Financial Services and Markets Bill [HL]

Lord Davies of Brixton Excerpts

Committee stage
Monday 29th June 2026 Grand Committee

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Tyler. I had the equal pleasure of serving alongside her during her excellent chairing of the Financial Exclusion Committee.

As the noble Baroness rightly identified, since we published our report, financial exclusion—or a lack of financial inclusion—has persisted. She rightly identified the Government’s financial inclusion strategy. There are a number of good things in it, but I ask the Minister: why was it so light on the potential role that fintech, as well as broader technologies, could play in addressing some of the elements of financial exclusion? It was largely silent on those issues.

I shall speak to Amendment 104 and all the other amendments in my name in this group. Similarly, I suggest having a financial inclusion objective and detailed reporting requirements therein. We have the Financial Inclusion Commission, which has some excellent members, but financial exclusion persists.

It is right to have our financial services regulator further empowered to be the lightning rod and the focus for this whole question of financial inclusion. To talk about the principles again, the Government are keen on growth, but financial inclusion does not run counter to that growth or the international competitiveness objective. Financial inclusion is essential to it: enabling people to have financial services and be financially included is likely to increase digital inclusion and social inclusion, as employees become self-employed and the employed become economically active. I ask the Minister: are these things—enabling and empowering financial inclusion—not what any Government should be about?

I suggest a financial inclusion unit for the FCA, so that it can be a powerhouse for innovation and research and a real regulator and driving force for financial inclusion. When the Minister comes to respond, can he identify how financial inclusion has changed in the almost two years of the current Government? Is it not time for greater focus and effort on this most significant of issues?

In many ways, the most significant issue when it comes to financial services is enabling and, in reality, empowering everybody to have a fair go, and to become active and enabled in our economy and our society. Amendment 161 builds on this, but in the specific context of broadening data-sharing requirements—always on a consenting and empowering basis—to look again at what we can do with new technologies. Let us look at other sources of data such as rental history, which can be so helpful in enabling financial inclusion—but currently are far from happening, never mind becoming the norm—to support those millions of individuals. Where is innovation when it comes to financial inclusion? Does the Minister not agree that these amendments would enable the Government to have a human lead on these technologies, with a far greater chance of much greater financial inclusion for all citizens?

My final amendment goes to KYC, or what passes for it. In many ways, you can see this within financial inclusion, where all too often, in whichever context one considers it, “know your customer” means almost completely the reverse or nothing of the sort. Does the Minister not agree that it is time to look again to innovation and the technologies that can be deployed to give us effective KYC and AML? Or does he believe that, because one is able to put a gas bill in paper form in front of a financial services business, it shows just what an upstanding citizen you must be and gives all that is required on KYC and AML? It is so gravely in need of transformation. We have the tools and technologies to achieve this, which would also add to significant financial inclusion. I look forward to the Minister’s response.

[Lord Davies of Brixton (Lab)]

This is an important and interesting debate. I want to draw attention to and base my remarks on Amendment 95, which refers specifically to the poverty premium in insurance. This is a theme that runs across financial services. It perhaps does not get the attention it deserves, because one of the main reasons for financial exclusion is of course poverty, and poverty is clearly an issue where the Government have a clear and central responsibility.

In practice, the approach taken by the FCA has been to use the obligation for the consumer duty as the primary vehicle for dealing with the poverty premium. The FCA has directly linked the consumer duty to the poverty premium, with the argument that firms are required to deliver good outcomes for retail customers and ensure that products and services offer fair value. The FCA has not itself specifically tackled the poverty premium head on; in effect it has passed the responsibility to providers.

The most obvious manifestation of the poverty premium arises with premium finance, whereby people have to pay premiums by instalments over the year instead of paying a lump sum at the beginning of the year. The terms on which they are financed have been open to significant criticism. People think they are paying the contributions monthly but, in practice, someone lends them the money to pay the initial contribution and they repay that loan over the year. There is a widespread lack of understanding that, in fact, they have two contracts: the insurance contract and the loan contract. The terms of that loan contract have been called into question. Figures from the FCA suggest that about four-fifths of customers in financial difficulty use premium finance and that, in 2024, 60% of motor insurance customers and 41% of home insurance customers paid by instalments because they could not afford to pay annually. There is probably a series of people who fail to do the sums and just pay monthly because that looks easier.

The FCA has found that the cost of premium finance has fallen since 2022, and made it clear to firms that they are under a clear requirement to ensure that fair value is offered. There is a technical problem here in that, as well as the financial issues, with some forms of insurance there is an underwriting issue. It is possible to argue that someone who pays monthly is not in the same underwriting position as someone who pays yearly. It is very difficult to pin down that aspect of the issue. The FCA accepts that this poverty premium exists and believes that some of the premium finance provides a poor product. It has accepted that

“financial regulation cannot tackle financial exclusion or the related ‘poverty premium’ alone. We must work together across government, regulators, industry and consumer groups”

to deal with it.

The Financial Inclusion Strategy published in November refers to the issue, and we now have the FCA’s 2026 insurance priorities, which include expanding access to insurance as a central priority and emphasise the importance of helping vulnerable groups. However, the campaigning group Fair by Design has argued that the FCA is not doing enough to deal with these issues. It points out that the FCA has said that it has the tools to deal with this but, in practice, is just leaving it to the individual companies to act responsibly.

--- Later in debate ---

[Baroness Donaghy (Lab)]

My Lords, I am tempted to say, “What she said” and sit down, but I want to emphasise the unanimity of the Committee on this crucial issue. Some of us think that the FCA has too much to do anyway. Some of us—probably fewer—think that successive Governments have used the regulators as a heat shield and that perhaps the balance has gone the wrong way.

Not to repeat the examples that have been given, the noble Baroness, Lady Kramer, mentioned the five-year strategic plan of the FCA. For some of us it was a glossy PR exercise. Examples have been given, naming and shaming. It took at least two meetings and several bits of correspondence before the FCA even hinted that it might have done it slightly differently had it given some consideration to what it did. In that case, you might argue that it was about a deregulatory issue, trying to hold companies to account. Our committee thought that it had gone too far.

One final example is the issue of cost-benefit analysis, which the Minister used on the first day in Committee. We tried very hard to pin down how the FCA conducted cost-benefit analysis and what was happening to the panels. We heard that they were work in progress. Had the panels met? No, they had not met. What approach did the organisation have to analysing cost-benefit analysis? I am sorry that the noble Lord, Lord Sharkey, is not here as he is the expert on the granularity of analysing cost-benefit analysis. It was a poor show. I am sure that it is working to improve, as it is improving in a number of other areas, but it is extremely important that the work of Parliament should not be inhibited by an attempt to tidy up regulation—which is in fact setting aside protections.

The Minister, on the first day in Committee, used the phrase “modernise protections”. I am sure that he meant to say, “Modernise the transparency, modernise the complexity and modernise the general approach so that people can understand them”. I hope that he did not mean “modernise protections” in the sense of setting them to one side.

[Lord Davies of Brixton (Lab)]

What she just said.

As the final representative of the committee in this Committee, I agree with what the other members of the Financial Services Regulation Committee have said. It is important. I remember sitting across the Room some years ago when the idea was being discussed. It is worth recalling that the original idea was, I think, a Joint Committee of both Houses but, for whatever reason, the Commons decided that it did not want to adopt that approach. I think there are rules about criticising what the other House does, but there is no doubt that the only effective manifestation of the belief that this sort of work is required has been the work of that committee. It is particularly important that we do not lose something that we achieved through cross-party agreement.

[Baroness Bi (Lab)]

My Lords, I declare an interest as chair of Norton Rose Fulbright. Some of my firm’s clients are regulated by the FCA and the PRA. I am not a member of the Financial Services Regulation Committee, which is why I am probably breaking what I have heard as unanimity by speaking in favour of Clause 17 remaining part of the Bill.

I note that the current accountability framework, including the role of the committee, was created only three years ago, pursuant to the Financial Services and Markets Act 2023 following Brexit. Before that, we have to remember that we were content with what was probably pretty limited oversight by the European Parliament, so hearing about the importance of very detailed parliamentary oversight when it comes to looking at every proposal that the regulators might have is a relatively new innovation for us.

I do not think it unreasonable for the Government now to consider how well that post-Brexit system has been working and to propose changes to a regime that the committee itself has criticised as overly complex and difficult to navigate. I note that the noble Baroness, Lady Noakes, commented at Second Reading how difficult it had been to hold the regulators to account under the current system. I am therefore curious about why noble Lords are keen to preserve a status quo that is far from ideal.

There has been significant opposition to Clause 17 and concern about the effect it could have on parliamentary oversight, but I am not convinced that that reaction is warranted. I do not think Clause 17 is a retreat from scrutiny, but it is looking to make it more targeted and effective by merely removing the obligation on the regulators to consider every step they take by reference to the eight FSMA regulatory principles for every day-to-day function. The obligation to notify all those processes to the parliamentary committee does not always lead to the kind of analysis or response and targeted feedback that we have been discussing. That volume of information that the regulators are producing has not led to a better system.

The result is that that documentation requirement has become a burdensome compliance exercise and not truly analytical. The Government’s consultation confirmed that the information produced is too granular to support effectively an overall assessment of regulatory performance, and nearly three-quarters of those who responded to that consultation were supportive of or broadly sympathetic to the approach the Government are proposing, and these are the customers, the regulated body, of the people that the FCA and the PRA are supposed to protect.

We should also acknowledge that Clause 17 does not abolish the Section 3B regulatory principles. The FCA and the PRA will continue to be bound to have regard to those principles when they are preparing or revising their five-year strategy plans, for which they will be held accountable not just by the parliamentary committee but by society as a whole. Those strategies will be subject to consultation and will create a public benchmark against which the regulators’ subsequent rule-making can be assessed and progress against the stated strategy can be monitored, in their annual reports if nothing else. I am not referring just to the glossy brochure that we have heard about.

It is also important to note that Clause 17 does not alter the requirement for the regulators to consider and document to the committee how they are pursuing their statutory objectives. In the case of the FCA, so much of the focus is on the competitiveness and growth objectives. That gives the committee a powerful accountability tool. There is nothing to stop the committee calling them in whenever it likes to talk to them about how they are meeting those objectives in line with the principles.

The requirement of the regulators to present their analysis to the committee on each of the eight regulatory principles in relation to each consultation is disproportionate. Its removal does not reflect a material dilution of the regulators’ obligations because the substantive matters of concern continue to bind the regulators in any event. Is it necessary for the committee to be involved in all the detailed work that the regulators need to do in order to exercise proper parliamentary oversight in what we all accept is a fast-changing financial services market in a post-Brexit regulatory environment where the FCA and the PRA now bear responsibility for significantly more rules than was contemplated when Section 3B of the original FSMA 2000 was drafted?

As a common law legal system, it is right that the Government ask the regulators to comply with broad principles and hold them accountable for the outcome without requiring parliamentary oversight of all operational steps and without expecting the regulators actively to consider and document their analysis of how they have complied with each principle every time they exercise their general functions, however routine they are. I know that there is a discussion about the system being modified and improved through this Bill, but that is not what we have at the moment.

The committee’s mandate is to scrutinise whether the UK’s regulatory framework and regulators operate effectively. That requires the committee to have access to meaningful information and a coherent standard against which to test the regulators’ conduct. The long-term strategy provides that broad standard, and the committee will still receive consultations and examine how individual proposals advance the strategy that the regulator has publicly committed to. Its constitutional role could therefore be strengthened rather than rendered ineffective. Clause 17 keeps the Financial Services Regulation Committee’s oversight where it should be: on the substance of regulatory performance, the delivery of publicly stated strategies and the real-world impact of regulation. It also frees the regulators from unnecessary procedural burden, so that they can focus on regulating well. The mechanism does not have to be the same as before, and keeping Clause 17 could materially improve it.