Financial Services and Markets Bill (First sitting)

Craig Tracey Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Stephen Hammond (Wimbledon) (Con)]

I guide the Committee and witnesses to my entry in the Register of Members’ Financial Interests.

[Craig Tracey (North Warwickshire) (Con)]

I chair the insurance and financial services all-party parliamentary group and am a former insurance broker.

[Peter Grant (Glenrothes) (SNP)]

I have money saved and invested with Nationwide building society, which has submitted evidence on its own account. I am also with a credit union that I believe is affiliated to the association of one of the witnesses.

--- Later in debate ---

[Tulip Siddiq]

Q I was referring to provisions in the Bill relating to net zero—as you say, it is not direct—but I hear what you are saying. I have a similar question for you, Karen. How should the regulators’ new secondary objective on long-term growth take account of investment in green industries, which is what Charlotte was talking about?

Karen Northey: Again, I would highlight that the UK is a centre for green finance and has done very well in it. It is a big part of what our members do. For risk management, investment managers have to take a long-term view, and that long-term view, by its nature, has to take into account climate change. Additionally, they play a huge role in directing finance towards transition, so there is a dual role for our industry.

In terms of a competitive and growth objective for our regulators, I agree with Charlotte that the regulators are generally doing a very good job. One of the key things in green finance is international standards and compatibility between them. There is a cross-border element to all forms of capital movement and investment, and alignment with international standards, so taking into account what is happening elsewhere is a key part of a regulator’s activity, particularly in green finance.

[Craig Tracey]

Q I think Charlotte partially answered my first question, which was about whether you think the objective should be a primary or secondary one. Karen, I think you said that you were happy with it as a secondary objective. First, do you think it will be enough to shift the culture of the regulator as a secondary objective? Secondly, when the FCA gave evidence it was unable to say, at this stage, what its key performance indicators or metrics would be; in the interests of helping it to form its opinions, do you have any views on that and how it could be effectively reported?

Karen Northey: On your question of whether the secondary objective is enough to change culture, I think an objective is necessary but I do not think it is sufficient—so it is necessary but insufficient. Culture absolutely has to follow. What we do not want is for it to be a check in the box when you are making a new rule for the handbook—“Yes, it will contribute to this.”

There does have to be an overall culture change, but to do that you do need the objective. I think that a lot of the ideas put forward this morning by TheCityUK around, for example, disclosure and transparency reporting on exactly how the objective is being met in each decision, will be key to that. I think we will continue to work with our regulators on that, as we currently do, but we would definitely encourage more transparency and disclosure around how individual measures are meeting that secondary objective.

[Craig Tracey]

Q Let me follow up before Charlotte comes in. Where do you see Parliament—not just Government but Parliament—sitting in that process?

Karen Northey: Parliament plays an important role. If I think of the various roles that, for example, the FCA plays as a rule-maker or a law-maker, as well as in supervision and enforcement, we are specifically talking about the rule-making function of regulators, which will be significantly increased. European directives are created through a process of Parliament, as well as through the Commission and Council, so if the regulators are taking on those responsibilities, it is important that Parliament then also plays a significant role in holding them to account. These are quite significant powers coming back from Europe and Parliament has a legitimate and important role that to play.

One important thing, from our perspective, is that that review and that holding to account of the regulators when they are being reviewed must be sufficiently well resourced and have access to sufficient expertise. Certainly our industry—I know this is true across financial services more generally—is willing and available to provide and help with that expertise, as appropriate. I understand that there are balances that need to be made, but ensuring that level of expertise is important, because there is a lot of this regulation and it is also very technical and across lots of different areas. Parliament absolutely has an important role to play and will need the resources and expertise to do that.

Charlotte Clark: My response is pretty similar. Part of the reason for arguing for the primary objective is that a lot of our experience is coloured or shaped by the debate around Solvency II. The Government proposed three objectives for the review of Solvency II. One was around a vibrant industry, the second was around policyholder protections and the third was around investment—getting investment in infrastructure, net zero and those sorts of things.

I would say that the regulator is still very focused on policy holder protection. While no one would want to undermine that—financial stability is the absolute bedrock of everything—it is a necessary but insufficient condition for everything else that needs to happen with regard to investment and growth. That is part of the reason why we have argued for the importance of a primary objective: that culture shift is needed. Could it be done through a secondary objective? I hope so. It is about whether there is the right reporting and the right accountability and whether the challenge is there.

These are very complicated issues. This is the joy of discussing Solvency II—I apologise if I have inflicted that on any of you. These are very complicated issues and it is very difficult to get that wider challenge. Those people who embed themselves in this day to day can slightly overrule things, rather than find a balance for the way these things are implemented.

[Craig Tracey]

Q I have a final question. How much of a barrier to investment is the current regulatory framework? We have heard about the time that it takes to get regulated, and the insurance and financial services all-party parliamentary group has had reports on the cost—that it is up to 14 times more expensive to be regulated in the UK. How much of a barrier do your members see that as? Will the Bill help to address it?

Karen Northey: I think that is a barrier. Previous conversations have covered authorisations of individuals and firms. If there is something unique in our sector, it is that our products also need to be authorised—the funds themselves need to be authorised. I mentioned the examples of Ireland and Luxemburg as key competitors in fund domicile: in Ireland it is possible to have approval for a fund within 24 hours. The FCA target is a month, but that does not always happen. There are definitely instances where in-depth review is important—we want to make sure that funds are meeting obligations—but sometimes they are very similar to previously authorised funds, run by managers who have a long history and so on. Definitely when it comes to fund domiciles it is something that is considered as important.

I know that the Bill focuses a lot on bringing EU legislation back, which is absolutely essential in terms of targeting certain areas so they are more fit for purpose for the UK market, but there are other areas of reform that are more homegrown that have led to challenges for our members in terms of our international competitiveness—the consumer duty was mentioned, for example, and there is the financial services compensation scheme and a number of others. It is not the only factor in making a decision, but it is definitely a factor.

Charlotte Clark: Similarly, I cannot recall a new insurance company being set up in this country—certainly not in the last 10 or 15 years. They are being set up in Gibraltar, Bermuda and other places where there is equivalent regulation. There is something about how we attract it, do it quicker and ensure that people feel that this is a good place to do business.

I will make a broader point with regard to investment and slightly contradict something I said previously about net zero. One of the things we talk about is that it is harder to invest in a wind farm than it is in coalmines. Those sorts of regulatory barriers need to be changed so that we are investing in the right things for the UK economy, particularly when it comes to net zero.

[Emma Hardy]

Q Karen, I wonder whether you heard the back and forth between me and Sheldon on financial inclusion. What are your thoughts about introducing a “have regard” provision for the FCA on financial inclusion? What else could be done through the Bill to strengthen financial inclusion?

Karen Northey: Financial inclusion is probably not relevant to our industry, in terms of access to bank accounts, but financial wellbeing is critical to our industry, in terms of how money is invested for the long term—particularly later in life—for individual investors. Three quarters of households use an investment manager through their pensions, for example, so it is about making sure they get the most out of their investments.

We have suggested that you address as quickly as possible the advice-guidance boundary. That might sound quite technical, but there are a large number of individuals who simply do not get financial advice because of the way the regulations work at the moment. We are encouraged to hear that the FCA fairly recently announced a comprehensive review of the advice-guidance boundary, but there are definitely things that can and should be done around enabling more people to get help, whether that be more bespoke guidance—there is lots of technology and innovation that will help without giving regulated advice, which absolutely should be the bedrock of complicated financial planning—or simplified advice. In terms of financial wellbeing, that is something we would like to see.