Financial Services and Markets Bill

Baroness Penn Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years. Perhaps it is a signal of the significance of this legislation that we have the pleasure of three maiden speeches during this debate. I welcome my noble friends Lady Lawlor, Lord Remnant and Lord Ashcombe to the House. I very much look forward to hearing their contributions.

I also pay tribute to the former Chancellor and Financial Secretary to the Treasury, my noble friend Lord Lawson, who has recently retired, having served Parliament in both Chambers for nearly half a century. While serving as Chancellor he transformed the tax system, unleashed the City and revolutionised the approach to macroeconomic policy, setting the economy on the path of growth. His voice, reason and perspective will be sorely missed in this Chamber, and I thank him for all his service.

The Bill represents the platform upon which much of this Government’s vision for financial services will be delivered—a vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across all four nations of the United Kingdom.

Effective, efficient and easily accessible financial services are a foundation for people’s everyday lives and the bedrock upon which our economy is built. They also make their own direct contribution to our economic growth, with financial and related professional services employing more than 2.3 million people across the UK and, in 2020, contributing nearly £100 billion in taxes. In recent decades, the UK has become a leading global centre for financial services and, as the Chancellor highlighted in the Autumn Statement, the sector is one of the UK’s five key areas of growth for the future. Our exit from the EU creates the opportunity to ensure that continues by implementing a more agile and internationally competitive set of rules, better tailored to the UK market, while ensuring the sector remains well-regulated and effectively supervised.

The Bill has five overarching aims. First, it implements the outcomes of the future regulatory framework review. Secondly, it bolsters the competitiveness of UK markets and promotes the effective use of capital. Thirdly, it takes steps to make the UK an even more open and global financial hub. Fourthly, it harnesses the opportunities of innovative technologies, enabling their safe adoption in the UK. Lastly, but by no means least, it promotes financial inclusion and enhances consumer protection.

I turn to the first aim, to implement the future regulatory framework or FRS review. Clause 1 revokes retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This approach builds on the existing model established by the Financial Services and Markets Act 2000 which empowers our independent regulators to set the detailed rules that apply to firms operating within the framework set by the Government and Parliament. The Government consulted extensively on how the UK’s approach to financial services regulation should be adapted following EU exit, and there was widespread support for the approach taken in this Bill. Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. These instruments will cease to have effect when the Treasury and the regulators have put into place the necessary secondary legislation or regulator rules to replace them as appropriate.

It is important for the House to recognise that putting this into effect will require a significant programme of secondary legislation to modify and restate retained EU law. As part of the Edinburgh reforms announced on 9 December the Treasury published Building a Smarter Financial Services Framework for the UK, which set out how the Treasury intends to use these powers. Alongside this we published several illustrative draft statutory instruments demonstrating how the powers in the Bill can be used to replace retained EU law.

As the regulators take on greater responsibility for setting rules following the repeal of retained EU law, the Bill makes changes to the regulators’ objectives to ensure that they consider the sector’s critical role in supporting the UK economy. For the first time the Prudential Regulation Authority and the Financial Conduct Authority will be given new secondary objectives to facilitate the international competitiveness of the UK economy and its growth in the medium and long term. The status as a secondary objective strikes the right balance and sets a clear hierarchy by ensuring that the FCA and the PRA must work to advance growth and competitiveness while maintaining their focus on their existing objectives.

The Bill also ensures that the regulatory principles of the financial services regulators require them to have regard to the UK’s statutory net-zero emissions target. This will embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the Government’s long-term commitment to transform the UK economy in line with their net-zero strategy and vision.

It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators. There are already a number of provisions in this regard, and the Bill makes further provision to support Parliament in carrying out this important role. It introduces new requirements for the regulators to notify the Treasury Select Committee of a consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee. In addition, the regulators will need to be transparent about all respondents to a consultation, subject to their consent. These measures were strongly informed by the views of this House, as expressed during the passage of the Financial Services Act 2021. The Bill also gives the Treasury the power to require the financial services regulators—or, where appropriate, an independent person—to review their rules where it is in the public interest.

I turn now to the Bill’s second aim of bolstering the competitiveness of UK markets and promoting the effective use of capital. The measures in Schedule 2 make important changes to the MiFID framework, which regulates secondary capital markets. They do away with burdensome rules such as the double volume cap and share trading obligation while maintaining high standards and protecting the smooth functioning of markets. High regulatory standards are an essential element of competitiveness in UK markets, and the Bill introduces a senior managers and certification regime for key financial market infrastructure firms, ensuring high standards of governance in these systemically important firms. The Bill also expands the resolution regime for central counterparties to align with international standards and enhances powers to manage insurers in financial distress.

The Bill’s third aim is to strengthen the UK’s leadership as an open and global financial centre. The UK is now able to negotiate its own international agreements, and the Government are currently negotiating an ambitious financial services mutual recognition agreement, or MRA, with Switzerland. While the MRA itself will be scrutinised under the procedures in the Constitutional Reform and Governance Act 2010, Clause 23 enables the Treasury to amend existing legislation to give effect to this and any future financial services MRAs once finalised. Schedule 2 will enable the UK to recognise overseas jurisdictions that have the equivalent regulatory systems for securitisations classed as simple, transparent and standardised, or STS, providing more choice for UK investors.

As its fourth aim, the Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure sandboxes, allowing firms to test the use of new and potentially transformative technologies and practices in the infra- structures that underpin financial markets.

The Bill’s final aim is promoting financial inclusion and consumer protection. The Government are committed to fostering a financial services sector that supports everyone, with appropriate consumer protections and measures to ensure that no one is left behind by the rapid advancement in financial technology. There is an extensive programme of work ongoing related to consumer protection, particularly in areas raised by noble Lords during the passage of the Financial Services Act 2021 such as buy now, pay later and the FCA’s new consumer duty. That Act also made legislative changes to support the widespread offering of cashback without purchase in shops and other businesses, following a proposal by my noble friend Lord Holmes of Richmond.

Clause 51 and Schedule 8 of this Bill go further and give the FCA responsibility for seeking to ensure reasonable access to cash across the UK. The Treasury will designate banks, building societies and operators of cash access co-ordination arrangements to be subject to FCA oversight on this matter. Clause 52 and Schedule 9 give the Bank of England new powers to oversee the wholesale cash infrastructure to ensure its ongoing effectiveness, resilience and sustainability.

Finally, the credit union sector plays a crucial role in providing access to affordable credit to its members. Clause 69 will allow credit unions in Great Britain to offer a wider range of products and services to their members. The Bill also strengthens the rules around financial promotions, requiring all authorised firms to undergo a new FCA assessment before they can approve financial promotions by unauthorised firms. This will reduce the risk of consumer harm. Additionally, Clause 68 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers for all payment systems it regulates. It also places a duty on the PSR to mandate reimbursement in relation to the Faster Payments system specifically.

This is a substantive Bill; in opening this Second Reading debate I have been able to touch only briefly on many of its main measures. I have no doubt that, when we enter Committee, noble Lords will subject the Bill to the level of scrutiny that it deserves.

As I conclude, I think it is worth reflecting on the journey that we have taken to the production of the Bill. It is the result of several years of consultation with industry, regulators and the public. The Government first consulted on the future regulatory review in October 2020, with a further consultation in November 2021 setting out detailed proposals for reform. It will enable a programme of essential reforms that will help drive our economy, including reforms to Solvency II and the prospectus regime and changes resulting from the wholesale markets review. So, as we conduct the important work of scrutinising this Bill, I hope that the Government’s broad approach will draw support from across the House and that many noble Lords share the Government’s ambition to ensure that the UK’s financial services continue to be an engine of growth for our economy. I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate for their valuable contributions, which reflect the breadth and significance of this Bill. I will try to get through as many points as possible but, looking at the stack of papers before me, I think I have been overambitious—so I will dive straight in.

Turning first to the future regulatory framework review, which is a once in a generation opportunity to update our rulebook and tailor it to UK markets, as I have said before, the Bill revokes retained EU law relating to financial services so it can be replaced by a coherent and agile approach designed for the UK, building on the FiSMA model. I reassure my noble friend Lord Hodgson that, when the repeal of retained EU law commences and the Government lay secondary legislation to replace it, the Treasury will fully assess the impacts of the exercise of these powers in secondary legislation. We will conduct impact assessments and post-implementation reviews in line with the Cabinet Office guidance and the Government’s Better Regulation Framework.

My noble friend and the noble Lord, Lord Sharkey, probed further on the process for replacing the different regulations and Clause 4 and the procedures associated with it. The affirmative procedure applies to statutory instruments made under Clause 4, except where the power is used to restate either EU tertiary legislation or legislation which was originally made under the negative procedure, or where there is no modification of retained EU law. In this case, it is appropriate to follow previous precedent and apply the negative procedure. EU tertiary legislation is technically complex and the same is true where the negative procedure was used for UK statutory instruments—these were technical SIs. Given the thousands of pages of retained EU law to deal with, as has been referenced in this debate, it is important that we ensure that Parliament can focus on potential policy implications from the changes we may make to retained EU law.

I turn now to the debate on the objectives for the regulators which are the starting point for the framework we will be taking forward. Those objectives are set out in FSMA and are amended in this Bill in two key ways: the introduction of the secondary objective on international competitiveness and medium and long-term growth, and a new regulatory principle to have regard to the Government’s net-zero commitment. The noble Lords, Lord Sharkey and Lord Tunnicliffe, the noble Baronesses, Lady Kramer and Lady Bryan of Partick, and others raised concerns about ensuring that the secondary objective does not dilute the regulators’ focus on the primary objective, whereas many other noble Lords spoke in favour of the new secondary objective. Noble Lords such as my noble friend Lord Bridges were perhaps concerned that it may not go far enough. The Government believe that having growth and competitiveness as a secondary objective strikes the right balance between providing a new focus on advancing medium to long-term growth and competitiveness while maintaining the regulators’ focus on their existing objectives. It provides a clear hierarchy of objectives to consider, and the regulators will need to balance those objectives and consider them in a way which respects that hierarchy.

The PRA’s existing secondary competition objective provides the model for how that hierarchy operates: the regulators must advance their secondary objectives in so far as that is compatible with their primary objective. However, with the introduction of the secondary objective, the Government expect that it will fulfil the expectations of many of those who have spoken in this House in support of delivering a step change in how the regulators approach growth and competitiveness, resulting in more proportionate rule-making while still ensuring high regulatory standards. As my noble friend Lord Remnant said in his excellent maiden speech, the UK is not unique in giving its regulators such an additional objective. He demonstrated the expertise that he will bring to this House, particularly in debates on this Bill.

The noble Lords, Lord Sharkey and Lord Butler, and the noble Baroness, Lady Kramer, spoke of the context for some of their concern around the introduction of the secondary objective and the previous structure we had for regulating financial services prior to the financial crisis. The FSA’s objectives prior to the financial crisis were market confidence, public awareness, consumer protection and the reduction of financial crime. The FSA did not have a financial stability objective. Noble Lords are right that one of the regulatory principles that the FSA had to take into account was the international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom. However, the post-crisis reforms focused on the institutional design and allocation of responsibilities, with the FSA abolished and replaced by both the PRA, which focuses on the safety and soundness of the financial sector, and the FCA, which focuses on market integrity, consumer protection and competition. The Government’s view is that those post-crisis structural reforms, along with the regulators’ existing primary objectives, mean that the environment in which the regulators are considering competitiveness is very different from that which has gone before.

The noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and the noble Lord, Lord Vaux of Harrowden, questioned the Government’s decision to make the net-zero commitment a regulatory principle rather than an objective. The noble Lord, Lord Vaux, asked about the difference between the two, while my noble friend Lord Bridges asked what would happen if objectives and principles are in tension with each other. On the question of objectives versus principles, the FCA and the PRA are required to advance their objectives when discharging their functions. The regulatory principles, on the other hand, are principles that the FCA and the PRA are required to take into account when discharging their functions. Having the net-zero target as a regulatory principle ensures that the Government’s commitment to achieve net zero will be embedded across the FCA’s and the PRA’s considerations when they discharge their general functions. The net-zero target is a cross-cutting government policy that we have seen in many different pieces of legislation that we have taken forward through this House. On the specific goal, many of the levers sit outside financial services regulation, so it is appropriately progressed by the FCA and the PRA as a regulatory principle, which means that they will consider it in advancing their own objectives.

Another significant focus of today’s debate has been, rightly, on how we hold the regulators to account for their progress in furthering their objectives and regulatory principles and their broader approach to regulation. Any Minister would be wise to listen carefully when an issue draws such a diverse set of voices from across the House as we have heard today.

It is worth setting out the parliamentary scrutiny and oversight procedures that are already a key part of the FiSMA process and how the Bill builds on those. There are already robust mechanisms to ensure appropriate parliamentary scrutiny of the regulators. Select Committees play an extremely important role in this process, as we have heard. As noble Lords know and have pointed out, they have the power to call for persons, papers and records that they consider relevant, and committees in both Houses regularly exercise this power to hold the regulators to account. Senior officials from the regulators attend general accountability hearings. For example, the FCA chair and chief executive appear before the Treasury Select Committee, or TSC, twice a year, and the chief executive of the PRA appears before the TSC after the publication of each annual report.

Parliament, through the TSC, conducts the pre-commencement hearings following the appointment of the chair and chief executive of the FCA, and the chief executive of the PRA. Most recently, the TSC held a pre-commencement hearing for the new FCA chair on 14 December before he takes up his role next month. FiSMA requires the Treasury to lay the regulators’ annual reports before Parliament.

The Bill builds on and strengthens these existing mechanisms of parliamentary scrutiny. First, the Bill requires the regulators to notify the Treasury Select Committee when they publish a consultation. Secondly, the Bill requires the regulators to respond formally to representations made by any parliamentary committee. I note the suggestion from the noble Lord, Lord Tunnicliffe, that the Economic Affairs Committee of the House of Lords should also be notified, and I am happy to discuss that proposal with him as the Bill progresses. I note that the noble Lord, along with many other noble Lords, proposed alternative committee structures, including Joint Committee structures, to scrutinise the work of the regulators. But here it is Parliament’s responsibility to determine the best structure for its ongoing scrutiny of the regulators, and the Government do not intend to make any recommendations to Parliament on this matter. In response to the noble Lord, Lord Blackwell, and others, I am sure that those responsible for determining those structures in Parliament will follow our debate on this question very carefully.

However, I would add that the additional accountability and reporting mechanisms provided by this Bill are designed to assist Parliament and government in holding the regulators to account. For example, when the regulators make rules using the powers that FiSMA gives them, they are required to do so in a way that advances their objectives. When notifying the TSC of a consultation, the regulators will be required to set out the ways in which their proposals advance the objectives and are compatible with their regulatory principles. This will support ex ante scrutiny of proposed rules at a point in the process where there is scope to influence the final outcome.

The changes that the Bill makes regarding cost-benefit analysis, including the additional challenge provided through the formation of a new cost-benefit analysis panel, will ensure that Parliament has access to high-quality information on the expected costs and benefits of new regulatory proposals to inform their scrutiny. The Treasury may also make recommendations to the regulators on aspects of the Government’s economic policy to which the regulators should have regard, known as remit letters. The new provisions in Clause 33, with equivalent provision made elsewhere in the Bill for the Bank of England and the Payment Systems Regulator, will require the regulators to respond in writing to these recommendations and the Treasury to lay the responses before Parliament. Clause 37 enables the Treasury to require the regulators to publish relevant information on a more frequent basis than in their annual reports, or in greater detail. This can also be used to support parliamentary scrutiny and oversight. For example, it could be used to publish further information on authorisation decisions, as highlighted by my noble friend Lord Hill.

These changes are designed to support Parliament in fulfilling its existing role in scrutinising the work of regulators. If there is a concern that any of the regulators’ rules are not operating effectively, the Bill gives the Treasury a power to require the regulator to review its rules when this is in the public interest. When appropriate, the Treasury may specify that the review should be carried out by an independent person rather than the regulator.

I reassure the noble Lord, Lord Tunnicliffe, that the Government expect that this power will be used only exceptionally, and that any such direction must be laid before Parliament, but I think noble Lords will agree that it is an important element of these reforms. I also expect that, in considering the exercise of this power, the Treasury will consider representations from relevant parties, including within Parliament.

The provisions we have put forward in the Bill seek to balance the operational independence of the regulators with clear accountability mechanisms and appropriate democratic input. We have heard a range of views on where that balance should lie, and the Government are confident that we have struck it in an appropriate way. We will continue to listen and will discuss further ideas in Committee in a thoughtful and constructive way, and will welcome suggestions from noble Lords in this area, including from my noble friend Lord Ashcombe, who I congratulate on his maiden speech, as I do my noble friend Lady Lawlor on her contribution to the debate today.

More broadly, on the regulators’ capacity to take on their further responsibilities, my noble friend Lord Grimstone asked about the FCA board. The Government believe that the board comprises members with extensive and broad experience in financial services, consumer advocacy and governance, among other things. The Government are further strengthening the FCA board this year, with Ashley Alder starting as the new FCA chair, as I already referenced. The Government are also running a campaign to appoint at least two new non-executive directors.

The noble Lords, Lord Sikka and Lord Mountevans, asked about FCA capacity more broadly. As noble Lords will be aware, the FCA is part-way through a transformation programme designed to make it a more innovative, assertive and adaptive regulator. Among other things, it aims to ensure that the FCA can make fast and effective decisions and prioritise the right outcomes for consumers, markets and firms. The Government continue to engage the regulator on its work here.

On innovation more broadly, many noble Lords asked about the Government’s strategic approach to crypto assets. We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin. My understanding is that it is still the intention for the Royal Mint to create a new NFT, and an update on this work will be provided in due course. It will be the regulations under the Bill that will allow for the regulation of stablecoins, backed by fiat currency. I can say in response to the noble Lord, Lord Cromwell, that specific definitions will be provided for that in secondary legislation.

The noble Lord, Lord Vaux, asked about the operation of regulatory sandboxes. The Government have emphasised that the testing of technology and practices in an FMI sandbox should not compromise existing regulatory outcomes, including market integrity and financial stability. The Treasury and regulators will very carefully consider what sort of investors should be able to use platforms in a sandbox. If consumers are allowed to use a platform participating in a sandbox, it is essential that the platform operates in a way that is consistent with existing regulatory objectives relating to consumer protection.

I turn to consumer protection and financial inclusion, an issue raised by a number of noble Lords, many of whom have done very important work in this area, and I am grateful to them for that. The noble Baronesses, Lady Twycross, Lady Bryan and Lady Tyler, the noble Lord, Lord Tunnicliffe, my noble friend Lord Holmes and others highlighted the important role that cash continues to play for many. The Government are committed to ensuring through the Bill reasonable access to cash across the UK. The FCA is best placed to deliver an effective, agile and evidence-based approach to regulating access to cash that can endure over time, and the Bill will allow for that. In approaching the policy statement that will inform this, the Government will consider how effective industry schemes have been in ensuring reasonable, free access to cash for individuals, and the policy statement is the right place to consider this matter further. The Government will reflect on the views of parliamentarians when crafting that statement.

The right reverend Prelate the Bishop of St Albans asked how rurality will be considered in that process. The FCA will be obliged to consider local as well as national deficiencies in cash, which would be relevant in rural areas; even if it is not subject to the same rural-proofing guidance, it will be subject to the equality duties around protected characteristics in undertaking that work. Where closure of bank branches affects access to cash, intervening in a closure would be within the scope of the FCA’s new powers in the Bill, provided that this fulfilled the purpose of seeking to ensure reasonable provision of cash access services. More broadly, decisions on in-person banking services are made by the providers of those services. However, that is still governed by the FCA’s existing powers and recently strengthened guidance on actions that must be taken when people seek to close branches to ensure that customers are treated fairly.

Financial fraud was raised by the noble Lords, Lord Hunt and Lord Tunnicliffe, my noble friend Lord Northbrook and many others. In financial services specifically, this Bill takes a crucial step forward in protecting victims of APP fraud. I emphasise that the measure enables the Payment Systems Regulator to take action in relation to any payment system that it regulates, not just faster payments. However, the initial focus is on faster payments because that is where the vast majority of APP fraud currently takes place. The Government expect protections for consumers in other payment systems to keep pace with those established for faster payments.

More broadly, noble Lords are right that tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector. I attended a meeting of the Joint Fraud Taskforce, which brings those different players together, just before the end of last year. The Government are committed to publishing their national fraud strategy later this year.

The consumer duty versus the duty of care was raised by many noble Lords. The FCA’s consumer duty consultation paper explains that there is a lack of consensus on exactly what constitutes a duty of care in this context. It cannot be exhaustively defined, but the FCA’s view is that a duty of care is a positive obligation on a person to ensure that their conduct towards others meets a set standard. It believes the consumer duty meets that definition.

The noble Lord, Lord Davies of Brixton, rightly and powerfully raised the challenges those with mental health issues can face when accessing or using financial services. The Government have taken quite a bit of action in this area, such as the introduction of the breathing space scheme for problem debt. The FCA has also been clear about the need for firms to respond flexibly to the needs of customers with characteristics of vulnerability, which includes mental health.

Buy now, pay later was raised by the noble Lords, Lord Hunt and Lord Balfe. We committed to bring this into regulation and will publish a consultation on draft legislation very soon. We intend to lay secondary legislation in mid-2023, so action on that is under way.

Finally, I am conscious of time, but I must turn more broadly to sustainability and green finance issues, as raised by the noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and many others. They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.

I will not dwell on that any further, except to respond to a point made by the noble Baroness, Lady Hayman, on the French and German regulators having climate change objectives. The codes and objectives for French and German regulators focus on instances of financial risk and greenwashing; the FCA can already consider these issues through advancing its operational objectives to ensure appropriate consumer protection and protect market integrity, and the PRA can similarly consider climate-related financial risks under its existing objective to ensure the safety and soundness of its regulated firms.

More broadly, noble Lords asked about measures that go beyond those in this Bill. I reassure them that work continues on taking forward the policies in the Greening Finance road map, including introducing economy-wide sustainability disclosure requirements—the FCA has launched its consultation on this already—and introducing transition planning requirements. We have also launched the transition plan task force, which has published its consultation, which will close next month. We are committed to updating our Green Finance Strategy early this year, setting out our approach on the green taxonomy and having a net-zero aligned financial sector. I am sure we will have many more discussions on this topic in Committee, which I look forward to, including on deforestation, which was raised by the noble Baroness, Lady Sheehan, and my noble friend Lord Randall.

On deforestation, financial institutions rely on the information disclosed by companies trading in these forest-risk commodities in order to take action, so a global framework for this disclosure is needed to make any action by UK financial services and firms overseas workable. That is exactly why we are a leading backer on the Taskforce on Nature-related Financial Disclosures. I was really happy to meet the task force in Montreal at COP 15 to discuss its work and how we are taking it forward.

I am out of time. I will pick up further questions from the debate in writing; I have not been able to cover them all here. To conclude, this is a landmark Bill, which I think many of the speakers in this debate have recognised, and the most ambitious reform of our regulatory framework in over 20 years. The Government are committed to building an open, green and technologically advanced financial services sector to deliver better outcomes for consumers and businesses. I am confident that the Financial Services and Markets Bill delivers on this commitment.

Bill read a second time.

Moved by

[Baroness Penn]

That the Bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the Bill in the following order: Clause 1, Schedule, Clause 2, Schedule 2, Clauses 3 to 8, Schedule 3, Clauses 9 to 13, Schedule 4, Clauses 14 to 20, Schedule 5, Clause 21, Schedule 6, Clauses 22 to 48, Schedule 7, Clauses 49 to 51, Schedule 8, Clause 52, Schedule 9, Clause 53, Schedule 10, Clause 54, Schedule 11, Clause 55, Schedules 12 and 13, Clauses 56 to 69, Schedule 14, Clauses 70 to 79, Title.

Motion agreed.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I too thank the noble Lord, Lord Sharkey, for tabling his amendment and provoking this discussion. It is interesting to find such a wide consensus on the general direction. I support the general direction which has emerged in the debate, but I question whether this is the right solution.

Nobody could be more sensitive to the meaningless process of the scrutiny of affirmative SIs; I have done hundreds over the years. It is a very nice little club. It is usually me and the Minister—and, I have to admit, the Liberals often provide the third person in the room, as it were. It is ridiculous at that level. There is a great attraction in saying that the House should consider secondary legislation as a whole and produce some solutions, but the problem is that that would take for ever.

We have a particular issue with secondary legislation in this Bill. As those of us who ploughed our way through the last financial services Bill will remember, there is a big chunk of EU legislation which, whether we like it or not, went through the democratic process in Brussels and was then put into UK law. That has been, effectively, removed and in this Bill we are creating the processes to substitute it. We are pretty well agreed that substituting 500,000 pieces of law—whatever the figure is; I do not know—through primary legislation is impossible, and that it has to be done by secondary legislation. However, because that intermediate level of legislation is so important, we must, for the purposes of financial services regulation, have a better scrutiny process than we do at the moment.

As the noble Baroness, Lady Noakes, pointed out, she, a number of other noble Lords and I have tabled a lot of amendments and we will have a good discussion. I see myself working with others, both in this Room and further afield, to see whether we can produce a consensual set of amendments to improve scrutiny in this area. In the meantime, I hope the Minister will listen to this debate and those that will follow and see whether the Government can come up with their own proposals to address this problem of scrutiny. Whether we like it or not, it is unfortunate that when the amendments we pass in this House get to the other end, they get chopped. If we can achieve some sort of consensus with the Government, that would be the best way through. If we cannot, I think we have to send something pretty powerful back to the other place, saying that this scrutiny process must be improved.

As an aside, I think it was yesterday when my colleagues at the other end said they had done an SI. I asked, “How long did you take?”, and of course the answer was, “Under 10 minutes”. Their level of scrutiny is worse than ours. At least we make useful points—not that anybody really listens to them.

I am pretty agnostic about the amendments in the name of the noble Baroness, Lady Noakes. My experience of deadlines is that they are real only in retrospect: you know of a deadline for real only when you have passed it. If you motor up to an impossible deadline—which is what these amendments may produce—you introduce a law to change it. I can see the benign nature of her intent but not what good it would do, in practice, somehow to punish an organisation that has missed a deadline by saying, “You won’t be able to make the rules, but we have to make the rules because we need the rules,” and so on. I am not going to get carried away about it, but I am not that seized of it.

The Minister will no doubt give us an appropriate assurance about her bucketful of amendments—that they are technical, minor and all that sort of thing—and I will listen. One is left wondering how many amendments will emerge from down the side of the sofa between now and Report, and even perhaps thereafter, because it seems there has been a failure to find all these amendments by the due date for the original procedures in the Commons. It is unfortunate that so many were missed that they have to be introduced now, but we will have no opposition to them.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I will speak first to Amendments 1, 244 and 245, before turning to the government amendments in this group.

With respect to Amendment 1, the Government are seeking the agreement of Parliament to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation, whereby the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.

As the noble Lord, Lord Sharkey, noted, it is not the Government’s intention to commence the repeal of retained EU law in financial services without ensuring appropriate replacement through UK law. That commitment was made by the Economic Secretary to the Treasury, including to the Treasury Select Committee and, as the noble Lord noted, in our memo to the DPRRC. His Majesty’s Treasury will commence a revocation only once appropriate secondary legislation and rules are in place.

Parliament will therefore play a key role in scrutinising any replacement secondary legislation. Where the Treasury replaces retained EU law through the powers in the Bill, this will almost always be subject to the affirmative procedure, with some limited exceptions specified in the Bill.

I recognise the wider debate in the House of Lords about secondary legislation and its scrutiny. I will resist the invitation from my noble friend Lord Naseby for this Bill to be the place where we address that wider debate. I point out to noble Lords that, in its report on the Bill, although the DPRRC did not bring to the attention of the House the delegated powers related to retained EU law, it did report on one specific issue regarding hybrid instruments, which I will respond to shortly. The committee commended the Treasury for

“a thorough and helpful delegated powers memorandum.”

That is not to say that the question of parliamentary scrutiny of the provisions in the Bill and the regulations that will be made under it is not important. I know that we will return to it many times during this Committee.

The Government have made efforts to set out how the framework provided by the Bill will work in practice. As part of the Edinburgh reforms, the Government published their approach in a document entitled Building a Smarter Financial Services Framework for the UK, which makes it clear that they will carefully sequence the repeal to avoid unnecessary disruption, and there will be no gaps in regulation. The Government have also recently published three illustrative statutory instruments under the powers in the Bill to facilitate scrutiny of the powers under which they will be made in Parliament.

It is also worth noting, as the noble and learned Lord, Lord Thomas of Cwmgiedd did, that large parts of retained EU law will be replaced by the regulators through their rules. The regulators have the tools and expertise to make rules at pace, in line with their statutory objectives, within a model of appropriate parliamentary scrutiny and oversight. Clause 36 of the Bill supports Parliament in that scrutiny and oversight, requiring the PRA and the FCA to notify the Treasury Select Committee when they consult on rules and to respond to any representations made by that Committee. That is a specific element of the provisions to which we will return at a later stage in Committee.

Ahead of considering the Bill, the Treasury Committee itself considered the appropriate model for parliamentary scrutiny of regulatory rules, concluding that effective scrutiny of regulatory proposals should be carried out through a targeted approach, with Parliament scrutinising proposals in more detail where there is a public interest in its doing so. The Government consider that the provisions of the Bill are consistent with the recommendations of the Treasury Committee.

I turn now to Amendments 244 and 245 tabled by my noble friend Lady Noakes. I can assure her that the Government intend to act at pace to complete the repeal and replacement of retained EU law, but we must also act in a way that allows everyone to adapt to the new model. That will often require the regulators to make replacement rules, which must be done in line with the appropriate procedures for consultation and engagement, as noble Lords have pointed out. As my noble friend Lady Altmann pointed out, there is a balance to be struck between the pace at which we undertake that work and the proper processes for consultation and scrutiny that that will need to be subject to.

[Baroness Kramer (LD)]

I am sorry to interrupt, but perhaps the Minister could clarify something we discussed before. What she describes puts Parliament in the position of a consultee, which I do not believe is the appropriate role for a democratically elected Parliament. Can she confirm that that is exactly what she is saying?

[Baroness Penn (Con)]

No, that is not what I am saying; I am saying that we will have procedures in place to allow Parliament to scrutinise legislation. We will also have procedures in place to ensure that, as part of that, relevant parliamentary committees can be notified of work by the regulators. That is just one aspect of how Parliament will conduct its role in the scrutiny of financial services, legislation and regulation. While the notification of consultations is one aspect, there are many others, such as the procedures for secondary legislation, the other procedures that Select Committees have to scrutinise the regulators’ work, the procedures for the provision of annual reports laid before Parliament, and others. So Parliament will be notified of consultations, but that does not imply that the Government view Parliament simply as a consultee in the process.

[Lord Tyrie (Non-Afl)]

The Minister has said that the use of Treasury powers under this Clause will normally be subject to affirmative resolution by Parliament. In the Minister’s experience—she could offer her personal view if she feels unable to offer a government view—does she think that that scrutiny is usually relatively effective or ineffective?

[Baroness Penn (Con)]

My Lords, standing here at this Dispatch Box, I would offer only a government view. I view it as entirely appropriate for the model we have set out today. I acknowledged the wider debate being had within the House of Lords on different mechanisms of scrutiny and lawmaking. As I have noted, the approach we have taken in this Bill has not been drawn to the House’s attention by the Delegated Powers and Regulatory Reform Committee.

In the model of financial services regulation that we seek to put in place, a large number of the rule-making powers flow to the regulators. We are delegating that further to the independent regulators that have the expertise to make rules in this area. This is the right model for the UK. We have consulted on it carefully and extensively, and we received broad support in that consultation. It reflects the careful approach we have taken and the choice we have made as to the model for the regulation of our financial services.

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[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.

[Baroness Kramer (LD)]

May I ask again for a bit more clarification, which I specifically asked for on Amendment 28? Is the Minister saying that this is a power for the Treasury to amend primary legislation outside the Bill through secondary legislation designed to enhance the powers of the regulators? Is that what this is? I tried reading the letter but it did not get me any further.

[Baroness Penn (Con)]

My understanding is that Amendment 28 contains powers to provide for amending secondary legislation, not primary legislation. I will seek a fuller explanation and I suggest that we briefly degroup that amendment, if we reach it today, to provide that explanation for the noble Baroness, so that she has further clarity. I do not think I will provide it for her at this point.

[Lord Tyrie (Non-Afl)]

That would be very helpful. Before the Minister leaves Amendment 28, can she say whether she discussed with officials whether to add a sunset clause to what otherwise will be a very open and extensive power in the hands of the Treasury?

[Baroness Penn (Con)]

No, that discussion was not had. The powers are constrained in that they relate to the provisions in place to transition away from and replace retained EU law, rather than going beyond that.

Amendments 242 and 243, put together, enable provisions subject to the negative procedure under an Act other than this Bill to be included in affirmative regulations made under the Bill. This is a procedural change with well-established precedent. Where any element of a statutory instrument is subject to the affirmative procedure, the combined instrument would also be subject to the affirmative procedure, so there will be no reduction in parliamentary scrutiny.

To conclude, the Bill will repeal retained EU law to establish a model of regulation based on FSMA. It will do so in a way that prioritises growth while moving in a sequenced and measured way, and through scrutiny, engagement and consultation. At this stage, I hope the noble Lord, Lord Sharkey, will feel able to withdraw his amendment and that other noble Lords will not move theirs when they are reached. Subject to providing that extra clarification to the noble Baroness, Lady Kramer, I intend to move the government amendments when they are reached.

[Lord Sharkey (LD)]

I thank all noble Lords who have spoken. I did ask the Minister about the Treasury’s assertion, or guarantee, that it will have replacements where necessary for the stuff that gets repealed, and about the tests for what is “necessary” and what is “appropriate”, how they will be applied and how transparently. I would be grateful if the Minister could write to tell me the answer to my question.

If we are to rely on SIs as a means of scrutiny of the measures in the Bill, that is the practical equivalent of having Parliament largely bypassed in this discussion. We need two fundamental mechanisms for effective parliamentary scrutiny: an effective means of triage and an effective means of revision. I am sure we will return to those issues either later in Committee or on Report. In the meantime, I beg leave to withdraw the amendment.

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Moved by

[Baroness Penn]

2: Schedule 1, page 94, line 12, at end insert—
“Official Listing of Securities (Change of Competent Authority) Regulations 1991 (S.I. 1991/2000)”Member’s explanatory statement
This amendment and the Minister’s other amendments to Schedule 1 (except for the amendment at page 100, lines 45 and 46) would add various instruments containing retained EU law relating to financial services to the list of subordinate legislation to be revoked in Part 2 of Schedule 1 to the Bill.

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[Baroness Penn (Con)]

My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.

Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.

While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.

The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.

Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.

Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.

The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.

Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.

On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.

However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.

To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.

The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.

I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.

On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.

The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.

I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.

[Lord Sikka (Lab)]

I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.

[Baroness Bowles of Berkhamsted (LD)]

If I may drag the Minister back to where she was just finishing off, in her response to me and the noble Baroness, Lady Worthington, she said that the UK would continue to observe its G20 commitments, which I do not doubt, and that various agricultural products and so on would definitely still be within scope. However, it says here in legislation that the FCA “may”. It does not say, “Apart from the fact that we are observing G20, and agriculture is still in”—it just says “may”. Where does it say in primary legislation that there will be guidance—or whatever the appropriate word is—as to how these things will be dealt with by the exchanges in the circumstances that give rise to concern? Otherwise, looking at our legislation—at least, our primary legislation —I see that we would not have that certainty, and it is proper that we have it.

[Baroness Penn (Con)]

It might be wise for me to write to the noble Baroness to address that specific point. Under the overall framework for the regulators, they need to make their rules in a way that is consistent with international standards, to which the noble Baroness referred. That would be the additional way in which one would have that reassurance, but it is worth writing to set out the point for her with more clarity.

The noble Baronesses, Lady Bowles and Lady Worthington, talked about whether the FCA, in acting to advance its objectives, would have sufficient grounds to intervene in these markets. The Treasury is confident that it would, and an example of humanitarian grounds for intervention was given. We are confident that the FCA could intervene on humanitarian grounds, acting in line with its objectives, but perhaps I will also write to the Committee to expand on that further.

The noble Lord, Lord Sikka, somewhat pre-empted me: I was just about to turn to Amendment 41. I am afraid that the Government will disagree with the noble Lord and the noble Baroness. Arguments were advanced by my noble friend on this point. Amendment 41 would require all listed companies to disclose how much revenue they make from trading commodity derivatives. However, listed companies are already required to publish comprehensive information about their operations and finances as part of their annual reports. The Government view that as sufficient.

It may be worth turning to the questions asked by the noble Baroness, Lady Kramer, on government Amendment 28, if the Committee is happy for them to be addressed here. Does the power in Clause 3 allow the Treasury to amend primary legislation to give us or the regulator new powers? The power in Clauses 3 and 4 to modify legislation, including to create new powers for the Treasury or regulators, is limited to retained EU law, as set out in Schedule 1. Clause 3 powers cannot amend primary legislation.

The powers in Clause 4 can be used to move provisions from retained EU law into primary legislation. The power in Amendment 28 applies where the Treasury is making transitional amendments to retained EU law or restating it. It is designed to allow, for example, the Treasury to give itself a power to update a definition or threshold in legislation. This mirrors delegated powers for the European Commission in retained EU law. While it would be possible to deliver the same outcome by reuse of the powers in Clauses 3 and 4, the Government consider it more appropriate to create a specific power to allow for such updates to be made, where they consider it appropriate. When creating such powers, His Majesty’s Treasury will have the ability to specify the procedure for any statutory instruments made using the new power. The Treasury will follow the same approach to determining the appropriate procedure as it has in the Bill. Where the Treasury exercises the power to create further powers, the instrument doing that will be subject to the procedure specified in Clause 3(9), which, in the vast majority of cases, will be the affirmative power.

[Baroness Kramer (LD)]

The Minister has been very helpful, but I will ask the question that I think the noble Lord, Lord Tyrie, would ask if he were still in his place: is there any kind of sunset clause on this?

[Baroness Penn (Con)]

There is no sunset clause on this power, just as there is no sunset clause on the powers in Clauses 3 and 4, so it is consistent with the approach we have taken with those other powers.

I thank the Committee for allowing me to address those points in this group. With that and the further information I shall deliver to the Committee on some of the questions from the noble Baroness, Lady Worthington, I hope that she will withdraw her Amendment 21 at this stage and will not move her other amendments.

[Baroness Worthington (CB)]

My Lords, I am genuinely grateful to the Minister for her response, which was very helpful and contained information about which I was not aware—I thank her for that. I will read Hansard in great detail. In her letter, can she explain a little more about those 18 contracts that will be covered and the retained powers? I would find that very interesting, although I am sure I can also google it.

I will now sum up. I am very grateful to the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. Returning to the statements by the noble Baroness, Lady Noakes, I am sure it is seen as a great success that we have this $600 trillion market in stuff that exists in the future, which is hugely complex and can crash the global economy. Some people will have benefited hugely from it; I have no doubt that some of those people may be in this Room. The point is that there is someone paying at the other end of that profit, and often it is the people at the very end of the chain who are trying to buy food in supermarkets or heat their homes. If a bubble in that market is definitely benefiting some—even maybe benefiting the Government, if they are receiving revenues from it—it comes at a cost, so we should be very mindful of the need to regulate that market. There is evidence after evidence of these bubbles forming because, quite frankly, the incentives to make cheap money are huge. Compared with the real economy, where you actually have to do things, build things, sell things and employ people, the desire to make money fast is overwhelming, and I do not want the UK to become the home of ever more exotic derivatives that allow us to make money the quick and easy way. Let us make banking and the financial markets boring again by getting them back to basics: using money to further society’s aims. If we cannot do that individually, we should do it collectively. I do not want to get on my soapbox, but the fact that we are exiting Europe makes that more difficult, so even more scrutiny needs to be applied now that we are setting our own rules.

I am grateful for the responses. I will end by saying that I had the pleasure of meeting a gentleman who worked in a bank that was more than 500 years old. I asked him about its ESG policies, and he listed them. They started with, “We will make no profit at all from soft commodities”, then went on to the usual checklist about arms and whatever else. I asked him where that came from, and he said, “Oh, we can’t remember”. Because it was such an old-fashioned concept—that we should take a moral position that we will not engage in profiteering from soft commodities—it sort of lapsed into the history of time.

Banking was moral once. I am not saying it is immoral now, but it is incredibly complicated. The incentives to make money in ever more novel ways are always there. Even the noble Baroness, Lady Noakes, alluded to the fact that systemic risks exist. They have existed in my lifetime and I am sure they will come again.

I am glad that we are here to do this scrutiny and very glad of the Minister’s offer to write. I hope that we will revisit some of these questions, and I will end on Amendment 41. I have personal experience of how energy companies are loath to disclose how much of their profits rest on trading. If that is the case, the markets should care about it and disclosure is the most obvious step to address it. With that, I beg leave to withdraw.

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Moved by

[Baroness Penn]

26: Schedule 2, page 126, line 39, at end insert—
“PART 4AAMENDMENTS TO THE CENTRAL COUNTERPARTIES (AMENDMENT, ETC., AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 201850A (1) Regulation 19B of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184) is amended as follows.(2) In paragraph (2) for “one year” substitute “3 years and 6 months”.(3) After paragraph (3) insert—“(4) The period determined by the Bank of England in a particular case under paragraph (2) (whenever determined) may be varied by the making of a subsequent determination.””Member’s explanatory statement
This amendment would allow the Bank of England to extend the period during which third country central counterparties that have fallen out of the temporary recognition regime following IP completion day can continue to offer services to firms in the United Kingdom, from a maximum period of one year to a maximum period of 3 years and 6 months.

[Baroness Penn (Con)]

I beg to move.

Amendment 27 (to Amendment 26) not moved.

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Moved by

[Baroness Penn]

28: Clause 3, page 3, line 15, at end insert—
“(aa) authorise the making of subordinate legislation by the Treasury;”Member’s explanatory statement
This amendment would ensure that the powers in clauses 3 and 4 of the Bill to make transitional amendments or saving provision in relation to the retained EU law listed in Schedule 1 for revocation, also include the power to confer new regulation-making powers on the Treasury.

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Moved by

[Baroness Penn]

29: Clause 6, page 6, line 39, at end insert “, and
“(ii) the Bank’s duties under section 30D(1)(a) of that Act;”Member’s explanatory statement
This amendment would ensure that when the Bank of England makes material changes to rules where consultation exemptions apply under clause 6, the Bank must publish a statement explaining how the rules are compatible with the Bank’s duties relating to the regulatory principles inserted by clause 45 of the Bill. (The words after “with” in line 38 become sub-paragraph (i)).

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[Baroness Penn (Con)]

My Lords, I shall briefly address government Amendment 33 in this group before I turn to the other amendments.

Government Amendment 33 fixes a minor drafting error in Clause 8, which introduces the designated activities regime, or DAR. Subsection (2)(a) of new Section 71P of FSMA states that contravention of a DAR rule does not constitute an offence except as provided under regulations made under Section 71R. These provisions allow the Treasury, when designating an activity, to apply existing criminal offences within FSMA to that activity. This amendment inserts a cross-reference to new Section 71Q, as it too makes provision for DAR regulations to apply existing criminal offences in FSMA.

Amendments 30 and 31 together seek to prevent the Treasury designating, and therefore bringing into regulation through the DAR, any activity unless the regulation of that activity is necessary for the FCA to further its operational objectives. I assure my noble friend that the FCA will be required to make rules relating to designated activities in a way which, as far as is reasonably possible, furthers one or more of its operational objectives. Simply put, the FCA will not be able to make rules about a designated activity unless doing so is in line with its objectives under FSMA. This approach is modelled on the way activities are currently regulated under FSMA, whereby the Government determine the regulatory perimeter by specifying which activities are regulated, and the regulators then make rules to advance their objectives.

Amendments 34 and 35 seek to remove short selling and the admission of securities to trading from the list of activities in Schedule 3. That schedule inserts new Schedule 6B into FSMA; Schedule 6B is designed to give noble Lords a sense of the types of activity that Treasury may designate under the DAR. However, my noble friend is absolutely right that this is an indicative list and does not mean that Treasury will designate that activity in future, or that it will do so in the way described in the schedule. Should the Treasury decide to designate short selling or the admission of securities to trading in future, it will be through a statutory instrument subject to the affirmative procedure, so that Parliament can fully consider and debate the implications.

I should say to my noble friend that the list included in Schedule 6B is not an FCA wish list: it is a set of activities currently regulated through retained EU law that may be appropriate for the designated activity regime. I should also be clear to my noble friend and to the Committee that the Government believe that there should be a regulatory regime for short selling in the UK.

My noble friend set out that short selling can play a role in the healthy functioning of financial markets. It provides essential liquidity to markets, helps to ensure that investors pay the right price when investing in shares, and allows investors to manage risks in their portfolios. However, there can also be risks associated with short selling. For this reason, all major financial services jurisdictions, including the UK, have some form of short selling regime. Noble Lords will know that the losses that short sellers can incur if prices increase rather than fall have no upper bound, making it riskier than a traditional investment. In exceptional periods, markets can be dysfunctional, and there is a risk that short selling can exacerbate volatility and undermine market integrity.

The UK intends to regulate in this area, and, as the noble Baroness, Lady Bowles, notes, the UK has a history of regulating short selling which predates the introduction of the EU’s short selling regulation. Parliament legislated to give the FSA specific powers over short selling in 2010 and, prior to that, the FSA took action to address instances of short selling in the financial crisis. The powers in the Bill will allow the Government to put in place a proportionate and appropriate short selling regime that is tailored to the needs of UK markets, companies and investors. The Treasury has issued a call for evidence to support this work, which will close in March.

To answer the question asked by the noble Baroness, Lady Bowles, on how you do just one simple thing, the DAR has been designed to be flexible and proportionate and would allow the Treasury to do something very targeted if appropriate. It removes the need to introduce a Bill every time something small but important arises, and it removes the need as potentially an alternative form of regulation for it to make a regulated activities order and for it to be regulated under that regime with the associated regulations of the authorised persons that come along with it rather than just the activity itself.

On regulation for companies listing on a stock market, the Government are in the process of a fundamental overhaul of the prospectus regime. There is clear scope to make this simpler and more effective and enhance the competitiveness of UK capital markets. I reassure my noble friend Lord Trenchard that the Government have committed to deliver the outcomes of the UK Listing Review from the noble Lord, Lord Hill. We published an illustrative statutory instrument in December showing how the Government plan to use the DAR to put in place a simpler, more agile and more effective listing regime. I therefore reassure my noble friend that the Government are fully committed to improving the attractiveness of UK markets, and that the powers in the Bill will be used to deliver on that objective.

My noble friend also asked whether the FCA is the only regulator able to make rules under the DAR. I can confirm that it is the only regulator that would have powers under this regime.

Amendment 32 from the noble Lord, Lord Stevenson, seeks to enable the DAR to regulate currently unregulated credit agreements secured by bills of sale. As the noble Lord set out for the Committee, the Bills of Sale Acts allow borrowers to use goods which they already own as security for a loan, while retaining possession of those goods. Today, they are most commonly used for logbook loans. Logbook loans are a type of high-cost credit regulated by the FCA in which a consumer uses their car as security, while allowing the consumer to keep using their vehicle. However, bills of sale are also used for other unregulated secured lending, such as businesses which wish to borrow against their assets, such as machinery.

I understand that the noble Lord would like to see the framework for these products modernised, and we have discussed this during the passage of previous Financial Services Acts, although his work on it predates that. He has suggested that the DAR might be the way to achieve this.

As the noble Lord noted, the Government previously considered repealing the Bills of Sales Acts and replacing them with a new goods mortgages Act. While there was support for this approach by many stakeholders, others raised significant concerns about the degree of consumer protection afforded by the proposed regime. The Government were also concerned that a modernised and streamlined regime could lead to more consumers using goods that they already owned as security for a loan, which is inherently a higher-risk form of borrowing.

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Moved by

[Baroness Penn]

33: Clause 8, page 10, line 31, after “provided” insert “by designated activity regulations under section 71Q or”
Member’s explanatory statement
This amendment would insert a cross-reference to section 71Q to ensure that the exception in section 71P(2)(a) of the Financial Services and Markets Act 2000 as inserted by clause 8 of the Bill (on liability in connection with designated activities) also refers to designated activity regulations under section 71Q.

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[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.

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[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.

[Baroness Penn (Con)]

I thank my noble friend Lady Noakes for her amendment. It is a good opportunity to talk about the Government’s proposals for mitigating the systemic risk posed by critical third parties in the finance sector, such as cloud service providers. The Government agree with the spirit of what my noble friend and the noble Baroness, Lady Kramer, have said.

The critical third parties regime has been designed with the aim of minimising the burden placed on these parties, while mitigating the systemic risks that could be posed by the use of these services. Rather than bringing, for example, a whole cloud services provider into the financial regulators’ remit, the regime instead gives the regulators powers over only the services that a critical third party provides to the financial services sector. I believe that that approach contrasts with the EU approach known as DORA, which I thought was the name of my parents’ dog. DORA bears similarities to the UK’s approach, but I am told that it is less proportionate than our regime, which targets only the services provided to the finance sector and not whole firms.

Proportionality and resource-effectiveness are therefore built into the design of the regime. I draw all noble Lords’ attention to the obligations that the regulators already operate under, including those resulting from FSMA, and the Bank of England Act 1998. In addition to public law obligations to act reasonably and proportionally, the regulators must also have regard to their regulatory principles. These include the principle that burdens or restrictions imposed on a person should be proportionate to their expected benefits. As the noble Baroness, Lady Kramer, indicated, we will come back to this question of proportionality and effectiveness as we go through our debates in Committee.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.

[The Parliamentary Secretary HM Treasury (Baroness Penn) (Con)]

My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.

As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.

As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.

[Baroness Kramer (LD)]

I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.

[Baroness Penn (Con)]

In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.

[Baroness Kramer (LD)]

May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?

[Baroness Penn (Con)]

No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.

Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I accept that the Minister is, essentially, responding in the narrow terms of the amendment before us, but she will be aware that our Lordships’ Select Committee looked into the whole issue of financial fraud and crime. The Minister mentioned the FCA, but the committee found that there are so many agencies involved that their collective effort is a total lack of integration and co-ordination, and that thousands of people are left completely unsupported. Less than 1% of police resources are spent on tackling a huge sector. The Government have now stopped publishing statistics in relation to crime that includes financial crime. I wonder why.

[Baroness Penn (Con)]

I opened my remarks by acknowledging that fraud needs a co-ordinated response from government, law enforcement and the private sector. That is at the heart of our approach, and it is why the Government established the Joint Fraud Taskforce to bring all those actors together. I attended it towards the end of last year, and it meets regularly. There are many different actors that need to take action in this space, including the regulators but also law enforcement, industry and companies—not just the financial services sector. Measures in the Online Safety Bill look at online platforms, for example.

[Lord Vaux of Harrowden (CB)]

I apologise for interrupting, but all this would be a lot easier if we had the national fraud strategy. When can we expect it?

[Baroness Penn (Con)]

I agree with the noble Lord. We can expect it soon—or imminently; I could use a variety of different descriptors, but it will be sooner than “in due course”.

[Lord Tunnicliffe (Lab)]

I hope the Minister will appreciate the utility of publishing it before Report.

[Baroness Penn (Con)]

I note the noble Lord’s point about the timing of that.

The noble Lord, Lord Hunt, mentioned resources. I repeat that additional resources have gone into tackling economic crime—£400 million during the spending review period, including £100 million dedicated specifically to fraud.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud, and recognised the important role it plays in tackling this issue. This existing remit allows the FCA to take proactive steps to tackle fraud and wider financial crime while driving a whole-system approach with relevant stakeholders.

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[Lord Tunnicliffe (Lab)]

My Lords, once again, the arguments for these amendments seem quite persuasive, and I look forward to the Minister’s reply. Having probably been responsible for this legislation in the past—since I failed to duck most of it—I cannot remember for the life of me why SMEs are excluded. Before addressing the amendments, I would be grateful if the Minister could explain the thinking behind the law as it stands.

[Baroness Penn (Con)]

My Lords, Amendment 40 intends to offer additional regulatory protections for businesses taking out finance. I hope this, in part, addresses the question of the noble Lord, Lord Tunnicliffe: the Government are committed to regulating business lending only where there is a clear case for doing so. Bringing SME lending into regulation would risk increasing costs for banks and alternative finance providers, which would in turn be passed on to businesses in the form of higher fees and interest rates. This could negatively impact the price and availability of credit for small businesses.

However, the Government see a case for regulation where that asymmetry which we have talked about is at its greatest. At the moment, loans of £25,000 or less to the smallest businesses are already regulated as consumer credit agreements under the Financial Services and Markets Act 2000. This captures over 60% of all UK businesses and aims to protect them where there is the potential for detriment in their dealings with banks and alternative finance providers.

Even for medium and larger firms outside the perimeter, multiple protections are already in place which, in some instances, act as a de facto extension to the regulatory perimeter, without the associated costs that formal regulation would bring. Over 99% of UK businesses can access independent dispute resolution through either the Financial Ombudsman Service or the Business Banking Resolution Service. I note the comments from the noble and learned Lord, Lord Thomas of Cwmgiedd. Alternative dispute resolution services provide a form of access to businesses that can be less costly to them. On his specific question about the views of regulators on the regulatory perimeter, I will write to both the noble and learned Lord and the Committee.

Furthermore, a recent FCA investigation found that many lenders, particularly large banks, extend regulatory protections to many or all of their unregulated business relationships. All the major bank lenders are signed up to a voluntary industry code, the Standards of Lending Practice, which contains clear guidance on best practice and can be considered by the Financial Ombudsman Service when adjudicating a business’s complaint against a financial institution. This achieves many of the same outcomes as extending the regulatory perimeter, so many loans that are not captured by consumer credit regulation nevertheless benefit from effective protections.

Given these factors, at this time, the Government do not believe that there is a clear and proportionate case for bringing business lending into regulation. I should be clear that we are open to considered, evidenced arguments on specific regulatory questions related to SME lending. That is why we have invited views on it as part of our ongoing consultation on the reform of the Consumer Credit Act.

Amendment 219 seeks to ensure that SMEs are given rights of action against firms that breach the FCA handbook. Currently, a breach of the FCA handbook may not be actionable by an SME in court—as noted by my noble friend. However, as I have already said, the Financial Ombudsman Service provides consumers and small businesses with a route to raise complaints against firms. This is an alternative to going through the courts, which can be expensive for the parties involved and delay redress. The Financial Ombudsman Service is required to decide cases on the basis of what it considers is fair and reasonable, in all the circumstances of the case, including whether there has been a breach of FCA rules.

Since 2019, SMEs with an annual turnover of up to £6.5 million and fewer than 50 employees have been able to take cases against financial services firms to the Financial Ombudsman Service. All firms regulated by the FCA are required under the FCA’s rules to co-operate with the ombudsman, which includes complying with any decision that it may make.

Since 2021, SMEs with a turnover of between £6.5 million and £10 million can also raise complaints about firms to the British Banking Resolution Service. This is a voluntary body set up and funded by banks to provide an alternative dispute resolution service without the need for litigation or external legal support. Given that more than 99% of UK businesses can access independent dispute resolution through either the FOS or the British Banking Resolution Service, it is unnecessary to provide for a right to take civil action in the courts for a breach of the FCA handbook.

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[Lord Tunnicliffe (Lab)]

The Minister’s argument seems to be about the cost of introducing regulation—that there is a big black cloud that means they cannot do it—but I have not heard any figures. Can she find an estimate of the cost of introducing the sort of regulation envisaged under the amendments and send us all a letter when she has?

[Baroness Penn (Con)]

I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.

Those were all the points—

[Lord Sharkey (LD)]

The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?

[Baroness Penn (Con)]

I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—

[Baroness Kramer (LD)]

Perhaps the Minister would confirm that the only cases in which the BBRS will intervene is where the bank complained against is Barclays, Danske, HSBC, Lloyds, NatWest, Santander or Virgin Money and that any institution outside that group—and there is a great range of new banks, challenger banks and others—is not included in its activities? Is that correct?

[Baroness Penn (Con)]

I note that it is a voluntary body. I do not have the list of those who have signed up to it to hand. If it differs from those outlined by the noble Baroness, I will write to the Committee, but she may well have listed those who have signed up to it. I note, however, that the combination of that service, and the scale of those involved in it, with the ability to go to the Financial Ombudsman Service means that research suggests that more than 99% of UK businesses can access independent dispute resolution. We should look at the size of the customer base as well as the number of organisations signed up to such dispute resolution mechanisms. I will write to the noble Lord, Lord Sharkey, on the number of cases taken by the organisation.

[Baroness Altmann (Con)]

I thank my noble friend for giving way, but perhaps I could press her a little more on the effectiveness of the Financial Ombudsman Service in providing a deterrent against poor practice in the areas where we have seen it in the past. The noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Sharkey, have outlined instances of banks not treating their customers well. Does my noble friend agree that having a statutory duty written into the legislation would be much more of a deterrent against the behaviour we have seen than the potential threat of someone going to the Financial Ombudsman Service?

[Baroness Penn (Con)]

That is one element to be considered. I was pointing in particular to the combined role of the FOS and the Business Banking Resolution Service in providing a route of redress for over 99% of businesses. In part, it comes back to my question in relation to Amendment 40 from the noble Lord, Lord Sharkey, on the Government’s commitment to regulating business lending only where there is a clear case for doing so, given some of the increased costs that bringing SME lending into regulation would bring. I return to the point that we currently have a consultation out on the Consumer Credit Act in which there is a question on business lending; the Government are considering this through that consultation.

With that, I hope that the noble Lord, Lord Sharkey, will withdraw Amendment 40 at this stage—

[Baroness Bennett of Manor Castle (GP)]

I think the whole thrust of the noble Baroness’s argument is that the non-statutory protection effectively offered to SMEs through the ombudsman and independent dispute resolution procedures is essentially the same as having statutory protection. She suggested that statutory protection would cost more, but if the protection is equal through these other mechanisms, surely the costs of the banks providing the documentation and the system to enforce those mechanisms would be very similar to the statutory costs.

[Baroness Penn (Con)]

The noble Baroness touches on one possible difference in documentation needing to be provided where something is regulated versus where it is voluntary. That comes back to the question of SME lending having increased costs for banks and alternative finance providers. This can be passed on to businesses in the form of higher fees and interest rates, and it can affect the availability of credit for small businesses. The noble Baroness, Lady Kramer, mentioned start-up banks and challenger banks. When we have discussions elsewhere on other issues related to financial services regulation, we also discuss how we create a more competitive environment in the banking sector, as smaller banks can struggle to deal with regulations. This is a general point about balance.

[Baroness Bowles of Berkhamsted (LD)]

I am sorry to intervene again, but I am also intrigued about what the extra cost is of this coming into regulation. We are not suggesting that there should be great big oversight mechanisms which mean that the FCA would have to do a lot more—until problems occur, when there must be a route to justice. Is the Minister saying that banks will make less profit when they cannot cheat their customers, and that is where the cost comes from? I do not understand it. The suggestion was that it might be documentation, but the cost of that is the same wherever the documents go. What is this extra cost other than banks having to behave responsibly?

[Baroness Penn (Con)]

In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.

On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.

[Baroness Kramer (LD)]

I will add one more piece to the response from the Minister—one more request. I just want to double-check what she said. She said that small businesses could go to the FOS and that they have to employ fewer than 50 people. The definition of a small business seems to encompass something much larger than that. Can she help us understand what happens to the businesses that are still considered small but have more than 50 employees? I would imagine that they are pretty easy targets. As I say, one of the things that is always noticeable is that those who decide to exploit are very clear about where the perimeters are and who they can freely approach, so they get away with it.

[Baroness Penn (Con)]

As I hope I was setting out for the noble Lord, Lord Sharkey, there are different definitions of businesses that can have different protections and routes of redress within a system of small business lending. The system that we have is aimed to be proportionate, focusing on the smallest SMEs which are at the most risk. On the difference between the voluntary measures that are in place and bringing it within the regulatory perimeter, we are not saying that those are entirely equivalent protections but that they are proportionate protections to the risks faced by those firms. I set out different thresholds in my answer in relation to both those businesses that are protected under the Consumer Credit Act, which are sole traders, loans under £25,000 and a few others there, and businesses that are able to access either the FOS or the Business Banking Resolution Service. There are other thresholds too. Therefore I appreciate the point that that is different from the definition of a SME that the noble Lord asked about. The system is designed to be proportionate to the size of the SME and the protections it affords to them as regards business lending.

[Baroness Altmann (Con)]

I thank my noble friend for giving way once again. This is an important area for the whole financial services framework that we have in this country. I think that the noble Baroness, Lady Bowles, the noble Lord, Lord Sharkey, and my noble friend Lord Holmes are all trying to press the Minister on the issue of protection before scandals happen so that our system can be trusted more. The point here is about deterring financial institutions from even trying to undertake these actions by having stronger regulatory protection upfront, rather than this or that right of redress after the event has happened.

[Baroness Penn (Con)]

I understand my noble friend’s point, and of course the Government also consider that when we look at what to bring into the regulatory perimeter or the right of redress, both as a route of redress and as a point of deterrence. The Government take all those factors into account when considering this question.

[Baroness Bowles of Berkhamsted (LD)]

If I may ask one more question, one area that might be interesting for comparison, especially if we are looking at the Consumer Credit Act, is what the difference is between the loans of £25,000 to small businesses and bounce-back loans, where the conditions of the Consumer Credit Act were dispensed with. Can we have a comparison to see whether they have fared better or worse? That will perhaps show us where the true costs of regulation and lack of regulation lie.

[Baroness Penn (Con)]

The noble Baroness makes an interesting point. However, bounce-back loans were designed for a specific set of circumstances, and the aim of disapplying the Consumer Credit Act provisions was to do with the speed of being able to get bounce-back loans out to customers. The noble Baroness has indicated that there can then be some regulatory cost to having those protections in place. That is an interesting point, which I am sure people will want to think about in the consultation that is under way on the Consumer Credit Act and the direction of travel there.

[Baroness Bowles of Berkhamsted (LD)]

I must point out that I was fearing that the true cost was with the small businesses.

[Baroness Penn (Con)]

The true cost of the protections afforded under the Consumer Credit Act—

[Baroness Bowles of Berkhamsted (LD)]

It is about the lack of protection.

[Baroness Penn (Con)]

To be honest, I am not sure that I totally follow the noble Baroness’s point.

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[Lord Mitchell (Lab)]

My Lords, I thank the noble Baroness, Lady Kramer, for drawing your Lordships’ attention to the three-year campaign we had on payday lending, which in the end won. We removed a great scourge from consumer credit in this country. I apologise for not speaking at Second Reading; I intended to, then Covid got me.

I will make a couple of general points before getting into buy now, pay later. When I was 16, I was asked to leave school. One mock GCE pass out of seven subjects at O-level led to my marching orders. I got a job at Hoover selling vacuum cleaners and washing machines door to door. That truly was the school of hard knocks. It was 1959. We were sent to sales training school to learn how to complete a sale. They told us, “Wear a dark suit, white shirt, firm handshake, and at all costs, get your foot in the door. Demonstrate the product to the lady of the house and then present her”—it was always her—“with the dual positive suggestion: ‘Will madam like to pay cash, or would she prefer hire purchase?’ Whatever the outcome, you’ve got the deal.”

So, I know about deferred payments, which in those days were also called “the never-never”. I emphasise to noble Lords that I am not against buy now, pay later. In fact, I think it is a good thing. People’s budgets are squeezed, and if a financial mechanism can be devised to make purchasing easier, it surely must be applauded. The problem is when it gets out of control, as many noble Lords have said.

Buy now, pay later has no interest component, and because of this, it is not regulated by the FCA, it is not protected by Section 75 of the Consumer Credit Act and individuals do not have recourse to the Financial Ombudsman Service. This loophole was surely never intended and ought to be closed.

It is currently too easy for consumers to acquire debt beyond their affordability, and therein lies the danger. Plus, of course, consumers can acquire payment liabilities through a host of different providers, each of whom has no knowledge of the existence of the other. We saw that in payday lending, whereby you got to your limit with one payday lender, so you went to another and then another, you got the money from here to repay this one, and so it went, until people got into terrible situations.

I do not have the foggiest why the Government have said that they want to regulate that but are telling us that it is not appropriate. I ask the Minister: why are the Government dragging their feet on something that seems so dangerous, obvious and uncontentious?

I have one further point to make. Buy now, pay later is growing exponentially and we now have a measure of just how big it is. Half the population use this unregulated form of finance. Casting our minds back to the financial collapse of 2008, we cannot ignore the subprime mortgage crisis in the US that triggered all the turmoil. We are not there yet, but massive and increasingly unaffordable debt is simmering below the radar, and it is a huge potential danger. Can the Minster assure the Committee that the Government are tracking this sector and are aware of the risk?

[Baroness Penn (Con)]

My Lords, I shall turn first to Amendment 43, tabled by my noble friend Lady Noakes, before dealing with buy now, pay later. The Government fully support the intention behind this amendment to facilitate the swift reform of the Consumer Credit Act, and work is under way to do just that. There is no doubt that this legislation needs updating. The Act is becoming increasingly outdated, and its prescriptive nature means that it is unable to keep pace with advances in the market without modernising reform.

However, we must appreciate that the Act is complex, and any work to review it requires careful consideration to ensure that any future approach is fit for purpose. For this reason, a first public consultation on this reform was published in December, which will close for responses in March. As part of the review, the Government are seeking views on how to rectify the complex split of regulation currently contained in primary legislation, secondary legislation and FCA rules which is hard for consumers and businesses to navigate.

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[Baroness Penn (Con)]

My Lords, as I was saying, we can also simplify the way in which information is provided to consumers throughout the lending process, which can be both inefficient and ineffective. This reform will also allow us to review retained EU law in the Act and amend regulation to better suit UK businesses and consumers.

Given that this work is at an early stage of policy development, the Government believe that it would be premature to consider legislative changes at this stage. I heard what my noble friend said about introducing more parliamentary scrutiny into her amendment but I am not sure that that would be sufficient to address the fact that we are not yet at the stage where we can bring forward our proposals and legislate on this issue.

On Amendment 212, the Government are working at pace to regulate buy now, pay later products, recognising the risks they may pose to consumers. We are now drafting secondary legislation and intend to consult on it very shortly. Subject to the outcome of the consultation, the Government aim to lay regulations later this year.

[Lord Tunnicliffe (Lab)]

I just point out to the Minister that “later this year” could be December. I hope the Government have a rather more optimistic view than that.

[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.

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[Lord Tunnicliffe (Lab)]

My Lords, the debate this afternoon, not just on this group, has been around how this Bill will influence the future. One of the advantages of being old is that you do not have to look too far, because you know where you are going to be. That is not true for our grandchildren. The present progress on the environment is painfully, frightfully slow. All the stuff I read says that, if there is not a change—if not in direction, then in the commitment and energy we put in—the future for our grandchildren will be very grim.

The other thing that has come out of this debate is the recognition that we have to move beyond carbon. If we crack net-zero carbon by 2050 and do nothing else for all the parts of the green world—the world that should be green—then we will live on a virtually lifeless planet, and we will have lost so many things. There are so many other issues that have to be taken into account in shaping the world of the future.

What does that have to do with financial services? Some may argue that financial services are just about making money and so on, but the way in which people in the past have chosen to make money has had a profound effect on societies—some good, some pretty frighteningly bad—and financial services and the way society develops are intertwined.

I do not support all the amendments in detail in this group, but their direction surely speaks to the fact that financial services will influence the future. The hopeful thing about financial services is that they will be provided by young people. They will not be young when they get around to doing it, but they are young now, and young people grasp this crisis much better than we do. One or two of us in this Room are young but, in general, it is the teenagers and the 20 and 30 year-olds who are really taking this issue on board. They will be the investors and shareholders of the future, so it is right that, in this Bill, we give them the best possible basis for their desire to create a greener world. It has to be a global solution—they will want that to happen.

Our effort, Amendment 208, may be a good vehicle. The Government said that they will publish an updated green finance strategy, relating in particular to a green taxonomy and sustainability disclosure requirements. The concept of a green taxonomy will have the same impact that universal financial reporting standards have had in improving the clarity with which you can look at enterprises. While it remains unregulated, the statements that companies make—especially those that are true—are diluted by the fact that nobody understands the terminology. Only when we bring the descriptions together—at least nationally and ideally internationally—will we start to shape the way that society develops and allow finance, which is so important in creating direction, to play its part.

I commend Amendment 208 to the Committee. Ideally, we should be going with the grain, because Ministers are committed to producing a financial strategy. We are told over and over again in some places—including, I believe, in the other place—that we might expect it imminently. Can we have some clarity about the Government’s commitment? I hope that in doing that, they will see the importance of a green taxonomy and that we can get this in hand and play our small part in what it is not overstating it to call saving the planet.

[Baroness Penn (Con)]

My Lords, the Government recognise and understand the importance of supporting the growth of sustainable finance in the UK. Indeed, it is because of the importance that Parliament, the Government, the regulators and industry have collectively applied to these issues that London ranks, once again, as one of the leading centres in the world for green finance in the Z/Yen global green finance index. The Government are committed to further strengthening the UK’s financial services regulatory regime relating to climate, which is why Clause 25 introduces a new net-zero regulatory principle for the FCA and the PRA.

Amendments 44, 53, 56, 62 and 68 seek to go further by introducing a secondary objective for the regulators to facilitate alignment of the UK economy with commitments outlined in the Climate Change Act and the Environment Act 2021. Similarly, Amendment 69 seeks to extend the new net-zero regulatory principle to also include nature, and Amendment 69A seeks to oblige the financial services regulators to have regard to a range of environmental concerns beyond the net-zero commitment.

It is important that we consider the regulators’ objectives, secondary objectives and regulatory principles in the round. The FCA and the PRA are required to advance their objectives when discharging their general functions. The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The PRA’s general objective is promoting the safety and soundness of PRA-authorised persons. It also has an insurance-specific objective of contributing to the securing of an appropriate degree of protection for those who are, or may become, policyholders. The PRA also has a secondary objective to facilitate effective competition.

As we have discussed, the Bill provides a secondary growth and competitiveness objective for both the FCA and the PRA. The Government consider that alongside these core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. This proposal received broad support through the FRF review consultation.

These objectives are underpinned by a set of regulatory principles which aim to promote regulatory good practice and set out the considerations that the FCA and the PRA are required to take into account when discharging their functions. The regulators’ primary focus must be to ensure the safety, soundness and integrity of the markets they regulate. While the Government expect that regulators will play a crucial role in supporting the achievement of the Government’s net-zero target, it is not their primary responsibility given that many of the levers for change sit outside financial services regulation.

Having said that, we should not underestimate the significance of Clause 25, which will embed in statute consideration of the UK’s climate target across the full breadth of the regulators’ rule-making and therefore support the Government’s action and ambition to transform the UK economy in line with their net zero strategy and vision.

As noble Lords have noted, the legislation creates a clear hierarchy. However, it is not simply the case that issues relating to climate change will be addressed only through the new regulatory principle. The Government’s view is that consideration of climate is already core to the regulators existing objectives: both safety and soundness for the PRA and market integrity for the FCA.

The Government expect that this will also be the case for their new secondary growth and competitiveness objective. Indeed, the recent recommendation letters from the Chancellor to the FCA and the PRA, published as part of the Edinburgh reforms, set out the Government’s view that delivering net zero is part of the wider economic policy objective of achieving strong, sustainable and balanced growth. This means that the new regulatory principle will ensure that where there are broader issues relating to climate change that are not captured within their existing objectives, the regulators will be required to give them specific consideration, where appropriate, in taking forward their general functions.

Regarding consideration of nature issues, the Environment Act 2021 provides a framework for setting the definitions of the Government’s future targets in this space. Noble Lords will recognise that work is ongoing to understand the interaction between these targets and the work of the financial services regulators, which is not yet clear. The Government consider that it would therefore not be appropriate to place such a requirement within the FiSMA regulatory principles without this clarity. However, I reassure noble Lords that there are clear examples of how the FCA and the PRA are supporting the Government’s work on nature under their existing objectives.

The Government and the financial services regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosures, which aims to help organisations to report and act on evolving nature-related risks. The UK is its largest financial backer. We are also committed to the International Sustainability Standards Board process, which will deliver a global baseline of sustainability disclosures that meet capital market needs, while working to decrease systemic environmental risk. These standards are expected to address aspects of the natural world beyond greenhouse gas emissions. The Government will continue to consider bringing these standards into any UK disclosure framework as they achieve global market consensus.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

The financial and related services industry is very significant to this country. The UK has a golden goose, but we need to be careful that it does not get strangled and swept away by someone else.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, there is a large number of amendments to cover in this debate, so I aim to be succinct. While these amendments cover a range of issues, they all relate to reporting requirements on the regulators to enable effective scrutiny and oversight of their work.

First, on Amendments 45 and 63, in the name of the noble Earl, Lord Kinnoull, and Amendment 66, in the name of my noble friend Lord Holmes, the Government agree that it is vital to have appropriate public metrics to ensure that the operationally independent regulators can be held to account for all aspects of their performance, including against their new growth and competitiveness objectives. FSMA establishes multiple channels for this, including annual reports. The regulators also voluntarily publish a range of data—for example, on operating service metrics. Specifically, Clause 26 will require the FCA and the PRA to report on their performance against the new growth and competitiveness objective, as part of their annual reports. That sets out for my noble friend Lord Bridges the existing reporting done by the regulators—but the Government recognised the need to go further in requiring the regulators to publish information, which is why we added Clause 37. It provides an additional mechanism for the Treasury to require the regulators to publish information, including performance data, on a more regular basis, where the Treasury considers it necessary to support scrutiny of performance.

The broad approach is that FSMA requires the regulators to report on how they have discharged their functions and that the decisions on publishing operational metrics are appropriate for the operationally independent regulators to determine, working with government, where appropriate. It is impossible to predict how the power in Clause 37 requiring regulators to publish information on a more regular basis may be used, but I reassure noble Lords that the Treasury will work with stakeholders, industry, consumers and Parliament to understand the evidence base for whether it is in the public interest to exercise this power and the kinds of situations in which it would be desirable to do so. That power also includes a number of safeguards to ensure that it is exercised appropriately.

However, locking specific, detailed metrics into primary legislation would result in a static framework unable to adapt and respond to wider changes, and impose fixed requirements which may not be possible or appropriate for the regulators to report on. Clause 37 provides a more flexible—and therefore future-proofed—mechanism for ensuring appropriate scrutiny. Similarly, Amendment 121, tabled by the noble Baroness, Lady Bowles, seeks to impose a requirement to report against metrics determined by the National Audit Office, along with consumer representative bodies. Again, embedding this in primary legislation would not be the most effective approach. The NAO is already able to examine and report on the value for money of spending by public bodies, including the FCA and the PRA, and it reports its findings to Parliament. The Government consider that the setting of specific reporting requirements for these bodies goes beyond the scope of the NAO’s remit.

[Baroness Bowles of Berkhamsted (LD)]

May I interrupt the Minister? The whole point of my amendment—whether it be the NAO or otherwise—was specifically to address the fact that the criteria might need to be changed, so it would not be a fixed list but would develop depending on circumstances. Perhaps the Minister does not think that the NAO is the body, but the question I posed was about this in general. There is a difference between it being an independent body and it being the Government. Given all the other powers that the Government have to direct the regulators, it could look like a conflict of interest if it is not done with a greater degree of independence. The fact that the Minister said that Clause 37 needs to be used with discretion seemed to recognise that that potential tension and conflict might be wrong. Would it not be better to have an independent body involved?

[Baroness Penn (Con)]

I thank the noble Baroness for teeing me up to answer the question that she posed at the end of her remarks. I understand her point about trying to have a more flexible framework of criteria and the NAO being one idea for an independent organisation that can do that. She will know that the Government considered this as part of the future regulatory framework review and found that there are substantial practical costs and resourcing obstacles to overcome in making such a body operationally effective. Such a body would also duplicate existing accountability structures and potentially undermine the regulators’ operational independence.

In considering that question, the Government concluded that the existing avenues for stakeholders to provide input, feedback and challenge through public consultation are appropriate, supported by strengthening the statutory panels, independent challenge and cost-benefit analysis.

In addition, the Treasury and Parliament will continue to assess the work of the regulators in their oversight role, strengthened by a number of the measures in the Bill. That position was supported by the TSC report The Future Framework for Regulation of Financial Services, which said:

“The creation of a new … body … would not remove the responsibility of this Committee to hold”


the FCA and the PRA

“to account, and it would also add a further body to”

the regime that Parliament would need to scrutinise. The Government therefore concluded that the Treasury, as the department responsible for financial services policy, is best placed to assess whether, as a backstop, further reporting is required by the regulators and to direct them to publish this if necessary and appropriate.

I fully appreciate that the Committee will want to continue to explore this question in discussing these amendments and further amendments as we reach them, but I think it is helpful to set out that the Government considered this question as part of their consultation and work in the development of the Bill. Careful thought has been given to it. We have been open to making improvements: indeed, I believe Clause 37 was an improvement made when the Bill was in the House of Commons, so we are open to further thoughts, having already given this quite a lot of consideration.

Turning to Amendments 83 and 84, I hope I can reassure my noble friend Lady Noakes that Sections 138I and 138J of FSMA already require the FCA and the PRA to provide an explanation of how their draft rules advance their objectives as part of their public consultations. The Government’s policy intention is that this requirement extends to the new secondary objectives. However, I thank my noble friend for raising this issue. We will consider whether the legislation could be made clearer on this point before Report.

I move to Amendments 113 and 114, tabled by the noble Baroness, Lady Kramer. The Government recognise that the Bill represents significant reform, and it will be important to provide an assessment of its effects on the system. However, we think it would be inappropriate to task the regulator with this assessment. In line with Cabinet Office guidance, within three to five years of Royal Assent, the Government will submit a memorandum to the Treasury Select Committee with a preliminary assessment of the impact of the Act in practice, to allow the committee to decide whether it wishes to conduct further post-legislative scrutiny.

Turning to Amendments 115, 116 and 196, tabled by my noble friend Lord Holmes, I am aware that the speed and effectiveness with which the regulators process applications for authorisation and other regulatory approvals remains an area of concern for both Parliament and industry, and the Committee has reflected that to me again today. I welcome the report published by TheCityUK last week about this important issue and, just as importantly, the constructive way in which the regulators have engaged with that feedback from the sector.

The Government share these concerns. In December, the Economic Secretary wrote to the CEOs of the PRA and the FCA setting out the importance of ensuring that the UK has world-leading levels of regulatory operational effectiveness. In their replies, both CEOs committed to publishing more detailed performance data on authorisation processes on a quarterly basis going forward. The FCA, in particular, has an extensive programme of activity under way to improve the timeliness of its approvals. It recruited almost 100 new authorisation staff in the last financial year, streamlined its decision-making processes and is digitising its application forms to make the process smoother for firms. The power in Clause 37, which I mentioned earlier, for the Treasury to require additional reporting from the regulators could be used to hold the regulators to account on the important issue of authorisations raised by these amendments, but, as I say, there is a commitment by the regulators to publish more detailed quarterly information on this matter. However, the Government will continue to engage in discussions with the regulators on continuing to improve operational efficiency.

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[Lord Carrington of Fulham (Con)]

On a point of clarification, my noble friend talks about mutual societies, which are very important. Mutual firms have many characteristics that are similar to those of so-called Islamic banks—banks that are sharia-compliant. Do her comments also refer to that slowly growing part of the economy?

[Baroness Penn (Con)]

They refer to organisations that were formed under the legislation to which I referred. We are taking forward work to look at amending the Building Societies Act, the Co-operative and Community Benefit Societies Act and the Friendly Societies Act. The definition of who I am talking about is driven by those Acts.

Amendments 157 and 158 are on transparency over who has responded to the regulators’ consultations. While promoting transparency is important, confidentiality must be respected. If a respondent has not consented to the publication of their name, they may be deterred from responding by the knowledge that a category description will be published, which risks making them identifiable. This is particularly the case in areas where only a small number of firms are affected. It could therefore reduce the number and scope of responses, which would weaken the effectiveness of the consultation process as a way for the regulators to receive challenge and feedback on their proposals. This would be contrary to the Government’s aims and, I believe, to the intentions of noble Lords, including the noble Baroness, Lady Bowles.

This brings me to the conclusion of my remarks—

[Lord Holmes of Richmond (Con)]

Before my noble friend sits down, would she care to spare a few words on Amendment 222?

[Baroness Penn (Con)]

I believe I have just addressed Amendment 222. We are supportive of the establishment of regional mutual banks in the United Kingdom, but they are currently still establishing themselves and are not yet trading. So it is a little too early for us to report on the current regime and any possible limitations of it for regional mutual banks.

[Lord Tunnicliffe (Lab)]

Does the Minister intend to make any response on the concept of proportionality?

[Baroness Penn (Con)]

As the noble Lord himself noted, proportionality is already within the regulators’ objectives and operating principles. It is a concept that the Government support in how the regulators undertake their business. I believe that it is provided for within the current framework.

I hope, therefore, that the noble Earl, Lord Kinnoull, will withdraw his amendment and that other noble Lords will not move theirs.

[The Earl of Kinnoull (CB)]

I thank the Minister. It has been a fascinating hour and 20 minutes on reporting requirements. The common themes, I think, have been clarity and independence. I associate myself with the remarks of the noble Lord, Lord Bridges, and his very good way of expressing the problems with the Bill. Coming from the insurance industry, I was of course very worried by what the noble Lord, Lord Ashcombe, had to say about the number of insurers being set up in Bermuda versus the number being set up here. Bermuda overtook the UK in 2004 in size of market; we remain number two but we are going backwards, and this needs to be addressed.

I feel that many of the amendments in this group need to be discussed with the Minister. I hope I will see her nod her head. My amendments derive from a big committee of this House which thought a long time and took a lot of evidence on this. The amendments tabled by the noble Lord, Lord Holmes, have a lot of merit in them as well. When we sit down, we will certainly hear the warnings issued by the noble Baroness, Lady Kramer, in our ears, but I hope that she agrees to discuss those well before Report so that we attain some additional clarity and some independence for the data that comes to whatever it is that will scrutinise all this. In the meantime, I beg leave to withdraw the amendment.

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[Lord Tunnicliffe (Lab)]

My Lords, we have no amendments in this group. I have listened to this interesting debate. It comes back to the classic dilemma in all parts of life, from family dilemmas right through to how you manage an industry, and it comes right to this proportionality issue. It is very easy to create rules so simple that you cannot see what they are trying to achieve. It is very idealistic to try to create some ideas that the industry should contain. I look forward to listening to the Minister’s reply, but I have enormous sympathy with her, and I hope she might perhaps give some thought to whether we might try to develop some mechanism between now and Report to see if we can create common ground on this extraordinarily important issue.

[Baroness Penn (Con)]

My Lords, the Government agree with noble Lords that the efficiency, predictability and proportionality of financial services regulation are a particularly important issue, and one that the Government and Parliament should continue to hold the regulators to account on. We have heard in this discussion many different approaches and ways of getting at this issue and seeking to advance it. I hope that in my response I can set out how the Government have had those concepts at the forefront of our mind when looking at the framework, and I shall seek to support the points that have been made by noble Lords today.

Put together, Amendments 46, 54, 57, 64 and 82 from my noble friend Lord Lilley seek to introduce a new effective for the PRA and the FCA relating to predictability and consistency. As I have said, the Government agree that predictability and consistency are an important component of an effective regulatory regime. As observed by IMF studies, when independent regulators make judgments on the design of regulatory standards, they are more likely to deliver predictable and stable regulatory approaches over time, and thus the centrality of the independence of our regulators at the heart of our regime seeks to support those objectives.

As we have discussed in previous debates, the FCA and the PRA are required to advance their objectives when discharging their general functions, as set out in FSMA. The Government’s view is that the regulators’ objectives should be focused on the core outcomes they should seek to achieve. The Government agree that, where possible, the regulators should advance their objectives in a predictable and consistent way. The framework already addresses this through the regulatory principles, as set out in Section 3B. These regulatory principles aim to promote regulatory good practice. The statutory requirement in FSMA for the FCA and the PRA to consult on rule proposals seeks to ensure that there is a predictable approach to rule-making. As part of this consultation, the regulators must explain why the making of the proposed rules advances, and is compatible with, their objectives as set by Parliament in legislation and how the proposals are compatible with their obligation to take into account the regulatory principles. These requirements are designed to ensure that consumers, market participants and wider stakeholders have a meaningful opportunity to scrutinise and feed into the development of regulator policy, guidance and rules. It also ensures that stakeholders are aware of planned changes to rules and can engage in their development.

In addition to seeking to introduce the new objective, Amendments 54 and 64 would also insert a provision that would prohibit the FCA and the PRA from taking retaliatory action against firms that challenge regulatory decisions. While I understand that firms may be concerned about how an appeal or judicial review may impact their relationship with the regulator, the Government consider that it would be wholly inappropriate for a regulator to treat a firm differently simply because it had chosen to challenge a decision. The Government would expect a regulator to respond to any such challenges appropriately and professionally. I am not aware of any evidence that the regulators have taken such alleged retaliatory action, and firms already have avenues available to them to contest and appeal enforcement decisions. The Government therefore do not believe that an amendment is required in this area.

Amendment 85 seeks to restrict the regulators from enforcing rules made at a “high level of generality”, except in certain circumstances. The FCA’s approach to regulation involves a combination of high-level principles and detailed rules. We discussed this balance and the benefits of those different approaches earlier in Committee and I am sure that we will continue to do so. Through its Principles for Businesses, the FCA aims to encourage firms to exercise judgment about, and take responsibility for, conducting their business in line with those principles. When conducting the future regulatory framework review, the Government reviewed over 100 responses to two separate consultations, which concluded that the provisions concerning enforcement and supervision remained appropriate. Enforcement decisions are specific to the firm and the rules concerned, and the FSMA model requires independent supervision and enforcement.

Amendment 85 would also require that regulator rules are interpreted according to common-law methods of interpretation. The Government are repealing the prescriptive provisions in EU law though this Bill so that they can be replaced with domestic legislation and regulator rules made under FSMA. I reassure my noble friend that it will be up to the UK courts to determine how that domestic legislation and rules are interpreted.

I turn to Amendments 70, 72, 74, 77A, 122 and 144, which in various ways aim to ensure that the regulators act proportionately. Again, I emphasise that the Government agree about the importance of proportionality and agree with the words of my noble friend Lord Holmes when he spoke to his amendment on this. A number of the regulatory principles already address the themes of good policy-making that these amendments seek to embed. These include principles of efficiency and economy, proportionality, and requiring the regulators, where appropriate, to exercise their functions in a way that recognises differences in the nature and objectives of different businesses subject to requirements imposed by or under FSMA. The Bill also introduces these principles for the Bank of England in its regulation of central counterparties and central securities depositories.

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[Lord Thomas of Cwmgiedd (CB)]

Would the Minister be able to get the views of the FCA and the PRA on this matter? It would be interesting, in examining consistency and all these issues, to see if—hopefully—they could do that in no more than two pages.

[Baroness Penn (Con)]

Is the noble Lord referring to their views on the question of proportionality and efficiency, or on a specific case?

[Lord Thomas of Cwmgiedd (CB)]

On the specific question of drafting rules, what do they think their mandate is? Do they accept that the rules have to be proportionate and clear? It would just be very useful to know how they see their new approach to things. I think it can be done in two pages, but that is a good test.

[Baroness Penn (Con)]

I am sure that the regulators have provided some of those views already. For example, they gave evidence during the Commons Committee stage of this Bill. I do not want to speak for them but I absolutely undertake to the Committee to seek that from the regulators, and obviously it will be down to them as to how they wish to deal with the request. With that, I hope that noble Lords will not press their amendments.

[Lord Lilley (Con)]

My Lords, this has been a fascinating and valuable debate, the highlight of which was obviously the agreement between my noble friend Lady Noakes and the noble Baroness, Lady Bowles, on the disproportionality of the PRA. Another common feature of the whole debate was that everyone seemed to express concern about the lack of accountability of the regulators. I was encouraged by the Minister’s remark that she would look positively at the debate.

I am grateful for the support of my noble friends Lord Trenchard, Lord Naseby, Lord Sandhurst, Lord Roborough and Lord Holmes for the amendments that stand in my name. I am also grateful to the noble Lord, Lord Tyrie, and the noble Baroness, Lady Bowles, for applying their critical faculties to the amendments that we tabled. I will consider carefully what they said. It will be easier for me to respond when I can actually read the text rather than doing so immediately now—anyway, I only have time for a few words now—but I think I can assure them that the amendments would not require new rules to be predictable from old, existing rules, nor would they forbid new rules that were inconsistent with existing rules; it would just have to be explicit that they overrode an existing rule—although I may have misunderstood what they said.

The noble Baroness, Lady Bowles, mentioned that she is worried about excessive powers to lawyers and litigation. I am in the unusual position of being in alliance with lawyers. I got into trouble early in my parliamentary career by quoting

“let’s kill all the lawyers”

in a debate in which it turned out that I was the only non-lawyer. I think we have to recognise that the only alternative to the common law approach which we seek to entrench here, which is the purpose of the Bill, is the codified approach, which is very much more rigid and unable to respond quickly to the rapidly varying world to which the noble Baroness rightly referred, or simple discretion which may not lead to being capricious, but does mean that it is very unpredictable for practitioners who do not know how rules are going to be applied. I will, of course, withdraw the amendment, but I hope we will return to these issues on later groups and perhaps on Report.

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[Lord Tunnicliffe (Lab)]

My Lords, I do not wholly associate myself or my party with my noble friend Lord Sikka’s comprehensive description of the finance industry, but I go back to one important area. I mentioned earlier that my previous career had a lot to do with safety. One of the things that it brought out was that people readily forget the catastrophic because the catastrophic occurs so rarely that attention drifts away and they get on with the day to day.

We broadly support the growth and competitiveness concept, although its impact will be modest. It would be a miracle if it added 1% per annum to the growth of the UK. If we read Alistair Darling’s autobiography—and yes, I am aware of the Mandy Rice-Davies test, “He would say that, wouldn’t he?” but it reads pretty convincingly—we see just how close we came to a totally catastrophic situation. It was only saved by a number of individuals, including Alistair and Gordon Brown, taking the very brave decision to do what had never been done before, which was essentially to throw the whole economy at a guarantee of the banking system. That is a pretty dodgy thing to do and, frankly, if you look at the timeline, it got very close to a catastrophic situation.

When one is looking at catastrophic risk—a low probability, perhaps, but catastrophic—you have constantly to bear that in mind. I do not think that the average practitioner in the finance industry works like that; I feel that day to day they are making trades and so forth. The sense of the primary objective is that that should be the salient thought behind all their decision-making: “We must not create another catastrophic situation.” To be fair to the Government, over the past decade or so quite a lot of sensible legislation has been introduced to protect ourselves from catastrophic risk. The Bank of England has a department working away at the regulation of financial institutions to make sure that they are orderly, safe and so on.

I have forgotten what the words are, but the concepts of stability, security and probity must be there in the primary objective and must be well-defined and clearly prime—the top objective. After that, competitiveness, growth and so on would be great.

Our Amendment 65 was a probing amendment and it has worked very well. The noble Baroness, Lady Noakes, assured me—perhaps the Minister will use similar words—that there is no question about the primacy of the objectives, that it is set in other rules and that if I looked at all the rules together, I would not be worried about it. I think that is basically what she said, and I hope it is right, because it is absolutely right that we bear in mind protection from catastrophic risk.

I note the assurances that the Minister gave in her letter following Second Reading, but I am still not clear about the specific mechanism whereby the primary objectives are expressly meant to take precedence in FSMA. To me, it appears that they are indeed split up, but there is nothing to define what it means to be primary. I may be wrong in that concern, and I am here to be persuaded that I am wrong. The more effort that is put into persuading me, the more will go on the record and form the environment in which financial services are delivered. I feel concerned that there is nothing in legislation, in the regulators’ rulebook or elsewhere to guarantee the primacy of the FCA’s and the PRA’s most important objectives. However, as I said, that is an open question, and this debate has been good.

Regarding the international dimension, I see the concerns being expressed about giving it too much primacy—although I do not want to use that word, because it has the wrong effect. My memory is useless but, about two years ago, we had what I will roughly call the Basel III Covid legislation. Many of us were there to debate it. If I remember rightly, it took out the EU law and made space for the regulators to create the situation we are talking about now. My recollection is that aligning with Basel III and the FSB—or whatever it is called—became an objective within that. I see the Minister is nodding, so my memory has some fragments of it.

Once again, it is clearly a good idea to be that bit looser if we are to be innovative. The probing worked brilliantly, as I far as I am concerned. The noble Viscount, Lord Trenchard, quite openly said that competitiveness and growth should be equal to the regulators’ concern about stability and safety. Arguably, that is a properly viewed position, but it is not my position. Failure must be avoided—not quite at all costs but, wherever there is a debate between bigger risk and modest profit, the bigger risk should be avoided.

[Baroness Penn (Con)]

My Lords, I will speak first to Clause 24 before turning to the other amendments in this group. The Government consider that, alongside their core responsibilities, it is right that the regulators can act to facilitate medium to long-term growth and international competitiveness, reflecting the importance of the sector as an engine of growth for the wider economy and the need to support the UK as a global financial centre. Therefore, Clause 24 introduces new secondary objectives for the FCA and the PRA to provide for a greater focus on growth and international competitiveness. This will ensure that the regulators can act to facilitate long-term growth and competitiveness for the first time.

For the FCA, this objective will be secondary to its strategic objective to ensure that markets function well and to its three operational objectives: to ensure consumers receive appropriate protection; to protect and enhance the integrity of the financial system; and to promote effective competition. For the PRA, this objective will be secondary to its general objective to ensure that UK firms remain safe and sound and its insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are, or may become, policyholders.

This is a balanced approach. By making growth and competitiveness a secondary objective, the Government are ensuring a greater focus by the regulators on growth and competitiveness. However, by making these objectives secondary, the Government are giving the regulators an unambiguous hierarchy of objectives, with safety and soundness and market integrity prioritised.

As set out in Clause 24(2) and (4)(b) and in paragraphs 215 and 216 of the Explanatory Notes, Clause 24 does not permit or enable the regulators to take action that is incompatible with their existing primary objectives. It is therefore clear that the FCA’s strategic and operational objectives and the PRA’s general and insurance-specific objectives are prioritised ahead of the secondary objectives in the regulatory framework. I hope that that provides further reassurance to the noble Lord, Lord Tunnicliffe, on his Amendment 65 that, in instances where the regulators’ primary and secondary objectives are incompatible, their primary objectives will take precedence over the secondary objectives.

I turn to Amendment 49, tabled by the noble Baroness, Lady Bowles, which seeks to ensure that, when facilitating the new growth and competitiveness objective, the FCA does not consider the financial services sector specifically. The Government are committed to ensuring that the financial services sector is delivering for businesses and consumers across the UK. It is therefore right that the objectives of the financial services regulators reflect the Government’s view that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The Government are confident that the current drafting recognises that the levers with which the regulators can act are specific to the markets that they regulate—the financial services sector. We believe that this is a helpful clarification, and expect the new objectives to benefit the growth and competitiveness of the wider economy as well as of the financial services sector specifically.

I now turn to Amendments 51 and 60, tabled by the noble Baroness, Lady Bowles, concerning the efficiency of the regulators’ operations. I believe that we have discussed this in Committee before, so perhaps we will move on if the noble Baroness permits me.

That brings me to Amendment 48, also tabled by the noble Baroness Lady Bowles, which seeks to amend Clause 24 to include consideration of sustainability. The new secondary objective is clear that the regulators should seek to facilitate sustainable growth by specifically mentioning growth of the economy in the medium to long term. The Government do not want the PRA or the FCA to act in a way that benefits short-term competitiveness at the cost of long-term growth. However, the Government are aware that, increasingly, and particularly over recent years, “sustainable” has also been taken to mean green or environmental considerations by some stakeholders.

As discussed in previous groups, Clause 25 introduces a new regulatory principle to require the FCA and PRA, when discharging their general functions, to have regard to the need to contribute towards achieving compliance with the Government’s net-zero emissions target. Therefore, the current drafting of the objective is clear that economic growth should be pursued sustainably, and the Government are already strengthening the requirements for the regulators to consider environmental sustainability targets in undertaking their duties.

On Amendment 50, tabled by my noble friend Lord Altrincham, the Government agree that high-quality infrastructure is crucial for economic growth, boosting productivity and competitiveness. More than this, it is at the centre of our communities: infrastructure helps connect people to each other, people to businesses, and businesses to markets, forming a foundation for economic activity and community prosperity.

In the Chancellor’s recommendation letters to the FCA and PRA, of December 2022, he set out that the supply of long-term investment to support UK economic growth, including the supply of finance for infrastructure projects, was a key aspect of the Government’s economic policy to which the regulators should have regard. Therefore, the Government already expect that, when advancing their new growth and competitiveness objectives, the FCA and PRA should include investment in infrastructure among their considerations. There are a number of other aspects in this Bill, such as reform to Solvency II, which will remove barriers to private investment in infrastructure.

I turn to Amendments 47, 52, 58 and 61. Robust regulatory standards are the cornerstone of the attractiveness of the UK’s markets. Including a reference to international standards in the growth and competitiveness objective demonstrates the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards and maintaining its reputation as a global financial centre.

The noble Baroness, Lady Kramer, expressed the importance of those standards well. Many of the issues that regulators need to address require international co-ordination and co-operation. To address the Committee’s concerns, the Government also recognise that it will not always be appropriate to fully consider international standards—for example, if it is best for UK markets to go beyond the international standard or where nuances of the UK market mean that the international standard is not appropriate. Those international standards operate on a comply-or-explain basis, recognising that individual jurisdictions will sometimes need to tailor standards to their own markets.

No standard trumps the objectives, and the clause does not constrain pursuit of the objective in relation to standards that we have not signed up to or that the regulators do not think are relevant in pursuing their objectives. It is there to acknowledge the importance and role of international standards, but we appreciate this nuance, where we may need to look at those standards and either go beyond them or adapt them to the UK market. I appreciate that this is difficult to navigate, but I hope we have done so successfully.

I also reassure the noble Baroness, Lady Kramer, that the Government do not consider MRAs to be international standards. To expand on this further, we consider international standards to be those set by specific standard-setting bodies listed in the Financial Stability Board’s compendium of standards. These standards are internationally accepted as important for sound, stable and well-functioning financial systems, and include those from organisations such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. To reassure my noble friend Lord Trenchard, we are using our seat on those organisations to influence those standard-setting bodies effectively.

Alternatively, MRAs are international agreements subject to international law and based on the principle of deference, where the UK and another country agree to mutually defer to each other’s regulatory, supervisory and enforcement regimes. MRAs are therefore simply a vehicle to recognise where another country meets equivalent regulatory standards to those already established in the UK. They provide a mechanism to reduce barriers to cross-border trade and facilitate greater market access between the two jurisdictions.

[Baroness Kramer (LD)]

Would an MRA covering these issues be enabled only if an equivalence decision had already been provided by the Treasury? In other words, are these only for countries whose financial services industries are already covered by equivalence decisions or could they be in agreements where that standard has not been met in the eyes of the Treasury?

[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.

[Lord Vaux of Harrowden (CB)]

It is easily done.

[Baroness Penn (Con)]

When the noble Baronesses sign up to each other’s amendments, it can be confusing.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

If we do this right, we will have credit unions, community banks and mutual regional bank networks. Through that mechanism, we can begin seriously to see an end to financial exclusion. For a Government looking for levelling up, that is surely critical, and for all of us, at a time of huge economic pressure, surely those kinds of mechanisms will be necessary to rebuild our economy.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I will speak first to Amendments 55 and 241, tabled by my noble friend Lord Moylan, before turning to Amendments 67A, 75, 117 and 228, tabled by my noble friend Lord Holmes, the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer.

On Amendments 55 and 241, I am happy to report that action is already being taken to reduce barriers for retail investors, while ensuring that appropriate consumer protection measures are in place. The Government are reforming the UK prospectus regime through the powers that are being legislated for as part of this Bill. These reforms will remove barriers to retail participation in equity and bond markets by removing the duplication and disincentives that exist in the current regime. Additionally, the reforms will require the FCA, as the responsible regulator, to have regard to the desirability of offers of securities being made to a wide range of investors when making rules in this area.

Separately, the Government appointed Freshfields’ partner Mark Austin to lead the secondary capital raising review and have accepted all his recommendations addressed to the Government. One of the objectives of the review was to promote retail shareholders’ inclusion in further issuances by listed companies. I assure my noble friend that this is not jam tomorrow; the reforms to the prospectus regime are set out in a draft statutory instrument published alongside the Edinburgh reforms. Taking that SI forward is part of the first-priority tranche of work that will happen once we have passed this legislation. We have a very clear plan.

The remaining amendments in this group relate to promoting financial inclusion through a different lens from that put forward by my noble friend. The Government seek to ensure that people, regardless of their background or income, have access to useful and affordable financial products and services. We work closely with regulators and stakeholders from the public, private and third sectors to improve people’s access to useful and affordable financial services, and we are taking a significant step to protect the most vulnerable by legislating to protect access to cash through this Bill—something noted by my noble friend Lord Trenchard and others.

Amendments 75 and 67A, tabled by the noble Lord, Lord Tunnicliffe, and my noble friend Lord Holmes, respectively, seek to add financial inclusion to the FCA’s objectives. While I commend these amendments and agree with their intention, the FCA’s objectives are core to its functions and should not be changed lightly or without detailed consultation, given the complexity of, and the risk of unintended consequences for, the way financial services are regulated in the UK.

Where there are gaps in the market that mean that some consumers struggle to access appropriate financial products, it is right that the Government, not the regulator, take the lead on action to address them. The Government have done this by, for example, requiring major banks to provide basic bank accounts for those who might otherwise be unbanked.

The FCA plays an important role in supporting this work. In his evidence to the Public Bill Committee, Sheldon Mills, the executive director of consumers and competition at the FCA, highlighted the proactive approach that the FCA takes on this issue, in line with its existing objectives, working in partnership with Fair4All Finance and others, and using the FCA’s innovation labs to explore how innovation can promote financial inclusion.

Amendment 67A also highlights the important issue of the accessibility of financial services products. I know that my noble friend Lord Holmes is a champion of consumers in this area. I agree that it is important that this continues to be an area of focus for industry. I am pleased that UK Finance has been working closely with the Royal National Institute for the Blind to develop accessibility guidelines for touchscreen chip and pin devices, as well as an approved list of accessible card terminals. The Government’s Disability and Access Ambassador for the banking sector, Kathryn Townsend, is encouraging firms to drive a more consistent consumer experience, as well as continuing engagement with deaf advocacy groups to identify opportunities for improved accessibility. The Economic Secretary will shortly convene the next Financial Inclusion Policy Forum with senior representatives from across financial services and the third sector, which will include a discussion specifically on accessibility in financial services. I hope that this provides reassurance that the Government are taking this issue seriously.

Amendment 67A raises financial literacy. My noble friend is right to recognise the importance of financial literacy, and financial education forms part of a broad and balanced school curriculum. However, it is the Government’s view that delivery of financial literacy in primary and secondary settings is a matter for government, rather than for the financial services regulator.

The amendment refers to digital inclusion, an issue also raised by the noble Baroness, Lady Twycross. Again, we absolutely recognise that digital skills and access to technology are increasingly required to take full advantage of services made available by financial services providers. Some examples of action in this space are that the DCMS has negotiated a range of high-quality, low-cost broadband and mobile social tariffs for those in receipt of universal credit and other means-tested benefits. Libraries are also a key focus, able to serve as an alternative point of internet access with in-person support. The digital entitlement allows for adults with no or low digital skills to study for new essential digital skills qualifications for free. There are also banks and financial services providers taking their own action to promote digital skills with their customers.

Amendments 67A and 117 would require the FCA to report on financial inclusion, but that would largely duplicate existing publications, including the FCA’s annual reports, its comprehensive Financial Lives Survey, and the Government’s financial inclusion report, which details joint work with the FCA to promote financial inclusion. On digital inclusion specifically, Ofcom’s latest data on digital equality was published on 30 January.

Finally, I turn to Amendment 228, tabled by the noble Baroness, Lady Kramer. While I sympathise with the intention of the amendment—and I hope that I have set out some of the ways in which the Government are seeking to tackle some of the issues that the noble Baroness raised today—it has the potential for unintended consequences which could harm consumers. As part of the authorisation process, the regulators already take into account a range of different objectives, such as promoting effective competition in the interests of consumers, including those in low-income communities. Adding additional complexity to the process of acquiring a banking licence could create barriers to entry and therefore harm the consumers we are trying to help by reducing the provision of services in the market and limiting competition.

As I have noted already, there are other policies in place which will do this without creating potentially burdensome expectations, particularly on new entrants to the market—for example, through the provision of basic bank accounts. We have also taken action to increase the provision of affordable credit for vulnerable consumers, including those on low incomes, such as providing £3.8 million of funding to pilot a no-interest loan scheme.

I hope that I have set out for noble Lords the wide-ranging government work on the issue of financial inclusion—

[Lord Tunnicliffe (Lab)]

My Lords, it is obvious that there is a problem, because virtually everybody has spoken to a problem and said that it must be addressed. It seems to me that the speech the Minister just made was that it is all right, because all these things that the Government are going to do will make it all right. The beauty of the amendments that have been put forward is that somebody is expected to do something. If government has such an important role, who in government will be personally responsible for delivering the improvement that we all seek?

[Baroness Penn (Con)]

In government, the Financial Inclusion Policy Forum is jointly chaired by my honourable friend the Economic Secretary to the Treasury and a Minister from the DWP; I will confirm who to noble Lords, because I would not want to get it wrong. That is the forum by which the Government drive the work and bring other actors into this space to co-ordinate on issues.

We recognise financial exclusion and the need to promote financial inclusion as an important area of policy work. We recognise some of the gaps raised today. I would point noble Lords towards progress that is being made in some areas.

We have also heard today about a changing landscape and how we will need to continue our work to keep up with it. As use of cash changes, we are legislating to protect access to cash, but we also need to consider how we can promote digital inclusion, so that, as services move online, people can access them in the same way as they have been able to previously.

The point of difference is not whether there is a problem but whether it is for the Government to lead on co-ordinating the response to that programme, with an important role for the regulators, or whether it is the regulators that should have more emphasis on driving this work.

[Baroness Kramer (LD)]

Can I put in a real request to the Minister? I understand that she is keeping to her brief, but could she get back to the department and tell it that it is time to do something about this, not just to have endless meetings, gatherings, reports, reviews or pieces of minor tinkering at the corners about it? This needs a driven central initiative. If she can answer me at all, can she take that on and go back to the department to tell it that it is time to do, not just to talk?

[Baroness Penn (Con)]

I will absolutely take that back to the department, but I disagree with the noble Baroness that no action is happening on this issue. We talked about access to cash; that is being legislated for in the Bill. On access to low-cost finance, I have talked about the money that the Government have put in to pilot a programme of interest-free finance for those who are most vulnerable. We have talked about access to bank branches. I acknowledge that the initiatives on banking hubs have not been as fast as people would want, but they put forward a solution to an issue that we face. We agree that it is a common issue. I have given examples of what we are doing on digital inclusion. In a later group, we will discuss the importance of mental health. We have put in place the Breathing Space scheme for those who are in problem debt and have mental health problems.

Yes, there is a lot more action to take. I recognise the problem and I will take the noble Baroness’s words back to the department, but we are legislating on some measures in the Bill. I have set out very specific measures that we are taking in other areas. It does not mean that the job is done, but it does mean that action is happening.

[Lord Moylan (Con)]

My Lords, I am grateful to all noble Lords who have spoken in the debate and for the support that has been given generally for the amendments tabled. It is true that one or two noble Lords have quibbled about the detail of particular proposals in the amendments, but I think there was universal support for the general principles underlying them.

It falls on me briefly to deal with the quibbles raised by the noble Lord, Lord Davies of Brixton, because they were pointed directly at amendments in my name. First, he is right to say that over a period of 30 or 40 years there will be a large number of sociological and economic changes that might explain the appetite for different types of investment among the population at large, but surely he will accept that these are completely dwarfed and made irrelevant if the fact is that you are not allowed to purchase the investments in the first place. The object of the amendment here is to allow this to happen. If you have to put €100,000 on the table to buy a corporate bond, people are excluded in very large measure, and questions of their appetite for different types of risk simply do not arise. If there is routinely no retail element to a new issue of shares, retail investors will not be able to buy those shares, so that is that.

The noble Lord, Lord Davies, also picked me up on what I meant by regulated investments. It is true that if the amendment were to come back on Report, it should perhaps be drafted more carefully to say, “investments traded in regulated markets”. I accept that it might have been infelicitously drafted but, to give a more substantive answer, perhaps one should take a more apophatic approach and define what non-regulated investments are. They are things such as betting, spread-betting, contracts for difference and mini-bonds.

The noble Lord is concerned that putting your money into highly rated shares, corporate bonds or gilts might be a little risky and inappropriate for somebody setting aside money for the future, but he has not tabled the amendment that I would hope to see in that case that would have prevented them investing in all these different products, which are there freely available and which people invest in. As the noble Baroness, Lady Kramer, pointed out, the mini-bond crisis was about perfectly respectable people believing that they were investing in something that looked like a bond, when it was not at all, for a return that appeared attractive. If we do nothing for them and allow that, why are we worried about them investing in real bonds?

Finally, there is the question of whether by agreeing such an objective for the regulators they would in effect be giving advice. I simply refute that: to remove a barrier to investment is not to give advice. I do not know where the noble Lord keeps his money for a rainy day. Perhaps it is all in a savings account somewhere, but I would encourage him to think a little more broadly and to look upon various safe and regular opportunities that would be available to him for his spare cash if he were to swing in behind this amendment. I am sure he would benefit in many ways from that.

I turn briefly to the remarks of my noble friend the Minister. I am grateful to her for the encouragement she has given and will look carefully at what she has said. I am still not wholly persuaded that proceeding on the basis of the Treasury’s current work, rather than by way of legislation, is entirely the best way. I will consider whether these amendments, or one of them, might come back on Report.

On the broader question of the financial inclusion of people who are marginalised by the financial system—I hope I am not presuming too much if I speak for the Committee at large—my noble friend might want to reflect a little further on whether a process of engagement with noble Lords on all sides of the Committee who have brought these issues up would be beneficial between now and the issue returning on Report. I know that it is not in her personal nature to sound negative and unwelcoming, but her speech had that tone of saying that everything was a little too complicated and might have an unintended consequence. Well, anything might have an unintended consequence; by definition, one would not know. I wonder whether she might consider some process of engagement on the issue, because I think the feeling around the Committee is quite strong. With that, I beg leave to withdraw my amendment.

--- Later in debate ---

In 2022, the FCA’s fines exceeded £215 million. That is not vast, but it could make a big difference to the capacity to regulate and enforce in this area. In 2021 the fines amounted to £568 million. Again, there would be real sources of funds. I have not looked at fines from other areas of financial services enforcement. Would the Minister consider such an approach and ask if that money could be dedicated and fed back into the system? It is easy to see that one could create a virtuous circle of funding action which then enables more action to be taken and in turn funds more action. I think the United States enforcement service is now a profit centre. It is not only able to fund everything that it does but able to pass additional funds that it does not need to the Treasury. It is an extraordinary situation, but there is no reason we cannot replicate it and have something similar here.

[Baroness Penn (Con)]

My Lords, I will first cover Amendments 67, 71, 73 and 214 tabled by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Hunt of Kings Heath. The question of the FCA’s powers on fraud has been raised before in this Committee, as noted. Before I address the detail of the amendments, it may be helpful if I set out for the Committee the FCA’s role under FSMA in relation to fraud. The noble Baroness, Lady Kramer, asked me specifically about this last Monday. I will write, but I thought it might also be useful to set it out in the context of these amendments.

Although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. If fraud is committed by an authorised firm in the course of a regulated activity, or if it carries out a regulated activity without the correct authorisations, the FCA will be able to take action against the firm on the basis of a breach of the FCA’s rules or other FSMA requirements. If a senior manager within the firm is responsible for the fraud or has culpably failed to prevent one occurring within the area of their responsibility, the FCA can take action against that firm and senior manager.

Where a firm is authorised for one activity, but is also carrying out an unregulated activity, FCA powers in relation to the unregulated activity will depend on the specific details of the case. In the case of a serious fraud, the FCA is able to take action, including on the basis that the firm or the senior manager is not fit and proper. If a firm provides regulated products or services without being authorised, unless exempt, it may be carrying on unauthorised business in contravention of the “general prohibition” in Section 19 of FSMA.

The FCA does not have powers to investigate a firm that is unauthorised and not carrying out any regulated activities unless, for example, that unauthorised person is carrying out market abuse—where the FCA has a specific role. In these circumstances, where problems fall outside the FCA’s statutory remit, the FCA assists other agencies and regulators wherever it can. That is important context for the noble Baroness’s amendments.

As I said last week, the Government take the issue of fraud very seriously. I repeat the point made by the noble Lord, Lord Hunt, that the prevention of fraud is a cross-cutting policy that requires a unified and co-ordinated response from many stakeholders. However, I acknowledge that the financial regulators, including the FCA, play a critical role in that, but many levers for change also sit elsewhere.

The Government’s view is that the FCA’s broad existing remit in relation to reducing and preventing financial crime, including fraud, allows it to take proactive steps to tackle fraud and wider financial crime, while driving a whole-system approach with relevant stakeholders. The FCA is an active and named agency in the national economic crime plan and the soon-to-be-published fraud strategy. Most crucially, the FCA and the PRA require regulated financial services firms to maintain effective systems and controls to prevent their being used to further financial crime, including fraud. In the first half of 2022, UK banks blocked over £580 million being stolen from customers. In its 2022-23 business plan, the FCA announced that it was developing its approach to supervision to include further oversight of firms’ anti-fraud systems and controls.

The noble Baroness, Lady Kramer, asked about the number of vacancies in the FCA for those working on fraud. I will write to the Committee to provide that detail. Under the FCA’s existing remit, it is able to have a leading role in this important issue. It does not require further powers to pursue fraud, but I will come on to address other points raised in the Committee about what more must be done overall about fraud.

In respect of Amendment 214, as noted by the noble Baroness, Lady Bowles, the Government are currently assessing options presented by the Law Commission for strengthening the law on corporate criminal liability, including for fraud. This includes committing to address the need for a new offence of failure to prevent fraud through the Economic Crime and Corporate Transparency Bill. I note the differences highlighted by the noble Baroness, but the Government believe that that Bill is the right approach and vehicle for dealing with the failure to prevent offence.

Amendments 209, 210 and 211, tabled by the noble Lords, Lord Tunnicliffe, Lord Hunt of Kings Heath, and Lord Davies of Brixton, respectively, relate to a national financial fraud strategy. As I have said, the Home Office will shortly publish a new strategy that will set out the Government’s plan on fraud, including fraud prevention, consumer protection and criminal prosecution. I am afraid that I did not read the Sunday papers as closely as other noble Lords, but I hear, understand and note the great interest in the strategy from this Committee and a desire to see it published as soon as possible. I reassure noble Lords that that continues to be a key priority for the Home Office, which is working closely with the Treasury and other government departments to make sure that we get it right.

[Lord Hunt of Kings Heath (Lab)]

I am grateful to the Minister for giving way. As part of this work, are the Government looking at the costs to the various statutory agencies of pursuing fraud? The noble Baroness, Lady Kramer, raised the example of the cost to Thames Valley Police—I think—of a prosecution, which on their budget was enormous. The fine was substantial, but there seemed to be no way of compensating the police for those costs. Can the Minister say whether that will be looked at within the strategy?

[Baroness Penn (Con)]

Funding is of course an important part of any strategy, and I have set out to noble Lords previously the increased funding that has gone to the specific issue of tackling fraud. I will turn to the specific proposal from the noble Baroness a little later, but I understand the point about not just the amount of funding but the incentives that different approaches can create.

The noble Lord, Lord Tunnicliffe, and other noble Lords talked about the devastating personal costs that fraud can have and the societal costs that having high levels of fraud in our society can bring. I agree with noble Lords on that. The noble Lord spoke about compensation not overshadowing the need for investigation and prosecution, and I also agree with that. Those considerations are all being taken forward through the strategy.

--- Later in debate ---

[Lord Sikka (Lab)]

I am encouraged by the Minister’s determination to tackle fraud. Can she answer the three specific questions I asked? First, can she give us a commitment that a copy of the Sandstorm report in relation to BCCI, which is now more than 30 years old, will be placed in the Library of this House? Secondly, can she make a statement now or come to the House soon to tell us why the Government covered up criminal conduct by HSBC in the US and how many other instances there are of that kind of cover-up?

Thirdly, in this country we have virtually eliminated the risk of bankruptcy for major banks and insurance companies. That then raises questions about the pressure points on directors to behave and act honourably. Fines are fairly puny and have not made much of a difference. Personal prosecutions of directors of banks hardly ever take place, and neither do they face any personal fines. Can the Minister explain what the pressure points are on the directors of major financial institutions to act with honesty and integrity?

[Baroness Penn (Con)]

I am afraid I will not be able to address the noble Lord’s first two points, but I will happily write to him. On his third point, I referred to the fact that, as part of the Economic Crime and Corporate Transparency Bill, we are looking to take forward the issue of corporate criminal liability and the offence of failure to prevent fraud, which would strengthen action in the areas he talks about.

I was talking about our work with other sectors. My noble friend Lord Northbrook and the noble Lord, Lord Sikka, raised the issue of online fraud. There is an intention to bring forward a tech sector charter with industry, to include public and private actions to drive down fraud in this area. Of course, fraud has been brought into the scope of the Online Safety Bill to better protect the public from online scams through, among other measures, a new stand-alone duty requiring large internet firms to tackle fraudulent advertising, including that of financial services.

The Government also recognise the particularly devastating impact that fraud can have on the elderly and the most vulnerable people in society and on people’s mental health. They have taken various steps, including banning cold calls from personal injury firms and pension providers and supporting National Trading Standards to improve the quality of care available to vulnerable fraud victims. More broadly, the FCA’s guidance on vulnerability explores how firms can understand the needs of vulnerable customers. This includes those who are older or have mental health conditions and sets out how the sector can provide targeted services for this cohort, including in the context of fraud. Where firms fail to meet their obligations to treat customers fairly, the FCA will take further action. I hope noble Lords are assured that further work is being taken forward on data sharing and on supporting older people and those with mental health conditions who are victims of financial fraud.

The noble Lord, Lord Davies of Brixton, mentioned measures in the Online Safety Bill, as have I. I have also mentioned the measures in the Economic Crime and Corporate Transparency Bill and revisions to the Data Protection Act. I am cognisant of the need to ensure that this work is well co-ordinated and that the progress we are making in other Bills is co-ordinated with the work we are doing on this issue more generally.

I turn finally to Amendment 217. Currently, the proceeds of such fines imposed by the courts must, by law, be paid—

[Lord Hunt of Kings Heath (Lab)]

I am sorry to interrupt the Minister again, but her comments have prompted a thought. Many of us are trying to cover, albeit not always successfully, three or four different Bills that are running through your Lordships’ House with slightly similar amendments around this issue of financial fraud. I do not know whether it would be possible for the Ministers dealing with all these Bills to come together at some point for a more general discussion; it might make this easier for us all. The Minister will know that these debates are going to be repeated on a number of occasions.

[Baroness Penn (Con)]

I will absolutely take away the noble Lord’s suggestion. I cannot speak for others but I would be happy to engage further on this before Report, drawing on the other strands of government work; I agree with the noble Lord that it might be useful to have other Ministers there too. I recognise that the other Bills are not as far along as this one is, so we will not be able to pre-empt some of that work, but I think we can co-ordinate it for noble Lords if that would be helpful.

Finally, I was dealing with Amendment 217 and noting that, by law, income from fines imposed by the courts needs to be paid into the consolidated fund. That income is not ring-fenced but is used towards general government expenditure on public services. The Government agree that it is important for bodies responsible for investigating and prosecuting fraud to be appropriately resourced to discharge their responsibility. The NCA’s budget is made up of a number of different funding streams. That budget has increased every year since 2019-20 and, as part of the 2021 spending review, it was allocated a settlement of more than £810 million. This represents an uplift of approximately 14%, or £100 million, compared with the previous spending review. The noble Baroness, Lady Kramer, asked me a few more specific questions beneath those headline figures; perhaps I can write to her and the Committee with that information.

The FCA and the PRA are operationally independent regulators funded by a levy on the firms they regulate. I would like to reassure the noble Baroness that the regulators already have the power to ensure that they are resourced appropriately, without the need to divert funds away from general government expenditure. As I said to the noble Lord, Lord Hunt, I recognise the important principle behind this amendment—that consideration should be given to how the proceeds of fines can support the costs of enforcement activity.

[Lord Northbrook (Con)]

Can the Minister address the point about Thames Valley Police not being reimbursed for the £7 million it spent, which has discouraged other police forces from carrying out those sorts of investigations? Will there be any sort of move to reimburse police forces investigating crimes of this sort?

[Baroness Penn (Con)]

I have heard the point and I acknowledge the principle that this amendment seeks to explore in terms of those incentives, but I point to the NCA’s budget and the regulators’ budgets. We seek to ensure that enforcement agencies have the proper money available to them to take enforcement activity. I also point out that, while the funds currently go into general expenditure, that funding is spent on other public services, so it does not go unspent elsewhere.

[Lord Flight (Con)]

This point seems absolutely central to me. Unless police forces have either a strong negative or a strong positive incentive, they are not going to be bothered, if you like, to prosecute serious fraud crime. I do not know what the Government’s preference is, but it has to be one way or the other.

[Baroness Penn (Con)]

I have listened very carefully to the debate, and I see the point that noble Lords are making. This operates in other areas of government—there is the Proceeds of Crime Act and how that operates—but I slightly counter leaning too heavily into the fact that the police would have no incentive to investigate serious organised crime unless the costs of the investigation and the prosecution are reimbursed to them. Their fundamental role is to investigate and prosecute crime. I understand that there is a complex landscape when it comes to investigating and prosecuting fraud, and that is something that the Government have tried to tackle with the establishment of the economic crime command at the NCA—but it is ongoing work for us. The challenge before me today is that the funding that comes from these fines currently goes to the consolidated fund and is spent elsewhere on public services, so any change of this nature would have implications that go—

[Baroness Kramer (LD)]

If the Minister is able to persuade the Treasury or the Government to look again at this issue, can she make the point that, if you can get much more activity from the police forces on pursuing fraud, you end up with much more coming in in fines? To look at the US example, it makes far more money out of financial crime because it prosecutes financial crime far more extensively.

[Baroness Penn (Con)]

I absolutely note the noble Baroness’s point. That same principle has informed our approach to proceeds under the Proceeds of Crime Act, so this has happened elsewhere in Government.

I was going to note that, previously, the FSA was able to keep all the income it took from penalties and use it to subsidise the levy it charged on the firms it regulated. That was changed because, when the regulators took a large amount of money from those they had fined, they reduced the charges they made on those firms. In thinking about these issues, we would want to avoid similar unintended consequences in the future.

I close by saying that I have heard noble Lords’ strength of feeling on this debate. As I said on the previous group, I am always open to meeting noble Lords to discuss issues further. We have different ways in which we think those issues can be tackled, but it is always right to see what more we can do. The noble Lord, Lord Hunt of Kings Heath, suggested perhaps having a co-ordinating meeting on fraud, particularly to cover the specific issues raised in the different Bills before your Lordships. I will endeavour to take that forward ahead of Report.

[Baroness Bowles of Berkhamsted (LD)]

Your Lordships will be pleased to know that I cannot possibly go through everything, yet again, that has been spoken about. I thank all noble Lords who have spoken in this debate. The Minister must have heard the concern from all sides of the Committee.

The only bit of good news that I can hang on to from what was said is that more work is being done on data sharing between banks. That is important. The list of roles of the FCA just proves that it does not have a great deal of power to do things within financial services in general. It can do things with regulated bodies, but that is very limited, as we discussed previously, so I will not go into it again. It can do things with bodies that are pretending to be regulated but are not, but we are for ever bashing up against this regulatory perimeter, one way or another. That just does not deal with fraud, because fraudsters are well aware of it and are going to use it.

We have tried to cover various different types of fraud. Fraud by and in financial services surely should be caught, even if it is by a regulated entity but in an unregulated area. The financial services regulator should still be able to prosecute the entity, not just through cases that deal with criminal matters which it can take; there should also be some regulatory approach. Then there is fraud in which financial services are the final vehicle. Financial services are in a special place because, ultimately, how can you monetise your fraud? You have to put it through a bank or somewhere else, no matter whether it was started or perhaps enabled by a telecoms company, online platform and so on. Ultimately, financial services firms have a special duty for extra vigilance, because that is where this all funnels down.

I agree that probably more has been done to capture these things in financial services than in some of the online platforms and telecoms companies. I will not go through the whole of the very thick fraud report, but there are issues in it that go across the piece. That is part of the problem. We have this complete alphabet soup of organisations that are supposed to be helping us address crime, and fraud in particular, in different ways. However, it is not well co-ordinated, and fraud falls between the gaps, and so it is with the financial services side of it.

One thing that was in the report from the Fraud Act committee was about engaging regulators more in the fight—that is, regulators in general—through having regulatory offences. Here, the imagination has to be used. We should not just pin down regulators to doing very small things within a tiny regulated bit, while everywhere else people can either get away with it or it has to go over to less specialised people to deal with. There are big holes, and we will have to come back to this.

At the bottom of it, there are issues around the funding. You will have to fund regulators more if they are to address fraud more. I do not see any harm in the recycling of fines. They should not be recycled so as to say “Right, now the levy is less”, but they could be recycled specifically for prosecutions. Given that you can turn a profit from them and that you are helping individuals who have had their money stolen, it is very bad if the Treasury does not look at that more favourably. Everybody is crying out for this, but we acknowledge that you have to have money to do it.

For now, I will obviously withdraw my amendment. However, we will have to come back on Report with one or two amendments aimed at furthering things, unless the Minister is able to persuade the rest of the Treasury that it needs to act in this area, as there would be ways in which it could ring-fence the financing and turn a net profit.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, let me start by dealing directly with Amendment 76, moved by the noble Lord, Lord Sharkey, and spoken to by many other members of the Committee.

I assure noble Lords that, in coming to this debate, I took the time to remind myself of our debate on the then Financial Services Bill in 2021; it is either an advantage or disadvantage, depending on your perspective, that I participated at the time. It is worth going through what that Bill, now the Financial Services Act 2021, required. It required the FCA to consult on whether it should make rules requiring regulated financial services providers to owe a duty of care to consumers. It also set out that the consultation must include

“whether the FCA should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care”.

The then Bill further set out that the consultation must be carried out by the end of 2021 and any new rules introduced, if considered appropriate, before 1 August 2022. The FCA publicly consulted on its consumer duty in May 2021 and again in December 2021, and issued its final consumer duty policy statement in July 2022. In its consultation, the FCA noted that its proposals met the requirements in the Financial Services Act 2021.

[Baroness Kramer (LD)]

I think the Minister said that the legislation, as it finally went through, gave the FCA the option of either a duty of care or something else. Did that imply that it could be much weaker than a duty of care—and did anybody signing up to it understand that?—or was there a sense that it might be done in a different way but would be equally as strong and effective as a duty of care?

[Lord Flight (Con)]

The other fundamental point is that it is not the law; it is a sort of quasi-law that does not have the same power as law.

[Baroness Penn (Con)]

If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.

The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.

The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.

I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.

The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.

In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.

[Lord Sharkey (LD)]

Before the Minister moves on, what are her views on the point I made about “reasonable expectations” for consumers, which is the standard required by firms to comply with the terms of the new consumer duty? The Minister will have heard the historical criticisms of the notion of reasonable expectations for consumers. How would she feel about having this concept at the heart of this new duty?

[Baroness Penn (Con)]

The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.

[Baroness Kramer (LD)]

Can I ask the Minister to follow up seriously on this? The reasonable expectation point matters so much. If it is a case only of outcomes, but that is then qualified by reasonable expectations, the reasonable expectations provide a complete out for PPI, interest rate swaps or virtually anything else that we see. The core concept of the consumer duty is that somebody has to be behaving outside the norm within the industry. The problem is that the norm within the industry was abusive.

[Baroness Penn (Con)]

The points that I gave in reply to the noble Baroness’s specific question on PPI and interest rate hedging products were in the context of the consumer duty as written, with the reasonable expectations provision in there. However, of course I take seriously the point raised by the noble Lord, Lord Sharkey, and I will write to the Committee to further expand on that.

[Baroness Bowles of Berkhamsted (LD)]

My recollection from the passage of the 2021 Act was that the final wording was government wording, put in as a concession to amendments from my noble friend Lord Sharkey. The government amendment said that a duty of care, or variations thereof, could be consulted on. Was it the Treasury’s, or the Minister’s, expectation at the time that it would be severely diluted? Was that the point of those extra bits?

[Baroness Penn (Con)]

I think I said directly what was required of the FCA, and the FCA has fulfilled its obligations under that Act. Furthermore, the FCA is not of the view that it has diluted the approach; it has taken a different approach from the duty of care. I have attempted to set out some of the reasoning and thinking behind the approach it has chosen to take versus the alternatives that were put to it. I am happy to write further.

[Lord Sharkey (LD)]

I am afraid to say that I am not sure I take much comfort from the FCA saying that it is right. Mandy Rice-Davies would know how to deal with that. My next question is about the lack of redress provided by the new consumer duty.

[Baroness Penn (Con)]

With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.

Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.

The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.

Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.

[Lord Sikka (Lab)]

Could the Minister clarify something? If I buy a bar of chocolate, the producer owes me a duty of care and, if I get injured, I have a right of redress. If I buy financial services, why can I not have the same rights?

[Baroness Penn (Con)]

My Lords, the concept of a duty of care in financial services may be different to the concept of a duty of care in other contexts. This was considered very carefully and consulted on by the FCA in 2019 and in 2021. It considered these questions and the issues we have discussed in the Committee today.

[Baroness Altmann (Con)]

I thank my noble friend for giving way. On these consultations, did the financial services companies generally respond not wishing to have the right of redress? Were the consumer organisations in favour of it?

--- Later in debate ---

[Baroness Penn (Con)]

I do not have a breakdown of the different responses to the consultations. However, as I said, in its feedback statement on a previous consultation on the duty of care, the FCA noted that industry stakeholders did not support a statutory duty of care. It also noted that a number of consumer groups did not support a statutory duty of care. I can point back to when that was considered in 2019 as not being a single view from a single source of consultees.

[Baroness Bowles of Berkhamsted (LD)]

One is a number, as I was always taught when I was training as a patent attorney. It might mean that one consumer organisation did not agree, but the vast majority did.

[Baroness Penn (Con)]

The noble Baroness has made her point.

I was turning to the private right of action, which was also consulted on by the FCA. It has concluded that it will not be beneficial at this time to introduce a private right of action, as it sees benefit in giving firms time to implement the significant changes that the duty entails without the threat of private action.

However, the FCA has committed to keeping this matter under review. The FCA has the power to introduce a private right of action through its rules, without the need for legislative change, if it considers it appropriate to do so in future. In addition, as noble Lords know, consumers will remain able to seek redress via the Financial Ombudsman Service where they believe a financial services firm has breached the consumer duty.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

The test put forward in reply to the first group was all about the public interest. I accept that the Government and Ministers always have to look to the public interest, but ultimately what greater test of and what greater body for the public interest do we have in this country than Parliament? That is where the sovereignty, if you like, of public interest lies. If you are not going to let Parliament in on the act then you are not acting in the public interest.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government are keenly aware of the interest in Parliament in the appropriate committee structures for scrutinising the regulation of financial services and will listen to the debate that we have on all the different groups very carefully. However, as noble Lords have noted, and I note myself, Parliament is of course responsible for determining the best structure to scrutinise the regulators.

As other noble Lords have also recognised, this debate has been had across different parts of Parliament over previous years, including during the Government’s consultation on our proposals. As my noble friend Lady Noakes said, the Treasury Select Committee considered this question in its report of June 2022, Future Parliamentary Scrutiny of Financial Services Regulations. That resulted in the establishment of a new sub-committee for scrutiny of financial services regulations. I also note that the All-Party Parliamentary Group on Financial Markets and Services published a report in February 2021, which recommended the creation of a Joint Committee.

I note that my noble friend modelled her amendment on the provisions relating to Parliament’s Intelligence and Security Committee, which is a Joint Committee set up on a statutory basis. Let me say to the Committee that the requirements applying to the ISC are quite unique, given the extreme sensitivities concerning the operation of the intelligence services. A large part of the provisions related to the ISC are about limiting its scrutiny powers to ensure that the intelligence services can operate and that the information they require to do their jobs is appropriately protected in those circumstances. The financial services regulators do not handle such sensitive information so the Government consider that a similar approach in statute is unlikely to be required in this instance. As I have said, it is not for the Government to impose an approach on Parliament.

I recognise the contributions from noble Lords saying that, by amending the Bill to create a Joint Committee, Parliament would be expressing its view. However, the point I would make in relation to that is that Parliament has the capability to set up Joint Committees without the involvement of government; they are usually established by Standing Orders in both Houses. This process does not require legislation. Introducing a Joint Committee at this stage of the Bill would be a significant change to the structure of the scrutiny of financial services. There is already a mechanism by which Parliament can establish such a Joint Committee should it wish to do so. Through this Bill, the Government intend to ensure that Parliament has the information it needs to conduct effective scrutiny of regulators, whatever structure it determines to be correct for doing so.

Clauses 36 and 46 and Schedule 7 require the regulators to notify the Treasury Select Committee of their consultations and draw the committee’s attention to specific sections, including those that deal with how the proposals advance the regulators’ objectives and how they have had regard to the regulatory principles. Those references to the TSC are in line with wider requirements elsewhere in existing financial services legislation, which establish that committee as the main committee for financial services matters. However, I note the wide range of sincerely held views on this matter and the fact that a number of different committees have previously been involved in scrutinising the wide breadth of financial services regulation.

[Lord Forsyth of Drumlean (Con)]

I am trying to follow the logic of my noble friend’s argument. If her argument is that Parliament can set up committees so there is no need for legislation, why is it necessary to reference the Treasury Select Committee in the legislation?

[Baroness Penn (Con)]

In the legislation, the Government are seeking to formalise and make explicit some of the ways in which committees can have their work facilitated. I recognise that this Bill refers to the Treasury Select Committee. That is the case in existing financial services legislation; for example, Schedule 1ZA to FSMA requires that the person appointed as the CEO of the FCA must appear before the TSC before their term can begin. Also, when appointing independent reviews of ring-fencing and proprietary trading, as required by Sections 8 and 10 of the Financial Services (Banking Reform) Act 2013, the Treasury was required to consult the TSC.

[Lord Vaux of Harrowden (CB)]

I am struggling with the logic here. If it is the case that scrutiny by the Treasury Select Committee is in previous legislation, why is it wrong to change that and enhance the scrutiny in this way? Logically, the two seem to be the same thing.

[Baroness Penn (Con)]

Perhaps I could finish my point; we will also come to this issue in the next group. In seeking to ensure that the relevant committees of Parliament have the information that they need to do their jobs, the Bill references the TSC, but I acknowledge that other committees in Parliament have done this role in the past or may wish to do it in future. That is something we will want to reflect on in our discussions of both this group of amendments and the next one. I recognise the point that has been made to me and will, I think, be made to me again in our debate on the next group. Although there is precedent for the TSC—indeed, it has set up its own sub-committee on this matter—I completely see the value of contributions of committees from this House or, if Parliament determined it, Joint Committees. We want to reflect carefully on how we can ensure that we are able to facilitate that also.

The noble Lord, Lord Vaux, invited me to reflect on this discussion and discuss with noble Lords between Committee and Report if and how we can take the thoughts and ideas further. That is something that I would be very happy to do. We will reflect on the points raised during this debate and consider them carefully before Report.

I wanted to make two points regarding this group. First, it is for Parliament to determine its committee structure and it has the ability to determine that, including the establishment of a Joint Committee, through existing procedure. Establishing a Joint Committee through statute is the exception rather than the rule and reflects the specific circumstances of the Intelligence and Security Committee. It is, I think, the only committee that has been established by statute in the last 100 years or so.

The other point, which we will discuss further, is that although we do not want to determine the correct committee structure, we do want to ensure that committees have the information they need to do their work. We have put clauses in the Bill to reflect that but, as I believe we will come on to, we will want to consider whether they fully reflect the work done in both Houses to scrutinise the regulators.

[Baroness Bowles of Berkhamsted (LD)]

I do not know whether the Minister is going to come on to this, but I hope she will also say something about what I called the consequences of scrutiny and what my noble friend called accountability. We can set up all the committees we like within the permissions of the parliamentary structure, but the point is what the Government then do and take notice of. There is no point in doing it otherwise. That is what we want to hear: how are they going to, as I would say, put wheels on it so that the reports are acknowledged? We are not saying that the Government or the regulators have to take everything but they at least need to comment and such things. Will the Minister say something about that, please?

[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.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, I hope I will be forgiven for not going through my various amendments. Their essence seems to be in the general direction of this group of amendments and I think it highly likely that, between now and Report, the supporters of this group will knock together a cohesive set of amendments to achieve our common objective. I know that the noble Lord, Lord Forsyth, finds it painful but we are agreeing with each other on this group.

One of the problems of society is that people grow old in waves. We are already running out of people who have forgotten about the last financial crisis. It was by a hair’s breadth that the economic system in the world did not fail. It took some brave decisions, in this country in particular and in the United States, to save the world from an economic catastrophe. This is different from the Intelligence and Security Committee but in no way is it less important. It is crucial to this nation.

We are suggesting that we in this House should be a backstop. That is not particularly surprising because that is what we do all the time. When the Government do not have a working majority, I believe that they are much more alert to what happens in this House because, suddenly, they are all there, they have their majority, they have got something through the House of Commons but then it runs into the Lords and new questions are asked. People spend a lot of time worrying about particular points. Yes, our role is a backstop, but we could not be one as the Bill is drafted at the moment because it sees two levels: the House of Commons level and the House of Lords level. This Bill brings us into parity of access. It is not nearly as comprehensive as the proposal from the noble Baroness, Lady Noakes, but it is a basic matter of equity to bring this on to a level playing field.

My next point concerns the issue of volume. The volumes will be very significant. One of the best things that the House of Lords does is its committees, where people actually put the time in. I really am quite pleased that I avoided becoming an MP. I only aspired to it before I knew what it was all about. Once you are an MP—I hope that ex-MPs will interrupt me if I am wrong—the first thing it is all about is getting re-elected. That requires a lot of work in the constituency and all that sort of thing. That is all part of the democratic process but the volumes need the sort of people who are in this House—as the noble Baroness, Lady Bowles, said, they almost self-select—to put the effort and energy in.

Scrutiny is not a negative process. Too often, in the way we run bits of society, it is a single heroic leader passing down the rules, but very good organisations encourage dissent in their top teams—not external dissent but internal dissent where people ask, “Do you really mean that? Have you thought through the consequences of that?” The effect of those processes is extremely benign. Either things get changed for the better or people understand what they are saying better and are able to present it better. Scrutiny is an extremely positive thing.

The mood that has got us here today has been around for years, I would say. We need a discontinuity; this group of amendments is the minimum discontinuity that I believe this House will tolerate. We will all be working across the House over the coming weeks to put together something that cannot be resisted. I hope that the Minister does not floor us by coming forward us early on in discussions with some sensible concessions to embrace the direction of this group.

[Baroness Penn (Con)]

My Lords, first, I will briefly speak to the government amendment in my name in this group—I feel I should—before turning to the substantive measures raised by the debate.

Amendment 151 corrects a minor drafting error in Schedule 7 to the Bill. The current drafting requires the PSR, when notifying the Treasury Select Committee of consultations, to set out how the proposals are compatible with the regulatory principles. However, the Financial Services (Banking Reform) Act 2013, which established the PSR, requires it to have regard to its regulatory principles. The Government are therefore bringing forward this amendment to Schedule 7 to align this Bill with that Act. The amendment also aligns the requirements on the PSR with those imposed on the FCA and the PRA through Clause 36 of the Bill.

I turn to the amendments tabled by my noble friend Lord Forsyth and the noble Lord, Lord Tunnicliffe. Through FSMA and, in respect of the PSR, as I just noted, FSBRA 2013, Parliament sets the regulators’ objectives and gives them the appropriate powers to pursue those objectives. I therefore agree with this Committee that Parliament has a unique and special role in relation to the scrutiny of the FCA, the PRA, the PSR and the Bank of England.

I also agree that effective parliamentary scrutiny provides a valuable service for consumers, firms and the regulators themselves. It can help ensure that the regulators’ resources are appropriately targeted to consider appropriate democratic policy input from Parliament and bring important public policy considerations into focus.

I recognise noble Lords’ point that regulators in this sector are in a somewhat unique position and the approach that we take to financial services regulation is somewhat unique in the level of delegation that we give regulators in their rule-making. The Government’s approach, through our FRF consultations and this Bill, is an attempt to recognise that somewhat unique position and role of regulators in this sector, their wide remits and their position as independent public bodies that are accountable to Parliament.

As I mentioned in the debate on the previous group, I will set out the rationale for the Government’s approach in the Bill and our consultations. Our intention is to ensure through the Bill that the Treasury Select Committee has access to the information needed to best scrutinise the work of the regulators. The requirements for the regulators to notify the TSC in Clause 36, and the PSR in Schedule 7, are in line with requirements elsewhere in FSMA that establish the TSC as the main committee for financial services business. This is intended to support more effective accountability and scrutiny of the regulators by Parliament as a whole.

The Bill requires that notifications sent to the TSC must be made in writing. As is usual practice, the Government expect this correspondence to be published. It will therefore facilitate broader awareness of the regulators’ consultations and enable relevant Lords committees to consider the matter. The clauses also require the regulators to respond in writing to formal responses regarding their consultations received from any parliamentary committee. The Government recognise the significant interest of this House and Committee in ensuring that all committees conducting regular scrutiny of financial services are adequately notified of the regulators’ consultations to ensure that they have the information required to conduct that scrutiny.

As I said in the previous debate, parliamentary scrutiny is first and foremost an issue for Parliament to consider. It is not for the Government to determine the best structure for ongoing scrutiny of the financial services regulators, but we do have a role in setting out the suitable mechanisms by which the regulators must give Parliament the appropriate opportunity to scrutinise the work of the regulators in taking forward their functions. I would like to reassure noble Lords that the Government have heard the points made in the debates today and that ahead of Report we will carefully consider the views expressed today.

I recognise the level of consensus among speakers in this Committee. My noble friend picked up my point and said that there was not a range of views on this issue. In the debate on the previous group—and we have touched on it in this debate—in some respects we are talking about the establishment of a Joint Committee of both Houses. If you look across both Houses, there is a range of views about how this should be taken forward. I will listen very carefully to the views of this Committee as we conduct our scrutiny of the Bill at this end—in our House—but, when I made that point, I was maybe pointing to the whole of Parliament, not just our end of it.

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[Lord Tunnicliffe (Lab)]

My Lords, I think I want to commend the Government on actually bringing in the concept of cost-benefit analysis panels. Generally speaking, the amendments in this group elaborate on that and probably make them better balanced. I will certainly be interested to hear the Government’s reaction to them.

We have Amendments 131 and 140 here, which would require the FCA and the PRA respectively to put on their CBA panels

“at least three individuals with experience and expertise in the field of economic crime, with one drawn from the public, private and third sectors”

and to consider

“any economic crime risks posed”

by any new rules they propose. These amendments have come from thinking at the other end and from the organisation Spotlight on Corruption. I thank it for contributing its expertise, and Emma Hardy MP for pursuing the amendments in the Commons.

These amendments are part of our overarching push to highlight the Government’s weaknesses on economic crime, mainly fraud. There are serious concerns from consumers and stakeholders across the board about the slowness of regulators in preventing and tackling the vast amount of economic crime in the system. The size of the prize is vast. Money laundering is estimated to cost the UK £100 billion a year and fraud costs us £137 billion a year. The regulators need to do much more. I hope the Minister will agree that having panel members with specific expertise in economic crime is one way to ensure this, given the perverse ingenuity of the criminals they are up against.

[Baroness Penn (Con)]

My Lords, perhaps it would be helpful to start with a bit of context behind the Government’s approach to the statutory panels and the new cost-benefit analysis panel established in the Bill. I will then turn to the specific amendments.

The FCA and the PRA are required by FSMA to maintain statutory panels as part of their general duty to consult. As noble Lords have noted, these panels play a vital role in supporting the PRA and the FCA in developing regulatory proposals. As noble Lords have also noted, robust cost-benefit analysis—CBA—is an important part of the regulators’ policy-making process. It helps the regulators to understand the likely impacts of a policy and determine whether a proposed intervention is proportionate.

Respondents to the October 2020 future regulatory framework review consultation recognised the value of cost-benefit analysis but expressed some concern about the rigour and scope of the regulators’ analysis. Several respondents also supported enhanced external challenge as an effective way to improve the quality of the regulators’ cost-benefit analyses. Clause 41 addresses these concerns by introducing requirements for the FCA and the PRA each to establish and maintain a new statutory panel to support the development of their CBAs. Clause 47 includes a requirement for the Bank to consult the PRA cost-benefit analysis panel in relation to its FMI functions, while Schedule 7 includes a requirement for the Payment Systems Regulator to consult the FCA cost-benefit analysis panel. The new CBA panels will have a crucial role to play in providing challenge to regulatory proposals and ensuring sufficient scrutiny of the regulators.

I turn first to Amendments 123, 129, 130, 132, 138 and 139, tabled by my noble friend Lord Holmes, and Amendments 125, 126, 134 and 135, tabled by my noble friend Lord Lilley. The Government agree that the composition of the regulators’ panels is important for ensuring that they can effectively fulfil their role as a critical friend to the regulators. In particular, the Government consider that the CBA panel should benefit from those with experience of working in authorised firms.

During the debate in the Commons, the importance of ensuring that the regulators’ statutory panels, including the new CBA panels, are made up of a diverse range of independent experts was highlighted. In response, the Government introduced Clause 44, which requires the FCA, the PRA and the PSR, when appointing persons to their statutory panels, to ensure that all members are external to the FCA, the PRA, the Treasury, the PSR and the Bank of England. The regulators’ existing panels are currently made up of external members so this requirement will ensure that the approach is standardised and maintained on a long-term basis. In addition, the Government expect the FCA and the PRA to publish responses to the CBA panel’s representations at appropriate intervals, although it would not be appropriate to fix in legislation specific deadlines for independent regulators that may not be deliverable in practice.

Turning to Amendments 131 and 140 from the noble Lord, Lord Tunnicliffe, I assure the Committee that the Government are committed to tackling economic crime, as we have discussed in previous debates. This is also a priority for the regulators. For example, since 2015, the FCA has prioritised its strategy to ensure that firms take adequate steps to prevent them being used for financial crime.

Section 1D of FSMA sets out the FCA’s market integrity objective while subsection (2)(b) makes it clear that, in advancing that objective, the FCA must ensure that the financial system is

“not being used for a purpose connected with financial crime”.

The Government therefore expect that consideration of economic crime will feature in the regulators’ considerations when conducting a CBA. This is reflected in the FCA’s existing published guidance for CBA, which sets out that, when considering the rationale for a regulatory proposal, it should be clear what type of market failure or harm it seeks to address—including, for example, economic crime.

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[Baroness Penn (Con)]

My Lords, as the Chancellor has set out previously, it is vital that lessons are learned from both the recent disruption in the gilt market and the vulnerabilities in leveraged funds that this exposed. Pensions and, more specifically, liability-driven investment—LDI—funds are regulated by a number of different bodies. In the UK, the Pensions Regulator oversees pension schemes and the FCA supervises fund managers that manage LDI funds. Many LDI funds are based overseas; authorities in these jurisdictions are responsible for supervising the funds themselves.

In accountancy, the Financial Reporting Council is responsible for regulating auditors, accountants and actuaries, whereas the UK Endorsement Board works internationally to agree accounting standards and adopts these for use by UK companies. More broadly, considering the financial system as a whole, the Bank of England’s Financial Policy Committee—the FPC—is responsible for monitoring and addressing systemic risks to promote financial stability in the UK.

It is therefore right that the FPC has played and will continue to play an important role in ensuring that vulnerabilities in LDI funds are monitored and tackled. The Government welcome the FPC’s Financial Stability Report from December as an important milestone in the “lessons learned” process. The Government and the Bank of England agree that the FPC’s existing powers and duties remain appropriate and are sufficient to monitor and address the systemic risks associated with pension funds and their investment strategies.

Regarding Amendments 149 and 149A, the FPC already has broad powers of recommendation, as set out in the Bank of England Act 1998. It can make recommendations to the PRA and the FCA on a “comply or explain” basis and can make recommendations to any other persons it deems necessary to fulfil its objectives, including the Pensions Regulator, the Financial Reporting Council or the UK Endorsement Board. The FPC is also able to make recommendations to the Treasury, including in relation to the regulatory perimeter. These powers are used by the FPC to ensure that it can effectively monitor and/or address systemic risks, including those that may arise from pension funds and their investment strategies or accounting standards.

Additionally, the FPC must keep its recommendations under review and publish an assessment of the effectiveness of the committee’s actions in its financial stability reports. These must be published twice per year and laid in Parliament, allowing for further public scrutiny with regard to the impact of any recommendation made by the FPC, including whether it was complied with.

The FPC’s proactive approach to reviewing and addressing systemic risks was demonstrated in December when the FPC recommended that regulatory action be taken as an interim measure by the Pensions Regulator in co-ordination with the FCA and overseas regulators to ensure that LDI funds remain resilient to the higher level of interest rates that they can now withstand, and defined benefit pension scheme trustees and advisers ensure these levels are met in their LDI arrangements. The FPC has welcomed, as a first step, the recent guidance published by the Pensions Regulator in this regard. The FPC can also make recommendations in relation to reporting and monitoring requirements for LDI funds and pension schemes. The FPC’s financial stability reports then provide a public assessment of risks to UK financial stability.

With respect to Amendment 159, the Government agree it is essential that appropriate risk oversight and mitigation systems are in place, including for non-bank financial institutions. Sections 9C and 9G of the Bank of England Act 1998 stipulate that the FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system. This responsibility includes risks emanating from all parts of the financial system, including the broader system of non-bank finance such as defined benefit schemes. It is right that this responsibility sits with the FPC which is able to prioritise its work as necessary to improve financial stability. The FPC has well-established processes for achieving this task, working closely with the FCA and the PRA.

[Lord Vaux of Harrowden (CB)]

The Minister seems to be telling us that it has all the powers it needs and that everything is fine, and yet it happened. What went wrong and how do we fix it, if not this way?

[Baroness Penn (Con)]

There is ongoing work to look at that question. There has been an interim finding, as it were, setting out a number of recommendations. At the moment what they do not do, in my understanding, is set out the need for increased or different powers. But the noble Lord makes the correct point that we then need to understand whether those powers were used in the most effective way to prevent something like this from happening in the first place. The point I was seeking to make was that, so far in its work in reviewing what went wrong and why, it was not a question of a lack of powers or the inability in its remit to make certain recommendations. That is not to say that that work has concluded or that all the action that we need to take after reflecting on what happened has concluded either.

I was talking about the FPC’s powers and responsibilities to look at risks emanating from all parts of the financial system, including non-bank finance. It has the powers to recommend and, under Section 9H of the 1998 Act, also to direct the FCA and PRA to implement certain measures as specified by Parliament in order to further its objectives. Furthermore, as the IMF noted last year, UK authorities have often taken the lead in international efforts to improve the surveillance of risks beyond the banking sector.

In dealing with Amendment 159, looking at the risk from the non-banking sector in terms of financial stability and echoing my words to the noble Lord, Lord Vaux, the Government’s position is not that those risks are all fine, managed and under control. It is that the FPC has the powers it needs to deal with those risks where it can at a domestic level. In the Chancellor’s annual remit letter to the FPC, he reiterated the importance of prioritising work with international partners to address the vulnerabilities associated with non-banks. The FPC welcomed this recommendation. I say to the Committee that we agree that this area has been identified for more work at an international level but, alongside this co-ordinated international work, the Bank will continue to take unilateral action to reduce domestic vulnerabilities where it is effective and practical to do so.

[Lord Tunnicliffe (Lab)]

Will the FPC go out of its way to seek out risks—not risks known at the moment or even evolving risks, but the possible risks that could lead to a catastrophic effect?

[Baroness Penn (Con)]

My understanding is that that is what the FPC does. One of the mechanisms by which it does it is through its stress tests; it operates regular stress testing of the banking system and has also undertaken stress tests of the non-bank system. For example, in the latest Financial Stability Report in December 2022, it included a specific chapter on market-based finance. In 2023 it will run for the first time an exploratory exercise to test the resilience of the financial system against a scenario focused on the risks associated with market-based finance. This is one route by which it seeks to explore and seek out what those risks could be, to help inform understanding of those risks and future policy approaches that should be taken to mitigate them.

As I have said, much of the work needs to take place at an international level, but I accept the point made by the noble Baroness, Lady Bowles, that we also need to take unilateral action at home to reduce domestic vulnerabilities where it is effective and practical to do so. That work is ongoing.

I hope I have dealt with the noble Baroness’s amendments and reassured noble Lords that the Government are conscious of the risks—including systemic risks—that can be posed by the non-banking financial sector. With the FPC, we are undertaking further work to ensure that we can better understand and explore those risks, and take domestic action where possible to mitigate them, but also lead the work internationally to ensure a co-ordinated response.

[Baroness Bowles of Berkhamsted (LD)]

I thank all noble Lords who have spoken in this debate. I will reply to some of the points, but I will start with the Minister’s response. I am a little disappointed in two things. The main point of these amendments is to draw attention to the fact that, while the Bank of England and the FPC maybe had the powers to do things, they did not do them. As the noble Baroness, Lady Noakes, and I said, they did not do them after having spotted that the problems were there.

They did something pretty de minimis—some stress tests that basically followed what the industry was already doing—and left out the smaller end of the market. Had they put their thinking caps on, they might have realised that that is exactly where you would have problems with providing collateral. They did not do it because the Pensions Regulator said, “We can’t put this onus on the small schemes”. Maybe that was a comply or explain type of answer, but they just took it as given.

The fact is that, once again, they are shutting the stable door after the horse has bolted. I am saying that they need to be more proactive. They have to stop being scared. This was not an issue where, by doing something first, we would have put ourselves at a competitive disadvantage with industry in other countries; that is why you do “hug a mugger” or “let’s do international rules”. I understand it for insurance companies, where there is big competition and if we do something and they do not do it in Europe, there will be issues.

By the same token, if you think you are ever going to get something agreed about insurance companies globally, you will hear some rude expressions. For starters, in the United States it is state-based, and they do not do Solvency II, so it will be very difficult to get that agreement on non-bank financial institutions, which basically means insurance companies. There is absolutely no reason to prevaricate and hide behind NBFI when you are taking about our specific defined benefit pension schemes. It is just an excuse, and I do not buy it. I do not buy it from the Minister, the Chancellor, the regulators or the Bank of England.

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Moved by

[Baroness Penn]

151: Schedule 7, page 156, leave out line 43 and insert—
“(b) demonstrate that the Regulator has had regard to the regulatory principles in section 53 when preparing the proposals,”Member’s explanatory statement
This amendment ensures that the notification provisions align with the duty in section 49(3) of the Financial Services (Banking Reform) Act 2013 for the Payment Systems Regulator to have regard to the regulatory principles set out in section 53 of that Act.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, the most important thing to have come out of this debate, which is now in its fifth or sixth day—frankly, I have lost count—is that the regulatory environment lacks sufficient parliamentary scrutiny; there is enormous consensus about that idea. We have heard several solutions. At least three groups have touched on this issue, and I hope this is the last group to do so. I will go as far as saying that it is an interesting idea. I say that in the sense that I am representing His Majesty’s loyal Opposition, and at the moment we have some concerns about resource consumption, et cetera.

However, if we take all the ideas together, I am convinced that they can be moulded into an important step forward in involving Parliament, and involving sufficient resource to make that involvement effective. We should set about trying to do that. The noble Lord, Lord Turnbull, said this more elegantly than I will, but if you toss a bunch of amendments together and hope that they are internally consistent and capable of execution, you are kidding yourself. I fear that that is where we are at the moment. If we were to vote on all the amendments we have had over the last five days or so, that would not work.

What should happen now—it will be interesting to see whether it does, and I shall do all I can to encourage it—is that cross-party discussions take place, focused on taking the best ideas and putting them together in a way that will work and will have support. This has to be a coalition that is irresistible in the parliamentary process, and that is possible. When you look at that lot over there, this lot here and us, that is a hell of a force for the Government to try to ignore, so I hope we can find ways of bringing us together. I hope the Minister will want to join in that process at some point and will want to see whether we can achieve a consensus with the Government. I strongly advise her today not to close off options. Options have to be open to try to move into this area.

There seems to be a secondary area, which I will loosely call the Lilley area, about legal involvement. I clearly do not understand enough of what this is about; I suspect a lot of people do not. There is confusion and, from what I have heard experts say, it is a dangerous confusion. We should stick to that central issue of parliamentary scrutiny, properly supported to be effective—and the time has come.

Some of us slogged through a Bill, about a year and a half or two years ago—I am losing track of time—where we worked quite hard on this and made very little progress, as we got rid of all the EU rules and then put all the stuff in the hands of the regulators. Many of us felt uncomfortable that there was not more scrutiny, but we did not really come up with a solution. Clearly, we are in a solution-rich environment now; the trick is to bring it together into a solution that will work, and it must be done now. This is the last legislative opportunity, in my view, that we will see for some time, so I hope that cross-party discussions take place and that we can take a real step forward for the industry and for democracy.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank my noble friends Lord Bridges of Headley and Lord Lilley for tabling these amendments, and for their contributions to this discussion.

I will speak first to Amendments 160 to 166, tabled by my noble friend Lord Bridges. The Government agree, and have been clear, that more responsibility for the regulators should be balanced with clear accountability, appropriate democratic input and transparent oversight. The proposed creation of a new regulatory body to oversee the regulators—a so-called regulator of the regulators, although I know that my noble friend set out why he thought that term did not apply—raises further questions about how the accountability structures for the various regulatory bodies would operate. The Government would need to carefully consider how to ensure clear accountability to both government and Parliament under such a model.

The noble Lord, Lord Hunt, talked—it feels a long time ago—about the need for greater clarity on where accountability lies in this system. I am not sure whether it is clear that the addition of a further body to the system would provide greater clarity on where accountability lies.

[Lord Bridges of Headley (Con)]

How does the OBR undermine accountability? Surely it just provides independent analysis and assessment, and I see no problem there.

[Baroness Penn (Con)]

I believe that is sometimes subject to debate. What I was saying to noble Lords is that it raises questions in this area that we need to consider. If I look back to the creation of the OBR, it was in the Conservative manifesto at the 2010 election; indeed, it was set up in shadow form in 2009. It was first established not in statute and operated without statute after 2010. The provisions for its establishment in statute were then brought forward in a Bill, where there was sufficient time to consider those questions.

I am not saying definitively one way or another, but it raises questions that we would need to consider more carefully about who this body is accountable to and the interactions with parliamentary accountability that we have discussed today; the need for clarity on accountability, raised by the noble Lord, Lord Hunt; and, for example, the remarks by the noble Baroness, Lady Bowles, on the role that the body could have in filling the space that allows industry to make private submissions to the new body, rather than public submissions as happened through Select Committees, and how that marries with the provisions in the amendments on the need for this body to operate transparently.

These are questions that are raised in considering how such a body would operate in this landscape. There is the potential that it could duplicate or dilute the roles within the regulatory framework of government and Parliament to scrutinise and hold the regulators to account.

[Lord Hunt of Kings Heath (Lab)]

There is a problem in the approach that the Minister is taking. She is suggesting that the body proposed by the noble Lord, Lord Bridges, will add to the accountability structure. I have added my name to the amendment and, as I see it, the body is there to support those who wish to hold the two regulators to account. It is not there to add to the architecture of accountability but to aid Parliament and others to hold them properly to account. There is a distinction.

[Baroness Penn (Con)]

Whether it is there to aid others in the accountability structure or is an accountability body itself is a further question, but its proposed role raises questions about, for example, how transparently it operates, as the noble Baroness, Lady Bowles, touched on, and other such considerations. I merely said to my noble friend who raised this point that the establishment of the OBR happened in a Bill of its own after a manifesto commitment, and that it had been up and running for some time before it was put into statute. It is not unreasonable to say that considerations need to be made when we think about this issue.

[Lord Deben (Con)]

There are certainly considerations, but surely one of them is that we have an opportunity to make the change in this Bill, and we will not have another opportunity for a very long time. The Minister is proposing that we do not do it, frankly. Therefore, let us do it in this Bill, because it is the one opportunity that we have.

[Baroness Penn (Con)]

My Lords, I would never want to speculate as to future parliamentary timetables. My noble friend Lord Naseby talked about the importance of listening to those who are impacted by the provisions of the Bill. He spoke about the City, and we have heard various points of view in that respect. I would add consumers into that mix, too. I say to noble Lords that the Government have consulted extensively on the approach we are taking in the Bill, and we have received a number of responses on this specific issue in both future regulatory framework review consultations that took place. Although I absolutely recognise that a small number of respondents were supportive of further consideration of such a body, the vast majority were focused on how existing mechanisms for accountability to Parliament and government and engagement with stakeholders could be strengthened. The Government therefore decided, in response to those consultations, against creating a new body, and focused on ensuring that the mechanisms for Parliament and government to scrutinise the regulators are effective.

[Baroness Bowles of Berkhamsted (LD)]

Will the Minister clarify what the questions were in the consultation? My recollection was that it was relatively open. Obviously, at that stage, industry was focused on its very important relationship with government—one cannot overestimate the importance of that—and it answered questions saying that it was happy with parliamentary scrutiny, but I have no recollection of there being a suggestion as to whether there should be another body that enabled any kind of regular review. Since that time, industry bodies have said that it would be a good idea, so it seems a bit inconsistent to claim that the consultation cleared the way to say that none was required.

[Baroness Penn (Con)]

My Lords, I was simply pointing out that this Bill is the result of two rounds of consultation. The Government are criticised for bringing forward proposals without sufficient consultation. I note the noble Baroness’s points but, even in the context of those questions, there were bodies that put forward the kinds of ideas that we are discussing today. However, in the balance of responses to that consultation, they were not the dominant voice or viewpoint from the range of different people who responded to us.

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[Lord Forsyth of Drumlean (Con)]

My Lords, in my day, although it may have changed, when the Government issued a consultation document, it was basically to get agreement to what they wanted to do. In the case of the OBR, I remember the then Chancellor, George Osborne, arguing that the OBR was necessary in order that people could see that the Government were being honest and were subject to some kind of scrutiny, and that it would provide independent information that would enable Parliament and others to take a view.

I am trying to put this delicately, but my noble friend’s argument seems to be that the Treasury set out a consultation and reached an agreement so it is in the Bill. But the view that is coming out very clearly is that, for Parliament or anyone else to effectively hold the Treasury and the regulators to account, it is necessary to have an independent source of information. My noble friend is just reading out what we already know is in the Bill, but there is pretty well universal acceptance that that does not actually provide for sufficient accountability. Could she deal with that point? Why on earth would she be against something that would enable more transparency and more effective scrutiny?

[Baroness Penn (Con)]

I am afraid I am going to have to disagree with my noble friend’s point about consultation. I have spent too long in this Chamber, even in a limited time, being on the receiving end of scrutiny from noble Lords about the lack of consultation. The proposals in the Bill have gone through two rounds of public consultation. My noble friend may not see the value in public consultation, but that is not something that has been fed back to me in my dealings in other policy areas.

[Lord Forsyth of Drumlean (Con)]

Forgive me, but I did not say anything of the sort. Of course I can see the value in consultation. What I do not see the value in is consultation that then concludes that the Government should do what they wanted to do in the first place.

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[Baroness Penn (Con)]

That is not what I am saying. One of the things that I was referring to with regard to the powers in the Bill was an amendment tabled in the Commons stages to try to respond to further questions about how we can facilitate accountability. I think I have been clear to all noble Lords in this Committee that that is a question that the Government will continue to consider and to engage with noble Lords on, whether it is about strengthening parliamentary accountability or other measures that help to provide the information and resources that people need to do that work. The Government will continue to reflect on those points.

[Baroness Bowles of Berkhamsted (LD)]

I am sorry to interrupt, but I find it slightly strange that the Minister is saying the Government will continue to interact with us. All that that interaction has been so far is “No”.

[Baroness Penn (Con)]

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

[Baroness Noakes (Con)]

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

[Baroness Penn (Con)]

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

[Lord Bridges of Headley (Con)]

To be absolutely clear and just to put it on the record, therefore, the proposal in my amendment has not been consulted on? Is that correct?

[Baroness Penn (Con)]

It would be best to set out in writing for noble Lords the specific areas of the consultation that sought to address the issues we are discussing today. As I have said, in response to those consultations, certain respondents put forward proposals in this area, so it is not right to say that it was not a topic for consultation. However, as my noble friend wants clarity on the record, I think that would be best delivered in writing.

[Baroness Bowles of Berkhamsted (LD)]

Perhaps I could intervene on this important point. In the first consultation, there were some respondents—I confess, I was one of them—who put forward notions of there being independent scrutiny. There were possibly some other organisations, I do not know, of the kind that come forward with policy ideas. But I suggest that the majority of respondents tended to be from the industry, and it is not usual for industry to invent new ideas in their responses to consultations. I asked some of the industry bodies about this at the time, and that was the response I got. They said that they thought that, as I had led the way, they might want to pick it up in later consultation—but by the time you get to round two, it is much more concentrated on what will be in the Bill and “Do you agree with this?” It does not say “And, by the way, what have we left out that might have been a good idea?” Industry does not spend its time and risk putting in responses about that kind of thing.

I should be very interested to hear the analysis of the type and numbers of people who responded. Frankly, we have to rely on what we are told. Once upon a time, you used to know who had responded and could judge, and if the weight of the responses came from industry, I am not surprised that there was nothing in there. If the weight of the responses from the non-industry part had some good ideas, perhaps the Minister could tell us.

[Baroness Penn (Con)]

As I have said, I will set out further detail on the consultation process in writing. It is worth just noting that this question was also considered by Parliament through the Treasury Select Committee in its report The Future Framework for Regulation of Financial Services, which said that

“The creation of a new independent body to assess whether regulators were fulfilling their statutory objectives would not remove the responsibility of this Committee to hold the regulators to account, and it would also add a further body to the financial services regulatory regime which we would need to scrutinise.”

[Lord Tyrie (Non-Afl)]

Can the Minister explain whether that constitutes opposition? I had a cup of tea with the chairman of the Treasury Select Committee only the day before yesterday to try to establish exactly that. She is fully supportive of the idea—we ought to get that on the record—although I should also say that she had not specifically consulted her committee on it.

The Minister must see that the Government are probably going to lose a vote on this at Report. Would she be prepared to sit down with a group of us to see whether we can work up some sort of proposal that she might be prepared to accept? To make that meeting effective, in the meantime, would she be prepared to ask her officials, on a contingency basis and without any commitment at all on her part, to write down on the back of an envelope—a long envelope, I admit—what it is that might conceivably, in certain circumstances, be acceptable to the Government?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I believe that I have already made the offer to noble Lords to meet to discuss the issue of accountability, both parliamentary accountability and the proposals such as those put forward in the amendments today. That still stands. I am afraid that I cannot—

[Lord Vaux of Harrowden (CB)]

I apologise for interrupting. The Minister is quite right that she has made that offer. We were grateful for it, but it is of fairly limited use if there is no recognition on the part of the Government that there is a gap here in terms of parliamentary accountability and scrutiny. She has not actually said yet that she recognises that there is a gap. I have to say that she should look around her: it is pretty clear that it is there.

[Baroness Penn (Con)]

What I have tried to say to noble Lords is that, in bringing forward the proposals in this Bill, we absolutely recognise that, with the increased responsibilities that go to the regulator, we need to ensure that there is proper accountability and scrutiny. We have put forward the proposals in the Bill to attempt to do that.

--- Later in debate ---

[Baroness Penn (Con)]

I did not finish the note I was writing to myself to try to draw the debate on my noble friend’s group of amendments to a close for now. In response to the noble Lord, Lord Vaux, I was setting out that the Government believe there needs to be clear and greater accountability for the regulators, given the greater powers they are taking on. We have set out our approach to this in the Bill. When it went through the House of Commons, we demonstrated our openness to finding new and improved ways to strengthen our approach.

Where the Government have considered and consulted on some of the options the Committee is discussing today—or bodies such as the existing Select Committees of this or the other House have considered those options—it is right to draw this Committee’s attention to the feedback we have had in those consultations or through those Select Committee processes. As I have said to noble Lords on numerous occasions, we will listen carefully to the various debates we have had, reflect on what has been discussed and meet and engage with noble Lords, who have clearly expressed their concerns on this matter, to see what further progress can be made.

I turn to my noble friend Lord Lilley’s Amendments 169 to 174. On Amendment 169, I believe I set out the Government’s position on a predictability and consistency objective in earlier debates. While the Government agree that predictability and consistency are important components of an effective regulatory regime, we do not think they are appropriate objectives for the regulators. Similarly, the Government consider that such objectives do not need to be applied to the Upper Tribunal’s decision-making.

Amendment 171 seeks to enable the Upper Tribunal to quash all rules made by the regulators. The Government consider that the regulatory framework, including through enhancements in the Bill, provides multiple opportunities and avenues for challenge and review of the rules, both before and after they are made. For example, Clause 27 introduces a new power for the Treasury to require the regulators to review their rules when it is in the public interest. I also note that the courts already have a role within the existing framework, where necessary, as decisions of the regulators are subject to judicial review.

Amendments 170 and 172 both concern the routes of redress available to consumers. The Financial Ombudsman Service already plays a valuable role in providing consumers with a swift and effective means of resolving disputes with financial services firms.

Amendment 170 would enable those currently eligible to bring claims to the FOS—consumers and most SMEs—to bring actions against firms for breaches of regulator rules in a new financial services chamber within the First-tier Tribunal. These actions could be brought even where the FOS had made a final decision. The FOS and the Business Banking Resolution Service already provide a cost-free alternative to the courts for consumers and 99% of SMEs. Going to court can be expensive for the parties involved and delay redress. It would likely be more expensive for consumers and SMEs to bring civil actions in the First-tier Tribunal than through the existing redress process.

I turn to Amendment 172. Establishing a new body with a different remit would take up resource from industry, government and the regulators and slow down redress for consumers without a clear need for this change. The key difference between the proposed new body and the FOS is that the new body would not be able to consider what was fair and reasonable in all the circumstances of a case when taking a decision. This consideration enables the FOS to take into account wider factors relevant to the case, such as regulator guidance and industry codes of practice at the time. This is in addition to the requirement in FSMA for the FOS to consider relevant law and regulator rules, and it enables it to tailor its decision to the particular circumstances of a case and ensure a fair and reasonable outcome for all parties.

The FOS’s ability to consider issues of fairness and reasonableness beyond a strict application of the law and regulator rules is consistent with its role as an informal alternative to the courts. FOS decisions can be, and have been, judicially reviewed by parties who are not satisfied with the reasons provided by the FOS for the decision.

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[Baroness Bowles of Berkhamsted (LD)]

I think the Minister has just said that she will engage but that the answer is still “no”.

[Baroness Penn (Con)]

I have set out why the Government have concerns and that we should have further conversations to explore the issues that have been raised. I believe that is neither a “yes” nor a “no”.

[Lord Bridges of Headley (Con)]

My Lords, I will conclude this two and a half hour debate on just the first group and my amendment. I am delighted and thankful to noble Lords on all sides of the House who have supported it. The amendment is mine; the concept belongs to others. I am extremely grateful to my noble friend the Minister for offering to engage. However, I question the word “further”; I have not had any engagement and, so far, all I have heard is three things.

The first is that the Government believe that the measures in the Bill are sufficient. I think there is unanimous support, on both sides of the Committee, that, as far as accountability and scrutiny go, the measures are insufficient and need to be improved. The second is that the Minister is actually against the measures in my amendment today and the third is that they have been consulted on, whereas we have established from the earlier interventions that the specific amendment I propose, with this concept, has not been consulted on and that it was up to others to come up with that. In my view, that is not a consultation.

The Committee has stressed just how important this issue is, not just by the fact that we have been debating it for two and a half hours but because of what my noble friend Lord Hill and others said about the importance of ensuring that our regulators are truly accountable. The noble Lord, Lord Eatwell, made this point extremely well, as does my noble friend Lord Hill in an article in the Financial Times which was published just this afternoon. My noble friend says that

“what regulators decide directly affects our ability to compete and grow”

and that it follows that getting a regulatory framework right

“is central to our national wellbeing”.

He then says that we risk creating

“a new system of unaccountable British regulation”.

I repeat: unaccountable British regulation, and that is despite the measures that my noble friend says are in the Bill to increase accountability and scrutiny. I think we agree that they are completely insufficient.

As the noble Lords, Lord Eatwell and Lord Tyrie, said, this is not a question of just one or another of the little things that we have debated over the last few weeks on the Bill. A package needs to be brought together and it should address three points. One is improving the data that the regulators themselves provide. The second is arming Parliament with independent analysis, and I do not buy for a moment what my noble friend says about it undermining the independence of regulators. It is about arming Parliament and others with independent analysis of what the regulators are up to. The third is improving parliamentary accountability and scrutiny; my noble friend Lord Trenchard and others have made this point, as my noble friend Lady Noakes did in a previous session. These three things hang together.

I am delighted that my noble friend the Minister is willing to meet us, but I very much hope that she comes there with an open mind and a constructive attitude, not just a sense of no. I will obviously not press this amendment to a vote now but I can absolutely assure her that if the outcome of those conversations is not one that meets the challenge at hand, I will have absolutely no hesitation in pressing this to a vote at Report.

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I am hearing noises off. Should I stop or continue?

[Baroness Penn (Con)]

You should finish.

[Baroness Sheehan (LD)]

Thank you. I come to Amendment 232 in my name on green savings bonds. My reason for tabling this amendment is to draw attention to the success of the National Savings and Investments green savings bonds, which are an important part of the green finance landscape. Really it is a pat on the back for the Government—much-needed, maybe —so the Minister should view this as an opportunity for the Government to congratulate themselves. For me, it is an opportunity to ask them what more they can do to raise awareness of these bonds and promote them more aggressively. After all, the Climate Change Committee identified public engagement and behaviour change as major elements in the success of measures to keep the planet in a fit state for future generations, but many people complain that knowing what to do for the best is confusing. These bonds represent a safe way of putting their money to work for the benefit of all our futures.

Here is the background. The NS&I’s new green savings bonds became available from 22 October 2021, introduced by the then Chancellor, Rishi Sunak. They pay a fixed rate of interest over a three-year fixed term, and the current rate is 4.2%. The minimum deposit is £100 and the maximum is £100,000 per person. NS&I’s savings accounts are long-standing, recognisable and safe. They are hugely popular with UK savers, not least because investments are totally safe, being 100% backed by the Treasury. There is not the usual limit of £85,000 that there is with providers covered by the Financial Services Compensation Scheme. Many savers want to make green and ethical investment choices. Work by the Cambridge Institute for Sustainability Leadership found that the median saver would prefer a sustainable fund, even if they have to sacrifice up to 2.5% returns.

Money saved with NS&I’s green savings bonds is used to fund six types of green projects: making transport cleaner; switching to renewable energy; improving energy efficiency; pollution prevention and control; protecting living and natural resources; and adapting to climate change. These projects are publicised and clearly audited for climate and nature benefits. Another benefit is that raising funds through NS&I can actually give greater financial stability than raising funds on the financial markets. During the meltdown in borrowing costs following the botched “fiscal event” in September last year, investors in NS&I did not dump their bonds because they could not do so; there was no panic in NS&I’s offices in Blackpool, Glasgow, Birkenhead and Durham—please note, none in the south-east—because the bonds are not transferable. Further, when a larger amount of a Government’s debt is held by their citizens, it is less prone to volatility. There is lots to like about the products. There are few cash-based green savings products in the market, especially ones with such a high level of transparency about their use of proceeds.

My amendment is intended to put in the public domain at regular intervals the contribution made by the NS&I’s green bonds and the like towards UK green financing and the consequent reduction in targeted greenhouse gas emissions. It is worded in such a way as not to make proposals over the amount of government borrowing or how they should raise taxes, only to seek information on how the Government are raising funds for green investment. It would be helpful if the Minister could say how much has been raised through the Government’s green bonds to date, how much is forecast to be raised annually in future and what the Government’s ambition is for their future, including in relation to the promotion of these products.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Meacher (CB)]

Amendment 168 is the lead amendment; that is absolutely right. I think we had got on to Amendment 199. Is that correct, Minister? Are you happy with that?

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

Noble Lords can speak to any amendment in the group once the lead amendment has been put, I believe.

[Baroness Meacher (CB)]

One or two people had talked to Amendment 199 and I was just about to do the same. Is that okay?

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[Lord Tunnicliffe (Lab)]

My Lords, this is a cross-party group on the environment. It has no amendments led by Labour, but I have signed Amendment 199 in the name of the noble Lord, Lord Randall, on outlawing someone carrying out a regulated commercial activity that directly or indirectly supports deforestation risk commodities, unless relevant local laws are complied with.

I pay tribute to the noble Lord, Lord Randall, and thank Global Witness for its support on this amendment. My party is committed to securing the highest sustained growth in the G7. That means modernising our economy and financial regulation. We cannot deforest our way to sustainable growth nor a robust financial system.

Leaders across the City of London, along with BNP Paribas, Legal & General, Unilever and Tesco, are supportive of the measure proposed by the noble Lord, Lord Randall. Sir Ian Cheshire, former chair of Barclays and head of the Global Resource Initiative task force, has written to the Minister to remind the Government that the task force concluded its work in May 2022 by reiterating the need for new legislation to provide due diligence obligations for financial institutions equivalent to those that will be in place on supply chain companies under the Environment Act 2021. The Minister has previously argued that enhanced risk reporting eliminates the need for this amendment but the GRI task force has already rejected that argument. Sir Ian’s letter put this issue to bed when he wrote that risk reporting mechanisms, such as the task force on nature-related financial disclosure and voluntary net-zero pledges, are insufficient to prevent deforestation financing.

This expert backing and the desire of the British public to eliminate the scourge of deforestation are key reasons why this amendment has such considerable cross-party support. It would allow us to be global rule-makers, not rule-takers, when it comes to our financial system; I urge the Minister to take it seriously. Beyond Amendment 199, this group contains a lot of common-sense amendments that highlight the expertise of this Committee.

[Baroness Penn (Con)]

My Lords, I welcome this chance to continue this Committee’s important debate on amendments concerning green finance. As I stated in a previous Committee session, the Government are committed to fostering sustainable finance in the UK and will shortly publish an updated green finance strategy to that effect.

I will speak first to Amendment 168 from the noble Baroness, Lady Worthington. It is of course correct that all models have their limitations in depicting the real world but the Bank of England’s models have considered the views of experts in the field; they therefore do not need to be directed to do so. The scenarios used in the climate biennial exploratory scenario, or CBES, were formed by the Network for Greening the Financial System, an international network of central banks in which the Bank of England plays a prominent role. The scenarios have been produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers—not to mention being used by and continuing to be used by the Intergovernmental Panel on Climate Change. These scenarios are updated continually by the Network for Greening the Financial System, which also ran a public survey welcoming feedback on its most recent iteration of climate scenarios.

It is also not the case that CBES is the PRA’s only tool to manage climate risk. It is actively using its position as a supervisor to ensure that firms are not materially undercapitalised for climate risks, setting out its expectations in its supervisory statement published in 2019. Furthermore, the PRA is an active member of two of the leading international standard setters: the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The Bank is actively participating in both forums to ensure that the regulatory frameworks for the banking and insurance sectors address potential gaps in the management of climate-related financial risks. This work will flow through to our domestic framework and at the same time ensure international co-operation on what is fundamentally a global issue.

I now turn to Amendment 199 in the name of my noble friend Lord Randall of Uxbridge, which is supported by other noble Lords in this Committee. The Government agree that the financing of illegal deforestation is a serious global issue that must be tackled. However, this amendment would involve implementing a new and untested regulation that would impose a broad supply chain rule on all regulated financial services firms. It would currently be very difficult, time-consuming and expensive for UK financial services firms to ascertain whether firms or products that they invest in are exposed to forest risk commodities in compliance with local laws.

In introducing this amendment, the noble Baroness, Lady Boycott, referred to the provisions in the Environment Act 2021. These provisions will apply to the supply chains of large UK corporates. However, UK-based banks and fund managers engage in lending and investment activities with companies in jurisdictions across the globe, not just commercial activity in the UK. There are currently no consistent, equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe. Given that, capturing the activity of all of their customers and supply chains would not be as simple as adding an extra stage of disclosure to the regime set out in the Environment Act 2021, as had been suggested. However, I assure noble Lords that the Government are committed to addressing this issue and will work with the financial services sector and those with expertise in tackling deforestation to consider how we can make further progress.

[Baroness Sheehan (LD)]

Before the Minister moves on to another amendment, I put a question to her on Amendment 199 on deforestation. I hope she is coming to answer it.

[Baroness Penn (Con)]

Not just yet. Was it about the letter?

[Baroness Sheehan (LD)]

The question was about the regulations under Section 17 of the Environment Act 2021 that are supposed to be forthcoming. I asked the Minister when she thought they might be ready.

[Baroness Penn (Con)]

I will have to get back to the Committee on that point. I had picked up the noble Baroness’s other point, which was also referenced by the noble Lord, Lord Tunnicliffe, on the letter from Sir Ian Cheshire on this issue. I looked closely at his report and the recommendations in it. I am happy to place a copy of that letter and my response to it in the Library so that all noble Lords have access to them.

I was going to add something about the importance, in seeking to address this issue, of co-ordinating action internationally. This is necessary to reduce the financing of illegal deforestation and not simply drive it into other jurisdictions.

The noble Lord, Lord Tunnicliffe, referenced the work by Sir Ian Cheshire’s task force and its references to the Taskforce on Nature-related Financial Disclosures, the TNFD. The Government accept that that will not solve this problem on its own but it is important to recognise it as an important building block in creating an international solution. As I have pointed out, other jurisdictions do not have disclosure regimes. The TNFD is an attempt to create a global standard on nature-related disclosures that could be an ingredient in making progress in this area. The UK is the largest financial backer of the TNFD. We support its work to develop a global framework for reporting on nature-related impacts, dependencies and risks, within which deforestation is being considered. Once the task force launches its final recommendations in September 2023, the Government will consider bringing these standards into the UK disclosure framework.

Finally, on deforestation, in response to Sir Ian and the noble Lords who raised it today, as I set out, we are looking at what we can do further in this area. If noble Lords would like to meet to take those discussions forward, I would be very happy to do that.

[Baroness Sheehan (LD)]

Before the Minister moves on, could I reiterate the strength of feeling across the Committee on deforestation? It is not just about the 12% of global carbon dioxide that is released by burning and cutting down forests; it is also about the destruction of the carbon sink. It is a double whammy. This is an issue that we can and must solve. We have a report by the Government’s own appointed head of the GRI, Sir Ian Cheshire, who clearly lays out how we move forward on this. I wonder why the Government will not accept the findings of their own reports.

[Baroness Penn (Con)]

I say to the noble Baroness that I absolutely agree. I appreciate the point that the issues concerning deforestation are about not just nature and biodiversity but our ability to tackle climate change. That is why we are such strong supporters of the TNFD’s work, for example. She mentioned Sir Ian Cheshire’s report. I said to the Committee that I have read that report and looked at it very carefully. I do not think that we are in disagreement in wanting to find solutions to this problem. Sir Ian’s report also sets out that work needs to be done to ensure that the solutions that we identify are effective. For example, he refers to ongoing work in other jurisdictions such as the EU and the US on disclosures that would be building blocks towards making the progress that we all want to make. The Government do want to make further progress on this issue and I understand the strength of feeling, so I commit to this Committee to take those discussions further and see where we can build consensus on it.

[Baroness Sheehan (LD)]

I thank the Minister. On behalf of the noble Lord, Lord Randall, I accept the meeting. I know that he cannot be with us today, sadly. The final point that I leave with the Minister is that Sir Ian Cheshire was very clear in his letter about why he thought the UK should be acting. It is because, as a financial sector, we really matter. We may have 1% of the global emissions footprint but, in terms of the deforestation footprint and the money that passes through London, it is substantial.

--- Later in debate ---

[Baroness Penn (Con)]

The Government understand and agree with those points. That is why we are also seeking to find a way forward on this work and have driven considerable work at a global level to try to tackle deforestation. I hope noble Lords can take some heart from our commitment on that.

On Amendment 232, also from the noble Baroness, Lady Sheehan, my noble friend Lord Naseby will be pleased to hear that NS&I’s retail green savings bonds, which I think have been available for a couple of years, are integral to the continued successful delivery of our green finance programme. We clearly have more work to do in promoting them, so the NS&I will continue to promote them and encourage retail investors to help finance the fight against climate change and other environmental challenges.

The Government committed to publishing a biennial impact report by September 2023, which will detail the environmental impacts and social co-benefits of the green financing programme’s spending. This will include available reporting on greenhouse gas emission reductions of projects financed by the green savings bonds and green gilts. The upcoming impact report will complement the programme’s first allocation report, published in September 2022. These annual allocation reports detail how funds raised from sales of green gilts and green savings bonds contribute to different green priorities such as clean transport and renewable energy.

Amendment 232 proposes publishing an assessment of the scope for future green financing. Decisions on future green financing ambitions are based on eligible green spending commitments and will be taken each financial year as part of wider decisions for the Treasury’s budget. Financing decisions are also influenced by gilt and retail savings market conditions and consultations with investors. Reporting on the future scope of green financing in advance, rather than at the beginning of each financial year, could create the risk that future spending requirements and conditions in the gilt and retail savings market are disregarded. That would make the successful delivery of the green financing programme more challenging.

I turn to Amendments 233, 235 and 236 from the noble Baronesses, Lady Wheatcroft and Lady Hayman, which concern sustainability disclosure requirements, green taxonomy and transition plans. Sustainability disclosure requirements—SDR—are designed to provide an effective and co-ordinated reporting framework for sustainability information. This is already being taken forward at pace. The FCA recently consulted on new sustainability-related disclosure requirements for all regulated firms and more detailed rules for asset managers and asset owners.

The Government’s 2021 road map made it clear that disclosure of transition plans will be a part of SDR. The Government launched the independent Transition Plan Taskforce in April 2022 to develop a gold standard for transition plans. The task force has since made huge progress, having just consulted on its recommendations, framework and guidance, with the final framework and guidance to be published later this year, alongside additional sectoral guidance.

The FCA has already implemented the guidance from the Taskforce on Climate-Related Financial Disclosures for transition plans for asset managers and asset owners, on a “comply or explain” basis. It is continuing to work closely with the Transition Plan Taskforce to develop and implement its recommendations.

As I reaffirmed to noble Lords in a previous debate, the Government are committed to implementing a green taxonomy as part of their sustainable finance agenda and, as I set out in my Written Ministerial Statement to the House on 14 December 2022, the Government will provide an update as part of the green finance strategy. We are clear that the value of a taxonomy rests on its credibility as a practical and useful tool for investors, companies, consumers and regulators in supporting access to sustainable finance.

Noble Lords have only to look at the implementation challenges the EU is facing, including on data availability and reporting, coherence with regulatory frameworks, and international interoperability, to see that this is a complex exercise. We have been clear in the UK that, with the support of our Green Technical Advisory Group and with public consultation, we will take the time to get the taxonomy right to ensure that it is usable and effective.

On Amendments 201 and 237, the Government and regulators are taking steps to improve the UK’s regulatory framework to support more effective stewardship. We have already discussed in Committee the Financial Reporting Council’s world-leading Stewardship Code 2020. This asks trustees and managers to disclose how they have considered environmental and social factors, including climate change, in their investments. The Department for Work and Pensions’ recent stewardship guidance for pension scheme trustees came into effect last October.

In addition to these existing initiatives, the DWP, along with the FCA, the Pensions Regulator and the Financial Reporting Council, has already committed to a review later this year of the regulatory framework for effective investment stewardship, to ensure that it is consistent across market participants and financial products. I recognise that this is a complex issue and recognise the concerns raised by the noble Lord, Lord Davies of Brixton, about the specific framing of the amendments. This is an issue that would warrant further discussion before Report.

On Amendment 241A, tabled by my noble friend Lady Altmann, UK pensions have been at the forefront of tackling climate risk and will undoubtedly continue to play a crucial role. The Government are working hard to drive consolidation among pension schemes so that they deliver increased scale, better value for money and improved access to investments such as green infrastructure. As part of this drive, the DWP recently published a consultation on a value for money framework for defined contribution pension schemes. Furthermore, the pooling of Local Government Pension Scheme assets, from the 86 funds into eight asset pools, has already led to £380 million in net savings to March 2022; these are projected to exceed £1 billion by March 2025.

We are also working hard to lower the barriers for individual pension schemes to invest in green. The DWP is reforming the treatment of performance-based management fees to enable individual pension schemes to invest more easily in assets such as green infrastructure.

Finally, when it comes to the noble Baroness’s amendment, we are aligned in wanting to see more of this pool of capital able to be directed in the way we have discussed in this Committee. It is important that we lower barriers to such projects and solutions. We do not see the benefit in creating a distinct, lighter-touch regulatory regime to support pooled investments in green projects. There may be risks in reducing regulatory oversight in this way.

The UK’s world-leading regulatory standards are important in providing market participants with the confidence to invest and we should be cautious about changes that could undermine that confidence. I say to my noble friend Lady Altmann and the noble Baronesses, Lady Hayman and Lady Drake, that we want to think about how we can make progress in this area. While the specific amendments suggested might not be the right way, we should continue to put our thinking caps on when it comes to how we can guide progress in this area.

With that, I hope that, for now, the noble Baroness, Lady Worthington, is able to withdraw her amendment and that other noble Lords will not press their amendments when they are reached.

[Baroness Worthington (CB)]

My Lords, I am grateful for the Minister’s reply to this varied group of amendments covering a range of issues that fundamentally speak to the need for the financial sector to take a more serious look at how it can help prevent the exacerbation of environmental challenges, including climate change, and invest in solutions at scale.

I was encouraged to hear that the Government are about to produce their green finance strategy. I wonder whether it might have been a good idea to have done that before the Bill, as then we might have had—

[Baroness Penn (Con)]

We produced our green finance strategy in 2019 and we provided a green financing road map in 2021. I very much hope that before we reach the end of the Bill noble Lords will have sight of the refreshed green finance strategy.

[Baroness Worthington (CB)]

That is great, but my point still stands. It would have been good to have had the refresh before the legislation so that we could have incorporated any findings into the Bill.

On my amendment on the assessment of risk in relation to capital requirements, it is not the case that everything is fine in the world of climate modelling. It really is not. If you spend time with climate scientists who are empirical scientists out in the field witnessing the impact of climate on the natural world, they will tell you that the models are not in line with what they are witnessing. That tells you that we have not got a handle on the speed and pace of change in the physical world thanks to decades of unmitigated emissions of greenhouse gases and the never-ceasing increase in concentrations of greenhouse gases in the atmosphere.

The noble Lords, Lord Lilley and Lord Naseby, may well say that it is fine and that we are just going to look at demand. We have been doing that for about 30 years. It has not made a jot of difference. The reason for that is that we have an economic system based on an incumbent power that is very adept at keeping demand for its product healthy and at finding new sources of demand for its product, so we absolutely need to cut with both sides of the scissors. We need constraints on demand and constraints on supply; otherwise, we will carry on with this merry dance and the emissions in the atmosphere, which are what matters, will continue to rise.

I believe that the finance sector is not the place to solve this. We need political will across all member states to pass the legislation necessary to drive capital into solutions and to stave off the continued licensing of extraction. That will take time, but it needs to be done.

In the meantime, if we walk into believing that the finance sector has got this—“Don’t worry; the models are all fine”—we will be making a grave error. These models are not sufficient; they do not take a whole host of measures into account. The noble Lord, Lord Stern, is not here, but he is an expert in these matters and he will tell you how flawed these models are. How can they be sufficient when many of them conclude that a global increase of around 3 degrees will take roughly 5%, 10% or 15% from GDP? That is ludicrous. Do not forget that an average global increase of 3 degrees means warming at the poles at three times that rate and hugely different regional impacts. That is not a safe place to be.

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[Lord Tunnicliffe (Lab)]

My Lords, this is a key group for the Labour Party politically; it contains four of our amendments. Amendment 180 would require His Majesty’s Treasury and the FCA to publish a review of the need for

“access to essential in-person banking services”

and to ensure

“a minimum level of access”

to them.

Amendment 181 would require HMT to

“publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including … support for online banking, and maximum distances people can expect to travel to access services.”

I would be interested to know the Minister’s view on the reasonable distance for an elderly or disabled customer to have to travel to speak to someone from their bank.

Amendment 182 is perhaps the most important. It would compel HMT to

“guarantee a minimum level of access to free of charge cash access”.

Amendment 184 would require the FCA to

“monitor and report on levels of cash acceptance across the UK.”

I set out the crucial importance of free access to cash at Second Reading so I will not do so at length a second time; well, that is what it says here. Nobody has more interest in being speedy than me, or perhaps the Minister, because we have to be here for every minute of this Committee. We are almost in our 27th hour but this group is different from anything else that we have discussed. The rest of it—I cannot think of a polite way of putting it—is about activity that takes place for people like us. Quite a number of people work in the finance industry; we are looking at the nuances of it and how politicians should be involved.

However, the issue of cash is about our society. It is about the poorest and least competent people in our society. Technology has been a substantial disruptor. It is a disruptor that particularly applies to finance. It has allowed financial transactions to become extraordinarily efficient and has created a whole new customer base of people who are comfortable with technology. They have access to a whole new marketplace. We know that the dynamics of that have probably been benign for society.

However, the other problem is that it has created a divide in our society. I ran an organisation that used to have a lot of cash; I am all too familiar with the tremendous impact of approaching a cashless society. In all the knowledge in the world, the last bits are the most expensive bits. Yes, the cost of transactions goes up and so on and so forth, but we cannot afford to create the divide in our society that is emerging. We must support all parts of our society seriously. We must recognise that, in their lives, people sometimes need all banking services. We must recognise that some people simply cannot envisage how to budget without physically seeing it in separate pots. It is clearly a natural reaction if you are running out of money. You can see it there and have confidence because you know that, if you go into the grey world of accounts, banks, overdrafts, loans and things like that, all sorts of horrible things happen. For that group in society—it is probably 10% of our society so it is a substantial number of people—we must find a way of maintaining the public service. We must achieve a minimum service.

The noble Lord, Lord Blackwell, said what all providers of service say: if you are not ultra-efficient, you load the inefficiency costs on to other customers. It so happens that being ultra-efficient does not do much harm to your profit line either. Big businesses such as banks pursue the maximisation of shareholder value. It is in the law. They are supposed to do it, for Christ’s sake. We should not be surprised when they do but I rarely see them turning into charities. We have got to find ways. We do not have to keep all the branches open; even I can work that out. We have to be much more inventive in how we service this need, which is still large, but the way we must do that is by creating duties on the purveyors of financial services as well as rights and constraints.

It is proper for the law to create duties to look after the poorer members of our society. That is why so many people have said that it is important for a variety of needs—resilience and so on—that we maintain it. The banks must play their part. They have enjoyed massive exploitation—I do not use that in a pejorative sense—of information technology, probably more so than any other section of our society. They must recognise that there has to be a cross-subsidy in this situation because we must restore financial equity to all our society.

[Baroness Penn (Con)]

My Lords, as we have heard in this debate, the nature of banking is changing. In 2021, 72% of people banked online, and 57% on their mobile phones. Meanwhile, 85% of payments were made without cash, up from 45% a decade earlier, and 86% of UK adults used contactless payments.

[Lord Tunnicliffe (Lab)]

Were 85% of the number of payments made without cash, or was it 85% of the value of payments?

[Baroness Penn (Con)]

I will check for the noble Lord because I do not have that level of detail in my notes. They say that “85% of payments” were made without cash, not “the value of payments”, but I should double-check to clarify for him.

In the light of these innovations in the way that we bank, the Government recognise that it is incredibly important that people are not left behind—we have heard that in today’s debate. Many people still rely on physical services: in particular, millions of people still rely on cash and need access to withdrawal and deposit services.

Working with industry, the Government are already undertaking positive action to support cash access in this context. For example, existing initiatives subsidise free-to-use ATMs in remote and deprived areas. Following changes in the Financial Services Act 2021, there is a new ability to have cashback without purchase services, enabling withdrawals to the penny that people request. Communities can ask LINK to assess whether additional cash services are needed, with several major banks and building societies funding new shared services. As a result of that initiative, over 70 communities are due to get new cash deposit facilities.

In that context, it is important not to underestimate the significance of the provisions contained in the Bill. It is the first time, in UK law, that we are protecting people’s ability to access cash. The Bill provides the FCA, as the independent regulator, with the responsibility and necessary powers to ensure reasonable provision of withdrawal and deposit services.

In evidence to Parliament, the regulator said that it anticipates taking account of reasonable access to free cash services for personal customers—subject to due process, which includes a requirement to consult on its rules. In using its powers, the FCA will utilise the wealth of data that it has collected, including on access at the regional level, and it must have regard to local deficiencies in cash access services and the Government’s policy statement.

The noble Baroness, Lady Tyler, asked about the policy statement. It is currently being developed, and we expect it to be published after the Bill completes its passage. It is important that it takes into account the latest available data and evidence ahead of its publication.

I have clarification for the noble Lord, Lord Tunnicliffe, on the statistic that I used, so I shall not need to write. I can confirm that 85% of the number, not the value, of payments were made without cash.

[Lord Holmes of Richmond (Con)]

While we are getting clarifications in flight, may I ask my noble friend the Minister about the 86% of people using contactless? Are 86% of people using contactless all the time or are they making one payment a year? If someone from the Box is able to answer that in flight, that would be helpful.

[Baroness Penn (Con)]

That request has been noted. Reading the statistic in my notes, I would say that 86% of adults have used contactless payments, rather than it being a comment on how much they use them as part of their payment mix. If I am wrong, I hope that the people supporting me will tell me.

I talked about the policy statement and the significance of the measure that we are taking in the Bill. We have heard from the Committee that not everyone agrees with that approach. In legislating to protect access to cash, the Government have sought to provide that reassurance for those who rely on cash for a number of different reasons.

We have heard why it can be important for accessibility and for people to manage their finances. We have also heard about privacy concerns. However, we have not sought for the legislation to be prescriptive on the cost, type of facility or range of services offered at facilities. We are seeking to ensure that this primary legislation allows for innovation and flexibility, as the needs of people and our communities evolve over time. I think those advocating for greater access to services also recognised the need for that flexibility and change in needs over time. It is for those reasons that the Government do not support Amendments 176, 178, 182 and 185 from the noble Baronesses, Lady Tyler and Lady Twycross, and the noble Lord, Lord Tunnicliffe.

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[Baroness Penn (Con)]

My Lords, we were addressing the question of when alternative service provision is put in place and the accessibility of that service provision.

I have addressed the point made by the right reverend Prelate the Bishop of St Albans about connectivity. He also made a point about customers needing, for example, a smartphone to make payments or access online banking. The FCA has stated that it expects payment service providers to offer solutions that work for all groups of people. It encourages all firms to consider the impact of their solutions for customers. The regulators’ guidance recognises that not all customers will have mobile phones or a reliable signal and that viable alternatives should be provided in these situations.

All service providers, including banks and building societies, are bound under the Equality Act to make reasonable adjustments where necessary. Many of them support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks.

As my noble friend Lord Holmes highlighted, moving towards digital can create opportunities for accessibility but it can also create barriers. It is important that we embrace these technological changes in ways that reduce those barriers, so his point about ensuring that interfaces, including ATMs and point-of-sale terminals, are accessible is really important.

[Lord Eatwell (Lab)]

Would the Minister indulge me for a moment? I have been intrigued by her discussion of the role of digitisation. I refer to Amendment 184, tabled by my noble friend Lord Tunnicliffe, on the duty to collect data on cash acceptance.

When teaching monetary economics, the first thing that you ask students to understand is, “What is money?” Money is something that is generally accepted in discharge of a debt. That is the definition of money. The issue of cash acceptance is therefore vital as society develops in the way that the noble Baroness, Lady Noakes, outlined so clearly. What will happen is that, for the section of society who rely on cash—several million people—their cash will no longer be money. It will no longer be generally acceptable in payment of a debt. In those circumstances, the digital instrument will be crucial. However, if the digital instrument is issued only by companies, namely banks, to those who are customers of the banks, who have some basic criterion, it is surely the responsibility of the state to issue a digital instrument that is available to all citizens.

That being the case, to get to that stage, we need to know how cash is generally accepted. Therefore, the amendment, which contains a duty to collect data on cash acceptance, is vital for the development of future policy with respect to cash and digital instruments. The Minister rejected the amendment by saying that it is not the FCA’s responsibility. Can she tell me which department of government has this responsibility to collect data on cash acceptance?

[Baroness Penn (Con)]

My Lords, there are a number of ways to tackle the issues that the noble Lord referred to. There are various statistics around payment methods used by consumers in the UK; I quoted some at the start of my speech. The Government have not mandated service providers to accept certain forms of payment; that is not the approach we intend to take to ensure that people continue to have access to cash or money. I have said that, in supporting businesses’ access to deposit services, that will support people’s ability to use their cash as a form of payment.

The noble Lord also raised the question of a digital form of money. That is a question that the Government have looked at very carefully. We launched what I think was a joint consultation between the Government and the regulators, looking in more detail at the question of a central government digital currency and how to take forward that work, as well as considering questions such as those from the noble Baroness, Lady Fox, about privacy issues in a world of having a digital form of money versus having cash as a form of money.

I understand the importance of having a picture and the data that allows us to understand what is going on. I do not think that the data is necessarily the gap here; it is about how you provide for the ongoing use of cash in a society where rapid changes are being made. Our approach to that has been through legislating in this Bill on access to cash withdrawal and deposit facilities.

I was just talking about the importance of the accessibility of payment interfaces, including ATMs and point-of-sale terminals. I am pleased that UK Finance and the RNIB have developed accessibility guidelines for touch screen chip and PIN devices, as well as an approved list of accessible card terminals. The Government’s disability and access ambassador for banking, Kathryn Townsend, also encourages a consistent consumer experience and engagement with deaf advocacy groups.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I do not want to delay the Committee or the Minister but, on ATMs, I referred rather incoherently to the interchange fee paid by LINK. Will the Minister take back the issue that this is having a big impact on the viability of providing free cash by the companies that do so? This partly seems to be down to the ownership of LINK and the influence of banks in relation to it, but does she accept that there can be very profound effects when you lose free access to cash and have to pay for it? I was told this morning at a meeting with NoteMachine —one of the companies that provide cash—that six out of 10 withdrawals are for £10 because people are using it to budget. The problem is, if you no longer have access to free cash, you then have to pay £1.50 for it. That is a huge rate. These are some of the practical issues that I hope the Minister will be prepared to take away between now and Report.

Even accepting that the Minister may not be prepared to accept any of these amendments, it seems that at the moment we do not, despite FCA guidance, have a guarantee that the financial sector as a whole is going to change the way it operates. This is the problem that we face. If anything, its policies are driving cash out without recognising the impact on some very vulnerable people.

[Baroness Penn (Con)]

On interchange fees, decisions regarding the operation and funding arrangements for an ATM network are taken by the parties involved. The noble Lord will know that LINK has commitments to protect the broad geographic spread of free-to-use ATMs and is held to account against those obligations and commitments by the Payment Systems Regulator. It has specifically committed to protect free-to-use ATMs more than one kilometre away from the next nearest free ATM or Post Office and free access to cash on high streets, and it supports free-to-use ATMs in deprived areas through its financial inclusion programme.

I recognise the point that the noble Lord has made. Coming back to the provision in the Bill, while I understand that different amendments have been tabled to look at how it could be enhanced or altered, it is important to acknowledge that legislating to protect access to cash is the Government recognising the point that the Committee made and taking action to address it. We want to have flexibility in how that is delivered, but we are providing for it in primary legislation and I hope that principle is welcomed, even though there are different opinions about how it could best be delivered.

Drawing towards the end of my remarks, I was going to note specifically on accessibility that that question was considered by the most recent Financial Inclusion Policy Forum. As I was saying to the noble Lord, Lord Hunt, while the Government do not support these amendments, I hope that noble Lords recognise the action that is being taken through the Bill and elsewhere, because the Government take these issues seriously. It is right to consider the outcome that we are all trying to deliver in a changing world: accessible financial services. That can mean a range of things, such as for people on low incomes being able to budget their money or for accessibility when it comes to disability, age or other factors. The way we have tried to approach access to cash in the Bill is by looking at delivering those outcomes in a flexible way, so I hope that at the moment the noble Baroness, Lady Tyler, is able to withdraw her amendment and that other noble Lords do not press their amendments.

[Baroness Tyler of Enfield (LD)]

My Lords, it feels some time now since we started this group of amendments. I thank the Minister for her measured response in which she tried hard to reflect quite a wide range of views on the issues we have been talking about. I also thank all other noble Lords who have contributed. This has been a fascinating debate. There has been a reasonable degree on consensus in places, but by no means full consensus, and I certainly understand that.

I want to refer to a very important comment made by the noble Lord, Lord Tunnicliffe. He said that this group is different and is about whether we want a divided society. Another noble Lord said—I am sorry but I cannot remember who it was—that banks are not charities. I think we all understand that but it is for us as legislators, a point I made in my opening speech, to decide on the sort of society that we want. That is actually what this group of amendments is about.

I listened to the noble Baroness, Lady Noakes, and others, and I assure your Lordships that I am not stuck in the past. I make most of my payments by holding out my phone. However, a very helpful point was made by the noble Baroness, Lady Fox, which was that there are times when I do not want to pay like that. I still want to use cash sometimes, even though I can hold my phone out, and it is rather important that I have that choice.

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Moved by

[Baroness Penn]

191: Schedule 11, page 213, line 3, leave out “financial”
Member’s explanatory statement
This amendment would enable the Bank to direct a central counterparty’s parent company to establish a separate holding company as a parent of the subsidiary, rather than requiring that holding company to be a separate financial holding company.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I support my noble friend Lady Noakes in her amendment. As she has explained well, Clause 38 requires the FCA, the FOS and the FSCS to co-operate and to consult with each other in exercising their statutory functions. However, it is important that FOS decisions with wider implications do not diverge from FCA rules, or there may be unintended consequences, and predictability and consistency may be negatively affected.

As my noble friend just said, this does not mean that the FCA or the FOS should act without thinking very carefully about what they are doing. Her amendment takes account of that and would be likely to encourage real thought about the consequences of making a particular decision in any case. Besides, Parliament never intended the FOS to be a quasi-regulator. UK Finance has recommended that the FCA should be given a power to overrule a decision by the FOS where it believes that the decision could have wider and perhaps unforeseen implications. My noble friend’s amendment would deal effectively with this potential problem.

Of course, the granting of additional powers to the FCA strengthens further the case that the FCA must be properly accountable to Parliament, and I regret that I have not yet heard my noble friend the Minister acknowledge that, as drafted, the Bill does not provide adequate arrangements for this. I firmly believe that a properly resourced joint committee is how to achieve that.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government agree that, where there are wider implications, it is critical that the bodies within the financial services regulatory framework, including the FCA and the FOS, co-operate effectively.

As my noble friend Lady Noakes noted, that is why Clause 38 of this Bill introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues which have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, FOS and FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications.

As my noble friend also noted, these organisations already co-operate on a voluntary basis through the existing wider implications framework. The voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.

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[Baroness Noakes (Con)]

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

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

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

[Baroness Penn (Con)]

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

[Baroness Noakes (Con)]

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

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[Lord Tunnicliffe (Lab)]

My Lords, this group of amendments has a general direction which may be supported. It would be much better if the Government were to come forward with proposals in that general direction and improve the situation.

I, too, however, feel that there is some moral hazard. The extent to which victims are compensated draws attention from the fact that this is serious crime which, as I understand it, is growing exponentially. I hope that in looking after victims, which I am broadly in favour of, we massively increase our efforts to prevent fraud in the first place. I do not have a simple solution to that, but it is my understanding that the relationship between a preventive resource in the police and the banks is, compared to the general application to prevent crime, disproportionately low. More resource has to be put into combating this frightening industry. There is a sense of almost moral decay that allows this virulent industry to continue to grow. I hope that, while responding to the concerns of victims, there is also feedback to the Government as a whole that we must find a way to get on top of this very unpleasant crime.

[Baroness Penn (Con)]

My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.

Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.

I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.

None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.

Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.

In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.

On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.

Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.

On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.

None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.

We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.

[Lord Vaux of Harrowden (CB)]

Can the Minister comment on the Treasury Select Committee’s recommendation on the PSR, effectively subcontracting its responsibilities to Pay.UK?

[Baroness Penn (Con)]

I apologise to the noble Lord; I did have an answer for him on that. The Bill is clear that the Payment Systems Regulator has the duty to act on mandatory reimbursement. The PSR has the relevant powers and expertise, as well as the appropriate discretion, to determine the most effective approach in that area.

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All in all, I hope that the Government have heard what has been said and come forward with a solution. If not, we will have to consider whether we will support a modified amendment on Report.

[Baroness Penn (Con)]

My Lords, the Government have a lot of sympathy with noble Lords who feel that they or their families have been subject to unreasonable treatment due to their status as politically exposed persons, or PEPs. As noble Lords have mentioned, I have engaged with noble Lords to understand this issue and I am aware that the difficulties faced can range from seemingly disproportionate requests for information to accounts being blocked, leaving Peers and their family members at risk of being unable to effectively manage their financial affairs.

The Treasury and the FCA will continue to work to address this issue and to ensure that those subject to these rules are treated fairly and proportionately. Before discussing that work further, I will set out the importance of the PEPs regime to UK security and the fight against economic crime.

Enhanced due diligence by banks is a key component of the UK’s anti-money laundering and anti-corruption measures, and ensures that any suspicious activity is identified and reported to law enforcement. Given the potential for the positions of influence held by those subject to the PEPs regime to make them targets for serious and organised criminals and hostile state actors, law enforcement agencies have strongly favoured maintaining these requirements on domestic PEPs. The enhanced due diligence measures are a crucial part of the UK’s anti-money laundering regime and contribute to a coherent, systemwide approach to tackling economic crime, providing law enforcement with valuable and actionable intelligence to help protect the UK’s political system from hostile state actors, for instance.

However, the Government of course recognise that domestic PEPs often represent a lower risk than overseas PEPs. This is already explicit in FCA guidance, which states that domestic PEPs should be treated as lower risk by financial institutions unless other risk factors are present. The FCA remains committed to monitoring banks’ compliance with its guidance on PEPs, and will take action where it identifies systemic issues. The FCA did so last year, resulting in one financial institution apologising to all PEP customers after its failure to adhere to FCA guidance.

In last year’s review of the money laundering regulations, the Government committed to an assessment of the risk profile of domestic PEPs and made it clear that we would consider removing the requirement for mandatory enhanced due diligence if they were found to be sufficiently low risk. The Government’s assessment of the risk profile of domestic PEPs has concluded. As part of that work, they engaged with law enforcement and other operational partners to develop their under-standing of the risk posed by domestic PEPs. In light of that review, the Government consider that the existing requirements remain appropriate.

However, given the concerns raised, the Government will continue to work with the FCA to ensure that banks and other financial institutions appropriately and proportionately implement the guidance set out by the FCA regarding the treatment of domestic PEPs, that it is taken forward in a way that is proportionate to their individual risk and that adjustments are made to enhanced due diligence measures as necessary. I would like to reassure noble Lords that the Treasury continues to engage with the FCA on this issue and stress the importance of taking a proportionate, risk-based approach to the application of enhanced measures on domestic PEPs.

I turn to the specifics of the amendments. Amendment 215 from my noble friend Lord Moylan would remove those politically exposed persons who are tax residents from the regime entirely. As I have set out, including domestic PEPs in the regime is important because of the risks presented by their positions of influence. Such a proposal would weaken the UK’s protection from money laundering and corruption and leave us non-compliant with international standards. International standards for domestic PEPs, as my noble friend set out, are set by the Financial Action Task Force. They require countries to implement a legal framework that compels regulated firms to identify whether their customers are domestic PEPs and make an assessment of which due diligence measures to apply based on the risk presented.

Amendment 215 would remove the requirement for financial institutions to identify and treat those resident in the UK for tax purposes as PEPs, making the UK non-compliant with those international standards. The UK is a leading member of the Financial Action Task Force and was recognised in its mutual evaluation report in 2018 as having the most effective anti-money laundering regime of well over 100 countries assessed to date. The UK remains committed to ensuring that its anti-money laundering regime is compliant with these international standards. While I appreciate that, in drafting their amendments, noble Lords may have sought to remain compliant with those standards, I am afraid it is not possible to remove domestic PEPs from identification altogether and remain compliant.

[Baroness Hayter of Kentish Town (Lab)]

Why is it therefore possible to exclude councillors, as the guidance does, but not Peers?

[Baroness Penn (Con)]

That is a question of who is classed as a domestic PEP, not of the need to have a regime in place to identify domestic PEPs and then look at what enhanced due diligence measures should be applied to them.

[Baroness Hayter of Kentish Town (Lab)]

Does the Minister accept that we could therefore exclude all Members of Parliament?

[Baroness Penn (Con)]

I do not think that would be consistent with the Financial Action Task Force guidance that is interpreted at a UK level.

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[Earl Attlee (Con)]

Further to the questions of the noble Baroness, Lady Bowles, can the Minister point to any illegal activity on the part of a parliamentary PEP that has been detected as result of the money laundering regulations?

[Baroness Penn (Con)]

My Lords, to deal with the question of the risk assessment undertaken as part of this work, as I have already said, the Government have engaged closely with law enforcement and the intelligence community to inform our understanding of the risk in this area. It is a difficult area, and it is not particularly appropriate to go into detail on the contents of the risk assessment, given the sensitive nature of the information. As I also set out, the context is that there is potential for those in positions of influence to make domestic PEPs targets for influencing behaviour by serious and organised criminals and hostile state actors. The potential links between domestic PEPs and criminal activity vary, including abuse of political position for personal gain or links to overseas corruption.

I very much understand the desire by those directed by the regulation to hear more about that risk assessment. It was a question that I anticipated and to which I sought to get as full an answer as possible for the Committee. I am under constraints, but I shall none the less take away the requests from noble Lords to see whether there is any more I can do to provide more information on that point.

[Lord Kirkhope of Harrogate (Con)]

I follow up the inquiry of my noble friend Lord Attlee about statistics—whether parliamentarians have actually fallen foul—and take it one stage further. With regard to the particularly appalling way in which family members are implicated here, do we have statistics on how many family members of parliamentarians have fallen foul? Surely, they are implicated simply because they are related to someone who is classified as a PEP. We have mentioned human rights, but this provision cannot be fair or proper and should surely be removed.

[Baroness Penn (Con)]

As I said, I shall take away the point about what further I can say about the work on the risk assessment. The focus has been on looking at risk, and my understanding is that, in considering that, the question of close associates or family members—I believe that is the terminology in the regulations—has also been considered.

[Baroness Hayter of Kentish Town (Lab)]

I am sorry about this, but the Minister will not be surprised, because we have had 10 years of this issue. There was a review last year, which she reported on in the House, which said that no change was needed, which is extraordinary. She referred to the case where we all got an apology, but that was only because we kept on standing up and asking for it, otherwise it would never have happened.

The important thing that I wanted to raise is that this somehow is going further than anti-money laundering—it is about general corruption. Some of us have been debating the National Security Bill, where it is being dealt with in another way. I do not think that the Minister has been following that Bill, but I can understand that she has not because she has been involved with this one. We now have the FIRS scheme, which will be set up when the Bill becomes an Act and which is about the other things—the approach to politicians by malign forces trying to corrupt us, or whatever. So can we take out corruption and that sort of thing, because the National Security Bill will deal with that? This is simply to be simply about anti-money laundering—in other words, dirty money.

A lot of what the Minister has said goes beyond that, and the fact that she cannot tell us means that the spooks—who tell us that they do not want it, by the way—want it for some other cause. That is not the purpose of the provisions on anti-money laundering; it is about dirty money. Perhaps the Minister could talk to the Home Office and Tom Tugendhat about how much is covered now on the approach to any of us as politicians by malign forces, because this is separate.

[Baroness Penn (Con)]

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

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

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

[Baroness Noakes (Con)]

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

[Baroness Penn (Con)]

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

[Lord Jackson of Peterborough (Con)]

The Minister is doing a very good job on a very sticky wicket. I am not surprised. Notwithstanding what she said about risk assessments and how that has to be, of necessity, a discretionary issue, the problem we are identifying, which the Government should address if they come forward with an amendment at Report, is the opaque nature of identifying these individuals and the offence against natural justice, because when people have accounts closed they are often not told why, who made the decision, on what basis and using what methodology. That is a serious issue and, after 10 years, one that the Government should address, if necessary by a government amendment.

[Baroness Penn (Con)]

I absolutely take that point. It comes back to the appropriate and proportionate enforcement of these regulations. I know that that is something noble Lords have raised previously, but we need to continue to work to ensure that it takes place.

[Baroness Bowles of Berkhamsted (LD)]

This goes back to when the Minister mentioned the FATF provisions. I thought she mentioned the risks in business relationships. All the stuff we get as PEPs is our personal stuff; it is nothing to do with business relationships. I have not been interrogated about anything to do with the London Stock Exchange, of which I am a non-executive director; I am interrogated about my father’s will and that kind of stuff.

Again, I am happy—in fact I would almost prefer—for the Minister to write the replies because it is hard to put together quoted bits and pieces, even when we get them back in Hansard. It seems that the whole risk assessment business is being set aside at the behest of the security agencies, which just like the idea that they have another captive load of people and that they may be able to track something with money—which I doubt, because these forms go to an outsourced place, they are filed, and nobody ever looks at them. There is no “know your client” going on. They may look at one or two, but I do not see how it adds up at all, even taking that security aspect into account, because if anybody was really a security threat, there are other ways of vetting.

[Baroness Fox of Buckley (Non-Afl)]

I am confused. I always encourage people to find out what is happening in this House by telling them to look at the speeches and follow Hansard, but now I am dreading anyone watching this because we have a government Minister implying that the security services at looking at us, particularly our private financial affairs, because we are high risk. Why? I do not think that is true. I want to denounce the notion that because you are in the House of Lords you are more likely to be doing something such as that.

I do not think the Minister can answer my second point, but I think we would all feel that it is a generalised accusation rather than specifically going after individuals who might be doing things that are wrong based on evidence, which nobody here objects to. Never mind the families; I have got to the point now where it is not just the families. I am sitting here feeling embarrassed, thinking, “Oh god, somebody is basically saying that the security forces think that we are all up to no good”. If the public find that out, it is said by a Minister and it is the general atmosphere, that is not good, is it? I usually put my speeches up on social media; I am not putting this one on. I do not want anyone to know about this conversation, because it will discredit the reputation of this House far more than anything else.

[Baroness Penn (Con)]

My Lords, I have already set out for the Committee, and I repeat now, the reasons why UK domestic PEPs may be at greater risk of money laundering. For example, in the general sense, the positions of influence that we have can put us at greater risk. I have also tried to set out—and will set out in writing for noble Lords—the approach that we are taking to look at risk in this area. I will share any further details that I am able to.

[Baroness Bowles of Berkhamsted (LD)]

Following on from what has just been said, I would quite like the Minister to rephrase what she said: that we are at greater risk of money laundering. I cannot let that stand on the record.

[Baroness Bowles of Berkhamsted (LD)]

I can let stand that we might, in some instances, be at greater risk of being targeted for various things, and I hope that we also have a greater capacity for repelling such actions, given the experience of people in the House and having done the sorts of things that we have done throughout our lives. I am not prepared to accept that kind of statement with any acquiescence whatever on my behalf or, by the sound of it, on behalf of colleagues here.

[Baroness Penn (Con)]

I am very happy to clarify for the Committee and anyone who may be reading our proceedings, that we, due to our positions of influence, are at greater risk of being targeted by those who may seek to engage in money laundering.

[Earl Attlee (Con)]

My Lords, I say to the Committee that if someone tried to target me in any inappropriate way, I would report it to the appropriate authorities immediately.

[Baroness Penn (Con)]

I am sure that many of us in this Committee would do so—

[Noble Lords]

All!

[Baroness Penn (Con)]

I am sure we all would. The noble Baroness, Lady Bowles, asked me to set out in writing the position of the Financial Action Task Force in terms of the requirements for foreign and domestic PEPs. I will also set out in writing the position on the risk assessment that has been undertaken, so that everyone has it and it is not just in the toing and froing of the exchanges in this Committee. I will clearly set out for the Committee the Government’s position on this.

--- Later in debate ---

[Baroness Penn (Con)]

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

[Baroness Noakes (Con)]

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

[Baroness Penn (Con)]

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

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

[Baroness Hayter of Kentish Town (Lab)]

The noble Baroness does not need to respond on this; it was a placeholder.

[Baroness Penn (Con)]

Okay—I was going to talk about the engagement that we have conducted so far and will continue.

My noble friend Lord Trenchard touched on my noble friend Lord Forsyth’s Amendment 234, but I am not sure whether anyone spoke to it specifically. In my response, I addressed the Committee’s desire to focus its attention on the statutory changes, and I am not sure we had a detailed discussion on the other proposals put forward here.

Noble Lords have made their position on the issue very clear. I hope that, to some extent, they have also heard the rationale for the Government’s approach and would agree with the desire to be in line with international standards in any action that we take in this area. As the noble Lord, Lord Tunnicliffe, said at the start of his remarks, we should bear in mind the context of the Government’s efforts, very much supported by this House—we are often pushed to go further by this House—in tackling issues of economic crime, which include money laundering. We have to recognise that London and the UK being such a centre for financial services, and the great benefits that that brings, also brings greater risks. It is right that we make sure that we have a regime that manages those risks as effectively as possible.

I shall write to noble Lords on the matters that I have mentioned, and any other matters in looking at this debate again, on which I can provide further clarity. I am sure that I will engage with noble Lords further on this issue ahead of Report.

[Lord Tunnicliffe (Lab)]

Would the Minister also engage with the banks and financial institutions to see whether they can improve their performance in being reasonable?

--- Later in debate ---

[Baroness Penn (Con)]

The noble Lord is absolutely right to say that. This Government are committed to do that with the regulator. I understand this Committee’s desire to look at legislative change, but I have also heard from the Committee that the guidance is clear on the lower risks of PEPs, and the challenge really lies in the effective implementation of that guidance. We should not take our eye off that work. It is something that the Government are absolutely committed to doing.

I know that noble Lords have raised the challenges of engaging with the FOS on this issue, but I remind them of that route. I have also said to noble Lords, as the FCA has said, that in the list of contacts that we have provided to parliamentarians with issues with their status as politically exposed persons, the FCA will monitor any of those points of contact in terms of complaints to look more systematically at whether there are issues in individual institutions so that further action can be taken on that basis. The Treasury will continue to engage with the FCA on how we can ensure that that takes place.

[Baroness Hayter of Kentish Town (Lab)]

I think that we have already mentioned why the FOS is so inappropriate. To expect a judge to take a complaint to the FOS is frankly out of order. It is no way for this issue to be raised. It is a very small number—but it is not appropriate to ask very senior judiciary to go via FOS, if their children are being affected. That is really not the right way forward.

[Baroness Penn (Con)]

I appreciate that it will not be the right route of recourse in many circumstances, but I do not agree that it is never the right form of recourse for people. It is important for people to know that that route is there. For particular cases, it may be appropriate. The noble Baroness has set out why, in many other cases, that is not the form of recourse that people want, which is why we have also set out other points of contact and ways in which to try to resolve these issues, which also act as a data point for the FCA as the regulator to look at issues in particular banks or institutions that are not applying the guidance appropriately.

[Lord Moylan (Con)]

My Lords, we have had a very valuable debate. I am grateful to all noble Lords who spoke in it and, if I do not thank them individually, I hope that they will forgive me, given the length of the debate so far. It is unusual, at the end of such a long debate, to be able to summarise the arguments made in one or two sentences—but I can, because everybody, in effect, said the same thing. That is that we want to see change, and the majority of us want to see legislative change.

Having said that I am not going to refer to individuals, there are two speeches to which I will briefly refer, because they were important. The first was the winding-up speech from the Labour Party Front Bench by the noble Lord, Lord Tunnicliffe. He spoke very briefly, but his words were very pregnant and important as we approach Report.

The second, which I will deal with at greater length, was the speech made by the noble Baroness, Lady Bowles of Berkhamsted, who acutely put her finger on a key issue that must be addressed if we are to achieve the legislative change that we want to see. That is about the definition that we choose. When I spoke earlier, I said that there must be a way in which to distinguish satisfactorily between domestic and foreign. In doing this, I will not use the term “non-discriminatory”, because that has legal implications, but we want to do it in a way that is fair and is seen to be fair by everybody who might be affected. At least a couple of suggestions have been made, and they both have merits. This is something to which we need to return as we approach Report, to make sure that we are comfortable with it—but I thought that the noble Baroness put her finger on that very acutely.

Normally, at this stage in a speech of reply, I would turn to a lengthy and careful analysis of the remarks made by the Minister, but she has been subject to a lengthy and careful analysis by practically everybody else in the course of her winding-up speech. So perhaps I will spare her that, and congratulate and thank her for taking, with such good grace, the questions and points that were put to her.

However, I shall refer to two points, the first being the security services. Frankly, I have never come across a case where the police or security services have given up a right to scrutiny that they already have. There is always some excuse for why it is necessary. I find that unconvincing—and the reasons are not, per se, on the grounds that it is the security services, but because of the arguments made here. It is astonishing that there is a special list of people in scope of suspicion of money laundering and terrorism, who happen to be the list in Regulation 35(14), when all of us could supply—even a five year-old could supply—a list of people much more likely to be in scope, who are not being subject to the same scrutiny.

On my second point, I do not think that I am in the wrong here, and suspect that my noble friend has not quite got it right, but am happy to be corrected. What are our international obligations to the FATF, insofar as we have legal obligations to it in a legal sense, given that it is not a legal body?

From this little iPad, I read out and referred very carefully to the current version of recommendation 12. It quite clearly says “foreign”; it places no obligation on the parties to the agreement to do anything about domestic PEPs. Clearly—this is where there may be a degree of confusion—in deciding who is a foreign PEP, you have to make a decision, if you like, that they are not a domestic PEP. Naturally, a sift is therefore required to get to the point of identifying that this is a foreign PEP, but I suspect that too much has been built on that, and there is some suggestion that that sift—are they foreign or are they domestic?—involves some obligation to scrutinise them. However, it simply is not there, so I referred in the course of my noble friend’s speech to the interpretative notes, and there is an interpretative note to recommendation 12, but it deals entirely with life assurance policies.

I think I also heard my noble friend say that recommendation 22 was relevant. That may have been a mishearing on my part but, looking at recommendation 22, it deals almost entirely with casinos, real estate managers and trusts. I do not know why they are all in the same recommendation, but there we are.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I thank His Majesty’s Treasury for sharing its policy on the Edinburgh reforms last month. This Government, following their initial floating of the HMT intervention powers, have given parliamentarians serious cause for concern regarding their judgment. We should be slow to trust that they have the judgment and operational competence to implement the changes in the Edinburgh reforms safely and effectively. Could the Minister give an indication of the Government’s intentions and/or direction of travel concerning both ring-fencing and the senior managers and certification regime?

We heard from the Bank of England governor this week that the Government’s version of Solvency II reform increases risks for insurance firms by 200% more than the Bank’s preferred option. I think we are vindicated in our general concern about the Government’s gung-ho approach to financial stability. Sweeping changes to ring-fencing and the senior managers and certification regime are too important to be left to statutory instrument. The amendments from the noble Baroness, Lady Kramer, are sensible safeguards that the Government should consider thoroughly.

We have seen chaos in two banks this week—Silicon Valley Bank and Credit Suisse. What is the Government’s assessment of whether other systemically important banks are safe and sound? Did we see SVB and Credit Suisse coming? Did the regulators? What are they proactively doing to protect UK consumers and investors?

My view on Amendment 216 is not yet fully formed; I want further discussions with colleagues. I agree with the general view on Amendments 241C and 241D that the issue is really about scrutiny and accountability. In my view, it is impossible to argue that a relaxation of either ring-fencing or the senior managers and certification regime is other than very significant. The present method of accountability through an affirmative instrument is clearly insufficient and I commend the device of the noble Baroness, Lady Kramer, which she has included in these two amendments. The Government should support them.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I will speak first to Amendment 216, which pertains to the Government’s announced reforms to Solvency II, made possible through the Bill’s revocation of retained EU law.

The Government are reforming Solvency II, the rules for prudential regulation of the insurance industry currently set by the EU, to reflect the UK insurance market’s unique features. These reforms will provide incentives for insurers to increase investment in long-term productive assets by more than £100 billion. They will also benefit consumers by increasing insurers’ ability to provide a broader range of more affordable products.

The Government have committed to make changes to the matching adjustment, an accounting mechanism whereby insurers can match their long-term liabilities with long-term assets and hold less money to pay out claims. These reforms will incentivise firms to invest significantly more in long-term productive assets such as infrastructure. This investment will support growth across the UK and the Government’s climate change objectives.

The noble Baroness’s amendment would instead result in a stricter treatment for some assets than under current rules. I reassure noble Lords that the Government’s reforms to Solvency II strike a careful balance between boosting growth across the economy and maintaining high standards of policyholder protection. Insurers will still be required to hold extra capital to safeguard against unexpected shocks, they will still have to adhere to high standards of risk management, and they will still be subject to comprehensive supervision from the PRA, our world-class independent regulator.

The noble Baroness, Lady Kramer, asked whether we would replicate the Canadian Government’s position with regard to pensions and insurance firms in this context. She referred to statements in the Budget about pension funds—although I think they were focused more on defined contribution pension funds than defined benefit pension funds. I do not know the detail of the specific Canadian regime, but the reforms proposed here do not pose risks to financial stability. As I said, each insurer must still hold enough capital to survive a 1-in-200-year shock over one year. Insurers will still have to adhere to the high standards of risk management. The Government and the PRA have announced a series of additional supervisory measures that the PRA will take forward to ensure that policyholders remain protected. For example, the PRA will now require insurers to take part in regular stress-testing exercises.

[Lord Eatwell (Lab)]

May I comment on the issue of stress tests, which the Minister also raised during Questions this afternoon? You can stress test only risks that you know are there. It depends on the underlying model that you create to examine in your stress tests. Thus stress tests did not pick up the LDI problem at all because it was not there in the models that were used. In financial services, risks appear in entirely unexpected places, and relying on stress tests is, and has been demonstrated to be, a very weak answer. She should reconsider her reliance on this argument.

[Baroness Bennett of Manor Castle (GP)]

Since it is related, I also question the readiness for a 1-in-200-year shock. We have seen very similar kinds of mathematical approaches, if you like, taken to issues such as flood risk and other climate risks, and they have been found to be very ineffective in dealing with problems. They only increase the failure to understand risks.

[Baroness Penn (Con)]

I would point to stress tests as one of the tools that the Bank of England, including the FCA and the PRA, has in its toolbox for securing financial stability. It is not the only tool that it uses. The noble Lord is right that it tests against certain scenarios, which are updated each year to take into account the changing picture around the world and look at different risks, but it can test for only the risks that we have thought about. It is a tool in the toolbox, not a solution to everything.

The noble Lord mentioned LDI. The picture there is mixed. It was identified as a source of risk by the Financial Policy Committee but the extent of movement in gilt prices that it was then stress-tested against was far greater in the scenario that we saw unfold. It may be a good example of the benefits of being able to horizon-scan and look for risk—risk was identified—but also of the limits of some of that work. I completely acknowledge that. The same applies to the point made by the noble Baroness, Lady Bennett.

Amendments 241C and 241D relate to important regulatory reforms introduced following the global financial crisis and the recommendations by the Parliamentary Commission on Banking Standards. I pay tribute to the important work of that commission and to its members who are here today. It has had a lasting legacy in improving the safety and soundness of the UK’s financial system.

Amendment 241C relates to the ring-fencing regime, which, as we have heard, is a major post-crisis reform separating retail activities from investment banking activities in large banking groups. As required by the Financial Services (Banking Reform) Act 2013, the Treasury appointed an independent panel, chaired by Sir Keith Skeoch, to review the ring-fencing regime. The legislation required this review to take place after the regime had been in operation for two years; that review concluded in March 2022. I say to my noble friend Lord Trenchard that the Skeoch review looked at the questions about the effectiveness of the ring-fencing regime, and it is in the context of that review that we are discussing the way forward.

In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime. These broadly follow the recommendations made by the independent review. It concluded that the financial regulatory landscape has changed significantly since the last financial crisis—a point made by my noble friend Lady Noakes. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can be managed in an orderly way in future, minimising risks to depositors and public funds.

In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the regime. Crucially, the panel stressed that these could be made while maintaining financial stability safeguards. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. I assure noble Lords that the Government remain firmly committed to the objectives of the ring-fencing regime: to protect core banking services, such as retail deposits, from risks elsewhere in the financial system while minimising risks to taxpayers in the case of a bank failure. As recent events have shown, it is critical that the Government and regulators have the necessary powers to act decisively in pursuit of these objectives.

In response to the review, the Government have announced their intention to consult later this year on a series of near-term reforms to the ring-fencing regime to implement the independent review’s recommendations. The proposed reforms will make the regime more adaptable, simpler and better placed to serve customers, while maintaining important protections for depositors and financial stability. Alongside this, and in response to the review’s longer-term recommendations, the Government recently published a call for evidence that explores how better to align the ring-fencing regime with the resolution regime. I assure all noble Lords that, in the context of that longer-term call for evidence, no decisions have been made on the longer-term future of ring-fencing. The call for evidence is seeking views on a wide range of options including the possibility of disapplying the regime where banks are deemed resolvable, which was one of the Skeoch review’s recommendations. It also seeks views on retaining or further alternative options for reforming the regime.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, on the digital pound, we support the Bank of England’s work exploring the potential benefits of a safe and stable central bank digital currency, but the Government’s overall approach to crypto remains unclear.

With the collapse of FTX, it is clear that crypto can pose a real threat to normal people in the real economy and therefore may pose a systemic risk in future. The approach HMT has taken to the digital pound is a welcome contrast to this Administration’s eagerness to lean into a crypto Wild West in the recent past. We need to get serious about attracting innovative fintech companies to the UK by safely harnessing the potential of new technologies. How will the Government do this?

On the amendments in general, the issue of accountability has come up once again. The concept of using primary legislation to have a check on these ideas is clearly practical and therefore very attractive, but it will have problems. If the Government would only embrace our concerns about accountability and come forward with a proper and comprehensive accountability structure, perhaps we would be able to develop a more sophisticated approach than the rather raw power of primary legislation. However, as a fallback it is very attractive.

[Baroness Penn (Con)]

My Lords, the Government have been transparent about their plans to enable the use of digital identities in the private sector, including in financial services, and we are committed to ensuring the scalability, flexibility and inclusivity of secure digital identities.

The Government initiated their digital identity programme following industry calls for the Government to take the lead in developing common standards for digital identity across the whole economy. We continue to believe that a whole-economy approach is the right way forward, and we are working with stakeholders to deliver this at pace.

For example, the UK digital identity and attributes trust framework has already enabled right to work, right to rent and criminal record-checking processes to be digitised, making these checks quicker and more secure. In addition, measures in the Government’s Data Protection and Digital Information (No. 2) Bill, which was introduced to Parliament on 8 March, go further by securing the reliability of digital identity services across the economy for those businesses and consumers who wish to use them. The Government also recognise that greater clarity with respect to how digital identity services certified against the digital identity and attributes trust framework support requirements under the Money Laundering Regulations will be key for market uptake. As set out in the Government’s 2022 Money Laundering Regulations review response, we have committed to considering this too.

I hope that I have reassured my noble friend Lord Holmes that the Government remain committed to enabling the use of secure, reusable digital identity products across the UK economy and that Amendment 218 is therefore not necessary.

Turning to Amendments 220 and 221, also from my noble friend, the Centre for Data Ethics and Innovation guidance has not been designed to form the basis of regulatory requirements relevant to financial services and is unlikely to address AI risks specific to that sector. Appropriating CDEI guidance for the basis of regulation that is aimed at the wider governance of AI through non-regulatory tools and industry-led techniques is therefore likely to lead to unintended consequences; however, I appreciate my noble friend’s point that he used the CDEI for illustrative purposes.

I assure my noble friend that the newly created Department for Science, Innovation and Technology is already developing a cross-economy, pro-innovation framework for AI regulation, underpinned by a number of cross-sectoral principles to strengthen the current patchwork approach to regulating AI directly. Further proposals for the new regulatory framework will be published in a White Paper in the coming weeks. Through our proposals for a new AI regulatory framework, we are building the foundations for an adaptable approach that can be adjusted to respond quickly to emerging developments. The vast majority of industry stakeholders we have engaged with agree that this strikes the right balance between supporting innovation in AI while addressing the risks.

Furthermore, the FCA, the PRA and the Bank of England recently published a discussion paper on how regulation can support the safe and responsible adoption of AI in financial services. Therefore, to avoid unintended complications with the use of digital identities and artificial intelligence in the financial services sector, I hope that my noble friend will not press his amendments.

Finally, I turn to the important topic of central bank digital currencies and Amendments 241F and 241FD, both ably introduced by my noble friend Lord Forsyth. The Government have been clear that they consider that Parliament will have a vital role to play in the future of any digital pound. As I set out to my noble friend Lord Bridges in a previous debate in the Chamber, when we discussed the findings of the report to which my noble friend referred, the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint Treasury and Bank of England consultation paper published on 7 February set out, the legal basis for the digital pound will be determined alongside consideration of its design; this is the subject of ongoing work.

[Lord Forsyth of Drumlean (Con)]

Could my noble friend the Minister just define what “vital” means? Does it mean primary legislation?

[Baroness Penn (Con)]

As I said, the approach we take will be determined alongside the consideration of any design of a central bank digital currency. The decision to move ahead with a CBDC has not yet been taken; however, we do believe that it is likely to be needed in future. Although it is too early to commit to build the infrastructure for one, we are convinced that further preparatory work is justified. Therefore, that definition will become clearer as the design of the approach also becomes clearer—but the commitment at the outset to parliamentary engagement is there.

[Lord Vaux of Harrowden (CB)]

The Minister just made a statement that it is likely to be needed in future. Can I ask a very simple question: why? Why is a CBDC likely to be needed in future? That seems a fairly bald statement.

[Baroness Penn (Con)]

My Lords, we may not wish to repeat the debate that we had in the Chamber earlier this year, but I was going to address my noble friend’s question about retail versus wholesale and the point from the noble Lord, Lord Vaux, about the use case for a CBDC.

The noble Lord, Lord Eatwell, made one of the points in relation to a CBDC. We want to ensure that central bank money, which is currently available to the public only as cash, remains useful and accessible to the public in an ever more digitalised economy. We have heard about access to cash in our debates earlier in Committee.

[The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)]

My Lords, I am sorry to interrupt the Minister but there is a Division in the Chamber. The Committee will adjourn for 10 minutes, after which we will resume and allow the Minister to finish what she had to say.

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[Baroness Penn (Con)]

My Lords, I was explaining why we think that the UK may need a digital pound in future. The central point is that we want central bank money, which is currently available to the public only as cash, to remain as useful and accessible as ever in an ever more digitalised economy.

I was going to address my noble friend Lord Holmes’s question about whether the work we are taking forward is focused on a wholesale or retail central bank currency. The proposal being considered is potentially to introduce a retail CBDC at some point in the future. With regard to a wholesale CBDC, banks have access to electronic central bank money in the form of reserves; we are open to exploring innovative ways in which wholesale firms could use reserves. There is a programme for reform under way on electronic central bank money in the form of reserves that will bring similar benefits to those that we see for CBDCs in the retail space.

[Lord Forsyth of Drumlean (Con)]

Is there going to be a limit on the amount that people can hold in this retail central bank digital currency? Does the Minister accept that, if there is no limit, that will have major implications for financial stability?

[Baroness Penn (Con)]

These are some of the questions that we want to consider through the consultation that is currently open and any further work. That consultation recognises the financial stability implications of developing such a proposal; we will want to consider them as we take this work forward.

[Lord Tunnicliffe (Lab)]

I hope that the Minister anticipates consultation and research. To me, “consultation” means coming back to the industry. The industry comes from a perfectly respectable position but it is one position. We need basic research, modelling and all the various techniques to explore the potential risks.

[Baroness Penn (Con)]

The noble Lord is right that the public consultation phases of this work are one element of the work that will be done by the Treasury and the Bank of England in developing this concept. There are many other strands of work that will also be undertaken. As we discussed in the previous debate, any such project would be a significant infrastructure project with significant financial implications so we would need an appropriate approach acknowledging that.

We are at an early stage of this work. As I said, we have not taken the decision to go ahead with a CBDC but we think that there is sufficient evidence to justify further exploratory work. At this stage, it would be premature to include any provision in the Bill. I reiterate my previous statement that the Government expect to keep Parliament fully engaged in this work as it progresses. I therefore hope that my noble friend Lord Holmes will withdraw his Amendment 218.

[Lord Tunnicliffe (Lab)]

That word, “engaged”, flummoxes us all. We do not see a mechanism in our system. Will the Minister write to us and spell out what “engaged” means?

[Baroness Penn (Con)]

I can look to write to noble Lords on this question but I am not sure that I would be able to add more to my response at this stage, which is that the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint consultation paper set out, the legal basis for the digital pound will be determined alongside consideration of its design; that is subject to ongoing work. If I wrote to noble Lords at this stage, I think I would be saying exactly that but, if there is anything further to add, I would be happy to do so.

[Lord Sharkey (LD)]

I just want to make sure that I understand exactly what the Minister is saying. If the Government decide to bring in the digital pound, will they commit to bringing it in via legislation?

[Baroness Penn (Con)]

I am afraid that I have gone as far as I can in detailing the approach that we would take to Parliament. We expect to engage Parliament fully. However, the legal basis for the digital pound will be determined alongside consideration of its design. Work is not yet at the stage where we can provide that further clarity.

[Lord Holmes of Richmond (Con)]

I thank all noble Lords who have participated in this debate and my noble friend the Minister for her response. At this stage, I beg leave to withdraw the amendment.

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[Lord Tunnicliffe (Lab)]

There is no official Labour Party position on this, but I feel enormous sympathy for the position of the noble Earl, Lord Attlee. I hope the Minister will take this away, not as a legislative proposal but as a problem to be solved, and ensure that it is considered at a very senior level in the Treasury.

[Baroness Penn (Con)]

My Lords, before I speak to his Amendments 223 and 241FB, I first thank my noble friend Lord Attlee for his engagement and for bringing to my attention the specific example he has raised today as context for his amendments. I commend his staunch support for Ukraine, and the Government remain fully committed to supporting Ukraine in the face of the relentless Russian bombardment.

I reiterate to the Committee that the money laundering regulations are a vital part of the UK’s comprehensive economic crime response. The regulations are designed to combat illicit finance but should not be barriers to legitimate customers, including those connected with the export of military equipment to the Ukrainian defence forces.

As the Prime Minister has set out, the Government are fully committed to helping Ukraine emerge from the war with a modernised economy that is resilient to Russian threats. Of course it is important that those contributing towards this are not prevented unnecessarily from carrying out their business, but this needs to be balanced with the existing controls which protect this country, and international partners, from risks of money laundering.

It is important that we do not take steps that might allow the money laundering regulations to be circumvented by bad actors, even in circumstances such as this. It is therefore right that financial services firms continue to be empowered to carry out their own, risk-based due diligence when financing the export of armoured vehicles or military equipment, or individuals who are engaged in the international defence industry.

The money laundering regulations are purposefully not prescriptive and are designed to allow firms to make their own decisions about how to comply, balancing their understanding of the risk with proportionality. The Government do not and will not involve themselves in commercial decisions of individual firms but we can be clear that, where all the correct licences are in place, the money laundering regulations should not be a barrier to the financing of legitimate export activity.

[Earl Attlee (Con)]

I am sorry to interrupt my noble friend, but I would like to make it clear that Peter does not need any financing. The other cases that I have come across in the aerospace and defence sector are very well financed; that is why their businesses are not very attractive to the banks, which can withdraw financial services because there is no money in it. Peter does not need finance; all he needs is the bank to process the money, but the bank has a real difficulty processing money from Ukrainian businessmen.

[Baroness Penn (Con)]

My Lords, I was making the point that there is a wider context here that there should be no barrier to the financing of legitimate export activity.

Turning to the point made by my noble friends Lord Attlee and Lord Trenchard, the government process for the granting of export control licences focuses on the end use of goods rather than the source of funds paying for them. It is therefore distinct from the due diligence checks that a bank would carry out before conducting the transaction. I assure noble Lords that, through the Government’s engagement with my noble friend on this, we have engaged with the Export Control Joint Unit, the Financial Conduct Authority and other partners on this issue. While I appreciate the frustrations of individual cases, we are not aware of a systemic issue. The Government will continue to monitor reports of similar problems; if we identify a systemic problem, we will act to address it.

I turn to the solutions suggested by my noble friend. The noble Lord, Lord Eatwell, and my noble friend Lady Noakes are right that our obligations around anti-money laundering regulations stem from our international obligations to the Financial Action Task Force. The approach set out in these proposals would very likely be in contravention of those obligations. My noble friend Lady Noakes is right that the current version of our anti-money laundering regulations reflects our membership of the EU, which is consistent with those obligations from the Financial Action Task Force, but in some areas goes beyond them.

I turn to Amendment 238, tabled by my noble friend Lord Holmes of Richmond. The Government undertook a review of the money laundering regulations, which was published last year. This was a comprehensive assessment of the effectiveness of their implementation and whether they had led to unintended consequences for businesses or consumers. It explicitly assessed whether aspects of the money laundering regulations remain appropriate and proportionate in light of the UK’s exit from the EU and the additional flexibilities that affords us. It identified a number of areas for reform to make the regulations more proportionate and reduce unnecessary burdens on legitimate customers, which we will take forward through future updates to the regulations. These reforms will further tailor the regime to the UK’s risk profile, following the removal of specific European requirements from the money laundering regulations last year.

While the Government remain committed to ensuring the proportionality and effectiveness of anti-money laundering regulations and the regime around it, and monitor the effects on financial inclusion, the review required by Amendment 238 would largely repeat the exercise conducted last year, of which we are still to implement the full results.

My noble friend referred to the previous group on digital identity. He is absolutely right; we recognise that greater clarity on how digital identity services are certified against the Government’s digital identity and attributes trust framework would support requirements under money laundering regulations that will be key for market uptake, so we see the opportunity there and the role for government in providing assurance on that process of uptake as a potential technical solution to make some of these processes easier. As set out in our 2022 money laundering regulations review response, we have committed to consider this fact too.

For the reasons I have set out, I hope that my noble friend Lord Attlee can withdraw his amendment and that my noble friend Lord Holmes will not move his when reached.

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[Lord Sharkey (LD)]

My Lords, I agree with everything that the noble Lord, Lord Eatwell, has said. We are happy to support this amendment. I simply have two questions and one observation about it.

The amendment says that we must include “green infrastructure”. Is there a practical, generally agreed working definition of what that actually means? I also notice that, in carrying out the review, the Treasury must consult a list of organisations. The final group of organisations is “relevant financial services stakeholders”. Is the intention also to include professional advisers? They would be a vital addition; perhaps that should be made explicit as we go forward.

My observation is that proposed new subsection (3)(c), which talks about

“establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank”,

is an extremely good idea. We should make sure that this happens as soon as we can.

[Baroness Penn (Con)]

My Lords, the Government remain fully committed to the objective of unlocking pensions capital for long-term, productive investment, where it is in the best interests of members. High-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that developing the next generation of globally competitive companies in the UK will require unlocking defined contribution pension fund investment into the UK’s most innovative firms.

That is why, in the Spring Budget last week, the Chancellor committed the Government to working with industry and regulators to bring forward an ambitious package of measures by this autumn. He also set out a number of initial measures to signal the Government’s clear ambition in this area. They included increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment; spurring on the creation of new vehicles for investment into science and tech companies tailored to the needs of UK defined contribution pension schemes by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative; and leading by example by pursuing the accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will shortly come forward with a consultation on this issue.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

We do not have a fixed view on this proposal and therefore will listen to the response of the Government. At an individual level, when invited to pay my off-sets to British Airways, I am deeply suspicious of them making any useful contribution. My general view on this Bill is that good regulation is important, because the problem with the financial services industry is that any areas of weakness can escalate into a significant wider impact. I take the point that this area of activity will almost certainly expand and there is a good prima facie case that it should be regulated.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government recognise the potential for off-setting to enable businesses to address emissions that cannot be reduced through decarbonisation strategies. As the Climate Change Committee has set out, they can play an important role in the transition to net zero.

Done well, and centred around high integrity, climate and nature off-sets through voluntary carbon credits can increase climate ambition, help mobilise finance to developing countries and provide a credible tool for the 1.5 degree transition. Done badly, and without integrity at their core, the potential for “greenwashing” clearly exists. Therefore, it is important that the voluntary carbon credits used by companies reflect genuinely additional removal of or reduction in greenhouse gas emissions.

The Government recognise that it is important to ensure the integrity of these markets if they are to play a role in mobilising investment. Concerns around the integrity of carbon and nature markets, from the supply of voluntary credits, their trading and green claims made by buyers through offsetting, must be addressed.

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[Lord Tunnicliffe (Lab)]

My Lords, I do not formally have a view on these amendments. It seems that they would have wide-ranging implications, and I shall consult with colleagues throughout Parliament about how we should come back to this issue. If a piece of legislation is proposed and supported by the noble Lord, Lord Sharkey, the noble Baroness, Lady Noakes, and the noble Viscount, Lord Trenchard, you have to think that it is pretty wide-ranging—in fact, close to impossible. Whether this is the right place to address this issue is a much bigger question than whether it is a good idea. It seems a pretty good idea, but I shall listen to the Minister’s response to the key point about the right place and the right mechanism.

[Baroness Penn (Con)]

My Lords, these amendments would introduce new parliamentary procedures when exercising the powers in the Bill, and the Government do not believe that they are necessary.

The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. This was recognised by the DPRRC, which praised the Treasury for

“a thorough and helpful delegated powers memorandum.”

The DPRRC has not recommended any changes to the procedures governing the powers in the Bill. That may, in part, answer the question from the noble Lord, Lord Tunnicliffe, about the right place. I have worked on enough Bills to know that that is not a frequent conclusion from the Delegated Powers Committee.

This includes the powers in relation to retained EU law. While they are necessarily broad, they are restricted in a number of important ways. First, they are governed by a set of principles that are based on the regulators’ statutory objectives. Secondly, they are limited in what they can be used for. For example, they cannot be used to create new offences. Thirdly, the powers over retained EU law are strictly limited to a subset of legislation. They can be used only to modify or restate retained EU law in financial services legislation, as set out in Schedule 1. Finally, only a small amount of primary legislation is included in the scope of this power, and it is all listed in Schedule 1, Part 4.

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[Baroness Kramer (LD)]

Could I ask a clarification of the Minister—I know that I have not participated? Has she just confirmed that in the Government’s view statutory instruments will indeed be making policy change? That would be important for us to understand. I believe that is what she has just said, but I thought I should confirm it.

[Baroness Penn (Con)]

I can only repeat to the noble Baroness my words, which were that consultation and informal engagement, including on draft statutory instruments, will take place where there is a material impact or policy change.

[Lord Deben (Con)]

If my noble friend is saying what the noble Baroness asked, she is making a very serious change. To object to the changes being recommended on the basis that this is the wrong place seems to me to be quite difficult to uphold.

[Baroness Penn (Con)]

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

[Baroness Noakes (Con)]

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

[Baroness Penn (Con)]

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

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

[Lord Tunnicliffe (Lab)]

Would the noble Baroness accept that we have heard that speech before? With every complex Bill where we have sought ways to have more control over statutory instruments, we get the same speech—that it has all been worked through, that the constraints are there and so on. Those of us who have to sit through statutory instruments are growing more and more uncomfortable at the increasing number of occasions when we want more involvement and commitment. We want a situation where some variation in the instruments would be possible and this is a way forward. It may not be the right way, but this is an area of powerful area in the House—the relationship between Parliament and the Executive.

[Baroness Penn (Con)]

The noble Lord, Lord Sharkey, I believe, referred to two pieces of work that looked at the wider concern around procedures when it comes to statutory instruments and the House’s involvement and ability to respond to them. I can talk only in relation to the Bill before us. Our approach is consistent with the policy approach to the regulation of financial services that the Government have set out and consulted on—the FSMA model. That delegates some policy-making both to the Treasury and then, significantly, to the regulators. In the context of the Bill, we are comfortable that our approach is appropriate to the model of regulation that we are advocating in these circumstances. I recognise the wider debate but, in the context of the Bill, we are confident that our approach is right and appropriate.

Coming to my noble friend’s specific question, I think the concern is around the definition of “securities” in the prospectus regime. The Government intend to include certain non-transferrable securities within the scope of the new public offer regime that is being developed as part of the review of the prospectus regime, which delivers on a recommendation of Dame Elizabeth Gloster’s review of the collapse of London Capital & Finance. We intend to capture mini-bonds and other similar non-transferable securities that may cause harm to investors if their offer is not subject to greater regulation.

The Government are keen to ensure that business that does not affect retail investors or is already regulated elsewhere, such as trading in over-the-counter derivatives, is not unintentionally disrupted by the reformed regime. We have been engaging with stakeholders on this point to understand the concerns of industry, and we are considering what changes we can make to the statutory instrument to address them.

The Government do not agree that the use of the super-affirmative procedure in this case is appropriate. Examples where it has been used include legislative reform orders made under the Regulatory Reform Act 2001 and remedial orders made under the Human Rights Act 1998. In both cases, the powers in question can be used very broadly over any primary legislation, due to the nature of the situations that they are intended to address. The delegated powers in this Bill are not comparable with these powers, and I have already explained how the powers over retained EU law are restricted and appropriately scoped. Therefore, in the case of the Financial Services and Markets Bill, we are confident that normal parliamentary procedures remain appropriate. I therefore ask the noble Lord, Lord Sharkey, to withdraw his amendment.

[Lord Sharkey (LD)]

My Lords, I am grateful to all noble Lords who have spoken in this short debate. I agree with the noble Baroness, Lady Noakes, about being able to amend SIs. It is a complicated and far-reaching issue and necessarily involves the House of Commons, but we need to find a mechanism for consulting all the interested parties and formulating a plan for reform. The Minister has not mentioned this, but, as I mentioned in my speech, this is to do with the balance of power between the Executive and Parliament. Many of our committees’ reports tell us in dramatic terms that the balance of power has recently shifted very significantly towards the Executive. To change that, we need to do something about our ability to scrutinise work that comes before us. That includes being able to amend it and not relying on a toothless system of negative and affirmative SIs, and it relies on being able to amend constructively regulations that might come before us.

As the SLSC said, it is clear that there is a need for such a mechanism to amend SIs and that finding a path to this fairly quickly is important. I agree with the suggestion by the noble and learned Lord, Lord Thomas, that here and now is a pretty good place to start thinking hard about what we do before we get to Report. It is true that the volume of skeleton Bills continues to increase, as does the abuse of delegated powers in a more general sense, and I cannot see it spontaneously decreasing, unless we do something about it.

As to Amendments 243A and 243B—the super-affirmative amendments—the case for them has been accepted by all speakers, except the Minister. We shall definitely want to revisit the issue on Report. In the meantime, I beg leave to withdraw the amendment.

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Moved by

[Baroness Penn]

242: Clause 76, page 89, line 36, after “Act” insert “, or under any other enactment,”
Member’s explanatory statement
This amendment and the amendment at page 89, line 37, would allow any provision that may be made by regulations subject to the negative procedure under this Act, or under any other enactment, to be made in regulations under this Act subject to the affirmative procedure.

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[Baroness Penn (Con)]

My Lords, through this Bill, the Government are seeking gradually to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation. Under this model, the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.

It is not the Government’s intention to commence the repeal of retained EU law without ensuring appropriate replacement through UK law when a replacement is needed. The Government set out their approach to the repeal of retained EU law in the document that I referred to earlier, Building a Smarter Financial Services Framework for the UK, which was published in December last year as part of the Edinburgh reforms. It makes it clear that the Government will carefully sequence the repeal to avoid unnecessary disruption and ensure that there are no gaps in regulation.

The Government are prioritising those areas that offer the greatest potential benefits of reform. They have already conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale markets review and my noble friend Lord Hill’s UK listing review. By setting out these priorities, the Government are enabling industry and the regulators to focus their work on the areas that will be reformed first.

My noble friend Lord Trenchard’s Amendment 246 relates to legislation implementing the Alternative Investment Fund Managers Directive in the UK. As has been noted, the UK is the second-largest global asset management hub, with £11.6 trillion of assets under management; this represents a 27% growth in the past five years. The sector also supports 122,000 jobs across the UK and represents around 1% of GDP. These statistics demonstrate the huge value of this industry to the UK and, while the Government would never be complacent, also suggest that the sector is in good health.

The health of the sector is underpinned by proportionate and effective regulation. The Government believe that this must include an appropriate regulatory regime for Alternative Investment Fund managers. These funds are major participants in wholesale markets; they take influential decisions about how capital is allocated, and it is vital that they are held to standards that protect and enhance the integrity of the UK financial system. Moving simply to repeal the legislation that currently regulates this sector without consideration of replacement could open the UK up to unknown competitiveness and financial stability risks. It could undermine the UK’s reputation as a responsible global financial centre committed to high standards of regulation, which could have significant ramifications for the UK’s relationships with other jurisdictions.

I understand that my noble friend Lord Trenchard has some concerns that the legislation deriving from the Alternative Investment Fund Managers Directive creates unnecessary burdens on innovative UK firms serving professional investors. The Government have not to date seen evidence that the reform of that directive is a widely shared priority across the sector.

[Baroness Lawlor (Con)]

Does my noble friend the Minister agree that UK law would be a better arrangement for supervising the sector than inherited EU law?

[Baroness Penn (Con)]

As I said at the start of my contribution, it is the Government’s intention to move all retained EU law when it comes to financial services into the FSMA model of regulation. That will apply to this area, too, but it is a question of sequencing and priorities. As I referenced before, we have set out our first wave of priorities and are seeking to look at those areas where the greatest potential benefits of reform lie. I am happy to confirm for my noble friend that it is our intention to move all areas of retained EU law on to a UK law basis.

[Baroness Lawlor (Con)]

Just for clarification, will that involve moving away from the precautionary, code-based approach of the EU, which very much influenced the sector post the 1990s and the thinking of our regulators? Will my noble friend confirm that, when the Government review the corpus of retained EU law for this sector, in line with their objects as has been stated, they will pay special attention to the need to rethink the framework of approach rather than simply adopting it? These are different ways of thinking.

[Baroness Penn (Con)]

My Lords, I would not want to pre-empt the approach for any specific area of regulation, but the principles on which we are seeking take forward this work are about looking at regulation and ensuring that we use the opportunities outside the EU to take the right approach to that regulation for the UK. My noble friend talked about the different perspectives taken by regulators in the different jurisdictions. That is right. The aim of moving from retained EU law is not simply to transcribe it into UK law but to ensure that it is well adapted to our own circumstances, too. However, I do not think that I can helpfully pre-empt the approach in each area in this debate, but only talk about some of those wider principles.

I was talking about the intention to move all retained EU law into the FSMA model. We have set out our priorities for the first areas in which we are seeking to do this. The Government have not to date seen evidence that the reform of the Alternative Investment Fund Managers Directive is a widely shared priority across the sector. However, the Treasury would of course welcome representations on this point. We are keen to engage further with industry and understand the sector’s priorities as we work to repeal retained EU law associated with alternative investment fund managers over the medium term.

The FCA also recently issued a discussion paper to consider whether wider changes to the asset management regime should be undertaken in future to boost UK competitiveness using the Brexit freedoms introduced by this Bill. This will allow the Government and the regulators to consider what replacement is appropriate for the legislation before commencing its repeal. For these reasons, I ask my noble friend to withdraw his amendment.

[Viscount Trenchard (Con)]

My Lords, I thank my noble friend the Minister for her reply, but I confess that I find it rather disappointing. I am grateful for the support that I received from my noble friend Lady Lawlor, who talked more than I had and expanded on what I had said about the emergence of the directive and the reasoning behind it at the EU level at the time. As she so well explained, the AIFMD system was always seen, not only at the outset but since then, to be unsuitable for the UK system.

My noble friend the Minister said that the Government have decided gradually to approach the question of repeal and reform of EU law—certainly, very gradually, I would suggest. As she rightly pointed out, this sector is hugely important and of huge value—she mentioned the figure of 122,000 jobs—to the City and the economy as a whole.

However, the Minister said that the financial services industry is underpinned by healthy and proportionate regulation, which I cannot agree with. I tried hard to explain the reasoning, as I understood it, for the introduction of this directive, and I tried to argue that it is not proportionate at all; it is widely regarded as being disproportionate.

The Minister said that there is no evidence of a widely held belief that the regulation underpinning this sector needs reform or revocation. I strongly question who she has been speaking to. In the last week, I have spoken to a very senior regulator of one of the Crown dependencies, who completely endorsed what I said: it is just not true to argue that this regulation is proportionate. The City has been hugely damaged over the years that the AIFMD regime has been in force. The Minister talked about 122,000 jobs, but how many more would there have been had we not, wrongly and unnecessarily, shackled this innovative sector of our financial services industry with this unnecessary, bureaucratic, cumbersome regulation, introduced entirely for political reasons?

I do not accept what the Minister said: that this would undermine the UK’s reputation. The UK’s present reputation, in the IOSCO and among other financial services markets, is that it has become steadily more bureaucratic. I talk to a number of other regulators, and I have technically been a regulator: I was the first non-Japanese to be appointed to the board of the Japan Securities Dealers Association, which has statutory, regulatory powers.

I very much hoped that the Minister would at least say that this is one sector where the Government recognise that there is disproportionate regulation, rather than argue that it is proportionately regulated, which I am convinced it is not. This would have been an opportunity to improve the City’s competitiveness. The listings review recently conducted by my noble friend Lord Hill of Oareford contains many instances of areas where the Government should move quickly. It is a pity that the Government are not using this Bill to move ahead immediately in areas where the case for further consultations is rather weak.

I hope that the Minister will bring back some better news when we next discuss matters such as this. In the meantime, I beg leave to withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Chapman of Darlington (Lab)]

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

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

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

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

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, before turning to the amendments at hand, I add my thanks to those of the noble Baroness, Lady Chapman, for the contribution of the noble Lord, Lord Tunnicliffe, to this Bill and the Labour Front Bench on Treasury matters. The noble Baroness referred to the noble Lord’s generosity; I have definitely found that to be the case. He has always had a very constructive approach and approached his work with kindness and wisdom, which is a great combination to bring to this House.

The amendments before us from the noble Lord, Lord Sharkey, Amendments 1, 116 and 117, would introduce new parliamentary procedures when exercising the powers in the Bill. As noble Lords have noted, very similar amendments were proposed to the retained EU law Bill, passed and then reversed by the Commons. We have just had a debate this afternoon on a modified version of those amendments, to which I listened very carefully, although I am not as expert in the passage of that Bill as some other noble Lords in the Chamber.

Many of the arguments covered in that debate also apply here, so I do not intend to repeat them at length. I want to focus on some specific considerations in relation to this Bill, which, as the noble Baroness, Lady Chapman, noted, takes a different approach to repealing retained EU law for financial services. That is because it enables the Government to deliver fundamental structural reform to the way in which the financial services sector is regulated.

The Government are not asking for a blank cheque to rewrite EU law. This Bill repeals EU law and creates the necessary powers for it to be replaced in line with the UK’s existing Financial Services and Markets Act 2000—FSMA—model of regulation, which we are also enhancing through this Bill to ensure strong accountability and transparency. A list of retained EU law to be repealed in Schedule 1 was included in the Bill from its introduction in July 2022 to enable scrutiny of this proposal.

Going forward, our independent regulators will generally set the detailed provisions in their rulebooks instead of firms being required to follow EU law. The Bill includes a number of provisions to enable Parliament to scrutinise the regulators; the Government have brought forward amendments to go further on this, as we will discuss later on Report.

Amendments 1, 116 and 117 would introduce rare parliamentary procedures, including the super-affirmative procedure, and create a process to enable Parliament to amend SIs. As I said in Committee, those procedures are not justified by the limited role that secondary legislation will have in enabling the regulators to take up their new responsibilities. The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. As I noted in Committee, the DPRRC praised the Treasury for a

“thorough and helpful delegated powers memorandum”.

It did not recommend any changes to the procedures governing the repeal of EU law or any other power in this Bill.

The powers over retained EU law are governed by a set of purposes that draw on the regulators’ statutory objectives. They are limited in scope and can be used only to modify or restate retained EU law relating to financial services or markets, as captured by Schedule 1. However, of course, the Government understand noble Lords’ interest in how they intend to use the powers in this Bill and are committed to being as open and collaborative as possible when delivering these reforms.

The Government have consulted extensively on their approach to retained EU law relating to financial services and there is a broad consensus in the sector behind the Government’s plans. As part of the Edinburgh reforms, the Government published a document, Building a Smarter Financial Services Framework for the UK, which describes the Government’s approach, including how they expect to exercise some of the powers in this Bill. It also sets out the key areas of retained EU law that are priorities for reform. Alongside this publication, the Government published three illustrative statutory instruments using the powers in this Bill to facilitate scrutiny.

When replacing retained EU law, the Government expect that there will be a combination of formal consultation, including on draft statutory instruments, and informal engagement in cases where there is a material impact or policy change, such as where activities that are currently taking place in the UK would no longer be subject to a broadly equivalent level of regulation. The Government will continue to be proportionate and consultative during this process, just as we have been up to this point.

Through the retained EU law Bill, the Government have also committed to providing regular updates to Parliament on progress in repealing and reforming retained EU law. I am happy to confirm that these reports will also cover the financial services retained EU law listed in Schedule 1 to this Bill.

I hope that I have satisfied noble Lords that the Government are committed to an open, transparent and consultative approach to implementing the reforms enabled by this Bill. I ask the noble Lord, Lord Sharkey, to withdraw his Amendment 1.

[Lord Sharkey (LD)]

I thank all those who have spoken in this brief debate—some more warmly than others, perhaps. In my initial speech, I forgot to be especially nice about Denis, the noble Lord, Lord Tunnicliffe; I regret that. I am of course disappointed by both his absence and the response of his successors. I repeat: when it comes to the need for real parliamentary scrutiny, the contents of this Bill are quite as important as the contents of the REUL Bill. That seems to me to be the essence of the matter. All the other arguments about the need to focus and get on with it on Report seem mechanistic; indeed, they are close to being excuses, in some ways.

The essential problem is that Parliament will be unable to scrutinise revocation and replacement, as it is set out in this Bill. I accept that it is not likely that we will revolutionise the way we treat these things as a result of this intervention, but perseverance is the only way of making any progress towards making certain that Parliament recovers its ability to scrutinise properly and does not continue to lose that ability. Although on some occasions—this is one of them—the outcome may be unsatisfactory in the short term, I am convinced that, over time and with enough persistence, we can find a way to do what the DPRRC recommended, which is restoring the balance between Parliament and the Executive. Having said all that, I beg leave to withdraw my amendment.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

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

[Baroness Penn (Con)]

My Lords, I join noble Lords in wishing my noble friend Lady Noakes and her husband well, and I look forward to her return to this House. As my noble friend Lord Trenchard noted, she worked with our noble friend Lord Callanan on amendments to the retained EU law Bill to introduce similar reporting standards to those in Amendment 3A. I can confirm that the reporting requirements in the retained EU law Bill already apply to the retained EU law repealed through Schedule 1 to this Bill, so the reports that the Government prepare under that obligation will include the Treasury’s progress in repealing retained EU law in Schedule 1.

I reassure my noble friends that through the Bill the Government are asking Parliament to repeal all legislation in this area, and we expect to commence it fully. The revocation is subject to commencement, and each individual piece of legislation listed in the Bill will cease to have effect only once the Treasury makes an SI commencing the repeal. As I noted in Committee, this is being taken forward in a carefully phased and prioritised way to deal with retained EU law, splitting it into tranches and prioritising areas that will provide the most concrete benefits to the UK. The implementation will take place over a number of years, which means that we are prioritising those areas with the greatest potential benefits of reform. We have demonstrated intent and action in this area. We have conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale market review and the UK listings review by my noble friend Lord Hill of Oareford, which my noble friend Lord Trenchard referred to in his Amendment 3B. The whole- sale markets review reform in Schedule 2 demonstrates the Government’s pace and ambition for reforming retained EU law, and that is very much the case.

I turn to Amendment 3B. Of course the Government must think carefully before choosing to replace EU law, and understand the impact of any replacement. The Government have consulted extensively on their approach to retained EU law relating to financial services, and there is broad consensus in the sector behind the Government’s plans, as I have already noted. However, I do not believe that an explicit mandatory statutory obligation to consult impacted parties is required. The powers in the Bill to designate activities under the designated activities regime are closely modelled on the secondary powers which already exist in FiSMA, especially the power to specify regulated activities. This existing power does not have an explicit statutory obligation to consult. I think the Government have already demonstrated that they will always consult when appropriate and will always approach regulating a new activity carefully. We can see this in the Government’s consultation on the regulation of funeral plans in 2019, and in draft legislation related to “buy now, pay later” published in February.

My noble friend Lord Trenchard referred to the listings review and implementing its results but, again, the Government have already consulted extensively. They launched a consultation in July 2021 that ran until September this year, and the proposals on listing reforms received broad support across the industry. The Government have already published a draft statutory instrument to illustrate how the new powers in the Bill could be used to bring forward a new regime in this area, so I believe that the Government have already demonstrated that they will consult properly when using the regulated activities order power. Therefore further amendments in this area are not necessary, so I hope my noble friend is able to withdraw Amendment 3A and will not move Amendment 3B.

[Viscount Trenchard (Con)]

My Lords, I thank all noble Lords who have taken part in this debate. In particular, I thank my noble friend Lady Lawlor for her support, and I entirely agree with what she said about the need to move back to our former common law-based approach. The noble Baroness, Lady Kramer, suggested that this would mean not just common law but going back to a simple, light-touch regulatory system. I am advocating going back not to a light-touch regulatory system but to a system based on common-law principles which also maintains the high standards for which the City is renowned across the world. Such a system is pursued also in the United States, Australia and many other countries with which we are doing more and more in financial services, including many CPTPP countries.

I am nevertheless grateful for the noble Baroness’s support, at least on Amendment 3B. I was not sure about the noble Baroness, Lady Chapman, but she was at least interested in both amendments and, I think, supported the need for increased accountability to Parliament.

I speak to the financial services industry and know many people in it. I have some outside interests, which I have declared, which involve me in it. I simply do not agree that all participants in the industry blame Brexit for the difficulties it faces. Rather, there are large parts of the financial services industry—in banking, insurance and asset management—which are waiting for us to reap the benefit of the upside of being free to develop our own regulatory regime. We have suffered the downside, which we knew would happen; we believe that reaping the benefits of the upside will be necessary to ensure that London can maintain its leading position. I very much hope that we can rely on the support of the parties opposite, as well as my noble friends, in seeking to ensure that that happens.

I am to some extent reassured by my noble friend the Minister’s words and her response to these amendments. She went further than I have heard her go before in saying that it is the Government’s intention to repeal all the EU retained law in—I think—Schedule 1, and that she has prioritised some areas. However, there are other areas that she has not prioritised. One of the those is the alternative investment fund managers directive and all its associated legislation, which was opposed universally by practitioners and—at the time—by the Treasury as well as by the regulators. Nevertheless, it was foisted on us by the EU for political reasons. I am very disappointed that few people in the Treasury seem to recognise how many small investment management companies have gone out of business or not succeeded in introducing new products because of the cost and burden of complying with this regulation. This is why, later in the Bill—I will not speak to it today —I have again brought back my amendment dealing with that issue. It is just one example of bits of EU legislation that, six years after the Brexit vote, I believe this Bill should deal with immediately.

I thank my noble friend for her partial reassurance and, in the circumstances, I am happy to withdraw my amendment.

--- Later in debate ---

Moved by

[Baroness Penn]

4: After Clause 20, insert the following new Clause—
“Sustainability disclosure requirementsSustainability disclosure requirements
(1) FSMA 2000 is amended as follows.(2) After section 416 insert—“Sustainability disclosure requirements416A SDR policy statement(1) The Treasury may prepare an SDR policy statement.(2) An “SDR policy statement” is a statement of the policies of His Majesty’s Government concerning disclosure requirements in connection with matters relating to sustainability.(3) In preparing an SDR policy statement, the Treasury must consult the regulators.(4) The Treasury must publish any SDR policy statement in such manner as they consider appropriate.(5) The Treasury—(a) must keep any SDR policy statement under review;(b) may prepare a revised statement (and subsections (3) and (4) apply in relation to any revised statement);(c) may withdraw any SDR policy statement.(6) The Treasury may request a regulator to provide them with a report on any matter that the Treasury require in connection with the preparation of an SDR policy statement.(7) A request for a report under subsection (6)—(a) must be made in writing, and(b) may require a regulator to send the report to the Treasury within such reasonable period as may be specified in the request (or such other period as may be agreed).(8) A regulator must comply with a request under subsection (6).(9) Nothing in section 348, or in regulations made under section 349, is to be taken as preventing or restricting the ability of a regulator to disclose information to the Treasury for the purposes of this section.(10) Subsection (9) does not apply in relation to information provided to a regulator by a regulatory authority outside the United Kingdom.416B FCA and PRA rules etc(1) When making rules or issuing guidance in connection with disclosure concerning matters relating to sustainability, a regulator must have regard to any SDR policy statement (within the meaning of section 416A) that the Treasury have published and not withdrawn.(2) For the purposes of this section, matters relating to sustainability include matters relating to—(a) the environment, including climate change,(b) social, community and human rights issues,(c) tackling corruption and bribery, and(d) governance, so far as relevant to matters within paragraphs (a) to (c).”(3) In Schedule 1ZA (the Financial Conduct Authority), in paragraph 11 (annual report), in sub-paragraph (1)—(a) after paragraph (ha) insert—“(hc) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”; (b) after paragraph (ia) insert—“(ib) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury published and not withdrawn under section 416A (sustainability disclosure requirements: policy statement);”.(4) In Schedule 1ZB (the Prudential Regulation Authority), in paragraph 19 (annual report), in sub-paragraph (1)—(a) after paragraph (e) insert—“(ea) how it has satisfied the requirement in section 138EA(2) so far as regarding disclosure requirements in connection with matters relating to sustainability;”;(b) after paragraph (fa) insert—“(fb) how it has satisfied the requirement in section 416B to have regard to any SDR policy statement of the Treasury under section 416A (sustainability disclosure requirements: policy statement), and”.”Member’s explanatory statement
This amendment would support the regulation of disclosure requirements relating to sustainability by requiring the FCA and the PRA to a.) comply with a request by the Treasury to provide a report in order to inform a policy statement by the Treasury on such requirements and b.) have regard to such a policy statement when making rules or issuing guidance about such requirements.

[Baroness Penn (Con)]

My Lords, the UK is a leading jurisdiction for sustainable finance, and the Government are proud of that record and determined to maintain and further that position. Since Committee stage, London has been ranked as the leading global green finance centre for the fourth consecutive time. Government effort, including on sustainability disclosure and reporting, has played a vital role.

The Government’s success in green finance has been down also to the responsiveness and technical capability of our independent regulators, who have collaborated to drive forward our policy on sustainability disclosures. The Government’s approach was established in the 2021 paper, Greening Finance: A Roadmap to Sustainable Investing, where we set out the foundations of sustainability disclosure requirements—or SDR—which build on our world-leading implementation of the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD. This includes taking forward an approach across the economy to implementing international standards, enabling firms to plan for the transition and ensuring that this information flows to investors and financial consumers. Credible, usable information is a core component of green finance that will allow us to reach our goals on sustainability. When this information is available, market participants can use it to take sustainability into account when making investment decisions. Our plan for SDR is central to delivering this.

In Committee, some noble Lords raised concerns about the Government’s ongoing commitment to implementing these important reforms, the legal basis for implementing them, and the timelines for doing so. I am therefore pleased to be able to update noble Lords on a number of substantive developments since then.

Significantly, the Government published an updated green finance strategy on 30 March. This set out next steps across core elements of SDR. The Government will consult on extending the transition planning requirements—a core component of SDR—to the largest private companies once the Transition Plan Taskforce has completed its work later this year. The Government will also set up a framework to assess the suitability of the IFRS International Sustainability Standards Board’s standards for adoption in the UK. The Government remain committed to delivering a usable and useful UK green taxonomy and expect to consult on this in autumn 2023. They are also committed to setting out further detail on SDR implementation and the timeline for it this summer to reflect the rapid development of international standards.

Alongside this, the Financial Conduct Authority continues to take forward SDR for authorised persons, including consumer-facing disclosure requirements, under its existing objectives and rulemaking powers, which are sufficiently broad for the purpose. The FCA intends to issue its policy statement on SDR and investment labels in the third quarter of this year.

However, the Government recognise that SDR policy has strong links to wider environmental policy and that they therefore have an important role to play in shaping SDR. That should be recognised in legislation. Parliament must be able effectively to scrutinise the actions of government and the regulators in this area.

Amendment 4 will therefore require the FCA and the PRA to have regard to any policy statement made by the Treasury on SDR when they make rules in connection to sustainability disclosures. The amendment obliges the regulators to consider the Government’s wider policy goals when bringing forward SDR rules, while still maintaining their independence.

Regulators will also be required to report on how they have satisfied the requirement to have regard to any such policy statement on an annual basis. This will support Parliament in scrutinising the regulator’s actions on SDRs. This ongoing reporting will support transparent, structured co-operation between the regulators, government and Parliament to achieve the UK’s objectives in this space.

We will be debating a number of other sustainable finance issues today, and disclosures are at the heart of some of the matters that they raise. The amendment is therefore an important measure in that context as well as in its own right. I beg to move.

[Baroness Wheatcroft (CB)]

My Lords, I thank the Minister for her introduction of Amendment 4 and her willingness to engage with Peers on the topic of sustainable disclosure requirements. However, while a government amendment on this important topic is welcome, what we have heard is yet more delay. A cynic might judge the amendment to have a whiff of green- washing about it. It does not do enough and does not do what is required. The amendment seeks to give regulators and Ministers the necessary powers to bring forward rules and regulations on SDRs in fulfilment of commitments that they made in 2019, 2021 and again in the green finance strategy in March this year.

Amendment 114 is an effort to be helpful because, despite making commitments for five years, the Government still do not have the powers to make sustainable disclosure requirements happen. Amendment 4 does not confer those powers. The noble Baroness, Lady Ritchie of Downpatrick, submitted a Parliamentary Question on this issue on 14 November last year, and the Government’s response was that:

“The FCA has extensive powers to … impose some of the Sustainability Disclosure Requirements”.


The noble Baroness also asked about the powers available to the Department for Work and Pensions, which would legislate for sustainability reporting by occupational pension schemes. An extensive search of the powers held by the DWP in relation to public reporting and sustainable reporting has found none that is suitable.

Amendment 4 gives the Treasury the power to issue a policy statement on SDRs and to require the regulators to report against it, but it is not an obligation—the Treasury “may” prepare an SDR policy statement. As the Minister admitted in her response last year to the noble Baroness, Lady Ritchie, the FCA does not have the powers to actually implement SDRs. It seems that we are looking at a Whitehall paper trail that keeps everyone occupied but with no meaningful legislation.

I am in favour of easing unnecessary burdens on business. However, repeatedly indicating—as they have for five years—that the Government are planning to legislate but not actually doing it creates a burden in itself for business. Should it invest in data, in systems or in strategy? After so many reassurances but so little progress, and more reassurances today, no one really seems to know the answer.

I noted with interest that the Minister’s letter to Peers ahead of tabling this amendment said that

“the Financial Conduct Authority is taking forward Sustainable Disclosure Requirements (including consumer facing requirements) under its existing objectives and rulemaking powers which are sufficiently broad for the purpose”.

I would like to understand the misalignment between that statement and the earlier Answer to the Question from the noble Baroness, Lady Ritchie. Is it because there has been a change of heart and the Treasury has discovered that the powers exist after all? I would be grateful if the Minister could clarify that. Or has the Treasury limited its proposals from its original ones so, while it did not have the powers for the original proposal, it does for the new, limited proposals? Or—and it would be deeply disappointing if this were the case—is the reference in the Minister’s letter to the FCA to “taking forward” SDRs intended to mean that the FCA would be merely progressing the work but not actually implementing it? Again, I would be grateful for clarification. The FCA consultation on SDRs closed on 25 January. We are promised a policy statement in the third quarter but, without statutory powers, that would be pointless.

I hope the Minister will be able to answer those questions and now, if we are able to accept the amendment, I hope she will be able to go a little further. While the amendment sets the right tone, it does not do what is needed. It embraces the idea of SDRs but does not make them a reality. The same governmental reluctance to take real action lies behind my Amendment 7, concerning vote reporting. If investors are to make serious decisions on ensuring that their savings are put to work in a sustainable way, it is essential that they be able to see how those who manage the money choose to vote on corporate issues. That is a crucial part of being an engaged investor. The FCA itself acknowledges that. Earlier this year, its vote reporting group stated:

“Improving transparency of how asset managers vote on behalf of their clients will mean investors can better hold them to account on their stewardship”.


We would all want that, but currently it is not possible for investors always to learn how their investments are being voted. Yes, there is now an FCA requirement under the shareholder rights directive that fund managers and insurers produce an annual report on how they have voted, but it is only that they must comply or explain; and even then, the requirement is only that they should report on significant votes. The FCA gives no guidelines as to what should be deemed significant, and what one investor feels is significant may not concur with what a fund manager deems so.

The fund manager is required to report only at group level, so, in terms of the individual funds in which investors and pension funds might be invested, how their votes have been voted in the individual funds cannot be seen; it is only possible to see across the group, which is effectively meaningless for many people who want to find out how their money is being used. A report is required to be made only annually—a hopeless timescale in an industry that moves as fast as this one. Nor is there any standard form for vote reporting. It is not a lot to ask in a digital age. The SEC in the US certainly demands it.

For all those reasons, the current situation does not serve investors as well as it should. Amendment 7 would require FCA-regulated investment managers and insurers to provide clients and those investing with them with voting information that they requested in a standard format and within 30 days. In Committee the amendment on this topic included pension funds in the requirement to report but, mindful of the DWP review of pension fund reporting, the current amendment is much narrower and does not prejudge the review. However, in the meantime it should help pension funds to monitor the way their investments are being voted. It is true that the FCA vote reporting group has yet to reach conclusions, but there is no reason to wait for that. Parliament has the power to put demands on the FCA, and this is a case where it should.

The Government accept the need for good stewardship by investors, and transparency on voting aids that. It is important, indeed crucial, for good corporate governance that decisions taken on behalf of investors should be clear and easily ascertainable. Making voting records available speedily in a machine-readable way would be a service to investors that, thanks to digital innovation, should be easy and relatively cheap to implement. Why would the Government resist that? I beg to move.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, this has been a fascinating if somewhat disheartening debate, and I have learned much listening to the contributions from noble Lords on all sides of the House.

We welcome the tabling of government Amendment 4, which brings forward new provisions relating to sustainability disclosure requirements, but we agree with the views expressed across the House, particularly as set out by the noble Baroness, Lady Hayman, arguing that the Bill simply does not go far enough in supporting the country’s green ambitions.

We support many of the amendments in principle but particularly Amendment 15 in the name of the noble Baroness, Lady Hayman, and Amendment 91 in the name of the noble Baroness, Lady Boycott, the latter having been signed by my noble friend Lady Chapman.

The financial services sector touches many more aspects of our lives then we may sometimes realise, with firms’ investment decisions having a direct impact on virtually all sectors of the economy. This activity can, and often does, do much that is good. For example, if we are to secure the green jobs of the future, businesses will need investment. But, as we see in some cases, such as investment activity that leads to deforestation, there can be severe negative environmental impacts. In a recent poll cited by Global Witness, 77% of UK savers said they would be unhappy to discover that their pension was funding deforestation and habitat loss, with 14 million people estimated to switch pension provider if they made such a discovery. However, as Amendment 7 highlights, there is currently no way for the public, nor indeed the Government, to tell if their money is invested in that way, and therefore no way for consumers to exercise choice. That surely cannot be right.

Amendment 91 would implement recommendations from the Government’s own Global Resource Initiative taskforce in relation to deforestation, a practice which causes significant harm to global climate ambitions, as well as to indigenous peoples who are evicted from their ancestral homes. We are told by the Government that they are serious about achieving net zero and protecting nature, yet, at present, the net-zero regulatory principle still fails to mention nature, which is what Amendment 15 would correct. Indeed, nature is not even mentioned in the Bill. As the WWF rightly points out, by excluding nature from this key financial services legislation, the UK will fail to secure opportunities that could make the UK a leading green finance centre, while exposing the country to nature-related risks.

We should also give serious weight to the intervention of Professor Sir Partha Dasgupta, who led the Government’s review of the economics of biodiversity, when he urges the Government to support the amendment. He says:

“We need to empower those in charge of regulating our financial system to support the sector to arrive at a nature-positive destination by recognising the value of natural capital and the significant social and economic benefits restoring nature presents”.


We are losing nature at an alarming rate, and these issues are only going to become more urgent. We have missed opportunities to act in the past, and we cannot continue to make the same mistakes. We therefore urge the Government to think again on these important areas, but if they are not willing to do so, we will support the noble Baronesses, Lady Hayman and Lady Boycott, should they choose to push their amendments to a vote.

[Baroness Penn (Con)]

My Lords, let me first take Amendment 15, from the noble Baroness, Lady Hayman. I reassure noble Lords that the regulators already consider issues related to sustainability, and specifically nature, as part of their work under their existing objectives. For example, the Government and the regulators are active participants in the work of the Taskforce on Nature-related Financial Disclosure, which we have heard about, which helps organisations to report and act on evolving nature-related risks; and the Bank of England is a key member of the Network for Greening the Financial System, which recently launched a task force on nature-related risks.

The noble Baroness listed the work that is happening and the various commitments, and I interpret that to mean that the lack of the reference to nature in the framework does not equal a lack of action by either the Government or the regulators. I understand the desire of noble Lords to see that reflected in the framework in the Bill. However, further work needs to take place to better understand the interaction between nature targets and the work of the financial services regulators when including it in regulation, and the conclusions of that work are not yet clear. Moreover, equivalent targets to those in the Environment Act for England and Wales in 2021 do not yet exist in the other devolved Administrations, so we remain of the view that it would not be appropriate to place a requirement within the FSMA regulatory principles without the clarity I spoke about, or to impose requirements that link to targets that do not yet exist; so unfortunately, the Government are unable to support the amendment.

Turning to Amendment 91 in the name of the noble Baroness, Lady Boycott, the Government are committed to working with UK financial institutions to further tackle deforestation-linked finance. As set out in the updated green finance strategy, we will begin this work with a series of government-convened round tables this year, and I am keen to work with noble Lords on this process.

As we discussed in Committee, the amendment we are considering today would involve imposing requirements on all regulated financial services firms, obliging them to undertake due diligence on practically all their client firms and their clients’ supply chains. In practice, this would amount to UK banks being required to check most of the world’s major companies and their supply chains for links to illegal deforestation, and stopping any finance to them until those companies can provide the data needed to do so. This is while the rest of the world’s banks carry on financing this activity with no global standard on deforestation in place.

Global due diligence is not something that can be legislated for by Parliament and the UK financial sector alone. In fact, trying to do so may make this problem harder to solve. Imposing this data requirement on UK financial firms alone where such data is lacking globally could lead to one of two things: firms trying to satisfy the requirement but failing due to a lack of data, leading to misreporting and misallocations of capital; or keeping that business outside the UK, with no chance of securing the type of environmental change we want and that is the aim of the amendment.

The Government therefore want to find a workable solution, and we are pursuing a number of different lines of action to do so, in addition to the commitment we made to work with UK financial institutions in the green finance strategy. First, we are directly addressing deforestation in situ by our partnerships approach. The Government launched the forest and climate leaders’ partnership at COP 27, and also fund the partnership for forests, which has channelled more than £1 billion of private investment into forests and sustainable land use, and brought more than 4 million hectares of critical landscapes under sustainable land use.

Secondly, the Government are working to address due diligence for illegal deforestation using the Environment Act. The most relevant UK businesses that use forest-risk commodities or products derived from them will be required to ensure those products are produced in compliance with relevant local laws. Thirdly, the Government are supporting the development of a coherent international approach on disclosure and management of nature-related risks and impact.

Since our debate in Committee, the Taskforce on Nature-related Financial Disclosure has published its latest draft framework. This now includes recommended metrics and associated governance strategies for businesses to understand and mitigate deforestation in areas of direct or indirect operational control. We committed in the green finance strategy to explore how the final TNFD framework should be incorporated into UK policy and legislative architecture, and we will start this work later this year, once the final framework is published.

I personally made the case to the International Sustainability Standards Board, while at COP 15 in Montreal, that such standards should be considered for integration into its work. If that happens, global standards are genuinely within reach. I acknowledge that TNFD or any subsequent global standards do not prohibit the financing of deforestation in itself but, as a disclosure framework, it is the bedrock for action, both by incentivising firms to take action on the risks that they identify and allowing the Government to consider taking further regulatory action after the establishment of such a disclosure framework. I hope, therefore, that I have explained why the Government cannot accept the amendments, but have also demonstrated that effective action is under way to address noble Lords’ concerns in these areas.

Turning to Amendments 93 and 113, also from the noble Baroness, Lady Hayman, in the updated green finance strategy, the Government have already recognised that decisions about investing in the context of systemic risks such as climate change and biodiversity loss are complicated, in particular for pension funds. The Law Commission’s 2014 report suggested that fiduciary duties mean that non-financial factors can be considered as part of investment decisions if trustees have good reasons to think their members share their concerns and if such decisions do not involve a risk of significant financial detriment to the fund.

However, the Government recognise that trustees would like further information and clarity on their fiduciary duties in the context of the transition to net zero, and that is why we are taking steps to ensure that such clarity is forthcoming. Later this year, DWP will examine how closely its stewardship guidance is being followed, including whether incorrect interpretations of fiduciary duties are playing a role in this area. The financial markets and law committee, which includes representatives from both DWP and the Treasury, is working to consider issues around fiduciary duties and sustainability and whether further action or clarity is needed.

--- Later in debate ---

Moved by

[Baroness Penn]

5: Schedule 5, page 137, line 32, leave out sub-paragraphs (3) to (5) and insert—
“(3) For subsection (4) substitute—“(4) If either regulator—(a) proposes to vary a Part 4A permission or to impose or vary a requirement,(b) varies a Part 4A permission, or imposes or varies a requirement, with immediate effect,(c) proposes to vary a permission under section 55NA, or(d) varies permission under section 55NA with immediate effect,it must give A written notice.””Member’s explanatory statement
This amendment would align the wording of new section 55Y(4A), being inserted by paragraph 10 of Schedule 5 to the Bill, with section 55Y(4) of the Financial Services and Markets Act 2000, by replacing both those provisions with a new section 55Y(4) which clarifies in a single subsection the circumstances in which a written notice must be given to a person.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we commend the noble Lord, Lord Tyrie, on his amendment and on using it to raise important questions. We understand that concerns have been raised about the perceived watering down of the RDC’s role within the FCA. While we know that the Government respect the operational independence of the FCA, we hope that the Minister is able to say something about the regulator’s recent decisions on the RDC, which are causing substantial concern.

The FCA believes that the current balance of responsibilities is correct and that the recent reforms were necessary to ensure quicker decision-making. However, it would help if the Minister could outline what steps, if any, the Treasury might take in future, should it come to the view, if it has not today, that the system is not quite working in the way that it should.

[Baroness Penn (Con)]

My Lords, I am also grateful to the noble Lord, Lord Tyrie, for raising this important issue through Amendment 8. The Regulatory Decisions Committee, or RDC, takes contested enforcement decisions on behalf of the FCA where the FCA has not been able to settle a case with the relevant firm. The Government recognise that the RDC performs a critical function within the regulatory framework. FSMA requires that decision-makers are independent, and the design of the RDC reflects this.

It is important that the RDC makes decisions fairly and transparently. To ensure this, the members of the RDC are wholly independent of the FCA’s executive. The RDC also has its own team of support staff and legal advisers. This structure ensures that FCA personnel involved in the investigation of the enforcement case are not involved in supporting the RDC in its final decision-making.

As noble Lords noted, the FCA has recently made a number of operational changes to transfer decision-making responsibilities in certain cases from the RDC to the FCA executive, which will increase the speed of decision-making. However, decisions in contested enforcement cases continue to be made by the RDC.

In addition, should a firm or senior manager disagree with the final enforcement decision taken against them by the RDC, they generally have the right to refer the case to the Upper Tribunal. Where decisions fall to FCA executives, the relevant parties retain the right to make representations in writing. The FCA will also consider taking oral representations in exceptional circumstances, when not doing so would be detrimental to the fairness of decision-making. As set out above, the decisions made by FCA executives can also be referred to the Upper Tribunal should a firm disagree with them.

Any proposed legislative changes to the structure of the FCA’s supervision and enforcement framework should be subject to appropriate public consultation. As we have discussed previously during the passage of the Bill, the Government sought views from stakeholders on the operation of the future regulatory framework through a review. However, we concluded during that review that the case had not been made for changes to the FCA’s enforcement and supervision functions given that these responsibilities were not increasing as a result of the UK’s departure from the EU, unlike the significant increase in its rule-making responsibilities, which was the focus of the review and the subsequent enhancements made by the Bill.

Nevertheless, I am grateful to the noble Lord for bringing the importance of the FCA’s supervisory and enforcement framework to the Government’s attention. The Government do not see the need for legislative change in this area at this time. However, we support the noble Lord’s aim to ensure greater independent scrutiny of and accountability within the regulatory framework. The Economic Secretary and I will look at this issue further, outside the passage of this Bill, to ensure that the FCA’s supervisory and enforcement framework remains appropriate as it takes on new powers. We will continue to listen to the views of the noble Lord and other stakeholders as we do so.

I have also raised the issue with the FCA, and will pass on the response with further detail on the decisions and changes made to the operation of the RDC to this House. Therefore, I hope, for the reasons I have set out, that at this stage the noble Lord is content to withdraw his amendment and continue this conversation further outside the passage of the Bill.

[Lord Tyrie (Non-Afl)]

I would be grateful for an opportunity to respond to a few of the points made there. Before I say anything more, I should say I have discussed this amendment on a couple of occasions with the Minister. If she does not mind my saying so, she makes a first-rate fist of doing an impossible job. I also hope she does not mind my saying that from time to time—and this was one of them—I had the impression that people in other places are pulling a number of the strings. That does give me cause for concern.

I will just make a few brief points. The Government have set great store by the Edinburgh reforms. They are designed to bolster business confidence and investment, and make sure that regulation and the threat of enforcement do not end up damaging the UK’s pre-eminence in financial services, among other things. But if the Edinburgh reforms mean anything, they must mean that measures such as this—which would give businesses, particularly smaller businesses, greater confidence that they would be protected from arbitrary enforcement—should be seriously considered. I regret that they are being dismissed somewhat peremptorily.

The Minister said that oral representation is still possible before the RDC. I will not read out the FCA’s response to the consultation, to which I referred earlier, in full, but if she were to go back and look at it, she will see that it has been effectively closed down for all but exceptional cases. It is that opportunity to have a private conversation with the RDC that is so greatly valued—I see the noble Lord who served on the RDC is agreeing—on both sides: on the RDC side and by firms. The RDC dose a very difficult job and does it very well, but it needs more empowerment. I regret that the Government are getting in the way of that.

My last substantive point takes us right back to where we started. Frankly, we have not heard a substantive argument against this proposal from the Front Bench just now, for the simple reason, I think, that there are not any. We have heard the suggestion that firms can still go to the Upper Tribunal, but there was no response to the points made that the Upper Tribunal is not a practical option for a very large proportion of the regulated community, both on grounds of cost and on reputational risk grounds, because it is held in public. I find the arguments adduced for not doing it to be frankly incomprehensible.

The only real opponent of this left is the FCA itself. I would like to end just by drawing one conclusion from that point. It is very concerning that, when a regulator has a vested interest in an issue such as this, it can succeed in knocking down a sensible proposal with scarcely any explanation, and can persuade the Treasury that it should be knocked down and that the advice of that regulator should be taken without challenge. At that point, we are into a self-reinforcing spiral of ever more powerful regulation. That is exactly why, in so many different ways, Members on all sides of the House have come to the conclusion that we must have better accountability of the regulators, particularly the financial regulators, if we are to carry on handing them more powers, as is intended in the Bill.

Having said all that, seeing as I do not have the troops just now, I will withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Lord Livermore (Lab)]

My Lords, we do not support this group of amendments. We strongly support the inclusion in this Bill of the new secondary objective for the regulators on international competitiveness and economic growth. Its position as secondary in the hierarchy of regulators’ objectives is of course key. As a secondary objective, economic growth and international competitiveness will remain subordinate to the regulators’ primary objectives of preserving financial stability and protecting consumers. The UK’s reputation and success as a leading international financial centre depend on high standards of regulation, and a stable and independent regulatory regime. These high regulatory standards are a key strength of the UK system and its global competitiveness, so we would not support any moves towards a regulatory race to the bottom. That would negatively impact international confidence in the UK, making the UK less attractive to international businesses and investment.

The UK’s financial services industry plays a vital role in boosting economic growth and delivering skilled jobs in every part of the UK. Almost 2.5 million people are employed in financial services, with two-thirds of those jobs based outside London, and the sector contributes more than £170 billion a year to GDP—8.3% of all economic output.

The City of London is one of only two global financial capitals and is at the very heart of the international monetary system. This is an enviable position, and it is vital that we support the sector across the UK to retain this competitiveness on the world stage post Brexit so that the UK can continue to be one of the world’s premier global financial centres. It is therefore crucial that the UK’s regulatory framework plays its part in supporting this positive contribution to the UK economy and society. To do this, it must enhance competitiveness and support the industry in trading with the world, including in new markets. It must attract investment into the UK and promote innovation and consumer choice.

A secondary growth and international competitiveness objective is a simple and internationally proven way to achieve this, helping to ensure that the UK remains a leading global financial centre by empowering regulators to make the UK a better place to do business and ensuring a more attractive market for international providers and consumers of financial services. The UK is, of course, in competition with other international financial centres, and many of them, including Australia, Hong Kong, Japan, Malaysia, Singapore, the United States and the European Union, have introduced a similar objective, which they balance against financial stability and consumer protection.

In future groups we will come to topics such as investment in high-growth firms, but it is precisely by having this secondary objective on competitiveness and growth that we will create an ecosystem that supports investment in new technologies, provides much-needed economic growth and secures new jobs.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the new secondary growth and competitiveness objectives in the Bill will ensure that the regulators can act to facilitate medium to long-term growth and competitiveness for the first time, but a focus on competitiveness and long-term growth is not new. When the UK was part of the European Union and financial services legislation was negotiated in Brussels, UK Ministers went to great efforts to ensure that EU regulations appropriately considered the impact that regulation could have on economic growth and on the competitiveness of our financial services sector.

Now that we have left the EU, and as the regulators take on responsibility for setting new rules as we repeal retained EU law, it is right that their objectives reflect the financial services sector’s critical role in supporting the wider economy. We must ensure that growth and competitiveness can continue to be properly considered within a robust regulatory framework. As the noble Lord opposite said, a secondary competitiveness objective strikes the right balance. It ensures that the regulators have due regard to growth and competitiveness while maintaining their primary focus on their existing objectives. That is why the Government strongly reject Amendment 10, tabled by the noble Baroness, Lady Bennett of Manor Castle, which seeks to remove the secondary objectives from the Bill.

Turning to Amendment 9 from the noble Baroness, Lady Bowles of Berkhamsted, the Government agree that the UK financial services sector is not just an industry in its own right but an engine of growth for the wider economy. The current drafting of the Bill seeks to reflect that but also recognises that the scope of the regulators’ responsibilities relates to the markets they regulate—the financial services sector—so it is growth of the wider economy and of the financial services sector, but not at the expense of the wider economy. I hope I can reassure her on that point.

On Amendment 115, also from the noble Baroness, Lady Bowles, as noble Lords know, the Bill repeals retained EU law in financial services, including the MiFID framework. Detailed firm-facing requirements, such as those that this amendment seeks to amend, are likely to become the responsibility of the FCA. As such, it will be for the FCA to determine whether such rules are appropriate. When doing so, the FCA will have to consider whether rules are in line with its statutory objectives, including the new secondary growth and competitiveness objective.

Parliament will be able to scrutinise any rules that the regulators make, including pressing them on the effectiveness of their rules, and how they deliver against their objectives. Industry will also be able to make representations to the regulators where they feel that their rules are not having their intended effect or are placing disproportionate burdens on firms. I hope the noble Baroness is therefore reassured that the appropriate mechanisms are in place for considering the issues that she has raised via that amendment.

[Baroness Bowles of Berkhamsted (LD)]

I understand that there are and will be mechanisms in place, but the point that I was trying to make—and the reason that I expounded at length on how we got into this mess—is that it is urgent action that is necessary. This is not something that waits for this great wheel of change that we are bringing in through this Bill to come along. This is something that should be on people’s desks tomorrow; it should have been on people’s desks a year ago. There will not be ongoing investments trusts if it is not fixed now.

[Baroness Penn (Con)]

I understand the case that the noble Baroness makes, but it is not for an amendment to this Bill but for regulator rules to address the issue that she raises.

I turn to Amendments 8A and 9A from my noble friend Lord Trenchard, which seek to remove the requirement for the FCA and the PRA to align with relevant international standards when facilitating the new secondary objectives and instead have regard to these standards. As we have heard, international standards are set by standard setting bodies, such as the Basel Committee on Banking Supervision. These standards are typically endorsed at political level through international fora such as the G7 and G20 but, given the need to enable implementation across multiple jurisdictions, they may not be specifically calibrated to the law or market of individual members. It is then for national Governments and regulators to decide how best to implement these standards in their jurisdictions. This includes considering which international standards are pertinent to the regulatory activity being undertaken and are therefore relevant.

Since we left the EU, the regulators have been generally responsible for making the judgment on how best to align with relevant standards when making detailed rules that apply to firms. This approach was taken in the Financial Services Act 2021, in relation to the UK’s approach to the implementation of Basel standards for bank regulation and the FCA’s implementation of the UK’s investment firms prudential regime. It was also reflected in the overarching approach set out in the two consultations as part of the future regulatory framework review.

Part of the regulators’ judgment involves considering how best to advance their statutory objectives. Following this Bill, this will include the new secondary competitiveness and growth objectives. The current drafting therefore provides sufficient flexibility for the regulators to tailor international standards appropriately to UK markets to facilitate growth and international competitiveness, while demonstrating the Government’s ongoing commitment for the UK to remain a global leader in promoting high international standards—which, as we have heard, the UK has often played a key part in developing. The Government consider that this drafting helps maintain the UK’s reputation as a global financial centre.

I turn finally to Amendment 112 from the noble Baroness, Lady Bennett. The Government consider the financial services sector to be of vital importance to the UK economy. The latest figures from industry reveal that financial and related professional services employ approximately 2.5 million people across the UK, with around two-thirds of those jobs being outside London. Together, these jobs account for an estimated 12% of the UK’s economy.

The financial services sector also makes a significant tax contribution, which amounted to more than £75 billion in 2019-20—more than a tenth of total UK tax receipts—and helps fund vital public services. It is not for the Government to determine the optimum size of the UK financial services sector, but in many of the areas that the noble Baroness calls for reporting on, the information would be largely duplicative of work already published by the Government, public sector bodies or other industry groups.

For example, the State of the Sector report, which was co-authored by the City of London Corporation and first published last year, covers talent, innovation, the wider financial services ecosystem, and international developments and comparisons. The Government will publish a second iteration of the report later this year. The Financial Stability Report—

[Baroness Bennett of Manor Castle (GP)]

The Minister said that was a City of London report, but then said it was a government report. Surely the City of London Corporation is not an independent source on the financial sector—it is the financial sector.

[Baroness Penn (Con)]

It is a joint report from the City of London and the Government that provides analysis of a number of the areas that the noble Baroness covers in her amendment.

I was just moving on to the Financial Stability Report, which is published twice a year by the Bank of England’s Financial Policy Committee, setting out the committee’s latest view on the stability of the UK financial system and what the committee is doing to remove or reduce any risks to it and make recommendations to relevant bodies to address systemic risks.

I hope that noble Lords will agree, although I am sure that not all do, that a well-regulated and internationally competitive financial services sector is a public good for the UK and something that we should continue to support. I therefore hope that my noble friend Lord Trenchard will withdraw his amendment and that other noble Lords will not move theirs when they are reached.

[Viscount Trenchard (Con)]

My Lords, I thank all noble Lords who have taken part in this short debate. The noble Baroness, Lady Bowles of Berkhamsted, talked about the senior managers and certification regime. Does she know that the Japanese banks have given up sending senior directors to London because they cannot get authorised, so they have to promote people who are already in London? All three main megabanks are now doing that because they are so exasperated with the difficulty of getting their senior officers approved by the FCA.

I entirely agree with what the noble Baroness said about the problem of the uneven playing field between listed companies and listed investment trusts. That is an urgent problem that needs to be addressed now. The FCA, with its current culture, is just not responsive to that type of situation. Everybody is aware of that, and it is why some of us are pushing so hard for a more determined effort to change things. I think that if the competitiveness and growth objective had been given equal status with the stability objectives and the other consumer protection objectives, we might have got somewhere nearer that, but I know that not all noble Lords agree.

The noble Baroness, Lady Bennett of Manor Castle, and the noble Lord, Lord Davies of Brixton, supported Amendment 10 to leave out the competitiveness objective and Amendment 112 to reduce the size of the financial services sector. If you leave out the competitiveness objective, you will not have much of a financial services sector, so we would not need both amendments.

The noble Lord, Lord Eatwell, always speaks with great authority. We served together on the original Joint Committee on Financial Services and Markets under the excellent chairmanship of the noble Lord, Lord Burns, in 1999, and it was hugely successful. I take the noble Lord’s point, but I still do not think that we should be bound to align to an international standard just because it is a Basel committee standard; we should have to have regard to it. I say to the noble Lord, Lord Livermore, that some of the other jurisdictions that he mentioned do not subordinate their competitiveness objective to the main stability objectives.

I am grateful for my noble friend’s reassurance and beg leave to withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

Moved by

[Baroness Penn]

11: After Clause 24, insert the following new Clause—
“Competitiveness and growth objective: reporting requirements
(1) Each regulator must make two reports to the Treasury on how it has complied with its duty to advance the competitiveness and growth objective.(2) The reports prepared by each regulator under subsection (1) must in particular explain—(a) the action taken by the regulator to ensure that the competitiveness and growth objective is embedded in its operations, processes and decision-making, and(b) how any rules and guidance that the regulator has made advance that objective.(3) The first report under this section must be made before the end of 12 months beginning with the first day on which section 24 of this Act comes into force, and must relate to that period.(4) The second report under this section must be made before the end of 24 months beginning with the first day on which section 24 of this Act comes into force, and must relate to the period beginning with the day on which the first report is published.(5) The Treasury must lay a copy of each report prepared under this section before Parliament.(6) Each regulator must publish its reports prepared under this section in such manner as it thinks fit.(7) In this section—(a) “regulator” means the FCA and the PRA;(b) references to the competitiveness and growth objective, and the duty to advance that objective, are—(i) in relation to the FCA, references to its objective in section 1EB of FSMA 2000 and to its duty to advance that objective under section 1B(4A) of that Act, and(ii) in relation to the PRA, references to its objective in section 2H(1B) of FSMA 2000 and to its duty to advance that objective under section 2H(1)(b) of that Act.”Member’s explanatory statement
This amendment would insert a new Clause to ensure that the FCA and the PRA, in addition to their annual reports, each provide for two consecutive years a report on the new competitiveness and growth objective, as inserted into the Financial Services and Markets Act 2000 by Clause 24 of the Bill.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, as your Lordships know, the Bill delivers the outcomes of the future regulatory framework, or FRF, review. It repeals hundreds of pieces of retained EU law relating to financial services and, as we have discussed, will give the regulators significant new rule-making responsibilities. The Government have been clear that these increased responsibilities must be balanced with clear accountability, appropriate democratic input and transparent oversight. The Bill therefore introduces substantial enhancements to the scrutiny and accountability framework for the regulators.

Following Grand Committee, the Government have brought forward a series of amendments which, taken together, seek to improve the Bill through further formalising the role of Parliamentary accountability, supporting Parliament through independent analysis and scrutiny, and increasing reporting and transparency to drive overall accountability. The group we are now debating covers proposals aimed at increasing reporting and transparency to drive overall accountability. I look forward to discussing the Government’s other amendments on accountability later today.

There has been significant interest in ensuring sufficient reporting, in particular of how the FCA and PRA are operationalising and advancing their new secondary competitiveness and growth objectives. The regulators are required to publish annual reports setting out how they have advanced their objectives, which are laid before Parliament. Clause 26 ensures that, in future, these reports must also set out how they have advanced the new secondary objectives.

Clause 37, introduced following the debate in Commons Committee, enables the Treasury to direct the FCA and PRA to report on performance where that is necessary for the scrutiny of their functions. To further support transparency, the Government published a call for proposals on 9 May, seeking views on what additional metrics the regulators should publish to support scrutiny of their work advancing their new objectives. This closes on 4 July.

The Government have been clear that they expect there will be a step change in the regulators’ approach to growth and competitiveness following the introduction of the new objectives, while maintaining high regulatory standards. It will therefore be important to have detailed information available to scrutinise how the regulators embed their new objectives into their day-to-day functions.

The Government have therefore tabled Amendment 11, which will require the FCA and the PRA to produce two reports within 12 and 24 months of the new objectives coming into force. These reports will set out how the new objectives have been embedded in their operations, and how they have been advanced. Once the new objectives have been embedded, it is appropriate that the regulators report on them in the same way as their other objectives, through their annual reports.

The Government have also heard the calls for further transparency to drive overall accountability in other areas of the regulators’ work. Clauses 27, 46 and Schedule 7 require the regulators to publish statements of policy on how they will review their rules. The Government’s response to the November 2021 FRF review consultation set out the regulators’ commitment to providing clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules in their rule review framework.

Reflecting representations made during my engagement with noble Lords between Grand Committee and Report, the Government have tabled Amendments 20, 52 and 56, which strengthen this commitment. The amendments will place a statutory requirement on the regulators to provide a clear process for stakeholders, including the statutory panels, to make representations in relation to rules and a statutory requirement to set out how they will respond.

I hope that noble Lords will support these amendments, which seek to provide Parliament, the Government and stakeholders with the relevant information to effectively scrutinise the regulators’ performance and drive overall accountability. I therefore beg to move Amendment 11, and I intend to move the remaining government amendments in this group when they are reached.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in the second day of Report. I declare my financial services interests as set out in the register. I thank my noble friend the Minister and all the Treasury officials for their engagement during and particularly after Committee with the issues in this group of amendments.

I will speak to Amendments 12, 19, 40, 41 and 92 in my name. Noble Lords with an eagle eye on the Marshalled List will note that there is more than a similarity between the amendments I tabled in Committee and in this group, and the government amendments. I thank the Government sincerely for taking on board not just the issues but also my wording.

Ultimately, as the Minister said, this is one of the most significant changes to financial services regulation in a generation. It is important that, in structuring the role of the regulator, we have at this stage the right level of scrutiny and the right requirements for the regulators to provide the information required at the right time to undertake that scrutiny.

The arrival of the international competitiveness objective is a positive thing within the Bill. These amendments give scrutiny the right opportunity to see how that objective is operationalised. Does the Minister agree that it is important to look at every element of information and the timeliness of all the elements being given to both financial services regulators to enable the right level of scrutiny to take place? To that extent, I ask her to comment particularly on Amendment 92, alongside my other amendments, because this seems like no more than the base level of detail that one would want to be able to form that crucial scrutiny function.

Having said that, I am incredibly grateful to the Minister, the Government and all the officials for taking on board so many of the issues and the wording from Committee, and bringing them forward in this group.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, I will be very brief so as not to detain the House further. Much of the substance of these issues was debated in the previous group on Tuesday evening, when I said that we strongly support the inclusion in the Bill of the new secondary objective for the regulators of international competitiveness and economic growth.

While the introduction of this secondary objective is a positive step, it is also important to ensure that it is meaningfully considered in the regulators’ decision-making. One of the main ways of doing this is by introducing some proven accountability measures to require the regulators to report on their performance against the objective. We therefore welcome the government amendments in this group, which will provide for initial reports on implementation of the competitiveness and growth objective, as well as other provisions that seek to improve regulatory accountability.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for that constructive debate and I seek to engage only with the points that have been raised.

I agree with the noble Lord, Lord Eatwell, that high regulatory standards are a key to London’s and the UK’s competitiveness as a financial centre. That is why the growth and competitiveness objective is a secondary objective to the primary objectives already in existence. However, high regulatory standards are not the only contributor to the growth and competitiveness of our economy or the sector. The new secondary objective, therefore, has an important role to play.

To address specifically the concern expressed by the noble Lord, Lord Eatwell, on day one of Report—the noble Baroness, Lady Kramer, reflected on that again today—that the government amendments in this area somehow seek to elevate the secondary objective from its position within the hierarchy, that is not the case. These amendments reflect the fact that they are new objectives for the regulators and it is right that we have a focus on new objectives being added through the Bill to understand how they are being embedded into the operation of the regulators.

The noble Lords, Lord Vaux and Lord Davies of Brixton, asked how the reporting will take into account the fact that the objectives are secondary and how they will impact on the primary objectives. It is in the structure of the objectives that the growth and competitiveness objective can be delivered only in the context of achieving the primary objectives. That is built into the system. Each year, in addition to these two reports provided for in our amendment, there will be the annual report from the regulators looking at their delivery across all their objectives.

Several noble Lords asked whether having a report on this specific objective for just two years was the right approach. We think it strikes the balance between reflecting the new nature of these objectives and, over time, integrating them into the working of the regulators and reporting them in future annual reports. However, I point out to noble Lords that the Government have the power to specify certain matters to be addressed in those annual reports if we think it necessary in future. Under Clause 37, we also have the power to require further reporting on certain matters, so if the Government felt that further focus on the embedding of these new objectives was needed, there are powers in the Bill that would allow that to be drawn out.

My noble friends Lord Trenchard and Lord Ashcombe, and others, raised concerns about the need for specific metrics for reporting the regulators’ delivery against their objectives, as set out in my noble friend’s amendment. As noble Lords recognise, that is exactly the purpose of the Government’s current call for proposals. We do not think it is right to have the metrics in the Bill, because that would hinder the objectives that my noble friends are talking about, in terms of having the best possible set of metrics that can be adapted and updated to ensure that Parliament, industry and the Government get the information that they need on the regulators’ performance.

My noble friends Lord Holmes and Lord Ashcombe also drew attention to Amendment 92 in this group. I am aware that the speed and effectiveness with which the regulators process applications for authorisation remains an area of concern for both Parliament and industry, and the Government share those concerns. In December, the Economic Secretary to the Treasury wrote to the CEOs of the PRA and the FCA, setting out the importance of ensuring that the UK has world-leading levels of regulatory operational effectiveness. Publishing more and better data detailing the FCA and PRA’s performance is critical to meeting these aims. That is why, in their reply to the Economic Secretary’s letter, both CEOs committed to publishing more detailed performance data in relation to authorisation processes on a quarterly basis.

On 19 May, both the FCA and the PRA published their first set of enhanced quarterly metrics relating to their authorisations performance, including the average time taken to process applications. The reports demonstrate that the regulators, particularly the FCA, are making progress towards meeting service-level targets, while recognising that there are further improvements to be made on some measures. The Government will continue to monitor this data to assess performance and discuss continuing efforts to improve operational efficiency with the regulators.

I am glad to have heard the general support for the Government’s amendments in this group. As my noble friend Lord Holmes said, we drew heavy inspiration from his contributions in Committee, and those of other noble Lords.

Amendment 11 agreed.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, the Government are committed to ensuring that people, regardless of their background or income, have access to useful and affordable financial services and products. We work closely with the FCA in pursuit of that goal.

The FCA’s strategic objective is to ensure that relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers. The FCA’s objectives are at the very core of its work, and it is its statutory remit to advance those objectives. While I therefore commend the intention behind Amendments 13 and 18, the FCA’s objectives should not be changed lightly and without detailed consultation, given the potential for unintended consequences for the way financial services are regulated in the UK.

Noble Lords will be aware that the new secondary growth and competitiveness objectives introduced by the Bill were the subject of in-depth consultation in several stages, to ensure that the legislation will have its intended effect. While some respondents to that consultation process raised the issue of requiring the regulators to have regard to financial inclusion, there was no consensus on this proposal in terms of approach or effect.

My noble friend invited me to take up the opportunity to consult further on this matter, anticipating what I might say. However, as I have just reflected, this was, in part, considered in the work that was done in the lead-up to the Bill, which took place over several years, and we have been considering the Bill before us for nearly a year. So, while I have heard the views raised in this debate, there has also been a strong feeling over the course of the Bill that there is a desire for the Government and regulators, once we have the Bill in place, to press ahead and use the powers in it to deliver regulatory reform. I do not think that further consultation on further changes to the objectives at this stage would be the right approach.

As I said, this was considered as part of the FRF review. Indeed, in its consideration of these matters, the Treasury Select Committee specified in its future of financial services regulation inquiry that it did not recommend that any changes related to financial inclusion should be made to the regulator’s objectives, noting that financial inclusion is a broader social issue and that the primary role of the FCA should not be to carry out social policy.

The FCA’s consumer protection objective requires it to protect consumers from poor conduct by financial services firms. Financial exclusion is driven by many factors which may not be attributable to firms’ conduct. Given this, the consumer protection objective is not the appropriate place to seek to address financial inclusion. Indeed, an objective to protect consumers from harm may, at times, be in tension with an objective to increase financial inclusion. For example, certain credit products or investments may not be appropriate in all circumstances and could be detrimental to a consumer’s financial situation and well-being. The FCA will already seek to balance this through developing its rules and interventions, but that means that adding a formal requirement to advance financial inclusion as part of the consumer protection objective risks adding complexity and uncertainty to one of the most important parts of the FCA’s work.

Where there are gaps in the market which mean that some consumers struggle to access appropriate products, it is right that the Government seek to tackle these. I hope that noble Lords will be reassured that we are taking, and will continue to take, action. The noble Lord, Lord Eatwell, spoke of the importance of cash to many. That is why the Government are taking unprecedented action in the Bill to protect access to cash.

The noble Baroness, Lady Kramer, referred to—

[Lord Eatwell (Lab)]

I actually said the opposite; access to cash will not be useful if the cash cannot be used to make a transaction. Increasingly, transactions cannot be made with cash but only electronically.

[Baroness Penn (Con)]

Some of the implications of the noble Lord’s contribution on potentially obliging people to use certain payment systems show that including financial inclusion under the consumer protection objective could have quite far-reaching consequences that we would want fully to think through and consult on before changing the objectives. That lies behind the Government’s concern about this approach.

As I was saying, this does not mean that there is no action to promote financial inclusion by the Government and the regulators. Major banks are required to provide basic bank accounts for those who would otherwise be unbanked. As of June last year, there were 7.4 million basic bank accounts open and during 2020-21 around 70,000 basic bank account customers were upgraded to standard personal current accounts, graduating to more mainstream financial services products. The FCA’s financial lives survey has shown that those aged over 75 are becoming more digitally included, with 64% digitally active in 2020 compared to 41% in 2017. However, we absolutely recognise that there is more work to be done in this area. The Government have allocated £100 million of dormant asset funding to Fair4All Finance, which is being used to improve access to affordable credit, with a further £45 million allocated recently to deliver initiatives to support those struggling with the increased cost of living.

While the FCA has an important role to play in supporting financial inclusion, it is already able to act where appropriate. For example, it has previously intervened in the travel insurance market to help consumers with pre-existing medical conditions access affordable credit. As the noble Baroness, Lady Chapman, recognised, the new consumer duty developed by the FCA is yet to come into force and we are yet to feel the full benefits of that. However, importantly, these issues cannot be solved through regulation alone. Where there are gaps in the provision of products to consumers, the Government will continue to work closely with the FCA and other key players across industry and the third sector to address them.

I turn to Amendment 14 from the noble Lord, Lord Davies of Brixton. I reassure him that the FCA is already well placed to take into account the protection of consumers’ mental health within its existing objectives. The regulator’s vulnerability guidance sets out a number of best practices for firms, from upskilling staff to product service and design, and specifically recognises poor mental health as a driver of consumer vulnerability. Where FCA-authorised firms fail to meet their obligations to treat customers fairly, including those in vulnerable circumstances, the FCA is already empowered to take further action. Since the publication of the vulnerability guidance, the FCA has engaged with firms that are not meeting their obligations and agreed remedial steps.

In summary, the Government believe that this is an incredibly important issue but consider that it is for the Government to lead on the broader issues of financial inclusion. Where necessary, in the existing framework the FCA is able to have the appropriate powers to support work on this important issue. While the Government do not support these amendments, I hope that I have set out how they are committed to making further progress in this area. I therefore hope that my noble friend Lord Holmes will withdraw his amendment and that the noble Lord, Lord Davies of Brixton, and the noble Baroness, Lady Chapman, will not press theirs when they are reached.

[Lord Holmes of Richmond (Con)]

My Lords, I thank everyone who has participated in this debate, and my noble friend the Minister for her response. This will continue to be a significant issue until we have something in the country which looks far more like financial inclusion for all those who are currently feeling the sharp end, or the wrong end, and who are shut out of so much of what passes for financial services today. However, having listened to my noble friend the Minister, I will not push this matter any further today. I beg leave to withdraw Amendment 13.

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Moved by

[Baroness Penn]

16: Clause 26, page 39, line 15, at end insert—
“(1A) In section 1JA (Treasury recommendations in connection with general duties), after subsection (1)(c) insert—“(ca) how to discharge the duty in section 1B(4A)(duty to advance competitiveness and growth objective),”.(1B) In section 1K (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the FCA’s operational objectives includes, in its application as a secondary objective, the competitiveness and growth objective (see section 1EB).”.(1C) In section 2I (guidance about objectives), after subsection (1) insert—“(1A) The reference in subsection (1) to the PRA’s objectives includes, in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1D) In section 3B (regulatory principles to be applied by both regulators), for subsection (3) substitute—“(3) “Objectives”—(a) in relation to the FCA means— (i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).”.(1E) In section 3D (duty of FCA and PRA to ensure co-ordinated exercise of functions), for subsection (4) substitute—“(4) In this section, “objectives”—(a) in relation to the FCA means—(i) operational objectives, and(ii) in its application as a secondary objective, the competitiveness and growth objective (see section 1EB), and(b) in relation to the PRA means—(i) the PRA’s objectives, and(ii) in their application as secondary objectives, the competition objective and competitiveness and growth objective (see section 2H).(5) Where a regulator is proposing to exercise a function that is not one of its general functions, the reference to “objectives” in subsection (1)(a) does not include the secondary objectives mentioned in subsection (4)(a)(ii) and (b)(ii).(6) In this section, “general functions”—(a) in relation to the FCA, has the same meaning as in section 1B(6), and(b) in relation to the PRA, has the same meaning as in section 2J(1).”.(1F) In section 138I (consultation by the FCA), in subsection (2)(d) after “1B(1)” insert “, (4A)”.” Member’s explanatory statement
This amendment would ensure that provisions of the Financial Services and Markets Act 2000 that refer to the objectives of the FCA and the PRA also include a reference to the new competitiveness and growth objective, as inserted by Clause 24 of the Bill.

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Moved by

[Baroness Penn]

20: Clause 27, page 40, line 6, at end insert—
“(1A) The statement must provide information about—(a) how representations (including by a statutory panel) can be made to each regulator with respect to its review of rules under section 3RA, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the FCA and PRA to ensure that those regulators include in their statements of policy about the review of rules (required by section 3RB of the Financial Services and Markets Act 2000, as inserted by Clause 27) information about how representations (including by statutory panels) can be made and considered.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

Moved by

[Baroness Penn]

23: Clause 35, page 49, line 40, at end insert—
“(ic) how it has complied with the statement of policy on panel appointments prepared under section 1RA in relation to the process for making appointments and the matters considered in determining who is appointed, and”Member’s explanatory statement
This amendment would ensure that the FCA includes in its annual report under paragraph 11 of Schedule 1ZA to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 1RA as inserted into FSMA 2000 by Clause 43.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I will speak to all the government amendments in this group, which are part of a package of changes that the Government have brought forward to support scrutiny and accountability of the financial services regulators.

This group of amendments focuses on supporting that work through independent analysis and scrutiny. The Government have listened to the view expressed by noble Lords that, for there to be effective scrutiny, it is critical that Parliament and others have access to accurate and impartial information to assist in assessing the performance of the regulators. The Government have carefully considered the proposal, put forward by my noble friend Lord Bridges in Grand Committee, to establish an office for financial regulatory accountability, or OFRA.

While the Government cannot accept the proposal to establish an OFRA, we have considered what more can be done to support the provision of independent analysis and scrutiny. FSMA already requires the regulators to consult on rule proposals and establish independent panels to act as a “critical friend” in the rule-making process. The regulators seek to engage the panels at an early stage of policy development and the panels voluntarily produce reports annually on their work.

Through the Bill, the Government are already enhancing the role of the statutory panels to support scrutiny and accountability. This includes Clause 43, which requires the regulators to publish a statement of policy on how they recruit members of their statutory panels. In addition, following the debate in Commons Committee the Government introduced Clause 44, which requires panel members to be external to the regulators and the Treasury.

However, the Government have heard the calls from across the House for further reassurance that the regulators’ approach to panel recruitment will ensure that panel members are drawn from a diverse range of stakeholders and are sufficiently independent of the regulators. The Government have therefore introduced Amendments 23, 24, and 57, which will require the FCA, the PRA and the PSR, as part of their annual reports, to set out how recruitment to their panels has been consistent with their statements of policy.

The Bill also already introduces measures to strengthen the quality of the regulators’ cost-benefit analysis, including the introduction of new, independent panels to support the production and development of CBA. It is important that CBA reflect as accurately as possible the costs and benefits to firms and consumers of implementing and following regulation. In assessing this, the experience of regulated firms themselves is vital.

The Government are grateful to my noble friend Lord Holmes for raising this issue in Grand Committee, and again through Amendments 44 and 47 today. The Government have reflected on that earlier debate and introduced Amendments 43 and 46, which will require both the FCA and the PRA to appoint at least two members to their CBA panels from authorised firms.

To ensure that Parliament has access to the important work of the panels, the Government have introduced Amendment 50, which provides a power for the Treasury to require the panels to produce annual reports. The Treasury will then be required to lay these reports before Parliament. I can confirm that, in the first instance, the Government will bring forward the necessary secondary legislation to require the CBA panels and the FCA Consumer Panel to publish an annual report to be laid before Parliament, reflecting the fact that the work of the Consumer Panel and the new CBA panels has been of keen interest to noble Lords in earlier debates. The Government will keep this under review, and the legislation will allow the Government to require other panels to publish annual reports and lay these before Parliament if they consider that appropriate in future.

Finally, Amendment 95 seeks to strengthen the independence of the complaints scheme through which anyone directly affected by how the regulators have arrived at their decisions can raise concerns. The scheme is overseen by the independent complaints commissioner, and Amendment 95 seeks to strengthen that independence further by making the Treasury responsible for the appointment of the commissioner, rather than the regulators.

Existing legislation requires the complaints commissioner to publish an annual report, including trends in complaints and recommendations for how the regulators can improve, which is to be laid before Parliament. Amendment 95 also enables the Treasury to direct the commissioner to include additional matters in the annual report. This will ensure that, where appropriate, the Government can make sure that the report covers issues which the Government consider are important to support scrutiny of. Amendment 95 also requires the regulators to include a summary of where they have disagreed with the commissioner’s recommendations, and their reasons for doing so, in their response to the commissioner’s annual report.

The Government have been clear that the regulators’ increased responsibilities as a result of the Bill must be balanced with clear accountability, appropriate democratic input and transparent oversight. The package of amendments we are debating in this group contribute to that and support Parliament through additional independent analysis and scrutiny.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to take part in the debate on this group of amendments. I will speak to Amendments 42, 44, 45 and 47 in my name, and offer my support for all the amendments in the name of my noble friend Lord Bridges, to which I have added my name. I will leave him to set them out.

I again thank my noble friend the Minister, and the Treasury officials and team, for all the meetings and work done during Committee, and between Committee and Report, on the question of regulator scrutiny and accountability. I thank her particularly for adopting my Amendments 44 and 47 on the membership of the panels. On my Amendments 42 and 45, could she say a little more about the evidence base the panel will use to come to its recommendations? Would it be valuable to publish any dissenting opinions on the matters to be published? This would be extremely helpful for Parliament to scrutinise the panel’s decisions.

Finally, I ask a broader question around cost-benefit analysis. How will HMT and the regulator seek to ensure that the whole CBA process is meaningful, balanced, considers all majority and minority views, and does not fall into the potential trap of being a utilitarianist pursuit, which cost-benefit analysis can sometimes fall foul of?

That said, I thank again the Minister and the Treasury officials for their support for the amendments and for the discussions we had to come to this point, particularly on Amendments 44 and 47. I look forward to hearing in detail, particularly from my noble friend Lord Bridges and the Minister, the suggestion around the office for regulator accountability.

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[Baroness Chapman of Darlington (Lab)]

My Lords, I start by acknowledging the government amendments in this group, which make a number of changes that we think are sensible to ensure that the cost/benefit analysis panels have representatives from industry, to allow the Treasury to direct statutory panels to make annual reports and to make it the Treasury’s job to appoint the complaints commissioner. These all represent steps in the right direction—even if, as the noble Baroness, Lady Kramer, has just said, they are not necessarily the giant leaps that some would hope to see.

We tabled Amendment 39 in this group, which would require the FCA consumer panel to produce annual reports on the regulator’s fulfilment of its statutory consumer protection duties, and my noble friend Lady Hayter explained why we were backing this so firmly and spoke about the work with the British Steel pensioners, led by Nick Smith. She saved my blushes because Nick is my husband. I know that is not a declarable interest, but in the interests of transparency, I should probably let people know. We are pleased to see Amendment 50 and will not be pressing our Amendment 39 to a vote because of it. We believe that the government amendments go a significant way to addressing our concerns, so will not press our amendment, but that does not mean that we are convinced that consumer issues are by any means resolved, and we may have to revisit this topic in future.

The noble Baroness, Lady Bowles, helpfully introduced the amendments tabled by the noble Lord, Lord Bridges, and presented his proposal for an independent office for financial regulatory accountability. This is an interesting proposal but, when considering the Government’s numerous concessions on scrutiny and accountability, at this point we would not be minded to support it at a Division, because the creation of such a body needs significant work and amounts to a fundamental change in how we regulate the sector. We do not want to pre-empt what the Minister has to say, but it was not a core focus of the future regulatory framework review, the outcomes of which the Bill seeks to implement.

The amendments from the noble Lord, Lord Bridges, raise important questions about the capacity of parliamentary committees to scrutinise the regulators’ output, and this is something we have consistently raised with the Minister during our private discussions. When I say “we”, that is very much the royal “we”—I obviously mean my noble friend Lord Tunnicliffe. I am sure that he is grateful to the Minister for the time she has given to him, to my noble friend Lord Livermore and to me in recent weeks. While we understand that it is for Parliament to make its own arrangements, both now and in future, we hope that the Government will acknowledge the substantial workload that committees will have and remain open-minded about whether and how the regulators can better facilitate Parliament’s work.

I am especially grateful to my noble friend Lord Eatwell for his amendments to the OFRA texts, but I suppose this highlights in part the difficulties with supporting the detail of the proposal at a Division at this point. We see that many people agree with the principle, but there is probably a great deal more work to be done on the detail.

[Baroness Penn (Con)]

My Lords, let me respond briefly to the points raised in the debate. I take first the amendments from my noble friend Lord Bridges, well introduced by the noble Baroness, Lady Bowles: Amendments 64 to 66 and 68 to 71, which would establish an office for financial regulatory accountability. As I said in my opening remarks, the Government agree that the provision of accurate and impartial information is extremely important for assisting Parliament in its important scrutiny role—and, indeed, others.

However, as the noble Baroness opposite acknowledged, creating a new body raises questions about how it would interact with the existing accountability structures and the balance of responsibilities between government, Parliament and independent regulators. As I noted in Grand Committee, the provisions for the establishment of the Office for Budget Responsibility referred to in this debate, on which OFRA is, at least in part, modelled, were brought forward in a stand-alone Bill after public consultation, where there was sufficient time to consider carefully its role and remit in advance. The Government therefore do not think that establishing such a body through amendment to this Bill is the right way forward at this time. We acknowledge the strength of feeling and degree of consensus from different parts of the House on this idea, and noble Lords can rest assured that my noble friend Lord Bridges has made it very clear to me that this is not the last that the Government will be hearing from him on this subject.

I turn to the series of amendments from my noble friend Lord Holmes. Amendments 42 and 45 seek to make specific provision for the regulators’ new CBA panels to be provided with the information required to perform their functions. The Government support the intention of these amendments but consider that the requirement in legislation to establish and maintain the panel already requires the regulator to ensure that the panel has the appropriate information and data to perform its functions.

My noble friend Lord Holmes asked how we could ensure high-quality cost-benefit analysis work. As he and the noble Lord, Lord Eatwell, noted, key to this is the composition of the panels. Panels with members who have diverse backgrounds, expertise and thought will be better placed to ensure that the FCA, the PRA and the PSR receive the most comprehensive appraisal of their policy. That is part of the reason why we have Clause 43, which requires the FCA and the PRA to set out a clear and transparent process for appointing members.

The FCA has also recognised the importance of improving diversity in the membership of its statutory panels and is undertaking a review to identify ways in which it can boost diversity so that the composition of panels appropriately reflects the range of practitioners and stakeholders in financial services. The Government welcome the work that is being done to move recruitment to the panels in this direction.

Amendments 41 and 45 seek to require the new CBA panels to make public their meeting materials and recommendations. The Government are not able to support this as it could undermine the confidentiality of the panels’ contributions, which is crucial to their role as a critical friend to the regulators. The panels and the regulator will already be able to make public their deliberations and materials when they consider it appropriate, without undermining that confidentiality. Through an amendment in this group, the Government are taking a power to oblige the panels to publish their annual reports on their work and lay them before Parliament; we think that this will deliver sufficiently.

If a panel feels that its work or conclusions are being ignored by the regulator, or where there are issues on which the regulator and the panel differ, the Government expect that these will generally be resolved in the course of regular engagement between the regulator and the panel. However, as I have said, panels are able to express their views publicly, including through their annual reports or by publishing responses to consultations. For example, as it currently operates, the FCA’s consumer panel regularly publishes its responses to the regulator’s consultations.

I turn to Amendment 39 in the name of the noble Baroness, Lady Chapman. I am glad that she and the noble Baroness, Lady Hayter, feel that government Amendment 50 seeks the same outcome and should help to deliver that, although I note that, as the noble Baroness said, this is not the last word on consumer issues. However, at least when it comes to this particular focus, we have, I hope, delivered on that.

I know that not all noble Lords are satisfied with all of what the Government have put forward, but this is a step forward in the right direction. I expect to hear more from noble Lords in future on how the new system that we are establishing through this Bill is operating. For now, I commend the amendment.

Amendment 23 agreed.

Moved by

[Baroness Penn]

24: Clause 35, page 50, line 6, at end insert—
“(za) after paragraph (ba) insert—“(bb) how it has complied with the statement of policy on panel appointments prepared under section 2NA in relation to the process for making appointments and the matters considered in determining who is appointed,”Member’s explanatory statement
This amendment would ensure that the PRA includes in its annual report under paragraph 19 of Schedule 1ZB to the Financial Services and Markets Act 2000 a summary of how it has complied with the statement of policy on panel appointments in section 2NA as inserted into FSMA 2000 by Clause 43.

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[Lord Livermore (Lab)]

My Lords, I join the noble Baroness, Lady Kramer, in congratulating the noble Lord, Lord Forsyth, on persuading the Government to adopt his amendments, albeit in a slightly different form. Given the amount of regulation coming forward in the months and years ahead, and with the expertise that your Lordships’ House can offer, it was crucial that the Government extended the Commons-only provisions to include a relevant Lords committee, and we very much welcome these government amendments.

We are also pleased that the Minister included the option of a Joint Committee, as this future-proofs the legislation in the event that colleagues in both Houses feel—as does my noble friend Lord Eatwell—that such a body would provide a better form of scrutiny of the regulator’s work. As my noble friend Lady Chapman mentioned in a previous group, and as the noble Lord, Lord Forsyth, stressed further, there are still significant outstanding questions about the level of staff resource and expertise that relevant parliamentary committees will be able to draw on. Although these questions cannot be adequately addressed through the Bill, these concessions will at least safeguard the role of your Lordships’ House and enable conversations on resourcing to now proceed.

[Baroness Penn (Con)]

My Lords, the amendments in this group focus on further formalising the role of parliamentary scrutiny of the regulators. The Government agree with noble Lords that effective parliamentary scrutiny, in particular through parliamentary committees, has a critical role to play in improving the quality of regulation, as the noble Baroness, Lady Kramer, said, and the performance of the regulators overall.

The Bill, through Clauses 36 and 47 and Schedule 7, seeks to ensure that the Treasury Select Committee has the information it needs to fulfil its role, by requiring the regulator to notify the TSC when publishing any relevant consultations. However, the Government have listened to the case made by noble Lords that the important role of this House was not adequately reflected by that approach. We have therefore tabled a series of amendments which will require the regulators to also notify the relevant Lords committee when they publish a consultation. These amendments will ensure parity between arrangements for the Commons and the Lords. They also provide that, if a Joint Committee is set up in future, the regulators will be required to notify it in the same way.

I am glad that my noble friend Lord Forsyth feels that these amendments fulfil the aims of his own; that is just as well, as his amendments in Committee and on Report formed the basis for the Government’s approach—that is no coincidence. I am grateful to him for the work that he has put in on this issue and for the time that he has taken to discuss these matters with the Government.

I am also grateful to my noble friend Lord Bridges and the noble Lord, Lord Hollick, for their engagement as the chairs of the current committees in this House that look at the work of the financial services regulators. When I spoke with them, they explained how the EAC and the IRC currently split some responsibility for financial services policy, an example of which was their recent work on LDI, where the EAC focused on the work of the Bank of England and the PRA and the IRC focused on that of the FCA. The Government’s amendments would allow for the two committees to continue with that approach if they wished to do so and for a different Lords committee to receive notifications of consultations from the FCA and the PRA. That structure would be for Parliament to decide.

I shall now pick up on the concern from noble Lords about having multiple committees looking at the same issues or the work of the same regulators. As I have said, the structure is a matter for Parliament, but currently we have the TSC in the Commons, and the Economic Affairs and the Industry and Regulators Committees in the Lords, which at the moment look at various aspects of the regulators’ work without duplicating each other or creating unnecessary burdens. Given the scale of powers for the regulators being established in this Bill, there will be more than sufficient work to go round different committees, and they have already proven themselves able to co-ordinate their work so that it is not duplicative.

We have heard, given the scale of the task before us, that there is concern about the resource made available to those committees. Committee structures and their resourcing will remain a matter for Parliament to decide and I have noted that noble Lords agree that that is the right approach. However, the Government recognise that the new model for financial services regulation will require a step change in this House’s scrutiny of the regulators and agree there must be suitable resource in place to support this. The Government will work with the usual channels and the House authorities in the appropriate way.

The Government have also heard concerns about the feedback loop when Parliament engages with regulatory proposals. There can often be a significant period of time between an initial consultation and the Bill’s existing provisions regarding the regulators’ engagement with parliamentary committees, and final rules being published. In particular, the Government recognise amendments tabled by the noble Baroness, Lady Bowles, in Grand Committee, seeking to require the regulators to explain how parliamentary recommendations have been considered. The Government have therefore tabled Amendments 61 to 63, which require the regulators, when publishing their final rules, to explain how they have considered representations from parliamentary committees. This will ensure that the regulators provide a public explanation of how the views of parliamentary committees have been considered at the point when rules are made. This complements the existing requirement in Clauses 36 and 47, and Schedule 7, for the regulators to respond in writing to the chairs of committees that have made representations. This will ensure not only that regulators appropriately consider Parliament’s representations but that they set out publicly how they have done so.

The debates so far have shown that there is no single silver bullet to solve the problem of accountability. However, the Government are committed to creating an effective, overarching ecosystem in which the various different actors all play their roles in holding the independent regulators to account, ensuring high-quality financial services regulation in the UK. I am therefore grateful that my noble friend Lord Forsyth has said that he will withdraw his amendments, and I intend to move the Government’s amendments, based on those amendments, when they are reached.

[Lord Forsyth of Drumlean (Con)]

My Lords, I am most grateful to my noble friend the Minister for the way in which she has responded to this. I entirely agree with her point, as a former chairman of the Economic Affairs Committee, on the way in which we have worked with the Treasury Select Committee. I agree also with the noble Lord, Lord Eatwell, that it is carefully drafted and—who knows?—it may very well lead to both Houses deciding to have a Joint Committee, which would certainly be the best possible option. But that is obviously not a matter for me and I beg leave to withdraw my amendment.

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Moved by

[Baroness Penn]

26: Clause 36, page 50, line 30, leave out “the Treasury Committee of the House of Commons” and insert “each relevant Parliamentary Committee”
Member’s explanatory statement
This amendment, together with the amendment at page 50, line 43, would extend the duties of the FCA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.

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Moved by

[Baroness Penn]

30: Clause 36, page 50, line 43, at end insert—
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the FCA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 50, line 30.

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Moved by

[Baroness Penn]

33: Clause 36, page 51, line 42, leave out “the Treasury Committee of the House of Commons” and insert “each relevant Parliamentary Committee”
Member’s explanatory statement
This amendment, together with the amendment at page 52, line 11, would extend the duties of the PRA to notify the Treasury Committee of the House of Commons so as to include a relevant Committee of the House of Lords and a Joint Committee.

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Moved by

[Baroness Penn]

37: Clause 36, page 52, line 11, at end insert—
“(5A) References in this paragraph to the relevant Parliamentary Committees are references to—(a) the Treasury Committee of the House of Commons,(b) the Committee of the House of Lords which—(i) is charged with responsibility by that House for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes, and(c) the Joint Committee of both Houses which—(i) is charged with responsibility by those Houses for the purposes of this paragraph, and(ii) has notified the PRA that it is a relevant Parliamentary Committee for those purposes.”Member’s explanatory statement
See the explanatory statement for the amendment at page 51, line 42.

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Moved by

[Baroness Penn]

43: Clause 41, page 57, line 29, at end insert—
“(7A) The FCA must appoint to the FCA Cost Benefit Analysis Panel at least two individuals who are employed by persons authorised for the purposes of this Act by the FCA, with each one being employed by a different person.”Member’s explanatory statement
This amendment would impose a duty on the FCA to ensure that the FCA Cost Benefit Analysis Panel includes at least two members who are employed by persons authorised by the FCA under the Financial Services and Markets Act 2000.

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Moved by

[Baroness Penn]

46: Clause 41, page 58, line 22, at end insert—
“(7A) The PRA must appoint to the PRA Cost Benefit Analysis Panel at least two individuals who are employed by PRA-authorised persons, with each one being employed by a different person.” Member’s explanatory statement
This amendment would impose a duty on the PRA to ensure that the PRA Cost Benefit Analysis Panel includes at least two members who are employed by PRA-authorised persons.

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Moved by

[Baroness Penn]

49: Clause 41, page 58, line 31, leave out “paragraph 10(1)” insert “paragraphs 10(1) and 10A”
Member’s explanatory statement
This amendment ensures that the PRA Cost Benefit Analysis Panel (established under Clause 41) will be required to provide advice in relation to cost benefit analyses prepared for the purposes of consultation under the new paragraph 10A of Schedule 17A to FSMA 2000 (inserted by Clause 19).

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Moved by

[Baroness Penn]

50: After Clause 44, insert the following new Clause—
“Panel reports
(1) The Treasury may by regulations require specified statutory panels of the regulator to produce an annual report on their work and provide that report to the Treasury.(2) Regulations under subsection (1) may make provision about the content of the annual report.(3) The Treasury must lay a copy of each report prepared by virtue of this section before Parliament.(4) Each specified statutory panel of the regulator must publish its reports prepared by virtue of this section in such manner as it thinks fit.(5) In this section—(a) “statutory panels of the regulator” means—(i) in relation to the FCA, the panels mentioned in section 1RA(8) of FSMA 2000,(ii) in relation to the PRA, the panels mentioned in section 2NA(8) of FSMA 2000, and(iii) in relation to the Payment Systems Regulator, a panel established under section 103(3) of the Financial Services (Banking Reform) Act 2013;(b) “specified” means specified in regulations under this section.(6) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This new Clause would provide the Treasury with a power to make regulations to require annual reports to be produced by the statutory panels established under the Financial Services and Markets Act 2000 and the Financial Services (Banking Reform) Act 2013.

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Moved by

[Baroness Penn]

52: Clause 46, page 67, line 14, at end insert—
“(1A) The statement must provide information about— (a) how representations (including by a statutory panel) can be made to the Bank with respect to its review of rules under section 300I, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “statutory panel” has the meaning given by section 1RB(5).”Member’s explanatory statement
This amendment would impose a duty on the Bank of England to ensure that the Bank includes in its statement of policy about the review of rules (required by section 300J of the Financial Services and Markets Act 2000, as inserted by Clause 46) information about how representations (including by statutory panels) can be made and considered.

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Moved by

[Baroness Penn]

54: Clause 47, page 72, line 32, at end insert “and the Bank’s secondary innovation objective (see section 30D(2) of the Bank of England Act 1998)”
Member’s explanatory statement
This amendment would ensure that new paragraph 33B of Schedule 17A to the Financial Services and Markets Act 2000, as inserted by Clause 47(14) of the Bill, includes a reference to the Bank’s secondary innovation objective, as inserted into the Bank of England Act 1998 by Clause 45 of the Bill.

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Moved by

[Baroness Penn]

56: Schedule 7, page 152, line 44, at end insert—
“(1A) The statement must provide information about—(a) how representations (including by a relevant panel) can be made to the Regulator with respect to its review of requirements under section 104B, and(b) the arrangements to ensure that those representations are considered.(1B) In this section “relevant panel” means—(a) a panel of the Payment Systems Regulator established under section 103(3), (b) a panel of the FCA mentioned in section 1RA(8) of FSMA 2000, and(c) a panel of the PRA mentioned in section 2NA(8) of FSMA 2000.”Member’s explanatory statement
This amendment would impose a duty on the Payment Systems Regulator to ensure that the Regulator includes in its statement of policy about the review of requirements (required by section 104B of the Financial Services (Banking Reform) Act 2013, as inserted by paragraph 7 of Schedule 7 to the Bill) information about how representations (including by statutory panels) can be made and considered.

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Moved by

[Baroness Penn]

61: Clause 50, page 74, line 9, at end insert—
“(4D) Where representations are made to the FCA by a Committee of the House of Commons or the House of Lords or a Joint Committee of both Houses in accordance with subsection (2)(e), the FCA’s account mentioned in subsection (4) must also describe how the FCA has considered the representations made by that Committee in making the proposed rules.””Member’s explanatory statement
This amendment would impose a duty on the FCA to include in the account that the FCA must publish under section 138I(4) of the Financial Services and Markets Act 2000 details about representations made by Parliamentary Committees.

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Moved by

[Baroness Penn]

73: Schedule 8, page 160, line 17, after “service”” insert “, “free cash access service””
Member’s explanatory statement
This amendment is consequential on the amendment at page 160, line 29.

[Baroness Penn (Con)]

My Lords, the Government recognises that, while digital payments are increasingly present in our society, cash continues to play a vital role in many people’s everyday lives. That is why this Bill puts in place a framework to protect the ability of people and businesses across the UK to access cash withdrawal and deposit facilities for the first time in UK law and introduces new powers for the FCA.

It is important to recognise that, on the whole, cash access in the UK remains comprehensive. Industry is already funding a range of new and innovative services to support communities and ensure that they have easy access to cash. To date, LINK has recommended new shared cash access services in over 100 communities across the UK. This includes the introduction of over 50 shared banking hubs. While the opening of these facilities is taking time to get right, I welcome the recent openings of new hubs in Troon in Ayrshire and Acton in west London. I also understand that the pace of delivery is due to accelerate over the coming months.

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[Baroness Penn (Con)]

My Lords, I will first address the point made by the noble Baroness, Lady Chapman, on the change between Committee and Report. On a whole host of areas, we have reflected on the discussions we had in Committee. The Government have taken the time to do that work and were able to bring forward amendments at this stage, whereas we simply were not able to bring forward amendments on a whole host of topics in Committee. I do not think it is anything to do with differing powers of persuasion between the different stages.

My noble friend Lord Holmes has many of the amendments in this group. I am glad that he also welcomes the Government’s amendments in this area. He asked what reasonable access would look like; that further detail will be for the policy statement. It is important to recognise that currently, on the whole, cash access remains extensive. According to FCA analysis, over 96% of the population are within 2 kilometres of a free-to-use cash access point.

Turning to my noble friend’s amendments, I too acknowledge his persistent campaigning on the provision of access to cash across successive financial services Bills. However, the Government are not able to support the approach in Amendment 82. We do not consider it necessary or appropriate to place additional requirements on organisations to accept cash across the public and private sectors. This should be a decision for individual organisations as they decide how best to operate. What I can say to my noble friend is that the provisions in the Bill do not reflect access just to withdrawal facilities but to deposit facilities, which will support organisations to continue to accept cash.

On Amendment 83, again, this is an issue that my noble friend has raised previously. The designation of critical national infrastructure is sensitive and is not made public. I reassure my noble friend and all noble Lords that appropriate arrangements are in place to ensure the resilience of the UK’s financial system, including cash provision.

I turn to Amendment 80 from the noble Baroness, Lady Tyler, spoken to by the noble Baroness, Lady Kramer, and Amendments 84 and 111 from my noble friend Lord Holmes, which all relate to access to banking services. I acknowledge the strength of feeling on this topic and the perspectives that have been raised. As people acknowledge, it is clear that the nature of banking is changing, and the long-term trend is moving towards greater use of digital and telephone banking services over traditional branches. Of course, it is vital that those customers who rely on physical services are not left behind, which is why the FCA is taking an assertive approach to its guidance for firms on this issue.

Where firms are closing branches, the regulator expects them to put in place appropriate alternatives where reasonable. If firms fall short, the FCA can and will ask for closures to be paused or for other options to be put in place. Beyond digital access, several banks are rolling out community outreach initiatives when they close branches, maintaining key physical services in local libraries, shopping centres and roaming vans. Over 99% of personal and 95% of business customers can, and do, do their everyday banking at 11,500 Post Office branches.

On banking hubs, determining their location and the range of services provided is a commercial decision. My noble friend asked what would be a reasonable number of hubs to have open by the end of the year. As I said earlier, over 50 have been announced. We expect delivery on that commitment to pick up as this year progresses. Furthermore, since the last debate, several firms have made the commitment that, where a banking hub has been announced as a result of their branch closure, they will not close that branch until the hub is open, so we have a double lock of improving the speed of delivery but not losing services until we see improvement in the pace of delivery. That is welcome and shows that the industry is taking this issue seriously.

Regarding accessibility in my noble friend Lord Holmes’s Amendments 85 and 110, I absolutely share his ambition for financial services to be accessible to all. He spoke about some of the work that we discussed in Committee and asked for an update. Perhaps I can write to him after today’s debate with an update on that work.

I turn to the amendment on a review of digital inclusivity. Many financial services firms also support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks. The Government recognise that we need to be proactive in this space, and there is a range of work under way to ensure that financial services adapt to the needs of consumers in the digital age and to address the issues that my noble friend rightly raised. These include driving further progress on access to digital infrastructure, connectivity and skills to fully benefit from this transition.

I am grateful to my noble friend for his constructive challenge of the Government’s approach to this important issue. I assure him and all noble Lords that the Treasury will continue to consider where there may be gaps in the Government’s approach and ensure that no one is left behind as we evolve into new ways of managing our money. An example of this is that the Government recently held a call for evidence on the Payment Services Regulations, which invited views on this policy. We are currently considering responses, including where these are linked to financial inclusion.

I hope that, although the Government are not able to support the other amendments in this group, I have reassured noble Lords that the Government consider these issues very seriously through this work. I hope that noble Lords do not move their amendments when they are reached.

Amendment 73 agreed.

Moved by

[Baroness Penn]

74: Schedule 8, page 160, line 29, at end insert—
“(3A) A “free cash access service” is a cash access service that is—(a) a free of charge service which enables cash to be placed on a relevant personal current account, or(b) a free of charge service which enables cash to be withdrawn from a relevant personal current account.”Member’s explanatory statement
This amendment would provide a definition of “free cash access service” in new Part 8B of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill.

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Moved by

[Baroness Penn]

79: Schedule 8, page 164, line 7, at end insert—
“(1A) In this section references to cash access services include references to free cash access services.”Member’s explanatory statement
This amendment would ensure that the FCA’s duty, in new section 131U of the Financial Services and Markets Act 2000, as inserted by paragraph 1 of Schedule 8 to the Bill, of seeking to ensure reasonable provision of cash access services includes seeking to ensure reasonable provision of free cash access services.

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Moved by

[Baroness Penn]

86: Schedule 11, page 257, line 7, at end insert—
“(2A) Regulations under this paragraph may apply to partial property transfers generally or only to partial property transfers—(a) of a specified kind, or(b) made or applying in specified circumstances.”Member’s explanatory statement
This amendment would provide consistency with other parts of Schedule 11 on Central counterparties by clarifying that regulations made under paragraph 75 (restriction of partial transfers) may apply to transfers generally or only to transfers of a particular kind or in particular circumstances, as specified in the regulations.

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Moved by

[Baroness Penn]

87: Schedule 12, page 311, line 11, at end insert—
“(5A) A liability, to the extent of its reduction by a write-down order under this section, is to be treated as extinguished unless and until revived by section 377H or 377I.”Member’s explanatory statement
This amendment would clarify the effect of a write-down order under section 377A (to be inserted into FSMA 2000 by paragraph 1 of Schedule 12 to the Bill) on the treatment of liabilities reduced by the order.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Livermore (Lab)]

My Lords, the Payment Systems Regulator is now putting in place requirements to ensure more consumers will receive a refund if they fall victim to authorised push payment scams. This is very welcome. Many banks have already taken steps to make customers aware of the risk of scams, but the sophisticated nature of many such scams means there is a need for even stronger efforts to prevent fraud occurring in the first place. Not all of the detail is yet settled, with consultation on key aspects of the new scheme to follow later in the year, but we hope the Minister can give an indication of the levels of protection likely to be offered.

We welcome the tabling of Amendment 94 by the noble Lord, Lord Vaux, which we understand to be a probing text. As the new system beds in, it will be vital for banks and other financial institutions to collect data and share that with the regulator, in order to inform future changes to guidance and regulation. The amendment also proposes public reporting of data to enable consumers to see which institutions have a good or bad track record. This is an interesting idea and we look forward to hearing the Minister’s response on this specific point.

While APP scams fall within the financial services realm, anti-fraud initiatives cut across departments and legislation. That is why one of our priorities for the Online Safety Bill is to ensure robust media literacy provisions, so internet users are able to better identify which articles, websites or emails are legitimate. With a significant amount of financial fraud taking place online but with the limited scope of that Bill, we hope the Minister and her department will engage with the Online Safety Bill as it approaches Report stage. Scams cause a significant amount of emotional distress, as well as coming with financial costs, so we hope that the Government and the regulators will do everything possible to keep ahead of the curve.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government and the Payment Systems Regulator recognise the importance of regular, robust data collection. This is crucial for monitoring the effectiveness of the reimbursement requirement and ensuring that firms are held accountable. I am grateful to the noble Lord, Lord Vaux of Harrowden, for his considered engagement on this issue. I reassure noble Lords that the PSR has committed to half-yearly publication of data on authorised push payment scam rates and on the proportion of victims who are not fully reimbursed.

I can tell my noble friend Lord Naseby that a voluntary system is already in place and the PSR has already begun collecting data from the 14 largest banking and payment groups. The first round of transparency data is due for publication in October this year. The data that the PSR will publish includes the proportion of scam victims who are left out of pocket, fraud rates where the bank has sent customers’ money to a scammer, and fraud rates where the bank has hosted a scammer’s account. That means that, from October this year, the PSR will publish data for total fraud rates, both for sending money and receiving fraudulent funds, and reimbursement rates, on a twice-yearly basis for the 14 largest banking groups. This so-called league table will provide customers with the information they need to consider the relative performance of different banking groups on these metrics, and to factor that into their banking decisions.

Further to this data, once the reimbursement requirement is in place the PSR will use a range of metrics to monitor its effectiveness on an ongoing basis. These include the length of reimbursement investigations, the speed of reimbursements, the value of repatriated funds, the treatment of and reimbursement levels among vulnerable customers, and the number and value of APP scams. Data on appeals will be captured and reported by the Financial Ombudsman Service separately.

More broadly, the PSR will publish a full post-implementation review of the reimbursement requirement introduced by this Bill within two years of implementation. The review will assess the overall impact of the PSR’s measures for improving consumer outcomes. That does not mean it will not also consider the effectiveness of this measure on an ongoing basis. Indeed, more widely, the PSR will consider risks across different payment systems and, where necessary, address them with future action. This includes a commitment to work with the Bank of England to introduce similar reimbursement protections for CHAPS payments, and with the FCA in relation to on-us payments.

The PSR has been working closely with industry to develop effective data collection and reporting processes for its work on fraud. While the Government recognise the intention behind the noble Lord’s amendment, they do not consider it necessary or appropriate to prescribe specific metrics to be collected in primary legislation. I hope that, given the reassurance I have been able to provide today, he would agree with that point.

The noble Lord, Lord Livermore, spoke about the wider impacts of fraud and the duties that go beyond financial services companies or payment system providers in addressing those risks of fraud. That is being looked at through both the Government’s counter-fraud strategy and other Bills. He mentioned the Online Safety Bill. I disagree with his assessment of the measures in there. The measures that we have to tackle fraud in that Bill are a significant step-change in what we expect of companies in this space, and I think they will make a real difference. We are committed to working across all sectors to look at what more we could do in this space once we have implemented those measures and see how effective they are. I hope noble Lords are reassured by our commitments more broadly on this issue, and specifically by the fact that the PSR will be publishing data in this space once we have implemented the measures in the Bill.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank all those who have taken part in this debate, particularly the Minister for her constructive engagement on this and the reassurance she has just given. In fact, in one area, she has actually gone further than my amendment suggested, as the noble Lord, Lord Naseby, pointed out: the annual report is now to be six-monthly, which is hugely welcome. It is only for the top 14 payment service providers, which will cover the bulk of the market, but that is something that the Government and the PSR might want to keep under review, particularly as different players come in and out of the market. I thank her very much for her reassurances.

I will make one comment more generally, echoing some of the comments made by the noble Lord, Lord Livermore. It is not only the banks that are players within the fraud chain, it is all those other parties that enable or facilitate fraud, from the tech companies to social media companies, the web-hosting companies, the telecom companies, et cetera. This measure puts all of the liability on to the banks. While it is a simple solution for victims—and that is to be commended—we need to find some way of incentivising all those other players in the fraud chain to behave properly and to stamp down on their services being used by fraudsters. I am hoping that we will see progress on that in the Online Safety Bill, and also in the failure to prevent fraud clauses in the economic crime Bill that is coming forward. With that, I beg leave to withdraw my amendment.

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Moved by

[Baroness Penn]

95: After Clause 71, insert the following new Clause—
“Arrangements for the investigation of complaints
(1) The Financial Services Act 2012 is amended in accordance with subsections (2) and (3).(2) In section 84 (arrangements for the investigation of complaints)—(a) omit the “and” at the end of subsection (1)(a);(b) omit subsection (1)(b);(c) after subsection (1) insert—“(1A) The Treasury must appoint an independent person (“the investigator”) to be responsible for the conduct of investigations in accordance with the complaints scheme.”;(d) omit subsection (4);(e) in subsection (5), in the opening words, for “regulators” substitute “Treasury”.(3) In section 87 (investigation of complaints)—(a) in subsection (9A), after paragraph (b) insert—“(ba) for the regulator’s response under paragraph (b) to include a summary of—(i) the cases in which the regulator decided not to follow any relevant recommendations, and(ii) the reasons for not following those recommendations;”;(b) in subsection (9B), after paragraph (e) insert—“(f) such other matters as the Treasury may from time to time direct.”;(c) after subsection (9B) insert—“(9C) In subsection (9A)(ba) the reference to “relevant recommendations”, in relation to the regulator’s response in respect of an annual report, is a reference to—(a) any recommendations to the regulator contained in that annual report, and(b) any recommendations to the regulator contained in final reports relating to individual complaints given during the period to which that annual report relates.”Member’s explanatory statement
This new Clause would amend the Financial Services Act 2012 to make the Treasury, rather than the regulators, responsible for the appointment of the Complaints Commissioner and would impose additional reporting requirements.

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Moved by

[Baroness Penn]

96: After Clause 71, insert the following new Clause—
“Politically exposed persons: money laundering and terrorist financing
(1) The Treasury must exercise the power conferred by section 49 of the Sanctions and Anti-Money Laundering Act 2018 (power of appropriate Minister to make regulations about money laundering etc) for the purpose mentioned in subsection (2).(2) The purpose is to make provision amending Part 3 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”) (customer due diligence) so as to secure the result required by subsection (3).(3) The result required by this subsection is that, where a customer is a domestic PEP, or a family member or a known close associate of a domestic PEP—(a) the starting point for the relevant person’s assessment under regulation 35(3) of the 2017 Regulations is that the customer presents a lower level of risk than a non-domestic PEP, and(b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer is less than the extent to be applied in the case of a non- domestic PEP.(4) In this section—(a) “customer” includes a potential customer;(b) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(c) “enhanced risk factors”, in relation to a customer who is a domestic PEP or a family member or a known close associate of that domestic PEP, mean risk factors other than the customer’s position as a domestic PEP or as a family member or known close associate of that domestic PEP;(d) “non-domestic PEP” means a politically exposed person who is not a domestic PEP;(e) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.(5) Section 55 of the Sanctions and Anti-Money Laundering Act 2018 (Parliamentary procedure for regulations) does not apply to regulations made in compliance with the duty imposed by subsection (1).(6) Regulations made in compliance with the duty imposed by subsection (1)—(a) are subject to the negative procedure, and(b) must be laid before Parliament in accordance with paragraph (a) before the end of 12 months starting with the day on which this section comes into force.(7) The Treasury must, before the end of 6 months starting with the day on which this section comes into force, lay before Parliament a statement setting out what progress has been made towards making the regulations in compliance with the duty imposed by subsection (1).(8) The duty in subsection (7) does not apply where the regulations have been laid before Parliament in accordance with subsection (6)(a) before the end of 6 months starting with the day on which this section comes into force.”Member’s explanatory statement
This new Clause would impose a duty on the Treasury to amend the money laundering regulations with the effect of ensuring that a politically exposed person who is entrusted with a prominent public function by the UK (or their family members or known close associates) should be treated as representing a lower risk than a person so entrusted by a country other than the UK, and have lesser enhanced due diligence measures applied to them.

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[Baroness Penn (Con)]

My Lords, there has been significant discussion throughout the passage of this Bill, and more broadly in parliamentary debates, around the treatment of politically exposed persons—PEPs—under the money laundering regulations. Noble Lords have made many valuable contributions on this issue, sharing their personal experiences and those of their family members. I appreciate the concern expressed across this House that noble Lords and their family members can face disproportionate treatment as a result of their PEP status, including burdensome requests for information and even being prevented from accessing financial services. The Government are clear that action is needed to address this. In looking at this issue, we have sought to balance the need to maintain our adherence to the international standards in this area, as set by the Financial Action Task Force, with the need to ensure proportionate treatment of PEPs.

Therefore, the Government are tabling amendments to this Bill to achieve this in two areas. The Government are clear that domestic PEPs are lower-risk than foreign PEPs, and this must be reflected in both policy and practice. Noble Lords will be aware that while the money laundering regulations require all PEPs to undergo enhanced due diligence, the Government require the FCA to publish guidance on how banks and other financial institutions should meet this requirement. The FCA’s current guidance, published in 2017 following a provision introduced in the Bank of England and Financial Services Act 2016 with cross-party support, makes it clear that financial institutions should treat domestic PEPs as lower-risk than non-domestic PEPs in the absence of other high-risk factors.

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[Baroness Chapman of Darlington (Lab)]

My Lords, I accept that we are politically exposed people—of course we are—and we can be bribed, so it is right that there are rules around this. This topic has attracted a lot of interest throughout the passage of the Bill, along with a number of questions and debates. I completely understand why that is.

While the enhanced checks faced by politically exposed persons are often onerous, as we have heard—all power to the elbow of the noble Viscount, Lord Trenchard; well done to him for finding the names of two actual human beings to speak to at American Express, and I hope he gets his situation resolved—it is vital that this country maintains strong anti-money laundering regulations and acts in a manner consistent with international standards. Unfortunately, to an extent that involves us, but I think the Government’s amendments in this group do what is needed in making the distinction, as do many other jurisdictions, between domestic PEPs and those from other countries, which is consistent with the Financial Action Task Force guidelines.

We welcome the support for the amendments from the noble Lord, Lord Forsyth, and my noble friend Lady Hayter of Kentish Town, both of whom have raised this issue consistently for some time. Most of all, though, it is right that we thank the Minister for bringing the amendments forward. She has worked hard to try to resolve colleagues’ concerns on this issue, and we hope that those will be dealt with by the upcoming changes to the regulations and the accompanying guidance.

[Baroness Penn (Con)]

My Lords, I reiterate what the noble Baroness, Lady Chapman, has just said: our approach in this area has always been guided by ensuring that the rules in place in the UK maintain the international standards that are set in this area. That has been the guiding principle in looking at resolving this issue. Nevertheless, we felt that it was right that action be taken. Examples such as that from the noble Baroness, Lady Kramer, demonstrate clearly that the approach taken by institutions is not always proportionate, and we need to address that.

I have heard from noble Lords, including my noble friends Lord Forsyth and Lord Moylan, questions about the timescale for the two pieces of work that are committed to in the amendments. I understand that feeling, but we have engaged closely with the FCA on the review that it is committed to undertaking through the government amendment, and it is clear that if there is to be a thorough assessment of the treatment of domestic PEPs at a systemic level—we have already raised individual issues or individual institutions in response to previous debates—then it must be given adequate time to be conducted.

The 12-month timeframe will allow the review to benefit from fuller engagement with industry and with affected PEPs, and it will ensure that the FCA is able to develop a full understanding of the scale and extent of this issue. I think it gives the FCA time to address issues such as those raised by the noble Baroness, Lady Kramer. Included in that timeframe is the fact that, if it deems it necessary to update its guidance, it will produce the draft within that timeframe.

The Government have 12 months to amend the money laundering regulations. As I said, the distinction between domestic and foreign PEPs does not currently exist in law, and we want to make sure that we get the drafting right to ensure that it achieves the intended outcomes without unintended consequences. That will require us to consult with industry to ensure that the language in the amendment has the desired outcome of altering firms’ behaviour in how they treat low-risk domestic PEPs. These points relate to the questions posed by the noble Lord, Lord Sharkey, because this definition will come in part through the amendment of the regulations but in part from looking at the FCA’s guidance, and what needs to be set out more fully there when it has done its review.

Acknowledging the interest from parliamentarians—perhaps we should all have declared our interest as we stood up to speak, in respect of PEPs—we have committed to updates on progress both from the FCA and the Government in delivering on these amendments.

My noble friend Lord Moylan and the noble Earl, Lord Erroll, raised the interaction with tipping-off requirements and communication to customers. We have asked the FCA to consider this as part of its review. The noble Baroness, Lady Hayter, and others, mentioned the impact on family members. Again, we have asked the FCA to consider this in its review.

My noble friend Lord Moylan also asked if we need to wait for 12 months for action. The FCA remains committed to taking action where it identifies non-compliance with its current guidance on PEPs and will do so throughout the course of the review. I encourage noble Lords to use the contacts provided in my letter on this issue in November, if they encounter difficulties while the Government amendments are being implemented. I am sure that those in the FCA responsible for this area will look at this debate carefully.

The noble Lord, Lord Eatwell, raised a question on Crown dependencies, and my noble friend Lord Naseby asked about overseas territories. I will write to noble Lords on that. If it is right or appropriate that this should extend that far, there is nothing in the amendments to prevent the Government doing that, but I would want to double-check the right interaction and the right locus for addressing those concerns. With that, I beg to move.

Amendment 96 agreed.

Amendment 97

Moved by

[Baroness Penn]

97: After Clause 71, insert the following new Clause—
“Politically exposed persons: review of guidance
(1) The FCA must review its guidance on politically exposed persons (“PEPs”) given under section 139A of FSMA 2000 and in compliance with the requirements under regulation 48 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692)(“the 2017 Regulations”).(2) The review required under subsection (1) must include—(a) an assessment of the extent to which the guidance is followed by those persons to whom it is given under regulation 48 of the 2017 Regulations, and(b) in the light of that assessment, consideration as to whether the guidance remains appropriate or whether it should be revised.(3) The FCA must—(a) before the end of 3 months beginning with the day on which this section comes into force, publish an update on the FCA’s plan for the review required under subsection (1), and(b) before the end of 12 months beginning with the day on which this section comes into force—(i) publish the conclusions of the review, and(ii) where the FCA concludes that the guidance should be revised, publish draft revised guidance for consultation.(4) Publication as required by subsection (3) must be in the way appearing to the FCA to be best calculated to bring the publication to the attention of persons likely to be affected by it.(5) The FCA is not required under this section to publish any information whose publication would be against the public interest.(6) In this section—(a) “domestic PEP” means a politically exposed person entrusted with prominent public functions by the United Kingdom;(b) the following terms have the same meaning as in regulation 35(12) of the 2017 Regulations—“politically exposed person” or “PEP”;“family member”;“known close associate”.”Member’s explanatory statement
This new Clause would impose a duty on the FCA to review the guidance that the FCA produced in 2017 on the banks’ treatment of politically exposed persons, and publish draft guidance alongside the review, if the FCA concludes that the guidance should be revised.

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[Baroness Kramer (LD)]

My Lords, we should thank the noble Earl, Lord Attlee, for raising a set of significant issues. I have no specialist knowledge in this area, but I am very well aware that SMEs generally are disadvantaged under our current framework arrangements. As the Minister will know, individuals and micro businesses—usually a small sole trader or somebody of that ilk—fall within the FCA’s regulatory perimeter, but the SMEs that have just been described fall outside of it.

Therefore, where there are gaps or where their treatment is completely inappropriate, they have nowhere to turn. In those circumstances, they face significant disadvantage compared to their competitors across the globe. So I hope the Minister will understand that this is a reflection—I think “tip of an iceberg” was the correct term—of something that is quite systemic in many different ways, and an area where the Treasury, and the regulators, need to focus attention.

[Baroness Penn (Con)]

My Lords, as I set out previously in Grand Committee, I commend my noble friend Lord Attlee for his strong role in supporting Ukraine and bringing the value of his expertise in support of efforts to provide Ukraine with vital supplies. I understand that my noble friend wishes to ensure that the money laundering regulations do not hamper the private export of armoured vehicles or military vehicles to Ukraine. However, this cannot come at the expense of weakening the regulations in a way that would allow them to be circumvented by those wishing to launder money or finance terrorism.

The Government are committed to providing economic, humanitarian and military support to Ukraine. That is why the UK is proud to have pledged £6.5 billion in support of Ukraine, including £1 billion of World Bank guarantees to go towards closing Ukraine’s 2023 financing gap and £2.3 billion in military support for 2023. In 2022, 195 standard individual export licences and three open individual export licences were granted for the export of military items to Ukraine.

I recognise that my noble friend has concerns about a wider issue relating to provision of banking services to those involved in the defence industry and the refusal or withdrawal of services for other reasons connected with money laundering or ethical concerns. As I said in Committee, I am not aware that banks are taking a blanket approach to such customers. I am grateful to my noble friend for setting out some further specific cases today and I am glad that he had the opportunity to meet my noble friend the Defence Minister. The Treasury would be happy to look further into these cases with my noble friend and the Ministry of Defence. Equally, if the defence industry has wider concerns, I would encourage it to bring them to the attention of the Government and the regulators.

My noble friend made a comment on the Government’s ESG policy and its impact on defence companies. Our ESG policy is focused on delivering the net-zero commitment and there is nothing in that policy framework that prohibits or otherwise disadvantages defence companies and the war in Ukraine—

[Earl Attlee (Con)]

I am sorry to interrupt the Minister, but it was not the Government’s ESG policy that had caused me a problem but the banks’ ESG policies.

[Baroness Penn (Con)]

I understand the point that my noble friend makes, but I think that is rather a matter for the banks. Nevertheless, as I have said to my noble friend, if there are wider or more systemic issues in this area, I would encourage him to draw this to the attention of the Government and the regulators. The Government are clear that investment in the defence sector remains important.

My noble friend suggested again that I or another Treasury Minister write to the bank which withdrew services from his associate telling it to relax steps to be taken to comply with MLRs. However, it would be extraordinary and inappropriate to override the MLRs in this way. Further, banks would still be under obligations in relation to the Proceeds of Crime Act which relate to dealing with such money.

I thank my noble friend for raising this issue. I am glad that he has met the Ministry of Defence on it. If there are wider issues that he would like to highlight to the Government, the Treasury is committed to working with the MoD to look at them. None the less, I hope my noble friend does not press his amendments at this time.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, we welcome the amendment in the name of the noble Lord, Lord Forsyth, which has enabled this short and informative debate on the process for establishing a central bank digital currency. As technology develops and people’s habits change, it is vital that we keep pace. Therefore, the principle of a digital pound has much to commend it, although the arguments, implications and details clearly need to be properly worked through. The introduction of a digital pound would represent a significant step, and it is therefore right for the noble Lords, Lord Forsyth and Lord Bridges, to ask about the underlying processes, though it is a novel experience for the two noble Lords to be asking for commitments from this side of the House.

We very much welcome the clarification offered by the Chancellor in his letter to the noble Lord, Lord Bridges, and the Economic Affairs Committee that there would be primary legislation before a digital pound could be launched. We agree that this is an important safeguard.

[Baroness Penn (Con)]

My Lords, I thank my noble friends Lord Forsyth and Lord Bridges for their leadership in the House on this important topic. I do not intend to relitigate the debates around the question of a central bank digital currency; I was one of the five or so noble Lords who debated the Economic Affairs Committee report in February, and I enjoyed it very much.

As we set out then and in Grand Committee, the Government have not yet made a decision on whether the digital pound should be introduced, and that remains the case. But we also take the view that a digital pound may be needed in the future, so further preparatory work is justified. Therefore, the Treasury and the Bank of England issued a joint consultation on a potential digital pound on 7 February. As that consultation paper makes clear, the legal basis for a digital pound will be determined alongside the consideration of its design.

--- Later in debate ---

[Lord Forsyth of Drumlean (Con)]

My noble friend has made valid arguments for not putting the amendment, as drafted, in the Bill. However, she and her very clever officials could get around this by tabling an amendment at Third Reading to that effect.

[Baroness Penn (Con)]

I am afraid that I am not in a position to commit to my noble friend’s suggestion. I hope that the reassurance he has heard from all Front-Benchers on this issue will persuade him not to press his amendment at this time.

[Lord Forsyth of Drumlean (Con)]

My Lords, once again, my noble friend has gone beyond what we might expect in responding to the debate, so it is a pleasure to beg leave to withdraw my amendment.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I speak from these Benches on behalf of my party, as a group of realists. The current Government, and any future Government, look at the pools of money in pension funds, whether defined contribution or defined benefit, and see them as a tempting source of investment in the area of scale up and infrastructure, where we are desperate to find additional investment. I point out that pension funds are not disadvantaged in investing in investment-grade assets in any way. It is in investing in sub-investment grade assets where they carry a burden under the current arrangements.

These investments in scale up and infrastructure are, by definition, high risk and illiquid, and we have to face up to that. Some 40% of scale-ups fail and infrastructure projects run notoriously late, and well over budget. I challenge people to come up with a very long list of infrastructure projects that have come in on time and on budget. It is hard to identify virtually any project that meets that test. It means that pension obligations must be fully protected if we are to open up these funds to be able to invest in a far more illiquid and high-risk way.

That is why I am comfortable with this amendment, because proposed new subsection (2) insists:

“The review must consider how best to do this while protecting the safeness and soundness of pension funds”.


I was also pleased that the noble Baroness, Lady Chapman, introduced the additional consultee identified by my noble friend Baroness Bowles—the Pension Protection Fund—in this process, because that is clearly a mechanism which could provide the kind of protection for pensioners who may be exposed if we change the risk profile of pension fund investment.

I insist that the first responsibility of a pension fund is to pay out its obligations on time and in full. I suspect that everyone who is invested in a pension believes that that is, and must continue to be, true. Often when we discuss these issues the Canadian pensions funds are cited because they do indeed invest in illiquid and high-risk assets, but anyone reading the credit rating agencies discussing those pension funds will find that the pension funds are pretty much backstopped by the Canadian Government.

What I hope will come out of this review process are new opportunities to fund our economic growth but also protections commensurate—it may not be the same strategy but through some mechanism—with those that the Canadians have put in place, to make sure that our pensioners will still be paid on time and in full. If that no longer remains true, we end up in a very serious pickle but, having read through this set of amendments, I think they get us to the right place to be able to achieve that.

[Baroness Penn (Con)]

My Lords, the Government welcome the further discussions that this debate has given us the opportunity to have on the issue of unlocking pensions capital for long-term, productive investment where it is in the best interests of pension scheme members. Indeed, as I set out in Committee, the Government have a wide range of work under way to deliver the objectives set out by this review. While I was a little disappointed not to hear those initiatives referenced in this debate—apart from, perhaps, by my noble friend Lady Altmann—I will give it another go and set out for the House the work that is already under way in this area.

As previously set out, high-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that unlocking pension fund investment into the UK’s most innovative firms will help develop the next generation of globally competitive companies in the UK.

The Chancellor set out a number of initial measures in the Budget to signal a clear ambition in this area. These included: increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment in the UK’s key high-growth sectors, including life sciences, green industries and deep tech; spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes, by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative—noble Lords may have seen that the Government launched the LIFTS call for evidence on 26 May; and leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will come forward shortly with a consultation on this issue that will challenge the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets.

At Budget, the Chancellor committed the Government to undertaking further work with industry and regulators to bring forward an ambitious package of measures in the autumn. I reassure the noble Baroness opposite that this package aims to incentivise pension funds to invest in high-growth firms, and the Government will, of course, seek to ensure that the safety and soundness of pension funds are protected in taking this work forward, as in proposed new subsection (2). Savers’ interests will be central to any future government measures, as they have been to past ones. The Government want to see higher returns for pension holders in the context of strong regulatory safeguards.

In addition, the Government are already working with a wide range of interested stakeholders, including the DWP, the DBT, the Pensions Regulator, the FCA, the PRA and the Pension Protection Fund, as well as pension trustees and relevant financial services stake- holders. Proposed new subsection (3) in the amendment seeks to set out this list in legislation. I reassure the House that this is not necessary as the Treasury is actively engaging with them already, as appropriate. The Government would also be happy to engage with other interested stakeholders, as raised by my noble friend Lord Naseby and the noble Lord, Lord Davies of Brixton.

I note the specific areas of review outlined in subsection (4) of the proposed new clause, and I reassure noble Lords that the Government are considering all these issues as part of their work. In particular, proposed new subsection (4)(a) references the existing value-for-money framework. As I set out in Grand Committee, one area of focus for the Government’s work in this area is consolidation. To accelerate this, the Government have been working with the Financial Conduct Authority and the Pensions Regulator on a proposed new value-for-money framework setting required metrics and standards in key areas such as investment performance, costs and charges, and the quality of service that schemes must meet.

As part of this new framework, if these metrics and standards were not met, the Department for Work and Pensions has proposed giving the Pensions Regulator powers to take direct action to wind up consistently underperforming schemes. A consultation took place earlier this year, and the Government plan to set out next steps before the summer.

Turning to proposed new subsection (4)(b), I have already set out the forthcoming consultation to support increased investment in innovative companies and other productive assets by the Local Government Pension Scheme. Noble Lords may also be aware that the levelling up White Paper in 2022 included a commitment to invest 5% in levelling up. This consultation will go into more detail on how that will be implemented.

I turn to proposed new subsection (4)(c). The Government are committed to delivering high-quality infrastructure to boost growth across the country. We heard references in the debate to the UK Infrastructure Bank, which we will work with. The Treasury has provided it with £22 billion of capital. Since its establishment in 2021, it has done 15 deals, invested £1.4 billion and unlocked more than £6 billion in private capital. Furthermore, we have published our green finance strategy and Powering Up Britain, setting out the mechanisms by which the Government are mobilising private investment in the UK green economy and green infrastructure.

The Government wholeheartedly share the ambition of the amendment to see more pension schemes investing effectively in the UK’s high-growth companies for the benefit of the economy and pension savers. We agree with noble Lords on the importance of this issue. Where we disagree with noble Lords is on how crucial this amendment is to delivering it. Indeed, the Government are currently developing policies to meet these objectives, so legislating a review would pre-empt the outcome and might delay the speed at which the Government can make the changes necessary to incentivise investment in high-growth companies. Therefore, given all the work under way, I hope the noble Baroness feels able to withdraw her amendment.

[Baroness Chapman of Darlington (Lab)]

My Lords, I am grateful to everyone who has taken part in this debate. The Minister’s response was not awful. It was encouraging to hear some of the things that she had to say, and we recognise the work the Government are leading on this issue. However, the benefit of taking the approach outlined in the amendment, notwithstanding some of the comments that have been made about it, is that it would give focus and prominence to this issue and would bring together some of the threads that the Minister referred to. It is an important piece of work that, given everything the Minister said, ought to be not too onerous and is something that the Government ought to be a little more enthusiastic about starting—because it needs to start. This is something we would like to see proceed quickly. I think there has been sufficient support for the amendment from all sides of the House, and I wish to test the opinion of the House.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, we fully support the steps taken by the Treasury, the Bank and the regulators in relation to Silicon Valley Bank UK. The system worked at pace to ensure SVB UK could continue its operations. However, while we endorse the outcomes, legitimate questions have been asked about the ring-fencing exemption granted to HSBC and the potential long-term implications.

The arguments have been excellently outlined by the noble Baroness, Lady Kramer, the most reverend Primate the Archbishop of Canterbury and my noble friend Lord Eatwell, and I will not repeat them now. The financial system has experienced much volatility in recent months, so preventing major changes to ring- fencing being made by secondary legislation is a sensible step and one that we believe the Commons ought to consider before this Bill goes on to the statute book.

[Baroness Penn (Con)]

My Lords, it has been over 10 years since the Independent Commission on Banking recommended important structural changes, including the introduction of ring-fencing for the largest UK banks, and the Parliamentary Commission on Banking Standards recommended the introduction of the senior managers and certification regime, or SMCR, to embed a culture of greater accountability and personal responsibility in banking. I pay tribute to the important work of these commissions and their lasting legacy in improving the safety and soundness of the UK’s financial system. Amendment 106 from the noble Baroness, Lady Kramer, covers the ring-fencing and SMCR reforms.

In response to my noble friend Lord Trenchard, the legislation that introduced the ring-fencing regime required the Treasury to appoint an independent panel to review the regime after it had been in operation for two years. That independent review was chaired by Sir Keith Skeoch and concluded in March 2022. The review noted that the financial regulatory landscape has changed significantly since the last financial crisis. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can in future be managed in an orderly way, minimising risks to depositors and public funds.

In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the ring-fencing regime while maintaining financial stability safeguards. In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime that broadly follow the recommendations made by the independent review. The Treasury will consult later this year on those near-term reforms. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. In response, the Government published a call for evidence in March. This closed at the beginning of May and the Government are in the process of considering responses.

The noble Baroness, Lady Kramer, and other noble Lords referenced the resolution of Silicon Valley Bank UK, which was sold to HSBC on Monday 13 March. The Government and the Bank of England acted swiftly to facilitate the sale of SVB UK to HSBC after determining that action was necessary to protect depositors and taxpayers and to ensure that the UK’s world-leading tech sector could continue to thrive. To facilitate the sale, the Government made modifications to the ring-fencing regime that apply to HSBC only in relation to its acquisition of SVB UK.

It is critical that the Government have the necessary powers to act decisively to protect financial stability, depositors and taxpayers. The power under the Banking Act 2009 enables the Treasury to amend the law in resolution scenarios. Parliament gave the Treasury this power recognising the exceptional circumstances that can arise. However, I say to the noble Baroness that the changes made to the ring-fencing requirements are specifically in relation to the acquisition of SVB UK and should not be viewed as an indication of the future direction of government policy on ring-fencing. The Chancellor has been clear that, in taking any reforms forward, the Government will learn lessons from the crisis and will not undermine financial stability.

The core features of ring-fencing are set out in primary legislation, which generally may be amended only by primary legislation, so the Government are already constrained in one of the ways that this amendment seeks to ensure. In passing that legislation, Parliament delegated certain detailed elements of the regime to the Government to deliver through secondary legislation, given its technical nature and to allow it to evolve over time, where appropriate. Parliament also included clear statutory tests and objectives within the framework, which the Treasury and the PRA must satisfy when making changes to the regime. These statutory tests continue to reflect the underlying objectives and purposes of the regime. The Government are of the view that they remain appropriate and that no further constraints are necessary.

Turning to the SMCR, I can confirm to the House once more that the framework of the SMCR is set out in primary legislation, so it is already the case that significant amendments can be made only via primary legislation.

Let me also reassure the House that the Government continue to recognise the contribution of the SMCR in helping to drive improvements in culture and standards. The principles of accountability, clarity and senior responsibility that are emphasised by the PCBS report were reflected in the SMCR. We should take confidence from the findings of separate reports by UK Finance and the PRA, which both show that these principles are now more widely embedded in financial services than before the introduction of the regime.

The Economic Secretary made it clear to the Treasury Select Committee on 10 January that the purpose of the review was to seek views on the most effective ways in which the regime can deliver its core objectives. It is important to review significant regulation from time to time to ensure that rules remain relevant, effective in meeting their aims and proportionate to those aims. The Government are grateful to those who have submitted responses to the SMCR call for evidence. This information will help the Government, alongside the regulators, build a proper evidence base for identifying what, if any, reforms to the regime should be taken forward.

I hope that I have sufficiently reassured noble Lords that the Government remain committed to high standards of regulation, and to the important reforms introduced following the global financial crisis. Therefore, I ask the noble Lady, Baroness Kramer, to withdraw her amendment.

[Baroness Kramer (LD)]

I thank the Minister, but she has essentially repeated the speech she gave in Committee. At the time, I took her assurances at face value that primary legislation would be necessary to make a fundamental change to the structure of the ring-fence. I was therefore frankly shocked when, within a matter of days, the Government took a different point of view in the acquisition of Silicon Valley Bank UK by HSBC. There is no reason why HSBC should have used its ring-fenced arm to make the purchase of SVB; it chose to do so because it got, as a consequence, this opportunity to take that ring-fenced money and put in into non-ring-fenced activities, with no constraints whatever in terms of amount or activity.

The Government are bringing forward another statutory instrument to make that change permanent for HSBC. It is unconscionable that our largest bank should have a competitive advantage like that and other banks not be given it. I am extremely concerned about the way in which statutory instruments are being used to undermine the principle that changing the principles should be only by primary legislation. Therefore, I wish to test the opinion of the House.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Lord, Lord Sharkey, for bringing back this amendment and for his persistence on this issue over many years. We are also grateful for the work of the APPG, particularly to Rachel Neale, who herself is a mortgage prisoner and has become a champion for those people who have been affected by this problem. I also want to mention my colleague in the Commons, Seema Malhotra, who is doing a lot of work on this issue.

We are hugely sympathetic towards mortgage prisoners, who have endured difficulties over so many years now, and wish that the Government had acted earlier to ease the burden on them. We were pleased to back this amendment during the passage of the Financial Services Bill in early 2021, when it passed by 273 votes to 235. However, we are mindful that at that point the House of Commons rejected that amendment, and did so at a time when a much larger proportion of the population was experiencing issues with mortgage affordability. In recent weeks, however, we have seen hundreds of mortgage products pulled and rates hiked on those that remain available. A number of major banks have even temporarily withdrawn offers for new customers, putting the brakes on the aspirations of many first-time buyers.

Of course, mortgage prisoners are in a different position, in that they have been facing problems for many years and are just not able to simply switch products in the way that others can. As the Minister will no doubt outline, while this amendment did not make it into the Financial Services Act 2021, it did prompt some new and welcome actions from the Treasury, regulators and banks. New advice was available and a number of lenders relaxed their criteria in certain cases. We know that the elected House has already rejected this proposal and, realistically, it is unlikely to reconsider in the current context, but more does need to be done. Can the Minister let us know whether the Government intend to respond to the recommendations that were made by the LSE in its report? If they are, when will that response be forthcoming? The Government urgently need to get a grip on the issues facing the mortgage market generally and, once that situation has calmed, we hope they will be able to do what they can to ease the difficulties faced by mortgage prisoners.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate, and in particular the noble Lord, Lord Sharkey, for tabling this amendment. I start by emphasising that the Government take this issue extremely seriously. We have a great deal of sympathy for affected mortgage borrowers and understand the stress they may be facing as a result of being unable to switch their mortgage. That is precisely why we, and the FCA, alongside the industry, have shown that we are willing to act, and have carried out so much work and analysis in this area, partly in response to prior interest from this House, as alluded to by the noble Baroness, Lady Chapman. This has included regulatory changes to enable customers who otherwise may have been unable to switch to access new products.

The Government remain committed to this issue and welcome the further input of stakeholders. For this reason, during Committee, the Government confirmed that they were carefully considering the proposals put forward in the latest report from the London School of Economics. Since then, as noted in the debate, I have met with the noble Lord and further members of the APPG and representatives of the Mortgage Prisoners Action Group to discuss the findings of the report and the issue of mortgage prisoners more widely.

The Economic Secretary to the Treasury has also written to the noble Lord, including to provide further clarity on the proceeds from the sale of UKAR assets. The LSE report recommends free comprehensive financial advice for all. That is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to £92.7 million this financial year.

The other proposals put forward by the London School of Economics are significant in scale and ambition. While the Treasury has been engaging with key stakeholders, including the LSE academics behind the report, for some time, including since Committee, we have concerns that these proposals may not be effective in addressing some of the major challenges that prevent mortgage prisoners being able to switch to an active lender. For example, the proposals would not assist those with an interest-only mortgage ultimately to pay off their balance at the end of their mortgage term.

We continue to examine the proposals against the criteria put forward originally by then Economic Secretary to the Treasury, John Glen, to establish whether there are further areas we can consider. I remind the House that those criteria are that any proposals must deliver value for money, be a fair use of taxpayer money and address any risk of moral hazard. This does not change the Government’s long-standing commitment to continue to examine this issue and what options there may be. However, it is important that we do not create false hope and that any further proposals deliver real benefit and are effective in enabling those affected to move to a new deal with an active lender, should they wish to.

I will not repeat the arguments against an SVR cap, as we discussed them at length previously in this House. An SVR cap would create an arbitrary division between different sets of consumers, and it would also have significant implications for the wider mortgage market that cannot be ignored. It is therefore not an appropriate solution, and I must be clear that there is no prospect of the Government changing this view in the near term. In the light of this, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey (LD)]

I thank all noble Lords who have spoken in this customarily brief debate on mortgage prisoners. I especially thank the noble Viscount, Lord Trenchard, for his contribution today and in Committee.

I am uncertain about what the Government’s response consists of. It seems to me that perhaps it consists of three things. The first is exculpatory—it was not our fault. It was the Government’s fault; it cannot be anybody else’s fault that these mortgage prisoners are in the position they find themselves in.

The second thing I am uncertain about is what the Government are actually going to do. I hear expressions of good will and care for mortgage prisoners but I do not hear anything at all that amounts to a plan, or the sight of a plan, or an objective, or something concrete that would help these people. I did not even hear whether we will get a response to the LSE report any time before the Summer Recess, or indeed whether there is a date by which response can be made—perhaps the Minister can enlighten us. I remind her again that by the Summer Recess it will be five months since the LSE report was presented, and the Treasury surely has had time to analyse it in some detail and to make a considered response.

It is quite clear that the real distress experienced by these mortgage prisoners is not understood or felt deeply within the Government or the Treasury. When we had a meeting with the Minister, we had a couple of the leaders of the Mortgage Prisoners group alongside us who told us some terrible stories about what has happened to their families over the past 10 years; 10 years of paying too much money—more than they should have done and more than they needed to in many ways—to these vulture funds.

Financial Services and Markets Bill

Baroness Penn Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

Moved by

[Baroness Penn]

118: Clause 78, page 90, line 16, at end insert—
“(aa) Part 5 of Schedule 2, and section 2 so far as relating to that Part;”Member’s explanatory statement
This amendment would bring the amendments made in Part 5 of Schedule 2 to the Bill (which relate to the third country CCP run-off regime) into force on the day the Act is passed.

--- Later in debate ---

[Lord Moylan (Con)]

My Lords, I will speak only briefly in support of my noble friend Lord Trenchard. It was commonly known, and widely reported in the newspapers at the time, that following the financial crash of 2008, the EU, which has always had its doubts and scepticism—indeed, hostility—about what it referred to as Anglo-Saxon finance, withdrew the indulgence that it had previously shown towards the City of London as part of the European Union and started to enact legislation that was injurious to the City of London, and quite deliberately so, to the annoyance of the Chancellor of the Exchequer at the time, George Osborne, who was reasonably open about his opposition.

This instrument, the alternative funds directive, was the prime example of that, although there were others. It contributed significantly to the fact that there was much more support for Brexit in the City of London than people often wanted to admit at the time, or have admitted since, because they understood that that oppositional turn had taken place and the tide was now flowing against the City. So I agree with my noble friend that it is very difficult to see why, now that we have the opportunity to remove it, we continue not to do so year after year—and there are other examples of that.

I also support the remarks of my noble friend Lady Lawlor. There is a prevalent idea—and not just in financial legislation—that, as we get rid of European Union legislation that we no longer need, we need to replace it with legislation that almost replicates what the European Union was doing. A prime example of that outside the field of financial services is the Procurement Bill, a massively complicated piece of legislation replicating European Union legislation, almost in great detail. In fact, the procurement legislation of the European Union—which was obviously designed for 28 states, not simply for the United Kingdom—was there largely to deal with problems embedded in a history of municipal corruption, which were manifest in various European states but, I am glad to say, of which the United Kingdom has a long, proud history of being pretty free, with one or two exceptions. It was not necessary to replicate it in the detail in which it was done.

There are genuine concerns, certainly among those of us on this side of the House, that insufficient dispatch is being brought to getting rid of injurious legislation that we inherited from the European Union but can now get rid of, and that there is a mentality that the right way to get rid of something is, in effect, simply to re-enact something very similar after a period of consultation. I have great sympathy with what my two noble friends said, and I hope that the Minister, when she replies, will be able to give them some comfort.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I am afraid that, as my noble friend Lord Trenchard set out, his amendment has not changed since Grand Committee and neither has the Government’s response, which he so adeptly summarised on my behalf. We are not able to support the amendment for those reasons.

While I recognise all three of my noble friends’ strength of feeling on this issue, it is important that we do not inadvertently damage the UK fund sector or its access to international markets. However, I reinforce the Government’s commitment to revoking all EU law in financial services—but with prioritisation and process. I hope that all three of my noble friends will take heart from the fact that we are on the last amendment on Report and near the end of the process by which we can see the Bill on the statute book. We can then begin the process of the revocation of EU law and its replacement—or perhaps not, depending on the individual circumstances—with an approach that is guided by what is best for the UK and our financial services sector, to support growth in that sector and across the whole country. That is something that we can all support as a result of the Bill. I hope that my noble friend is able to withdraw his amendment.

[Viscount Trenchard (Con)]

My Lords, I thank my noble friend for her reply. I am slightly more reassured than I was by her reply in Committee. I nevertheless do not feel that she yet recognises the very clear point that this regulation was hugely controversial and was opposed by everybody involved in the financial services industry—there were no supporters of it. I am afraid that we have become rather inured to operating under it, but I can assure her that there are still very large sectors of the asset management industry that would be delighted if the Government would show that this is a priority area for revocation when she gets going with the job of revoking EU law and replacing it with a more reasonable UK-friendly alternative regime.

I thank my noble friend for her response. I also thank all those still in the Chamber for their patience in sitting here right to the end and sharing in this final amendment. I beg leave to withdraw my amendment.

Financial Services and Markets Bill

Baroness Penn Excerpts

3rd reading
Monday 19th June 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill do now pass.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, this Bill helps to deliver the Government’s vision for an open, sustainable and technologically advanced financial services sector. I thank all noble Lords for their valuable scrutiny and input, which has led to some important enhancements to this Bill. I formally thank the Opposition Front Benches, particularly the noble Baroness, Lady Chapman of Darlington, and the noble Lords, Lord Livermore and Lord Tunnicliffe, for their positive engagement and overall support for the Bill and its important aims. I also thank the noble Baroness, Lady Kramer, from the Liberal Democrats, supported by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bowles, for their thorough scrutiny and constructive debate. Finally, I thank the noble Lord, Lord Fox, for bringing his considerable expertise to the scrutiny of this Bill.

The Bill delivers the outcomes of the future regulatory framework review, giving the regulators significant new rule-making responsibilities while balancing that additional responsibility with clear accountability, appropriate democratic input and transparent oversight. Thanks to the positive engagement of this House, we can now be more confident that we have got that balance right.

I also thank my noble friends Lord Forsyth of Drumlean, Lord Bridges of Headley, Lord Holmes of Richmond and Lady Noakes, in particular, for their constructive challenge of the Government’s approach to the important issues that the Bill deals with. I hope that the package of amendments brought forward by the Government on Report demonstrates the open and collaborative way in which we have engaged with the important matters raised in this House.

The level of scrutiny and debate on the Bill rightly demonstrates the vital importance of the financial services sector to the UK economy. Financial and related professional services employ more than 2.5 million people across regional hubs in all four nations of the UK, and create £1 in every £10 of the UK’s economic output. Building on the strengths of our financial services sector is fundamental to its continued growth and to the wider economy. I am therefore pleased to see the Bill progress towards becoming law. It will allow us to begin the process of revoking EU law and replacing it with an approach that is guided by what is best for the UK.

Before the Bill returns to the Commons, I extend my thanks to the significant number of Treasury officials, in the Bill team and beyond, for their work in preparing such a substantial Bill and for their support in engaging fully with your Lordships’ scrutiny. I also recognise the work of the Office of the Parliamentary Counsel in drafting the Bill, and of House staff.

While the Bill is the culmination of a large amount of work over a number of years, it is also the foundation of much work still to come, and I look forward to continuing to discuss these important issues with noble Lords in the future. I beg to move.

[Baroness Chapman of Darlington (Lab)]

My Lords, I thank the Minister for her kind words as she introduced this Third Reading. The Bill leaves the House in a much better condition than when it arrived. We have made changes to the Bill on the treatment of politically exposed people, financial inclusion and the FCA’s accountability to Parliament, and through measures that help to protect the environment. I thank all Members of the House who contributed to our consideration of the Bill, from both sides, and from the Liberal Democrats and Cross Benches, especially those from Peers for the Planet. I also thank the doorkeepers and House staff teams, and everyone who enables us to do our work.

I thank the Minister for her open and welcoming approach to our discussions. I particularly thank my noble friend Lord Livermore for doing more than his fair share of the work from Report onwards, and of course my noble friend Lord Tunnicliffe who led the Labour Party—he did not lead the Labour Party but led for the Labour Party; that was quite a thought experiment—throughout the long Committee stage. His advice and support have been invaluable. Lastly, I thank the outstanding Dan Stevens for his impeccable advice, preparedness and thoughtfulness.

We hope that the Government accept the Bill as amended and do not feel the need to bring it back to the House for further amendments.

Financial Services and Markets Bill

Baroness Penn Excerpts

Consideration of Commons amendments
Tuesday 27th June 2023 Lords Chamber

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 7 and do agree with the Commons in their Amendments 7A, 7B and 7C in lieu.

7A: Page 39, leave out lines 11 to 13 and insert—
“(c) the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution;”

7C: Page 148, leave out from “compliance” in line 14 to end of line 15 and insert “by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets) where the Payment Systems Regulator considers the exercise of its functions to be relevant to the making of such a contribution;”.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I beg to move Motion A and, with the leave of the House, will also speak to Motions B and C. I am grateful to all noble Lords for their considered scrutiny of the remaining issues in front of us today and throughout the Bill’s passage.

I will speak first to Lords Amendments 7 and 36, and I thank the noble Baronesses, Lady Hayman and Lady Boycott, in particular, for their leadership on these issues during the passage of the Bill.

The UK is a global leader in sustainable finance. The Government’s ambition to support the growth of this important area is demonstrated by the amendment relating to sustainability disclosure requirements made on Report, and the amendments in lieu of Amendments 7 and 36 introduced during Commons consideration.

I turn first to Lords Amendment 7. The regulators have an important part to play in supporting the Government’s ambitions, which was demonstrated by the inclusion of the net-zero regulatory principle at introduction. The Government have reflected carefully on the calls to ensure that the regulatory framework also reflects the Government’s nature targets.

While I welcome the intention behind Amendment 7, the Government cannot accept this amendment because it is too broad and therefore too open to interpretation. We have therefore brought forward Amendments 7A, 7B and 7C in lieu of Amendment 7, which add the relevant and well-defined targets made under the Environment Act 2021 to the new regulatory principle. It is important to recognise that addressing climate change and nature issues is not the regulators’ primary function, which is, broadly, to advance their objectives, including to protect the integrity of the financial markets and the safety and soundness of firms within the financial system and to deliver appropriate protection for consumers. Most of the levers for reaching our net- zero and environmental targets sit outside the regulators’ remit and control.

The amendments in lieu will ensure that, when acting to advance their objectives, the regulators will be required to consider the Government’s commitments to achieve the net-zero emissions target and the environment targets. I assure noble Lords that the amendments do not weaken the requirement for the regulators to consider the Government’s net-zero target. FSMA requires the regulators to act in a way that advances their statutory objectives when carrying out their general functions. When advancing their objectives, the regulators must also have regard to the regulatory principles, which aim to promote good regulatory practice.

It is for the independent regulators to decide how best to meet the requirements placed on them in legislation when discharging their general functions. The drafting of the amendments in lieu makes this clear: the regulators are required to have regard to the regulatory principle only in so far as it is relevant to advancing their objectives. This does not change the effect of the net-zero requirement, but the Government considered that this additional language was needed, alongside expanding the principle, to make this point clear and to ensure consistency. I am confident that the Government’s approach meets the intended effect of Amendment 7, and I hope noble Lords will acknowledge it as a significant step to further support the growth of sustainable finance in the UK.

I turn to Lords Amendment 36 on deforestation-linked financing. As I set out on Report, the Government again support the intention behind this amendment. The policy considerations for tackling the financing of deforestation risk commodities are complex. We are grateful for the work of the Global Resource Initiative and in particular its report on this issue from May 2022. This emphasised the need to take a staged approach and that further exploratory work would be needed to investigate the implementation of a prohibition on the financing of the use of prohibited forest risk commodities.

The Government have therefore brought forward Amendment 36A in lieu of Amendment 36, which commits the Treasury to undertake a review to assess whether the financial regulatory framework is adequate for the purpose of eliminating the financing of illegal deforestation and to consider what changes to the regulatory framework may be appropriate. This will ensure that any intervention is scoped appropriately and that the UK moves in lockstep with our international partners to ensure the effectiveness of any regime in tackling the financing of illegal deforestation.

The Treasury will be required to undertake this review within nine months of the first relevant regulations under Schedule 17 to the Environment Act being made. This will enable the Government to reflect those regulations in the review, which is essential if we are to have a joined-up and effective approach.

As the Government set out in the updated green finance strategy, we will convene a series of round tables this year. These will form the basis of a taskforce to drive forward the work of this important review and support the development of clear conclusions. This will complement the Government’s existing commitment to explore how best the final Taskforce on Nature-related Financial Disclosures—or TNFD—framework should be incorporated into the UK policy and legislative architecture. As the GRI report acknowledged, the developing work of the TNFD is increasingly important, especially as it has now included recommendations relating to deforestation in its draft standards.

Following the review, the Government will consider what further action is appropriate to progress the goal of eliminating the financing of illegal deforestation. The Bill and the existing provisions in FSMA provide the Treasury with extensive powers, including through the regulated activities order or the designated activities regime, to bring new activities into the scope of regulation if needed.

Finally, I turn to Lords Amendment 10. As the Economic Secretary set out yesterday, and as I set out on Report, the Government cannot accept this amendment. While I acknowledge the intention behind it, I reiterate the point that financial inclusion is a complex societal issue that cannot be solved through financial regulation alone. The Government are committed to the aim of ensuring that people, regardless of their background or income, have access to useful and affordable financial products and services. The Government’s view is that the FCA’s current and ongoing initiatives around financial inclusion demonstrate that it can already effectively support the Government’s leadership on this agenda through its existing operational objectives and regulatory principles.

Parliamentary scrutiny of the introduction of the new secondary growth and competitiveness objectives for the regulators comes after two consultations on the Future Regulatory Framework Review and extensive engagement with industry and other stakeholders. It is not appropriate to amend the regulators’ objectives, which are crucial to the effective regulation of financial services in the UK, at this late stage of the Bill’s passage without due consultation. Furthermore, the FCA’s new consumer duty, which comes into force on 31 July, seeks to set a higher and clearer standard of care that firms owe to their customers, and includes a new principle requiring firms to act to deliver good outcomes for consumers. It is important that the sector is given the opportunity to embed these important new requirements before considering further action of a similar nature.

I ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C, and 36A in lieu. I beg to move.

[Baroness Hayman (CB)]

My Lords, I declare my interests as set out in the register, and will speak to Amendment 7A. I thank the Minister and her team for the considerable efforts that have been put in, since the Bill left this House, to find a way to respond positively to the issues raised in my original amendment, which was supported from all sides of the House. As the Minister knows, the central issue was that of providing a clear legislative basis for financial regulators to act, not only on our climate change duties, which the Government themselves recognised and included in the original Bill, but in relation to our duties relating to the natural environment.

This issue is seen as important in Parliament but also outside it. The inclusion of nature was supported both by Professor Sir Partha Dasgupta and, in a statement last week, by a group of eight leading financial firms. I am extremely pleased that the Government decided not to try to completely overturn the amendment but to introduce the amendment we have before us now, the basis of which the Minister has just explained. It recognises that the importance of climate should go alongside the importance of nature, which was not there originally.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, we on these Benches supported all three of the amendments that we are discussing today when we looked at them last time, including Amendment 7, which would expand the regulatory principle on net-zero emissions to include conservation and nature. We also voted for Amendment 36, imposing a duty on those conducting regulated activity to conduct due diligence with the aim of preventing illegal deforestation.

We have listened carefully to what the Minister has said and will be listening to what she says in response to this debate, particularly to the questions asked by the noble Baroness, Lady Boycott. However, I thank the Minister for her openness in engaging with these issues and for the amendments in lieu, which demonstrate an agreement with your Lordships that these are issues that the Government need to address urgently. They may not be doing so in a way that we would have preferred today, but it is right that we acknowledge the moves that the Government have made.

Amendment 10 in my name would require the FCA to take financial inclusion into account when advancing its consumer protection objective of securing an appropriate degree of protection for consumers. The Government disagree with that amendment, saying they consider that the FCA is already able to tackle issues of financial inclusion within its remit. We argue that the problem is that the Government have failed to address our key concern in tabling the amendment, which is about the poverty premium—that is, the extra costs that poorer people pay for essential services such as insurance, loans or credit cards.

We see this Bill as something of a missed opportunity to build a strong future for our financial services and rethink financial resilience, including how some of the wider well-being issues are tackled by the regulator in the future. Everybody should be able to access the financial services they need, regardless of their income or circumstances. Although we do not intend to push this to another vote today, I can assure noble Lords that we will be returning to this subject at every opportunity—especially if that opportunity arrives in the form of a Labour Government.

For now, I place on the record our sincere thanks, particularly to the noble Baronesses, Lady Hayman and Lady Boycott, who have been highly effective in raising nature and deforestation issues. I also thank my noble friends Lord Livermore and Lord Tunnicliffe for their work on this Bill. We are probably at the end of it now. I note what the noble Lord, Lord Leigh, said about the need to get this Bill through and on to the statute books for the benefit of this important sector.

[Baroness Penn (Con)]

My Lords, I am grateful to noble Lords for the debate today, and I would like to address some of the points raised.

On the addition of the obligations under the Environment Act to the principle on climate change, I intended in my opening speech to clarify some of the language in that amendment. I am very happy to emphasise again the Government’s intention that the legal effect of the new provisions will be the same as the original climate principle, with the addition of the targets under the Environment Act. The intention is that it will be at least as strong as the provisions in the Financial Services Act 2021. I explained in opening the reasons for amending the language. It is not about diluting the principles or commitments, but further clarifying them, given that these are new areas.

I accept the noble Baroness’s point that often, these issues can be two sides of the same coin. We had the debate on whether the issues were sufficiently covered by just mentioning climate. Adding the explicit reference to the Environment Act targets led to a desire to be even clearer about the effect of that principle, but it has not changed in the wording of our amendment.

On Lords Amendment 36, there were questions on the timing of the provisions under Schedule 17 to the Environment Act. I am afraid that, as hard as I have tried, I cannot provide a definitive date, but I reassure noble Lords that I have met the Minister leading on this at Defra. Work is under way to bring forward those regulations, and we are seeking to do it at the earliest opportunity.

The noble Baroness, Lady Boycott, and my noble friend Lord Randall of Uxbridge asked what commodities those provisions will cover, and the noble Baroness mentioned a consultation on two forest risk commodities. My understanding is that the consultation and impact assessment covered a variety of policy options across three different turnover thresholds and seven different commodities. While I cannot pre-judge the outcome of the regulations under Schedule 17, our approach to this review will mirror the approach taken forward under Schedule 17.

On the point about the outcomes of this review, I am sure that the noble Baroness will understand that I cannot prejudge that, but I can say that it is not intended to duplicate work already being done; it should build on it. I am happy to make sure that noble Lords and other parliamentarians are involved in the progress of that review as we take it forward, so that they can see that it is heading in the right direction.

I thank the noble Baroness, Lady Chapman of Darlington, for the constructive way she has approach the Bill in its latter stages. She raised the issue of the poverty premium that can be placed in financial services. We are progressing work in areas where the poverty premium can occur. For example, we are working with Fair4All Finance, the organisation set up to use funding from dormant assets for financial inclusion, to improve access to affordable and appropriate financial products, including a package of tailored support to scale affordable credit in order to help the sector develop a sustainable model for serving people in vulnerable circumstances. We also looked at issues in the insurance industry in a number of areas, in terms of outcomes and access. We will continue to look at the areas where the poverty premium occurs, the factors that are driving it and the right levers we should think about to address it. It is different for different sectors, services and products, but that work will continue, despite our not being able to accept the noble Baroness’s amendment.

I therefore ask noble Lords not to insist on Amendments 7, 10 and 36 and to agree with the Commons in their Amendments 7A, 7B, 7C and 36A in lieu.

Motion A agreed.

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 10, to which the Commons have disagreed for their Reason 10A.

10A: Because financial inclusion is a broader social policy issue, the Financial Conduct Authority is already able to take action on issues related to financial inclusion within its remit and it would not be appropriate to amend the regulators’ objectives without due consultation as it would create uncertainty for FCA-regulated entities.

--- Later in debate ---

Moved by

[Baroness Penn]

That this House do not insist on its Amendment 36 and do agree with the Commons in their Amendment 36A in lieu.

36A: Page 87, line 34, at end insert the following new Clause—
“Forest risk commodities: review
(1) The Treasury must carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
(2) In subsection (1) the reference to “prohibited” forest risk commodities is a reference to forest risk commodities, or products derived from forest risk commodities, the use of which is prohibited by paragraph 2 of Schedule 17 to the Environment Act 2021.
(3) Having carried out a review the Treasury must lay before Parliament, and publish, a report stating—
(a) the conclusions of the review, and
(b) the steps the Treasury considers it appropriate to take to improve the effectiveness of the regulation of the UK financial system for the purpose stated in subsection (1).
(4) Subsection (3) must be complied with before the end of 9 months beginning with the day on which the first regulations under paragraph 1 of Schedule 17 to the Environment Act 2021 are made.
(5) In this section—
“forest risk commodities” has the same meaning as in Schedule 17 to the Environment Act 2021;
“UK financial system” has the same meaning as in FSMA 2000 (see section 1I of that Act).”