John Glen
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Financial Services Bill
John Glen ExcerptsMonday 9th November 2020
(4 years ago)
Commons ChamberRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
Earlier today, we heard the Chancellor describe the UK’s financial services industry as fundamental to our economic strength. I wholeheartedly agree with that statement. This is an extraordinary industry: it drives growth and generates millions of jobs in every corner of our country, it has secured our reputation as a dynamic and world-leading financial centre, and it contributes vast sums to the public purse—money that has helped this Government to support millions of individuals and business through the pandemic. Now, however, as we leave the European Union and start our recovery from coronavirus, we commence a new chapter in the sector’s story.
We have set out a vision to create an industry that is even more open, more technologically advanced and greener than before; an industry that serves the people of this country and drives our economic recovery. That is underpinned by an unwavering commitment to high quality, agile and responsive regulation, and safe and stable markets. Through this Bill, I am laying the legislative foundations on which we will build to achieve those goals. I will speak briefly about the context in which the Government are bringing forward the Bill.
Until now, most of our recent financial services regulation was introduced through EU legislation. Having left the EU, we now have the opportunity to take back control of decisions governing the sector and, guided by what is right for the United Kingdom, to regulate differently and regulate better. That is why the Government are also undertaking a more fundamental review of our financial services regulatory framework, which will allow us to consider how the way in which we make our future rules might change to reflect the UK’s position outside the EU. The review will take time, however; the Government are consulting on it and there are changes that need to be made now. The Bill is therefore an important first step in taking control of our financial services legislation, which will support our position as a global hub for the sector in line with international standards.
In many parts, the Bill is consistent with the approach we took while this country was still part of the EU, but there are areas where it will better suit us to choose our own path, and this Bill marks the start of a process of evolution towards our goals. The Bill has three objectives: first, to enhance the UK’s world-leading prudential standards and protect financial stability; secondly, to promote openness between the UK and international markets; and thirdly, to maintain the effectiveness of the financial services regulatory framework, along with sound capital markets. I will speak about each of those objectives, starting with the first.
Clauses 1 and 2, along with schedule 2, require the Financial Conduct Authority to create a tailored prudential regime for investment firms—businesses that provide a range of services that allow investors to access financial markets. At present, investment firms are part of the same prudential regime as banks, even though their services are quite different and they do not pose the same risks to financial stability. The Bill will therefore require the UK’s independent regulator, the Financial Conduct Authority, to set more proportionate prudential requirements, which better reflect these firms’ risks. These measures will drive healthy competition across the sector, while allowing the UK investment industry to thrive outside the EU.
The UK’s regulators are globally respected, in large part as a result of the expertise of leaders such as Nikhil Rathil of the Financial Conduct Authority, Sam Woods at the Prudential Regulation Authority, and, of course, Andrew Bailey as Governor of the Bank of England. That is why it is appropriate to delegate responsibility to them for this complex and technical area of financial regulation. However, I can assure the House that the Bill also introduces an accountability framework to ensure greater scrutiny and transparency of the FCA’s decision making when implementing this regime.
This framework will sit alongside the prudential regime for banks and the largest investment firms, whose failure would impact the wider economy. They will remain subject to internationally agreed prudential standards. That is why clauses 3 to 7, along with schedule 3, will enhance the prudential regulatory regime in line with the latest global Basel banking standards endorsed by the G20. That will increase the UK’s resilience to economic shocks, while meeting our international commitments to protecting the global financial system. The Bill will enable the PRA to implement the standards in its rulebook. It, like the FCA, will be subject to an accountability framework. These measures illustrate this Government’s commitment to global financial stability.
Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)
Is there any chance, therefore, that, as part of this process, some of the commitments the UK has signed up to, such as those under Basel III, will be watered down?
John Glen
I am grateful to the hon. Gentleman for his intervention. The driving principle guiding the Government in bringing forward the Bill is to maintain the highest possible standards; indeed, our reputation globally relies on the maintenance of such standards. However, it will be in the role of our regulators, with their technical expertise, to determine how those standards are implemented.
Let me move on to the next part of the Bill.
Kevin Hollinrake (Thirsk and Malton) (Con)
My hon. Friend mentioned the word “banks”, which obviously stimulated my interest as the co-chair of the all-parliamentary parliamentary group on fair business banking. He mentioned prudential risk around banks. Currently, the capital adequacy requirements for banks are all pretty much treated the same, which can deter competition from new entrants, such as regional mutual banks. Is he interested in looking at that issue in this legislation or in a future piece of legislation?
John Glen
My hon. Friend has unrivalled expertise and tenacity in bringing these matters before the House. He is right that there is a challenge to examine the relative regimes for different sized banks and institutions. That is something that regulators, subsequent to this Bill, will need to look at—indeed, they are keen to look at it—and I would welcome my hon. Friend’s further interventions in discussions in this place as we move forward on that legitimate question.
Eight years ago, the world was shocked by the LIBOR scandal. As the House will recall, traders at multiple banks attempted to manipulate that crucial benchmark, which contributes to interest rates for everything from complex derivatives to mortgages. Since then, significant improvements have been made to the benchmark’s administration. However, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, has stated that continued use of LIBOR and other major interest rate benchmarks poses a serious source of systemic risk. That is because the decline in the inter-bank lending market has meant that such benchmarks depend increasingly on the judgments of panel banks rather than actual transactions. UK regulators have been encouraging firms to gradually shift away from LIBOR and are at the forefront of the global response to the transition, so to ensure that that transition was orderly, the FCA agreed with the LIBOR panel banks that they would continue to contribute to the benchmark for a temporary period. However, that temporary period will expire at the end of 2021, and after that point there is a risk that the benchmark will become unrepresentative of the market that it measures, potentially leading to disruption.
While we want firms to take the initiative in migrating from LIBOR, we recognise that there are some contracts that cannot be realistically amended to achieve that goal, so clauses 8 to 19, along with schedule 5, will give the FCA the powers that it needs to oversee the orderly wind-down of critical benchmarks, including LIBOR, and clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 until the end of 2025. This will avoid difficulties for our firms while the Government consider any changes required to our third country benchmarks regime to ensure that it is appropriate for the United Kingdom.
I will move on to the second objective of the Bill: to promote openness to overseas markets. I am delighted that clauses 22 and 23, along with schedules 6 to 8, establish a framework to provide long-term market access between the UK and Gibraltar for financial services firms. As many will know, Gibraltar boasts an array of thriving businesses in the sector, many of which are UK household names, including Admiral and Hastings, to name just two. The new Gibraltar authorisation regime in this Bill delivers on an earlier ministerial commitment and recognises our long-standing special relationship.
Sir Robert Neill (Bromley and Chislehurst) (Con)
I refer to my entry in the Register of Members’ Financial Interests. May I say, as chair of the all-party group on Gibraltar, how delighted I am to see this in the Bill? I know that that is echoed by Her Majesty’s Government of Gibraltar and the whole Gibraltar community. The Government have made good on a promise and it is very welcome. The Minister is right to set out that some 20% of UK insurance contracts are written by Gibraltar-based insurers. Will he undertake that, as well as this important piece of legislation, we will now build on it with his colleagues in other Departments to develop a full free market—a free-trade area effectively—between the UK and Gibraltar in services and goods?
John Glen
My hon. Friend is absolutely right with that 20% statistic and to point to the extensive orientation of the Gibraltarian insurance industry towards the UK. Ninety per cent. of the business that it writes comes to the UK. He is right to say that this is foundational to a deepening relationship, and I will ensure that Gibraltarian firms can continue to access the UK market on the basis of aligned regulation and supervision. I look forward to listening to him, as we move forward, on further steps that he thinks would be appropriate.
The proposals will guarantee close co-operation between our regulators, and this measure highlights the spirit of openness that underpins our approach. The same can be said of clauses 24 to 26 and schedule 9, which make up the overseas funds regime. These measures will simplify the process under which overseas investment funds are marketed in the UK. Under the present system, the FCA has to assess the protection standards of every individual fund before allowing it to be offered to UK consumers. However, the Bill will allow the Treasury to give market access to entire categories of funds from other countries that have so-called equivalent regulatory standards to those in the UK. Funds in this group can then undergo a simpler application process, due to the confidence provided by their home regime, which will allow overseas investment funds to be marketed in the UK, maintaining the UK’s position as a global centre of asset management. There are currently over 9,000 funds that passport into the UK from the EU, and let me stress that the existing process will remain for funds that have not been declared equivalent.
Sir Robert Neill
I am grateful to the Minister for correcting me. Of course, my figure of 20% related purely to motor insurance policies; it is 90% for all Gibraltar-based insurance. Can he help me on the specific point of the overseas funds regime? It is widely welcomed in the sector that he will allow access for overseas funds that have not yet achieved equivalence, but can he help give some clarity on a matter that is of concern to some providers? What is the position if people have invested in the fund and for some reason equivalency is withdrawn? What would then happen in practical terms if, for example, additional money is invested in the fund after suspension? Can he help as far as that is concerned? It is important for many people.
John Glen
It would not be for me at this point to set out the deductions to be made on individual funds, but I would like to follow up with my hon. Friend formally on that matter, because a process is under way for that to be examined, and I am happy to engage with him further in due course.
I will move on to the importance of ensuring that the FCA has an appropriate degree of oversight over firms that could register under the regime. To my hon. Friend’s point, there is a tension between the objectives set in Parliament and the regulators’ judgment on the ground. We need to ensure not only that they are accountable, but that we have set the right prescription for the outcomes we wish to see.
Richard Fuller (North East Bedfordshire) (Con)
Will my hon. Friend spend a moment putting the Bill in context? Earlier today, we heard the Chancellor outline the bold initiatives on green finance and on making the UK a leader in transparency internationally and financial technology. As we leave the European Union, we are keen to accelerate away from a sclerotic, introspective set of financial markets. The Bill looks very worthy, but can he put it in the context of those broader ambitions for financial services? Is this the first of a series of Bills we will see, or is it clearing things up so that afterwards we are in a position where we can move forward to capture that opportunity?
John Glen
This is a portfolio Bill of 17 measures, some of which I have been wanting to introduce for some while. It is the first step on a journey, and there will, if the authorities allow me, be further financial services legislation that we will need to make following the consultation on the future regulatory framework. We need to be ambitious for financial services. We live in a dynamic world where financial services are evolving all the time, and we need to have regulators that are nimble in developing world-class regulation that allows us to continue to grow, and that is reflected in our appetite for FinTechs, stablecoins, digital currencies and the right regulatory framework for firms of different sizes, as my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) referred to earlier.
The third objective of the Bill is to maintain the effectiveness of the financial services regulatory framework and ensure sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. That will improve accuracy, while reducing opportunities for fraudsters.
Clause 29 makes small changes to the market abuse regulation, making the regime more effective, while reducing some of the administrative burden facing firms. I draw attention to clause 30, which raises the maximum sentence for two kinds of financial market abuse from seven to 10 years in prison, bringing the penalties for those offences in line with other forms of economic crime, such as fraud. Clause 31 will ensure we can enforce the rules that apply to trusts. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, collecting a range of ownership information on those that have a connection to the UK.
Kevin Hollinrake
My hon. Friend mentions economic crime, the prevention of fraud and the penalties for fraud, but one of the things the Government are committed to doing is bringing forward a corporate offence for the failure to prevent economic crime. It is not within this Bill. Is there any reason why not? What timescale might we see around that kind of legislation?
John Glen
As my hon. Friend mentioned to me a few days ago, he is aware that the Ministry of Justice is conducting a consultation on that matter, and that will drive the Government’s response overall, but it is a matter we take seriously. Following the Financial Action Task Force review at the end of 2018, we needed to move forward a number of measures to improve and tighten our regime. It is critical for the integrity of the United Kingdom’s financial services industry to have in place the appropriate sanctions and the important regulations on reporting standards across the whole of financial services.
Let me turn to clause 32, which will strengthen our breathing space scheme that supports people with problem debt. That has long been a priority of mine as City Minister, and I put on record my gratitude to my hon. Friend the Member for Rochester and Strood (Kelly Tolhurst), who introduced a private Member’s Bill on this issue, for all her efforts, and to Members across the House for the consensus on that legislation’s introduction. The Bill contains crucial amendments that are required to implement fully and effectively statutory debt repayment plans, which will help people facing problem debt to pay back what they owe within a manageable timeframe. The Bill’s measures will allow us to compel creditors to accept these new repayment terms, providing greater peace of mind to consumers, many of whom will be vulnerable.
Bim Afolami (Hitchin and Harpenden) (Con)
I congratulate the Minister on the work I know he has done over many years on this subject. I understand that the Bill amends the Financial Guidance and Claims Act 2018 to ensure that the statutory debt repayment plan can include debts owed to the Government or Government Departments. Will he explain a bit further how that will work in practice? What will the ranking for claims be for creditors? Will it require a mediated process?
John Glen
I thank my hon. Friend for his question. As he says, the purpose of the measure is to provide, during the eight-week moratorium—longer for those with a mental health condition—a set of options, and it is key that the Bill will allow us to compel creditors to accept the new repayment terms. He is right to say that it will provide peace of mind to all consumers, with a compulsion under the provision to bring in debts owed across the public and private sector. He asked me to list the hierarchy of debts, which is probably beyond my capacity at this point, but I am happy to write to him to set out in more detail what the provision gives us room to do.
Clause 33 complements the Government’s pioneering Help to Save scheme, which supports people on low incomes to build up a nest egg. These changes will ensure that people can continue to save through a National Savings & Investments account after their participation in the scheme ends.
As I mentioned earlier, there will be some areas where this country will decide that it is right to diverge from EU regulation. Clause 34 is a good illustration of that, making amendments to the packaged retail and insurance-based investment products regulation, commonly known as PRIIPs. That EU legislation was laudable in its aims, although, one might argue, not quite as laudable in its outcomes and achievements. Concerns have been raised by Members across the House, and most tenaciously by my hon. Friend the Member for Basildon and Billericay (Mr Baron), that it is not working as intended and that there is a risk that consumers may be inadvertently misled by disclosures that firms must provide under the regulation. I am pleased finally to be able to address those concerns. The Bill will allow the FCA to clarify the scope of the regulation. It will tackle the issues around misleading performance scenarios and allow the Treasury to extend an exemption from the PRIIPs regime for undertakings in collective investments in transferable securities—UCITS—which are a type of investment fund.
These are some examples of how we intend to take advantage of a new ability to address issues in retained EU law. However, we have no intention of needlessly, ideologically or recklessly diverging from EU legislation. Instead, we will maintain existing regulations where they make sense for the financial services industry in this country. One instance of that approach is clause 35, which finalises reforms to the European market infrastructure regulation, which the UK supported as an EU member state, while clause 36 contains a change that should provide certainty to markets by ensuring the legal validity in the past and in the future of the financial collateral arrangements regulations.
Finally, clause 37 will make the role of the chief executive of the Financial Conduct Authority a fixed five-year term appointment that is renewable only once, in line with other high-profile roles in financial services regulation. That was recommended by the Treasury Committee not so long ago.
I recognise that Members might be concerned that some of the Government’s prior commitments are not included in the Bill. I assure the whole House that our focus on these issues has not wavered. One issue that came up in questions to the Chancellor earlier was access to cash. The Government are committed to ensuring that everyone who needs it has easy access to cash. I have heard representations on the issue from Members across the House in recent weeks, including my right hon. Friend the Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell), whom I met recently, and Members from across Scotland and the whole UK.
Earlier this month, we launched a call for evidence, seeking a wide range of views on the subject’s key considerations. Once we have reviewed the findings, we will bring forward legislation as soon as parliamentary time allows.
Alison Thewliss (Glasgow Central) (SNP)
I thank the Minister for making that point, because I was not going to make a great deal of it in my remarks. Does he appreciate the fears on the SNP Benches that by the time the Government get around to legislating on this, there will be no banks left?
John Glen
I understand the hon. Lady’s anxiety—it is one she has expressed to me a number of times over the past nearly three years.
We asked Natalie Ceeney to do a review last spring. Immediately the review was completed, we put together the JACS process—the joint authorities cash strategy—and brought together the Payment Systems Regulator, the FCA, the Bank of England and the Treasury. We are working closely with LINK and the banks to look at a new way of making cash available. The cashpoint network in this country is not fit for purpose and urgent work is going on behind the scenes to bring forward a cohesive solution.
The prospect of legislation remains, and the call for evidence a week or so ago is another step in moving this forward as rapidly as possible. This problem has been extended and made worse by our recent experience of covid. I assure the hon. Lady that I am committed to getting to the end of this in a positive way.
To conclude, the Bill marks an important moment in the history of the UK’s financial services sector. It is the next step of an ambitious programme of regulatory reform that will be guided by what is right for UK industry. In short, the Bill will support financial stability and high regulatory standards, promote openness between the UK and international markets, and maintain the effectiveness of this country’s financial regulatory framework. I commend it to the House.
Alison Thewliss (Glasgow Central) (SNP)
My colleague from the Treasury Committee, the hon. Member for West Worcestershire (Harriett Baldwin), mentioned earlier that some of the Benches in this place are a little empty this evening. I am sure that that is not because this is not a wonderfully exciting Bill—well, perhaps. But we have to look at the reality of the situation that we are in. We are here in London in lockdown and people are being advised not to travel. So I do not hold a grudge against any Member who has decided not to travel today, for their safety or the safety of their constituents and their families. It is important that we consider each other in this place as well as those out there in every street in the country as coronavirus continues to spread.
I thank the Minister for his briefing on Thursday evening. It was a very good distraction from all the events in the United States. I also thank all the organisations that have provided such helpful briefings in advance of the Bill. The financial services are a significant part of the economy in Scotland in terms of the number of businesses, the number of employees and their contribution to the wider Scottish economy, particularly in the growing area of FinTech, where we have much innovation coming out of our universities.
The Bill is, relatively speaking, a wee bit dull and a wee bit functional. Some bits have been taken out of the back of the drawer at the Treasury and presented in the Bill tonight.
Alison Thewliss
The Minister says that is harsh, but he said himself that there are things here that he has wanted to do for quite a wee while and has not found the mechanism to do. It is a portfolio Bill, as he called it generously, of some things that hang together and some things that are a wee bit tacked on.
The regulations are important, and they affect us all in some way or another. The purpose of financial regulations is to protect us as citizens from the worst extremes of the financial inclinations of those who wish to grab the cash a wee bit quicker. We would all live with the consequences of deregulating to an extreme, so we need to be very careful of the regulations that we make.
The Bill’s objective is to enhance
“the UK’s world-leading prudential standards and promote financial stability”,
to promote openness
“between the UK and international markets”
and to maintain
“an effective financial services regulatory framework and sound capital markets”.
I am sure that that is all very laudable. It is what we had as a member state of the EU. Who could really object to any of those aims? We on the SNP Benches will not be opposing this Bill on Second Reading tonight, but we do hope to put together some constructive amendments for the Government to ignore in Committee. If they would like to surprise me and take them on I would be absolutely made up, but we shall see. I shall go ahead and hope rather than look at experience.
I hope that we can have some good discussions on the things that should be put into the Bill to give people greater protection, and where things should be that wee bit tighter. Despite what the Chancellor said earlier about unilateral equivalence, the reality is much more complex and many firms do not yet know what they are preparing for. Whether it is the worst or not quite the worst, it will still cost money, time and resource, at a time when covid affects us all, and it will still be significantly less advantageous than it was under EU membership or even single market membership.
I am nervous, as are many others, about Parliament’s role in the regulatory framework and where that ends up. CityUK has expressed concerns, as has Barclays, about taking back these powers to hand them straight over to the PRA and the FCA. This is hardly taking back control. I worry that with the safeguards that we have, we will not find out that something has gone terribly wrong until it is far too late, and far too far down the line. I worry that Parliament will find out about these things when it is too late, because that has been the experience of the banking crisis and other things. We need to be careful that we do not end up going down those same roads. A statutory limit on the term of the FCA chief executive is not quite taking back control in the same way. This is giving a whole lot of power to these institutions and cutting out Parliament.
I have some questions and I would be grateful if the Minister picked them up. For example, the Bill will allow Her Majesty’s Treasury to revoke the capital regulation in favour of PRA rules, so what happens to those who are already working to the CRR2 EU regulations and what do they now need to do? Will regulatory decisions and implementation be in line with broader public policy objectives and is there a safeguard within that, because Parliament should be satisfied that existing appeals mechanisms are sufficient and, as Barclays says, that they are commensurate with the increased level of autonomy and rule making for those regulators?
The ABI is also concerned about a number of areas. It talks about the need for the Gibraltar authorisation regime, saying:
“We welcome that Government will work with the FCA to ensure that, once the GAR comes into force, individuals and eligible small businesses using financial services sold in the UK by Gibraltar-based firms can refer disputes to the UK Financial Ombudsman Service”.
That protection ought to be there in black and white but it does not appear quite yet to be at that stage. People need to have that protection—that recourse—if something goes wrong.
It is of huge concern to us that the UK regulators have threatened to deviate from EU rules on share trading if Brussels does not deliver market access permissions to the City of London. The ABI has said that the equivalence process has occasionally been used as a political weapon to wield against third countries. It is concerned about where the overseas funds regime sits within this, particularly because it does not know what might happen should there be a negotiating advantage for one side or another when the cost is borne by companies and consumers.
There are further questions on what this means for existing investors if equivalence is withdrawn. What happens if someone has money in a particular fund and then it goes? What are the practicalities there? What do they need to do as an investor in those circumstances? We need urgent clarity for people so that they know where they stand on these issues. Perhaps the Minister cannot give us those answers yet. That is part of the wider problem that people do not know exactly what is going to happen and how they can prepare for it. There could be a risk that people will withdraw from these funds altogether rather than keeping their money there, which would have further knock-on effects.
We support the increased sentences for insider dealing and market abuse. It is quite right that those should be increased. However, as I have said many times in this House, enforcement is key—having the tools in the box to make sure that we can find these frauds, market abuses and insider dealings and then punish those responsible. That is crucial, because if people are felt to get away with these things, then having the rules is really not enough.
On people exploiting rules and general misbehaviour, I want to talk about money laundering. I was on the Committee that considered the Bill that became the Sanctions and Anti-Money Laundering Act 2018 and I worked on it in this House. Clause 31 amends schedule 2 of SAML to ensure that regulations can be made in respect of trustees with links to the UK. Without it, any powers that HMRC sought to exercise to access information on such trusts are at risk of being held invalid under legal challenge. The Government say that this technical change
“will reaffirm the UK’s global leadership in the use of public registers of beneficial ownership, as identified by the Financial Action Taskforce’s Mutual Evaluation of the UK in 2018. This will further support the public and private sectors to efficiently and effectively target their resources towards potential criminal activity using trusts, maintaining the resilience of the UK’s defences against economic crime.”
That does not stack up to me because there have been opportunities to deal with this.
I was on the Committee on the Registration of Overseas Entities Bill, which sought to look at trusts as well. We took lots of evidence on how trusts are an open door for people to move money around, yet the Government are not really acting to deal with that. The Registration of Overseas Entities Bill went through the whole pre-legislative scrutiny process and then just disappeared. The difficulty is that people are moving money around and buying properties, largely in the city of London, where they can launder that money. There are huge buildings sitting empty in the city because people are using that as a means of moving money about. There is a huge homelessness problem as well, so this is a really pernicious problem that the Government need to get their head around.
I do not understand why there is not more to deal with the issue of trusts, or with the issue, as I have mentioned ad nauseum, about Scottish limited partnerships and proper reform of Companies House. The Chancellor mentioned the consultation on that earlier. That consultation has been going on for ever, it feels like, and nothing has yet changed. The Government have this huge, big, wide, gaping loophole in Companies House that allows people to move money around. If they want to do something properly, I would suggest that they deal with that, and do a lot more to take action on trusts and other means of shunting money about. Not doing that makes this country a home for dirty money. Lots of research has been done on this issue by Transparency International and others. The evidence is there; the action, unfortunately, is not.
The debt respite scheme in clause 32 can be enhanced further. I know the Minister is committed to doing this and wants to act on it. I would be curious to find out a bit more about what he has learned from what Scotland has done so far and how the schemes will work together, because we have had the debt arrangement scheme in Scotland since 2004 and the statutory moratorium since 2011. There are always improvements that Scotland can make and the UK can make as well. I would be very interested to hear what more can be done to improve upon that.
I have been contacted, as many other Members might have been, by Macmillan’s duty of care campaign. What conversations has the Minister had with the Financial Conduct Authority on that campaign? Macmillan fears that many people—people with cancer who are struggling —are finding things incredibly difficult. Can he say with certainty that the guidance put out by the FCA is enough? Could more be done to protect people in the most vulnerable of circumstances?
Help to Save customers have enough on their plate at the moment without having to navigate myriad changes to their saving products. We firmly believe that the accounts should continue to earn interest until this crisis is over. Savers who do not withdraw the funds after maturity and whose balance remains in the account do not seem to be eligible for further bonuses and they are also not earning interest. It seems very unfair to expect low-income savers, who are potentially dealing with the risk of redundancy and are worried about the risk of covid, to change financial products at this time to avoid losing interest. Some of this is the UK Government’s fault for not having set an end date when the scheme was introduced. We argue that they should extend the active period of these accounts at least until the end of this pandemic, so that nobody loses that all-important interest.
What is the communications strategy from the UK Government to make sure that nobody loses out? Since the launch of the scheme, more than 222,000 people have opened Help to Save accounts, with some £85 million deposited, I understand. So this is not a small amount of money for people at the very lowest end of our economy and they need to have some certainty that the scheme will not be rolled up and that they will not lose out because of the changes the Government seek to make in this Bill.
I wish to close by discussing a briefing I received from the Finance Innovation Lab, which makes three well made points about the Bill. First, it says that the Bill threatens to introduce a democratic accountability deficit in financial sector policymaking, and I made that point earlier. We cannot be in the situation where we take all these powers back from Brussels and hand them straight over to unaccountable, arm’s length organisations. They might come before the Treasury Committee once every six months or so, when we will ask them some questions, and that is the extent of the scrutiny they get from this House. We do the best job we can to ask them questions—I see some colleagues from the Committee on the Government Benches tonight—but that is not the same.
Secondly, the FIL also argues, as the right hon. Member for Wolverhampton South East (Mr McFadden) did, that the purposes of the Bill should be broadened to economic, social and environmental outcomes. The Chancellor talked a lot earlier about how important those environmental outcomes are, but they are missing from this Bill. I do not know whether that is because one part of the Treasury is not speaking to the other or how else that has come about, but if the Government are now saying today that these environmental aspects are incredibly important and they should be a key part of COP26, as the former Governor of the Bank of England has also argued, they need to be in the Bill. If they are that important, the Government need to put them in the Bill.
Lastly, the FIL suggests that the Bill should help the UK to be a leader in financial regulation that sets high standards. There should be no backsliding on the standards we have built up as part of being in the EU. It is an area in which we had huge and significant influence as a member state in making a lot of these rules. Now if we want to have equivalence and have access, we are going to have to abide by some rules made by other people, rather than being able to make the rules ourselves. I believe firmly that we should not have less power as Members of this House than MEPs have to scrutinise all of those things that come before them, and we should have a bit more than we have in statutory instruments Committees; we cannot vote on those and we cannot amend them either. So we need to have a whole lot more by way of scrutiny of financial services in the future. In those Committees, I have argued regularly to the Minister that we need a plan and a framework, and we need to see the whole spectrum of what this Government propose for financial services. It needs to involve everybody—the people in the sector and Members from across parties in this House—so that we can build something resilient that we can all have trust and faith in. That trust and faith in financial services is what we all need. We need to be able to trust the institutions and that our money will be well managed and we will be protected in the event that anything goes wrong.
This is all about building something new, but there is really not a huge amount that is new in the Bill. The Government need to do a whole lot more on financial services, which have been neglected as part of the Brexit negotiations, put to one side and not prioritised, despite being an absolutely massive sector of the economy in Scotland and the rest of the UK. I hope very much that we will be able to make amendments to the Bill to improve it and that the Government will listen to those amendments and take them forward in good faith.
John Glen
With the leave of the House, I too would like to speak a second time. I thank hon. and right hon. Members for their contributions and I welcome the broad support that I believe exists across the House on the Bill. Clearly, I will not be able to address all the points that have been made, but I have taken extensive notes and I shall write to colleagues where I feel I can say something meaningful at this point. But I look forward to further comments to address some of these points in Committee.
The right hon. Member for Wolverhampton South East (Mr McFadden) is right to say that the UK is a key player in the global effort to ensure that globally active banks are subject to strong regulation. I have huge respect for him and his experience in Government. I think he set out very clearly and plainly the fundamental challenges with which we are grappling in this industry. The track record we have in the United Kingdom should give him and other Members comfort that this Government have no intention of watering down regulations that have been agreed on the international stage. High-quality, agile and responsive regulation is absolutely key to the continuing success of the UK financial services sector and to addressing the potential challenges raised by my hon. Friend the Member for North East Bedfordshire (Richard Fuller) in his characteristically powerful speech.
On the matter of equivalence, I would like to address the wide-ranging questions from across the House. Equivalence assessments are an autonomous technical process. We have been clear from the beginning that the politicisation of equivalence is in no one’s interests. We are committed to an outcome-based approach. That means acknowledging how different approaches to regulation can achieve the same regulatory objectives.
A number of Members, including the right hon. Member for Wolverhampton South East, raised green finance. While he acknowledges that it is not directly related to the Bill—he wonders why—I hope the measures announced today show that the Government take their commitments in the green finance space very seriously. I look forward to engaging with him on the substantive points about how regulatory oversight works with the announcements made today.
I welcome the comments from the hon. Members for Glasgow Central (Alison Thewliss) and for Aberdeen South (Stephen Flynn) regarding overseas trust. The Government are taking proportionate and effective action to prevent the misuse of trust, through clause 31. The Government also intend to implement a register, the first of its kind, of beneficial owners of overseas entities that own or buy land in the UK.
Alison Thewliss
We both know that the Registration of Overseas Entities Bill was a Department for Business, Energy and Industrial Strategy Bill. Does the Minister have any further gen on what happened to it and when it might come back to this House?
John Glen
I think I have demonstrated that I have quite a lot to deal with in the Treasury, but I would be very happy to correspond with the hon. Lady further on the status of that Bill. I know she takes a very close interest in those matters.
On the hon. Lady’s words on the duty of care, the Government believe that the FCA, the UK’s independent conduct regulator, is best placed to evaluate the merits of a duty of care. She will know that last year the FCA published a feedback statement on its discussion paper on duty of care and announced that it will undertake further work to examine how best to address potential deficiencies in consumer protection, in particular by reference to its principles for businesses. The Government will continue to engage with the FCA, as I have done during my time in office, on a very regular basis.
The first objective of the Bill is to enhance the UK’s world-leading prudential standards and promote financial stability. On that theme, my hon. Friend the Member for Hitchin and Harpenden (Bim Afolami) asked a number of characteristically insightful questions that I expect to cover in detail in Committee. But I will also look to respond to his letter urgently.
Let me address the constructive points made by all Members on the important issue of the democratic oversight of the regulation of the financial services sector. Our independent expert regulators are a key strength of the UK’s existing framework. The right hon. Member for Wolverhampton South East and my hon. Friend the Member for Wimbledon (Stephen Hammond) should be reassured that it is these expert regulators who will be setting the firm-level requirements. We therefore think that they should continue to play a central role in developing and maintaining regulatory standards, in line with their statutory objectives. However, as my hon. Friend the Member for Wimbledon pointed out, that must be balanced with appropriate strategic policy input from Government and parliamentary scrutiny.
This Bill delivers for the specific purposes of implementing the remaining Basel standards and introducing a new prudential framework for investment firms. It introduces an enhanced accountability framework, specifying regulatory principles that the regulators must have regard to, as well as additional consultation and reporting requirements for the regulators when implementing the changes in the Bill. That sits alongside their existing statutory objectives. In addition, I recently issued a consultation on broader reforms to the regulatory framework as a whole: the future regulatory framework review. As I noted in my earlier remarks, this Government are committed to promoting openness to overseas markets. That is the Bill’s second objective.
My hon. Friend the Member for West Worcestershire (Harriett Baldwin), who is one of my predecessors, spoke to our ambitions for building our relationship with the USA in the area of financial services. I value her comments. It is important that we continue to maintain a truly global outlook, and we have well developed regulator-to-regulator relationships. I thank my hon. Friend the Member for Bromley and Chislehurst (Sir Robert Neill) for his intervention concerning the Gibraltar authorisation regime. A number of Members mentioned the overseas funds regime, for which I am grateful, and I hope that the complexity of this technical measure can be fully discussed in Committee.
As our third objective, it is essential that we maintain the effectiveness of the financial services regulatory framework and sound capital markets. I have outlined the measures in the Bill that will help to achieve both those things. Finally, I listened with particular interest to the typically well-informed speech from my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake). He covered a lot of important issues, some of which I may have heard before, and I look forward to discussing them further, as I always do; we do discuss these matters further, and we do make progress on some of them.
This Bill is a critical first step in taking control of our financial services legislation. As I said, it has three objectives: to enhance the UK’s world-leading prudential standards and promote financial stability, to promote openness to overseas markets, and to maintain the effectiveness of the financial services regulatory framework and sound capital markets. I am confident that the Bill will succeed in achieving all three, and I commend it to the House.
Question put and agreed to.
Bill accordingly read a Second time.
Financial Services Bill (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Financial Services Bill:
Committal
1. The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
2. Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 3 December 2020.
3. The Public Bill Committee shall have leave to sit twice on the first day on which it meets. Proceedings on Consideration and up to and including Third Reading
4. Proceedings on Consideration and any proceedings in legislative grand committee shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which proceedings on Consideration are commenced.
5. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.
6. Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and up to and including Third Reading.
Other proceedings
7. Any other proceedings on the Bill may be programmed.—(David T. C. Davies.)
Financial Services Bill (Ways and Means)
Motion made, and Question put forthwith (Standing Order No. 52(1)(a))
That, for the purposes of any Act resulting from the Financial Services Bill, it is expedient to authorise provision enabling sums payable in respect of a debt in accordance with a repayment plan under the Financial Guidance and Claims Act 2018 to be payable towards costs of operating repayment plans of the debt respite scheme operated under that Act.—(David T. C. Davies.)
Financial Services Bill (First sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (First sitting)
John Glen ExcerptsTuesday 17th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Chair
Q
Victoria Saporta: Good morning everyone, and good morning, Chair. I am Vicky Saporta, executive director for prudential policy in the PRA within the Bank of England.
Sheldon Mills: Good morning. I am Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority.
Edwin Schooling Latter: Good morning all. I am Edwin Schooling Latter, director of markets and wholesale policy at the Financial Conduct Authority.
The Economic Secretary to the Treasury (John Glen)
Q
Victoria Saporta: Thank you for the question, Mr Glen. Yes, we worked closely together, as you would expect for a Bill that proposes to revoke elements of the acquis and give the regulators specific powers. Ultimately, of course, it is for the Government to introduce the Bill and for Parliament to take it forward. However, the working relationship was very close, and because of that we are content with the content of the Bill and the proposed measures.
John Glen
Q
Sheldon Mills: We have had close interaction with you and your officials throughout the drafting of this Bill, and also the preparations for a new UK financial regulatory system, as we move to exit from the EU. We think it is important that there is an agile and confident UK financial services regulatory system, which will support the UK financial services industry and, importantly, also protect consumers and ensure market stability. We feel that the Bill is a good first step in that direction, to enable us to play our role in those goals and objectives for the UK financial services industry.
John Glen
Q
Edwin Schooling Latter: Yes, of course. Committee members will be aware that LIBOR is a benchmark that has had a troubled past. It is also a benchmark that probably does not suit the needs of its users as well as some alternatives; but it is very deeply embedded in the financial system, so while we think it is the right thing to move towards the end of LIBOR and its replacement with better alternatives, we need to be able to do that in an orderly way. The provisions in front of you contain some important measures to enhance the FCA’s powers to manage an orderly wind-down—for example, to identify the point at which the benchmark is no longer sustainable and to take measures to ensure that its publication ceases in the least disruptive way possible for the many hundreds of thousands of contract holders who have mortgages or more complex financial instruments that reference the benchmark in some way.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Before I begin, can I get some sense from you, Mr Davies, about whether we can have a few questions?
The Chair
I remind colleagues that we have until 10.55 am for this session, so it is much shorter than the previous one. I hope that colleagues will be mindful of that.
John Glen
Q
Simon Hills: It is important to recognise that the Prudential Regulation Authority has been a strong supporter of Basel 3.1. It has been very influential in the way it was finalised, and I think that it is committed to implementing the Basel 3.1 framework in an internationally aligned way. That is important for our members, particularly if they are internationally active, because they want a coherent and harmonised regime across the world. If you are a UK bank operating in the UK, North America, Europe and Asia, you want one version of Basel 3.1 and you want it to be implemented in a coherent way. If not, and if there are different approaches to regulatory reporting, to how credit risk is assessed and to liquidity requirements, you have to implement a number of different versions of Basel 3.1, which will be more difficult.
In terms of UK Finance’s competence in, if you like, holding the PRA to account, we have a wide range of members for whom Basel 3.1 implementation is very important. I am pleased to say that I have good working relationships with Vicky and her colleagues at the PRA.
John Glen
Q
Daniel Cichocki: Certainly, the issues with the lack of sustainability of the LIBOR benchmark are very well documented, and it is important, as the Financial Stability Board has acknowledged at an international level, that we move away from LIBOR on a smooth and timely basis. It is also very important, certainly from an industry perspective, that as a result of moving away from LIBOR on to more robust reference rates, customers who have contracts referencing LIBOR are not inadvertently affected by that transition.
What this Bill seeks to do—and we are very supportive of its provisions—is to make sure there is a safety net in the form of powers being granted to the FCA, to ensure that those contracts that cannot be migrated on an active basis before LIBOR ceases have a solution so that the customer has a clear outcome for the contracts beyond LIBOR cessation.
These powers are important because before 2017, and the acknowledgement that LIBOR would cease, many contracts did not have clear, robust terminology setting out what would happen if LIBOR ceased. They may include terminology addressing if LIBOR should be unavailable for a day or two, and that might be the reference point those contracts would take. In that instance, without these powers, we may have seen customers falling back on to the last available LIBOR rate to the point of cessation, essentially becoming a fixed-term contract. We may have seen customers falling back on to cost of funds, which would create very diverse and disadvantageous outcomes for them. Equally, we would have seen fairly significant levels of contractual disputes beyond the end of 2021. These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.
Mr McFadden
Q
Simon Hills: I am not sure that we would want the UK Government and authorities to diverge significantly, if at all, from other standards. We are not sure yet what Europe will do in respect of Basel 3.1. We do not expect draft legislation from the Commission until around Easter next year. That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.
The Chair
Q
Paul Richards: I am Paul Richards. I am a managing director at ICMA, which is the international bond market association. I am here to give evidence on the transition from LIBOR. I am involved in the transition from LIBOR to SONIA—the sterling overnight index average—because I chair the bond market sub-group, which consists of issuers, banks, investors and four major law firms. We work closely with the FCA and the Bank of England. If you will permit me, I shall make a short introductory statement.
I hope to be able to give you a bond market perspective on the Bill but, for the market as a whole, we are all trying to move away from LIBOR to risk-free rates while minimising the risk of market disruption and litigation. The Bill is welcome and very important for the bond market because it will give the FCA extra powers to deal with tough legacy LIBOR contracts and wind them down in an orderly manner.
There are three main points on which it would be very helpful if the Committee was willing to strengthen the Bill. First, the Bill needs to provide continuity of contract between the current definition of LIBOR and the new definition of LIBOR for legacy transactions once LIBOR is prohibited for new transactions. Legacy contracts referencing LIBOR under the current method of defining LIBOR need to be read as references to LIBOR under the new definition as determined by the FCA, so that there will be continuity there—this is sometimes called a deeming provision. This will reinforce the message that LIBOR will continue to appear on the same screen page, and it should also help to remove uncertainty and minimise the risk of a legal challenge on the basis that the current definition of LIBOR and the new definition are not the same and one party or another is worse off.
This is particularly a risk in the bond market in cases where LIBOR is specifically defined in legacy bond contracts in terms of its current definition. Continuity of contract or deeming provision like this was used when the euro was launched in 1999, and it worked well. Clearly, it would need to be drafted with the help of the Treasury and it would probably need to be drafted in terms of an article 23A benchmark in the way that the Bill is looked at. That is the first point.
The second and related point on which I hope the Committee will help is that the provision of the continuity of contract under the Bill needs to be accompanied by a safe harbour against the risk of litigation. This would provide that the parties to contracts would not be able to sue each other as a result of the change in the definition of LIBOR, and it would allow them to make conforming changes to bond market documentation.
The third point on which I hope the Committee will help is that the safe harbour and contract continuity provisions in the Bill need to be drawn as widely as possible, to protect any entity that uses the new definition of LIBOR for legacy transactions in place of the current definition of LIBOR. This would need to cover not just supervised entities in the Bill, but non-supervised entities, as the range of institutions involved in the international bond market is very wide.
Finally, I would like to draw your attention to two other points where there are significant legal risks under the Bill. One is that there needs to be equal treatment between legacy LIBOR bonds when the new definition of LIBOR takes over from the current definition, so that some legacy bonds are not preferred to others and there is no discrimination between them; otherwise, legal problems may arise. This would be a matter for the FCA under the Bill.
The other point is that there needs to be alignment internationally between the Bill and the similar legislation that is being introduced in the US and the EU, so that the rate used for legacy dollar bonds under English law and legacy dollar bonds under New York law is the same. Thank you, Mr Davies. I would be very happy to do my best to answer your questions.
John Glen
Q
Paul Richards: Thank you, Minister. First, as I mentioned, we welcome the Bill. The only question is: can it be improved to minimise disruption and litigation? The essential point is that, in the bond market, we have moved to SONIA as the risk-free rate, and new issues have been in SONIA for over two years now. That is the first step in the process.
The second step in the process is that we actively convert as many bonds as we can from legacy LIBOR to SONIA. We are making some progress there, but the third point is that we will still have tough legacy contracts that cannot be converted, either because they are too difficult to convert or because there are too many to convert by the end of 2021. In those circumstances, the provisions in the Bill are extremely helpful, because they provide for an orderly wind-down of tough legacy contracts. From that perspective, the Bill is very helpful. My questions relate to when the current definition of LIBOR is replaced by a new definition. Will there be contract continuity and a safe harbour to minimise the risk of disruption in the market and litigation?
Mr McFadden
Q
Paul Richards: LIBOR was set by a panel of banks. As the market no longer uses the underlying information that it used to use for banks, it has now changed, or will change, with the admission of SONIA, to a different definition. SONIA is essentially an overnight rate. It is a robust rate, because it is used widely in the market, whereas LIBOR is no longer used in the market as it was 30 or 40 years ago. That is one difference. A second difference is that LIBOR is a term rate—it is expressed over one month, three months or six months—whereas the liquidity in the SONIA rate is focused on the overnight market, which is therefore a much more representative selection and does not require expert judgment, unlike LIBOR.
A third point, perhaps, is that it is not just a UK proposal to replace LIBOR with risk-free rates in SONIA. A similar change is taking place globally. In the US, USD LIBOR is being replaced by the secured overnight financing rate, which has a similar sort of construction, and the situation is similar around the world. Those are the main reasons for the change.
Financial Services Bill (Second sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Second sitting)
John Glen ExcerptsTuesday 17th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Economic Secretary to the Treasury (John Glen)
Q
Chris Cummings: Thank you for the opportunity to speak to one of the most central parts of the Bill. May I take a moment to congratulate you and your team on introducing the Bill? It provides much-needed reassurance to my industry, so thank you for that.
The industry is very pleased to see the overseas funds regime introduced as part of the Bill. Around 9,000 funds are currently available to UK investors as a result of the current regime. The reason we feel it is in the interests of UK savers and investors to have access to such a variety of funds is that it brings to the market not only choice but much-needed competition. It means that individual investors have greater choice and an ability to tailor their portfolio in a way that makes sense to them and reflects their risk profile. It is really the foundation of why the UK is the pre-eminent fund centre, not just in Europe, but globally. As the Minister knows, the UK has long enjoyed a reputation for being an attractive centre for fund management. That is built on the ability of UK investors to access an innovative and ever-adapting fund market.
We support this measure in the Bill wholeheartedly. At the moment, as the Minister knows, we manage around 37% of Europe’s assets, which is enabled through measures such as this. It is important for UK savers and investors; having such a variety of funds goes to the heart of having such a sophisticated savings environment in the UK.
It is important to note that if there was a cliff edge—if UK investors were not able to access these funds—that would constrict consumer choice. In trying to replicate something akin to what we have at the moment, we would bring a heavy burden of extra costs on to the industry and greater bureaucracy. It would reduce significantly the number of funds to which UK investors could have access. That is why we believe that the overseas fund regime is material.
It is worth contrasting that with what we see at the moment. In order to help navigate these turbulent waters through the Brexit period, I was delighted that the Government heard our calls to introduce a temporary permissions regime with the Financial Conduct Authority. I am pleased to note that the Bill extends the period from three to five years for that requirement, which is very good. It also allows us to tackle two particular issues wrapped up in the overseas funds regime.
First, there is a review of section 272, which is the current structure by which a fund sponsor or investment management company would seek to have their fund recognised by the FCA—our regulator here in the UK. Section 272 is okay, but it is rather cumbersome. It does not stand up well compared to international comparators. It is a rather lengthy form, which takes a while to complete and gives the FCA a six-month period to look at approving that particular fund.
The proposals in the Bill take us to a completely different level, where the FCA is able to look at fund structures across the piece rather than at each individual fund. We feel that is a big step forward. While section 272 could be reviewed and reformed, there is a different category of opportunity presented by the Bill and that is why our industry is so keen to see the Bill come forward and have the overseas fund regime baked into it as a measure that goes ahead. I will pause there in case there are comments before I move on to comment on equivalence, as you were kind enough to mention.
John Glen
Q
Chris Cummings: Currently, we enjoy unfettered marketing right across the whole of Europe and the EEA. Post Brexit, naturally, that will come to an end. The way that the regulatory authorities assess whether a particular fund is suitable is to judge the equivalence of the regime of the sponsoring organisation or where the organisation is based. Having that judgment of equivalence has been one of our industry’s clear calls throughout the Brexit process.
We were pleased that the Chancellor took a step forward in recognising and granting equivalence to a limited measure in the House of Commons in his statement last week. We think that was absolutely in the right direction. We have been unstinting in our calls for the European Commission and our European regulator, the European Securities and Markets Authority, to respond to those in kind and move forward so that the equivalence determination could have been made by now and be working. We were sorely disappointed that in June ESMA decided not only not to make a decision on equivalence, but to defer it for a period of time until after the IFR comes into effect.
We feel that that was a missed opportunity to settle the fact that the UK and the EU would be equivalent, which we currently are, having adopted, rather in full vigour, the European rules under which our industry labours. We are hopeful that continuing industry efforts to encourage ESMA and the European Commission to recognise the UK as equivalent will come through, but we are more than pleased with the steps that the Chancellor announced and the comments that are carried forward in the Bill. At the moment, we see that as a first step, but we look forward to greater work being done on this in the months and years ahead.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
The Bill does lots of different things, but I would like to mention two. First, it onshores or incorporates a significant body of EU law through different directives into UK law and gives the governance of those to the UK regulators. Secondly, it sets up this overseas fund regime, by which it grants equivalence on a country-by-country basis. It says that the Treasury will make these equivalence decisions as well. The Chancellor announced the direction of travel last Monday.
How do you see the relationship between these two different parts of the Bill? In theory, in future, having onshored the body of EU law and the directives, we are now at liberty to depart from them if we so choose. Do you see a relationship between that debate around divergence and the degree of divergence that the UK decides to opt for and the equivalence decision that we now need from the rest of the EU?
Chris Cummings: It is worth reflecting on the good work that has been done so far in trying to bring the different regimes together and match equivalence. Looking to the future, there is a strong argument for the UK to continue to bolster its presence in the international standard-setting fora, whether that is the Financial Stability Board, the International Organisation of Securities Commissions, Basel, and so on. Our authorities can continue to play a very strong role in arguing for what our industry would prefer, which is global and international standards.
We continually push for international standards as a global industry because that allows us to operate with reduced bureaucracy and by taking costs out of the organisation so we can really focus on looking after client needs. The UK has an outstanding track record of having its policymakers and regulators taken seriously in those international fora, because of the scale of the market that we have in the UK and the sophistication of our capital market in particular. At that level, if we can push for international standards in an international environment, that reduces some of the potential friction between the EU and the UK or other jurisdictions about where divergence may or may not be happening. That is the first thing we would like to stress—the international nature.
Secondly, something that has become part of the discussion in terms of the future relationship of the UK and the EU, and which our industry thoroughly supports, is a much clearer focus on outcomes and outcome-based regulation. It is noticeable that across the EEA there are different approaches in different European jurisdictions, all of which have been judged equivalent so far. Recognising that different jurisdictions will walk up to the same issue from different directions, yet seeking to achieve the same thing, that is the material part.
The third area I would just point to, if I may, is the depth of relationship between the UK authorities and those across the EU, not just in ESMA, our European regulator, but in the national domestic regulatory authorities. It is still absolutely the case that the UK policy-making apparatus—the UK regulatory bodies—is seen to have considerable expertise to offer. So just because we start in different places, it does not mean that we should not see the UK taking a little leadership and the EU tacking towards us in terms of lessons learned because of the sophistication of the market that we can offer. That was one of the reasons why we in the IA, among many other organisations, through the Brexit process was keen to press for a regulator to regulate a dialogue, which could be technically oriented, focused on bringing market and regulatory understanding to bear and making sure that there was a no-surprises, keeping-markets-open focus through the process that we have been through.
So I do not see equivalence and divergence as axiomatically pulling in different directions. I think what we will undoubtedly see is a period where the definition of equivalence needs to be—we need to have a thoughtful discussion, actually, about the substance of equivalence, moving away from its ephemeral nature and the fact that it can be granted or dismissed within a 30-day notice period. We need to have a much more joined-up and mature discussion about how two major markets can keep on doing business together, particularly in investment management when, as I mentioned earlier, 37% of Europe’s assets are managed here in the UK and when, for certain member states, whether it is the Dutch pensions industry or something else, the quality of investment management conducted here in the UK is seen as a prized asset and something that they want to learn from and continue to enjoy the benefit of.
John Glen
Q
Emma Reynolds: Thank you, Mr Glen. We support the measures in the Bill, and both the overarching and the stated objectives. It is absolutely right that the UK Government are onshoring the regulations. There are obviously other measures within the Bill that are extraneous to that, which we support. The Bill is a welcome first step, but we look forward to working with the Government to develop an overall strategy for the financial services sector that could pull all the different strands together, building on what the Chancellor said last week, which was very welcome.
John Glen
Q
Emma Reynolds: It is a very welcome first step. All I would say is that we, as an industry, have a broader agenda about our industry’s long-term competitiveness going forward. I would not have expected to see that in this Bill. We had a very good relationship with Government, particularly with the Treasury, but some of the other issues that we are concerned about relate more to other Departments, whether it is access to skills and talent from abroad or green finance or other issues that are not in the Bill. It is a welcome first step.
John Glen
Q
Catherine McGuinness: Thank you for inviting me to give evidence. I cannot answer on the technical ability of the regulators in detail, other than to say that, in our experience, they are very capable of adapting and innovating. Indeed, we heard last week at Mansion House from both the Financial Conduct Authority and the Prudential Regulation Authority about their plans. Obviously, the regulators will be gaining significant powers under the Bill. It is important that we look at how those powers are scrutinised, including by Parliament.
On that front, the International Regulatory Strategy Group, which both TheCityUK and the City Corporation support, has suggested that parliamentary scrutiny be strengthened and reordered, and that the role of the Treasury Committee be complemented by setting up a joint Select Committee on financial regulation to look in detail at specific pieces of financial services regulation. That would be important to strengthen scrutiny, as we hand more responsibility to the regulators. It would also be useful––and the IRSG has recommended it––to increase the transparency of decision making by both the Treasury and the regulators, and to improve scrutiny. I am not sure if I have fully answered your question.
Mr McFadden
Q
The Bill does lots of different things but two big things are that it transposes, or onshores, lots of different parts of EU regulation from many different directives. It gives powers to the UK regulators to govern all that. In doing that, as we come to the end of the transition process, there is greater freedom for either the Treasury or the regulators to diverge from that body of EU law. The Bill does that, but it also has this overseas markets vision, which is granting equivalence on a country-by-country basis, to the 9,000 funds that are domiciled overseas but which operate in the UK. I want to talk a bit about these two different parts of the Bill. Starting with you, Emma, what do you think your members’ attitude is to onshoring this body of EU law? Do they broadly regard it as something that they would like to stick with or are there areas that they would quite quickly want to diverge from and, if so, what would be the most prominent areas?
Emma Reynolds: We were delighted that the Government took the unilateral decision last week to grant the EU equivalence in a number of different areas. We are still hopeful that the EU might follow suit. We have been calling for a technical outcome-based approach to equivalence for some time now. Within that, you could have different rules but the same outcomes. Even if there are pinch points around Solvency II—only some elements of Solvency II—you could have different rules in the UK that achieve the same objective.
From now until 1 January, we will remain technically equivalent. Inevitably, over time, there will be some changes in regulation, both on our side in the UK and in the EU. The EU is currently reviewing some of its own directives, MiFID being a case in point, but there are others too. We do not want to see divergence for divergence’s sake. We would like to encourage a strong dialogue between regulators in the UK and the EU. There already is that dialogue, but we would like to see a framework for that plan. If you are a member of ours who trades across borders, you want similar or the same rules.
John Glen
Q
Adam Farkas: I will try to answer the first part of the question, but then I will leave it to Constance. because this is one area where I was personally involved, and I am not allowed to comment.
On the first part of the question, it is beyond doubt, and everybody in the public and private sector recognises it, that the UK as part of the European Union was playing a leading role in shaping and forming financial services regulations in the Union. That is clearly evidenced by the leading role of London and the UK more broadly as the financial services centre or hub of the Union. That is beyond any doubt. It was respected as such, and had a very strong voice in shaping the different regulatory initiatives. For the future relationship, it is important to have engagement and openness, and that a co-operative attitude, or co-operative setting, is retained, with two autonomous decision-making jurisdictions, in which the two sides can co-ordinate, exchange views and possibly even influence each other’s new initiatives or the evolution of their respective regulatory frameworks, with the potential aim of maintaining as much consistency as possible and practicable. On the investment firms regime, I pass the floor to Constance, because I was part of the development of the standards at the EBA, so I must refrain from comment.
Constance Usherwood: With the investment firms prudential regime, the UK authorities have played a key role in the development of the prudential regime that is specifically targeted to the business models of investment firms and making sure that it is proportionate. In that respect, we fully support the approach that is being taken today. In terms of the application to the different prudential frameworks and of the regimes versus the CRR, the bulk of our membership will probably not be directly impacted by the regime due to their size and activities. That would also tally with the approach that the EU has taken.
John Glen
Q
Constance Usherwood: Yes, I would agree with that, absolutely.
John Glen
Q
Constance Usherwood: I am going to apologise, but I think that Adam is probably best placed to come in on this one.
Adam Farkas: We very strongly support the clear and oft-repeated message of the UK authorities that active transition by transaction parties to the new risk-free rate is the only way to achieve certainty of outcome in the transition. We have promoted this message regularly and we have developed market standard language to support it that can be used by investors to assist them in this process.
A very difficult part of the transition process relates to what happens to legacy contracts already in place that reference the old LIBOR rates that are being phased out. Within legacy contracts, there are the so-called tough legacy contracts, which are very difficult to repaper or change the reference in. They cause the most complex challenges for end users as well as for members of AFME or other financial services providers. We therefore very much welcome the provisions of the Financial Services Bill that give the FCA new powers to mitigate that risk by directing the administrator to change the methodology of LIBOR if doing so would protect the consumer and market integrity. That would enable the FCA to stabilise certain LIBOR rates during the wind-down period so that their limited use in legacy contracts can continue. The answer is yes, we are very supportive. None the less, we welcome the further clarity which, I think, will be forthcoming on 25 November from the FCA and the Treasury on what steps the authorities are planning to further this objective, because there are some outstanding questions that require clarification. I would be happy to go into them, but in the interests of time, I will stop there.
John Glen
Q
Adam Farkas: That is a difficult question to answer because we have not speculated on different outcomes, but certainly the path that the Bill is taking is something that we can very strongly support.
Mr McFadden
Q
Adam Farkas: Very briefly, equivalence determinations provide the major legal framework for different jurisdictions to provide access to service providers that are licensed and supervised in each other’s markets. To answer your question, if equivalence determinations by the EU are not forthcoming, or not brought forward at pace or with the width that is expected, that will put limitations on the access of service providers—financial services companies and firms—to the EU market. This is really an issue of market access.
The Chair
Thank you very much. We are going to follow the time-honoured tradition of going first to the Government, then to the Opposition, and then to other members of the Committee. We will start with the Minister, John Glen.
John Glen
Q
Gurpreet Manku: We welcome the Financial Services Bill as it implements a prudential regime for investment firms that is tailored to the specificities of the UK market while maintaining world-class regulatory standards. To give you some context, the UK has already regulated private equity and venture capital firms. Broadly, there are two categories. First, we regulate the managers of private equity and venture capital funds. Those entities are regulated under the alternative investment fund managers directive. We also regulate advisory entities under MiFID. Those firms will be most impacted by the investment firms prudential regime. These advisory firms advise on and arrange private equity transactions for other regulated fund managers, sometimes within the same group. Those other managers tend to be based overseas, including in the US, Asia and Europe.
That is important because the fact that the UK has a lot of those advisory entities signifies that the UK is a global hub for private equity and venture capital. Many international firms choose to make the UK a base for carrying out UK, European and, in some cases, international investment and fund-raising activity. Since the inception of the investment firms review, the BVCA has been in dialogue with both the FCA and the Treasury about its implementation.
We welcome the introduction of a tailored regime that appropriately covers the activities of these firms, as well as their size, and the relative risk they pose to the financial system when compared with other banks and financial institutions. The new regime will lead to additional requirements for some of those firms, particularly the advisory entities that I mentioned, including higher capital requirements. We submitted feedback to a recent FCA discussion paper on the need to calibrate these new requirements for the risk posed by those firms. Our key ask for the FCA and the Treasury is that an appropriate transition period is available to those advisories.
Interestingly, the FCA’s discussion paper acknowledges that while there are transition provisions in place for other categories of investment firms, there is a gap for the category that includes these private equity advisers. That FCA category in the UK is known as exempt CAD—capital adequacy directive—firms. That is not just an issue for private equity and venture capital firms. There are many other types of firms in this category. My understanding is that they tend to be smaller financial services firms, such as corporate finance advisory boutiques and other consultants. That reflects the UK market, which has a huge number of financial services firms at the smaller end.
We think that the omission of this transitional period in the EU text was not deliberate and was just a mistake. The category of advisers that we are referring to should also have a transition period. The benefit of the Financial Services Bill is that it will enable the FCA to correct this omission and ensure that all types of investment firms benefit from transition rules.
Finally, I welcome the confirmation that the target implementation date is January 2022, because I think that will give sufficient time for the FCA to consult on the detailed rules and we need that lengthy consultation period. It will also give firms the time that they need to implement them.
John Glen
Q
Gurpreet Manku: Interestingly, we have been speaking to the FCA about this since 2016. The need for a special investment firms prudential regime emanated out of discussions in the UK, because there was a recognition that regulatory requirements that apply to banks do not necessarily work in an investment firms context.
The FCA does understand the breadth and variety of firms that operate in the UK. The confirmation that there will be a bit more time to think through how the detailed rules will operate in practice is really welcome. If I had one ask, it would have been for more time to look at the details of what would follow.
The Chair
We will now move on to our final panel of the afternoon. It is another one-man virtual panel, with Peter Tutton from StepChange joining us remotely. We have until 5 o’clock, when we must adjourn. Peter, could you introduce yourself for the record and for the members of the Committee?
Peter Tutton: Good afternoon, everyone, and thanks for inviting me. My name is Peter Tutton; I am head of policy at StepChange Debt Charity.
John Glen
Q
Peter Tutton: That is a good question. We are delighted that the two new debt schemes are going forward. We think that they will be a very important help for people who are struggling. What we think they will do is partly driven by our experience of being a deliverer of the debt advice scheme in Scotland. From when we have spoken to our clients, we know that the protections that both the breathing space scheme and the statutory debt repayment plan will offer––a sort of guarantee that if you keep up with your payments you will have protection from your debt spiralling, from collections activity, with people asking you to pay money that you cannot afford, and the threat of enforcement action––deal with the things that frighten people and make them stressed and anxious. They damage people’s health and lead them to do things like borrowing more to cope with unaffordable demands. The lack of a guarantee of forbearance can really impede people’s recovery from debt and financial difficulty.
We are very pleased: those protections have existed in England and Wales for insolvency solutions for some time but not for people who are able to repay their debts. Very often, clients will come to us after an income shock. As we sit here now, people are losing their jobs, having income reductions or falling ill. Their income will drop significantly for a time, but then it takes time for them to recover and get back on track. In those cases, these kind of schemes, first the breathing space scheme to help people to get advice and then the statutory debt repayment plan to help people pay their debts off within that safe space, will be really important in helping people. A lot of the fine detail about how they will work has still to be worked out. It will be important to ensure that they are accessible and that they fit together.
One thing we are interested in is when someone gets to the end of their breathing space scheme. If someone is still recovering, as we call it, from their financial difficulties, will they be able to go into the statutory debt repayment plan, where it may not be apparent that they can pay their debts within their long-stop period at that point, but where we have good reason to believe that their income will recover and that they have a good chance of getting back into work? It would be useful if the two schemes aligned so that people do not, first, get protection, then fall out of protection and only come back into it later. There could be a position where creditors could all pile in to take enforcement action or debts could begin to grow again. That is one of the things where we are keen to see the detail to ensure that the two schemes align and that we can move people from one to the other, with a long-stop on “How long is a reasonable period to repay their debts?” but one that is not worked out very strictly at the beginning while people’s circumstances are still fluid.
There is lots of fine detail to work out. We are going through the process at the moment with the Insolvency Service creditors and debt advice. Agencies are working out the detail of how the scheme will work in practice. What is important for both schemes is that we as debt advisers need to be able to administer them without significant extra cost. We might come to that later. With breathing space, there is no direct funding so the cost situation is very important. If it is very burdensome for us to deliver, it may be hard to do. We then need to do some work still with the creditors to make sure that everyone is getting the information that they need to get protection quickly to people who need it. There is a bit more work to be done there. Likewise, with regard to the way in which the statutory debt repayment will work, there are practical details such as how people will go into the scheme; how the “fair and reasonable” test will work—there is a need to make sure that it is not too cumbersome, and that it is effective and cannot delay protection unduly—and ensuring that creditors do not abuse the right to object, although they must have that right, in a way that can slow the whole scheme down. These are the sorts of things we will need to work out.
John Glen
Q
Peter Tutton: I think this is a necessary measure. We should cast our minds back to the child trust fund. In some ways that was similar, as it was a way of encouraging people to build up savings, although in that case the savings were for their children. As you may remember, one aspect of the child trust fund is that people got a voucher and then had to put it somewhere. A huge number of those vouchers ended up in default. We know that, especially among people who are less experienced in using financial services and in lower income households, it can be quite daunting when a choice has to be made between a number of different savings products that they do not really understand, and when they do not really know the difference.
That can create inertia. It makes a great deal of sense to give a safe way of moving people automatically into a successor product so that we do not have that problem of trying to contact them to get them to make a decision. The clause is worded so as still to allow people to make their own decision, which is quite right, and having safeguards seems sensible. We are big supporters of the Help-to-Save scheme, which is a cracking scheme. Our own research shows that having a pot of precautionary savings can significantly reduce people’s chances of falling into debt. If I had one criticism—
John Glen
I agree with that. We are trying to do what we can to improve awareness and get people to use small amounts; I think they can put by up to £1 or £2 minimum.
Peter Tutton: But it is a good scheme, and it is sensible to allow people who have saved into the scheme to put their savings somewhere else. They can make a choice if they want to, but we know that some of the people whom the scheme is designed to attract may struggle to choose between superficially similar financial service providers and get stuck in the middle. This makes sense.
Mr McFadden
Q
Peter Tutton: In an ideal world, we would like the breathing space period to be longer. We can understand why it has been set up as it has. It is very good that it includes, for instance, Government debt; it is a new thing that people will have protection from Government and local government debt; things like council tax are a very big problem for our clients. We can see that the Government may be nervous about a longer scheme. Perhaps if there was a way of looking again soon, once we are satisfied that it works okay, we could give that breathing space a bit more time. There are two things that the breathing space can do. There is what it does at the moment, which is largely about allowing people to get advice and get into a debt solution, but there is also time during which people need to recover.
As I said earlier, when people come to us they are often still in quite a degree of difficulty and their circumstances have not resolved themselves. We cannot always instantly put them into a stable long-term solution. One of the things that might help that would be a longer period of breathing space while they are recovering. In lots of cases, there is an obvious solution to put people into; if their circumstances are not going to improve and debt relief is the right solution, we will put them into that. We may be able to deal with that by articulating the statutory debt repayment plan and the breathing space such that there is a gap in the middle. Ideally, a longer period would be good. There may be a way of effecting that just by making sure those two things align, so that people whose circumstances are still recovering—they come to us and have a very small amount of money, but we believe that they will back into work, and for a lot of our clients that is what happens—can keep that protection going through until their circumstances improve and they can get back on the track of repaying their debts. That would be the one thing, instantly, that we would think about changing.
Another thing is that in the Treasury policy statement, including this legislation, there is a provision for funding the statutory debt repayment plan. The Treasury policy statement talks about that funding for debt advice providers being around 9% if you distribute funds as well. That is something that may need to be looked at again—not a lot, but a bit. That 9% is a bit less than the funding that we currently get from what is called fair share funding, which is [Inaudible] funding we get for helping clients with debt management plans. That funding actually allows us to do a lot of things.
One of the things that we are not yet sure about and are not able to model is what the additional costs of the statutory debt repayment plan will be. For instance, there is a provision in there for creditors to have a vote as a safeguard before a plan can be accepted. If we have to administer that vote in some way, for instance, it would mean an extra cost. There are some bits and pieces around that that may need looking at a bit more once the precise details of the debt repayment plan scheme are better understood.
Financial Services Bill (Third sitting) Debate
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John Glen
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Financial Services Bill (Third sitting)
John Glen ExcerptsThursday 19th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 November 2020 - (19 Nov 2020)
Mr McFadden
I have no further questions, although my colleagues might have.
The Economic Secretary to the Treasury (John Glen)
Q
There is a Law Commission consultation going on. We have fully transposed the fifth anti-money laundering directive in line with international best practice. You gave us some perspectives on Germany and Holland in terms of future orientations, which is something that I imagine we would look at in the context of that review. How would the provisions of the Bill help?
Dr Hawley: Obviously, we have welcomed the leadership that the Government have taken on beneficial ownership and the implementation of the fifth AMLD. My colleagues from Transparency International, who are giving evidence later to the Committee, have done more work on the beneficial ownership side. They are the people to talk in more detail about how the Bill specifically relates to that.
We hope that there will be other legislative vehicles brought forward soon to introduce the property register of beneficial ownership and the Companies House reforms. It is excellent that that consultation has now come out and the Government have taken strong steps towards looking at how Companies House can be strengthened, because, as FATF noted, it was, as you have mentioned, an area of weakness.
I do not want to bang on about it, but FATF also highlighted the lack of high-end money laundering convictions in the UK and questioned whether that was really reflective of the risk within the UK. We are carrying out some analysis into what is happening with regulatory fines in this space. The number of fines seems to be going down dramatically, and we are not seeing an increase in high-end money laundering convictions. To be honest, we are a bit worried that the Law Commission review, which we really welcome, will take too long.
John Glen
Q
Dr Hawley: I am actually saying something different. That review rightly focuses on the identification doctrine that was the primary focus that the Law Commission was given, and it is absolutely right that the Law Commission does that. We monitor bribery cases as they go through the courts, and we have seen that, even with the Bribery Act, there is still an ongoing unfairness. A small company can be prosecuted for a main offence and a “failure to prevent” offence. We have heard directly from prosecutors that they can say to a small company, “Look, if you co-operate with us, we will only prosecute you for failure to prevent. But if you don’t, we will prosecute you with section 1 or section 2.” We also have the fact that a section 1 or a section 2 offence incurs mandatory debarment from public procurement and a “failure to prevent” offence does not. So small companies face the risk of being excluded from public procurement in a way that large companies do not. We think that that is not compatible with the Government’s stated intention of levelling the playing field for small companies in public procurement.
What we would say—and it is something we have always said—is that we absolutely need the Law Commission to look into the identification principle, but we do not think it would pre-empt the review to introduce the “failure to prevent” offence for these crimes, because we already have that offence for bribery and tax evasion. That would complement the Law Commission’s work. We still need the review of the identification doctrine, and that cannot be done by anyone other than the Law Commission.
Stephen Flynn (Aberdeen South) (SNP)
Q
“However, there is no corporate offence in the FSA and it is therefore not clear that prosecutors would be able to hold companies to account were similar conduct to reoccur.”
I will be open and honest with you: I do not have a legal background, so perhaps you could elaborate on that further. Either there is the ability to do something or there is not. That ties in with the remarks about Barclays in point 21, which quotes remarks that it
“effectively removes companies with widely devolved management and functioning boards”.
The term “effectively” implies that it could or could not. Can I have a little more clarity on that point?
Dr Hawley: Yes, absolutely. We have checked that with lawyers, and it is the case currently under the Financial Services Act that if you wanted to bring a prosecution for misleading statements on benchmarks—let us hope that will not happen again because financial institutions have learned the lessons from last time—the only way that you could hold a company to account would be under the directing mind principle that I mentioned earlier. You would have to show that one of the directors knew and intended for this to occur. There is no comparative offence, as there is under the Bribery Act, of a failure to prevent misleading statements being made, for which there could be a corporate fine. That would be almost impossible to do if a bank were making misleading statements.
The Barclays judgment has made that even more difficult and narrower. Prosecutors and the Serious Fraud Office can no longer say, “We’ve got the evidence on the CEO and CFO, and we think we can prove it, so we will take this to court.” The court then turns round and says, “No, it’s not just that. You have to show that the board actually delegated authority to these people.” It set a whole new hurdle for how you hold corporates to account. What we are hearing from people is that this is going to lead to a massive decrease in corporate prosecutions, because the grounds for bringing a company to account are so narrow now that they are almost impossible. I cannot say that it would not happen, but I can say that it would be an extremely brave prosecutor to risk public money in the courts to try.
Financial Services Bill (Fourth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Fourth sitting)
John Glen ExcerptsThursday 19th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 November 2020 - (19 Nov 2020)
The Economic Secretary to the Treasury (John Glen)
Q
I would like to probe your views on the measures that we are introducing with respect to access arrangements between the UK and Gibraltar for financial services firms. How do you see the issues around maintaining the same quality of regulation between the Gibraltarian and UK regimes? Do you foresee any challenges with that? How important do you think that that level playing field will be?
Hugh Savill: A level playing field between Gibraltar and the UK is essential. I think that about 20% of the British motor insurance market is in fact serviced by firms from Gibraltar so, clearly, whether people are working from the UK or from Gibraltar, that needs to be on the same basis. Given that you have two regulatory authorities, and that can always be quite awkward, we think this strikes a good balance. There is good dovetailing of the relationship between our regulators and the Gibraltarian regulators, and we really hope that the Gibraltar authorisation regime works and provides a smooth basis for business in the future.
John Glen
Q
Hugh Savill: This is mainly derived from our experience of conduct regulation at the European level over the past 10 years or so. To be honest, it has not shown the European Union at its best. We have the PRIIPs regulation, which is mentioned in the Bill—well, we are having to correct it—and there have been other measures, such as the insurance distribution directive, which, frankly, have been no better. It is not entirely to do with the way that the European Union makes rules; it is because consumers expect different things in different countries. All you have to do is put together all the things that consumers want. It makes for a very heavy-handed—[Interruption.]
The Chair
I’m sorry, Hugh, could you please pause for a moment? We have a noisy bell. It is gone now, so please carry on. Can you start that sentence again?
Hugh Savill: Worse things might happen at my end.
John Glen
We won’t go there.
Hugh Savill: The fact is that consumers expect different things; they have different traditions. Introducing conduct regulation at the international level—setting what people expect from their bank, so that it fits the conditions in Japan, Brazil and the UK—is too big an ask. You will end up with a very unwieldy rule book that is not particularly suitable for British consumers. We think the retail conduct rules need to be set with British consumers in mind.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
Hugh Savill: I should say that we are equally blunt when we see shortcomings in British regulation, as well as European regulation, but, yes, we have criticised some of the European rules. In effect, the Bill sets out the first step towards a UK regime for financial services, and there will be others that follow. Really, this needs to be tailored to the needs of the British market—first to the needs of British consumers and secondly to the needs of British providers of financial services. Now that we have left the European Union, we think that is the way to go forward, and that is what we are hoping our legislators and regulators will concentrate on.
John Glen
Q
This Bill ensures that HMRC retains its ability to access information on the ownership and beneficiaries of UK-linked overseas trusts, building incrementally on things that have been done previously. Can you explain why this information is important? This is a key measure and, I would have thought, the most relevant.
Duncan Hames: It is certainly a welcome measure. We have found that some of the complexities of the structures and design of different corporate entities have proved difficult, in terms of the implementation of existing legislation. That was a feature of the recent Baker et al case in relation to appeal against an unexplained wealth order; there was a South American foundation, which was perhaps not the corporate structure that Members of this House had in mind when that legislation was being decided.
Addressing trustees and overseas entities, to strengthen and ensure there are no loopholes in existing legislation, is definitely to be welcomed. In the past, when the House has been considering legislation to address money-laundering risks—do not forget that another piece of legislation related to leaving the European Union is the Sanctions and Anti-Money Laundering Act 2018—it has focused on what can be done about the transparency of ownership, and not just of UK limited companies but of overseas entities, too.
John Glen
Q
Duncan Hames: Certainly. Although some of the things we have already discussed this afternoon are not in the economic crime plan, there is much in that plan that we welcomed at the time. It was about 15 months ago that that plan was adopted by the Government. Some of the measures in that plan require legislation, and I am sure the Minister is itching for legislative opportunities to enact his policy.
John Glen
Q
Duncan Hames: Indeed. I think we have recently completed a consultation on it, and I hope, therefore, that it will be in the Queen’s Speech.
The register of beneficial owners of overseas entities enables us to know who really owns the foreign companies that own property real estate in this country. It was a Government commitment announced around the time of the London anti-corruption summit, which was four and a half years ago. Although that legislation has already been through pre-legislative scrutiny in both Houses, the conclusions of which were, “Get on with this; we must advance quickly,” it still has not been brought forward. These are both measures in the economic crime plan. It is great that they are in the economic crime plan, but it would be much better if they were implemented. I hope that that will be addressed very soon, but, equally, given how long one waits for legislative opportunities to keep up with the pace of nefarious actors in economic crime, if you have an opportunity to make progress in this Bill, in any additional manner, we would obviously be keen to see you take it.
John Glen
Q
Duncan Hames: I think we would see the creation of OPBAS as a very helpful staging post in addressing this problem of inadequate supervision, albeit that it can address and challenge only the professional body supervisors. HMRC has been found wanting, and I have already criticised the level of its fines. OPBAS cannot do anything about HMRC, and I think we have been party to discussions about that in other proceedings of the House.
What OPBAS has found is pretty devastating. In its 2018 report, 62% of accountancy supervisors had some overlap between their advocacy and regulatory functions. Those represent a conflict of interest. There are some really choice quotes from OPBAS in that report, about what supervisors said about the impact on their membership income, were they to take more assertive enforcement action. That really is a conflict of interest in these supervisory bodies.
I think what we need, Minister, is for you or your colleagues to have the ability to respond to these reports—I think we have now had two annual reports from OPBAS—and, where necessary, to strip the supervisory duties from bodies that are failing in this regard. Obviously, all bodies should address their own conflicts of interest, but performance is a really important issue.
The report I was referring to earlier was HMRC finding that about half of the businesses it had reviewed were non-compliant with its anti-money laundering regulations. So, the changes that have been made recently to the regulatory landscape, in and of themselves, are not enough to address the holes in our money laundering defences that are overseen by this very fragmented regulatory arrangement. I said there were more than 14 accountancy sector supervisors; I think we are at 25 anti-money laundering supervisors, altogether.
The Chair
I call the third Front Bencher, Alison Thewliss, for the Scottish National party.
Alison Thewliss
Q
Duncan Hames: I think trusts are intended to be in the scope of the registration of overseas entities Bill. That is definitely something required by the fifth anti-money laundering directive as well, so we should consider them within scope. Whether we have yet got that working, I am not so confident. For example, if we take something that I am sure is of interest to you—Scottish limited partnerships—the Financial Action Task Force report, which the Government are very pleased with, noted that there remains a weakness in terms of scope for abuse of that corporate structure. I should acknowledge that those are regulated by UK law, not by decisions made in Scotland. Those partnerships can be partnerships with two corporate entities—so, no human personality. If those two corporate entities are registered in jurisdictions where beneficial ownership is not clear—it is not public—we essentially have a UK entity that has got around all of the strictures that the Government are very proud of, in terms of the transparency that the UK’s own registry demands.
There are other issues with having corporate partners of a legal partnership. Obviously, it all comes down to accountability. It is very important if we want to be able to hold corporate entities accountable for their role in economic crime. I am afraid that many such complexities remain to be addressed. We cannot just take the bits we like when a report like that is presented.
The Minister is correct: the UK outcome was very favourable compared with other FATF evaluations. I hope, by the way, it will give the Treasury the confidence next time around to invite civil society representatives to give evidence to the FATF assessors. None the less, FATF came up with a number of things that it identified needed to be addressed, and the Government have a plan, but we seem to lack a timetable for implementing a number of these things. If the Minister is able to give us a timetable for when the legislation to introduce measures such as robo, which is in the economic crime plan, will be introduced, I think we would all be very glad of it.
John Glen
The point is, as Duncan well knows, that a whole range of interventions have been provoked by that FATF report. I am glad he acknowledges its world-leading nature for the UK. It is good that we should be pleased about that, but there were significant elements that need to be worked on. They are obviously taken in different ways across Whitehall, and there will be more to be said about that in due course. I am responsible for what I am responsible for in this Bill, and the purpose of this conversation is about that.
Alison Thewliss
Q
Duncan Hames: I doubt you need primary legislation to fix that. I expect that secondary legislation giving direction to Ministers and regulatory bodies to ensure that fines are commensurate with the level of offending would be helpful. I suggested that the level of fines by these professional bodies supervisors and by HMRC is just not commensurate with the financial advantage of taking part in these transactions.
Indeed, if you are a solicitor, and someone complains to the Solicitors Regulation Authority about you because you have been holding up a transaction, that will still be investigated. You will still incur quite a discomfort in responding to that investigation. That is quite a powerful incentive just to go along with the transaction, whereas the fine you might receive for having gone along with a transaction that you should not have could well be less consequential for you. That needs to be addressed.
Fines wielded against trust and company service providers by HMRC, for example, are pitifully low. We were told by the trade body that its experience of fines imposed by HMRC on trust and company service providers was typically no more than £1,000.
The Chair
Thank you. We will return to the traditional format with questions first from the Minister and then from the two Opposition spokespeople.
John Glen
Q
Fran Boait: Shall I kick off? This is definitely one of the key issues in the Bill that I wanted to raise. Although I understand that the Bill is about regulation and tidying up a few things, it does set the framework and direction for future financial regulation. It is important to say at the outset that we are only 11 years on from a global financial crash that resulted from deep regulatory failures. Neither my organisation nor Jesse’s existed 10 years ago—they were formed since the crash. Without a number of amendments to the Bill, it could pave the way for a repeat of that failure.
To put it in context, I remind you that, according to the Bank of England’s chief economist, Andy Haldane, the banking cash cost Britain about £7.4 trillion and it would take the financial services sector’s tax contribution about 100 years to make up for that. It is a really important Bill that sets the direction, but accountability and transparency are severely lacking in its current form. The civil society sector is tiny, relative to the industry lobby. Although we have engaged in FCA and PRA consultations, the fact that we are onshoring so much legislation right now means that we need to think about the balance of input from the industry and civil society. It is worth noting that the EU, which obviously to date has been where the scrutiny for much of this legislation has been, funded civil society consumer, environmental and social groups in order to provide a balance to the industry lobby, because it recognised that this area is severely complex and critical.
The substantial transfer of power to the financial regulators—the Treasury, the FCA and the PRA—is concerning if there are not increases in parliamentary scrutiny and more detail about the accountability framework. I noted this morning that a number of amendments have been put forward, and I think a lot of them enhance accountability and require parliamentary scrutiny and reporting. I would really welcome that. I could list them—I have some of the numbers. An MP put forward a suggestion for a new specialist financial services Joint Committee between the Commons and the Lords, and that would be welcome, especially if it engaged with civil society.
From where we are starting, in its original form the Bill really is quite concerning in relation to accountability and transparency, but we would welcome all the amendments being put forward—and more—to improve those aspects.
John Glen
Q
The Financial Services and Markets Act 2000, introduced under the previous Labour Government, was about setting an approach for how the regulators worked, looking at an outcome-based approach with the observation of technical standards. I note that you refer to the proposal about Parliament’s role. Are you really saying that you do not support that fundamental architecture? Given the complexity of the regulations and technical standards, do you think it is realistic for Parliament, in terms of capacity and expertise, to offer the sort of scrutiny that you think is lacking?
Fran Boait: Fundamentally, we want robust frameworks that allow for input and do not just allow legislation, such as the capital regulation requirements, to be changed without scrutiny, because they have really significant consequences for the whole UK economy. That is why I started by laying out how critical the direction of financial services is.
It is worth saying that we are not out of the repercussions of 10 years ago, so we do not want in any way to go back to the days of regulation being done behind closed doors. I understand that there is a capacity issue, but is about having those opportunities for both Parliament and the wider public—civil society—to feed in.
It is also worth thinking about the regulators themselves. For example, one of the things that the new chief executive of the FCA has said is that they will also be liable for legal attacks on what they are having to implement, so putting all the onus on them is an issue. At the same time, we know that there has been an issue with the revolving door between our regulatory bodies—the Treasury, the FCA, the PRA and the Bank of England—and the industry.
There is a grave concern about this transfer of power. If capacity is an issue, Parliament surely wants to be looking at how to resource things better, in terms of more Clerks or staff, plus thinking about how the EU funded civil society, rather than saying, “Actually, no, it’s fine. We will just have reduced transparency and accountability.”
John Glen
Q
Jesse Griffiths: Thank you. I think they are extremely important questions, and that is one reason why this Bill is so important as part of the other important consultations and discussions that you have mentioned—because we are now setting, if you like, the precedent for how we might deal with financial sector regulation in the new era, where the focus will be in London and not in Brussels. Actually, I worked for seven years in Brussels on related issues, so I have some experience from there to share.
I think I agree with the points that Fran has made about the fundamental importance of trying to find ways to support broader civil society engagement in these types of discussion. Perhaps it links to another important point on the Bill, which is that part of the issue will always be ensuring that the purpose of the regulations and the regulators includes social and environmental purpose, so that it is clear that that is an extremely relevant angle from which to discuss these things. One thing that definitely came out of my experience in Brussels was that the role of Parliament is very important, or can be very important, not just because it is important in itself, but because it does open a window for broader input and discussion.
I will explain one particular amendment or change we would welcome. As I understand it, the current Bill allows changes to capital requirements and other regulations under the affirmative procedure. That is obviously more welcome than the negative procedure, but it does not actually specify a role for specialised Committees, so finding a way in which specialised Committees in the House of Common or Lords, or both, could have input would be both a useful step and an entry point for a broader discussion for groups likes ours to help to support the new framework.
Could I say one other thing on a kind of related point? We recognise that it is important that different institutions have different regulatory frameworks and that this is not just about making every single type of institution abide by extremely stringent regulations. That sort of principle is involved in the Bill, and we would welcome that being extended to, for example, the nascent mutual banking movement. We know that the co-operative banking movement is struggling to get off the ground, because the regulations are not tailored to its particular circumstance. I would be willing to talk more about that. It is something that could perhaps also accompany this Bill as a commitment and that Government might like to think about.
Mr McFadden
Q
The Bill, in schedules 2 and 3, sets out new accountability frameworks for the regulators. They are to abide by relevant international standards and to have regard to the relative standing of the UK as a place for internationally active investment firms to be based, or to other matters specified by the Treasury. I would like to ask whether you think it is appropriate for broader goals to be considered in that regulatory framework, and I am thinking particularly of environmental, social and governance goals. The UK wants to be a leader in that area. The Chancellor of the Exchequer set out an ambitious environmental agenda for our financial services industries in his statement about 10 days ago. Do you think that the Bill is an opportunity to put regulatory weight behind the ESG agenda?
Fran Boait: That is a really great question. It is definitely something that stood out for me when I first read through the Bill. The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash in 2008.
As you mentioned, there is clearly cross-party agreement, and we have had announcements from the Government this week and last week on wanting to be a leader in green finance, especially ahead of COP26. There is also pretty much cross-party agreement on issues such as the banking sector severely under-serving small and medium-sized businesses. In his speech yesterday, Andy Haldane, the chief economist at the Bank of England, mentioned that the funding gap is £20 billion. We know there is cross-party agreement on wanting more of our productive and manufacturing sectors to grow, and we need to level up. Some Conservative MPs, such as Kevin Hollinrake and Danny Kruger, have done reports on that and on the need for a different banking system. We have to recognise that that will all require quite a significant shift in the direction of financial regulation, yet there is not anything in the Bill that suggests that such a shift in direction is something that the Treasury is interested in at the moment.
We would certainly support the hardwiring of ESG considerations into the regulation. I looked this morning at the proposed amendments, and we would be very supportive of amendments 20 and 24, which have regard to climate and net zero in terms of investment firms and CRR—that is on climate and environmental. There are some other amendments on social practice and corporate governance that are really important, and there are potentially bigger amendments that we could be thinking about, which would embed sustainability in the regulatory framework of our regulators, such as the FCA and the PRA. That would involve further amending the Financial Services and Markets Act, which I know is being amended already in the Bill, but we could add an environmental sustainability objective, for example, to the FCA’s or PRA’s objectives.
It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement. If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission. Obviously, that starts with this piece of legislation and others. We would fully support the amendments to the Bill that have been put forward already, and we would potentially suggest further ones.
Jesse Griffiths: I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators. I do not think it would take a huge change, or huge amendments to the Bill, to set that precedent and really kick-start what I agree is a cross-party consensus that we need to deal with the climate crisis and the rising problems —inequalities caused by covid and so on—and that the financial system is central to that. How it is regulated determines a lot about how it will react to those points.
I can give some examples. Of course, it would be helpful if the Bill required the FCA to refer to the Climate Change Act when preparing secondary legislation. If you wanted to be more ambitious, it would obviously be helpful if capital requirements for investment firms introduced weightings on environmental, social and governance issues—for example, by penalising assets that have climate risks.
I know the Bill covers legislation on PRIIPs—packaged retail and insurance-based investment products—which is a huge, €10 trillion market in the EU. One specific example we have suggested is that, if we could improve the key information document that investors receive when they are looking at PRIIPs to include disclosure on environmental, social and governance issues, and ask the FCA to ensure that that happens, that would be an important signal.
I think that there are real opportunities here to change the nature of the discussion and set the UK as a leader in this area. We know that the direction of travel is towards much greater ESG integration across the financial sector. Investors are pushing for it. We do a lot of work with the big four banks in the UK, and many of them are pushing a purpose-driven agenda. It is the way that we are going, and I think about this as a real signal that the UK wants to be the leader in this field and takes it very seriously.
John Glen
Q
Albert Isola: I thank you and your team in the Treasury, as well as the regulators at the PRA and the FCA, who have engaged with us over a three-year process of looking at all the areas of market access, all the challenges and opportunities, and how, post Brexit, we can best replicate what we had under the European Union, as that ends and we begin something new. It has been an interesting and almost enjoyable journey. It has been extremely hard work, but the professionalism of your team has been exemplary, and I am extremely grateful to all of them for the conversations that we have had. Sometimes they were difficult, but they were always positive and proactive in looking for solutions, for which I am extremely grateful.
On the relationship between Gibraltar and the United Kingdom on financial services, it is important to remember that when the United Kingdom joined the European Union in 1973, because the United Kingdom was responsible for Gibraltar’s external relations, we joined with you. As a consequence of that, for many years, up until 2001, we were striving to enjoy the benefits of that membership. With that came the responsibilities of adhering to the many directives and complying with regulations that were passed from Brussels.
We talk about 28 or 27 member states, but there was another competent authority, the Gibraltar Financial Services Commission, in financial services; it was able to issue a banking licence, an insurance licence or any other financial services licence in exactly the same way as all the other competent authorities within the remainder of the European Union. I ask the Committee to think through the fact that Gibraltar has complied with all European Union directives and legislation in all areas, including financial services. That includes all the anti-money laundering perspectives, which you may wish to discuss later.
For all intents and purposes, Gibraltar and the UK, from a financial services perspective, are aligned. We have the same rules. As we discussed with your teams over the past few years, this is about outcomes—where we get to, and how we get there. We have been through a very long assessment with an independent contractor that was jointly engaged by Her Majesty’s Government and the Government of Gibraltar to deep-dive into insurance, which is the largest area of interest between the United Kingdom and Gibraltar, to analyse in enormous detail, and to conduct a sort of gap analysis of whether we were getting to the same outcomes. Where we felt that we were not, we have dealt with that.
Parallel to that process, we also had what you call the legislative reform programme, which was a three-year piece of work, which started before Brexit, to completely redo our financial services legislation. Before, we had 87 pieces of legislation; we now have one Financial Services Bill, which encompasses everything, and is far more aligned to the Financial Services and Markets Act 2000 than we were previously.
This legislation came into play in January this year. Section 20(2) refers to the Gibraltar regulatory regime aligning its standards and supervisory practices with that of the United Kingdom. We had that before, and we again have it in 2020. We are drawing closer together under the new regime that we are discussing; that relationship should continue and prosper, so that consumers in the United Kingdom can have more choice and competition. At the same time, we can know that our aligned standards of law and practice match those of the United Kingdom. I apologise if I have gone on a bit long, but I thought it was important to put today’s discussions in context.
Financial Services Bill (Fifth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
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Financial Services Bill (Fifth sitting)
John Glen ExcerptsTuesday 24th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Economic Secretary to the Treasury (John Glen)
I would like to take this opportunity, at the beginning of the Committee scrutiny stage, to say what a pleasure it is to serve under your chairmanship, Mr Davies, and to consider this important legislation with all Committee members. I welcome the opening comments of the right hon. Member for Wolverhampton South East, who described how the Opposition will approach the eight sittings over the next two weeks. I also broadly acknowledge and agree with virtually all of the comments that he and the hon. Member for Wallasey made in respect of the history of financial services regulation, and I look forward to responding to the points made and to a wide-ranging and constructive discussion over the next two weeks.
As I set out on Second Reading, this Bill forms an important part of the Government’s wider strategy for financial services at this critical moment, as we approach the end of the transition period. I just want to say at the outset that financial services, as some of us know––I look particularly to the hon. Member for Glasgow Central who has been in multiple Committees with me over the last three years––is necessarily a complex topic with a sometimes impenetrable vocabulary of its own. I will do my utmost to ensure that, in speaking to the Bill and any Government amendments, my comments are as clear, accessible and accurate as possible. Please feel free to challenge me on this and if at any point Committee members feel that I have fallen short of that ambition, I look forward to trying to correct that.
Let me move to amendment 19. The Government are fully committed to ensuring that any delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. Members referred to divergence and regard to consumer interests. The differentiation between different categories of firms depends on an assessment of eight systemically important firms that will continue to be the responsibility of the Prudential Regulation Authority. Amendment 19 seeks to add a requirement for the Secretary of State to publish a report within three years of this Act, including an assessment of the impact of amendments to the capital requirements regulation on financial stability, competitiveness and consumer risk.
The amendments to the capital requirements regulation tell only a small part of the story. The Bill amends the capital requirements regulation to remove Financial Conduct Authority investment firms from the scope of the banking regime. The more important story will be told by the FCA’s rules that implement the investment firms prudential regime. I want to be absolutely clear on the point about divergence. Obviously, as we get towards the end of the transition period, we will get to a point where we have left the EU and the provisions of alignment within the transition period. Therefore these measures reflect the reality of where we will be on 1 January. As the hon. Member for Wallasey said, the UK’s regulators, Ministers and officials played an instrumental role, given the size of the UK financial services industry, in shaping those regulations on an EU-wide basis. But it is surely only appropriate that, when we have left the alignment provisions of the transition period—and rightly so—we should look to actually govern and set the regulatory environment that suits the particular needs of our industry. The configuration of that industry, as was understood in the speeches that have been made, is different.
When the FCA does implement the IFPR, the Bill requires the FCA to demonstrate how it has regard to several considerations, which I shall set out now. First it must have regard to relevant international standards: Basel 3.1. That goes to the point about the relative standing of the UK. The right hon. Member for Wolverhampton South East made a point about the risk around individual firms lobbying for differentiated treatment. It is right that the regulators are responsive to the needs of the UK industry, but they are also accountable to those international standards––the relative standing of the UK––in addition to the current statutory objectives under the Financial Services and Markets Act 2000 to protect consumers and the integrity of the UK financial system.
This approach aligns with the March 2020 House of Lords EU Financial Affairs Sub-Committee recommendation to delegate more power to the regulators, underpinned by more and strengthened parliamentary scrutiny. We are delegating this to regulators because they have the technical expertise, not the Government. The Bill’s reporting provisions should provide the information that Parliament is seeking. This amendment would create a duplication of efforts by the regulator and the relevant Departments on undertaking such an assessment.
Ms Eagle
I want to come back on that and press the Minister on a couple of questions that, with all due respect, I do not think he answered in his response. Clearly, our amendment is a hook on which to hang a debate about transparency, so that we know what the regulators are doing, and about accountability, because, as I said earlier, if these organisations begin to respond to particular inducements, such as their own remuneration, they can cause risk to happen in a way that can be severely detrimental to consumers and entire economies, as we have seen in recent history. I think that, in the light of that, we are perhaps owed a little more of an explanation from the Minister—I am putting this gently—about what the approach of the regulators will be. The Minister can stand there and say, “The regulators are going to right-size regulation.” That sounds like a fantastic thing because of the very phrase that the Minister has used—“right-size”—but how are they deciding?
We clearly got the wrong size because of evolutionary behaviour to avoid regulation and increasingly risky behaviour in the global financial system in the run-up to the global financial crisis in 2008, which was caused by or began in the subprime mortgage market in America but which brought most of the—if I can put it this way—western-style banking systems close to ruin in the rest of the very interconnected economy because of what had been happening with derivatives. Therefore I wonder whether the Minister might be able to say a little more about the benefits of having the regime that he called right-sized regulation; why we might wish to move away from the current position so quickly after the transition period is over; and what he sees as the benefits of doing this. Refusing our amendment means that there will be no transparent analysis of the effect on the public domain, so we will not be able to discuss it.
I for one think it is important to get these very technical, dry regulations out into the open and to translate them, with the seriousness they deserve, into the potential implications that they present for all our constituents. Our amendment seeks to do that by at least having a transparent publication of these kinds of analyses. The Minister wants to keep it in the regulators’ ambit, in which there is not so much light, to be honest. It is highly technical, and it is hard for those on the outside to have a look inside to see what the implications are. I have hardly had any correspondence from outsiders on the Bill to help me through the long hours and sittings to come. That rather illustrates my point: that a light needs to be shone on this area, because of the risks if we get it wrong.
The Minister rightly wants to get it right, but surely it is relevant to hear from him and to have a bit of transparency, and to put something on the record now about how he sees the advantages playing out, as opposed to the risks. Will he have another go?
John Glen
I am very happy to have another go. The hon. Lady is at risk of suggesting that there is somehow a clumsy, rushed delegation to regulators and a risk that—in that delegation—the industry will influence regulators to right-size in a way that damages consumers. I draw her attention to the fact that the legislation gives the FCA responsibility to have regard to the impact on consumers, on the market and on firms—that is, the impact on themselves—of not having the appropriate capital requirements.
The right-sizing comment refers to the fact that the firms are currently bound by rules that align them to other institutions that are clearly functionally different. Nobody really believes that it would be right for there to be a prescriptive mandate from primary legislation on exactly how those technical rules and those capital requirements on a firm-by-firm basis should exist. The FCA has the right to reclassify firms and monitor that reclassification as firms evolve. The PRA will retain oversight of systemically important firms.
I contend that the Bill contains sufficient mechanisms to ensure public and parliamentary scrutiny of both the FCA and the Treasury through the draft affirmative procedure and the FCA reporting requirements. That combination of the FCA’s existing statutory duties and the “have regards” set out in the Bill cover the areas that amendment 19 seeks to address.
I make one further important point that goes to the heart of the wider regulatory framework. The future regulatory framework consultation that we launched on 19 October sets out over a 12-week period to look holistically at what should be the constitutional relationship between the FCA, the PRA, the Treasury and Parliament to embed an enduring accountability framework on a much broader basis. There will be another consultation subsequent to that. I anticipate that the response to the consultation might be, “Why haven’t you done this before?”. The bottom line is that the measures are required to meet international standards within an internationally determined timeframe of expectations. I declared on Second Reading that this is the first in a series of pieces of legislation, and I have always said so. This first piece of legislation sets the accountability framework for the initial measures.
Stella Creasy (Walthamstow) (Lab/Co-op)
I do not think any of us doubt the Minister’s intention to get this right and to recognise that these decisions have a consumer impact. The challenge, which I think we all see, is that it is one thing for the FCA to conduct a public consultation on high-cost credit firms, for example—he knows my specialist subject—but on something like LIBOR or the Basel regulations, which is less tangible but no less impactful, the argument he is making seems rather to strengthen the point the amendment makes about including consumer risk as one of the things to be reported on, because it does not immediately grasp people’s imagination until a catastrophe such as the last financial crisis happens. He says he envisages the FCA’s performing this role, so will he set out how he sees it performing that role if we do not say, “Actually, could we in a couple of years’ time get some information on how consumer risk has been identified and addressed in this process?”. That is harder to quantify, but no less important.
John Glen
I am very happy to respond to that point and I thank the hon. Lady for her comments. I recognise her expertise, particularly on high-cost credit, and I look forward to—I imagine—further amendments on that, perhaps next week.
The FCA will be required to publish an explanation of how having regard to the additional considerations that I have set out has affected the proposed rules that it comes up with. When the FCA makes those final rules, it will publish an explanation complying with them, as well as a summary of those new rules, aligned to the FSMA publication requirements.
The challenge here is a bit of a mismatch between the concerns that we have collectively in Parliament to maintain standards that will not allow a repeat of what the right hon. Member for Wolverhampton South East eloquently set out as the problem leading up to 2008 and to have regard to the enduring and ever-transforming consumer risks, which derive from rules and technical standards that we in this place are not well placed to deliver, given their design. What we must do subsequently with the future regulatory framework review—it is not some short, rushed exercise, but a deliberately open exercise of consultation to try to examine best practices—is to come up with something that gets that balance right between the direction that Parliament sets in primary legislation and the accountability to this place that will exist for our regulators, through the Treasury Committee and through potentially significantly enhanced accountability mechanisms.
However, setting out the enduring final framework of that relationship between the regulators and Parliament is the point of that consultation exercise. With respect to this measure, I believe that the accountability mechanisms set within it and the procedures set out will achieve the accountability that is necessary and appropriate at this stage.
The Chair
Before I call the shadow Minister, I say that one of his many qualities is that he is very softly spoken, which is not conducive to Committee Room 14 with social distancing in place, so I encourage him to speak up; I am sure that would be appreciated by all.
John Glen
As ever, the UK remains committed to the highest level of regulatory standards. The UK is also committed to better regulation—regulation that is fit for purpose and appropriate to the risks, size and activities inherent to UK firms. At present, investment firms are supervised by either the FCA or—for those that are systemically important—the PRA. However, both currently operate under the same prudential regulatory regime as banks, which is not appropriate for non-systemically important investment firms. Such investment firms do not typically grant loans or accept deposits, so the risks they face and pose are different from those of banks.
A new, bespoke regime is required for investment firms, and the first step in that process is to remove non-systemically important FCA investment firms from the relevant regulations for banks. That is precisely what clause 1 does: it sets out the necessary amendments to remove FCA investment firms from the scope of the capital requirements regulation. Only credit institutions and PRA-designated investment firms will remain under the CRR. That is appropriate, as systemic investment firms pose similar risks to financial stability as the largest banks.
Clause 1 also introduces a definition of “designated investment firm” that recognises that only investment firms that conduct bank-like investment activities may be designated by the PRA as systemic institutions. As such, commodity dealers, collective investment undertakings and insurance undertakings that are not bank-like are excluded from the definition. That reflects the EU’s approach. The remaining investment firms—all FCA investment firms—will be regulated under the new investment firms prudential regime, which I will turn to when we debate clause 2 and schedule 2.
Clause 1 also amends the Capital Requirements (Country-by-Country Reporting) Regulations 2013. The amendments are necessary to ensure that FCA investment firms adhere to tax reporting requirements that are consistent with the new investment firms prudential regime, and not with the current banking regime. For example, the smallest FCA investment firms will be exempt from the reporting requirements, which is in line with the IFPR’s more proportionate application of regulatory requirements on the smallest firms.
Clause 1 is merely a first step in the introduction of the investment firms prudential regime, but it is a crucial step. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?
What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?
Ms Eagle
Like the hon. Member for Glasgow Central, I am on the Treasury Committee. We have a very full programme. The hon. Member for Hertford and Stortford also shares the pleasures of being on the Treasury Committee. However, it would be very difficult for us to question the FCA with this level of granularity. Therefore, given the onshoring and the importance of this regime as it evolves, how does the Minister expect the transparency, oversight and accountability to be put in place going forward? Does he expect that to also include consumer authorities and the consumer interest, and will explain what he expects these companies to be able to do under this regime that they cannot do now?
John Glen
I am grateful for those questions, and I shall seek to bring some clarity. The right hon. Member for Wolverhampton South East asked me two questions about the numbers. I cannot give a specific number here, because it is fluid and would be something for the FCA to determine. I am sure the FCA would be very happy to give him an indication on that.
To the other point around interconnectedness, made by the hon. Member for Glasgow, Central as well, the classification will be based on the evolving nature of the activities, and this is something the FCA makes judgments on all the time. The PRA is responsible for eight systemically important institutions, covering Goldman Sachs and J. P. Morgan, among others, which are of a size and scale such that their interconnectedness means they are of systemic significance.
There are a lot of complex relationships between financial institutions. Therefore, as acknowledged by the hon. Member for Wallasey, as people who are technically capable of evaluating those interconnected elements, it is appropriate and in their interest to make those judgments, and that sort of decision making does go on currently.
The scrutiny process links back—I will not keep repeating it—to the point that the right hon. Gentleman made about the “Future Regulatory Framework Review”, which will look at the appropriateness in a situation where that scrutiny has previously happened at an EU level, through combined conversations, the Council of Ministers, work that is then is auto-uploaded to the regulators. What is the new mechanism to hold regulators accountable in a situation where they are given the task from this place? That would be the purpose of the extended regulatory review and future legislation. It may involve an enhanced role for the Treasury Committee, with additional resources to augment the expertise that already exists, but that is a matter for that consultation.
In answer to the question from the hon. Member for Wallasey about what I expect the companies will be able to do that they currently cannot, this comes back to some of the evidence we heard last week from the British Private Equity and Venture Capital Association, which says there is a wide family of firms with different activities. The question is: are the regulations as they apply at the moment—as fitted for 28 countries, where obviously some compromises were made—appropriate for the configuration of firms as they exist?
What I would expect to see is consideration given for capital requirements that match the actual profile of activities, notwithstanding the very legitimate points made around the interconnectedness and the risks associated with their broadest activities. I have stressed throughout the passage of this Bill so far, and I reiterate now, that the essential purpose of the Government’s approach is to ensure that we have the highest regulatory standards. Our reputation as a centre for financial services is based not on finding quick fixes that shortcut regulatory standards, but on finding something that fits the nature of our industry, aligned to international standards, that gives us the best opportunity to grow and prosper in a way that is safe and secure for consumers.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Schedule 1
Exclusion of certain investment firms from the Capital Requirements Regulation: consequential amendments
Question proposed, That the schedule be the First schedule to the Bill.
John Glen
Schedule 1 complements clause 1, in so far as it makes consequential amendments to the Capital Requirements Regulation 2013 and the Capital Requirements (Country-by-Country Reporting) Regulations 2013. For example, many of these consequential amendments remove references to the Financial Conduct Authority as the competent authority under the CRR in recognition of the fact that henceforth only the Prudential Regulation Authority will be responsible for regulating credit institutions and PRA-designated investment firms under the CRR. Taken together, these technical amendments achieve the aim of removing FCA investment firms from banking rules while keeping the most systemically important investment firms under the regulation and supervision of the PRA. I therefore recommend that the schedule be accepted.
Mr McFadden
I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?
Alison Thewliss
I just want to ask the Minister about the additional responsibilities in the schedule. When we took evidence last week, Sheldon Mills said:
“We can always do with more resources”.––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 9, Q12.]
What further discussions has the Minister had about ensuring that the PRA and FCA are adequately resourced for these additional responsibilities? It is an awful lot of extra work. We are moving an awful lot of work over to them while they have covid and Brexit to look at too. I just wondered whether there had been any further detail about what additional resources might be available or required in the months and years ahead.
John Glen
I will come first, if I may, to the hon. Lady’s point about the resourcing of the FCA. It is resourced by a levy, which it determines. It is under review, but it is approved and set by the FCA. The hon. Lady has asked that question a number of times over the past 18 months. She is right to draw attention to the enormous pressure that the FCA is under, in terms of giving guidance about the forbearance measures for consumers and banks. That will be a matter for the FCA. I have six-weekly conversations with its chief executive officer. That is not a matter that he has raised with me, but it will be under review. I support it in what it needs to do to secure those resources.
The right hon. Member for Wolverhampton South East asked about the Capital Requirements (Country-by-Country Reporting) Regulations. They were designed to ensure that appropriate tax reporting regulations are imposed on firms regulated under the banking framework. They require firms to report relevant information on tax and revenue in each country that it has operations. An objective of the IFPR is to make regulations for FCA investment firms more proportionate to the risk, size and activities of those firms. That will be reflected in the country-by-country reporting. That will enable certain investment firms, such as the smallest FCA investment firms, to have reporting requirements consistent with their size and activities, and ensures that such firms are competitive. Furthermore, the smallest investment firms do not typically have overseas operations, making these requirement irrelevant for them. I cannot say any more about that at this point, but I am happy to follow up further if the right hon. Gentleman wishes to have information.
Question put and agreed to.
Schedule 1 accordingly agreed to.
Clause 2
Prudential regulation of certain investment firms by FCA rules
Question proposed, That the clause stand part of the Bill.
Mr McFadden
I do not really have substantial questions at this stage, because schedule 2 sets out the detail, and I think we will probably have an extensive debate on it.
Ms Eagle
The clause inserts a new part 9C into the Financial Services and Markets Act 2000, which forms the legal basis for the new regime that the Bill introduces for investment companies. We have been talking about the minimum amount of capital required. We have covered some of that, although we will get further into it when we come to the Basel 3.1 bits.
Will the Minister say a bit about remuneration policies? That is another issue that will be regulated. We know from what happened in the financial crash and the build-up to that bubble that remuneration policies formed a key part of the bad incentives that created the behaviour that caused the crash. How will the Government be dealing with the regulators about remuneration? What will the principles be? Getting the right incentives for remuneration is a key driver for behaviour, and behaviour is a key driver for activities in that area, as we know only too well. If we did not know that from 2008, we would know it from the Wall Street crash in 1929. It is part of a set pattern. How will the Government ask the regulators to deal with that issue?
John Glen
I am happy to respond to that. The risk that the hon. Lady sets out—that, broadly, this country will go down a route where we deviate significantly from the new established norms of the regulation of remuneration and the rules around rewards and bonuses and so on—is a matter for which the regulator has responsibility. It will be incumbent on the Government to look at evolving best practice and the appropriate way to bring continuity to such regulations in line with those highest standards.
It is not our wish to create deviation for the sake of it. We will continue to look at the market situation. The point has been made already that we have to be alert to evolving new practices. In the same way, I think the hon. Lady would acknowledge that, in the light of the last crisis, there was an evolution in business models with respect to high-cost credit. There is always a risk in the sort of environment that we are in now that there will be new developments. I cannot prescribe precisely how we will look forward, but we will look to adhere to global high standards, because the integrity of our reputation relies on it.
Ms Eagle
I thank the Minister for his indulgence. Clause 2 is also partly about enforcing regulations; there are references to fraud and criminal offences, which again we will come to in more detail later. Will he let us know whether fraud enforcement will be beefed up? We can have a great regulatory regime and redefine fraudulent behaviour, but if enforcement is not up to scratch, that will not really deter. This is area where, if enforcement is too weak, the rewards are very high and the risk of being caught and prosecuted or fined is very low. Can he give some reassurance on that point at this stage?
John Glen
I am happy to. The hon. Lady makes a fair and reasonable point. We have to maintain the highest standards of regulation. The FCA and the PRA are extremely well respected globally, but that does not lead me as the Minister to be complacent. We must continually be vigilant about whether those standards of compliance and intervention into non-compliance are sufficient and adequate. We will always seek to maintain that.
To return to the principle, these capital requirements for firms are extremely detailed and technical. The regulators have the right expertise to update them. They will have increased responsibility, but they will need to consider the principles set out in the Bill. We are following the advice of the House of Lords Financial Affairs Sub-Committee, which said that these delegations would be appropriate. The broader conversation about the direction of travel around what sort of framework we wish to have in the UK is not fully addressed at this moment, but there will be more to say in the context of the response to the future regulatory framework two-stage review and the legislation we bring forward subsequently.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Schedule 2
Prudential regulation of FCA investment firms
Mr McFadden
I beg to move amendment 20, in schedule 2, page 63, line, at end insert—
“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.
This amendment would require that, when making Part 9C rules, the FCA must have regard to the UK’s net zero 2050 goal and the legislation that has been passed in pursuit of this goal.
Abena Oppong-Asare
My hon. Friend makes a good point. The UK Government constantly say on their website that they plan to go further and faster to tackle climate change. As my hon Friend has mentioned, this is a perfect opportunity to ensure that this is implemented in the Bill. I am surprised, frankly, that it is not in there. All that we are asking for is a reasonable amendment that already falls in line with the Government’s objectives. It is not going to create any extra work. We need to think about the future, particularly if we do not take action to address climate change, because we are heading for difficult times and I am really worried about the future for younger generations.
John Glen
Let me say at the outset that the Government are fully committed to reaching our climate change aims both domestically and internationally. We have set our commitment to net zero in legislation. When I was listening to the right hon. Member for Wolverhampton South East discuss the range of interventions and announcements that the Government have made in recent weeks and pivot back to the good work done previously, this underscores the fact that looking at this through a bipartisan lens is probably the most effective way. The aims that we share should be supported by sectors across the economy, not least financial services, as the Chancellor set out in his recent statement to the House.
Amendment 20 would insert the net zero target into the FCA’s accountability framework for the implementation of the investment firms prudential regime. Amendment 39 is similar, as it would insert an additional consideration into the FCA’s accountability framework, requiring the FCA to have regard to the likely effect on the UK’s domestic and international commitments on climate change.
I fully support the intention behind these amendments, of course, but the aim of this measure is to enable the implementation of a specific prudential regime to apply to a specific type of firm. The current “have regards to” provisions in the Bill are those that the Treasury found to be immediately and specifically relevant and that reflect issues raised by industry. I think about our relative standing and the importance of considering and aligning with international standards. Those are the ones that also relate to the equivalence decision and are directly tied to the implementation of the IFPR.
As the Chancellor set out in his statement outlining the new chapter for the financial service in the UK, if we are to achieve the net zero target it will mean putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. The Treasury and the regulators are already making ambitious strides to that effect, and Members have referred to the role of the former Governor, Mark Carney. I draw attention to the green finance strategy, which the Government published just 15 months ago, and to the work across a number of activities in the City on which I have been seeking to lead over the past three years. The green finance strategy is something that the regulators have actively supported.
Stella Creasy
Apologies; I did not realise the Minister was going to move on. He has made an incredibly powerful case for the importance of including such a commitment, and he has essentially said that the Treasury might look to include it. He said that it had looked only at the immediate and specific regulatory requirements. Of course, many of us believe that we are facing an immediate and specific crisis, so can he tell us why the Treasury has not already taken on the issue of climate change, given that he has made a case that it should be part of it? He has gone for pop No. 3 in the shadow Minister’s list. There might be a sixth option here, which is: “If we did not come up with it, we are not going to support it.” That would be rather short-termist, surely.
John Glen
I hope I would never be accused of taking such an approach. The reality is that I want the Bill to work most effectively. As I just said, the regulators are already taking into account climate change as a risk to the economy. The FCA/PRA climate financial risk forum and the Bank of England’s climate change stress test are alive and working, and I am confident that they will continue to consider climate change risk when making rules for the prudential regimes. In that context, we will look carefully at the need to add that specific additional reason. I have also stressed the work that is going on internationally. We should ensure that what we put in primary legislation is actually best practice and in line with the evolving consensus on how to deal with such matters.
I turn now to amendments 24 and 42, which make a similar set of changes to the Prudential Regulation Authority’s accountability framework for the implementation of the remaining Basel standards. As I have already said, the Government are already considering how best to ensure that the regulators and the financial sector can meet the commitments, and the Bill grants the Treasury a power to specify further matters in both accountability frameworks at a later data, which could potentially be used to add such a “have regard” in future, if appropriate. Therefore, after serious consideration, I respectfully ask the right hon. Member to withdraw the amendment.
Mr McFadden
The Minister is effectively saying that this is not the right time or place, but it is something that the Government will carefully consider. Given the things that have happened in politics in recent years, prediction is a dangerous game, but I expect that this is something that the Government will eventually decide to do, and I think they will make a virtue of doing it at that time. Indeed, I can see the Chancellor making the statement to the House of Commons right now, saying, “This new requirement for the Bank of England, for regulators, for the whole of Government, puts the UK at the heart of this shift to green finance and the achievement of tackling climate change.”
I agree with my hon. Friend the Member for Walthamstow that the more the Minister said he agrees with this, the more it begged the question of why he does not do it now; we have to start somewhere, and putting it in here would only encourage it being put in broader financial regulatory systems. We also have this consultation in the future regulatory framework; it might even be part of the conclusion to that. For that reason, I am minded to press the amendment today.
Question put, That the amendment be made.
Financial Services Bill (Sixth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Sixth sitting)
John Glen ExcerptsTuesday 24th November 2020
(4 years ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
Alison Thewliss
I meant more that the actions of businesses had slipped, but the hon. Lady is correct to point out that the Government have abandoned that commitment as well. I was going to go there with that point. If companies are not held to account, that slippage will become irreversible. Companies have worked so hard to try to bridge that gap, and going backwards really is unacceptable.
By bringing those elements together, companies across Scotland have shown that they can improve productivity and competitiveness and build sustainable growth in a way that achieves fairness, equality, opportunity and innovation. We have the UK’s highest proportion of living wage employers in Scotland because the Scottish Government made that commitment. That is what we can do with the limited powers that we have. If we were to put into legislation here far more responsibility and accountability, it would certainly move that agenda forward.
In addition, we believe that moves such as increasing worker representation on company boards, which is commonplace among our more productive, investment-rich European competitors, would promote much greater social responsibility among companies that had that representation, as would increasing the representation of women and minority communities on public and private sector boards.
Scotland is on track to ensure that all public sector boards have a 50/50 gender balance due to the statutory targets that we put in place. We would support similar UK legislation for the private sector, because if these things are not in place, it will take a very long time before we see any meaningful change. The evidence shows that it is good for companies and organisations to do that, because they do better when they better represent society.
It is important that we make sure that companies are held to account in this way. The amendments tabled by the official Opposition are good and sound. I am interested to hear why the Minister thinks that they are not good ideas worthy of pursuit.
The Economic Secretary to the Treasury (John Glen)
It is great to be under your chairmanship again, Dr Huq. I thank the right hon. Member for Wolverhampton South East and the hon. Member for Glasgow Central for their comments.
The right hon. Gentleman opened with a depiction of the appalling situation with Boohoo, the Levitt review and the challenge of securing widespread adherence to higher standards of corporate governance. He mentioned the actions of Sir Douglas Flint from Standard Life Aberdeen, with whom I have worked closely during the last three years.
Many of the particular aspects of that case are beyond the scope of the Bill, but the right hon. Gentleman uses it to illustrate the reasons why he tabled the amendments, which would introduce a new “have regard” in the accountability regime to which the Prudential Regulation Authority and Financial Conduct Authority would be subject when implementing the Basel standards and the investment firms prudential regime respectively. The amendments would require the PRA and FCA to consider higher standards in social practice and corporate governance when making new rules under the Bill.
It is unclear from the wording of the amendments whether regulators would need to look at their own best practices or those of the firms they regulate. Regardless, I fully support the intention behind the amendments. Indeed, I have chaired the asset management taskforce over the past three years: we have had 10 meetings with industry representatives, including Catherine Howarth, whose responsible investment charity ShareAction has done some significant work on stewardship and how we can get better transparency across the whole of the ESG agenda. Indeed, I believe that our report on that will be produced imminently.
There is no doubt that the regulators are committed to the highest levels of equality, transparency and corporate responsibility. For example, the UK has some of the toughest requirements on bonus clawback and deference in the whole world. The Government, working with the regulators, were also world-leading in the design of an accountability regime for senior managers in the industry; sequentially, over the past three years, that has extended to more and more parts of the financial services industry.
FCA solo-regulated firms are expected to have undertaken a first assessment of the fitness and propriety of their certified persons by 31 March 2021. The senior manager and conduct regime, implemented for all banks, building societies, credit unions and Prudential Regulation Authority-designated investment firms in 2016, was extended to cover insurance firms in December 2018 and most other FCA-regulated firms by December last year.
However, the track record of our regulators should not make us shy away from making them legally accountable for upholding the highest standards going forward. The fact is that the regulators, as public authorities, are already subject to the requirements under the Equalities Act 2010, as are businesses across the UK, including firms within the scope of the PRA and FCA remits. They already have existing powers and duties under the Financial Services and Markets Act 2000, which is being amended by this Bill, in respect of pay, transparency and principles of good governance. In fact, they are already responsible for making rules on remuneration under these two prudential regimes.
I recognise that when I think about the City, there are significant elements that need more work. For the past while, I have been responsible for the women in finance charter. I am currently conducting a series of challenges to the CEOs of banks, looking at what they are doing to address, beyond the targets, a pipeline of talent, so that there are better opportunities for more women to reach the executive level. I will speak more about that later this year.
Sound governance is necessary to support the regulator’s primary objectives of safety and soundness, market integrity and prevention of harm; a new legal obligation in this space would only be duplicative and redundant. It would likely conflict with existing obligations on the regulators in exercising their duties to ensure the sound governance of regulated bodies, creating confusion over whether these vaguer concepts conflict with the regulator’s general objectives.
I do not believe that this Bill is the right place for such changes, but there might be other routes to reassert how important we think these matters are. The Government are currently considering the policy framework in which the regulators operate through the future regulatory framework review, which I mentioned this morning and on Second Reading. I would welcome right hon. and hon. Members’ engagement on this important question—I really would. The matters that the regulators need to have regard to as part of this Bill reflect considerations immediately pertinent to these specific prudential regimes and, I believe, provide the right balance.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I am really happy to put forward amendment 25, because it will require that, when making capital requirements regulation rules, the FCA must have a high regard to standards in social practice and corporate governance, including pay, adherence to equalities legislation, transparency and corporate responsibility.
We know that best practice corporate governance results in social and economic gains, and that is something the Government are particularly passionate about. Companies that persist in treating climate change solely as a corporate responsibility issue, rather than a business problem, are running a risky business and stand to lose out.
We have seen businesses turn the need to tackle climate change into successful business opportunities. For example, BrewDog, the world’s largest craft brewer, will remove twice as much carbon from the air as it emits every year, becoming the first carbon-neutral brewery. If companies can already shoulder this social responsibility and incorporate it into a successful business model, there is no reason not to hold all businesses to the high standards our country needs to tackle imminent social and political issues.
Climate change affects every facet of everyone’s lives. The effects of climate on companies’ operations are now so tangible and certain that the issue demands a strategy and leadership from the Government. Government intervention has worked before, and it will work again, particularly through amendment 25. Take the Equal Pay Act 1970, for example, which was mentioned previously. Business and civil society converged, and companies with over 250 employees were made to publish data on pay gender discrepancies, resulting in a win-win scenario. Excellent work is now being done to tackle this further and understand racial, gender and environmental concerns, which are intricately linked. We have to follow civil society’s work on equal pay and extend the reporting to data collections on the grounds of racial equality and environmental equity, because our actions will be futile if our evidence is not fertile.
There is no one-size-fits-all approach to climate change: each company’s approach will depend on the particular business and strategy. What we are calling for in this amendment is for the Government to support and enable employers to publish an action plan to tackle climate change and social inequalities, including initiatives to mitigate climate-related costs and risks in client value chains. Jesse Griffiths, the CEO of the Finance Lab, had some important advice for the Committee last week. He said:
“I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators.”—[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 113.]
Environmental engagement is economic effectiveness, and this amendment will improve the economic health of our businesses and the environmental health of our country.
The amendment would also ensure that regulators can act in accordance with social needs, and ensure that businesses maintain corporate responsibility while still thriving in a competitive marketplace. When the Government asked Ruby McGregor-Smith to review the diversity pay gap, I welcomed that initiative. Campaigners have moved mountains in terms of identifying the profitability, both social and economic, of deepening our commitment to diversity and opportunity of wealth and health creation for all. In McGregor-Smith’s review, “The Time for Talking is Over, Now is the Time to Act”, she highlights how for decades, successive Governments and employers have professed their commitment to racial equality, yet we see that vast inequalities still exist. We must ensure this does not happen with our commitment to environmental stability, and the amendment will help ensure that.
Racial equality, gender equality and environmental stability can never be achieved unless we understand the ways in which they are intricately linked. As Ruby says, the time for talking is over, and I am sure that all the young people participating in the mock COP as we speak agree. I know that I mentioned this earlier about young people, but they are important: they are our future, and we really need to take them into consideration. With 14% of the working-age population coming from a black or minority ethnic background, we know that employers have to take control and start making the most of our talent, whatever their background.
The point stands out when looking at the pay gap for disabled people in the UK. In 2018, the median pay for non-disabled employees was £12.21 an hour, while for disabled employees, it was £10.63. The Minister mentioned earlier that he sat on the asset management taskforce—
Abena Oppong-Asare
Chaired—apologies; I have bad hearing. He gave examples of shared actions and how to get better transparency, and mentioned that regulators are already committed to higher transparency. I am sure he agrees with me that businesses need to be held to account. The amendment will also help to create an environment that nourishes talent equality and protects our natural habitable environment.
The amendment basically brings huge financial, environmental and social rewards. Companies must realise they cannot ignore those issues anymore. However, we know that most companies will act only when they see a reason to do so. What we need is less talk and more action.
John Glen
I have listened carefully to the points made by the hon. Lady, who touches on a wide range of subjects, some of which I responded to in my response to the shadow Minister. I would just say that a number of initiatives are under way and intensifying. Just a few hours ago, I launched a piece of work with the Corporation of London on social diversity, a taskforce to bring people together to look at what we can do to improve access to financial services. That follows the work that we have been doing and that former Minister Mark Hoban is doing with the Financial Services Skills Commission. I mentioned the work of Women in Finance, but there are a lot of other pieces of work that my colleague the Exchequer Secretary is also looking at in her dual role as Equalities Minister.
I made clear in my response a few moments ago that I believe the provisions we have already give the regulators significant licence to operate in this area and, although I do not rule out any changes subsequently, I believe at this time that the amendments should be resisted.
Stella Creasy
The challenge that the Minister has with these instruments is exactly the issue around the gender pay gap. We were told that that did not need to be written into the legislation, because there would be a commitment. As we have seen this year, that commitment has not been absolute. It has been abandoned by the Government.
The Minister has said that he agrees with those commitments and the issues that the shadow Minister has raised, and that they might be put into legislation. Does he recognise that, for those of us who are committed to those high standards, the point of such amendments is to put it beyond doubt that they will actually happen? As we have seen, if we do not put them beyond doubt, it is tempting for future Administrations and future regulators to remove or weaken the protections.
John Glen
I thank the hon. Lady for those points. As public bodies, it is clear that the regulators are answerable and accountable to Parliament, and I have explained how that will be enhanced, but they are also subject to legal duties to publicly consult on the new rules and to how Parliament wishes to scrutinise them. I recognise the point that she is making, but I believe that putting that obligation into legislation in that way would not immediately lead to the outcome that she supports. Across those areas of completely legitimate aspiration, many of which I share in an identical form, this is something that we would need to look at in the round following the regulatory framework review.
Alison Thewliss
I appreciate the work that the Minister and other Ministers are doing in this area, but does he accept that he if puts it into the legislation, he might actually have less work to do, because everybody will then be obligated to do it, rather than him having to ask nicely?
John Glen
Unfortunately, I do not share that view. Given the arguments that I have made about the complications that it would bring, because of the overlap with existing provisions, I do not think that would be the right way to go. I am very sympathetic, however, to many elements of the speeches made concerning the aspirations that we should have to improve the overall quality of corporate governance and behaviour across the City.
Mr McFadden
I am sure that the Minister is completely genuine when he says that he supports this agenda and the aims behind the amendment, but anyone who has followed the issue over the years will realise that we have had taskforces galore on it in the City. We have had taskforces on women on boards and on diversity; now we have a new one on social mobility. I wish that well but, after all those taskforces, do those in the top jobs in this sector—the real pool of decision makers—reflect the country as it is today?
Mr McFadden
Of course they don’t. We cannot conclude that, for all the taskforces and all the well-meaning, great people who have been involved in them, they have made enough progress.
This is not just a British agenda by the way. I read in the news the other day that the upper echelons of German industry are having exactly the same debate about whether to mandate quotas on boards for so many women and about the broader equalities agenda that my hon. Friend the Member for Erith and Thamesmead referred to.
Mr McFadden
I will speak briefly in support of the amendment. I think it adds an interesting new angle to our considerations on the schedule. There is quite a lot in the schedule about the UK’s standing as a place to do business. Proposed new section 143G(1)(b) to the 2000 Act talks about the
“relative standing of the United Kingdom as a place for internationally active investment firms”.
Proposed new section 143G(2) says that
“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”
None of us has argued that those are not completely legitimate considerations. Of course we want to consider our standing in relation to other countries, but that is different from the trading aspect.
The amendment points out that decisions can be taken that are facilitated by the Bill, for example on divergence, which we have discussed and will discuss further, and those decisions can have one impact on competitiveness but a very different one on the ability to trade. That is particularly important when this equivalence decision is still on the table. I think these amendments on considering our trading position usefully add to the job description of the regulators, which should be about not just competitiveness, but market barriers, market access and our ability to trade into other countries. Considering both of these proposals would be a good addition to the “have regard to” list set out in schedule 2.
John Glen
It is a pleasure to respond to the hon. Member for Glasgow Central and the right hon. Member for Wolverhampton South East. The hon. Members for Glasgow Central and for Aberdeen South propose to introduce a new “have regard” for the FCA and PRA when making rules for the new investment firms prudential regime and implementing the Basel standards respectively. That would require the regulators to consider the likely effect of their rules on trade frictions between the UK and the EU, as the hon. Lady set out.
Again, I understand and share the ambitions for frictionless trade between the UK and one of our biggest trading partners, the EU, but, as I am sure the Committee will understand, I am not able to discuss the details of our ongoing negotiations. We want a free trade agreement outcome with the EU that supports our global ambitions for financial services, and we have engaged with the EU on the basis that the future relationship should recognise and be tailored to the deep interconnectedness of those relationships across financial markets. The EU has made it clear that it does not support such an approach. We remain open to future co-operation with the EU that reflects our wide, long-standing, positive financial services relationship, and we will continue to engage in a constructive manner.
The regulators do not have oversight beyond their financial services remit. It would therefore be highly disproportionate to require them to assess the impact of their rules on all trade matters, covering goods and services. Furthermore, trading partnerships with overseas jurisdictions are the Government’s responsibility, not the regulators’. We consider that regulators should not be asked to go beyond the scope of their capabilities and duties. We have already discussed the capacity of the regulators; the amendment would really go beyond that.
We agree that financial services firms care about the UK’s relationship with overseas jurisdictions, which has a real impact on them. That is why the accountability framework that the Bill will introduce already requires regulators to consider the likely effect of their rules on financial services equivalence granted by and for the UK. Financial services equivalence will be the main mechanism underpinning financial services relationships between the UK and overseas jurisdictions. I believe therefore that the accountability framework, as proposed, meets the aim of the hon. Member for Glasgow Central.
In addition, the amendments focus solely on the relationship between the UK and the EU. That is obviously a matter of enormous concern, but we need to make legislation that accounts for the future. Equivalence or trade in financial services considerations must relate to all jurisdictions. It is crucial that we recognise that in the context of financial services firms, which often have a global footprint and global operations. That also reflects the UK’s present and future ambitions.
The accountability framework recognises the importance to UK firms of our relationship with overseas jurisdictions in financial services matters, while upholding broader international obligations. The Bill already supports the intentions behind the amendment, and for that reason I ask the hon. Lady to withdraw it.
Alison Thewliss
I would prefer to press the amendment to a vote because it fits well with the other parts of the Bill. Asking the FCA to consider the UK’s international standing with other countries aligns with other areas in which it is taking on wider roles, and the amendment reflects that. Regulators should have regard to the wider impact of their decisions and to problems that their rules might cause to trade between the UK and the EU, which could be quite significant. It seems wise to put that in the Bill so that the regulators are mindful of it in the decisions that they make.
Question put, That the amendment be made.
Alison Thewliss
I very much agree with the proposals brought forward by the official Opposition. I congratulate them on their drafting and having found a way to put these amendments forward. Our attempt at this comes in new clause 32, and I will discuss that a bit further when we eventually get to it.
I agree that it is vital that there is scrutiny of these institutions and these powers. It is surely unacceptable that the Government have made so much play of taking back control from the EU only to hive it off to regulators because it is far too terribly complicated for us parliamentarians to worry our sweet heads about. That is not acceptable. That is not the way that it works in the European Union, and it certainly should not be the way Westminster operates. We should trust ourselves and our colleagues slightly more to do that scrutiny. If European parliamentarians, some of whom are now in this place, can do it, we can certainly look at a way that this can be done and that accountability can be taken for these powers.
I agree with those who have said that the Treasury Committee is stretched in its business. Having had a brief discussion yesterday in our pre-meeting about the sessions to come in the weeks and months ahead, I can tell the Committee that those sessions are already very full, running at two sessions in most weeks. We are certainly being kept very busy with all the important things our constituents bring to us, the responsibility the Committee has to scrutinise the Government and all the other things the Committee wants to do. The logic of setting up a new Select Committee to examine these things is certainly very compelling to me, because it will need that specialist knowledge in addition to the heavy burden of work it might have.
I noted that the hon. Member for Hitchin and Harpenden (Bim Afolami) made a very good plug for this on Second Reading. I think his feeling is that it helps out the Government to have this additional scrutiny. It helps everybody see what is coming, prepares the ground and tries to make decision making better, which should be in the Government’s interest—trying to get to the right thing for all our constituents and for the financial services sector as a whole.
So that is important, and we should have no less of a role in all this than MPs currently have. I draw the Minister’s attention to the evidence given to the House of Lords EU Financial Affairs Sub-Committee, whose reports I am sure he is an avid reader of, for International Regulatory Strategy Group, which also recommends enhanced parliamentary accountability and scrutiny. Its suggestion is a new system of Committee oversight in not just the Commons but the Lords, as we suggest in new clause 32.
The group has a series of principles it thinks such oversight should stand to, such as it being cross-party and apolitical—those are the principles of Select Committees, but it is important that we look at this. It mentions the ethos of the Public Accounts Committee in the way it goes about its business in scrutinising regulatory authorities. It also believes that oversight needs to be authoritative and expert, building up expertise within Committees, that it needs to be risk-based and mainly ex-post, and that it should be open to stakeholder input, which is incredibly important. We all know Select Committees do that; they take evidence and they have good records of bringing in expertise and evidence from people, but they need to be able to use that evidence in a practical way to inform the best strategy and best way forward as we take these powers back.
I very much recommend to the Minister the evidence given by the IRSG. What is he doing to meet this challenge of the “accountability deficit”, as the Finance Innovation Lab put it? We cannot have a situation where more powers are coming back, yet we give them away. That is certainly not what was promised on the side of any Brexit bus, and it should not be the way we go forward. As the honourable grandee, the hon. Member for Walthamstow, said, it stores up a risk that we do not see something coming, that we have not identified a problem on the horizon and that we all end up in a bit of a crisis because we did not have the opportunity to scrutinise properly, to look at the regulations as they come forward and to ensure we do what is best for our constituents and the wider economy. There is logic in having some form of Committee to look at this, in whichever format the House wants to bring that forward. It is essential that that scrutiny exists and that it is at least as good as what was done in the European Parliament.
John Glen
I am very pleased to address the points raised by the right hon. Member for Wolverhampton South East, the hon. Member for Walthamstow and the hon. Member for Glasgow Central. I have listened carefully to what they had to say, and their remarks go to the heart of the distinction between the provisions of the Bill that we are scrutinising in Committee and the broader questions around the future scrutiny mechanism, and the necessity to ensure that we do not undermine the legitimate and appropriate scrutiny by Parliament of our regulators.
It is critical that we ensure sufficient accountability around the new rules of the UK’s financial sector. Capital requirements for firms are extremely detailed and technical. It is right that we seek to utilise the expertise of the regulators to update them in line with international standards.
In return for delegating responsibility to the Financial Conduct Authority, this Bill requires it, under proposed new clause 143G of the Financial Services and Markets Act 2000, to publish an explanation of the purpose of its draft rules and of how the matters to which it is obliged to have regard have influenced the drafting of the rules. The Bill introduces a similar requirement for the Prudential Regulation Authority, under proposed new clause 144D of the Financial Services and Markets Act.
These matters concern public policy priorities that we consider to be of particular interest to Parliament. I have looked carefully at the amendments proposed by the right hon. Gentleman, and the amendments envisage Select Committees reviewing all investment firms prudential regime and capital requirements regulation regulator rules before they can be made. Under that model, Parliament would need to routinely scrutinise a whole swathe of detailed new rules on an ongoing basis. That is very different from the model that this Parliament previously put in place for the regulators under the Financial Services and Markets Act, where it judged it appropriate for the regulators to take these detailed technical decisions—where they hold expertise—within a broader framework set by Parliament.
It should not go unnoticed that, if Parliament were to scrutinise each proposed rule, the amendment does not specify a definite time period in which any Committee must express its view on them. That could bring a great deal of uncertainty to firms on what the rules would look like and when they would be introduced. That makes it more difficult for these firms to prepare appropriately for these changes. Ultimately, there is currently nothing preventing a Select Committee, from either House, from reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations. That is a decision for the Committee.
My officials have discussed this amendment with the regulators, and they have agreed that they will send their consultation draft rules to the relevant Committee as soon as they are published. The FCA and the PRA both have statutory minimum time periods for consultation and will take time to factor in responses to consultation—so this is not a meaningless process—providing a more than reasonable window within which the Committee can engage the regulators on the substance of the rules, should it desire to.
The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.
Before I conclude, I would like to address the point the right hon. Gentleman made concerning the document that was published a month ago on the future regulatory framework, and to address the supposition he very courteously made that, somehow, the Government believed that everything was fine and little needed to change.
The purpose of this extensive consultation is to do what it says: to consult broadly to ensure that, through that process, the views of industry, regulators and all interested parties and consumer groups are fully involved, such that, when we then move to the next stage of that process—I would envisage making some more definitive proposals—it would meet expectations on a broader and enduring basis. This Bill is about some specific measures that, as I explained earlier this morning, we need to take with an accountability framework in place, but I do not rule out any outcome.
The right hon. Gentleman made some observations about the prerogative of Government over mandating Parliament and Select Committee creation. I think we are some way away from that. We want to do these things collaboratively and end up with something that is fit for purpose, and I recognise the comments he made about the resourcing of such Committees with respect to the role they would play.
I do believe that this scrutiny process, as set out in the Bill, is extensive, and, for the reasons I have given, I again regret that I must ask the right hon. Gentleman to withdraw this amendment.
Mr McFadden
I cannot resist the irony of pointing out that the Government are resisting what could be termed the “take back control” amendment and do not want to add it to the Bill. There are many illustrious Members of this House we could name this amendment after; they have been arguing to take back control for many years.
The Minister said that the amendment would cause a lot of uncertainty; that it might be too much work; that it might require a Committee—whichever Committee it was—to look in too much detail at rules, when it would probably be more concerned with the broad direction. He also pleaded with us to allow the consultation to play out.
There is a serious point at the heart of this about the sovereignty agenda. There will be some kind of consequence at some point, possibly a backlash, that will draw attention to how this is done and the new powers that the regulators have. At that point, people will ask, “What was Parliament doing? What role was Parliament playing?”
John Glen
I beg to move amendment 1, in schedule 2, page 76, line 31, leave out “143O(4), (6) or (8)” and insert “143O(3), (6) or (8)(b)”
This amendment corrects a cross-reference to new provisions inserted by Part 1 of Schedule 2.
This is a technical amendment that corrects a cross-reference from section 395 of the Financial Services and Markets Act 2000 to new section 143O, as proposed in schedule 2.
Amendment 1 agreed to.
Question proposed, That the schedule, as amended, be the Second schedule to the Bill.
John Glen
Investment firms have a significant role to play in enabling investors to access financial markets, but the current prudential framework that applies to FCA investment firms was made for banks, which is why we need a new bespoke investment firms prudential regime. Schedule 2 contains relevant provisions that enable the FCA to implement a tailor-made prudential regime for non-systemic investment firms.
The new regime will set out new capital and liquidity requirements that will ensure that firms can wind down in an orderly way without causing harm. The right hon. Member for Wolverhampton South East and the hon. Member for Walthamstow are rightly concerned about consumer harm, so I draw their attention to the fact that the FCA will have to set those requirements in relation to the risks that firms pose to consumers, as well as the integrity of the financial system.
The FCA will also be required to make rules for parent undertakings of investment firm groups, because appropriate regulation and supervision are as important at the group level as at the individual firm level. Parents, as heads of the group, should be held responsible for the prudent management of the group.
It is right that specific rule-making responsibilities should be delegated to the FCA as an independent expert regulator, but those responsibilities must come with enhanced accountability. Schedule 2 requires the FCA to have regard to a list of important public policy considerations when making its rules in relation to the new investment firms regime, including any relevant international standards and the relative standing of the UK as a place for internationally active investment firms to carry on activities. To support scrutiny, the FCA will need to report publicly on how its consideration of those matters has affected its decisions on the rules in relation to the IFPR.
The FCA will also have to consider the impact on financial services equivalence, both by and for the UK, and consult the Treasury on that. Consulting the Treasury ensures that the FCA has appropriate accountability for technical choices that might have an impact on firms, while recognising that the Government retain responsibility for international relations and therefore equivalence. These three considerations are those that we have deemed to be immediately pertinent to the new investment firms prudential regime today.
However, as I have mentioned previously, the accountability framework is meant to reflect the changing context. That is why the Treasury will have power to add additional considerations, which would be done following discussions with the regulators and industry, and following parliamentary scrutiny. That is the overall framework that will allow greater scrutiny and transparency, and provide the direction the FCA will take in implementing the new regime in the UK, while rightfully leaving the detail to the experts.
In the longer term, any wider deregulation will need greater debate and the proper scrutiny of Parliament. The Government intend to address that part through the future regulatory framework, as I have discussed, which is now out for consultation. I therefore recommend that that this schedule stand part of the Bill.
Question put and agreed to.
Schedule 2, as amended, accordingly agreed to.
Clause 3
Transfer of certain prudential regulation matters into PRA rules
Mr McFadden
I beg to move amendment 23, in clause 3, page 4, line 31, at end insert—
“(9A) The Treasury must, within six months of making any regulations under this section, prepare, publish and lay before Parliament a report setting out—
(a) the reasons for the revocation of the provisions of the Capital Requirements Regulations being made under the regulations;
(b) the Treasury’s assessment of the impact of the revocation on—
(i) consumers;
(ii) competitiveness;
(iii) the economy.”
This amendment is intended to ensure the Treasury reports to Parliament on the impact of divergence from CRR rules.
In debating this amendment and this clause, I am hoping the Minister will be able to explain the relationship between this clause and clause 1. Clause 1 specifies the certain type of investment firms to which CRR rules need not apply, and he was at pains to say that that was a specific, targeted approach, but clause 3 looks to range very widely on the Treasury’s powers to revoke aspects of the capital requirements regulation.
The list in clause 3(2), on page 2 of the Bill, has many different headings, including business lends such as mortgages, retail investments, equity exposures and so on. Without getting into the detail of the technicalities of the Basel rules, not all capital is treated as equal. A pound is not just a pound. It depends against which line of business it is weighted. For example, financial institutions will argue that mortgages pose a particular category of risk, probably quite low risk, compared with another line of business where they may be lending against business loans, commercial property or some other activity. The Basel rules do not judge all these activities equally and they apply what are known as risk weights to them.
The clause allows the Government pretty sweeping powers, as far as I can see, to depart from and to revoke aspects of the capital requirements regulation, against all these different types of business. I would be very interested for the Minister to set that out and clarify it.
Through this process, the capital ratios are allocated. Again, I draw the Committee’s attention to the important paragraph (m) at the bottom of page 3 of the Bill, the leverage ratio. That is described in the notes on clauses as the “backstop.” I hope that that term does not cause too much excitement in the Committee. Like all backstops, it is there in case the list from paragraph (a) to paragraph (l) does not prove sufficient.
This particular backstop of the leverage ratio casts aside all this stuff about risk ratings. It takes the whole lending book and the whole lending business, and says that a certain proportion of capital must be held against the whole thing. It is a bit of an insurance policy in case the risk ratings do not do the job. It is true that the risk ratings are where this is open to all kinds of lobbying, as people will say that one line of business is less risky than another.
At the core of this is a debate between regulators who must consider the safety and resilience of the system as a whole, and individuals who will argue that if only they did not have to hold all this capital, they could lend more, stimulate more economic activity, and so on. That is the debate that takes place. Without wanting to go over all the ground that we covered this morning, the amendment asks for a report on the degree to which the divergence—the leeway powers, as we might call them—will be used, and the Treasury’s assessment of the impact on the economy. As I said this morning, we believe it is important that such a report should consider the impact on consumers, because they do not want to be on the hook for decisions that allow capital levels to fall too much, thereby weakening the resilience of the financial institutions in question.
This is a “lessons learned” amendment. It is important that the debate about capital ratios does not take place altogether in the dark—that it is exposed to what my hon. Friend the Member for Erith and Thamesmead called the daylight of scrutiny—and that we do not hear just from financial trade bodies. If they all genuinely have no intention of lobbying for a less safe system, have no desire for a race to the bottom and want the highest possible global standards on regulation, they have absolutely nothing to fear from this amendment. It does no more than ensure that we have reports from the Treasury on what happens when these powers are passed to UK regulators, and what happens if the divergence that is facilitated in clause 3—in this long list on pages 2 and 3 of the Bill—takes place.
John Glen
In addressing this amendment, I want to start by saying that the Government are fully committed to ensuring that this greater delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. To pick up on the point made by right hon. Gentleman about clauses 1 and 3, they amend the existing banking framework for different reasons. Clause 1 only removes FCA investment firms from the CRR. Clause 3 enables the implementation of Basel standards for the remaining firms, credit institutions and PRA investment firms by enabling the Treasury to revoke parts of the CRR that relate to Basel. That is so that the PRA can fill the space with its rules.
Amendment 23 seeks to add a requirement for the Treasury to assess and report on the impact of its revocations of the capital requirements regulation on consumers, competitiveness and the economy. However, I would argue that the emphasis is in the wrong place. The Treasury will only make revocations to enable the introduction of the PRA’s rules. A stand-alone assessment of the provisions being deleted would not provide meaningful information for Parliament—it is unnecessary. Those revocations are to be subject to the draft affirmative procedure, so they will be explained to Parliament and Parliament will be able to debate their appropriateness before they are made.
I agree with the principle of scrutiny, but the emphasis should be placed on the PRA’s rule making, and that is what this Bill does. The Bill includes provisions requiring the PRA to publicly report on how it has had regard to upholding international standards and relative standing in the UK, as well as facilitating sustainable lending. Those are in addition to the PRA’s existing statutory objectives on safety and soundness of financial institutions and its secondary competition objective, so they overlap with the areas that the amendment attempts to address.
The provisions in this Bill sit alongside existing provisions in the Financial Services and Markets Act 2000, which require the PRA to publish a cost-benefit analysis alongside its consultation on rules. That will provide Parliament and the public with the information required to scrutinise the PRA’s actions. Therefore, the current provisions in the Bill, combined with those existing provisions in the Financial Services and Markets Act, already ensure that the information that Parliament is seeking will be in the public domain. The hon. Member for Walthamstow asked me to set out a vision, almost, for the conduct regulator with respect to the future operating environment. To some extent, that is deferred to the future regulatory review, but I will give her my view because this goes to the core of the future of financial services. We need an environment in which the regulator is accessible to consumer concerns. I recognise the work that she has done and the shortcomings that she perceives with the regulator’s current dynamic. We need Parliament to be at the heart of scrutinising its activities. The legislation would give it an obligation to report, but then we need meaningful scrutiny from Parliament.
The challenge is based on the work that the hon. Lady did after 2010—we came into Parliament at the same time—after which there was a rapid evolution in business models and new types of things. That is why I am delighted that Chris Woolard is doing a high-cost credit review and looking at some of the areas that she is engaged in, such as buy now, pay later. He is looking at that urgently so that we do not make the mistakes of the past and do not face some of the emerging challenges, in terms of behaviours—[Interruption.] She smiles. I suspect that she is not completely convinced by what I am saying about the provisions. We are resisting the amendment because in the narrow confines of what we need to achieve, with respect to the translation of these directives appropriately at the end of the transition period, that is distinct and different from an enduring solution. I look forward to her contribution to the regulatory framework review, because that will drive a meaningful discussion about how we achieve the sort of accountability that she and I want and think should be enhanced.
Stella Creasy
I am sure the Minister will have some delightful conversations about the regulatory framework that will keep many people wide awake for hours to come, but the two are not mutually exclusive. This amendment and this debate are about capital holdings.
Does the Minister recognise that what I said about what happened in 2008-09 is directly linked to this? We need to keep a tight eye on this, especially because of the global context in which it is happening. We cannot protect our economy and our constituents without some form of scrutiny and control. The Minister said that it is important to have parliamentary involvement, but he has just refused an amendment that would have brought the Select Committees into the process.
I am struggling to understand why in this instance, with this amendment and this requirement of the Bill, given the role of the FCA in overseeing capital requirements, the Minister feels that it would not be important to have the data, so that we are not in a position in which that subprime lending happens again in a different guise. If we have learned anything—this is not just about the high-cost industry—it is that these models evolve. It is like water: exploitation in the system will find a way through unless we have robust procedures. It is possible to have both this report and a regulatory framework; the two are not mutually exclusive. If there is not a reporting provision, the Minister leaves a gap until one is in place.
John Glen
This legislation provides the regulators with the responsibility and the reporting obligation to Parliament. What the hon. Lady has done is make an explicit relationship between conduct failure and capital requirement decisions. Decisions about the overall framework for accountability for the regulators are embedded within this Bill. The point of disagreement between us is whether there are sufficient obligations, in terms of reporting and scrutiny, for these narrow measures. We obviously disagree. I am trying to signal that, more broadly, on the wider issues of the future dynamic among Parliament, the Treasury and regulators, there is scope for significant review, and appropriately so given the changing nature of where these regulations are coming from. I do not have anything else to say.
Mr McFadden
The Minister said that he does not want to accept the amendment because he thinks it is in the wrong place. I would find that a little bit more convincing if I really thought he would accept it if he thought it were in the right place, but so far today, Members on the Government Benches have steadfastly voted against this kind of reporting back and reviewing of things to do with the capital rules, as well as the other amendments tabled. I am sure that the Minister has read the whole amendment paper, and will have seen that I have tried to come at the same issue from a number of different angles and different timetables. This morning, we pressed to a Division an amendment asking for a report after three years, which was defeated. I will not press this one, Dr Huq, but we will be coming to other, similar amendments very soon. I therefore ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
The 2008-09 financial crisis led to significant economic hardship. Since then, post-crisis regulatory reforms set by the Basel Committee on Banking Supervision have supported financial stability, which underpins our economic prosperity. We in the UK intend to uphold our international commitment to the full, timely and consistent implementation of these reforms, alongside other major jurisdictions, and clause 3 creates the space in legislation for the financial regulator—the Prudential Regulatory Authority—to implement the remaining Basel standards. Like our approach to investment firms, our intention is to delegate the responsibility of implementing these to the PRA with enhanced accountability, as I have described. This is the right thing to do: the PRA has the technical expertise and competence to implement these post-crisis reforms as they should be implemented.
However, in delegating this responsibility, this Bill ensures that checks and balances are in place. First, clause 3 ensures that we transfer only some elements of the capital requirements regulation, or CRR, to the PRA, and that the extent of the Treasury’s powers to delete will be constrained to those areas of the CRR that are necessary to implement the Basel standards and ensure the UK upholds its international commitments. Secondly, this clause ensures that the deletions the Treasury makes take place when it is clear that adequate provision has been made by the PRA to fill the space. Those deletions will also be subject to the draft affirmative procedure, providing the opportunity for Parliament to scrutinise the Treasury’s actions. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and other PRA rules, amounting to a clear prudential rulebook that industry can follow.
Further, clause 3 enables the Treasury to make transitional and savings provisions to protect cliff edges from the deletion of certain provisions on the operations of a firm. This will allow the Treasury to save permissions already granted by the PRA, to modify capital requirements and avoid the need for firms to reapply for those permissions under new PRA rules where they are being replicated in the rulebook as a result of the Bill. This clause is essential to the delivery of our international commitments, and I therefore commend it to the Committee.
Mr McFadden
I do not want to force the Minister to go over the same ground again and again, but I am just trying to fully understand this. He used a phrase something like “the clause allows for departure from the CRR in order to implement Basel”, if I have understood him correctly. I am not trying to be obtuse, but I want him to explain fully to the Committee what that means. Why do we have to “depart” from the capital requirements regulation in order to implement the Basel rules? On the face of it, the list contained in clause 3 is a very wide list of things from the CRR that the Treasury is taking powers to revoke, and I am therefore trying to fully understand what the effect of this clause is. Is it just to implement Basel, or does it give a wider, ongoing power to the regulator to change capital ratios against these lines of business that are set out in the amendment? I genuinely want to understand that.
My second question is about the potential impact on risk weightings and how capital ratios can look. There is a potentially perverse effect here—almost a mathematical one. Because these things have risk weightings attached to them, if the regulator makes a decision to reduce that weighting—from 50% to 40%, for example, or whatever it is—but the bank still holds the same amount of capital against that stream of business, it has the effect of making the bank look more safe and secure, even though it does not have any more capital—even though nothing has changed.
John Glen
I thank the right hon. Gentleman for his points. On the first point about why we are deleting what we are deleting, we are deleting elements of the capital requirements regulation to the PRA so that it can implement the provisions of capital requirements II, which the EU is commencing, in the appropriate way for our firms—that is basically it. The EU is on a journey of implementing CRR II, and we need to do what is appropriate for our firms, as I have discussed.
John Glen
The future in terms of the evolving rulebook of the EU and other jurisdictions and how we seek to do that here will be subject to the future regulatory framework. We cannot anticipate the future evolving regulatory direction of new directives that have not yet been written elsewhere. What we have to do is to build the right framework for origination of rules in the Treasury and from the regulators, with the right accountability framework in place.
The problem we have conceptually in this discussion is that we are coming out of an embedded relationship in which we have auto-uploaded stuff that we have discussed, crudely, elsewhere. We have a legacy set of issues over which we have not had complete control this year that we are obliged to implement, but as we approach the end of the transition period, we have to make provision for things that actually make sense and we want to do anyway, in an appropriate way.
The driver of the right hon. Gentleman’s remarks— I understand why—is this desire to scrutinise the appetite for a sort of ad hoc, and I do not mean to be pejorative, but almost opportunistic, divergence, when what we are trying to do is to enable the regulator to do what is appropriate for a set of entities that will not naturally conform to the enduring direction of travel of the CRR II within the EU, because of the different nature of our firms and, as we have discussed, the different treatment of capital that is appropriate, given what they are actually doing vis-à-vis banks.
Secondly, he asked some detailed questions about risk weight.
Mr McFadden
Before the Minister moves on to the potentially perverse effects, does clause 3 simply give the regulators the powers to implement Basel 3.1, or does it give the regulator broader powers to change risk weightings against those lines of business in ways other than under Basel 3.1?
John Glen
My understanding is that the licence to operate given to the PRA is to make it consistent with Basel 3.1, in the context of the evolving rules that are being implemented elsewhere, but the notion that there is a single downloadable format of the Basel 3.1 rules in every single jurisdiction is a false proposition. Every regulator in different jurisdictions will do that in different ways. It is important, therefore, that whatever decisions they come to around the specific decisions on different entities will be published and scrutinised, such that it could be justified against the international standing and the other factors that we have put in place as a meaningful accountability framework.
I am probably close to the limit of my capacity to answer further on this point, but I am happy to reflect further and to write to the right hon. Gentleman and make it available for the Committee, to clarify anything that would be helpful to the Committee.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4 ordered to stand part of the Bill.
Clause 5
Prudential regulation of credit institutions etc by PRA rules
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 1—Annual review of the CRR rules—
“(1) The Secretary of State must, once each financial year, prepare, publish and lay before Parliament a review of the changes to CRR rules made by the PRA in the relevant financial year.
(2) The review must include an assessment of the impact of any changes to CRR
rules on—
(a) consumers;
(b) competitiveness; and
(c) the wider economy.”
This new clause would require regular reviews of any departures from the current regime of capital requirements.
Mr McFadden
This is my third attempt to get the Government to commit to reporting on the impact of these measures. Clause 5 and the accompanying provisions in schedule 3 insert new part 9D into the Financial Services and Markets Act 2000. This new part 9D will empower the PRA to make changes to capital requirements regulation rules. Schedule 3 also sets out the accountability framework, which we have discussed quite a lot throughout the day.
New clause 1 is an attempt to understand and explain the effect of changing these rules. It calls for an annual review to be published of changes to the CRR rules and their impact on consumers, competitiveness and the wider economy. As with similar amendments, all of this is an attempt to ensure that we do not simply pass all these powers from the EU to UK regulators without having processes in place, making clear what the changes we are making do and giving Parliament a proper voice in debate over these matters.
As I have said in relation to other amendments that, as things stand, unless we strengthen the parliamentary side of this, we could end up having less input to these issues in the future than we do at present. All these capital rules are there for a reason. We have thrashed it out today. It is important that we have proper transparency and a full understanding of the consequences if we depart from these rules in a significant way in the future.
My hon. Friend the Member for Walthamstow described these amendments as mild. I think they are mild. None of them say even that we should not have any of these departures. They simply ask for some process to understand the effect of them, which is open to Parliament. That is what new clause 1 would do.
John Glen
I really respect the right hon. Gentleman’s approach to this. It is very constructive. I accept his frustration with what I am saying, but I do respect his patience with me through this process. Each time, I will try to justify what we are doing.
This Bill enables the implementation, as the right hon. Gentleman understands, of the Basel standards. That will be done by deletion of parts of the capital requirements regulation that need to be updated, so that the PRA can make those Basel updates in their rules. As a result, we will see a split in this prudential regime, perhaps temporarily, depending on the end result of the future regulatory framework across legislation and regulatory rules.
The regime is already split in this way to an extent, with some rules for firms set directly by regulators and others contained in retained EU law or law that has originated in this Parliament, and it will continue to work in this way. However, we will seek to ensure that this is done as effectively as possible through clause 5. Clause 5 ensures that cross-references between legislation and PRA rules work properly on an ongoing basis. It also requires the PRA to publish an explanatory document outlining how it all fits together. Finally, the clause introduces schedule 3, which contains further detail to ensure that the regime works. As the elements contained in the clause help to ensure a workable framework for the UK to remain Basel-compliant, I recommend that the clause stand part of the Bill.
New clause 1 seeks to add an annual reporting requirement, as the right hon. Member for Wolverhampton South East said, for the Government to carry out and publish a review of PRA rules that implement the Basel standards, including an assessment of the impact of changes to the rules on consumers, competitiveness and the wider economy. The Bill will require the PRA to demonstrate how it has regard to several considerations: the international standards that it seeks to implement, the relative standing of the UK and the ability to finance businesses and consumers sustainably.
However, I regret that the amendment has the potential to duplicate the PRA’s reporting duties. I respectfully contend that this additional annual reporting requirement is not necessary, because through the Bill the PRA will also be required to publish a summary of the purpose of the rules it makes when implementing the Basel standards and an explanation of how it has complied with its reporting duties. Furthermore, the Financial Services and Markets Act 2000 already requires the PRA to make an annual report to the Chancellor on its activities, including on the extent to which its objectives have been advanced and how it considered existing regulatory principles in discharging its functions. The Chancellor must lay that report before Parliament.
I therefore question whether the proposed review would really provide much more insight than what the current reporting arrangements already achieve. I have myself checked whether there are no reporting requirements and we are entering some sort of wild west environment, but I do not think that that is the case. The amendment duplicates efforts that are already in place. Ultimately, to require the Treasury to undertake such an assessment would undermine this delegation and the regulator’s independence. I therefore ask the right hon. Gentleman not to move the amendment.
Mr McFadden
The Minister has given a pot 3 defence. I apologise for using that in-joke from this morning’s session; I am happy to explain it to you later, Dr Huq. A pot 3 defence means that it is already covered. It is my pleasure not to move the amendment.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Schedule 3
Prudential regulation of credit institutions etc
Alison Thewliss
I beg to move amendment 40, in schedule 3, page 79, line 25, after “activities” insert
“in the UK and internationally”.
This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.
This is quite a modest amendment. The Bill is supposed to ensure that Scotland, the City and the rest of the UK remain internationally competitive but robustly regulated, as the sector and everyone beyond a few marketeer ideologues are looking for. The amendment seeks simply to ensure that the FCA has regard to the standing of the UK as a base for financial firms that operate internationally. It is a kind of reflection amendment. It is common sense. It is really a drafting amendment. There is not terribly much more to it.
John Glen
As I have said, the UK is committed to maintaining its high standards. We heard during evidence sessions last week that these high standards will not hinder the UK’s ambition to remain an attractive place to carry out business. None the less, the Government want to ensure that our regulators have specific regard to these ambitions, particularly for international businesses, which bring jobs and innovation and, I believe, improve our economic prospects and prosperity.
The amendment aims to ensure that that is the case, and I welcome the intention, but I reassure the Committee that the Bill as drafted will deliver that. I highlight in particular to the hon. Member for Glasgow Central that subsections (1)(b) and (2) of proposed new section 144C to the 2000 Act requires the PRA to
“consider the United Kingdom’s standing in relation to the other countries and territories”
that could affect where international firms
“are most likely to choose to be based or carry on activities.”
I believe that that is adequate to address the concerns that have been raised.
Mr McFadden
I beg to move amendment 27, in schedule 3, page 80, line 8, at end insert—
“(7) The PRA must, at least once every five years, review the provisions of this section.
(8) The Treasury must lay before Parliament a report setting out—
(a) the outcomes of this review; and
(b) any changes the Treasury proposes to make as a result of this review.
(9) The Treasury may by regulations make any changes identified in subsection (8)(b).
(10) Regulations under subsection (9) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.”
This amendment would ensure there is a review of the accountability framework for regulators once in each Parliament and give it a role in approving subsequent changes to the accountability framework.
This will be my last attempt. I have tried to get reviews after six months, one year and three years; this is the attempt at once in every Parliament. Of all the mild amendments, this has to be the mildest. Once in every Parliament, we are asking for the PRA to review the provisions of proposed new section 144C in schedule 3, and for the Treasury to lay before Parliament a report setting out the outcomes of that review and any changes that it proposes to make as a result. I really think it reasonable to expect that as a minimum, given the sensitivity and potential combustibility of the provisions, which is why we have tabled the amendment.
John Glen
On a human level, I have found this process quite challenging, because my instincts are to try to accommodate the right hon. Gentleman when he sounds so reasonable and plausible. The amendment seeks to introduce a requirement to review the PRA’s accountability framework for Basel implementation and, as he said, it would require the PRA to conduct a review every five years, which is the least demanding of his requests today.
It is right to ensure that the accountability framework is fit for purpose and up to date. Indeed, that is one of the aims that we want to achieve through the Bill: flexible and agile regulation. The Bill’s purpose is to enable the implementation of the Basel standards, and the international deadline for Basel 3.1 reforms is 1 January 2023. By 1 January 2023, the bulk of Basel-related rules made as a result of the Bill should therefore already be published. The accountability framework that the Bill introduces for the PRA to make rules to meet Basel requirements relates only to the implementation of the specific so-called Basel 3.1 rules and does not relate to the ongoing prudential regulation of financial service firms that is being considered by the future regulatory framework review. The review is consulting on the important split of responsibilities between Parliament, Government and the regulators now that the UK has left the EU.
Reflecting the wisdom of the right hon. Gentleman with respect to the value of reviews, in that context a five-year review would clearly be appropriate. However, in the current context, it would be inappropriate to ask the PRA to report on an Act of Parliament given that the Bill already includes a more appropriate reporting requirement for the PRA, as set out in proposed new section 144D, that is adapted for the CRR rules. That requirement is to publish an explanation of how the matters in the accountability framework have impacted on the PRA’s rules whenever it consults on and publishes final rules to implement Basel. That will directly attend to the logic and rationale for what it has done.
The amendment would also add a new power for the Treasury in relation to the accountability framework. The Treasury already has a similar power in the Bill to add additional matters for the PRA to consider. The power proposed in the amendment goes further, allowing the Treasury to amend the list, including removing matters from it. It is not clear to me why the Treasury should ever remove, for example, the requirement for the PRA to have regard to the Basel standards. Such matters are immediately pertinent to the prudential regime and would have been agreed by Parliament through the Bill process. Therefore, the existing provisions in the accountability framework already appear to achieve the aims intended in the amendment in the best way possible and, as such, do not need to change. For those reasons, I regret to ask the right hon. Gentleman to withdraw the amendment.
Mr McFadden
Is the Minister saying that if there were a Basel 3.2 or a Basel IV process—that is quite likely, because at some point there will be a revision to the capital rules because things change and the system has to evolve—somehow the part 9D provisions cannot be used? Are they only for Basel 3.1? That is the implication of his response. I would have thought that giving the regulator powers over all those areas would be applicable to future Basel revisions and not just this one. In other words, we are not making a regulatory snapshot; we are creating a movie. This is a genuine question: the part 9D rules must be applicable to any future revisions of the Basel process, too. If so, there is a strong case for a once-in-a-Parliament review of how that is going.
John Glen
Those rules will have regard to future Basels. The reporting mechanism we have and the accountability to Parliament when those rules are published is more immediate and comprehensive. My contention is that a five-year provision would be out of date because we would have done it by then. That is why I am apprehensive about the right hon. Gentleman’s suggestion.
However, within the context of the future regulatory review—I cannot be bound on the outcome of that, because it is genuinely consultative—and what would be the appropriate reporting, there is a difference between short-term reporting on a particular measure or decision and a more fundamental review of the strategic dynamics of the relationship between the regulators, which we have seen evolve over decades. On the principle, there may be the need to have something like that. I am straining to be positive and constructive in my engagement with the right hon. Gentleman.
Mr McFadden
The truth is that there is no science about what is exactly the best timetable for reviewing these things. I am not pretending that one of the various timescales that we have mooted is perfect, and there is probably a legitimate debate to be had about that. However, as the Minister has just confirmed that we have given the regulator the power to make rule changes regarding future Basel changes on an ongoing basis—I am sure he is right about that—having a review and a report on this once every five years is a reasonable timescale to say what the impact of these things has been. I therefore wish to push the amendment to a Division.
Question put, That the amendment be made.
John Glen
I beg to move amendment 2, in schedule 3, page 84, line 19, leave out paragraph (b) and insert—
“(b) section 144D (explanation to accompany consultation on rules);
(c) section 144E(1) and (4) to (7) (exceptions from sections 144C and 144D).”
This amendment corrects the explanatory words in a list of provisions that apply to section 192XA rules that are not CRR rules.
This technical amendment corrects a reference to words contained in parentheses to make it clear that those words apply only to proposed new section 144D to the 2000 Act, and it adds the correct words in parentheses to the references in proposed new section 144E. The words in parentheses explain the scope of the clause.
Amendment 2 agreed to.
Schedule 3, as amended, agreed to.
Clause 6
Power to amend the Credit Rating Agencies Regulation
Question proposed, That the clause stand part of the Bill.
John Glen
The Basel standards include rules relating to credit assessments—also called external ratings—which some firms use to assign risk ratings. Risk ratings are used to determine the minimum amount of capital that must be maintained by a firm, and the right hon. Member for Wolverhampton South East has already drawn attention to this matter.
In the UK, credit ratings agencies, or CRAs, that issue credit assessments are regulated by the credit ratings agencies regulation, and the changes needed to the CRA regulation to implement Basel are minor. Consistent with the 1 January 2023 international deadline, however, the PRA has yet to issue its rules implementing the Basel 3.1 reforms, and it makes sense to consider changes to the CRA regulation as part of the wider 3.1 package of changes. Therefore, the clause gives the Treasury a power to amend the CRA regulation while requiring it to consider the Basel standards when that power is exercised. That confirms our intention to use the power only to implement changes stemming from Basel. The changes to the CRA regulation will help to ensure that the UK is fully Basel-compliant.
Mr McFadden
I have a couple of questions, because credit rating agencies did not cover themselves in glory in the financial crisis, so I want to be clear about what clause 6 does and does not do with regard to them. How does the credit rating agencies regulation regulate them at the moment, and how will that be altered by the provisions in clause 6? For example, does clause 6 deal with the situation where a credit rating agency charges a fee to those who are asking for a rating and with the potential conflicts of interest involved in that process? That played out in the financial crisis, as anyone who has watched the movie “The Big Short” will have seen. The clause does talk about the regulation of the credit rating agencies, so I wonder if the Minister could explain a bit more how they are regulated and how that would be altered by the clause.
John Glen
I am happy to do my best. In terms of the changes and why they are not set out in the Bill, the changes that need to be made to the CRA regulations stem from “Basel III: Finalising post-crisis reforms”—the Basel document—which is part of the most recent Basel 3.1 package of reforms. Most of those have not been legislated for in the UK or the EU, and it makes sense to consider changes to the regulation as part of the wider implementation of the 3.1 package, which will be done through the future rules. They will be consulted on prior to the deadline.
The power to amend the regulation will be used solely to implement Basel 3.1. There are a number of minor amendments contained in that “Basel III: Finalising post-crisis reforms” document of December 2017. The two eligibility criteria that credit rating agencies need to satisfy are added. The power in clause 6 safeguards that intent as it requires the Treasury to have regard to the standards rather than making other amendments for unrelated reasons.
In terms of the other limited changes made in schedule 4 as part of the implementation of the UK regime equivalent to the EU’s second capital requirements regulation, they again relate to earlier Basel III standards. I do not think I can answer with enough specificity to do justice to the right hon. Gentleman, so I think I will need to write to him on this matter.
In what I have said, I hope that I have explained the confines and drivers of the reform; the powers that we are giving to the regulator; and the consistency with which they will be exercised to the Basel 3.1 proposal. I have previously spoken about accountability for that. I need to write to the right hon. Gentleman to give more clarity, and I am happy to address the issue at further stages in the Bill’s passage.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7 ordered to stand part of the Bill.
Schedule 4
Amendments of the Capital Requirements Regulation
John Glen
I beg to move amendment 32, in schedule 4, page 89, line 11, at end insert—
“11A (1) Article 500d (temporary calculation of exposure value of regular-way purchases and sales awaiting settlement in view of COVID-19 pandemic) is amended as follows.
(2) In the heading, omit ‘Temporary’.
(3) In paragraph 1, omit ‘until 27 June 2021,’.”
This amendment removes the time limit on the availability of the derogation under Article 500d of the Capital Requirements Regulation.
This is a minor amendment. In 2017, as I mentioned, the Basel Committee on Banking Supervision introduced favourable treatment for firms in how they calculate the leverage ratio. The EU was due to introduce that treatment through its second capital requirements regulation on 28 June 2021. Given that the revised calculation will reflect the leverage of a transaction more appropriately, and at the same time increase the capacity of an institution to lend and to absorb losses amid the covid-19 pandemic, the EU brought this provision forward through a derogation to the first capital requirements regulation that is currently in effect. The UK supported that approach. This derogation is time-limited in the EU to 28 June 2021, as that is when the relevant EU CRR II comes into force, which will put in place the new permanent provisions on leverage ratio.
As the Committee will be aware, the European Union (Withdrawal) Act 2018 provides that EU law, as it is in effect at the end of the transition, will continue to apply in the UK. This means that the first capital requirements regulation as it exists on 31 December will remain in place in the UK until it is amended by this Bill. That means that the derogation would also cease to have effect in the UK on 28 June 2021, because we will have adopted it on the terms that it is now live in the EU. The UK has not legislated a date by which to update its prudential regime in this Bill, because it is most important that our regulators get the rules right and have enough time to consult and finalise them, and also to minimise disruption.
The UK is targeting 1 January 2022 for firms to have implemented the PRA CRR rules. This decision was made after introduction of the Bill, in response to industry concerns about the general volume of regulatory reform in 2021. I referred earlier to the future regulatory framework review. The first stage of that was a piece of work that the Treasury did with industry and the regulators following Chancellor Hammond’s work 18 months ago, which sought to rationalise and understand the range of regulatory interventions that were ongoing.
UK financial services providers would have to revert to the previous rules from June for a period of approximately six months, which would be costly for industry and inconsistent with the EU regime during that period. This amendment therefore removes the time limit on the derogation, so it will remain in place until the new permanent provisions are in place in the UK, giving clarity and certainty, and not seeking to cause disruption. That is why I ask hon. Members to accept this amendment.
Mr McFadden
Can I ask a question about this? The Minister said that the leverage ratio had been changed so that institutions could lend more. I assume that means it is being reduced as a temporary measure during the covid crisis. He then said that, while at EU level that was to be for six months, the UK had not decided when such a change should end. The implication is that we are allowing a reduction in the leverage ratio without an end date. That is potentially very significant in terms of the discussions that we have had about capital today.
I appreciate that it is late in the afternoon and all the rest, but having listened to the Minister, and given how sensitive this issue of leverage ratio is—how can I best put this?—I would be grateful if he could undertake to write to the Committee with more detail on how this will operate. A permanent or long-term reduction in the leverage ratio would be a very big regulatory decision and would be precisely the kind of thing that we have been talking about all day, and precisely the kind of thing that we have been saying should have proper reports back, which those on the Government Benches have been resisting all day. I would like to find out more about what exactly this means and how long it will last for.
John Glen
To the right hon. Gentleman’s point, the UK has not legislated a date by which to update the prudential regime in this Bill, because it is most important that our regulators get the rules right. On the amendment made for the covid crisis that we have aligned to, which essentially ends next year, he is asking about the potential for us not to end it and therefore to be at odds with the prevailing new situation in the EU after 28 June.
John Glen
Well, whatever the enduring reversion environment is in the EU following the end of this special measure. I will be happy to write to the right hon. Gentleman on that, but the key point is this: it would not be appropriate for the UK to determine where we would be beyond 28 June in advance of the regulator’s looking at those matters, when at the same time the EU’s definitive position at the end of June is not yet known. I will write to him, because I recognise that he is saying that he is apprehensive about the fact that we will have an apparent 18-month period from next June until January 2022 where we are at odds with the prevailing norms, and that is a risk. If I have understood him correctly, I am happy to address that point.
Mr McFadden
I am grateful to the Minister, but it is not an EU alignment point that I am making. He is right that, yes, this has arisen because of a disalignment with the EU, but my point is not that we have to always look at this through the lens of being aligned with the EU on capital requirements. I am talking about a public safety point; I am talking about a UK regulator taking a view on the leverage ratio, not necessarily in the light of what the EU is doing after June, but precisely because of all the points we have been making about the importance of capital after the financial crisis.
John Glen
I am happy to restate what I said. We have inherited an environment and indeed we have been obliged—quite reasonably—to absorb into law where the EU has got to at the end of the transition period. My point is that, in order to get the right enduring solution for our capital requirements for the UK, as it is in the UK, we have to allow a regulator to do that work.
The point the right hon. Gentleman is making is about the potential deviation of that enduring solution, and the gap between its implementation and the capital requirements that are normative globally, next June. I will undertake to clarify how we consider, in essence, the trade-off between that potential deviation and the disruption to firms. However, what I have tried to convey throughout today’s proceedings is that our desire is not to deregulate or to deviate from international norms, but to set out a UK framework that is necessary and appropriate for the institutions that exist in the UK.
Financial Services Bill (Seventh sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Seventh sitting)
John Glen ExcerptsThursday 26th November 2020
(3 years, 12 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 26 November 2020 - (26 Nov 2020)
Mr Pat McFadden (Wolverhampton South East) (Lab)
I beg to move amendment 28, in clause 8, page 7, line 38, at end insert—
‘(7) In reviewing critical benchmarks in accordance with Article A20 of the Benchmarks regulation as amended by this Act the FCA must have regard to—
(a) ensuring a benchmark is based on actual trades or contracts;
(b) preventing a benchmark from manipulation for the benefit of anyone submitting information to that benchmark; and
(c) robust sanctions up to and including custodial sentences for anyone found to be engaged in manipulation or attempted manipulation of a benchmark.’
This amendment would require the FCA to have regard to ensuring a benchmark is based on actual trades or contracts, that it is not open to manipulation and that robust sanctions are in place for those who manipulate, or attempt to manipulate, a benchmark.
Thank you for your chairmanship today, Mr Davies. Perhaps with your indulgence I may, as I did the other day, explain how I shall try to approach this morning’s sitting. I believe that within a sometimes impenetrable Bill the clauses we are to debate this morning may be the most impenetrable. That is often the case when clauses change provisions elsewhere, as in this instance. I shall, as I go through my remarks on the provisions, ask the Minister some questions. The real meat will come at about clauses 13 to 16, and I will speak for a bit longer. I just want to give the Committee the shape of my approach.
To return to the amendment, it begins, I guess, with LIBOR. I want by way of illustration to ask the Committee to think about the price of bread. If we were all asked what the benchmark price of a loaf is, it would be easy to establish it. We would go to a supermarket, look on the shelf, and see the price of a loaf. If we were keen shoppers with a good eye for a bargain, we might go to two or three supermarkets and compare the price of a loaf. I could pop-quiz the Committee, but I shall not put anyone through that.
The price of a standard loaf in one of our supermarkets is roughly £1.10, give or take; people who want to go for one of those sourdough loaves can pay a bit more if they want, but for what I would call a normal brown loaf it is about £1.10. That is the benchmark price of a loaf, dictated by the supply and demand of a competitive supermarket environment.
Now I want Members to imagine a different way of setting prices, where we were setting the price of a loaf and could all submit our opinion on what the price of the loaf might be—and we owned bakeries, and were selling loaves. We would have a debate every day to set the price of bread. Perhaps the Minister and I would converge on about £1.10, but someone else might say, “Look, could we just edge that price up? Could you do me a favour and make today’s price £1.11 or £1.12? It would be a really good favour and, by the way, if you do it I might send you a case of champagne at Christmas.”
The trader might be saying those things in the knowledge that they had a lot of loaves to sell that afternoon—maybe millions. The penny difference in price could make a great difference to the profit. Alternatively, a benchmark price of £1.09 instead of £1.10 could mean that they would lose a lot of money on the bread they had to sell. That is basically what was happening with LIBOR. That is the problem that was unveiled.
The problem is exacerbated where there is not a liquid market for bread and where the benchmark relies more and more on what our oral witnesses last week called “expert judgment”. That is one phrase for it, but we could also call it opinion, and if we did not have supermarkets selling millions of loaves every day and the price of bread was down to the opinion of only the bakers, we can see there would be the potential for price manipulation.
That is what was happening with LIBOR and what was uncovered as traders around the world shaved tiny proportions off the daily rates. The volume of money being traded meant that even a tiny proportion—0.01% or something like that—could make a huge difference to their own trading account over the course of the year. That is the problem that this set of clauses is trying to deal with.
How do we deal with the problem? We focus a lot on what the Bill calls the representativeness of the benchmark, because there is not really a problem when millions of loaves are being sold and there is a competitive environment; if I do not like the price at Tesco, I can go to another supermarket and try my luck elsewhere. But when wholesale markets were not very liquid and relied more and more on expert opinions, there was the potential for—indeed, the reality of—manipulation. That is what happened.
That matters because this benchmark underpins trillions of pounds’-worth of trades, yet was found to be vulnerable to the kind of manipulation I have just tried to illustrate. I have tried to show that even the tiniest movement in the daily benchmark could make a big difference to traders because of the volumes of money that they were trading. The benchmark’s flaws were exposed a number of years ago, yet its use to underpin trading has persisted because of the volume of contracts linked to it.
One of the problems in the complexity of this set of clauses is that it takes us into the area of contract law, which is both complex and, in this case, international. Huge volumes, contract law and international jurisdictions are involved, so—to be fair to the regulators and the Treasury—it is not easy to get this right. Our amendment does not try to get into the contract issue, which we will come to later when we debate a few clauses further on, but rather tries to set out some ground rules for the regulator in establishing and sanctioning successor benchmarks to LIBOR.
The criteria that we have set out ought to be uncontroversial. The first is that the benchmark should be based on actual trades in the market for which real prices were paid. I confess I have been away from the issue for a while, although I served on parliamentary inquiries into it some years ago, but we learned last week that those so-called expert judgments are still being used to set LIBOR prices. That is someone’s opinion of what a trade might cost, not necessarily what it does cost in a real marketplace. That use of expert judgments has created the potential—and, as we have seen, more than the potential—for manipulation.
We also learned that SONIA, the sterling overnight index average and the favoured successor to LIBOR in the UK, is based on much more liquid markets. That is a good thing, but there is also a potential problem. LIBOR is an internationally used benchmark. While we are debating this legislation, the United States is also legislating, the European Union has parallel legislation and the Swiss have parallel legislation—and they have all gone for slightly different successors. That raises the problem, which the Minister and I will get into discussing: how to take contracts based on an internationally used benchmark and try to ensure fairness to those who signed up to contracts under it when the countries legislating for successors to it are all choosing slightly different overnight rates for those successors.
The amendment, therefore, goes with the grain of how trades are moving. We all agree that a benchmark based on large liquid markets will be more accurate than one based on opinion. The second and third elements of the amendment give the regulator a duty to prevent manipulation by those submitting information to the benchmark and to have robust sanctions, including custodial sentences, when that occurs.
We will get back to debating that elsewhere in the Bill. When the LIBOR scandal unfolded some seven or eight years ago, I remember that both the Treasury Committee and the Parliamentary Commission on Banking Standards heard evidence from chief executives of the major banks. Often, their defence was, “I had no idea what my traders were doing. I did not know that they were doing this.” There was a constructive ignorance built into the system. Although that did not make the chief executive look good, it was far better than the chief executive admitting that they knew what the trader was doing but they looked the other way because it was making more profit for the bank and the trader. The sanctions and the responsibility up through the institution are very important.
All that is hugely important for trust in the system. The average constituent probably does not know much about LIBOR or what it does, but the truth is that the financial products they buy are often related to this benchmark, so it does have an impact in the real world. No matter how esoteric the financial products are—they have become too esoteric—in the end there is a customer, and the customer should only pay a fair price. The imbalance of information should not result in the customer being fleeced or the trader being unfairly enriched, and it is the job of the regulator and the financial institution for which that trader works to ensure that is the case. That is the intention behind our amendment: to set that as a clear goal for the regulators before we get into the meat in the clauses of how we will transition from LIBOR to other kinds of benchmarks.
The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship again, Mr Davies. I appreciate the opening remarks of the right hon. Member for Wolverhampton South East and his compelling attempt to contextualise the complexity of the scrutiny of the clauses that we will undertake this morning. In that spirit, it might be helpful if I contextualise for the Committee what benchmarks are, what the LIBOR benchmark is and where we are with the EU benchmarks regulation before I respond to the Opposition amendment.
A benchmark is a standard against which the performance of a fund can be measured or by reference to which payments can be calculated. They are most commonly found in financial instruments, but are used to compare a variety of products, from commodities—oil, gold and diamonds—to the weather. The most widely used benchmarks are interest rate benchmarks, such as LIBOR, the Euro Interbank Offered Rate and SONIA. They reflect interest rates for inter-bank lending and borrowing. They are regularly calculated and made publicly available. As was mentioned, they are used in a wide array of financial instruments used in global financial markets. They also have a use in trade, finance, valuation, accounting and taxation.
Stella Creasy (Walthamstow) (Lab/Co-op)
It is wonderful to serve under your chairmanship, as ever, Mr Davies. The Minister is explaining that there is a process for enforcement. We all know that this issue is very specialist. If he thinks the current regulations and sanctions are appropriate, could he set out how they are being enacted and monitored? Frankly, it requires someone with a specialist understanding of how these rates can be manipulated to enact them in the way he outlines. If he does not want to add the amendment, could he explain how these issues can be investigated, and what resources there are to do that?
John Glen
I thank the hon. Lady for her point. These matters are administered by the FCA. I have set out the framework under which it operates. Its resourcing is a matter for it, and I speak on a six-weekly basis to the chief executive about that. The sanctions available to the FCA vary considerably according the nature of the breaches. Some will be small, modest technical breaches.
Stella Creasy
The Minister has set out the criminal sanction. I am interested in whether there is support and resourcing expertise in relation to the criminal element, as opposed to the regulatory element.
Stephen Flynn (Aberdeen South) (SNP)
It is a pleasure to serve under your chairmanship, Mr Davies. I will be brief. The Minister has made a compelling case, but perhaps not as compelling as that made by the right hon. Member for Wolverhampton South East, who made illuminating remarks on the potential price of bread, although I encourage him to go to Aldi, where he will get it for a lot cheaper than £1.10.
What is proposed here is a common-sense approach that would give the wider public confidence that the Government are taking this matter seriously, notwith- standing the Minister’s remarks thus far. In general terms, I do not think there is a huge difference between the two positions, but looking at both sides, I think the common-sense approach would be to tighten this process and make it more robust; that would provide the public with the confidence they feel they need on these matters, particularly given the scale of past scandals.
Mr McFadden
I listened carefully to what the Minister said. I do not think anyone looking at the issue would conclude that the responsibility for these actions had been fairly allocated, so there is an issue. I am not saying we want to go around looking to put people’s heads on spikes—we do not want that sort of politics—but it does rankle with our constituents when certain types of crime that are, candidly, easier to understand are met with heavy punishments while somebody who does a very complex crime that is more difficult to understand can somehow get away with it.
Having said that, I accept that legislation for criminal offences, and particularly for custodial sentences, needs to be very carefully drafted in exactly the right way, and I cannot say that I am 100% certain that my amendment is, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 8 is the first of 14 clauses that amend the benchmarks regulation in order to provide the FCA with the powers it needs to oversee the orderly wind-down of critical benchmarks such as LIBOR. Critical benchmarks are benchmarks that meet certain criteria—for instance, they are used in a significant volume of transactions, or the benchmark is based on submissions by contributors, the majority of whom are located in the UK. A number of powers in the benchmarks regulation are limited to the oversight supervision of critical benchmarks or the administrators of such benchmarks.
Clause 8 adds new criteria for what may be designated as a critical benchmark. As a result, a benchmark will be considered critical if its cessation would cause significant and adverse impacts on market integrity in the UK, even where the benchmark has market-led substitutes, provided one or more users of the benchmark cannot move on to a substitute. The new test means that, as a critical benchmark winds down, the value of contracts that use the benchmark diminishes. The powers available to the FCA to manage the wind-down of critical benchmarks will remain available, provided that the benchmark meets the relevant tests to remain designated as a critical benchmark.
In addition, one of the existing tests for what may be designated as a critical benchmark has been changed. The test originally stated that a benchmark would be designated as critical where it met either both a qualitative and quantitative threshold of use in more than €400 billion-worth of products, or the qualitative threshold only. The quantitative threshold has now been removed, as it has become redundant. This measure has been welcomed by industry as an important development in managing LIBOR transition, and will ensure that the FCA has the powers it needs to manage the orderly wind-down of this critical benchmark.
I am aware, as a result of my engagement with industry—indeed, the Committee heard evidence of this last week—that there is support among market participants for additional safe harbour provisions to complement the provisions in this Bill. I can assure the Committee that we are committed to looking into that further issue and providing industry with the reassurance it needs. That conversation is ongoing and, I think, is to the satisfaction of the industry; we are working to a conclusion with it. However, given what I think the Committee will concede is the complexity of the matters involved, I cannot commit to an outcome, and I think the industry recognises that.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I want to go back to what happens if moving to another benchmark is “not reasonably practicable”. I note that the Minister is looking into that and seeking reassurance. One thing that we are particularly concerned about in this clause is the question of whether “one or more users”, if it is reasonable and practicable, can switch to a market-led substitute benchmark. How do the Government define what is reasonably practicable in this case? Will he explain that to me, please?
John Glen
I am grateful to the hon. Lady for her question. In terms of the benchmark’s being classed as critical and the appropriateness of substitutes, certain contracts face barriers to moving off a benchmark. While some contracts are bilateral and that renegotiation may be possible, many contracts are multilateral and involve the consent of multiple parties before a change can be made. Therefore, in some cases, achieving consensus on the changes is likely to be difficult or impossible, due to the absolute number of parties that will be involved, or due to the threshold at which consent would be achieved. In those situations the existence of an appropriate substitute is not relevant, as users will not be able to move on to it. The complexity of what they are on means that there is not anything substitutable.
Abena Oppong-Asare
On the point about the Government making a direct evaluation, if the benchmark user argues that it would not be reasonably practical to move to a market-led substitute, but the Treasury disagrees with that, what recourse does the user have to challenge this decision?
John Glen
These matters will be governed by protocols with the industry. The industry would have a dialogue with the FCA, through which these matters would be resolved. There would be a dispute, I would imagine, about the number of contracts, the number of people involved in those contracts, and the readiness of an available alternative. Usually, these matters would be resolved through dialogue and consultation.
Abena Oppong-Asare
That is really helpful, in terms of the dialogue with the FCA. Will a process be followed to ensure a fair system is applied with regard to substitutes that disagree with the Treasury process, or will how it is done be judged at that time?
John Glen
The complexity of these contracts and their reference to these benchmarks necessitates ongoing dialogue. There is a significant team in the FCA that deals with this work. The industry has been very concerned about this. This is a live, ongoing conversation. Given the context, and the history that the right hon. Member for Wolverhampton South East and I set out, and how appalling this situation was previously, there is wide consensus that this should be done in an open and collaborative way. This regulation will be used in that spirit.
Alison Thewliss (Glasgow Central) (SNP)
Paul Richards from the International Capital Market Association, who gave evidence last week, said there were around 520 legacy bond contracts to be moved over, and only 20 had been converted in the market so far, because it is a difficult and time-consuming process. Is there more the Government could be doing to reassure and help? Does the Minister envisage bringing forward any amendments to make this any easier? It sounds like this process will cost the markets money.
John Glen
I thank the hon. Lady for her question. The evidence from the ICMA last week underscored the ongoing complexity and challenges of this. It may be that legislation will be required in a future Session, but that would be subject to a resolution. There is no point of crystallisation from the industry; it is not compelling us to bring something forward. There is no resistance on the part of the Treasury to doing that; it is a question of working out what would be appropriate for the market. That dialogue will continue, and the Government will respond in the appropriate way in due course. I think the gentleman who gave evidence last week was appropriately making the Committee aware of that ongoing additional dialogue regarding that safe harbour provision. But there is no point of conflict between the Treasury and the industry on this matter.
Mr McFadden
The questions asked by my hon. Friend the Member for Erith and Thamesmead expose the potential for litigation if the Government and regulators are moving contracts from one basis to another; some of the people involved will have deep pockets and expensive lawyers. The Minister tells us that it will all be sorted out—thrashed out—and I hope he is right; but I am not sure that we can guarantee that.
I have a couple of questions about the clause and those clauses that follow. First, is it all about LIBOR, even though it talks about critical benchmarks, or is it more general? For example, might the provisions be used on a benchmark related to the price of a particular metal, or something like that? For our understanding of the matter, should we, wherever the provisions refer to a critical benchmark, just be thinking about LIBOR—because that is what we really mean; and is there some parliamentary drafting reason why the Bill does not say that?
Secondly, the clause deals with a review of which benchmarks are critical benchmarks. The Minister said, and the clause says, that that seems to be a benchmark for which a market-led substitute exists, although for some reason it is not practical to transfer activity to such a market-led substitute. That is what is confusing about the clauses. We are told that the policy decision, and the regulatory decision, is to move away from LIBOR and to cease using it by the end of 2021. That is my understanding. Yet it seems that the clauses both facilitate that and facilitate the continued use of such benchmarks.
My reading of the clause and the one that follows is that the FCA will retain the power to compel organisations to submit information to a critical benchmark, even though the policy decision has been made to move away from that benchmark. The question then is why the regulator would want to do that, and what the power means for the 2021 LIBOR end date. Does the power mean that the FCA could compel submitters to keep submitting information to LIBOR, and is that because so many contracts depend on it? Is that really why the power to continue submitting information to critical benchmarks is engaged in this? What I am really asking is whether the clause is putting the brakes on LIBOR or, in some ways, continuing a facilitation of LIBOR after the end of 2021, for some things.
John Glen
In the UK, LIBOR is the only critical benchmark. However, for reasons that the right hon. Gentleman has alluded to, we do not want the provision to be on just the LIBOR benchmark. For reasons to do with the type of legislation that that would mean—private legislation referring to something specific—a different process would be created. We have to use benchmark legislation—benchmark regulations; but LIBOR is what it pertains to. That is the only critical benchmark in the UK.
A mechanism to compel panel banks to continue to submit data beyond the end of 2021 does not exist. We have to be able to wind down in an orderly way and make provision for continuity, which is needed for the tough contracts that continue to exist and will need some reference point. We need to do that in a way that satisfies the market and maintains stability. It is in that context that we are giving the FCA the powers.
Question put and agreed to.
Clause 8 accordingly ordered to stand part of the Bill.
Clause 9
Mandatory administration of a critical benchmark
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 9 amends article 21 of the benchmarks regulation, which concerns the mandatory administration of a critical benchmark.
Article 21 gives the FCA the power to compel the provision of a critical benchmark where the administrator notifies the FCA of its intention to cease providing the benchmark. Clause 9 amends article 21 to increase from five to 10 years the maximum period for which an administrator can be compelled by the FCA to continue to provide the benchmark. This will increase the time which the FCA has to manage the wind-down of a critical benchmark.
Under the clause, if the FCA decides to compel an administrator to continue publishing the benchmark, the FCA must assess the capability of the benchmark to measure the underlying market or economic reality and inform the administrator in writing of the outcome of this assessment. The FCA’s assessment that a critical benchmark is no longer representative of its underlying market, or is at risk of becoming unrepresentative, is the first step in providing the FCA with its wider powers to manage the wind-down of such a benchmark. We therefore wish to ensure that the FCA can take steps towards starting the managed wind-down of a critical benchmark in circumstances where the benchmark administrator itself proposes to cease the benchmark. I recommend that the clause stand part of the Bill.
Mr McFadden
The clause takes us, in a sense, to the next step after a review. Again, I have a couple of questions. First, subsection (2) refers to a period of 10 years. The Minister made clear a few minutes ago that LIBOR is definitely winding up by the end of 2021, so to what does 10 years refer? With something that is supposed to be winding up in one year, I still cannot quite understand why we are giving the regulator powers to continue it in a form for up to 10 years. I am confused about that, and I do not know if I am the only one.
Secondly, subsection (3) refers to an assessment of a benchmark. That assessment revolves around the question of the representative nature of the benchmark. It says that the FCA will always give either
“a written notice stating that it considers that the benchmark is not representative of the…economic reality”—
perhaps it has become too illiquid, in the way we discussed, or too reliant on expert opinion—or
“a written notice stating that it considers that the representativeness of the benchmark is not at risk.”
In other words, we have a good competition going here for the price of the bread. Does the 10-year period of extended mandatory information apply when the FCA has judged that the benchmark is not representative, or could it apply in cases where it is judged that it is representative as well? Subsection (3) seems to indicate that the assessment could go either way. I am trying to get at what this 10-year power is for and to which kind of benchmark it applies.
John Glen
I thank the right hon. Gentleman for his entirely reasonable and appropriate questions. The compulsion period of 10 years is about having a timely period to continue with the revised methodology of the synthetic LIBOR. One of the main aims of the Bill is to provide an appropriate mechanism for the wind-down of LIBOR and to reduce the risk of contractual frustration in the event of an unplanned or sudden cessation of LIBOR. To enable a managed wind-down of LIBOR, it may be necessary for the FCA to compel the benchmark administrator to continue to provide the benchmark for a period of time, to allow a portion of LIBOR-referencing contracts to mature and end. We expect a significant number of outstanding LIBOR legacy contracts at the end of the five-year compulsion period, and those outstanding contracts will still pose a material financial stability risk, as the Financial Stability Board noted in 2014.
Mr McFadden
The Minister’s phrase, “synthetic LIBOR”, helps us to understand this. I think it might mean something like this: that the regulator has the power to designate a benchmark as critical when it is unrepresentative of market reality, but in a way LIBOR is not really ending at the end of 2021, because we have synthetic LIBOR—the ghost of LIBOR, we might say—and the ghost of LIBOR is necessary because of those legacy contracts.
Where I still get confused is that the reason LIBOR is being wound up, and the reason that the FCA can designate it in this manner, is that it is unrepresentative—yet for the ghost of LIBOR, or synthetic LIBOR, to have any validity, the FCA has to continue to compel submitters to submit information to it. I do not know what the implications of that are for the quality of the ghost of LIBOR; we must remember that the reason it has been designated in the first place is that it is failing the market representativeness test. How is it, therefore, that for up to 10 years we can compel submitters to submit information to something that the regulator has judged invalid?
John Glen
The right hon. Gentleman has accurately summarised the issue around synthetic LIBOR, but we are getting into suppositions about the time period for which that synthetic LIBOR would be necessary. The FCA recently published a paper on this. It is about evolving circumstances in the market. It is very difficult to be prescriptive, hence the 10-year provision. We are now getting into the realm of market operating realities at some point in the future. We have to have something that references the fact that we have a considerable volume of contracts that reference the historical LIBOR and we have to have a reference point going forward. I hope that is helpful.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clause 10
Prohibition on new use where administrator to cease providing critical benchmark
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 10 inserts article 21A to the benchmarks regulation. This article provides the FCA with the power to issue a notice prohibiting some or all new use of a critical benchmark by supervised entities. The FCA may use this power where the administrator has stated that it wishes to cease providing the benchmark and the FCA has assessed the administrator’s plans to cease the benchmark or otherwise transfer it to a new administrator.
The FCA can exercise this power only if it considers that it is desirable to advance its consumer protection objective or its integrity objective under the Financial Services and Markets Act 2000. The notice will contain the reasons for the prohibition, the date when it is to take effect and any further information that the FCA considers appropriate to allow supervised entities to understand the decision. The FCA’s ability to prohibit new use in circumstances where the administrator is seeking to cease to provide the critical benchmark is an important step in preventing the pool of contracts referencing a benchmark from growing ahead of its possible cessation. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I thank the Minister for his explanation. This clause is about the prohibition of the use of benchmarks. Again, I have a few questions. Is it the case that prohibition can take place only after the kind of assessment of the representative nature of the benchmark that we discussed under clause 9(3), or are there other grounds for issuing a notice prohibiting the use of a benchmark, such as suspected criminal activity or manipulation in some other way?
My second question is about use. New article 21A prohibits “new use” of a benchmark. I think the Minister is saying that there should not be new use of a benchmark, but there may be continued use for the reasons that we have discussed—for legacy reasons. Could the Minister confirm that existing contracts referenced in the benchmark would not be covered by this “new use” provision?
My third question is about paragraph 4 of new article 21A, which says that the FCA must have regard to effects outside the UK of any decision to cease use of a benchmark. I can see why such a provision would be there, because LIBOR is used to underpin contracts all over the world. However, what can the regulator, which only has jurisdiction in the UK, do to stop the use of a benchmark elsewhere in the world? To what degree does this require work with other regulators through, for example, the Financial Stability Board, or is the judgment that action by the FCA alone would be enough, even though that action might have international effects, because of the importance of UK benchmarks? I suppose it is as if some jurisdiction has a particular influence in a sport, so when they change the rules, everybody else has to change the rules, too.
I assume that those criteria about the protection of the consumer and so on that the Minister referred to are in the Bill to protect the FCA from litigation risk by making clear that in acting on this, it was doing so in line with its statutory objectives, because the danger of litigation risk runs right through this.
John Glen
The right hon. Gentleman raises a number of questions, and I should start by making it clear that we in the UK cannot stop use overseas. The provision applies to UK-supervised entities working with international partners. He is right to say that there is interconnectedness between those institutions, and the FCA has a significant role in terms of LIBOR.
The simple purpose here is that, where a benchmark is to be ceased, the pool of contracts referencing that benchmark should stop growing. The prohibition power that the right hon. Gentleman referenced is available only at the point at which the benchmark administrator has informed the FCA that it is planning to cease to publish it and the FCA has considered whether it is realistic for the benchmark to be ceased or transferred to a new administrator. Clearly, it would not be desirable for the pool of contracts that reference the benchmark to continue to grow in circumstances where it is likely that that benchmark is on a pathway to ceasing to be used. It is therefore appropriate at that stage to stop supervised entities entering into new contracts that reference the relevant benchmark.
In terms of the rules broadly governing the FCA in exercising this power, it can do that only if it is desirable to do so in order to advance this FSMA consumer protection objective or the integrity objective, so it would have to be confident that it would secure an appropriate degree of protection for consumers or advance the integrity of the market, and it would have to publish a statement along those lines. I recognise that this is complex, but we are really trying to give an appropriate toolkit to the FCA to do what is necessary not only to safeguard the appropriate ongoing construction of benchmarks, but to ensure that it has the authority to justify the management of the wind-down in circumstances where that is necessary.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
Assessment of representativeness of critical benchmarks
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 11 introduces two new articles to the benchmarks regulation. New article 22A requires the administrator of a critical benchmark to undertake,
“an assessment of the capability of the benchmark to measure the underlying market or economic reality”.
The administrator must undertake such an assessment when a contributor to the benchmark is proposing to withdraw, when the FCA requires the administrator to undertake a review of the benchmark, or every two years as part of a biannual review process. New article 22A also requires that:
“If a supervised contributor…intends to cease contributing input data to a critical benchmark”,
it must provide written notification to the administrator at least 15 weeks ahead of the date it intends to cease contributing. That replaces the existing four-week notice period, which is insufficient.
New article 22B requires that the FCA must conduct its own representativeness assessment of the benchmark once it receives an assessment from a benchmark administrator under article 22A. The FCA may also proceed with its assessment where the administrator has failed to provide an assessment within the timelines specified by the legislation. After making its assessment under this article, the FCA must provide the benchmark administrator with a written notice setting out its findings, which could be that it considers that the benchmark is not representative of the economic reality it is intended to measure, that it is at risk of not being representative, or that the representativeness of the benchmark is not at risk.
Those assessments play a crucial role in the process we have designed for managing the wind-down of a critical benchmark. A finding that a benchmark is no longer representative or that its representativeness is at risk is the first step in activating many of the new powers that are being granted to the FCA. I recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Clause 12
Mandatory contribution to critical benchmarks
John Glen
Clause 12 amends article 23 of the benchmarks regulation, which concerns the mandatory contribution to a critical benchmark by supervised entities. Article 23 already provides the FCA with certain compulsion powers over the administrator and supervised entities, which contribute to a benchmark, including the power to compel supervised contributors to continue to contribute to a benchmark. These powers were previously only available where the representativeness of the benchmark was judged to be at risk.
The clause amends the article to ensure that it works with the new representativeness assessments we are introducing under the Bill, and that these powers are available either where the benchmark is at risk, or where the benchmark has actually become unrepresentative. The changes mean that, for instance, the power to compel a contributor will now become available whenever the FCA has made a finding that the benchmark is unrepresentative, or its representativeness is at risk.
The clause also extends the compulsion powers to supervised third country contributors and requires that if a contributor gives notice that it intends to withdraw on a specific date, it may not cease contributing on that date without written permission from the FCA. It also clarifies that the FCA’s compulsion powers and other powers in paragraph 6 of article 23 are available specifically for the purpose of restoring, maintaining or improving the representativeness of a benchmark.
These powers are important in ensuring that a critical benchmark does not simply cease in circumstances where the representativeness of the benchmark could reasonably be maintained or restored through appropriate FCA action. I recommend that the clause stand part of the Bill.
Mr McFadden
I have one or two questions to the Minister. The clause gives the FCA the power to mandate contributors, including those outside the UK—it will be interesting to see how that works—to continue to submit information to a benchmark for up to five years. However, clause 9 states that synthetic LIBOR—the ghost of LIBOR—can be kept going for up to 10 years. Why is it five years in this clause but 10 years in clause 9?
John Glen
I thank the right hon. Gentleman for his question. He draws attention to the discrepancy between the provision for five years in clause 12 and 10 years elsewhere. It is important to remember that the powers in the Bill are not just for LIBOR but will be relevant to benchmarks that are designated as critical in the future. The changes in the clause ensure that the existing compulsion powers work with the amendments made to the wider regulation. Where we have a benchmark that is unrepresentative or is at risk of being unrepresentative, the FCA should have access to these powers.
With respect to LIBOR, the amendments ensure the FCA will have the required time to implement the various processes that we are introducing, to access their new powers, and to mitigate the risk of the rate simply ceasing due to insufficient input data. The 10-year provision is a contingency about the ongoing use of the benchmark. The timeframes are constructed with respect to both the LIBOR provision and the wider needs of benchmarks and have been constructed in consultation with the FCA over quite a long period.
Mr McFadden
I am not sure that that is entirely convincing, because neither clause refers specifically to LIBOR, for reasons that the Minister has explained. They both refer to benchmarks in general.
The different timescales used throughout this section are somewhat confusing. There are reviews every two years; other timescales of three months are mentioned here and there. I am genuinely confused about why clause 9 gives the power to compel contributions for up to 10 years, yet here we are a few clauses on talking about five years. I accept that the Minister says that the 10 years might be a maximum, but if these powers are to deal with the issue of legacy contracts, I am still not sure why we have this discrepancy. It could be that I am not understanding something or that I am missing something. That is certainly possible. Is this an arena where the Government may come forward with an amendment during the later stages of the Bill’s passage?
John Glen
I am always open to looking at the possibility of amendments, as I have demonstrated during the sittings we have had so far. The 10-year reference was under the revised methodology for LIBOR to be produced by the administrator. It will probably be useful for me to reflect on this exchange, and to write to the right hon. Gentleman and the Committee to clarify the apparent discrepancies and rationale for this. I recognise that this is genuinely complicated. I want to bring satisfaction to the Committee and I am happy to do that.
Julie Marson (Hertford and Stortford) (Con)
It is a pleasure to serve under your chairmanship, Mr Davies. The shadow Minister is obviously concerned and quite rightly scrutinising the detail of every clause. Does my hon. Friend agree that it would be apposite to recall from the evidence from the regulators, including the Prudential Regulation Authority, the FCA, and specifically the LIBOR transition director for UK finance, how supportive they are of the provisions of this Bill? The LIBOR transition director said explicitly in his evidence:
“These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.”––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 18, Q30.]
That plays back into the consultation and regulators’ support for the Bill.
John Glen
I appreciate my hon. Friend’s intervention. It demonstrates that there is widespread concern for this legislation to be passed. The right hon. Gentleman is pressing me, quite appropriately, on these apparent anomalies, and I am happy to submit to his questions. The issue is that synthetic LIBOR is related to the 10-year provision, but the five-year provision is for other critical benchmarks, which do not have the same context in terms of their contractual longevity. As I said in my response to the right hon. Gentleman, I will write to him and to the Committee to bring clarity on this matter. It is an important matter that needs clarifying.
Question put and agreed to.
Clause 12 accordingly order to stand part of the Bill.
Clause 13
Designation of certain critical benchmarks
Question proposed, That the clause stand part of the Bill.
John Glen
The clause inserts a new article into the benchmarks regulation that, in essence, provides the FCA with the power to designate a critical benchmark as an article 23A benchmark, if they consider that the representativeness of the benchmark cannot reasonably be restored, or there are not good reasons to restore and maintain its representativeness. This designation allows the FCA to use a number of the new powers that are set out later in the Bill, such as the ability to require that the administrator change the benchmarks methodology.
Given the significant impacts of making such a designation, we have included a number of safeguards to the designation power. First, if the FCA considers it appropriate to designate a benchmark, they must inform the administrator and allow 14 days for the administrator to make representations before proceeding with the designation. If the FCA decides to proceed with the designation, they must publish a notice. That should include, among other things, the reasons for their decision, the date it takes effect and any further information that the FCA considers appropriate to assist supervised entities in understanding the effects of the designation.
In summary, clause 13 sets out the procedure by which the FCA can designate a benchmark and access the powers detailed later in the Bill. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I am grateful to the Minister. Before I begin, I say to the hon. Member for Hertford and Stortford that we are under a duty here to try to understand what we are doing. It is in that spirit that I am asking these questions. I was reminded by a colleague about a different kind of Standing Committee, which some years ago was considering the Hunting Bill. He told me that after a month they were still on clause 1, which was about the title of the Bill, so I do not think we have gone over the top in asking these questions.
With your and the Minister’s indulgence, Mr Davies, I would like to make a few points about the next few clauses; I think they go together and get to the heart of what this area of the Bill is about. As I said, the Opposition understand why LIBOR is being wound down; we have gone over the history of the manipulation and so on. It is why the Bill rightly places such an emphasis on benchmarks being representative of market activity: so far, so uncontroversial.
However, there is a problem in the transition from LIBOR to SONIA or other new benchmarks. As we have referenced several times, there will clearly be some impact on the value of LIBOR-based contracts. That impact is openly acknowledged by the FCA when it says:
“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”
Remember that, given the volume of money involved—we are talking about not millions or billions but trillions—this is a systemic risk, as well as a risk to individual parties to contract.
My understanding of the provisions in clause 13 and a few that follow is this. When the FCA feels that a benchmark is no longer representative of the market to which it relates or that that representativeness is at risk, it can designate the benchmark under article 23A of the benchmark regulation. Then there are various provisions about notices being published, reasonable fees being charged and so on; we can leave those aside. When such a benchmark is designated by the FCA, that can only be done in line with the statutory duties, to which the Minister referred, of consumer protection and market integrity. When a benchmark is designated in that way, new use of the benchmark is prohibited, but—this is the critical “but”—the FCA can mandate continued legacy use of that benchmark. The Minister may come back to me about timescales—five years, 10 years or whatever it is.
Finally, if the potential disruption brought about by the discontinuation of LIBOR—or a critical benchmark, if we want to refer to it in that way—is too great, it is suggested in the Bill that the FCA may compel its continuation, as we have discussed. How realistic is it for the FCA to continue to compel administrators to submit information to something that they have said they want to phase out in a year’s time? The provisions are intended to allow the FCA to wind down a critical benchmark but in a way that protects these legacy contracts, which are based on the old benchmark. That brings us to those legacy contracts and what is or is not included, and to the potential legal risks.
As I understand it, there might be two issues. First, what is the definition of a legacy contract? Is it one where there has not been agreement between the two parties to transfer to the new benchmark, or is it something different? What are we talking about when we discuss legacy contracts? What would we do if there were a dispute between the parties about whether something should be treated as a legacy contract or not?
Secondly, how will the provisions cope with the potential legal action and/or market disruption as a result of parties feeling aggrieved, for one reason or another, about the switch from one benchmark to another or, in consequence, taking action that results in disorderly markets? In other words, to what degree is the process subject to disruption through legal action by the parties involved, which could feed into market operation, given the volume of money involved in these contracts?
Mr McFadden
However, I thought it better to take these next few clauses together and raise those points with him in this way.
Alison Thewliss
I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.
I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.
John Glen
I thank the hon. Lady and the right hon. Member for Wolverhampton South East for their questions, and I will do my best to address them.
On legacy use, this is broadly where a benchmark was used in specified existing contracts or instruments prior to its designation as an article 23A benchmark. The right hon. Gentleman went on to ask a series of questions about the concept of safe harbours, the different jurisdictions of legal process, and the compulsion process. The Government believe that the proposal is realistic. The administrators do not submit information; the contributors do. On safe harbours, which we picked up on from the evidence from the gentleman from the trade association last week, we recognise the challenges identified in that session, and the powers are designed to assist those contracts that cannot feasibly move away from LIBOR, as Paul Richards described. I am committed to looking to address the issue of safe harbour through further work with industry.
In practice, it will not be possible to table amendments during the passage of this Bill, but that is not down to my unwillingness to do so; it is a matter of the maturity of the conversation, and I think that will be acknowledged. A live productive conversation is going on.
Mr McFadden
Is the parallel legislation in the United States and the EU part of that consideration? When we received the oral evidence last week, I confess that I had not appreciated that parallel legislation on this subject, with safe harbour provisions, was going through in those two jurisdictions. Given the co-operation that already exists through the FSB, involving in the Federal Reserve Bank of New York and the Bank of England, is that part of the consideration?
John Glen
We are looking and working internationally. We have an active dialogue with the US through a regulatory working group, and we will be monitoring that. There is no question of us seeking to find some competitive advantage in this; there will be a need to find as much alignment as possible to give as much clarity and certainty to the market actors. However, the conversation is not at that stage yet here. There is no sense that that is jeopardising the integrity of this process. This is the first step, but we reserve the right to do other things further to the conclusion of those conversations.
As for accountability to Parliament, as raised by the hon. Member for Glasgow Central, the legislation requires the FCA to produce statements of policy and notices when exercising the powers. There is also a requirement to review the exercise of its methodology every two years and to publish a report following that review. The FCA is required to exercise its powers in accordance with the two statutory objectives: consumer protection and market integrity. That is the relationship to parliamentary accountability.
Turning to the other matters raised by the right hon. Gentleman around the administrator challenging a designation, if the FCA decides to designate a benchmark under this article, the benchmark administrator has the option of referring the matter to the upper tribunal. The FCA is required to inform the administrator of its right to refer the decision to the upper tribunal and the procedure for doing so.
As for the continued publication of a benchmark that has been deemed unrepresentative, in the case of a critical benchmark such as LIBOR, the benchmark is so widely used that its discontinuation would represent a risk to financial stability and create disruption for market participants. Therefore, this Bill provides the FCA with the power to require a change to how a critical benchmark is determined, including input data, to preserve the existence of the benchmark for a limited time period to help those contracts that otherwise would not realistically transfer to an alternative benchmark.
I hope I have done justice to most of what the right hon. Gentleman raised. I will seek to review what we have exchanged and, if there are outstanding matters, to write to him. I am relieved we have moved beyond clause 1.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Ordered, That the debate be now adjourned.—(David Rutley.)
Financial Services Bill (Eighth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Eighth sitting)
John Glen ExcerptsThursday 26th November 2020
(3 years, 12 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 26 November 2020 - (26 Nov 2020)
The Chair
The same drill as the other day: I am happy to permit Members to remove their jackets. Apparently permission has to be sought from the Chair to remove a jacket, so there you go—that is how nice I am. I saw you a lot on TV yesterday, Minister; it is nice to see you in the flesh.
Clauses 14 and 15 ordered to stand part of the Bill.
Clause 16
Review of exercise of powers under Article 23D
The Economic Secretary to the Treasury (John Glen)
I beg to move amendment 3, in clause 16, page 23, line 13, leave out “latest” and insert “most recent previous”.
This amendment clarifies what the FCA has to review before re-exercising the power under Article 23D(2) of the Benchmarks Regulation.
Clause 16 introduces a new provision: article 23E of the benchmarks regulation. It requires the Financial Conduct Authority to conduct and publish a review of an exercise of its article 23D powers to direct the administrator of an article 23A benchmark to change the methodology rules, or code of conduct, of the benchmark. Where the FCA has exercised a power under article 23D, the FCA is required to conduct and publish a review of the exercise of that power two years after the power is first exercised. The FCA must then conduct and publish such a review in each subsequent two-year period until the benchmark ceases to be published.
The FCA will also be required to review the exercise of this power under article 23D whenever it intends to re-exercise its power in relation to the same benchmark. The FCA must conduct and publish a review of the latest exercise of its article 23D power before re-exercising the power where that is reasonably practicable. In circumstances where it may not be reasonably possible for the FCA to conduct its review prior to the use of the power, the FCA must conduct and publish its review as soon as is reasonably practicable after the re-exercise of its article 23 power. For instance, it is possible that the FCA may need to take such a course of action when it needs to access its article 23D powers urgently to prevent significant market disruption or financial stability risks.
In concluding the review, the FCA will be required to consider whether the exercise of its power has advanced, or is likely to advance, its statutory objectives to protect consumers and market integrity. It must also have regard to the statement of policy that the FCA has published in respect of the use of its article 23D powers. The clause provides a statutory mechanism through which the effectiveness of the FCA’s exercise of its powers under article 23D can be evaluated. It also serves to increase the accountability of the FCA in the exercise and re-exercise of the powers.
I apologise for not acknowledging you in the Chair, Dr Huq; it is a pleasure to serve under your chairmanship. I recommend that the clause stand part of the Bill.
Mr Pat McFadden (Wolverhampton South East) (Lab)
I thank you, Dr Huq, for chairing this afternoon’s session. For clarity, we had a fairly extensive debate on clauses 13 to 16 together, hence the speed of our progress at the beginning of this session.
John Glen
Amendment 3, which stands in my name, is a technical amendment. As the explanatory note says, it is intended to clarify the scope of the review that the FCA is required to undertake where it re-exercises its article 23D(2) powers in relation to the same benchmark. Article 23D(2) provides the FCA with the powers to direct the administrator of a critical benchmark to change the methodology rules or code of conduct of the benchmark. The amendment serves to put beyond doubt which exercise of power the FCA is required to review at this point in time.
I would like to address the point raised by the right hon. Member for Wolverhampton South East just before we broke for lunch on the international LIBOR transition. The Government have followed related global regulatory developments closely, including what is going on the United States, as he mentioned, with the US Alternative Reference Rates Committee’s legislative proposal. We continue to work with regulators to engage our international counterparts directly, as well as through the Financial Stability Board’s official sector steering group and the International Organisation of Securities Commissions.
It is quite clear that, as the right hon. Gentleman stated, we will need a co-ordinated global approach, and we aim to provide consistent outcomes for users. The Government are committed to ensuring that their dialogue with international counterparts continues, and aim to firmly limit any unhelpful divergence to outcomes. I hope it will be helpful for the Committee to have that put on the record.
Mr McFadden
I am grateful to the Minister; I suspect that is a harbinger of a Government amendment at some point, because of the debate we had on safe harbour provisions. If they are coming in in the US and the EU, I suspect, given what he has just said about marching together on this internationally, we may see an amendment from him on this at some point.
The Chair
It sounds like fine-tooth comb stuff this morning.
Amendment 3 agreed to.
Clause 16, as amended, accordingly ordered to stand part of the Bill.
Clause 17
Policy statements relating to critical benchmarks
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 17 introduces a new provision, article 23F of the benchmarks regulation. This clause requires the FCA to publish statements of policy and to have regard to those statements when exercising certain new powers set out in the benchmarks regulation. The FCA is required to publish a statement of policy with respect to the exercise of this power to designate a critical benchmark as an article 23A benchmark. This is the designation the FCA can make where it determines that a benchmark’s representativeness cannot be restored or maintained, or that there are good reasons not to restore or maintain representativeness.
The FCA must also publish a statement of policy with respect to the exercise of its powers under article 21A, which allow it to prohibit new use of a critical benchmark when the administrator of that benchmark has notified the FCA of its intention to cease providing the benchmark. The FCA is also required to publish a statement of policy in exercising its powers under article 23C, which allow it to permit certain types of legacy use of an article 23A benchmark by supervised entities. Finally, the FCA must also publish a statement of policy in exercising its power under article 23D, which allows the FCA to impose requirements on the administrator of an article 23A benchmark to change the methodology, rules or code of conduct of the benchmark.
The Bill states that the FCA’s duty to prepare and publish those statements of policy can be satisfied before as well as after this legislation comes into force. On 18 November, the FCA published two consultations inviting industry feedback on statements, which ask for views on how the FCA intends to exercise its article 23A and article 23D powers granted under this Bill. It has also stated its intention to engage with industry stakeholders and international counterparts in the development of its statements of policy with respect to its powers under articles 21A and 23C.
This clause increases transparency regarding how the FCA will exercise certain new powers set out in the Bill to support the orderly wind-down of a critical benchmark. In developing statements of policy, the FCA will be able to engage with industry and international counterparts. The clause also requires the FCA to have regard to those statements when exercising its new powers, reducing uncertainty for market participants. Therefore, I recommend that the clause stand part of the Bill.
Mr McFadden
I just have a question about these policy statements. We have been through quite a lot about how the FCA will designate, compel and continue the submission of information and all the rest of it. What role do these policy statements play in all of that? Is the policy statement simply putting into law a requirement on the FCA to say why it has acted as it has, or is it, as part of what I think is behind some of the stuff in these clauses, insulating the FCA against the threat of legal action because of the possible effect on contracts? Is this a nice to have, best practice or is it something that helps to protect the FCA against the threat of litigation, which has been a thread through this discussion?
Ms Angela Eagle (Wallasey) (Lab)
Obviously, this is a very technical area, to say the least. I just want to ask a couple of questions so that I can get my head round how the FCA will use the power. We have different regulators who could make different determinations as to what constitutes benchmarks going forward, and yet those benchmarks write contracts worth trillions of pounds and dollars into the future. Any arbitrage opportunity in the way that those contracts work could make some people very rich and ruin others. This will be decided as one goes along. Some of these contracts are being made, but some are already projected into the future.
To ensure that markets are not distorted and the potential for nefarious profit by some with insider information is minimised, we need reassurance about how the FCA will perform the task, particularly in its interactions with the other regulators. I am not sure what the Government’s intention is, apart from saying they are going to liaise with other regulators. Is it the Government’s intention that these benchmarks ought to be similarly designed and defined across different regulatory jurisdictions, since this is almost a currency, or are we seeking divergence here as well in order to perhaps increase our chances of being the place where some of this business is written?
Perhaps the Economic Secretary could reassure me on that, because the FCA’s powers are pretty strong, but what is the intention? That might be in all of the many consultations, which I confess I have not read, so it might be set out there. If the Minister could put a little more on the record, we might at least have some certainty there, not least for Pepper v. Hart purposes.
John Glen
I thank the right hon. Member for Wolverhampton South East and the hon. Member for Wallasey for their observations. The hon. Lady demonstrates her experience and professionalism in being able to jump in on the first clause, having not been here this morning—no disrespect intended.
John Glen
The point that the hon. Lady makes is absolutely clear. We need to ensure that the regulations are in line with global practices because the issue is global. The interconnectedness of financial services markets demands, as in the statement I made just now, that we work very closely with regulators in other jurisdictions. It is absolutely right that we learn the lessons that the right hon. Gentleman, in his work on the Parliamentary Commission on Banking Standards several years ago, drew attention to with respect to the appalling abuses in the market. This measure is designed to give us a framework and to give the FCA the powers to ensure that we have global best practice and no ambiguity.
John Glen
This clause introduces a new provision, article 23G, into the benchmarks regulation. The clause makes provision about critical benchmarks provided for different currencies, or for different maturities or periods of time. This type of benchmark is known as an umbrella benchmark. LIBOR, for instance, is an umbrella benchmark. It is published in five different currencies over seven different time periods, ranging from overnight to up to one year. Those five currencies and seven time periods are paired to form 35 individual LIBOR settings, referred to in the legislation as “versions” of the benchmark. An example of a version of LIBOR would be three-month US dollar LIBOR.
Paragraph 3 of article 23G sets out that specified articles of the benchmarks regulation will apply to umbrella benchmarks as if each version were a separate critical benchmark. Paragraph 4 sets out how provisions under paragraph 3 of article 21, paragraphs 1(a) and 2 of article 22A and paragraph 1 of article 23E of the benchmarks regulation are modified in relation to an umbrella benchmark.
The Treasury will be able to make, by regulations, provisions about the operation of the UK BMR in respect of umbrella benchmarks. The regulations must be made by way of the affirmative procedure.
This clause sets out that the FCA will be able to exercise certain new powers to support the orderly wind-down of a critical benchmark in different ways in relation to different versions of an umbrella benchmark. It also clarifies the existing operation of certain provisions of the benchmarks regulation and how the FCA’s powers apply to versions of a benchmark. Those clarifications of the FCA’s powers will be of aid in supporting the orderly wind-down of a critical benchmark. For example, where panel banks begin to withdraw their submissions to some or all versions of LIBOR after the end of 2021, the different versions of LIBOR are likely to become unrepresentative, as we discussed earlier, or be at risk of becoming unrepresentative at different speeds.
It would be neither practicable nor appropriate for the FCA to exercise its new and existing powers uniformly across all versions of LIBOR simultaneously. For example, it is possible that if the robust input data necessary for an alternative methodology is not clearly available for certain versions of LIBOR, the FCA may not be able to exercise its power to direct a change in its methodology. In other cases, market participants may prefer to cease publication of some LIBOR versions. The FCA will consider evidence and views from market participants and global authorities in deciding the best course of action in respect of LIBOR versions.
It is critical to the wind-down of LIBOR, and future umbrella benchmarks, that the FCA can apply its powers under this legal framework to different versions of an umbrella benchmark at different times and in different ways. I therefore recommend that this clause stand part of the Bill.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Clause 19
Changes to and cessation of a benchmark
Question proposed, That the clause stand part of the Bill.
John Glen
The clause introduces amendments to article 28 of the benchmarks regulation, including new paragraphs 1A to 1E. Article 28 of the benchmarks regulation stipulates requirements for benchmark administrators and supervised entities in preparing for changes to, or the cessation of, benchmarks. I will refer to this as the change and cessation procedure.
The clause inserts the word “robust” in paragraph 1 of article 28 to define and strengthen the nature of the change and cessation procedures that benchmark administrators are required to publish. The clause also inserts new paragraphs 1A to 1E, which set out requirements for the written change and cessation procedure that a benchmark administrator must publish.
New paragraph 1A establishes that the administrator must publish a robust written change and cessation procedure alongside the publication of the administrator’s benchmark statement, which, among other things, sets out the market or economic reality that the benchmark intends to measure. The documents must be published within two weeks of the benchmark being registered in the FCA’s register. Wherever a material change occurs, the benchmark administrator is required to update its written procedure. For critical benchmarks, the proposed changes in new paragraphs 1B to 1E set out additional and more stringent requirements.
When publishing its written procedure, the administrator of a critical benchmark is required to provide an assessment to the FCA, on the basis of the information available to it, that considers the nature and extent of the current use of the benchmark, the availability of suitable alternatives, and how prepared users are for changes to, or the cessation of, the benchmark. Before publishing an updated written change and cessation procedure, critical benchmark administrators must also provide that assessment together with their updated written procedure to the FCA for review. The FCA is required to review and consider whether the procedure is sufficiently robust. The administrator must not publish an update of its procedure without receiving written notice from the FCA that its procedure is sufficiently robust.
In order to be designated as a critical benchmark, a benchmark must be used extensively, and its cessation may pose significant and adverse impacts on market integrity, financial stability, consumers, the real economy, or the financing of households and businesses. It is therefore reasonable and proportionate to require administrators of critical benchmarks to demonstrate via an assessment that their cessation plans are robust. We do not expect it to be an overly burdensome assessment for benchmark administrators. The clause will support increased preparedness in the event of changes to, or the cessation of, benchmarks in the future. I therefore recommend that the clause stand part of the Bill.
Ms Eagle
Again, I have just a few questions so that I can get in my head precisely what the reason is for putting this in primary legislation. LIBOR clearly had its issues but it was used for a very long time. Is the Minister anticipating that benchmarks will change much more rapidly in the future, or does he want some kind of stability with the new benchmarks that are based on actual prices, rather than the guesses of participants in the market, as LIBOR came to be defined prior to its demise?
Is the Minister expecting that this kind of provision for ceasing benchmarks will be used regularly? I anticipate that the answer will be, “Only when it is needed because of what is happening in the market.” If this kind of procedure is theoretical and on the face of a piece of legislation but hardly ever used, does that mean that the mechanisms that the Minister is setting out in clause 19 and other parts of the Bill will rust away? They will be there in theory, but there will be nobody there to work them properly. How does he anticipate that the market, the FCA and the benchmark administrators will maintain the capacity to do this if cessation is a very irregular, rare thing?
Will the Minister spend a bit of time defining what “robust” means in this context? In my time in this place, I have had many arguments with Ministers, and made many arguments as a Minister, about why we must not put particular words on the face of Bills and what their meaning is. Can the Minister enlighten us as to what he, the FCA and the Treasury mean by “robust” and how they are defining that in law, so that I can have a bit more confidence that they have got it right on the face of the Bill?
John Glen
I thank the hon. Lady for her comments. Although the provisions of this legislation are under the heading of benchmarks, they really refer to the capacity that we need to have to deal with the LIBOR issue. She is right to raise the question of the enduring provision and how tested and exercised that capacity would be, but this is about setting a framework for future use, which is very difficult to anticipate. We want to ensure that it is fit for purpose for the future.
The hon. Lady asks when the framework could be used, which is not a matter that I can reasonably be drawn on, because it would be about market conditions evolving, but it certainly means that we are ready for whatever might evolve, in terms of benchmarks on the path towards becoming critical. However, it will be for the FCA, in conversation with the market and Parliament, to determine how to bring that forward.
Ms Eagle
Does the Economic Secretary think that, given the incredible trouble that the wind-down of LIBOR has caused in the markets—not least because of what is on the face of the Bill and the very difficult issues caused by having to exit the LIBOR benchmark—it is best to try to get the next benchmark sorted and future-proofed, so that it does not turn into LIBOR 2 and cause his future successor in the Treasury and me all this kerfuffle in a Public Bill Committee?
John Glen
Absolutely. It is absolutely right that we give the power to the FCA but also keep a vigilant eye on evolving market conditions, so that we are well placed to move earlier to deal with any failures in benchmarks.
The hon. Lady asked me to define “robust” in the context of the Bill. I am reluctant to be drawn on that, because it is a matter of legal definition, but I would be very happy to write to her on that and respond at subsequent sittings of the Committee, if she wishes me to do so.
Question put and agreed to.
Clause 19 accordingly ordered to stand part of the Bill.
Clause 20
Extension of transitional period for benchmarks with non-UK administrators
Question proposed, That the clause stand part of the Bill.
John Glen
The clause amends article 51(5) of the benchmarks regulation, which provides for a transitional period during which the UK’s supervised entities can continue to use all third-party benchmarks. Those are benchmarks that are provided by administrators located outside the UK. When the UK onshored the EU benchmarks regulation, the transitional period for third-country benchmarks was extended from the end of 2019 to the end of 2022. The extension was made to provide third-party benchmark administrators with more time to apply for continued access to UK markets. For the UK’s supervised entities to continue to use benchmarks that are administered outside the UK after the end of 2022, the benchmarks or their administrator must be listed on the FCA benchmarks register.
The benchmarks regulation provides three access routes for third-country administrators or benchmarks. They must apply for the endorsement of specific benchmarks or for recognition as an administrator, or they can benefit from an equivalence decision made by the Treasury with respect to their home jurisdiction’s regulatory framework. As of October 2020, however, only 14 third-country benchmark administrators have come through the access routes that are outlined in the EU benchmarks regulation. Industry engagement has also revealed important concerns about the operation of the current regulatory regime for third-country benchmarks under the benchmarks regulation. For example, many non-European economic area jurisdictions do not have specific regulator rules for benchmarks.
The UK will explore how best to support the use of global, non-UK benchmarks that adhere to equivalent regulatory outcomes. The endorsement and recognition access routes both rely on third-country administrators being willing to apply for market access, and require the appointment of a UK entity to facilitate their application for ongoing market access. Some third-country benchmarks are provided on a non-commercial basis, however, meaning that those administrators lack an economic incentive to apply. Smaller firms may also be reluctant to appoint a third-party UK entity to oversee their benchmark administration.
Ms Eagle
Will the Economic Secretary share with the Committee the intention behind the extension to 2025? He said that it was to create certainty—I can understand that. Is the intention to transition to something different—the new third-country regime—after the extension, or is it to develop and introduce it earlier if it looks like there are advantages to doing so? I know that I am asking him to gaze into the future, but this will be in the Treasury and regulators’ work list and they will presumably schedule it at some stage. Does he expect the creation of a third-country regime to be difficult or quite easy? Are the Government thinking of basing it on the existing regimes or diverging from what we are used to? Will he give us a little more information about how the Treasury intends to proceed with this piece of technical but very important work.
John Glen
I am very happy to address those points. The right hon. Member for Wolverhampton South East raised the issue of the different time periods. This is different from the LIBOR transition; it is about the third-party benchmarks exclusively. It is a response to the market reality, as we have seen in the number of applications. I will come to the point of the hon. Member for Wallasey in a second.
The right hon. Gentleman also asked about the risk of harm concept and how important that is. Clearly, the LIBOR transition, as we have established today, is an incredibly complicated matter with a great deal of legal complexity, an imperative to align to global best practice, the need to produce a synthetic alternative and the evolution of policy around that. It is also designed to protect. He is right to say that there is a lot more work to be done; there is no off-the-shelf solution. This measure allows the formal framework for that to evolve.
The hon. Member for Wallasey asked me to comment on the future time period by which the new third-country benchmark regime would be constructed. The extension is a response intended to resolve industry concerns and to ensure that UK markets can retain access to the third-country benchmarks. There is no intention to find some way of deviating from norms on that. It is in our interest to have complete alignment to global best practice. The extension gives UK firms the legal and economic certainty. As soon as it can be done, it should be done. I cannot give her the precise location of where that is in the work plan—the FCA has a lot on at the moment—but she is right that we need to operationalise it appropriately, recognising the different obligations on different sized firms. I will be working with the FCA to keep an eye on that in the coming weeks and months.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Clause 21
Benchmarks: minor and consequential amendments
Question proposed, That the clause stand part of the Bill.
John Glen
This clause inserts schedule 5, which sets out minor and consequential amendments to the benchmarks regulation to provide for the effective operation of that regulation in the context of the amendments introduced by clauses 8 to 19. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Schedule 5 agreed to.
Clause 22
Regulated activities and Gibraltar
Question proposed, That the clause stand part of the Bill.
The Chair
It was projected that we would get up to clause 20 by the end of this morning, in fact.
John Glen
I allowed myself a moment of light-heartedness, but I can see that that was not appropriate.
In financial services, the Financial Services and Markets Act 2000 allows for several categories of authorised persons to carry on regulated activities in the UK, such as firms with domestic part 4A permission or, until the end of the transition period, EEA passporting firms. The clause provides a regime through which firms authorised for activities in Gibraltar can be recognised as authorised persons in the UK.
When significant areas of financial services regulation were set at EU level, that meant that the UK and Gibraltar followed the same rules. Now that the UK and Gibraltar have left the European Union together, the legal framework that provides for mutual market access and aligned standards needs amending. Without new permanent arrangements, Gibraltar will lose its current breadth and depth of access to the UK market, which not only would damage Gibraltar’s economy and our special and historic relationship but could lead to disruption and more limited choice for UK consumers.
The detailed application of the regime is set out in two schedules, which in turn insert two new schedules into the Financial Services and Markets Act 2000: schedule 2A, as inserted by schedule 6, governing the operation of the arrangements for Gibraltar-based firms; and schedule 2B, as inserted by schedule 7, which provides for the requirements that outgoing UK-based firms must meet before accessing the Gibraltarian market.
I should clarify that we are not legislating for Gibraltar. The measure is primarily about Gibraltar-based firms’ access to the UK. The Government have a responsibility to ensure financial stability and the correct operation of the UK financial services system, particularly when we open our markets to other jurisdictions. The clause therefore also requires the Treasury to lay a report before Parliament about the operation of the regime every two years.
The report will explain the Treasury’s assessment of whether the three conditions in the clause—that is, compatibility with the objectives in the clause, the alignment of law and practice, and co-operation—have been met during any reporting period, and whether the Treasury therefore proposes to enable market access for particular activities. That will give Parliament confidence that regulatory and supervisory standards are being applied in a consistent manner by UK and Gibraltarian institutions, so that UK consumers can benefit from products from a wide range of providers without additional risks.
Given that clause 22 is central to the creation of permanent market access arrangements between the UK and Gibraltar, I recommend that it stand part of the Bill.
Mr McFadden
Like the Minister, I too bid a fond farewell to LIBOR. Clauses 22 and 23 and schedules 6 and 7 establish the Gibraltar authorisation regime, which could be described as a sort of mini-single market in financial services between the UK and Gibraltar. The Government have set out many detailed pages in the schedules in particular about how that mini-single market should work.
Up until now, Gibraltar has been regarded as a European territory that was a member of the EU through its status as a British overseas territory. That meant that Gibraltar had full access to single market rights, including those in financial services. Given that Gibraltar, as well as the UK, has now left the EU and is coming towards the end of the transition period, the Government clearly felt that they had to put a regime in place to be the basis of future trade in financial services between Gibraltar and the UK.
Such a regime was, to some extent, necessary, because of the volume of trade in financial services that already exists between the UK and Gibraltar. We heard during last week’s oral evidence that roughly one in five car insurance policies in the UK is held by Gibraltar-based insurance companies. As I said during an oral evidence session last week, there is great good will towards Gibraltar on both sides of the House. The people of Gibraltar voted to remain in the EU by an overwhelming margin—I think it was about 95%—so we could describe the clauses and the accompanying schedules as the consolation prize to Gibraltar for having to depart the EU at the same time as the UK.
I know that under clause 22 the Treasury will report every two years on how the regime is operating. I cannot fail to reflect that that is precisely the kind of regular reporting mechanism that the Minister so stoutly rejected about four times on Tuesday when we were trying to insert it into the clauses on capital requirements. Why is it right and necessary for the Treasury to review this regime every two years but not to review the impact of change in the capital requirements on major parts of our financial system?
According to schedule 6, the report must have particular regard to paragraphs 7, 8 and 9 of that schedule, which set out the details of the new regime. Paragraph 7 tries to instil protections for the UK into this process, including for the soundness and stability of our own system, and, according to paragraph 7(c),
“to prevent the use of the UK financial system for a purpose connected with financial crime”.
It goes on to talk about ensuring markets work well, the protection of consumers and, interestingly, according to paragraph 7(h), about the need
“to maintain and improve relations between the United Kingdom and other countries and territories with…significant markets for financial services.”
Ms Eagle
Clearly, the potential situation is there now. In evidence, the response—reasonably—was that that has not happened to date, even though there have been close connections between Gibraltar and the UK. However, these things tend to be dynamic and, once the agreement with Gibraltar is established, our tax regimes may diverge even further. If the Chancellor has his way after yesterday’s statement, I suspect they might have to.
Will that create more of a temptation for financial service companies to offshore to Gibraltar outside of the UK? Is the Minister convinced that that will not happen as a result of the Bill? I want reassurance from him about those potential weaknesses or risks and about consumer protections. He might even want to say a bit about benefits, if he feels up to it.
John Glen
I counted several questions in those four contributions and I will do my best to address them. First, I will reiterate what we are trying to do: to create the market access regime for Gibraltar-based financial services wishing to operate in the UK, and to make provision for outbound UK-based firms wishing to operate in Gibraltar.
The right hon. Member for Wolverhampton South East made a number of points, which I will start to address. He asked about the two-year reporting mechanism. The Gibraltar authorisation regime provides a broader and deeper market access into the UK market—including to the retail market—than other market access regimes, so the Treasury needs to be satisfied continuously that all conditions are met. We will therefore work carefully with the Minister we spoke to last week from the Government of Gibraltar to ensure that those conditions can be satisfied on an ongoing basis.
It is important to contextualise the nature of the relationship with Gibraltar. There has been a lot of dialogue, visits—not latterly—and evaluation of each other’s situation with respect to market access. In the lead up to the new regime, the Treasury will assess Gibraltar against the relevant market conditions for the sub-sectors to which it seeks access, and we will work closely with the Government of Gibraltar. The most significant area is the Gibraltarian insurance market, and 90% of that is UK facing.
The right hon. Gentleman compared the two-year review to our refusal to review the prudential regimes. As we have already discussed, the prudential measures include an accountability framework; we had a different view on the suitability of the one we suggested versus the amendment. The regulators have the expertise to set rules in the complex and technical areas of financial regulation and can do so in an agile way.
The right hon. Gentleman also referred to the FATF report. I have not read it in full, but I am aware of its broad indications of the challenges that exist. I am also aware that, while we had a good report, there are some challenges that we need to address in the UK. I will not hold back on admitting that. I will write to him specifically on those measures that pertain to Gibraltar, because I ought to do justice to his proper scrutiny.
There is an issue with the extension of the Gibraltarian regime to other countries. That is a bespoke regime that has been specifically designed for Gibraltar, recognising what the right hon. Gentleman and others will acknowledge is a special historical relationship, and our past common membership of the EU. These circumstances do not apply to any other jurisdictions, so that is not designed as a model or, as he said, a mini-single market to be extended elsewhere.
The hon. Member for Glasgow Central asked about the scope of the FOS jurisdiction over products sold by Gibraltarian firms. Our intention is that all Gibraltar-based firms with a schedule 2A commission will be covered by the FOS’s compulsory jurisdiction. That ensures that individuals and small businesses can seek appropriate redress. However, the extension of the FOS’s jurisdiction to schedule 2A firms does not require express wording in this Bill. The Bill makes schedule 2A firms a type of authorised person, so the FCA be able to make rules about them, bringing them inside the FOS’s remit. The FCA will be reflecting that change in the rules governing the FOS’s jurisdiction. Firms already under the FOS’s voluntary jurisdiction will transfer to the compulsory jurisdiction, with no loss of eligibility for their consumers in respect of actions occurring before they entered the compulsory jurisdiction.
The hon. Member for Glasgow Central also asked about the withdrawal of equivalence. If market access were to be withdrawn, schedule 2A puts in place winding down arrangements that enable the Government to pass secondary legislation providing for Gibraltar-based firms to exit the market in an orderly fashion, with appropriate protections for UK consumers. That is what would happen in market failure.
Stella Creasy
The Minister was just talking about the Financial Ombudsman Service being extended. One of the things that we might be concerned about is that our constituents might experience fraud from companies based in Gibraltar, perhaps in relation to insurance. Many of us can think of some famous Brexit backers who run insurance companies in Gibraltar and might have concerns about these issues. The FAFT report tells us that at the moment the supervision is only for new companies. There is a historical legacy of companies that have not previously been registered that might, therefore, under new supervision, be companies that we would not want to see operating in the UK. The Minister talked about the FOS’s requirements being retrospective, but that will be the same with the FCA. Can he clarify that if there are companies that are historically registered in Gibraltar, which we would not want to see registered here, perhaps because the people running them have criminal records, will they retrospectively be denied a licence, or is it only those from new registrations onwards, as with the current Gibraltarian regime?
John Glen
I wish to examine that matter carefully on the basis of the FATF report. I totally understand the clear point the hon. Lady is making about the retrospective nature of this and what could we essentially onshore, in terms of access to UK consumers, and the inherent and apparent risks in that. If the hon. Lady will permit me, I would like to examine that and get back to her.
The hon. Member for Wallasey asked about the independent Gibraltarian regulator and whether it will remain the supervisor of Gibraltar-based firms. The explicit intention for the UK regulators, contained in proposed schedule 2A, is to guarantee the protection of UK consumers, but that will be exercisable only on specific grounds, for example where a situation is urgent or if a Gibraltar-based firm is contravening a rule. We are not trying to take over their regulator.
The hon. Lady asked if the parties will co-operate sufficiently. There has been close and frequent co-operation over the past three years, between both Governments and regulators. They are developing their regime, and I am confident that will continue. The Minister in Gibraltar —effectively, my opposite number there—was positive about that last week. Schedule 2A will create a framework for this effective co-operation. That also means that the UK and Gibraltar Governments, the respective regulators and the Financial Services Compensation Scheme will put in place effective procedures to carry out any dialogue and co-ordinated action for the good functioning of the regime.
The hon. Members for Walthamstow and for Wallasey asked about consumer protection. It is obviously of the upmost importance that we provide the right level of protection for UK customers of Gibraltarian products, and that the level of protection afforded is communicated to them. Under this regime, most UK-based consumers purchasing products from Gibraltarian providers will receive a similar level of compensation as those purchasing their products from UK firms, whether through the FSCS or through the equivalent Gibraltarian schemes.
John Glen
I beg to move amendment 4, in schedule 6, page 100, line 31, at end insert—
“(i) an order under section 143S, or”.
This amendment extends the definition of “prohibition order” in paragraph 19 of new Schedule 2A to the Financial Services and Markets Act 2000 to include an order under section 143S (inserted by Part 1 of Schedule 2 to the Bill).
John Glen
These very simple and limited amendments are necessary to ensure that the measure functions as intended. As the explanatory note states, amendment 4 expands the definition of “prohibition order” in paragraph 19 of new schedule 2A to the Financial Services and Markets Act 2000 to include an order made under section 143S, as inserted by part 1 of schedule 2 to the Bill.
The amendment ensures that UK regulators can reject a notification in relation to a Gibraltar-based firm if a senior manager of the Gibraltar-based firm is prohibited from performing a function by a part 9C prohibition order made under new section 143S, in line with the treatment of other firms in the Bill. A part 9C prohibition order may be made by the FCA in relation to an individual if the FCA believes that the individual is not of sufficiently good repute or does not possess sufficient knowledge, skills and experience to perform a function relating to an activity carried on by a non-authorised parent undertaking of an FCA investment firm.
Amendment 5 expands the definition of “prohibition order” in paragraph 19 of new schedule 2A to the Financial Services and Markets Act 2000 to include an order under the law of Gibraltar that the appropriate UK regulator considers to be equivalent to an order under section 143S as inserted by part 1 of schedule 2 to the Bill. That is a simple and limited expansion enabling the UK regulators to reject a notification if a senior manager of a Gibraltar-based firm is prohibited from performing a function by a prohibition order under the law of Gibraltar that they consider to be equivalent to an order under section 143S.
Finally, amendments 6 to 11 clarify the UK regulators’ powers to give directions altering the meaning of “protected contract” and “existing contract” for the purposes of part 10 of new schedule 2A to the Financial Services and Markets Act 2000 in the event that a UK regulator or the Gibraltar regulator cancels the permission of a Gibraltar-based firm.
Amendment 4 agreed to.
Amendments made: 5, in schedule 6, page 100, line 34, after “56” insert “or 143S”.
This amendment extends the definition of “prohibition order” in paragraph 19 of new Schedule 2A to the Financial Services and Markets Act 2000 to include an order under the law of Gibraltar which a UK regulator considers to be equivalent to an order under section 143S (inserted by Part 1 of Schedule 2 to the Bill).
Amendment 6, in schedule 6, page 123, line 32, leave out “67” and insert “67(1)”.
See the explanatory statement for Amendment 11.
Amendment 7, in schedule 6, page 123, line 38, leave out “67” and insert “67(2)”.
See the explanatory statement for Amendment 11.
Amendment 8, in schedule 6, page 124, line 37, leave out “67” and insert “67(1)”.
See the explanatory statement for Amendment 11.
Amendment 9, in schedule 6, page 124, line 43, leave out “67” and insert “67(2)”.
See the explanatory statement for Amendment 11.
Amendment 10, in schedule 6, page 125, line 17, leave out
“this Part of this Schedule”
and insert
“paragraph 64 or 65 (or both)”.
See the explanatory statement for Amendment 11.
Amendment 11, in schedule 6, page 125, line 19, leave out
“The power under sub-paragraph (1) includes power to”
and insert
“A UK regulator may, by giving a direction,”.—(John Glen.)
This amendment and Amendments 6, 7, 8, 9 and 10 clarify the UK regulators’ powers to give directions altering the meaning of “protected contract” and “existing contract” for the purposes of Part 10 of new Schedule 2A to the Financial Services and Markets Act 2000.
Question proposed, That the schedule, as amended, be the Sixth schedule to the Bill.
John Glen
New schedule 2A to the Financial Services and Markets Act 2000 sets out in detail the operation of the new market access arrangements for Gibraltar-based firms into the UK. Part 1 of the schedule defines key concepts of the new framework, such as approved activity. Part 2 sets out that the Treasury will be able to designate a regulated activity as an approved activity for market access only if the following conditions are met: if approval of an activity is compatible with certain objectives, such as financial stability and consumer protection; if the Treasury is satisfied that the relevant law and practice between the UK and Gibraltar is sufficiently aligned; and if the Treasury is satisfied that there is co-operation between the UK and Gibraltar Governments, our respective independent regulators and the FSCS.
Part 3 will introduce a simple notification process by which Gibraltar-based firms will be able to obtain permission to carry on an approved activity. I stress that this is not intended to be an application process; Gibraltar-based firms will automatically obtain a schedule 2A permission once the period for the UK regulators to consider a notification has expired. Parts 4 to 6 provide for the Gibraltarian regulator or the UK regulator to be able to vary or cancel a schedule 2A permission, or to impose, vary or cancel requirements on a Gibraltar-based firm, and set out the process the regulators could follow in each case. None of those powers dilutes the fact that Gibraltar-based firms will continue to be supervised by the Gibraltarian regulator and remain subject to the laws of Gibraltar. The intervention powers for the UK regulators will be available only in specific defined circumstances, as set out in paragraph 28. The option of withdrawal of approval for an activity will remain available to the Government as a tool of last resort. However, were any issues to emerge, the Treasury would work closely with the Gibraltarian authorities to ensure that all conditions of market access can be satisfied.
To provide clarity and transparency, part 11 will require each UK regulator to issue a statement of its policy on the use of its intervention powers. Part 12 imposes duties on the UK regulators to inform, consult and obtain consent from one another, as well as to keep the Gibraltarian regulator informed to support the functioning of the regime. Similarly, part 13 will require co-operation between the UK and Gibraltar Governments, our independent regulators and the manager of the FSCS, including setting out procedures and approaches to resolving any supervisory concerns to support the delivery of the regime.
I have summarised the effects of proposed new schedule 2A in the legislation. It sets out in great detail the new market access arrangements for Gibraltar-based firms looking to operate in the UK and it will lead to the renewal and strengthening of our relationship with Gibraltar. For that reason, I therefore recommend that the schedule be agreed to.
Question put and agreed to.
Schedule 6, as amended, accordingly agreed to.
Schedule 7 agreed to.
Schedule 8 agreed to.
Clause 23
Power to make provision about Gibraltar
Question proposed, That the clause stand part of the Bill.
John Glen
The new regime introduced by clause 22 revolves around activities covered by the so-called Gibraltar order, which provides Gibraltar-based firms accessing UK markets and UK-based firms accessing Gibraltar markets with rights equivalent to the passporting rights conferred on European economic area firms. Certain regimes conferring rights on UK and Gibraltar firms sit outside the remit of the Gibraltar order, as they are authorised not under the Financial Services and Markets Act but under separate regulatory regimes, and therefore need to be addressed separately.
The majority of these regimes are not as central to the UK-Gibraltar bilateral relationship as the regimes under clause 22, as they represent smaller sub-sectors such as e-money and payment services. The Government are requesting a delegated power to make provision for these regimes, which will allow the Treasury to safeguard the rights that Gibraltar firms currently exercise, to ensure that the legislative framework works efficiently and, wherever possible, to subject these regimes to principles and mechanisms similar to those in the new section 32A of and schedules 2A and 2B to the Financial Services and Markets Act, to ensure consistency with the rest of the regime introduced by clause 22.
Regarding the regime introduced by clause 22, it is right and proportionate that the Government are able to make adjustments to take account of the UK’s and Gibraltar’s new position outside the European Union and in relation to the regimes not captured by the Gibraltar order. The power that the Treasury is requesting is not unlimited, but is constrained at multiple levels. The power is limited in scope, as it only applies to a narrow pool of legislative regimes, as described in clause 23, which are not covered by clause 22. Further, this power can be exercised only in a manner that is compatible with the objectives set out in clause 23, such as financial stability and consumer protection. In addition, the Treasury must consult the FCA, the PRA and the Government of Gibraltar before making certain regulations. Finally, all regulations made in the exercise of this power will be subject to the affirmative procedure, giving Parliament effective oversight of the exercise of these powers by the Treasury.
The clause is crucial to ensuring a consistent approach to regulatory supervision, co-operation and other relevant standards and requirements across different financial services regimes. It achieves the right balance between accountability and effectiveness, so I recommend that the clause stand part of the Bill.
John Glen
I thank the hon. Lady for that relevant question about how we intend to apply these powers to smaller regimes that are of increasing significance to consumers and potentially to stability. As a Government, our intention is to ensure that existing cross-border activities are not disrupted in any way. We are asking for the ability to update these regimes to reflect the growing relationship and the evolving domestic mechanisms and principles.
To some extent, many of these areas being looked at now—crypto-assets, stablecoins and so on—are evolving globally and there is is a spectrum of approaches, so we need to examine the appropriateness of the application. We would work to examine closely where the risks are, and therefore where the application of new and evolving orthodoxies of regulation would apply to Gibraltar. We are committing to ensuring that the necessary legislative arrangements are in place in any event, but we rule nothing out in terms of scope and application to new sectors as the world of financial services evolves, which it has done considerably in recent years.
Question put and agreed to.
Clause 23 accordingly ordered to stand part of the Bill.
Clause 24
Collective investment schemes authorised in approved countries
Question proposed, That the clause stand part of the Bill.
John Glen
The clause introduces the new overseas funds regime, which delivers on the Government’s commitment to introduce a simpler way for large numbers of investment funds from other countries to be marketed to retail investors, including the general public. The OFR will promote openness to overseas markets, allowing the UK to offer broad market access to investment funds from other countries. It will also allow consumers to benefit from the widest possible choice of funds, while maintaining existing levels of investor protection.
The new regime could provide a more efficient way of allowing large numbers of investment funds from the EEA to market to retail investors on a more permanent basis. Many EEA funds are marketed into the UK through the EU’s passporting regime, which will end after the transition period. Although the Government have introduced a temporary marketing permissions regime to allow existing EEA funds to continue marketing after the transition period, these funds will need to apply for permission to market on a more permanent basis. If the OFR were not legislated for, the funds would have to apply for recognition under the existing regime; that regime allows overseas funds to be marketed to the general public, but it requires an assessment of each individual fund. Establishing the OFR could therefore provide a more permanent basis for these EEA funds to continue marketing in the UK, provided that the EEA member states are found equivalent. It will also allow for the possibility of funds in other countries gaining easier access to the UK if they meet the criteria set out in the schedule. The new regime has been welcomed by the UK’s asset management industry, and the majority of consultation respondents were highly supportive.
I will now detail how clause 24 introduces the new OFR. The clause adds to the legal definition of a recognised scheme, so that it includes funds recognised under the OFR. That will allow the funds to market to the general public in the UK. The clause also introduces schedule 9 to the Bill, which comprises the main operational elements of the OFR and any minor and consequential amendments needed to ensure the new regime is fully functional. Compared with the current assessment of individual funds, the OFR enables the Treasury to make equivalence determinations which allow specified categories of funds from other countries and territories to be marketed in the UK. Therefore, the OFR has the potential to promote the interconnectedness of financial markets and consumer choice, to provide a more appropriate basis for recognising the large number of EEA funds currently marketing through the temporary marketing permissions regime, and to support bilateral agreements with other countries.
The clause is necessary to ensure that the OFR is inserted into the relevant legislation and can fulfil its potential. I recommend that it stand part of the Bill.
Mr McFadden
I thank the Minister for his explanation. As he said, this clause, schedule 9 and clause 25 create an overseas fund regime for establishing the recognition of collective investment schemes based outside the UK. It is estimated that there are about 9,000 such schemes, which are often known as UCITS.
Up until now, those schemes have operated under the European Union’s passporting provisions, as have UK-based schemes operating in other countries; it has been a two-way street. It was not inevitable that passporting had to end when the UK left the EU. There were models of leaving that could have preserved those rights for UK-based firms. Indeed, there were votes in Parliament that sought to guarantee the continuation of passporting rights, but the Government set their face against that, so the first thing to say about these provisions is that the need for them has arisen out of choices made by the Government.
That there would be an adverse impact on services from this decision was acknowledged. It seems the dim and distant past now, but back in the halcyon days of 2018, we had something called the Chequers plan. That document was issued in July 2018 with—I noted when I had another look at it—a foreword from the current Foreign Secretary. The Minister could usefully remind him of that the next time he bumps into him. The document said that the Government
“acknowledges that there will be more barriers to the UK’s access to the EU market than is the case today.”
It went on to note that
“these arrangements will not replicate the EU’s passporting regimes”.
Let us look at what the document’s verdict was on equivalence, which is the thing that we are trying to achieve and in part legislate for today. This is the Government’s own verdict on the kind of regime in clauses 24 and 25 and schedule 9. It said:
“The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:…institutional dialogue…a mediated solution where equivalence is threatened by a divergence of rules”—
we have discussed divergence of rules quite a lot in this Committee—
“or supervisory practices…sufficient tools for reciprocal supervisory cooperation…This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or…phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.”
That is not my verdict on equivalence; it is the Government’s verdict on equivalence when they published their own plan two years ago. So there we have it in the Government’s own words. That which they have been as yet unable to secure from the EU was dismissed as inadequate for the UK’s financial services sector even if we were able to secure it, which we have not, or at least not yet. The Government were aiming for something different, because it was deemed by them to be inadequate. They were aiming for
“a bilateral framework of treaty-based commitments to…ensure transparency and stability”,
because, as the document goes on to say, equivalence
“is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities”.
The Government wanted common principles, supervisory co-operation and
“a shared intention to avoid adopting regulations that produce divergent outcomes”.
Where did all that go? What happened to all of that? That was the aim. Why is it now the summit of the Government’s ambitions to achieve an outcome for the UK’s globally significant financial services sector that they dismissed as inadequate only two years ago? Why is this not at the heart of the UK-EU negotiations, in this crucial period? We have just over a month left—less, in real terms—to strike a deal. We must think of the significance of this sector to the UK economy and look at the employment, the investment and the tax revenue.
Alison Thewliss
I have one or two further questions about people who are invested in things for which equivalence is withdrawn. The Association of British Insurers said in its written evidence:
“While the regime states that investors can stay invested in funds if equivalence has been withdrawn, they do not to spell out the practicalities of the situation an existing investor may face if a fund they are invested in has been suspended, for example if additional money is invested after a fund suspension. For the regime to fully work for consumers, situations such as this need to be clarified.”
What happens to investors in those funds if equivalence is withdrawn? What information will they receive from the Government, from regulators or from anybody else if that happens, so that they know what they have to do in that scenario, if anything? That could affect many people and would be very complicated to unravel, so it would be useful to set out people’s obligations in those circumstances.
John Glen
We were treated to more of a Second Reading response there from the shadow Minister, with all that he said about the frustrations of the last three years. Having been Minister for three years under three Chancellors and seen the evolution in the nature of that negotiation, I have a lot of empathy with his analysis about the evolving nature of a negotiation, which is of course what happens.
I can tell the right hon. Gentleman that the whole issue of the importance of financial services has gripped me since 9 January 2018, when I came into the role, and he is absolutely right to say that it is a very important industry and that we must do all that we can to maximise opportunities for it. I very much regret where we are on what we thought would be a technical process of equivalence granting. We filled in 2,500 pages of forms over about 40 questionnaires by June last year and, self-evidently, we have been leaders in the regulation of financial services within the EU. We have not heard anything from the EU on the equivalence determinations, which is strange. We regard the EU as some of our most important trading partners, and we look forward to continuing a constructive dialogue.
The right hon. Gentleman raised a number of questions about the Chancellor’s statement, the registration process and the situation for jurisdictions beyond the EU, and I will address those. On the equivalence for UK firms, although the EU does not currently have an equivalence regime for the marketing of investment funds—we cannot speak for any future changes to the EU’s equivalence framework—the Government are introducing the new equivalence regime for overseas investment funds to market to UK retail investors, to allow our consumers to benefit from the widest possible choice of funds. We are doing that to support and preserve consumer choice for UK investors. Currently, about 9,000 EEA-domiciled funds use passporting to market to retail investors in the UK. That makes up a substantial proportion of the overseas funds that are on offer to UK investors. In comparison, about 2,600 UK-domiciled funds are available to UK investors, and UK funds do not commonly sell into the EU.
The geographic scope of the OFR could be used to find any jurisdiction equivalent, but a fund from another jurisdiction could be permissible even if the jurisdiction is not equivalent. That would use a different process—the existing process, which I think is provided for in section 272 of the Financial Services and Markets Act 2000. We hope and expect to refine that to align it with this process to remove any uncertainty.
The Chancellor’s announcement of 9 November, when we made 17 equivalence decisions, is separate to the OFR, which is a new equivalence regime that the UK is introducing for EEA funds. The withdrawal of equivalence can happen at the country level, but the FCA has powers to suspend or revoke the marketing permissions of individual funds. If funds from a country are found equivalent under the OFR, they will not need to go through the section 272 provision, so this will be a faster route.
The hon. Member for Glasgow Central asked what happens to investors if equivalence is withdrawn or a fund is suspended. Obviously equivalence is necessary to ensure that UK investors can assume at least equivalent investor protection to that of the UK. If the Government believe that that is no longer the case, it would be appropriate for the Treasury to act and to make that clear to potential existing investors by withdrawing equivalence.
We recognise the importance of clarity and stability regarding the potential withdrawal of equivalence, so withdrawing an equivalence determination will be undertaken in an orderly and controlled manner to ensure that investors are protected and businesses have time to adjust. In the event of equivalence being withdrawn, funds from the country or territory in question will no longer have recognised status and can no longer be marketed to the general public in the UK.
The Treasury does not envisage that investors will be forced to divest their investments in the fund, and the funds should continue to service them; however, the loss of recognition could make it more difficult for investors to continue investing in the fund.
For example, the loss of recognition might result in investment platforms no longer offering the fund on their platforms. The Bill also includes a power so that the Treasury can take steps to smooth the transition for funds to the existing regime if equivalence has been withdrawn.
Alison Thewliss
I thank the Minister for that clarification. I am just trying to get my head around the practicality or how this would work. If equivalence is withdrawn, how do people who have money in the funds find out about it? Is there an obligation on the funds to tell them, or on the Government to ask the funds to tell them? Do the Government somehow contact these people, and what is the timeline of those things, should that occur?
John Glen
That procedure would depend on the particular breakdown of the fund and the scale of the problem. It would be for the regulator to work with the individual fund to demonstrate that, and to give clarity to consumers. It is difficult without a specific example to set that out, but the provision is there and the provisions are comprehensive in terms of being able to do that.
The right hon. Member for Wolverhampton South East asked about the relationship between equivalence and the divergence allowed for by the Bill. The Bill makes no assumptions about what the relationship between the UK and the EU will be in the area of financial services. That negotiation is ongoing. That is entirely consistent with the mutual findings of equivalence. It ensures that the right framework is in place for making equivalence decisions and for ensuring that any likely impact on existing equivalence decisions is taken into account when making rules in an area covered by the Bill.
I have tried to cover everything that has been raised. I am sure that I have not covered everything, but if I find anything substantive when I reflect on today’s proceedings, I will write to the right hon. Gentleman and make the letter available to the Committee.
The Chair
These letters are coming back quite quickly. The one from the other day is already here, so we look forward to any future ones.
Question put and agreed to.
Clause 24 accordingly ordered to stand part of the Bill.
Schedule 9
Collective investment schemes authorised in approved countries
Amendments made: 12, in schedule 9, page 151, line 16, leave out
“granting an application under section 271A”
and insert
“under section 271A granting an application under that section”.
This amendment clarifies that both the application and the order are made under section 271A.
Amendment 13, in schedule 9, page 154, line 43, leave out “271G” and insert “271A”.
This amendment and Amendments 14, 15, 16 and 17 correct cross-references to the section under which an order recognising a scheme is made.
Amendment 14, in schedule 9, page 155, line 14, leave out “271G” and insert “271A”.
See the explanatory statement for Amendment 13.
Amendment 15, in schedule 9, page 155, line 24, leave out “271G” and insert “271A”.
See the explanatory statement for Amendment 13.
Amendment 16, in schedule 9, page 156, line 7, leave out “271G” and insert “271A”.
See the explanatory statement for Amendment 13.
Amendment 17, in schedule 9, page 156, line 29, leave out “271G” and insert “271A”.—(John Glen.)
See the explanatory statement for Amendment 13.
Schedule 9, as amended, agreed to.
Ordered, That further consideration be now adjourned.—(David Rutley.)
Financial Services Bill (Ninth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Ninth sitting)
John Glen ExcerptsTuesday 1st December 2020
(3 years, 11 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 December 2020 - (1 Dec 2020)
The Chair
Before we begin, I have a few preliminary points to make. Please switch electronic devices to silent. Tea and coffee are forbidden during sittings, but I will allow Members to take their jackets off, as Chris Clarkson politely asked at the start, so feel free to remove outer layers if you wish.
I remind Members of the importance of social distancing. Everyone is sitting in the right place, but if necessary, people will have to sit in the Public Gallery. Hansard reporters have asked for speeches to be sent to hansardnotes@parliament.uk. Today we will continue with line-by-line consideration.
Clause 25
Individually recognised overseas collective investment schemes
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (John Glen)
Thank you for your continued chairmanship of this Committee, Dr Huq.
The clause makes changes to section 272 of the Financial Services and Markets Act 2000, which allows individual investment funds from other countries and territories to be marketed to the general public, including retail investors, in the United Kingdom. Although we have separately introduced a new overseas funds regime to allow specified categories of overseas funds to market to retail investors, section 272, the existing provision, will remain and will be available for investment funds that do not fall within the scope of an equivalent determination under the OFR, but still wish to market to retail investors in the UK. Investment funds that are eligible to apply under the OFR will not be able to make an application under section 272. This is to ensure that funds always apply through the most efficient route possible.
We have proposed simplifications to section 272 and sections relating to it, which are supported by both the Financial Conduct Authority and industry. First, the changes will streamline the FCA’s assessment of individual investment funds from other countries. In making its assessment, the FCA would now need to consider only issues that are subject to existing rules on UK authorised funds rather than potential laws that do not yet exist. Secondly, we will simplify when the fund operators have to notify the FCA of changes to their funds and, thirdly, we will make wider changes so that section 272 is compatible with the new OFR.
Also, provisions are added to FSMA, mirroring the ones in the OFR, to enhance consumer protections and ensure consistency in comparability between the two regimes. This includes requiring fund operators to notify such persons as the FCA may direct, such as investors, if the fund’s permission to market is suspended or revoked. The FCA will also have the power to make public censure if certain rules and requirements are breached. Finally, we are also making it clear that sub-funds can be recognised under section 272 if investment funds are part of an umbrella and sub-fund structures.
As I noted earlier, an umbrella fund is a legal entity that groups together different sub-funds where each sub-fund has a separate pool of assets that typically has its own investment strategy. The changes set out in clause 25 will improve the process in section 272, reducing the administrative burden for the FCA and asset management firms. I therefore recommend that the clause stand part of the Bill.
Mr Pat McFadden (Wolverhampton South East) (Lab)
It is a pleasure to serve under your chairmanship, Dr Huq.
I want to ask the Minister where the clear water is. In simple terms, is this about granting equivalence recognition to individual companies from countries where we do not grant the overall country the equivalence recognition? The Minister nods, so perhaps that is what it is about. That implies that those firms might need a higher level of monitoring or observation, given that they are from countries that have not been granted equivalence recognition—presumably, we think that the regulatory system in the country in which they are based is perhaps not quite of the standard of some other countries. Will he tell us a little more about how that would work? Will there be a set of firms that the FCA keeps an extra eye on? If the FCA decided that equivalence recognition permission should no longer be granted to an individual firm, how would the process work? Is it something that can be withdrawn quite quickly if we think things have changed?
John Glen
I thank the right hon. Member for Wolverhampton South East for his questions. His characterisation of what this is about is absolutely right: the clause provides a mechanism to ensure that funds that are not eligible for the new overseas fund regime may still apply and secure access. In terms of the FCA, monitoring and protection, it is important to point out that the FCA’s online register shows that there are currently four stand-alone funds, seven umbrella funds and 27 sub-funds that have permission to be marketed to UK retail investors under section 272. Some of those funds have been carried over from a previous regime for overseas funds marketing to the UK, set out in section 270 of FSMA.
To give some comfort about investor protection, the FCA is required to examine whether the fund gives adequate protection to investors in the scheme. It will examine whether the fund’s arrangements for constitution and management are adequate; the powers and duties of the fund’s operator, trustee or depositary must also be adequate. It is another mechanism to be applied in conditions where a country as a whole is not given the adequacy equivalence decision.
Under the clause, the FCA has suitable powers to verify the full context of the fund’s operations and to take account of the risks associated with the fund. It would make a determination based on the full range of factors available to it.
Mr McFadden
We will be discussing a couple of similar clauses very soon, but it strikes me that quite a big role is envisaged for the FCA in advising the Government on equivalence recognition and regulation in other countries. It has not performed such ongoing monitoring up until now. It is quite easy to go through the Bill clause by clause, subsection by subsection, and think that each change is a nothing more than a small change here and a small change there that do not add up to much, but the impression gained is that the Bill creates a big job for the FCA. Is it properly resourced and equipped to carry out that role?
John Glen
As ever, the right hon. Gentleman makes a very reasonable point. In this context, the obligations on the FCA and the Prudential Regulation Authority will continue to be considerable. They will have significant responsibilities. In previous sittings, we talked about the necessity of having a clear framework for the regulator to be accountable to Parliament, subject to Parliament’s determination of what that will be. The resourcing of the FCA with the right sort of skills to carry out the proposed functions will be an issue that its new chief executive will consider in due course. We will seek to co-operate with him to ensure that he has those resources.
The section 272 provision is extant and I outlined the number of funds that are using it, but I accept the right hon. Gentleman’s general point about the FCA. It is something of which we are very aware.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26
Money market funds authorised in approved countries
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 26 is a core element of the overseas funds regime, the equivalence regime for money market funds. As I am sure a number of colleagues know, money market funds are a type of investment fund that invests in liquid assets such as cash, Government bonds and corporate debt. They are considered to be a low-risk, short-term and high-liquidity investment. Many organisations in the UK, such as local authorities, use money market funds to invest their cash in the short term as an alternative to bank deposits, and the vast majority of money market funds currently available to UK investors are domiciled overseas. UK investors need continued access to those overseas money market funds to use for cash management purposes. Money market funds are subject to separate regulations for other types of funds, and the Government therefore believe it is necessary to have a separate equivalence regime for money market funds that allows the Government to consider the additional factors and regulations.
Clause 26, and the new article 4A equivalence regime that it creates, will ensure that overseas money market funds that wish to become recognised in the UK must be from a country or territory where the relevant regulations have equivalent effect to the MMF regulation in the UK. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
We have met the capital requirements regulation, we have met undertakings for collective investment in transferable securities, and now we meet the money market funds regulation. I have a couple of questions for the Minister on this issue. First, new article 4A(2) of the money market funds regulation says that the Treasury must be satisfied that the requirements on money market funds
“have equivalent effect to the requirements imposed by this Regulation.”
The key phrase here is “have equivalent effect”. That is the yardstick by which judgments will be made. How will this be assessed? What exactly will the Treasury be looking for when it makes such an assessment? How are we judging equivalent effect?
Secondly, article 4A(4) says that when considering the revocation of equivalence,
“the Treasury may ask the FCA to prepare a report on the law and practice of the country”
that is involved. That harks back to what I said a moment ago. Will preparing reports on the law and practice involved be a new task for the FCA? The Bill states only that the Government “may” ask the FCA, but I would have thought that if the Treasury were to consider the revocation of one of the equivalence recognitions, it would be pretty essential that the FCA be involved in that.
Thirdly, there is nothing in new article 4A that requires the UK to continuously monitor the law and practice of other countries once equivalence has been granted. That is important, because we grant the equivalence recognition on the basis of a view at the time that a country’s regulations have equivalent effect. However, how can we guarantee that there might not then be a process of regulatory or deregulatory change in the country that had been deemed equivalent, with consequential risks for UK consumers if—to put it in lay terms—the rules become a lot more lax in that country? Really, I am asking how this will all be monitored again in the future, and I would be grateful if the Minister has some comments on that.
John Glen
I thank the right hon. Gentleman for those questions. Essentially, there are two parts. The first is about how the assessment will be made. The UK is committed to what we describe—I have said it before—as an outcome-based approach to equivalence. That is based on the principles of FSMA, which means acknowledging how different regulatory practices can combine to achieve the same outcomes, as opposed to the prescriptive rule-by-rule-based approach that our friends in the EU have often preferred. We would not expect to see identical line-by-line regulations.
The OFR does not require countries to have those exact rules and regulations, but they must have laws and practices that have an equivalent effect in terms of the outcomes achieved. Obviously, there is considerable expertise involved in evaluating that and a particular group of people who are capable of doing that within the FCA. We believe that that outcomes-based equivalence can provide a high level of consumer protection while also allowing the UK to maintain a competitive market for overseas funds.
The second part of the right hon. Gentleman’s question addressed the issue of future evolution and divergence in standards, and how that would be monitored. The monitoring would be conducted in line with the equivalence guidance document that the Government published on 9 November. It sets out the framework for ongoing monitoring, recognising this outcomes-based approach, but being cognisant of changes in the underlying regulatory regime. This would not be a question of going through a gateway, gaining approval and that would be it forever. There would be some monitoring proportionate to the nature of the risks and the assurance that we had around the regime. I hope that answers the right hon. Gentleman’s question.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
Clause 27
Provision of investment services etc in the UK
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 27 gives effect to schedule 10 and amends the markets in financial instruments regulation. MiFIR is a piece of retained EU legislation that will continue to have effect in the UK after the end of the transition period, with amendments made under the European Union (Withdrawal Agreement) Act 2020 to ensure that it continues to operate effectively.
In summary, the amendments that the Bill makes to MiFIR broadly reflect the changes that the EU has introduced to its own third country regime, so it makes sense for us to do so. The third country regime in MiFIR established the basis on which overseas investment firms will be able to offer investment services and undertake investment activities in the UK. It allows overseas firms to apply for recognition that will allow them to provide cross-border services to more sophisticated clients, without establishing a local branch, if there has been an equivalence in respect of their home jurisdiction.
The changes made in this Bill will ensure the effective operation of the equivalence assessments and the subsequent operation of the recognition regime. That will mean that we can access the EU and treat EU investment firms in the same way that the EU will assess the UK and treat UK firms in the future. I will detail the specific amendments that this Bill makes to MiFIR during my explanation of schedule 10. I recommend that the clause stand part of the Bill.
Mr McFadden
I have two questions about schedule 10. The Minister has set out what it is intended to do, but I want to ask a few questions on the theme of monitoring and compliance.
New paragraph 5A of article 46 of the regulation defines reverse solicitation, and therefore an exemption from the equivalence rules, as when a business is not initiated at a client’s own initiative. Is the Minister confident that this is a tight enough turn of phrase to mean that firms cannot solicit business in the UK while dodging the stricter regulations that come within such marketing activity?
Secondly, and more important, new paragraph 1C of article 47 of MiFIR says that when making an equivalence determination the Treasury must take into account whether a country is classed as high risk for money laundering. Surely that is not strong enough. We will talk more about money laundering shortly. Why do we not say outright that the UK should not consider any such jurisdiction as equivalent until it is no longer considered a high-risk location for money laundering?
New article 48A of the regulation gives significant powers to the Treasury to impose additional requirements on third-country firms, but there are no details of what those requirements might be. Again, I would be grateful if the Minister said a bit more about that.
John Glen
I thank the right hon. Gentleman for his comments. He raises a number of specific points around drafting, and if there is anything that I cannot answer, I shall write to him today.
On the first point, the FCA needs to register overseas firms, which will give the right oversight, and also needs to monitor the overseas framework on an ongoing basis. From June 2021, the EU will be able to assess the UK and treat UK firms under a new regime. These changes are necessary to ensure that the Treasury is well equipped to assess the EU and that the FCA can exercise the appropriate level of oversight over overseas investment firms operating in the UK under this regime.
The core thrust of the right hon. Gentleman’s questions relates to the apparent weakening of the UK’s position. The Treasury has not yet determined which additional requirements, if any, would apply to overseas firms; that will be done when an equivalence determination is made, after the Government have fully considered the views of the FCA and other relevant matters.
The point the right hon. Gentleman makes about protection for consumers is obviously a critical one. Firms operating on a cross-border basis under this regime are not allowed to service UK retail consumers. The regime only applies to more sophisticated professional clients such as other financial services firms. None the less, I recognise that it is clear that we need to ensure that firms that are accessing UK markets from overseas are subject to similarly robust regulatory standards to those we place on our firms at home, and these amendments will do exactly that.
The Treasury will be able to determine whether a third country has a regulatory framework that has an equivalent effect to the UK’s, meaning that we can be confident that these third-country firms are regulated to the same level as our own. For firms that do not play by the rules, it is important that we have the right mechanisms to call that out, and the FCA will be able to step in where needed to protect UK investors and the integrity of our financial system.
On the right hon. Gentleman’s last point about money laundering specifically, we need to assess a jurisdiction’s regulatory framework as equivalent. That provides a high bar for anti-money laundering risks, and that is reflected in the guidance document that I referred to earlier. I will make the general point, though, that I understand the sensitivity to this fear and anxiety around wilful divergence to have a less regulated and less secure environment. I want to put it on the record that the Government do not see the changes as a mechanism to achieve some loosening. However, we will need to take account of the new directives that the EU continues to develop without our being at the table, and we will also need to develop our own response. Even though it will not be identical, that does not mean that we will not observe the high standards.
Mr McFadden
I think the Minister is getting to the heart of it. I asked detailed questions, but at the core of them is this one: is there a policy intent in these little changes of words, when we transpose the regulation, to have a loosening in some way, or are those little changes almost incidental—with no policy intention to have a less rigorous regime than MiFIR proper would apply to money laundering, recognition or any of the other things that I asked about?
John Glen
There is no intention to moderate or significantly alter the effect of the regulation. This is about doing what is necessary to ensure that we regulate the services and activities of overseas investment firms following an equivalence determination. The changes are designed to be consistent with the direction of travel that we have pursued within the EU, but making changes that are necessary for the different outcomes-based approach that we have always taken in the UK.
Ms Angela Eagle (Wallasey) (Lab)
Just briefly to add to the questions from my right hon. Friend, why on earth is there all this faffing about when we are having total equivalence and companies will want the rules to be the same? Is this just another obtuse obsession with sovereignty, which will cost a hell of a lot more money because we will have to have our own bespoke regime that is meant to do exactly the same thing?
John Glen
I think the hon. Lady’s point goes back to the decision made to leave the EU and the implications of that. I recognise that we had a conversation in the previous sitting about the nature of the regimes that have been mooted as a possible solution.
I did an extensive session with the Lords EU Services Sub-Committee yesterday morning dealing with the issue of equivalence. We see this as a technical process. We have filled in several thousand pages of forms across 17 questionnaires for the EU, and it has not made those determinations, so we moved forward and made our determinations of the EU and are seeking to bring as much clarity as possible. This is another example of our bringing clarity to industry in as straightforward a way as possible, and the changes reflect that.
Ms Eagle
I praise the Minister for his diplomacy. Having been a Treasury Minister myself, I know that diplomacy is extremely important when he sits in his bivouac. Has he made any assessment of the extra red tape that he is putting on our own financial services sector by insisting, for reasons of sovereignty, on a different but hopefully equivalent route? He and I both know that the minor differences between what is allowed and what is not can turn into weaknesses and reasons for arbitrage and rule breaking if those who regulate are not extremely careful.
John Glen
I acknowledge the hon. Lady’s deep experience in this matter and I am grateful for her empathy with the need to be diplomatic as a Treasury Minister. The measure is about extending limited supervisory powers to replicate EU powers. Her general point about the additional costs that can accrue to industry is something that we are very concerned about. We have always had within the UK a different approach to onshoring regulations, and that will continue.
FSMA 2000 gives us that outcome-based approach. When we downloaded the directives that we participated in creating in the EU and the Commission process, we always did it in our own way as per those principles. The hon. Lady’s main point is a key concern for the Government. That is why we are anxious to give assurance of continuity where it is plainly necessary and illustrate how we can do things as smoothly as possible, to minimise disruption to industry in a time of prolonged uncertainty, which I hope will come to an end soon.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Schedule 10
Amendments of the Markets in Financial Instruments Regulation
John Glen
I beg to move amendment 18, in schedule 10, page 164, line 7, leave out “services” and insert “investment services, or performing investment activities,”.
This amendment provides that the Treasury’s regulation-making power under new Article 48A of the Markets in Financial Instruments Regulation applies to third-country firms performing investment activities, as well as to third-country firms providing investment services.
The intention of this amendment is to make a correction to article 48A for the markets in financial instruments regulation by replacing the word “services” in line 7 of page 164 with
“investment services, or performing investment activities,”.
This will mean that the Treasury may impose requirements on overseas firms performing investment activities in the UK in addition to overseas firms providing investment services in the UK.
Amendment 18 agreed to.
Question proposed, That the schedule, as amended, be the Tenth schedule to the Bill.
John Glen
Schedule 10 amends the retained Markets in Financial Instruments Regulation. This regulation will continue to have effect in the UK after the end of the transition period. In part, it regulates overseas firms that provide investment services and activities in the UK, following an equivalence determination, as I described in relation to clause 27.
Under MiFIR, investment firms in a jurisdiction the regime of which has been found to be equivalent can provide a specified range of services in the UK under a recognition regime. The amendments the Bill makes to MiFIR broadly reflect the changes that the EU introduced to its own overseas regime for investment firms where those changes make sense for the UK. These changes will ensure that we can assess the EU and treat EU firms seeking to operate in the UK in the way the EU will assess the UK and treat UK firms in the future.
Schedule 10 provides the FCA with a power to specify reporting requirements for overseas firms that register under the regime. As the expert regulator, the FCA is best placed to specify that level of detail. Schedule 10 also updates the assessment criteria for equivalence to reflect the latest changes in the UK’s prudential regimes, as updated by this Bill. Countries will be required to have provisions in place that are equivalent in effect in areas such as prudential rules, business conduct, market transparency and other areas. That means that overseas firms accessing UK markets will be subject to the same level of investor protection and prudential regulatory standards as that which we place on UK firms.
The process of equivalence is a dynamic one. Indeed, we need to ensure that equivalence can be monitored, not only now but in the future—that speaks to the point made earlier by the right hon. Member for Wolverhampton South East. That is why the FCA will be required to monitor the regulatory and supervisory developments and enforcement practices of an overseas country that has received an equivalence determination and report its findings to the Treasury. By doing that, we will be able to ensure that we can continue to protect UK consumers as much now as in the future.
Schedule 10 also enables the FCA to temporarily restrict or prohibit an overseas firm from accessing UK markets if the firm does not co-operate with the FCA. In some cases, the FCA may withdraw an overseas firm’s registration. These important tools need to be exercised carefully and, as such, schedule 10 also specifies the procedures that the FCA must follow when using them.
Finally, schedule 10 will enable the Treasury, where appropriate, to impose specific requirements on overseas firms that register under the MiFIR regime as part of the equivalence decision. That will allow the FCA to account for the specific nature of overseas firms providing services across borders to UK markets. The schedule therefore provides the Treasury and the FCA with the appropriate powers to ensure that the UK remains open to global investment, while upholding the highest standards of investor protection and ensuring the effective functioning of UK markets.
Ms Eagle
The powers are necessary to prevent not only exploitation that might pose some systemic risks to the financial system, but catastrophic loss to UK investors due to rogue investors or investments. Regulators are reluctant to use the more draconian end of their powers, and there is little evidence that they actually go there.
Is the Minister satisfied that the practical effect of the changes will be that the FCA is determined to use those powers, if need be? It seems to be reluctant to go to the stage of closing firms down. That would be a huge decision that may involve considerable disruption. Is he convinced that the FCA has the resources, the aptitude and the determination to do that if necessary?
John Glen
The hon. Lady makes a good point. This goes to the heart of the evolution in the FCA’s responsibilities in an environment where it is being asked to do things differently and to account to Parliament for its actions. The future regulatory framework discussions through the next six months will allow us to solidify what those responsibilities will be.
The hon. Lady is right to say that the FCA will be required to make significant judgments on regulatory and supervisory developments, enforcement practices and other relevant market developments in third countries. The Treasury will request reports from the FCA with regards to overseas jurisdictions. We will consider those reports and other sources of information and take appropriate action, which would involve reviewing and equivalence determination or withdrawing equivalence.
Resourcing is a matter for the FCA itself, which it reflects on and establishes a levy for. I have conversations every six weeks with the FCA’s chief executive and chairman, and such matters are under ongoing review. Clearly, in the light of these changes, the FCA will need to update its provision. The FCA has a new chief executive officer who is undertaking a significant transformation project. I welcome his appointment and his plans, but reviews will be ongoing, and I am confident that he and his organisation will rise to the occasion.
Ms Eagle
I am sorry to press the Minister again, but this area is crucial to ensuring that our financial services industry is properly and appropriately regulated. We will be discussing crime, money laundering, and market abuse later today, I think, but the powers arranged against a regulator wanting to take drastic action, particularly in the form of disruption, trouble, lawyers, threats and all that, can mitigate decisive action. With Action Fraud and the failures in some of these areas, we have seen that even when criminal liability and offences are in the mix, rather than just regulatory offences, we do not seem to have developed a system that is as effective as it needs to be.
To what extent does the Economic Secretary think that the FCA’s use of levies to finance that activity is good enough given their volume and the drastic effects of some decisions, especially considering the funding of other regulators? Across the pond—we will increasingly have to look across the Atlantic—regulators are much better resourced than our own. Is he convinced that he has got the balance right for capacity and resources?
John Glen
The hon. Lady is taking me further and further away from the Bill. Her core point is about the suitability and sufficiency of the FCA’s capability. The FCA has provision to take account of consumer and market conditions and intervene, and I am clear that it has the capacity and the experience to do that work. The broader economic crime challenges that she mentions are why the March Budget contained an additional £100 million economic crime levy to support existing public investment and levies.
These are an ongoing, challenging, evolving and changing set of risks across that market, with the application of new technology—I have mentioned cryptocurrencies—and new ways of doing business that mean that the nature of crime is also evolving. I would never be complacent about the capacity of the FCA, and I recognise that it needs constant review and refresh to ensure that it is aligned with the other agencies involved in monitoring and dealing with threats to market integrity.
Question put and agreed to.
Schedule 10, as amended, accordingly agreed to.
Clause 28
Part 4A permissions: variation or cancellation on initiative of FCA
John Glen
Clause 28 introduces schedule 11, which amends the Financial Services and Markets Act 2000 to put in place a new process so that the FCA can more quickly cancel the authorisation of firms that it believes are no longer continuing regulated activity.
Since the existing grounds and method for cancellations were introduced, the FCA-regulated population has expanded, such that the FCA now regulates approximately 59,000 firms. Under the current cancellation process, it can take considerable time for the FCA to build its evidential case that the firm is no longer carrying out authorised activity, even when it is likely that the firm is no longer doing so. That means that there is a delay between the firms being identified as inactive by the FCA, and the FCA being able to remove or vary their authorisation.
The FCA estimates that at any point in time, the number of firms no longer carrying on FCA-regulated activities but which have not sought cancellation to their authorisation is about 300 to 400. Although that is a small proportion of the 59,000 FCA-regulated population that I mentioned, the Government nevertheless consider that it creates a risk, particularly in regard to the financial services register. Fraudsters can take advantage of inaccuracies in the register to their benefit by cloning inactive firms to scam consumers. That involves impersonating a firm that is on the register to give people the impression that they are dealing with a regulated entity.
Alison Thewliss (Glasgow Central) (SNP)
What is the interaction between that register and the Companies House register? If we removed an inactive business from one register, it would make sense to remove it from the other.
John Glen
As far as I am aware, the Companies House register is a separate entity run from the Department for Business, Energy and Industrial Strategy. A considerable amount of work is going on at the moment to look at how the data around Companies House registration works, reflecting concerns raised in the December 2018 Financial Action Task Force report. The hon. Lady makes a very reasonable point about the alignment of the two registers, and I will need to come back to her on that matter. Clearly, it would be perverse to remove an FCA-registered entity but not have a forfeit of registration from Companies House. I shall write to the Committee and to the hon. Lady on that matter.
I want to ensure that consumers can take informed financial services decisions. To achieve that, we need to ensure that the financial services register is accurate and that consumers are not exposed to unnecessary risk. This new process will sit alongside the existing process, to allow the FCA to streamline cases in which it suspects that a firm is no longer carrying on an authorised activity, enabling the FCA to more quickly cancel the firm’s authorisation and update the financial services register accordingly. In cases in which the FCA is looking to cancel a firm’s authorisation for another reason, this will continue to pass through the existing process.
I therefore recommend that this clause stand part of the Bill.
Mr McFadden
I suspect that I am going to follow up on the question from the hon. Member for Glasgow Central. As the Minister has explained, the problem that this clause and schedule are intended to resolve is dormant companies that no longer do the things that they were doing when originally registered with the FCA. Regulation is sometimes described as a needle-in-a-haystack problem, because there are so many companies and there is so much going on. Okay, it is not a massive number; it is 300 or 400 among 59,000 companies, but if we can strip those out, we make the job of the regulator that little bit easier because it is monitoring fewer companies and there is less danger of the cloning activity that the Minister described.
However, this does prompt a question: if 59,000 companies are regulated by the FCA and some 4 million to 5 million are registered with Companies House—we will come on to this under other clauses shortly—surely the process that the Minister has just outlined for clause 28 and schedule 11 should apply to companies there, if we find that they are simply paper organisations that may be designed as much to deceive as to actually carry out any business. Where they are engaged in activities that they should not be, they should be taken off the register, too, but that would of course imply a change in job description for Companies House. It has traditionally regarded itself more as a register and library rather than a real regulator or what might be called a partner in law enforcement. Therefore, can the Minister at least—he will hear this more than once today—talk to colleagues in BEIS to encourage a parallel approach with Companies House? It seems to me that what is being done in clause 28 is sensible, but it is only part of the picture of clamping down on illegal activity.
John Glen
The point here is that clearly a business could be registered at Companies House, could historically have done regulated activity under the FCA and that regulated activity could have ceased; it may have other business activities that are completely compliant with Companies House law, but it should not be registered for doing financial services regulated activity. The question would then be this: what would be the obligation on Companies House to make an interaction so that, as the right hon. Gentleman said, the definition of its activities would be amended?
Obviously, there are complex legal issues here. This is associated with the review that BEIS will be coming back to, responding to. I think it is important that we acknowledge that issue about not doing a regulated activity but continuing to trade legally in other realms. But the point that I hear and recognise needs to be clarified is this: what is the interaction between the two processes? I undertake to examine that and to make clear to my colleagues in BEIS what the risks are and what the view of this Committee is.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Schedule 11
Variation or cancellation of Part 4A permission on initiative of FCA: additional power
Question proposed, That the schedule be the Eleventh schedule to the Bill.
John Glen
I have already explained why we are acting to create a new process so that the FCA can more quickly cancel the authorisation of firms that it believes are no longer continuing regulated activity. Schedule 11 amends the Financial Services and Markets Act 2000 to give the FCA the necessary power to do that If it appears to the FCA that an FCA authorised person is no longer carrying out a regulated activity, it can vary or cancel that firm’s permissions. Examples of where the FCA might pursue this approach could be when the firm has failed to pay its fees or levies or provide information to the FCA as is required in the FCA handbook.
John Glen
Clause 29 makes two small technical changes to the market abuse regulation. The first concerns insider lists, which are lists of all persons who have access to inside information and are working for firms that issue financial instruments or those acting on their behalf. They are a crucial tool for regulators and for firms themselves in controlling the flow of inside information. Currently, the market abuse regulation requires issuers or any person acting on their behalf or on their account to maintain an insider list. This has created uncertainty as to whether third parties acting on behalf of an issuer should be holding their own list or sending it to the issuer to hold, leading to a risk that some of the parties are not maintaining insider lists. These lists are vital. In this clause, we are acting to remove this uncertainty by making it clear that both issuers and any person acting on their behalf or on their account are required to maintain an insider list.
The second part of the clause concerns the timetable within which issuers are required to disclose transactions by their senior managers in the issuers’ own financial instruments to the public. Under the market abuse regulation, senior managers—referred to as persons discharging managerial responsibilities, or PDMRs—need to notify the issuer and the FCA of any transaction undertaking in financial instruments related to the issuer. This notification must be made within three working days of the transaction and the issuer must also notify the public within the same three working days of the transaction. This means it is possible that an issuer may only receive the notification from the PDMR on the day that they are required to publish the transaction. We are changing this to require notification to the public within two working days after the issuer receives notification of a transaction. This introduces a more practical and sensible timetable for observing timely and transparent disclosure of PDMR transactions to the market. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Clause 30
Maximum sentences for insider dealing and financial services offences
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 30 concerns the penalty for criminal market abuse. Market abuse undermines integrity, reduces public confidence and impairs the effectiveness of the financial markets. Market abuse is comparable to other types of economic crime, such as fraud, so it should carry an equivalent penalty.
The clause will increase the maximum prison sentence for such crimes from seven to 10 years, demonstrating that the Government take criminal market abuse offences just as seriously as other types of economic crime offences. In 2015, the findings of the fair and effective markets review were published jointly by the Treasury, the FCA and the Bank of England. This report assessed market standards in the financial services industry, looking for ways to improve fairness and effectiveness in fixed income, currencies and commodities markets. The report contained 21 recommendations to improve market standards assigned to a number of public bodies. The Government are committed to delivering the improvements to the body of financial services legislation that were recommended in the report, and the clause follows the recommendation of the report. I therefore recommend that the clause stand part of the Bill.
John Glen
I thank Opposition Members for the last three speeches. I think that they expressed a broad understanding of and agreement with the measure, but more general concern about the capacity for implementation and the need to ensure that the issue is addressed more broadly. I am happy to try to respond to those points.
The right hon. Member for Wolverhampton South East started the conversation about enforcement and prosecution. The terms of the clause will help to ensure that market abuse is recognised as serious misconduct in the same way as fraud is currently judged, and that will send a clear message to individuals who break the law: they will be held to account.
The hon. Member for Glasgow Central spoke about the length of sentencing. Since 2009, there have been 36 successful prosecutions for market abuse offences—the average sentence is 1.7 years, and the longest sentence was 4.5 years. To date, no criminal market abuse case has been tried that resulted in a seven-year sentence. That does not preclude the possibility of convictions in future cases that require a longer sentence as a result of aggravating factors, such as a significant breach of trust by senior individuals or sophisticated criminality by organised criminal groups.
In the light of the comments of the hon. Member for Wallasey about the challenges faced, I also want to add that in last week’s spending review an additional £63 million was allocated to the Home Office to boost Action Fraud. I also mentioned the economic crime levy in an earlier response, although that is anti-money laundering specific, and will not cover fraud. But a number of other activities are relevant to the points raised by Opposition colleagues.
A significant amount of work is going into the reform of suspicious activity reporting, where banks highlight transactions that give reasons for concern. That reform will be integral to our response to economic crime, and it is vital in uncovering and combating wider criminal activity. The Home Office is leading on that work.
The hon. Member for Wallasey made a point about the £100 million levy and the outsourcing, essentially, of capacity. It is important that we have joint working between the Home Office, the Treasury and the private sector on this matter. Just last week, I had a conversation with the payments regulator and UK Finance about push payment scams and the need to increase the confidence in the way those matters are treated. They are complex and involve sophisticated fraud against many of our constituents. I completely empathise with the hon. Lady’s frustration regarding the apparent lower prioritisation of this area. Across my 12 broad areas of responsibility, it is this that I find most challenging to move forward on definitively because the nature of the challenge is evolving. However, the work going on there and the payments regulator’s imperative to act, which it will do following the consultation, is significant.
However, with respect to the questions on this particular clause, I hope that the value of that enhanced sentence, which reflects the 2015 report, is understood. We will not bring the broader measures to a conclusion now, but I hope that I have signalled some of the ongoing efforts to try to deal with what is a particularly challenging area.
Ms Eagle
To some extent, this is illustrated by the fact that the enhanced sentence was in a 2015 report but we are only just legislating for it now. Five years later, we are still only talking about a sentence that is highly unlikely ever to be used, based on the past record—the Minister just quoted it himself. I wonder whether he might increase the confidence that some of us have that this is being tackled in a coherent way—we will get on to some of this later—by talking about the fragmented supervisory system and what he is doing to help bring that together so that the fragmented regulation of this whole area can actually be done more coherently, so that we can get enforcement on abuse. We all know that, prior to the big bang in the City, this was all done informally anyway, by gentleman in their clubs. It seems to me that we never really got a grip, after the big bang, in dealing with that informal networking that goes on, where a lot of the gaps and a lot of the potential insider dealing actually lurks. Perhaps he could give me a little bit more confidence about that.
Mr McFadden
I want to double check something that the Minister said a minute ago. I think he said that there have been 36 prosecutions since 2009.
Mr McFadden
That might illustrate the point that we are making, because by my rudimentary maths, that would suggest—
Mr McFadden
Something between three and four a year, which is hardly the sign of a system that is working, unless we think that only three or four people a year are doing insider dealing. However, for those who do not believe that, and who believe that hundreds of investigations go on but only three or four people are prosecuted a year, that illustrates the point that increasing the sentencing alone will not deal with this problem.
John Glen
I would never say that the measure was a panacea for economic crime or the complexity of the evolving and changing nature of the risks that we face in financial services. It is obviously an interconnected world across different jurisdictions. I empathise with the frustration around which of the multiple agencies will get a grip on this. It is necessarily complex because of the sophisticated nature of the way that data flows are reported and the way that different specialist agencies of crime enforcement and regulators need to work together.
I do not think I will give satisfaction to the Committee on this matter. The right hon. Member for Wolverhampton South East makes a reasonable point about the implied annual number of successful prosecutions. It is impossible for me to comment on what is lost, because it is counter-factual; I cannot prove what is not there. However, I recognise that there is more work to be done and that this is one step, amid others in other Departments—particularly the Home Office—to move this forward.
Question put and agreed to.
Clause 30 accordingly ordered to stand part of the Bill.
Clause 31
Application of money laundering regulations to overseas trustees
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 30—Application of money laundering regulations to overseas trustees: review of effect on tax revenues—
‘(1) The Chancellor of the Exchequer must review the effects on tax revenues of section 31 and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) The review under sub-paragraph (1) must consider—
(a) the expected change in corporation and income tax paid attributable to the provisions in this Schedule; and
(b) an estimate of any change attributable to the provisions of section 31 in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.
(3) The review must under subparagraph (2)(b) consider taxes payable by the owners and employees of Scottish Limited Partnerships.’
This new clause would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of section 31, and in particular on the taxes payable by owners and employees of Scottish Limited Partnerships.
New clause 35—Money laundering and overseas trustees: review—
‘(1) The Treasury must, within six months of this Act being passed, prepare, publish and lay before Parliament a report on the effects on money laundering of the provisions in section 31 of this Act.
(2) The report must address—
(a) the anticipated change to the volume of money laundering attributable to the provisions of section 31; and
(b) alleged money laundering involving overseas trusts by the owners and employees of Scottish Limited Partnerships.’
This new clause would require the Treasury to review the effects on money laundering of the provisions in section 31 of this Act, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish Limited Partnerships.
John Glen
This amendment to the Sanctions and Anti-Money Laundering Act 2018 ensures that the Government have the power to change, and Her Majesty’s Revenue and Customs has the power to enforce, elements of our anti-money laundering regime relating to extraterritorial trusts. Enacting this amendment will cement HMRC’s power to access information on who really owns and benefits from overseas trusts with links to the UK. This is part of our wider reform efforts to improve beneficial ownership transparency.
It is important to stress that this merely ensures the continuation of existing powers. After the end of the transition period, the Sanctions and Anti-Money Laundering Act will take over from the European Communities Act 1972 as the statutory framework for implementing sanctions and anti-money laundering policy in the UK. Changes introduced by the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 provide for the expansion of the HMRC trust registration service. Some non-UK express trusts with a connection to the UK, including those buying UK land or property, will need for the first time to register with HMRC’s trust registration service. The number of registered trusts is expected to increase from 120,000 to an estimated 3 to 6 million as a result of those changes made by the money laundering regulations.
The amendment made by the clause will confirm the Government’s ability, after the end of the EU exit transition period, to make regulations applying to trustees of overseas trusts with links to the UK, even where they are non-resident. It also confirms HMRC’s ability to take enforcement action against those trustees. I therefore recommend that the clause stand part of the Bill.
Alison Thewliss
New clauses 30 and 35 are the result of long-standing concerns that I and my hon. Friend the Member for Aberdeen South have about money laundering in the UK. That was accentuated by what the Minister said about increasing the number of trusts. It goes some way to reflect the evidence we took during prelegislative scrutiny of the draft Registration of Overseas Entities Bill, where a witness suggested that if he were going to hide some money, trusts are pretty much where he would go to do so. The Government should be doing an awful lot more on this, because with this increase in trusts and the Government’s response, it feels as though the Government are pursuing a Whac-a-Mole strategy. However, Whac-a-Mole is not a mole-eradication strategy; it just makes them pop up somewhere else. The Government need to be wiser to that.
Our new clauses would require the Treasury to review the effects on money laundering of the provisions in clause 31, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish limited partnerships. The Minister will be fed up with me talking about Scottish limited partnerships, because I and the colleagues who preceded me have never shut up about them, but they remain a problem. The number of people fined for misuse of SLPs remains pretty much at zero, as far I am aware. The Government need to do a huge amount more.
It beggars belief that the Sanctions and Anti-Money Laundering Act left an oligarch loophole, allowing money laundering by overseas trusts to buy UK property with impunity. That Act contains the framework that the UK will use to implement sanctions and anti-money laundering policy after leaving the European Union single market. However, as the Government have observed, it is not clear that under the current drafting anti-money laundering regulations can be made in relation to non-UK trustees of trusts based outside the UK. Even though a trust may be based outside the UK, and the trustee may be a non-UK corporate or individual, the trust may have links to the UK—for example, because it owns UK property. We start to see the very complexity of the web that exists here, and the difficulty in dealing with it and finding who is really in control. New clause 31 would amend schedule 2 to the 2018 Act to ensure that regulations can be made in respect of trustees with links. Without this, any powers HMRC sought to exercise to access information about such trusts are at risk of being held invalid under legal challenge.
The Government, for their part, believe that the change will reaffirm the UK’s global leadership in the use of public registers of beneficial ownership, as identified by the Financial Action Task Force mutual evaluation of the UK in 2018. They will further support public and private sectors sufficiently and effectively target resources towards potential criminal activity using trusts, maintaining the resilience of the UK’s defences against economic crime. That is quite a joke; it really is not good enough. Trusts are the largest gaping loophole that we have. We want the Government to accept our amendments and come clean on how little impact this measure, as with many others previously, has had on money laundering.
In June 2019, HMRC published revised estimates that put the tax gap at £35 billion for 2017-18, representing 5.6% of total tax liabilities. While welcome action has been taken and that gap has had some impact, no Government have yet created a comprehensive anti-avoidance rule, because at the moment people are allowed to move around in different ways and find different loopholes and different mechanisms to avoid paying their tax.
Mr McFadden
Sometimes, when I look at this Bill and all the different things it attempts to deal with, I have an image in my head of somebody cleaning out a cupboard in the Treasury, finding lots of policy things and looking for a legislative truck on which they can be loaded.
Ms Eagle
I suspect you have just wiped out most of my speech, Dr Huq. We want to hear from the Minister about the adequacy of having just this clause, and not a lot else, to deal with the issue in this portmanteau Bill. In the debate on clause 30, we heard that it had taken the Treasury five years to increase from seven to 10 years the potential sentence for market abuse. The Treasury Committee’s 2019 report—I am now a member of that Committee—was excoriating about the scale of the problem, with between tens of billions and potentially £100 billion lost. As we have discussed in relation to other parts of the Bill, we know that small weaknesses in the defences can be ruthlessly targeted and become much bigger if they are not closed off.
We are reassured about the point that the Minister is trying to make with clause 31, but given that our country has been described as a laundromat for money laundering, perhaps the Government could have used this Bill as a suitable legislative opportunity to make other changes to the money laundering legislation that this clause amends. Perhaps the Minister could explain why that action has not been taken and give us an idea of what will follow. He has already referred to a reform of the suspicious activity reports regime. Why is that not included in this Bill, given that an analysis of it has found that over 80% of the reports are from banks, and very few from other places where there might be suspicious activity, such as property ownership in the UK? As we know, that is how money can be laundered.
We seem to have got ourselves into a situation where the banking structures just produce suspicious activity reports in massive numbers—three quarters of a million of them in a year, I think. Among those, the real ones are perhaps hidden, but the regulators are trying to get through them all and do very little. At the same time, we know that when the FinCEN papers were actually leaked, that involved, between 2000 and 2017, the transfer of close to $2 trillion of transactions, which were included in these suspicious activity reports.
Many transactions laundered money through our systems—many from overseas, in terms of what we are dealing with in clause 4. HSBC allowed fraudsters to move millions of dollars of stolen money around the world even though they knew it was a scam. J.P. Morgan allowed a company to move more than one billion through a London account without knowing who owned it. I could go on.
It seems that clause 31 is a tiny little attempt to stop an abuse, given that the abuse going on is of that scale. There is also the husband of a woman who donated £1.7 million to the UK’s Conservative party, secretly funded by a Russian oligarch with close ties to President Putin. Again, I could go on. I hope that the Minister is going to at least give us some view about what is going on here and whether clause 31 is the be-all and end-all of what the Government intend to put in place to deal with this issue.
On victims of fraud, criminals have successfully stolen £1.2 billion from individuals through banking fraud; in an earlier debate, the Minister was talking about his own frustrations with trying to get a grip of that issue. That figure on scams comes from 2018. It is also estimated that £5.9 billion a year is defrauded from businesses in the public sector.
The issue is not just about oligarchs running their money around the world and laundering it into property and other things. It is not just about mafiosi or corrupt political leaders doing the same, although all that is happening. This involves your constituents, Dr Huq, and my constituents, who are losing money through banking scams. Our public sector is losing money through other scams, which bleeds away the resources available to us to do the other things we need to, especially when these resources are scarce.
This issue can sometimes look very technical—it is about overseas investors and is only little clause 31. But it is not only about corrupt laundromats, Russian reports and corruption on a scale we can only think about. It is also about some of our well-known high street banks indulging in such activity and covering it up somehow, because having the business is so profitable for them—and, again, the risks of being caught and fined are outweighed by the profits that can be made by turning a blind eye. It involves all of the major banking and investment institutions. It involves estate agents, lawyers and accountants who are facilitators—wittingly or unwittingly—to all these activities.
We had better get a grip: the more this kind of money is present, the worse and dirtier it makes our structures and systems and the more cynical it makes our constituents. It makes all of us less likely to follow the rule of law and agree that the right thing should be done. It changes the balance that people calculate between the risks of doing something wrong and the rewards of not being caught. None of that helps the rule of law; none of it helps honesty; and none of it helps those of our constituents who strive their whole lives to do the right thing and yet see others profit massively from scams and reprehensible behaviour—criminal behaviour, in a lot of cases.
Dr Huq, I have ranged a bit wider than the terms of clause 31, but I think that it is the start of a fightback on money laundering regulations. Even though it represents a tiny, tiny little step, the Government have yet to persuade me that they want to get a grip of the situation and intend to do so through the Bill.
John Glen
I thank Members for their contributions, although at times as I listened I thought that I was in the wrong place, given the wider conversation about economic crime. However, I greatly respect the sentiments and points expressed and I will try to address the questions put.
The right hon. Member for Wolverhampton South East spoke of a mental image of a cupboard being cleared out. I will not deny that in my three years as Economic Secretary I needed to legislate on a number of matters, and the Bill necessarily brings together a number of them. However, there will be more legislation if I can persuade the authorities in this place to grant me that opportunity. I assure him that the Bill does not represent the end point on a number of matters. The clause, however, merely ensures the continuation of, and ability to vary in future, existing powers and requirements with respect to overseas trusts.
New clause 30, proposed by the hon. Member for Glasgow Central, would impose a requirement on the Treasury to report on the impact of the provisions of clause 31 on the expected change in corporation tax and income tax paid, and the expected change in the difference between the amount of tax required and the amount tax paid in relation to overseas trusts and Scottish limited partnerships. I reiterate that the Government are committed to ensuring that the UK’s corporate structures are not exploited by those seeking to avoid or evade tax. For reasons that I will outline, however, the Government cannot support the proposed new clause.
As I have said, the Government have introduced changes through amendments to the money laundering regulations that directly aim to improve the transparency of the ownership of trusts. In particular, those changes significantly expand the requirement for non-UK trusts to register with the HMRC trust registration service. Trusts will have to provide evidence that they are registered before entering into business arrangements with regulated firms under the money laundering regulations. HMRC needs clear powers to take enforcement action against those who do not comply with registration requirements, and the Government need to maintain the ability to amend those requirements in future.
The powers in the Sanctions and Anti-money Laundering Act 2018 will ensure that the UK Government can continue to make and amend their regulations. The proposed new clause would require the Treasury to publish a report on the effects of clause 31 on the amount of taxes paid, but it is not in line with effects of that clause, which does not make changes to taxes. The provision is not expected to bring about any changes in the amount of corporation tax and income tax paid nor any change to the tax gap in relation to Scottish limited partnerships or otherwise. Neither is it envisioned that it would be possible to attribute any variation in taxes paid, nor the tax gap, to clause 31.
New clause 35 imposes a requirement on the Treasury to report on the impact of the provisions in clause 31 on money laundering volumes involving overseas trusts and Scottish limited partnerships. I understand that it seeks to measure the impact of our efforts to prevent money laundering through trusts, but may I remind hon. Members that the current Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 and the 2017 regulations that they amended, namely, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, already require the Treasury to carry out a review of its regulatory provisions and publish a report setting out the conclusions of its review by June 2022? That wider review will provide a more meaningful evaluation than simply reporting on the narrow provision of the clause, and provide continuity in the Government’s powers to make changes in the UK’s anti-money laundering regime.
I also remind colleagues that Scottish limited partnerships are not specifically within the scope of the trust register, and point them towards separate legislation that deals with transparency for those vehicles. In June 2017, Scottish limited partnerships were brought into scope with the public register of beneficial ownership maintained by Companies House. Since the Government introduced new reporting requirements for Scottish limited partnerships in 2017, new registrations of Scottish limited partnerships have greatly reduced, with registrations falling from 4,932 in 2016-17 to 2,689 in 2017-18, and falling further to 657 in 2019-20.
I want to take this opportunity to address some of the broader points on the alleged failures, and the work in progress, with respect to anti-money laundering and trusts. I think it reasonable to say that the UK is recognised as having some of the strongest controls internationally for tackling money laundering and terrorist financing. In recent years, we have taken a number of steps, including creating a new National Economic Crime Centre, passing the Criminal Finances Act 2017, and establishing the Office for Professional Body Anti-Money Laundering Supervision.
The hon. Member for Wallasey referred to the challenge of suspicious activity reports processing. The economic crime levy, in working with industry, is a direct attempt to invest in that reform. She asked specifically why legislation on that is not included in the Bill. That is continuing work that urgently needs to move forward, but provision for extra investment to process SARs more efficiently is being conducted at pace.
Last year, the Government published the landmark economic crime plan, which brought law enforcement and the private sector together in closer co-operation than ever before to deliver a whole-system response to economic crime. This year, we completed the transposition of the fifth anti-money laundering directive into domestic law. That remains comprehensive and responsive to emerging threats, in line with the evolving standards set out by the Financial Action Task Force—the international body that monitors such matters.
The expansion of the trusts registration service referenced today will bring millions more trusts in scope, including overseas trusts that purchase land or property in the UK. We will ensure that information on the register is made available in certain circumstances to those with a legitimate interest. We do recognise—I acknowledge the sentiments that have been expressed—that more needs to be done, and we are committed to making further progress, building on that made so far, to lead the global fight against illicit financial flows.
New clauses 30 and 35 make small amendments to clarify that the Government can enforce extraterritorial trust registration in relation to non-UK resident trustees and update those requirements in future. On why we are not doing more in the Bill, I have mentioned a number of the activities that the Government are undertaking, but I recognise that more needs to be done.
I should also mention the overseas entities Bill. In line with the ongoing commitment to combatting illicit finance, we intend to implement a register of beneficial owners of overseas entities that buy or own land in the UK as a measure of the economic crime plan 2019 to 2022. The register will be the first of its type in the world. The Government published a draft of that legislation, which accepted many of the subsequent recommendations by the Joint Committee that carried out that pre-legislative scrutiny. As the hon. Member for Glasgow Central knows, the Queen’s Speech last year committed to this Bill and to the continuing progress of that draft legislation. Lord Callanan’s written ministerial statement in July outlined the progress to date of that draft Bill.
On Companies House register reform—another matter mentioned by several colleagues—the Government are currently considering a broad package of reforms to Companies House to boost its potential as an enabler of business transactions and economic growth, but also giving it a bigger role in combatting economic crime. Following last year’s consultation, the Government issued our response to the corporate transparency and register reform on 18 September. The response summarises the views received and sets out how the Government will take forward those plans.
The Government will legislate when the parliamentary calendar allows and intend to deliver more reliable information on the companies register—reinforced by the verification of the identity of people who manage, control or set up companies, as has been referenced—and greater powers for those at Companies House to query and challenge information, so they are not just librarians, as I think they were described.
We will bring effective protection of personal information provided to Companies House and a more effective investigation and enforcement regime for non-disclosure and false-filing; the removal of technological and legal barriers to allow enhanced cross-checks on corporate data with other public and private sector bodies; continued investment in technology and in the skills of Companies House staff to make that register more efficient, effective and resilient; and broader reforms to clamp down on the misuse of entities I hope that my answers have done some justice to the questions asked, and I ask the hon. Member for Glasgow Central to withdraw the new clauses.
The Chair
Actually, new clauses 30 and 35 will not be decided until Thursday because of where they are on the amendment paper, so the hon. Member for Glasgow Central can decide then whether to press or withdraw them. For now, we are on clause 31 stand part.
Question put and agreed to.
Clause 31 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned.—(David Rutley.)
Financial Services Bill (Tenth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Tenth sitting)
John Glen ExcerptsTuesday 1st December 2020
(3 years, 11 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 December 2020 - (1 Dec 2020)
The Economic Secretary to the Treasury (John Glen)
Let me see if can get straight to the right hon. Gentleman’s point. The statutory debt repayment plan is an option that will be available to people who go into the breathing space scheme. That will be up and running on 4 May next year, and the SDRP is an option that we would move the regulations for as soon as possible after this Bill is passed. After Royal Assent, we will consult on those regulations. Given the challenges and complexity involved, we need to work very closely—as we did on the breathing space scheme—with the debt advice sector, creditors and regulators to ensure that we deliver the policy successfully.
The regulations that come from this work will need to be developed and consulted on over a longer timetable, and we will consult on those draft regulations as soon as possible after the Bill receives Royal Assent. In the meantime, we are pushing ahead with the implementation of the breathing space scheme, which will come into force on 4 May next year. Other voluntary and statutory debt schemes will continue to be available to debtors in the meantime. This is an option to add to the list of options available to those who go into the breathing space scheme.
Amendment 29 would require the Government to make regulations establishing a debt respite scheme within one year of the Financial Guidance and Claims Act 2018 coming into force. As that Act has been in force since 1 October 2018, that would make it a retrospective requirement and I do not think that is quite what is intended. The regulations establishing the first half of the Government’s debt respite scheme—the breathing space scheme—were made in November 2020, and the right hon. Gentleman participated in the debate on that statutory instrument. That part of the scheme will commence in May 21, as set out in those regulations.
Leaving aside the drafting issues, I understand that hon. Members are keen that the Government do not delay introducing the second part of the scheme, the statutory debt repayment plan. I assure the Committee that it is our intention to support those who are experiencing problem debt swiftly and effectively. The Government will consult on those regulations as soon as possible after the Bill receives Royal Assent. We set out our outline policy in the June 2019 consultation response, but there is significant ongoing work to be done. In the meantime, the breathing space scheme will be up and running from next May and all existing statutory and voluntary debt solutions remain available to those in problem debt. I respectfully ask that the amendment be withdrawn.
Mr McFadden
As I said, I do not intend to press the amendment today. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
John Glen
Forgive me, Mr Davies; I did not acknowledge what a pleasure it is to serve under your chairmanship in my previous remarks, so I do so now. I will address amendment 34 and new clause 11, but first I feel that I should respond to the general context that colleagues have raised. The hon. Member for Walthamstow is right that I share many of her perspectives, if not always her solutions.
High-cost credit will always be with us; the question is about the terms on which it is made available and what we can do to make available better alternative provision of credit. As the hon. Lady acknowledged, we have had conversations and debates about the issue many times. It will be useful for the Committee to know that Chris Woolard, the former interim chief executive of the FCA, is currently conducting a review into high-cost credit, particularly looking at the explosion of new models of payment—“buy now, pay later” in particular.
I have also been very focused on making more of the alternatives, by supporting the credit unions to allow them to lend more easily and by looking with the Association of British Credit Unions, one of their trade bodies, at what legislation we can bring forward. That is something we have committed to. I have also committed to working on pilots for the no-interest loan scheme, because that could be really useful; if we can establish where that can be used, it would provide a meaningful alternative.
Some of my most compelling experiences as an MP have come from working on the all-party parliamentary group on hunger and food poverty with the hon. Member for South Shields (Mrs Lewell-Buck) and the former Member for Birkenhead. On a visit to South Shields in 2014, I remember seeing first hand some of the really challenging situations that people get into with debt. That has been echoed in my own constituency in Salisbury, where the Trussell Trust was founded. That is why it is really important we have invigorated the support that the debt advice sector can have. We have allocated an extra £37.8 million in May, so that it has £100 million this year.
The main objective of the breathing space mechanism is to get people to a place where they can evaluate their situation and find the right option. The effect of amendment 34 is to require the Government to provide protections that last at least 120 days when making future regulations concerning breathing space or the statutory debt repayment plan. The amendment does not amend the existing breathing space regulations, which, I believe, was probably the intention. The aim of breathing space is to provide temporary debt relief, and extending the duration by that amount of time does not align with the policy intent.
In the 2017 manifesto, we committed, as an aspiring Government, to a six-week moratorium breathing space period. That is what we consulted on and it was, I think, through my direction as the Minister two and a half years ago that we committed to extend that to 60 days. That was the expectation and consensus among those who contributed to that. The Government consider those 60 days to be an appropriate period for a breathing space moratorium. I have not received any direct representations from charities, although StepChange believes that 60 days is the right period, although that could be changed in exceptional circumstances. I recognise that that charity may consider that as being met, but I am told by my officials that I have not received direct representation about that.
Stella Creasy
Apologies; I just want to clarify. Some 80 debt advisers have written to the Committee to support the measure on precisely the grounds that I have set out. Is the Minister saying he has not seen those representations or that he does not see them as a voice of the sector? There is a difference and I do not know whether that is an absence we need to address.
John Glen
The difference is that, as a Minister, I have not been written to by them. I recognise that there is a range of views out there, but I also recognise that a significant piece of work was done to consult on and to establish these measures and to secure cross-party support for them.
We believe that the time period will allow individuals to identify and access a debt solution, while the fixed period will provide certainty to creditors. It is important to reflect on that: this is in the interests of both the debtors—the individuals who have significant debt—and also creditors, often small businesses, who are owed money. There is a judgment to be made about how that balance is achieved.
Given the current circumstances, I understand why Members believe that a stronger moratorium would benefit those in problem debt who are struggling with their finances during this difficult time. The Government have put in place an unprecedented package of support to help people with their finances during the covid-19 pandemic. We have worked with mortgage lenders, credit providers and the FCA from the outset to help people manage their finances. A lot of work has been done and is still being done by financial services firms to make those measures work.
During the consultation period, the Government explained their position on the duration of the scheme and were supported, as I said, by many stakeholders. The regulations were approved by Parliament in October and by the Welsh Senedd in November and have subsequently been made.
The amendment would also apply to any regulations made in the future on the statutory debt repayment plan—the second part of the debt respite scheme, which the clause is focused on. It would set a new minimum duration for an SDRP of 120 days. Of course, in practice, most SDRPs are likely to last for a period of years rather than months, allowing individuals to repay their debts to a manageable timetable. Introducing a minimum duration is not likely to be a necessary protection in this scheme.
New clause 11 would do two things. First, it would require the breathing space scheme to commence on 31 January 2021 instead of 4 May 2021, which was set out in regulations that we approved in October, as I said earlier. Secondly, the new clause would also extend the duration of a breathing space moratorium from 60 days to 12 months.
Increasing the duration of the scheme to 12 months would create much greater interference in creditor rights without increasing any of the corresponding safeguards. For example, the midway review process, which regulations stipulate must take place between days 25 and 35 of a breathing space moratorium, would need to be reconsidered and redesigned.
As the breathing space regulations have already been made and the proposed amendments would not achieve the policy intent, I ask, with some regret, the hon. Member to withdraw the amendment.
Stella Creasy
I thank the Minister for his response. I am sorry to hear that he did not see the document, which I know was sent to his office yesterday by the debt advice workers, because I think we all recognise that we are dealing with unusual circumstances. Covid is that Monty Python foot coming down on any of the plans that might have made the policy intent 60 days prior to our current situation.
Unless the Minister thinks that the Office for Budget Responsibility is wrong about the levels of redundancies, unemployment and financial contraction—we have not even mentioned the B-word, Brexit, on top of that—that will face the economy that we want to provide the jobs that allow people to earn the money to pay off their debts, he is having a bit of a tin ear to what people are saying. In this circumstance, we need to extend the breathing space for it to be a breathing space.
This is not just about high-cost credit; this is about the people who are stuck on credit cards as well—the people who will end up spending 25 years to pay back the credit card average debt at minimum repayments. He talks about small businesses. This is about people who have mortgages, for example—
Stella Creasy
Well, but there are also major banks. If we push too quickly, problem debt will sink any possible financial recovery. We have never learned that lesson as a country. I really wish we would. With the greatest respect to the Minister and his talk about policy intent, he is in the wrong place on these measures at this point in time. I will press this to a vote because I think it is important that we set on the record the concern that we should listen to the debt advisers who say that we will need longer in the pandemic to sort the issues out.
Question put, That the amendment be made.
Alison Thewliss
We should recognise the professionalism, expertise and qualifications of those giving debt advice to our constituents, and not try to put a provision in the Bill that prejudges what they do. Speaking from experience, they have worked incredibly well, over time, with my constituents, so I question whether the midway review is necessary.
Let me give a case from my constituency. A woman came to my office very upset, very much in the way that the hon. Member for Walthamstow described, because she was being evicted the next day. We had to swing into action and try to find ways around that, and spoke to the Glasgow Housing Association. It did take time to make that happen, but the GHA sat down with her, went through all her bills and outgoings and worked with her intensively over a period, to make sure it would get the rent money and that the other debts she had, that were also causing her problems, were taken care of.
I was struck by the professionalism of the GHA advisers and by the fact that they were experienced and were tough but compassionate with the woman. They made sure she could see a way through. If people see an arbitrary cut-off point halfway through, that will give them fear, not reassurance. There is a risk that the respite will be removed from people who are supposed to be helped by the midway review, if it is put at an arbitrary halfway point. The Minister should consider whether that is really the outcome that he wants to achieve. Yes, there should be some kind of review mechanism, but my experience is that it is done all the way through the process. There is no need for the midway review, because reviewing is already happening.
John Glen
Amendment 35, put forward by the hon. Member for Walthamstow, would restrict the Government’s ability to require debt advisers to complete any review of debtor eligibility in any future regulations made concerning breathing space or the SDRP. As the Committee will be aware, breathing space regulations were approved by the House in October, and they state that a debt adviser must complete a midway review after day 25 and before day 35 of the moratorium.
The amendment would not amend the existing breathing space regulations, which I believe was the intention. In addition, it would apply to any regulations made in the future on the SDRP and the second part of the debt respite scheme, which the clause is focused on. That would restrict the Government’s ability to require debt advisers to complete any review of debtor eligibility related to a plan. It is expected that SDRPs will be reviewed annually, or when requested by a debtor, to ensure that payments are set at the right level and the plan remains appropriate. If those reviews could not consider a debtor’s eligibility in any way, that could be a significant constraint on the design and effectiveness of the scheme in future, and would remove the safeguards put in place for creditors.
Stella Creasy
What the Minister has just said suggests he thinks there is a binary choice between debt advisers reviewing and being involved in seeing how the breathing space is working, and their being completely absent. Does he recognise that, in the words of a previous Prime Minister, there could be a third way? Debt advisers could be given the professional courtesy of having the responsibility of doing their job. As part of that there might, absolutely, be some people they would spend more time with, whereas they might know that others had got on the right course. It is not that debt advisers would be absent if not put under a requirement; sometimes red tape can be a burden, not a benefit.
John Glen
Absolutely; that is why we listened carefully to the sector in constructing the measure. For example, when we were designing the breathing space scheme, we worked with the Money and Mental Health charity to design a different pathway for different groups with chronic crisis in mental health, allowing them to re-enter the scheme on multiple occasions in a year, and giving an extra provision. It is not something where I am being prescriptive when, alongside the SDRP regulations, it is being consulted on. However, we are in danger of making arbitrary changes in a similar vein.
If I leave aside the question of drafting, which I think I have addressed, the Government consider that a midway review is necessary to the breathing space scheme, to assess whether the debtor continues to comply with the conditions of the moratorium. I see that not as a policing exercise but an appropriate step in reviewing the suitability of the mechanism. The breathing space mechanism will not work for everyone, and it is important for a review to take place.
During the consultation period the Government explained their position on the midway review and it was supported by many stakeholders. The regulations were approved by Parliament in October and by the Welsh Senedd in November, and were subsequently made. I respectfully ask the hon. Lady to withdraw the amendment.
Stella Creasy
Again, I am afraid that the Minister has a slightly tin ear to the reality of what people will be asked to do and what they are trying to do. We cannot have it both ways. It cannot be claimed that our amendments about how services should be run are too prescriptive but it is not prescriptive for the Government to specify that after 30 days there must be another meeting, something which puts at risk the ability of debt advice providers to manage their own diaries. That does feel like the dead cold hand of the state going overboard, and I am sure that many Conservative Members present who perhaps have pledged their lives to fighting such intervention would recognise that that requirement is rather prescriptive.
Above all, I am listening to the sector, and those debt advisers say that in the current environment, when they will be overwhelmed by so many people needing their help, they should be allowed to do it in the way that they know best. I do know that the Minister wants to get this right, but I think he is not listening, and I think it is important that Parliament does, so I will press the amendment to a vote. We can then say to the sector that we have tried to articulate its concerns about this particular prescriptive clause.
Question put, That the amendment be made.
John Glen
Amendment 33, tabled by the hon. Member for Walthamstow, would dictate specific eligibility criteria for a statutory debt repayment plan, which would involve requiring debt advice providers to carry out a complex assessment of a debtor’s resources against external data and benchmarks and, where a debtor is unable to repay their debts within three years, to conduct a revised assessment of the debtor’s circumstances and advise on insolvency solutions.
I reassure the Committee that the Government are keen for any eligibility criteria to strike the right balance between allowing suitable debtors to enter the protections of an SDRP and ensuring that creditors are repaid over a reasonable timeframe. The Government set out the proposed eligibility criteria in their consultation response of June 2019, and they expect the principles to remain the same.
Imposing an additional obligation on debt advice providers to conduct an assessment of a debtor’s living standards, fixed by reference to income distribution and local house prices, could lead to inflexibility and inconsistency in the way the SDRP is provided. In any case, the appropriate mechanism for setting out that level of detail is the regulations, on which, I absolutely reassure the Committee, the Government will consult.
I turn to the suggestion that debt advice providers be required to conduct an assessment of a debtor’s circumstances, and to consider insolvency solutions if the debtor is unable to repay the debt within three years. Again, let me reassure the Committee that it is absolutely the Government’s intention for debtors’ plans to be reviewed regularly. In fact, our consultation response proposes that debt advice providers complete an annual review to ensure that a debtor’s plan continues to be the most suitable solution for them. This review can propose changes to the planned payments if the debtor has experienced a rise or fall in surplus income.
In line with the consultation response, we expect to include in the SDRP regulations provision for a debtor to request a review, and provision for payment breaks in the case of an income shock. The ability for an individual’s plan to last longer than three years, and up to a maximum of 10 years in exceptional circumstances, is intended to support sustainable repayment plans over time. If, once the SDRP scheme is up and running, a debt adviser considered an insolvency solution more appropriate for an individual than their entering into an SDRP over a longer period, that option would remain available.
Stella Creasy
I thank the Minister for what he is saying, and I appreciate that he is setting out that he thinks the amendment is not needed because there will be earlier interventions. Does he understand that the £680 cost of going bankrupt can be a barrier to taking up the options that he is talking about? It could lead to people above these very low thresholds staying in the same position not for a couple of years, but for seven, eight, nine or 10 years—not because they want to live like that, but because they have not got enough money built up to take the alternative.
John Glen
I recognise that these are complex matters. There will sometimes be a need to pay fees over a much longer period, and that option exists. The consultation on how the regulations will work will engage very closely with the sector, and I anticipate that it would get to the right place. I do not think that I have reassured the hon. Lady, but I hope that I have reassured other members of the Committee about the Government’s intentions. I ask her to withdraw the amendment.
Stella Creasy
I thank the Minister for what he said. If he is saying that he is prepared to engage on the subject of debt advice—perhaps the debt advisers’ writings for the Committee on this point were lost in translation—I am happy to withdraw the amendment. It is about recognising that the thresholds have to change, and it sounds like the consultation is the right place to have that conversation. If the Minister nods and says that that is the sort of thing that the consultation will consider, that is perfect.
Stella Creasy
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 12—Impact of COVID-19 on the Debt Respite Scheme: Ministerial report—
“(1) The Treasury must prepare and publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme.
(2) The report must include—
(a) a statement on the extent to which changes to levels of household debt caused by the COVID-19 pandemic will affect the usage and operation of the Debt Respite Scheme;
(b) a statement on the resilience of UK households to future pandemics and other financial shocks, and how these would affect the usage and operation of the Debt Respite Scheme; and
(c) consideration of proposals for the incorporation of a no-interest loan scheme into the Debt Respite Scheme for financially vulnerable individuals affected by the COVID-19 pandemic.
(3) The report must be laid before Parliament no later than 28 February 2021.”
This new clause would require the Treasury to publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme, including consideration of a proposal for the incorporation of a no-interest loan scheme into the Debt Respite Scheme.
New clause 19—Report on functioning of debt respite scheme and compatibility with personal insolvency regime—
“(1) The Treasury must prepare a report on—
(a) the functioning of the debt respite scheme under section 32;
(b) the extent to which it is achieving its objectives;
(c) its compatibility with personal insolvency legislation and policy.
(2) That report must be laid before Parliament no later than one year after this Act is passed.”
New clause 25—Debt Respite Scheme: review—
“(1) The Chancellor of the Exchequer must review the impact on debt in parts of the United Kingdom and regions of England of the changes made by section 32 of this Act and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on debt held by—
(a) households,
(b) individuals with protected characteristic as defined by the Equality Act 2010,
(c) small companies as defined by the Companies Act 2006.
(3) In this section—
“parts of the United Kingdom” means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland; and
“regions of England” has the same meaning as that used by the Office for National Statistics.”
This new clause would require a review of the impact on debt of the changes made to the Financial Guidance and Claims Act 2018 in section 32.
John Glen
Clause 32 builds on existing legislation, and will allow us to implement a statutory debt repayment plan that will help people who are in problem debt. The Government want to incentivise more people to access professional debt advice, and to do it sooner. To this end, we are introducing a debt respite scheme.
The first part of the scheme is a breathing space, which commences on 4 May 2021. The second part is the SDRP, which will be a new debt solution for people in problem debt. It will provide a revised, long-term agreement between the debtor and their creditors on the amount owed, and a manageable timetable over which those debts are to be repaid. It is intended that during the agreement, debtors will be protected from most creditor enforcement action, and from certain interest and charges on debts in the plan.
The clause amends sections 6 and 7 of the Financial Guidance and Claims Act 2018 to allow the Government to implement the SDRP effectively, as set out in their policy consultations on the debt respite scheme. The amendments will allow the Government to make regulations that can compel creditors to accept amended repayment terms and provide for a charging mechanism where creditors will contribute to the running of the scheme, ensuring it is fair and sustainable.
The clause will also allow the SDRP to include debts owed to central Government, which is crucial to helping people in problem debt. In time, I hope that will encourage more people to access debt advice sooner and enable them to repay their debts within a more manageable timeframe.
We are debating a number of new clauses alongside the clause, and I will allow hon. Members to speak to those before I respond to them. I recommend that the clause stand part of the Bill.
Stella Creasy
I will speak to new clauses 12 and 19. New clause 12 appears in the name of my friend, the hon. Member for Edinburgh West, but I recognise that she and I share a similar concern about seeing these measures in the round. As the Minister has spoken this afternoon, he has made the case for doing that, because he has talked very strongly about the policy intent and all the work that has been going on, but he has said limited amounts about the Monty Python foot of covid coming down on those best intentions.
Both of these new clauses speak to that Monty Python foot and the very different circumstances people face in terms of having a stable income to be able to repay any debt, problem or not, over the coming years. We know that there is already a problem brewing on top of a problem—a double problem, as it were. I am sure I could think of a better analogy if it was not a Tuesday afternoon.
One in three of those people reporting a fall in income over the past seven months has already borrowed to try to make ends meet. They are already on that carousel, going round and round, putting a bit of money here, hoping they can put another bit there and wondering when it will stop—hoping that schemes will come through. I am sure we will have heard about the economic impact in the debate in the main Chamber today, so I simply say to colleagues on the Government Benches: “You cannot be concerned about the economic impact of the tier system if you turn a blind eye to the debts in our communities and what happens to them.” It is dangerous simply to presume that we can spend our way out of this, knowing that debt is not equally distributed in our country.
That is why the new clauses are about having that evidence in front of us. I am a big fan of evidence-based policy making—although it has not often been in vogue in the 10 years I have been an MP—particularly when it comes to debt. That is partly because the figures change. As I said in my first set of contributions, there is some evidence that people are paying down their debts and trying to be more financially resilient, but we know that a tsunami of unemployment and low incomes is coming our way, and we know it will hit people who have not had to deal with it before—people who have never had to budget in the way that they will have to budget in the coming months.
The new clauses are about having that information and understanding why people take up particular options. Again, I do not wish to prosecute the Insolvency Act 1986 and how it works, but I do wish to set out that, if people cannot access those mechanisms, the breathing space is no breathing space at all—it is just limbo. We will not know that unless we put those measures in the context that these new clauses create by asking to have that information and that detail. If we do not ask ourselves why it is that every six minutes a person is declared insolvent and bankrupt in the UK, is that going to change over the year ahead? If not, is the breathing space working, or is it that people are not able to access alternative support?
The Minister will need that information to be able to flex the policies, as he inevitably will have to because of the Monty Python foot of covid. The longer this place pretends that that is not going to be a problem—that debt is not going to be part of everyday life for millions of people who have never really had to deal with it before—the more the vultures will circle. I have tabled other amendments later on in the Bill, and I do not know whether we will get to them today, but I know we will get to them on Thursday. Those amendments are about how we protect consumers, but sunlight is the best disinfectant—knowing where the damage is being done.
These new clauses and this data are about recognising that we will not get everything right now. There may be all sorts of consequences. What happens if the implementation of the vaccine takes longer to do and more industries go bust? We have already seen Arcadia going into administration today. What happens if it comes in more quickly, but the jobs that are created or the jobs that are available to people pay a fraction of what they previously earned? There are huge uncertainties ahead in the policy context into which the policy intent is being put.
I hope the Minister will see the new clauses from myself and the hon. Member for Edinburgh West as they are intended, which is to be forewarned and forearmed so that we can take a muscular and proactive approach in this place to not just protecting consumers and our constituents, but preventing problem debt in the first place. We would then not have to have that conversation with people about whether it is a problem that they have put everything on the credit card, taken out a payday loan in one of its various forms, taken out an Amigo loan or gone to the buy-now-pay-later industry, which we are going to come on to.
Mr McFadden
I should begin by acknowledging that the Minister has put an awful lot of work into the debt respite scheme. He has encouraged it, consulted the sector widely and really tried to get it right. As I said at the beginning, the Opposition support it. It is a valuable addition and a source of help for people in debt.
The new clauses call for a review of the scheme at some point in different ways, which is the right thing to do with a new scheme. It makes sense to look at how it works and see if any changes need to be made to it. We have already had a debate about whether 60 days or 120 days is the best timescale, and a review could consider that sort of thing. Of course, there is also the covid impact, which new clause 12(2) specifically references. Covid will have an impact on household finances. We had an exchange in Treasury questions an hour or two ago about corporate debt and small business debt. I therefore do not think that the new clauses on review are in any way a threat to the basic integrity of the scheme. They simply ask for a look back at the scheme after a year or so of operation.
I could give the Committee a long and enthusiastic speech about the merits of the third way, but I suspect I will fall foul of your instructions about scope, Mr Davies. I award the prize for word of the day to my friend the hon. Member for Glasgow Central who has given Hansard the challenge of spelling “wheeched”, which I can roughly translate as forcibly or speedily removed. I think we would agree on that definition, but I look forward to seeing how that appears in our record.
John Glen
We are considering several amendments and I turn first to new clause 12. Its effect is to require a report to be published by 28 February 2021 on the impact of covid-19 on the debt respite scheme. That would include statements on the impact on levels of household debt and financial resilience, and what that might mean for how the scheme works, and consideration of the incorporation of a no interest loan scheme.
As the Committee knows, covid-19 poses many uncertainties. The Government have responded dynamically to the challenges posed and taken unprecedented action to support individuals and businesses during this time. With that in mind, teamed with the fact that both elements of the debt respite scheme are new policies, arriving at any sort of meaningful estimate of the impact of covid-19 on the scheme’s expected usage and operation will be very difficult.
Expected demand and take-up of both elements of the debt respite scheme have been quantified to the extent possible and published in the appropriate impact assessments, which have been approved by the Regulatory Policy Committee. A more detailed impact assessment will be developed alongside implementing regulations establishing the statutory debt repayment plan to a longer timetable, which will of course need to consider the full impact of covid. We will be more able to evaluate it over that period. The Government will of course closely monitor both schemes’ usage once they are up and running, and consider the impacts of covid-19 and the wider economic recovery.
Turning to the suggestion for the report to explore financial resilience more broadly, I point towards the Government’s annual financial inclusion report, which was published only last week. We also work closely with the Money and Pensions Service, which was established in the last two years, the FCA and other stakeholders to monitor personal finances, including financial resilience. Earlier, I mentioned some of the measures I have been engaged in as the Minister for this area with the Pensions and Financial Inclusion Minister.
Finally, the new clause also requires a report exploring the incorporation of a no-interest loan scheme into the debt respite scheme. The Committee will be pleased to hear that the Government are working closely with stakeholders towards a pilot of a no-interest loan scheme, building on the findings of a feasibility study published earlier this year. I am personally passionate about that. It will be an amazing breakthrough if we can institutionalise the scheme and establish its credibility. That will have to be on the basis of international comparisons, establishing which groups of people would benefit most from it, and how we can establish a protocol around the cost. Clearly, given the vulnerability of the people to whom we seek to apply it and make it available, it will be expensive to deliver, but I continue to persist with it.
Any pilot will take time. Of course, it is urgent, but I would rather ensure that it is credible and can be supported more broadly. Reporting by February 2021 on the viability of a no-interest loan scheme risks coming to a premature judgement based on inadequate evidence—I say that with some experience, given that I have been working closely on this for some while. I can assure the Committee, however, that I will keep Parliament updated on progress as we continue that work over the coming months.
Alison Thewliss
Looking at the clause, we feel that it is important to protect customers who may have put money into help to save accounts but do not necessarily follow all the things that come in the post and risk losing their bonus or losing track of the funds. It is important to ensure that those people, who are the most vulnerable—the type of people who might turn up to my surgery with a plastic bag full of unopened letters—are protected, along with the savings that they have made, and do not risk losing anything as a result of the changes being made.
Help to save customers really have enough on their plate at the moment without having to navigate myriad savings products to transfer the funds over. We think it particularly important that their accounts continue to earn interest until this crisis is over. Amendment 36 ensures that customers will not be given a lower bonus should their funds be moved from a matured account to a new one.
In the Savings (Government Contributions) Act 2017, the Government introduced help to save accounts with the big purpose of encouraging working people with very low incomes and who were in receipt of certain benefits to save money. Since the launch of the scheme, more than 222,000 people have opened help to save accounts, with £85 million deposited. That is quite a significant number of people and a significant amount of money. My worry is that between opening the account and now, people may have moved house multiple times or may have been difficult to trace, and it is important the Government do all they can to ensure that people do not lose the money to which they are entitled.
I would be interested to hear from the Economic Secretary how the Government manage to keep in touch with those 222,000 people. How many of them do the Government expect to contact in advance of the Bill’s passage? What protections will be put in place? It seems important to ensure that those people, who are not the most financially literate people in the country, get as much advice as possible. StepChange, in its evidence to the Committee, was quite happy with the idea of accounts staying open just that wee bit longer, to give people extra time and reassurance so that they can transfer funds when they can. Many people up and down country have seen bank branches closing in their local communities, and it is now a lot more difficult to go and set up a new account than it was before.
The Government need to make the changes as easy and as simple as possible, to ensure that those who have money saved know where it is and can access it, and do not lose out in any way by changing from one scheme to another.
John Glen
The Government are committed to supporting people of all income levels to save, including those on low incomes, through the pioneering Help to Save scheme. To be clear, the scheme provides generous Government bonuses of 50% on up to £50 of monthly savings after two and four years—I say to all hon. Members that it is a great scheme to promote among all their constituents. This means that an individual could save £2,400 and receive £1,200 in bonuses over a four-year period. I hope the Committee will agree that this is an attractive incentive to encourage people to save and build up that resilience. In fact, as of September 2020, more than 47,200 account holders had benefited from their first bonus payment, with an average value of £375 two years after opening their accounts.
The effect of amendment 36 would be to extend Help to Save accounts beyond their intended four-year term. The aim of Help to Save is to kick-start a regular, long-term savings habit, and encourage people to continue to save via mainstream savings accounts. The Government’s view is that a four-year Help to Save period is sufficient to achieve this objective. Therefore, the Government do not consider it necessary to extend the bonus incentive beyond four years.
Clause 33 relates to what happens to the customer’s savings at the end of the four-year period. This clause provides the legislative basis for successor accounts, which is one of a number of options that the Government are considering for supporting those customers who have become disengaged from their Help to Save account. We expect that the majority of account holders will make an active decision about where they want to transfer their money. Indeed, HMRC and National Savings and Investments will communicate with account holders ahead of accounts maturing, to ensure that savers receive appropriate information and guidance on the range of retail options available to continue saving once their participation in the scheme ends.
On the specifics of amendment 37, if the Government decide to proceed with successor accounts, account holders will be contacted both before and after the transfer. Ideally, once customers have been contacted to highlight that their account is maturing, the vast majority will take an active decision to transfer the funds elsewhere. This policy is designed to support those who have disengaged from their account and failed to provide instructions for transferring their balance upon maturity. Hopefully, with those clarifications, the hon. Member for Glasgow Central will be willing to withdraw the amendment.
Alison Thewliss
I still have a wee bit of hesitation about how the Government intend to communicate with people. If the Minister wants to write to me with a wee bit more reassurance about that, I would welcome that, because I am particularly worried. I know how often people move about and how they might lose contact with their accounts, and it would be useful to have a bit more detail from the Government about how many of those accounts they deem to be active and have money put into them, how many are relatively dormant, and the extent to which people are contacted to let them know what their options are.
Like I say, if there is money out there and it belongs to people in my constituency, I want them to be able to get it and have that money in their hand, because people need it, particularly at this time. If they have put money away, it should be there for them when they need it, and I would like a bit more detail from the Government about precisely what their communications strategy is, and how they are going to follow up with people. If they do not get in touch with those people the first time, are they going to follow them up a second time, and what then happens if they cannot reach somebody? A bit more detail on how the mechanics of that would work would be very useful, because, as I said, the purpose of amendment 37 is to make sure that customers are contacted and informed before anything happens to the money that is rightfully theirs. I ask for additional reassurance that they are not going to lose this money they have scrimped, saved, and done their very best for.
John Glen
I am happy to give that reassurance. I would just say that since this scheme has been operating, the Government have been working hard to understand better ways of promoting it, and the most cost-effective way of doing that. I have had meetings at the University of Birmingham with academics and charities to try to establish the best way forward. Obviously, we have only got to the early stages of the first two-year bonus, but the hon. Lady makes a perfectly reasonable point about wanting to make sure that those who have saved and have become disengaged can get hold of that bonus money, which the Government are very happy to give.
Alison Thewliss
Specifically on the point about engaging with academics and people who understand how best to do this, I would gently say that it is not necessarily the academics that the Minister wants to be speaking to, but the guy who turns up on a rainy Friday morning with a Farmfoods bag full of bills and unopened envelopes. That is the guy who the Government need to reach. That is the person they need to understand, and who needs to get that money if it belongs to him.
John Glen
Absolutely. I am just trying to demonstrate my willingness to engage with creative ideas about it. Obviously, our comms strategy has not yet been defined because of the gap between the maturing of it, but I will undertake to keep in touch with the hon. Lady and Committee members on the evolution of this construct.
The Chair
With this it will be convenient to discuss the following:
New clause 3—Help to Save annual report—
“(1) The Treasury must prepare and publish an annual report on the Help to Save scheme for each financial year in which the scheme remains open to new accounts.
(2) The report must cover the following matters—
(a) the performance of the scheme;
(b) observations on take-up including, where applicable, reasons for take up being low;
(c) actions the Treasury proposes to take to increase take up of the scheme; and
(d) progress towards implementing successor accounts for the Help to Save savers.
(3) A report must be laid before both houses of Parliament no later than 31 October in the financial year following the financial year to which the report relates.
(4) The first annual report would be laid before both Houses of Parliament by 31 October 2021 and relate to the 2020-21 Financial year.”
This new clause would require the Treasury to publish an annual report on take up levels of the Help to Save scheme.
New clause 14—Help-to-Save accounts: report on effectiveness—
“(1) The Secretary of State must, within six months of the passing of this Act, and thereafter on an annual basis until 2027, lay before the House of Commons a report on the effectiveness of Help-to-Save accounts.
(2) The report in subsection (1) must cover—
(a) levels of take-up of Help-to-Save accounts;
(b) an analysis of the typical financial assets held by target users of the Help-to-Save scheme;
(c) an analysis of alternative forms of access to finance available to target users of the Help-to-Save scheme; and
(d) the effectiveness of the measures introduced by section 33.”
This new clause would gather the data required to enable policy makers to understand the effectiveness of the help to save scheme in addressing asset inequality amongst the UK population.
John Glen
The clause will insert new paragraph 13A into schedule 2 of the Savings (Government Contributions) Act 2017. The clause gives the Treasury a power to make regulations that provide for the transfer of funds from a mature Help to Save account to a new or existing savings account with NSNI in the National Savings Bank where the account holder has not provided instructions upon maturity for it to be transferred elsewhere. It will be known as the successor account. The clause also provides that any regulations made under it cannot override the account holder’s instructions for the transfer of the balance to an account of their choosing. Where a transfer is made to a successor account, no charge may be imposed on the account holder for the transfer.
The Help to Save scheme supports individuals on low incomes to build a savings fund over four years, providing a generous 50% bonus. More than 222,000 accounts have been opened as of July 2020, and more than 47,200 savers have benefited from their first bonus. At the end of the four-year term of the Help to Save account, savers will be encouraged to provide instructions on where they want their savings transferred—for example, to a new or an existing savings account. However, some savers might not provide instructions, and the Government are in the process of evaluating the best way to support such customers, who have become disengaged from their accounts, to continue to save. A successor account is one of a number of options that are being considered. I therefore recommend that the clause stand part of the Bill.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
It is a pleasure to be under your chairmanship, Mr Davies. I would like to speak to new clause 3, which calls on the Government to prepare and publish an annual report on the Help to Save scheme for each financial year that it remains open to new accounts.
The Help to Save scheme is a form of savings account that allows eligible people to receive a bonus of 50p for every pound they save over four years. The scheme is particularly good, as it targets people who are entitled to working tax credits or who are in receipt of universal credit. Given the failure to support jobs during covid-19, the number of households currently receiving universal credit has risen from 1.8 million in May 2019 to almost 4.6 million as of October 2020. I am sure everybody on the Committee agrees that that is a very high figure, although I appreciate that we are going through really difficult times because of covid.
One of the things that I am seeing as a local MP in my constituency—I am sure it is the same for everybody on the Committee—is a huge increase in universal credit claimants. We are likely to see an even bigger increase as people are no longer able to rely on their personal savings, so the Help to Save scheme is more important than ever.
After a two-year delay, the Help to Save scheme was launched by the Government in September 2018, to much anticipation. However, the scheme to date cannot be considered a success, and I am eager to find out why. We tabled the new clause because we feel that an annual report would help us in uncovering that. Of the 2.8 million people eligible to take up the scheme, only 132,150 accounts had been opened by July 2019—just 4.6% of those eligible for the scheme. I am still struggling to understand those figures and to believe that the Government are truly committed to a savings scheme and to creating a culture of household saving.
Furthermore, in last year’s spring statement of March 2019, the Government’s Budget watchdog slashed by half its forecast of how much the taxman would have to spend on Help to Save by 2021, citing lower than expected take-up. However, as I mentioned, I am in favour of the scheme and want it to succeed. That is, after all, why the previous Labour Government spent time highlighting the scheme and planning to launch it in 2010 as a savings gateway, only for it to be scrapped in 2010 by the then Chancellor.
Members may agree that the information we have so far does not paint a picture of commitment from the Government to supporting people to save. When the savings gateway was created, Labour worked with banks, building societies and credit unions, which invested in software and promotional literature for the launch. Some potential savers had received letters informing them of their eligibility and telling them about local providers just hours before the scheme was scrapped by the incoming Conservative Government.
I am really interested to hear what measures the Government have implemented to promote take-up of the scheme. I could raise many issues about universal credit and working tax credits, but as you advised, Mr Davies, we need to keep to the new clause, so I will raise them another time. My primary concern is to ensure that those who are eligible can access the scheme, now and in the future.
The Government’s pilot scheme found that 45,000 individuals saved a total of £3 billion during the trial period. We know that the scheme works. Charities and debt support services are hopeful that it can directly tackle asset poverty. The Help to Save scheme is due to come to a close in three years’ time, in September 2023, which means that we still have time to support people to save over £800, if we act now to make the scheme more widely accessible.
Publishing an annual report on the scheme, as provided for by the new clause, would allow us to see in detail where take-up has been successful and what we can do to ensure that people are aware of the scheme and how to engage with it. We feel very strongly that a report would help us to capture what areas we need to improve. The Minister mentioned that the Government are committed to providing support. I hope that they are, but agreeing to have an annual report would show further commitment.
In the meantime, I believe that more can be done, particularly to integrate with credit unions and debt management services so that the scheme functions more effectively in the years it has left to run. I would also be really interested, in lieu of an annual report for 2020, given that at the end of last year it was estimated that only 4% of eligible people have signed up to the Government’s Help to Save scheme, if the Minister could tell the Committee whether he thinks it has been unsuccessful and what the Government are doing to promote take-up.
John Glen
Understandably, this topic brings out some very deeply held beliefs about the sort of society that we live in and the inequalities and challenges we face. I very much respect the points made by the hon. Member for Walthamstow and the hon. Member for Erith and Thamesmead.
I will try to respond to new clause 3 and new clause 14, but before I do, I think it would be helpful to clarify a few points about the Help-to-Save scheme. It is open to new entrants until September 2023 and those individuals will then be able to have it open for four years from that point. It is possible to save between £1 and £50 a month, so various modest savings can be made.
The hon. Member for Erith and Thamesmead asked about the schedule of promotion activities. Some of the full schedule was curtailed for this financial year because of covid, but we anticipate resuming our promotional activity early in 2021. We promoted Help-to-Save through Talk Money Week, we have engaged with Martin Lewis, who is also a key advocate of this scheme, and we will continue to work with the DWP to target those in receipt of universal credit and on working tax credits. The other point I would like to make clear to the Committee is that if somebody is in receipt of either of those benefits for just one week, they are eligible to open an account that is then valid for four years.
New clauses 3 and 14 require the Government to publish reports into the Help-to-Save scheme. Of course, the Government are prepared to inform Parliament on the progress of the scheme. Indeed, the Government committed to Parliament in 2018 to monitor and evaluate the scheme and has been publishing data every six months, in February and August. Therefore, we do not consider it necessary to enact these amendments as a statutory requirement. The latest statistics, published this August, show that by the end of July 2020 more than 222,000 accounts had been opened, with over £85 million in deposits between them. This has been a 37% increase in the total number of accounts opened by the end of January 2020, and a 57% increase in the total deposits into the scheme, compared with in the previous six-month period from August 2019 to January 2020. I am sure the Committee will agree that this is excellent progress, despite the difficult economic period.
The Government already work closely with stakeholders to monitor personal finances, including financial resilience; the Money and Pension Service monitor financial difficulty through an annual survey; and the Financial Conduct Authority undertake the biannual financial lives survey. It is not clear that this amendment would improve the data available to the Government in shaping policy. The Government are also working with stakeholders to raise awareness and encourage eligible individuals to open an account and benefit from the scheme, and I indicated some of the ways that is happening earlier. In fairness to the hon. Member for Walthamstow, who made a passionate and wide-ranging set of observations about these matters, I do not think I can fully do justice to them today. However, I share her belief that there are significant inequalities and certain obligations on people who have more to do more to support those who are more vulnerable in society. This measure is a good policy that we should all be able to promote and I am committed to promoting it further. I would ask the hon. Members to withdraw the new clauses.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clause 34
Amendments of the PRIIPs Regulation etc
Mr McFadden
I beg to move amendment 30, in clause 34, page 40, line 33, after “performance” insert
“including information relating to environmental, social and governance standards.”
This amendment would require that consumers are given information about the environmental, social and governance standards of PRIIPs.
John Glen
Amendment 30 seeks to require that information about the environmental, social and governance standards of PRIIPs products be included in the key information document, the KID. Now is not the time to address this, as I shall explain, but I have a lot of sympathy with the intent behind the amendment proposed by the right hon. Member for Wolverhampton South East. The reason I do not believe it is the right time to address this is that it would result in significant uncertainty for industry.
Clause 34 makes changes to the PRIIPs to address the potential for unintended consequences for consumers. The PRIIPs were created by the EU to improve the quality of financial information given to retail investors purchasing PRIIPs, by introducing a short, consumer-friendly and comparable disclosure document. The Government are committed to the original aim of the regulation and has proposed changes in this Bill to ensure it functions as intended.
In particular, there is not a fixed definition of environmental, social and governance standards and no standardised precedent for how such disclosures could be made in a comparable way for PRIIPs products. That is why I sincerely say that I agree with the sentiment, but I do not think we are yet at a level of maturity in definitional terms for such a measure to work. To put this in place, and ensure that the ensuing disclosures are appropriate and useful for consumers, significant policy development would be required.
As a result, the amendment would bring significant industry uncertainty, as they do not report in a standardised way on environmental, social and governance issues at a product level, which is what this would be, and have minimal guidance on how to do so. That would come at a time when the Government are intending, through the Financial Services Bill, to provide more certainty to industry on PRIIPs disclosures.
I recognise that high-quality sustainable finance disclosures that enable investors to take environmental impacts into account in their investment decisions will be crucial in facilitating the growth of green finance and supporting the transition to a lower-carbon economy. As I have previously stated, it would also be premature to adopt an environmental, social and governance amendment in the specific context of PRIIPs when the Government are considering the requirements for legislation relating to the sustainable finance disclosure regulation.
Amendment 31 also seeks to amend the PRIIPs disclosure regime, to require that changes to performance information that will be made by the FCA do not leave consumers with a reduced understanding of the levels of risk involved in buying PRIIPs products. I respectfully submit that the amendment would have little or no effect. The Bill is already intended to address concerns about the information provided to consumers in order to avoid the potential for consumer harm. The issues with the PRIIPs regulation, addressed by the Bill, include concern that the requirement to include performance scenarios in the key information documents may result in potentially misleading disclosures. That has been the key concern that has led to that measure being included.
Clause 34 will replace
“performance scenarios and the assumptions made to produce them”
with “information on performance”. That change will allow the FCA to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided. The FCA already has a statutory objective to secure an appropriate degree of protection for consumers and, as the expert regulator, is best placed to work with consumers and industry to understand issues and respond to them effectively. Moreover, changes the FCA makes to the information provided to consumers in the key information document are subject to a consultation, which it expects to publish next year. Requiring the regulator to ensure that changes to the KID do not reduce consumer understanding of risk would have no effect.
The changes we are making to the Bill address the potential for consumer harm and the FCA is best placed to ensure the appropriate degree of consumer protection. I hope that offers reassurance to the right hon. Member for Wolverhampton South East. I therefore ask that he withdraw the amendment.
Mr McFadden
At this stage in our proceedings we begin to recognise the debates that we are having, because we have had them more than once. I find the Minister’s answers on the subject of ESG slightly circular. He says—and I believe him—that he has great sympathy with the intent, but now is not the time or this is not the quite the way to do it, and so on. The reason I find that unconvincing is that I think the Government will do this, or something quite close to it, and will then claim credit, saying that doing it makes the UK a more friendly environment for environmentally sustainable investments. Because of that, I will press the amendment to a vote. Then, as is the way of these things, what we did when we had the chance to make a decision about this, both at the level of the regulator and at the level of the investment product, will be on the record.
John Glen
May I express my regret at the right hon. Gentleman’s decision? I acknowledge that this country is going on a journey, and it is very important that we make progress with regard to such disclosures, but this specific measure in this specific Bill at this time would not be in the interests of consumers or the regulation. I respectfully disagree, and I look forward to the vote.
Question put, That the amendment be made.
John Glen
Clause 34 makes changes to the packaged retail and insurance-based investment products—PRIIPs—regulation to address the potential for unintended consequences for consumers. PRIIPs are a category of financial assets regularly provided to retail investors, and the PRIIPs regulation will form part of retained EU law from the end of the transition period. The regulation sets the requirement for a standardised disclosure document known as the KID—key information document—which must be provided to retail investors when they purchase certain packaged investment products.
The regulation, while its aims are laudable, has arguably been less successful in its achievements. The clause demonstrates our balanced approach to remedying the issues with the regulation by addressing the most pressing concerns ahead of the further wholesale review of the disclosure regime for UK retail investors to which the Government are committed. This will limit any disruption to the disclosure of information to investors while seeking to improve the existing framework in this area.
To address uncertainty regarding the precise scope of the PRIIPs regulation, the clause will enable the Financial Conduct Authority to clarify the scope of the PRIIPs regulation through its rules, allowing it to address existing and potential future ambiguities. To address concerns that the methodology used to calculate performance scenarios misleads consumers, the clause will also replace performance scenarios and the assumptions made to produce them with information on performance. After the transition period, that change will allow the FCA, the expert regulator with a responsibility to protect consumers, to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided in the KID.
The final change allows the Government to extend the exemption currently in place for undertakings for the collective investment in transferable securities—UCITS, a type of investment fund—from December 2021 for a maximum of five years. That will allow the Government to consider the most appropriate timing for the transition of UCITS funds into any domestic successor that may result from the planned review of the UK framework for investment product disclosure.
We recognise that there is more to be done to improve the overall disclosure regime for UK retail investors. That is why we have committed to a wholesale review. In the meantime, these changes will provide greater certainty to PRIIPs manufacturers and address the potential for consumer harm. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35
Over the counter derivatives: clearing and procedures for reporting
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 35 makes two small technical amendments to the UK’s version of the European market infrastructure regulation. This is important to help improve the overall functioning of the UK’s regulatory regime for derivatives.
The first amendment to UK EMIR will promote transparency and accessibility in the clearing of derivatives transactions, by ensuring that the clearing members of UK central counterparties and their clients offer clearing services on
“fair, reasonable, non-discriminatory and transparent”
commercial terms. Clearing contributes to the safety of the UK’s financial markets, especially our derivatives markets. It does this by ensuring that a trade will still be honoured if one party to a contract does not fulfil their side—for example, if a firm goes bust. This will reduce barriers to accessing clearing services, which will in turn make it easier for firms to fulfil their clearing obligations. It will strengthen incentives to clear centrally and reduce systemic risk in financial markets.
The second amendment to UK EMIR will increase transparency in derivatives markets. Such transparency is vital to ensure that regulators in the UK can monitor risks in financial markets and ensure financial stability. This amendment will also make the environment in which trade repositories operate more competitive. This is achieved through ensuring that trade repositories put in place procedures to improve the quality of the data they collect, and establish policies to transfer their data to other trade repositories in an orderly fashion when it is necessary to do so. Trade repositories collect and maintain records of derivatives trades with the aim of helping regulators to monitor the build-up of systemic risk.
Overall, these two sensible technical amendments to UK EMIR will bolster the UK’s regulation of derivatives markets, further delivering on the UK’s G20 commitments in this area. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I have just one question. As the Minister said, this clause deals with the EMIR directive, which governs the sale of over-the-counter derivates. To add to our joys, we have EMIR and something called EMIR refit. The clause is about access to clearing for people dealing in these products. Over-the-counter derivates are perhaps among the more opaque financial services products on the market, but we learnt during the financial crisis that whatever their other qualities, these products exposed the interconnection between different companie, and the vulnerability of that interconnection. That is why clearing is important. It acts as what could be called a circuit breaker to ensure that if one party to the transaction gets into trouble, we do not have a domino effect right throughout the system, so the clause is designed to ensure that smaller traders have access to this circuit breaker or clearing activity. I ask the Minister: is what we are doing here mirroring what the EU have done through this EMIR refit process, or are the two measures in this clause—the data one, and the fair and transparent one—a departure in any way from that?
John Glen
The changes are almost identical to those made through EMIR refit in the EU. The UK played a pivotal role in the design of the EMIR refit and previously voted in favour of this legislation. Now that the UK has left the EU, we continue to believe that these measures are helpful to UK industry and will improve the financial stability of the UK. As I said, the FCA will design the implementation of the new frameworks in a way that works best for the UK. In making these observations, I underscore the comments I have made throughout that we will always seek to maintain the highest standards but to make them work optimally in the United Kingdom.
Question put and agreed to.
Clause 35 accordingly ordered to stand part of the Bill.
Clause 36
Regulations about financial collateral arrangements
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 36 serves to clarify existing legislation concerning financial collateral arrangements. This issue dates back to 2003, when the Treasury introduced the Financial Collateral Arrangements (No.2) Regulations 2003, or FCARs, to transpose the EU financial collateral arrangements directive, or FCAD, into UK law. The FCAD was introduced to simplify the process of taking financial collateral across the EU.
Subsequent litigation has questioned the UK’s implementation of the FCAD—specifically the extent to which the FCARs went beyond the scope of the FCAD. However, that litigation has not invalidated the FCARs, and they are extensively relied on by market participants entering into financial collateral arrangements. The clause removes any doubt about the validity of the FCARs. The clause has retrospective effect, confirming the legal effectiveness of the financial collateral arrangements made in reliance on the FCARs since their introduction in 2003. It also confirms the legal effectiveness of any future such arrangements.
By reaffirming the FCARs, the risk of legal doubt and any resulting financial instability is removed. This measure will therefore help to facilitate the Bill’s broader aims of promoting financial stability and maintaining the effectiveness of sound capital markets. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 36 accordingly ordered to stand part of the Bill.
Clause 37
Appointment of chief executive of FCA
Question proposed, That the clause stand part of the Bill.
John Glen
The Government believe that the appointment of the FCA’s chief executive officer should be brought into line with similarly high-profile appointments in financial services, such as the deputy governor of the Bank of England or the CEO of the Prudential Regulation Authority. The clause will therefore set out in statute that the FCA CEO should be subject to a fixed five-year term, renewable once. This delivers on a commitment made to the Treasury Committee during the passage of the Bank of England and Financial Services Act 2016. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 37 accordingly ordered to stand part of the Bill.
Clauses 38 to 44 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(David Rutley.)
Financial Services Bill (Eleventh sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Eleventh sitting)
John Glen ExcerptsThursday 3rd December 2020
(3 years, 11 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 December 2020 - (3 Dec 2020)
Stephen Flynn
Then I will do that—thank you. It is a pleasure to see you in the Chair once again, Mr Davies. It is probably accurate and correct that the new clauses are grouped together, because they are quite similar in scope, particularly when considering the wider issue of divergence. I will come back to that.
New clause 28 seeks to provide an impact assessment before disapplying European Union rules or applying rules different from those of the EU. That is incredibly important, because it goes to the core of what the Bill is about in relation to our leaving the European Union. Only a few day ago, the Governor of the Bank of England highlighted that a no-deal Brexit could of course lead to a worse economic situation than covid. We need to be in a position to assess the reality of what the Government seek to do. That should apply in the case of no-deal, a good deal—as far as the Government see it—a bad deal or a “Boris deal”.
We should compare what we could have had with what we get. We should be open and transparent with the public about that. The Government talk about wanting to take back control and parliamentary sovereignty; let us take that back to the people as well and show them that the Government are being open and transparent with everything that is put forward. That is particularly important in a Scottish context because—lest we forget—the people of Scotland did not vote for Brexit, and they do not want it to happen, so it is incumbent on the UK Government to provide that clarity to them, particularly on such important matters.
If the Government are proud of the actions that they are taking and seek to go down a different path, they should be willing to follow up on their actions and be open and transparent, not shy away from that.
That takes me on to new clause 36, which would do something very similar to new clause 28, but rather than looking at the potential impact of future decisions, it would provide for an annual review of the decisions that had been taken. That, as the right hon. Member for Wolverhampton South East said, is, in the context of equivalence, incredibly important, particularly if we are to see the UK diverge from the European Union in any way, shape or form. As we have heard, the Chancellor has guaranteed equivalence to the European Union, so it will have access to the UK markets, but of course there is not a similar agreement in place for us. Conservative Members would, understandably, argue that that is the EU’s fault and that the EU should be delivering that for us, but, as I said on Second Reading, who can blame it when this is a Government who simply cannot be trusted, a Government—lest we forget—who are willing to break international law?
Irrespective of that, we should all be concerned about the reality of not having equivalence in place and what that could lead to. We have made and heard suggestions that it could mean, ultimately, divergence in relation to MiFID—the markets in financial instruments directive. It could mean divergence in relation to the wider insurance regulatory framework. I appreciate that there are arguments both in favour and against in that regard, but we need always to be mindful of what we are seeking to diverge from in relation to our wider relationship with the European Union. I appreciate that it will ultimately be in the gift of the Government to do these things, but they should surely have some concerns about the actions that they will be taking.
I go back to the comments that I made about new clause 28. If the Government are proud of the actions that they take and have taken, they will be willing to accept both new clause 28 and new clause 36 and to put their money where their mouth is and be open and transparent with the people of Scotland and the people of the United Kingdom that their decisions have not been ones that have had disastrous consequences for the economy of the UK. I suggest that if they do not accept the new clauses, that is because they know the damage that they are going to do.
The Economic Secretary to the Treasury (John Glen)
What a pleasure it is to serve under your chairmanship once again, Mr Davies. These new clauses seek to place requirements on the Government to make various reports related to the UK’s withdrawal from the EU and the subsequent evolution of our financial services regulation.
New clause 2 deals with equivalence, which is an important mechanism for managing cross-border financial services activity. I can well understand hon. Members’ interest in that. However, the obligation that the new clause would impose on the Government—essentially, to report on the status of the EU’s considerations about UK equivalence—is beyond the Government’s power and therefore not something that the Government can agree to do.
The right hon. Member for Wolverhampton South East rightly referred to my right hon. Friend the Chancellor’s speech on 9 November, in which he made clear that we have made equivalence decisions—17 of the 30 that we have to make. We have co-operated very fully with the EU in terms of a timely response to the 17 questionnaires. Again, we cannot determine how it responds. Equivalence assessments are an autonomous process, managed separately from trade negotiations. That applies in the case of the EU, and where the EU chooses to grant the UK equivalence, that will be done in accordance with its own decision-making process. EU equivalence determinations are unilateral and do not require the UK’s agreement. Those decisions will be published and readily available to all, including UK parliamentarians.
I can reiterate today the Government’s commitment to operating an open and transparent approach to equivalence as the Chancellor explained in his speech on 9 November. Our overall approach is outlined in the recently published guidance document on the UK’s equivalence framework. That document makes it very clear that transparency will be one of the key principles of our equivalence framework.
As part of this, the Treasury will provide Parliament with appropriate information about the operation of the equivalence framework. After the end of the transition period, future equivalence decisions will be made by regulations laid before Parliament, giving Members the opportunity to consider and scrutinise the Treasury’s decisions as part of the UK’s normal legislative process.
As I said, the Chancellor recently announced a package of equivalence decisions following the completion of our assessment of the EU, where we took a thorough but proportionate outcomes-based assessment against the criteria in legislation. As the EU has confirmed publicly, there are many areas where it is not prepared to assess the UK at the current time. In the absence of clarity from the EU, we have made decisions to provide clarity and stability to industry, supporting the openness of the sector and to help to deliver our goal of open, well-regulated markets.
Alison Thewliss (Glasgow Central) (SNP)
I very much support what the right hon. Member for Wolverhampton South East says. It is important that we look at this in the round, and particularly at the newer technologies coming into force that we will need as part of our economy going forward.
John Glen
I very much appreciate the sentiment behind the new clause. The right hon. Member for Wolverhampton South East set out all the different areas of focus involved in financial services, taking me through all our different calls for evidence and ongoing pieces of work—there are a number of others, too. However, the new clause is unnecessary.
Only a few weeks ago, the Chancellor made a statement to Parliament on the future of the UK financial services sector. Indeed, Miles Celic from TheCityUK described it as an “ambitious vision” for financial services. Across the range of different elements that the right hon. Gentleman set out, a lot of activity is ongoing. Indeed, a number of consultations are out at the moment. As the Chancellor stated, we are at the start of a new chapter for the industry, and our having an open, green and technologically advanced industry that serves the consumers, communities and citizens of this country and builds on our existing strengths, including our world-leading regulatory system and standards, was the essence of that vision. The UK will remain the most open and competitive place for financial services in the world by prioritising stability, openness and transparency.
The Chancellor set out new proposals to extend our leadership in green finance, including by taking the key step of introducing mandatory requirements for firms to disclose their climate-related risks within five years, making the UK the first country to go beyond the “comply or explain” principle. He also announced plans to implement a green taxonomy and, subject to market conditions, to issue the UK’s first ever sovereign green bond next year. He set out his intention that the UK will remain at the forefront of technological innovation, to provide better outcomes for consumers and businesses.
The UK’s position as a global and open financial services centre will be underpinned by a first-class regulatory system that works for UK markets. The Government already have several reviews under way, including the future regulatory framework review and the call for evidence on Solvency II, to highlight two. We also have the FinTech review, which will report early in the new year. That is the Government’s strategy for financial services now that we have left the European Union.
I hope that I could not be accused, as the City Minister, of being unwilling to come before the House to provide updates on the Government’s work relating to financial services, whether in the Chamber, Select Committees—I think I have made about 12 appearances now—or in Westminster Hall, or of doing that infrequently. The Chancellor and I will continue to provide updates at the appropriate times in the normal way.
Having considered the issue carefully, I ask the right hon. Gentleman to withdraw the new clause.
Mr McFadden
The Minister is right to refer to the Chancellor’s statement on 9 November, which was called a vision. While it touched on the green finance things the Minister mentioned, it did not touch on many of the things that I mentioned. He is also right to say that lots of reviews are going on. While it may be unfair to say that that is the problem, there is nothing that really brings them together with clarity about where we are going. I will not press the new clause to a vote today, but we may return to it, so I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 5
Regulation of lead generators for debt advice and debt solution services
“(none) In section 22 of the Financial Services and Markets Act 2000 (regulated activities), after subsection 1A insert—
‘(1AA) An activity is also a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and relates to—
(a) effecting an introduction of an individual to a person carrying on debt advice and debt solution services, or
(b) effecting an introduction of an individual to a person who carries on an activity of the kind specified in paragraph (a) by way of business.’”—(Mr McFadden.)
This new clause would empower the FCA to regulate activities such as paid search and social media advertisements, including the impersonation of reputable debt management charities.
Brought up, and read the First time.
Alison Thewliss
I rise to support the new clause. It is typical of the eagle-eyed way that the right hon. Gentleman has approached this Bill that he found this particular loophole. I am not sure which of his pots he thinks the Government might think it falls into, but it is a sensible, minor change. The Government would do well to take it on now or bring it back at a later stage. We want to protect people who have fallen into that situation in every way we can. We all know that there are vultures on the internet who want to cut a share of that and exploit people. The new clause is a sensible and reasonable way of addressing that and I commend it to the Minister.
John Glen
I take this issue very seriously. I recognise the work of StepChange and I note the letter from Marlene Shiels, chief executive officer of the Capital Credit Union and her support for this. She makes a significant contribution to the Financial Inclusion Policy Forum that I chaired just last week.
The Government are taking strong steps to ensure that lead generators do not cause consumer harm. As the right hon. Member for Wolverhampton South East said, lead generators identify consumers in problem debt and refer them to debt advice firms and to insolvency practitioners. That can help consumers access appropriate debt solutions and support their recovery on to a stable financial footing. However, I readily recognise the risk that unscrupulous lead generators could act contrary to their clients’ interests. To mitigate that risk, debt advice firms and insolvency practitioners are already required to ensure that any lead generators they use are compliant with applicable rules to prevent consumer harm in the market.
Under Financial Conduct Authority rules, that includes ensuring that lead generators do not imitate charities or deliver unregulated debt advice, and that they are transparent with clients about their commercial interests. As such, the FCA, as the regulator of debt advice firms—and the Insolvency Service, as oversight regulator of insolvency practitioners—already influences lead generators’ impacts on consumers.
New clause 5 would not materially improve the FCA’s influence over lead generators. Its scope would be incomplete, applying only in respect of lead generators’ referrals to debt advice firms, not to insolvency practitioners. The Government have already issued a call for evidence on whether changes are needed to the regulatory framework for the insolvency profession and will publish a response next year. In the light of our recognition that the matter needs a focus and that work is being done on a response, I ask the right hon. Gentleman to withdraw the motion.
Mr McFadden
I am happy to do that. I just appeal to the Minister to try to find a way that he is comfortable with of closing the loophole. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 6
Duty of care for financial service providers
‘(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) In section 1C, after subsection 2(e) insert—
“(ea) the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices;”
(3) After section 137C insert—
“137CA FCA general rules: duty of care
(1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.
(2) The FCA must make rules in accordance with subsection (1) which come into force no later than six months after the day on which this Act is passed.””—(Mr McFadden.)
This new clause would introduce a duty of care for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty of care.
Brought up, and read the First time.
John Glen
I thank the hon. Ladies and the right hon. Gentleman for their speeches, to which I have listened carefully. I will try to address fully the 10 new clauses that have been tabled. In essence, they relate to the effectiveness of the FCA’s oversight; that is the substantive point behind them.
The lead new clause is new clause 6, which has two functions. Subsection (2) requires the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective, and subsection (3) introduces a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service.
UK financial services firms’ treatment of their customers is governed by the FCA in its principles of business, as well as specific requirements in its handbook. The FCA’s principles for businesses require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA already has recourse to disciplinary action against firms that breach the principles.
The FCA has already announced that it will undertake work to address potential deficiencies in consumer protection, in particular by reference to its principles for businesses. Although the coronavirus pandemic has caused the FCA to reprioritise its resources and delay certain pieces of work, including the next formal stage of this work, delaying these initiatives has ensured that firms are able to focus on supporting their customers, including the most vulnerable, during this difficult period.
I draw attention to the second purpose of new clause 6, alongside new clauses 38 and 39, which require the FCA to introduce a duty of care. A number of other amendments here also relate to the duty of care.
The Government believe that, as the FCA is already taking steps to ensure that consumers are treated fairly and financial services firms are obliged to exercise due care and regard when offering products, services and advice, a statutory duty of care requirement is not necessary. I have already set out a number of actions that the FCA is taking to ensure that customers are properly protected.
On new clause 39 in particular, the Government believe that the scope, which applies to all financial services providers, is inappropriately broad. For example, it is unclear whether that would include persons exempt under the exemptions order, which includes entities ranging from central banks to any employer offering a cycle-to-work scheme. Furthermore, there is no indication of the territorial scope of the financial services provider. Assuming that the duty of care would apply only to actions being done within the UK, the vagueness is still likely to lead to enforcement difficulties if a provider is based outside the UK.
Finally, it is inappropriate to apply the provisions to all financial services providers as no assessment has been made, in relation to unauthorised firms, of the extent to which the existing common law and other consumer protection legislation is or is not sufficient to achieve the right level of consumer protection. For example, where providers are subject to supervision or oversight by other professional bodies, as is the case with professional firms, it is unclear how this proposal would interact with the remit of those bodies who may be better placed to assess matters relevant to duties of care.
New clause 40 would require the Treasury to review at least once a year the case for instructing the FCA to introduce a duty of care for all financial services providers. The Treasury will of course keep this question under consideration. However, it is disproportionate to set this requirement in statute. I have already set out the actions that the FCA is taking to ensure that customers are properly protected.
I want to pause here and note that I have enormous respect for the perspectives of the hon. Member for Walthamstow on this issue. I do not have her encyclopaedic knowledge of dinosaur names, but I do respect her engagement on the issue. I have engaged very closely with the FCA. I recognise that she is still dissatisfied with where things have got to and she makes some reasonable points, on which I am happy to continue the dialogue, but there have been significant changes in recent months with respect to the work that is going on—that is live at present. I suspect she will not be satisfied, but let me carry on and then we can see where we get to at the end of this.
On new clause 41, the Government believe that the FCA, as the independent conduct regulator for the financial services industry, is best placed to judge the merits of a duty of care for the financial services industry. It would therefore be inappropriate for the Treasury to instruct it to impose a duty of care on authorised firms, although that dialogue is ongoing.
On new clause 42, the FCA has already published a feedback statement following its discussion paper on duty of care last year. The FCA will also publicise the findings of its upcoming work on how to address potential deficiencies in consumer protection. Therefore, the Government view is that it would be unnecessary at this point for the Treasury to report on the FCA’s position on the need for a duty of care.
The Government believe that there are sufficient protections in place without expanding the FCA’s statutory consumer protection objective or introducing a statutory duty of care, but I reassure members of the Committee that we will continue to work closely with the FCA to keep this issue under review—I am not saying “No, never.”
New clause 15 would require the FCA to have explicit regard to the prevention of consumer detriment, including the promotion of unaffordable debt, when discharging its consumer protection objective. The Government believe that the FCA, as the UK’s independent conduct regulator, is best placed to judge how to protect financial services consumers from detriment, including that which arises from the promotion of unaffordable debt. The existing legislation accounts for the prevention of consumer detriment as a result of section 1C(2)(e), which outlines
“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved…and the capabilities of the consumers in question”.
Stella Creasy
I am conscious of time, but approximately 1 million households that could ill afford it have lost out on about £1 billion of compensation from Wonga and QuickQuid. Does the Minister really believe that under the existing regime that he is defending, there has been sufficient recognition of what it means to consumers when it goes wrong, and that there is no need for change?
John Glen
There is ongoing work and ongoing evolving action by the FCA. The Government have taken strong steps to prevent problem debt from occurring and to support those who fall into it. We want to make sure that people have the guidance, confidence and skills to manage their finances. That is why we established the Money and Pensions Service last year to simplify the financial guidance landscape, to provide more holistic support for consumers, and to give free support and guidance on all aspects of people’s financial lives. I welcome the publication of its UK strategy for financial wellbeing, which will help everyone to make the most of their money and pensions.
I have already mentioned the role played by the FCA’s principles of business. Further to that, the FCA has recently concluded a consultation on guidance for firms on the fair treatment of vulnerable customers. The protection of vulnerable customers and consumers is a key priority for the FCA. Although many firms have made significant progress in how they treat vulnerable consumers, the Treasury and the FCA want the fair treatment of vulnerable consumers to be taken seriously by all firms so that vulnerable consumers consistently receive fair treatment. I think that was the key point made by the hon. Member for Walthamstow.
Despite those preventive measures, I recognise that many people still fall into problem debt. Professional debt advice plays a vital role in helping people to return to a stable financial footing. That is why in June the Government announced £37.8 million of extra support, which brings the budget for free debt advice to more than £100 million this year. From May, the Government are delivering the first part of the new breathing space scheme, as discussed in Committee, for problem debt. That gives eligible people a 60-day period in which fees, charges and certain interest are frozen and enforcement action is paused.
We discussed on Tuesday the importance of the statutory debt repayment plan, as part of the debate on clause 32. The Government believe that sufficient protections are in place without expanding the FCA’s statutory consumer protection objective. However, I reassure the hon. Lady that the Government will continue to work closely with the FCA to keep that issue under review.
New clause 18 would introduce a duty on the FCA to launch investigations in situations where there is suspected regulatory failure as a result of inaction or a lack of effective action by the FCA, but that is already covered by section 73 of the Financial Services Act 2012. That section imposes a duty on the FCA to investigate where it appears to the FCA that events have occurred that, among other things, indicate
“a significant failure to secure an appropriate degree of protection for consumers”
either by the FCA or otherwise, and where those events might not have occurred but for a serious failure in the regulatory system, or operation thereof, established by FSMA 2000.
Further, section 77 of the 2012 Act enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so, for example under section 73. The section 77 powers are broader than those set out in section 73, in that the Treasury can require the regulators to conduct an investigation into relevant events where it considers that it is in the public interest to investigate them. In addition, section 77 investigations can consider aspects outside the regulatory system as established by FSMA, which allows a comprehensive review to be undertaken in the public interest. Those existing powers ensure that, in cases where section 73 does not apply, a mechanism remains to ensure that investigations can be conducted in the public interest.
If I understand new clause 21 correctly, it reflects the ongoing concerns of the hon. Member for Walthamstow that she has raised in Parliament previously, specifically about circumstances where a firm fails but compensation is owed to a consumer. While I am sympathetic to these concerns, the Government believe that the FCA, as the independent regulator, is best placed to judge the resources that authorised firms need to maintain in order to carry out regulated activities.
I should explain that the FCA is already required by schedule 6 of the Financial Services and Markets Act 2000 to consider whether a firm’s resources are appropriate to the activities it carries out. It is obliged to take into account the nature and scale of a firm’s business, as well as the risk to the continuity of the services it provides to consumers, and must consider whether the business is to be carried on in a sound and prudent manner, with particular regard to the interests of consumers. The legislation also already requires the FCA to consider how a firm’s potential liabilities might impact the resources it should hold. The Government therefore believe that this new clause does not add anything further to the FCA’s requirements that already exist in legislation.
Once again, I would mention the FCA’s principles for businesses, which already require firms to maintain adequate financial resources and organise their affairs with adequate risk management. The FCA has recourse to take disciplinary action against firms that breach these principles. Therefore, the Government believe that there are sufficient provisions in place to ensure consumers can access compensation where they have suffered detriment.
Finally, I turn to new clause 23. I should first note that the launching of any consumer redress scheme is a significant undertaking, and it is right and proper that the process be open and transparent. The new clause proposes making amendments under section 404A of the Financial Services and Markets Act 2000, referred to as FSMA, which provides the FCA with rule-making powers for consumer redress schemes.
However, the existing legislation already sets out a number of requirements governing the actions of the FCA, including provisions to ensure that its actions are transparent. Rules made under section 404 by the FCA are subject to a formal public consultation before a scheme is put in place. The FCA also publishes a policy statement explaining its decision and the rationale for the provisions in any proposed scheme. That consultation also includes any decision to appoint a competent person, and the scope of the competent person’s responsibilities, which are documented in the policy statement. Finally, it is right that any scheme is monitored and assessed, to ensure that it has delivered its intended outcomes. Given the importance and impact of consumer redress schemes as good regulatory practice, the FCA would as a matter of course monitor the progress of the scheme as it is implemented, which would include assessing the scheme against its stated objectives.
Introducing a statutory requirement for a process that the FCA already undertakes introduces an additional and unnecessary hurdle. I appreciate that there is a desire to ensure that the regulators are properly accountable to Parliament, and I reassure members of the Committee that such an accountability mechanism already exists. As part of the requirements under FSMA, the FCA must already provide an account of its activity to the Treasury on an annual basis, and that account is shared with Parliament.
I regret that I have spoken for some time, but this is an important set of questions, and some more will come up later this afternoon. I hope I have satisfied the Committee, and therefore I ask the right hon. Member for Wolverhampton South East to withdraw the new clause.
Mr McFadden
I want to press new clause 6 to a vote.
Question put, That the clause be read a Second time.
Financial Services Bill (Twelfth sitting) Debate
Full Debate: Read Full DebateDepartment: HM Treasury
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill (Twelfth sitting)
John Glen ExcerptsThursday 3rd December 2020
(3 years, 11 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 December 2020 - (3 Dec 2020)
The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship, Dr Huq. Before I respond to the hon. Member for Erith and Thamesmead, I would like to recognise her award last night as newcomer of the year by the Patchwork Foundation; I congratulate her on that success.
The hon. Lady asked a number of specific questions about suspicious activity reports, or SARs, and I have those answers for her. Before I come on to them, it is important that we contextualise this new clause in the great success that is the UK’s FinTech sector, with 600 propositions, 76,500 people working in the industry and £4.1 billion of venture capital money put into it just last year. The Government remain committed to supporting the sector, trying to maintain the UK’s leadership position in this market and making it the best place to start and grow a FinTech firm.
I am pleased to say that assessments have cited the UK’s strong Government support, access to skills, robust domestic demand and flexible regulator as particular strengths. It is a priority for the Government to maintain the UK’s strength as a FinTech destination and continue fostering innovation. That is why the Chancellor asked Ron Kalifa OBE to carry out an independent review of the sector. The review will make practical recommendations for Government, industry and regulators on how to support future growth and adoption of FinTech services.
The Government are conscious of the challenges that face the FinTech sector under the current suspicious activity reporting regime, in particular with respect to defence against money laundering SARs, sometimes known as DAML SARs. The volume of DAML SARs received by the NCA has grown substantially, with more than 60,000 received in 2020. Electronic money institutions—EMIs—are the largest contributor to that increase, with such companies accounting for four fifths of the increase in these requests. As the hon. Lady rightly pointed out, that has resulted in increased pressure on limited law enforcement resources. This year, £172 million was denied to suspected criminals as a result of DAML requests, up 31% on the previous year’s £132 million and more than three times the £52 million from 2017-18. It would be useful for the Committee to know that the Government are working closely with law enforcement to further resolve the current anomaly with regard to account freezing orders.
The Government are supportive of the objective to equalise treatment of banks and FinTech firms in the Proceeds of Crime Act 2002. Of course, that legislation could not take account of FinTechs. Under the economic crime plan, the Treasury and Home Office, along with law enforcement, have been working with the FinTech sector to identify and implement solutions to the challenges that the provisions of the Proceeds of Crime Act create. Progressing those solutions remains a priority, and we are committed to reforming the suspicious activity reporting regime as part of the wider programme of economic crime reform. It is a significant area in which banks and financial institutions urgently need to see reform, and it requires a collaborative effort between the Treasury, the Home Office and private sector actors.
While the Government agree with the intent behind new clause 8, it is drafted in such a way as to create inconsistencies with definitions set out within the wider statute book. Specifically, the insertion of references to electronic money institutions into the definition of “deposit taking body” in the Proceeds of Crime Act introduces scope for confusion as to the status of electronic money institutions in wider financial services legislation, such as the Financial Services and Markets Act 2000. Electronic money institutions are not classified as “authorised deposit takers” for the purposes of that Act.
The Government agree with the principle that the treatment of e-money institutions should be equalised with banks in those two specific areas. However, as the Committee will be aware, financial services legislation is complex, and it is important to work through these things carefully, to ensure that the legislation operates as intended and avoids any unintended outcomes. This new clause does not adequately consider interactions with other pieces of legislation. I recognise that that is a technical matter. The Government are aligned with the intent, so I have asked my officials to work—and, indeed, I have been working myself—with colleagues across Whitehall, particularly in the Home Office, to identify a way of addressing this issue that is consistent with the broader regulatory framework for these firms. I intend to provide the House with an update on Report. Given that commitment, I ask the hon. Lady to withdraw the new clause.
Abena Oppong-Asare
I beg to move, That the Clause be read a Second time.
If agreed to, new clause 9 would be good for the country and at the same time would tackle widespread concerns about multinational enterprises exploiting the way national systems interact in order to minimise the total amount of corporation tax they pay. It would help create greater transparency around the taxation of multinational companies, achieving those objectives by requiring the Treasury to report on a regular basis to Parliament on its progress in pursuit of international action on public country-by-country reporting by relevant bodies.
Let me say at the outset that those outcomes are what we want to see. Labour’s aim in tabling new clause 9 is to use the Bill as an opportunity to help make the UK a world leader in financial transparency. I appreciate, as the Minister mentioned earlier, that financial legislation is complex, but we hope that on this occasion we will be able to receive cross-party support, as I believe we are all united in our desire to have far greater transparency.
The Government currently have the power to require multinational enterprises to publicly report their tax payments on a country-by-country basis, but so far they have resisted using that power. As I mentioned earlier, there is widespread concern about how multinational enterprises successfully exploit the way national systems interact in order to minimise the total amount of corporation tax they pay. New clause 9 is one way of tackling that. It is quite simple: it just requires public country-by-country reporting of the amount of tax multinational enterprises pay in each country where they have operations.
Schedule 19 of the Finance Act 2016 introduced a requirement for UK-headed multinational enterprises, or UK sub-groups of multinational enterprises, to publish a tax strategy. Paragraph 17(6) gives the Treasury the power to require those tax strategies to include country-by-country reports of tax paid. However, while the Government do not appear to disagree with the principle of country-by-country reporting, we still have not seen the full use of powers to require that. They say they want international agreement on public reporting first.
I am sure the Minister agrees that there has been recent pressure on the Government to use the power in the Finance Act 2016 to introduce public country-by-country reporting. It was most recently discussed during the passage of the Finance Bill this year. On Report, on 1 July, the right hon. Member for Barking (Dame Margaret Hodge) tabled new clause 33, which would have required a tax strategy published by a group liable for the digital services tax to include any relevant country-by-country reports. At the time, new clause 33 received cross-party support, including from our own shadow Chief Secretary to the Treasury, my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson), and Conservative Members such as the right hon. Member for Haltemprice and Howden (Mr Davis), the hon. Member for Thirsk and Malton (Kevin Hollinrake) and the right hon. Member for Sutton Coldfield (Mr Mitchell). I echo the comments made by the shadow Chief Secretary to the Treasury, who said:
“For years, the Opposition have urged the Government to commit to country-by-country reporting on a public basis…the way in which they have held up progress at an international level, has been a source of deep frustration to those of us who want to see far greater transparency around the taxation of multinational companies.”—[Official Report, 1 July 2020; Vol. 678, c. 367.]
The right hon. Member for Sutton Coldfield said:
“The new clause would allow Parliament, journalists, campaigners and civil society to see clearly whether these businesses are paying their fair share of taxation. If the Government accept the new clause, that would, as the hon. Member for Houghton and Sunderland South suggested, make the UK a world leader in financial transparency.”—[Official Report, 1 July 2020; Vol. 678, c. 369.]
There are companies already undertaking voluntary country-by-country reporting. For example, SSE—one of the largest electricity network companies in the UK—has been awarded the fair tax mark for the fourth year in the row. It provides a shining example of how this could be done. We are seeing companies doing this on a voluntary basis, and the new clause would ensure that all companies do it and that it is not a difficult process.
The Government have made quite a big deal about wanting to be a global leader next year—it is not just me saying that; those are the Government’s words—particularly post Brexit and with our presidency of the G7. If the Government genuinely want to show global leadership, should they not be at the forefront of pushing these kinds of measures, rather than passively waiting for an international agreement to be reached? This is a perfect time to implement this provision. It would be great if we could get just one amendment through on this occasion.
The new clause would require the Government to publish an annual report to Parliament on their progress towards the international agreement, including whether they intend to use the power in the Finance Act 2016 to require public country-by-country reporting and publish tax strategies. We would welcome the Minister taking this opportunity to give us the latest update on progress towards the international agreements on public country-by-country reporting, including what specific discussions the Government have had with international partners and whether the Government anticipate any progress on this matter in 2021.
John Glen
New clause 9 would require the Treasury to publish and lay before both Houses of Parliament an annual report that outlines its progress towards international action on public country-by-country reporting, and provides an update as to whether it intends to expand the existing tax strategy reporting requirement to include country-by-country reports of financial services companies. As the hon. Lady has acknowledged, the Government have championed tax transparency through initiatives at the international level, including tax authority country-by-country reporting and global standards for exchange of information, and through domestic action such as the requirement for groups to publish tax strategies.
In relation to public country-by-country reporting, the Government continue to believe that only a multilateral approach would be effective in achieving transparency objectives, and avoiding disproportionate impacts on the UK’s competitors or distortions regarding group structures. Different global initiatives to increase tax transparency and to help protect against multinational avoidance continue to be discussed in the international forums, such as the OECD, in which the UK is an active and leading participant. However, although the Government will continue to be clear and transparent about our broad objectives in this area, it would not be appropriate for the Treasury to provide a detailed report each year assessing the status and evaluating the progress of fast-moving, complex discussions that typically take place between countries on a confidential basis, nor do we think it appropriate to approach that from the narrow focus of financial services as the new clause suggests.
Although the Bill makes specific amendments to the scope of country-by-country reporting required in order to reflect the changes to the prudential regimes, the question of whether corporates should be required to publish country-by-country reports as part of their tax disclosures is a wider question that is relevant to large multinationals operating in all industry sectors, not just those in regulated financial services sectors. For those reasons, I ask the hon. Lady to withdraw the new clause.
Abena Oppong-Asare
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 10
FCA recommendation to remove a self-regulatory organisation: Ministerial statement
“(1) When the FCA makes a recommendation that a self-regulatory organisation be removed from Schedule 1 to the MLR pursuant to Paragraph 17 of the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, the Treasury must make a statement to Parliament.
(2) The statement must be made within four weeks of the recommendation being made.
(3) The statement to Parliament must set out—
(a) the Government’s response to the FCA’s recommendation;
(b) the likely impact on the sector of any action the Government is proposing to take, including—
(i) the impact of the organisation retaining its Anti-Money Laundering supervisory responsibilities if the Government decides not to remove the organisation from Schedule 1 to the MLR; and
(ii) where the Government intends to place an organisation’s Anti-Money Laundering supervisory responsibilities if it decides to remove the organisation from Schedule 1 to the MLR; and
(c) where applicable, a timescale for the removal of the self-regulatory organisation from Schedule 1 to the MLR.
(4) For the purposes of this section, “MLR” means the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.”—(Abena Oppong-Asare.)
This new clause would require the Treasury to report to Parliament on its response to any recommendation by the FCA that an organisation have its anti-money laundering supervisory responsibilities removed, including the impact of either accepting or rejecting any such recommendation.
Brought up, and read the First time.
Abena Oppong-Asare
I beg to move, That the clause be read a Second time.
New clause 10 would be good for consumers. At the same time, it would improve the ability of our crime prevention agencies to do the job that we all want them to do—namely, to crack down on criminal activity and, in this case, money laundering. Our aim in tabling the new clause was to take the opportunity offered by the Bill to address technical deficiencies in the anti-money laundering regime. Again, I hope that we will receive cross-party support for our proposal, as I believe we are all united in a desire to clamp down on money laundering.
Tackling money laundering has a strong international aspect, but the Government need to ensure that we have clear and effective anti-money laundering measures within the UK. The intergovernmental Financial Action Task Force was founded by the G7 in 1989 to design and promote policies to combat money laundering around the world. In the EU, FATF standards are implemented by way of money laundering directives, which are designed to establish a consistent regulatory environment across member states. As I said, there is clearly a strong international aspect to the work, but it is the responsibility of the UK Government to implement effective measures in this country. Implementing new clause 10 would certainly help to address that.
There are concerns about fragmentation. Indeed, that is a long-standing concern about the UK’s anti-money laundering supervisory regime. In the UK, there are, in the accountancy and legal sectors, 22 different professional bodies with responsibility for monitoring compliance by their members with anti-money laundering measures. The EU’s fourth money laundering directive made it clear that bodies that represent members of a profession may have a role in supervising and monitoring them. As I said, however, the supervisory landscape in the UK has been criticised for being highly fragmented.
In 2015, that was recognised by the Government in the “UK national risk assessment of money laundering and terrorist financing”, the first such assessment, which highlighted the challenge of having a large number of supervisory organisations. Advocacy organisations such as Transparency International, which gave evidence to our Committee a few weeks ago, have long criticised the fragmented nature of the UK’s anti-money laundering supervisory regime.
In 2018, the Government created a new office within the Financial Conduct Authority to improve standards among professional supervisory bodies—the Minister will probably mention that—but concerns have been raised about its effectiveness. For example, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 gave the FCA the role of ensuring that the anti-money laundering work of the professional supervisory bodies was effective. That would be done through the new office within the FCA, the Office for Professional Body Anti-Money Laundering Supervision. The 22 professional bodies that OPBAS regulates are named in schedule 1 to the 2017 regulations.
However, a Treasury Committee report from last year, entitled “Economic Crime - Anti-money laundering supervision and sanctions implementation”, concluded that it was not clear how the Treasury would respond to an OPBAS recommendation to remove a professional body’s supervisory role. In particular, the Treasury Committee said that there was not an adequate indication of where the Treasury would move a body’s supervisory responsibilities if it was stripped of them. It concluded that the lack of preparation created a risk that a supervisor might become “too important to fail”. That is quite concerning to me. The Committee recommended that the Treasury publish within six months a detailed consideration of how it would respond to a recommendation from OPBAS.
In their “Economic Crime Plan 2019-22”, which was published in July last year, the Government committed to meeting the Treasury Committee’s recommendation by publishing
“a detailed consideration of the process for responding to an OPBAS recommendation to remove a professional body supervisor’s status as an AML/CTF supervisor, including managing changes in supervisory responsibilities, by September 2019.”
In a letter to the Chair of the Treasury Committee dated 17 October last year, the Economic Secretary to the Treasury set out in a few paragraphs the Treasury’s response to an OPBAS recommendation. The letter provided little extra information and cannot be taken to constitute the
“detailed consideration of the process”
promised in the economic crime plan.
In September this year, the Royal United Services Institute noted:
“OPBAS are working with HM Treasury on designing a process in the event that a supervisor is removed from the Schedule 1 list of approved supervisors. This work is nearing completion, but has been delayed to autumn 2020 by the Covid-19 situation.”
In short, the Government committed to publishing a detailed consideration by September last year but still have not done so. It is now December 2020, so it has been more than a year.
Labour’s new clause seeks to underline the importance of the Treasury having a clear and credible response to OPBAS recommendations. For OPBAS’s role to be as effective as possible, it is crucial that its ultimate sanction must have credibility, so the Treasury must be clear of its response to a recommendation from OPBAS to remove a professional body’s supervisory responsibilities. Our new clause attempts to formalise the process of a Treasury response by committing the Government to publishing their response within four weeks of an OPBAS recommendation to remove an organisation from schedule 1. The response must make clear what the Government intend to do and, crucially, the impact of their decision either to leave an organisation on schedule 1 or to remove it.
We would welcome a commitment from the Minster today—this is my third time trying, with a third new clause—on when the Government will finally publish their
“detailed consideration of the process”
for responding to OPBAS recommendations to remove a professional body supervisor from schedule 1. This is also an opportunity for the Minister to set out the Government’s intended approach to complying with the FATF standards after the end of the transition period, and whether the Government intend to meet or exceed future EU money laundering directives. For that reason, the new clause really must be added to the Bill to help the Treasury finally to meet its obligations.
John Glen
The Government are committed to ensuring consistently high standards across the UK’s anti-money laundering supervision system, and the FCA’s Office for Professional Body Anti-Money Laundering Supervision—known as OPBAS—is a key part of that. It works with the 22 professional body supervisors to address any weaknesses identified in their supervisory responsibilities. When OPBAS has identified deficiencies in professional body supervisor oversight arrangements or practices, it has taken robust action, including by using powers of direction. OPBAS will continue to take such action with supervisors when appropriate, to ensure that consistent high standards of supervision are achieved.
Regulation 17 of the regulations that establish the role of OPBAS ensures that there is a clear route to removal if OPBAS has significant concerns about a supervisor’s effectiveness. As the hon. Lady pointed out, following the Treasury Committee’s economic crime inquiry, I wrote to the Committee to set out the process by which the Treasury would respond to a recommendation from OPBAS for such a removal. That covers each of the points that have been included in subsection (3) of the proposed new clause.
The removal of a professional body supervisor would be a highly significant decision; the Treasury would carefully consider any recommendation and, if approved, would work with other professional body supervisors, OPBAS and the statutory supervisors to ensure the continuation of anti-money laundering supervision for the affected professional body supervisor’s members. That would also require the agreement of a transition period before the removal of the professional body supervisor from schedule 1 of the money laundering regulations. It could not just be done abruptly without due recourse to what interim measures or further successor measures would need to be put in place.
It is essential that any recommendation is given due consideration and planning before a decision is announced, and the introduction of a four-week statutory deadline from the issuance of a recommendation would place that at risk. If a decision has not been reached, any enactment or publication of details of the recommendation would be inconsistent with regulation 21(2) of the OPBAS regulations, which prohibits such publication.
While any recommendation for removal would be treated with urgency by the Treasury, the length of the process would be dependent on the circumstances. We therefore believe that it would be wrong for a statutory deadline to be placed on reaching an effective outcome. In the event of OPBAS’s recommending the removal of a professional body supervisor, a notice would be placed on gov.uk once a decision on removal had been reached and, if necessary, plans would be agreed for the transition of affected businesses. I therefore ask the right hon. Member for Wolverhampton South East and the hon. Members for Erith and Thamesmead and for Manchester, Withington not to press the new clause.
Abena Oppong-Asare
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 16
Consumer credit: extension of FCA rule-making duty
“(1) Section 137C of the Financial Services and Markets Act 2000 shall be amended as follows.
(2) In subsection (1A), substitute
‘one or more specified descriptions of regulated’
for ‘all forms of consumer’.”—(Stella Creasy.)
This new clause would extend the responsibility of the FCA to make rules with a view to securing an appropriate degree of protection for borrowers against excessive charges to all forms of consumer credit.
Brought up, and read the First time.
John Glen
I would like to sincerely thank the hon. Member for Walthamstow for her tireless work in this area—she does not look too happy that I have said that, but I sincerely mean it. I recognise the contributions she has made to cap the cost of payday lending. That has made a significant difference, and although we differ on some elements, my vigilance is seriously minded towards these problems, and I will try to respond in full to the points she has made.
As the hon. Lady knows, the Government have given the FCA the power to cap all forms of regulated credit, and the FCA can do so if it thinks it is necessary to protect consumers. I note that her new clause seeks to require the FCA to use this power for all forms of consumer credit and that the retained reference to “high-cost short-term credit” appears to limit its application, but I will proceed on the basis of the intention behind the new clause.
Government legislation has previously required the FCA to use this power, leading to the 2015 cap on the cost of payday loans, and Government will consider further action as circumstances require. However, the Government do not encourage regulatory intervention where there is no clear case for doing so. That can increase the costs to business, which are usually passed to consumers, or lead to products and services being commercially unviable, reducing consumer choice.
While the Government imposed a requirement on the FCA in legislation to use its capping powers for payday loans, the context for that intervention was very different from the current consumer credit market. The Government legislated only after agreement between the FCA and Government that the cap was necessary, in response to the well-evidenced harm that was occurring in the payday lending market, which the hon. Member for Walthamstow has done a massive amount of work to promote awareness of. Introducing this duty on the regulator ensured that its efforts were focused on implementing the cap quickly, rather than spending time and resources on making the case for a cap in the first place. Following this successful intervention, the FCA independently implemented a similar price cap on rent-to-own products in March 2019 in response to the FCA finding evidence of consumer detriment as a result of excessive charges.
The FCA keeps the issue of capping the cost of other types of credit under constant review. There is not an equivalent case today that necessitates this action. Therefore, we should not legislate to force the FCA, as the independent and expert regulator, to implement a cap. As can be seen from the payday and rent-to-own markets, in some cases price caps can be effective in protecting consumers from the most egregious harm. However, a blanket cap would not take into account the idiosyncrasies of the breadth of consumer credit products on the market and could give rise to unintended consequences.
Let me turn to new clause 17. This amendment speaks to the exemption under article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. That exemption covers interest-free loans, repayable in no more than 12 instalments, within no more than 12 months, used for the financing of specific goods and services. It allows businesses such as gyms and sports season-tickets providers to avoid the burden of FCA regulation for offering deferred payment terms for the goods and services they provide. It also catches many everyday transactions, where the supplier of goods or services issues an invoice and affords a period of time to pay.
The exemption is important in allowing low-risk day-to-day business activity to be undertaken without firms needing to be authorised by the FCA or to comply with consumer credit regulation. However, the Government are alert to the specific concerns about buy now, pay later products that utilise this exemption. I know that the hon. Member for Walthamstow is concerned about the way in which those products are advertised, as she set out this afternoon, and the risk of borrowers unknowingly building up problem debt.
An interest-free credit, unregulated, buy now, pay later product, as it is inherently lower risk than other forms of borrowing, can provide a lower-cost alternative to help people buy the products they need and can be a useful part of the toolkit for managing personal finances and tackling financial exclusion. However, despite the potential benefits and the fact that we are yet to see substantive evidence of widespread consumer harm, the Government and the FCA are aware that risks are associated with those products, as with any type of borrowing. Therefore, the former interim chief executive officer of the FCA, Chris Woolard, is urgently undertaking a review into change and innovation in the unsecured credit market.
The Government welcome the review. I have spoken with Chris Woolard about it, and he attended the financial inclusion forum in the past few weeks. A key focus of the review is on areas of growth from non-traditional providers of credit, which includes unregulated, buy now, pay later products, which the hon. Lady described. It will assess both the supply and the demand sides of the market, cover the customer journey and engage with the main providers to better understand business models and how customers interact with such firms. The FCA has also commissioned consumer research to help inform its understanding. I recognise that particularly vulnerable groups of consumers seem to be using such products more.
The review is due to present its conclusions early next year, in a few months. If it concludes that there is the potential for significant harm occurring as a result of those exempt products, the Government will assess the options for how to address that best, and whether they would be proportionate to counter such harm.
I will now turn to new clause 22. As I noted previously, the Government have fundamentally reformed regulation of the consumer credit market, giving control of the area to the FCA in 2014. That more robust regulatory system is helping to deliver the Government’s vision for a well-functioning and sustainable consumer credit market that can meet consumers’ needs. The Government have given the FCA strong powers to protect consumers, and the FCA assesses whether a firm’s business model is in a consumer’s interest as part of the authorisation process.
In 2017, the FCA confirmed that, in its assessment of firms’ business models, it considers how each firm makes money. That allows the FCA to identify any economic incentives that a firm might have to cause harm to consumers and to take appropriate mitigating actions.
In its August report on re-lending by high-cost lenders, the FCA set out clearly the potential issues around re-lending. The report identified ongoing concerns about the business practices of some of those lenders, which it deemed to be breach of FCA rules and principles for business. More importantly, the report reiterated the FCA’s expectations that firms should treat their customers fairly. It made it clear that it expects firms to review their re-lending practices so that they can properly assess affordability; further, that any re-lending firms undertake is sustainable and will not give rise to borrowers entering into problem debt; and, finally, that the customer’s full financial position should be taken into consideration when making those re-lending decisions.
While the hon. Member for Walthamstow is right that re-lending can cause consumer harm, it is clear that the FCA understands the issues and is acting where necessary to protect consumers’ interests. As I have set out, the FCA will consider consumer interest in relation to a firm’s business model during the authorisation process, and will monitor the market through its supervision process, reminding firms of their obligations and intervening where necessary. I therefore ask that the hon. Member for Walthamstow withdraw the new clause.
John Glen
The change proposed under this new clause to allow Select Committees to require the FCA to launch investigations in situations where there is suspected regulatory failure would mirror powers that are already available to the Treasury. As I set out earlier, section 77 of the Financial Services Act 2012 enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so under, for example, the regulators’ power in section 73 of that Act.
The Treasury has used those powers to require the PRA and FCA to launch investigations where it considers that appropriate. As Members are aware, the Treasury Committee had the opportunity to scrutinise the investigation that was carried out into the Co-operative Bank in 2018, and it made a number of recommendations that were accepted by the PRA.
I am therefore confident that investigations under existing section 77 powers are useful in holding regulators to account, ensuring proper scrutiny of them and conducting investigators in the public interest. In determining whether an investigation is in the public interest, the Treasury will also consider the views of the relevant Select Committee in reaching its decision.
The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services. The Treasury is confident that proper mechanisms exist to allow the Treasury Committee to scrutinise and comment on investigations, as is right and proper. Ultimately, there is nothing to stop a relevant Select Committee launching its own investigation into an issue, calling witnesses, gathering evidence and making recommendations. That is a decision for the Committee.
Stella Creasy
Earlier today, we talked about the fact that the Treasury instructed the FCA to get involved in the debate around payday lending. Indeed, it went into companies such as Wonga and QuickQuid and set out redress schemes. We know that they were ineffective because it ended up with the ombudsman getting involved, and it was only then that those companies went into administration because it was revealed how much they owed to our constituents. In circumstances such as that, where no doubt there would be difficult conversations about what role the Treasury and the FCA played in the process, who watches the watchmen? Who would instruct that inquiry? At the moment, that inquiry has not happened, so we do not know why that redress scheme did not work. There is no sign that the FCA wants that. Is the Minister saying that he would instruct that so that we can get to the bottom of why the redress scheme did not work? If it did not, it seems rather apposite to have an independent third party that could look at issues such as that on behalf of consumers.
John Glen
I am very happy to look at that particular case. The point I am making is that there is a mechanism to compel the FCA to investigate, and the Treasury does not do that in isolation from the its wider accountability to Parliament, individual Members of Parliament and the Treasury Committee. I am very happy to examine the point that the hon. Lady has made and I will look at it carefully, but that provision exists. Frankly, I cannot and would never expect to act in isolation and without accountability to Parliament. Given the powers available to the Treasury, which can be used in that context, and the opportunity for scrutiny by Select Committees, I ask that this new clause be withdrawn.
Stella Creasy
If the Minister is saying that he is going to instruct a redress investigation, I will happily withdraw the new clause. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 21
Assessment of risks of consumer detriment
“(1) Schedule 6 of the Financial Services and Markets Act (2000) is amended as follows.
(2) After paragraph 2D(2)(c) insert—
‘(d) the risks of consumer detriment associated with the firm’s business model and the likelihood for compensation claims from consumers.’
(3) After paragraph 2D(3), insert—
‘(3ZA) When assessing whether the firm has appropriate financial resources to meet the risks of consumer detriment and the likelihood of compensation claims from consumers, the Financial Conduct Authority must ensure that, at all times, firms hold sufficient financial resources to meet any likely compensation claims from customers in full.’”—(Stella Creasy.)
This new clause would ensure that the FCA considers the likelihood of consumer detriment arising from the firm’s business model prior to, and following, authorisation, and that firm’s hold sufficient financial resources to meet potential compensation claims from customers in full.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
John Glen
The new clause proposes to create a new criminal offence, for FCA-regulated persons only, of facilitating economic crime and of failing to prevent economic crime.
In recent years, the Government have taken significant action to improve corporate governance and culture in the financial services industry. Following the financial crisis we introduced the new senior managers and certification regime. The regime is now in place for all FCA-regulated firms, and it requires firms to allocate to a specific senior person a senior management function for overseeing the firm’s efforts to counter financial crime. If there is a failure in a firm’s financial crime systems and controls, the FCA can take action against the responsible senior manager where it is appropriate to do so. That enforcement action includes fines and prohibition from undertaking regulated activities.
As well as creating the senior managers regime, through the Money Laundering Regulations 2017 and subsequent amendments, the Government have recently strengthened the anti-money laundering requirements that financial services firms must adhere to. Failure to comply with these requirements can be sanctioned through either civil or criminal means. Recent FCA regulatory penalties related to firms’ anti-money laundering weaknesses include a £102 million fine for Standard Chartered in April 2019 and a £96.6 million fine for Goldman Sachs in October 2020.
I hope that recent action demonstrates to the Committee that the Government are committed to upholding a robust framework that deters and sanctions any corporate criminal activity in the financial services industry. It is only right that we challenge ourselves on whether we need to go further, and I listened very carefully to the right hon. Gentleman. Regardless of our tenure, the Government must always take that responsibility seriously.
In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. It is fair to say that the findings of the call for evidence were inconclusive. As such, the Government’s response to the call for evidence determined that a more comprehensive understanding of the potential options and implications of reform was needed. As the right hon. Gentleman acknowledged, the Government have therefore tasked the Law Commission to conduct an expert review on this issue.
Through the Bribery Act 2010 and the Criminal Finances Act 2017, the Government have demonstrated we are open to new “failure to prevent” offences. These offences, however, were legislated for because there was clear evidence of gaps in the relevant legal frameworks, which were limiting the bringing of effective and dissuasive enforcement proceedings.
Before any broader new “failure to prevent” offence for economic crime is introduced, there needs to be strong evidence to support it. It will also be important that any new offence is designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business. The scope of who a new offence applies to must also be holistically worked through.
The Law Commission’s work will take some time, but it is clear that we are zoning in on that aspect of the problem. In the light of that response, I ask the right hon. Gentleman to withdraw the new clause.
Mr McFadden
I am happy to withdraw the new clause today, but I suspect the Minister might meet a very similar amendment later in proceedings on the Bill. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 26
Legal protections for retail clients against the mis-selling of financial services
‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.
(2) In paragraph 1(a), after “individual”, insert “, partnership or body corporate that is or would be classified as a retail client”.
(3) In paragraph 1(b), leave out “who is not an individual”, and insert “not within the definition of paragraph 1(a)”.
(4) For the purposes of this regulation, a “retail client” means a client who is not a professional client within the meaning set out in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.’—(Stephen Flynn.)
This new clause seeks to give retail clients greater legal protections against the mis-selling of financial services products.
Brought up, and read the First time.
Stephen Flynn
New clause 26 seeks to give retail clients greater legal protection against the mis-selling of financial services products, and new clause 27 seeks to give small businesses greater legal protections against the mis-selling of financial services products. I want to make a couple of quick remarks on that matter.
I do not need to tell hon. Members how important small businesses are. They make up three fifths of employment, and half the turnover in the UK private sector goes through small businesses. Those are telling figures. What is more, just 36% of small businesses use external finance; indeed, seven in 10 would rather forgo any growth than take on external finance. That is an important point that the Government must reflect on.
As they deliberate on why that may be the case, I will provide some additional information. There is a history of mis-selling, which causes small businesses a great deal of concern. Although regulation has been tightened, gaps remain. For example, small businesses complained earlier this year about the mis-selling of interest rate swaps. The FCA found that 90% of those businesses did not have a clue what that meant in reality, and it went on to talk about the dialogue between sophisticated and unsophisticated businesses in that regard.
The ultimate issue is that small businesses did not know what they were getting themselves into, and I think that is telling. No one wants that situation to arise, now or in the future. I encourage the Government to take heed of that and, therefore, agree to both new clauses.
John Glen
The Government are committed to ensuring that the interests of individuals and businesses that use financial services are protected. With the creation of the conduct-focused Financial Conduct Authority in 2013, we have ensured that those interests continue to be placed at the heart of our regulatory system and given the priority that they deserve.
The Government have given the FCA a strong mandate to stop inappropriate behaviour in financial services, and it has a wide range of enforcement powers—criminal, civil and regulatory—to protect consumers and businesses alike. That means taking action against firms and individuals that do not meet appropriate standards.
These new clauses, which have been tabled by the hon. Members for Glasgow Central and for Aberdeen South, seek to broaden the scope of parties that can seek action for damages related to mis-selling of financial services. The changes are unnecessary, however, because businesses already have robust avenues for pursuing financial services complaints. The Government are committed to ensuring that we do not unnecessarily push up the cost of borrowing for small businesses by creating additional legislative burdens.
In April 2019, the remit of the Financial Ombudsman Service was expanded to allow more SMEs to put forward complaints, and that covers 97% of SMEs in the UK. An enterprise that employs fewer than 50 people and has a turnover that does not exceed £6.5 million is entitled to bring a complaint to the FOS. If that complaint is upheld, the FOS can make an award of up to £350,000 in relation to acts or omissions that took place on or after 1 April 2019.
Moreover, SMEs will also have access to the business banking resolution service, an independent non-governmental body, which will provide dispute resolution for businesses. It will serve two purposes. First, it will address historical cases from 2000, which would now be eligible for the FOS but which were not at the time, and which have not been through another independent redress scheme. Secondly, it will address future complaints from businesses with a turnover of between £6.5 million and £10 million.
Given the robust avenues that are available to businesses for pursuing financial services complaints, I hope the Committee will agree that the new clauses are not necessary, and I respectfully ask the hon. Members not to press them.
Stephen Flynn
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 29
Review of Impact of Scottish National Investment Bank Powers
“(1) The Chancellor of the Exchequer must review the effect of the use of the powers in this Act in Scotland and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on—
(a) business investment,
(b) employment,
(c) productivity,
(d) inflation,
(e) financial stability, and
(f) financial liquidity.
(3) The review must also estimate the effects on the changes in the event of each of the following—
(a) the Scottish Government is given no new financial powers with respect to carrying over reserves between financial years,
(b) the Scottish Government is able to carry over greater reserves between financial years for use by the Scottish National Investment Bank.
(4) The review must under subsection 3(b) consider the effect of raising the reserve limit by—
(a) £100 million,
(b) £250 million,
(c) £500 million, and
(d) £1,000 million.” —(Alison Thewliss.)
This new clause requires a review of the impact of providing Scottish Government powers to allow the SNIB to carry over reserves between financial years beyond its current £100m limit.
Brought up, and read the First time.
Alison Thewliss
I beg to move, That the Clause be read a Second time.
New clause 29 would require a review of the impact of providing the Scottish Government with powers to allow the Scottish National Investment Bank to carry over reserves between financial years beyond its current £100 million limit. As Members may know, the Scottish National Investment Bank has been firmly established as a public limited company and has a proposed mission to focus the bank’s activities on addressing key challenges and creating inclusive long-term growth, including
“supporting Scotland’s transition to net zero, extending equality of opportunity through improving places, and harnessing innovation to enable Scotland to flourish.
It will provide patient capital—a form of long-term investment—for businesses and projects in Scotland, and catalyse further private sector investment.”
The bank’s first investment, announced the other week, was £12.5 million to the Glasgow-based laser and quantum technology company, M Squared, to support the company’s further growth in Scotland, which speaks to the bank’s proposed core missions.
The Scottish National Investment Bank will help to tackle some of the biggest challenges we face in the years to come, delivering economic, social and environmental returns, but currently there is a slight barrier, in that the Scottish Government can only roll over £100 million of their annual reserves. We are asking for the UK to look at increasing that to allow the Scottish National Investment Bank to get on with the job that it is set up to do.
As the Committee can see, the new clause asks the Government to introduce an impact assessment—because that is what we can do in this Committee; we can ask for reports and impact assessments—looking at increasing the Scottish Government’s reserves by £100 million, £250 million, £500 million or £1 billion for business investment, employment, productivity, inflation, financial stability and financial liquidity. We need the Government to come on board with that and provide some help to us. It is a huge and important project, so much so that the UK Government seem to be copying it by having an investment bank.
We would like to have an infrastructure bank for Scotland that can meet Scotland’s needs and priorities. It is desperately important that we do that. The bank will learn from banks such as KfW in Germany, which was set up after the war by the UK, and then we learned nothing from it ourselves. We want to be able to get on and do this and invest in Scotland’s future, but unfortunately we need the Government’s co-operation at this point to do that.
John Glen
The UK Government are committed to supporting investment across the whole of the United Kingdom. Indeed, at the spending review, we confirmed our intention to establish a new infrastructure bank in the UK that will help to support infrastructure projects across the whole of the UK, including in Scotland. I was therefore pleased to see the Scottish Government launch their Scottish National Investment Bank on 23 November.
The new clause seeks to establish a review process for considering whether the Scottish Government’s reserve flexibility should be increased and expanded for use by the Scottish National Investment Bank. We have already agreed significant financial flexibilities with the Scottish Government as part of the Scotland Act 2016 and their fiscal framework, which provide unprecedented policy levers to shape Scotland’s economy, including a £700 million Scottish reserve. The Scottish Government are able to manage the Scottish National Investment Bank through those existing arrangements if they choose to prioritise that.
Furthermore, we have agreed to undertake a review of the Scottish Government’s fiscal framework. That will include an independent report, jointly commissioned with the Scottish Government, next year in 2021, followed by a renegotiation of the fiscal framework in 2022. I therefore think in light of that information that the hon. Member might consider withdrawing the new clause.
Alison Thewliss
I am not going to withdraw it. The Minister has an absolute cheek, and he knows it. We were working on the bank for quite some time, and it has opened its doors and is already lending money while the UK Government are still only talking about their bank. Help us do the job and help us make sure that we can make this work for Scotland’s future, because, frankly, we do not trust the UK Government to do that for us, and we have good grounds for that.
When the UK Government invested in things in Scotland before, we ended up with things such as the Skye bridge, for which we were paying well over the odds. When Scotland is able to invest in things, we build bridges such as the Forth replacement crossing—sorry, the Queensferry crossing—which is an excellent bridge for us all to use in the future. I will press the new clause to a vote.
Stephen Flynn
I will be incredibly brief. Again, both new clauses 31 and 32 are about oversight and scrutiny. I have absolutely no doubt that Conservative Members will want to take back parliamentary sovereignty and ensure that this place has oversight of the Government’s actions.
John Glen
I think I have previously detailed my response to new clauses 22 and 26 why it would not be appropriate for Parliament to scrutinise all regulator rules made in relation to those two specific measures. These new clauses go further, and would require all rules made by the Financial Conduct Authority in relation to anything within this Bill to be approved by Parliament before the rules can be made, and would prevent the FCA from exercising its powers effectively. New clause 31 would make the FCA’s rule making subject to parliamentary approval. New clause 32 prevents the FCA from making rules under the Bill until two new parliamentary Committees are established. The same arguments that I made previously are relevant here: new clause 31 would apply a higher level of parliamentary scrutiny—to the FCA only—when making rules in areas covered by the Bill. That would mean that those areas were inconsistent with other areas of financial services regulation not covered by this Bill or within the remit of the Prudential Regulation Authority, which will retain the existing scrutiny requirements.
Parliament would need routinely to scrutinise a large number of detailed new rules on an ongoing basis. That is very different from the model that Parliament has previously put in place for the regulators under the Financial Services and Markets Act 2000, where it has judged it appropriate for the regulators to take these detailed technical decisions where they hold expertise.
Turning briefly to new clause 32, although I note that Select Committees of both Houses already have the option to scrutinise the regulators as they see fit, it is naturally for Parliament to decide how best it wishes to scrutinise financial services regulation. However, I do not believe that it is appropriate to make the introduction of an investment firms prudential regime, or any of the other changes enabled by this Bill, subject to the establishment of new parliamentary Committees. Nor do I believe it is for the Treasury to make regulations related to the establishment or functioning of parliamentary Committees. As the right hon. Member for Wolverhampton South East pointed out in an earlier sitting, that is a matter for the House to decide.
I would like to reassure the Committee that I am committed to ensuring appropriate accountability and scrutiny around new rules for our financial sector. That is why I recently published a consultation document on the review of the future regulatory framework for financial services. This review seeks to achieve the right split of responsibilities between Parliament, Government, and the regulators now that we have left the EU. It seeks views, including those of all parliamentarians, on how we can best scrutinise and hold the regulators to account, while respecting and safeguarding their independence. I look forward to engaging with hon. Members on that subject but, given what I have said, I suggest that they might consider withdrawing the new clause.
Stephen Flynn
I am not surprised, but I am disappointed. I would like press new clause 31 to a vote.
Question put, That the clause be read a Second time.
Alison Thewliss
I will be brief. It is important that the Government take their obligations under the Paris climate change commitments and the UN sustainable development goals seriously. I did not know when we tabled these new clauses that my son would be studying the sustainable development goals at his school this week. It would be very good if the Government took the sustainable development goals quite as seriously as the primary 6 pupils I know.
John Glen
It is clear that this new clause is similar to other amendments. We have discussed the issues in relation to Basel and PRIIPs measures, and new clauses 33 and 34 would mean that they would apply to a Bill as a whole. As I have set out in previous responses, we are committed to meeting international obligations and strongly support the aims of the Paris agreement and the sustainable development goals. That will mean a combined effort across the whole economy, especially with the involvement of financial services. As the Chancellor set out in his statement, they will be at the heart of that effort. We are pursuing world-leading standards, and ahead of COP26 the Prime Minister’s COP26 finance adviser, Mark Carney, will advise the Government on embedding climate considerations into every financial decision.
These new clauses would require the provision of an assessment of the impact of the Bill, specifically on the UK’s ability to meet its commitments to the Paris agreement and sustainable development goals. We published in June 2019 a voluntary national review, setting out in detail our progress towards those goals, and a comprehensive account of the further action to be taken, and we remain committed to supporting the implementation of those goals. We therefore cannot support these new clauses, as we believe that we are held to account through other mechanisms. That is probably all I need to say. I suggest that the clause may be able to be withdrawn on that basis.
Alison Thewliss
I am happy to do so. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 35
Money laundering and overseas trustees: review
“(1) The Treasury must, within six months of this Act being passed, prepare, publish and lay before Parliament a report on the effects on money laundering of the provisions in section 31 of this Act.
(2) The report must address—
(a) the anticipated change to the volume of money laundering attributable to the provisions of section 31; and
(b) alleged money laundering involving overseas trusts by the owners and employees of Scottish Limited Partnerships.”—(Alison Thewliss.)
This new clause would require the Treasury to review the effects on money laundering of the provisions in section 31 of this Act, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish Limited Partnerships.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
John Glen
I am grateful for the enticement to be generous, but I was quite generous on new clause 8. I gave some positive indications about the intentions of the Government, and I look carefully at everything that is said by Members from across the Committee. I am very engaged with the mutual banks and with the co-operative sector generally, which I will say more about in a moment.
This amendment aims to remove the restriction which prevents co-operative societies holding withdrawable share capital from carrying out the business of banking. I share the interest of the hon. Member for Walthamstow in how the mutual model of financial services can add much-needed diversity and competition to the sector. Treasury officials and I have had constructive conversations with individuals seeking to set up regional mutual banks, and I look forward to continuing those. I will not mention their names, because they are going through different regulatory processes, and I am told that that is sensitive and so I should not do so. I try to help them.
Ensuring that banks hold the appropriate capital is critical to a stable and functioning financial system. It is therefore important that we consider any legislative changes in this area. I have thought about the amendment, and there are several immediate concerns about the potential risks to financial stability and consumer protection, which the Government have a duty to consider.
I will set out our most pressing concerns. As the global financial crisis highlighted, sufficient regulatory capital is needed by financial institutions as a source of resilience and to ensure losses can be effectively absorbed. To ensure capital fulfils this function, capital held by banks must always be readily available to absorb losses, which cannot be the case where investors can withdraw capital. Enabling co-operative banks to hold withdrawable share capital, as this amendment intends, could place consumer deposits at risk, create an inconsistent regulatory regime between co-operative and non-co-operative banks, and cause risks to the stability of the financial system, if it led to banks being inadequately or inappropriately capitalised.
I have had representations from the prospective regional mutual banks sector that they would seek to use this amendment to issue additional tier 1 capital instruments, or contingent convertible bonds. These are complex instruments that would need further thought to ensure they fulfilled their purpose within the legislative framework for co-operatives. It is also unlikely that the ability to raise additional tier 1 capital would be very beneficial to regional mutual banks currently, given they are at the early stages of their development where raising core equity capital is the priority.
I also note that the activity of deposit taking, in the form of withdrawable share capital that co-operatives and community benefit societies carry out under the present legislation, is subject to certain exemptions from regulatory requirements, which are applicable to other institutions carrying out business activities. These may no longer be appropriate if they were generally allowed to carry out the business of banking.
In conclusion, the Government believe that the fundamental issue is that it is not appropriate for deposit takers to rely on withdrawable share capital. In any case, certainly a measure like this would need further consideration of the legislative and regulatory implications rather than being introduced by way of amendment. I will continue to look carefully at these matters with the sector, but in the context of what I have said I ask the hon. Member for Walthamstow to withdraw her amendment.
Stella Creasy
I am so sorry to hear that the Minister is still listening to Marley rather than Bob Cratchit about the true spirit of Christmas. This is legislation from the 1800s. It is about £400 worth of share capital. It is outdated and needs a little more Christmas cheer. The Minister said that he would commit to working with the sector to get this amendment right, and if amended this Bill could be great. I think I will push the new clause to a vote—if nothing else, to put on the record that there are those of us who understand that co-ops want to move into the 21st century—and wish everyone a merry Christmas at the same time.
Question put, That the clause be read a Second time.
Mr McFadden
On a point of order, Dr Huq, I would like to thank you and Mr Davies for your chairmanship during the proceedings, and the Clerks from the Public Bill Office for helping all of us with our amendments in recent weeks. I would like to thank my colleagues on the Opposition side of the Chamber; I believe we approached this in the right spirit. We set out at the beginning the way we would approach it and I think that is the way that we have carried through: trying to improve the Bill, to give it proper scrutiny and to try to point to some kind of future direction for UK financial services as we come to the end of the transition period. Some of us here are Front-Bench Members and this is part of our terms of appointment, so, with their indulgence, I would particularly like to thank my hon. Friends the Members for Wallasey and for Walthamstow, who I believe both brought considerable experience and value to our proceedings.
I would like to thank the Minister for his patience and forbearance. We did not set out to torture him, I promise, but I appreciate that for him, taking through a Bill like this is a substantial piece of work, and I am grateful to him for the spirit in which he responded to amendments, questions and so on as we went through. Finally, I thank the Back Benchers on the Government side. For the most part they took a rather passive approach to the proceedings. There is a mixture of experience and new MPs on that side. To the new MPs in particular I will say that I hope the last three weeks have been an important part of their learning about what it means to be a Government Back Bencher.
John Glen
Further to that point of order, Dr Huq, I thank the right hon. Member for Wolverhampton South East for the courteous and constructive way in which he led the Opposition scrutiny of the Bill. I thank all members of the Committee for their contributions. I looked carefully at all amendments, and I did not categorise them in buckets. I thank you, Dr Huq, and your colleague Philip Davies, and the team of Clerks, as well as my officials from the Treasury, who sit silently at the end and do a great deal to support me and the much wider team back in the Treasury who have helped to prepare the Bill. Clearly, we shall now move on to its further stages, and there is more work to do. I thank my hon. Friend the Member for Macclesfield for his support, in particular, as well as my hon. Friend the Member for Montgomeryshire, who has given me enormous support throughout.
Alison Thewliss
Further to that point of order, Dr Huq, I thank you for your time in the Chair, and Philip Davies as well. I want to thank colleagues for their contributions, the Clerks for all their assistance, and the Treasury officials, who were good about meeting us ahead of the proceedings. That was really useful. I thank our team of researchers, Scott Taylor and Linda Nagy, who have been great in providing support to us. I also thank those who sent evidence to the Committee. That was extremely useful for briefings, and we were grateful.
The Minister said earlier that he was not saying no or never; I live in hope that some time he will say mibbes aye. We might get there, yet. I said on Second Reading that we would bring forward constructive amendments and the Government would ignore them, and that turned out to be what happened, but we hope that on Report perhaps some of the good Opposition suggestions, made with the best intentions to make things better for all our constituents, will be taken on board. I thank the Minister for his work on the issue.
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services Bill
John Glen ExcerptsWednesday 13th January 2021
(3 years, 10 months ago)
Commons ChamberRead Full debate Financial Services Bill 2019-21 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 13 January 2021 - (13 Jan 2021)
The Economic Secretary to the Treasury (John Glen)
I beg to move, That the clause be read a Second time.
Madam Deputy Speaker (Dame Rosie Winterton)
With this it will be convenient to discuss the following:
Government new clause 28—Forfeiture of money: electronic money institutions and payment institutions.
New clause 1—Report into standards of conduct and ethics in the financial services industry—
“(1) The Treasury must prepare and publish a report into standards of conduct and ethics of businesses regulated or authorised by the Financial Conduct Authority.
(2) The report must include—
(a) an assessment of the prevalence of unlawful practices in the sector, including—
(i) tax evasion, and
(ii) money laundering;
(b) an assessment of the prevalence of other practices including—
(i) the charging of excessive fees,
(ii) the provision of inadequate advice to customers, and
(iii) tax avoidance;
(c) consideration of the case for the establishment of a public inquiry into standards of conduct and ethics within the UK financial services industry, under the Inquiries Act 2005; and
(d) an assessment of the present arrangements for the regulation of the financial services sector and the Government’s plans for further reform of the regulatory system.
(3) This report must be laid before Parliament within six months of this Act being passed.”
This new clause would require the Government to publish a report into the standards of conduct and ethics of businesses regulated or authorised by the Financial Conduct Authority, including consideration of the case for the establishment of a public inquiry.
New clause 2—Report into anticipated use of the Debt Respite Scheme—
“(1) The Treasury must prepare and publish a report into the anticipated use of the Debt Respite Scheme over the five years following the passing of this Act.
(2) The report must include an assessment of—
(a) the number of people likely to use the Breathing Space scheme
(b) the number of people likely to be offered a Statutory Debt Repayment Plan,
(c) the scale of personal and household debt within the UK economy and the impact of this on use of the Debt Respite Scheme,
(d) the effectiveness of current mechanisms to prevent people having recourse to the Debt Respite Scheme, and
(e) the potential for additional policies and mechanisms to complement the work of the Debt Respite Scheme.
(3) This report must be laid before Parliament within six months of this Act being passed.”
This new clause would require the Treasury to publish a report into the anticipated use of the Debt Respite Scheme, including the effectiveness of the current mechanisms to prevent people having recourse to the Debt Respite Scheme.
New clause 4—Facilitation of economic crime—
“(1) A relevant body commits an offence if it—
(a) facilitates an economic crime; or
(b) fails to take the necessary steps to prevent an economic crime from being committed by a person acting in the capacity of the relevant body.
(2) In subsection (1), a ‘relevant body’ is any person, including a body of persons corporate or unincorporated, authorised by or registered with the Financial Conduct Authority.
(3) In subsection (1), an ‘economic crime’ means—
(a) fraud, as defined in the Fraud Act 2006;
(b) false accounting, as defined in the Theft Act 1968; or
(c) an offence under the following sections of the Proceeds of Crime Act 2002—
(i) section 327 (concealing etc criminal property);
(ii) section 328 (arrangements etc concerning the acquisition, retention, use or control of criminal property); and
(iii) section 329 (acquisition, use and possession of criminal property).
(4) In subsection (1), ‘facilitates an economic crime’ means—
(a) is knowingly concerned in or takes steps with a view to any of the offences in subsection (3); or
(b) aids, abets, counsels or procures the commission of an offence in subsection (3).
(5) In proceedings for an offence under subsection (1), it is a defence for the relevant body to show that—
(a) it had in place such prevention procedures as it was reasonable in all circumstances for it to have in place;
(b) it was not reasonable in the circumstances to expect it to have any prevention procedures in place.
(6) A relevant body guilty of an offence under this section shall be liable—
(a) on conviction on indictment, to a fine;
(b) on summary conviction in England and Wales, to a fine;
(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.
(7) If the offence is proved to have been committed with the consent or connivance of—
(a) a director, manager, secretary or other similar officer of the relevant body, or
(b) a person who was purporting to act in any such capacity,
this person (as well as the relevant body) is guilty of the offence and liable to be proceeded against and punished accordingly.”
This new clause would make it an offence for a relevant body authorised or registered by the Financial Conduct Authority to facilitate, or fail to prevent, specified economic crimes.
New clause 6—Money laundering: electronic money institutions—
‘(1) The Proceeds of Crime Act 2002 is amended as follows.
(2) In section 303Z1 (Application for account freezing order)—
(a) In subsection (1) after “bank” insert “, electronic money institution”
(b) In subsection (6) after “Building Societies Act 1986;” insert—
“‘electronic money institution’ has the same meaning as in the Electronic Money Regulations 2011.”
(3) In section 303Z2 (Restrictions on making of application under section 303Z1), in subsection (3) after “bank” insert “, electronic money institution.”
(4) In section 303Z6 (Restriction on proceedings and remedies), in subsection (1) after “bank” insert “, electronic money institution.”
(5) In section 303Z8 (“The minimum amount”), in subsection (4) after “bank” insert “, electronic money institution.”
(6) In section 303Z9 (“Account forfeiture notice”), in subsection (6)(b) after “bank” insert “, electronic money institution.”
(7) In section 303Z11 (“Lapse of account forfeiture notice”)—
(a) in subsection (6) after “bank” insert “, electronic money institution”
(b) in subsection (7) after “If the bank” insert “, electronic money institution”
(c) in subsection (7) after “on the bank” insert “, electronic money institution.”
(8) In section 303Z14 (“Forfeiture order”), in subsection (7)(a) after “bank” insert “, electronic money institution.”
(9) In section 327 (Concealing etc), after subsection (2C) insert—
“(2D) An electronic money institution that does an act mentioned in paragraph (c) or (d) of subsection (1) does not commit an offence under that subsection if the value of the criminal property concerned is less than the threshold amount determined under section 339A for the act.”
(10) In section 328 (Arrangements), after subsection (5) insert—
“(6) An electronic money institution that does an act mentioned in subsection (1) does not commit an offence under that subsection if the arrangement facilitates the acquisition, retention, use or control of criminal property of a value that is less than the threshold amount determined under section 339A for the act.”
(11) In section 329 (Acquisition, use and possession), after subsection (2C) insert—
“(2D) An electronic money institution that does an act mentioned in subsection (1) does not commit an offence under that subsection if the value of the criminal property concerned is less than the threshold amount determined under section 339A for the act.”
(12) In section 339A (Threshold amounts)—
(a) in subsection (1) leave out “327(2C), 328(5) and 329(2C)” and insert “327(2C), 327(2D), 328(5), 328(6), 329(2C) and 329(2D)”
(b) in subsection (2) after “deposit-taking body” insert “or electronic money institution”
(c) in subsection (3) after “deposit-taking body” insert “or electronic money institution”
(d) in subsection (3)(a) after “deposit-taking body’s” insert “or electronic money institution’s”
(e) in subsection (3)(b) after “deposit-taking body” insert “or electronic money institution”
(f) in subsection (4) after “deposit-taking body” insert “or electronic money institution”
(g) in subsection (8) after “deposit-taking body” insert “or electronic money institution.
(13) In section 340 (Interpretation), after subsection (14) insert—
“(14A) “Electronic money institution” has the same meaning as in the Electronic Money Regulations 2011.”’
This new clause would update definitions in the Proceeds of Crime Act 2002 to reflect the growth of financial technology companies in the UK by equalising the treatment of electronic money institutions with banks in regard to money laundering regulations.
New clause 7—Regulation of buy-now-pay-later firms—
“Within three months of this Act being passed, the Treasury must by statutory regulations make provision for the protection of consumers from unaffordable debt by requiring the FCA to regulate—
(a) buy-now-pay-later credit services, and
(b) other lending services that have non-interest-bearing elements.”
This new clause would bring the non-interest-bearing elements of buy-now-pay-later lending and similar services under the regulatory ambit of the FCA.
New clause 8—European Union regulatory equivalence for UK-based financial services businesses—
“(1) Within three months of this Act being passed, the Treasury must prepare and publish a report on progress towards regulatory equivalence recognition for UK-based financial services firms operating within the European Union.
(2) This report should include—
(a) the status of negotiations towards the recognition of regulatory equivalence for UK financial services firms operating within the European Union;
(b) a statement on areas in where equivalence recognition has been granted to UK based businesses on the same basis as which the UK has granted equivalence recognition to EU based businesses; and
(c) a statement on where such equivalence recognition has not been granted.”
This new clause would require a report to be published on progress towards, or completion of, the equivalence recognition for UK firms which the Government hopes to see following the Chancellor’s statement on EU-based firms operating in the UK.
New clause 9—Debt Respite Scheme: review—
“(1) The Chancellor of the Exchequer must review the impact on debt in parts of the United Kingdom and regions of England of the changes made by section 32 of this Act and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on debt held by—
(a) households,
(b) individuals with protected characteristic as defined by the Equality Act 2010,
(c) small companies as defined by the Companies Act 2006.
(3) In this section—
‘parts of the United Kingdom’ means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland; and
‘regions of England’ has the same meaning as that used by the Office for National Statistics.”
This new clause would require a review of the impact on debt of the changes made to the Financial Guidance and Claims Act 2018 in section 32.
New clause 10—Legal protections for retail clients against the mis-selling of financial services—
‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.
(2) In paragraph 1(a), after “individual”, insert “, partnership or body corporate that is or would be classified as a retail client”.
(3) In paragraph 1(b), leave out “who is not an individual” and insert “not within the definition of paragraph 1(a)”.
(4) For the purposes of this regulation, a “retail client” means a client who is not a professional client within the meaning set out in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.’
This new clause seeks to give retail clients greater legal protections against the mis-selling of financial services products.
New clause 11—Legal protections for small businesses against the mis-selling of financial services—
‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.
(2) In sub-paragraph 1(a), leave out “individual” and insert “relevant person”.
(3) In sub-paragraph 1(b), leave out “individual” and insert “relevant person”.
(4) After paragraph 1, insert—
“(1A) For the purposes of this regulation, a ‘relevant person’ means—
(a) any individual;
(b) any body corporate which meets the qualifying conditions for a small company under sections 382 and 383 Companies Act 2006 in the financial year in which the cause of action arises;
(c) any partnership which would, if it were a body corporate, meet the qualifying conditions for a small company under section 382 Companies Act 2006 in the financial year in which the cause of action arises.”’
This new clause seeks to give small businesses greater legal protections against the mis-selling of financial services products.
New clause 12—Pre-commencement impact assessment of leaving the EU Customs Union—
“(1) No Minister of the Crown or public authority may appoint a day for the commencement of any provision of this Act until a Minister of the Crown has laid before the House of Commons an impact assessment of—
(a) disapplying EU rules; and
(b) applying rules different from those of the EU
as a consequence of any provision of this Act.
(2) A review under this section must consider the effects of the changes on—
(a) business investment,
(b) employment,
(c) productivity,
(d) inflation,
(e) financial stability, and
(f) financial liquidity.
(3) A review under this section must consider the effects in the current and each of the subsequent ten financial years.
(4) The review must also estimate whether these effects are likely to have been different in the following scenarios—
(a) if the UK had left the EU withdrawal transition period without a negotiated comprehensive free trade agreement, or
(b) if the UK had left the EU withdrawal transition period with a negotiated agreement, and remained in the single market and customs union.
(5) The review must also estimate the effects on the changes if the UK signs a free trade agreement with the United States.
(6) In this section—
‘parts of the United Kingdom’ means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland; and
‘regions of England’ has the same meaning as that used by the Office for National Statistics.”
This new clause would require the Government to produce an impact assessment before disapplying EU rules or applying those different to those of the EU; and comparing such with various scenarios of UK-EU relations.
New clause 13—Review of Impact of Scottish National Investment Bank Powers—
“(1) The Chancellor of the Exchequer must review the effect of the use of the powers in this Act in Scotland and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on—
(a) business investment,
(b) employment,
(c) productivity,
(d) inflation,
(e) financial stability, and
(f) financial liquidity.
(3) The review must also estimate the effects on the changes in the event of each of the following—
(a) the Scottish Government is given no new financial powers with respect to carrying over reserves between financial years,
(b) the Scottish Government is able to carry over greater reserves between financial years for use by the Scottish National Investment Bank.
(4) The review must under subparagraph 4(b) consider the effect of raising the reserve limit by—
(a) £100 million,
(b) £250 million,
(c) £500 million, and
(d) £1,000 million.”
This new clause requires a review of the impact of providing Scottish Government powers to allow the SNIB to carry over reserves between financial years beyond its current £100m limit.
New clause 14—Application of money laundering regulations to overseas trustees: review of effect on tax revenues—
“(1) The Chancellor of the Exchequer must review the effects on tax revenues of section 31 and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) The review under sub-paragraph (1) must consider—
(a) the expected change in corporation and income tax paid attributable to the provisions in this Schedule; and
(b) an estimate of any change attributable to the provisions of section 31 in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.
(3) The review must under subparagraph (2)(b) consider taxes payable by the owners and employees of Scottish Limited Partnerships.”
This new clause would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of section 31, and in particular on the taxes payable by owners and employees of Scottish Limited Partnerships.
New clause 15—Parliamentary scrutiny of FCA provisions—
“Any provision made by the Financial Conduct Authority under this Act may not be made unless a draft of the provision has been laid before and approved by a resolution of the House of Commons.”
This new clause subjects FCA provisions under this Act to the affirmative scrutiny procedure in the House of Commons.
New clause 16—Scrutiny of FCA Powers by committees—
“(1) No provision may be made by the Financial Conduct Authority under this Act unless the conditions in subsection (2) are satisfied.
(2) The conditions are that—
(a) a new statutory committee comprising Members of the House of Commons has been established to scrutinise financial regulation, and
(b) a new statutory committee comprising Members of the House of Lords has been established to scrutinise financial regulation.
(3) The Treasury must, by regulations, make provision for and about those committees.
(4) Those regulations must provide that the committees have at least as much power as the relevant committees of the European Union.”
This new clause requires statutory financial regulation scrutiny committees to be established before the FCA can make provisions under this Bill.
New clause 17—Review of impact of Act on UK meeting Paris climate change commitments—
“The Chancellor of the Exchequer must conduct an assessment of the impact of this Act on the UK meeting its Paris climate change commitments, and lay it before the House of Commons within six months of the day on which this Act receives Royal Assent.”
This new clause would require the Chancellor of the Exchequer to review the impact of the Bill on the UK meeting its Paris climate change commitments.
New clause 18—Review of impact of Act on UK meeting UN Sustainable Development Goals—
“The Chancellor of the Exchequer must conduct an assessment of the impact of this Act on the UK meeting the UN Sustainable Development Goals, and lay it before the House of Commons within six months of the day on which this Act receives Royal Assent.”
This new clause would require the Chancellor of the Exchequer to review the impact of the Bill on the UK meeting the UN Sustainable Development Goals.
New clause 19—Money laundering and overseas trustees: review—
“(1) The Treasury must, within six months of this Act being passed, prepare, publish and lay before Parliament a report on the effects on money laundering of the provisions in section 31 of this Act.
(2) The report must address—
(a) the anticipated change to the volume of money laundering attributable to the provisions of section 31; and
(b) alleged money laundering involving overseas trusts by the owners and employees of Scottish Limited Partnerships.”
This new clause would require the Treasury to review the effects on money laundering of the provisions in section 31 of this Act, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish Limited Partnerships.
New clause 20—Regulatory divergence from the EU in financial services: Annual review—
“(1) The Treasury must prepare, publish and lay before Parliament an annual review of the impact of regulatory divergence in financial services from the European Union.
(2) Each annual review must consider the estimated impact of regulatory divergence in financial services in the current financial year, and for the ten subsequent financial years, on the following matters—
(a) business investment,
(b) employment,
(c) productivity,
(d) inflation,
(e) financial stability, and
(f) financial liquidity.
in each English region, and in Scotland, Wales and Northern Ireland.
(3) Each report must compare the analysis in subsection (2) to an estimate based on the following hypothetical scenarios—
(a) that the UK leaves the EU withdrawal transition period without a negotiated comprehensive free trade agreement;
(b) that the UK leaves the EU withdrawal transition period with a negotiated agreement, and remains in the single market and customs union;
(c) that the UK leaves the EU withdrawal transition period with a negotiated comprehensive free trade agreement, and does not remain in the single market and customs union; and
(d) that the UK signs a comprehensive free trade agreement with the United States.
(4) The first annual report shall be published no later than 1 July 2021.”
This new clause requires a review of the impact of regulatory divergence from the European Union in financial services, which should make a comparison with various hypothetical trade deal scenarios.
New clause 21—Duty of care specification—
“(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After Section 1C insert—
‘1CA Duty of care specification
(1) In securing an appropriate degree of protection for consumers, the FCA must ensure authorised persons carrying out regulated activities are acting with a duty of care to all consumers.
(2) Matters the FCA should consider when drafting duty of care rules include, but are not limited to—
(a) the duties of authorised persons to act honestly, fairly and professionally in accordance with the best interest of their consumers;
(b) the duties of authorised persons to manage conflicts of interest fairly, both between themselves and their clients, and between clients;
(c) the extent to which the duties of authorised persons entail an ethical commitment not merely compliance with rules;
(d) that the duties must be owned by senior managers who would be accountable for their individual firm’s approach.’”
This new clause would mean that the FCA would need to ensure that financial services providers are acting with a duty of care to act in the best interests of all consumers.
New clause 22—Extension of the Breathing Space and Mental Health Crisis Moratorium—
‘(1) The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 shall be amended as follows.
(2) In section 1(2), for “4th May 2021” substitute “31st January 2021”.
(3) In section 26(2), for “60 days” substitute “12 months”.’
This new clause would bring forward the start date of the Debt Respite Scheme and extend the duration of the Breathing Space Moratorium from 60 days to 12 months.
New clause 23—Impact of COVID-19 on the Debt Respite Scheme: Ministerial report—
“(1) The Treasury must prepare and publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme.
(2) The report must include—
(a) a statement on the extent to which changes to levels of household debt caused by the COVID-19 pandemic will affect the usage and operation of the Debt Respite Scheme;
(b) a statement on the resilience of UK households to future pandemics and other financial shocks, and how these would affect the usage and operation of the Debt Respite Scheme; and
(c) consideration of proposals for the incorporation of a no-interest loan scheme into the Debt Respite Scheme for financially vulnerable individuals affected by the COVID-19 pandemic.
(3) The report must be laid before Parliament no later than 28 February 2021.”
This new clause would require the Treasury to publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme, including consideration of a proposal for the incorporation of a no-interest loan scheme into the Debt Respite Scheme.
New clause 24—Mortgage contracts: regulation of management and ownership—
‘(1) Article 61 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 shall be amended as follows.
(2) After paragraph (2), insert—
“(2A) Managing a regulated mortgage contract is also a specified kind of activity.
(2B) Owning a regulated mortgage contract is also a specified kind of activity.”
(3) For sub-sub-paragraphs (3)(a)(ii) and (3)(a)(iii) substitute—
“(ii) the contract provides for the obligation of the borrower to repay to be secured by a legal mortgage of land (other than timeshare accommodation) in the United Kingdom;
(iii) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling.”
(4) After sub-paragraph (3)(c), insert—
“(d) ‘managing’ a regulated mortgage contract means having the power to exercise or to control the exercise of any of the rights of a lender under a regulated mortgage contract.
(e) ‘owning’ a regulated mortgage contract means holding the legal title to a regulated mortgage contract or to own beneficially the rights of the lender under a regulated mortgage contract.”
(5) For paragraph (4), substitute—
“(4) For the purposes of sub-paragraph (3)(a)—
(a) ‘mortgage’ includes charge and (in Scotland) a heritable security;
(b) the area of any land which comprises a building or other structure containing two or more storeys is to be taken to be the aggregate of the floor areas of each of those storeys; and
(c) ‘timeshare accommodation’ has the meaning given by section 1 of the Timeshare Act 1992(c).”’
This new clause would require the regulation of the ‘management’ and ‘ownership’ of a regulated mortgage contract.
New clause 25—Standard Variable Rates: Cap on charges for Mortgage Prisoners—
“(7) The FCA must make rules by virtue of subsection (1) in relation to introducing a cap on the interest rates charged to mortgage prisoners in relation to regulated mortgage contracts with a view to securing an appropriate degree of protection for consumers.
(8) In subsection (7) ‘mortgage prisoner’ means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following type of firms—
(a) inactive lenders: firms authorised for mortgage lending that are no longer lending; and
(b) unregulated entities: firms not authorised for mortgage lending.
(9) The rules made by the FCA under subsection (7) must set the level of the cap on the ‘Standard Variable Rate’ at a level no more than 2 percentage points above the Bank of England base rate.
(10) In subsection (9) ‘Standard Variable Rate’ means the variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.
(11) The FCA must ensure any rules that it is required to make as a result of the amendment made by subsection (7) are made not later than 31st July 2021.”
This new clause would require the FCA to introduce a cap on the Standard Variable Rates charged to consumers who cannot switch to a different lender because of their characteristics and who have a regulated mortgage contract with either an inactive lender or an unregulated entity.
New clause 26—Conditions for the transfer of a regulated mortgage contract—
“(1) A regulated mortgage contract shall not be transferred without the written consent of the borrower.
(2) When seeking consent from either an existing or a new borrower the lender must provide a statement to the borrower containing sufficient information in order for them to make an informed decision.
(3) The statement provided pursuant to subsection (2) must be approved in advance by the Financial Conduct Authority and shall include—
(a) a clear explanation of the implications in terms of the interest rates which will be offered to the borrower including details of the policies and procedures which will apply for the setting of mortgage interest rates and for the making of repayments if the transfer takes place;
(b) how the transfer might affect the borrower;
(c) the name and address of the intended transferee, and of any holding company applicable;
(d) the relationship, if any, between the lender and the transferee;
(e) a description of the intended transferee and of its business, including how long it has been in operation, and details of its involvement in the management of mortgages; and
(f) confirmation that in the absence of a specific consent the existing arrangements will continue to apply.
(4) Each borrower shall be approached individually and shall be given a reasonable time within which to give or decline to give their consent.
(5) In this section, ‘regulated mortgage contract’ has the meaning given by article 61(3) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.”
This new clause would require the written consent of the borrower for the transfer of a regulated mortgage contract and require lenders to provide specified information to borrowers when seeking this consent and for this statement to be approved in advance by the FCA.
New clause 30—Offence of facilitation of or failure to prevent financial crime (No. 2)—
“(1) A financial services company commits an offence if it—
(a) facilitates, aids or abets a relevant offence;
(b) does not take all reasonable steps to prevent the commissioning of a relevant offence.
(2) A financial services company guilty of an offence under this section shall be liable—
(a) on conviction on indictment, to a fine;
(b) on summary conviction in England and Wales, to a fine;
(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.
(3) For the purposes of this section—
‘financial services company’ means any person, including a body of persons corporate or unincorporated, authorised by or registered with the Financial Conduct Authority’;
‘relevant offence’ means—
(a) fraud, as defined in the Fraud Act 2006;
(b) false accounting, as defined in the Theft Act 1968;
(c) any offence under the following sections of the Proceeds of Crime Act 2002;
(d) tax evasion;
(e) an offence under Part 7 of the Financial Services Act 2012; and
(f) insider dealing, as defined in the Criminal Justice Act 1993.”
This new clause would create an offence in cases where financial services companies facilitate or fail to prevent financial crime.
Government amendment 15.
Amendment 13, in clause 33, page 39, line 37, at end insert—
“(c) the successor account must bear, in each financial year, at least the same level of bonus as the mature account before maturation.”
This amendment would ensure customers do not lose any bonus should their funds be moved from a matured account into a new one.
Amendment 14, in clause 33, page 39, line 37, at end insert—
“(7) Regulations under sub-paragraph (2) may only be made if the conditions in sub-paragraph (8) are met.
(8) The conditions referred to in sub-paragraph (7) are—
(a) There must be an account available to any affected customer which provides at least as generous a bonus structure as the matured account.
(b) The customer must have been successfully contacted by a relevant Department or public body.
(c) The customer must have been given full and accessible information on the effects of changing account.”
This amendment would ensure customers are contacted and informed before their funds are transferred.
Amendment 4, in clause 37, page 44, line 9, at end insert—
“(c) after subparagraph (2) insert—
(2A) A person may not be appointed as chief executive under paragraph 2(2)(b) unless they have the consent of the Treasury Committee of the House of Commons.”
This amendment would require a candidate for the position of chief executive of the FCA to receive the consent of the Treasury Committee for their appointment.
Amendment 3, in clause 37, page 44, line 14, at end insert—
“(2C) A person may not be appointed as chief executive under paragraph 2(2)(b) until the Treasury has prepared and published a report on the effectiveness of the FCA under the tenure of the previous chief executive.”
This amendment would require the Treasury to prepare and publish a report on the effectiveness of the previous chief executive in advance of the appointment of a new chief executive.
Government amendments 16 to 21.
Government new schedule 1—Forfeiture of money: electronic money institutions and payment institutions.
Government amendment 22.
Government amendment 23.
Amendment 5, in schedule 2, page 60, line 18, at end insert—
“(f) impose requirements relating to the publication of quarterly statements on portfolio holdings.”
This amendment would allow the FCA to impose requirements on investment firms to publish quarterly statements on their portfolio holdings.
Amendment 6, in schedule 2, page 60, line 18, at end insert—
“(3A) General rules made for the purpose of subsection (1) must impose requirements relating to the publication of quarterly statements on portfolio holdings.”
This amendment would require the FCA to impose requirements on investment firms to publish quarterly statements on their portfolio holdings.
Government amendments 24 to 26.
Amendment 1, in schedule 2, page 63, line 5, at end insert—
“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.
Amendment 7, in schedule 2, page 63, line 5, at end insert—
“(ba) the promotion of ethical investments with reference to the judgements of the International Court of Justice or the High Court of England and Wales concerning genocide under Article II of the United Nations Convention on the Prevention and Punishment of the Crime of Genocide, and findings of genocide or ethnic cleansing by a United Nations-mandated investigation.”
This amendment would require the FCA, when making Part 9C rules for investment firms, to have regard to findings of genocide by the courts and UN-mandated investigations.
Amendment 8, in schedule 2, page 63, line 5, at end insert—
“(ba) the likely effect of the rules on trade frictions between the UK and EU, and”.
This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before Part 9C rules are taken.
Amendment 9, in schedule 2, page 63, line 5, at end insert—
“(ba) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.
This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before Part 9C rules are taken.
Amendment 10, in schedule 2, page 79, line 25, after “activities” insert
“in the UK and internationally”.
This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.
Amendment 2, in schedule 3, page 79, line 29, at end insert—
“(ca) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.
Amendment 11, in schedule 3, page 79, line 29, at end insert—
“(ca) the likely effect of the rules on trade frictions between the UK and EU, and”.
This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before CRR rules are taken.
Amendment 12, in schedule 3, page 79, line 29, at end insert—
“(ca) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.
This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before CRR rules are taken.
Government amendments 27 to 31.
John Glen
Our financial services sector is critical to our national effort to recover from the impacts of covid-19 and move towards a resilient, open and sustainable future for the UK economy. The Bill is the next step in a process to take back control of our financial services legislation, having left the European Union and come to the end of the transition period.
There are a large number of amendments to address, so I will speak at some length, but hopefully as succinctly as possible. Let me start with the 20 new clauses and amendments tabled in my name, which do four things. I will first address new clauses 27 and 28, new schedule 1 and amendments 16 to 20. I hope that the right hon. Member for Wolverhampton South East (Mr McFadden) will be pleased to see this set of new clauses and amendments, which have been tabled in response to an issue that he raised in Committee.
The Government remain committed to supporting the FinTech sector. The UK is widely considered to be a leading market—probably the leading market—for starting and growing a FinTech firm, and I am proud of that reputation. It has recently become clear that provisions in the Proceeds of Crime Act 2002 are creating challenges for some types of smaller firms known as e-money institutions and payment institutions. These institutions, which include industry leaders such as Revolut, Worldpay and TransferWise, have experienced significant growth over recent years. Currently, they need to submit a defence against money laundering request—which I shall refer to as a DAML from now on—to the National Crime Agency, to seek consent before proceeding with any transaction involving criminal property, however small.
John Glen
I will not on this occasion, if the hon. Gentleman does not mind, because I need to make progress.
In the context that I just outlined, e-money and payment institutions are subject to greater bureaucracy than banks and building societies, which benefit from a £250 threshold amount, under which, in certain circumstances, they do not need to submit a DAML and can proceed with the transaction. E-money and payment institutions must submit a large number of DAML requests for low-value transactions, which are generally of extremely limited use to law enforcement. Processing these requests consumes law enforcement resource, as well as placing a disproportionate burden on these firms, so the amendment equalises the treatment between banks and payment and e-money institutions.
Alongside this change, new clause 28 amends the scope of account freezing and forfeiture powers in the Proceeds of Crime Act and the Anti-terrorism, Crime and Security Act 2001 to include accounts held at payment and e-money institutions. That will ensure that law enforcement are able quickly and effectively to freeze and forfeit the proceeds of crime and terrorist property when held in payment and e-money institution accounts. I hope that, given this, the Opposition will consider withdrawing new clause 6, which has a similar purpose. I am grateful to the right hon. Gentleman for his co-operation on this matter.
Jim Shannon
I want to ask this question because it is very important. We have had tremendous difficulties in Northern Ireland with paramilitaries and money laundering. I am just wondering, in the context of the legislation to which the Minister has just referred and money laundering in particular—we have this in my constituency of Strangford and across the whole of Northern Ireland—what discussions has he had with the police and those in the Northern Ireland Assembly to ensure that loyalist paramilitaries and republican paramilitaries, who are really criminals at the end of the day, are stopped from using that money? Will that be able to be stopped in Northern Ireland if this legislation goes through?
John Glen
I thank the hon. Gentleman for his point. It really does stray beyond the provisions of this particular amendment. He makes an important point, but it is not one that I can address at this point. I would be very happy to write to him to answer his question more appropriately.
I shall now turn to the remaining amendments in my name, which ensure that the powers that the Prudential Regulation Authority and the Financial Conduct Authority have over holding companies function as intended. Amendments 25, 26 and 27 enable the PRA and the FCA to make rules directly over holding companies to void employment contracts and require recovery of remuneration paid to individuals when rules prohibiting them from being paid in a certain way are breached. This is important because, as a result of the measures brought forward in this Bill, responsibility for ensuring compliance with a banking or investment group’s capital requirements is moving from its operating companies to its holding company. This amendment ensures that the regulator can enforce breaches of the rules at the level at which they are set.
Amendments 15, 28, 29, 30 and 31 are a set of relatively small amendments that ensure that the PRA has the full suite of enforcement tools at its disposal for the supervisory regime over holding companies. Amendment 24 is a technical drafting point. Amendments 22 and 23 are clarificatory amendments, which are necessary to ensure that the investment firm’s prudential regime applies to the correct set of firms and does not have extraterritorial effect. I know that this is an important point for my hon. Friend the Member for Hitchin and Harpenden (Bim Afolami). I thank him for his work on this and hope that he will welcome these amendments.
I shall now turn to the other amendments that have been tabled by Members of this House. First, there are a number of amendments that relate to criminality and money laundering. New clause 4 and new clause 30 would create a new criminal offence for FCA-regulated persons of facilitating and of failing to prevent economic crime. This is an important and complex topic, so I will seek to address it in detail.
The Government have taken significant action to improve corporate governance and culture in the financial services industry. We introduced the new senior managers and certification regime, which enables the FCA more easily to take action against the responsible senior manager where there has been a failure in a firm’s financial crime systems and controls. Separately, the Government have recently strengthened the anti-money laundering requirements on financial services firms.
In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. Unfortunately, the findings were inconclusive and, as a result, the Government have tasked the Law Commission to conduct an expert review on this issue to report by the end of this year. That will ensure a more comprehensive understanding of any issues with current economic crime law, as well as the implications of any potential options if reform is considered necessary. Before any broader new “failure to prevent” defence for economic crime is introduced, there needs to be strong evidence to support it, as there was when similar bribery and tax evasion offences introduced in 2010 and 2017 respectively took place. A new offence will also need to be designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business.
The proposed new offences in this amendment would lead to a discrepancy in treatment between FCA-regulated businesses and other businesses under criminal law. The 2017 call for evidence did not provide any evidence to suggest financial services businesses should be specifically targeted with a new offence. Indeed, many of the examples provided related to businesses in other sectors.
Kevin Hollinrake (Thirsk and Malton) (Con)
In terms of the corporate offence of failing to prevent economic crime, the Minister asked for evidence on that, but there is a wealth of evidence that the FCA is not holding either corporations or individuals to account for some egregious behaviour, particularly in the banking system and many other parts of corporate life. We are seeing fraud, but £9 billion of fines in the US in a 10-year period and only £260 million in the UK. Is that not proof alone that we need legislation in this area?
John Glen
It is easy to point to headline differences in rates of fines, but it is quite different to intervene with a new piece of legislation that is fit for purpose. That is why I am absolutely clear that the call for evidence this year will gather that evidence—I am sure that my hon. Friend will be keen to submit his evidence to that—and, in due course, we will look at it and examine what the implications are. However, I am not suggesting from the Dispatch Box that everything is perfect with respect to regulation, and of course, there are regulatory failures from time to time and criminal activity. The question is what the most appropriate legislative response is.
I turn to new clause 14, which would add a requirement for the Government to report on the effect of clause 31 on tax revenues. This does not reflect the effect of the provision that we have included in the Bill. The Bill provision merely ensures the continuation of, and the ability to vary in future, the original powers assigned to Her Majesty’s Revenue and Customs with respect to registration of overseas trusts. It does not make any change to taxes.
Similarly, it is not necessary to introduce a report on the impact on money laundering of clause 31, as proposed by new clause 19. Existing legislation already requires the Treasury to carry out a review of its existing provisions within money-laundering regulations and publish a report setting out the conclusions of its review by June 2022. This wider review will provide a more meaningful evaluation than the one envisaged in the amendment.
Amendment 7 raises a very important issue. This amendment would require the FCA to “have regard” to the promotion of ethical investments with reference to findings of genocide by the High Court and the International Court of Justice when making rules for the investment firm prudential regime. While I am extremely sympathetic to the issue raised by Members on both sides of the House, including the hon. Member for Bethnal Green and Bow (Rushanara Ali) and my right hon. Friend the Member for Chingford and Woodford Green (Sir Iain Duncan Smith), this Bill is not the right place to address the issue. This amendment would require the FCA to make political choices about whether to associate itself and its rules with countries that are guilty of genocide or ethnic cleansing. These important decisions on UK foreign policy are for Government to take and not an independent financial services regulator.
I will now address a number of amendments that seek to bring new activities—
Sir Iain Duncan Smith (Chingford and Woodford Green) (Con)
Will the Minister give way?
Sir Iain Duncan Smith
I am glad he gave me time to get this awful mask off.
I understand fully my hon. Friend’s arguments, and I will come to that in a second when I have an opportunity to catch Madam Deputy Speaker’s eye, but on the point he is making, I simply ask him this question: can he conceive that any UK Government would ever authorise trade arrangements on a special basis with any country guilty of genocide?
John Glen
My right hon. Friend has raised this matter in the context of his raising it in a number of other regards with respect to the Trade Bill, and it would obviously be appropriate for my ministerial colleagues in that Department to address it in that context. Today, it is my responsibility to deal with it in the context of financial services regulation, as I think I have done, but I do not want to deny the grave significance of the matter that he is raising, and indeed, my right hon. Friend the Member for Sutton Coldfield (Mr Mitchell) has raised it with me, too. Obviously, these are complex matters on which others will respond in due course.
I will now address a number of amendments that seek to bring new activities into FCA regulation. New clause 7 relates to “buy now, pay later” products and would require the Treasury to bring those products and other interest-free credit products into the scope of financial services regulation. Those products can play an important role by providing a lower-cost alternative for people making purchases, especially larger items. As an interest-free credit product, “buy now, pay later” is inherently lower-risk than other forms of borrowing, and can be a useful part of the toolkit for managing personal finances and tackling financial exclusion.
Kevin Hollinrake
Yesterday I was looking at a document written by a former lead analyst in that very market—someone who used to work for PIMCO. He very clearly sets out that the proposed change would have a transformational effect on tens of thousands of mortgage prisoners who will not be helped by any other measure that could be put in place. He says quite clearly:
“Introducing an SVR cap on closed, non-lending books would not disrupt the residential mortgage-backed security market”.
That is a direct contradiction of my hon. Friend’s position.
John Glen
Indeed, Martin Lewis, who does some excellent work in this regard and whom I met on this topic recently, looked at this very matter—he commissioned some work from the London School of Economics to look into it—and recommended that we should not take this cap on the SVR. There will always be a variety of views, but I have set out very clearly why I think this is the right position.
Dame Angela Eagle (Wallasey) (Lab)
The Minister is full of reasons, as Treasury Ministers always are, for not accepting amendments or new clauses that people have tabled to solve problems. Does he appreciate the frustration that mortgage prisoners and those who are trying to do something about financial crime feel when they hear Ministers giving us all the technical reasons why things cannot be done but not really proceeding with much alacrity to solve the problems that we raise, albeit not necessarily in the correct format?
John Glen
I am very happy to respond to that. That is why, over the last three years, I have engaged with the problem and worked with the FCA to change the lending criteria so that an estimated 125,000 of the 250,000 mortgage prisoners have been able to switch to more affordable mortgages if they are not taking on lending and are not in arrears. This a complex problem. I am still focused on the 55,000 that we estimate are in that difficult position. I will continue to work with stakeholders and industry representatives to find solutions, working closely with the FCA, but that does not permit me simply to allow any intervention. I did start my remarks with a concession on something that I thought was constructive.
Let me move on to new clause 26, which would require a lender to seek a borrower’s permission before transferring their loan. That would give rise to significant financial stability concerns, especially if a firm was entering liquidation, since it would prevent the timely transfer of the mortgage book. Selling a mortgage book can also represent a sensible way for a lender to manage its balance sheet and does not change the terms or conditions of a borrower’s mortgage contract.
I turn to a number of amendments relating to EU exit and financial services. New clause 12 would require the Treasury to assess the impact of adopting different rules from those of the EU through the Bill. It is right that the UK is able to adopt rules that best suit our own markets. The Government have published an impact assessment alongside the Bill, so the new clause is unnecessary.
Sir Edward Leigh (Gainsborough) (Con)
There is one overseas territory that is intimately connected to the EU: Gibraltar, which values its financial independence. I would just like to use this opportunity—I am sure the Minister will not mind commenting—to reassure the people of Gibraltar that their financial services are absolutely safe under this Government and this Bill.
John Glen
I am very happy to do that. Indeed, the Bill makes provision to ensure that there is ongoing certainty for financial services—particularly the insurance industry, which is so significant to the Gibraltarian economy.
New clause 20 would require the Government to review the cost of divergence from EU rules. I just do not accept that characterisation. Regulatory regimes are not static. There are a lot of myths around this area of divergence. Rules evolve all the time. Where we make changes to our frameworks as they stand today, those will be guided by our continued commitment to the highest international standards and by what is right for the UK’s complex and highly developed markets, to support our world-class environment for doing business. The Bill is the first part of that journey.
New clause 8 would require the Government essentially to report on the status of the EU’s considerations about UK equivalence. That is an autonomous process for the EU, and therefore that is not something that the Government can agree to do. The Chancellor recently announced a package of equivalence decisions—17 decisions out of the 30 that we had to make for the EU—and I will keep the House updated on the UK’s approach to equivalence, just as I did throughout the transition period.
I turn to new clauses 15 and 16, and amendments 3 and 4, which relate to how the regulators’ actions under the Bill will be scrutinised by Parliament. The UK’s regulators are internationally renowned as leaders in financial services regulation, and the Government believe that it is right that powers to implement often highly complex rules are delegated to the bodies with the appropriate technical expertise.
The FCA is already accountable to the Treasury, Parliament and the public. There is a statutory requirement for the FCA’s annual report and accounts for the financial year to be laid before Parliament by the Treasury, and a requirement to hold an annual public meeting at which the annual report can be discussed. There is currently nothing preventing a Select Committee of either House from reviewing the activities of the FCA at an inquiry, taking evidence, calling witnesses and reporting with recommendations. The Treasury recently published a consultation document on the review into the future regulatory framework for financial services, which seeks to achieve the right split of responsibilities between Parliament, Government and the regulators, now that we have left the EU. That is a significant undertaking that we must get right, and I look forward to continuing to engage with Members as part of that review.
I have spoken at length about a number of topics that are not directly addressed in the Bill. I will now address amendments relating to some of the measures that make up the Bill itself. I have already said that the prudential measures contain accountability frameworks, and I will begin by addressing a number of amendments that seek to add additional elements to that framework. As I said to the Public Bill Committee, amendments 1 and 2, along with amendments 9 and 12, all add considerations relating to climate change to the accountability frameworks. They are not necessary, as the Bill grants the Treasury a power to specify further matters to the accountability framework at a later date. I can assure Members across the House that the Treasury will carefully consider adding climate change as an issue to which the regulator should have regard, in the future. However, any such addition needs careful consideration and consultation on how it can be best framed. Therefore, the Government cannot support these amendments.
Amendments 8 and 11 would require the FCA and the PRA to have regard to the impact of their prudential rules on frictionless trade with the EU. Similarly, amendment 10 would require the PRA to have regard to the UK’s relative standing when making rules on capital requirements. These amendments are unnecessary. The accountability framework introduced by the Bill already requires the regulators to consider the impact of their rules on financial services equivalence. That is the main mechanism for financial services relationships between the UK and all overseas jurisdictions, not only the EU, and the Bill already requires the PRA to consider the UK’s standing in relation to other countries and territories.
Amendments 13 and 14 relate to the Help to Save scheme. We expect the majority of account holders to make an active decision about where they want to transfer their money where their accounts mature. However, I recognise that some individuals will become disengaged from their accounts, and before I turn to the specific amendments, I want to update the House on the Government’s plans for supporting these disengaged customers. Successor accounts, which are enabled by this clause, are one of the options that have been under consideration. Having carefully assessed the options, the Government have decided not to use the power provided by this clause at this point. This is primarily because of the operational issues, which mean that we would not be able to guarantee that every customer would be able to have a successor account opened for them automatically. I was therefore unable to conclude that this approach represented value for money. Instead, the Government propose to support customers who do not provide specific instructions for the transfer of their money, by ensuring that they receive their funds into their nominated bank account—the account into which they already receive their bonus payments. If the bonus payments are paid into that account, the principal amount will revert to that account. This will ensure that disengaged customers will be reunited with their savings and bonus payments.
Amendments 13 and 14 would, in effect, extend the four-year term of the Help to Save scheme by providing a guaranteed bonus for the successor account. The aim of Help to Save is to kick-start a regular long-term savings habit and encourage people to continue to save via mainstream savings accounts. The Government’s view is that a four-year Help to Save period is sufficient to achieve this objective. Amendment 14 also seeks to mandate the contacting of customers regarding the transfer of balances to a successor account. This amendment is unnecessary, as all customers will be contacted ahead of their accounts maturing, to encourage them to engage with their accounts and to provide instructions on where to transfer their funds.
New clause 2 would require the Treasury to publish a report on the anticipated use of the debt respite scheme. The expected demand and take-up of both elements of the debt respite scheme have been quantified to the extent possible at this stage and published in the appropriate impact assessments. I share right hon. and hon. Members’ determination that these schemes should work for those who need them. The Government will of course closely monitor both schemes’ usage and consider the impacts of covid-19 and the wider economic recovery on them. I am afraid that producing a report within six months evaluating the impact of changes made by clause 32 on levels of debt across the UK, as proposed by new clause 9, is not possible, as the regulations establishing a statutory debt repayment plan are unlikely to have been made and implemented by that point. I can assure Members that the Government are committed to properly evaluating both the statutory debt repayment plan and the breathing space after their commencement.
Mr Deputy Speaker (Mr Nigel Evans)
Apologies to those who failed to get in because of time constraint. I call the Minister.
John Glen
Thank you, Mr Deputy Speaker; and I thank all Members who have tabled amendments and spoken to them today. The Bill deals with a number of important issues, and this has been reflected in the wide-ranging contributions that we have heard today and over the last couple of months at various stages. I will take this opportunity to add to my earlier remarks and respond to some of the points raised in the contributions this afternoon.
On economic crime, I have already set out a number of actions that the Government have taken. On the specific issue of whether corporate criminal liability law should be reformed, the Law Commission is undertaking an expert review and we should await its outcome, but I note the range of views expressed today. We have discussed amendments that would bring additional activities into FCA regulation, including “buy now, pay later” products. I have heard the points raised on this matter today, particularly by my hon. Friend the Member for Blackpool North and Cleveleys (Paul Maynard), who gave a sensible, thoughtful and constructive analysis, but I believe that it is right to wait for the Woolard review.
On the question of equivalence and divergence, I have said before that there are some areas where the UK will want to take a different approach from the EU to better suit the UK market, and some areas where we will not. I do not accept the characterisation of divergence. Regulatory regimes are not static—they evolve—and it is right that regulators should adapt to them. We have heard about the relationship between the regulators, the Treasury and Parliament. Again, I look forward to continuing these conversations through the future regulatory framework review, which will be ongoing in the coming weeks and months.
We have discussed several amendments that would require the regulators to have regard to different objectives when implementing the prudential regimes provided for in the Bill. It is right that the regulators set the detailed rules implementing these regimes, as they have the right technical expertise. That has long been a principle by which our regulators have worked over the past 20 years. These regimes are vital, but I do not believe that regulators should be required to have regard to broader questions that are not so closely related to prudential standards.
Several of today’s amendments relate to issues not included in the Bill. I emphasise to the House once again that the Bill is just one part of the wider long- term strategy for financial services that will ensure that the UK financial services industry continues to be a global leader.
As is traditional at this stage of the Bill’s passage, I would like to take this opportunity to thank those who have contributed to its development and scrutiny. In particular, I thank the right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Erith and Thamesmead (Abena Oppong-Asare) on the Opposition Front Bench, as well as the hon. Members for Glasgow Central (Alison Thewliss) and for Aberdeen South (Stephen Flynn), for the care and attention that they have brought to scrutinising the Bill and the constructive way in which they have approached it. I thank the Public Bill Committee for its detailed engagement with the legislation, particularly the Chairs, my hon. Friend the Member for Shipley (Philip Davies) and the hon. Member for Ealing Central and Acton (Dr Huq).
The hon. Members for Walthamstow (Stella Creasy) and for Wallasey (Dame Angela Eagle) have provided thorough examination and important contributions on parts of the Bill, as has just been seen, and I congratulate the hon. Member for Wallasey on the recognition of her services to Parliament over nearly 29 years in the new year honours list. On this side of the House, my hon. Friends the Members for Basildon and Billericay (Mr Baron), for Bromley and Chislehurst (Sir Robert Neill) and for Hitchin and Harpenden (Bim Afolami), and others, have provided characteristically thorough and thoughtful contributions.
I am grateful to the many experts who gave evidence to the Committee, and I thank the Commons staff and Clerks, Kevin and Nick, who have managed the process so smoothly. Not least, I thank the Treasury officials, Alex Patel, Liz Cronin, Fred Newman, Catherine McCloskey and Tim Garbutt. I hope the House has found my—
Mr Deputy Speaker (Mr Nigel Evans)
Order. I am sorry to interrupt the Minister; I know he wanted to thank more people, but we will have to take that as read, because under the Order of the House of 9 November 2020 I must now put the Questions necessary to bring proceedings on consideration to a conclusion.
John Glen
I beg to move, That the Bill be now read the Third time.
I would like to build on what I was saying previously and thank all Members for their examination of this legislation since it was introduced in October. The thoroughness with which right hon. and hon. Members have undertaken this task only serves to underline the significance of the measures included within the Bill and the importance to the UK of the financial services industry.
As I set out on Second Reading, the financial services sector is fundamental to the UK’s economic strength. It contributed nearly £76 billion in tax receipts last year and it supports jobs across the country, two thirds of which are outside London, as well as providing vital services to people and businesses across the United Kingdom.
The Bill represents a key part of our wider approach to financial services regulation now that we have left the EU. Since its introduction, Members have clearly outlined their expectations that the UK maintains its position as a leading centre of global financial services, while also maintaining high regulatory standards and ensuring that the sector serves the needs of the people and businesses of the United Kingdom. I believe that this Bill will make an important contribution to that goal.
Let me briefly reiterate the three themes of the Bill. First, the Bill enhances the UK’s world-leading prudential standards and promotes financial stability through the implementation of a new tailored prudential regime for investment firms and through enabling the implementation of the Basel III standards. The Bill will also ensure that the FCA has appropriate powers to manage an orderly transition away from the LIBOR benchmark, providing stability and clarity to financial markets.
Secondly, the Bill promotes openness between the UK and international markets by simplifying the process for marketing overseas investment funds in the UK and by delivering on our commitment to provide long-term access between the UK and Gibraltar for financial services firms.
Finally, the Bill supports the maintenance of an effective financial services regulatory framework and sound capital markets. It does this through a range of measures, such as improving the functioning of the packaged retail and insurance-based investment products regulation and increasing penalties for market abuse.
As I said earlier, this is an important Bill. It is also a very technical one, so let me once more thank hon. Members for their valuable and insightful contributions to the scrutiny of this Bill at each stage of its passage. As I indicated earlier, it is important to note that this Bill marks the beginning of a process. It represents a necessary first step towards maintaining high standards and protecting financial stability now that we have left the European Union and the transition period has ended. The Bill is also a foundation for our wider vision for financial services in this country, as the Chancellor set out to this House in his speech on 9 November 2020.
Much of the future of UK financial services regulation will be the continuation of work we led while we were a member of the EU, and I reaffirm this Government’s commitment to the highest internationally agreed standards, which we recognise as a cornerstone of the industry’s reputation and success.
Although we remain committed to those standards, it is important to acknowledge that there are areas in which we will forge our own path and establish an approach better suited to the unique nature of the UK market. Having left and reached an agreement with the EU on the nature of our future relationship, the UK must now have the confidence to regulate our financial services sector in a way that works for us and best meets our needs and our constituents’ needs.
This Bill provides continuity and certainty to the UK financial services sector, demonstrating to it that the UK remains an attractive and stable environment for its global business.
John Glen
Main Page: John Glen (Conservative - Salisbury)Department Debates - View all John Glen's debates with the HM Treasury
Financial Services
John Glen ExcerptsMonday 26th April 2021
(3 years, 7 months ago)
Commons ChamberRead Full debate Financial Services Bill 2019-21 Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: Commons Consideration of Lords Amendments as at 26 April 2021 - (26 Apr 2021)
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021 (S.I., 2021, No. 392), dated 24 March 2021, a copy of which was laid before this House on 25 March, be approved.
This Government are committed to combating money laundering and terrorist financing and recognise the threat of economic crime to our financial system. Illicit finance risks damaging not only our national security, but our reputation as a global financial centre by undermining the integrity and stability of our markets and institutions.
While it is right that we stamp out the scourge of illicit finance for the benefit of the United Kingdom, it is also right that we do so because of our responsibilities to the wider world. When illicit finance flourishes, so does serious and organised crime, such as people and drug trafficking and terrorism. These are acts that have huge social and economic costs and, of course, cause unimaginable suffering. That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering while strengthening the response of the whole financial system to economic crime.
The bedrock of these efforts is the money laundering regulations. This is the legislative framework that sets out a number of requirements that businesses falling under its scope must take to combat money laundering and the financing of terrorism. These requirements include the need for firms to implement measures to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.
In addition, the regulations require financial institutions and other regulated sector businesses to carry out greater scrutiny or enhanced due diligence in respect of business relationships and transactions involving so-called high-risk third countries. These are nations that have been identified as having strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes, and that pose a significant threat to the UK’s financial system. The statutory instrument under discussion this evening amends the definition of a high-risk third country in the money laundering regulations.
Allow me to explain the background to some of these changes. At present, the definition of a “high-risk third country” in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 is linked to retained EU law and references the list of countries identified by the European Commission as high risk. This list was previously operated via EU law, which no longer has an effect in the UK. If our legislation is not amended, the list will become outdated and could leave the United Kingdom at risk from those operating in nations with poor money laundering and terrorist financing controls.
Furthermore, the United Kingdom will risk falling behind international standards set by the Financial Action Task Force or FATF. This instrument will therefore amend the money laundering regulations to remove references to the EU’s high-risk third countries list and insert a new list of countries identified in schedule 3ZA. This will be the UK’s new autonomous high-risk third countries list. It will mirror exactly the list of countries identified by the Financial Action Task Force as having strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes, and it will keep the UK in line with international standards.
The change that I have outlined will allow us to continue to protect businesses and the financial system from those who pose a significant threat, while ensuring that the United Kingdom remains at the forefront of global standards in combating money laundering and terrorist financing. I thank Members for their examination of this important piece of legislation, and hope that colleagues will join me in supporting it this evening.
John Glen
I thank the right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glenrothes (Peter Grant) for the points they raised. I shall try to address some of them. As I outlined earlier, the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations introduce a new autonomous high-risk third countries list, which will ensure that UK legislation to protect the financial system from money laundering and terrorist financing remains up to date.
The right hon. Gentleman raised a number of points. He first mentioned the FinCEN files, which are largely historic, but I will write to him about anything further I can on that. I met Spotlight on Corruption recently to be challenged on a number of aspects. He mentioned Companies House reform, on which work is ongoing, and there will be further announcements in due course.
The regulations represent the UK’s new approach to high-risk third countries. It will allow the UK to take its own view on which countries are high risk without referencing EU legislation and to remain in line with international standards in the fight against money laundering and terrorist financing. The UK is internationally recognised as having some of the strongest controls worldwide for tackling money laundering and terrorist financing.
Sir Geoffrey Clifton-Brown (The Cotswolds) (Con)
Who will be responsible for maintaining the list? Will it be Her Majesty’s Treasury? What will be the procedure to review it so that countries may come on to it and existing countries may come off it if they no longer meet the criteria?
John Glen
I thank my hon. Friend for his reasonable question about the updating of the list. The Financial Action Task Force meets three times a year to determine the countries identified on its public lists. As such, the UK’s new autonomous high-risk third countries list could be updated up to three times a year to mirror the decisions made by FATF. We will look at that carefully. FATF monitors the UK—indeed, it did a mutual evaluation of the UK in December 2018 and gave us one of the highest ever rankings—and constantly updates countries who are high risk around the world.
I will make a few points in response to the right hon. Member for Wolverhampton South East. In recent years, the Government have taken a number of actions to combat economic crime, including creating a new National Economic Crime Centre to co-ordinate the law enforcement response to economic crime, and passing the Criminal Finances Act 2017, which introduced new powers, including unexplained wealth orders and account freezing orders, and established the Office for Professional Body Anti-Money Laundering Supervision to improve the oversight of anti-money laundering compliance in the legal and accountancy sectors. In 2019, the Government and the private sector jointly published a landmark economic crime plan that outlines a comprehensive national response to economic crime such as fraud and money laundering, as mentioned by the right hon. Gentleman. It provides a collective articulation of 52 actions being taken in both the public and private sectors in the next three years to ensure that UK cannot be abused for economic crime.
The hon. Member for Glenrothes mentioned the Cayman Islands. As of the FATF plenary in February 2021, FATF collectively agreed to include the Cayman Islands in its list of jurisdictions under increased monitoring. As that is one of the FATF public lists that the UK autonomous list mirrors, the Cayman Islands will be included in the UK’s list of high-risk third countries. The outstanding issues that the Cayman Islands must address are outlined in FATF’s publicly available statement.
I hope that the House has found the debate informative and will join me in supporting this important step to ensure that we have an up-to-date framework to protect the financial system from money laundering and terrorist financing.
Question put and agreed to.
Business of the House (Today)
Ordered,
That, at this day’s sitting, the Speaker shall put the Question on the Motion in the name of Keir Starmer relating to the Health Protection (Coronavirus, International Travel) (England) (Amendment) (No.7) Regulations (SI, 2021, No. 150) not later than 90 minutes after the commencement of proceedings on the motion for this Order; the business on that Motion may be proceeded with at any hour, though opposed; and Standing Order No. 41A (Deferred divisions) shall not apply.—(David Duguid.)
Madam Deputy Speaker (Dame Rosie Winterton)
We will now have a two-minute suspension for cleaning.