Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Altmann (Con)]

My Lords, I add my support to the amendment so excellently moved by the noble Lord, Lord Sharkey, and I thank my noble friends Lord Hamilton and Lord Naseby, who have spoken about the dangers that are entailed if we do not introduce measures such as this amendment into the Bill. There is a risk of executive power-grab. I am not at all saying that that is the intention, but the possibility of that would be opened and surely, as we have just argued in the previous legislative discussion, it is so important that we ensure that Parliament has control, not a few Ministers. That is what I hoped we were going to do when we were revising the laws that had been adopted from the EU.

[Baroness Kramer (LD)]

My Lords, I can add very little to the extraordinary speeches we just heard, many of them quite brief but absolutely targeted and to the point. I simply want to add just two more issues that perhaps have been mentioned but not stressed.

The first is that a carve-out of financial services from the REUL Bill is not the carve-out of some minor area of insignificant interest. Financial services are in effect our largest and most significant industry at this point in time in the UK and will be for many years in the future, and indeed the products that come from financial services are the lifeblood of our economy, both for businesses and for ordinary people. Therefore, scrutiny of decisions that are made within this arena surely has to be a central and significant responsibility of Parliament.

I say to the Minister, who always prays in aid consultation, both formal and informal, in the process of making change, when did consultation replace scrutiny in the mind of this Government? Parliament is not a consultee but the body that is democratically elected to make the key legislative decisions about the future of our country. Its relegation to the role of a consultee, which in effect happens and which this legislation would in some ways counter, is, I believe, completely unacceptable to most people when they have the opportunity to face up to it and think through this issue. Therefore, we on these Benches are very much in support of these amendments, and if necessary we will go through the Lobbies if the Minister is unable to accept at least a significant one of them.

[Baroness Chapman of Darlington (Lab)]

My Lords, before I address the amendments, I want to acknowledge the work of my noble friend Lord Tunnicliffe, who had been leading for these Benches on this Bill until very recently, and thank him for his hard work and generosity in the way he has handed over custody of the Bill to me and my noble friend Lord Livermore. We are very grateful to my noble friend for everything he did, and he continues to advise and support—as noble Lords who know him can well imagine.

However, we are on Report, and this is the stage where we cut to the chase and pick our battles. I have been leading on the retained EU law Bill and am very familiar with the arguments raised in this debate, but we are treating this Bill slightly differently to the retained EU law Bill because our concerns on that Bill revolved around the lack of certainty created by the Government’s approach. There was no definitive list of the terms of retained EU law that would be revoked at the end of the year, and the absence of that list meant limited scope for meaningful engagement, scrutiny or consultation. That was our fundamental objection to that Bill.

The process set out in this Bill is different, with most of the retained law listed in the legislation and to be repealed and revoked only once replaced by regulations that are UK-specific. Fundamentally, we think that changing the process outlined in the Bill at this stage in a manner that the sector has not asked for—it is very different to the engagement that we had on the retained EU law Bill, where there was strong demand from various sectors for change—would introduce uncertainty.

The Lords were right to ask the Government to think again on the retained EU law Bill, but amendments to one Bill do not automatically work for another and, in any event— as I know from having worked on the retained EU law Bill—the version of the amendment we are considering today has already been convincingly overturned by the elected House and we have had to come back with another. As we need to pick our battles and to prioritise at this stage in our proceedings, we on these Benches will not be participating should the issue be put to a Division today.

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[Lord Harlech (Con)]

My Lords, I beg to move government Amendment 2 and will also speak to the other amendments in this group. These are a set of minor amendments that the Government have tabled to ensure that all provisions of the Bill and the Financial Services and Markets Act 2000 operate effectively and fully achieve their intended policy effect.

Turning first to Amendments 2 and 118, central counterparties, or CCPs, are a type of financial market infrastructure and are crucial to global financial stability. Following the UK’s exit from the EU, the Treasury established a temporary recognition regime to enable eligible non-UK CCPs to continue providing important clearing services to UK firms while equivalence and recognition decisions were ongoing. To allow CCPs exiting the temporary recognition regime without recognition time to wind-down exposures to UK firms, a run-off regime was also established. The length of the run-off is determined by the Bank of England for each CCP, with a current maximum period of one year. As a result of provisions in this Bill tabled in Committee, the Bank of England will have the ability to extend the maximum run-off period for CCPs from one year to three years and six months. This would allow overseas CCPs currently due to exit the run-off regime at the end of June 2023 further time to apply for recognition if desired, and to remain able to offer services to UK firms during that period.

Amendments 2 and 118 seek to facilitate continuity of services under the run-off regime in the event that Royal Assent of this Bill occurs very close to or after 30 June. Amendment 118 provides that the Bill provision that gives the Bank the power to extend the run-off period comes into force on Royal Assent. This will allow the Bank of England to extend the run-off for those CCPs that wish to continue providing services to UK firms but need more time to apply for recognition, as was set out in Committee. However, if Royal Assent is secured after relevant CCPs have exited the run-off, government Amendment 2 will give the Bank of England the ability to reinsert a CCP into the run-off regime by determining that a CCP’s run-off is to be treated as not having expired. This will allow the Bank of England to extend the length of a CCP’s run-off period even in cases where a CCP has already exited the run-off. This will avoid any potential disruption that could otherwise arise if CCPs exited the run-off period before the Committee stage amendment had come into force.

Amendments 3, 16, 17, 21, 22, 34, 53 and 54 ensure that the references to the regulators’ objectives in the Bill and the Financial Services and Markets Act 2000 include the new competitiveness and growth secondary objectives for the PRA and the FCA, and the Bank of England’s new secondary innovation objective.

Turning to Amendments 5 and 6, Schedule 5 to the Bill makes amendments to FSMA to ensure that the regulatory gateway for financial promotions legislated for in this Bill can be implemented and operated. One way that it does this is by applying other relevant parts of FSMA to ensure that the FCA can oversee the gateway effectively. Amendment 5 aligns the wording between a provision introduced by Schedule 5 and a similar existing provision within FSMA. These provisions relate to the issuance of notices to vary permissions or to impose requirements. The amendment will ensure that the regulator is required to provide notice when they propose to vary a permission in all cases, and to avoid any potential duplicatory requirements to provide notices. Amendment 5 replaces the relevant provisions in Schedule 5 and in FSMA with a single new provision. This will help to ensure that these similar provisions are interpreted consistently and achieve the intended policy effect. Amendment 6 is consequential on Amendment 5.

Amendment 49 ensures that the CBA panel’s statutory remit includes cost-benefit analyses for rules for critical third parties, and that it is therefore able to provide advice to the Bank in relation to this. Amendment 86 corrects a drafting error, ensuring that Schedule 11, regarding the central counterparties resolution regime, functions as intended. It provides clarity over the Treasury’s power to lay regulations restricting the making of partial property transfers. Amendments 87, 88 and 89 make technical corrections and clarifications to the insurer insolvency provisions in Schedule 12 to the Bill. Amendment 89 provides a clarification to make clearer the amount of FSCS top-up compensation that policyholders will be eligible to receive following a write-down order, meeting the stated policy intent. Amendment 87 clarifies that a liability is, to the extent of its reduction by a write-down order, to be treated as extinguished unless and until revived by the variation or revocation of the order. This helps to ensure that the intent of the provisions is achieved by increasing legal certainty about the treatment of written-down liabilities.

All these amendments seek to ensure that the provisions in this Bill achieve the policy intent and minimise potential disruption to the UK financial services sector. Therefore, I beg to move Amendment 2 and intend to move the remaining amendments when they are reached.

[Baroness Kramer (LD)]

My Lords, I will make very few comments on this group of amendments. I accept that they are technical. I find some of them distasteful, particularly those that enhance the scope of the competitiveness and economic growth agendas. I fear very much that the underlying concept and construct will lead us back in the direction of the kind of risk taking that created the crisis that we went through so badly in 2008 and 2009. However, given that our attempts to turn around those objectives have not won support from other parts of the House, there is no sensible reason for me to object to these more technical amendments, other than to say that it is a sad day and that many of us will be revisiting this, if we live long enough, when we hit the next financial crisis.

[Lord Eatwell (Lab)]

My Lords, I will make two points on these technical amendments. As the Minister said, central counterparties are fundamental institutions in maintaining the stability of financial markets. This measure, to continue the role of overseas-based central counterparties, is enormously sensible. But there is an issue that has not been addressed. What if the overseas central counterparties decide not to provide services to UK firms—if they decide, following the UK exit from the European Union, that they will withdraw from providing such a service? What provision has His Majesty’s Government made for providing those services in those circumstances?

Secondly, I echo the point that the noble Baroness, Lady Kramer, made about the competitiveness and economic growth objective that is being incorporated as a subsidiary objective. As a subsidiary objective, it is unobjectionable. What is striking in the government amendments that we will debate is the way in which it is continuously privileged, such that it no longer remains subsidiary; extra reports and consideration will now be required, all focused on one objective. This is a serious mistake, because the statutory objectives of the regulatory authorities will change with circumstance over time. Writing into law that one objective should be privileged is a significant error. The primary and secondary objectives make sense, but overegging the position of a subsidiary objective is a mistake.

My main point at this time is to ask the Minister what measures provide central counterparty provision in those areas where overseas central counterparties decide not to act for UK firms.

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It is indeed this economy and its people who bear the cost of that dual system on which my noble friend Lord Trenchard touched, the danger being that the lack of competitiveness might stymie the economy. The reporting requirement is important to encourage further reform and transparency. It will enable a determined effort to be made to move rapidly. It matters that we have greater certainty about where things have got to and what still remains to do. Many do not have ready access to legal help to navigate their way through the retained EU law book and the more complex system for the financial sector, so I hope that my noble friend the Minister will look kindly on and support this amendment. It will make for fairness so businesses are clear about the rules, and it would be a means to the prosperity of the whole economy that we need to encourage. In my view we need to move back more rapidly and thoroughly to our common-law system, and I urge the Minister and the Treasury to be equally as receptive to the obligation to report regularly as her colleagues on the Business team.

[Baroness Kramer (LD)]

My Lords, I will be very brief. I have no objection to either of these amendments, although for very different reasons from the previous two speakers. On the first, which is about the report on retained EU law, it seems sensible to have a proper and lasting reporting requirement to Parliament, although I point out to those who are very worried about additional burdens that the report itself generates a huge amount of effort, energy and paperwork, so I doubt it goes very far in reducing any burden on anybody.

I am more interested in the second amendment tabled by the noble Viscount, Lord Trenchard, Amendment 3B, because it embeds the principle of accountability to Parliament and the wider world and states that, where changes are made in regulation, other than in situations of genuine urgency—I underscore “genuine” because we have seen that flex a great deal, with things said to be very urgent that seem to have no urgency whatever attached to them—the Treasury should carry out consultations.

I say to both previous speakers that if they speak to the industry they will find that the struggles that the financial sector has been facing in the UK—the decline in listings, virtually the complete loss of the European swaps market, our gradual exclusion from a significant range of activities that are international and certainly pan-European and fintech outsourcing extensively into Europe—are post-Brexit consequences. Frankly, I do not think that amendments such as this, in the hope that there will be much lighter-touch regulation, which is what common law really means, are going to remedy that problem. We built our reputation on quality and consistency and, like it or not, those are quite demanding standards that light-touch standards do not achieve.

[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Viscount, Lord Trenchard, for bringing these amendments forward and we ask him to pass on our very best wishes to the noble Baroness, Lady Noakes, and her husband. I am sure she will be impressed by the way he introduced her ideas this afternoon. I feel somewhat that we are intruding on a bit of a family squabble on the Government Benches with this group in that, in the retained EU law Bill, the amendment that she brought forward was as a consequence of her deeply felt disappointment—shared by the noble Baroness, Lady Lawlor, if I remember her speech at the time, and others—at the Government’s change of approach to that Bill. The change of approach was one that we had been calling for and very much welcomed, and we did not feel on that Bill and we do not feel on this Bill that there is an awful lot to be gained by these amendments. There is not a huge amount to be lost either, particularly with Amendment 3A. We are interested in what the Government have to say about them, but they are not amendments that we take a particularly firm view on either way because we think they are designed with a rather different purpose in mind, which is to hold the Government’s feet to the fire.

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[Lord Tyrie (Non-Afl)]

I declare my interest as a consultant to DLA Piper, which helped me with drafting the amendment.

The need to provide the RDC with statutory autonomy was a recommendation of the Parliamentary Commission on Banking Standards, which I chaired in 2013. The purpose of my amendment is to give the FCA’s internal watchdog, the Regulatory Decisions Committee, greater independence by putting it on a statutory footing. I set out why this is necessary in Committee so I will not repeat all those arguments now but, in a nutshell, the benefit will be greater fairness for firms and individuals; it can be accomplished without compromising high-quality enforcement.

The case for this is pretty straightforward. The RDC was created to act as a check on what would otherwise be the FCA’s almost untrammelled power of enforcement. The RDC is the FCA’s in-house watchdog —a second pair of eyes—which can stop an enforcement action. In theory, firms could go to the Upper Tribunal, the equivalent of the High Court, but that is very costly and the fact that its proceedings are in public creates huge reputational risk for a firm or individual going there. For many of them, that can be terminal. So, the RDC is often the only practical safeguard they have against overly zealous enforcement by the FCA.

The problem for the RDC is that it does not have enough statutory authority to do the job as well as it should. At the moment, the RDC’s operational independence is wafer-thin. For a start, the RDC is subordinate to the FCA board. The board can and does decide what type of cases the RDC looks at, what resources are available to it and what procedures it should follow. The RDC also sits down the corridor from the enforcement team in the FCA. So it is small wonder that firms think it is much less than fully independent.

The price of the perception that the RDC is not fully independent is not just a sense of unfairness among some in the regulated community; it also carries a significant economic cost. It acts as a deterrent to activity and investment to many who do not want to take a risk of being on the wrong side of the enforcers. It is for these reasons, among others, that the Parliamentary Banking Commission, which I chaired, concluded that the RDC should be provided with statutory autonomy for its operations.

No doubt the Minister will have been briefed by the FCA, via her Treasury officials, that all these changes that I have set out are unnecessary—but they are necessary. The dangers that come with lack of independence have recently been vividly illustrated by the FCA board’s decision significantly to limit the scope of the RDC’s activities. There was very little public discussion. As of 2021, it no longer supervises the FCA’s decisions relating to a firm’s licensing, authorisations—the specific activities permitted under its licence—or an individual’s approval: that is, whether people are suitable for senior appointments under the senior managers’ regime. It also leaves firms and individuals unable to make oral representations in front of the RDC for many decisions that are crucial to their future. For many cases, those oral representations have now been closed down under the 2021 reforms.

So the narrowing of the remit will matter a lot, particularly for smaller firms. What is more, it will drive a coach and horses through the RDC’s already fragile independence and certainly through the perception of it. The fact that such a change could have been pushed through by the FCA board, after a consultation exercise which did not even support it, illustrates the need for much greater accountability and much better explanations from the regulator. Something was already needed in 2013 when we looked at this, to boost the RDC’s operational independence, but this 2021 reform shows that it is even more badly needed now. The modest amendment on the Marshalled List will entrench the RDC’s independence in statute. It will give the RDC the jurisdiction to challenge—publicly, if necessary —FCA board decisions that are relevant to its work, and it will create a direct statutory line of accountability to Parliament for everything it does.

Since 2013, I have scarcely heard any arguments against the banking commission’s proposal and, since I raised these issues in early March, I have been flooded with support from all sides of the financial services industry, and from a number of Peers and several former senior regulators. Two former Cabinet Secretaries have contacted me to tell me they strongly support it, as has the right reverend Primate the Archbishop of Canterbury. This is quite a large collection of varied support for a relatively small but sensible measure. They have done this, I think, because it has clear upsides, and neither they nor I can think of any downsides. It does not even carry an Exchequer cost.

I very much hope that the Minister will not be the last opponent standing when she stands up, but, if she is unpersuaded, I very much hope that she will at least agree to a consultation taking place on whether something should be done to boost the RDC’s independence, with an open mind on what should be needed. In that conciliatory frame of mind, I beg to move.

[Baroness Kramer (LD)]

My Lords, I had the privilege of adding my name to this amendment, and of serving with the noble Lord, Lord Tyrie, in his pre-Lordship days, when he chaired the Parliamentary Commission on Banking Standards. Like virtually everyone else who was on that committee and had spent two years taking evidence across the full range of issues that underpinned the crisis of 2008 and 2009, we were very surprised that the Government did not seize upon the recommendations for a body such as the RDC to have the kind of statutory independence that is described in this amendment. The amendment is extremely well drafted, as anybody reading it can recognise. It is not one of those where people say that the idea is good but there is a problem with the language. In this instance, there is not.

I have always thought that the regulator benefits as much as anybody else from oversight and challenge by an independent body with the requisite expertise. I also have the privilege of sitting in the Economic Affairs Committee. We have had discussions in the context of the independence of the Bank of England, but this has far broader implications. The problems of groupthink are becoming extraordinarily evident. Creating independence in a body such as the RDC is a mechanism for breaking down some of that groupthink. It is not because people are bad, incompetent or inadequate, but because, if there is not a process of challenge with sufficient gusto, groupthink begins to take hold. There begins to be a measure of complacency, people become less inclined to challenge and that benefits none of us.

I see no downside to the Government accepting this amendment. I hope that they take it extremely seriously and recognise that the quality of the language is here, meaning that they can run with this amendment as it sits, and that the regulator will benefit, the industry will benefit and individuals will benefit. There are very few occasions when one can look at a measure and say that this is true on all those fronts.