Financial Services and Markets Bill

Lord Sharkey Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Baroness Hayter of Kentish Town (Lab)]

My Lords, it is exactly three months ago today that we debated this issue in Committee, when the Minister heard many examples of what had been going on. She has done rather more than any of her predecessors in acknowledging that there is a problem with how the AML rules are applied to PEPs and that change needs to happen—but she has gone even further and done something about it. I will not say that it is simply because she is a woman and that is what we do, but it is interesting that she has done it. As we heard, she has tabled Amendments 96, 97, 118 and 119, which she has outlined.

I have added my name, as the noble Lord, Lord Moylan, said, to Amendment 105, which goes a bit further and is more specific than the Government’s amendment. Ideally, they might have accepted it and made a carve-out for our family members; as we have heard, we may be guilty because we are here, but they have done nothing wrong and it is awful that they are caught by it. So I welcome the Minister saying in her introduction that the review will specifically look at whether it is possible to tweak that somewhat.

As I said in Committee, this has been going on for rather a long time. The noble Lord, Lord Flight, was the first noble Lord to raise it that I could find, in 2013, and I have been on about it since 2015, as the House knows. We have had Written Questions, Oral Questions, meetings, press coverage and all of that. In addition to the inconvenience for us, this has also meant that all these banks and others are wasting their time looking at our business instead of, as we have heard, at some other people. It is not just Amex and others; it is car purchase firms and everybody else inconveniencing us and wasting their time.

The Minister has acknowledged that it is time for legislation. The key part of her proposal is distinguishing between domestic and foreign PEPs and a requirement both on HMT and the FCA to do something. What the Government have done may not be perfect, but it is a real step forward. I think the Minister is well aware that we will keep a rather beady eye on what is happening, and we will be back here if nothing changes.

In the meantime, we should thank the Minister for what she has done. We have made a big step forward and I am delighted that the noble Lord, Lord Moylan, will not be pressing his amendment. It is right that we accept where we have got to with the Minister, and we will watch that being implemented.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 105 in the name of the noble Lord, Lord Moylan, and I congratulate him on his determination and persistence. I do not quite understand his dislike of Turkish barbers, but we can deal with that some other time.

His amendment’s simplicity and its direct modification of the regulation is an appealing approach, as is the absence of the word “review”. I was very pleased to see the government amendments in this group, chiefly because, of course, they are government amendments. I am very grateful for the Minister’s clear and long-standing commitment to resolving, or at least ameliorating, the problem. I have only a couple of observations about the government amendments.

The explanatory statement to Amendment 96 says that UK PEPs

“should be treated as representing a lower risk than a person so entrusted by a country other than the UK, and have lesser enhanced due diligence measures applied to them”.

The amendment itself, in proposed new subsection (3)(b), states that

“if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer is less than the extent to be applied in the case of a non-domestic PEP”.

Neither of those offers a definition or sets an upper limit to what this lesser form of due diligence should be. Is that decision to be left entirely to the financial services companies? If it is, can we reasonably expect uniformity of definition and behaviour?

Why would we expect the banks to significantly change their current behaviour? Would it not be more likely that they will simply water down some minor aspect of the diligence they currently feel is due and carry on otherwise much as they do now? In a way, that is what is happening anyway. The banks mostly ignore the FCA’s current guidance, as set out in paragraph 2.35 of FG17/6. The FCA, in response to that, applies no sanctions. Nowhere in the government amendments is there mention of sanctions for non-compliance with the new arrangements.

Given the rather cavalier disregard some banks have displayed towards the current guidance, do we not need some sanction for future non-compliance, or a way of making the FCA properly enforce its own guide- lines? What use are guidelines if they are not enforced? I would be very grateful if the Minister could say how a workable definition of “lesser due diligence” is to be arrived at and how the new regime may be enforced.

[Viscount Trenchard (Con)]

My Lords, I declare my interest as a director of two investment companies, as stated in the register. I was interested to hear the remarks of my noble friend Lord Forsyth of Drumlean about American Express. He said that he had had a gold credit card with that company since 1979. Well, I had a gold card issued by American Express in 1978. I was very proud of having that card. I did not use it often, but it is one of those cards that clears automatically every month so there is no danger of running up unpaid debts and paying 20% or 30% interest.

In November 2021, I missed an email from them asking me for KYC information, including my passport details, proof of address and a utility bill, and I omitted to reply. I then got another email a month later—with no telephone call or letter through the post—saying that my account will be closed down. I telephoned them and, after waiting for three-quarters of an hour or so, I spoke to someone who agreed that they did not really need KYC information on me, but if I supplied it and uploaded it to their website, my account would not be cancelled, and all would be fine. I duly did that, but the account was still cancelled in about February 2022. I was not happy about this, because, as I said, I rather liked my gold card issued in 1978, so I took issue with them.

Over the past 15 months, I have spoken with them about six times; I have been on the chat function about six times. I now have two names of individuals and an email address I have been corresponding with, but my account is still cancelled—although they still send me a monthly statement through the post giving me a credit balance. I will print out the Hansard report of this debate and attach it to my next email to American Express, because I am not giving up on this.

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Moved by

[Lord Sharkey]

107: After Clause 71, insert the following new Clause—
“Interest rates for mortgage prisoners
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137FD insert—“137FE FCA general rules: interest rate for mortgage prisoners(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)—“mortgage prisoner” means a consumer who cannot switch to a new mortgage deal (with a new lender or with their existing lender) and includes—(a) all 195,000 mortgages identified in CP576 Mortgage Prisoners Review, and(b) those who have a regulated mortgage contract with one of the following types of firms—(i) inactive lenders: firms authorised for mortgage lending that are no longer lending;(ii) unregulated entities: firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration; or(iii) closed mortgage books within larger financial groups: a closed mortgage book that is within a larger financial group but in a different entity to an active lender;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years with their existing lender;“Standard Variable Rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the Standard Variable Rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) should make new fixed interest rate deals available to mortgage prisoners who meet criteria determined by the FCA.(5) When specifying the criteria which mortgage prisoners need to meet to access the new fixed interest rate deals required by subsection (1) the FCA should take into account the criteria used by active lenders to enable their existing customers to access product transfers and ensure that similar criteria apply in the rules required by subsection (1).(6) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA should specify rates for a range of Loan-To-Value (LTV) ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(7) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made not later than six months after this Act is passed.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and ensure their access to fixed rate interest deals.

[Lord Sharkey (LD)]

My Lords, I declare an interest as co-chair of the APPG on mortgage prisoners and I thank the noble Viscount, Lord Trenchard, for adding his name to this amendment.

The amendment is similar to the one we debated in Committee: the only difference is that it gives the FCA the power to determine which mortgage prisoners may qualify for new fixed interest rate deals. The Committee amendment was more prescriptive. Its chief purpose was to allow discussion of the new Martin Lewis-funded LSE report on resolving the plight of mortgage prisoners. I said then that we would bring back the amendment on Report if no discernible progress had been made. No discernible progress has been made. The LSE report contains detailed and costed proposals and was published on 8 March this year. HMT officials were present at the launch and copies of the report were made available. When we debated the amendment in Committee on 13 March, the Minister committed to arranging an urgent meeting to discuss the report.

That urgent meeting with HMT, interested Peers, Seema Malhotra MP, researchers and representatives of the mortgage prisoners finally took place on 26 April, six weeks after the Minister had promised to arrange it. I am pretty sure that that long delay was not the fault of the Minister but simply a clear indication of the very low priority that HMT gives to the matter. In fact, the Minister had written to me to say that he was extremely disappointed that HMT had made no contact, and that his team had called for the meeting to be organised on multiple occasions and had stressed the urgency of the situation.

The Minister was absolutely right to stress the urgency. We stressed it again in our letter of 17 May to the noble Baroness, Lady Penn, asking HMT to make a full response to the LSE proposals before Report. We have had no response to the letter or to the LSE report.

Interest rates are rising significantly and the already intolerable burden on mortgage prisoners is growing steeply, increasing their misery, despair and uncertainty. HMT seems not to understand that or even to care much about it. We know that HMT officials have recently had contact with the academic authors of the LSE report. We also know that those officials told the academics that they hoped to have a response to the report before the Summer Recess. That would be five months since HMT first had sight of the report—an intolerable and unjustifiable delay and a clear indication of the low priority the Treasury is giving the matter.

The treatment of mortgage prisoners is certainly uncaring and at times almost contemptuous. Whatever the outcome of today’s debate on this amendment, I urge the Minister to galvanise the Treasury team and replace what seems to be a leisurely approach with real urgency. After all, in February 2020 the then Economic Secretary to the Treasury said in a letter to Martin Lewis:

“My officials … will take any new proposals under full consideration if they meet our strict requirements that they a) deliver value for money for government (not just individuals), b) are a fair use of taxpayer spending, and c) address any risks of moral hazard”.


The LSE report explains how its proposals satisfy those requirements. I ask the Minister to deliver urgently on John Glen’s promise.

Mortgage prisoners are not to blame for the very high SVRs that are ruining or have ruined their lives; the Government are to blame. HMT sold mortgages to vulture funds without protection for the mortgagees. It later claimed to have been misled by those funds but in fact, research funded by Martin Lewis found that the Treasury was aware of the potential problems as early as 2009, when it recognised that the sale of closed books to investors had the potential to harm borrowers. Martin Lewis’s report went on to say:

“It has subsequently become clear that many prisoners did suffer harm; our first report detailed negative effects including paying high interest rates and difficulty in remortgaging, leading in some cases to anxiety, depression, physical and mental ill health and the prospect of losing the family home”.


Interventions by the Government to date have helped at most 2,200 of the 195,000 mortgage prisoners, and in fact only 200 borrowers have been directly helped to switch as a result of the modified affordability tests run by the FCA. As things now stand, the Government and the FCA are not proposing any further action to help mortgage prisoners. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or to provide any help.

The amendment would provide immediate and practical support to mortgage prisoners. It would introduce a cap on the standard variable rates paid by mortgage prisoners. Capping at 2% over the base rate would return the margins to what they were prior to the financial crisis. That should stop firms exploiting their captive customers but would have no impact on the wider market.

To ensure that mortgage prisoners can gain some certainty over their mortgage payments, the amendment would also require mortgage prisoners who meet FCA criteria to be offered fixed rates. These fixed rates would vary according to the loan-to-value of the mortgage prisoner, so would be reflective of risk.

The amendment does not single out mortgage prisoners for help that is not available to other borrowers in the active market. It just ensures that mortgage prisoners are able to access fixed-rate deals on the same terms as others in the active market. It stops mortgage prisoners being exploited by vulture funds and inactive lenders and it ensures that they are treated fairly. The amendment requires the FCA to set the criteria for accessing new fixed-rate deals and interest rates based on those in the active market so that mortgage prisoners are treated the same as those in the active market and can access new deals with their existing lender.

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[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate, and in particular the noble Lord, Lord Sharkey, for tabling this amendment. I start by emphasising that the Government take this issue extremely seriously. We have a great deal of sympathy for affected mortgage borrowers and understand the stress they may be facing as a result of being unable to switch their mortgage. That is precisely why we, and the FCA, alongside the industry, have shown that we are willing to act, and have carried out so much work and analysis in this area, partly in response to prior interest from this House, as alluded to by the noble Baroness, Lady Chapman. This has included regulatory changes to enable customers who otherwise may have been unable to switch to access new products.

The Government remain committed to this issue and welcome the further input of stakeholders. For this reason, during Committee, the Government confirmed that they were carefully considering the proposals put forward in the latest report from the London School of Economics. Since then, as noted in the debate, I have met with the noble Lord and further members of the APPG and representatives of the Mortgage Prisoners Action Group to discuss the findings of the report and the issue of mortgage prisoners more widely.

The Economic Secretary to the Treasury has also written to the noble Lord, including to provide further clarity on the proceeds from the sale of UKAR assets. The LSE report recommends free comprehensive financial advice for all. That 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 £92.7 million this financial year.

The other proposals put forward by the London School of Economics are significant in scale and ambition. While the Treasury has been engaging with key stakeholders, including the LSE academics behind the report, for some time, including since Committee, we have concerns that these proposals may not be effective in addressing some of the major challenges that prevent mortgage prisoners being able to switch to an active lender. For example, the proposals would not assist those with an interest-only mortgage ultimately to pay off their balance at the end of their mortgage term.

We continue to examine the proposals against the criteria put forward originally by then Economic Secretary to the Treasury, John Glen, to establish whether there are further areas we can consider. I remind the House that those criteria are that any proposals must deliver value for money, be a fair use of taxpayer money and address any risk of moral hazard. This does not change the Government’s long-standing commitment to continue to examine this issue and what options there may be. However, it is important that we do not create false hope and that any further proposals deliver real benefit and are effective in enabling those affected to move to a new deal with an active lender, should they wish to.

I will not repeat the arguments against an SVR cap, as we discussed them at length previously in this House. An SVR cap would create an arbitrary division between different sets of consumers, and it would also have significant implications for the wider mortgage market that cannot be ignored. It is therefore not an appropriate solution, and I must be clear that there is no prospect of the Government changing this view in the near term. In the light of this, I ask the noble Lord to withdraw his amendment.

[Lord Sharkey (LD)]

I thank all noble Lords who have spoken in this customarily brief debate on mortgage prisoners. I especially thank the noble Viscount, Lord Trenchard, for his contribution today and in Committee.

I am uncertain about what the Government’s response consists of. It seems to me that perhaps it consists of three things. The first is exculpatory—it was not our fault. It was the Government’s fault; it cannot be anybody else’s fault that these mortgage prisoners are in the position they find themselves in.

The second thing I am uncertain about is what the Government are actually going to do. I hear expressions of good will and care for mortgage prisoners but I do not hear anything at all that amounts to a plan, or the sight of a plan, or an objective, or something concrete that would help these people. I did not even hear whether we will get a response to the LSE report any time before the Summer Recess, or indeed whether there is a date by which response can be made—perhaps the Minister can enlighten us. I remind her again that by the Summer Recess it will be five months since the LSE report was presented, and the Treasury surely has had time to analyse it in some detail and to make a considered response.

It is quite clear that the real distress experienced by these mortgage prisoners is not understood or felt deeply within the Government or the Treasury. When we had a meeting with the Minister, we had a couple of the leaders of the Mortgage Prisoners group alongside us who told us some terrible stories about what has happened to their families over the past 10 years; 10 years of paying too much money—more than they should have done and more than they needed to in many ways—to these vulture funds.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

Moved by

[Lord Sharkey]

1: Clause 1, page 1, line 6, leave out subsection (1) and insert—
“(1) A Minister of the Crown may by regulation revoke or replace any legislation referred to in Schedule 1 provided that—(a) a document containing a proposal for those regulations has been laid before each House of Parliament,(b) the document has been referred to a Joint Committee of both Houses, and(c) a period of at least 40 days has elapsed after that referral, not including any period during which Parliament is dissolved or prorogued or either House is adjourned for more than four days.(2) If the Joint Committee, after considering any regulations laid under this paragraph, finds that—(a) the regulations represent a substantial change to the preceding retained EU law, or(b) the Government have not carried out sufficient public consultation lasting at least six weeks before laying the draft before Parliament, a Minister of the Crown must arrange for the instrument to be debated on the floor of each House and voted on before the period in sub-paragraph (1)(c) elapses.(3) If any amendments to the regulations, whether or not proposed by the Joint Committee, are agreed by both Houses of Parliament the regulations must be made in the form so amended.(4) If one House agrees amendments to the regulations under sub-paragraph (3) the Minister may not make the relevant statutory instrument until the other House has debated and voted on a motion to agree or disagree with those amendments.”

--- Later in debate ---

[Lord Sharkey (LD)]

My Lords, I shall speak first to Amendment 1 and then to Amendments 116 and 117. The Bill gives the Ministers and regulators power to shape our financial services regimes, but it does not allow for any meaningful parliamentary scrutiny of the changes that Ministers and regulators may introduce into law. This is another very clear example of what the noble Lords, Lord Hodgson of Astley Abbotts and Lord Blencathra, and their committees, warned about—the significant and continuing shift of power from Parliament to the Executive. The DPRRC report says in its introduction:

“We have concluded that it is now a matter of urgency that Parliament should take stock and consider how the balance of power can be re-set”.


It goes on to highlight the problem of what it calls

“Legislative sub-delegation of power: where ministers can confer powers on themselves or other bodies”,

which is precisely what this Bill is about. The report, called Democracy Denied?, goes on to say:

“we conclude that conferring legislative sub-delegation of power is potentially a more egregious erosion of democratic accountability than a simple delegation to a minister”.

The Minister is aware of these concerns. In our previous discussions, she has noted, by way of compensation no doubt, that there will be opportunities for Parliament to be consulted and for post-hoc accountability reviews. Neither of those things, desirable though they may well be, is a substitute for meaningful legislative scrutiny. This scrutiny is what Amendment 1 proposes to introduce, and I am very grateful to the noble Lords, Lord Hodgson of Astley Abbotts and Lord Lisvane, and the noble and learned Lord, Lord Thomas of Cwmgiedd, for adding their names to the amendment.

The amendment is based on the Amendment 76 of the noble and learned Lord, Lord Hope, to the REUL Bill, which your Lordships agreed to on 17 May by 231 votes to 167. This amendment was discussed at ping-pong in the Commons 10 days ago, and was rejected by the Government on three grounds. The first was that the Government do not accept the principle that Parliament should be able to amend statutory instruments. The second was that the scrutiny proposed would take up too much parliamentary time. The third is the really rather astonishing and disappointing view of the reach and capability of our Joint Committees. I shall not comment on that last point, except to say that it is obviously mistaken, as many of us here could attest.

The objection against taking up too much parliamentary time seems pretty odd, as scrutiny is obviously the essence of our role. In any case, that objection may, if one is charitable, have some force in the case of the monster that is the REUL Bill, but surely has none in the case of this much shorter and more coherent Bill.

As for the Government’s not accepting the principle that Parliament should be able to amend statutory instruments, that surely needs qualification. We have heard that qualification discussed in the preceding business. There are two examples of Acts of Parliament containing provisions for the statutory instruments that they generate to be amended—the Census Act 1920 and the Civil Contingencies Act 2004. Both those Acts allow for SIs to be amendable in the way that our Amendment 1 proposes, only by agreement of both Houses. There are no free-standing or wide-ranging powers.

The Government seem to be sticking to this rather confected set of objections to parliamentary scrutiny. Noble Lords who were here for the preceding ping-pong on the REUL amendments from the noble Lord, Lord Anderson, will have heard the repeated resistance to parliamentary scrutiny. That is despite the SLSC’s calling for the REUL Bill to contain

“an enhanced scrutiny mechanism that enables Parliament to decide that an instrument makes changes of such policy significance that the usual ‘take it or leave it’ procedures—even if affirmative—relating to statutory instruments should not apply but that a further option should be available, namely a procedure by which the Houses can either amend, or recommend amendments to, the instrument”.

The Bill before us is essentially a financial services carve-out from the REUL Bill and it suffers from the same lack of effective scrutiny provisions. What was necessary for parliamentary scrutiny of the REUL Bill is also necessary for this. Our Amendment 1 responds to the SLSC’s call. It brings in a sifting process. It allows a Joint Committee discretion over what constitutes substantial change to preceding retained EU law. It requires a debate on the Floor of each House if the Joint Committee makes a finding of substantial change or that there has been insufficient public consultation. It also allows SIs generated by the Bill to be amended if, and only if, both Houses agree. This is not a prescription for frequent and casual intervention but a narrowly drawn means of altering SIs on those rare occasions when both Houses find the case compelling.

The amendment returns a measure of meaningful parliamentary scrutiny to the Bill. It allows careful parliamentary scrutiny of proposed changes to our critically important financial services regime. Without it, there would be none; Ministers and regulators would decide, and Parliament would be bypassed yet again.

I turn to Amendments 116 and 117. These amendments, taken together, would allow either House to insist on an enhanced form of scrutiny for SIs it deemed likely to benefit from more detailed examination and debate, as well as from recommendations for revision. The usual SI procedures, as we all know, do not allow this and do not constitute parliamentary scrutiny in any meaningful sense: we cannot amend and we do not reject. The super-affirmative procedure set out in Amendment 117 would allow a measure of real, detailed scrutiny, a means of hearing evidence and a means of making recommendations to Ministers. It would not allow the amendment of SIs: that power remains exclusively with the Minister.

Identical amendments were debated in Committee. The noble Baroness, Lady Noakes, who is not in her place, added her name to the amendments and spoke in support; so did the noble Viscount, Lord Trenchard, and the noble and learned Lord, Lord Thomas of Cwmgiedd. The noble Lord, Lord Tunnicliffe, also not in his place, commented:

“If a piece of legislation is proposed and supported by the noble Lord, Lord Sharkey, the noble Baroness, Lady Noakes, and the noble Viscount, Lord Trenchard, you have to think that it is pretty wide-ranging—in fact, close to impossible”.—[Official Report, 23/3/23; col. GC 329.]


I think he meant that as a compliment, but it is not entirely clear.

The super-affirmative procedure is appropriate here because, for example, Clause 3 allows for very significant policy changes to be made that could be significant in the context of the restatement of EU law, as the noble Baroness, Lady Noakes, noted in the debate. The Minister thinks that the super-affirmative procedure is unnecessary and promises instead that

“the Government will seek to undertake a combination of formal consultation and informal engagement appropriate to the changes being made”.—[Official Report, 23/3/23; col. GC 331.]

That is not even a real commitment, with the phrase “will seek to undertake”, and it is certainly nothing close to meaningful parliamentary scrutiny. We need the super-affirmative procedure, and I commend these amendments to the House. I beg to move Amendment 1.

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies as stated in the register. I listened with interest to the noble Lord, Lord Sharkey, in bringing forward his Amendment 1 and other amendments. I feel strongly, as he has suggested, that what has been agreed for the REUL Bill should also be acceptable for this Bill. Indeed, one of my later amendments makes the same point. As he said, the Bill is in some sense a carve-out from the REUL Bill dealing exclusively with financial services. As for his other amendments, I will not repeat the arguments I made in Committee, but I look forward to hearing whether the Minister can give any greater assurance to the House today than she did at that time.

--- Later in debate ---

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, before turning to the amendments at hand, I add my thanks to those of the noble Baroness, Lady Chapman, for the contribution of the noble Lord, Lord Tunnicliffe, to this Bill and the Labour Front Bench on Treasury matters. The noble Baroness referred to the noble Lord’s generosity; I have definitely found that to be the case. He has always had a very constructive approach and approached his work with kindness and wisdom, which is a great combination to bring to this House.

The amendments before us from the noble Lord, Lord Sharkey, Amendments 1, 116 and 117, would introduce new parliamentary procedures when exercising the powers in the Bill. As noble Lords have noted, very similar amendments were proposed to the retained EU law Bill, passed and then reversed by the Commons. We have just had a debate this afternoon on a modified version of those amendments, to which I listened very carefully, although I am not as expert in the passage of that Bill as some other noble Lords in the Chamber.

Many of the arguments covered in that debate also apply here, so I do not intend to repeat them at length. I want to focus on some specific considerations in relation to this Bill, which, as the noble Baroness, Lady Chapman, noted, takes a different approach to repealing retained EU law for financial services. That is because it enables the Government to deliver fundamental structural reform to the way in which the financial services sector is regulated.

The Government are not asking for a blank cheque to rewrite EU law. This Bill repeals EU law and creates the necessary powers for it to be replaced in line with the UK’s existing Financial Services and Markets Act 2000—FSMA—model of regulation, which we are also enhancing through this Bill to ensure strong accountability and transparency. A list of retained EU law to be repealed in Schedule 1 was included in the Bill from its introduction in July 2022 to enable scrutiny of this proposal.

Going forward, our independent regulators will generally set the detailed provisions in their rulebooks instead of firms being required to follow EU law. The Bill includes a number of provisions to enable Parliament to scrutinise the regulators; the Government have brought forward amendments to go further on this, as we will discuss later on Report.

Amendments 1, 116 and 117 would introduce rare parliamentary procedures, including the super-affirmative procedure, and create a process to enable Parliament to amend SIs. As I said in Committee, those procedures are not justified by the limited role that secondary legislation will have in enabling the regulators to take up their new responsibilities. The Government have worked hard to ensure that every power in the Bill is appropriately scoped and justified. As I noted in Committee, the DPRRC praised the Treasury for a

“thorough and helpful delegated powers memorandum”.

It did not recommend any changes to the procedures governing the repeal of EU law or any other power in this Bill.

The powers over retained EU law are governed by a set of purposes that draw on the regulators’ statutory objectives. They are limited in scope and can be used only to modify or restate retained EU law relating to financial services or markets, as captured by Schedule 1. However, of course, the Government understand noble Lords’ interest in how they intend to use the powers in this Bill and are committed to being as open and collaborative as possible when delivering these reforms.

The Government have consulted extensively on their approach to retained EU law relating to financial services and there is a broad consensus in the sector behind the Government’s plans. As part of the Edinburgh reforms, the Government published a document, Building a Smarter Financial Services Framework for the UK, which describes the Government’s approach, including how they expect to exercise some of the powers in this Bill. It also sets out the key areas of retained EU law that are priorities for reform. Alongside this publication, the Government published three illustrative statutory instruments using the powers in this Bill to facilitate scrutiny.

When replacing retained EU law, the Government expect that there will be a combination of formal consultation, including on draft statutory instruments, and informal engagement in cases where there is a material impact or policy change, such as where activities that are currently taking place in the UK would no longer be subject to a broadly equivalent level of regulation. The Government will continue to be proportionate and consultative during this process, just as we have been up to this point.

Through the retained EU law Bill, the Government have also committed to providing regular updates to Parliament on progress in repealing and reforming retained EU law. I am happy to confirm that these reports will also cover the financial services retained EU law listed in Schedule 1 to this Bill.

I hope that I have satisfied noble Lords that the Government are committed to an open, transparent and consultative approach to implementing the reforms enabled by this Bill. I ask the noble Lord, Lord Sharkey, to withdraw his Amendment 1.

[Lord Sharkey (LD)]

I thank all those who have spoken in this brief debate—some more warmly than others, perhaps. In my initial speech, I forgot to be especially nice about Denis, the noble Lord, Lord Tunnicliffe; I regret that. I am of course disappointed by both his absence and the response of his successors. I repeat: when it comes to the need for real parliamentary scrutiny, the contents of this Bill are quite as important as the contents of the REUL Bill. That seems to me to be the essence of the matter. All the other arguments about the need to focus and get on with it on Report seem mechanistic; indeed, they are close to being excuses, in some ways.

The essential problem is that Parliament will be unable to scrutinise revocation and replacement, as it is set out in this Bill. I accept that it is not likely that we will revolutionise the way we treat these things as a result of this intervention, but perseverance is the only way of making any progress towards making certain that Parliament recovers its ability to scrutinise properly and does not continue to lose that ability. Although on some occasions—this is one of them—the outcome may be unsatisfactory in the short term, I am convinced that, over time and with enough persistence, we can find a way to do what the DPRRC recommended, which is restoring the balance between Parliament and the Executive. Having said all that, I beg leave to withdraw my amendment.

Amendment 1 withdrawn.

Insider Dealing (Securities and Regulated Markets) Order 2023

Lord Sharkey Excerpts

Tuesday 16th May 2023 Grand Committee

This SI will reinforce the UK’s reputation as a fair and transparent place to invest, with robust regulatory standards and serious consequences for those who do not comply with our laws. I beg to move.

[Lord Sharkey (LD)]

My Lords, this SI seems admirably straightforward and uncomplicated. We support it and I can be brief. I have only a couple of questions and one observation.

The first question relates to paragraph 7.7 in the EM. Why is it necessary to keep NASDAQ and the successor to the SWX Swiss Exchange explicitly in scope, and to add the New York Stock Exchange for that matter? Are they not already brought into scope by this SI’s adoption of the definitions in Article 4? I am sure that there is a good reason but I would be grateful if the Minister can explain what it is.

My observation concerns paragraph 7.8 of the EM. It points out that

“the set of securities to which the criminal offence of insider dealing applies to is narrower than the securities covered … in MAR”.

It goes on to give examples of the missing securities. It lists currency options, credit default swaps and units in collective investment undertakings, such as exchange traded funds—and says that the list is not exhaustive. It rather coyly says that this is “not optimal”. I agree entirely. I understand that this SI corrects that but, given the historical absence of these securities in the list of activities that may be pursued in the criminal courts for insider dealing, today’s SI rather looks like having just noticed that the stable door has been left open for 20 years and hastily closing it. It is good that no more horses will be able to bolt but that invites the question of how many have already bolted and how many, if any, were caught by the civil procedures in MAR. Does the Minister have an assessment of how many criminal cases would or could have been brought had the missing securities categories been within the purview of the Criminal Justice Act and how many were taken forward instead under the MAR provisions?

Finally, why does this instrument not come into force immediately? Does not the 21-day delay provide a further window for possibly unactionable criminal malfeasance? I look forward to the Minister’s reply.

[Baroness Chapman of Darlington (Lab)]

We agree with the Minister’s assertion that there should be serious consequences for those who break the law. We also agree with the comments from the Liberal Democrat Benches and echo the comments about the seriousness of insider dealing. We share the curiosity shown in the other place when this instrument was considered about the length of time it has taken to bring in this measure, given we understand that it came about as a result of a review that took place in 2015. I am not asking this to be facetious, but what assessment have the Government made of the number of criminal offences that would have been caught had this measure been in place sooner, which were treated under the civil regime because this instrument had not yet been brought? We want to highlight the consequences of leaving things quite this late, because we are concerned. That underscores our support for this measure. The Government are right to address this gap between the two regimes and we support this instrument.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their support for this statutory instrument.

On the time it has taken to deliver this measure and the potential impact in the meantime of not having the criminal regime and the civil regime aligned, it is important to note that since the Fair and Effective Markets Review was published, considerable work has been undertaken to modernise the UK’s market abuse legislation. For example, the civil regime for market abuse was updated in 2016 by the EU market abuse regulation and the Government and UK regulators have implemented the majority of the recommendations from the Fair and Effective Markets Review, including making changes in the Financial Services Act 2021 to increase the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with comparable economic crimes such as fraud and bribery. The Government have also recently completed a broader review of the criminal market abuse regime as part of the 2019 to 2022 economic crime plan. While this measure has taken longer to implement, there has been other action in this space in the meantime, including delivering on other recommendations from that review.

On the impact of the length of time in which the scope of the criminal offences has been different from that of the civil offences, it is important to note that the FCA has a number of tools available to tackle market abuse, of which the criminal insider dealing offence is only one. In addition to prosecutions under the criminal regime, between 2013 and 2022 the FCA has had 36 regulatory outcomes relating to market abuse, with regulatory fines totalling more than £70 million in that period.

The Government do not have data on the number of criminal prosecutions that have not been pursued due to the difference in the scope of the regimes. The FCA does not routinely record and track cases that it cannot take forward. This includes cases taken forward under the civil regime that could have resulted in a criminal prosecution with the changes made by this SI. Moreover, it is important to remember that there are a number of reasons why the FCA may choose to pursue a civil rather than a criminal prosecution other than the scope of the two regimes. For example, the FCA will consider the severity of the offence in question and whether the evidence meets the higher legal threshold needed to secure a criminal conviction.

It is not possible to say with certainty whether the FCA’s decision not to pursue criminal proceedings in a particular case was due to the issues that this statutory instrument addresses or to other factors, and we do not believe that attempting to determine that retrospectively would be a good use of government legal resources. It is a perfectly legitimate question to ask but, given that other mechanisms were available to the FCA to tackle market abuse under the civil regime—and it has also continued to bring prosecutions under the criminal regime—we can be reassured that it has been able to take action in this period. The Government are confident that the FCA has a strong track record of identifying, investigating and prosecuting insider dealing.

The noble Lord, Lord Sharkey, asked why we include specific US and Swiss exchanges and why they are not covered under the more general definitions that have been used in this SI to avoid the need to update this list again as specific named instruments change. My understanding is that for the more general definitions there are commonly understood definitions used in the UK and EU markets that this can work for, but that when you are looking at other exchanges further afield outside that scope, there remains a need to name those trading venues. That is the difference between continuing to need to name some trading venues versus going for the more general definition-based approach that this SI has done.

As to why we have chosen to include specific US and Swiss exchanges in addition to the UK and EU exchanges that will be covered by this measure, the FCA has seen a persistent trend of organised crime groups recruiting UK insiders to disclose inside information relating to securities traded on those markets. While of course this abusive behaviour is also possible for other third-country venues, this SI includes the third-country markets where the FCA has observed the greatest risk of harm. With regard to other third-country trading venues, and indeed in respect of these ones too, you would expect the home regulator to take action to tackle market abuse in those cases.

I hope that with those remarks I have answered the questions put forward today.

[Lord Sharkey (LD)]

Will the Minister address the point about the 21 days?

[Baroness Penn (Con)]

I can write to the noble Lord on that. It is probably the standard implementation period for a change of this nature. As I said in answering on the assessment of the FCA’s tools and track record on being able to tackle market abuse before this update was made, we do not think that will have a substantial impact on the ability to tackle these issues in that implementation period. I think that that addresses the point but, if there is anything further to add to that, I shall also write to the noble Lord.

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

Lord Sharkey Excerpts

Tuesday 2nd May 2023 Grand Committee

[Lord Sharkey (LD)]

My Lords, we support both of these instruments, with some reservations and a few questions.

I will speak first to the commodity derivatives and emission allowances order. As the Minister said, it proposes a very sensible reduction to regulatory burdens. I note that the procedure followed in this case was a kind of super-affirmative, as prescribed in Schedule 8 to the European Union (Withdrawal) Act 2018. The instrument was published in draft to enable recommendations to be made by a committee of either House; no such recommendations were made but some questions nevertheless arise.

Perhaps the key question is when we will see the FCA’s new replacement regime, mentioned in paragraph 7.8 of the Explanatory Memorandum. Paragraph 10.2 of the EM notes that respondents to the consultation

“did not want to return to a wholly qualitative definition of ‘ancillary trading’”

and

“were in favour of the FCA developing a simplified method to determine when an activity is ancillary”—

one that would give them the legal certainty that qualitative definitions would not. I think this means that, until January 2025, when the SI comes into force, the current rules continue to apply. If that is the case, and if the current regulatory burden is so obviously unnecessary, why do we have to wait so long for the new regime?

The EM also notes:

“HMT is committed … to ensuring that the FCA has the right powers to set any transitional provisions that may be necessary to deal with the situation in which a firm’s trading activity can no longer be regarded as ancillary”.


I take this to mean that the FCA does not currently have these powers. If that is the case, perhaps the Minister can say why the usual transitional powers article was not included in this SI.

I now turn to the financial promotion SI. I agree that that it is vital both to increase consumers’ understanding of the risks associated with crypto assets and to ensure that the promotion of these assets is subject to the same standard of regulation as is the case for broader financial services; I welcome the proposed order. I am glad to see that the proposed implementation period has been reduced from six months to four months but I wonder whether this is still too long and invites an avalanche of unregulated promotion in those four months. Can the Minister explain why the four-month period was chosen and say what consideration was given to a shorter period? I would also be grateful for more explanation of the exemption mentioned in paragraph 6.4 of the EM— specifically why it is necessary and how long it will last—and for an assurance that it does not create any unhelpful loopholes.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

Moved by

[Lord Sharkey]

241G: Clause 76, page 89, line 32, at end insert—
“(3A) For each statutory instrument laid before Parliament in draft under this Act, if each House of Parliament passes a resolution that the regulations have effect with a specified amendment, the regulations have effect as amended.”Member’s explanatory statement
This would allow affirmative SIs generated by this Act to be amended by agreement of both Houses.

[Lord Sharkey (LD)]

My Lords, in moving Amendment 241G, I will also speak to Amendments 243A and 243B. The noble Baroness, Lady Noakes, has added her name to the last two; I am grateful for her support. I will speak first to Amendments 243A and 243B, then to Amendment 241G.

At Second Reading, I estimated—as did the noble Lord, Lord Hodgson of Astley Abbotts—that this Bill would generate at least 250 SIs. Many, if not all, of them would bring or have the potential to bring significant policy changes to the regulatory structures of our financial services industries. They would be able to do this without any significant scrutiny by Parliament. The parent Bill—this Bill—rarely sets out explicit policy changes; rather, it gives the Treasury powers to make policy changes when it has decided what those policies might be. Of course, this bypasses parliamentary scrutiny; it also, yet again, ignores the proper purpose and province of delegated legislation.

Amendments 243A and 243B propose a partial remedy. They would allow either House to insist on an enhanced form of scrutiny for SIs that it deems likely to benefit from more detailed examination and debate, as well as from recommendations to Ministers for revision. The usual SI procedures do not allow this. I think we would all accept—perhaps with the dutiful exception of the Minister—that neither the negative nor the affirmative procedure allows for proper and effective scrutiny. This is obviously true for the negative procedure but is also obviously true for the affirmative procedure. We cannot amend them and we do not vote them down.

The super-affirmative SI procedure, as set out in Amendment 243B, would allow a measure of real, detailed scrutiny; a means of hearing evidence; and a means of making recommendations to Ministers for revision. I should emphasise that the super-affirmative procedure does not produce a power to amend SIs; that remains exclusively with the Government. Paragraph 31.14 in part 4 of Erskine May characterises the procedure as follows:

“The super-affirmative procedure provides both Houses with opportunities to comment on proposals for secondary legislation and to recommend amendments before orders for affirmative approval are brought forward in their final form … the power to amend the proposed instrument remains with the Minister: the two Houses and their committees can only recommend changes, not make them.”


During the recent passage of the Medicines and Medical Devices Bill, the noble Baroness, Lady Penn, helpfully summarised the super-affirmative procedure, saying that

“that procedure would require an initial draft of the regulations to be laid before Parliament alongside an explanatory statement and that a committee must be convened to report on those draft regulations within 30 days of publication. Only after a minimum of 30 days following the publication of the initial draft regulations may the Secretary of State lay regulations, accompanied by a further published statement on any changes to the regulations. They must then be debated as normal in both Houses and approved by resolution.”—[Official Report, 19/10/20; col. GC 376.]

That is quite a good précis but it omits reference to the requirement to take account of any representations or recommendations made by a committee and of any resolution of either House. It also omits the requirement to say what these representations, resolutions or recommendations were and explain any changes made in any revised draft of the regulations.

It was during the passage of that Bill—the Medicines and Medical Devices Bill—that this House last voted to insert a super-affirmative procedure. Prior to that, according to the Library, the last recorded insertion was by the Government themselves in October 2017 in what became the Financial Guidance and Claims Act.

When not doing it themselves, the Government traditionally put forward any or all of three routine objections to the use of the super-affirmative procedure. The first is that it is unnecessary because the affirmative procedure provides sufficient parliamentary scrutiny. That is obviously not the case. The second is that the super-affirmative procedure is cumbersome. I take this to mean only that it is more elaborate than the affirmative procedure but that is precisely the point of it: it is necessarily more elaborate because it provides for actual scrutiny where the affirmative procedure does not. The third is that it all takes too long. This has force only if there is some imminent and necessary deadline but there is none in this case.

In a debate on the then UK Infrastructure Bank Bill, speaking about the super-affirmative procedure, the noble Baroness, Lady Penn, said:

“This procedure has rarely been considered the appropriate one to prescribe in primary legislation; where it has, the relevant instances have tended to be of a particularly substantive and wide-ranging sort.”—[Official Report, 4/7/22; col. 905.]


I am not sure that I entirely understand the Minister’s first point about prescribing in primary legislation, because that is the only place it can be prescribed, but I understand her second point. However, “particularly substantive and wide-ranging” exactly characterises the changes that SIs could produce in our financial services regime. That is why we propose the super-affirmative procedure.

Amendment 243B sets out the procedure for a super-affirmative SI. Amendment 243A simply says that either House may by resolution require any provision that may be made by the affirmative procedure to be made instead by the super-affirmative procedure. It is left to Parliament to decide which SIs merit the additional scrutiny.

On my Amendment 241G, 18 months ago, the SLSC and the DPRRC published simultaneous and powerful reports setting out in detail concerns that the balance of power has moved significantly from Parliament to the Executive. Part of the reason for this shift has been the abuse of delegated legislation. Cabinet Office guidance explicitly states that delegated legislation is not to be used for policy-making but is to be reserved for detailed proposals about how policy agreed in Parliament can in fact be made to work. This is not what happens. Skeleton Bills, their dependent SIs and Henry VIII provisions all essentially bypass parliamentary scrutiny.

The best current example of this kind of abuse of secondary legislation is probably the REUL Bill, which has been described as “hyper-skeletal”. It allows Ministers, via SIs and other mechanisms, to make, change or revoke policy without any meaningful parliamentary scrutiny. The Bill is a direct assault on Parliament’s interests and its constitutional role.

How could Parliament regain at least some element of effective scrutiny? Absolute rejection of SIs would probably not be desirable or workable but the ability to amend them in critical circumstances, where at issue was the whole notion of parliamentary sovereignty and effective scrutiny, may well be desirable. The SLSC report of February this year, Losing Control?: The Implications for Parliament of the Retained EU Law (Revocation and Reform) Bill, has this to say in its executive summary:

“We call for the Bill to contain an enhanced scrutiny mechanism that enables Parliament to decide that an instrument makes changes of such policy significance that the usual ‘take it or leave it’ procedures—even if affirmative—relating to statutory instruments should not apply but that a further option should be available, namely a procedure by which the Houses can either amend, or recommend amendments to, the instrument.”


What applies in the case of the REUL Bill applies to this Bill, too.

Amendments 243A and 243B, which I have discussed, would provide the powers to recommend amendments to the SIs generated by this Bill. The question of the ability to amend SIs is a bit more complicated. I asked the Library why it is that SIs are not currently amendable. There are two reasons. The first is that almost all Acts that provide for secondary legislation-making powers do not contain provisions that would enable associated instruments to be amended. In other words, to amend SIs, you would have to have the power to amend written into the parent Act. The House of Commons Information Office publication Statutory Instruments, revised in May 2008, explains this on page 5 in some detail.

The second reason is the absence of relevant parliamentary procedures that could enable amendment to take place. It is clear that it would be a nonsense to replicate all or any of the procedures used in amending primary legislation to amend secondary legislation. However, there is already a simple method for amending SIs that avoids this problem. It is set out in Section 27(3) of the Civil Contingencies Act 2004, which states:

“If each House of Parliament passes a resolution that emergency regulations shall have effect with a specified amendment, the regulations shall have effect as amended”.


Amendment 241G takes its text from the language of that Act. It simply says:

“For each statutory instrument laid before Parliament in draft under this Act, if each House … passes a resolution that the regulations have effect with a specified amendment, the regulations have effect as amended.”


The noble Lords, Lord Bridges and Lord Forsyth, used almost identical language in their Amendment 241F, which we debated on, I think, day 9.

--- Later in debate ---

[Baroness Penn (Con)]

The noble Lord, Lord Sharkey, I believe, referred to two pieces of work that looked at the wider concern around procedures when it comes to statutory instruments and the House’s involvement and ability to respond to them. I can talk only in relation to the Bill before us. Our approach is consistent with the policy approach to the regulation of financial services that the Government have set out and consulted on—the FSMA model. That delegates some policy-making both to the Treasury and then, significantly, to the regulators. In the context of the Bill, we are comfortable that our approach is appropriate to the model of regulation that we are advocating in these circumstances. I recognise the wider debate but, in the context of the Bill, we are confident that our approach is right and appropriate.

Coming to my noble friend’s specific question, I think the concern is around the definition of “securities” in the prospectus regime. The Government intend to include certain non-transferrable securities within the scope of the new public offer regime that is being developed as part of the review of the prospectus regime, which delivers on a recommendation of Dame Elizabeth Gloster’s review of the collapse of London Capital & Finance. We intend to capture mini-bonds and other similar non-transferable securities that may cause harm to investors if their offer is not subject to greater regulation.

The Government are keen to ensure that business that does not affect retail investors or is already regulated elsewhere, such as trading in over-the-counter derivatives, is not unintentionally disrupted by the reformed regime. We have been engaging with stakeholders on this point to understand the concerns of industry, and we are considering what changes we can make to the statutory instrument to address them.

The Government do not agree that the use of the super-affirmative procedure in this case is appropriate. Examples where it has been used include legislative reform orders made under the Regulatory Reform Act 2001 and remedial orders made under the Human Rights Act 1998. In both cases, the powers in question can be used very broadly over any primary legislation, due to the nature of the situations that they are intended to address. The delegated powers in this Bill are not comparable with these powers, and I have already explained how the powers over retained EU law are restricted and appropriately scoped. Therefore, in the case of the Financial Services and Markets Bill, we are confident that normal parliamentary procedures remain appropriate. I therefore ask the noble Lord, Lord Sharkey, to withdraw his amendment.

[Lord Sharkey (LD)]

My Lords, I am grateful to all noble Lords who have spoken in this short debate. I agree with the noble Baroness, Lady Noakes, about being able to amend SIs. It is a complicated and far-reaching issue and necessarily involves the House of Commons, but we need to find a mechanism for consulting all the interested parties and formulating a plan for reform. The Minister has not mentioned this, but, as I mentioned in my speech, this is to do with the balance of power between the Executive and Parliament. Many of our committees’ reports tell us in dramatic terms that the balance of power has recently shifted very significantly towards the Executive. To change that, we need to do something about our ability to scrutinise work that comes before us. That includes being able to amend it and not relying on a toothless system of negative and affirmative SIs, and it relies on being able to amend constructively regulations that might come before us.

As the SLSC said, it is clear that there is a need for such a mechanism to amend SIs and that finding a path to this fairly quickly is important. I agree with the suggestion by the noble and learned Lord, Lord Thomas, that here and now is a pretty good place to start thinking hard about what we do before we get to Report. It is true that the volume of skeleton Bills continues to increase, as does the abuse of delegated powers in a more general sense, and I cannot see it spontaneously decreasing, unless we do something about it.

As to Amendments 243A and 243B—the super-affirmative amendments—the case for them has been accepted by all speakers, except the Minister. We shall definitely want to revisit the issue on Report. In the meantime, I beg leave to withdraw the amendment.

Amendment 241G withdrawn.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

Finally, and perhaps unusually, I agree 100% with the noble Lord, Lord Forsyth of Drumlean. His Amendment 241FD makes a crucial point of democracy that should be written into the Bill. Another thing to add to his list of concerns about digital currencies in general, which also applies to CBDCs, is their potential environmental impact.

[Lord Sharkey (LD)]

My Lords, I will speak briefly to the amendments in the names of the noble Lords, Lord Bridges and Lord Forsyth. I agree with the analysis by the noble Lord, Lord Forsyth, of the dangers of having Parliament bypassed in the creation of a CBDC, but I will mention two things to which he may not have given enough weight.

The danger crystallises in the possibility of the disintermediation of the retail banking system, which would have incalculable consequences. Given the difficulties people have in dealing with their own banks at the moment, imagine the difficulty of trying to deal with the Bank of England about your personal account when things go wrong or you do not understand what things are doing. Given banks’ habit nowadays of closing people’s accounts without notice or reason, I wonder whether the Bank of England would take the same view if it had that power.

Like the noble Lord, Lord Forsyth, I would prefer any such creation—although I am not sure that I want one—to be via an Act of Parliament rather than regulation. However, regulation is tempting because I notice that proposed new subsection (3) of the amendment tabled by the noble Lord, Lord Bridges, finds a way of amending secondary legislation. With a bit of luck, we will deal with my amendment tomorrow, which does exactly the same thing in exactly the same kind of words but with broader application.

It is dangerous in the extreme to have Parliament excluded on the central bank digital currency, as the Government clearly intend at the moment. We ought to be very careful about that. When it comes to Report, where we need to think about what amendments we press, I would be very tempted to suggest to the noble Lord, Lord Forsyth, that he presses his amendment.

[Lord Eatwell (Lab)]

My Lords, I will make two general comments about these amendments—first, on Amendment 218 in the name of the noble Lord, Lord Holmes.

When I was chairman of the Jersey Financial Services Commission and therefore the regulator in Jersey, I was continually lobbied about the issue of digital identification simply because of the high cost of repetitive KYC investigations that institutions had to go through. It seems that the possibility of having a system of digital identification which would be generally acceptable and generally accepted within financial services would significantly reduce the costs of KYC and would provide a much sounder foundation for the credibility and respectability of the individuals attempting to transact within financial services. So this is broadly a good idea. It is very complicated, as I discovered when I tried to introduce it in Jersey, and it raises very important privacy issues, but, none the less, this is the way that the world is going and we need to think this through extremely carefully. It could be of great benefit to the whole KYC problem.

With respect to digital currencies, the one comment I will make is to remind the Committee of the debate that we had about the decline in the acceptance of cash and the fact that a significant number of people in our country are being deprived of money, since cash no longer works as money—it is no longer generally acceptable in discharge of a debt, which is the definition of money. Therefore, there will be a responsibility for the state to provide a digital form of money, because digital payment, as the noble Baroness, Lady Noakes, argued strongly at the time, will become the standard form of payment and cash is basically going to disappear —apart, perhaps, from the Tooth Fairy.

The issues of digital currency and digital identification are both hugely important for our future and, as the noble Lord, Lord Forsyth, argued—I agree with him most strongly—they require very careful parliamentary consideration.

--- Later in debate ---

[Baroness Penn (Con)]

I can look to write to noble Lords on this question but I am not sure that I would be able to add more to my response at this stage, which is that the Government expect to fully engage Parliament, including through any possible legislation, in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals over the coming years. As the joint consultation paper set out, the legal basis for the digital pound will be determined alongside consideration of its design; that is subject to ongoing work. If I wrote to noble Lords at this stage, I think I would be saying exactly that but, if there is anything further to add, I would be happy to do so.

[Lord Sharkey (LD)]

I just want to make sure that I understand exactly what the Minister is saying. If the Government decide to bring in the digital pound, will they commit to bringing it in via legislation?

[Baroness Penn (Con)]

I am afraid that I have gone as far as I can in detailing the approach that we would take to Parliament. We expect to engage Parliament fully. However, the legal basis for the digital pound will be determined alongside consideration of its design. Work is not yet at the stage where we can provide that further clarity.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, I support the amendment from my noble friend Lord Leong. I was a bit shocked to discover that factoring companies are not regulated through the FCA. My discovery of this through my noble friend’s initiative reinforces my view, which he very clearly expressed, that this is the business equivalent for SMEs of payday loans in the consumer retail sector. Given the importance of small and medium-sized enterprises to the growth of the UK economy, which he quite rightly pointed out, one of the most important elements of public policy is to ensure that they receive the best, most appropriate and well-regulated financial services, which provide them with a firm financial platform on which to grow. I hope that the Minister takes this amendment away and has a serious think about it, because this is a serious gap in the regulatory framework.

[Lord Sharkey (LD)]

I rise briefly to support this amendment. It was with some surprise that we also discovered that this sector is unregulated, but we entirely understand how important it is to the small business community. In that respect, it is hard to see why it is not regulated and why it should not be regulated. It is hard to see how any Government could resist the force of the noble Lord’s amendment—but we may see a demonstration of that in a moment or two.

[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.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, it is obvious that the issue of pension funds investing in equities and longer-term growth prospects was highlighted by the LDI crisis in the autumn. I hope that, when the Government come to consider the consequences of that crisis, they will look at the letter that your Lordships’ Industry and Regulators Committee sent to Andrew Griffith MP, the Economic Secretary to the Treasury, setting out the reasons it saw for the peculiar financial structures that led to the LDI crisis and the lack of long-term investment in equities and growth stocks by British pension funds. They traced this to the accounting regulations that are imposed on British pension funds—particularly the way in which liabilities are assessed—and noted that, since those regulations were introduced maybe 15 years ago, there has been a dramatic reduction in the investment by British pension funds in long-term equity assets and a focus mostly on rather low-yielding government securities instead.

The LDI scandal was produced by the development of a peculiar financial device using repos, which were then used to make some investment in equities. There is clearly a fundamental problem in the regulation of British pension funds, which has both reduced the returns on their investment and limited the sort of investments they might be able to make in growth assets to their benefit and that of the economy as a whole. There needs to be a major review on the regulation of pension funds, both to make them more secure—to avoid them resorting to very unstable financial constructions to try to increase their returns—and for the overall benefit of the economy.

[Lord Sharkey (LD)]

My Lords, I agree with everything that the noble Lord, Lord Eatwell, has said. We are happy to support this amendment. I simply have two questions and one observation about it.

The amendment says that we must include “green infrastructure”. Is there a practical, generally agreed working definition of what that actually means? I also notice that, in carrying out the review, the Treasury must consult a list of organisations. The final group of organisations is “relevant financial services stakeholders”. Is the intention also to include professional advisers? They would be a vital addition; perhaps that should be made explicit as we go forward.

My observation is that proposed new subsection (3)(c), which talks about

“establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank”,

is an extremely good idea. We should make sure that this happens as soon as we can.

[Baroness Penn (Con)]

My Lords, the Government remain fully committed to the objective of unlocking pensions capital for long-term, productive investment, where it is in the best interests of members. High-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that developing the next generation of globally competitive companies in the UK will require unlocking defined contribution pension fund investment into the UK’s most innovative firms.

That is why, in the Spring Budget last week, the Chancellor committed the Government to working with industry and regulators to bring forward an ambitious package of measures by this autumn. He also set out a number of initial measures to signal the Government’s clear ambition in this area. They included increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment; spurring on the creation of new vehicles for investment into science and tech companies tailored to the needs of UK defined contribution pension schemes by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative; and leading by example by pursuing the accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will shortly come forward with a consultation on this issue.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

Moved by

[Lord Sharkey]

197: After Clause 65, insert the following new Clause—
“Duty of the FCA with regard to interest rates for mortgage prisoners
After section 137FD of FSMA 2000 insert—
“137FE FCA general rules: interest rate for mortgage prisoners
(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the standard variable rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)—“mortgage prisoner” means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following types of firms—(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending, and(b) unregulated entities, or firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years;“standard variable rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the standard variable rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) must make new fixed interest rate deals available to mortgage prisoners who—(a) are up to date with payments or have aggregate arrears of no more than one monthly payment in the past 12 months,(b) have a remaining term of 2 years or more,(c) have an outstanding loan amount of at least £10,000, and(d) have not received consent to let the property. (5) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA must specify rates for a range of loan-to-valuation ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(6) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made no later than six months after this Act is passed.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and, under specified circumstances, ensure their access to fixed rate interest deals.

[Lord Sharkey (LD)]

My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. I thank the noble Viscount, Lord Trenchard, for adding his name to my Amendment 197, which is a probing amendment to allow debate on the issue of mortgage prisoners. There are getting on for 200,000 mortgage prisoners in the UK, who are trapped with their current lenders. For eight years or so they have paid very high standard variable rates, now of around 7%, 8% or even more.

Mortgage prisoners exist because the Government sold their mortgages to vulture funds, which have been increasing their standard variable interest rates and refusing to offer mortgage prisoners new deals or access to fixed rates. The harm being caused to these mortgage prisoners is the direct responsibility of the Government; when the time came for the mortgages of Northern Rock and Bradford & Bingley customers to be sold back to the private sector, the Government could have pursued an approach that ensured that these customers were protected. They could have sold them to active lenders or secured a cast-iron commitment from purchasers to offer these customers new deals.

The risk to these customers was clearly identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to highlight that many of those affected by the sales were mortgage prisoners who would be unable to switch lender. He warned:

“Given the prospect of rising interest rates it is important that all mortgage customers are given the opportunity to achieve certainty over their payments by accessing a fixed rate. I am concerned that some customers affected by these mortgage sales … will not be offered reasonable fixed mortgage rates.”


UKAR responded that, in returning these mortgages to the private sector,

“the option to be offered new deals, extra lending and fixed rates should become available”.

However, this requirement was not written into the contract when mortgages were sold to the vulture fund Cerberus, with the BBC reporting that UKAR is now claiming to have been misled by it.

Consumer champion Martin Lewis, about whose work I will have more to say in a moment, lays the responsibility for the treatment of mortgage prisoners with the Government. He said that they have

“sold these loans to professional debt buyers that don’t offer mortgages, and left these people with these types of mortgages that have been too expensive and crippled their finances and destroyed their wellbeing.”

The Government are directly responsible; they chose to sell the mortgages to vulture funds.

In 2021, the House of Lords passed an amendment that would have capped standard variable rates for mortgage prisoners. This would have provided immediate, practical help for the 200,000 mortgage prisoners and their families. When the Government rejected this amendment in the Commons in April 2021, the Minister claimed that

“the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers.”—[Official Report, Commons, 26/4/21; col. 85.]

The FCA published an update in November 2021; this review confirmed that its interventions have, so far, had only a tiny impact. Only 2,200 of the almost 200,000 mortgage prisoners have been able to switch, just over 1% of the total. It turned out that lenders had only a limited appetite to offer options to switch using the modified affordability test devised by the FCA.

The FCA and the Government show little understanding of how vulnerable many mortgage prisoners really are or what stress and financial hardship they have endured and continue to endure. They certainly have not done anything practical to help. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or provide any help. At the moment, they and the FCA propose no further action.

This is deeply unfair and more than slightly ironic. A recent LSE report found evidence that the Treasury has not only made back the cost of managing the sales of these mortgages but has made a £2.4 billion surplus. However, there has been one significant development. Last Wednesday, my co-chair of the APPG on Mortgage Prisoners, Seema Malhotra MP, and Martin Lewis, chaired a meeting in Parliament to examine and explain new research conducted by the LSE, generously funded by Martin Lewis. The Treasury and the FCA were in attendance. This research contains concrete and costed proposals for a solution to this long-standing and continuing injustice.

Martin Lewis told the meeting:

“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations. When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.”


Therefore, there should be no more excuses. He went on:

“The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”


The APPG has sent copies of the LSE report to the Treasury, the FCA and other interested parties.

Will the Minister and her Treasury colleagues meet the APPG and its supporters to discuss the solutions proposed in the LSE report? Can she arrange this meeting urgently—certainly well before Report? Thanks to the support, generosity and persistence of Martin Lewis, and the work of the LSE and the APPG, we now have a clear and costed plan finally to bring relief to the nearly 200,000 mortgage prisoners. There can be no excuse for further delay. If we cannot set a course to free these prisoners, we will want to return to the issue on Report. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I am delighted to support Amendment 197, moved by the noble Lord, Lord Sharkey, and to which I have added my name. I served on the former Services Sub-Committee of the former European Union Committee with the noble Lord and have been impressed by his accurate understanding of, and thoughtful approach to, this and other financial issues.

The noble Lord explained the reasons for his amendment with his customary clear logic. I will not take up the Committee’s time by repeating them. I particularly endorse the introduction of a cap of 2% over the standard variable rate for mortgage prisoners. UK Finance has identified 195,000 borrowers from inactive lenders, of whom 47,000 have been identified as mortgage prisoners.

I welcome the FCA’s recent review of this problem and its review of the effectiveness of its regulatory interventions to remove barriers to switching. Recently, only a small number of borrowers have been able to switch from an inactive lender to a new deal with an active lender. I share the FCA’s hope that more mortgage prisoners will be able to switch their mortgage and I hope that the Minister will support this amendment.

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[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.

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Finally, the banks are not the only players in the chain that are responsible for fraud. Other players, such as telecom companies, social media, dating sites, web hosting companies, online marketplaces and so on all play a part in the fraud chain. Information I received just last week from a major UK fintech company indicates that over half the scams by number originate on just four social media platforms, three of which are owned by Meta. These fraud enablers—I call them that because they are the conduits by which most people are found and contacted by fraudsters—need to be robustly incentivised to stop their services being used to defraud innocent people. It is not right that only the banks end up picking up the cost. I beg to move.

[Lord Sharkey (LD)]

My Lords, I will speak briefly to Amendment 203 in the name of my noble friend Lady Kramer, who cannot be with us today. She is making good progress but is still recovering from surgery. On her behalf, I gently disagree with the noble Lord, Lord Vaux. The amendment is straightforward: it would simply prevent financial services from using the “You should have known it was fraud” excuse to deny restitution. In effect, in many sectors this allows the banks to decide whether to refund.

It seems to me that it is impossible to design a fair test for “You should have known” when talking of retail customers, especially vulnerable ones. How on earth do we devise a fair test under those circumstances? It is true that most consumers will not have the ability to challenge a bank’s classification of an event as “You should have known”, because they do not have the resource or the means to do so. Effectively, without Amendment 203, banks can decide for themselves which cases to allow, and that does not seem to be a good idea.

[Lord Naseby (Con)]

My Lords, I will speak broadly in support of these amendments, starting with Amendment 202. The incidence of fraud is growing almost daily. It is a huge worry and, unfortunately, it rests on His Majesty’s Government to try to find an answer to it. I accept that it is not an easy problem, but we cannot shy away from it. Over lunch today I was having some discussions with Transparency Task Force, a certified social enterprise. Certainly, some of the evidence it has is quite extraordinary and deeply worrying. I do not know whether there are other types of scams not covered in the Bill. I have not given any notice to my noble friend on that, but we would certainly like an answer.

On Amendment 203 on qualifying cases, I have spoken to only about half a dozen people who have had scams, but none of them knew anything about who was behind it. It is not very likely, is it? Having watched “The Gold” on television on Sunday, I can see how creative some people can be. It does not seem realistic, which is why Amendment 203 is important.

I have had a chat with members of the All-Party Group on Personal Banking and Fairer Financial Services. The only way to get a grip of these problems is to know what is happening on the ground. The noble Lord, Lord Vaux, asked for a six-monthly report, which is quite right. A quarterly report would probably be better, though it might be too tedious. At this point in time, His Majesty’s Government do not have a handle on the rate of growth, which is deeply worrying. I do not know whether these amendments are exactly right, but the problem is there, and it is the responsibility of His Majesty’s Government to get a grip on them.

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Moved by

[Lord Sharkey]

213: After Clause 71, insert the following new Clause—
“Access to Sharia-compliant financial services including student finance
(1) Within six months of the passing of this Act, the Treasury must make provision by regulations to facilitate the availability of Sharia-compliant financial services in the United Kingdom, including availability to students who are eligible for the Government’s student finance provision of Sharia-compliant finance products for paying tuition fees and for student maintenance on equitable terms with students accessing the Government’s student finance provision.(2) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This is a probing amendment to allow debate on the progress towards provision of Sharia-compliant student funding.

[Lord Sharkey (LD)]

My Lords, Amendment 213 addresses the provision of sharia-compliant student finance, of which there is currently none. This matters because Islam forbids interest-bearing loans and that prohibition can be a barrier to our Muslim students going on to attend our universities.

This is not a new problem, nor the first time the issue has been raised in this House. The problem became clear in 2012 when tuition fees were significantly increased and it became worse when maintenance grants were replaced by maintenance loans. In 2014, the Government published a report on the consultation they had undertaken. It attracted 20,000 responses, a record at the time. The Government acknowledged that the lack of an alternative finance product to the conventional interest-bearing student loan was a matter of major concern to many Muslims.

The report also identified a solution: a takaful, a well-known and frequently used non-interest-bearing, sharia-compliant financial product. The Government explicitly supported the introduction of such a product. That was nine years ago, and we still have no takaful. In 2013, Prime Minister Cameron promised action. He said:

“Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan—simply because of their religion.”


But nothing has changed. There is still no available sharia-compliant student finance. In fact, it now looks further away than ever.

The Muslim community and parliamentarians in both Houses have continued to press. Last September, the right honourable Sir Stephen Timms wrote to the then Secretary of State for Education to ask whether delivering sharia-compliant student finance was still a government commitment. He got a reply saying that it was. Sir Stephen wrote again in October to the new Secretary of State, the right honourable Gillian Keegan MP, asking whether government policy had changed—there was quite a lot of change around at the time.

Ms Keegan confirmed that the provision of a sharia-compliant student finance product remained a government commitment and that the Government were considering whether and how the ASF could be delivered as part of the lifelong learning entitlement. She noted that the consultation on the LLE had concluded last May and promised to provide a further update on ASF as part of the Government’s response to that consultation.

The Government published their response to the LLE consultation last Tuesday. The whole response runs to 71 pages, yet ASF gets no mention in the document’s ministerial foreword and only two substantive paragraphs right at the end of the response. This does not seem a proportionate reaction, either to the gravity of the issue or to the overwhelming number of individual respondents who asked for sharia-compliant student finance, by far the largest group of respondents. The question about sharia-compliant student finance attracted 851 unique individual responses; the average number of unique individual responses to all the other questions in the consultation was 30.

The first substantive paragraph confirms the Government’s commitment to the ASF but says, without any explanation, that it will not be delivered with the 2025-26 launch of the LLE. The second paragraph says:

“The Government is procuring advice from experts in Islamic finance and will be working with the Student Loans Company … to better understand timescales for delivery of an ASF product under the LLE. Our aim is that learners will be able to access ASF as part of the LLE as soon as possible after 2025. An update on ASF will be provided by late 2023.”


This is miserable stuff. It makes it clear that, in the past nine years, there has been no serious thinking or planning for ASF. It does not explain why ASF has to be linked to the LLE at all or why it cannot be launched simultaneously with it. It also makes no hint of an apology to the Muslim community for condemning at least four more cohorts of Muslim students to choose between faith and education.

If we interpret the Government’s vague timings generously, the ASF will arrive in the academic year 2026-27. That is four academic years away and means an additional 16,000 qualified Muslim students not going on to university. It will have taken 16 years for the Government’s firm, clear and repeated commitment to be realised. The problem remains as it was 11 years ago. This is deeply unsatisfactory and obviously has gravely disadvantaged our Muslim community. It is easy to see how the Government’s inaction over such a serious issue over such a very long timescale could look like discrimination against our Muslim community, especially since the Government seem not to have engaged with the community or explained the very long delay and lack of a target date.

Before last Tuesday, Universities UK and 68 Muslim organisations and prominent individuals had written to the Minister, pressing for speedy action and a firm date for ASF. Since then, there has been widespread disappointment and dismay at the very long further delay and the continuing lack of a firm date. The Muslim Council of Britain, UUK, the CEO of Islamic Finance Guru, the NUS and others have all written to me expressing their disappointment at the Government’s response. It is deeply distressing and shameful that the Government, despite their firm promises, should continue to treat our Muslim community in this offhand, almost contemptuous way.

It is very hard to avoid the conclusion that the Government are making a fundamental error—moral, social and political—in putting Muslim students right at the back of the queue. Will the Minister talk to her colleagues in the Department for Education to ask them to arrange an urgent meeting with interested parliamentarians and Muslim community groups? This would allow explanation of the further delay and of the work programme, and an exploration of the possibility of setting an earlier and firmer date for the introduction of the ASF.

All this has gone on for far too long. I hope the Minister will be able to give a substantive and encouraging reply. I beg to move.

[Baroness Sheehan (LD)]

My Lords, I support my noble friend Lord Sharkey’s amendment. I should declare that, as a Muslim woman, I have a number of relatives who will be, and are being, affected by this. Not every Muslim feels unable to take out student loans as they are currently structured but there is a significant minority. It is usually women affected because they always come at the bottom of the list of who will be financed without a loan through private means. I urge the Minister, particularly given all the conversations we had last week about International Women’s Day, to consider this.

I will not detain the Committee long; my noble friend Lord Sharkey gave us chapter and verse on the Government’s position and prevarication on this issue, which, we are told, they have been able and willing to support for over a decade now. The Higher Education and Research Act 2017 allows the Government to introduce a student finance product consistent with Muslim beliefs regarding interest-bearing loans. However, as my noble friend said, the Government have yet to launch such a product. In February last year, as part of the conclusion of their review of post-18 education and funding, the Government said that they were still considering whether and how to deliver sharia-compliant alternative student finance and whether they would do so as part of the lifelong loan entitlement.

We have a situation where, not only are 18 and 19 year- old Muslims—predominantly girls—unable to access higher education but it now looks as though, with the LLE, they will not be able to access post-18 further education either. That will curtail their life chances, their ability to contribute to the life of this country and the financial contribution that they make to their families.

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[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.

Amendment 213 withdrawn.

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[Baroness Noakes (Con)]

My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.

I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.

Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.

I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.

My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.

In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.

I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.

Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.

I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Lord Bridges of Headley (Con)]

My Lords, I will make a couple of points quickly. In so doing, I once again declare my interests as an adviser to and shareholder in Santander and, more appositely, as current chairman of the Economic Affairs Committee.

I want to pick up on the noble and learned Lord’s excellent points. If I may be very frank, I was disappointed that in the Minister’s response to the previous group he consistently referred to accountability to the Treasury. We are talking here about accountability to Parliament. This is what matters; it is what concerns so many noble Lords who take a great interest in this debate. There is just nowhere near enough of that in the Bill. I am very disappointed by the tone and approach that the Government seem to be taking, so far, to what I see as a highly constructive set of amendments, especially my noble friend Lady Noakes’s amendment, which I entirely support. I have two brief points to make about the committee structures of this House and of the other place.

As we have seen and are already seeing, the remit of committees here and in the other place is not set up to handle and scrutinise the avalanche of regulation coming out from all the regulators. It is nowhere near adequate to handle the consultations, let alone everything else. They do not have the resources either. It is imperative that the Bill is amended to reflect this. I very much hope that when my noble friend responds she will give this amendment some warm words of support, go away and think of ways in which she might support it. I will be speaking again in support of my noble friend’s other amendments.

[Lord Sharkey (LD)]

My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Noakes, and observe that the Government have said, more or less consistently, that it is for Parliament to decide what form of scrutiny it requires. This acknowledges the importance of the issue. This is Parliament, and the amendment sets out a clear way ahead to establish parliamentary oversight. If the Government mean what they say, they will not oppose these amendments. They might join in a constructive discussion of how to make them better, but they will not oppose these amendments if they are to be at all consistent.

It is worth noting, though, that accountability and scrutiny are not quite the same. Even if we were to pass the amendments in the name of the noble Baroness, Lady Noakes, we would need to take a closer look at the delegated powers mechanisms that the Bill contains. As things stand, Parliament will have no meaningful say in whatever the new rules may be. Unless I have misunderstood, the proposed financial services regulators review committee will not be able to intervene as the new rules become law. We will need to think about that carefully as we make progress with the Bill.

[Lord Tunnicliffe (Lab)]

Can I say a couple of words about regulation and regulators? This is usually a political divide and I am proud to be on my side of it. I believe that society is the richer for good regulation; I am against bad regulation but in favour of good regulation. When one has good regulation, the problem is often that it is poorly executed. These financial regulators do the execution, so processes to hold them better to account have to be a good thing. That may include the distasteful fact—it may or may not emerge—that they are underresourced. Certainly, this sort of debate will bring out those sorts of issues.

I have to be careful here, but my general view is that this is really a rather good group. I shall consider it carefully and discuss it with colleagues across the House between now and Report to decide on the extent to which we will support it. I strongly recommend that the Minister does as asked and enters discussions with us, to see how much of this can be agreed and included in the Bill. We had a similar tussle two years ago when we did a big chunk of this and tried to draw in the regulators more. The regulators put down on paper that they were willing to talk to us more. The problem was that we did not have mechanisms in the House to take advantage of that. This would be a game-changer, by breaking through into that area and creating processes to have proper accountability and scrutiny—supervision is the wrong term—of these enormously powerful regulators, which are vital to the success of our financial markets, in terms of both opportunities and appropriate restraint to avoid catastrophes.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.

I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.

I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.

I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.

Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.

[Lord Sharkey (LD)]

My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.

There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.

[Lord Davies of Brixton (Lab)]

I intended to make a second point about risk. Everyone tends to think about risk in terms of systemic risk—the finances of the country come under some pressure—but there is another risk that is not given sufficient attention, which is the risk that pension funds will fail to deliver the benefits that people expect to receive. That risk is given insufficient attention, but I hope it will be covered if there is a system where someone is given responsibility to look at risk. There is the risk of not getting out the benefits expected, as well as the risk to the financial system.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

Moved by

[Lord Sharkey]

76: After Clause 26, insert the following new Clause—
“Duty of the FCA to make rules introducing a duty of care to replace the Consumer Duty
(1) After section 137C of FSMA 2000, insert—“137CA FCA general rules: duty of care and replacement of the consumer duty(1) The power of the FCA to make general rules incudes the power to replace the consumer duty with a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.(2) In this section—“consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015 (key definitions);“consumer duty” means the rules and guidance contained in the FCA’s Policy Statement PS22/9 and in the FCA’s Final Guidance FG22/5 of July 2022;“duty of care” means an obligation to act in consumers’ best interests and to exercise reasonable care and skill when providing a product or service.”(2) The FCA must make rules in accordance with section 137CA of FSMA 2000 which come into force no later than six months after the day on which this Act is passed.(3) In section 138D of FSMA 2000 (action for damages), omit subsection (3).(4) The FCA may not make rules which change or qualify the definition of “duty of care” as provided for by virtue of subsection (2), reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”Member’s explanatory statement
This is a probing amendment to allow debate on the FCA’s new Consumer Duty and a replacement Duty of Care and on a Private Right of Action.

[Lord Sharkey (LD)]

My Lords, Amendment 76 in my name and that of my noble friend Lady Tyler of Enfield—I am very grateful for her support and look forward to hearing her speak later on in our debate—would require the FCA to make rules replacing the new consumer duty that it has devised with a duty of care. This duty of care would be

“owed by authorised persons to consumers in carrying out regulated activities under”

FSMA 2000. The amendment also makes provision for redress via a private right of action; it does this by removing the barrier contained in Section 138D of FSMA. Finally, the amendment contains provisions to prevent the FCA using its rule-making powers to

“change … the definition of ‘duty of care’ … reduce its scope of applicability, or disapply or fetter the private right of action afforded to consumers by section 138D of FSMA 2000.”

This last bit is to ensure that Parliament’s intentions are rigorously carried out and reduce the opportunities for dilution.

The questions of imposing a duty of care on financial services providers and creating a private right of action have been debated in this place many times. The last time was during the passage of what is now the Financial Services Act 2021. In Committee on that Bill, I proposed the introduction of a duty of care in terms that were very similar to the text of the amendment before us; that amendment had strong support. I closed the debate by setting out the five key reasons for adopting a duty of care:

“The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues … The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry.”—[Official Report, 22/2/21; col. GC 120.]


All those points remain valid today. Indeed, the FCA has openly acknowledged the need for significant improvement in how consumers are treated.

At the Report stage of the same Bill, in March 2021, the noble Lord, Lord Stevenson of Balmacara, put forward a duty of care amendment in terms nearly identical to the one that we debated in Committee and nearly identical to the text now before us. All the speakers in that debate—apart from the Minister, the noble Baroness, Lady Penn—were in favour of the amendment, which was passed in the House by 296 votes to 255—a majority of 41. The Commons removed our amendment and, in ping-pong, proposed an amendment in lieu. This amendment required, among other things, the FCA to carry out

“a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.”

It was also required to consult on whether it

“should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care.”

Whether that actually happened in any meaningful way is strongly contested. The Transparency Task Force has long argued that the consultation was deeply flawed. It has argued, and continues to argue, that the FCA only ever really consulted on its proposed new consumer duty and not, since the 2021 Act was passed, on a duty of care. It is a contentious area, but there is merit in these criticisms. At the very least, I understand how the impression might form that the FCA had it regulatory thumb firmly on the scales.

This matters because the FCA’s new consumer duty is not a duty of care; it is significantly different and significantly weaker. These differences can be summarised as follows. First, there is no private right of action for breaches of the consumer duty. This means that the FCA will not be able to implement a redress scheme using its powers under FSMA if there are breaches of the consumer duty. This lack of a power to order redress will weaken the incentive to comply with the consumer duty.

The second flaw in the consumer duty is the lack of disclosure of information about how firms are complying with it. A firm’s board is required to assess only annually whether the required outcomes under the consumer duty are being achieved and agree any actions needed for compliance, but the firm will be able to keep that assessment secret from its customers and shareholders and will not have to publicly disclose any action it has taken. That is hardly transparent. For example, Which? has noted that:

“Without some kind of compulsory form of publication, it’s very hard to see how industry commentators, stakeholders and consumer representatives will gain an insight into the impact of the consumer duty.”


The third flaw in the consumer duty is that the standard required by firms to comply with its terms is based on the “reasonable expectation” of consumers. All this brings to mind the Equitable Life debacle and the difficulty of imposing a regulatory standard based on the reasonable expectations of consumers. In 2001, Sir Howard Davies described the concept as having a “chequered history” and as

“lacking in clarity and definition.”

The concept was also described by the then Treasury Minister as “nebulous”. The concept was eventually removed from the FSA’s regulatory framework in 2001-02. With the new consumer duty, it will be impossible to measure what the “reasonable expectations” of consumers are in any particular case. There would be obvious problems if the FCA or firms believed that consumers could be treated poorly because they had low expectations.

When the Government proposed the reintroduction of the concept of “reasonable expectations” during the passage of what became the Financial Services Act 2012, the Joint Committee that examined the Bill noted that the concept would make it difficult for the regulator to be clear on the meaning of its duties and near to impossible for consumers and Parliament to hold the regulator to account. The Joint Committee described the concept as “problematic” and concluded that its reintroduction would be unwise. Yet here it is again.

The final flaw is that the fair value assessment that firms are required to do under the consumer duty allows them to consider

“The market rates and charges for comparable products or services and whether the product is a significant outlier compared to these”.


There is a significant risk that this will allow firms to continue to exploit trapped customers as long as other firms are doing it at the same time. For example, in the case of mortgage prisoners who are trapped with their existing lender, a firm will say that they are being offered the “market rate” because they are being charged a similar rate to other mortgage prisoners at other vulture funds. All the customers across many firms are being exploited, but it is not a breach of the consumer duty.

The FCA’s proposed new consumer duty is deeply flawed and is not a duty of care. It is an enormous addition to the box-ticking culture and the antithesis of an aid to judgment. The new rules and feedback run to 161 pages with a further 121 pages of guidance to help. Diligent application of all these rules and guidance notes will not produce the required consumer benefits, nor drive a change of culture in the regulator or the firms it regulates.

The fact is that FSMA does not adequately protect consumers. Malfeasance continues and is unlikely to be much influenced by the new consumer duty. Under the new duty, redress is patchy, lengthy, uncertain and not really available to those who need it most. We should return to what this House originally voted for: a statutory duty of care. I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.

The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.

The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.

I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.

The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.

In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.

[Lord Sharkey (LD)]

Before the Minister moves on, what are her views on the point I made about “reasonable expectations” for consumers, which is the standard required by firms to comply with the terms of the new consumer duty? The Minister will have heard the historical criticisms of the notion of reasonable expectations for consumers. How would she feel about having this concept at the heart of this new duty?

[Baroness Penn (Con)]

The noble Lord gave other examples of the concept in the past, but it is important to root it in this particular context. Perhaps I can write to the Committee to expand on that point.

--- Later in debate ---

[Baroness Penn (Con)]

I think I said directly what was required of the FCA, and the FCA has fulfilled its obligations under that Act. Furthermore, the FCA is not of the view that it has diluted the approach; it has taken a different approach from the duty of care. I have attempted to set out some of the reasoning and thinking behind the approach it has chosen to take versus the alternatives that were put to it. I am happy to write further.

[Lord Sharkey (LD)]

I am afraid to say that I am not sure I take much comfort from the FCA saying that it is right. Mandy Rice-Davies would know how to deal with that. My next question is about the lack of redress provided by the new consumer duty.

[Baroness Penn (Con)]

With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.

Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.

The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.

Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.

--- Later in debate ---

I draw my remarks to a close there. I know I have a number of points to follow up for noble Lords, in particular in response to their duty of care amendment, but with that I hope that the noble Lord, Lord Sharkey, will withdraw his amendment.

[Lord Sharkey (LD)]

I thank the Minister for that reply. It is hard to understand exactly what the defence of the new consumer duty is, and why the private right of action is not included. I am very grateful for all the contributions made. I note that the Minister did not really address the defects of the consumer duty that we set out in detail, and I hope she will write to me and explain her views on that.

I close by saying that there is a slight Alice in Wonderland quality to this argument because, essentially, it boils down to something that we have discussed before: that it is not in the consumer’s best interests that financial service providers act in their best interests. That simply cannot be right. There is something fundamentally wrong with all this, and I look forward to having more time on Report to return to the issues.

Amendment 76 withdrawn.

Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

Moved by

[Lord Sharkey]

40: After Clause 23, insert the following new Clause—
“Regulation of commercial lending to SMEs
(1) The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) is amended in accordance with subsections (2) to (4).(2) In article 60C, in paragraph (3), at the end of sub-paragraph (b) insert “, and(c) the borrower is not an SME.”(3) In article 60D, at the end insert—“(6) This article does not apply to an agreement if the borrower is an SME.”(4) In article 60L(1)—(a) at the appropriate place insert—““SME” means a small or medium-sized enterprise, being any person who is not an individual which—(a) carries on business of any kind which employs fewer than 250 persons, and(b) has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.”;(b) in the definition of “relevant recipient of credit”—(i) omit the “or” at the end of paragraph (a), and(ii) at the end of paragraph (b) insert “, or“(c) an SME;”.”(5) Article 3(1) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (S.I. 2001/2256) is amended in accordance with subsections (6) to (8).(6) In sub-paragraph (a), for “any individual, unless he” substitute “any individual or SME, unless he or it”.(7) In sub-paragraph (b), after “individual” insert “or SME”.(8) At the end insert—“(c) “SME” means a small or medium-sized enterprise, being any person who is not an individual which carries on business of any kind which employs fewer than 250 persons; and has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.””Member’s explanatory statement
This would bring lending to SMEs within the perimeter of the FCA.

[Lord Sharkey (LD)]

My Lords, Amendment 40 is in my name and that of the noble Baroness, Lady Bennett of Manor Castle, whose support I am grateful for. The amendment would bring lending to SMEs within the FCA’s perimeter and would allow a private right of action to enable SMEs to sue lenders for breaches of regulatory protection, as I believe would Amendment 219 in the name of the noble Lord, Lord Holmes of Richmond.

However, there appears to be some uncertainty about the definition of an SME. The government website, which I checked this morning, says that it encompasses all businesses with no more than 250 employees and a turnover or balance sheet of no more than €50 million—the qualification is still given in euros—but it seems that Liz Truss might have changed all this. In an article in the Telegraph of 3 October last year, she raised the employee limit from 250 to 500. I cannot find this on any government website and I do not know whether the turnover and balance sheet requirements were also raised. If this is still government policy—perhaps the Minister can tell us whether it is—that is a good thing, bringing with it a significant relaxation in reporting rules and red tape to an important part of our commercial base. In fact, any encouragement or support for SMEs is a good thing.

As Rishi Sunak said in the policy booklet he wrote in 2017 for the Centre for Policy Studies:

“We have a world-beating record when it comes to creating entrepreneurial start-ups. Some 21% of UK firms are less than two years old, a higher figure than even the US … Yet when it comes to growing those businesses—the stage at which access to capital is most crucial—Britain’s record is dismal. In a ranking of 14 OECD countries, the UK comes a lowly 13th in terms of the proportion of start-up businesses that grow to having 10 or more employees within three years.”


He also noted that

“UK companies are far too reliant on banks for their credit financing needs”,

a reliance that has increased post pandemic. This reliance has been extremely problematic. Mistreatment of SMEs by banks is a truly serious problem, not just because it causes immense damage to companies and individuals but because the means of redress are cumbersome, full of long delays and generally unsatisfactory.

Commercial lending to SMEs is not regulated. It sits outside the FCA’s regulatory perimeter. In its annual perimeter report published last year, the FCA said:

“SME lending is a longstanding perimeter issue, as business lending is generally only a regulated activity where both the loan is up to £25,000, and the borrower is either a sole trader or a ‘relevant recipient of credit’”.


That excludes most of the SME sector by value. That sector operates without FCA regulation and has suffered some of the most appalling mistreatments at the hands of banks. Some examples of this have already been quoted this afternoon by my noble friend Lady Bowles.

There was the scandal of the mis-selling of interest rate hedging products, about 90% of which were subsequently found to have been mis-sold. There was also the treatment of SMEs by the Royal Bank of Scotland’s global restructuring group; the Tomlinson report on the scandal suggested that there were occasions where RBS had engineered businesses into default to move them out of local management and into the clutches of the GRG. The FCA later found that there was a systemic and widespread mistreatment of SME customers between 2008 and 2013. Andrew Bailey said

“GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so”

the FCA’s

“powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”

Then there was the HBOS Reading fraud in the early 2000s. A group of bankers was found by a court to have run

“an ‘utterly corrupt scheme’ that left hundreds of small business owners ‘cheated, defeated and penniless’”.

Those are just three of the major scandals affecting SMEs. There are others: mis-selling of loans under the Government’s enterprise finance guarantee scheme; mis-selling of tailored business loans by Clydesdale plc; allegations of misconduct involving business support units at other banks and mistreatment of small business borrowers when they are in arrears. There is clearly widespread, long-standing mistreatment of SMEs by financial services organisations. The case for regulation is particularly compelling because SMEs rarely have the practical ability to enforce whatever legal rights they may have against the banks. It would be exceptional for an SME to have the financial resource to take a bank to court.

--- Later in debate ---

[Baroness Penn (Con)]

I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.

Those were all the points—

[Lord Sharkey (LD)]

The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?

[Baroness Penn (Con)]

I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—

--- Later in debate ---

[Lord Sharkey (LD)]

I thank the Minister for her response but this all seems astoundingly Panglossian. It is as though there is nothing wrong with all this and the SMEs are protected, happy and profitable. That is not the case. If it were the case, why has there been this succession of appalling scandals and appalling mistreatment, causing so much damage to our small businesses? We cannot both be right here. If the system is working, why do all these things continue to happen?

I beg leave to withdraw the amendment and give notice that we will return to this issue on Report.

Amendment 40 withdrawn.