table the draft wording of the proposed intervention power during this Committee remains. That remains the intention. I do not accept the characterisation of a sledgehammer and a nut. What we are doing in the whole of the Bill is giving vast new powers to the regulators that were previously held and exercised, with potential oversight and intervention, from Brussels. We are bringing that into the UK rulebook. The proposed power here, and any proposed intervention power, is a proportionate response to the significant expansion in regulations of financial services, which touch and are capable of touching every aspect of human life in this country.
It is important that we give the Government of the day, subject to Parliament, that failsafe ability. It may one day even be the hon. Member for Hampstead and Kilburn who is exercising that power, and she may be grateful for the foresight of this Committee in providing that, with the caveat that this is clearly anchored in the public interest. That is a well-understood concept. I do not want to rehearse all the points that the Committee heard from witnesses, but it is the Government’s view that this power is necessary. To the extent that we seek to go forward with what is called the public interest intervention power, beyond merely directing regulators to look again at rules, we should discuss that again in the context of what the checks and balances on that would be.
Tulip Siddiq
I am not sure, but I think the Minister was advocating for a general election; I am not putting words in his mouth. I understand what he is saying, but we asked the witnesses to come and give evidence for a reason, so he needs to respond to the concerns of those witnesses, who were clearly concerned about this intervention power. Those two key witnesses said they were worried about undermining the independence of the Bank of England. What is the Minister’s opinion about that?
Andrew Griffith
The Treasury has consulted widely on the future regulatory framework. One of the key points made by all the industry participants, very few of whom were part of the witness sessions—although we did hear from two particular witnesses, we did not hear the same volume of responses as in past consultations—was that industry is firmly of the mind that this is proportionate and potentially required.
I will clarify a couple of things for the Committee, because these matters are often misunderstood. First, we have operationally independent regulators. That is absolutely right, and no one is seeking to interfere in the findings of any particular regulatory review with respect to an industry participant. Secondly, none of this speaks to the scope of the Monetary Policy Committee. Sometimes the debate is couched in terms of monetary policy independence. What we are actually talking about is the regulatory rulebook. There are large public policy considerations for the insurance industry, for example, and in relation to consumer duty matters, such as access to cash and consumer protection, which we will debate in later sittings. Those are all matters that the Government consider and will continue to consider, notwithstanding the evidence given in that witness session. That is the right, proportionate response.
I should clarify that the hon. Member for Hampstead and Kilburn will get her general election in due course, but I fear she will have some time to wait.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)
Andrew Griffith
Main Page: Andrew Griffith (Conservative - Arundel and South Downs)Financial Services and Markets Bill (Sixth sitting)
Andrew Griffith ExcerptsThursday 27th October 2022
(2 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services and Markets Act 2023 Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 27 October 2022 - (27 Oct 2022)
Tulip Siddiq (Hampstead and Kilburn) (Lab)
I thank the hon. Member for tabling the amendment. In principle, Opposition Members are supportive of providing regulators with clearly defined metrics to assess their performance. We would need further information about how it would work in practice before we could lend our support to the amendment, but in principle we are in agreement with the views that the hon. Member has outlined.
The Financial Secretary to the Treasury (Andrew Griffith)
I am grateful to my hon. Friend the Member for Wimbledon for raising this important issue, and I note the potential, in-principle support of the hon. Member for Hampstead and Kilburn, speaking for the Opposition.
The Government agree that it is vital to have appropriate public metrics for holding regulators to account on their performance. FSMA already requires regulators to report annually on how they have discharged their functions, advanced their objectives and complied with their other duties. In addition, schedules 1ZA and 1ZB to FSMA provide that the Treasury may direct a regulator to include such other matters as it deems appropriate in the regulator’s annual report.
As part of their annual reports, both the Financial Conduct Authority and the PRA publish data on operational performance. The FCA annually publishes operating service metrics relating to authorisations, timeliness of responses to stakeholders, and regulatory permission requests, among other things. In April 2022, the FCA also published a comprehensive set of outcomes and metrics that it will use to measure and publicly report on its performance. The PRA annually publishes data on its performance of authorisation processes.
Amendment 48 seeks to allow the Treasury, in addition, to determine what metrics the FCA and the PRA should use to measure their performance and over what period, and other technical aspects of the measurement and publication of metrics. Let me reassure my hon. Friend of the importance that I attach to the matter he has raised. I have discussed it with the CEOs of the PRA and the FCA since taking up my role, and I will continue to do so. I am open to discussing the matter with my hon. Friend outside the Committee to see what further reassurance the Government could give, or what further measures we could take. I therefore ask him to withdraw his amendment.
Stephen Hammond
I thank the Minister for his response, and I thank the hon. Member for Hampstead and Kilburn for hers. Clearly, there is a willingness across the House to look at this matter again, so I am going to take the Minister at his word—as I always do—and accept his kind reassurance. Perhaps he might ask the hon. Lady to join us in that discussion, because it would be beneficial. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Andrew Griffith
Clause 28 enhances FSMA by enabling the Treasury to place an obligation on the FCA or the PRA to make rules in a certain area of regulation. Equivalent provision for the Bank of England and the Payment Systems Regulator is made in clause 44 and in paragraph 7 of schedule 7.
FSMA requires that regulators advance their objectives when they make rules, set technical standards and issue guidance. The regulators must also take into account eight regulatory principles when discharging their functions. It is generally up to the regulators to determine what rules are necessary, but as set out in the future regulatory framework review consultation in November last year, that approach may not always be sufficient. There must be a means for the Government and Parliament to require the regulators to make rules covering certain matters, in order to ensure that important wider public policy concerns are addressed. That approach has already been established in legislation through the Financial Services Act 2021, which required the FCA to make rules that applied to FCA-regulated investment firms.
Clause 28 enables the Treasury to make similar regulations and place an obligation on the regulators to make rules in a certain area. The clause aims to strike a balance between the responsibilities of the regulator, the Treasury and Parliament now that we are outside the EU. It does not enable the Government to tell a regulator what its rules should be; it simply enables the Government, with the agreement of Parliament, to say that there must be rules relating to a particular area. The FCA and the PRA must continue to act to advance their objectives and take into account their regulatory principles when complying with the requirements set under this power. The Treasury cannot require the regulators to make rules that they would not otherwise have the ability to make.
I assure the Committee that this power will always be subject to the affirmative procedure. That is the most appropriate procedure, as it means that Parliament will be able to consider and debate any requirements set in this way. It also ensures that the Government are able to act to ensure that these requirements stay up to date with changing markets, rather than setting them out in primary legislation, where they could quickly become out of date. The clause enhances the FSMA model, enabling the Treasury to ensure that key areas of financial services continue to be regulated following the repeal of retained EU law and in the future. I commend the clause to the Committee.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Clause 29
Matters to consider when making rules
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
I beg to move amendment 1, in clause 29, page 41, line 7, at end insert
‘, and also to financial inclusion.
(2A) For the purposes of this section, “financial inclusion” means the impact on those who might be prevented from accessing financial services as a result of the new rules made by either regulator, or from accessing them on the same terms as existed before the making of the new rules.’
Tulip Siddiq
When I was first elected, I was told by another MP here that I should pick an issue, stick to it and talk about it constantly. I pay tribute to my hon. Friend the Member for Kingston upon Hull West and Hessle for following that advice to a tee. I follow in the steps of my hon. Friends the Members for Kingston upon Hull West and Hessle, for Wallasey and for Mitcham and Morden, who spoke about financial inclusion and how it affects us all. Later, we will debate essential face-to-face banking services. For now, I want to focus on the poverty premium, which my hon. Friend the Member for Mitcham and Morden mentioned: the extra costs that poorer people have to pay for essential services such as insurance, loans or credit cards.
We believe that everyone should have access to financial services—whether it is savings schemes or insurance—when they need them, regardless of their income and circumstances. If the Government are serious about building a strong future for our financial services outside the EU, they should recognise that the Bill is an opportunity to rethink how financial resilience, inclusion and wellbeing are tackled in the UK.
We support amendment 1 and new clauses 2 and 3, which would give the FCA a new cross-cutting “must have regard” to financial inclusion measure as part of its regulatory framework. As the Minister knows, that would mean that the FCA would have to consider financial inclusion across all its activities and report on its progress.
In our evidence session, Fair by Design talked about the higher costs that poorer people have to pay for insurance products. Research from the Social Market Foundation, with which the Minister will be familiar, has shown that those who are unable to pay for their car insurance in annual instalments face an average extra cost of £160. Surely the Minister agrees that that is unjust, and that regulation must play a role in tackling the poverty premium. If he accepts that principle, what is the argument against introducing a new “have regard” provision to empower the FCA to monitor how well financial services are meeting the needs of low-income consumers? For example, a “must have regard” for financial inclusion could allow the regulator to review practices such as insurers charging more to customers who pay for their insurance in monthly instalments.
Does the Minister recognise that exclusion from financial services is a growing problem in the UK? If he rejects the arguments for a “have regard”, what solution does he propose instead? It is something we all see in our casework as constituency MPs.
Andrew Griffith
I thank hon. Members for their contributions. I appreciate the work of the hon. Member for Kingston upon Hull West and Hessle. I have been to Hull, but I think that everyone has constituents who face precisely the problem of which she speaks, so I will depart from my text.
The Government oppose the new clauses and the amendment. However, we have heard from the FCA its opposition to this measure and its contention that it is not required. It would say that—I understand that point. I would be happy to consider how the Government respond. That is the most worthy response I can make; I am not inclined to dismiss any of the hon. Lady’s arguments.
Andrew Griffith
I will give way; I do not propose to speak for very long on this point, anyway.
Craig Tracey
I am very much in favour of financial inclusion, but we have to be careful about how we achieve it. I was an insurance broker before coming here. The reason I left was that the cost of regulation on our business meant that we disappeared from the high street. That meant that vulnerable people had less access to insurance. We see more and more access points moving out, and having to go online, so people are losing out. Does the Minister agree that, although we must ensure that we are looking after the most vulnerable people, more regulatory burdens will put up the cost and affect the availability of products?
Andrew Griffith
I thank my hon. Friend for that intervention. He put it far better than I did, bringing to bear his personal experience, but that was precisely the point that I was making.
Siobhain McDonagh
Does the Minister agree, though, that unless we know what is happening and somebody keeps the figures, there can be unintended consequences? Martin Coppack from Fair by Design made the point that he has been trying to get this thing done for years and what he has found is that when he goes to the internal Treasury committee that considers financial exclusion, it says, “It’s not our job to keep the numbers. Go to the FCA.” The FCA says, “It’s not our job to keep the numbers. Let’s go back to the Treasury.” Surely it needs to be somebody’s responsibility, so that we understand and know the direction of travel.