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.

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[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.

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[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.