Financial Services and Markets Bill [HL]

Lord Burns Excerpts

2nd reading
Monday 8th June 2026 Lords Chamber

[Lord Burns (CB)]

My Lords, this Bill is another example, I am afraid, of my past catching up with me. It is 27 years ago that I was asked to chair a Joint Select Committee of both Houses to scrutinise the draft Financial Services and Markets Bill that was introduced back then. The committee met for three months and published two reports. I believe the noble Lord, Lord Eatwell, is the only other member of the committee still in this House. That became the Financial Services and Markets Act 2000, and all the subsequent changes that have taken place, including in 2012, have been amendments to that Act. I also note my interests in this legislation as outlined in the register. I own shares in Banco Santander and Flagstone Group. Furthermore, I was chairman of Abbey National and then Santander UK from early 2002 until 2015.

It is worth recalling some of the factors that lay behind the need for the Bill back in 2000. The first, of course, was the decision by Chancellor Gordon Brown to remove banking supervision and regulation from the Bank of England and to transfer those responsibilities to the proposed Financial Services Authority. Secondly, this provided the opportunity to consolidate various financial regulatory bodies that had previously operated independently, including—and this is just the beginning of the list—the Building Societies Commission, the Securities and Investments Board, several self-regulating bodies and various ombudsman schemes. In fact, it is really quite astonishing to think back at how complicated and complex the arrangement was before the 2000 Act. Thirdly, there had been—as there always seem to be—problems with a number of financial institutions during the time I was Permanent Secretary, including the closure of BCCI, the collapse of Barings and some difficulties with smaller banks; before that, there had been the collapse of Barlow Clowes. So there were quite a lot of lessons to be learned, and the Bill aimed to put those into a comprehensive framework.

The committee agreed with the Government, and one of the significant issues that came up was that the appropriate approach to this legislation was that it should be principles based rather than rules based. Even then, the financial services industry was growing rapidly. The building societies were in the process of becoming banks, the banks were getting involved in the mortgage market, and a principles-based approach was seen as the most practical way to ensure that the regulatory process remained fresh and relevant as these changes progressed.

As explained in the Explanatory Notes, this approach involves a three-stage process, and it can make it look very complicated. Some of the issues we have already heard from the noble Baroness, Lady Neville-Rolfe, are the product of the way in which this was designed. It remains the case that Parliament sets the overall regulatory framework in primary legislation, including the regulator’s objectives. The second step is that the Treasury then sets the regulatory perimeter through secondary legislation, including specifying which activities are regulated and in what circumstances. The third step is that the PRA and the FCA operate as independent statutory bodies responsible for setting and enforcing the detailed rules for firms engaged in regulated activities.

Some of these issues about when and what should come to Parliament, what should be in delegated responsibilities and how far the regulators are allowed to set the rules are always going to overlap each other, and people will worry about them at various stages. But it is important to recognise, through the discussion and debates that will take place, that from the beginning this three-stage process has been in mind.

I believe the principles-based legislation has been effective for this fast-moving industry. However, achieving the right regulatory balance, as we have heard this afternoon already, is very challenging at any time. Sometimes, regulation becomes overly burdensome and the economy suffers. At other times, insufficient regulation can lead to consumer harm, detriment or the failure of firms. Lots of factors influence this balance, including external development, product innovation, the expectation of customers and the level of effective competition. Therefore, it is important to periodically review these various components of the principles-based approach, to assess their effectiveness and to determine whether any rebalancing is necessary.

I regard many of the changes proposed here as very sensible rebalancing of the factors involved. In the past, of course, rebalancing has happened on several occasions. Following the financial crisis, it became clear that banks’ capital requirements had been insufficient during the run-up to the crisis. It was demonstrated clearly in a subsequent FSA report into RBS. Banks had held too little capital against the complex products that they were dealing with, and many banks were overly reliant on the interbank market for funds, with lending overconcentrated in the real estate market. Subsequently, the FSA and the FCA rightly raised capital and liquidity requirements. The question is: did they change them by the right amount? Was it sufficient or was it excessive? At the time, of course, it was understandable—we had been through this very painful process—but the later evidence suggested to me that the response had been excessive. It contributed to a sharp reduction in bank lending to the private sector, particularly to SMEs. This in turn has had some substantial knock-on effects. Given the subsequent evidence, my view is that some rebalancing of the capital requirements is appropriate. The ring-fence banks should also be looked at to adjust the size of the ring fence around which they operate.

It is also important to recognise that the rapid growth of new products also led to underregulation of some products at times, leading to consumer detriment. Product details were not always clearly communicated to customers, as we would expect today, but this has to be seen against the huge success of the introduction of internet banking. It is also important to ensure that senior people working in the financial industry are fit and proper, but again the question is of balancing bureaucracy against—the question has been raised—a less onerous approach.

This is a dynamic system; getting the level of regulation right has to evolve over time, but it is never going to be a straightforward task. I regard this Bill as an important part of trying to move forward that rebalancing.