Financial Services and Markets Bill [HL]

Lord Thomas of Cwmgiedd Excerpts

2nd reading
Monday 8th June 2026 Lords Chamber

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I, too, welcome this Bill as an important step in strengthening the position of London in the world’s financial markets. However, I also pay tribute to the regulators, particularly the FCA, who have had to cope with markets that have changed enormously over the years that the FCA has been in existence. However, the fact that one extends praise to them does not mean that things do not need putting right.

There are two areas that I wish to address. The first is the problem of climate change, which has been so ably addressed by the noble Baronesses, Lady Hayman and Lady Northover. I agree completely with what they said. I want to underline the effect that this is having. There is litigation in almost every country in the world about the risks of climate change. Central banks and regulators worldwide are concerned about its impact. We must therefore ensure that this Bill is fit to deal with this problem and that regulation of the financial markets, because of what is involved for the longer term, deals properly with this area.

The second area is the control—I use that word deliberately—that Parliament should exercise over regulators and their accountability. In doing so, I declare my interest as chairman of the Financial Markets Law Committee, though I speak in an entirely personal capacity. One symptom of the current problem can be taken simply from the volume of litigation. We all suffer in this House from, and complain about, the thickness of the Bills and statutory instruments that we have to look at. Perhaps the problem of our age is being unable to express ourselves concisely enough. However, it is an extremely serious problem in the financial markets. Last year, the FCA produced 1,918 pages of regulatory instruments. The fact that so much legislation is being produced—the noble Lord, Lord Pitt-Watson, gave an illustration earlier of the change—shows that someone needs to hold the regulators accountable and ask why we need it all.

There are five points I would like to make. First, there is a serious problem with Clause 17 because of the weakening effect it has on transparency and proportionality and, as the noble Baroness, Lady Noakes, so clearly demonstrated, the more insidious impact it will have on the ability of this House to scrutinise Bills. We must increase scrutiny and outside control, because fundamental to any body that makes laws or, as in the case of the FCA, also enforces them, is accountability, and I think there is a plain lack of accountability.

Secondly, I accept, as the Treasury rightly points out, that expertise is required to draft the regulations. These transactions, when I look at them, are of immense complexity, and you really need to understand the market to draft them, but that does not mean that you do not need someone looking over your shoulder to see whether you are getting it right. It is very easy to see just trees and forget the wood. What I cannot understand is why the regulator is not happy for someone to look over what it is doing, because if things go wrong, it is a mighty source of comfort. There is no doubt we shall have another financial crisis in a way none of us can anticipate.

Thirdly, there is a wider issue as to the form of rules. We have got to a stage now where we produce very detailed rules, and we have to ask ourselves: is this the right approach? Compliance departments like detailed rules, because if you have detailed rules, all you have to do is go through them all—tick, tick, tick, tick—and you have complied with your obligations. But that should not be the test. The test should be: “Have you complied with the principles?” We are in danger of transferring to the regulator the risk that market participants should have in complying with the underlying principles and not merely with the tick-box exercises of dealing with rules. I pointed this out when, with a co-inspector in the system of inspections we used to have many years ago, we said that one of the problems with the whole Maxwell case was a tick-box mentality, and we must always remember that.

It is also necessary to point out that, if you have very clever people, and one of the regulator’s difficulties is that the people he supervises pay so much money, you can always use rules to justify what is done. It is worth turning up what happened in Enron. Time does not permit me to explain, but Enron is a classic case of applying rules to produce a result that was completely contrary to the underlying principles.

Fourthly, there is cost. The point is, very shortly made, long and complex rules are very expensive. Fifthly, there is consultation. It is very important that we look very carefully at the provisions in the Bill relating to consultations with the market. When drafting, it is very easy, as long experience has taught me, to overlook the obvious. We have to be very careful in what we permit the regulators to do without consultation with the market.

For those reasons, therefore, I very much hope we will scrutinise these two areas of the Bill in particular, and again I pay tribute to the noble Baroness, Lady Noakes, for the extraordinarily lucid explanation she gave of the problems with Part 3, Clause 17 in particular.