Financial Services and Markets Bill

Baroness Noakes Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I draw attention to my interests in the register, in particular that I hold shares in a number of listed financial services companies. This Bill could certainly have been bolder, and it needs to be improved, but it also has my broad support. I would like to touch on just four aspects of the Bill in the short amount of time we have been allowed.

First, the competitiveness and growth secondary objective is welcome, if overdue. We must never forget that, without a strong economy—and in the context of the UK that inevitably means a strong financial services sector—there will be nothing worth regulating. The financial crisis led to a series of risk-averse reforms and a decade of regulatory gold-plating. It is no coincidence that the last decade has been disappointing in economic terms. We need a period of rebalancing.

However, whatever we do in the Bill will come to nought unless the regulators themselves change. I fear that they will find ways to marginalise the new secondary objective. We need them to put the interests of the UK ahead of the comfort blanket of precautionary regulation and, if necessary, to stand against the consensus in international regulatory fora, however comfortable that seems. The PRA’s public statements to date on what it will do with the new secondary objective and the FCA’s radio silence on the subject do not give me any comfort that they get what is needed.

The Government were right to bring forward amendments in the other place to strengthen the regulators’ reporting arrangements to reinforce the new objective. We will need to explore that in Committee to see how it will work in practice, and I suspect that we will conclude that it will need more teeth.

My second point relates to the role of Parliament. I am glad that the Government have finally accepted that there is an important role for Parliament in holding the regulators to account alongside the transfer of huge new rule-making powers. Most of us argued strongly for that in the passage of the Financial Services Act 2021. My noble friend the Minister will not be surprised that I am disappointed that the role of your Lordships’ House is something of an afterthought in Clause 36. I promise her that I will return in Committee not only to the role of your Lordships’ House but to the narrow construct of the remit for Parliament in that clause.

My third point concerns getting rid of retained EU law. Chapter 1 of Part 1 of the Bill is very welcome. I fully accept that replacing retained EU law with something tailored to the circumstances of the UK is a large task, but the Bill needs the discipline of a deadline. The approach of the Retained EU Law (Revocation and Reform) Bill is what we should be seeking to replicate in this Bill.

My final point relates to access to cash, and I fear that I shall disappoint my noble friend Lord Holmes of Richmond, who will speak after me. I fully accept that cash remains important to many people, but the fact is that the use of cash is in permanent secular decline. UK Finance expects only 6% of transactions to be in cash form by 2031, down from around 15% now. The Bill imposes costs on all consumers to maintain access to cash for a decreasing proportion of the population. The Access to Cash Review estimated the cost of providing cash at around £5 billion per annum—to put that in context, that is roughly equivalent to 1p on the basic rate of tax. Trying to preserve cash in our society, as if it is part of our national heritage, is just crazy. The Bill goes too far.

I end with a plea for the Government to bring forward a consolidation of financial services legislation. Most of the Bill comprises yet more alterations to FSMA 2000, which is itself already heavily amended. If now is not the right time for consolidation, will my noble friend the Minister say when that time will come?

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Sharkey (LD)]

My Lords, the purpose of the amendment is to allow debate on the possible means of parliamentary scrutiny of the many legislative changes that will be brought about by the implementation of Clause 1 and Schedule 1.

The question of meaningful parliamentary scrutiny was frequently mentioned in all parts of the House at Second Reading. There seemed to be consensus that there is nothing in the Bill that would enable proper scrutiny of the changes proposed by the Bill. The whole wider question of parliamentary scrutiny was debated at length in the Chamber on 12 January. That debate was on the report from the DPRRC called Democracy Denied? and the report from the SLSC called Government by Diktat. The titles of the reports accurately represent their urgent concerns.

The debate was led by the noble Lords, Lord Blencathra and Lord Hodgson of Astley Abbotts, the respective chairmen of the Select Committees. There were 35 speakers, 34 of whom were sympathetic to the notion that our system of dealing with delegation is defective and does not provide effective scrutiny. Regrettably, there is plenty of evidence that that is the case, and much of it is presented vividly in those two reports. There is also plenty of evidence to support the view that Governments try, when they can, to bypass real parliamentary scrutiny, and plenty of evidence that the balance of power between Parliament and the Executive has been shifting in favour of the Executive.

I noted at Second Reading, as did the noble Lord, Lord Hodgson, that the Bill seems likely to generate more than 250 pieces of secondary legislation or binding rules. That might seem like a lot, but, in reality, it is just a very small and very important subset of the estimated 4,000 pieces of legislation to be revoked, amended or substituted in the Retained EU Law (Revocation and Reform) Bill, and it may be more than that if the National Archives find any more down the back of their sofa, in addition to the 1,300 which the Government have already overlooked. The scales of 250 to the retained EU law Bill’s 4,000 plus may be very different, but the underlying problem is exactly the same: how can parliamentary scrutiny be effectively and proportionately applied to those proposed legislative changes?

As things stand, the Bill provides that some of the proposed changes will be subject to the negative procedure and some to the affirmative procedure; for others, it is not clear whether they will be subject to any procedure at all. In practice, that amounts to no parliamentary scrutiny at all. The negative SI procedure is not scrutiny of any kind, nor is the affirmative procedure. If SIs cannot be amended and are not voted down, they are not scrutiny. In reality, our SI procedures are legislative theatre. Our recent debates and comments at Second Reading have shown a strong feeling across the House that, as a means of scrutiny, our current SI procedures are simply not fit for purpose. It does not help to have the Government insisting, as I am certain the Minister will, that they do in fact provide meaningful scrutiny. I am equally certain that she will not provide us with any evidence that that is the case.

The amendment suggests a way of achieving a modest amount of parliamentary scrutiny over the regulation-making powers in the Bill. The first part of the amendment simply places in the Bill the exact text of an important commitment made by the Treasury in paragraph 16 of its memorandum to the DPRRC. It says that, as a condition of the Treasury’s power to revoke, the regulators must

“have drafted and, where necessary, consulted on rules that are ready to be enforced, where it is appropriate, to replace the legislation”,

and so on. I am not certain of the force of a Treasury commitment made in a memorandum to a parliamentary committee, and that is one reason why I think it should be in the Bill: to put beyond doubt that the commitment is legally binding.

However, there is another reason for inserting the memorandum text: that is, to be able to ask the Government what the tests are for “necessary” and for “appropriate”, who decides, and how, whether the tests have been satisfied, and how much of this will be transparent. Without such detail, the commitment may be completely meaningless. I would be grateful if the Minister could address those points when she replies.

The second part of the amendment says that before the Treasury can, by regulation, revoke any legislation in Schedule 1:

“any such revocation or replacement which represents a significant divergence from current rules or practice has had the opportunity to be scrutinised by the relevant Parliamentary select committee and the views and recommendations of that committee or those committees have been taken into account.”

That is a rather broad-stroke first attempt at triage and at inserting a scrutiny mechanism. It is intended to identify a subset of changes that represent significant alterations in policy or practice and to provide the opportunity for the relevant committees to scrutinise these if they choose and to require the Treasury to take into account any views or recommendations expressed by the committees. The word “significant” is obviously key. We will need some specified tests for significance or perhaps leave it to the discretion of the relevant committees to decide for themselves. The amendment is not prescriptive about what form any committee scrutiny might take; that seems best left to the committees themselves.

I am sure that debate will generate improvements on Report or entirely different and better methods of ensuring that Parliament can play a meaningful scrutiny role with respect to the provisions in the Bill and perhaps make a contribution to addressing the similar but numerically much larger problem presented by the Retained EU Law (Revocation and Reform) Bill.

I conclude as I did at Second Reading by saying that the structure of our financial services regime is far too important to be left to the Treasury and the regulators alone. Real parliamentary scrutiny is vital, but it is entirely absent from the Bill. I look forward to hearing the contributions of other noble Lords. I beg to move.

[Baroness Noakes (Con)]

My Lords, as this is the first day of Committee, I declare my interests as recorded in the register, in particular that I hold shares in listed financial services companies. I will not comment on the government amendments in this group; I am taking those on trust.

I share the desire of the noble Lord, Lord Sharkey, for Parliament to be involved in the new rules that will replace retained EU law, but this is part of the larger issue of how there will be parliamentary accountability of the regulators. A number of us have tabled amendments of slightly different varieties on how to achieve that in the Bill. I for one will not contribute to that issue in this debate, because it is better saved until the various mechanisms that some of us have proposed are debated later in Committee.

I have two amendments in this group: Amendments 244 and 245. At Second Reading I acknowledged that the replacement of retained EU law on financial services would take some time, but I felt that the process needed the discipline of a hard stop along the lines of the Retained EU Law (Revocation and Reform) Bill. I have not copied that Bill, with its deadline of the end of this year, but I have instead proposed one three years later: that is, on 31 December 2026.

That will doubtless disappoint some hardliners among my Brexiteer colleagues, but I see that as a pragmatic compromise between getting the issue fixed and letting the regulators do a proper job in turning EU rules into something that works for the UK or indeed, whenever possible, removing the rules entirely.

I am not convinced that, left to themselves, the FCA and the PRA will prioritise the task of dealing with the full corpus of retained EU law, especially once the first batch of relatively easy issues has been dealt with. A deadline is a simple device in order to incentivise them to get on with it or risk losing the related law entirely.

If my noble friend resists the notion of a statutory deadline, even though it is government policy for retained EU law generally, perhaps she will explain what sticks and carrots the Treasury has at its disposal to get the job done within a reasonable timeframe. I do not think it reasonable to have this large body of EU law left in limbo for any considerable period of time.

[Viscount Trenchard (Con)]

My Lords, I share the views of the noble Lord, Lord Sharkey, to a large extent, but I agree with my noble friend Lady Noakes that the question of parliamentary scrutiny is better dealt with when we come to that part of the Bill to which her amendments are tabled.

I declare my interest as a director of two investment companies, as stated in the register. On the whole, I welcome the Government’s amendments in this group and look forward to hearing my noble friend the Minister explain them. Insofar as they increase the powers of the regulators, I welcome the improved clarity and transparency, but we need to improve the method of scrutiny and degree of regulators’ accountability to Parliament, as I have said.

I support my noble friend Lady Noakes in her Amendments 244 and 245. While the task of reviewing, revoking and replacing retained EU financial services law is monumental, it is important that there be a time limit to this process. Ideally, it should be completed this year, because more than four years have passed since the passage of the withdrawal Act and more than two years since the end of the transition period. We have not acted as fast as we should perhaps have done in moving to exploit the opportunities available to make bold moves away from the cumbersome, expensive and anti-competitive regulatory regime that has progressively constrained the competitiveness of the City of London and its innate ability to innovate. There has been some inbuilt resistance to making any changes, and I am glad that this Bill takes some significant steps in that direction.

I would have preferred the Bill to be more radical and to require that certain EU regulations automatically be repealed without replacement, such as the whole regime around the alternative investment fund managers directive and its subordinate legislation. That directive was opposed by the whole City establishment and has served merely to divert new and innovative fund managers wishing to launch new products for professional investors away from the City to other jurisdictions. However, too little work has yet been done, and I think that my noble friend’s suggested latest revocation date of 2026 is a reasonable compromise. I look forward to discussing that later, and I hope the Government will accept my noble friend’s two amendments.

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I turn to my noble friend’s Amendments 244 and 245 and seek to reassure her that we intend to work at pace, but also recognise that there is a balance to be struck with the need for proper consultation, engagement and scrutiny of replacement rules. The key thing here for the Government is to think about the priority we give to undertaking what is a large piece of work. As I said, the Government have set out which measures they attach priority to and which they will seek to address first in their forward look. That means we will be able to deliver changes where the benefit can be greatest, while also making sure we have the time to conduct the process properly.

[Baroness Noakes (Con)]

I was interested in what my noble friend said about a forward look. Can she explain a little more what this forward look is and where one might find it?

[Baroness Penn (Con)]

In short, the approach is set out in Building a Smarter Financial Services Framework for the UK, which was published alongside the Edinburgh reforms. A number of those reforms set out where our priorities are. They set out where we have already done consultations and will be ready to move forward with new secondary legislation or regulator rules. They set out where we are starting consultations or calls for evidence in a number of areas where we seek to make changes. They also give a forward look at some of those other areas where we seek to make changes but have not yet published our consultation or call for evidence.

[Baroness Noakes (Con)]

Does that represent a comprehensive analysis of what the Government expect to happen to all the retained EU law covered by the powers in this Bill?

[Baroness Penn (Con)]

No, it does not. This comes back to the point about prioritisation. It represents the Government’s initial prioritisation of the measures where they think that making amendments or using the powers under this Bill to repeal the retained EU law and put in place regulator rules under our new model would have the biggest or most important effect. There will be subsequent work to do after what is set out in that vision, but in sequencing it is important that we direct our efforts and resources to measures that will make the most difference.

My noble friend asked how the regulators and the Government can be incentivised to complete the replacement of EU law in a timely way. We are working closely with the regulators to co-ordinate the programme to deliver the rules and legislation that will be necessary to enact the repeal of retained EU law. Where necessary, the Treasury could use the power under Clause 28 of this Bill, which sets requirements on the regulators to make rules in specific areas of regulation. So there would be that option within the powers in the Bill.

The noble Lord, Lord Davies of Brixton, asked about the difference in approach in this Bill from that in the Retained EU Law (Revocation and Reform) Bill. Unlike the approach taken in that Bill, this Bill repeals retained EU law in financial services, as set out in Schedule 1. The Government will continue to repeal and replace the contents of Schedule 1 until we have an established a comprehensive FSMA model of regulation. It will take time for regulators to make, and for industry to adapt to, technical and less important rules, as well as delivering major reforms. The Treasury developed a bespoke approach to financial services, given the existing role of the regulations to preserve that and bring the regulatory regime into line with the FSMA model.

I hope I have addressed the points about the desire to complete this work in a timely way, the need to balance that with resources for regulators and, indeed, industry to adapt to this change, and the importance that the Government place on therefore prioritising the work so that those reforms that have the biggest impact will take place earliest.

I turn to the government amendments in this group, Amendments 20, 28, 29, 242 and 243, which are all in my name. The Treasury undertook an extensive exercise to identify retained EU law relating to financial services to be repealed by this Bill, listed in Schedule 1. Late last year, the National Archives identified additional pieces of retained EU law across the statute book, some of which relate to financial services. The Government have also, through their own work, become aware of a small number of additional pieces. Amendments 2 to 20 make changes to Schedule 1 as a result of this. Government Amendments 2 to 16 and 18 add a number of statutory instruments, and Amendments 19 and 20 place three provisions in FSMA into Schedule 1 to be repealed. Amendment 17 removes one statutory instrument from the schedule, which was included in error, due to containing a small amount of retained EU law alongside largely domestic legislation.

I reassure the noble Lord, Lord Tunnicliffe, that every effort has been made to identify all legislation that should be repealed though this process. If he looks at the balance of what we have identified and what is in these amendments, it was a comprehensive job. None the less, to be as transparent as possible, when we find further measures that would be provided for under this Bill, we have sought to include them by way of amendment.

Amendment 28 clarifies the legislative effect of Clause 3, ensuring that the Government have the necessary tools to create a comprehensive FSMA model of regulation. It does so by clarifying that the Treasury can use the powers in Clauses 3 and 4 to create powers to make further regulations. Under the FSMA model, the Government are responsible for setting the regulatory perimeter via secondary legislation. There may be times in future when, for example, the Treasury will need the ability to update key definitions that sit within legislation restated under Clause 4, to clarify what sits within the UK’s regulatory perimeter.

Amendment 29 makes a technical fix to the explanation requirement in Clause 6, requiring the Bank of England to explain how updates to its rules are compatible with its new regulatory principles, introduced by Clause 45.

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[Baroness Worthington (CB)]

I shall seek to remember where I was in my speech. I was talking about international co-ordination and how the FCA currently is part of a global network of regulators, and therefore has a more effective chance of spotting systemic risks building up in the global markets, and that the exchanges would not be plugged in at the same level of international co-operation and co-ordination. The FSB warned, in the aftermath of Russia’s invasion of Ukraine, that

“prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain”.

So I ask the Minister: in these uncertain times, how certain are we that UK exchanges can be patched into that wider market scrutiny and regulatory infrastructure, which the regulator currently has the power to do?

The powers retained by the FCA are limited to intervening on operational objectives and, most relevantly here, consumer protection and integrity, but I am concerned that that definition of consumer may be rather too narrow. It could refer, as it does in Section 1 of the 2000 Act, to the investor, rather than the man or woman on the street. I worry that “integrity” could simply refer to soundness, stability, orderliness and lack of crime. I would welcome the Minister’s view on how this maps on to the existing grounds for regulation that are to be revoked, which are much broader and relate to preventing market abuse and market distortion and try to ensure that there is no artificial inflation of commodity prices.

My concern is that we can have a sound and orderly market which works very well for investors but inflates prices for consumers and businesses and adds extra costs on to essential commodities. I believe the FCA should retain the power to intervene in these cases, and that the definition of grounds for intervention should be as broad as it is currently.

I mentioned the over-the-counter derivatives no longer being covered in regulation. I was rather worried to read in the Treasury’s consultation on wholesale markets that:

“The objective of including them as part of the regime was to prevent market participants from circumventing regulatory requirements that are applicable to exchange traded commodity derivatives by dealing in lookalike OTC contracts. However, in practice, identification of these contracts has proven difficult, and they have only been reported in a very small number of instances.”


Therefore, the Treasury concluded that

“the inclusion of these contracts and uncertainty about the scope of this requirement imposes increased legal risk and potential compliance costs for firms.”

To me, that sounds as though something important is proving difficult and, rather than seeking to solve it, make it easier and provide clearer guidance, we have decided to drop it altogether.

The consultation goes on to say:

“to ensure market integrity, the government proposes that the FCA and trading venues should continue to take account of relevant OTC contracts when monitoring markets.”

But amendments to Regulations 27 and 28 take away the power from the FCA to do this and to request information on these contracts. That is my reading of it, but I look forward to reassurance or clarification from the Minister. If the FCA is not able to monitor these transactions, how can we oversee them? Would it not be more desirable to have the FCA retain the powers it has?

I am grateful for the support of the noble Baroness, Lady Bennett of Manor Castle, for my amendments. Essentially, they seek to unhook the legislation from the EU but continue to require the FCA to maintain the same powers to set position limits and to intervene as widely as possible to ensure proper consumer protection and maintain international co-ordination, which is so essential in these markets.

Amendment 41 requires the FCA to make rules requiring listed companies to publish the revenue and earnings attributable to trading commodity derivatives and economically equivalent over-the-counter contracts. I think this is important because I have personal experience—and there is plenty of anecdotal evidence—of firms that are operating very significant trading activities but hiding their profits in their financial statements and in other parts of their accounts, because to disclose quite how much was being made from trading would bring a lot of questions about the nature of those companies. I am specifically talking about energy companies, which have very significant trading activities and are not, at the moment, required to disclose in their accounts the level of profit they are making from those activities.

This is important because it materially affects the ability of financial services to assess the health of these companies. If we are not seeing the extent to which they are engaged in these derivative-trading activities and we are unable to see where the profits are being made, how can we make fair and open assessments about the nature, success and propriety of their business? It is important that we give ourselves the transparency to see exactly how much of this is happening and the degree to which it is altering the balance sheets of companies in these sectors, which are so essential to maintaining our standard of living and, in the case of energy and food companies, have such a material impact on our environment and global climate.

I am sorry that that was a very long speech, but I look forward to hearing the Minister’s responses and to continuing the debate.

[Baroness Noakes (Con)]

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

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

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

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

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

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

[Baroness Bowles of Berkhamsted (LD)]

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

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Moved by

[Baroness Noakes]

30: Clause 8, page 8, line 4, at beginning insert “If the condition specified in subsection (1A) is met,”
Member’s explanatory statement
This amendment, and another, would ensure that the designation of activities did not go beyond the FCA’s operational objectives (consumer, integrity and competition).

[Baroness Noakes (Con)]

My Lords, in moving Amendment 30 I will also speak to Amendments 31 and 34 in this group. Amendments 30 and 31 would amend Clause 8 and Amendment 34 would amend Schedule 3. They all concern a new power in the Bill to designate activities that the FCA will regulate.

The power to designate activities in Clause 8 is a very wide one. I have no problem in principle with the designation of activities, as there have been too many instances in the past where activities went unchecked and where the FCA’s inaction was blamed on lack of powers. But it is not necessary to regulate absolutely everything in the financial services sector, and new Section 71K(3) of FSMA allows practically anything to do with finance to be regulated.

My Amendments 30 and 31 are modest, in that they say the power to designate activities can be used only if the Treasury thinks it necessary for the purposes of the FCA meeting its operational objectives. These operational objectives are consumer protection, enhancing the integrity of the financial system and promoting effective competition in the interests of consumers. That should not be a high bar, but it is important that when the Treasury brings forward designated activity regulations, it demonstrates that the activity is needed for these objectives and that it would not result in mission creep for the FCA.

I illustrate this with my Amendment 34, which would remove paragraph 4 from new Schedule 6B to FSMA which is introduced by this Bill’s Schedule 3. I am not at all clear why the Government have included Schedule 3, given that the unconstrained new power to designate activities expressly says that nothing in the schedule limits the power. I can conclude only that new Schedule 6B to FSMA contains the FCA’s wish list of areas that it wants to regulate.

My amendment, which deletes new paragraph 4, concerns short selling. I strongly believe that this should not become a designated activity, or should do so only if there is clear evidence that it is needed for one of the FCA’s objectives. Of the three objectives, I imagine that the only one that would be engaged is the market integrity objective, and I am not aware of any evidence that the regulation of short selling is necessary from a market integrity perspective. What enhancement of market integrity would be achieved? Is it actually necessary?

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That draws my remarks to a close. I hope that my noble friend will feel able to withdraw her amendment and that other noble Lords will not move theirs when they are reached.

[Baroness Noakes (Con)]

My Lords, I thank my noble friend the Minister for her comprehensive reply to this short debate. I also thank all noble Lords who have taken part in it.

For my amendments, one was in relation to whether the Treasury’s power to designate activities should be constrained in any way. I understand that the FCA will of course be able to make rules only in accordance with its own objectives. I was trying to put an earlier hurdle in: that the Treasury should go in that direction only if it has had evidence that there was need in relation to the FCA’s objectives. I regret that the Minister indicated that she did not want to go down that route, so I will have to think carefully about that.

I was disappointed though perhaps not surprised on short selling, because there is a kind of prevailing view that if something moves in financial services, it ought to be regulated somehow. I can see that if it was regulated in the EU, it will end up being regulated again and some of the advantages of us having left the EU will simply not be realised because there is a mindset, in particular in the Treasury, which never wanted to leave the EU, that what happened in that era of our membership has to be preserved if at all possible. That is, as I say, disappointing to me.

When the noble Lord, Lord Stevenson of Balmacara, got up, I thought, “It’s déjà vu all over again”, because I too remember our debates on earlier financial services legislation. However, I believe that he has a good point and I was particularly glad to hear my noble friend offer a small possibility that some progress might be made. I think the whole Committee would be happy if that could be achieved, because it clearly does not seem like a happy state of affairs. With that, I beg leave to withdraw my amendment.

Amendment 30 withdrawn.

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Moved by

[Baroness Noakes]

36: Clause 12, page 19, line 25, at end insert—
“(4) Omit subsections (3), (6) and (7).” Member’s explanatory statement
This amendment probes why the power to make recommendations to and obtain information from “bankers” remains relevant.

[Baroness Noakes (Con)]

My Lords, Amendment 36 would delete some subsections from Section 4 of the Bank of England Act 1946, the only nationalisation legislation that made any sense. Indeed, it was surprising that the Bank of England existed outside the public sector for as long as it did—the best part of 250 years. Section 4(3) says:

“The Bank, if they think it necessary in the public interest, may request information from and make recommendations to bankers, and may, if so authorised by the Treasury, issue directions to any banker for the purpose of securing that effect is given to any such request or recommendation”.


Subsection (6) says that a banker is any banking undertaking that the Treasury declares to be a banker for the purpose of Section 4. That is quite a sweeping power in relation to all kinds of banks: retail banks, commercial banks, investment banks and so on.

This is a probing amendment to find out why on earth this power is still on the statute book, given that we have a highly defined system of prudential regulation laid out in extensive detail in FSMA. In addition, the various Bank of England Acts deal with the Bank’s other functions. Collectively, the legislation gives extensive powers to the PRA, the Monetary Policy Committee, the Financial Policy Committee and the Bank of England itself. There is no deficit in powers related to bankers, as anyone operating in the financial services sector will attest.

Why does Section 4 retain these powers? How often have they been used? When was the last time they were used? If my noble friend cannot make a case for these powers still being needed—if they were ever needed—I invite her to agree to their removal from the 1946 Act. I beg to move.

[Baroness Penn (Con)]

My Lords, my noble friend has just described what Amendment 36 probes and the power it is seeking to look at, so I will not repeat that. What I will say is that the power is designed to be used only when it is necessary to do so in the public interest, such as in an unexpected or emergency scenario.

The Government looked at some of my noble friend’s questions. We are not aware that the Bank has ever used this power, but it could be useful in some scenarios—for example, for the Bank to require certain actions from troubled firms during a period of financial crisis. As we saw in 2007-08, such crises can develop quickly and create novel policy challenges that may not be anticipated in advance. As such, the Government consider the power to be a useful potential backstop. Any changes to this power would require careful consideration and consultation before acting.

I have been brief, but I hope that I have answered my noble friend’s questions, at least in part, and that she feels able to withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I rather thought I would get that answer—that the power has never been used—because I certainly could not recall any situation when it could have been used. My noble friend the Minister has put up a good case for keeping something that has been there since 1946—which is rather a long time—and has never been used but might be needed in an emergency, notwithstanding that, certainly for the last 20 years, we have been legislating on financial services and banks in extenso and there exists a range of powers that any intelligent person involved in this area thought that the Bank or the PRA would ever need to use. I think the case for removing these powers is unanswerable. I hope that my noble friend the Minister might think a little more about that between now and Report. It would be a good thing for the Government to bring forward something that would clean up our statute book. I beg leave to withdraw.

Amendment 36 withdrawn.

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Moved by

[Baroness Noakes]

37: Clause 18, page 29, leave out lines 34 to 36 and insert—
“(3) In complying with the duty in subsection (1) the relevant regulators must ensure that any information or other requirements imposed on a critical third party minimise, so far as is reasonably practicable, the burden placed on the critical third party.”Member’s explanatory statement
This amendment shifts the emphasis from burdens on regulators to burdens on third parties.

[Baroness Noakes (Con)]

My Lords, I understand regulators’ desire to have more insight into the risks that critical third parties present to the provision of financial services. The regulators have been fretting about the provision of cloud services for some time—not always with good cause, because cloud providers offer some significant benefits to financial services firms in a range of areas. The PRA and the FCA have already increased their focus on critical third party suppliers by way of operational resilience requirements on regulated firms, and they already have the ability to get information via the regulated firms.

I was not hugely surprised to find a regulatory power grab regarding critical third parties in this Bill, but I was genuinely shocked to find 10 whole pages of legislation giving the regulators huge powers over critical third parties: the power to make rules, a power of direction, information powers, censure and disciplinary powers, and so on. This is typical regulatory gold-plating of the kind that I hoped we had left behind when we exited the EU. The Treasury ought to be on the alert against this kind of thing, rather than being complicit in it.

The regulators will have to exercise real care when they use these new powers. It would be a very bad outcome if some—for example, the cloud providers or the major ICT providers—decided to exit the UK financial services market because of heavy-handed regulation. If that happened it would likely increase the concentration risk within the financial services sector, as well as reducing competition in the provider market.

My Amendment 37 is in fact extremely modest. TheCityUK has called for one of the regulators to be in the lead for any critical third party, so that the likelihood of duplicative requirements and other burdens between the regulators involved would be minimised. TheCityUK is not comforted by the co-ordinating duty in the new Section 312U of FSMA because just about everybody who has been involved in financial services has been on the receiving end of unco-ordinated regulator action, despite the existence of co-ordinating duties already in FSMA. Those duties have not been a resounding success, and I may return to the idea of a lead regulator on Report.

For today, my Amendment 37 would delete subsection (3) of new Section 312U and replace it with a more third-party friendly version. Subsection (3) says that the duty to co-ordinate

“applies only to the extent that compliance with the duty does not impose a burden on the relevant regulators that is disproportionate to the benefits of compliance.”

This is typical of regulation, in particular financial services regulation. It sees things through the prism of the regulators, not the persons impacted by the regulation. My amendment would replace this with a requirement to minimise the burden placed on critical third parties so far as is reasonably practicable.

I do not regard this rebalancing of the new rules as a radical proposition in the context of the radical new powers that are being taken. The impact on third parties really does need to be taken into account, and it is curiously absent from the 10 pages of the Bill dedicated to the new powers over critical third parties. The need for rebalancing of the new regulatory provisions ought to go wider than the duty to co-ordinate, and I should probably have drafted something broader to consider in our Committee today. My purpose is to probe how the Government see the new provisions impacting on third-party suppliers, not just on the regulators, and whether they even acknowledge that they might have created something of a monster in these new rules. I beg to move.

[Baroness Kramer (LD)]

My Lords, I shall speak only very briefly, because I have a great deal of sympathy with the proposition that the noble Baroness, Lady Noakes, puts before us. The resistance in the industry to rules is not to the principle of the rules but to the way in which they operate, and the cumbersome methodologies—the dotting of every i three times and crossing of every t four times—that drives people completely insane. It has undermined respect for both the regulator and its effectiveness. The noble Baroness, Lady Noakes, said she had something broader in mind, and she will find amendments coming forward later, particularly in the name of my noble friend Lady Bowles, focusing on the issue of efficiency. I think that is something we would all like to see.

There are those who would like to see less regulation per se, and those like me who are very cautious about having less regulation. Obviously, less regulation may release animal spirits and innovation, as the noble Lord, Lord Naseby, pointed out earlier; in fact, he did not talk about animal spirits, but he talked about innovation. The downside is that light-touch regulation could leave you with a financial crisis, an awful lot of victims and, potentially, an undermined economy. It is very asymmetric. But efficiency ought to be built into the very heart of this, and regulation ought to be designed to put a minimum operational burden on the various parties affected. If we can adopt that somewhere as a principle in the Bill, it would be exceedingly useful.

--- Later in debate ---

I hope that this goes some way to reassuring my noble friend that, in the wider regime, the intention of her proposed amendment has already been fulfilled through existing public law obligations and requirements in FSMA and the Bank of England Act 1998 around proportionality. I also pointed to the example that, in our design of the regime, we took the opportunity to make it more targeted than, for example, the EU regime. I hope that she will therefore withdraw her amendment now, although I feel we may return to it on Report.

[Baroness Noakes (Con)]

My noble friend correctly anticipates how I intend to conclude my remarks. We will return to this in Committee because, as she noted, I and other noble Lords have tabled amendments on proportionality. Although proportionality is in the legislation as a regulatory principle, there are considerable concerns among those who are regulated that proportionality does not mean much to regulators—or that it never seems to actually bite.

I am grateful for the information on my noble friend’s parents’ dog, and I have learned something about the EU that I did not know before—although I do not generally need to learn things about the EU. We will also return to the important issue of efficiency. I have added my name to at least one of the amendments on efficiency in the name of the noble Baroness, Lady Bowles.

The weight of this regulatory package that has been put together looks scary to those who may potentially be drawn within it, and there are concerns among those who wish to use the services of cloud providers in particular—but also some of the other ICT providers —that the UK regulators will scare off things that are important to them.

I will read carefully in Hansard what my noble friend has said, but I feel that we will probably need to return to one or more specific aspects of this on Report, as well as explore further the issues of proportionality and efficiency in Committee. However, for today, I beg leave to withdraw my amendment.

Amendment 37 withdrawn.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

Moved by

[Baroness Noakes]

43: After Clause 23, insert the following new Clause—
“Regulation of consumer credit
(1) The Treasury may by regulations make such provision as they consider appropriate for the purpose of, or in connection with, the regulation of consumer credit.(2) The power under subsection (1) is exercisable only by making such provision as the Treasury consider necessary or desirable for or in connection with one or more of the following purposes—(a) promoting effectiveness in the functioning of financial markets; (b) promoting effective competition in the interests of consumers in financial services and markets;(c) facilitating the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term;(d) protecting consumers;(e) providing for efficient and effective regulatory, enforcement, investigatory and supervisory arrangements in relation to the provision of financial services or the operation of financial markets.(3) The provision that may be made by regulations under this section includes provision—(a) conferring powers on the Treasury (including a power to legislate);(b) conferring powers, or imposing duties, on the FCA (including a power to make rules or other instruments).(4) In exercising their powers under this section, the Treasury must have regard to—(a) the general principle that consumers should take responsibility for their decisions,(b) the importance of securing an appropriate degree of protection for consumers, and(c) the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.(5) The power to make regulations under this section includes the power to modify legislation.(6) Regulations under this section are subject to the affirmative procedure.(7) Before making regulations under this section, the Treasury must consult the FCA.(8) In this section, “legislation” means primary legislation, subordinate legislation and retained direct EU legislation.”Member’s explanatory statement
This amendment would give HM Treasury the powers necessary to implement the findings of its ongoing review of the Consumer Credit Act 1974, saving the need for further primary legislation.

[Baroness Noakes (Con)]

My Lords, Amendment 43 would confer on the Treasury a wide-ranging power to legislate for consumer finance.

As I am sure noble Lords are aware, reform of consumer credit has been a long time in the making. The core legislation is nearly 50 years old and remains the Consumer Credit Act of 1974. That legislation was forged in a very different era: there were much lower levels of consumer credit; the internet was only a gleam in the eye of a few researchers; and regulation of financial services firms barely existed, certainly compared with what exists today.

The 1974 Act is based on a very different legislative approach from FSMA; it is based heavily on processes and paperwork rather than outcomes. When FSMA was passed, the Consumer Credit Act was left basically as it was despite the fact that the FSA became a powerful financial services regulator with a clear consumer focus. Some of the 1974 Act was later imported into the FCA model, in 2014, but that was only a partial exercise; the FCA was then tasked by statute to look at what could be done with the rest of the Act’s territory. That review eventually reported in 2019; last December, more than three years later, the Government finally produced their own consultation document.

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[Baroness Penn (Con)]

I would like to share the noble Lord’s optimism. We need to have the consultation on the secondary legislation, which we are expecting very shortly, and then progress as quickly as we can to lay the regulations after we have completed that consultation. I completely accept the point from the noble Lord and the Committee more widely that there is a desire for swift action in this area. We understand that there are concerns about the pace of the delivery of this secondary legislation. This is a new and developing market, and it is important to get the regulation right. We need to ensure that it is proportionate and that lenders can continue to offer a useful form of interest-free credit to consumers responsibly.

While work continues to bring this fully into regulation, I should stress that buy now, pay later borrowers already benefit from wider consumer protection regulation. This includes standards on advertising, rights concerning the fairness of contracts and regulations to protect consumers from unfair commercial practices. However, to reiterate, I reassure the noble Lord, Lord Tunnicliffe, and other noble Lords in the Committee that they can expect to see draft legislation very soon and that we are committed to progressing this as quickly as we can.

I therefore hope my noble friend Lady Noakes will withdraw her amendment and that the noble Lord, Lord Tunnicliffe, will not move his when it is reached.

[Baroness Noakes (Con)]

Will my noble friend say how she sees the timetable going forward? I think she said that the Treasury is at the first stage of consultation, but it would be interesting to see the outline timetable that my noble friend thinks the Government will work to on this. It has taken a long time even to get to this stage, and it would be very useful to have an idea of when something tangible might be expected.

[Baroness Penn (Con)]

I will do my best, but I am afraid it will disappoint my noble friend. We expect to publish a second-stage consultation in due course, and it is likely that the FCA will also consult. Implementation of the final approach will require primary legislation, which will be brought forward when parliamentary time allows. I hope she draws some comfort from the fact that this process has started and that this reform is under way. We heard from everyone that this legislation is long overdue for reform, but we also heard a desire from the Committee that appropriate parliamentary scrutiny be applied when the Government bring forward proposals for reform.

[Baroness Noakes (Con)]

I thank all noble Lords who spoke in this debate, especially those who supported my amendment. I freely concede that, as I said in my introductory remarks, more parliamentary involvement would be required before any proposals were finalised.

Consumer groups have already been heavily involved. There are problems because the Consumer Credit Act focuses on paperwork and processes and not on whether it produces good outcomes. For example, it has no concept of vulnerable customers. There are real, good reasons for progressing this into law.

I was not surprised but somewhat disappointed by my noble friend’s response; it is a big step to take a big Henry VIII power when dealing with anything other than EU law. Normally, of course, the Committee would be criticising such a power, but I was particularly disappointed not to get a sense of the real urgency from my noble friend. Having a secondary consultation in due course is the kind of timetable beloved by Governments who do not really want to do anything. I hope that my noble friend will go back to her department, the Treasury, and say that this issue must be progressed. With that, I beg leave to withdraw the amendment.

Amendment 43 withdrawn.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, there are many good suggestions in this group of amendments. Indeed, they are all good and they are all very supportable. It is particular pleasure to follow the noble Lord, Lord Holmes, because with the amendment on the determination of authorisations he has put his finger on a specific problem that interferes with the day-to-day running of businesses, or those hoping to run new businesses, and is at the heart of competitiveness. So without addressing those kinds of issues, we will not get anywhere. This lies behind similar amendments in my name, in a later group, relating to efficiency.

I hope that, given the number of amendments, and no doubt contributions, from noble Lords from all sides, the Government and the regulators will acknowledge the need and the parliamentary appetite for further accountability through formal reporting and, as I point out in my Amendment 121, for independent performance metrics. I thank the noble Lord, Lord Naseby, for signing that amendment. Of course, it is a probing amendment directed at the FCA. To be thorough, there would need to be another one replicating it for the PRA, but I had tabled enough amendments already. I am conscious also that the noble Lord, Lord Bridges, has proposed a more fully developed model, with an amendment in a later group creating an office for financial regulatory accountability. I have signed that amendment.

My amendment suggests that the FCA report its performance against a set of statistics developed and periodically updated by the National Audit Office, in consultation with consumer representatives, through which the FCA’s achievements and progress may be objectively evaluated. The idea for the amendment developed out of discussions that we had in your Lordships’ Industry and Regulators Committee when we were looking at competitiveness in financial services, particularly in the insurance sector, as well as the wider discussion about competitiveness.

The issue with reports by the regulators is that, even within a given topic, they are setting their own exam questions and then grading themselves on how well they have passed. There is a constant need to get different specifics and granularities as new issues arise, and that is not necessarily being done—for example, reporting on authorisations, as I have mentioned. The committee had some discussions with the NAO, finding it very helpful and astute, and there are always lots of interesting things in its report that at times already challenge what the regulators have said about themselves and how they have spent their resources. It sheds light on things that—shall we say?—have certainly been exaggerated by the regulators in the past.

It is clear from the number of amendments in this group and elsewhere that to address problems comprehensively within the structure of FSMA is quite difficult and convoluted, needing many amendments that make it ever more difficult and convoluted. That is one reason to have an external body that can look over everything and cut through some of the obfuscation and difficulty one has in trying to put something comprehensive into FSMA and needing about eight amendments to do it. My fundamental question is: does the Minister recognise that need for an independent body of substance that can update what is reviewed and measured around regulatory performance and is free from the regulators’ own glossing, and if not, why not?

I need touch only briefly on my other two amendments in this group, Amendments 157 and 158. They simply suggest that when respondents to consultations do not wish to be named—that is perfectly reasonable—there should nevertheless be an indication of the nature of the respondents so that we can see how many have come from industry and how many from elsewhere. That is done sometimes; it is done routinely in some departments but in others it is never done. It is just good governance because, without revealing the identity of individuals or companies, you can nevertheless see what the universe of respondents truly looks like.

[Baroness Noakes (Con)]

My Lords, I have Amendments 83 and 84 in this group and I have added my name to Amendments 66, 115 and 116 in the name of my noble friend Lord Holmes of Richmond. I did not add my name to some of the other amendments in this group but I think a pattern of considerable agreement is emerging from all parts of this Committee as to the things that we need to address. Perhaps we have not quite honed in on how to find the one solution to that, but the purpose of Committee is to explore these things.

My noble friend Lord Holmes of Richmond’s Amendment 66 aims at much the same target as Amendments 45 and 63 in the name of the noble Earl, Lord Kinnoull. I support what both said in introducing their amendments. I understand what the noble Earl, Lord Kinnoull, is seeking to achieve but it is not enough just to tell the FCA or the PRA to monitor and measure what they are doing in certain areas. We need to go further, and into regular and focused reporting, which is why I particularly wanted to support my noble friend Lord Holmes’s Amendment 66. Of course, the two issues are not mutually exclusive, and I can see the start of a way forward to an amendment on Report that encapsulates many of the issues arising in respect of the competitiveness and growth objectives.

I am particularly concerned that the regulators will pay lip service to the new objective: we will get pages of elegant words in their annual reports but whether they will amount to anything useful in terms of information is something of a moot point. I also believe that relatively few people actually read the annual reports of the regulators, much as not many people read the annual reports of listed companies. If noble Lords are in any doubt about the capacity of the PRA to write a lot of words without saying much of substance, they need only look at the PRA’s discussion document on how it will respond to this new competitiveness and growth objective. It runs to 70 pages but there is virtually no meat in there at all. We need hard data in a regular report which will get attention in Parliament and elsewhere, which is the other main theme that will emerge from our Committee: how we can start to build a proper system of accountability. However, reporting by the regulators is an important building block in there.

My Amendments 83 and 84 also concern the competitiveness and growth objective, but this time in the context of consultation on new rules. These amendments amend new Sections 138I and 138J of FSMA, as inserted by Clause 29, so that the PRA and the FCA have to include an explanation of the impact of how the competitiveness and growth objective has affected whatever new rules are brought forward. Whenever new rules are proposed, there is an important opportunity to consider their potential impacts on competitiveness and growth. As we know, regulators do not need many excuses to create new rules, but every time they respond to real or perceived risks with another addition to the rule book, they will end up imposing costs, and costs are ultimately borne by consumers. They can also have the effect of slowing down or hampering innovation, so it is important that, at the point before new rules are introduced, we have the opportunity to review the impact of those rules on competitiveness and growth in the UK. I like ex poste reporting, but I also like ex ante analysis and, if necessary, action to change rules before they have an adverse impact.

I have also added my name to my noble friend Lord Holmes’s Amendments 115 and 116 because they would give hard data on how speedy the regulators are in handling new approvals, which is an important area. Amendment 116, which would require information on various kinds of regulatory decisions made by the FCA, could usefully be extended to the PRA because it, too, seems to drag its feet on those areas.

Anybody who has worked in a bank will have a story about how long it took to get directors and key executives approved. Last week the Financial Times reported that a digital asset technology company was forced to register in Switzerland because the FCA was too slow to deal with its UK authorisation application. We really must have regulators in the financial services sector that work efficiently and effectively if the UK is to remain a successful financial centre. We need the kind of reports covered in these amendments to form part of a suite of information on which Parliament can start to hold these regulators to account more effectively.

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[Lord Sandhurst (Con)]

My Lords, I first apologise for not having spoken at Second Reading. I speak in support of Amendments 46, 54, 57, 64, 82 and 85 tabled by my noble friends Lord Lilley, Lord Moylan and Lord Trenchard. When effected, they will provide a much-improved basis for regulation. These amendments introduce an additional statutory objective, consistent with the existing objectives—namely, predictability and consistency.

Amendment 85, as we can see, obliges the FCA and PRA to apply common-law techniques of interpretation to regulations. These are to be interpreted in the same way as a court would look at them. That is critical for the promotion of predictability and consistency. Here I speak, as noble Lords know, as a lawyer, not a financier. By Amendment 85, rules of high-level generality will be used by the FCA only to assist in interpreting specific rules, not as stand-alones, as a general principle.

The context of these amendments is important. First, the ombudsman can award as much as £375,000—that is a lot of money—in an individual case and there might be 50 claims. Secondly, its determination is in respect of a vast body of technical rules with which the financial companies have to comply. Thirdly, as we have heard, the ombudsman decides a dispute on the basis of what is “fair and reasonable”, but is under no obligation to be predictable or consistent, nor to explain its reasoning. Indeed, the ombudsman is

“free to make an award different from that which a court applying the law would make”

when applying a rule. Lack of consistency results in unpredictability. We need legal accountability and predictability. We are dealing here with complaints about potentially large sums of money.

Lack of predictability means that firms must build compliance programmes based, in part, on guesswork about how the regulator might react when applying its rulebook. This is particularly so when considering the vaguely drafted rules known as “principles”. To take one example, it will be a principle for there to be a new vague duty to

“act to deliver good outcomes for retail customers”.

That is a rule with a high level of generality, which our amendment will address. It should not stand alone.

To apply such concepts to specific fact situations, without case law precedent, can be contentious. It is hard to challenge the assertions of the regulators as to how their rules are to be applied. Lack of definition in the rules cannot be good for entrepreneurs or for the competitiveness of the United Kingdom. Compliance activity becomes materially inefficient where there is lack of clarity and certainty in drafting and where there is lack of predictability and consistency in application. Costs are driven up; ultimately, the consumer pays.

We seek to introduce a new approach which produces predictability. Having established the principles set out in the amendments in this group, there will follow in later groups the means to give them practical effect through properly conducted adjudications. The gain for all concerned will be consistency and predictability, flowing from having to apply the regulations consistently and in accordance with ordinary legal principles of interpretation. Everyone concerned will know where they stand.

It will be simple, therefore, for the regulator to see whether a regulation is being applied—by adjudication or on appeal by the courts—as it would wish. It can then make changes based on hard evidence. Consumers and financial companies, meanwhile, will know where they stand. We invite my noble friend the Minister to acknowledge the need to incorporate these new objectives and the need for consistent, predictable application of the rules.

[Baroness Noakes (Con)]

My Lords, I have added my name to Amendment 70 in the name of the noble Baroness, Lady Bowles of Berkhamsted, because any way that we can reinforce the need for the regulators to be efficient is welcome. I look forward to hearing what she has to say when she speaks to her amendment.

I also have two amendments of my own in this group: Amendments 72 and 77A. Amendment 72 deals with proportionality, which the noble Lord, Lord Tunnicliffe, referred to in the discussion on the first group of amendments. My amendment seeks to raise proportionality from a regulatory principle to a general duty. I have to say that I have always found the hierarchy of what the regulators have to follow rather difficult. They have general duties, strategic objectives, operational objectives, secondary objectives and a number of statutory “have regard” duties, which include regulatory principles. On top of that are the so-called recommendations from the Treasury to which they also have to have regard.

The regulatory principles in Section 3B of FSMA are a list of eight motherhood and apple pie things about which I am sure there is little debate, but there should be a debate about whether all or any of them have any practical impact on the way in which regulators behave. For example, one of the principles is that consumers should take responsibility for their decisions, but the FCA’s direction of travel is the opposite. Indeed, I do not think that caveat emptor has any part in the FCA’s thinking. There are other principles on value for money and transparency, but if we thought that they had any impact, we would not have the amendments that we have in today’s Marshalled List.

I am sceptical about regulatory principles not because they are bad things but because they appear to be ineffective. With Amendment 72 I have sought to elevate the proportionality principle, which is one of the eight, into a duty so that it has more meaning in how the PRA and the FCA go about their business. In case anybody has any doubt about whether proportionality concerns are real, I will give a few examples.

The first is PEPs, which we will be debating later in Committee, but, for today, both Houses of Parliament are full of people who have faced wholly disproportionate action by financial services providers. Of course, at the end of the day, it is the financial services firms—the providers—which apply the rules, but the FCA has done nothing of substance to ensure that the firms act in a way that is proportionate. Had it done so, the aggravation that we and, importantly, our family members have had to face would have been considerably reduced. It is obvious that we present no more risk than the general UK population, yet enhanced due diligence is still required—and is often extremely officiously applied.

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[Baroness Kramer (LD)]

If I could just interrupt, the noble Baroness might want to go back and take a look at the MREL rules. It is in the UK that smaller banks got loaded up with the MREL requirement. I do not have the exact numbers in front of me but I could easily get them for the noble Baroness. She will discover that within the EU, small banks do not have to deal with the MREL issue. This was the particular interpretation by the UK PRA and has long been a battle that I have every time I meet PRA officials.

[Baroness Noakes (Con)]

I thank the noble Baroness for that. Of course, I got carried away by my usual desire to knock the EU and lost sight of the essential principle, which is that the PRA is in fact applying the MREL rules disproportionately. I think that on that, the noble Baroness and I will agree.

So the PRA is applying a system that is designed for systemic bank failure to smaller banks, which present no systemic risk at all. While some modifications were made in 2021, medium-sized banks still end up having to issue MREL-compliant capital, which adds to their cost of capital, and this in turn reduces their capacity to lend. A number of mid-sized banks told the Treasury late last year that this reduction in the capacity to lend could amount to £62 billion over the next five years. Everyone loses—except the larger banks, who see smaller competitors facing considerable competition barriers. I believe that the regulators need to focus more on proportionality, which is the aim of my amendment.

Earlier I said that I was sceptical about the regulatory principles in FSMA, but they exist and we need to make sure that they are comprehensive. My Amendment 77A introduces an additional regulatory principle of being evidence-based. We have inherited all those EU rules, which were drawn up in the context of the EU’s well-known precautionary approach to regulation. I can see how easy it is to slip into the habit of regulating in the UK in the same way, just because we had to regulate that way in the past.

On our first day in Committee, we had a short debate on short selling. There is no evidence that short selling is or has been a problem in the UK, and yet the Government and the FCA are lining up to carry on regulating it. We need a shift of mindset in financial regulation in the UK, because the regulators should regulate only where the evidence points to the need for regulation, and we should not be regulating on the basis of hypothesis or speculation. That may well mean stepping back from regulating in areas where there is a possibility of a problem but no evidence that problems actually exist.

If we have a nimble system with agile and responsive regulators—I accept that that might be a rather big assumption—we should have no problem in stepping back, because we can act when a problem emerges. I certainly do not recommend or seek the widespread dumbing down of our regulation, because good regulation is part of the strength of our financial services sector. However, I believe that we are failing to take advantage of our Brexit freedoms to liberate our financial services businesses where there is no evidence that it is not safe to do so. That is what lies behind my seeking to add an additional regulatory principle.

[Lord Tyrie (Non-Afl)]

I declare my interests as in the register. I was not intending to begin with these remarks but I think the one thing we can all agree on is the fundamental weakness of the Bill, which is that it repatriates considerable powers to UK regulators from the EU without giving any meaningful consideration as to how these powerful bodies will be scrutinised and held accountable.

The noble Lord, Lord Bridges, has made a detailed proposal; there are others around. Somewhere in that area we have to put something on to the statute book to accompany these measures. I think that is relevant to the consideration of the amendments in the name of the noble Lord, Lord Lilley. One task such a body can be asked to accomplish is to evaluate and make suggestions for more far-reaching reform. A number of the amendments in the noble Lord’s name might fall into this category and they may have quite profound effects on the way that we are regulated.

As for competition—which I also was not intending to speak about but I cannot resist it—I spent an enormous amount of effort and time, with the noble Lord, Lord Flight, and others, when we were in the other place, trying to get competition and competitiveness built into FiSMA; this was in 1998-99. We largely failed and even now we have not succeeded as much as we would like. I strongly agree with what the noble Baroness, Lady Noakes, said about these multi-tiered objectives and principles—operational objectives, strategic objectives, et cetera. The consequence, of course, is that they are gamed by regulators, which implement the bits that they most like and leave behind the bits that they do not like if they are all too difficult.

These two first points I have made are interlinked. Currently nobody holds regulators to account for that gaming. If we did have a more powerful body, if Parliament could have at its disposal more effective expertise—something akin, perhaps, to the NAO but much smaller and specialising in regulatory scrutiny; we will come on to this in more detail next week—we might find that the regulators stopped picking and choosing.

When I first read the amendments in the name of the noble Lord, Lord Lilley, I thought they were easy to support. They have some of the character of motherhood and apple pie about them. What could be more reasonable than that the regulator should be given the additional statutory objective of predictability and consistency? But, having thought about it a bit and discussed it with quite a few people, now I am not so sure. I am becoming concerned that, taken together—the noble Lord’s amendments are interlinked—and notwithstanding his good intentions, they could have a major effect on the conduct of financial regulation in the UK, and not altogether necessarily for the public good.

Perhaps I could step back for a moment and explain why, in the context of some of the work we did on the Parliamentary Commission on Banking Standards. The current regulatory framework derives directly from that commission, which I chaired, and from the Vickers commission. These proposals have largely been put on to the statute book and implemented, where appropriate, in the rulebook, with many of those rules being implemented only recently.

When the PCBS and subsequently the Treasury Select Committee were trying to work out how to improve the regulatory framework, which had so manifestly failed in 2008-09, we had several core purposes in mind. Among these were, first, to challenge and, where possible, expunge the box-ticking, back-covering culture which had grown up in both the regulators and the regulated community, often in the search for safe harbours—safe harbours for both of them, incidentally. In doing so, we hoped to bear down on regulatory capture—the dangerous community of interests between the regulators, the regulated and the sponsor departments, which develops at the least opportunity. I strongly agree with what the noble Lord, Lord Lilley, said about what regulators will regulate for if no one keeps an eye on them at all.

A second purpose we had in mind was to try to safeguard market entry; that is, in particular, to develop a regulatory framework that did not discourage challenger banks: regulation to competition, not from it. I mention in passing that this is very much unfinished business, to put it mildly. There are barriers to entry everywhere.

A third purpose, and closely related to the second, was to bear down on excessive legalism. Access to the law is rarely cheap and usually favours large incumbents. Regulatory barriers to entry suit them and they are difficult and expensive for small firms to deal with. Big firms can certainly look after themselves. Tracey McDermott—I am almost quoting; I tried to look up the quote just before I came in this afternoon but could not quite find it—once suggested in evidence that we catch the small fry, the big fish get away.

A related point on excessive legalism is that legal scrutiny can provide greater certainty, but after a certain point it comes at the price of effective regulation. Markets are themselves inherently uncertain. Risk-making is of its nature forward looking. It will therefore always be imperfect for the conditions in markets at any one time. Regulation can be a lot better than nothing, but there will always be regulatory failure, and there will always be some legal uncertainty.

The fourth purpose we had in mind was to limit the FCA to a narrow range of objectives and to expect it to explain in much more detail than prior to the crash how they should be applied. This lies at the heart, at least in theory, of principles-based regulation supported by guidance. Multiple objectives, as I said a moment ago, will always be gamed by the regulator. Generally, the fewer the objectives, the better.

Others may disagree with everything I have said, but I still think that those purposes, which were not the only purposes that we had in mind, were probably on the right track. What concerns me about these amendments is that, among other effects, several of them will strike at some of these core purposes. For example, building on Amendment 54, Amendment 85 seems to suggest that the regulator can make new rules only if, or will find it difficult to make new rules unless, they are fully consistent with existing rules and that they are capable of prediction. At the least, even if the regulator can make rules, can they be enforced? This is what I understand proposed new subsections (1) and (2) in that amendment to say. It seems to me that it is how the objectives of consistency and predictability will be satisfied in law. My concern is that this will restrict adaptation and enforcement by the regulator. Fast changes in markets and the creation of new markets are features of much of the financial sector. We want to encourage dynamism and creativity and it seems to me that this proposed new requirement of predictability could make it more difficult for a regulator to enforce rules to address new market developments. It certainly seems likely to make regulators more cautious about enforcement.

I heard calls on the radio today for regulation of the cryptocurrency markets. I offer no view on the merits of cryptocurrency market regulation at the moment, but if they are to be regulated and enforced, does that have to be done in a way that could have been predicted from current regulation; for example, from the regulation of securities markets? I hope not, and I may have misinterpreted. I certainly do not think that was the intention of the noble Lord, Lord Lilley, but I hope it is not the effect of his proposal.

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Moved by

[Baroness Noakes]

47: Clause 24, page 38, line 22, leave out from “facilitating” to end of line 23
Member’s explanatory statement
This amendment probes what “relevant international standards” are and their relationship with the competitiveness and growth objective.

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[Baroness Noakes (Con)]

My Lords, I shall speak also to Amendment 58 in my name. The new competitiveness and growth objective, which I strongly support, is rather curiously drafted, as the FCA and the PRA are mandated to pursue competitiveness and growth

“subject to aligning with relevant international standards”.

My Amendments 47 and 58 remove this from the formulation for both the FCA and the PRA on a probing basis to try to understand what the Government mean by it.

International standards come in all shapes and sizes and it is far from necessary for the UK to adhere to everything which claims to be an international standard. The term is not defined in this Bill nor, I think, in FSMA. Part of what I am seeking is to understand what is a “relevant standard” and what kind of standards can in effect trump the competitiveness and growth objective. I hope that my noble friend will be able to explain this when she winds up.

The competitiveness and growth objective is already circumscribed by its status as a secondary objective. Using the PRA as an example, this means that it has to act only

“so far as reasonably possible”

in a way which advances its competitiveness and growth objective. Its primary objective—promoting the safety and soundness of PRA-authorised persons—will always trump a secondary objective. In this respect, I am not sure that Amendment 65 from the noble Lord, Lord Tunnicliffe, is necessary. That is certainly the view of the PRA, which has been clear about the primacy of its prime objective.

Although some of us might have preferred competitiveness and growth to be a primary objective, which could then raise different issues, the Bill does not go that far and the secondary objective is therefore secondary to the primary objective. I completely understand if the PRA choses to follow international standards because it believes that this advances its primary objective, and that would trump the secondary objective. On that basis, there is no need to refer to international standards in relation to the competitiveness and growth objective because if the PRA thinks that they are necessary, they are already absorbed within its primary objective. However, if an international standard is not necessary for the primary objective, I do not understand why any such international standard should crowd out the competitiveness and growth objective.

There may well be a presumption that standards promulgated by bodies such as the Financial Stability Board or the BCBS will be followed, but that is accommodated within the primary objective. However, even in that context I think we have to remember that, for example, the Basel capital standards have not always been followed universally, most notably by the USA, which pursued its own course for a considerable period of time. International standards are not matters of international law. Their implementation is always a matter of judgment for the home regulators and therefore needs to be considered in the judgments they make on their primary objective.

I believe that the words

“subject to aligning with … international standards”

give too much weight to policies developed outside the UK and could damage our competitiveness and growth. The regulators should not be allowed to ignore the secondary objective on the grounds that they are following international standards if those standards are not core to their primary objective.

I look forward to hearing the noble Baroness, Lady Bowles of Berkhamsted, on her Amendment 49, but my initial view is that it is right to keep the reference to financial services in the competitiveness and growth objective. Whether we like it or not, the financial services sector contributes around 12% to the UK economy and 7% of all UK jobs, according to the City of London Corporation. The regulators that can have the biggest impact on the financial services sector are clearly the financial services regulators: the PRA and the FCA. It seems to me only right to emphasise that their new secondary objective should specifically refer to the financial services sector. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I support Amendments 47 and 58 in the name of my noble friend Lady Noakes, to which I have added my name. I also appreciate the support of my noble friend Lady Lawlor.

The FCA is influential in the formation and development of standards, and states on its website:

“We contribute to and implement international standards, and supervise and enforce rules based on them in the UK.”


The principal international standard-setting body for the industry is IOSCO. Will the Minister confirm that the UK is already using its enhanced influence in that body resulting from our having a seat at the table in our own right rather than through the EU? IOSCO’s key strategic goal is to be accepted as the recognised standard-setter for securities regulation. The International Association of Insurance Supervisors seeks to play the same role for the insurance industry. Its mission is to promote effective and globally consistent supervision of the insurance industry to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.

Nevertheless, international standards are a very subjective concept, and the introduction of this concept does not assist the need for clarity and predictability, besides the question of whether international standards will assist or impede the advancement of the competitiveness and growth objective. I am unable to support the proposal of the noble Baroness, Lady Bowles, to include sustainability in addition to relevant international standards because I think that sustainability is an even more subjective concept and that this amendment would reduce clarity and predictability.

I do not understand Amendments 49 and 59 from the noble Baroness; I think the financial regulators’ responsibility for financial services does not extend to different spheres of activity, although I, too, question why this limitation is included in the Bill anyway. The amendments in this group are really important because the Bill provides for rather limited supervision of regulators, and I believe it is necessary to improve parliamentary oversight.

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[Baroness Penn (Con)]

I suggest that I triple-check that for the noble Baroness and write to her. The provision to enable the implementation of MRAs included in the Bill does not enable the Government to change the clear hierarchy of the regulators’ objectives, only to specify the areas in which regulators should make rules to give effect to an MRA. If, after I have written to the noble Baroness, she wants to discuss the Government’s interpretation of international standards, or if my noble friend wants to discuss her points further, I will happily meet them if that would be helpful.

I hope that the noble Baroness, Lady Bowles, can withdraw her amendment and that other noble Lords will not move theirs when they are reached. The Government, of course, support Clause 24 standing part of the Bill.

[Baroness Noakes (Con)]

My Lords, I think my noble friend is confusing me with the noble Baroness, Lady Bowles.

[Baroness Penn (Con)]

Yes—I am sorry.

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[Baroness Noakes (Con)]

I thank all noble Lords who have taken part in this debate, which has turned out to be a rather more interesting one than I thought we might have on this subject. It has raised a lot of very interesting points. The noble Baroness, Lady Kramer, challenged us on why we do not keep referring back to the financial crisis. There is a very simple reason: we are in a different world now. As we know, financial regulation was overhauled both in the UK and internationally. The banks have far more capital but, more importantly, significant changes have been made to ensure that they can fail safely. We are not talking about carrying the inherent risks which came to fulfilment in the early part of this century. Constantly harking back without recognising the huge changes that have happened since then is just not helpful.

I thank my noble friend the Minister for explaining which standards are intended to be covered by this. That is a helpful statement to have on the record. However, I confess that, while I completely accept the notion that we will want generally to comply with international standards—we lead them quite a lot of the time—as far as I can tell, the regulators spend at least half their lives on airplanes to exotic parts of the world to have meetings about international standards. I am not sure that that is a very good use of their time.

It could be that we do not wish to follow particular standards, even though being in a leadership position would imply that we would generally do so. It continues to trouble me that the wording says

“subject to aligning with relevant international standards”,

as if we align with them automatically, not merely as our default position. I am not entirely convinced that my noble friend has explained to my satisfaction that this wording gives sufficient flexibility to allow international standards to be ignored when relevant to the UK. I completely accept that whether or not international standards are followed will be primarily determined by our regulators, in the light of what is necessary. I may well want to revisit this on Report but, for this evening—which has gone on for rather a long time—I beg leave to withdraw.

[Baroness Bowles of Berkhamsted (LD)]

Before the noble Baroness sits down, I mentioned that I wrestled with this in the EU. There it says “having regard to”, which I would have thought was the appropriate wording: we have regard to it and usually do it, but do not have it in binding language.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

Yes, I think that is correct.

[Baroness Noakes (Con)]

My Lords, I support Clause 27 and, in particular, its new Clause 3RC of FSMA, which allows the Treasury to require the regulators to review their rules. As the noble Baroness, Lady Bowles of Berkhamsted, said, I have added my name to her Amendment 78 because it is important to widen out the scope of the reviews which the regulators will have to carry out. I also support her Amendment 145 for the same reason and should have added my name to it as well, so that we cover both the PRA and the FCA.

A lot of the things that regulators do are grounded in the specific rules that they apply, which is the focus of new Clause 3RC, but it should also be possible for the Treasury to tell the regulators to review, for example, the cumulative impact of rules as they affect innovation or new market entrants or any particular segments of the financial services industry. The Bill as drafted simply does not give the Treasury that power.

My Amendment 79A in this group seeks to involve more parties in the review-initiation process. At the moment, it involves only the Treasury and the regulators. My amendment is designed for other voices to be heard and responded to by the Treasury; it would require the Treasury to “consider any representations made” by various sources. I have included all the statutory panels attached to the regulators, including those created by the Bill. These panels ought to have good insights into how the rules work in practice and their opinions on which should be reviewed should be heard, so my amendment says that the Treasury must consider representations from representative bodies, which would include all trade and consumer bodies involved in the sector.

My noble friend the Minister may well say that the Treasury will of course consider any representations made to it in respect of the review of rules and that it is quite unnecessary to put that into statute. I accept that, but only up to a point. The relationship between regulators and their sponsoring departments is often much too close and certainly has the potential to shut out anything that might be uncomfortable for either the regulators or the sponsoring department, or both. That is why the second leg of my amendment requires the Treasury to “inform the body” making the representations if it decides not to require a review.

I do not believe there should be any power for outside bodies to tell the Treasury what it should do, but there needs to be something to counteract the imbalance of power that the Treasury has. Transparency is often the best remedy and it is, in effect, what I propose in my amendment by requiring the Treasury to respond with reasons for not pursuing a particular review. If Ministers do not like the idea of transparency by the Treasury, my noble friend will need to be very persuasive when winding up this debate.

[Lord Tunnicliffe (Lab)]

My Lords, I will not make any specific comments on this group but I will comment on all that we are doing today—certainly the first three groups, all of which seem to me to have a common theme: the accountability of the Executive to Parliament. The degree of consensus between the amendments is almost historic. I said to my researcher, “I think I am in support of all today’s amendments.” She said, “You mean other than ours?”

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[Baroness Noakes (Con)]

I think that is merely restating the problem. Could my noble friend have another go?

[Lord Harlech (Con)]

I will write with a full definition of what constitutes “in the public interest”.

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[Lord Harlech (Con)]

Like I said, I will speak to the department and write with a definition of what constitutes “in the public interest”.

Parliamentary committees can already conduct their own inquiries and hearings, call for papers, and call for individuals and organisations to give evidence. The power in Clause 27 seeks to complement, rather than substitute or detract from, the important role played by parliamentary committees. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.

On Amendment 79A, from my noble friend Lady Noakes, as with parliamentary representations, it will be important for the Treasury to consider the views of the regulators’ statutory panels and representatives of those affected by the rules. However, it would be inappropriate for the Treasury to provide a running commentary on the individual representations made. In addition, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules. These channels will be set out in the regulators’ policy statements on rule review, required by Clause 27, in due course.

[Baroness Noakes (Con)]

Could my noble friend explain why it is inappropriate to have transparency on why the Treasury chooses not to pursue representations that have been made to it by bodies that clearly have an interest in and experience of the matters under consideration?

[Lord Harlech (Con)]

I do not think I said that it would be inappropriate; I said that it would be inappropriate to provide a running commentary, not that there would be no comment on individual representations. Again, my understanding is that it will be done on a case-by-case basis.

[Baroness Noakes (Con)]

Could my noble friend explain that a little further? If I am a panel, consumer body or one of the trade bodies and I make a representation to the Treasury, what can I expect from the Treasury?

[Lord Harlech (Con)]

I am sorry; at this stage, I will have to take that back to the department and write to my noble friend.

On Amendments 80 and 147, tabled by the noble Baroness, Lady Bowles, the new rule review powers inserted by Clauses 27 and 46 concerning the appointment of an independent person are in line with the practice of other powers in the regulatory framework. For example, the appointment of Dame Elizabeth Gloster to investigate the FCA’s regulation and supervision of London Capital & Finance plc was approved by the Treasury. The Government do not consider that it would be appropriate to require that appointment to be subject to approval by a parliamentary committee, which, as I have mentioned, can already undertake its own inquiries.

Amendments 81 and 148 were also tabled by the noble Baroness, Lady Bowles. The primary role of the Government in the regulatory framework is to ensure that the regulators operate effectively and in accordance with the framework, as set out by Parliament in legislation. Where there is a case for external review of the rule-making of the regulators, the Bill provides powers to enable this.

Section 1S of FSMA and Section 7F of the Bank of England Act 1998 already permit the Treasury to appoint

“an independent person to conduct a review of the economy, efficiency and effectiveness”

of how the FCA and the PRA use their resources. In addition, Section 77 of the Financial Services Act 2012 allows the Treasury to direct an investigation into relevant events, such as the FCA’s regulation and supervision of London Capital & Finance plc.

The Bill further strengthens these accountability arrangements with regard to specific rules through Clauses 27 and 46, allowing the Treasury to direct the regulators to review their rules. In addition, as we have already discussed in this Committee, Clause 37 inserts new provisions into FSMA which permit the Treasury to direct the FCA and the PRA to report on performance where that is necessary for scrutiny of the discharge of their functions. Clause 47 modifies FSMA so that these provisions also apply to the Bank of England in relation to its regulation of CCPs and CSDs.

Finally, as I have already mentioned, Parliament is already able to conduct thematic reviews where it considers these necessary. Clause 36 is designed to support this scrutiny by requiring the regulators to notify the Treasury Select Committee of their consultations and to respond to representations to consultations by parliamentary committees. We will discuss noble Lords’ views on the operation of those specific provisions later today.

With that, I hope I have provided sufficient reassurance to the noble Baroness to withdraw Amendment 78, and that she and my noble friend do not move the remaining amendments when they are reached.

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Moved by

[Baroness Noakes (Con)]

86: After Clause 35, insert the following new Clause—
“The Financial Services Regulators Committee of Parliament
(1) There is to be a body known as the Financial Services Regulators Committee of Parliament (“the FSRC”).(2) The FSRC is to consist of nine members who are to be drawn both from the Members of the House of Commons and from the members of the House of Lords.(3) Each member of the FSRC is to be appointed by the House of Parliament from which the member is to be drawn.(4) A person is not eligible to become a member of the FSRC if the person is a Minister of the Crown.(6) A member of the FSRC is to be the Chair of the FSRC chosen by its members.(7) Schedule 7A makes further provision about the FSRC.”Member’s explanatory statement
These new Clauses, together with a new Schedule 7A, create a joint committee of both Houses of Parliament to oversee the FCA, PRA and the Payment Systems Regulator.

[Baroness Noakes (Con)]

My Lords, in moving Amendment 86 I will also speak to the other amendments in my name in this group. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Trenchard for adding their names to the lead amendment.

As has already emerged again this afternoon, there is clear agreement in this Committee that Parliament needs to exercise more oversight of the financial services regulators than has been the case in the past. The proximate cause is that huge new rule-making powers will be granted to them by the Bill, but a number of other issues, which noble Lords have raised in connection with the Bill and doubtless will continue to raise through Committee, also point to the need to put more effective accountability arrangements in place.

The Government have been on something of a journey on this. Their consultation on the future financial framework in October 2020 basically said that the existing arrangements involving the Treasury Select Committee in the other place were fine; your Lordships’ House did not even get a mention. By the time the Government’s final proposals came out in November 2021, they rode in behind the views of the Treasury Select Committee, which, by then, had reported that it was well equipped to carry out the accountability role. It subsequently set up a sub-committee for this purpose.

The November 2021 document did acknowledge that there were serious debates in your Lordships’ House during the passage of the then Financial Services Bill 2021, in particular the view expressed by a number of noble Lords that a Joint Committee of both Houses was the appropriate way forward. I think many of us felt then that the expertise that noble Lords would be able to bring to that accountability should be harnessed. The Government, however, said that this was a matter for Parliament. Well, we now have an opportunity for Parliament to express its views and determine the issue in this Bill.

My Amendments 86, 87, 88 and 156, together with the other amendments in my name that are consequential, would create a Joint Committee of both Houses. I have called it the financial services regulators committee, or FSRC. This would not technically be a Select Committee of Parliament, but the only difference between a committee of Parliament set up by statute and one set up by Parliament itself is the absence of parliamentary privilege, which I do not see as a crucial feature of any accountability oversight committee.

The main amendments in this group are based on the precedent of the Intelligence and Security Committee, a committee of both Houses of Parliament set up by the Intelligence Services Act 1994 and given stronger powers by the Justice and Security Act 2013. It is a committee that has demonstrably worked well on a joint basis.

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[Baroness Penn (Con)]

On that point, the noble Baroness referred to the Government responding, but we are broadly discussing the committee’s scrutiny of the regulators and the Government’s role as well. The Bill provides a specific power to ensure that the regulators respond to representations made to them by parliamentary committees in response to their consultations. That clause is not limited to the Treasury Select Committee but applies to any parliamentary committee that makes a representation.

I look forward to debating the next group, which continues the theme, but for now, I hope that my noble friend will withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who took part in this debate—with the possible exception of my noble friend the Minister.

I think we were pretty much at one in this Committee on the importance of setting up proper accountability arrangements for the financial services sector. I make no apology to my noble friend Lord Forsyth for trying to design a Rolls-Royce solution. The financial services sector is the biggest contributor to the national economy. What regulators in the financial services sector do has a huge impact, not just on the players in the financial services sector but on the whole economy. For that reason, we have to take this extremely seriously. It is at this point, when we are about to make a very radical change in the scope and responsibilities of those regulators, that we should consider this all very carefully.

The noble and learned Lord, Lord Thomas of Cwmgiedd, is absolutely right: this is about the importance of accountability to Parliament, and we must not forget that. That is what we have been trying to do.

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[Lord Lilley (Con)]

My Lords, I did not speak on the previous group of amendments, but I endorse everything that my noble friend Lord Forsyth and the consensus of speakers said on that issue. I also strongly support what my noble friend Lord Holmes has spelled out, in not only proposing his amendment but providing an overview of this whole group.

We all agree that regulators must meet the objectives set by Parliament, but should do so in a cost-effective way, without erring, as regulators can, on the side of overburdensome regulation that makes life simpler for them without consideration of the costs to others. As drafted, the Bill requires both the FCA and the PRA to have two panels that undertake cost-benefit analysis. That is excellent but, as with much else in the Bill, it allows the regulators to mark their own homework or, at least, to appoint most of the panel of examiners who will mark their homework for them.

My Amendments 124 to 128 and 133 to 137 do, in essence, three things. They ensure, first, that all the members, not just the chair, are appointed by the Treasury rather than by the regulators; secondly, that they are independent; and, thirdly, more specifically, that they are not employees of the FCA or the PRA. I hope they find acceptance from the Government and this Committee. They are not contentious and are quite simple. They are within the spirit of the Bill, but simply tighten it up and make sure that what the Government appear to want is achieved without allowing the regulators to take over the process and run it in their own interest.

[Baroness Noakes (Con)]

My Lords, I have added my name to the amendments in this group in the name of my noble friend Lord Holmes of Richmond, and I endorse everything that he said in introducing them. I should also have added my name to my noble friend Lord Lilley’s amendments, because I agree with everything that he said in respect of them.

I congratulate the Government on embedding cost-benefit analysis panels into the architecture of the PRA and FCA. That is a very good thing. These amendments, which focus on transparency and independence, are intended to be helpful and to make the implementation of cost-benefit analysis panels more effective so that we can properly rely on their contribution to regulation. I hope that my noble friend the Minister will welcome these amendments.

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[Lord Davies of Brixton (Lab)]

I broadly support the proposals in these amendments, although I have doubts and I do not think this is the final answer—I suppose that is what I am struggling to say—in part because I have yet to be convinced that the Bank of England is the appropriate holder of the knowledge on these issues. It is a highly contested area; there are strong views and a range of views.

It is not clearly understood, except perhaps by the noble Baroness who moved this amendment, that there is total confusion between different standards involved in assessing a pension fund. There are the technical provisions under the solvency legislation; the accounting standards set by the accounting bodies so that the sponsor has some idea of the ongoing liabilities to the pension fund; and the standards set by the Pension Protection Fund. They are all important, but they are not the funding standards. The funding standard is the assessment of what money is required to be paid into the scheme to fund future benefits, and none of those other three funding standards is designed to produce that result.

The technical provisions are not a funding standard, just a way of assessing whether further contributions to the scheme are required; they do not tell you what those contributions should be. Similarly, the accounting standard does not tell you how to fund the scheme; it is purely for the purposes of the sponsor, so it has some idea of its financial standing. The standards set by the Pension Protection Fund, which are a specific insurance-type approach, are certainly not a funding standard.

The problem is that there is total confusion, and I am not sure that we can look to the Bank of England in its present state of knowledge, or the financial responsibility committee, to make that assessment. The issue is: who is going to promote this debate and arrive at a conclusion?

Another point that needs to be clearly understood is that pension funds are distinct from insurance offices. They are two financial institutions of a completely different nature. Over the last 20 years we have edged to a situation in which pension funds are expected to behave as though they are insurance companies.

I support the amendments, but I raise some doubts as to whether we can really look to the Bank of England and its committee to provide the clarity that is so sorely needed on these issues.

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.

I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.

I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.

I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.

Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.

[Lord Sharkey (LD)]

My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.

There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Baroness Penn (Con)]

In Committee, we are discussing the different proposals that have come from noble Lords to solve these problems. I am trying to set out where the Government have previously considered these questions and the thinking behind our approach in the Bill, demonstrating that where we have been able to, for example in the introduction of Clause 37, we have made amendments to the Bill further to take into account some of these issues. When it comes to the specific proposals we are talking about, it is right that I set out that this has been considered by the Government, including through public consultation.

[Baroness Noakes (Con)]

I was not going to speak on this group in order to have a speedier debate, but I completely failed in that aim, so I think I am allowed to say something now. Can my noble friend explain to what extent these two consultations actually address the issues that have been raised by the amendments of my noble friend Lord Bridges? From memory, neither of the consultations examined the idea of having some kind of independent scrutiny of the regulators; they merely proceeded on the basis of what the Government wanted to do and did not seek to analyse the benefits of an alternative solution.

[Baroness Penn (Con)]

That is a similar question to that of the noble Baroness, Lady Bowles, and it is probably because I did not answer it satisfactorily that it has come up again. Noble Lords are right that there was not a question on those specific proposals in those consultations. I endeavour to point out, however, that does not prevent the respondents to those consultations, where they believe it to be a good idea, to use them to put forward their support for such an approach. Perhaps I could write to noble Lords specifically on the areas within both those consultations that touched on accountability measures.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Lord Holmes of Richmond (Con)]

My Lords, my Amendment 187 seeks to draw together the need for access to cash and acceptance of cash, but in no sense places burdensome requirements on retailers or financial services providers, in terms of the provision in local communities, by virtue of what is now possible through shared banking hubs. As we heard earlier in the debate, since the Bill entered Parliament on 20 July 2022, 390 bank branches have closed. Can the Minister say how many shared banking hubs have opened in that time? If we plot a similar trajectory for this year, which seems reasonable on the data we have available to us, and suggest a similar, if not slightly higher, number of bank branches closing, how many shared banking hubs will be open by 31 December this year?

Amendment 187 would provide access to banking facilities on every high street and give the Treasury the power to determine the size and scale of that high street to enable provision across the country for individuals and micro, small and medium-sized enterprises for deposit and withdrawal for the benefit of the community, the economy and our country.

Moving to Amendment 189, if we consider not only the need for cash but the current geopolitical circumstances we find ourselves in, it would seem a very good idea to classify the cash network as critical national infrastructure. I thank my noble friend Lord Naseby who has put his name to this amendment, which simply states that the cash network should be critical national infrastructure because of economic reasons. I believe we can move positively to a digital financial future where everybody is included. It is one heck of a transition, but I believe we can get there. Even when we reach that point, for reasons of reliance, there may well still be a need for cash. The level of the cash network could be determined by the Government, but having a cash network would seem to be a thoroughly good idea for reasons of resilience, unless the Minister can suggest an alternative second or third line of resilience, which I would be delighted to hear.

Finally, my Amendment 239 asks the Government to consider an access to digital financial services review. This is critical and timely. It would build on the great work that was done with the Access to Cash Review published in 2019. It would have many of the same aims, but in no sense the same specificities. If the logic was good for an access to cash review, which I believe it was, does my noble friend agree that the logic for an access to digital financial services review is equally good? I suggest that the review should look at issues around access to digital payments, online platforms, mobile applications, skills and, crucially, connectivity.

It is probably best to look at this in terms of an example. Imagine a mobile application, the best digital payments application ever created. However, I do not own a smartphone, so that digital payment is not being made. Imagine the same application, but it is not accessible. That digital payment is not being made. Imagine I own a smartphone and I have that app, but I am in an area of low or no connectivity. I could have the best digital skills, the best smartphone and this best app, but the payment is not being made. Imagine I have the app, the smartphone and the connectivity, but I do not have the digital skills. That payment is not being made.

It is those issues and more that we urgently need to look into with an access to digital financial services review, which can come up with recommendations for the Government to put into practice for the benefit not just of individuals but of micro-businesses, small and medium-sized enterprises, local economies, communities, cities and our country. The logic was good for an Access to Cash Review; I believe it is good for an access to digital financial services review.

To conclude, we need access to cash, as well as acceptance of cash; access to banking services on every high street; cash as critical national infrastructure; and an access to digital financial services review. Will my noble friend the Minister channel a retro TSB marketing campaign and, for all these amendments, be the Minister who likes to say yes?

[Baroness Noakes (Con)]

My Lords, I have Amendments 179 and 190 in this group. I am not very enthusiastic at all about the provisions for cash access and distribution in the Bill. I am far from clear that a heavy-handed regulatory solution, which is what we have in the Bill, is necessary to preserve cash access and distribution, but, if we have to have it, I believe that the powers in the Bill should be time limited, which is what my Amendments 179 and 190 seek to achieve. Under these, the powers would expire in 10 years, unless the Treasury brought a statutory instrument giving a later date.

This is not a hard-nosed sunset clause, because we genuinely do not know what the future will be like. What we do know is that, before Covid, the use of cash was on a long-term downward trend and the use of debit cards had already overtaken cash. Covid then accelerated those trends so that, by 2019, debit card usage was 50% higher than the use of cash, and the latest data for 2021 shows that debit cards were used three times more often than cash. UK Finance forecasts that, by 2031, cash will account for only 6% of transactions while debit cards will account for more than half.

I do not deny that some people are more comfortable using cash than other payment options, and I accept that digital exclusion exists. It may well be a proportionate response to the current need for cash to protect its availability in the way that the Bill does, but I find it hard to see why we should set cash up on a pedestal as though it is some form of human right.

There is a large cost associated with cash provision. The Access to Cash Review found that it costs around £5 billion per annum. That is ultimately borne by all users of banking services, with the possible exception of holders of basic bank accounts, which do not cover their costs anyway and are already loading costs on to other users. As the use of cash continues to plummet, the cost will become disproportionately high because most of the costs involved are fixed.

I am certain that the future is digital, and the real need in the medium term is not to build shrines around cash points but to incentivise the financial services sector to make digital payment systems more accessible and inclusive. The best fintech brains should be put to work on this, and the banks need to see that it is in their interests to support innovation. This is where the regulators should be putting their efforts, rather than working out where cash points should be.

For this reason, I quite like the idea behind my noble friend Lord Holmes of Richmond’s Amendment 239, which calls for a review of access to digital financial services, although I am not sure that now is quite the right time. I am also not sure that a review should result in decisions made by government. We need to incentivise the providers of financial services to provide answers for this, rather than thinking that government can dictate how things will work in practice as society changes.

Some of the other amendments in this group, in particular those in the name of the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Tyler of Enfield, seek to cling to an idea of high street banking that has already been overtaken by events. Bank branches closed because people stopped going to them; I predict that the new hubs will go the same way. The future is digital—that is what we should be trying to encourage. Making banks shoulder the costs of branches or hubs that are little used will simply increase the costs of the banking sector. This will end up harming consumers because costs will be passed on to them or, in some cases, providers may decide to withdraw from servicing particular sectors. In trying to preserve high street provision, the outcomes for consumers are not good.

I do not believe that it is responsible to legislate to preserve a version of the past unless there is clear evidence that the benefits outweigh the costs. I doubt that the cost-benefit case could, in truth, be made at the moment for maintaining branches or paying for the setting up of hubs, but I am absolutely certain that, when we look back in 10 or 20 years’ time, we will be amazed that we even thought that standing Canute-like against technological and societal change was the right thing to do in this area.

[Viscount Trenchard (Con)]

My Lords, I recognise the good intentions of the noble Baroness, Lady Tyler of Enfield, in introducing her Amendment 176. However, the tide is running out for cash. We are not the most advanced country in this area. It is now almost impossible to use cash in Sweden. What does my noble friend the Minister know about how the authorities in countries such as Sweden, which have largely dispensed with cash in daily life and where retailers are not prohibited from refusing to accept cash, support those who have no bank account, debit card or credit card?

I sympathise with the aim of this amendment. I regret the disappearance of the bank manager, but I doubt that this is an area where the Government should be too prescriptive. Where there really is demand to meet a bank manager, surely the market will respond and one or more banks will locate a manager where he or she is needed.

I support Amendments 179 and 190, to which my noble friend Lady Noakes has already spoken so ably. Her amendments recognise the reality of the disappearing role of cash.

I have sympathy for the aims of Amendments 180 and 181 in the name of the noble Lord, Lord Tunnicliffe, as I think it important that banks continue to provide in- person banking services where there is demand for them.

I sympathise with Amendments 238 and 239 in the name of my noble friend Lord Holmes of Richmond. The way the KYC rules are interpreted by banks and credit card providers is completely absurd and disproportionate. It really is ridiculous to have to prove one’s existence to an institution with which one has had an active business relationship for many decades. Can my noble friend the Minister tell the Committee whether she agrees that a review of the KYC rules is absolutely necessary?

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.

The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.

[Baroness Noakes (Con)]

My Lords, like the noble Baroness, Lady Bennett of Manor Castle, I recall our debates on this subject in 2021. Indeed, I think the amendment that the noble Lord, Lord Sharkey, has tabled is word for word the amendment he tabled on Report during the passage of what became the Financial Services Act 2021. It will not surprise the noble Lord that familiarity with it has not made me any warmer to the amendment.

As the noble Lord, Lord Sharkey, reminded us, mortgage prisoners derive from lending practices before the financial crisis. These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still have relatively high loan-to-value ratios, and they often have unsecured debt as well. Many of them have interest-only mortgages, with no repayment plan. Put simply, they typically have higher-risk characteristics than borrowers with active lenders.

The noble Lord, Lord Sharkey, has correctly excluded 50,000 or so of the population of mortgage prisoners from his amendment, because they are in arrears or within the last 12 months of their mortgage term, but I think he intends the remaining 143,000 to benefit from the largesse provided by this amendment. This is notwithstanding that the FCA estimates that 66,000 of them could, in fact, switch to active lenders because the active lenders in the market have changed their risk appetite, with the encouragement of the FCA, and they would now be able to remortgage. I do not believe that it is right to legislate to give preferential financial terms to those who choose not to take advantage of the opportunities available to them in the market.

The FCA’s last review found that around 30,000 of the remaining 47,000 would be unlikely to benefit from switching, because if they did find a deal it would cost them more than the interest rates that they are currently paying. High-risk borrowers do not get the best rates in the market, however much they might wish to. Amendment 197 would give these borrowers a rate that did not reflect the market for them, and I do not believe that it is fair to give them a special advantage by legislating for them.

The FCA has proposed some practical steps to assist the remaining population, but it does not propose anything like that which is contained in Amendment 197. That is not surprising because the LSE in its earlier, independent study—I have yet to see the study that the noble Lord, Lord Sharkey, referred to—concluded that market interventions were not justified and could cause markets harms.

We all have sympathy for those stuck with debt that they struggle to afford, but the problem is not confined to mortgage prisoners, and it is just not fair to single out this group of problem borrowers for special treatment. It is also an extraordinary departure from regulatory norms. The FCA does not tell lenders to whom they must lend money; that is not how regulation works. Under this amendment, the FCA would be telling lenders what their risk appetite should be, which raises big issues of moral hazard and fails to deal with the prudential consequences in terms of capital, on which the PRA is the arbiter.

Furthermore, the FCA is required to set interest rate caps, but only by reference to LTVs. This ignores the other key driver of interest rates—namely, the credit risk of the borrower. Whatever rate the FCA comes up with, it will be the wrong answer for some borrowers, and it would be plainly unfair if the FCA set the rate assuming high credit quality, because that is very likely to be at odds with the facts. In addition, requiring the standard variable rates to be no more than two percentage points above base rate ignores any evidence about the correct uplift for the particular type of loan and borrower characteristics, which can produce outcomes that do not reflect objective market realities. I hope that the noble Lord, Lord Sharkey, does not pursue this amendment, as he did in the 2021 Bill; it really does not make sense.

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Moved by

[Baroness Noakes]

201A: After Clause 65, insert the following new Clause—
“Financial Ombudsman Service
(1) FSMA 2000 is amended as follows.(2) After section 229 insert—“229A Power of FCA to require Financial Ombudsman Service to refrain from specified action (1) Where the first, second and third conditions are met, the FCA may give a direction under this section to the Financial Ombudsman Service.(2) The first condition is that the Financial Ombudsman Service is proposing to exercise any of its powers in relation to the determination of a complaint.(3) The second condition is that the FCA is of the opinion that the exercise of the power in the manner proposed may have implications beyond the specifics of the complaint in question.(4) The third condition is that the FCA is of the opinion that the giving of the direction is necessary in order to avoid the possible consequence described in subsection (3).(5) A direction under this section is a direction requiring the Financial Ombudsman Service not to exercise the power or not to exercise it in a specified manner.(6) The FCA must consult the Financial Ombudsman Service before giving a direction under this section.”(3) In paragraph 15(1) of Schedule 17 (fees) after “respondent” insert “or relevant party”.”Member’s explanatory statement
This amendment gives power to the FCA to overrule a decision of the FOS where this would have implications which would affect the FCA’s ability to regulate effectively and to allow the FOS to make persons other than the complainant make a payment towards the costs of a case.

[Baroness Noakes (Con)]

My Lords, this amendment concerns the Financial Ombudsman Service. It is in fact two amendments in one; I should have separated them. The amendments were suggested by UK Finance and I will speak to each leg separately.

The first two subsections of proposed new Section 229A of FSMA, which my amendment would insert, would establish that, in certain circumstances, the FCA can direct the FOS in a particular complaint determination. I should say that I welcome Clause 38, which will set up a new duty of co-operation and consultation between the FCA, the FOS and the Financial Services Compensation Scheme. It was curious that FSMA provided for co-operation and consultation for the FCA and the PRA but the FOS was left out. In practice, I understand that Clause 38 would do little more than formalise what has already been happening in practice as part of the FOS’s wider implications framework, although that is entirely voluntary and Clause 38 would make it mandatory.

In the past, there have been problems with regulated firms having acted in a way that they believed was wholly in accordance with the FCA rulebook, including the principles that should guide how firms act. Firms believed that their actions were in accordance with the FCA’s expectations as well, although those are notoriously hard to pin down. Then, following a complaint, the FOS took a different view. As we know, the FOS is required to determine each complaint individually and makes its determinations using the FSMA formula of what is fair and reasonable in the circumstances of the individual complaint. That can and does result in outcomes that are, at best, frustrating for the firms involved when they believe that they have been doing exactly what was expected of them. A particular source of concern has been fraud cases, where the FOS has often gone beyond the requirements of the banking protocol, which was supposed to set out agreed expectations of what banks need to do in relation to suspicious transactions.

In addition, the FCA handbook requires firms to apply the outcome of FOS determinations to future complaints, so individual FOS decisions in effect become precedents, even though they were determined on the facts of individual cases. Another frustration can be that FOS decisions are not always internally coherent, so a confusing pattern of precedents can be created. In effect, a parallel rulebook grows up, but one created out of specific cases without underlying principles—certainly without any underlying principles that have been consulted on.

I think it fair to say that, although the financial services sector values the fact that the FOS represents a low-cost dispute-resolution service, it has for some time had concerns about how it operates and how its decisions become quasi-law. These concerns are now amplified, with the advent of the new consumer duty, which rests on the principle of delivering good outcomes for consumers. This adds a layer of complexity and uncertainty into an already challenging environment. There are concerns about precisely what firms are expected to do in the case of closed products and whether new vectors are being opened up for claims management companies. There will be an ongoing tension between the consumer principle, which is not intended to operate at the level of individual consumers, and the FOS, which is unambiguously focused on individual cases.

My amendment does not give the FCA an unconstrained ability to override the FOS; it is drafted to apply only where there are implications beyond the specifics of the particular complaint. The PRA has long had the power to overrule the FCA where it thinks it will have an adverse impact, as specified in Section 31 of FSMA. Similarly, the banking reform Act of 2013 gave powers to the Bank of England, the PRA and the FCA to intervene against the payment services regulator. It is genuinely puzzling that a similar power in relation to the FOS was not granted to the FCA when it was set up, or to the FSA under FSMA. This is a modest provision designed to ensure that the activities covered by both the FOS and the FCA are dealt with in a coherent way.

The second leg of my amendment is on a slightly different subject: it is a minor amendment to paragraph 15 of Schedule 17 to FSMA. Under this paragraph, the financial services firms complained about pay fees to the FOS—there is no problem with that. My amendment adds “or relevant party” to this, so that firms or individuals other than the firm complained about could be required to pay fees. This is obviously not intended to enable the FOS to charge fees to complainants, which I am sure it would never do, even if it had the power. Instead, it is intended to give some flexibility to the FOS so that, for example, claims management companies might be asked to pay fees if they have been responsible for unmeritorious complaints. That in turn could help disrupt the business model of the worst offenders in this parasitic industry. I hope this will be seen as a modest change that will give greater flexibility to the FOS. I beg to move.

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The Government are clear that all consumers should be able to access the FOS without the need of any CMC support in bringing their complaints. Ensuring that the FOS remains a free and impartial alternative to the courts is critical, and any legislative changes to this model would need to be appropriately targeted to maintain free access to the FOS for consumers. I am trying to say that we see the case being made and will look at it further, but we need to ensure that, in doing so, we do not override that fundamental principle of access for consumers. With that, I hope that, at this stage, my noble friend Lady Noakes is able to withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, I thank my noble friend Lord Trenchard for his support; I was not expecting the noble Baroness, Lady Bowles, to support my amendment, because she and I have discussed the FOS in the past.

There is a potential problem in the relationship between the FCA and the FOS with the introduction of the new consumer duty. I think that is particularly concerning people: we are going a little into the unknown. We know that if regulatory pressures get too difficult for firms, their natural response is, ultimately, to leave or severely curtail the elements of the market that they are prepared to operate in. We need look only at the availability of advised investment to see what can be the consequence of heavy-handed regulatory action. If the new consumer duty becomes a nightmare, with individual cases being settled on particular circumstances but then having to be read across because of the FCA handbook, which requires cases to then be followed by firms, we could end up with a very confused understanding of what the consumer duty involves. That was the main burden of my tabling the amendment, but we may just need to see what happens when the consumer duty operates in practice to see whether those harms genuinely emerge.

As for the second leg of my amendment, which should have been a separate amendment, I was very interested to hear what my noble friend said about the case having been made. What I am not quite clear about, which she may be able to clarify, is on what timescale she believes the Government will be looking at this, because not many financial services Bills come along to get things done in.

[Baroness Penn (Con)]

I will have to write to the Committee to clarify the timescale for the noble Baroness.

[Baroness Noakes (Con)]

My Lords, I look forward to that letter with great anticipation. With that, I beg leave to withdraw the amendment.

Amendment 201A withdrawn.

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This is not what the AML regulations are meant to be used for. They are being misused. The Government have to step up to the mark and stop this. If they will not do it, let us put it into law.

[Baroness Noakes (Con)]

My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.

I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.

Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.

I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.

My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.

In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.

I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.

Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.

I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.

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[Baroness Penn (Con)]

My Lords, although I have not been following the detail of that Bill, I am aware of the provisions in it. As part of looking at this question, one question asked is, in our broader ecosystem of the checks and balances that we have on our politicians and people defined as PEPs—the other requirements of disclosure that they are held to and the other tools that we have at our disposal—how they influence the risk assessment has been done. I reassure noble Lords that that question has been asked. I should also reassure noble Lords that I am seeing the Security Minister tomorrow to discuss economic crime, but also that issue. We are seeking wherever possible to ensure that there is join-up across government in our assessment of the risks and the tools available to deal with them, ensuring that where we have measures in place they remain proportionate. That is something that I continue to engage with, with the Security Minister and others across government.

I shall just try to answer the point on the Financial Action Task Force, the difference between domestic and foreign PEPs, and the requirements within that, as I understand it. I commit to following up in writing if it remains unclear or if anything I say is not correct. The requirement for automatic enhanced due diligence applies to foreign PEPs. However, within the FATF guidance on recommendations 12 and 22—I think that this is particularly around 12—there is still the need to take steps to identify whether someone is a domestic politically exposed person and then review the relevant risk factors. So they need to determine whether a customer or beneficial owner is a domestic PEP, then determine the risk of the business relationship in that context—and then, in low-risk cases, there are no further steps to determine whether a customer is a PEP. In other words, there is still a requirement to identify whether someone is a domestic PEP or not and to look at the risk around that.

Where there is a difference, in my understanding, from the Financial Action Task Force requirements, is that for foreign PEPs you need to apply automatic enhanced due diligence. Under the EU regulations, that also applied to domestic PEPs—and we therefore ensured that automatic enhanced due diligence applied to domestic as well as foreign PEPs was a system in our regulations. The review we did last year into all of our anti-money laundering regulations did not conclude that on this matter no further action was to be taken but that we needed to look at the risk profile and risks associated with domestic PEPs before determining whether those requirements of automatic enhanced due diligence remained appropriate, now that we had the ability to vary our money laundering regulations, having left the EU. So that was a further piece of work that needed to be done after the review was published last summer of our money laundering regulations overall. That further piece of work has been undertaken, and I have undertaken to write to noble Lords with further details if I can provide them on that risk assessment, but that concluded that it was appropriate to maintain automatic enhanced due diligence for domestic PEPs.

[Baroness Noakes (Con)]

Did this review involve the FCA? When the FCA reissued its guidance in 2017 it was very clear about domestic PEPs being low risk, but it was constrained by the regulations, which said that you had to do enhanced due diligence. It was within that context. There seems to have been a shift between the FCA’s apparent position on the risk profile of UK PEPs and what my noble friend the Minister is now saying that she is being told by the security services, which will always try to find things that can go wrong. It is quite easy to construct a case that we are potentially capable of being corrupted by whoever and involved in money laundering, but they are not involved in the money laundering processes; the FCA is. I am getting a bit confused about how robust this risk assessment is in the context of money laundering.

[Baroness Penn (Con)]

I believe that it aimed to get relevant information from all those involved and take a holistic view. I appreciate and agree that we need to ensure that, when these measures are put in place, they are proportionate to the risk faced, so it is entirely right to interrogate that risk assessment. I also appreciate that it is a slightly frustrating process when the sensitive nature of some of these issues means that we cannot always go into all the details noble Lords want at this time. I have tried to explain the context as to why domestic PEPs are viewed as having sufficiently high risk so that enhanced due diligence should still apply. I have the FCA guidance in my pack but I will not go through it, but it is also true to say—this is another point that I checked—that although the risk is sufficient to have enhanced due diligence measures, it is lower for domestic PEPs than for foreign PEPs. That assessment still applies.

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Amendment 227 from my noble friend Lady Noakes has similar challenges, although I acknowledge that she has allowed for certain classes of politically exposed persons to be included within those regulations on the authority of the FCA’s judgment of the risks involved. She rightly asked whether the FCA had been involved in the risk assessment that I referred to. One of the challenges with the approach in Amendment 215 is that, although the FCA will have a lot of that information, such a risk assessment would want to take into account wider considerations. We therefore think that it is right that the scope of the money laundering regulations—

[Baroness Noakes (Con)]

This is a risk of money laundering, not anything else. What wider implications should be taken into account? The FCA knows about money laundering and its risks. How could there be wider considerations than money laundering?

[Baroness Penn (Con)]

Others are involved in looking at the risks of money laundering in counterterrorist and proliferation financing, which I believe are subject to these regulations.

[Baroness Noakes (Con)]

As far as financial institutions are concerned, all of those are dealt with by the FCA, not the security services or any other shadowy agencies that seem to be involved in this latest risk assessment, so I am struggling to see what wider issues could possibly have been taken into account.

[Baroness Penn (Con)]

The Government believe that the decision about the scope of the money laundering regulations is best taken by, and should remain with, the Government, rather than being delegated to the FCA.

I turn to Amendment 224 from the noble Baroness, Lady Hayter of Kentish Town. This would require the FCA to consult with consumers with regard to its functions relating to PEPs. In the discussion—

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

My Amendment 241D would require any modification or revocation of the relevant principles established in the Financial Services (Banking Reform) Act 2013 and FiSMA 2000 to come before Parliament in primary legislation. This decision is so fundamental that it is one that Parliament should make.

[Baroness Noakes (Con)]

My Lords, the banking commission did sterling work in the years after the banking crisis, helping shape the content of the banking reform legislation. However, I cannot support these amendments because they are trying to set the findings of that conclusion in concrete, to apply for all time. One thing we know is that times change—sometimes for the better, sometimes for the worse. Having constantly to hark back to what the banking commission said before any sensible changes can be made under the existing available rules seems the wrong direction of travel.

If there was one thing that the HSBC/Silicon Valley Bank episode showed, it was the rigidity of the ring-fencing rules, which were effectively one of the great successes of the banking commission in making sure that rigid rules were set in statute. What had to happen to facilitate HSBC’s acquisition and takeover of Silicon Valley Bank were special statutory exemptions via a statutory instrument. The result was that HSBC now has permanent changes to the ring-fencing regime for it alone, which may well end up with it having permanent competitive advantage over its other rival ring-fenced banks in the UK.

We need to learn lessons from what has happened over recent weeks; the noble Baroness, Lady Kramer, is absolutely right about that. I would be interested if my noble friend the Minister could give more of an idea on the timing of when we might get a lessons-learned report—I think she spoke about that when she first spoke at the Dispatch Box about the HSBC takeover. The answer is not necessarily that we should be taking less risk and making things more difficult to happen, as that is not necessarily the right conclusion from what went wrong.

I hope that the Government will not be frightened by the recent events into not carrying out some reforms of ring-fencing. They have shown themselves willing to consider some sensible reforms to make sure that ring-fencing works well, particularly with regard to small and medium-sized banks. Only a few weeks ago in Committee the noble Baroness, Lady Kramer, agreed that the MREL rules caused a particular problem in the UK; indeed, she said that she constantly reminded the chief executive of the PRA about that. There is an issue about how the rules apply to small and medium-sized banks in the UK. We have to remember that the thresholds used to establish what is a small and medium-sized bank in the UK are way below the thresholds which were increased by the Republicans and which may well have contributed to the problems with Silicon Valley Bank in the US.

I hope that the Government will press on with their consultation on ring-fencing and on the senior managers regime. Having been on the receiving end of the senior managers and certification regime for the nine years that I was on the board of what is now NatWest, I know that it is very bureaucratic and inefficient, and it does not necessarily target the kind of things that people thought it was going to be targeting at the time. It is therefore time to step back and ask whether this is the best way of achieving the objectives, which are to ensure that people take responsibility for their actions. What this has ensured is that there is a whole industry of chopping down forests, in order to fill files of evidence that you have taken reasonable steps to carry out your responsibilities, and I do not think that was the intended outcome of the reforms at the time.

I therefore make a plea: let us not get panicked by what has happened in recent weeks into not accepting that there is a good case for reviewing both the ring-fencing and the SMCR rules. I have nothing to say on insurance because it is not my specialist subject.

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[Lord Eatwell (Lab)]

My Lords, on the point made by the noble Lord, Lord Holmes, surely these regulations are derived from the Financial Action Task Force. We would usurp international agreements if we modified our regulations in a way that was outwith the positions established by the FATF.

[Baroness Noakes (Con)]

I completely accept that we need to comply with the Financial Action Task Force regulations but, as we discovered the other day when we were discussing PEPs, the regulations we have in the UK have in some instances gone beyond what is actually required by the Financial Action Task Force. The issue with the KYC regulations is one of immense bureaucracy and great irritation for people to no particular end. It is worth looking again at whether the way we have drafted our regulations, to the extent they go beyond what we are required to do, has in turn led to more problems for individuals.

I am sure we have all had problems but I will share one with the Committee. My husband had a very small investment—way below the level at which it would have to be declared as one of my interests in your Lordships’ House—and there was periodic updating of the know your client regulations. Because of the way that firm’s forms were comprised, it refused to accept my noble friend Lady Neville-Rolfe’s signature attesting that the document was a fair copy, because she could not tick a particular box on the form. It was completely ludicrous.

That permeates the way many financial service institutions have come to apply these rules in practice. They have become highly bureaucratic, operated by people who probably have no common sense and possibly not even a brain. To go back to the regulations and see what is absolutely required and then follow it on through the FCA seems a really important thing.

[Earl Attlee (Con)]

My Lords, although I agree with everything my noble friend Lady Noakes said, I point out that I have discussed Peter’s case at a very senior level with his bank and I can absolutely understand the decision the bank made. It looked at it very carefully, but it cannot take the risk because it is dealing with Ukrainian businessmen of whom it knows very little.

Financial Services and Markets Bill

Baroness Noakes Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, I have put my name to two of the amendments tabled by the noble Lord, Lord Sharkey, in this group: Amendments 243A and 243B, which would require the super-affirmative procedure to be used. I have not added my name to Amendment 241G. I am in complete sympathy with the call for Parliament to be able to amend statutory instruments; I pay tribute to the work done by the committees chaired by my noble friends Lord Blencathra and Lord Hodgson of Astley Abbotts. They have highlighted the dangerous shift to skeleton legislation with the resultant reliance on secondary legislation, which has inflicted great harm on Parliament’s ability to scrutinise and hold the Executive to account.

On the other hand, I recognise that this is a large issue that needs to be taken forward at a high level within both Houses of Parliament, and also of course with the Government. I do not believe that this Bill is the right place to start that process, although I do believe that we need to find a way of progressing the dialogue to find a way forward. I am of course concerned about the parliamentary processes around the many statutory instruments that will come under the powers in this Bill. The super-affirmative procedure is certainly better than the ordinary affirmative procedure, which is why it has my support.

In adding my name to these amendments, I am in fact hitching a ride on them in order to raise some wider issues about the statutory instruments that will come forward once this Bill is made law. This is an issue that should probably have been debated earlier in Committee but I have only recently been made aware of it. I have given my noble friend the Minister only a very small amount of notice of the nature of my concerns; I accept that she may not be able fully to answer at the Dispatch Box today.

The amendments focus on parliamentary oversight of legislation being brought in by statutory instrument. What I think we have not focused on is whether there will be adequate consultation by the Treasury before the statutory instruments are laid in Parliament. Many of the statutory instruments will of course be uncontroversial in the sense that they will merely recreate the EU law in a UK-based framework for the rules that will then be made by regulators.

However, it is entirely possible, as the noble Lord, Lord Sharkey, said, that the statutory instruments will contain significant changes from EU law. Clause 4, which allows the restatement of EU law, can be used to incorporate changes to the law within the huge range of possibilities that are allowed for by Clause 2(3). There is no requirement in Clause 4 for the Treasury to consult anyone at all before laying these statutory instruments. This is in stark contrast to the regulators, who have very clear statutory obligations to consult in respect of any rules they will be laying under the terms of the statutory instruments that give them the power.

In addition to Clause 4—this is the actual example that has come to my attention—the Treasury might choose to use the new designated activities power in Clause 8 to set up the replacement regulatory regime under UK law. As with Clause 4, the use of the Clause 8 power does not require the Treasury to consult anyone at all. The example that has been brought to my attention concerns the prospectus regime. I am indebted to the briefing provided to me by a partner in one of the Magic Circle law firms.

As part of the Edinburgh package, the Government published a policy note and a draft statutory instrument on how they intended to replace the EU prospectus rules. Put simply, the designated activities regime will be used to create the new prospectus regime when the existing EU law is repealed. The publication of the draft statutory instrument and the policy note was well received because it allowed those who specialise in this territory to get to grips with the proposed legal framework. Although the policy note was clear that the drafting was not final, it was not clear whether there would be a proper consultation on the new regime.

By way of background, there was a policy intent to deal with the issue of mini-bonds in the light of the London Capital & Finance scandal; that policy is, of course, uncontroversial. The Government were clear in their policy note that they intended to affect retail investors only and did not intend to cover things that were regulated elsewhere. It appears, however, that the chosen vehicle of relevant securities, as defined in the draft statutory instrument, also captures things with no likely impact on the retail market, including—somewhat incredibly—over-the-counter derivates and some loans, securities and financial transactions. I believe that this analysis has been made available to the Treasury via various players in the wholesale financial markets.

Although I understand that communications are constructive, there is a fundamental problem emerging: the so-called illustrative statutory instrument now seems to have morphed into a pre-final document on which no formal consultation will be held. This is important, given the significant widening of the reach of the proposals, well beyond the existing prospectus regime. I would be grateful if my noble friend the Minister could set out how the Government see the next steps for the prospectus statutory instrument and whether formal consultation will occur. I hope that she will be able to respond not only on the particular issue of the prospectus statutory instrument but, more broadly, on the extent to which the Treasury will consult across the range of replacement EU law when it brings that law forward.

[Viscount Trenchard (Con)]

My Lords, I declare my interest as stated in the register.

I congratulate the noble Lord, Lord Sharkey, on finding a way to amend statutory instruments. If it really is possible to change what noble Lords have always believed about SIs, that is welcome news indeed. As the noble Lord says, this procedure would be used only on the rare occasions when your Lordships’ House or another place considered it vital.

I support the noble Lord’s Amendments 243A and 243B, to which my noble friend Lady Noakes has added her name. These would create a super-affirmative category of approval process, introducing a higher bar but only after a resolution is made by either House of Parliament. I also agree with the points made by my noble friend on the prospectus directive and other matters. I support all these amendments.

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[Baroness Penn (Con)]

The Government will make those changes only within the agreed scope set out in the Bill. That is perhaps why the DPRRC was content with the approach that they were taking.

[Baroness Noakes (Con)]

Does my noble friend accept that the specification in Clause 3 allows for very significant changes to be made? There are many heads under which the Government could fit a change in policy, and that policy change could be significant in the context of the restatement of EU law.

[Baroness Penn (Con)]

The intention is to allow for the restatement within EU law or to adapt it to a situation or circumstances within the UK. As I have said, in undertaking that work the Government will seek to undertake a combination of formal consultation and informal engagement appropriate to the changes being made. As set out in the Government’s policy statement on the repeal of retained EU law in financial services, the Government aim to balance the need to deliver much-needed reforms with the need to consult industry and stakeholders. They will take the decision on the approach to this on a case-by-case basis.

I wanted to address my noble friend’s specific question on the prospectus regime. The Government intend—