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 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.

--- Later in debate ---

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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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 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.

--- Later in debate ---

[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 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.

--- Later in debate ---

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?

--- Later in debate ---

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

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?

Autumn Statement 2022

Baroness Noakes Excerpts

Tuesday 29th November 2022 Lords Chamber

[Baroness Noakes (Con)]

My Lords, my noble friend Lady Lea of Lymm was kind enough to reference my role as her mentor. I particularly commended the Companion to her as she absorbs the way in which we work in your Lordships’ House, so today I must live by its paragraph 4.52 and treat the excellent speech by the noble Baroness, Lady Fox of Buckley, as a welcoming of my noble friend and as congratulations on her maiden speech on behalf of the whole House.

I have not always been inspired by the various Budget Statements, Autumn Statements and Spring Statements since we came into government, although I have generally been able to content myself that they were undoubtedly better than anything that a Labour Government would have come up with. With this Autumn Statement, even that flimsy source of comfort has disappeared: it could have come from the pen of Gordon Brown. It is deeply, deeply depressing, and it is not a Conservative Budget.

I will start with growth—or, rather, the lack of focus on growth in the Statement. The Chancellor’s speech had a few references to growth, but there was no deep commitment to a growth economy. Mouthing platitudes like

“Being pro-education is being pro-growth”—[Official Report, Commons, 17/11/22; col. 849.]


is no substitute for an unerring focus on the drivers of growth. Whatever criticisms can be made of the ill-fated fiscal event in September, it was unambiguously focused on growth. I am sorry that, in the kerfuffle that followed in bond markets, amplified by complete regulatory failure in relation to concealed leverage in pension funds, we have lost sight of the imperative of growth.

Instead, this Autumn Statement has gone overboard on financial stability, which is certainly a good thing, but it is nothing like enough. Even worse, the Chancellor has taken financial stability as forecast by others, particularly the OBR and the Bank of England, whose forecasting records are nothing to brag about. More importantly, their forecasts are a largely static view of the economy and generally do not even try to incorporate the dynamic effects of pro-growth policies. The future is bleak if a Government cannot adopt positive pro-growth policies because they score negatively rather than positively in the spreadsheets of the independent forecasters. My noble friend Lady Lea gave us a master class on the issues around economic forecasting. We also need a conversation about the limitations of current approaches to economic forecasting. In my view, the Government should be going full throttle not only for growth itself but also for making the case for dynamic forecasting of the effects of that growth.

I am appalled by the tax burden rising to a post-war high of 37.5%. High taxes blunt incentives to work, invest and innovate. In short, high taxes are anti-growth. I deplore the return to a socialist narrative that singles out savings and investments, with a tax on capital gains and investment income—I never thought that I would see that from a Conservative Government. The high marginal rates of tax associated with the higher tax bands interacting with personal reliefs were already a stain on our tax system, and this has now been magnified by the reduced threshold for the higher rate of tax. We will likely not be forgiven by an electorate that will learn what fiscal drag really is in a time of inflation and what it does to household finances.

I am equally appalled at the lack of focus on controlling expenditure. If ever there were a right time to read the last rites of the expensive white elephant that is HS2, it is now. If ever there were a right time to stop shovelling money into an unreformed and under- performing NHS, it is now. Instead, we are pouring more taxpayers’ money into these black holes. There is no plan to rein in expenditure—all of that is left to another day. But the inconvenient truth is that, without a plan for growth, cuts to expenditure will last longer and be more severe.

This Statement has been clear about raising taxes, but that is all. The Chancellor concluded by saying that the Statement was:

“a balanced plan for stability, growth and public services.”—[Official Report, Commons, 17/11/22; col. 856.]

Throwing money at some public services while being silent about the consequences for others does not count as a plan for public services. There is nothing in the Statement that any reasonable person would count as a plan for growth. My noble friend Lord Bridges said that we are heading towards the stability of the graveyard, but it could be worse than that. Fiscal tightening, coupled with monetary tightening by the Bank as we move into recession, has the potential to wreck the economy.

I believe that we should strain every sinew to create a low-tax, high-growth and small-state economy, where the people of the UK can feel the benefits. This Autumn Statement delivers the exact opposite.