Financial Services Bill

Baroness Hayman Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

I hope that the Government are listening and will work with Peers on all sides of the House during the remaining stages of the Bill to ensure that we address these vital issues effectively. I beg to move.

[Baroness Hayman (CB) [V]]

My Lords, I declare my interests as set out in the register. It is a pleasure to follow the noble Lord, Lord Oates, who, both at Second Reading and today, has argued passionately and cogently about the need to remedy the absence from the Bill of any reference to the risks and opportunities that climate change presents to the financial services industry. I have tabled Amendments 14, 35, 75, 76 and 98 and added my name to Amendments 11, 12, 23, 48 and 89 in the names of the noble Lord, Lord Oates, and the noble Baroness, Lady Jones of Whitchurch.

As the noble Lord, Lord Oates, said, all the amendments in this group seek to put a climate change lens on the provisions of the Bill. There are various approaches, but the amendments focus, as he said, on ensuring that the regulators take into account climate-related risks when they are making the new rules and regulations proposed in the Bill. They seek to address the remit of the regulators and thus ensure that climate risk is considered at a systemic level.

The increase in firms reporting on such risks at an individual level is both necessary and welcome; however, there is a widely recognised and existential threat to our entire financial system from climate change. Last year, the Governor of the Bank of England, Andrew Bailey, said:

“Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage.”


We need to ensure that those with the responsibility for financial stability at a macro level are assessing and reporting systemic climate risk as a core function.

On numerous occasions, the Government have recognised the integral role of our financial services industry in driving the change to a green economy, with an urgent focus on aligning investment with the objectives of the Paris Agreement and the Climate Change Act. Our amendments would put that into reality. The Chancellor spoke on 9 November about

“putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment”.—[Official Report, Commons, 9/11/20; col. 621.]

Yet, as has been said, this crucial piece of financial industry legislation remains totally silent, hence the importance of our debate on this group of amendments and the urgency, in this year of COP26 when our own domestic performance will be integral to the success of our global leadership, of making progress before the Bill leaves this House.

Turning to individual amendments, I have tabled Amendment 14, which, as the noble Lord, Lord Oates, says, addresses the same issues as his Amendments 11 and 12, but in a slightly less detailed way. The intention of Amendments 14 and 35 is to ensure that the FCA makes new prudential regulations for investment firms and that, before the PRA makes any new rules in relation to the capital requirements regulations, these regulators must have regard to the likely effect of those rules on the UK meeting its net-zero commitments. “Having regard” is an important issue and one to which, when this was debated in the other place, I sensed that the Government were not completely antagonistic, but took rather a St Augustine view—being happy to be made green, “but not yet”.

I see no reason whatever for awaiting the consultation on this issue, especially because when one reads the consultation document, apart from a few words in the foreword by the Minister, there is no reference to climate change and no request for views on it. Given the importance of the issue, this is something on which we should be making progress straightaway.

I am grateful for the support of the noble Lord, Lord Oates, and the noble Baronesses, Lady Altmann and Lady Bennett, for Amendment 75, which focuses on the current remit and governance provisions of the regulator. It proposes amending Schedule 1ZA to the Financial Services and Markets Act 2000, which deals with the constitution of the governing body of the FCA, and provides for the appointment of a board member with direct responsibility for climate change issues. This would enable a focused and strategic approach to be taken to climate change across the sector at the highest level of the regulator.

Essentially, the amendment requires the regulators to do what they have asked of the sector itself, because those are the same provisions that they now require financial institutions to comply with, and they replicate the senior management regime, which requires those institutions to appoint a board member responsible for identifying and managing financial risk from climate change, and reporting on it.

As part of the process to embed climate risk and the net-zero transition into investment and supervisory decisions, institutions are asked to

“embed the consideration of the financial risks from climate change in their governance arrangements”

and

“demonstrate an understanding of the distinctive elements of the financial risk from climate change and a sufficiently long-term view of the financial risks that can arise, beyond standard business planning horizons.”

That long-term view is particularly important, and there is no reason for the FCA not to take on this responsibility. The Bank of England itself has appointed an executive sponsor for climate-related risks, who is responsible for recommending to the governors the Bank’s strategy for addressing the risks that climate change poses to its objectives, and overseeing the implementation of that strategy. So I hope that, when he winds up, the Minister will be able to respond positively to this very limited but still important amendment.

Amendment 76 deals with the need to ensure that the regular mandatory reporting mechanisms for a sector-wide climate risk assessment provide for FSMA to be amended; the need for the PRA to provide a regular report on how it has evaluated exposure to climate risk; and the impacts that it would have on the stability of the United Kingdom financial system. That could form part of the annual reporting that the regulators are required to provide to the Treasury, and to Parliament via the Treasury Select Committee.

The amendment also provides that, as part of the reporting process, the PRA must seek advice from the climate change committee. It is important that we join the dots between the different bits of government, and ensure that a statutory body such as the climate change committee is integrated into the advice received by regulators and those responsible for economic stability.

My final amendment in this group is Amendment 98, which seeks to amend the Financial Services and Markets Act to insert a new FCA climate-related financial risk objective. While the regulators are moving forward with approaches necessary to address climate-related financial risks, such as through the UK Climate Financial Risk Forum, their statutory remit does not currently include a duty to consider the impact of climate change on the stability of the financial sector overall.

The theme running through this group of amendments is to seek to embed climate risk and the net-zero obligation into the financial system. This is one critical step towards doing that, by ensuring that they are embedded within the scope and remit of the regulators at every level.