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.

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
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

Wednesday 24th May 2023 Lords Chamber

Moved by

[Baroness Penn]

That the amendments for the Report stage be marshalled and considered in the following order: Clause 1, Schedule 1, 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.

Tourist Spending: VAT

Baroness Penn Excerpts

Wednesday 24th May 2023 Lords Chamber

[Baroness Doocey]

To ask His Majesty’s Government what assessment they have made of the impact of VAT on tourist spending.

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

The Government engaged with varied stakeholders and produced analysis on the cost of VAT-free shopping before withdrawing the previous scheme. Government analysis done in 2022 that took increased tourist spending into account found that introducing worldwide VAT-free shopping would come at a fiscal cost of £2 billion each year. Furthermore, the OBR’s assessment of the previous VAT-free shopping scheme showed that its withdrawal would have a limited behavioural effect on decisions to visit or spend in the UK.

[Baroness Doocey (LD)]

I find it so difficult to understand why the Government keep saying that the reintroduction of VAT-free shopping for tourists would be a problem for the country and would cost much more than it would bring in. All the mounting evidence suggests that the opposite is the case. The tourists who come to the UK at the moment are spending about the same as they did in 2019, but US tourists who are going to France, Spain and Italy are spending at the rate of three times what they did in 2019. Does the Minister really believe that this disparity is nothing to do with the fact that we abolished duty-free spending for tourists? I ask the Minister to at least re-look at the figures as a matter of urgency, because our retailers are really struggling, and they need and deserve a level playing field.

[Baroness Penn (Con)]

My Lords, I reassure the noble Baroness that the Government continue to monitor the evidence around VAT shopping, as we do keep all taxes under review. As to the process the Government went through in making their decision, I reassure the noble Baroness that we engaged with a wide variety of stakeholders on the removal of the VAT scheme, including Border Force, retailers, VAT refund providers, refund agents, airport operators and shoppers. That research took place in parallel with a consultation which produced a range of views. So the Government did make every effort to look at the evidence available when reaching this decision, including their analysis of the costs of the policy.

[Lord Forsyth of Drumlean (Con)]

My Lords, would my noble friend welcome the conversion of the Liberal Democrats to the idea that cutting taxes results in more revenue? Could she explain to them that, at the moment, we need that revenue because of the level of borrowing the Government have?

[Baroness Penn (Con)]

I absolutely agree with my noble friend that levels of government borrowing are high because of the impact of both the Covid pandemic and the war in Ukraine. One of the reasons that levels of debt are high is that we have provided strong support to sectors such as tourism during the difficult years of Covid, and we are also providing strong support to them to recover from the pandemic and build back visitor numbers.

[The Earl of Clancarty (CB)]

My Lords, the Minister should look at the Oxford Economics report from last year, which showed a net economic benefit from tax-free shopping. Does she not accept that this is about an ecology of tourism—not just high-end shopping but the hospitality trade, theatres, concert halls and more? The UK needs to clearly show that it is open for business, as other countries are capitalising on this failure.

[Baroness Penn (Con)]

My Lords, I would say to the noble Lord that the Government have looked very carefully at the Oxford Economics analysis, and we do appreciate that some of the costs would be offset by higher visitor numbers and their spending. However, the OBR’s and the Government’s previous analysis suggested that the offset was marginal and the policy still comes with significant fiscal costs. One of the key differences between the Government’s costings and those produced by Oxford Economics is the assumptions around additional visitor numbers, with the OBR estimating that VAT-free shopping could bring in 50,000 to 80,000 additional visitors and the industry commission report suggesting 1.6 million additional visitors.

[Lord Livermore (Lab)]

My Lords, major UK tourist attractions last year saw 38 million fewer visitors than in 2019—a 23% fall—suffering first from lower international tourism because of the pandemic and then lower domestic tourism because of the cost of living crisis. Many of the UK’s seaside towns, already neglected, and with tourist spending in long-term decline, have suffered particularly badly. I ask the Minister what steps the Government are taking to support the regeneration of our seaside towns.

[Baroness Penn (Con)]

The noble Lord makes an important point. We have taken steps during the pandemic to provide support for those towns that rely on tourism; £37 billion of support went to tourism, leisure and hospitality in the form of grants, loans and tax breaks. We have the tourism recovery plan, which is focused on both international visitors and domestic tourism within the UK. We also have the towns fund, which is specifically focused on helping regenerate towns, including many of the seaside towns that do not tend to benefit from the bigger-city deals.

[Lord Lee of Trafford (LD)]

My Lords, last week, as president of the Association of Leading Visitor Attractions, I received an email from Dr Julia Knights, the deputy director of the Science Museum, who wrote:

“It is devastating to see so few schoolchildren now visiting the Science Museum from France and Germany especially.”


Could the Minister urge our trusty and well-beloved Home Secretary to again press the accelerator, but this time to urgently expedite the visa passport situation for visiting European schoolchildren and, similarly, to urge the Chancellor of the Exchequer to man up and admit that the VAT refund policy needs to be reversed, and do it now and not wait until the Autumn Statement.

[Baroness Penn (Con)]

I am not sure that the reversal of the VAT refund scheme would encourage more schoolchildren to visit the Science Museum. But I will certainly take back the noble Lord’s point about visas to the Home Office.

[Lord Hannan of Kingsclere (Con)]

My Lords, there seems to be a discrepancy between the Treasury figures quoted by my noble friend the Minister and almost every independent survey, including the one referred to by the noble Earl, Lord Clancarty. There is a persistent pattern of the Treasury refusing to take into account the secondary, more dynamic impact of taxes—the way in which lower rates can generate more economic activity. Does my noble friend the Minister think that it might be time to revise the way in which the Treasury does these forecasts, to take account of our observed experience?

[Baroness Penn (Con)]

As I have said to noble Lords, the Treasury took into account a wide range of information when reaching its decision. Indeed, the Treasury was judicially reviewed on the decision to withdraw the VAT RES scheme in Great Britain and successfully defended it, with the judge noting the thorough government analysis. As more evidence and data emerge in this area, we will of course keep it all under review.

[Lord Watts (Lab)]

My Lords, perhaps the Minister could give us two figures. What has been the increase or decrease in VAT since this change took place, and what has been the increase and decrease of sales in duty-free shops?

[Baroness Penn (Con)]

It is difficult to disaggregate the impact of this policy versus the overall take of VAT, which will be affected by a wide range of economic factors during this time. When we think about the tourism sector, we must remember that China represents a large number of visitors to the UK and China opened up only at the beginning of this year. Based on that, we hope to see a stronger recovery this summer, compared with previous summers.

[Baroness Wheatcroft (CB)]

My Lords, it is not the number of tourists that is important but the type of tourist. The higher-spending tourists are being deterred from coming to this country because of the lack of VAT-free shopping, as the figures quoted by the noble Baroness, Lady Doocey, made clear. Those tourists are heading to Spain and France and spending their money there. I declare an interest as chairman of the Association of Leading Visitor Attractions. Our members are losing out because these high-spending tourists are not coming to this country, doing their retail therapy and then taking in museums, galleries et cetera. Will the Minister undertake to take into account our cultural heritage when she looks at this issue?

[Baroness Penn (Con)]

I do absolutely appreciate the point that the noble Baroness is making. As part of the research that we did in considering this question, HMRC surveyed VAT RES users and the scheme did not make the top 10 in their list of reasons for visiting Britain—and that was for the 8% of visitors who qualified for the scheme who actually used it. We also asked them whether they would continue to purchase in the way they had previously. Two-thirds of those surveyed said that they would have purchased the same items regardless of the scheme, and 95% of people said that they would still shop. I appreciate that there is a wider impact, but we considered that when taking this decision.

[Baroness Foster of Oxton (Con)]

My Lords, tourism in England generates £106 billion to the Treasury and underpins 2.4 million jobs. I could never understand why we stopped encouraging people and businesses with the VAT situation and when they were in-bound at airports. I ask my noble friend seriously to reconsider this. Why we would wish to encourage tourists to shop and holiday in different countries around Europe and around the world when we have the greatest capital city on the planet is beyond me.

[Baroness Penn (Con)]

My Lords, the Government are a strong supporter of the UK’s tourism industry and absolutely recognise the contribution that it makes to our economy. As I said earlier, we previously surveyed users of VAT-free shopping. Fewer than 8% of non-EU visitors used it and, for those who did, it was not in their top 10 reasons for visiting the UK. There are many great reasons to visit our country and we will continue to promote and advocate them to people across the country and across the world.

Insider Dealing (Securities and Regulated Markets) Order 2023

Baroness Penn Excerpts

Monday 22nd May 2023 Lords Chamber

Moved by

[Baroness Penn]

That the draft Order laid before the House on 17 April be approved. Considered in Grand Committee on 16 May.

Motion agreed.

UK-EU Relationship in Financial Services (European Affairs Committee Report)

Baroness Penn Excerpts

Wednesday 17th May 2023 Grand Committee

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

My Lords, I thank the noble Earl, Lord Kinnoull, for securing this important debate on the report from the European Affairs Committee, which he so expertly chairs. I am grateful to all noble Lords for their contributions. Once again, I welcome the noble Lord, Lord Livermore, to his place on the Labour Front Bench.

I welcome the committee’s report on the UK-EU relationship in financial services, particularly its encouraging assessment of the UK financial services sector and the sector’s performance following Brexit. I also welcome the committee’s praise for the Government’s financial services agenda and reforms, including the future regulatory framework review.

Earlier this year, the Prime Minister welcomed President von der Leyen to Windsor to announce the Windsor Framework, achieving a decisive breakthrough. As the Prime Minister said, the UK and the EU may have differed in the past, but the two are allies, trading partners and friends. The Windsor Framework agreement restores the free flow of trade from Great Britain to Northern Ireland, protects Northern Ireland’s place in the Union, and safeguards sovereignty for the people of Northern Ireland. The Government also welcomed agreement at the Partnership Council on 24 March that we will shortly be able to move forward and sign the memorandum of understanding on regulatory co-operation in financial services and operationalise the forum.

I recognise that many noble Lords, including the noble Earl, Lord Kinnoull, my noble friend Lord Trenchard, the noble Lords, Lord Livermore and Lord Liddell, and the noble Baroness, Lady Kramer, asked for further detail on when that MoU would be signed. The Commission has today adopted the MoU and transferred it to the council for political endorsement, and we welcome this positive news. As we have previously said, the Treasury stands ready to sign the MoU, and we look forward to operationalising the forum as soon as possible this year.

I cannot comment any further on the EU process, but welcome movement has been seen today. This reflects the fact that the UK and EU’s financial markets are deeply interconnected, and building a constructive relationship is of mutual benefit. In the meantime, we continue to closely engage with EU authorities bilaterally and through multilateral fora. Indeed, the Chancellor and the Economic Secretary to the Treasury will meet Commissioner McGuinness next week.

The noble Earl, Lord Kinnoull, asked how the Government intend to support the financial services sector outside London, and the noble Lord, Lord Livermore, asked what we are doing to boost the competitiveness of the sector. The noble Earl is right that financial services are vital to the whole UK economy; they are important in not just London and the south-east or Edinburgh and Scotland. The Government’s vision for financial services will drive growth across the country. It is one for a sector that is open, sustainable, technologically advanced and globally competitive, and which acts in the interests of communities across the UK.

The Government are committed to delivering the Edinburgh reforms, which will take forward this ambition for the UK and ensure that the sector benefits from dynamic and proportionate regulation, that consumers benefit from high-quality services with appropriate protection and that the sector embraces the latest technology. This sector-wide plan will have benefits across the UK, both from direct jobs in financial services and through the role the sector has to allocate capital to grow our businesses, develop new technology and tackle climate change.

The noble Baroness, Lady Kramer, asked where the UK is relevant to other EU financial services centres, which picks up on this point about competitiveness. I do not have the figures that she asked for, but I can tell her that the UK is consistently ranked first or second among the world’s leading financial centres.

The noble Lord, Lord Livermore, asked about exports, and I have figures closer to those that the noble Baroness asked for on that subject. The UK is the world’s largest net financial exporter, slightly larger than the US and significantly ahead of the EU as a whole. The UK’s financial exports totalled $87.2 billion in 2021; the top five countries in the EU totalled $53.7 billion in the same year.

The noble Lord, Lord Livermore, asked what more we can do to promote financial services exports, and this is a focus for the UK. We are about to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership—CPTPP—which adds to the trade agreements with Australia, Japan and New Zealand, as well as the digital economy agreements with Ukraine and Singapore. The UK is looking to add to this list by making progress on negotiations to update our existing FTAs with Canada and Mexico, plus agreeing new FTAs with India and the Gulf Cooperation Council.

Several noble Lords, including the noble Earl, Lord Kinnoull, and my noble friend Lord Holmes, asked about the Swiss negotiations. A huge amount of progress has been made in that area. Given the ambition and novelty of the agreement, there are some complex and highly technical issues to work through. It is important that we get those right, given that this agreement is intended to serve as a new blueprint for financial services trade. We continue to work at pace, and we still aim to conclude those negotiations by the end of the summer.

The noble Earl, Lord Kinnoull, also asked about the publication of the Government’s updated green finance strategy. It was published on 31 March alongside a raft of documents setting out our vision for energy security and to tackle climate change more generally. It set out a vision for how the UK can continue to be a leader in green finance. A recent report reaffirmed our position as the number one global centre for green finance, but we cannot be complacent.

The noble Earl also asked about the State of the Sector report published last year. I confirm we are committed to publishing a second report this year, part of which will cover the opportunities the UK has to strengthen its position as a global financial services hub. That will reflect the Government’s ongoing commitment to this being an open market. I hope that also reassures my noble friend Lord Hannan about our approach to maintaining openness in this sector.

The noble Lord, Lord Liddle, was a little sceptical about the value of divergence, having left the EU. I will agree with him on one point: there is no value in pursuing divergence for divergence’s sake. But, if I may highlight just one example that other noble Lords have touched on, Solvency II reforms in the UK could unlock over £100 billion from UK insurers for productive investment, while maintaining high standards of policyholder protection. I believe that there are significant opportunities for us in charting our own way, having left the EU.

I believe that the noble Lord, Lord Liddle, also expressed some scepticism about the regulator’s new objective on long-term growth and competitiveness. I know that I heard that from the noble Baroness, Lady Kramer. I reassure them both that there is a clear hierarchy in the regulator’s objectives, which puts financial stability ahead of the new growth and competitiveness objective. I also say to my noble friend Lord Trenchard that we have included that new objective for the regulators because we believe that there are opportunities for smarter regulation to both maintain higher standards and drive growth, and that the inclusion of this objective will help to deliver that. I must disagree with my noble friend, however, about returning to the previous structure of financial services regulation. The changes that we made with the establishment of the PRA and FCA were not imposed by Brussels; it was a structure that the UK assessed as best preventing future crises. We continue to believe that it is appropriate in today’s world.

My noble friend Lord Holmes focused specifically on fintech. I was going to quote some statistics on the success of the UK’s fintech sector but the noble Lord, Lord Livermore, did that for me. However, I share my noble friend’s expectations about the promise of the FMI sandbox that is provided for in the Financial Services and Markets Bill. My noble friend also raised crypto assets; the Government have set out their approach towards crypto regulation in our recent consultation, and we will reflect carefully on the responses to that. Our approach is driven by embracing the opportunities of the technology that it represents while also protecting consumers against the risk. My noble friend talked of rational optimism and having the right regulatory framework; I believe that is a good way to describe the Government’s approach.

The noble Lord, Lord Bilimoria, and my noble friends Lord Hannan and Lord Holmes all raised talent and skills as a key component for our financial services sector. We recognise that maintaining a deep talent pool is integral to the UK’s continued success as a financial centre. The Government are committed to ensuring that the UK attracts and retains top talent. Since 2021, we have announced a set of targeted high-skilled visa reforms. These have included the global talent route, global business mobility, high potential individual, scale-up worker and reformed innovator visas. None the less, we continue to listen to the views of the sector. The Financial Services Skills Commission is a key industry body, working to take forward collective action to address the needs of the sector, whether it be in identifying and addressing emerging skills gaps, widening access to talent across the sector or promoting diversity and inclusion across it.

Many noble Lords also touched upon the debates that we have been having on the Financial Services and Markets Bill. I do not wish to repeat all of those debates today, as we will debate the Bill further when we reach Report. I should correct something I said earlier, when I misspoke: the green finance strategy was published on 30 March, not 31 March. I would not want to mislead those who might be googling the wrong date.

To return to the Bill, I once again reiterate the Government’s view that effective parliamentary scrutiny is valuable for consumers, firms and regulators, and that the new powers we are giving to regulators through the Bill should be matched by strengthened scrutiny and accountability of the regulators. There are provisions in the Bill to strengthen that scrutiny and accountability, and we are reflecting carefully on our discussions in Committee about how we can further build on those ahead of Report.

The noble Lord, Lord Desai, asked when we will finally get Brexit done. When it comes to financial services, we have onshored the previous EU regulations, but he is right that moving a set of laws from the EU to the UK statute book brings no benefit in and of itself. The Financial Services and Markets Bill, which is currently before this House—I look forward to it completing its passage—is the basis on which we will take forward a significant programme of reforms that we can implement once it is in place. The benefits of those reforms will not be felt overnight, and their scale means that we will need to phase their implementation over several years. However, that Bill and the reforms it will allow us to deliver are the basis on which we will build our vision for the future of financial services in the UK: a sector that is open, sustainable, technologically advanced and globally competitive.

Insider Dealing (Securities and Regulated Markets) Order 2023

Baroness Penn Excerpts

Tuesday 16th May 2023 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Insider Dealing (Securities and Regulated Markets) Order 2023.

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

My Lords, this statutory instrument updates the UK’s criminal insider dealing regime to ensure that all market participants are held to high standards and that there are meaningful consequences for those who break the law. As noble Lords will be aware, insider dealing is a form of market abuse. In broad terms, it is where an individual trades in a financial instrument based on material, non-public information about a company. Insider dealing compromises the integrity and orderly functioning of financial markets. For this reason, it is both a criminal and civil offence in the UK.

The Financial Conduct Authority is responsible for identifying and taking enforcement action against cases of insider dealing. The FCA can impose a variety of criminal and regulatory sanctions under the criminal and civil market abuse regimes. The intention of this framework is to enable the FCA to take action against market abuse in a way that is commensurate to the seriousness and market impact of the abusive behaviour.

The legislation that defines the current criminal offence for insider dealing was first introduced in 1993. The Criminal Justice Act 1993 lists the securities and regulated markets to which the insider dealing offence applies. However, financial markets have evolved since the lists of instruments and regulated markets were last updated. As a result, these lists are narrower than the more recently updated civil market abuse regime.

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

We agree with the Minister’s assertion that there should be serious consequences for those who break the law. We also agree with the comments from the Liberal Democrat Benches and echo the comments about the seriousness of insider dealing. We share the curiosity shown in the other place when this instrument was considered about the length of time it has taken to bring in this measure, given we understand that it came about as a result of a review that took place in 2015. I am not asking this to be facetious, but what assessment have the Government made of the number of criminal offences that would have been caught had this measure been in place sooner, which were treated under the civil regime because this instrument had not yet been brought? We want to highlight the consequences of leaving things quite this late, because we are concerned. That underscores our support for this measure. The Government are right to address this gap between the two regimes and we support this instrument.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their support for this statutory instrument.

On the time it has taken to deliver this measure and the potential impact in the meantime of not having the criminal regime and the civil regime aligned, it is important to note that since the Fair and Effective Markets Review was published, considerable work has been undertaken to modernise the UK’s market abuse legislation. For example, the civil regime for market abuse was updated in 2016 by the EU market abuse regulation and the Government and UK regulators have implemented the majority of the recommendations from the Fair and Effective Markets Review, including making changes in the Financial Services Act 2021 to increase the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with comparable economic crimes such as fraud and bribery. The Government have also recently completed a broader review of the criminal market abuse regime as part of the 2019 to 2022 economic crime plan. While this measure has taken longer to implement, there has been other action in this space in the meantime, including delivering on other recommendations from that review.

On the impact of the length of time in which the scope of the criminal offences has been different from that of the civil offences, it is important to note that the FCA has a number of tools available to tackle market abuse, of which the criminal insider dealing offence is only one. In addition to prosecutions under the criminal regime, between 2013 and 2022 the FCA has had 36 regulatory outcomes relating to market abuse, with regulatory fines totalling more than £70 million in that period.

The Government do not have data on the number of criminal prosecutions that have not been pursued due to the difference in the scope of the regimes. The FCA does not routinely record and track cases that it cannot take forward. This includes cases taken forward under the civil regime that could have resulted in a criminal prosecution with the changes made by this SI. Moreover, it is important to remember that there are a number of reasons why the FCA may choose to pursue a civil rather than a criminal prosecution other than the scope of the two regimes. For example, the FCA will consider the severity of the offence in question and whether the evidence meets the higher legal threshold needed to secure a criminal conviction.

It is not possible to say with certainty whether the FCA’s decision not to pursue criminal proceedings in a particular case was due to the issues that this statutory instrument addresses or to other factors, and we do not believe that attempting to determine that retrospectively would be a good use of government legal resources. It is a perfectly legitimate question to ask but, given that other mechanisms were available to the FCA to tackle market abuse under the civil regime—and it has also continued to bring prosecutions under the criminal regime—we can be reassured that it has been able to take action in this period. The Government are confident that the FCA has a strong track record of identifying, investigating and prosecuting insider dealing.

The noble Lord, Lord Sharkey, asked why we include specific US and Swiss exchanges and why they are not covered under the more general definitions that have been used in this SI to avoid the need to update this list again as specific named instruments change. My understanding is that for the more general definitions there are commonly understood definitions used in the UK and EU markets that this can work for, but that when you are looking at other exchanges further afield outside that scope, there remains a need to name those trading venues. That is the difference between continuing to need to name some trading venues versus going for the more general definition-based approach that this SI has done.

As to why we have chosen to include specific US and Swiss exchanges in addition to the UK and EU exchanges that will be covered by this measure, the FCA has seen a persistent trend of organised crime groups recruiting UK insiders to disclose inside information relating to securities traded on those markets. While of course this abusive behaviour is also possible for other third-country venues, this SI includes the third-country markets where the FCA has observed the greatest risk of harm. With regard to other third-country trading venues, and indeed in respect of these ones too, you would expect the home regulator to take action to tackle market abuse in those cases.

I hope that with those remarks I have answered the questions put forward today.

[Lord Sharkey (LD)]

Will the Minister address the point about the 21 days?

[Baroness Penn (Con)]

I can write to the noble Lord on that. It is probably the standard implementation period for a change of this nature. As I said in answering on the assessment of the FCA’s tools and track record on being able to tackle market abuse before this update was made, we do not think that will have a substantial impact on the ability to tackle these issues in that implementation period. I think that that addresses the point but, if there is anything further to add to that, I shall also write to the noble Lord.

Motion agreed.

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

Baroness Penn Excerpts

Tuesday 9th May 2023 Lords Chamber

Moved by

[Baroness Penn]

That the draft Orders laid before the House on 27 and 29 March be approved.

Relevant document: 36th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 2 May.

Motions agreed.

Energy Profits Levy

Baroness Penn Excerpts

Tuesday 9th May 2023 Lords Chamber

[Lord McNicol of West Kilbride]

To ask His Majesty’s Government what assessment they have made of the impact of the Energy Profits Levy on energy companies.

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

The energy profits levy was introduced to respond to extraordinary profits in the oil and gas sector and includes an investment allowance to encourage companies to reinvest their profits in the UK. It has raised £2.8 billion to date and is expected to raise almost £26 billion by March 2028, in addition to around £25 billion from the permanent regime over the same period.

[Lord McNicol of West Kilbride (Lab)]

I thank the Minister for her response. We have all seen the eye-watering profits of the oil and gas companies. The energy profits levy does not treat all companies the same. Many of the largest companies pay considerably less, with their profits and extraction being largely outside the UK. This is not the same for many of the smaller domestic UK producers. Moreso, the EPL has a more favourable capital relief than the electricity generator levy. How can the Government justify a levy that gives favourable treatment to oil and gas companies over renewable developers?

[Baroness Penn (Con)]

On the noble Lord’s first point, he is right that the energy profits levy is applied to profits made in the UK or on the UK continental shelf. That is in line with other profit-based taxes on companies that operate in the UK and overseas. On the difference between the energy profits levy and the electricity generator levy, they are structured in completely different ways. The headline rates of those two taxes are also completely different. We have different programmes in place to ensure that we incentivise continuing investment in our renewables, which is why we have such a great track record on delivering renewable energy in the UK.

[Baroness Sheehan (LD)]

My Lords, one of the peculiarities between the energy profits levy and the electricity generator levy is the huge difference in tax relief—80% and 0% respectively, as the noble Lord, Lord McNicol, alluded to. So why this preferential treatment for the oil and gas sector? It is not as though we need new sources of fossil fuels for domestic use—or are the IEA, the IPCC, the vast bulk of UK scientists and the Government’s own net zero tsar, Chris Skidmore, wrong on this?

[Baroness Penn (Con)]

My Lords, I disagree with the noble Baroness that there is preferential treatment for the oil and gas sector, which faces a far higher tax rate based on the extraordinary profits it is benefiting from. That is entirely appropriate. On the investment incentive, we will continue to need oil and gas as we transition to net zero. We need to encourage investment into UK oil and gas fields to help meet that demand, and that is something the Government will continue to do.

[Lord Browne of Ladyton (Lab)]

My Lords, in November 2022 the current Chancellor estimated that the levy would raise £40 billion over six years. Six months later, the Treasury’s estimate seems to have gone down to £28 billion. What is responsible for that? Is it by any chance the OBR’s estimate of the increase in oil and gas expenditure by these oil and gas companies, rather than renewables expenditure, which they released alongside the Spring Budget, and the consequential forecast increase in tax relief on those sectors’ windfall tax bills?

[Baroness Penn (Con)]

My Lords, a number of factors affect predicted revenues from the EPL, not least the high degree of volatility that we have seen in commodity prices. I say to the noble Lord that, if we do not have investment allowances in place and if we do not invest in the future of this industry in the UK, there will be less revenue in future coming from UK oil and gas fields to contribute to the Exchequer and our priorities in future.

[Lord Kamall (Con)]

My Lords, following that answer by the Minister, I completely agree that we still need oil and gas as we transition to net zero. We cannot have a modern digital economy with high-speed electric rail running on solar and wind only, as the technology stands. However, the issue with the levy is that there are companies that are now saying they will pull investment from the North Sea. So how do we encourage that investment, given that we need it in the transition to net zero?

[Baroness Penn (Con)]

My noble friend is right. That is why the Government have always sought to deliver a balance between a fair return for the UK from the use of its resources and providing the right conditions to attract investment in the North Sea. That is why we have the investment allowance in the EPL that provides an additional incentive for companies to reinvest profits in the UK. On the point about environmental impact, the level of tax relief available for upstream decarbonisation expenditure was increased from January this year to incentivise companies for the cleaner production of oil and gas.

[Lord Livermore (Lab)]

My Lords, the Government’s energy levy leaves billions in excess profits on the table while many households struggle through an unprecedented cost of living crisis. Only last week BP announced quarterly profits of over £6 billion while Shell recorded a quarterly profit increase of 22%, handing a further £5 billion to shareholders and now allocating more to dividend payments alone than to its entire investment in renewables. Given that, and with households and small businesses facing sky-high energy bills, how well does the Minister think the current levy is working?

[Baroness Penn (Con)]

I welcome the noble Lord to the Front Bench. He referred to figures that are the global profits of companies. As I have said to his noble friend, the UK applies its windfall tax to UK profits, and I think that is the Labour proposal also. Abolishing the investment allowance would be counter-productive. As I have said, the UK is still reliant on gas for its energy supply. Reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower future tax revenue—tax revenue that we have used to put in place unprecedented cost of living support to families, which is still going out to households at the moment, so that those who are worried about their bills who are on low incomes and means-tested benefits can look forward to more support coming from the Government over the next year.

[Lord Woodley (Lab)]

My Lords, while I am delighted that the Government took Labour’s advice to introduce the windfall tax that has been mentioned, there is no doubt that what is happening now, with the profiteering coming from these energy giants, is insufficient and is just not working. In fact, I would go as far as to say that it is almost peanuts when you look at the profits that were announced last week. So when will the Government fight back against “greedflation” and bring in a windfall tax with real teeth in it—something similar to what is happening across the rest of Europe at the moment?

[Baroness Penn (Con)]

I do not know whether referring to over £50 billion of tax take as “peanuts” reflects the broader Labour Party’s attitude towards public finances, but the Government consider that the measures we have put in place are working well. We need to balance the rightful approach of taxing the unexpected profits of these companies while ensuring that we have investment incentives in place that protect UK jobs and UK energy security.

[Lord McLoughlin (Con)]

Does my noble friend have any figures for the amount of money when profits are made that goes into pension funds and therefore to people who are earning pensions?

--- Later in debate ---

[Baroness Penn (Con)]

My noble friend makes an important point. Investors in these companies can come from all sources, including pension funds. It is right and proper that they think about the return they get from their investments when making those decisions.

[Baroness Hayman (CB)]

My Lords, I declare my interests. May I take the Minister back to her fundamental argument that the electricity generator levy, which applies to renewable energy, is completely different from the energy profits levy? She has argued strongly that the latter needs the additional investment allowance to encourage investment in oil and gas, but somehow the electricity generator levy does not need that additional investment incentive. Is she absolutely sure that that is true and is she in any way concerned about the report that we may lose some offshore wind projects because of it?

[Baroness Penn (Con)]

The electricity generator levy reflects a historic approach to how we pay for our electricity. New electricity contracts are often done, for example, under the contracts for difference process, which is not subject to this levy. We have also put in place a wide range of other measures to support investment in renewables. That is why we have such a great track record and why I have every faith that we will meet our stretching targets on decarbonisation in future.