Financial Services and Markets Bill (Fifth sitting)

Emma Hardy Excerpts

Committee stage
Thursday 27th October 2022 Public Bill Committees

[Dame Angela Eagle (Wallasey) (Lab)]

Will the Minister give us a little more flavour on how he sees the evolution of this area? Does the clause give him enough powers to go with that evolution, or will we need to legislate again as the landscape changes? It is clear that we have to avoid the potential harm of allowing consumers to think that all digital coins are somehow the same. We know what Bitcoin is, and do not need to spend much time talking about it. We would not want to give people the impression that it is safe to indulge in investing in it.

At the same time, both sides of the Committee realise that digital payment systems and coins are a huge and rapidly developing area that national Governments must get a grip on. That is why we all welcome the fact that the Bank of England is looking at launching its own non-fungible token, or whatever we want to call it. We have to keep a very close eye and watch this space to see how it evolves. Will the Minister give us an impression of whether the clause is evolutionary enough for his purposes in that rapidly changing environment? Might he want to change it through some later piece of legislation?

Finally, we all know how much energy is used in the creation of Bitcoin. I confess myself ignorant about whether the creation of other non-fungible tokens is as energy intensive as the creation of Bitcoin. Perhaps the Minister can enlighten us. There is a green side to the issue as well.

[Emma Hardy (Kingston upon Hull West and Hessle) (Lab)]

My point is further to those made by my hon. Friends the Members for Hampstead and Kilburn, and for Wallasey. My hon. Friend the Member for Wallasey asked whether the definition was evolutionary enough, and I want to pin down the Minister’s response. Does he believe that the definition of “digital settlement assets” is broad enough to allow for regulation to cover the wide range of cryptocurrency, other cryptoassets and exchanges?

[Andrew Griffith]

I thank hon. Members for their contributions. As currently envisaged, the definition successfully encompasses what it intends to today. The definition starts with the most safe, least volatile domain, which is the use of digital settlement assets. The Bill confers secondary powers, which are subject to the affirmative procedure, that allow the definition to change elastically over time. It is right that Parliament should have the opportunity to look at such changes. That achieves the balance that Members on both sides of the Committee seek. It does not rush headlong to confer legitimacy.

The hon. Member for Wallasey rightly raised the point about the energy used. The truth is that we do not know, but we all suspect that the activity is highly energy intensive. Partly due to the lack of regulation, there is no real data other than anecdotes that one hears that suggest the process is very intensive—even getting into whole percentages of world energy consumption, according to some anecdotes. That is the process of mining that things like Bitcoin and Ethereum are associated with.

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[Dame Angela Eagle]

I want to focus on parliamentary scrutiny of these changes. They are quite technical, but they could be very important, including for consumers. If we do not get them right, they could have unintended consequences for financial stability and so on, because of the range of agreements under discussion. One assumes that those negotiating the agreements have a reasonable model of what they want to achieve, but that will also be the case for those with whom we are negotiating. The context is about gaining an advantage in the international competition for financial services. Indeed, both Front Benchers have hinted at that. If we are looking for a competitive advantage and growth, that kind of struggle for an advantage has obvious implications.

Until we left the EU, much of the negotiation on the financial directives that were promulgated went on within the European Commission. The UK had a great deal of influence over how those directives were negotiated, but it did not always win out; for example, the markets in financial instruments directive was a cause of some consternation for our financial services, because it did not fit with our kind of plan. We were always the country with the largest financial services sector, and were mostly likely to be impacted by agreements and compromises that did not clearly represent our best interests. We can now hope to move back towards that position, if we can come to an agreement. However, as my hon. Friend the Member for Hampstead and Kilburn said, we are constrained by the fact that a great deal of our financial services activity happened within the EU. I suspect that the divergence is likely to become greater over time. What does the Minister think would constitute a timely attempt by Government to ensure proper parliamentary scrutiny of these things? Aside, that is, from Parliament potentially debating 50 pages of extremely technical statutory instruments.

We know that the Treasury Committee will have a say, but some of the changes negotiated in these agreements with other countries may have important impacts on consumer rights, and larger number of Members of Parliament might want a say on them. Perhaps the Minister could say how he envisages the process going forward. I presume we will have some agreements—there has been a slow start. How can Parliament keep an appropriate eye on the philosophy behind the agreements, and the way in which they are going, as we diverge more from our closest partner?

[Emma Hardy]

I want to probe the Minister a little further. Obviously, it is a huge disappointment that we do not yet have a memorandum of understanding with the EU. Will the Minister indicate when we will have one?

[Andrew Griffith]

The hon. Member for Hampstead and Kilburn is right about the significance of the European Union member states as trading partners for our financial services. It remains the Government’s intention to form the closest possible relationship with those partners, and to help our financial services businesses access those markets in the most frictionless way. Both sides will have to be involved in reaching any agreement. I do not want to stray too far off the point, Dame Maria, but yesterday I met my German counterpart; Germany is probably the state with the biggest market for financial services. I hope the Committee will take that as a statement of our intent to negotiate as many agreements as possible, whether at national or EU level.

As I said, it is not the Government’s position to diverge for divergence’s sake. The hon. Members for Hampstead and Kilburn, and for Wallasey, accurately identified some of the provisions on which there may be opportunities to diverge, based simply on a different fact pattern in our financial services industries.

[Emma Hardy]

It is positive news that the Minister has met his German counterparts. Could he give any indication of the progress made towards a memorandum of understanding, and of when we might see one with the EU?

[Andrew Griffith]

The hon. Lady will forgive me, but I cannot give an indication of timing. However, I will undertake to engage with the Treasury Committee, whose acting Chair is with us today, as we go through that process. To speak to the point made by the hon. Member for Wallasey, we have a diligent Treasury Committee that exercises oversight of this area. I consider it unlikely that we will suddenly procure an MRA that blindsides that Committee, and I certainly undertake to keep it informed, so that the detailed parliamentary scrutiny provided for in the Bill is adequately exercised.

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[Andrew Griffith]

I will speak to clauses 25 and 26 in order. As I set out in previous comments, the Government remain committed to reaching net zero greenhouse gas emissions by 2050, as set out in section 1 of the Climate Change Act 2008. Clause 25 reflects the Government’s commitment by introducing a new regulatory principle for the FCA and the PRA to contribute towards achieving compliance with the net zero emissions target. FSMA 2000 sets out eight regulatory principles that the FCA and the PRA must have regard to when discharging their functions. These existing principles aim to promote regulatory good practice across the regulators’ policy-making. The principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the United Kingdom economy in the medium or long term.

The November 2021 future regulatory framework review consultation proposed amending the sustainable growth principle to explicitly incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the Bill introduces new secondary objectives for the FCA and the PRA to facilitate international competitiveness and growth in the medium to long term, clause 25 removes the sustainable growth principle for the FCA and the PRA to avoid unnecessary duplication.

Clause 25 replaces the sustainable growth principle with a new regulatory principle to require the FCA and PRA to have regard to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008. This new regulatory principle will cement the Government’s long-term commitment to transform the economy in line with our net zero strategy and vision to make the UK a net zero financial centre by ensuring that the FCA and the PRA must have regard to these considerations when discharging their functions. A similar requirement will be introduced for the Bank of England and the Payment Systems Regulator, which we will cover in more detail later.

Clause 26 makes consequential amendments to FSMA 2000 to take account of the new regulatory principle in clause 25, and the new growth and competitiveness objective for the FCA and PRA in clause 24. Clause 26 also requires the FCA and PRA to explain how they have advanced the new growth and competitiveness objectives, as well as their existing statutory objectives, in their annual reports to the Treasury, which are laid before Parliament. This requirement aligns with the PRA’s current reporting requirement for its secondary competition objective. I therefore commend clauses 25 and 26 to the Committee.

[Emma Hardy]

I have not tabled an amendment to the clause, but the Minister will be aware that on Second Reading there was a huge amount of support across the House for strengthening these proposals on net zero and nature. I hope we will see some movement on these issues as the Bill progresses through Parliament.

I want to start by saying why net zero and nature matter and looking at the situation in France and Germany. The German regulator already has a sustainability objective, with a focus on combatting greenwashing. The French regulator already looks at overseeing the quality of information and has set up the Climate and Sustainable Finance Commission. I want the Minister to note that our competitors are already moving ahead in this area.

One thing that came out of the written evidence, which I have just been re-reading, was the need for net zero transition plans and the establishment of a transition plan taskforce. The Minister has not really mentioned that. The purpose of the transition plan taskforce was to look at a gold standard for climate transition plans, but it is not stipulated in the Bill that companies will be expected to develop these and move them forward.

Disappointingly, although the Bill talks about net zero, it says nothing about nature. I wish I could recall who from the Bank of England came to give evidence to the Treasury Committee, but it was incredibly interesting to hear that, in looking at the risks to our country and our future financial sustainability, it is starting to look at the risk to nature and what the decline in nature will cost us all. We have heard much about climate change and the obvious risks it poses to our country and our financial sector, but people are starting internationally to look at the impact that a decline in nature has on our economic wellbeing. Again, nature is not mentioned in the Bill at all.