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.