Financial Services and Markets Bill

Lord Harlech Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

[Baroness Kramer (LD)]

My Lords, with three outstanding speeches, I have very little to add other than to say that I very much support this. However, I have a question for the Minister. I was just looking up the definition of a fiduciary duty, which is when someone

“has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”

We know that many people feel that there is an implied and inherent fiduciary duty between the person who puts their money into a pension fund and those who act to invest it—I see that the noble Baroness, Lady Noakes, is shaking her head. I know that in various pieces of legislation there has been an attempt to clarify that. However, surely at the very least there is a responsibility to transparency. This seems to me a very mild but important principle to establish. I suspect the Minister would be very concerned if she were to put her money into an entity and did not know, within reasonable boundaries, how it was being invested and used and what impact it had. Surely, these amendments are minor and mild but important.

[Lord Harlech (Con)]

My Lords, I thank the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Hayman, Lady Bennett of Manor Castle and Lady Kramer, for raising voter reporting.

The Government recognise that the ability of investors to exercise their voting rights is an important issue, which is why they are taking steps to address barriers in this area. The Financial Reporting Council’s world-leading UK Stewardship Code 2020 already requires detailed and annually assessed reporting from its voluntary signatories on voting disclosure, and the recent stewardship guidance for pension scheme trustees from the Department for Work and Pensions, which included substantial guidance on the exercise of voting rights, came into effect in October 2022.

However, the Government recognise that there is still more work to do. The DWP’s guidance includes sustainability-related issues, and its stewardship guidance focuses on areas where existing policies and reporting appear to be weakest: stewardship and, to a lesser extent, consideration of financially material ESG factors and non-financial factors. Stewardship encompasses a range of activities, and this guidance focuses specifically on voting and engagement; it is about creating long-term, sustainable value for savers and includes recognition of environmental and social governance factors, which is encompassed in the DWP’s guidance.

Furthermore, the DWP has already made a public commitment to review voting disclosure requirements in the response to the consultation on Climate and Investment Reporting: Setting Expectations and Empowering Savers. This review will be conducted jointly with other government departments, including the Treasury, and regulators. This will ensure consistency across the investment chain. The review will begin in late 2023, which will give the Pensions Regulator time to gather evidence on how the DWP’s existing guidance has influenced standards of voting disclosure.

[Baroness Sheehan (LD)]

Why is this review starting in late 2023 necessary when substantial reviews have already been carried out and there are various ongoing task forces? I am really at a loss to understand why this is necessary.

[Lord Harlech (Con)]

Is the noble Baroness asking why the review is necessary or why it is scheduled for that time?

[Baroness Sheehan (LD)]

It would be useful to have answers to both: why is a review necessary and why is it scheduled so late?

[Lord Harlech (Con)]

The review is necessary because it is important to take into account multiple government departments, including the Treasury, and non-governmental bodies such as the regulators. I believe it is scheduled for that time to facilitate the gathering of evidence and set out the scope of the review.

[Baroness Wheatcroft (CB)]

Rather than talking about a need for more investigation, could the Minister say what he thinks could possibly be wrong with telling organisations that they must put this information up? I cannot see the downside. Can he explain?

[Lord Harlech (Con)]

If I could go on, perhaps my further remarks will address the noble Baroness’s question; if not, I will endeavour to write to her, if that is all right.

In November 2022, the FCA convened an independently chaired vote reporting group following the recommendations made by the Taskforce on Pension Scheme Voting Implementation. The aim of this is to develop a more comprehensive and standardised vote disclosure framework for asset managers, ensuring a fair, proportionate and practicable approach. The group’s draft proposals are expected to be published in April 2023 for public consultation. Moreover, local government pension scheme funds are already required to publish an investment strategy statement, including their policy on voting rights and ESG matters, with guidance on annual reports also encouraging transparency on how voting rights are exercised.

The FCA’s Conduct of Business Sourcebook—COBS—Shareholder Rights Directive rules already require all investment firms to develop and disclose an engagement and voting policy. This includes how the engagement is integrated into the investment strategy; how environmental, social and governance issues are monitored; and how conflicts of interests are managed. This policy must be reported on annually online.

The Government believe that it would be premature and unnecessary to amend voting disclosure legislation at the current time, given the initiatives that are already under way. I therefore ask the noble Baroness, Lady Sheehan, to withdraw her amendment.

[Baroness Sheehan (LD)]

I thank the Minister for his response. I also thank the noble Lords who spoke in support of my amendment.

I found the Minister’s response unsatisfactory. It did not address any of the issues that have been raised. We know that the voting reporting group is doing its work at the moment. The issue that I wanted the Minister to address is that participation is going to be voluntary; over the past 17 years, that has not produced any further transparency of the kind that we are looking for in this amendment.

Before he sits down, I want to ask the Minister a question about the rules made under the Shareholder Rights Directive. If the rule Bill becomes an Act, will there be a void there? Will there be nothing in its place? I assume that that will be the case.

[Lord Harlech (Con)]

I will have to write to the noble Baroness.

[Baroness Sheehan (LD)]

Undoubtedly, there are a great deal of unanswered questions but, for now, I beg leave to withdraw the amendment.

Financial Services and Markets Bill

Lord Harlech Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

I will not get carried away—I will probably declare neutrality and opt out—but this issue is so important. I suspect that this Bill is much more constitutional than we expected when we first picked up the document. It is about filling in the space between primary legislation and secondary legislation in all these difficult areas relating to financial services. Members of the Committee have done a great job of putting together a series of proposals.

As far I can see, the proposals in this grouping are to use, in different ways, the age-old device of requiring reports. I can see the value of that. My own experience is that, because time goes on, they are not as effective as one might hope; however, once again, that is down to the membership of Parliament in particular. I support the general thrust of this group but I see it as part of our looking at the first three groups and, with or without the Government’s co-operation, working together after the end of Committee and before Report to try to achieve a common thrust that, if necessary, we can vote through in order to make the important step forward in the relationship between the Executive and Parliament that is so needed.

[Lord Harlech (Con)]

My Lords, the Government agree that the regular review of rules after implementation is essential to ensure that they remain appropriate and continue to have the desired effect.

The Bill makes a number of substantial changes to the regulators’ framework to ensure that such reviews will be an integral part of the regulators’ functions going forward. In particular, Clause 27 inserts a new provision into FSMA that will require the FCA and the PRA to keep their rules under review. To supplement this duty and ensure that there is a mechanism to require the regulators to conduct reviews of their existing rules where needed, Clause 27 also inserts a new power into FSMA for the Treasury to direct the regulators to review their rules where the Treasury considers it is in the public interest. Clause 46 inserts similar provisions into FSMA for the Bank of England in relation to its regulation of CCPs and CSDs.

I will speak first to Amendments 78 and 145 in the name of the noble Baroness, Lady Bowles. I assure her that the powers inserted into FSMA by Clauses 27 and 46 of this Bill already allow the Treasury to require these regulators to review a range of rules, entire regimes and interrelated rules, as appropriate, where that is in the public interest.

I turn next to Amendments 79 and 146, also in the name of the noble Baroness, Lady Bowles. In order for the Treasury to direct the regulators to review their rules, certain criteria must be met. One of the key criteria is that the Treasury considers the review of the rule or rules in question to be in the public interest. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.

[Lord Forsyth of Drumlean (Con)]

I am most grateful to my noble friend; I apologise for not having been able to attend all the Committee’s meetings. Can my noble friend help me by defining “public interest”—that is, how it will be defined?

[Lord Harlech (Con)]

I understand what my noble friend is getting at and think that, when each issue is put to the Treasury, it will consider whether or not it is in the public interest.

[Baroness Noakes (Con)]

I think that is merely restating the problem. Could my noble friend have another go?

[Lord Harlech (Con)]

I will write with a full definition of what constitutes “in the public interest”.

[Lord Forsyth of Drumlean (Con)]

I am most grateful to my noble friend and do not want to detain the Committee, but the whole point of the noble Baroness’s amendment is to avoid exactly this kind of debate. To my mind, what is in the public interest suggests a very substantial test, leaving the regulators to mark their own homework.

[Lord Harlech (Con)]

Like I said, I will speak to the department and write with a definition of what constitutes “in the public interest”.

Parliamentary committees can already conduct their own inquiries and hearings, call for papers, and call for individuals and organisations to give evidence. The power in Clause 27 seeks to complement, rather than substitute or detract from, the important role played by parliamentary committees. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.

On Amendment 79A, from my noble friend Lady Noakes, as with parliamentary representations, it will be important for the Treasury to consider the views of the regulators’ statutory panels and representatives of those affected by the rules. However, it would be inappropriate for the Treasury to provide a running commentary on the individual representations made. In addition, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels for industry and other stakeholders to raise concerns about specific rules. These channels will be set out in the regulators’ policy statements on rule review, required by Clause 27, in due course.

[Baroness Noakes (Con)]

Could my noble friend explain why it is inappropriate to have transparency on why the Treasury chooses not to pursue representations that have been made to it by bodies that clearly have an interest in and experience of the matters under consideration?

[Lord Harlech (Con)]

I do not think I said that it would be inappropriate; I said that it would be inappropriate to provide a running commentary, not that there would be no comment on individual representations. Again, my understanding is that it will be done on a case-by-case basis.

[Baroness Noakes (Con)]

Could my noble friend explain that a little further? If I am a panel, consumer body or one of the trade bodies and I make a representation to the Treasury, what can I expect from the Treasury?

[Lord Harlech (Con)]

I am sorry; at this stage, I will have to take that back to the department and write to my noble friend.

On Amendments 80 and 147, tabled by the noble Baroness, Lady Bowles, the new rule review powers inserted by Clauses 27 and 46 concerning the appointment of an independent person are in line with the practice of other powers in the regulatory framework. For example, the appointment of Dame Elizabeth Gloster to investigate the FCA’s regulation and supervision of London Capital & Finance plc was approved by the Treasury. The Government do not consider that it would be appropriate to require that appointment to be subject to approval by a parliamentary committee, which, as I have mentioned, can already undertake its own inquiries.

Amendments 81 and 148 were also tabled by the noble Baroness, Lady Bowles. The primary role of the Government in the regulatory framework is to ensure that the regulators operate effectively and in accordance with the framework, as set out by Parliament in legislation. Where there is a case for external review of the rule-making of the regulators, the Bill provides powers to enable this.

Section 1S of FSMA and Section 7F of the Bank of England Act 1998 already permit the Treasury to appoint

“an independent person to conduct a review of the economy, efficiency and effectiveness”

of how the FCA and the PRA use their resources. In addition, Section 77 of the Financial Services Act 2012 allows the Treasury to direct an investigation into relevant events, such as the FCA’s regulation and supervision of London Capital & Finance plc.

The Bill further strengthens these accountability arrangements with regard to specific rules through Clauses 27 and 46, allowing the Treasury to direct the regulators to review their rules. In addition, as we have already discussed in this Committee, Clause 37 inserts new provisions into FSMA which permit the Treasury to direct the FCA and the PRA to report on performance where that is necessary for scrutiny of the discharge of their functions. Clause 47 modifies FSMA so that these provisions also apply to the Bank of England in relation to its regulation of CCPs and CSDs.

Finally, as I have already mentioned, Parliament is already able to conduct thematic reviews where it considers these necessary. Clause 36 is designed to support this scrutiny by requiring the regulators to notify the Treasury Select Committee of their consultations and to respond to representations to consultations by parliamentary committees. We will discuss noble Lords’ views on the operation of those specific provisions later today.

With that, I hope I have provided sufficient reassurance to the noble Baroness to withdraw Amendment 78, and that she and my noble friend do not move the remaining amendments when they are reached.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I am afraid that the Minister has not given me any reassurance. I think the only thing I have learned is that the Treasury is all at sea and does not understand what parliamentary scrutiny is actually about. It has to have effects and consequences. It is no good saying that Parliament can do its own inquiry and its own report and it is a very pretty document—yes, quite a lot of people praise such reports from time to time—but nothing happens. The attitude of the Government is that these reports can be completely ignored, that there is nothing in them that they wish to do—they do not want anybody else to have any ideas. That is a poor state of affairs.

There are some things that the Treasury does all right. I agree that, for example, when it appointed Dame Elizabeth Gloster to investigate the FCA, it appointed a good person and there has been a good report. I think that in general the people who have been appointed by the Treasury have been reasonably okay, but that does not mean that the responsible committee should not be able to have a view. I can think of instances in other departments where totally unsuitable people have been appointed to do some reviews.

What is wrong with Parliament having a say? I do not think that the constitutional point, as made by the noble Lord, Lord Tunnicliffe, has been understood. We still do not know how high a barrier this “public interest” is. The public interest is just what the Treasury thinks from time to time, by the sound of it. I do not think that there are sufficient safeguards there for when the regulators, as the noble Lord, Lord Forsyth, said, are, in essence, marking their own homework. This is something that has gone wrong in the past.

Yes, Section 1S is there but it is not used often enough. It is a last resort when you have had a whole history of errors and similar things happening and then there is a review. The whole idea of regular review is to make sure that you can intervene before big things happen, that there is the ability to nudge if something is heading off in the wrong direction. You can say that the review is, “All clear: it’s going well”. Why is there such a fear of them?

We will continue this discussion, because there are many formulations in which this can be done. If the Government do not want to have responsibility for it, maybe there has to be some kind of independent body to do it. While Parliament may be ready and willing to do it, what is the point when you are going to ignore what Parliament says? That is not parliamentary scrutiny; scrutiny must have a purpose and must lead to a result.

As this stage is exploratory I will, of course, withdraw my amendment but, as we go through the rest of this group, I hope that some enlightenment will dawn on the Treasury that these are not issues that can be just left. There is a body of opinion around the Committee, on all sides and none, that something has to be done. Most certainly, I will support things returning on Report.

Financial Services and Markets Bill

Lord Harlech Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I do not come to this debate with a predetermined position but to listen and take a view after we have looked at the circumstances and listened to the Minister’s response. I would value a copy of the report that the noble Lord, Lord Sharkey, spoke about. I have a lot of sympathy for these individuals and note that their problems are undoubtedly exacerbated by—I do not know how to describe it—the Truss impact on loan rates in the UK, which must fall particularly heavily on those individuals. I await the Minister’s response.

[Lord Harlech (Con)]

My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment, and all noble Lords for their contributions.

The Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and the Treasury has already worked extensively with regulators and industry to act where possible to support borrowers. For example, we have worked with the FCA to implement changes to its mortgage lending rules, removing the regulatory barrier that prevented some customers, who otherwise may have been able to switch, accessing new products.

However, we do not believe there are further practical and proportionate universal options than those already taken to reduce the rates paid by these consumers. Extensive work has been done to look into this issue, partly as a result of prior interest from this House, which has emphasised the complex and varied circumstances that consumers are in. Specifically, following commitments made during the passage of the Financial Services Act 2021, the Government worked with the FCA to conduct a report into mortgage prisoners, which was completed and laid before Parliament in November 2021. This report found that the vast majority of those with the 195,000 mortgages held by inactive firms are not mortgage prisoners, as they are already paying competitive rates for their circumstances or they would be able to switch if they took action to do so—if, of course, they met the risk appetite of active lenders, a point raised by my noble friend Lady Noakes. Others had different factors that might prevent them being able to switch, such as being close to the end of their mortgage term or having an account in arrears. The report found that only 47,000 were truly mortgage prisoners—that is, customers who are up to date with their mortgage payments and unable to switch to a new mortgage deal, but who could potentially benefit from lower rates if they were able to switch.

While I understand the difficulty that many of these customers are facing, capping the standard variable rates charged on mortgages with inactive lenders to help this limited group of customers would have significant implications for the wider mortgage market which cannot be ignored. Any action we take must also be fair to other borrowers in the active market, particularly those with similar characteristics and paying similar rates, who may be unable to access fixed-rate deals.

A cap for mortgage prisoners would therefore create an arbitrary division between one set of consumers and another. Capping rates would also restrict lenders’ ability to vary rates in line with market conditions—a key part of responsible lending. This is a material risk, which, as Ministers set out during the passage of the Financial Services Act 2021, could have financial stability implications. Those concerns were also raised by the London School of Economics in its November 2020 report on mortgage prisoners, which argued against the introduction of a standard variable rate cap. In view of these risks and the proportionate steps that the Government and the FCA have already taken to support mortgage prisoners, it is clear that an SVR cap is not an appropriate solution.

However, borrowers who have switched have seen significant savings. The FCA’s review found that take-up was affected by consumer inertia and limited lender risk appetite. Some 140,000 letters were sent to borrowers about the rule change, which resulted in only 700 calls to brokers.

The noble Lord, Lord Sharkey, raised the new report from the London School of Economics and Martin Lewis. The Government will of course carefully consider the proposals put forward in this report. I note that it recommends free, comprehensive financial advice for all, but I would like to provide reassurance that the Government are committed to helping people in financial difficulty. We recognise the important role that debt advice providers play in assisting people, including mortgage prisoners, who are in problem debt, especially with the increasing cost of living pressures that were raised by the noble Baroness, Lady Bennett.

This is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to more than £90 million this financial year. Furthermore, the Government have made a number of interventions, as a result of the financial crisis, to protect the economy and ordinary savers and businesses from the negative impacts of economic and financial instability. These include the interventions in Northern Rock and Bradford & Bingley, with their loan and mortgage assets ultimately held in the government-owned company UK Asset Resolution. It is right that the Government seek to achieve value for money for taxpayers as we exit the interventions made as a result of the financial crisis. The proceeds from these sales are not hypothecated and go towards supporting wider public finances.

The noble Baroness, Lady Bowles, sought to draw out the wider case of the Government selling on. I can say only that UK Asset Resolution sales met or exceeded best practice for customer protections. Firms had to agree to robust protections before their bids were considered. Inactive firms have and use a range of forbearance options for borrowers in payment difficulty, and many borrowers with inactive firms pay competitive rates.

However, the Government are consistently committed to looking for practical and proportionate options where they will deliver genuine benefits for affected mortgage borrowers, and where interventions are fair to borrowers in the active market and to taxpayers. In light of the request, we will be happy to facilitate a meeting with Treasury officials before Report. We will co-ordinate with Members’ offices to agree a time and place suitable for everyone.

While it is important that we do not create false hope, the Government will carefully consider the proposals from the LSE/Martin Lewis report. In light of this, I ask the noble Lord to withdraw this amendment.

[Lord Sharkey (LD)]

I thank all noble Lords who spoke in this brief debate. There was a sense of déjà vu in all this. I recognise the arguments of the noble Baroness, Lady Noakes, because it is not so long since we heard them last time. It would be indelicate of me to remind the Committee that, having heard all those arguments last time around, and mine, we voted fairly massively in favour of the amendment in front of us again today.

As I said in my opening remarks, at the moment this is not about the amendment as it is down on the page. This is a probing amendment to make sure that the initiative of Martin Lewis, the LSE and the APPG is taken seriously by the Government. I am grateful for the Minister’s promise—if that is what it was—to arrange a meeting with the APPG and other interested parties. It would be wrong if, after all this work and effort, we were simply to get a note from the Treasury passed under the door saying, “No, it doesn’t work”. We want an interactive process to discuss the proposals that Martin Lewis and the APPG are putting forward. I do not think the Minister talked about timing, but we need to do that urgently and before Report.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, there has been a series of powerful speeches. The Government really ought to react to this: either they believe what they have said they will do, or they do not. If they do believe in it, surely action could take place more quickly. The community concerned is now a very important part of our society, and it is crucial that we create an environment where its needs are taken seriously. It is particularly crucial that we do not create a situation where it is disadvantaged. I take the point about the gender issue, which is even more worrying, in many ways. I urge the Government to find some way of assuring us that they will act quickly.

[Lord Harlech (Con)]

My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment on access to sharia-compliant financial services, including student finance. The UK is widely considered the leading western hub for Islamic finance. Institutions across the UK have been providing sharia-compliant retail and wholesale financial services for nearly 40 years, offering a range of products, including bank accounts, mortgages and insurance.

Last year, the Government expanded the scope of the alternative finance rules, which support equal treatment for sharia-compliant finance products, to include home-purchase plan providers and arrangements made through peer-to-peer platforms. This allowed for these products to be treated in the same way as conventional mortgages and loans for tax purposes, contributing to a level playing field for Islamic and conventional finance products. The Treasury is currently consulting on reform of the Consumer Credit Act, which will consider ways to make it easier to provide sharia-compliant consumer finance.

Within this context, the Government want to help ensure that higher education remains accessible to all those with the desire and ability to benefit from it. They remain committed to delivering an alternative student finance product compatible with Islamic finance principles and, more broadly, to ensuring equitable regulatory and tax treatment when compared to conventional finance. The Government legislated at the first opportunity to make a system of alternative student finance possible, taking the necessary powers in the Higher Education and Research Act 2017. However, a range of complex policy, legal and operational issues need to be resolved before a sharia-compatible product can be launched.

When noble Lords discussed this matter during consideration of the Financial Services Act 2021, my noble friend Lord True stated that the Government would provide an update alongside the Government’s response to the post-18 education funding review. As a result of that review, the Government have been progressing plans for introducing a lifelong loan entitlement, which will provide an individual entitlement equivalent to four years of post-18 education. This will significantly change the ways that students can access learning and financial support.

It is important that an alternative student finance product mirrors the mainstream student finance offer; therefore, it cannot be delivered until the LLE regulations and delivery specification are finalised. The Department for Education consulted on the LLE in February 2022 and sought views on barriers that learners might face in accessing their entitlement, including consideration of an ASF product. The Government’s response to that consultation was published last week; it provided an update on ASF and set out the Government’s aim to deliver an alternative student finance product as soon as possible after 2025.

Several Members, including the noble Lords, Lord Sharkey and Lord Tunnicliffe, and the noble Baronesses, Lady Sheehan and Lady Bennett, spoke about timespans—in particular, harking back to 2013. In September 2014, the Government published their consultation on a potential model that could form the basis of a new student finance product. The Government signalled in the consultation response that they would need to take new primary powers to enable the Secretary of State for Education to make alternative payments in addition to grants and loans. These were secured in the Higher Education and Research Act, which received Royal Assent in April 2017. Specialist consultants were appointed in October 2017 to provide advice on the range of issues that would need to be resolved for a new system of alternative student finance to be implemented.

Work has started to assess how the Department for Education can ultimately deliver an ASF product alongside the LLE. Our aim is that students will be able to access alternative student finance as soon as possible after 2025. The reason for that timespan is that a range of complex policy, legal and system issues will need to be resolved to launch an alternative student finance product. Most importantly, that includes procuring advice from experts in Islamic finance, who will be working with the Student Loans Company to better understand timescales for delivery of such a product. The Government are introducing the LLE, which will significantly change the ways students can access learning and financial support. The scale and complexity here should not be underestimated. The DfE is trying to replicate a system of student finance that delivers the same results as now and whereby students do not receive any advantage, or suffer any disadvantage, through applying for alternative student finance.

Furthermore, the ASF product will need to mirror the mainstream student finance offer to ensure that access to finance and the repayments expected from borrowers are the same. From the 2025-26 academic year, new students studying at level 6 seeking government financial support will do so using the Student Loans Company’s systems under new LLE regulations. The LLE regulations and delivery specification therefore need to be finalised before an ASF equivalent can be delivered. Finally, every “touch point” for students at the SLC—that is, marketing and information materials, application forms, online portals and correspondence—will need to be reviewed and modified to ensure sharia compliance.

The Department for Education is procuring advice from experts in Islamic finance to support delivery and planning of this product, and launched an expression of interest advertisement, which closed on 20 February, to understand the market capability to deliver this advice. The department is currently considering responses and next steps. The noble Lord, Lord Sharkey, raised the takaful. The advice will support the next phase of delivery of alternative student finance on the detailed design of an ASF takaful product, as part of the LLE, and on the delivery of ASF by the Student Loans Company.

In response to the request for a meeting, this is obviously something that will need to be done in joint consideration with the Department for Education. I cannot make promises for both departments but I will take the request back. As per the request in the previous group, I note that this would ideally be before Report.

I hope I have reassured noble Lords that the Government are committed to ensuring that sharia-compliant financial products are accessible. I therefore request that the noble Lord withdraws his amendment.

[Lord Sharkey (LD)]

I regret to say that the noble Lord has not convinced me at all that any progress is likely to be made and has not really explained why we are in the position we are in. I have talked to Islamic finance experts quite frequently over the last 11 years that this has been going on. They have always told me that it should take up to 18 months or so to have some kind of ASF product available on the market. They point to the Islamic version of the Help to Buy scheme, which I think the Minister mentioned. From a standing start, that was sold in the marketplace 18 months later. If that can be done, why can we not move faster? The basic question of why this is taking so long has not been answered by anybody here today.

I return to the 71-page report on the LLE. Why was the delay in ASF not explained? There was no attempt to explain why it was put back. It is quite obvious that no preliminary work of any standing was being done for the last 11 years. That in itself is deeply shocking.

It is also true that there has been no significant engagement with the Muslim community throughout this whole period. Why is that? That does not seem sensible, reasonable or honest.

I get no sense that the Government are embarrassed by their position, that they intend to move faster than they have over the past 11 years or that they understand the moral nature of this issue. I will withdraw the amendment but, unless we get the meeting that we talked about so we can sit down together to talk about this with members of the community as well as parliamentarians, when it comes to Report we will find a way, if we can, to encourage the Government to do more faster than they currently plan to do. With that, I beg leave to withdraw the amendment.

Financial Services and Markets Bill

Lord Harlech Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[Lord Jackson of Peterborough (Con)]

My Lords, I rise briefly to support Amendment 241B, moved by the noble Baroness, Lady Fox of Buckley. I declare at the outset for full transparency that I am a paid-up member of the Free Speech Union. To be fully topical, I am also a graduate of Royal Holloway, which has been in the news today along with the noble Baroness on similar free speech issues. We debated this matter in the Chamber earlier.

This is a very gentle nudge by way of an amendment. Like the debate we had earlier this month on politically exposed persons, in this case, we see that a regulatory regime does not work and that we sometimes need a legislative nudge by way of something like this amendment. We could have a sterile debate about EDI/ESG and woke and cancel culture, but that is perhaps for another day. My concern is that untrammelled free speech should not be a monopoly; it is a relative concept because we have laws in this country to prevent egregious offence against certain people who have protected characteristics under the Equality Act 2010. Free speech within the law cannot be the preserve of a plutocratic, wealthy elite as represented by big financial institutions and big tech companies.

I never thought I would quote the comedian Jack Dee but, when the decision was taken by PayPal on 15 September last year to throw off the Free Speech Union, the Daily Sceptic blog and UsforThem, he quite rightly said:

“Big Tech companies that feel they can bully people for questioning mainstream groupthink don’t deserve anyone’s business.”


The offence of UsforThem was to question the efficacy of a policy of the teaching unions and, by inference, the Government not to force or even encourage children to go back to school. UsforThem felt that there was a serious public policy issue around that; it was well within its rights to debate that on the basis of empirical evidence and a well-argued case but PayPal took against it and threw it off the platform for breaching its rather Orwellian-sounding “acceptable use policy”. I do not think that is at all right.

The point that the noble Baroness, Lady Fox, made is right. In a competitive market where you have perfect competition—that is, lots of participants and allowing people to enter and leave the market—people can pick and choose which banks and tech companies they go to. However, when there is an oligopoly, as in this case, with a small number of providers of technical applications, perfect competition falls down. There is effectively a situation where people have no choice. That is why people who are not exactly conspiracy theorists, including me, worry about the idea of a cashless society because it puts absolute power in terms of business into the hands of the powerful, the influential, the wealthy, the well-connected and those who believe in and articulate groupthink.

The other thing that slightly worries me is not necessarily the overt idea of censorship, which is itself very worrying in an advanced liberal democracy such as the UK and the United States, but the concept of self-censorship—that is, you do not debate these important issues of public policy that might push against vested interests because you know that the battlefield is so asymmetrical that you do not have the funds to fight big tech or to engage civil litigation, and you run the risk of criminal penalty and sanctions should you do so. That is important. You cannot afford to take the risk so we get into this cul-de-sac of self-fulfilling beliefs and views, which were represented by PayPal.

I am glad that PayPal capitulated and surrendered, and said that it was wrong, but it did a lot of damage to the Free Speech Union, its membership base and its cash flow. Not surprisingly, Toby Young, the founder and CEO of the Free Speech Union, made it absolutely clear that he would not go back to PayPal because it had egregiously ruined his business model.

However, that is not as important as the general principle that, unless you have a bit of stick with these tech companies, they will not voluntarily eschew the concept of EDI and their fixed beliefs. Only the power of legislation can force them to comply with the basic tenets of a decent, liberal society: that free speech should be available to everyone; and that people should be able to voice unfashionable opinions. The mark of a mature and sensible society is that we allow people with whom we vehemently disagree to have a say in the public square.

To an extent, this a probing amendment, but my noble friend the Minister—incidentally, she has done extremely well in a very long and difficult Bill; I give her that plaudit, having given her a hard time the last time I was before this Committee—should reflect on it and come back with some sanction to defend the long-standing commitment that all of us, as parliamentarians and legislators, should have to the concept and practice of free speech.

[Lord Harlech (Con)]

My Lords, I thank the noble Baroness, Lady Fox, and my noble friend Lord Jackson of Peterborough for raising the important issue of freedom of expression and, within that, the role of payment providers.

Following PayPal’s temporary suspension of some accounts in autumn last year, to which both the noble Baroness and my noble friend referred, the Economic Secretary met PayPal and the FCA, as well as interested Members of Parliament. He subsequently set out the Government’s position on this matter on Report during this Bill’s passage through the Commons.

The Government fully recognise the importance of protecting free speech and the crucial role of payment providers in delivering services without censorship. The Government are committed to ensuring that the regulatory regime respects the balance of rights between users’ and service providers’ obligations, including in relation to protecting freedom of expression for anyone expressing lawful views. My noble friend made that distinction in his remarks.

I draw noble Lords’ attention to the letters from the Economic Secretary, the Financial Conduct Authority and PayPal regarding this issue, copies of which have been deposited in the Commons Library. The letter from PayPal explains that it re-evaluated and reversed its decision in a number of the specific cases raised. It made clear that it was never its intention to be an arbiter of free speech and that none of its actions were based on its customers’ political views.

While welcoming this clarification, the Economic Secretary expressed his concern about the importance of protecting free speech and recognising the crucial role of payment service providers in delivering payment services without censorship. As a result, he pledged to take evidence on the adequacy of the existing legislative framework through the statutory review of the Payment Services Regulations. This was published on 13 January 2023; the Government look forward to responses from all interested parties. I note for the Committee that that consultation is open for 12 weeks, meaning that it will close on 7 April. The Economic Secretary will promptly update Parliament through a Written Ministerial Statement following this review. He has committed that, if it emerges that there is a problem with the existing regime, the Government will act swiftly to address it.

In terms of going further to protect the importance of free speech, we have to understand that the Government do not believe there is evidence of a potential issue with payment services regulation beyond these few PayPal cases. The existing legal regime includes statutory minimum notice periods, rights of appeal to the Financial Ombudsman Service and the FCA’s principles on fair treatment. Users of payment services, in common with all UK citizens, benefit from a safety net of legislation such as the Human Rights Act, criminal law and court decisions, which balance the rights of people to express their ideas in a public space with the necessary limits of a democratic society, for example, to protect people from hate speech. More specifically, the Equality Act 2010 prohibits service providers in the UK denying services to users on the basis of their beliefs, including philosophical as well as religious beliefs.

Noble Lords talked about going further in this Bill. The Government’s view is that making legislative change just for payment services would not be proportionate or correspond with the requirements placed on other essential service sectors. The Government need evidence if there is a problem given the existing protections in the current legal regime for payment service users. Today I am aware of the concerns raised in relation only to PayPal, which re-evaluated and reversed its actions in several cases. The FCA has explained that it has the tools to regulate in a further specific way through its authorisation processes if there is a problem.

[Lord Jackson of Peterborough (Con)]

When the Minister analyses the results of the review which is concluding next month, will he also look at the slightly wider issue of barriers to entry and the possible oligopoly behaviour of payment services? That is a linked issue which is pertinent to the debate we have had today.

[Lord Harlech (Con)]

My noble friend makes an excellent point. I will certainly feed that back to the department in terms of the review.

To conclude, the Government already have the means to act on this issue and have made a clear commitment to do so if necessary. We are clear that we first need public consultation and an evidence base before determining the right course of action on this matter. I therefore request that the noble Baroness withdraws her amendment.

[Baroness Fox of Buckley (Non-Afl)]

I thank the noble Lord, Lord Jackson, and the Minister for that response. I will not keep noble Lords long. What the noble Lord, Lord Jackson, said about self-censorship was important. I mention that because I am worried that the Government are underestimating the climate that financial services providers are embroiled in relating to ESG and EDI. This is a warning shot that we recognised around PayPal, but I did not confine it to PayPal. It is just one example. There are sadly lots of recent examples, with organisations such as GoFundMe refusing to accept certain people because of their views and so on. I know that is not strictly within the remit of this Bill, but I know that the Government understand that there are tensions here. I do not want them to be too narrow and technocratic in the way they approach it by saying “Oh, there are only three examples, so what is there to worry about?” We have seen this internationally. I note that the Chinese social credit system lurks around this debate as something we want to be careful of. Big tech financial companies do not have regard for free speech as their terms and conditions will often cut against what is required in equality legislation here. That was the point I was making.

I hope that this short debate will be taken note of in that consultation. I also hope the Government do not feel that they can just deal with it simply through the consultation but will keep a close eye on what could be a dangerous and nasty situation of financially powerful organisations having an impact on individuals, frightening them into thinking that if they say the wrong thing they will not get banking. That is not the sort of society that we would like to end up with. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, I first welcome my noble friend Lord Leong to this very special club, the Financial Services and Markets Bill club. I am sorry that it is a little thin on the ground. I will say no more than that the case, as presented and supported, seems strong.

One of the sad things about occupying this position is that, every time credit comes up, you get abusers. The large companies are frequently the abusers, and payday loans are a classic example of that. Anywhere there is credit, you end up with pockets of abuse. I unashamedly believe in regulation. I do not believe in bad regulation; I believe in good regulation and I think it should enter this field. But that is not a formal position, so we will listen to the Minister before concluding our point of view.

[Lord Harlech (Con)]

My Lords, I thank the noble Lord, Lord Leong, and others noble Lords for their contributions on this amendment headed “Regulation of factoring companies”.

As noble Lords know, invoice factoring is a type of invoice finance where suppliers effectively sell their invoices at a discount to a finance provider in exchange for an advance. This means that suppliers can receive payments sooner, helping them to manage cash flow. Invoice factoring is an important product for British businesses, helping them to grow sustainably when they might otherwise struggle to do so. It is a relatively standardised product designed to help businesses manage their cash flow and support growth.

Businesses benefit from a diverse finance market made up of high street banks, smaller banks and a range of non-banks to ensure that they can continue to access suitable finance. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. We have discussed the approach to regulating small businesses in an earlier debate but, as noble Lords know, invoice factoring is not considered credit, because it is an advance on invoices already generated; therefore, any small businesses using these products do not benefit from protections such as those under the Consumer Credit Act, which apply to the smallest businesses taking out loans.

However, invoice factoring is generally used by larger SMEs that would not benefit from protections under the Consumer Credit Act in any case. UK Finance estimates that its members advanced invoice finance and asset-based lending facilities to just 35,000 firms in 2022, representing less than 1% of all UK businesses; in comparison, according to the SME Finance Monitor, 36% of SMEs—nearly 2 million of them—were using external finance in 2022.

However, the Government believe that businesses using invoice finance are well protected in other ways. The banking and finance industry has recognised that businesses should be able to use invoice factoring with confidence, so has taken steps to ensure that businesses have adequate protections. UK Finance members, representing between 90% and 95% of invoice factoring by volume, are subject to a standards framework and code, which set the standards that firms should meet when supplying invoice factoring facilities. They include an independent complaints process focusing on the requirements of those smaller businesses using invoice factoring, which might otherwise be reluctant to raise concerns about their treatment. For invoice factoring among larger firms, these businesses will have the financial and legal resource available to take action through the courts.

Bringing invoice factoring into regulation would likely increase costs for businesses. This would negatively impact the ability of these businesses to manage their cash flow in a flexible, cost-effective way at a time when it is important that they have the confidence to invest and expand. There is a fine balance between the costs and benefits when bringing activities into the regulatory perimeter. It requires careful consideration to ensure that there is an appropriate balance between several factors, including ensuring that consumer protection is in place and that businesses are allowed to innovate.

Overall, the Government believe that the current approach—enforcing standards through industry bodies and voluntary codes while facilitating innovation and competition—is more likely than new regulation to drive positive outcomes for businesses that rely on invoice factoring. I therefore ask the noble Lord, Lord Leong, to withdraw his amendment.

[Lord Leong (Lab)]

I thank all noble Lords who have kindly supported this amendment. Access to finance is vital to start-ups and small companies; it is one way in which they can easily get money without any security. The number of small companies that have to resort to factoring invoice discounting is on the rise because banks are becoming more and more demanding as far as security is concerned. As I said in my speech earlier, my amendment is a probing one. I want to take this opportunity to ask the Minister this: can we do some more work to see how many companies access this form of finance and how many companies go bust because they cannot afford to pay some of the rates that are being asked by these companies?

On that basis, I beg leave to withdraw my amendment.

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[Lord Tunnicliffe (Lab)]

Before I start, would the Government Whip like to give us some indication as to how we are going to end this session?

[Lord Harlech (Con)]

The Grand Committee is scheduled to run until 7.45 pm, which gives us half an hour. However, in the usual way, if the debate has not concluded by that point, the debate on this group will continue into the next day of Committee.

Financial Services and Markets Bill

Lord Harlech Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

Moved by

[Lord Harlech]

2: Schedule 2, page 128, line 38, at end insert—
“(5) Paragraph (6) applies where—(a) a central counterparty (A) was taken to be recognised pursuant to Article 25 of the EMIR regulation in accordance with regulation 19A(3), and(b) A ceased to be taken to be so recognised by virtue of the relevant period in the case of A having expired before the commencement day.(6) The Bank of England— (a) may determine that the relevant period in the case of A is (in spite of its expiry) to be treated, as from the making of the determination, as not having expired, and(b) may accordingly exercise its power under this regulation to vary the relevant period on or after the commencement day.(7) In paragraphs (5) and (6) “the commencement day” means the day on which Part 5 of Schedule 2 to the Financial Services and Markets Act 2023 comes into force.(8) Paragraphs (5) to (7) expire at the end of 31 December 2025 (but without affecting any variation of a relevant period made under this regulation by virtue of paragraph (6)(b) before that time).”Member’s explanatory statement
This amendment would enable the Bank of England to restore a third country CCP to the run-off regime in cases where the regime has ended in the case of that CCP before the coming into force of the amendment made by paragraph 51 of Schedule 2 to the Bill.

[Lord Harlech (Con)]

My Lords, I beg to move government Amendment 2 and will also speak to the other amendments in this group. These are a set of minor amendments that the Government have tabled to ensure that all provisions of the Bill and the Financial Services and Markets Act 2000 operate effectively and fully achieve their intended policy effect.

Turning first to Amendments 2 and 118, central counterparties, or CCPs, are a type of financial market infrastructure and are crucial to global financial stability. Following the UK’s exit from the EU, the Treasury established a temporary recognition regime to enable eligible non-UK CCPs to continue providing important clearing services to UK firms while equivalence and recognition decisions were ongoing. To allow CCPs exiting the temporary recognition regime without recognition time to wind-down exposures to UK firms, a run-off regime was also established. The length of the run-off is determined by the Bank of England for each CCP, with a current maximum period of one year. As a result of provisions in this Bill tabled in Committee, the Bank of England will have the ability to extend the maximum run-off period for CCPs from one year to three years and six months. This would allow overseas CCPs currently due to exit the run-off regime at the end of June 2023 further time to apply for recognition if desired, and to remain able to offer services to UK firms during that period.

Amendments 2 and 118 seek to facilitate continuity of services under the run-off regime in the event that Royal Assent of this Bill occurs very close to or after 30 June. Amendment 118 provides that the Bill provision that gives the Bank the power to extend the run-off period comes into force on Royal Assent. This will allow the Bank of England to extend the run-off for those CCPs that wish to continue providing services to UK firms but need more time to apply for recognition, as was set out in Committee. However, if Royal Assent is secured after relevant CCPs have exited the run-off, government Amendment 2 will give the Bank of England the ability to reinsert a CCP into the run-off regime by determining that a CCP’s run-off is to be treated as not having expired. This will allow the Bank of England to extend the length of a CCP’s run-off period even in cases where a CCP has already exited the run-off. This will avoid any potential disruption that could otherwise arise if CCPs exited the run-off period before the Committee stage amendment had come into force.

Amendments 3, 16, 17, 21, 22, 34, 53 and 54 ensure that the references to the regulators’ objectives in the Bill and the Financial Services and Markets Act 2000 include the new competitiveness and growth secondary objectives for the PRA and the FCA, and the Bank of England’s new secondary innovation objective.

Turning to Amendments 5 and 6, Schedule 5 to the Bill makes amendments to FSMA to ensure that the regulatory gateway for financial promotions legislated for in this Bill can be implemented and operated. One way that it does this is by applying other relevant parts of FSMA to ensure that the FCA can oversee the gateway effectively. Amendment 5 aligns the wording between a provision introduced by Schedule 5 and a similar existing provision within FSMA. These provisions relate to the issuance of notices to vary permissions or to impose requirements. The amendment will ensure that the regulator is required to provide notice when they propose to vary a permission in all cases, and to avoid any potential duplicatory requirements to provide notices. Amendment 5 replaces the relevant provisions in Schedule 5 and in FSMA with a single new provision. This will help to ensure that these similar provisions are interpreted consistently and achieve the intended policy effect. Amendment 6 is consequential on Amendment 5.

Amendment 49 ensures that the CBA panel’s statutory remit includes cost-benefit analyses for rules for critical third parties, and that it is therefore able to provide advice to the Bank in relation to this. Amendment 86 corrects a drafting error, ensuring that Schedule 11, regarding the central counterparties resolution regime, functions as intended. It provides clarity over the Treasury’s power to lay regulations restricting the making of partial property transfers. Amendments 87, 88 and 89 make technical corrections and clarifications to the insurer insolvency provisions in Schedule 12 to the Bill. Amendment 89 provides a clarification to make clearer the amount of FSCS top-up compensation that policyholders will be eligible to receive following a write-down order, meeting the stated policy intent. Amendment 87 clarifies that a liability is, to the extent of its reduction by a write-down order, to be treated as extinguished unless and until revived by the variation or revocation of the order. This helps to ensure that the intent of the provisions is achieved by increasing legal certainty about the treatment of written-down liabilities.

All these amendments seek to ensure that the provisions in this Bill achieve the policy intent and minimise potential disruption to the UK financial services sector. Therefore, I beg to move Amendment 2 and intend to move the remaining amendments when they are reached.

[Baroness Kramer (LD)]

My Lords, I will make very few comments on this group of amendments. I accept that they are technical. I find some of them distasteful, particularly those that enhance the scope of the competitiveness and economic growth agendas. I fear very much that the underlying concept and construct will lead us back in the direction of the kind of risk taking that created the crisis that we went through so badly in 2008 and 2009. However, given that our attempts to turn around those objectives have not won support from other parts of the House, there is no sensible reason for me to object to these more technical amendments, other than to say that it is a sad day and that many of us will be revisiting this, if we live long enough, when we hit the next financial crisis.

[Lord Eatwell (Lab)]

My Lords, I will make two points on these technical amendments. As the Minister said, central counterparties are fundamental institutions in maintaining the stability of financial markets. This measure, to continue the role of overseas-based central counterparties, is enormously sensible. But there is an issue that has not been addressed. What if the overseas central counterparties decide not to provide services to UK firms—if they decide, following the UK exit from the European Union, that they will withdraw from providing such a service? What provision has His Majesty’s Government made for providing those services in those circumstances?

Secondly, I echo the point that the noble Baroness, Lady Kramer, made about the competitiveness and economic growth objective that is being incorporated as a subsidiary objective. As a subsidiary objective, it is unobjectionable. What is striking in the government amendments that we will debate is the way in which it is continuously privileged, such that it no longer remains subsidiary; extra reports and consideration will now be required, all focused on one objective. This is a serious mistake, because the statutory objectives of the regulatory authorities will change with circumstance over time. Writing into law that one objective should be privileged is a significant error. The primary and secondary objectives make sense, but overegging the position of a subsidiary objective is a mistake.

My main point at this time is to ask the Minister what measures provide central counterparty provision in those areas where overseas central counterparties decide not to act for UK firms.

[Lord Harlech (Con)]

My Lords, I am grateful for both contributions to this short debate. The noble Lord, Lord Eatwell, brought up the competitiveness issue, which is something we will come on to at a later stage in the proceedings on the Bill. In answer to his point about overseas CCPs, that would be a commercial decision for that institution to make. However, the idea of the run-off regime is to provide time for UK firms to wind down their operations and make alternative arrangements.

Amendment 2 agreed.

--- Later in debate ---

Moved by

[Lord Harlech]

3: Clause 6, page 6, line 29, after “section 1B(1)” insert “, (4A)”
Member’s explanatory statement
This amendment would ensure that Clause 6(10)(a) of the Bill includes a reference to the duty relating to the competitiveness and growth objective, as inserted into section 1B of the Financial Services and Markets Act 2000 by Clause 24.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, I apologise for missing the introduction from the noble Lord, Lord Tyrie; I was caught out by the Whips’ rearrangement of business. Fortunately, I read his pamphlet on this matter, so I have a good idea what he said.

[Lord Harlech (Con)]

My Lords, I am afraid that the noble Lord, Lord Eatwell, was not here for the opening comments from the noble Lord, Lord Tyrie.

[Lord Eatwell (Lab)]

I am probably the only Member of this House who has been a member of the Regulatory Decisions Committee and I might have some observations to make.

[Noble Lords]

Hear, hear!

[Lord Harlech (Con)]

Clearly, the House wants to hear the noble Lord’s remarks, so please continue.

[Lord Eatwell (Lab)]

If the Whips had not rearranged the business so peremptorily, one would not have been caught out.

[Lord Harlech (Con)]

The business has not been rearranged; the Order Paper says,

“at a convenient time after 7.30pm”.

[Lord Eatwell (Lab)]

My Lords, as a founding member of the Regulatory Decisions Committee of the Financial Services Authority who served from 2001 to 2006, I reflect on the fact that at that time the FSA took extraordinary care in preparing the documentation that was submitted to the RDC. This clearly had an effect on the way in which the RDC prepared itself. This is an important element in ensuring that our regulatory system is not only fair but seen to be fair. Having read with care the pamphlet from the noble Lord, Lord Tyrie, I support the arguments that he made there, which I am sure he recently repeated in the House.

Financial Services and Markets Bill

Lord Harlech Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

Moved by

[Lord Harlech]

90: After Clause 59, insert the following new Clause—
“The Ombudsman scheme
(1) FSMA 2000 is amended as follows.(2) In section 429 (Parliamentary control of statutory instruments), in subsection (2B) after paragraph (c) insert—“(d) provision made under paragraph 15(3) of Schedule 17.”(3) Paragraph 15 of Schedule 17 (the Ombudsman scheme: power of scheme operator to charge fees) is amended as set out in subsections (4) and (5).(4) In sub-paragraph (1) after “respondent” insert “or other persons of a specified description”.(5) After sub-paragraph (2) insert—“(3) The reference in sub-paragraph (1) to persons of a specified description is a reference to such descriptions of persons as may be specified in regulations made by the Treasury.(4) The power conferred by sub-paragraph (3) to specify descriptions of persons may not be exercised so as to provide for eligible complainants to fall within a specified description of persons.(5) The reference in sub-paragraph (4) to “eligible complainants” is a reference to complainants who are eligible in relation to the compulsory or voluntary jurisdiction of the ombudsman scheme (see section 226(6) and 227(7)).(6) Before making regulations under sub-paragraph (3) the Treasury must consult the scheme operator.””Member’s explanatory statement
This new Clause would enable the scheme operator of the Financial Ombudsman Scheme to make rules requiring persons of a description specified in regulations, other than eligible complainants, to pay fees in connection with the investigation of complaints (in addition to the existing power to impose fees on persons who are the subject of complaints).

[Lord Harlech (Con)]

My Lords, the Financial Ombudsman Service was established through the Financial Services and Markets Act 2000 to provide for the proportionate, prompt and informal resolution of disputes between consumers and financial services firms. The FOS offers a cost-free service for consumers, which is fundamental to its purpose.

The FOS is funded by a combination of an annual levy on regulated firms and case fees. Under the current framework, it is responsible for setting its case fee rules and can charge case fees only to firms that are subject to complaints. This means that claims management companies—or CMCs—and other professional representatives cannot be charged for bringing cases to the FOS. The Government heard the concerns raised by noble Lords, particularly by my noble friend Lady Noakes during Grand Committee, about CMCs bringing large numbers of vexatious claims against firms to the FOS.

Amendment 90 therefore addresses those concerns by amending FSMA 2000 to give the Treasury the power to make regulations specifying categories of persons to whom the FOS can charge case fees. The Treasury intends to add CMCs and other professional representatives such as law firms to this list. This will enable the FOS to amend its rules to charge case fees to CMCs and other professional representatives for bringing complaints, subject to its usual consultation processes. By specifying who can be charged by the FOS in regulations, the Government can ensure that the full range of claims management models can be effectively captured. It also allows flexibility to amend this list in future if different models emerge.

The Government are clear that all consumers should be able to access the FOS free of charge and without the need for any CMC support. The FOS remaining a cost-free service for consumers is fundamental to its purpose. The amendment therefore expressly prevents the Treasury adding consumers to the categories of persons who can be included in the regulations.

In summary, Amendment 90 will ensure that the Treasury is able to empower the FOS to charge case fees to CMCs while ensuring that the FOS remains cost-free for consumers. I beg to move.

[Baroness Kramer (LD)]

From these Benches, the amendment makes sense to us.

[Baroness Chapman of Darlington (Lab)]

Happily, it makes sense to us as well. Without wishing to delay anybody—remembering the exchanges we had before this debate started today—I wonder whether the Minister could indicate the level of fees. He said that consumers would be excluded, which is very important. Are the Government confident that this will not in any way suppress the use of this service? Do they have anything in mind to improve awareness of the service among consumers?

[Lord Harlech (Con)]

My Lords, I am grateful for the contributions in this short debate and thank both noble Baronesses for them.

On case fees, the amendment follows the existing approach under FSMA to allow the FOS to charge fees to respondents. Under this approach, the Government set out through legislation who the FOS is able to charge fees to and it will be for the FOS to set the detail of those case fee rules. This may include when firms should be charged; for example, from the first case or after a certain number of cases. Similarly, the amendment will not prescribe the specific approach the FOS will have to take in charging CMCs—it will be for the FOS to look at those fees. The FOS highlighted concerns from industry about this issue in its feedback statement following its recent consultation on its funding framework, and it acknowledged examples of poor behaviour by CMCs.

The Government agree that there are wider implications and it is critical that the bodies in the financial services regulatory framework, including the FCA and the FOS, co-operate effectively. That is why Clause 38 introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues that have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, the FOS and the FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications. These organisations already co-operate on a voluntary basis through the existing wider implications framework. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.

As I have set out, the Government are clear that all consumers should be able to access the FOS free of charge, without the need of any CMC support. Amendment 90 will enable this.

Amendment 90 agreed.

Financial Services and Markets Bill

Lord Harlech Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords, this is an issue that I have raised in the House before, having run into the same set of issues—I suspect with some of the same companies down in the West Country involved particularly in large-scale exports which require performance bonds to be able to meet their contractual obligations. In these instances, performance bonds were denied by the banks unless the collateral included the homes and personal possessions of the directors and senior managers of the company. This was despite the fact that the firms had long-standing records of being able to deliver on the projects they engaged in and indeed the customers at the far end had reputations, again, of being excellent payers.

It is a real weakness in the system that we have no one who deals with market gaps, particularly when it applies to SMEs. I attribute part of this to the regulatory perimeter, but regardless of where the fault lies, there needs to be a remedy if we are to build a future economy which will be based very largely on SMEs and, hopefully, very significantly on exports.

[Lord Harlech (Con)]

My Lords, the Government recognise the importance of ensuring that SMEs are able to access appropriate financial products, including performance bonds, and of ensuring the availability of useful information on such products. As noble Lords are aware, performance bonds are a type of financing product that provides a financial guarantee to one party in a contract in the event of the failure of the other party to fulfil its obligations.

More broadly, SMEs already benefit from a diverse financial market, made up of high-street banks, smaller banks and a range of non-banks, to ensure they can continue to access suitable finance. The Government support SMEs’ access to finance through a variety of debt and equity finance programmes through the British Business Bank. These programmes were supporting more than £12 billion of finance to more than 94,000 smaller businesses as of June 2022.

The British Business Bank also produces several reports on access to finance on an annual basis, including the Small Business Finance Markets report, providing expert and independent assessment of the availability and options within the wider funding landscape for SMEs. Fundamentally, the commercial terms that banks and insurers offer, including the collateral they require for performance bonds, are a matter for the firms, subject to meeting the relevant regulatory requirements.

The Government remain committed to maintaining the highest international standards of regulation, and the Financial Services Act 2021 granted the PRA the powers to implement the latest international standards, known as Basel III.1. These include revised capital requirements for performance bonds for banks. The PRA recently consulted on its proposals and specifically requested comments and data from firms and wider stakeholders on its proposals for capital requirements for products such as performance bonds, and it will be considering feedback provided by respondents in formulating its final proposals. For insurers providing performance bonds, the Government are reforming one of the capital requirements, the risk margin, removing a barrier to lower product pricing.

As noble Lords are aware, under the provisions in the Bill, our independent regulators will take on new responsibilities. This means that the PRA will take on responsibility for setting the relevant regulatory requirements that are currently set through retained EU law, acting within the framework set by the Government and Parliament.

As we have discussed a number of times in relation to the Bill, when making rules designed to ensure the safety and soundness of financial services firms it is also important to consider how those firms can support the wider UK economy. That is why the Government have introduced the new secondary growth and competitiveness objectives, which will require the regulators to act to facilitate the competitiveness of the UK economy and its growth in the medium to long term. The PRA’s current consultation has been undertaken before the provisions in the Bill will come into effect. However, the Financial Services Act 2021 requires the PRA to “have regard” to the Government’s economic policy, including investment in SMEs and infrastructure, as well as the effect of its requirements on the UK’s international standing and the provision of finance to businesses and consumers in the United Kingdom on a sustainable basis.

Measures in the Bill also allow for parliamentary scrutiny of the regulators’ performance, including how they have advanced their new secondary competitiveness and growth objective. In addition, the Bill requires the regulators to produce statements of policy on how they will review their rules. Recent government amendments will require these statements to include information on how stakeholders can make representations to review rules, and on the arrangements for ensuring that these representations are considered.

In conclusion, the Government are committed to ensuring that SMEs have access to suitable financial products which are subject to suitable prudential safeguards to appropriately manage any risks. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. I therefore ask my noble friend to withdraw his amendment.

[Earl Attlee (Con)]

My Lords, I am particularly grateful to the noble Baroness, Lady Kramer, for her intervention, which showed how much more she knows about finance than I do. She did a great job. I am not convinced that industry will be cracking open the champagne after listening to my noble friend’s response to my amendment; nevertheless, I am grateful for it. In the meantime, I beg leave to withdraw my amendment.

--- Later in debate ---

Amendment 107 withdrawn.

[Lord Harlech (Con)]

My Lords, I beg to move that further consideration on Report be now adjourned until 8.31 pm.

[Lord Kennedy of Southwark (Lab Co-op)]

My Lords, I do not think that the debate on our regret amendment is time-limited.

--- Later in debate ---

[Lord Harlech (Con)]

My mistake. I did not mean to imply that it was time-limited. I meant to say that Report stage on the Bill would resume not before 8.31 pm.

Consideration on Report adjourned until not before 8.31 pm.

Financial Services and Markets Bill

Lord Harlech Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Holmes of Richmond (Con)]

My Lords, in moving Amendment 108 I will speak also to Amendment 109 in my name and, in doing so, I declare my technology interests as set out in the register. The purpose of both amendments is predicated on the fundamental truth that AI is already extraordinarily powerful and pervasive across our financial services, impacting so many elements of people’s experience and ability to access and avail themselves of financial services. If AI is to human intellect what steam was to human strength, we see the extent of the issue.

In Committee, the Minister perhaps rightly suggested that it would be wrong from a policy perspective to have an AI reporting officer in financial services and not consider this across the whole of the economy. If so, will my noble friend take back to the Treasury the need to work across departments—with the Business Department and the newly formed DSIT—to consider an approach where an AI-responsible officer on the boards of all companies would be considered, for the benefit of all those involved in the provision of those services; in this context, financial services? Perhaps this would be a good topic to work up for the AI summit which will be taking place in London later this year. Similarly, the UK has an extraordinary opportunity to be a leader in ethical AI, and I ask my noble friend whether it would make sense, with colleagues across government, to expand the specificity of these amendments in financial services and look at how they might be implemented, coming off the back of the AI summit in the autumn.

The Bill provides an opportunity to raise the whole question of AI. I bring these amendments to do just that. I believe that it would make a real difference to financial services—consumers, businesses and regulators alike—if these amendments were considered in that context, but I completely accept that there is a broader context and would welcome my noble friend’s comments on both the specific and the broader context. I beg to move.

[Lord Harlech (Con)]

My Lords, I thank my noble friend Lord Holmes of Richmond for tabling these amendments for discussion. The Government are firmly of the view that artificial intelligence has the opportunity to revolutionise every aspect of our lives, and we are committed to unlocking the enormous benefits that it can bring, in a way that is fair and allows everyone in society to benefit.

In March 2023, the Department for Science, Innovation and Technology published proposals for a new regulatory framework for AI regulation in the government’s AI regulation White Paper. This sets out a proportionate, adaptable framework for AI regulation, underpinned by five potential cross-sectoral principles, which include concepts such as fairness, safety and transparency, to strengthen the current patchwork approach to regulating AI indirectly.

Through the proposals for the new AI regulatory framework, we are building the foundations for an adaptable approach that can be adjusted to respond quickly to emerging developments. The vast majority of industry stakeholders we have engaged with so far agree that this strikes the right balance between supporting innovation in AI while addressing the risks it presents. We are committed to a proportionate approach to AI regulation that allows us to maximise the benefits that AI can bring to the economy and society and can effectively respond to the fast-moving risks presented by AI.

The White Paper is currently undergoing public consultation until 21 June 2023. We will continue to work with experts and stakeholders across the AI economy during the consultation period and beyond in order to identify emerging opportunities and risks and ensure that the regulatory framework can adapt to them. Furthermore, the FCA, the PRA and the Bank of England recently published a discussion paper on how regulation can support the safe and responsible adoption of AI in financial services. Last week, the Government announced that the UK will host the first major global summit on AI safety this autumn.

While I am very sympathetic to the intentions behind my noble friend’s Amendments 108 and 109, the Government believe that they could result in unintended complications in the use of artificial intelligence in the financial services sector. I hope that I have sufficiently reassured noble Lords that the Government remain committed to an effective and consultative approach to the use of artificial intelligence within the financial services sector. Noble Lords can be reassured that the Government will continue actively to involve Parliament in decisions in this area, particularly in relation to the future creation of a digital pound. Therefore, I ask my noble friend to withdraw his amendment.

[Lord Holmes of Richmond (Con)]

My Lords, I thank the Minister for his full response, which is appreciated. It is a thoroughly good thing that, particularly this year, we have heard more conversations and considered thought around AI, both in this place and in wider society, than we probably had in preceding years. I hope that we can have increasing public engagement and public debate around AI to ensure that everybody is enabled to take the benefits, understand the risks and understand that they are mitigated, managed and eradicated by regulators and legislators so that the UK can be the place where ethical AI is championed for the benefit of businesses, consumers and communities alike. I very much look forward to the global summit later this year. I beg leave to withdraw the amendment.