Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Naseby (Con)]

My Lords, I was one of the 34 who took part in the debate on secondary legislation, and I previously had the privilege of being on the Public Accounts Committee for some 12 years.

The debate on those two reports was an absolute watershed. Here is a golden opportunity to ensure that this Bill, which is so fundamental to the growth of our country, particularly the City of London, at a particular time can be pioneering. I am sorry to load that on to my noble friend; at any other time it might not be loaded on to her.

The key elements are there: secondary legislation basically means that those of us here in Parliament, in both Houses, have an opportunity to debate any changes made to a Bill. If I had to take issue with the noble Lord, Lord Sharkey, it is that he has in his amendment, at proposed new paragraph (b), the word “significant”. One company’s “significant” might be insignificant to another, and vice versa, so I do not think that is quite the right word to use.

We will go through this Bill in detail. Others have made their points, but for me—I did previous work with two quoted companies and a friendly society in the role of chairman—this is an opportunity. We must recognise that growth for our country is fundamental. That fundamentality is, to a fair degree, influenced by the Bill before us.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, for the purposes of Committee I declare my interests in the register, in particular as a non-executive director of the London Stock Exchange.

I will comment only briefly in this debate because, as others have said, it touches on some issues that run throughout the Bill. This is a matter of great importance: how we transpose the legislation and get the benefits of that transposition into UK law. If we have the flexibility, we ought to be able to use it, but financial services are our largest-earning industry, and I believe it is right that Parliament has to be able to keep track of what is going on and why when there are changes, and, as has already been pointed out, to have its attention drawn to significant changes.

If this amendment comes round again on Report, I would also like to see in it a report on the resulting change to the regulatory perimeter. Quite a lot of change is already going on and it is not necessarily something that we have had our eye on. Some of this change will be entirely at the behest of the regulators rather than in the hands of government. We will come across this later. It was always clear with EU legislation—maybe irritatingly so, in some instances—that the regulator “shall” do something, which did not give it any room for manoeuvre if it thought something did not need to be done. It looks like we will give our regulators the bits of wriggle room and the flexibility that we want, but it is wholly right that there should a report back to draw to the attention of our House and those who scrutinise this the intended difference in the regulatory perimeter, among other things, so that we can watch it and see how it goes.

I will return to the regulatory perimeter in many ways, because one of the problems is that once something is inside that perimeter, a whole truckload of things that were not really necessary might come along. AIFMD might be a good example of that. It is a whole load of extra reporting: where has it gone, what has happened to it, and has it done anything?

At the same time, if bad things are going on, you want there to be some kind of powers of intervention. It should not be a whole caboodle, with lots of rules and regulations and reporting on one hand but nothing on the other. We need to be able to do the things that are in the middle and bridge that gap. Given the way the edges of what is or is not a financial service are getting more and more blurred, what with the big tech industries and so on as well as the more nimble fintechs, we need that ability to ensure that where there is harm there is a route for action, without it having to mean that the whole kitchen sink of reporting is thrown at it across the board.

[Lord Davies of Brixton (Lab)]

My Lords, I thank the noble Baroness, Lady Noakes, for pointing out that the process here differs from that in the retained EU law Bill. Could the Minister in her response set out more clearly the differences between the process here and the process in the other Bill, and the reasons for the differences?

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[Baroness Noakes (Con)]

My Lords, I will speak to the amendments from the noble Baroness, Lady Worthington. I do not support them, because I think that what the Government are trying to do in this Bill is moving in the right direction.

We have to remember that derivatives are basically a success story. It is a huge financial activity. The total value of derivative trading is sometimes estimated to be a multiple of global GDP. Of course, commodity trading is only a relatively small part of that, but it is important because the advantages of trading allow effective risk management, price discovery and market efficiency. Those are the sorts of things that actually help consumers, at the end of the day, so we must be very wary of trying to interfere in what is fundamentally a successful part of our financial infrastructure.

Of course, speculation is involved in derivatives, there is risk for some counterparties—and sometimes systemic risk—in derivatives, and sometimes they are extremely complicated as individual instruments, even to understand. But they are part of and underpin something that works well for markets overall. We should intervene in that only if absolutely necessary.

My own view is that the changes in the Bill probably do not go far enough to take the dead hand of EU prescriptive regulation away, but they are a solid move in the right direction. As the noble Baroness, Lady Worthington, pointed out, they replace a mandatory regime with a permissive one that allows the rules to be designed for the particular markets. In particular, the changes in Schedule 2 will allow the FCA to transfer responsibility for setting position limits to trading venues, if indeed position limits are needed. For some time now, the FCA has not been enforcing excesses on position limits in respect of the majority of contracts, and the world has not come to an end.

I think Amendments 21 and 22 are a step backwards in trying to preserve a mandatory EU regime. So too is trying to drag over-the-counter derivatives into that regime, because—as the noble Baroness pointed out—it has been found that they are extremely difficult to identify. Their removal from the regime was almost universally supported in the consultation that the Government carried out on changes to the derivatives regime.

Amendment 41 from the noble Baroness, Lady Worthington, is about putting additional information in annual reports and accounts. There are already obligations on companies to report things that are material to an understanding of the financial position of those companies. They are required to describe their trading model and the operating segments that are relevant to them, but they are not required to identify income streams from particular instruments that they operate. There is a good reason for that. Annual reports are already very long, complicated and difficult to understand, and the noble Baroness is asking for information that in very many cases will be wholly irrelevant to an understanding of the financial position or operations of the companies that involve some trading. For many, it is embedded in their marketing activities for the products they engage in. I do not support any of the amendments put forward by the noble Baroness.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I congratulate the noble Baroness, Lady Worthington, on venturing into commodities. I remember many happy hours—I call them that—when I was chair of ECON, discussing commodities with the chair of the CFTC, Gary Gensler, in particular, and the chairs of the agriculture committees in the Senate, which deal with a lot of the derivatives. It is an impossible task to get a grip on everything, but that does not mean you should not try to get a grasp of things that might go wrong.

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[Baroness Bowles of Berkhamsted (LD)]

If I may drag the Minister back to where she was just finishing off, in her response to me and the noble Baroness, Lady Worthington, she said that the UK would continue to observe its G20 commitments, which I do not doubt, and that various agricultural products and so on would definitely still be within scope. However, it says here in legislation that the FCA “may”. It does not say, “Apart from the fact that we are observing G20, and agriculture is still in”—it just says “may”. Where does it say in primary legislation that there will be guidance—or whatever the appropriate word is—as to how these things will be dealt with by the exchanges in the circumstances that give rise to concern? Otherwise, looking at our legislation—at least, our primary legislation —I see that we would not have that certainty, and it is proper that we have it.

[Baroness Penn (Con)]

It might be wise for me to write to the noble Baroness to address that specific point. Under the overall framework for the regulators, they need to make their rules in a way that is consistent with international standards, to which the noble Baroness referred. That would be the additional way in which one would have that reassurance, but it is worth writing to set out the point for her with more clarity.

The noble Baronesses, Lady Bowles and Lady Worthington, talked about whether the FCA, in acting to advance its objectives, would have sufficient grounds to intervene in these markets. The Treasury is confident that it would, and an example of humanitarian grounds for intervention was given. We are confident that the FCA could intervene on humanitarian grounds, acting in line with its objectives, but perhaps I will also write to the Committee to expand on that further.

The noble Lord, Lord Sikka, somewhat pre-empted me: I was just about to turn to Amendment 41. I am afraid that the Government will disagree with the noble Lord and the noble Baroness. Arguments were advanced by my noble friend on this point. Amendment 41 would require all listed companies to disclose how much revenue they make from trading commodity derivatives. However, listed companies are already required to publish comprehensive information about their operations and finances as part of their annual reports. The Government view that as sufficient.

It may be worth turning to the questions asked by the noble Baroness, Lady Kramer, on government Amendment 28, if the Committee is happy for them to be addressed here. Does the power in Clause 3 allow the Treasury to amend primary legislation to give us or the regulator new powers? The power in Clauses 3 and 4 to modify legislation, including to create new powers for the Treasury or regulators, is limited to retained EU law, as set out in Schedule 1. Clause 3 powers cannot amend primary legislation.

The powers in Clause 4 can be used to move provisions from retained EU law into primary legislation. The power in Amendment 28 applies where the Treasury is making transitional amendments to retained EU law or restating it. It is designed to allow, for example, the Treasury to give itself a power to update a definition or threshold in legislation. This mirrors delegated powers for the European Commission in retained EU law. While it would be possible to deliver the same outcome by reuse of the powers in Clauses 3 and 4, the Government consider it more appropriate to create a specific power to allow for such updates to be made, where they consider it appropriate. When creating such powers, His Majesty’s Treasury will have the ability to specify the procedure for any statutory instruments made using the new power. The Treasury will follow the same approach to determining the appropriate procedure as it has in the Bill. Where the Treasury exercises the power to create further powers, the instrument doing that will be subject to the procedure specified in Clause 3(9), which, in the vast majority of cases, will be the affirmative power.

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[Lord Naseby (Con)]

My Lords, I am not going to repeat what my noble friends Lady Noakes and Lord Trenchard have said, but I certainly think that His Majesty’s Government—I am a very loyal member of the governing party—need to recognise that this is a once-in-a-lifetime opportunity in this Bill. Therefore, for me, the driving force should be to ensure that in doing what we are doing—I accept that it is important to mention designated activities—we should be driven by the need for growth for our economy, good competition and innovation. Those things are so key to the future of this country, the City and the whole of the financial services area that we need to be a little bit careful. I think that my noble friend Lady Noakes’ proposal is a perfectly valid one. The Government can have another look at it, but I do not think that it is necessary.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have some questions which arise from what the noble Baroness, Lady Noakes, said. If we want to go back to before the EU had the single market in financial services, we need to know how it worked with short selling. Unfortunately, I do not know how it all worked in the UK back then. When we started to do, or were forced into doing, the short selling regulation, I was told repeatedly from all sides in the UK that we did not need it but that naked short selling was banned. A lot of the concern was about short selling when you had not actually located where you would be able to get the share from for delivery. After the regulation was done, you had to know where you were going to get it, and it was a little firmer. However, I was assured that the wording was more or less the same as was applied, so how did we apply it? We did not have a designated activity regime.

There may be lots of little snippets around in financial services where you just need a simple rule like that—that you cannot do naked short selling but covered short selling is fine—without having lots of regulation, reporting and things around it. How are we going to do this? Would we do a designation just for a one-line piece of information? This is a genuine question, because absurdities begin when you have to invoke something that then requires complex rules. As soon as you go beyond the simple principle of no naked short selling, it will become a much bigger thing, as the European regulation did. There are other drivers for that, and it may be that more than just not doing naked short selling is necessary. My question is, within this designated activities regime, how do you do just one simple, little thing?