Financial Services and Markets Bill (Fifth sitting)

Angela Eagle Excerpts

Committee stage
Thursday 27th October 2022 Public Bill Committees

[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?

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[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.

[Dame Angela Eagle]

I want to focus on parliamentary scrutiny of these changes. They are quite technical, but they could be very important, including for consumers. If we do not get them right, they could have unintended consequences for financial stability and so on, because of the range of agreements under discussion. One assumes that those negotiating the agreements have a reasonable model of what they want to achieve, but that will also be the case for those with whom we are negotiating. The context is about gaining an advantage in the international competition for financial services. Indeed, both Front Benchers have hinted at that. If we are looking for a competitive advantage and growth, that kind of struggle for an advantage has obvious implications.

Until we left the EU, much of the negotiation on the financial directives that were promulgated went on within the European Commission. The UK had a great deal of influence over how those directives were negotiated, but it did not always win out; for example, the markets in financial instruments directive was a cause of some consternation for our financial services, because it did not fit with our kind of plan. We were always the country with the largest financial services sector, and were mostly likely to be impacted by agreements and compromises that did not clearly represent our best interests. We can now hope to move back towards that position, if we can come to an agreement. However, as my hon. Friend the Member for Hampstead and Kilburn said, we are constrained by the fact that a great deal of our financial services activity happened within the EU. I suspect that the divergence is likely to become greater over time. What does the Minister think would constitute a timely attempt by Government to ensure proper parliamentary scrutiny of these things? Aside, that is, from Parliament potentially debating 50 pages of extremely technical statutory instruments.

We know that the Treasury Committee will have a say, but some of the changes negotiated in these agreements with other countries may have important impacts on consumer rights, and larger number of Members of Parliament might want a say on them. Perhaps the Minister could say how he envisages the process going forward. I presume we will have some agreements—there has been a slow start. How can Parliament keep an appropriate eye on the philosophy behind the agreements, and the way in which they are going, as we diverge more from our closest partner?

[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?

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[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.

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[Craig Tracey (North Warwickshire) (Con)]

As ever, it is a pleasure to serve under your chairmanship, Dame Maria. I refer to my interest, which I declared at the start of Committee proceedings. I welcome the Bill, and particularly clause 24 because of its competitiveness duty, for which I have campaigned for quite some time. I would prefer it to be a primary objective, and perhaps the Minister will look into that, but if we keep it in its current form, then we have to go further for it to be meaningful. There must be proper metrics to ensure that the regulator follows up on it. For that reason, I support the amendments put forward by my hon. Friend the Member for Wimbledon.

In the evidence sessions, I was surprised to hear that the FCA was not aware of any other regulator that had a competitiveness duty. That is quite worrying. It seemed slightly detached from what our competitors are doing. We need to ensure that the FCA is pressed hard on this issue, and that there is a clear, stated objective for them to promote competitiveness in the industry. To be clear, this is not at all about lowering standards. The FCA said in its evidence that it considers jurisdictions such as Hong Kong, Japan, Singapore and Australia to be robust financial centres. They all have a competitiveness duty, so a duty of that kind can be beneficial.

Let me put this into context by giving the example of insurance-linked securities. The FCA created regulations regarding them, which Singapore then lifted—took and used. Because of Singapore’s competitiveness duty, we lost one firm midway through the process. In the same timeframe, 15 firms have been regulated there, against five in this country. The estimated loss is around $700 million. That is money out of our economy that could come our way with just this simple change.

There is a similar story on captives. We do not have any set up here. The reason cited is over-burdensome regulation. The industry agrees that there needs to be regulation, but it needs to be proportionate, and we need to ensure that it does not block investment in this country. I hope the Minister will consider the amendments and see what can be done to strengthen the measures.

[Dame Angela Eagle]

I approve completely of having a competitiveness and effective competition analysis duty being attached to the regulators, and for them to report on it annually, which would allow us to see how much they are taking account of it. I would also like them to be thinking about financial inclusion, but that comes later in our proceedings.

Will the Minister tease out a little for the Committee how he thinks the regulator can go about discharging that duty safely? We have seen some of the carnage caused by bad regulation in the energy sector, where a superficial view of competition has led to problems in that market, with companies collapsing. There is an obsession with the idea that competition is about the number of firms, whether or not they are sound. If something similar were to happen in this context, it could be even more serious and even more costly. I broadly support the aims of clause 24, but would welcome the Minister’s thoughts on how the problems and the bad effects in the energy market caused by the regulator’s misguided attempts to prove that there was competition—the trap of thinking that competition is just about the number of firms—can be avoided in this context.

[Tulip Siddiq]

I will speak to clause 24. I was going to speak to amendment 43, but it has not been moved.

We strongly welcome clause 24. We are completely committed to supporting the City to retain its competitiveness on the world stage and we support the new secondary objective for regulators to consider competitiveness and growth. However, I hope the Minister will agree that financial stability and consumer protection must always remain the priority for our regulators. Any compromise on those important objectives would be self-defeating. The competitiveness and global reputation of the City depends on the UK’s reputation for strong regulatory standards.

Although supporting the financial services sector to thrive and grow will be key to delivering the tax receipts that we need to fund public services, it will not be enough. To get the economy growing, the Minister knows that we need to harness the power of the City to drive growth in every part of the economy and the country. The financial services sector will have to play an important role in driving our transition to a low-carbon economy and creating the green jobs and businesses of the future. Perhaps the most interesting part of the new secondary objective is how our regulatory system can incentivise medium and long-term growth beyond the financial services sector in the wider economy.

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[Craig Tracey]

I will speak specifically to clause 26. It is really welcome that this measure has been brought forward, but I have a big worry that the wording of the clause is open to interpretation. I have therefore tabled a new clause that we will get to later. The main change is to amend the wording in the clause that the regulator has complied with the competitiveness duty, “in its opinion”. I think that is quite worrying. There is a worry that it will turn into a tick-box exercise. As Emma Reynolds from TheCityUK pointed out, there is concern that the regulator will end up marking its own homework. The regulator was not even aware that other jurisdictions had international competitiveness duties.

We should also find it concerning that Charlotte Clark from the ABI said in her evidence that she could not recall a new insurance company being set up in this country in the last 10 to 15 years, yet they are being set up in other countries, including in the EU—countries with which we have equivalence. The main reasons seem to be the time that it takes to get regulated and the cost. As my hon. Friend the Member for Wimbledon said, in some instances it is up to 14 times more expensive to get regulated here than in similar jurisdictions that are similarly robust.

I therefore think that the provision needs to be much tighter and to have some proper key performance indicators and metrics. It was good to hear the FCA say that it was looking at those, but we need to set them out clearly. The types of thing that could be in there are an understanding of who is leaving the country for other regimes and why; rule monitoring and evaluation; the level of duplication in the rulebook; the speed and responsiveness of the regulator; and our success in attracting new applicants. As I said, I have a new clause, which we will come to at the end, but it would be great if I could meet the Minister beforehand to talk this through and to see whether it can be incorporated into the Government’s thinking.

[Dame Angela Eagle]

Again, there is largely agreement about the aims of clauses 25 and 26. We are on the cusp of a complete transformation in the way our economies have to work. Sometimes, I think we do not quite understand the extent of the transformation that will be needed and the speed at which it will have to be done, given that we are so behind in our attempts to reach net zero and avoid catastrophic climate change. It really is the last few hours, in terms of the biodiversity and climate stability of the Earth, for us to be able to do this.

The scale of the required transformation is mind-boggling. Virtually every piece of infrastructure in existence in our society will have to be transformed. That will have to be done through public-private partnerships, investment to lead the market in areas where there is market failure and investment in innovation in financial services to help to provide that investment, but also through proper regulation, which is what these clauses are about. All those things have to be done in a timely way to create the circumstances for realising all the capital investment potential that will be needed to make this change happen, especially in established economies with old infrastructures, which are often the largest emitters of carbon, as it happens. All of that has to be done virtually in parallel, so that we can try to reach these important targets.

It is very important that, through these clauses, the Government have agreed to incorporate the legislative target of reaching net zero by 2050 into this part of financial services law. However, they have amended it by replacing what was there before—the “have regard to sustainable growth”—with the target. Is that the right way to go about it? By getting rid of that “have regard”, do we lose an opportunity to make progress, rather than just focusing on a future output? That is not a philosophical question; it is a practical one. Why have the Government decided to replace the “have regard”, rather than enhance it? Will the Minister reassure us that, in the context of having to retool the way we do almost everything in all our infrastructure, we could not have gone with both? Will there be the potential for people to think, “We’ll put everything off until closer to 2050,” because the “have regard” has been replaced with an end-date output target? Can the Minister justify why the Government thought that was the best approach?

When regulation is being refocused on net zero, there will be those who wish to greenwash what they are doing—I will use that phrase; the Minister understands what it means—in order to continue to attract investment and piggyback on the good will of people who wish this change to happen when, in the case of those companies, it is not happening. I suspect there is a little bit of that going on at the moment. How does the Minister envisage enforcement mechanisms and proper regulation being put in place to ensure that greenwashing is not going on everywhere? Such greenwashing would move us away from meeting the target. Not only would it be to the detriment of consumer interests; it would squeeze out more genuine activities, firms and investment if it were allowed to be too prevalent.

[Stephen Hammond]

I am not sure whether I am supposed to, Dame Maria, but I refer the Committee to my entry in the Register of Members’ Financial Interests.

Like many Members, I welcome the thrust of clause 25 and think it is important that we are setting the principle of net zero in legislation. However, I agree with my hon. Friend the Member for North Warwickshire. Clause 26 amends FSMA 2000 in relation to the content of the annual report. I will not go through all the arguments that we may well make when my hon. Friend’s new clause is debated, but I want to register with the Minister my concern about the phrase “in its opinion”. There is a reputational risk for the regulator, as much as for anyone else, if someone were to examine it later. I will not detain the Committee any longer, but I will want to speak to this point quite extensively when my hon. Friend’s new clause comes up.

I ask the Minister to look at the phraseology and consider whether it is appropriate. As we have all said in Committee, during the evidence sessions and in widespread discussion of the Bill, the need for clear metrics, regulatory transparency and regulatory accountability is key. That is one of the things we have all welcomed in the Bill.

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[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?