Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024

Baroness Kramer Excerpts

Monday 2nd December 2024 Grand Committee

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, these regulations will add four pieces of legislation, known as “enactments”, to the list set out in Section 17(3) of the Financial Services and Markets Act 2023, so that those enactments can be temporarily modified as part of the financial market infrastructure sandboxes.

A financial market infrastructure sandbox is designed to provide a regulatory environment in which existing legislation and regulation are temporarily removed or modified. Firms that participate in a financial market infrastructure sandbox are able to test new and developing technologies and practices that would otherwise be inhibited by existing legislation. If an activity in a financial market infrastructure sandbox is successful, the Treasury can make permanent changes to legislation—only after laying a report before Parliament.

The Treasury was granted the power to make provision for financial market infrastructure sandboxes by Section 13 of the Financial Services and Markets Act 2023, and the list of enactments that the Treasury can temporarily modify is set out in Section 17(3). The Treasury also has the power to add further enactments to this list, set out in Section 17(6) of the Financial Services and Markets Act 2023. This is because the testing of new technology and practices, by its nature, evolves over time, and the list of legislation in scope would likely need to be added to. The ability to add further enactments to the list is therefore a way of ensuring that the financial market infrastructure sandbox regime can be used to its full potential, ensuring that the testing of new technologies and practices can continue to take place as new legislative changes are identified.

This statutory instrument exercises the power set out in Section 17(6) of the Financial Services and Markets Act 2023 so that new enactments can be added to support two financial market infrastructure sandboxes; namely, the existing digital securities sandbox and the future private intermittent securities and capital exchange system—known as PISCES—sandbox. The digital securities sandbox will enable firms to test new and innovative technology across financial market infrastructure activities, while the PISCES sandbox will allow private companies to have their shares traded on an intermittent basis on a new type of stock market.

This statutory instrument will bring the following legislation into the scope of the power to make temporary modifications in future financial market infrastructure sandboxes: the Stock Transfer (Gilt Edged Securities) (CGO Service) Regulations 1985, which I will refer to as STRs; the Government Stock Regulations 2004, which I will refer to as GSRs; the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which I will refer to as MLRs; and Regulation (EU) 2017/1129 of the European Parliament and of the Council, also known as the prospectus regulation, which we inherited from the EU.

Temporarily modifying the STRs and GSRs will enable us to support a digital gilt issuance through the digital securities sandbox. The MLRs will be modified to facilitate an exemption from the MLRs crypto asset regime for digital securities sandbox participants; this is on the basis that digital securities sandbox activity will involve regulated securities and conventional anti-money laundering legislation will be applied. The new UK prospectus regulation will be modified as part of the PISCES sandbox so that prospectus requirements can be disapplied in favour of bespoke disclosure requirements in the PISCES sandbox.

I should note at this point that this statutory instrument does not make any temporary changes to the enactments themselves. Under the procedure stipulated by Financial Services and Markets Act 2023, this will be done as part of further negative SIs to be laid before Parliament, which will provide all the relevant explanatory information for the changes being made to each enactment. For example, the Government published a draft of the instrument that will set up the PISCES sandbox in November for public comment. Similarly, the digital securities sandbox has already been established by a statutory instrument laid last December, although changes to the MLRs will require a further statutory instrument.

In closing, this statutory instrument will make changes consistent with the powers established by the Financial Services and Markets Act 2023 and will support the continued development of the digital securities sandbox and future financial market infrastructure sandboxes, such as the PISCES sandbox. The Government believe that this will help support innovation through each of these financial market infrastructure sandboxes. I hope that noble Lords will  feel able to support these  regulations and their objectives. I beg to move.

[Baroness Kramer (LD)]

My Lords, the more times I read this statutory instrument—even after writing myself a cheat sheet on its alphabet soup of acronyms—the more I realise that I lack the expertise in the digital financial services and crypto space to really understand what is happening, the context and the implications. However, I have always supported the sandbox approach as a creative way for the regulator to understand innovations in financial services and how to appropriately regulate them.

This is a high-level SI that will, as the Minister said, be followed by detailed—although negative—SIs to address specific cases. I am a bit concerned that we will need to spot these cases in order to question them, but I have no intention of opposing the regulations before us today. PISCES is a slightly different issue but, frankly, without seeing the new prospectus regime, I have absolutely no idea how to comment on the changes contained in this SI.

I do, as always, have a few questions. First, I want to understand how this SI and what lies behind it ties in with the competition and growth objective. Are the Government taking the view that future growth in financial services is largely linked to digital business models, including blockchain infrastructure and crypto assets, and that shaping the FCA to be a benign regulator will make the UK a leading player in designing, holding, trading and marketing new instruments? Or are the Government concerned that digital and crypto create a new potential for market manipulation, mis-selling and money laundering, such that the FCA needs to find ways to counter, with different approaches to monitoring supervision enforcement? In other words, are the Government playing offence or defence? I would like to hear the Minister’s view.

Secondly, and related to that, with this instrument and the related activities, are we ahead of the curve, with the curve or behind the curve compared with other international regulators? I am afraid I do not have the global reach to understand, and it would be helpful if the Minister could tell us.

My lack of knowledge in this area led me to contact a friend in the industry to seek advice, and I was stunned by the response. In summary, I was told that the innovators who bring new and innovative models to the regulator’s sandbox are the smartest people in the room, but the regulator views the sandbox as a means to decide on monitoring procedures, compliance algorithms and approaches to enforcement. The innovators, by contrast, use the sandbox to identify the regulator’s points of weakness and then build them into their models to escape regulatory control. Innovators in the sandbox explore the regulatory perimeter, for example, to design products that will fall just outside; the mini-bonds are an example. They identify transaction sizes that will slip under the radar and coding approaches that will prevent multiple transactions that are essentially identical to be linked together and therefore escape both supervision and action. Those are just examples, but, increasingly, the industry seems to regard observing the intent of the regulator as purely voluntary. Does the Minister have any concerns that the regulator is outmanoeuvred, underpowered and underresourced?

I will end on my hobby-horse, which applies very much in these circumstances. Does the Minister recognise that, in this very fast-changing world, when so much is global and so much is digital, an effective whistleblowing system is absolutely vital, and our current system is a serious weakness?

[Lord Altrincham (Con)]

My Lords, it is a privilege to address the Committee on the Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024. These regulations serve to bring various legislation under the remit of the financial market infrastructure—FMI—sandbox. The sandbox regime is an important part of the Financial Services and Markets Act, giving expression both to good prudential regulation and economic growth by supporting innovation.

As we heard, the regulations being transferred to the FMI sandbox are: the STRs, or stock transfer gilt-edged securities regulations 1985—the digital gilt area that is likely to be an enormous focus of the government team in the coming months; the GSRs, or Government Stock Regulations 2004; the MLRs, or Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; and the UK prospectus regulation, Regulation (EU) 2017/1129 of the European Parliament and of the Council.

Since our departure from the European Union, the British Government have pursued an ambitious programme of reform to establish a regulatory framework that is better tailored to the strengths and opportunities in UK financial services. These regulations further enhance our ability to adapt and thrive in a competitive global financial environment. The instrument is more than a technical adjustment; it is a demonstration of our commitment to dynamic regulation in financial services and support for innovation. The instrument ensures that our laws continue to reflect the highest standards of probity and innovation while giving the financial services sector clarity and confidence.

As Conservatives, we believe in the power of free markets, tempered by fair rules and effective oversight. These regulations are a testament to that philosophy, and they ensure that the UK remains the jurisdiction of choice for global financial institutions and investors, which in turn helps the country secure tax revenues needed to fund public services. By updating and expanding the scope of the Act, we are aligning our regulations with emerging opportunities including advances in financial technology, green finance and digital assets—areas in which Britain has already established itself as a global pioneer.

The FMI sandbox scheme commenced under the previous Conservative Government and was a success, with the digital securities sandbox—the DSS—proving useful to business. Three of the pieces of legislation being brought into scope would facilitate activity in the first FMI sandbox, known as the DSS: the STRs, the GSRs and the MLRs. Bringing the GSRs and the STRs into the scope of the FMI sandbox powers under the Financial Services and Markets Act 2023 would facilitate the possibility of sovereign debt issuance, using distributed ledger technology, under the DSS.