Financial Services and Markets Bill [HL]

Baroness Neville-Rolfe Excerpts

Committee stage
Monday 29th June 2026 Grand Committee

[Baroness Kramer (LD)]

I very much support the two amendments of my noble friend Lady Bowles. There is often an assumption that those of us who feel that regulation plays an important role have no instinct or desire to see proportionality in place, which could not be more untrue. My history is as a commercial banker, back in the days when we used to participate intensively in writing the loan documents and creating the covenants associated with our lending, whether to small companies or to some of the largest on the globe. Frankly, covenants that were off the shelf were completely inappropriate for providing the protection we needed in many cases. They were just useless exercises in paperwork for the companies involved. We used to reshape the loan agreements on that basis and, frankly, it worked exceedingly well.

When I look at the amendments, I am glad that proportionality is being recovered from the scrapheap that would result from Clause 17. That is important, and the way that my noble friend Lady Bowles, framed it is particularly significant. Both for the PRA and the SRA, the focus is proportionate to the benefits expected to result from the imposition of the burden or restriction, recognising the difference in size, nature and objectives. I agree with her that this really needs to be considered through the lens of genuinely sustainable—as in durable as well as environmental—growth. That is a very important addition to the discussion.

I am disturbed by Amendment 81. I am not disturbed by most of it, but when I read

“proportionate to that level of risk and whether the burden or restriction enhances UK international competitiveness”,

I begin to get somewhat queasy, because the lowest common denominator is not where we should be headed. We need to genuinely assess risk—the cost of dealing with and understanding it—in a very direct way. I have always thought that a distortion was introduced by the competitiveness objective, and I am afraid that it is reflected in Amendment 81, in my reading at least.

I hope that the Minister understands that proportionality is not something for five-year strategies. It is central to the work, culture and behaviour of a regulator; as such, it clearly belongs in principles that sit on the face of the Bill.

[Baroness Neville-Rolfe (Con)]

My Lords, I am grateful to my noble friend Lord Holmes and other noble Lords for bringing forward their amendments in this group.

I was glad to hear that the Minister will meet the Financial Services Regulation Committee to discuss this part of the Bill. I am sure he will be as disturbed as I was to hear about the widespread fear of regulated businesses in expressing any criticism of the regulators—the most important regulators in the land, to quote my noble friend Lady Noakes. We certainly rely on financial services and good regulators for growth in this country.

The central theme of this group is the proportionality of regulation. That is an absolutely fundamental requirement for all regulation; it is particularly so when we are talking about small and medium-sized enterprises, which are less able to afford the costs of regulation—in terms of diversion of time, regulatory fees and legal fees—and are the most held back by excess regulation.

There were 5.6 million small businesses in the UK at the start of 2025. They account for three-fifths of employment and around half of turnover in the UK private sector. Total employment in SMEs was 16.9 million—60% of the total—with turnover estimated at £2.8 trillion, or 51% of the total. Having financial services that operate with proportionality and common sense is important to them; indeed, almost every single one of these firms will access and use financial services through the course of their operations. It is even more important to the thousands of SMEs that operate in financial services, whose remit is of course being extended by the Bill, and the thousands more SMEs in the legal and professional firms that advise on financial services.

In practice, regulation often falls most heavily on precisely those smaller firms least able to absorb it. The reasons are obvious: SMEs do not have large compliance departments or in-house legal teams; and they do not have armies of advisers whose job is to interpret regulatory requirements. In many smaller firms, people wear many hats, as I know well. This means that a regulatory requirement that may be manageable for a large institution can be a serious burden for a smaller firm. Above all, regulation should be designed in such a way that it protects consumers and supports market integrity without imposing unnecessary burdens.

Amendments 83 and 84 in the name of my noble friend Lady Noakes, to which I have added my name, go to this underlying point by seeking to elevate proportionality in the FCA and PRA frameworks; it is pleasing to have the support of my noble friend Lord Ashcombe and the Liberal Democrat Front Bench in this. Proportionality should not be a box that regulators tick after the main decisions have already been made; it should be central to how they think about regulation from the outset.

The amendments in the name of the noble Baroness, Lady Bowles, raise an important point about tailoring regulation to the size, nature and objectives of different firms. The regulatory framework should recognise that a mutual does not have the same objectives as a major bank, and that different business models can present very different risks; the noble Baroness explained all that eloquently.

I would also like to comment on Amendment 86 in the name of my noble friend Lady Noakes. As she said, the Legislative and Regulatory Reform Act 2006 requires regulators to act in a way that is transparent, accountable, proportionate, consistent and targeted, ensuring that regulation is effective without being unnecessarily burdensome. Those are fundamental points and likewise need to be protected as guiding principles.

In closing, I would be grateful if the Minister could assure us: first, that proportionality will be genuinely embedded in regulatory decision-making, ideally by amending the Bill on the lines of Amendment 83. We hope he will look at this issue very seriously. Secondly, can he assure us that the FCA and PRA will in future be expected to take account of the particular position of SMEs, mutuals and smaller firms when designing and applying rules? A proportionality duty would go a long way to fixing the problem and would seem to fit in well with government policy to support small business promoted by his other department, the DBT.

[Lord Stockwood (Lab)]

My Lords, this will be the first of many groups where we discuss the frameworks that the regulators operate under, so I will say a few words about that framework before turning to the amendments.

Many of these amendments, and those in other groups we will take today, focus on the regulators and their accountability to Parliament. Parliament has enshrined the principle of regulatory independence into primary legislation through the Financial Services and Markets Act 2000, which obviously everyone in the Room knows as FSMA. The Government continue to believe that this model best serves the UK’s long-term interests by delivering effective regulation, informed by evidence and free of political interference. It is absolutely right that financial services markets, firms and activities are overseen by operationally independent, expert regulators. The FSMA model sets out clear roles and responsibilities for Parliament, the Government and the regulators. Parliament sets the objectives for the regulators and holds them to account for how they further those objectives when discharging the statutory functions that Parliament has given them.

The Government and Parliament must be able to scrutinise the work of the regulators to evaluate how effective they are and the impact that their rules are having. It is important that the regulators remain independent and accountable for their actions. The regulators are directly accountability to Parliament, and there are a range of mechanisms within FSMA to support that accountability and allow Parliament to effectively scrutinise the regulators.

A critical part of regulatory independence is the idea that the regulators listen to legitimate criticism and scrutiny—and the regulators do listen. For example, the FCA decided not to progress some changes to its proposed enforcement policy following scrutiny from the House of Lords Financial Services Regulation Committee. However, it is clear from the debate today and from outside the Room that there is room for improvement.

On the recent publication by the Financial Services Regulation Committee, chaired by the noble Baroness, Lady Noakes, I recognise the important work of that committee in its Growing Pains report and share its ambition to see a regulatory culture that is more proportionate, more responsive and more supportive of growth. The committee’s recommendations were directed principally at how regulators exercise their functions rather than at the statutory framework itself. The Bill provides greater legal clarity and certainty but it remains for regulators, through their leadership, judgment and accountability to Parliament, to deliver the cultural change that the committee rightly called for.

On the amendments in this group, Amendments 81, 83, 83A, 84, 84A and 85 each seek to address various aspects related to the principle of proportionality. I recognise the concerns and strength of feeling that I have heard today and I agree that the principle of proportionality is extremely important and must remain central within the regulatory framework.

The Bill’s approach is not to remove proportionality from meaningful consideration. Instead, the reforms will require the regulators to have regard to proportionality in the development of their long-term strategies, ensuring that they are applied in a more coherent and visible way at the strategic level. This would mean that, for example, rather than considering if an individual proposal is proportionate, the regulators will be required to set out clearly how they have considered whether their strategy and workplan as a whole results in burdens on firms that are proportionate to the outcomes they achieve. This change will support more meaningful scrutiny of how the regulators are considering and responding to the regulatory principles, and will support greater overall scrutiny of the regulators’ work.

Amending the framework to prescribe in detail how the regulators must recognise differences in the size, nature and objectives of the firms it regulates goes far beyond the current framework and risks adding unnecessary complexity to the framework. It is for these reasons that the Government cannot accept these amendments.

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[Lord Stockwood (Lab)]

Let me get back to the noble Baroness on that. I believe the amendments were trying to change and streamline the regulation, but I want to make sure I give a precise answer rather than a quick judgment on that.

Let me turn to Amendment 86, which seeks to bring the regulatory principles of the Legislative and Regulatory Reform Act 2006 into FSMA. The Government recognise the importance of certainty in the regulators’ framework. FSMA already contains its own carefully developed set of duties, objectives and principles, designed specifically for financial services regulation. The Legislative and Regulatory Reform Act is very broad in scope, and the principles it contains are important ones. But there is significant overlap between these principles and those already in FSMA, so adding them here would bring duplication and legal complexity, rather than clarity. These will now be considered at a strategic level as a result of Clause 16.

In some way, the Government agree that proportionality matters, that unnecessary burdens should be avoided, and that the regulators must be held properly to account for how they exercise the significant powers Parliament gives them, but they should not be overly constrained in how they approach their work. We should have confidence in their expertise and regulatory judgment, and confidence in the mechanisms in place that allow us to ensure that they are performing as they should do so. Ultimately, an overly prescriptive approach that ties the regulators would not be in the interests of those they regulate, or those protected by their regulation.

This is not a question of whether Parliament should hold regulators to account. We all clearly agree that it should. The matter before us is where we think the right balance lies between democratic oversight and allowing regulators to carry out statutory responsibilities effectively. I recognise that not everyone will agree that the Bill strikes that balance in the right place, and I respect the arguments that have been made this afternoon and the continuing debate that we will have. I hope noble Lords will also accept that I have listened carefully to those arguments that have been made. I will respond either in writing or in meetings outside the Room to any points that I have not answered fully today. I therefore ask the noble Lord to withdraw his amendment.

[Baroness Neville-Rolfe (Con)]

Perhaps I might press the Minister on the subject of smaller businesses and the Bowles amendment to the proportionality proposal, which takes account of differences in the size, nature and objectives of businesses when the regulators are plying their trade. I am not quite clear what the Minister feels about these smaller businesses and whether he agrees that it is necessary to deal with them in a slightly different way.

[Lord Stockwood (Lab)]

My business insured a million small businesses, so I think they are vital to the UK economy. Let me come back to the noble Baroness with a full answer on that. It is critical that we make sure that they are protected.

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On the issue of access, as with so many other issues, the ultimate aim is not a report by the regulator, though that may be a necessary part; still less is it to place costs on the industry. Our goal goes beyond that and beyond the Bill. We want a financial services system that allows every system and business to connect to and access financial services. That will require partnership between Parliament, Government, regulator, customers—and potential customers—and the providers of financial services to know that the services we so clearly need are delivered and, where there are gaps, to set in place actions to improve things. If our debates on the Bill begin to catalyse that, to hold to account what the financial services industry of Scotland said it could do for the whole country, wow, we would be making progress.

[Baroness Neville-Rolfe (Con)]

My Lords, we understand the reasoning behind these amendments. Financial inclusion is, of course, an important objective, as the noble Baroness, Lady Tyler, explained so clearly. Indeed, that is precisely why we have tabled amendments on financial education, to be discussed at a later stage. We believe that one of the most effective ways to improve financial inclusion is to ensure that from a young age, people have the knowledge, confidence and capability to understand how to manage their money to avoid harmful financial decisions and to access the products and services that are right for them—and, I should add, to understand new technology, data and digital inclusion, as my noble friend Lord Holmes explained.

However, we are not persuaded that the mechanism proposed in these amendments is the right one. In particular, when it comes to proposals such as expanding the scope of Section 3B of FSMA and adding further regulatory principles, we encounter the same problem that I raised in previous groups: every time Parliament adds another principal duty, reporting requirement or objective to the regulator’s framework, it may sound reasonable in isolation but, cumulatively, these duties feed through into more process, more internal assessment, more reporting and more consultation paragraphs. That is more compliance requirements, more boxes to tick and less overall efficiency for financial services.

We should be careful not to assume that every social or economic objective is best delivered by placing a new statutory duty on the FCA or PRA. Regulators already have extensive responsibilities, so we have to make the choices with care because, at some point, the accumulation of such duties becomes counterproductive. It makes the regulatory priorities less clear and it can slow decision-making and create uncertainty for firms. In short, it is unwise.

As I have explained, we would improve inclusion via improved education, and we are about to introduce an amendment on debanking, which may be relevant. There is a lot of partnership and voluntary activity, as the noble Lord, Lord Pitt-Watson, hinted at—and as I remember from my time with Tesco Bank, which was centred in Scotland and did some terrific work.

The problem of child trust funds was mentioned by the noble Baroness, Lady Kramer, and it seems like a popular cause for deregulation by the Treasury and the regulators. I am sure the Minister will want to comment on that.

[Lord Stockwood (Lab)]

My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, the noble Baronesses, Lady Tyler of Enfield and Lady Kramer, of Richmond Park, and other Peers for drawing attention to the important issue of financial inclusion. As someone who grew up in poverty, it is not an abstract concept to me and the community I come from.

The noble Baroness, Lady Tyler of Enfield, asked if I would meet her to discuss this agenda further. I would of course be happy to meet her and any other noble Lords who would like to discuss the topic. I will write to her ahead of that meeting on the FCA’s consumer duty and what it means for financial inclusion, but I assure noble Lords that the Government are not relying on the FCA’s consumer duty as a catch-all solution. The Government agree that people should be able to access the financial services they need—that is an important objective—but we think that these amendments are not necessary to achieve that.

Amendments 124, 128 and 104 would give the Financial Conduct Authority a new statutory financial inclusion objective and require it to establish an independent financial inclusion unit. These amendments focus on action and measurement. Financial inclusion requires all parts of the system to work together. That is why it is important for the Government to lead this agenda, not the FCA. To secure action, we have published a Financial Inclusion Strategy, setting out an ambitious package of measures to improve access to financial services.

The FCA is closely involved in delivering this work. Sarah Pritchard, the deputy chief executive, also sits on the Financial Inclusion Committee, which monitors the strategy and supports its implementation. The Government have taken formal steps to reinforce the FCA’s role in this area. In her most recent remit letter, the Chancellor asked the FCA to have regard to reinforcing financial inclusion, and the FCA is responding to that ask.

The FCA’s 2025-2030 strategy identifies helping consumers to navigate their financial lives as one of its four strategic priorities. As part of this, it highlights an increase in the consumers who hold key products as a success metric for its work, and it is acting on this. For example, to advance the Financial Inclusion Strategy’s aim of boosting savings, the FCA developed a regulatory statement to support the uptake of workplace saving schemes. On measurement, the FCA already plays an important role in tracking progress on financial inclusion through its flagship financial lives survey, which provides a strong evidence base for monitoring outcomes over time.

I recognise Amendment 128’s emphasis on independent scrutiny and prioritisation of financial inclusion in the FCA’s work. As part of the FCA’s statutory framework, the consumer panel is in place to represent the interests of consumers and provide independent advice and challenge to the FCA. As already covered, the FCA’s strategy and membership of the Financial Inclusion Committee means that financial inclusion is embedded in its work. This is more effective than an operationally independent unit.

On oversight and transparency, I understand the intention behind Amendment 104, which seeks to require the FCA and PRA to report annually on financial inclusion, and Amendment 95, which would require the FCA to report on financial inclusion metrics and how it has acted to improve financial inclusion. However, these amendments are not necessary or appropriately targeted. The regulators already report publicly and are accountable to Parliament. Moreover, the FCA’s financial lives survey provides a biannual update on a wide range of financial inclusion metrics in the UK, including the numbers of unbanked people, those who have been declined for a product and the experiences of vulnerable customers. The FCA is also closely involved in the delivery of the Government’s Financial Inclusion Strategy, which is a public document and subject to public review next year. Amendment 104 would place reporting duties on the PRA, whose statutory role is prudential regulation, creating uncertainty about the PRA’s remit and what it would be expected to report against.

Amendment 82 would add financial inclusion to the regulatory principles that the FCA and the PRA must have regard to when discharging their general functions. The Government do not agree that this is the right mechanism to ensure that financial inclusion is prioritised. The amendment would require unclear action from the PRA. Parliament regularly holds the regulators to account for their work on financial inclusion. The Commons Treasury Select Committee recently held a session with the FCA’s deputy CEO for its Financial Inclusion Strategy inquiry. Amendment 97’s requirement that the FCA be prepared to demonstrate to relevant parliamentary committees how it has had regard to financial inclusion is therefore unnecessary. Any relevant Select Committee can call the FCA and hold it to account for its work on financial inclusion.

Amendment 141 seeks to require the FCA to establish a new legal route for third- party access to control another person’s assets, which goes well beyond its regulatory remit. The law requires parents or guardians to have legal authority to make decisions about the financial assets or property of their adult children. This includes accessing funds held in a mature child trust fund. Decisions about who may act on behalf of a person lacking capacity are governed by the Mental Capacity Act 2005 and are determined by the courts, reflecting the need for safeguards to protect vulnerable people. It is not appropriate for FCA rules to seek to substitute or override existing rules and processes. The Ministry of Justice recognises that the process of obtaining access can be challenging for the parents and carers of young people who lack capacity. It is exploring how the Government can best facilitate access for parents and carers to child trust funds on behalf of their children. I would be happy to raise this with the MoJ rather than berate it, as the noble Baroness suggests.

Turning to Amendment 161, I recognise how a broader set of data might support a more accurate assessment of underserved SMEs’ creditworthiness. However, it should be noted that the Treasury already has the ability in Section 4(5) of the Small Business, Enterprise and Employment Act 2015 to specify the SME information that must be shared. We are actively considering updates to the scope of data in the next phase of the CCDS reforms. However, it will not be expanded in line with this amendment, given that it would require redesigning the scheme entirely, expanding it beyond financial services participants, some of whom see little return for their participation, which already imposes a degree of burden. I do not think it appropriate for financial services legislation to impose regulatory obligations on non-financial market actors in this way, not least without consultation. That is not to say the ambition is misplaced. Indeed, these issues are potentially better addressed through the future development of open finance and smart data initiatives.

Amendment 169 seeks to require a review of know-your-customer requirements. I understand the concern that the current framework may not always operate as it should in supporting access to financial services. As the noble Lord, Lord Holmes, rightly stated, technology is already playing a part but can do better. Indeed, businesses such as Quantexa and Onfido are leading the way in this space. The Government do not believe that anti-money laundering requirements and financial inclusion are mutually exclusive. The money laundering regulations already provide firms with the flexibility to take a proportionate and risk-based approach to customer due diligence. As part of the financial inclusion strategy, major high-street banks have launched pilots on improving access to bank accounts, demonstrating how financial inclusion initiatives can operate within the existing framework.

Reforms to make customer due diligence requirements more proportionate and effective have already been made, including through amendments to the money laundering regulations made via statutory instrument earlier this month. The Government are also taking steps to support the effective use of new technologies, such as through the publication in February of guidance on the use of digital identities to support customer verification. Finally, the money laundering regulations also mandate a review of their regulatory provisions every five years to assess whether they are effective, appropriate and proportionate. The next such review will be published in 2027.

The noble Lord, Lord Holmes, asked how financial inclusion has changed under the current Government. In November, we published the Financial Inclusion Strategy, which supports access to banking for those with no fixed abode and small-sum lending to help people access credit and makes it easier for people to save. The noble Baroness, Lady Tyler of Enfield, noted that when a House of Lords Select Committee looked at this topic, it found that 1.7 million people were unbanked. Although it is still too high, I can report that the latest survey data shows that the number of unbanked people has fallen to under one million. As I already set out, with many of the actions we are taking, the Government hope to reduce this further. Financial inclusion is not a gap in the framework. It is an agenda already being delivered by the Government, with the FCA closely engaged in its implementation. I therefore ask the noble Baroness to withdraw her amendment.

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[Baroness Noakes (Con)]

I shall make a brief comment on why Parliament has not offered any guidance on risk metric. The committee was well aware that the FCA sought to get clarity about the risk appetite that it was taking. The PRA had not made that request; it regards it as its responsibility to judge the balance of risk. There is no unanimity in the regulator community on this, but we reported the issues as we found them in one of our reports.

The noble Baroness asks why Parliament has not given its answer. The straightforward answer is that the Government have not brought forward anything. Parliament gives an answer only when it approves something that the Government bring forward. When we asked the Financial Secretary to the Treasury whether she intended to operationalise the giving of a more specific risk appetite to the FCA, she said pretty clearly that she thought that the Government would not do that.

If the Government do not bring forward something for Parliament to approve, it is not going to happen. Parliament does not act in the way that the noble Baroness seemed to think that we would act, which is that a committee would somehow produce an answer on risk appetite. The committee can comment on the issue of risk appetite and has done so, but it is fundamentally for the Government to take any action that is to change the way in which the risk appetite is specified for any regulator.

[Baroness Neville-Rolfe (Con)]

My Lords, this is an important clause, and I understand why noble Lords wish to probe the Government’s approach to Clause 17. It is always right that we scrutinise carefully any change to the statutory framework governing our financial regulators, and the sponsors have set out their case well. I note that they were introduced into the 2023 Act for good reason: to try to ensure that financial regulation in the UK is proportionate, accountable, flexible and aligned with economic and market objectives.

As I said earlier, I am glad that a meeting with the Financial Services Regulation Committee will take place next week. Certainly, I would like to get to the bottom of whether the change neuters the committee, as has been suggested by the noble Lord, Lord Eatwell, and my noble friend Lady Noakes; indeed, I think that committee was unanimous that there was a problem. I thought it was interesting that my noble friend Lord Bridges echoed concerns that key, case-by-case analysis by the committee would disappear, and that the noble Baroness, Lady Donaghy, expressed concern about the way that her questions about cost-benefit analysis had been answered, presumably under the existing system.

These are all very legitimate questions, but there are other considerations—the noble Baroness, Lady Bi, touched on some of them. Our position is that we do not want to perpetuate overburdensome regulation. In discussions with industry, we have heard repeatedly that the regulatory principles in Section 3B of the 2000 Act can themselves lead to tick-box exercises. That is particularly true where the principles require regulators to consider wider public policy objectives, which may have only a very indirect connection with the firms being regulated or the activities in question. For example, Section 3B(1)(c) includes

“the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act”—

the net-zero target—

“and … the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution”.

My own experience of serving on a challenger bank’s board is that there is already a lot of climate-related activity required by the regulators that creeps into many aspects of governance. It is generally costly and sometimes of little worth. That was before the regulatory principles were added. That reflects, harking back to our earlier conversation, the extensive net-zero regulations that exist, the remit letters and the sustainability reporting network, all of which were cited earlier. Therefore, the real question is whether financial regulation is the right vehicle through which to pursue such goals and whether embedding such considerations produces better regulation or simply more process, as we suspect.

The Bill is meant to be deregulatory, and it is meant to simplify the regulatory environment and to support growth and competitiveness. I think the Government may be genuinely reducing a burden that has been identified by industry. We should be careful before assuming that every principle must remain in place. For me, the real tests are about what improvements are coming about here. I am interested in the detail. Does it make the FCA or the PRA more effective? Does it protect consumers? Does it support financial stability? Does it help growth? Alternatively, does it simply create another layer of process, the cost of which falls on firms?

I would be grateful if the Minister could explain more clearly the Government’s rationale for Clause 17. What burdens have been identified and what will the impact be of the changes proposed here? What evidence have the Government received from industry and regulators about the operation of the current Section 3B principles? How will the Government ensure that removing or amending such principles reduces unnecessary burdens, without weakening the core protections that consumers and markets expect?

As the Official Opposition, we are, in essence, in listening mode on this quite radical proposal. We would like to understand whether the “whereases” that are being partially abolished are a burden on only the regulators or whether that feeds through to industry and consumer protection—and, if so, how. I believe that, sometimes, a clearer, simpler and more focused framework is more effective. If Clause 17 helps move us in that direction, it may be needed in the Bill, as the noble Baroness, Lady Bi, suggested. However, it also seems very important to work out how the two parliamentary committees will exercise proper oversight going forward in a post-Brexit regulatory environment, and to ensure that any regulatory resistance, which we have been hearing about this evening, is minimised.

[Lord Stockwood (Lab)]

My Lords, it is clear that the Committee places a strong emphasis on getting the regulatory principles right. The Government also take this matter very seriously and genuinely value the contributions made in this debate.

Before I start, it is important to remember that the regulators have both principles and objectives. The regulators need to advance these objectives—regulatory principles are something that they consider only when doing so—and the Bill does not change that. The noble Lord, Lord Vaux, asked me whether the regulators will be required to report on the long-term strategy. Clause 16(6) amends Schedule 1ZA to FSMA so that the FCA must explain, in its annual report, the extent to which it has implemented its long-term strategy. Clause 16(7) does the same for the PRA.

The Government agree that the regulatory principles are an important part of the statutory framework. They are also aware that each of these principles has strong support, so, while there may be a view that some could be removed, there is no consensus on which ones it would be suitable to remove. This is why, when the Government reviewed the principles, they concluded that none of the individual principles should be removed from legislation. Instead, the Government concluded that the regulatory principles must continue to play a significant part and a central role in the work of the regulators through new long-term strategies. The regulators will be required to have regard to those principles when preparing or revising their strategies, ensuring that they are applied in a more coherent and visible way at the strategic level and in a manner that supports an overall assessment of the regulators’ performance and actions.

In our debates on other clauses, there has been a widely shared view that, in some areas, regulatory requirements on firms have become overly prescriptive and, in some cases, duplicative. The Government consider that, in some areas, this is also true of the regulators, and that, over time, various requirements have been added to and extended. This places the resourcing burden on the regulators, which is ultimately paid for by firms and can reduce their capacity to act quickly and effectively.

That is why the Government consider it appropriate to change the way in which the regulatory principles in FSMA are applied to the regulators. The Government consider that this new approach will support more meaningful scrutiny of the regulators’ strategy, as opposed to repetitive and fragmented processes across the individual exercising of their functions. As I explained earlier, it would mean that, for example, rather than considering whether an individual proposal is proportionate, the regulators will be required to set out clearly how they have considered whether their strategies and work plans as a whole will result in a proportionate burden on firms.

Let me be clear: the regulatory principles will remain central to the regulators’ work under the new framework. Parliament will continue to have the full range of statutory and constitutional levers through which it can hold the regulators to account, including scrutiny by parliamentary committees and review of the regulators’ publications, such as their annual reports, on how they have advanced their statutory objectives and their annual responses to the Treasury’s letters of recommendation on economic policy—both of which the Treasury is required to lay before Parliament. The requirements for the regulators to consult on proposed rules and demonstrate how they have advanced their objectives will remain. If the rules on which the regulators are consulting will impose costs, their cost-benefit analysis must also be published. The regulators must also notify the chairs of parliamentary committees when they issue consultations. This requirement is also unchanged. If a parliamentary committee writes to a regulator concerning a publication, the regulator must respond to that committee in writing. The Government consider that these are the most effective ways of holding the regulators to account.

The accountability of financial services regulators is a significant matter for this Committee—I have heard that loud and clear. The regulatory principles are important for shaping the work of the regulators, and I recognise the strength of feeling on how they operate. However, the way in which they currently operate can reduce the regulators’ agility while doing little to support effective overall scrutiny or to materially benefit firms. Reforming how the regulatory principles work will ensure that these principles continue to be central to the work of the regulators and will support enhanced scrutiny of their overall performance. I therefore move that Clause 17 should stand part of the Bill.

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[Baroness Noakes (Con)]

My Lords, I will speak briefly in support of Amendment 88 in the name of the noble Baroness, Lady Bowles. It would be a useful addition to FSMA to have a specific power for the Treasury to issue a statement of concern; I particularly like the fact that it could be used without the full parliamentary process of regulations. As the noble Baroness may recall, when we debated the then Bill in 2023, the Treasury took a power to tell regulators to make rules. However, that power has to be exercised via regulation, so it needs to go through the whole statutory instrument procedure. It has not yet been used, as far as I am aware, but it is a useful backstop that the Treasury has if it wants to direct the work of the regulators, which is a perfectly reasonable thing for it to do in certain important areas.

The existence of the Treasury’s ability to issue a statement of concern would be particularly useful when interested parties were trying to get a point about things that were not working heard by the regulators. The ability to engage the Treasury in that would be very helpful, although I am sure that it would be used more as a background factor in the relationship than as an active part of the Treasury’s relationship with the regulators. I applaud the noble Baroness on her ingenuity in bringing this amendment forward.

[Baroness Neville-Rolfe (Con)]

My Lords, I am grateful to the noble Baroness, Lady Bowles, for bringing forward these amendments. They raise two very salient points about the accountability of the financial regulators and the mechanisms by which Parliament, the Treasury and the public can scrutinise how those regulators use their powers.

One of the core functions of the Bill is to increase the power and scope of the remit of the regulators, in particular the FCA. Across the Bill, more responsibility is being transferred, more detail is being left to rules and more of the practical operation of the regime will depend on regulatory judgment, rather than primary legislation. My concern is that although the Bill increases the power of the regulators, it does not always provide a corresponding increase in oversight or scrutiny of them; as an ex-Treasury Minister, I am slightly surprised that the Treasury is entirely happy with that.

To me, Amendment 88 seems a sensible and proportionate form of challenge. It would create a formal and transparent way for the Treasury to say that, in effect, a regulator may have gone beyond what Parliament intended or may have acted in a way that is not consistent with its statutory remit. This matters because the Treasury is directly accountable to Parliament in a way that independent regulators are not. If regulators are to exercise substantial powers delegated by Parliament, there must be some meaningful mechanism by which Ministers can challenge, explain and account for how these powers are being used. We will come back to this point again at a later stage in Committee; my noble friend Lord Bridges has tabled an amendment that speaks to this same broad issue.

The underlying point is simple: if regulators are powerful, they must also be accountable. How best to achieve this should be a key objective of our scrutiny in Committee and on Report. I would be grateful, therefore, if the Minister could set out the Government’s position on this wider issue. He wrote to us shortly before Committee—a little too shortly before Committee; I say that politely—but I am not sure whether what he sent us, including the Treasury memorandum, answers our outstanding questions. So do the Government accept that the Bill increases the powers and responsibilities of the FCA and PRA? If so, do they accept that stronger oversight mechanisms are called for? What formal routes currently exist for the Treasury to raise concerns about regulator rules or guidance that may not reflect Parliament’s intention?

Also, what is the Government’s objection, if any, to periodic independent reviews of regulator performance and burden? As a former Minister, I found that, although such requirements were unpopular with the department at the time they were put into law, they proved useful in helping me keep on top of the responsible regulators and their policies.

I very much hope that the Minister will engage constructively with the problem, answer my questions, on both the previous group and this group, and appraise in a constructive spirit the amendment tabled by the noble Baroness, Lady Bowles. Above all, we need reassurance that the Government recognise the importance of scrutiny, transparency and trust in the regulatory system.

[Lord Stockwood (Lab)]

My Lords, the accountability of our financial regulators is a serious matter, and Parliament rightly takes a close interest in how the FCA and PRA exercise their powers. We have extensively discussed the FSMA model of regulation today. It is the foundation of a system of regulation under which Parliament sets the regulators’ objectives, invests them with the powers that they need to further those objectives and sets out a clear system of governance and accountability under which the regulators are required to account for their actions and effectiveness in furthering the objectives that Parliament has set for them. As I said before, the Government remain of the view that this is the most appropriate and effective model of regulation available. It has served us well and is internationally respected.

The difficulty with this amendment, therefore, is that it would cut across the foundational principle of our regulatory architecture. The FCA and PRA are operationally independent bodies. That independence is not incidental; it is the source of their authority and credibility and, ultimately, their value to the consumers and markets they serve. Under the FSMA model, it is the responsibility of the regulators to interpret their statutory objectives. It is not the role of HM Treasury to do so. This amendment would, over time, erode precisely the independence that makes those regulators effective. Markets, firms and consumers need to know that regulatory decisions are made on the merits, free from political pressure. This amendment, however well-intentioned, risks compromising that assurance.

Of course, Parliament can and does challenge the regulators where it thinks they have done something wrong. Given that their authority ultimately flows from Parliament, the regulators take that incredibly seriously. Parliament can and does make its views known to the regulators on key issues. For example, after a highly critical report from the House of Lords’ Financial Services Regulation Committee, and in recognising the lack of consensus among the stakeholders, in 2024 the FCA dropped plans to change the way that it publicised ongoing enforcement cases.

The noble Baroness, Lady Neville-Rolfe, asked whether the Government are satisfied with the current framework. There is an appropriate requirement already set out in FSMA that is designed to support scrutiny and oversight and, in certain circumstances, to allow the Government to give the regulators some level of direction. For example, the Government can require a regulator to review one of its rules or to appoint an independent person to review those rules where they consider this would be in the public interest. The Government can also require the regulators to make rules but cannot direct their content or purpose.

The regulators have a statutory duty to keep their existing rules under active review. This is contained in Section 3RA of FSMA. Furthermore, the Treasury has an ability to direct regulators to launch an independent review of specified rules, with the outcome laid before Parliament. The regulators are also subject to robust wider parliamentary accountability, including through the information they are required to provide to relevant committees and the vital role those committees play in questioning the regulators and critiquing their work. Those are the appropriate channels for testing the consistency of regulators’ actions with legislation or statutory objectives, not a ministerial statement of concern, which starts to undermine the principles of independent regulation. I therefore ask the noble Baroness to withdraw her amendment.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, we are sympathetic to the concerns raised by noble Lords across this group. I was glad to add my name to several amendments tabled by my noble friend Lady Noakes. I entirely agree with her and with the noble Lord, Lord Vaux, that the role of the relatively new and very effective Lords Financial Services Regulation Committee should be added to the 2023 Act. We are lucky to have such an assembly of experts and effective questioners, as well as Lords clerks, to help with the enormous task of scrutiny in the financial services sector.

We have just been discussing the accountability of the regulators, the importance of scrutiny and the need to ensure that the FCA and PRA exercise their considerable powers in a way that is transparent, proportionate and properly justified. This group raises those same issues in the more specific context of guidance, consultation, cost-benefit analysis and the way regulators explain the impact of what they do. I look forward to the Minister’s response to the noble Baroness, Lady Bowles.

Our Amendment 90 asks a serious question about cost determination. The cost-benefit analysis panels within the regulators are an existing mechanism of accountability. They are designed to provide scrutiny of the costs and benefits of regulatory proposals and to help ensure that regulators properly consider the burden that their rules impose.

But there is a significant limitation. As I understand it, the cost-benefit analysis panels are engaged only where the regulator makes a rule change that the regulator itself considers to be materially significant. Should there not be a more independent mechanism for testing whether a regulator’s view that a proposal has no or minimal cost impact is actually correct? If the regulator decides that a proposal has no or only minimal cost impact, then the process may not trigger a cost-benefit analysis—but that judgment may itself be contestable, especially if it is a net threshold, hiding both the costs and the benefits. Firms may take a very different view about the practical cost of implementation, the operational burden, the systems changes required and the cumulative impact when viewed alongside other requirements. Indeed, cumulative effect is a concern rightly enshrined in my noble friend Lady Noakes’s Amendment 119, which we will discuss on a later group.

There is also a wider issue. The cost-benefit analysis panels are not generally able to assess changes in guidance or enforcement activity. Guidance can be hugely significant in practice. Enforcement activity can create powerful incentives and costs across the sector, even beyond the firm that is directly affected. So the question is not simply whether a formal rule change has costs; it is whether the regulators’ activity as a whole is proportionate, whether it is evidence-based and whether the burden it places on firms is properly understood. That is why we want to press the Minister on whether the Government will give thought to expanding the remit of the cost-benefit analysis panels. For example, how will they operate in relation to the FCA’s new powers on credit, on in-person banking and on payment regulation?

Equally importantly, should they not be able to consider whether guidance, supervisory expectations and certain enforcement-related approaches carry material cost implications? Cost-benefit analysis forces a discipline on regulators. It requires them to summarise what they are doing succinctly and clearly, and to ask whether the benefit justifies the burden, whether the same objective could be achieved in a less costly way and whether the cumulative effect of regulations is proportionate. I always turn to the impact assessment of a rule if it is available, as it allows one to get to the heart of what is happening.

The broader point is that transparency, consultation and cost scrutiny are not bureaucratic obstacles to good regulation; they actually help to prevent unintended consequences and excess red tape, and they sometimes draw attention to harm to SMEs. They give Parliament and industry confidence that regulatory powers are being exercised responsibly.

So I would be grateful if the Minister could address the specific issues raised by Amendment 90. I have five questions, to which the Minister may want to respond by letter if necessary. First, who in practice decides whether a proposed regulatory change has no or minimal cost impact? Secondly, what is the threshold, in millions of pounds, and is it gross or net of benefits? What safeguards exist to test that judgment? Fourthly, are the Government satisfied that the cost-benefit analysis panels have a sufficiently wide remit? Fifthly, will the Minister consider whether that remit should be expanded to include guidance, supervisory expectations and other regulatory activity that may impose material costs on our important financial services sector?

As we have said throughout Committee, accountability must keep pace with regulatory power. If regulators are to be given more responsibility, the scrutiny of their decisions, their processes and their costs must be strengthened. I will listen carefully to all the Minister’s responses on cost-benefit and, unless these are satisfactory, the Opposition will want to bring forward an amendment on Report.

[Lord Stockwood (Lab)]

My Lords, I begin by explaining the Government’s purpose behind Clause 18 and why it should stand part of the Bill. Over time many reporting and procedural requirements have been placed on the FCA and the PRA, increasing burdens, introducing duplication and in some cases complicating oversight, scrutiny and accountability. There is broad agreement that this dynamic is true for firms subject to regulation. I ask noble Lords to reflect on whether it might also be true for the regulators and on whether that is slowing them down and ultimately having a negative impact on firms and consumers.

These burdens are not without consequences. The regulators must follow the letter of these requirements, diverting time and resources away from other work. Ultimately the cost of that work is passed on to firms through the levy they pay and through their engagement with the asks of the regulator. The Government’s view is that there is scope to rationalise parts of this approach to enhance the effect of scrutiny and to help regulators become more agile and ultimately better support innovation and growth.

The Government sought feedback on which regulator publications stakeholders found most useful and then worked closely with the regulators to consider this feedback and further assess the range of requirements placed on them. Feedback to the regulatory environment consultation indicated very low engagement with certain types of regulator publications, and the regulators’ data confirms this. In recent years, the FCA and the PRA consulted on several proposals to which they received zero responses, although I accept that not all publications are created equal.

I have listened carefully to the concerns raised, particularly the argument that these provisions remove practical tools that help Parliament and stakeholders understand what the regulators are doing and why. I recognise that concern, and that is why the Government have approached this area carefully. Clause 18 is carefully targeted and relatively modest. The Government are retaining the vast majority of the existing transparency and reporting framework. Clause 18 is focused on removing a small number of requirements where the burden of complying is disproportionate to their value. These changes do not prevent the regulators undertaking any of these activities where they judge it useful to do so. Instead, they give the regulators greater flexibility to focus on delivering their strategic priorities.

This clause must also be read in the context of the wider framework. The Bill introduces new long-term strategies, maintains the requirement for regulators to respond annually to Treasury recommendation letters and provides for an additional annual report on how the FCA and the PRA have complied with their competitiveness and growth objectives. Taken together with the existing framework in FSMA, these measures are intended to strengthen overall transparency, not weaken it.

I turn to the amendments, starting with Amendment 89—