Financial Services Bill

Lord Oates Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

Moved by

[Lord Oates]

11: Schedule 2, page 62, line 9, at end insert—
“(ca) the climate-related financial risks to which FCA investment firms are exposed,”Member’s explanatory statement
The purpose of this amendment is to require the FCA, in exercising its power to make general rules, to have specific regard to the climate related financial risks to which FCA investment firms are exposed.

[Lord Oates (LD)]

My Lords, I declare my interests as chair of the advisory committee of Weber Shandwick UK, as set out in the register. In moving Amendment 11 in my name and the names of my noble friend Lady Kramer and the noble Baroness, Lady Hayman, I will also speak to the other amendments in this group. Before doing so, I put on record my thanks to a number of organisations for their briefing and patient answers to the many and often ignorant questions that I have posed to them in preparing for the Bill, particularly Finance Watch, Positive Money and Carbon Tracker.

I am also grateful to the City Corporation and the APPG for Financial Markets and Services for the helpful information they provided, and, of course, to the noble Earl, Lord Howe, and his ministerial colleagues for meeting to discuss the Bill and, if not immediately signing up to all our climate amendments, at least recognising the seriousness of the issues that they raise. I hope that over the course of Committee we will be able to convince the noble Earl and his colleagues of the urgency of acting through this legislation.

There are essentially three categories of amendment in this group. The first addresses the rule-making powers of the regulators, requiring them when making the rules to take account of the climate-related financial risks to which the entities they regulate are exposed. This issue is dealt with in Amendments 11 and 12.

The second category requires regulators when making rules to have regard to the UK’s national and international climate change objectives and obligations. Amendments 13, 14, 15, 16, 17, 23, 34, 35, 36 and 37 address this issue in a number of different ways.

Finally, Amendments 48, 75, 76, 89 and 98 fall into a third category, which tackles disclosure and governance issues as they relate to climate change.

Turning to the first category, the objective of Amendments 11 and 12 is simply to ensure that the prudential regulation of FCA investment firms under Schedule 2 is fit for purpose; that is, that it properly takes account of and seeks to manage and control the risk exposure of the firms it regulates. It is hard to understand on any accepted definition of prudential regulation how it can be regarded as such if it fails to take account of exposure to climate risks, given the potential threat they pose, not only to individual firms but to the financial system as a whole.

There are those who argue that it is premature to take this approach, because the sector is in the process of working out how to measure climate risk, which is undoubtedly a complex matter, given the myriad interrelationships that exist and the fact that there is no precedent for measuring such dynamic risks. While I acknowledge that we do not have a perfect understanding of climate risk, we cannot wait for a perfect solution. We cannot accept that a potentially enormous risk exists for FCA investment firms, but, because it is difficult to measure its exact scale, we are going to act as if it does not exist at all. That is not prudential regulation; it is wantonly reckless negligence.

I hope that the Government will look at this matter very carefully and that the Minister will be able to give us some comfort that, if they will not accept our amendments, they will at least bring forward proposals to ensure that prudential regulation of FCA investment firms does not continue to ignore what is likely to be the most significant risk to which they are exposed over the coming decades.

The second set of amendments seek in different ways to ensure that the FCA and the PRA must have regard in rule-making to our net-zero target and our wider international obligations on climate change and biodiversity. Amendment 23 in my name, with the support of my noble friend Lady Kramer and the noble Baronesses, Lady Hayman and Lady Bennett of Manor Castle, would prevent the Treasury from using its power under Clause 3 to evoke capital requirement regulations unless the effect of the new regulation was compliant with the UK’s net-zero target.

Amendment 13 to Schedule 2 and Amendment 34 to Schedule 3 require the FCA and PRA, when making rules, to have regard to the

“the likely effect of the rules on the relative standing of the United Kingdom as an international leader in combatting climate change”.

Amendments 16 and 37 to Schedules 2 and 3 respectively require that, in considering that likely effect on the UK’s standing, the FCA and PRA have regard to our commitments under the Paris Agreement. This includes our nationally determined contribution of a 68% reduction in emissions from 1990 levels by 2030 and the UK’s net-zero target under the Climate Change Act 2008, as amended in 2019. Amendment 17 in the name of the noble Baroness, Lady Bennett of Manor Castle, adds the United Nations Convention on Biological Diversity to that list of “have regards”.

In these amendments, I have deliberately replicated existing language in the Bill’s rule-making clauses, which require the FCA and PRA to have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.

That is an undoubtedly an important consideration, but it needs to be specifically supplemented by a requirement that takes into account the UK’s standing as a leader on climate change. This will force the regulators to raise their sights and ensure that we have the rules in place to cement the UK’s position as the leading financial centre in tackling climate change and providing green finance.

On an earlier group on Monday, my noble friend Lord Sharkey quoted the Barclays CEO Jes Staley, who said when asked which amendment he would like to burn now we had left the EU:

“I wouldn’t burn one piece of regulation.”


He went on to say:

“I would continue pushing the climate agenda, trying to make London a centre of innovation around financing climate and transitioning to a net zero economy by 2050”.


That might be a pretty brilliant idea and we agree with him, but we need an adequate system in place to allow it to happen. In the last 15 years, Governments in which all the main parties have been represented have ensured that the UK has established and retained international standing as a leader on climate issues. We need to ensure that leadership is reflected not just in our politics and Government, but across industry and society as a whole. Nowhere will this be more important than in the most significant sector of our economy.

If our financial services industry and its regulators show leadership on climate, the industry will not only have the opportunity to gain a clear market advantage in the years ahead but will help to address the current climate emergency. If they do not, instead of playing a key role in averting climate catastrophe, that same industry will be a key contributor to it. That is what is at stake here.

Amendments 14 and 35 tabled by the noble Baroness, Lady Hayman, have a similar objective although I must admit that they are a little more concise than my version. They would require the FCA and PRA, in making rules, to have regard to

“the likely effect of the rules on the United Kingdom meeting its international and domestic commitments on tackling climate change”.

Amendments 15 and 36 in the name of the noble Baroness, Lady Jones of Whitchurch, have a similar objective again but focus specifically on the net-zero target under the Climate Change Act, as amended. I put my name to both these sets of amendments because the purpose of all our amendments is a common one: the essential task of ensuring that our regulators take account of the most significant threat that faces the financial services industry, and indeed every one of us on this planet—the climate emergency. The intent of these amendments has support across the Committee, so I hope that the Minister will recognise the need to act and the Government will either accept a version of these amendments or bring forward one of their own. If they are unwilling to do so, I think the spirit of the House will be to come together on a joint amendment on these matters on Report.

--- Later in debate ---

[Earl Howe (Con)]

My Lords, I failed to cover the Pension Schemes Act. I apologise to the noble Baroness. The Act provides a power to bring forward regulations, placing various obligations on pension schemes relating to climate change risks. The provisions in the prudential package of the Financial Services Bill do something slightly different. They place a duty on the regulators to have regard to certain matters and to explain how they have been considered, given that the Bill imposes duties on the regulators to make rules relating to Basel and the IFPR. I reassure the noble Baroness that my officials and I have considered these provisions carefully, as we have the other amendments discussed today.

As regards her main question, my point was simple. As yet, there is no international agreement on what the term “green” means. Therefore, we cannot say with certainty that greener means prudentially safer. I do not say that we will never be able to, but it is not possible at present.

[Lord Oates (LD)]

My Lords, I am grateful to all noble Lords for their thoughtful contributions to the debate. I thank and pay particular tribute to the noble Baroness, Lady Hayman, for her important leadership on these issues through Peers for the Planet which is recognised across the Committee. I also thank all noble Lords who signed or spoke in favour of amendments for their co-operative, cross-party approach.

In quoting the Government’s approach, the noble Baroness, Lady Hayman, paraphrased St Augustine: “Lord, make me greener, but not yet”. I thank the Minister for his comprehensive response and characteristic courtesy, but it felt a little complacent. One could also quote from St Paul—that it was about “the good that I would I do not”. There is no doubt about the Government’s intentions, ambitions and targets. We welcome and are impressed by them, but it is now reaching the point where we have to act.