Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

Andrew Griffith Excerpts

Tuesday 2nd May 2023 General Committees

[The Economic Secretary to the Treasury (Andrew Griffith)]

I beg to move that the Committee has considered the draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.

It is a pleasure to serve under your chairmanship, Mr Gray. The Government have a clear vision for financial services: an open, sustainable and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens across all four nations of the UK.

[The Chair]

Order. I introduced the incorrect statutory instrument. We are actually debating the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023. I think the Minister was quite correctly addressing it, but I wanted to point out that I got it wrong in my introductory remarks.

[Andrew Griffith]

Thank you, Mr Gray. Two excellent proposals remain in front of the Committee.

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023.

Over recent years, multiple reports by the cryptoassets taskforce and the Financial Conduct Authority have identified misleading advertising and a lack of suitable information as a key consumer protection issue in cryptoasset markets. The statutory instrument seeks to address those issues by ensuring that cryptoasset promotions are held to the same standards as broader financial services products carrying similar risks. The statutory instrument therefore proposes to expand the scope of the restrictions provided for by the Financial Services and Markets Act 2000 by amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to include financial promotions in respect of in-scope cryptoassets.

Firms that are not authorised by the FCA will be required to have promotions of qualifying cryptoassets approved by an authorised firm unless an exemption applies. To avoid the unintended consequence of an effective ban on such promotions, the intention is to have a temporary exemption for firms registered with the FCA under its anti-money laundering regime. The intention is that promotions made under that exemption would still have to comply with the same rules set by the FCA for equivalent promotions made by authorised firms. When in force, the SI and the FCA rules will apply to all businesses making cryptoasset promotions to UK-based consumers, whether from the UK or abroad, so it is a valuable protection for UK consumers.

In order that firms have suitable time to understand and prepare for the regime, the SI proposes a four-month implementation period, which is intended to commence on publication of the FCA’s detailed rules, subsequent to the SI being made. That will reduce a key risk to consumers of suffering unexpected or large losses without regulatory protection as a result of buying cryptoasset products while unaware of the associated risks. That complements, and forms part of, our wider proportionate approach to regulation, harnessing the advantages of distributed ledger and crypto technologies while mitigating the most significant risks for consumers.

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[Peter Grant]

I can assure you I have been called worse, Mr Gray.

The Scottish National party, like the official Opposition, will not be opposing the draft order today, but I want to raise one or two points. I am concerned not about the way in which these transactions will be regulated, but about just how effective the arrangements will be. My concern is that the financial promotion regulation that we have for more traditional forms of financial products is not working. It is not protecting consumers. Too many of my constituents have lost a lot of money. I do not remember whether I have had discussions with the Minister about Blackmore Bond, which I have certainly discussed with a lot of his colleagues.

[Andrew Griffith]

indicated assent.

[Peter Grant]

I see from the Minister’s nodding that he knows what I am referring to. The Financial Conduct Authority just never got ahead of the chancers in the way that those bonds were being sold and promoted to innocent members of the public in my constituency and elsewhere. There is still an issue as to whether the Financial Conduct Authority takes seriously enough potential scams that may not break the economy, but will certainly cause untold harm to sometimes quite significant numbers of our constituents.

Will the Minister indicate what the Government are doing to make sure that the Financial Conduct Authority and others who are trying to regulate the crypto market have got the resources and expertise to do the job? If we are giving them more and more responsibilities and they are already saying that they do not have the resources they need to regulate as firmly as we would like, that means that significant additional resources will have to be put in. Will the Minister confirm whether, on the back of this order, there is an intention to increase the resourcing of the Financial Conduct Authority?

What are we going to do to make sure that where there are breaches, those who are in breach are brought to book much more quickly than often happens with more traditional promotions? One of the problems with any kind of e-commerce is that if things start to go wrong, they can go very wrong very quickly indeed. We need to make sure that the regulatory process can be speeded up.

Finally—this may be beyond the remit of the Minister today—what are the Government doing to make sure that when cases come to court, those hearing the cases understand what they are dealing with? A judge and jury trial in relation to these matters might not work, for example: where are we going to find a jury that understands the very fine points of technical detail that may be critical in deciding whether something is permitted or not permitted and therefore in deciding whether somebody is innocent or guilty?

My primary concern is whether those who will be asked to regulate under this new order will have the resources and the expertise necessary to make sure that they can do the job effectively.

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[Andrew Griffith]

It is a pleasure to follow the hon. Member for Brent North. I will attempt briefly to address Members’ concerns.

The fact that there is an exemption process is something that came out of the consultation, to which we responded. It is the way in which we can encompass regulation around what is currently an unregulated sector. It still requires the relevant firms to act as if and to comply with the FCA requirements in this area. It is not a bug; it is a feature. I hope the hon. Member for Hampstead and Kilburn will accept that.

We did not talk too much about the specific regulations with which we expect the FCA to come forward. It is right that the purpose of this SI is to set out the overall structure, on the bones of which the FCA will put some flesh. Members will be interested to know, though, that the regulations will certainly encompass, for example, a 24-hour cooling-off period.

I will try to address the points of my right hon. Friend the Member for North West Hampshire separately—he gave an interesting tour around this space—but he is wrong to assert that the regulation for cryptoassets would be the same as that for stocks and shares or for bonds. Cryptoassets would form part of a high-risk group that required, for example, a 24-hour cooling-off period, which we do not apply to those other assets. They are therefore being regulated as high-risk assets.

The hon. Member for Hampstead and Kilburn mentioned stablecoins. The detailed regulations for them have yet to be seen. There are stablecoins backed by fiat currency, and the thrust of the regulations will ensure that people can have the highest level of trust that they are properly backed. As ever, I am happy to write to the hon. Lady.

I think that I wrote to the hon. Lady about the decision on NFTs—I certainly wrote to the Chair of the Treasury Committee, my hon. Friend the Member for West Worcestershire (Harriett Baldwin). We have clearly delineated that because NFTs are—as in their name—non-fungible and we do not wish investors and consumers to confuse them with instruments of investment. That is important because the counterfactual that Members should consider is not that consumers are not exposed to promotions of cryptoassets. One does not have to go far—we have only to venture down into London’s fine underground—to find currently unregulated promotions, which expose consumers to all the risks without any of the protections. The statutory instrument seeks to rectify that.

My right hon. Friend the Member for North West Hampshire gave quite a tour around the sector. He talked about money supply and cash fraud, on which he is obviously an expert. I would argue that by bringing cryptoasset promotions within the perimeter, we are not making the existing situation worse. Arguably, by imposing the FCA’s rigorous anti-money laundering measures and providing a greater incentive for more firms to come within them, we potentially add a clearly difficult task, on which I will not expand.

[Kit Malthouse]

I just want to take the Minister back to his point about NFTs. He said that they are not a form of investment, but I am afraid that they are. People are investing thousands of dollars in NFTs, and particular groups of NFTs, and effectively holding them as a collection as they would fine wine or art. They are certainly not a consumable. They are designed to hold value and to be disposed of at a future date, which is why NFT exchanges exist.

Secondly, does my hon. Friend accept that bringing NFTs into the investment fold grants them an air of legitimacy? We are saying, “This is a legitimate investment, notwithstanding the risk. We’ll give you some protections and the FCA will provide investment advice.” It makes such investment more legitimate than it otherwise would be.

[The Chair]

Order. Interventions must be brief.

[Andrew Griffith]

My right hon. Friend has not been dabbling in either tulips or NFTs, but just like, for example, the art market, they are not within the scope of financial regulations. We can revisit the subject. The purpose of today is to address the clear challenge before us: the number of unprotected consumers, whom all the evidence suggests are being exposed to the promotions. If my right hon. Friend wants to continue to engage in the debate, we shall do so, and I am sure that the Treasury Committee will keep a close eye on that. However, there are markets or perceived investments, whether they be tulips, art or NFTs, that do not fall within the scope of financial regulations and therefore we are not addressing them today.

The hon. Member for Glenrothes made points, which he has made directly to me in the past, that pertain to the regulations but are a bit more general and relate to the FCA’s conduct and effectiveness. He and I served on the Committee that considered the Financial Services and Markets Bill, which seeks to place greater duties and accountability on the FCA. I hope that he will continue to work on that, but will let the matter rest for today.

Question put and agreed to.

Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

[Andrew Griffith]

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.

This is like the main feature after the short film, for those of us who are old enough to remember that. The second instrument reduces the burdens that firms face when determining whether their trading in commodity derivatives or emission allowances require them to be authorised as an investment firm. Effective commodities markets regulation is key to ensuring that market speculation does not lead to economic harm. The regulator should be able to effectively regulate and supervise firms that trade commodity derivatives for investment purposes as their main role. However, as well as financial services firms, a number of businesses trade on commodity markets to protect their business from market fluctuations. In regulation that is referred to as trading that is ancillary to their main business.

We have inherited a regime from the EU that uses something called the ancillary activities test, which determines whether activities are primarily for investment purposes or support only the firm’s commercial business. That ancillary activities test requires firms to undertake complex calculations. They are also required to notify the FCA about the outcome of the calculations on an annual basis. Taken together, the regime is overly burdensome for firms. Prior to the implementation of the EU ancillary activities test, the UK had a simpler test for determining whether firms were trading in commodity derivatives or emission allowances as an ancillary activity. It was cheaper for firms to comply with and resulted in the same outcomes as the current regime.

In 2021, as part of the wholesale markets review, the Government consulted on reverting to that simpler regime, which maintains the same regulatory outcome. The proposal was to remove the annual notification requirement and revert to a principles-based approach. Respondents to that consultation agreed with the proposed changes, stating that the current regime was onerous and complicated. Consequently, the Government committed to bringing forward those changes when we responded to the consultation in 2022. Today’s SI delivers that. It will pave the way for the FCA to adopt a simpler and more streamlined approach to determining whether firms need to be authorised, alongside this SI.

To reflect the FCA’s adoption of that simpler approach, the instrument also amends part of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which exempts firms from having to perform the current calculation. As the FCA’s new approach will be based on different information, that exemption is no longer relevant. The SI will not come into force until 1 January 2025, to ensure that industry has sufficient time to reflect on the changes that the FCA will make, and to make the necessary system changes. I understand that the FCA plans to consult on its changes later this year.

The measure will reduce costs for firms and make the UK a more attractive place to do business, with no detriment to our high regulatory standards. I therefore commend it to the Committee.

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[Andrew Griffith]

I shall be brief. I am happy to be guided by the hon. Member for Hampstead and Kilburn; she should let me know if there is anyone she would particularly like to be consulted as the FCA brings forward rules. This is the third consultation in the process, so it will be fairly well sighted on the interested parties, but, as ever, one would encourage the widest range of participants. That is certainly the way that we seek to make and inform policy, and I know that the FCA will also seek to do so.

My right hon. Friend the Member for North West Hampshire will forgive me; he used the word “trading” repeatedly, so let me be very clear that this is not the regulation of those who are trading in commodities. By their very definition, they would not be able to take advantage of this measure. This is for the manufacturer of an engine who seeks to place their order for copper some months in advance—those who are using a commodities market, but not for the purpose of trading. With this measure, we are reverting to the situation prior to 2018, when a piece of European legislation came into a regulatory environment that was working perfectly well, in which no one had diagnosed any problem. There was a pragmatic way for businesses to operate and then the bar was raised. We now have the opportunity simply to revert to the situation prior to the introduction of that legislation.

[Kit Malthouse]

I understand the Minister’s point. I am aware of the fact that it is perfectly possible for a company that is trading in a commodity to have futures trading, which is what we are talking about here—commodity derivatives trading—as an ancillary function of its overall business. For example, the Man Group, of which I am sure the Minister is aware, started as a cocoa and sugar ordinary trader. It had a small derivatives department, which was actually algorithmic black box trading—commodity trading adviser trading—which grew and grew. In the early days of the Man Group, under the test, that would have been ancillary to their trading. Nevertheless, it would have been a reasonably big part of the market.

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[Andrew Griffith]

I suspect that neither my right hon. Friend nor I would know the exact application of that test. Clearly, the Man Group would look very much like a very large trading outfit, with all its revenue derived from a source of trading, rather than the purchase of being an end user. However, we are reverting to the original position. Let us be clear: whether it is onions or the Man Group, it would have fallen within the scope of this test in 2018 and we seek to simply revert to that.

Question put and agreed to.