Financial Services Bill

Pat McFadden Excerpts

2nd reading & 2nd reading: House of Commons & Programme motion & Programme motion: House of Commons & Ways and Means resolution & Ways and Means resolution: House of Commons
Monday 9th November 2020 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I thank the Minister and his officials for the information they have shared about the measures in the Bill over the past couple of weeks. I have, of course, been riveted by the Bill in recent days, but I confess that I had to put it down for a while at 5 o’clock on Saturday to watch CNN when something more exciting than the Bill came through on the news.

[Harriett Baldwin (West Worcestershire) (Con)]

Will the right hon. Gentleman clarify whether that is where all his colleagues are this evening? I note that he does not have many behind him. In fact, his Benches are empty.

[Mr McFadden]

There is a phrase: I am not my brother or my sister’s keeper. They will have to answer for themselves.

The backdrop to these measures is formed by two significant events in recent years. The first of those is not Brexit but the financial crash of 2007 and 2008, which exposed the risks being run in the financial services industry and the huge knock-on effects for the rest of the economy when those risks go wrong. That experience prompted a global rethink about banking regulation, the capital levels that banks and other financial institutions are expected to hold, resolution measures in the event of banking failure, and the balance of obligations between the industry and the state. Much of that rethinking was expressed in the series of directives with which the Bill deals and in the Basel process on capital rules.

For all the complexity in the detail of these things, at root the questions are quite basic. First, how much capital should institutions hold as insurance against things going wrong? Secondly, who should be on the hook if things do go wrong? And thirdly, how do we insulate the wider economy from the consequences of instability in financial services? It is on these questions that much financial services regulation has focused over the past decade. The UK has been a key player in this process at both a European and a more global level. These are not things that have been imposed on us; we have played a significant role in the design of the measures that we are onshoring through the Bill.

The second event is, of course, Brexit and the consequent withdrawal from the European regulatory institutions responsible for the oversight and implementation of these directives. By definition, the process requires a recasting of regulatory responsibilities in the UK, and much of the Bill is concerned with that. The key question, then, is not so much the onshoring of the regulations themselves, but what happens next. Do the Government intend to diverge significantly from the rulebook, and in which direction will they go?

[Jonathan Edwards]

I am grateful to the right hon. Gentleman for setting the scene. Many of us are concerned that the Basel III regulations did not go far enough—that is, they did not really solve the “too big to fail” issue. We need to be very careful that we do not water down the proposals. Does he agree with that position?

[Mr McFadden]

I do, and I will talk later about the Basel III regulations; certainly Basel II did not prove to be any kind of protection against what happened in 2007 and 2008.

The other issue that we will have to consider is the role of Parliament in debating and deciding these matters. The approach that we will take is to ask at each stage what these measures will mean for the UK financial services industry, for the wider economy and for consumers. Do they guarantee robust regulation in the public interest, or do they expose the consumer to greater risk?

There is a particular onus on the UK to get this right, because we are a medium-sized economy with a globally significant financial sector. There are obviously crucial benefits of that to the UK: the huge number of jobs generated around the country by financial services; the investment that comes into the country through being a world leader in the sector; and, of course, the tax revenue that goes towards supporting our public services. But, as we have also learned, there are risks if things go wrong, and it is in no one’s interest for the post-Brexit regulatory system to result in a race to the bottom, where the public are exposed to greater risk in the name of increased competitiveness.

We know that parts of the financial services sector will be knocking on the Minister’s door. They will not put it in terms of watering things down; they will tell the Minister that they could be so much more competitive if only he changed this rule or that rule, or gave them this or that exemption. Of course, we do not argue that any rulebook should be frozen in time. Regulation must adapt to circumstances and innovation, but these things are there for a reason. Capital has to be held against lending and other products for a reason. These rules are the public’s insurance policy against the risks involved in the enormous capital flows that go across countries and between financial institutions. They are the as yet untested firewall against a repeat of what happened across the globe a decade ago.

[Bim Afolami]

What is the right hon. Gentleman’s view on an expanding, ever more complex set of measures obscuring good supervision and prudential management of the financial services sector? To what extent would he welcome any efforts—whether cross-party or by the Government—to simplify regulatory standards while also ensuring that they continue to be robust? There is a danger for many in different parts of the industry not of watering things down, but of such complexity making it very difficult to manage a business on an ongoing basis.

[Mr McFadden]

Nobody should be wedded to complexity for complexity’s sake. As I said, beneath the complexity, the issues are actually not that complicated. They are about the safety of insurance and resilience when things go wrong, and that is what we are focused on, rather than defending complexity for complexity’s sake.

The second thing that we will have in mind as we debate the Bill is the broad question of what financial services are for. The Chancellor set out green goals for the UK financial services industry in his statement today, and we welcome, for example, what he said on green gilts. But those green goals are not mentioned in the accountability framework set out in the Bill. Indeed, in schedule 3, the accountability framework states that the regulator must have regard to

“relevant standards recommended by the Basel Committee”.

The hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) was right to say that that should be a minimum, not a maximum, given the importance of resilience and robust regulation. The regulator must also have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities”

and

“the likely effect of the rules on the ability of…firms to continue to provide finance to businesses and consumers”.

Nothing there speaks of the green goals. Do the Government intend to amend the Bill as it progresses, to reflect the statement made by the Chancellor today? There is an opportunity here to put regulatory power behind the goal of net zero and, indeed, broader social and governance considerations for the greater public good. As it stands, the Bill is silent on that—it does not do that yet. When will the Bill be reconciled with the statement that we heard this afternoon?

Thirdly, we will want to ensure that the UK maintains the highest standards when it comes to transparency, money laundering and corruption. We have already had the report from the Intelligence and Security Committee referring to the “London laundromat”, where illicit funds can be washed and corrupt financing rendered more obscure. The UK’s globally significant financial services sector must not be tainted with any sense that this is an easy place for illicit or corruptly obtained finance to be washed through different institutions. As the Bill progresses, we will seek to ensure the highest possible standards with regard to these issues. Of course we want a successful, globally competitive financial services sector, but it has to be based on clean money, honest endeavour and socially responsible goals.

I turn to some of the individual measures in the Bill. As the Minister said, clauses 1 to 7 deal with new prudential regulation requirements, the implementation of the Basel rules and the new accountability framework, which I quoted from a moment ago. As I said, the schedule on the accountability framework states that, when making these new rules, the regulator must have regard to the likely effect on the “relative standing” of the UK as a place for firms to be based or carry on activities. I want to explore that with the Minister. Does that clause about the relative standing of the UK mean that, every time a regulated entity says, “We don’t want you to do that because it will affect our competitiveness in relation to other countries”—and they are liable to say that quite a lot when regulatory proposals are put forward—the regulators have to keel over and give in? How does this point to the UK being a leading player in the kind of environmental or social regulation that can help to ensure that the power of our financial services sector is a force for good? What is the guarantee that the provision does not, in fact, become a deregulator’s charter, on the basis that we should not do things that some in the industry could claim put us at a competitive disadvantage relative to other countries? The wording is crucial. The accountability frameworks, Parliament’s role in them and what they should cover will be the subject of significant debate as the Bill progresses.

On capital ratios, the FCA has estimated that total pillar 1 capital requirements will decrease by 5%. What is the justification for decreasing the capital requirements when we know that over-leveraging was a key cause of the financial crisis? How can the Government ensure that the onshoring of these powers does not result in a chipping away of the public’s insurance policy on financial risk? Similarly, in relation to Basel reforms, the Bill’s impact assessment talks of

“flexibility to tailor the actual detail of these subject areas to the UK.”

Given the weakness of the Basel rules in the past, it is clear that they should be seen as a floor, not a ceiling. Adherence to international standards is a minimum, not a maximum to be wriggled out of when we get the chance, so what exactly is the flexibility to be used for?

Clauses 8 to 19 deal with LIBOR and the governance of benchmarks. For my sins, a few years ago I served on the cross-party Parliamentary Commission on Banking Standards, which was established in the wake of the LIBOR scandal, which exposed manipulation, mutual favours and price setting based on conjecture rather than actual trades. The benchmark was abused to benefit traders, rather than markets or the end consumers of those trades, so it is right that it goes, but so many contracts around the world have been based on it that the Bill has to put in place a system for dealing with such so-called tough legacy contracts. The principles behind benchmarks should be clear: they should be based on actual trades and costs and should be insulated against manipulation for personal gain by those who submit the information to the benchmark in the first place. That will be the task of the FCA.

Clauses 22 and 23 establish the new Gibraltar authorisation regime. I share the warmth towards Gibraltar that is felt in all parts of the House. The measures could be described as a necessary consolation prize for taking Gibraltar out of the EU, by ensuring continued market access on a free basis between Gibraltar and the UK.

Clauses 24 to 26 give us a picture of how equivalence will work from the UK point of view, at least in part, by establishing the overseas fund regime, which negates the need for fund-by-fund approval and will instead be based on country-by-country approval and extending the time period for such funds to trade in the meantime. In his statement earlier this afternoon, the Chancellor had more to say about how we will grant equivalence recognition to others, but of course he could not say what would happen to UK companies that sell services overseas, because over that he has no control.

What was announced today dealt with one end of the telescope, because that is the position we are now in. Whatever this can be described as, it certainly cannot be described as taking back control, for we are now dependent on a response from others in respect of the crucial UK companies in the overseas markets in which they want to trade. There is also the question of how equivalence decisions are to be granted. Are such decisions a matter of economic policy or foreign policy—or both? I would be grateful if the Minister addressed that when he responds.

[Jonathan Edwards]

Considering the amount of work that needs to be done on this issue before the end of the transition period, is not the reality that the best we can hope for for the financial sector is some sort of base deal? The negotiations on what the situation may be down the line will then take many, many months, if not years.

[Mr McFadden]

If we read the political declaration, we can see that this was all supposed to be wrapped up by June. We are now approaching mid-November. The hon. Gentleman is certainly right to suggest that the time has slipped.

Subsequent clauses in the Bill go through a number of other EU directives and the onshoring process. They cover the markets and financial instruments regulation, the market abuse regulation, European markets infrastructure regulation dealing with over-the-counter derivatives, and the EU financial collateral directive. I have no doubt we will have a lot of fun with all of them in Committee. On money laundering, we will want to see as strong a system as possible to ensure that the UK is no safe harbour for anyone who wants to wash dirty money, avoid taxes or evade accountability. Again, I am sure the Minister is expecting more discussion of this as the Bill progresses. He and I debated the statutory debt repayment plan a few weeks ago, and Labour supports moves to create this system. It will be particularly important in the light of the increasing debt burden on many families due to the covid pandemic, and the sooner it is in place, the better.

On PRIIPS, the Government propose to remove the performance scenarios. The question, of course, is what they will be replaced with, how useful and accessible the information for consumers will be and what protections will be in place against the mis-selling of products or fraudulent claims. The imbalance of information is always a challenge in financial products because, in most cases, the seller knows more than the purchaser. Regulators have an important duty to be on the side of the consumer when it comes to the marketing of such products, so if the current performance scenarios are to go, they must be replaced with something better that will genuinely help the consumer. Other measures, including the fixed term for the FCA chief executive, have finally found the legislative home for which they have been waiting in the Treasury for some time.

That is, broadly speaking, what the Bill legislates for, but there are important areas, as the Minister said, that are not included. The most obvious is access to cash. Cash use has declined markedly this year, as people have moved to more online shopping and many businesses have moved to card-only payments, but this is not a trend that falls evenly on the population. Most of the population might need less cash or, in some cases, no cash in the future, but we have a duty to ensure access to cash for those who still need it, including many on low incomes for whom cash budgeting is a vital way of making ends meet. If we do not do that, inequality will be sharpened and there is a real danger that cash-dependent consumers will be cut off from important areas of economic activity. The Government have said—the Minister repeated it tonight—that they want to ensure access to cash, but if that cannot be done through this Bill, we urge the Minister to come forward with appropriate measures as soon as possible.

Standing back and looking at all this, I get an overwhelming feeling of it being all deckchairs and no iceberg. The Government can, of course, rearrange the regulatory furniture, and in many areas that is a necessary consequence of leaving the EU, but the bigger policy decision to downgrade financial services in the negotiations was taken a long time ago. The Chancellor talked today about the economic and employment importance of this industry, and he was absolutely right to emphasise that, but the more he emphasises it, the more it begs the question why market access for this crucial sector, and indeed services in general, has not been a negotiating priority for the Government. The truth is that, in this negotiation, services have been thrown under the bus.

On manufacturing, we have also moved further and further away from the earlier promises of frictionless trade, exact same benefits and all the rest. The fact that these things are not front and centre of the final round of talks is not because agreement on them has already been reached, but because the Government have decided not even to prioritise them. That is a louder testament to where we have ended up in this process than anything in the Bill. This is a series of measures that are trying to compensate for much bigger decisions. This will create more trading friction and more market barriers for our crucial financial services, and for our broader services industry and manufacturing. In the end, no amount of cutting and pasting of EU directives or last-minute vision statements can change that bigger picture.

--- Later in debate ---

[Mr McFadden]

With the leave of the House, I should like to respond to the debate and pick up on a few of the contributions made over the last couple of hours. The hon. Member for West Worcestershire (Harriett Baldwin) spoke of historic turning points, citing the change of presidency and the potentially huge announcement today on a workable vaccine. She is right about those, but I thought it was a bit of a stretch to include this Bill in the same bracket, as a historic turning point.

The hon. Member for Edinburgh West (Christine Jardine) spoke of the importance of financial services jobs in her constituency and in many other parts of the country. The hon. Member for Thirsk and Malton (Kevin Hollinrake), as chair of the all-party group on fair business banking, spoke of some of the past banking scandals, mistreatment of small businesses and so on. The hon. Member for Wimbledon (Stephen Hammond) told us that this might be the first of several such Bills, which gives us all something to look forward to in these long winter nights. He gently and right reminded us of the contrast between where we are and what was promised. He and the hon. Member for Hitchin and Harpenden (Bim Afolami) focused on the issue of accountability frameworks and the role of Parliament. That is very important because—let us be honest—that is what the discussion will be like in the Treasury. We have this big increase in regulatory focus in the UK. We have these existing regulators. We are going to pass a lot of this new power to the regulators through the onshoring of these directives and MPs will be standing up in Parliament saying, “Well, what about our role in this?” I suspect there is some scepticism about giving Members of this House a very active role in these regulations.

Exactly the same discussion took place during the financial crisis. Here, in the United States and in other countries, emergency measures had to be introduced and decisions had to be taken quickly by Executives, and the discussion was: what role for elected politicians? Hon. Members can be sure that there will be significant resistance to giving MPs in this House a big role in things such as capital ratios or whatever else is being discussed.

We will continue to debate these issues. To recap, our approach will be to protect consumers and the wider economy as these measures go through; and to focus on accountability frameworks and try to bring them closer to the policy aims of finance and what it can really do. We have broadened our understanding of that. The Chancellor, whether he meant to or not, has opened the door for us to discuss that through his statement this afternoon on the importance of green finance. Thirdly, our approach will be to try to ensure that this globally significant industry operates on the basis of finance that is clean, that is not a place for illicit funding and stops any race to the bottom on standards.

I look forward to debating these things with the Minister in Committee, but it is impossible not to contrast what is before us with what was promised all the way through and what was said earlier. The announcement today on equivalence is not taking back control; it is the opposite of taking back control. It was a symbol of our lack of control. It was, in fact, an act of unilateral financial disarmament. We decided to give companies operating here, for reasons of market continuity, the right to continue to practise. I understand why that was done, but the fact that we have no guarantee of what the response will be is a symbol of where we have ended up. It is certainly not taking back control. I fervently hope that that move is reciprocated, because that is in the interests of UK companies that are trading abroad, jobs here and this very important industry, but the fact that we cannot guarantee it and have no control over it speaks volumes about where we have ended up in this process.

The announcements on green finance were welcome, but they are not in the Bill. We have to ask why not, given that the Chancellor chose today to make his announcements, just an hour or so before we started debating the Bill. I am sure we will discuss that as we go forward.

To repeat, we have to have a UK-based system as a consequence of leaving the EU, and we will not oppose the Bill because we understand that reality, but that does not balance out or make up for the significant downgrading of our globally important financial services sector in the Brexit negotiations that are taking place at the moment. The fact that it is not front and centre in what we are trying to negotiate speaks volumes about where we have ended up.

Financial Services Bill (First sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 1st sitting: House of Commons
Tuesday 17th November 2020 Public Bill Committees

[John Glen]

Thank you. That is all.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Before I begin, can I get some sense from you, Mr Davies, about whether we can have a few questions?

[The Chair]

Yes, absolutely. Fire away.

[Mr McFadden]

Q Thank you. I would like to begin with you, Vicky. The Bill goes through a process of onshoring a number of EU directives that are concerned with financial services. Can you tell us conceptually whether there is a difference between the way the UK regulators tend to go about their business or think about these things, compared with the way the various EU directives have been drawn up, debated and discussed in the EU institutions until now?

Victoria Saporta: Yes, I am happy to do so. The way the EU tends to function in terms of regulations—particularly banking regulations, which are part of the provisions of the Bill that relate to the PRA—tends to be quite unique relative to other non-EU regulators. Essentially the Commission proposes very technical regulations, which in banking are often agreed by technocrats in the Basel environment—in the Basel committee—and then these are debated in the European Parliament and the Council of Ministers, and become directly-applicable law. The reason for that way of doing it relates to the single market, so that every EU member state has exactly the same regulations. As I said, that is very unique. Every other member of the Basel committee, for example—all the G20 jurisdictions with the exception of Switzerland, which is another federal democracy—would have its regulators applying these technical rules that they have themselves negotiated internationally.

Pre the treaty of Lisbon and before the single market rulebook, this was the way that regulation was done in the UK through the Financial Services and Markets Act 2000. Primary legislation set out the objectives, framework and constraints through which regulators would operate and the regulators would then go about implementing the rules for the purpose, so that they could achieve the objectives that Parliament would have set for them.

Traditionally, UK regulators have done that in the prudential sphere, which is my current sphere. To preserve safety and soundness and contribute to financial stability, the PRA currently has a secondary objective of facilitating competition, but with the remit that the Government give them and always with an eye to preserving responsible openness and dynamism.

[Mr McFadden]

Q If you are a bank that wants to lobby about the rules or a trade body representing financial institutions, do you think there is any advantage in your lobbying in one of these systems or the other—the more rule-based one or the more flexible one that you have outlined? Which is the more open to lobbying?

Victoria Saporta: There is a considerable body of empirical research that suggests that regulatory independence is strongly correlated with stronger financial stability. Particularly in the banking system, there are lower losses under stress. One of the reasons for that is because regulators—at least in theory, but I happen to believe from my experience that that is the practice—potentially have longer horizons than Governments, and therefore regulatory independence tends to be more robust to such lobbying in the longer term, subject, of course, to accountability and objectives set by Parliament.

[Mr McFadden]

Q Thank you. Sheldon, I want to ask you about the accountability framework in the Bill. It asks you and the PRA to take account of various things. In going about your work in the FCA of regulating conduct, products and so on that financial bodies distribute, what account is taken of wider Government objectives? I am thinking most obviously of things such as the net zero commitment and the legislation that has been passed for that. Do you consider those things or do you say: “Look, our day job is the fairness and stability of financial products and it’s somebody else’s job to worry about that”?

Sheldon Mills: It is a good question. The starting point is our statutory objectives. We set our priorities for the year and also over three years on the basis of our statutory objectives, which are consumer protection, competition and market integrity. We then work out whether, serving those objectives, certain types of activities will help protect consumers, and help us ensure market integrity or further competition.

If you take the example of net zero, it is quite clear, regardless of where Government’s ambitions are in relation to net zero, that the move towards net zero forms a part of the issues that we face globally in terms of climate change. Those are risks in the economy and therefore impact the firms that we regulate and in turn may impact the consumers that we seek to protect. In a sense, we have little choice but to consider and be cognisant of Government’s aims in relation to net zero, because if we are not thinking about those climate risks and challenges, which our firms face, we would not be doing our job and serving our statutory objectives.

Quite often, you find that the aims of Government are merely looking at some of the risks that are impacting markets, impacting the firms, and therefore it is right and proper that we have work in relation to those areas, and we do have work in relation to net zero and climate change.

[Mr McFadden]

Q Thank you very much. My final question is to Mr Latter. In the onshoring of all these EU directives, where do you see, if you like, the main opportunities not to do things that the directives currently mandate us to do? Where are the divergence opportunities for the UK financial services sector?

Edwin Schooling Latter: In answering that question, I think that an important starting point is to recognise that the UK regulators, including the FCA, played a very large role in designing a lot of that EU regulatory framework. So the overall picture is definitely one where we support the nature of that framework and the provisions within it. There are a few areas where compromises to span 28 countries perhaps do not suit as well as they might the particular circumstances of UK markets. I think that there are some areas, for example in the MiFID regime, where we could look at an approach that was better calibrated to the UK’s capital market infrastructure, but areas where we would diverge are the exception rather than the rule.

[Mr McFadden]

Thank you.

[Alison Thewliss (Glasgow Central) (SNP)]

Q I have a couple of questions, first to the FCA. Can you explain a wee bit more why you feel that you need a change in primary legislation in order to remove companies from your register?

Sheldon Mills: We have an obligation under FSMA such that all authorised firms will sit on our financial services register, and that allows a sense of public transparency as to who is authorised and what they are authorised to do. As the Committee may or may not know, we regulate tens of thousands of firms, upwards of 60,000 firms, so the register is quite large. The current rules allow firms that are authorised on the register to maintain their registration even though their activities are, in effect, dormant and they are not actually carrying out certain financial services. We need to give them rights to be heard in order to remove them from the register, and that takes time. Therefore, having a different regime, whereby we can give notice to firms that their removal might be pending unless they prove to us that they are active, is going to be a much more efficient and effective way of operating the register. This is important because harms are occasioned by the presence on the register of dorman firms. There is the activity of cloning, whereby firms use dormant names on the register to practise certain fraudulent and scam activity, which is a significant problem that we are seeking to tackle. We are committed, of course, to removing people from the register as swiftly as possible, but the provisions in the Bill will really help to accelerate that for us.

--- Later in debate ---

[John Glen]

Thank you very much. I shall pass over to my colleagues.

[Mr McFadden]

Q Thank you both for coming along this morning, virtually. Could I begin with you, Simon, and ask about onshoring and divergence? The Bill onshores significant bodies of EU legislation and directives. From the point of view of UK Finance, where would you like to see the Government and regulators diverge from that body of EU law in the future?

Simon Hills: I am not sure that we would want the UK Government and authorities to diverge significantly, if at all, from other standards. We are not sure yet what Europe will do in respect of Basel 3.1. We do not expect draft legislation from the Commission until around Easter next year. That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.

[Mr McFadden]

Q We have had the Chancellor’s announcement on equivalence from the UK end of the telescope last week. Do you think there is a relationship between the degree of divergence we pursue in the future from the EU rulebook and equivalence decisions from the other end of the telescope, that is, by the EU or EU member states to UK companies selling into their markets?

Simon Hill: Yes, I think there is likely to be work to be done there. Of course, one of the accountabilities the Financial Services Bill gives the PRA is to take financial services equivalence and international competitiveness into account, and, importantly, the banks’ ability to continue to provide finance to UK businesses and consumers on a sustainable basis. I think we will all want to understand how different regulators around the world—not just in Europe—look at the PRA’s implementation when it gets down to those technical standards, which is why it is important for both Parliament and UK Finance to make sure there is no inappropriate deviation from international standards. I can assure you that if UK Finance members see that there is, we will speak up about it.

[Mr McFadden]

Q May I ask you, Daniel, a question about LIBOR to fill in a small gap in the knowledge of those of us who have not followed every twist and turn of this? The measure became a scandal because it was being manipulated for the benefit of the traders who were submitting information. That information was based sometimes not on actual trades but on their estimates of what trades would cost. What changes have been made to the administration of LIBOR in recent years to stop those things?

Daniel Cichocki: It is absolutely right to acknowledge the issues with conduct around LIBOR in the past and the reforms that have taken place to make sure that those things are prevented. That includes the FCA oversight of the LIBOR benchmark, the introduction of the benchmark regulations at a European Union level, and transcribed into UK law, and broader reforms since the financial crisis, including the senior managers regime to ensure that the issues with LIBOR are not repeated. As the Committee will be aware, the fundamental reason why it is important to move away from LIBOR is that the underlying markets on which the rate is based have largely dried up. Therefore it is right to move us on to robust reference rates based on markets that are highly liquid and not reliant on expert judgment.

Simon Hills: It is important to remember that individuals in banks who are responsible for benchmark submission and administration are classified as so-called certified persons under the senior manager certification regime and they have to be certified as fit and proper every year by their firm. If they are not certified as fit and proper, they will lose their job and will find it very difficult to find a role in financial services again.

[Mr McFadden]

Q One more for you, Daniel. As things stand with LIBOR today, is it still possible for traders to submit information based on their estimates of what trades would cost rather than actual trades that have taken place?

Daniel Cichocki: LIBOR as it is formed today includes both elements of actual transactions and expert judgments of firms. These expert judgments, as a result of the issues in the past, are subject to those very high levels of governance control that I have talked about being introduced as a result of the benchmark regulation—absolutely appropriate as a result of the issues with LIBOR in the past. The underlying reason why we need to move away from it is that we want to be internationally on rates that do not require that expert judgment.

[Mr McFadden]

So no more cases of champagne? Thank you.

[Alison Thewliss]

Q Are there any further measures that you expected to see, or would have liked to see, in the Bill?

Simon Hills: Shall I go first and talk about the prudential regulation of banks? The Financial Services Bill achieves what it sets out to do: to implement a coherent version of Basel 3.1 in the UK. It is quite important to our members that we do Basel 3.1 the same in all the major financial centres in which firms operate. If a firm that is regulated by the UK operates in a different host country and the host country says, “That UK firm operating on our patch is supervised by the PRA and the PRA has introduced a watered-down version of Basel 3.1”, then they would add extra supervisory levels to bring it back up to the Basel 3.1 standard. That leads to a bifurcated approach with different regulatory standards in different countries, which makes life very difficult. A coherent approach, which is what the Bill seeks to achieve, is what we and our members want.

--- Later in debate ---

[John Glen]

Thank you for clarifying that. That is very helpful for the Committee.

[Mr McFadden]

Q Thank you for appearing before us, Mr Richards. Can you set out for us, in as simple terms as possible, the difference between how prices are set under SONIA and how they were traditionally set under LIBOR?

Paul Richards: LIBOR was set by a panel of banks. As the market no longer uses the underlying information that it used to use for banks, it has now changed, or will change, with the admission of SONIA, to a different definition. SONIA is essentially an overnight rate. It is a robust rate, because it is used widely in the market, whereas LIBOR is no longer used in the market as it was 30 or 40 years ago. That is one difference. A second difference is that LIBOR is a term rate—it is expressed over one month, three months or six months—whereas the liquidity in the SONIA rate is focused on the overnight market, which is therefore a much more representative selection and does not require expert judgment, unlike LIBOR.

A third point, perhaps, is that it is not just a UK proposal to replace LIBOR with risk-free rates in SONIA. A similar change is taking place globally. In the US, USD LIBOR is being replaced by the secured overnight financing rate, which has a similar sort of construction, and the situation is similar around the world. Those are the main reasons for the change.

[Mr McFadden]

Q Can I just focus on the point about expert judgments? That is quite a polite term for some of things that happened with LIBOR. They were not really expert judgments in some cases, were they? They were effectively deals between different traders to put in submissions at particular prices, to the individual advantage of the traders, based on the trades that they were doing. To what degree is SONIA insulated against that kind of manipulation?

Paul Richards: As you say, LIBOR depended on expert judgment in many cases, because the market was no longer using LIBOR in the way it had been constructed. With SONIA, it is a much more liquid market and there is no need for expert judgment at all. That is one of the reasons why it is being preferred as the replacement for sterling LIBOR, and similarly around the world in other currencies.

[Mr McFadden]

Q Can I take you back to the second point you made about the danger of litigation? We might all agree that moving away from LIBOR is a good thing, partly because we do not want to see a benchmark manipulated in the way that LIBOR was. However, as a consumer, I might have agreed trades or contracts based on a particular price set by LIBOR. What is the situation with potential litigation from a consumer who says, “You’re telling me that SONIA is a more honest benchmark because it’s based on actual trades and actual prices in market transactions, but now I’m being told that instead of paying x%, I will be paying x% plus y%”? What does the Bill say about that kind of situation at the moment, and what would you like it to say?

Paul Richards: A significant difference between LIBOR and SONIA is what is called the credit adjustment spread, which takes account of the difference between LIBOR and SONIA. In the consumer market, the proposals are, at a general level, to treat customers fairly. In the wholesale market, the aim is to have continuity of contracts between the old definition of LIBOR and the new definition that will be used for legacy transactions. This will be determined under the Bill by the FCA. It is not specified how it will determine it. There are market assumptions about that, but it is not decided yet how they will determine it. It is thought that it will consult the market before making a decision, but the end result will be that the rate that arises under the new definition of LIBOR will take over from the old definition of LIBOR, and there will be continuity of contracts between them. If that is emphasised in the Bill, that will give legal protection for all those involved, which is one of the main reasons for providing it. It needs to be accompanied by a safe harbour provision, which would protect all the different market participants involved. I would like to be able to tell you that this will eliminate the risk of litigation, but I cannot tell you that. What I can tell you is that it will minimise the risk of disruption and litigation that might otherwise occur because of the huge volume and value of transactions.

[Mr McFadden]

Q So how would this safe harbour provision that you are advancing work? Why is it needed beyond the FCA acting to ensure continuity for legacy contracts, as is I think is already envisaged in the Bill?

Paul Richards: They are both needed, I think. The FCA’s judgment about treating customers fairly relates primarily to consumers. The protection that a safe harbour would provide, so that parties would not sue each other as a result of the change from the old definition to the new definition, is essentially designed for the international markets. So they are both needed. The FCA is already making statements about treating customers fairly, but the Bill should include both the continuity of contracts provision and a safe harbour protection to accompany that. The broader the safe harbour protection is drafted in the Bill—the Treasury, I am sure, could help on this—the better and more effective it will be in minimising disruption and the risk of litigation.

[Mr McFadden]

Q Have you already made these arguments to the Treasury only to be rebuffed, or is this the first chance you have had to make them because the Bill was published only a few weeks ago?

Paul Richards: These are points that law firms that work in the City are acutely aware of from their previous experience. The law firms have been looking at what needs to be done to ensure that there is continuity of contract and a safe harbour protection. Of course, I hope that the Treasury will take account of that, as your Committee will take account of it before reaching a final conclusion. We should do everything we can to minimise the risk of market disruption and litigation, within the context of the overriding point, which is that we do need to move away from LIBOR to risk-free rates. That is, of course, what we have done, with new issues in the bond markets and with the conversion of legacy contracts from LIBOR to SONIA. We have a tough legacy problem for the future, which needs to be dealt with. The Bill helps to deal with that.

[Alison Thewliss]

Q I have some follow-up questions. You mentioned how the FCA will determine these things. Do you feel that that needs to be set out quite explicitly in the Bill—how the FCA will make those determinations around benchmarking and LIBOR contracts?

Paul Richards: Sorry, I did not quite catch the last point.

Financial Services Bill (Second sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 2nd sitting: House of Commons
Tuesday 17th November 2020 Public Bill Committees

[John Glen]

Thank you very much, Chris, and thank you, Chair.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Q Chris, good afternoon and thanks for giving evidence today. I want to continue to ask about the same things.

The Bill does lots of different things, but I would like to mention two. First, it onshores or incorporates a significant body of EU law through different directives into UK law and gives the governance of those to the UK regulators. Secondly, it sets up this overseas fund regime, by which it grants equivalence on a country-by-country basis. It says that the Treasury will make these equivalence decisions as well. The Chancellor announced the direction of travel last Monday.

How do you see the relationship between these two different parts of the Bill? In theory, in future, having onshored the body of EU law and the directives, we are now at liberty to depart from them if we so choose. Do you see a relationship between that debate around divergence and the degree of divergence that the UK decides to opt for and the equivalence decision that we now need from the rest of the EU?

Chris Cummings: It is worth reflecting on the good work that has been done so far in trying to bring the different regimes together and match equivalence. Looking to the future, there is a strong argument for the UK to continue to bolster its presence in the international standard-setting fora, whether that is the Financial Stability Board, the International Organisation of Securities Commissions, Basel, and so on. Our authorities can continue to play a very strong role in arguing for what our industry would prefer, which is global and international standards.

We continually push for international standards as a global industry because that allows us to operate with reduced bureaucracy and by taking costs out of the organisation so we can really focus on looking after client needs. The UK has an outstanding track record of having its policymakers and regulators taken seriously in those international fora, because of the scale of the market that we have in the UK and the sophistication of our capital market in particular. At that level, if we can push for international standards in an international environment, that reduces some of the potential friction between the EU and the UK or other jurisdictions about where divergence may or may not be happening. That is the first thing we would like to stress—the international nature.

Secondly, something that has become part of the discussion in terms of the future relationship of the UK and the EU, and which our industry thoroughly supports, is a much clearer focus on outcomes and outcome-based regulation. It is noticeable that across the EEA there are different approaches in different European jurisdictions, all of which have been judged equivalent so far. Recognising that different jurisdictions will walk up to the same issue from different directions, yet seeking to achieve the same thing, that is the material part.

The third area I would just point to, if I may, is the depth of relationship between the UK authorities and those across the EU, not just in ESMA, our European regulator, but in the national domestic regulatory authorities. It is still absolutely the case that the UK policy-making apparatus—the UK regulatory bodies—is seen to have considerable expertise to offer. So just because we start in different places, it does not mean that we should not see the UK taking a little leadership and the EU tacking towards us in terms of lessons learned because of the sophistication of the market that we can offer. That was one of the reasons why we in the IA, among many other organisations, through the Brexit process was keen to press for a regulator to regulate a dialogue, which could be technically oriented, focused on bringing market and regulatory understanding to bear and making sure that there was a no-surprises, keeping-markets-open focus through the process that we have been through.

So I do not see equivalence and divergence as axiomatically pulling in different directions. I think what we will undoubtedly see is a period where the definition of equivalence needs to be—we need to have a thoughtful discussion, actually, about the substance of equivalence, moving away from its ephemeral nature and the fact that it can be granted or dismissed within a 30-day notice period. We need to have a much more joined-up and mature discussion about how two major markets can keep on doing business together, particularly in investment management when, as I mentioned earlier, 37% of Europe’s assets are managed here in the UK and when, for certain member states, whether it is the Dutch pensions industry or something else, the quality of investment management conducted here in the UK is seen as a prized asset and something that they want to learn from and continue to enjoy the benefit of.

[Mr McFadden]

Q What would be the practical implications for UK-based investment companies— your members—if we stayed where we are now, with the UK having granted equivalence recognition to EU-based companies but not having a reciprocal recognition in return?

Chris Cummings: We have been helping our members prepare for all shades of Brexit outcome over the last four years. Firms have taken the decisions that inevitably they would take, so they have set up extra offices, they have recruited further staff, they have gained the necessary permissions and licences from the national competence authorities. At the moment, even with, perhaps, no deal or a rather thin deal, we are as well prepared for that outcome as it is possible to be. We are giving much more thought to the companies that we invest in—everything from life sciences to technology, to transport and infrastructure, to make sure that those companies are well prepared for the Brexit outcomes, but from our industry’s point of view, recognising the equivalence decisions that have been made today, we are set as fair as any industry can be. I am trying not to over-promise, but suggesting to you that the industry has thought long and hard about potential outcomes, and we are as prepared as we can be for immediate issues.

[Mr McFadden]

Q Thanks. Can I slightly switch subjects now, to ask you about packaged retail investment and insurance-based products? The Bill removes the requirement for performance scenarios on PRIIPs. Could you just set out for us, in as simple terms as possible, what is wrong with these performance scenarios, and why there is a desire to remove them? If they are removed, what kind of information should be provided to consumers to help them make as informed an investment choice as people can?

Chris Cummings: Thank you for the question. You have touched on such an important issue for our industry. Through the consultation on PRIIPs we highlighted to EU policy makers and regulators, to our own Financial Conduct Authority and others, the dangers that we saw in the PRIIPs key information document, the PRIIPs KID. Because of how the methodology for PRIIPs was created—taking a rather avant-garde view of the calculation basis—it meant that we could have negative transaction costs. Somebody could trade in the market and it would not only not cost them any money; they could actually lose money by making a trade. That led to some perverse outcomes that were pro-cyclical in the presentation of the information they gave.

Let me give you an example by reflecting back on a new fund that has had just two or three years’ experience. Imagine if, over the course of its life, that fund had had a very strong performance; it had done very well over a three or four year period. Because of the pro-cyclicality of how it had to report performance scenarios—looking to the future—it would have to present a potential investor with scenarios that were entirely positive and that generated levels of return that nobody in the industry would seriously put in front of a retail investor to suggest that this was what they could actually get. They were being forced to do it because of the methodology—the calculation basis—which reflected only that, if you had a few good years of performance, your fund would continue to have good years of performance. Similarly, if your fund had had a few bad years of performance, all you could project was that that bad performance would just continue and continue. That was because of the calculation basis and the way that the rules were written.

As an industry, we kept drawing this issue to the attention of the policy-making community in order to say that, if nothing else, when it comes to disclosure and investment, we have managed to convey the central message that past performance is no guarantee of future performance. Please let us keep on reminding people that past performance is no guarantee of future performance. Sadly, that requirement was taken away. The new calculation basis was introduced, which led to the industry ultimately being forced by its regulator to produce this pro-cyclical—and deeply misleading, in our view—information.

We continued to lobby against the wider introduction of the PRIIPs KID, arguing first that it should not be introduced. Secondly, having lost that argument and seen that that it was introduced only to closed-ended funds, we argued that it should be kept there until the wider implications were seen and not extended into the world of undertakings for the collective investment in transferable securities, because of the scale of UCITS and how many millions of people across the UK and Europe rely on them.

We were genuinely heartened when the Treasury announced that, post Brexit, it would be undertaking a review of the PRIIPs KID. What we hope to see, actually, is a wider-scale review of disclosure, whereby we can start from a different position. Given the technologically advanced world that we are living in today—the greater use of mobile phones, applications and computers, and just understanding that people engage with financial services in a very different way—could we have a rounder discussion about how we can do the thing that we want to do as an industry? We want to have a more engaged client base and to help them understand the different funds that are available and the different risk profiles of those funds, so that they can invest with more confidence, and certainly with more clarity about likely outcomes, rather than having to give false performance scenarios that simply nobody trusted in the industry.

[Alison Thewliss (Glasgow Central) (SNP)]

Q I have a couple of questions on equivalence. Equivalence is a bit of a point in time. How far do you feel that the limits of equivalence could go? How much change would happen before that was withdrawn?

Chris Cummings: I think this is a “two ends of the telescope” question, if you pardon the analogy. We tend to think a lot about the UK changing rules and changing approaches, and there are one or two examples of that in the Bill—we have just mentioned PRIIPs KID. There always seems to be a sense that it would be the UK moving away from the central European view of regulation. Of course, that need not be the case. There are a number of regulatory reviews that are timetabled to be considered by the European Commission. There is the alternative investment fund managers directive. There is the review of PRIIPs and so on. Looking two or three years out, there are quite a few opportunities where, actually, the UK may stay still because the rules work in practice and it could be the European Commission that is drifting away from the central scenario that we are in today. That is perhaps almost inevitable, looking 10 years out; there are bound to be changes to the regulatory architecture and the regulatory regime, because the UK will need to modernise its approach to regulation, and not only here and across Europe, but more globally, every economy is thinking about growth-oriented policies as a result of the covid crisis.

That is why, for us, we approach the discussion around equivalence very much from a point of view of saying, “Okay, even if the words on the page change, how can we make sure that the bandwidth is agreed by all sides, so that minor degrees of divergence from equivalence are not the straw that breaks the camel’s back?” That is why I come back to the point I was making just a moment ago about having a regulator to regulate a dialogue—a set, established forum where the FCA and the Prudential Regulation Authority can meet the European Securities and Markets Authority and the European Central Bank and so on, in order that information can be shared, regulatory approaches can be discussed and data can be shared as well, on a “no suprises” policy, so that we can make sure that in the UK and Europe there is a commonality of view, or a commonality of outcome certainly, that is being laboured towards.

I am confident that that would make sure that any discussions on equivalence are structurally much more sound and that we remove the political overlay. Across the industry, there is a concern that equivalence could be used as a political process rather than a regulatory one, which perhaps does not really lead to an outcome that is in the interests of savers and investors.

Every time a new rule is introduced that is different in the European Union from the UK, that adds costs to the industry, because we have to navigate our way through two sets of rules, which might not contradict, but simply do not join up. There are different reporting deadlines for data and so on. That is why we would really like to make sure we move to an outcome-based approach, rather than to a prescriptive, words on the page, exact phraseology, which will simply prove a headache for all.

--- Later in debate ---

[John Glen]

Q You are referring to the response of both yourselves and TheCityUK to the consultation on the future regulatory framework, separate and additional to the Bill?

Catherine McGuinness: indicated assent.

[Mr McFadden]

Q Good afternoon, Emma and Catherine. It is very nice to see both of you. Emma, I want to come to you first. You are the fifth panel to appear and there is beginning to be a pattern to the questions that we have asked. I feel that I have asked this of a few people.

The Bill does lots of different things but two big things are that it transposes, or onshores, lots of different parts of EU regulation from many different directives. It gives powers to the UK regulators to govern all that. In doing that, as we come to the end of the transition process, there is greater freedom for either the Treasury or the regulators to diverge from that body of EU law. The Bill does that, but it also has this overseas markets vision, which is granting equivalence on a country-by-country basis, to the 9,000 funds that are domiciled overseas but which operate in the UK. I want to talk a bit about these two different parts of the Bill. Starting with you, Emma, what do you think your members’ attitude is to onshoring this body of EU law? Do they broadly regard it as something that they would like to stick with or are there areas that they would quite quickly want to diverge from and, if so, what would be the most prominent areas?

Emma Reynolds: We were delighted that the Government took the unilateral decision last week to grant the EU equivalence in a number of different areas. We are still hopeful that the EU might follow suit. We have been calling for a technical outcome-based approach to equivalence for some time now. Within that, you could have different rules but the same outcomes. Even if there are pinch points around Solvency II—only some elements of Solvency II—you could have different rules in the UK that achieve the same objective.

From now until 1 January, we will remain technically equivalent. Inevitably, over time, there will be some changes in regulation, both on our side in the UK and in the EU. The EU is currently reviewing some of its own directives, MiFID being a case in point, but there are others too. We do not want to see divergence for divergence’s sake. We would like to encourage a strong dialogue between regulators in the UK and the EU. There already is that dialogue, but we would like to see a framework for that plan. If you are a member of ours who trades across borders, you want similar or the same rules.

[Mr McFadden]

Q You referred to the equivalence decision announced by the Chancellor last week. That is one end of the telescope; the other end is hoping—I am sure the Chancellor hopes, too—that this is reciprocated. Do you see a relationship between the degree of divergence, which may occur and the decision-making process from the other end of the telescope on equivalence for UK firms trying to sell into EU markets? In other words, Mr Barnier talks a lot about the level playing field, but if it looks like we are departing from a level financial playing field, will that impact on those equivalence decisions you hope for?

Emma Reynolds: We are still hopeful that the EU might take a similar decision to what we saw last week. We would not like to see divergence for divergence’s sake. There is no immediate appetite for great divergence from EU rules from our members. Does that answer your question?

[Mr McFadden]

Q Yes. Catherine, can I turn to you on the question of regulators? This gives a huge amount of new powers to the regulators. I have a two-part question. One, do you think they can handle it? Two, returning to what you said about a new Select Committee on financial services regulation—or whatever the exact title was—do you think that is an important part of a new accountability regime for the regulators, given the enhanced powers that the Bill gives them?

Catherine McGuinness: First of all, I do think the regulators can handle this, but I think it is important that we look at the right degree of scrutiny. Yes, when we speak to practitioners with the International Regulatory Strategy Group, it is their view that a joint Select Committee on financial regulation, which could look in detail at pieces of financial services regulation, would be a useful way of enhancing and embodying that scrutiny.

[Mr McFadden]

Thanks very much. I have no further questions.

[The Chair]

For the Scottish National party, first of all, their spokesperson, Alison Thewliss.

--- Later in debate ---

[John Glen]

Q Just to be clear, there is no substantively different path that you anticipate that we could have taken on this matter that would give us a better outcome than the one that we are headed for, notwithstanding the need for the further clarification that is in train?

Adam Farkas: That is a difficult question to answer because we have not speculated on different outcomes, but certainly the path that the Bill is taking is something that we can very strongly support.

[Mr McFadden]

Q Thank you for coming today. I want to start with our current situation on equivalence, where we had an announcement from the Chancellor that the UK will grant equivalence recognition to companies based in current EU member states but we have not got a reciprocal equivalence recognition for UK companies selling into EU markets. What are the practical implications for UK-based financial services companies if that situation continues to exist for some time?

Adam Farkas: Very briefly, equivalence determinations provide the major legal framework for different jurisdictions to provide access to service providers that are licensed and supervised in each other’s markets. To answer your question, if equivalence determinations by the EU are not forthcoming, or not brought forward at pace or with the width that is expected, that will put limitations on the access of service providers—financial services companies and firms—to the EU market. This is really an issue of market access.

[Mr McFadden]

Q Can you give us some practical examples of what kind of barriers companies could face and of what decisions they might have to take to overcome them?

Adam Farkas: In very simple terms, if a company is licensed in the United Kingdom and does not have access, or loses access, to the EU—of course, that is completely free under passporting regimes—it will find limitations in serving clients or trading with counterparts in respect of the financial services that it provides in the other jurisdiction, which would be across the channel in this case. A lack of equivalence has been a risk throughout the process of the negotiations, so authorities have made significant efforts to prepare regulated entities—financial firms—and to force them to prepare for all eventualities. In other words, everyone is hoping for the best but preparing for the worst.

AFME members—of course, our membership is tilted towards the large players—have made extensive preparations over the years to get ready for the worst outcome, which would limit direct market access from the United Kingdom to the EU, by way of setting up entities, moving activities across the border and making all necessary arrangements to allow them to continue to serve their clients across the European market. Of course, if equivalence is granted and access is provided on that basis, it would improve the general situation of market access between the EU and the UK, so we welcome the Chancellor’s announcement and the UK Government’s determination last week to grant equivalence within a certain scope to third countries, including EU countries.

[Mr McFadden]

Q So the main mechanism for preparation, as you put it, is to establish an operation inside the EU if you have not already got one.

Adam Farkas: With a lack of equivalence. If no market access is provided on another basis, the main mechanism is to establish entities that are licensed, capitalised and supervised in the other jurisdiction, meaning that that entity can have access to the market, but that involves costs and operational implications.

[Mr McFadden]

Q Can I ask you about LIBOR? We have heard that the Bill facilitates a move away from LIBOR. The weaknesses and manipulation of LIBOR are well documented. The L in LIBOR stands for London—it is the London interbank rate. Are there any implications for London’s status as a global financial centre from a move away from LIBOR towards different kinds of benchmarks?

Adam Farkas: It is a very difficult question. We all know the history of what happened. What is important is what happened afterwards and how the authorities decided to move away from the possibility of manipulating these rates. There is a global co-ordination effort and a long-standing global discussion on transitioning out of the old way of setting different financial benchmarks.

Regulations were put in place, changes to methodologies were put in place and public institutions took a stronger role to make sure that benchmarks are more robust and not prone to manipulation or potential distortions. I think, in that sense, this issue of reputation and the credibility of these benchmarks has been very strongly addressed by the authorities globally, and also in the UK by the authorities. I believe strongly that this will lead to a much sounder and more credible framework once the transition is completed.

[Mr McFadden]

Q Finally, I would like to ask if you a question about future direction. We have heard today about British influence on the EU directives that govern financial services—that there has been quite heavy British influence over the years in designing this set of regulations, which this Bill onshores back to the UK as a result of Brexit. That means that, come the end of the year, we will be very closely aligned with what has been developed over the years so far.

What is your view of what will happen on the EU side, absent a British influence, as financial services regulation inevitably evolves and develops? We no longer have one table, if you like. We have two tables—a British one and a European one. Does that mean, inevitably, that the two sets of regulations gradually spin off in different directions, or is that not the case?

Adam Farkas: Before I answer the bilateral question, I think that there are other forms of international co-ordination of financial services policy. One is multilateral in the form of the FSB, IOSCO—that is on market rules—and the Basel committee, which deals with prudential rules. Both the EU and the UK are significant players and participants in this global co-ordination. In the interest of having open, transparent, and well-functioning financial markets and maintaining international flow in capital movement, allowing both banks and corporates to manage their risks cross-border, these multilateral engagements are extremely important. They actually provide a very good platform to co-ordinate the major direction of financial regulation globally.

Now, the bilateral co-ordination will change, because it will take the form of the so-called bilateral regulatory dialogue—or whatever similar term the EU uses—with third countries, which provide a platform. Inevitably, if two jurisdictions take a separate course in legislation, there will be some divergence between the rules. What is very important is that if that happens, it is transparent to this multilateral setting as well as in the bilateral context; it is well-explained and co-ordinated as much as possible; and it is only done if there is a real justification for it.

[Mr McFadden]

Thank you. Constance, do you want to add anything?

Constance Usherwood: I would add that in the context of the Basel framework, that does allow for some adjustments or tailoring for jurisdictions when it comes to implementing that in law. That is certainly something that we would expect the PRA to look at, going forward—such things as mortgages and trade finance. There are little aspects of the Basel framework that already allow for some consideration of how that is best tailored to the market in which it is being implemented.

[The Chair]

We will now move on to the SNP spokesperson, Alison Thewliss.

--- Later in debate ---

[The Chair]

I call the shadow Minister, Pat McFadden.

[Mr McFadden]

Q Good afternoon, Gurpreet. Thank you for speaking to us today. Does the Bill mean that your members will have to hold less capital against their activities than would otherwise be the case?

Gurpreet Manku: No, actually they will be holding more. The bulk of the members most affected are in that category known as exempt CAD. It is an odd category that exists in UK legislation. At the moment, that broad category of firms is required to hold a level of capital set at €50,000. Under the new regime, the calculation methodology will change to a quarter of their fixed annual overheads. For many firms, that will lead to an increase in capital requirements, which is why I referenced the need for a transitional period. A few years ago, we recognised that this was coming, and the transitionals were always going to be a feature of this regulation. In terms of what it means in practice, for some firms, there would have been a fixed requirement of €50,000, and that will move to several million pounds; for others, it might not be much of a jump. There is a wide variety of firms out there in the UK market. Those that might not be in my constituency could also be significantly affected.

[Mr McFadden]

Q Looking to the future and the onshoring of all this EU regulation, from your members’ point of view, what do you think needs to change in order for the UK to become more competitive in the BVCA field?

Gurpreet Manku: What I have seen in recent years is that other jurisdictions have tried to emulate what we have here. That is because the UK has always been an attractive jurisdiction, because of its highly regarded legal and regulatory framework, as well as the quality and depth of the financial and broader professional services ecosystem. In practice, that means that global institutional capital can be raised from here. So when it comes to the onshoring and the development of regulation in the future, we would be looking for continued high standards, but clear and effective regulation.

[Mr McFadden]

Q What are the EU regulations that you would most like to get rid of? What is on the bad list?

Gurpreet Manku: Sorry, I had not thought about that for this session. Interestingly, one of the regulations that probably caused the most concern was referred to earlier—the PRIIPs regulation. Most of our members will market to professional institutional investors rather than to retail ones, but where that particular regulation is relevant, it has led to information that many have felt is misleading. Seeing that changed and the changes being introduced in the Bill is welcome.

The investment firms regime is probably one of the biggest changes to come—we are implementing that now. If we are looking ahead a few years, we want to look at how the alternative investment fund managers directive changes. The way it was implemented in the UK historically—through the work that our authorities and regulators have done—has meant that it was implemented in a proportionate and sensible way. We want that to continue.

[Mr McFadden]

Q Finally, we have heard about a difference in philosophical approach between the European approach of codifying lots of financial services regulation in very detailed directives—often lengthy and dense documents—and the more independent British regulator approach, which it has been argued is more flexible. From the point of view of the BVCA, what would you rather be dealing with—the UK regulators or the traditional European directive approach?

Gurpreet Manku: Throughout the past few years, we have continued to work with both the Treasury and the regulators. Given the body of legislation that has come to the UK’s shores and the work that we have done historically, it makes sense for the policy-making and rule-setting process to sit within the regulator, and there is an appropriate accountability framework around it.

[Mr McFadden]

Thank you.

[Alison Thewliss]

Q You have talked about the importance of having clear and effective regulation, which all of us around the table can probably agree with. Have you any concerns about the transparency issues around the regulations, with the regulator taking on so much more of the responsibility?

Gurpreet Manku: I think that what will be important to see over the next year and in future is sufficient time for consultation, because that leads to further transparency. The documents that the FCA publishes are generally quite good and detailed, but I have seen some cases in recent years, and not just domestically, where there were very short windows to respond to quite technical consultations. Ensuring that there is sufficient time to review and digest any changes and to sit down and speak to the regulator about them will be helpful, and will also support the transparency objectives.

--- Later in debate ---

[John Glen]

Thank you very much indeed, Peter.

[Mr McFadden]

Q Peter, we are talking about things that have broad support: the debt respite scheme, Help-to-Save and so on. The Minister and I debated some regulations about these matters about a month ago. This is really just a short question. You have looked at how these things have been set out in the Bill and you have been very warm about them today. Is there anything you would change, given what you have seen in the Bill? Are there any gaps or any changes you would suggest to the way in which these things have been set out in the Bill?

Peter Tutton: In an ideal world, we would like the breathing space period to be longer. We can understand why it has been set up as it has. It is very good that it includes, for instance, Government debt; it is a new thing that people will have protection from Government and local government debt; things like council tax are a very big problem for our clients. We can see that the Government may be nervous about a longer scheme. Perhaps if there was a way of looking again soon, once we are satisfied that it works okay, we could give that breathing space a bit more time. There are two things that the breathing space can do. There is what it does at the moment, which is largely about allowing people to get advice and get into a debt solution, but there is also time during which people need to recover.

As I said earlier, when people come to us they are often still in quite a degree of difficulty and their circumstances have not resolved themselves. We cannot always instantly put them into a stable long-term solution. One of the things that might help that would be a longer period of breathing space while they are recovering. In lots of cases, there is an obvious solution to put people into; if their circumstances are not going to improve and debt relief is the right solution, we will put them into that. We may be able to deal with that by articulating the statutory debt repayment plan and the breathing space such that there is a gap in the middle. Ideally, a longer period would be good. There may be a way of effecting that just by making sure those two things align, so that people whose circumstances are still recovering—they come to us and have a very small amount of money, but we believe that they will back into work, and for a lot of our clients that is what happens—can keep that protection going through until their circumstances improve and they can get back on the track of repaying their debts. That would be the one thing, instantly, that we would think about changing.

Another thing is that in the Treasury policy statement, including this legislation, there is a provision for funding the statutory debt repayment plan. The Treasury policy statement talks about that funding for debt advice providers being around 9% if you distribute funds as well. That is something that may need to be looked at again—not a lot, but a bit. That 9% is a bit less than the funding that we currently get from what is called fair share funding, which is [Inaudible] funding we get for helping clients with debt management plans. That funding actually allows us to do a lot of things.

One of the things that we are not yet sure about and are not able to model is what the additional costs of the statutory debt repayment plan will be. For instance, there is a provision in there for creditors to have a vote as a safeguard before a plan can be accepted. If we have to administer that vote in some way, for instance, it would mean an extra cost. There are some bits and pieces around that that may need looking at a bit more once the precise details of the debt repayment plan scheme are better understood.

[Mr McFadden]

Q Thank you. Covid has had a paradoxical effect this year because, on the one hand, some people have become better off as the year has gone on because they are still getting paid but are not spending as much as they would normally—that is why we have seen bank deposits going up around Europe—while on the other hand, there has been an increase in unemployment and a lot of people with increased debt burdens and so on. Does anything about the covid impact suggest to you that there should be changes in the timing order of the introduction of the proposals and their content?

Peter Tutton: That is a really good question. I agree that that is what we are seeing—we put a report out last week. We see a growing number of households struggling because of covid—those who have lost their jobs. Furlough may be picking up 80% of their wages, but if you are on low pay, that is a big jump and a big cut can put people into difficulty.

You are absolutely right: this is growing. In an ideal world, it would be great if we had those breathing space protections tomorrow so that people had a safe place to go and we could start getting them back on the road towards control of their finances and stopping their debts growing. For practical reasons, I do not think that it will be possible to put that in place tomorrow. For the scheme to work and for us to be able to do it at the scale that we think it would need, it needs to work as an online remedy.

It also needs to work for advisers, to make sure that where we capture information or when someone inputs information into our online system debt help tools, for example, we do not then have to copy that again into the Insolvency Services portal, which is incredibly expensive. That is something that happens with DROs and can be very expensive. The software and APIs need to be developed so that there is a seamless process and the cost is minimised for the scale that we need to get people into this. I do not think it is possible to do that or for us, as debt advice providers, to be organised to do it on the scale that we would need to, much before the implementation date.

Bringing the scheme forward, for practical, implementation and software reasons—all that kind of stuff—is going to be hard, but I think there are things that the Government can do, in the areas that we are really worried about at the moment, to bring forward the protections, if not the breathing space scheme. One of the things that our polling estimates, and other people have said the same thing, is that a large number of people have fallen into rent arrears. Those people [Inaudible] in the private rented sector have relatively little protection against eviction for rent arrears. There are longer notice periods, but that will start unfolding quite soon—it probably already is—so are there protections? Similarly with council tax, there are people falling behind who may be subject to enforcement by bailiffs, which we know can be intimidating and expensive and can make people’s problems worse.

It seems to me that the Government and Parliament supported breathing space. There was cross-party support for the idea that people in financial difficulty need protection from unaffordable collections and enforcement that make their problems worse, so I think there is something the Government can do. That may not be through the breathing space scheme itself now, but it is in the spirit of those protections, particularly for key debts: things like rent arrears and council tax, and maybe other types of debt enforcement that will have lasting, harmful consequences if they are not addressed. That is something that the Government should be looking at now, to make sure that in the coming months people are not worrying more and more about what will happen to their house if their incomes do not recover, or worrying about a bailiff for council tax. Those are things that can be done by Government without the whole breathing space scheme, so I agree: with covid, there is a pressing need to look at the different things that Government may be able to do to help people through this period. Otherwise, we are likely to see some of those harsh enforcement actions starting to happen, and people experiencing harm because of covid. No one really wants to see that.

[Mr McFadden]

Thank you.

[The Chair]

For the Scottish National party, Alison Thewliss.

Financial Services Bill (Third sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 3rd sitting: House of Commons
Thursday 19th November 2020 Public Bill Committees

[The Chair]

We will now hear from Susan Hawley, from Spotlight on Corruption, who is joining us remotely. I remind colleagues that we have until 12.15 pm for this session. Sue, please could you introduce yourself for the record?

Dr Hawley: Hello. I am Susan Hawley, executive director of Spotlight on Corruption. We are an anti-corruption charity that monitors the UK’s enforcement of its anti-corruption and economic crime laws.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Q139 Thank you for giving us your time today, Sue. You have also given the Committee some written evidence, which I will come to in a second. Before I do that, I just want to let you know that a number of witnesses on Tuesday were more clearly focused on the European end of the Bill—the onshoring of various regulations—but with you we will probably concentrate more on the later clauses in the Bill. Before I come to your written evidence and your specific suggestions about financial crime, what is your general impression of the Bill?

Dr Hawley: Than you, Pat. We very much focus on, and our expertise is on, the potential of the Bill to bring the UK into greater equivalence with the EU on money laundering and to ensure high standards of corporate governance in the financial services sector. Overall, we support some of the points made by our colleagues, which I think you might be hearing later today—from Jesse Griffiths of the Finance Innovation Lab, for example—around ensuring that there really is strong parliamentary accountability for regulatory changes.

[Mr McFadden]

Q May I come to your specific suggestions? You submitted written evidence that focuses on a suggestion for an amendment to the Bill on the prevention of economic crime. Could you talk us through your suggestion and where you think the Bill may have a gap to fill in that area?

Dr Hawley: Absolutely. We really welcome this opportunity, and many thanks for inviting us to give evidence to the Committee. We want to make the case for the urgent introduction, through the Bill, of a “failure to prevent economic crime” corporate offence. We think that could fit in the “Insider dealing and money laundering etc” part of the Bill. We want it to focus particularly on the areas of fraud, money laundering and false accounting.

Just to explain the problem we think needs addressing, fundamentally at the moment, particularly after the judgment in the Barclays case, which was the only prosecution for financial crime following the last financial crisis, there is increasing legal commentary that large financial institutions are beyond the reach of prosecutors for certain economic crimes. Legal attempts to resolve this have failed—in fact, the Barclays judgment has now made it even more difficult for prosecutors to prosecute large financial institutions—and only action by Parliament can change that.

If I may, I will say a little about the reasons why this amendment is needed. We outline in our evidence four broad areas that we think the amendment would resolve. One of them is about the protection of market integrity. The real issue is whether the current state of the law, particularly after Barclays, promotes strong enough corporate governance and deters corporate wrongdoing. The Treasury Committee has already highlighted that it does not—in its words, it is “wrong” and “dangerous”.

The second issue is about fairness and ensuring equality before the law for large and small financial institutions and companies. That is particularly important, we think, in the context of the burgeoning fraud crisis, which is being exacerbated by the pandemic. It cannot be fair or right that small companies face the burden of prosecution in the UK and that large companies can be seen as getting away with it.

The third area is about equivalence, or parity with international standards, on the enforcement of economic crime. The Law Commission—I will come on to the Law Commission later in our evidence, if I may—has announced it is doing a review of corporate crime rules. It has said that one of the reasons for that is so that the UK does not fall behind. We think there is a real danger that the UK falling behind might happen very speedily. It is already quite behind the US—we have seen a lot of commentary from legal experts about how the UK, effectively, outsources its economic crime enforcement to the US, which means that some British institutions are being fined very heavily by the US authorities, and that money is going to the US Treasury.

It is not just the US, but the EU. There is a real emerging issue with the sixth EU anti-money laundering directive, which requires EU states, from early December this year, to have strong corporate criminal liability for anti-money laundering. That liability must include where there is a lack of supervision or control, and the Government recognised when they looked at whether we should opt into this directive—which they chose not to do—that the UK’s corporate liability regime would not fit the directive but would need to be amended if the UK were to opt in. A real issue here is that UK companies might end up operating in the EU to higher standards than they are operating to in the UK, and that might become more of an issue of market access for UK financial services.

The final area is consistency across economic crime. We have seen a “failure to prevent” offence introduced for bribery and for tax evasion. No less harm is caused to society by fraud and money laundering than is caused by the other offences, and it creates real problems for enforcement agencies. Prosecutors have long asked for that “failure to prevent” offence to be extended to other economic crimes. We think its introduction would benefit the UK, because it would see more enforcement—higher fines—coming into the UK Treasury, and it would benefit society, because when companies have in place procedures that prevent economic crime, it helps to reduce the cost of that crime to society.

I will stop there, in case there are any questions. I am very happy to talk about how we think this amendment is compatible with the ongoing Law Commission review.

[Mr McFadden]

Q I have a couple of questions, and my colleagues might too. There are quite a lot of different parts to this, and I want to ensure that I understand properly what you are saying. You referred, I think, to a corporate offence. Is the first big point that you are making here that, although individual prosecutions may be rare—you are right that on LIBOR, for example, they were very rare—even then it tends to be the individual trader who gets prosecuted, rather than the organisation they were working for? The organisation they were working for can always say, “We didn’t know what he or she was doing,” and wash their hands of it. Is the first essential point you are making that you want to create a corporate offence rather than an individual offence whereby somebody goes to jail for a certain number of years for committing an economic crime?

Dr Hawley: Absolutely. We think that the corporate offence is essential, but that does not mean we do not think that individual accountability is very important. There is also a real issue about how senior executives are held to account. If we take LIBOR as an example, I think there were four convictions out of 13 prosecutions for the rate rigging in the UK, and in a lot of those cases people said, “The management knew we were doing this.” That was their defence. If that is really the case, you are not going to change the culture. There are two really important reasons for having a corporate offence, and part of it is about changing the culture. If corporates know that they might face a huge fine, they will put in place procedures to stop that happening. That is really important.

[Mr McFadden]

Q The other part I want you to explain a little more is that you said that small and large companies are treated differently under the law as it stands, and you implied that there is a greater sense of liability for small companies. Can you explain that a little more to us? What do you mean by that, and why is that the case?

Dr Hawley: Under the current law, if there is not a “failure to prevent” offence in a piece of legislation, a company can be held to account only if its directing mind can be found to have intended for the crime to occur. In a small company, the directors are much more hands-on, so it is much easier for prosecutors to pin the blame on someone at a senior level—it has to be at the board level—and therefore prove that the company is guilty. That is not how large corporations and businesses work, and that is what prosecutors have been saying for a long time. They work on a much more devolved basis.

The problem is that the way the law is at the moment, not only does it make it easier to prosecute small companies —small companies bear the burden of prosecution—but it incentivises bad corporate governance in larger companies because it encourages people to insulate the board from knowledge about wrongdoing. That is the point that prosecutors and people in the legal community have been making for some time.

[Mr McFadden]

Q So there is almost an incentive for the board to be in ignorance, because that is a legitimate defence when wrongdoing is exposed in the company. Is that what you are saying?

Dr Hawley: This is what we write about in our evidence. HMRC, in its consultation on its new “failure to prevent tax evasion” offence, specifically highlighted that these laws encourage bad corporate governance. It says that they provide incentives for senior management to turn a blind eye to wrongdoing in order to shield the corporate body from criminal liability and they disincentivise the reporting of wrongdoing to senior members of corporate bodies. That is not me; that is the Government consultation on the “failure to prevent tax evasion” offence for criminal finances, but that is no different from the other economic crime offences. That is a corporate governance issue that cuts across all these economic crimes.

[Mr McFadden]

Q The final question I want to ask you is about what you said about equivalence. We had a series of bodies give evidence to us the other day, all of which said that they had no desire for a race to the bottom, that they want the highest possible standards of regulation and corporate governance, and that that is good for the UK, the financial services sector and so on. You are implying that there is a danger here of a looser standard on this issue in the UK than in the EU. Could you explain that to us a bit more? What is the difference in terms of the way that they will view corporate offences and the gap that you see in the UK?

Dr Hawley: In the UK at the moment there are two ways in which companies could be held to account for money laundering. One of them is under the money laundering regulations, and that is a minor offence. To give you a comparative example, if it is an individual being fined for that, they would get two years in prison. The kinds of fines we are seeing are around the £5,000 mark. There have been some higher marks—sorry, that was HMRC’s enforcement at a regulatory level. We have not seen any corporate criminal fines in this space at all. There is no criminal enforcement going on under the money laundering regulations, but that is a different issue. To explain the law, theoretically companies could be held to account, but it is a relatively minor offence. That is very different from holding them to account for the main offences under the Proceeds of Crime Act, which, for an individual, carries a maximum sentence of 14 years. You can see from that that it is a very different type of offence, and the courts would treat it very differently.

Under the EU’s sixth anti-money laundering directive, all states must have corporate criminal liability and must impose criminal and non-criminal sanctions that are proportionate and dissuasive. We are already seeing countries such as Germany taking really strong steps to implement that. It has a corporate sanctions Bill coming up, which has a clause that requires prosecutors to investigate suspicions of corporate crime. It is a very strong Bill. Before that, Germany was the outlier and had no proper corporate criminal liability. We see it in the Netherlands as well, where increasing levels of corporate fines are being imposed for money laundering, and there is a very strong corporate liability framework there as well. In Ireland, the Irish Law Commission has recommended changes to the law on corporate liability. We are seeing a raising of standards across the EU that the directive will bring in the context of money laundering.

[Mr McFadden]

I have no further questions, although my colleagues might have.

[The Economic Secretary to the Treasury (John Glen)]

Q Thanks for giving evidence, Susan. Following the December 2018 Financial Action Task Force mutual evaluation on the UK, which was pretty positive, there were a few elements that we need to address. You will know that BEIS is taking forward a lot of that work with Companies House and looking at the registration of overseas entities as well. This Bill ensures that HMRC retains its ability to access the ownership of beneficiaries of UK-linked overseas trusts. Can you explain to the Committee how important that is, notwithstanding what you have just been talking about?

There is a Law Commission consultation going on. We have fully transposed the fifth anti-money laundering directive in line with international best practice. You gave us some perspectives on Germany and Holland in terms of future orientations, which is something that I imagine we would look at in the context of that review. How would the provisions of the Bill help?

Dr Hawley: Obviously, we have welcomed the leadership that the Government have taken on beneficial ownership and the implementation of the fifth AMLD. My colleagues from Transparency International, who are giving evidence later to the Committee, have done more work on the beneficial ownership side. They are the people to talk in more detail about how the Bill specifically relates to that.

We hope that there will be other legislative vehicles brought forward soon to introduce the property register of beneficial ownership and the Companies House reforms. It is excellent that that consultation has now come out and the Government have taken strong steps towards looking at how Companies House can be strengthened, because, as FATF noted, it was, as you have mentioned, an area of weakness.

I do not want to bang on about it, but FATF also highlighted the lack of high-end money laundering convictions in the UK and questioned whether that was really reflective of the risk within the UK. We are carrying out some analysis into what is happening with regulatory fines in this space. The number of fines seems to be going down dramatically, and we are not seeing an increase in high-end money laundering convictions. To be honest, we are a bit worried that the Law Commission review, which we really welcome, will take too long.

Financial Services Bill (Fourth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 4th sitting: House of Commons
Thursday 19th November 2020 Public Bill Committees

[John Glen]

Thank you very much, Hugh. I will pass you on to Pat.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Q Good afternoon, Hugh. I want to follow on from the questions that the Minister asked you. I think it is fair to say that ABI has been a part of the financial services sector that has perhaps been more critical than others of the way that EU directives have applied to your sector. Given that the Bill onshores quite a lot of that regulation and gives it to the UK regulators, what differences are you hoping for in the way you will be regulated in the future compared with these directives, which you have been unhappy with in various ways?

Hugh Savill: I should say that we are equally blunt when we see shortcomings in British regulation, as well as European regulation, but, yes, we have criticised some of the European rules. In effect, the Bill sets out the first step towards a UK regime for financial services, and there will be others that follow. Really, this needs to be tailored to the needs of the British market—first to the needs of British consumers and secondly to the needs of British providers of financial services. Now that we have left the European Union, we think that is the way to go forward, and that is what we are hoping our legislators and regulators will concentrate on.

[Mr McFadden]

Q Can I go back to the issue of Gibraltar? Gibraltar has lots of friends across the parties in Parliament, and the Bill sets out a special regime for Gibraltar. Given the generous access to the UK market envisaged in the Bill for Gibraltar-based firms, is there any risk or danger that UK-based insurance companies might have reasons to relocate to Gibraltar and do their business from there?

Hugh Savill: I would be surprised. Ideally, what the Gibraltar authorisation regime sets out is the same basis, whether you are doing business in the UK or from Gibraltar. It is quite an enterprise to move your business to Gibraltar, and I am not certain you would be able to take all your skilled people with you. It is expensive to shift domicile like that. I see no big advantage in firms that are servicing the UK market from the UK moving to Gibraltar. Most of the Gibraltarian firms that have moved into the UK market, particularly the motor market, have done so as new entrants.

[Mr McFadden]

Q Is there any tax advantage to being located in Gibraltar?

Hugh Savill: I will have to let you know on that point. I believe there is a small value added tax advantage, but I will let you know that in due course.

[Mr McFadden]

Q Okay. Is there a particularly good reason for creating this sort of regime for Gibraltar, but not having something similar for, say, the Channel Islands, the Isle of Man or other Crown dependencies elsewhere in the world?

Hugh Savill: They are all slightly different circumstances. I am by no means an expert on the relationship between, say, the Channel Islands and the UK, Gibraltar and the UK, and so on. What was unusual about Gibraltar was that it was part of the single market in a way that the Channel Islands were not, so you had an existing passporting arrangement between Gibraltar and the UK, which, for the sake of the smooth continuation of the motor market, would be helpful to continue.

[Mr McFadden]

Thank you very much. I don’t have any further questions.

[The Chair]

So we go to the Scottish National party spokesperson, Alison Thewliss.

--- Later in debate ---

[Alison Thewliss]

Q I am just curious because you said that, for the regime to fully work for customers, situations such as this need to be clarified. I thought that you were asking for further detail or reassurance.

Hugh Savill: Not at the moment, no.

[Mr McFadden]

Q I had a further thought on the question of tax advantage. A quick search tells me that Gibraltar’s corporation tax level is 10%. There may be some caveats around that—it was a quick search—but if that is the case, that is quite a hefty advantage for a company, compared with the UK rate, is it not?

Hugh Savill: I am not aware of the corporation tax differences between the UK and Gibraltar, so, again, I am sorry but I will have to cover that in my reply later.

[The Chair]

Thank you. This letter is getting longer.

Hugh Savill: Do not worry—I will not make it too long.

--- Later in debate ---

[The Chair]

We have until half-past 3 for this session, so a good long time. Unusually, we are going to the two Opposition spokespeople first, and then to the Minister. We are shaking it up a bit. We will start with shadow Minister, Pat McFadden.

[Mr McFadden]

Q Thank you, Dr Huq, and thank you, Duncan, for coming. Let me first ask a broad question. On transparency, when you look at the regulators’ duties as changed by the Bill, do you want to see any additional duties placed on the regulators on the transparency front, or do you think they are properly armed and equipped as they are?

Duncan Hames: There is much in the Bill that I am not qualified to comment on, but certainly in relation to regulatory duties around money laundering it is our contention that the challenge is as much about means of implementation and the expectations placed on the private sector in relation to supervision, which needs addressing. There is an analysis—in fact, it was probably our conclusion on seeing the Financial Action Task Force evaluation—that there are many good policy measures in place, but that they are yet to be fully implemented, and therein lies the nub of this problem.

[Mr McFadden]

Q Do you want to see more duties on companies or do you think that, at least on paper, the duties on companies in terms of corporate declarations and so on are currently fit for purpose?

Duncan Hames: We have found with the UK Bribery Act 2010, which has been in force for 10 years now, that a “failure to prevent” offence within that legislation has served to enhance corporate governance. That is not just our view; it was the conclusion of the parliamentary post-legislative review into that legislation a year or two ago. Government Ministers have expressed their interest in seeing that model—which they have described when introducing it in other areas, such as failure to prevent tax evasion, as effective—applied more widely in areas of economic crime. That is certainly something we would consider there was an opportunity for in the Bill.

[Mr McFadden]

Q We had a witness this morning from Spotlight on Corruption, who argued for the addition of a “failure to prevent economic crime” measure to the Bill at the appropriate place. Is that something you would support?

Duncan Hames: Yes, we would. That is separate to the discussions about the identification doctrine, on which, as I am sure you will be aware, the director of the Serious Fraud Office has frequently shared views and on which now the Law Commission has been invited to bring forward its own options for reform. These are complementary measures.

We now have a “failure to prevent” offence in relation to two areas of offending: one, the Bribery Act and, two, failure to prevent the facilitation of tax evasion. Applying a “failure to prevent” offence more widely, while still considering reform of the identification doctrine in regard to the substantive offence, would be entirely complementary, rather than the House having to consider doing one or the other.

[Mr McFadden]

Q I suspect if we got into this in Committee, on Report or wherever, the counter-argument would be, “Look, the Law Commission has just launched this great consultation, and we should not be pre-empting that by jumping to a conclusion. We might do this, but we have to wait for the Law Commission.” What is your response to that argument, in case we hear it at some point?

Duncan Hames: If I were in the business of money laundering, I would be laughing at the glacial pace at which reform happens. So I would counsel against waiting. As I say, we have two “failure to prevent” offences, and it would be entirely possible to apply that more widely in economic crime. Sadly, it has taken the Government over three years to reach their conclusions in response to the call for evidence on failing to prevent economic crime, and Law Commissions are not generally considered to move more quickly than ministerial responses to consultations. I would not want to estimate quite how long we will have to wait before the conclusions of the Law Commission are enacted in law. I think that is plenty of time to put in other measures, which will help the corporate sector improve their corporate governance, as we have seen in the case of Bribery Act.

[Mr McFadden]

Q In terms of potential amendments to the Bill, that would be top of your list. Are there any other areas that you think could usefully be amended or added to?

Duncan Hames: I certainly think we need to look at the area of supervision. This is a regulatory function. We have private sector supervisory bodies tasked with helping the business sector to put in place the necessary preventive measures to prevent money laundering.

While we welcome the introduction of the Office for Professional Body Anti-Money Laundering Supervision a couple of years ago, its reports—these are not activist or campaigner reports; these are Government regulatory reports—have been very damning of the effectiveness of the supervisory bodies. It is very fragmented—I think there are 14 supervisory bodies for the accountancy sector alone.

OPBAS has identified conflicts of interest between the advocacy and supervisory functions of those bodies. The effectiveness of their enforcement activity is really inadequate. If we take Her Majesty’s Revenue and Customs as one of the supervisory bodies, the fines imposed are barely a couple of thousand pounds and will quite possibly be less than the value of the commission or fee on any individual transaction. That is clearly an inadequate incentive for private sector actors to say no to handling illicit funds.

The quality of the money laundering defences in the private sector has also been found to be poor. The Solicitors Regulation Authority recently conducted reviews into about 60 companies. In nearly half of those cases, they are pursuing the findings they had for potential disciplinary action. A similar proportion of cases were found to be areas of weakness in money laundering defences in other sectors.

So we have a problem with supervision. The first line of defence against money laundering is tasked to the private sector, and yet the supervisory bodies that are meant to ensure that that is being done well, both in terms of guidance and in subsequent enforcement of regulations, are not effectively ensuring that those defences are good.

At the end of the day, the police estimate that the impact of money laundering on the UK economy is of the order of £100 billion a year. We can have lots of good measures and lots of good policies, which at times the Government will have been congratulated for, but the upshot is that we still have a big problem, which is not going away. That is why we think taking action where we can to improve the defences is urgent.

[Mr McFadden]

Q The last thing I wanted to ask you is about the most recent FinCEN files. This all comes out through the United States authorities. We find out about the actions of British financial institutions through the actions of a regulator in another country. How would you fix that so that the actions of UK companies are uncovered and publicised here, rather than coming out through another body in another country?

Duncan Hames: We have to recognise that the FinCEN files were a leak; I would want us to be hearing about suspicious transactions as a result of enforcement having been taken by law enforcement agencies. It has been a concern of the now Secretary of State for Justice that too often we see enforcement, effectively, outsourced to the United States authorities. I do not think that is good for the corporate reputation of UK plc, and I do not think it is how we would want things to proceed as Britain defines a newly independent role in international commerce.

[Mr McFadden]

Thank you. I will stop there.

[John Glen]

Q Good to see you, Duncan. You have offered a wide-ranging critique on general aspects of anti-money laundering and anti-corruption matters. You rightly draw attention to the FATF report, which was generally, in the international context, seen as a very favourable assessment of the UK. Department for Business, Energy and Industrial Strategy activities include the Companies House review, the registration of overseas entities work and the limited partnerships reform.

This Bill ensures that HMRC retains its ability to access information on the ownership and beneficiaries of UK-linked overseas trusts, building incrementally on things that have been done previously. Can you explain why this information is important? This is a key measure and, I would have thought, the most relevant.

Duncan Hames: It is certainly a welcome measure. We have found that some of the complexities of the structures and design of different corporate entities have proved difficult, in terms of the implementation of existing legislation. That was a feature of the recent Baker et al case in relation to appeal against an unexplained wealth order; there was a South American foundation, which was perhaps not the corporate structure that Members of this House had in mind when that legislation was being decided.

Addressing trustees and overseas entities, to strengthen and ensure there are no loopholes in existing legislation, is definitely to be welcomed. In the past, when the House has been considering legislation to address money-laundering risks—do not forget that another piece of legislation related to leaving the European Union is the Sanctions and Anti-Money Laundering Act 2018—it has focused on what can be done about the transparency of ownership, and not just of UK limited companies but of overseas entities, too.

--- Later in debate ---

[John Glen]

I am very supportive of your observations there, and I look forward to further engagement on that. I think that, in fairness to other Members, I should now pull back and hand over to Pat.

[Mr McFadden]

Q Thanks to both of you. We had a bit of a discussion earlier about a suggested reform for preventing economic crime. We were saying that when we get into it, we are probably going to be told to wait for the Law Commission. I have a feeling that, on accountability, we are going to be told to wait for the future regulatory framework review to conclude, but I do want to ask you about this area and about the duties on regulators, and I would like to start with the latter.

The Bill, in schedules 2 and 3, sets out new accountability frameworks for the regulators. They are to abide by relevant international standards and to have regard to the relative standing of the UK as a place for internationally active investment firms to be based, or to other matters specified by the Treasury. I would like to ask whether you think it is appropriate for broader goals to be considered in that regulatory framework, and I am thinking particularly of environmental, social and governance goals. The UK wants to be a leader in that area. The Chancellor of the Exchequer set out an ambitious environmental agenda for our financial services industries in his statement about 10 days ago. Do you think that the Bill is an opportunity to put regulatory weight behind the ESG agenda?

Fran Boait: That is a really great question. It is definitely something that stood out for me when I first read through the Bill. The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash in 2008.

As you mentioned, there is clearly cross-party agreement, and we have had announcements from the Government this week and last week on wanting to be a leader in green finance, especially ahead of COP26. There is also pretty much cross-party agreement on issues such as the banking sector severely under-serving small and medium-sized businesses. In his speech yesterday, Andy Haldane, the chief economist at the Bank of England, mentioned that the funding gap is £20 billion. We know there is cross-party agreement on wanting more of our productive and manufacturing sectors to grow, and we need to level up. Some Conservative MPs, such as Kevin Hollinrake and Danny Kruger, have done reports on that and on the need for a different banking system. We have to recognise that that will all require quite a significant shift in the direction of financial regulation, yet there is not anything in the Bill that suggests that such a shift in direction is something that the Treasury is interested in at the moment.

We would certainly support the hardwiring of ESG considerations into the regulation. I looked this morning at the proposed amendments, and we would be very supportive of amendments 20 and 24, which have regard to climate and net zero in terms of investment firms and CRR—that is on climate and environmental. There are some other amendments on social practice and corporate governance that are really important, and there are potentially bigger amendments that we could be thinking about, which would embed sustainability in the regulatory framework of our regulators, such as the FCA and the PRA. That would involve further amending the Financial Services and Markets Act, which I know is being amended already in the Bill, but we could add an environmental sustainability objective, for example, to the FCA’s or PRA’s objectives.

It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement. If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission. Obviously, that starts with this piece of legislation and others. We would fully support the amendments to the Bill that have been put forward already, and we would potentially suggest further ones.

Jesse Griffiths: I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators. I do not think it would take a huge change, or huge amendments to the Bill, to set that precedent and really kick-start what I agree is a cross-party consensus that we need to deal with the climate crisis and the rising problems —inequalities caused by covid and so on—and that the financial system is central to that. How it is regulated determines a lot about how it will react to those points.

I can give some examples. Of course, it would be helpful if the Bill required the FCA to refer to the Climate Change Act when preparing secondary legislation. If you wanted to be more ambitious, it would obviously be helpful if capital requirements for investment firms introduced weightings on environmental, social and governance issues—for example, by penalising assets that have climate risks.

I know the Bill covers legislation on PRIIPs—packaged retail and insurance-based investment products—which is a huge, €10 trillion market in the EU. One specific example we have suggested is that, if we could improve the key information document that investors receive when they are looking at PRIIPs to include disclosure on environmental, social and governance issues, and ask the FCA to ensure that that happens, that would be an important signal.

I think that there are real opportunities here to change the nature of the discussion and set the UK as a leader in this area. We know that the direction of travel is towards much greater ESG integration across the financial sector. Investors are pushing for it. We do a lot of work with the big four banks in the UK, and many of them are pushing a purpose-driven agenda. It is the way that we are going, and I think about this as a real signal that the UK wants to be the leader in this field and takes it very seriously.

[Mr McFadden]

Q Thank you, both. The second thing that I want to ask you about is accountability. It is true that proper scrutiny of all this requires resources, but that is a question not just for Parliament but for the regulators, which are being given big additional tasks. You have indicated that you are in favour of a more active ongoing role for Parliament, and I would like to give you the chance to tell us a bit more about that. Obviously, the regulators have to have day-to-day freedom to apply regulation at the level of the individual firm, but you are absolutely right, Fran, that in the financial crisis capital was at the heart of this and how we regard that level of resilience for firms.

If we are giving the regulators these big new responsibilities, both at the prudential and the conduct level, how would a more active role for Parliament work? We have one Select Committee that is active in this area, which already has a really broad agenda of work—the Treasury Committee. We have members of it on this Bill Committee, and they all do a great job, but things are pretty thinly stretched. Could you tell us more about how you think Parliament could have a more active role after the onshoring of all this regulatory responsibility? Again, I will start with you, Fran.

Fran Boait: I think we agree that this is the critical part of the Bill. That is why I mentioned the suggestion that has been put forward of a new potential Joint Committee between the Commons and the Lords. That would be absolutely right. The direction of the financial services sector is fundamental to the direction of the UK. We are really at a crossroads. We have been a large financial sector in the world, and generally the Treasury would say that it has prioritised the international competitiveness of our financial sector in the global market. It has held that in greater reverence than domestic competition that serves the needs of the people—your constituents, your businesses and the productive UK economy.

I think it is in Parliament’s interests to think about how we set up processes for greater scrutiny and about engaging civil society actors in that as well. I would have thought that quite a few people sitting within those regulatory bodies would welcome that. They are under immense stress from the last 10 years of post-crash change. As I mentioned, they are subject to legal challenge from the industry.

Although, ideally, there would be greater scrutiny in Parliament, and I think that a Joint Committee would be good, some of the amendments that have been tabled on specifics, such as an annual review of capital regulation requirements, are really great additions—I hope the amendment on that will go through.

I also think that we need to ensure that the regulators are given the right direction for financial services, which is why I would also welcome the amendment that was put to us about this Government’s strategy for financial services. As I said, we are at a kind of crossroads, and understanding what direction the Government want to take it in is critical for the regulators. I support a lot of the amendments that have been put forward. Setting up a new Select Committee or some kind of Joint Committee is also a strong proposal.

[Mr McFadden]

Q Jesse, you have experience of this at EU level where they have the ECON Committee, which looks at things before they are implemented. We have also had a suggestion from the hon. Member for Hitchin and Harpenden (Bim Afolami) for some kind of specific financial services Committee in Parliament. Would you think of that suggestion?

Jesse Griffiths: I think it is extremely important that there should be some Committee, whether it is a financial services Committee or some other way of doing it, that gives Parliament that role. That could be operationalised in a number of different ways, but it should be done in a way that makes sure that consideration is given to the way the Bill and, I presume, future legislation delegate a lot of power to the Treasury and the regulators to change, through secondary legislation, regulations that were previously agreed jointly between the European Parliament and the European Council. Some kind of check that that has been done in the correct way, and that it has been done with regard to the fundamental purposes of that legislation, is the role that the Committee would fulfil.

Obviously it would need more resources, which is a key lesson from the European experience. You are right to say that it is not an easy thing to do, nor is it something that can be done in addition to what is already being done by the Treasury Committee, for example. Resources is a key point.

The second key point, of course, is that such a Committee, and potentially the Bill and some of the amendments that have been referenced, can allow the regulators to report and explain more clearly why they are making certain changes, so that is a useful transparency and information point. The third point is that, without such parliamentary oversight, it becomes extremely difficult for civil society organisations such as ours, which are trying to ensure that the voice of the environment and social issues are raised in financial sector regulation, to be heard as effectively as other voices that are trying to influence that regulation. So it helps to create a better balance of lobbying, if you like, or of advocacy in this area.

[Mr McFadden]

Okay. I will stop there and leave it to others.

[Alison Thewliss]

Q I would like to thank Finance Innovation Lab for the briefing, which was really quite interesting and a different approach. Pat has hoovered up some of the questions that I was going to ask, but is there anything else in particular that you would like to see in the Bill?

Jesse Griffiths: One of the main issues that we would have loved to have seen in the Bill—I recognise that it would be outside the scope to introduce it now—is a proportionate regulatory regime for mutual banks. One thing that is important, or one problem that is very evident in the UK financial sector, is its lack of diversity of institutions. Across Europe, co-operative banks have an average of more than 25% of assets, and in the UK they were not even legal until 2014. The mutual banking movement is now trying to establish that vital part of the system that would help to improve services for customers, improve competitiveness and bring important countercyclical and social and environmental benefits. That would have been nice, given that the Bill recognises that there is a need for a different regime for investment firms from banks, for example. There is a huge unmet need for a more proportionate regime for those institutions. That would be my wish list of what might have been in the Bill. Perhaps as part of the Bill discussions, we might get a commitment to consult on such a proportionate regime.

Of course, the other point to make here—to repeat some of the points we have made about social and environmental purpose and accountability—is that the main issues with the Bill are the things that are missing that could make it much more ambitious and set a much better precedent for financial sector regulation going forward.

Finally, one issue that is worrying to us is the danger of a return to framing the purpose of financial regulation as being about the competitiveness of the UK financial sector globally. That appears in a few places in the Government’s explanatory notes to the Bill. The key point is to make a distinction between competition, which is good, and competitiveness, which can be dangerous when applied as a principle for regulation. Framing regulation within that competitiveness framework is widely recognised as one of the main contributors to the global financial crisis. It was easy to make the case for relaxing regulation to make any particular financial sector more competitive compared with others, when actually I think what we want to establish, through the Bill and other actions, is that the UK financial sector will seek to set high standards and to be the leader in that, not to introduce a competitiveness framing that raises the risk of standards being lowered.

Fran Boait: I can build on that. I agree with a lot of what Jesse has said. For us, the overarching areas are accountability and seeing more that it in the Bill, the environmental, social and governance aspects, and the purpose. On that last point, while we understand the Bill is onshoring and tidying up, as I have said before, it sets the direction, and that strategy for the financial services sector has not been laid out by the Government. I think that is key because, as Jesse has mentioned, it is concerning to see competition and competitiveness in there—in the run-up to the crash, that was shorthand for deregulation—at the same time as handing a lot of power to regulators. Again, it is worth noting that the FCA chief executive said himself that they would prefer high standards to the idea of competition, so there is support for that. Making the direction clear is critical.

On a few specifics that have been left out, over the last few years Positive Money has been working on things such as access to cash and the need to protect people’s right of payment in different ways—I noted that there were a few questions on that—and thinking about financial inclusion. Thinking more about the financial services’ role in the wider UK economy is absolutely critical at this time, and there is not too much in the Bill in terms of the direction of that.

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[The Chair]

We have until 5 pm for this session, so there is a good length of time.

[Mr McFadden]

Q Minister, thank you for giving us your time this afternoon. There is a long-standing and warm relationship between the UK and Gibraltar that informs the measures in the Bill. The Government are trying to create a sort of mini-single market in financial services between the UK and Gibraltar to ensure your continued market access to the UK in future. I am sorry we cannot do much about your market access to the other 27 states to which you currently have market access, but sadly that is beyond the powers of the Committee. Can I ask you, in simple terms, are you happy with the Gibraltar provisions in the Bill as they stand?

Albert Isola: The fundamental question for us is, do we continue to have market access? The answer to that, of course, as you know, is yes. As you have rightly pointed out, we lose single market access to the remainder of the European Union with the United Kingdom on 1 January, and this is where we will look for our future. If I can put it a slightly different way, some 90% of our financial services business before Brexit was with the United Kingdom, so that puts in focus how important this legislation is for all of us here. In each of the different areas in which we have worked, we have developed a niche—an area of specialisation and expertise—that has served those who work here with us well. We very much hope that that will continue into the future.

[Mr McFadden]

Q We have heard quite a lot of references today to the proportion of motor insurance policies in the UK that are sourced out of Gibraltar. I think it is roughly 20%. Looking at the market access regime established by the Bill, is it Gibraltar’s ambition to grow the proportion of UK-purchased financial products from Gibraltar—for example, in other areas of insurance, other savings products, or other parts of financial services? Is it a platform on which you want to grow?

Albert Isola: As the Minister with responsibility for financial services, I would love to see our businesses grow —of course I would—but responsibly and in a manner that matches the standards that we have with the United Kingdom in terms of the regulatory approach. The reason that we have been successful in motor insurance is because we have developed expertise and specialisations in the firms that have come here. It is not that we switched on one morning and had 20% of the United Kingdom motor market; that has grown over a 15-year period. As they have grown, so have we, in terms of the business we do with the UK. There are a number of other businesses that have tried in other areas of insurance, and they do well, but with nothing like the success that the motor insurers have enjoyed in working with the UK.

[Mr McFadden]

Q My final question is one that I touched on with the Association of British Insurers in its evidence earlier this afternoon. Given the platform that is being created by the Bill, do you see any potential for attracting businesses currently in the UK to relocate to Gibraltar? Would there be any corporation tax advantage for them in doing so, for example?

Albert Isola: My experience, put quite simply, is that of all the firms that have come and set up here in the last seven years while I have been in this job, not one of them has ever said they are coming for tax purposes. There is a tax differential—I think the rate of the UK’s corporate tax, or profit tax, is 19%; in Gibraltar, it is 10%—but that has never been cited as one of the reasons for setting up in Gibraltar.

It is far more about our agility as a jurisdiction and the accessibility of the regulator. I can arrange to meet every single insurance company in Gibraltar in two weeks if there is something that I would like them to do or be more conscious of. That is just not possible in the United Kingdom. The accessibility of our regulator for all our insurance firms is the No. 1 point that they measure as to why Gibraltar has been so good to them. They have that access and they have that contact. Then you have the expertise we have developed: the lawyers, the accountants, the insurance managers, who are able to provide the services that they need. These are far more important to the firms than the corporate tax. I have to say, if I may—allow me this plug—the quality of life is obviously important too. The sun shines here for a little longer than it does in the City of London, and I think that is important too.

[Mr McFadden]

I am sure it is; your weather is certainly better. I have no further questions. Thank you very much, Minister.

Financial Services Bill (Fifth sitting)

Pat McFadden Excerpts

Committee stage
Tuesday 24th November 2020 Public Bill Committees

[The Chair]

Before we begin, I have a few preliminary points to make, some of which you will have heard before. Please switch electronic devices to silent; tea and coffee are not allowed during sittings and, again, I remind everyone about the importance of social distancing and thank you all for complying with that. The Hansard reporters would be grateful if Members could email any electronic copies of their speaking notes to [e-mail].

Today, we begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally taken on the same or a similar issue, and decisions on amendments do not take place in the order they are debated, but in the order they appear on the amendment paper. The selection and grouping list shows the order of debates; decisions on each amendment are taken when we come to the clause that the amendment affects.

If a Member wishes to press to a Division an amendment that is not the lead amendment in a group, it would be helpful to indicate that in advance. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules, following the debates on the relevant amendments. We start with clause 1 and amendment 19.

Clause 1

Exclusion of certain investment firms from the Capital Requirements Regulation

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I beg to move amendment 19, in clause 1, page 2, line 21, at end insert—

“(7A) The Secretary of State must, within three years of this Act being passed, prepare, publish and lay before Parliament a report on the impact of the amendments to the Capital Requirements Regulation made by this section and Schedule 1 to this Act.

(7B) The report must assess the impact on—

(a) financial stability;

(b) competitiveness; and

(c) consumer risk.”

This amendment would ensure that, where departures from current capital requirements take place, the Government carries out a review of the impact on competitiveness and consumer risk.

Thank you for your chairmanship today, Mr Davies. With your indulgence, I would like to explain to the Minister broadly the approach we are going to take with these amendments. A number will be about reviewing, producing reports, parliamentary accountability and so on. Another number get into the accountability framework for the regulators and that “have regard to” list, and we will want to explore that quite deeply. Then there will be another set around the later parts of the Bill, relating to the savings provisions, the debt scheme and so on. That might help the Minister and the Committee to understand broadly where we are coming from when we move these amendments.

This first amendment, amendment 19 to clause 1, is in the first of those groups. Clause 1 exempts certain categories of investment firms from the requirements of the capital requirements regulation. This amendment explores what the effect of that might be and not only our right to know that effect, but our obligation to understand it. The reason we tabled this amendment is that capital, or the lack of it, was at the heart of the financial crisis. The banks that keeled over were over-leveraged and behaved as though a rainy day would never come. In fact, it is estimated that when the financial crisis hit, Royal Bank of Scotland, which was one of the biggest banks in the world at the time, was leveraged to a degree of about 50:1, so they had very little cushion of resilience for when more troubled times came.

The Basel II rules, which were in place at the time, failed to stop either the collapse or the public’s having to step in—through taxpayers and Governments around the world—to bail out the sector. Last week, when we were taking oral evidence on the Bill, I quoted Paul Volcker, the former Chairman of the Federal Reserve, who gave evidence in this House about a senior banker who had told him that his bank did not need any capital at all, that money could always be borrowed on the wholesale markets and that the banks could operate without capital. The crash proved that not to be true. The banks need capital. They need a cushion. That is not just their insurance policy, it is ours—it is the public’s insurance policy too.

Following the crash, the world’s regulators, whether in the United States, the UK or the European Union, set out to solve the problem of “too big to fail”, which has been characterised as privatising the profits and nationalising the risks, and developed a new set of capital requirements for banks and financial institutions. It was designed to make them more resistant to downturns. Those rules, on a global level, are set out in the Basel III process, now revised to the Basel 3.1 process, in the CRR and in the actions of national regulators. That is important, because the Basel rules should not be regarded as a maximum when it comes to the safety of our financial institutions. They should be regarded as a floor.

Most banks and regulators will say that today they hold significantly more capital against their loan books and that they are better equipped to handle a downturn or economic shock than they were 12 years ago. That is broadly true. Banks are better capitalised now than they were. However, they do not all like that situation, in truth. They will also say—I am sure that some banks tell the Minister and the regulators—that if only they did not have to hold so much capital they could lend more. They may well be saying that more loudly during the covid situation, when, as we see light at the end of the tunnel, we want to get the economy moving again. The smaller banks and new entrants will complain about being held to the same capital rules as larger and more established institutions. They will argue that that is a barrier to market entry and that it acts to reinforce the oligopoly in the UK where there are four or five major high street institutions, which it is difficult for new entrants to compete against. Other institutions will complain of being held to the same rules as deposit-taking institutions, which is part of the exemptions in clause 1, arguing that the character of their business is different.

Clause 1, as I have said, equips the regulator to respond to some of those points. We are not only onshoring, as it were, the capital requirements regulation, we are making provision, through the clause and other subsequent clauses, for the regulators to depart from it. Of course, departure from a common rulebook is a consequence of Brexit. Indeed, some might argue that it is the whole point. The clause allows it, and it is important that the Committee understands that the amendment would not prevent it. Neither does it seek to relitigate the referendum or to prevent the common rulebook to which we have subscribed for many years from ever being changed. That is not what the Opposition are saying. We are saying that, Brexit or not, and inside the EU or not, capital requirements still matter and they are there for a reason.

I would argue that for the UK the need for financial resilience is even greater than it is for most economies. We are a medium-sized economy with a huge financial sector. The consequences of that sector getting into deep trouble are potentially all the greater for our economy than for some others. Having a big financial sector is in many ways a great strength, of course. It brings employment, tax revenue and investment to the country, but it is a risk when it gets into trouble, as we found out in our recent history.

The other thing that we learned during the crash was how interconnected the system was. With so many institutions lending to and trading with one another, when one falls over the consequences for the whole system can be catastrophic. That old saying “The thigh bone’s connected to the knee bone” was certainly true during the financial crash, as it is of our interlocked and interdependent financial system.  We therefore have a duty, at the very least, to be vigilant about capital requirements. They are, as I said, the public’s insurance policy against having to bear the costs of another crash or steep financial crisis. The changes that have been made since 2007 and 2008 through the CRR, the Basel rules and other steps are, as yet, untested. Yes, the regulators do conduct stress tests and scenarios about what would happen if employment rose to this level or GDP fell to that level, but these are inevitably not quite real-world exercises. They are as real as war games compared to the real thing.

All the amendment does is ask for a report from the Treasury after three years of the new regime. That report should cover the impact of any departure from the current capital requirements in three areas: financial stability, that is to say the overall health of the system, because we learned how interconnected it all was; competitiveness, which is built into the regulator’s aims in the Bill and is bound to be the argument for any changes to the capital requirement rules; and, importantly, consumer risk. If we are only thinking about the competitiveness of our financial institutions and not considering consumer risk, we have not learned from the financial crisis. That is the other side of the scales. We can make the system ultra-competitive by asking institutions to hold hardly any capital but that exposes the consumers and public to greater economic risk. That last point is crucial.

To recap, the amendment does not attempt to freeze the situation forever as it is now. It does not stop clause 1 doing what the Government want it to do. It does ask for a report on the consequences and broader issue of divergence from capital rules, should the regulator allow greater divergence in the future. We should not allow this regime to be set up and then opened up to all the banking and industry lobbying that is likely to take place without making sure we have a means of understanding the consequences of that. Given the importance of this sector for the UK economy, we should be careful of these consequences. By enshrining these in a report from the Treasury, we can ensure that Parliament and the public see the consequences of divergence. That is the purpose of amendment 19.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Mr Davies. I rise to support the amendment. I think it is perfectly sensible that we make assessments and ensure that the changes the Government are putting in place are worth while and valid and that we keep a close eye on them, because of the very risks that the Labour Front-Bench spokesman set out. We cannot predict the future, but we can assess how things are going and make sure that neither consumers nor businesses are at risk. I support that very much and do not have much to add to his comprehensive speech.

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[The Chair]

Before I call the shadow Minister, I say that one of his many qualities is that he is very softly spoken, which is not conducive to Committee Room 14 with social distancing in place, so I encourage him to speak up; I am sure that would be appreciated by all.

[Mr McFadden]

I am a softly spoken and moderate man; it has not always done me good, but I am on track here at the moment.

I want to respond to the Minister’s reasons for advising us not to press the amendment. I talked at the beginning about three pots of amendments, and it strikes me that there are really two or three pots of reasons why Ministers say no to amendments. The first is that the amendment is wrong or not competently written in some way. Pot two is that it has completely misunderstood the Bill and therefore is not just incompetently written, but actually wrong in its intent. Pot three is to say that it is covered anyway. Usually, if somebody is not going to say yes to an amendment, it falls into one of those categories. The Minister has gone for pot three today. He has not really argued that the amendment is wrong in its content or that there is anything wrong with the way it is written; he has argued that this kind of thing is covered anyway. There is a problem for us in accepting that.

[Ms Eagle]

Does my right hon. Friend agree that there is a fourth one, which is to say, “This should not be on the face of the Bill; we are going to do it, but we are going to put it in secondary legislation,” which of course is unamendable and usually rammed through this House in a way that makes scrutiny even harder?

[Mr McFadden]

My hon. Friend is absolutely right. Perhaps there is even a fifth one, which is, “Wait for the consultation on something else.” The problem with going for pot three and saying the amendment is covered anyway is that that concedes that it would be completely harmless and there would be nothing wrong if it were accepted. The Government are, in effect, agreeing with its intent and saying they will do it.

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[John Glen]

As ever, the UK remains committed to the highest level of regulatory standards. The UK is also committed to better regulation—regulation that is fit for purpose and appropriate to the risks, size and activities inherent to UK firms. At present, investment firms are supervised by either the FCA or—for those that are systemically important—the PRA. However, both currently operate under the same prudential regulatory regime as banks, which is not appropriate for non-systemically important investment firms. Such investment firms do not typically grant loans or accept deposits, so the risks they face and pose are different from those of banks.

A new, bespoke regime is required for investment firms, and the first step in that process is to remove non-systemically important FCA investment firms from the relevant regulations for banks. That is precisely what clause 1 does: it sets out the necessary amendments to remove FCA investment firms from the scope of the capital requirements regulation. Only credit institutions and PRA-designated investment firms will remain under the CRR. That is appropriate, as systemic investment firms pose similar risks to financial stability as the largest banks.

Clause 1 also introduces a definition of “designated investment firm” that recognises that only investment firms that conduct bank-like investment activities may be designated by the PRA as systemic institutions. As such, commodity dealers, collective investment undertakings and insurance undertakings that are not bank-like are excluded from the definition. That reflects the EU’s approach. The remaining investment firms—all FCA investment firms—will be regulated under the new investment firms prudential regime, which I will turn to when we debate clause 2 and schedule 2.

Clause 1 also amends the Capital Requirements (Country-by-Country Reporting) Regulations 2013. The amendments are necessary to ensure that FCA investment firms adhere to tax reporting requirements that are consistent with the new investment firms prudential regime, and not with the current banking regime. For example, the smallest FCA investment firms will be exempt from the reporting requirements, which is in line with the IFPR’s more proportionate application of regulatory requirements on the smallest firms.

Clause 1 is merely a first step in the introduction of the investment firms prudential regime, but it is a crucial step. I therefore recommend that the clause stand part of the Bill.

[Mr McFadden]

I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?

What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?

[Alison Thewliss]

My concerns very much lie around the interconnectedness, because the system will be only as strong as the weakest part within it. If the weakest parts start to pull down everything else and make everything else unravel, we have a real problem on our hands.

My questions are about the monitoring of risk within the system that is being established. How can the Minister be certain that the risks are being closely monitored by the regulators, that the regulators understand the business that smaller firms are doing in their part of the market, and that the activities that those smaller firms are engaged in does not pose a risk to everything else? There is definitely cause for them to be monitored in order to have an eye kept on them, and to ensure that their activities do not cause wider risk. If attention is not being given to them, how can we ensure that their activities are above board and are not causing further risks anywhere else within the system?

How will the monitoring be scrutinised more widely by Parliament and others? The Treasury Committee gets the opportunity to question the regulators, but getting down to such a level of detail is not necessarily something that we would do. How does the Minister envisage Parliament having a role in that scrutiny in order to ensure that, should something happen or go wrong, we find out about it timeously rather than when it is too late to have any impact and when the whole thing has tumbled down?

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[John Glen]

Schedule 1 complements clause 1, in so far as it makes consequential amendments to the Capital Requirements Regulation 2013 and the Capital Requirements (Country-by-Country Reporting) Regulations 2013. For example, many of these consequential amendments remove references to the Financial Conduct Authority as the competent authority under the CRR in recognition of the fact that henceforth only the Prudential Regulation Authority will be responsible for regulating credit institutions and PRA-designated investment firms under the CRR. Taken together, these technical amendments achieve the aim of removing FCA investment firms from banking rules while keeping the most systemically important investment firms under the regulation and supervision of the PRA. I therefore recommend that the schedule be accepted.

[Mr McFadden]

I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?

[Alison Thewliss]

I just want to ask the Minister about the additional responsibilities in the schedule. When we took evidence last week, Sheldon Mills said:

“We can always do with more resources”.––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 9, Q12.]

What further discussions has the Minister had about ensuring that the PRA and FCA are adequately resourced for these additional responsibilities? It is an awful lot of extra work. We are moving an awful lot of work over to them while they have covid and Brexit to look at too. I just wondered whether there had been any further detail about what additional resources might be available or required in the months and years ahead.

[John Glen]

This short clause gives effect to schedule 2, which inserts provisions that will enable the introduction of an investment firm’s prudential regime into the Financial Services and Markets Act 2000. I therefore recommend that it stand part of the Bill.

[Mr McFadden]

I do not really have substantial questions at this stage, because schedule 2 sets out the detail, and I think we will probably have an extensive debate on it.

[Ms Eagle]

The clause inserts a new part 9C into the Financial Services and Markets Act 2000, which forms the legal basis for the new regime that the Bill introduces for investment companies. We have been talking about the minimum amount of capital required. We have covered some of that, although we will get further into it when we come to the Basel 3.1 bits.

Will the Minister say a bit about remuneration policies? That is another issue that will be regulated. We know from what happened in the financial crash and the build-up to that bubble that remuneration policies formed a key part of the bad incentives that created the behaviour that caused the crash. How will the Government be dealing with the regulators about remuneration? What will the principles be? Getting the right incentives for remuneration is a key driver for behaviour, and behaviour is a key driver for activities in that area, as we know only too well. If we did not know that from 2008, we would know it from the Wall Street crash in 1929. It is part of a set pattern. How will the Government ask the regulators to deal with that issue?

--- Later in debate ---

[John Glen]

I am happy to. The hon. Lady makes a fair and reasonable point. We have to maintain the highest standards of regulation. The FCA and the PRA are extremely well respected globally, but that does not lead me as the Minister to be complacent. We must continually be vigilant about whether those standards of compliance and intervention into non-compliance are sufficient and adequate. We will always seek to maintain that.

To return to the principle, these capital requirements for firms are extremely detailed and technical. The regulators have the right expertise to update them. They will have increased responsibility, but they will need to consider the principles set out in the Bill. We are following the advice of the House of Lords Financial Affairs Sub-Committee, which said that these delegations would be appropriate. The broader conversation about the direction of travel around what sort of framework we wish to have in the UK is not fully addressed at this moment, but there will be more to say in the context of the response to the future regulatory framework two-stage review and the legislation we bring forward subsequently.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Schedule 2

Prudential regulation of FCA investment firms

[Mr McFadden]

I beg to move amendment 20, in schedule 2, page 63, line, at end insert—

“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.

This amendment would require that, when making Part 9C rules, the FCA must have regard to the UK’s net zero 2050 goal and the legislation that has been passed in pursuit of this goal.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 39, in schedule 2, page 63, line 5, at end insert—

“(ba) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.

This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before Part 9C rules are taken.

Amendment 24, in schedule 3, page 79, line 29, at end insert—

“(ca) the target for UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050) Target Amendment Order 2019, and”.

This amendment would require that, when making CRR rules, the FCA must have regard to the UK’s 2050 net zero goals and the legislation underpinning those goals.

Amendment 42, in schedule 3, page 79, line 29, at end insert—

“(ca) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.

This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before CRR rules are taken.

[Mr McFadden]

Amendment 20 focuses on the new accountability framework for the FCA set out in schedule 2. If anyone wants to follow the detail, I am referring to the list at the top of page 63 of the current edition of the Bill. Returning to my opening remarks this morning, we tabled a similar—possibly identical—amendment to the accountability framework set out for the PRA in schedule 3, but we will come to that in due course.

As the Bill stands, the accountability framework in schedule 2 asks the FCA to have regard to three things: international standards, which I do not think anyone would argue with; the relative standing of the UK as a place to do financial business, which can be interpreted in a number of ways, but could be summed up as a competitiveness criterion; and other matters, which may be specified by the Treasury. I ask the Minister, why were those three picked out of all the things that we wanted the FCA to have to regard to in this brave new world, where we are onshoring all this, and not others?

We take the view that this list is incomplete and could be usefully added to. The regulators have an expanded new task, between schedule 2 and schedule 3, of regulating this huge, globally significant financial services industry with a lot of new powers, so what should they have regard to when they do this? There could be a number of things added to this “have regard to” list. Perhaps the most obvious is the UK’s climate change goals, specifically the commitment to reach net zero emissions of all greenhouse gases by 2050.

Why do we want to add that in particular? There are several reasons. First, this is completely bipartisan. The Government are committed to it and the Opposition support it. It does not divide the parties in this House; it has multi-party support. Secondly, we are not asking for something that has not already been legislated for. It was legislated for on two important occasions in this House. We are not tacking on a new, previously undiscussed climate change commitment to the Bill. The legislative history of this, as hon. Members will know, is that the original goal of an 80% reduction in greenhouse gases by 2050 was legislated for in the Climate Change Act 2008 under the last Labour Government, which the Conservative Government changed to a commitment to net zero by 2050 through the 2019 order referred to in the amendment, so this has already been legislated for twice, once at 80% and now at net zero.

--- Later in debate ---

[Stella Creasy]

Is it not also important to recognise that some of the strongest drivers for reaching some of those emissions targets will come from the financial sector itself? For example, the move towards decarbonising pension funds has been hugely beneficial in promoting renewable energy. It makes sense to join the dots when it comes to our country’s financial objectives and our wider social and climate objectives.

[Mr McFadden]

My hon. Friend is absolutely right. Joining the dots is exactly what we should do. Of course, she is right that individual investment firms will make their own decisions on these things, perhaps sometimes pressed by pension fund members, consumer groups or trustees in some ways. We applaud firms that do that, but how much more powerful would it be if that was a goal of the regulators, set out in our own financial services legislation? It would be more powerful, because the UK has this huge financial sector, which has around it this cluster of expertise, which we refer to a lot—legal and accountancy firms and all the rest—and because our own domestic commitments can bend the power of that sector towards the net zero goals.

The amendment goes with the grain of what more and more firms and people in this sector are talking about. By including this change, we can take all the fine-sounding commitments on corporate websites and put them at the heart of our regulatory mission. It can mark out the UK financial services regulation as having a new post-Brexit mission. If asked what we want the UK financial services sector to do in this post-Brexit world—we debated divergence and capital rules and all the rest earlier—what would be a better answer than making sure that the power of this is bent towards us achieving net zero, and in so doing encouraging financial sectors elsewhere in the world to go down the same path?

Finance will play a huge role in whether or not we meet the target. I do not propose, Mr Davies, to go through what the Committee on Climate Change has said that we need to do to reach the target in great detail, because we would be here all day, but I want to give the Committee an idea of a few headings that will require enormous investment.

If we are going to achieve the target, we will need a quadrupling of the supply of low carbon electricity. We have done well on low carbon electricity in the UK, in the last 20 years or so. We have vastly expanded the provision of renewables that go into the grid, but even after doing well we need to quadruple that if we are going to meet the target.

We will need a complete automotive transition, from internal combustion engines to electric or other zero emission vehicles. Just a few days ago, the Prime Minister himself announced a new, more advanced target for the phasing out of internal combustion engines.

There will need to be a huge programme of investment in buildings and heating. Whether that is through heat pumps or hydrogen boilers, there will need to be a huge programme of retrofitting equipment to millions of houses throughout the UK.

There will need to be a large programme of afforestation, because remember this is net zero. It will not be that we never have emissions, but we will have net zero. One of the main vehicles, if you like, in absorbing the emissions that we are still responsible for is afforestation, so we will need a huge programme.

We will need changes in farming and food production. We have the return of our old friend, carbon capture and storage. That takes me back, because a decade ago, when I was sitting where the Minister is now, we were announcing carbon capture and storage. It was announced again last week. There might be Members here who are quite new to Parliament, such as my hon. Friend the Member for Erith and Thamesmead, the hon. Member for Hertford and Stortford and maybe others who were elected in 2019. I look forward to them coming back in 10 years’ time and debating a Bill where new carbon capture and storage has been announced. Maybe we will even have achieved it by then, who knows?

[Alison Thewliss]

Members may indeed remember carbon capture and storage well, because we were promised a huge project in Peterhead, ahead of the indy ref, which has not yet emerged.

[Mr McFadden]

The hon. Lady is quite young, so she might be here in 10 years’ time—

[Alison Thewliss]

I hope not!

[Mr McFadden]

Perhaps it is not her ambition to be here in 10 years’ time. Carbon capture and storage is back. There are more things that we will have to do, but all of those headings will need finance, capital and investment. That will not all come from the state. It has got to be a combination of public and private investment, if the country is serious about this goal.

This is not an ordinary piece of legislation or A. N. Other Bill that we want to tack on to the regulatory framework. It is an overarching piece of legislation that will inform investment patterns and work production in a whole range of areas. It is one of the most significant pieces of legislation in this country since the end of the war. Perhaps we do not always realise that, but it really is, if one thinks about the list that I have gone through.

All of those things will take finance. It seems to me not odd to add this to the regulatory framework, but very odd that it has not been added already, particularly because the Government have made so much of the country being an international leader in the area, including asking the former Governor of the Bank of England, Mark Carney, to play a leading role. We absolutely welcome that.

[Gareth Davies (Grantham and Stamford) (Con)]

The right hon. Gentleman sets out very well the problem that our generation faces. I say that as someone who has worked in financial services and has a family member who also works in the sector. The right hon. Gentleman is totally right that the key to unlocking progress towards 2050 is through private capital, but will he not concede that the Government have already made significant announcements such as those on the green gilts, the long-term asset fund and the green homes grant? Many announcements that have been made will help to mobilise capital towards the goals that he seeks.

[Mr McFadden]

The hon. Gentleman is right and he goes for pot 3 in terms of my reasons. I repeat: the problem about pot 3 is that the reason not to accept an amendment is that it concedes that it is absolutely heartless to do so. He is absolutely right. The Government have said that they want the UK to be a leading player and they appointed Mark Carney, who is a champion of green gilts, I believe. I was pleased to hear the Chancellor’s announcement, because green gilts have been issued by other countries in the past year or two. They have often been oversubscribed, which shows an investor appetite for products geared to that end.

Let me put the point back to the hon. Gentleman. If there are new financial innovations, such as green gilts, that Governments can issue to finance the list of things I mentioned from the Climate Change Committee and if there is investor appetite, as there seems to be, for the limited number of green gilts that have already been issued, why on earth would we not put at the heart of the regulator’s mission that they should have regard to these goals and use them as a guiding principle, particularly as we are going into a post-Brexit world where we will be asked on many fronts what we are for now given that we have left an existing framework? It is particularly appropriate to add this proposal to the Bill. This will require investment and it cannot all be done by the state. It will require innovation in finance. We have mentioned green gilts but other kinds of saving products, investment products, bonds, loans and all sorts of instruments will all have to be geared to the necessary changes to meet the net zero target.

The final reason for the proposal is to stress the ambition of the target. Any one of the things that I read out would require a lot of ambition and a lot of investment. It is pretty hard to see how this can all be achieved if it is not an explicit goal of financial regulation.

To recap, the amendment seeks to make these changes in the least possible contentious way. We have not added a syllable or comma to anything that the Government have not already legislated for. All we are asking for is that the Government signal that they are taking their own legislation seriously by adding the net zero commitment, which the House has already legislated for, to the mission of the financial regulators. That seems to be a most uncontroversial and reasonable thing we can do in the post-Brexit financial regulatory framework.

[Alison Thewliss]

I support Labour amendments 22 and 24 and wish to speak to amendments 39 and 42 in my name and those of my hon. Friends.

I agree very much with the right hon. Member for Wolverhampton South East. Our amendments are trying to help the Government out. That is unusual but, in the spirit of cross-party consensus and doing things together to save the environment, that is perhaps how we should proceed. On 9 November, the Chancellor said that he wanted to lead the world in the use of technology and green finance. Unfortunately, the Bill somehow missed the boat. It is unfortunate that the Chancellor’s statement came just before the Minister made his Second Reading speech because the Bill would be the place to start with this ambition.

--- Later in debate ---

[John Glen]

I hope I would never be accused of taking such an approach. The reality is that I want the Bill to work most effectively. As I just said, the regulators are already taking into account climate change as a risk to the economy. The FCA/PRA climate financial risk forum and the Bank of England’s climate change stress test are alive and working, and I am confident that they will continue to consider climate change risk when making rules for the prudential regimes. In that context, we will look carefully at the need to add that specific additional reason. I have also stressed the work that is going on internationally. We should ensure that what we put in primary legislation is actually best practice and in line with the evolving consensus on how to deal with such matters.

I turn now to amendments 24 and 42, which make a similar set of changes to the Prudential Regulation Authority’s accountability framework for the implementation of the remaining Basel standards. As I have already said, the Government are already considering how best to ensure that the regulators and the financial sector can meet the commitments, and the Bill grants the Treasury a power to specify further matters in both accountability frameworks at a later data, which could potentially be used to add such a “have regard” in future, if appropriate. Therefore, after serious consideration, I respectfully ask the right hon. Member to withdraw the amendment.

[Mr McFadden]

The Minister is effectively saying that this is not the right time or place, but it is something that the Government will carefully consider. Given the things that have happened in politics in recent years, prediction is a dangerous game, but I expect that this is something that the Government will eventually decide to do, and I think they will make a virtue of doing it at that time. Indeed, I can see the Chancellor making the statement to the House of Commons right now, saying, “This new requirement for the Bank of England, for regulators, for the whole of Government, puts the UK at the heart of this shift to green finance and the achievement of tackling climate change.”

I agree with my hon. Friend the Member for Walthamstow that the more the Minister said he agrees with this, the more it begged the question of why he does not do it now; we have to start somewhere, and putting it in here would only encourage it being put in broader financial regulatory systems. We also have this consultation in the future regulatory framework; it might even be part of the conclusion to that. For that reason, I am minded to press the amendment today.

Question put, That the amendment be made.

Financial Services Bill (Sixth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 5th sitting & Committee Debate: 5th sitting: House of Commons & Committee Debate: 6th sitting: House of Commons
Tuesday 24th November 2020 Public Bill Committees

[The Chair]

We now continue the line-by-line consideration of the Bill. I think everyone is okay with all the normal announcements about social distancing, Hansard and tea and coffee. The Clerks have told me that you have to ask my permission to remove your jackets, so I can unilaterally grant everyone permission to strip off—to remove their jackets if they so wish. As you know, we may debate amendments together when that is logical, but the votes on them will not necessarily be in the same sequence.

Schedule 2

Prudential regulation of FCA investment firms

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I beg to move amendment 21, page 63, line 5, in schedule 2, at end insert—

“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility, and”

This amendment would require that, when making Part 9C rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.

[The Chair]

With this it will be convenient to discuss amendment 25, page 79, line 29, in schedule 3, at end insert—

“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.”

This amendment would require that, when making CRR rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.

[Mr McFadden]

Thank you for your chairmanship, Dr Huq. Your initial instructions threaten to make the proceedings a lot more interesting than this morning’s. We will not take them too literally when it comes to how much clothing we remove.

Like amendment 20, on which we concluded debate this morning, amendment 21 relates to schedule 2 on page 63 of the printed Bill. It is designed to ensure that the regulators have regard not only to environmental regulations, which we tried to press this morning, but to social and governance considerations.

Committee members who have anything to do with the sector or industry will know that the letters ESG—environmental, social and governance—come up a lot. I am sure that, like me, the Minister does lots of roundtables, meetings and so on, and he will be struck by the enthusiasm with which City voices are speaking about ESG. We dealt with “E” this morning when discussing amendment 20; amendment 21 is about the “S” and the “G”.

The agenda of prioritising those things goes with the grain of what investors and fund managers say, at least, they are doing of their own accord. However, we believe that adding it to the Bill and the regulatory framework would put regulatory force behind these trends, which already exist with varying degrees of enthusiasm in the investor world.

[The Chair]

Order. I think you were told this morning that if you crank the volume up a bit, it is better for the recording.

[Mr McFadden]

I apologise, Dr Huq; I shall try to speak up.

There are many fine-sounding statements about ESG principles on corporate websites. Some of the toughest money management companies in the world are now telling us that it is no longer just about quarterly or annual returns, but about long-term sustainability. We are told that investors do not want to be making money on the back of poor governance or shoddy or illegal working practices; they want their investments to be in companies and projects that are sustainable for the long term and are run in the right way.

With your indulgence, Dr Huq, I will illustrate that with an example that has been in the news recently. I want to consider what these corporate statements were worth in the case of the clothing firm boohoo. When The Sunday Times exposed the shocking conditions in boohoo’s supply chain back in July, including paying workers in the supply chain well below the minimum wage and serious fire risks in the factories in which the clothes were made, the company commissioned an independent review of the supply chain. That was chaired by Alison Levitt QC; she reported in September. She found that the allegations about the supply chain were

“not merely well-founded but substantially true”.

On the corporate governance side of things, her findings were damning. Her report says:

“No member of the Board I interviewed mentioned that the responsibility for what is happening in the supply chain derived from the duty of the company’s officers to act in the best interests of all the shareholders.”

In other words, the board did not understand that it was not in the interest of their own shareholders to allow a supply chain in which these illegal practices were taking place. Ms Levitt was effectively concluding that the board did not know it was their duty—or that if they did know, they did nothing about it.

[Ms Angela Eagle (Wallasey) (Lab)]

Does my right hon. Friend agree that the lack of effective enforcement is also an important factor in boards’ thinking that the risk may be worth taking? Lack of effective enforcement has been a feature of the last 10 years, as enforcement authorities have been starved of funding and retreated further and further from the frontline, where these practices are going on.

[Mr McFadden]

My hon. Friend is absolutely right. The point I am making in moving the amendment is that, although there are arguments to be made about enforcement and minimum wage inspectorates and so on, there is another side to the issue: the considerations for investors in these companies and the role of regulators. That is what the amendment is about.

Following Ms Levitt’s report, my hon. Friend the Member for Leicester West (Liz Kendall) wrote to all of boohoo’s main shareholders—the list reads like a “Who’s Who” of blue-chip City firms: it includes Jupiter, Fidelity, Invesco, BlackRock and Standard Life Aberdeen. None of those firms—with one notable exception, which I will come to—has taken meaningful action. They talk about engaging and following the situation closely, but only one has actually followed through. All the firms have on their websites very fine-sounding statements about ESG, corporate governance, social considerations, sustainability and so on—indeed, some have set themselves up as champions of those causes.

Let me come to the exception to the rule on that list: Standard Life Aberdeen. It has sold all its shares in boohoo and is clear about why. In a letter to my hon. Friend the Member for Leicester West, the Standard Life Aberdeen chairman Sir Douglas Flint says that the firm had been concerned about the supply chain for some time and that

“Our patience with the company’s responses on the issue had been diminishing during the last year. That patience evaporated this summer with the company’s response to the media allegations and that is why we took the decision to sell our remaining shareholding.”

Standard Life Aberdeen is run by serious people. It is a very reputable, important financial management firm and it has decided to act in accordance with its ESG principles and wants to uphold them. What the story shows is that too many companies do not and that often it is just words.

Our amendment seeks to put some regulatory force behind the upholding of these principles. Firms say that they want to uphold them, but, as the story shows, too often that is not the case—action is wished away with talk of engagement and monitoring the situation and all the rest of it. The amendment would make the regulator have to have regard to the exploitation of workers and make upholding high social and governance standards a hallmark of the UK financial services industry. In that way, we would not just depend on good people such as Sir Douglas Flint and on companies that are the exception to the rule; we would send a clear signal to the whole investment industry about the kind of response that we want to see. Otherwise, the fear must be that, although there will be plenty more warm words and mission statements, they will be of little comfort to someone working in an overheated factory and earning £3 or £4 an hour—about half the minimum wage—and that, when the story is exposed and the exploitation is no longer hidden, the investors in the company that is ultimately responsible will not do anything about it.

I ask the Minister to imagine the signal that such a regulatory duty could send. Not only would there be a minimum wage law, as there is now, but the UK’s supercharged, empowered regulators would have social and governance considerations at the heart of what they do.

We have had many debates about standards and what would happen in the UK after Brexit on this issue. Time and again, the Prime Minister has said that he does not want a race to the bottom: he wants the UK to uphold high international standards and there is absolutely no reason to think that our departure from the EU should be any threat to rights of work or any considerations like that. This amendment is a chance to prove that and put it at the heart of financial regulation.

The truth is that companies are much more likely to take such considerations seriously if their investors are tapping them on the shoulder and saying, “Why aren’t you doing that?” It is clear that Standard Life Aberdeen tried to do the right thing for a time with boohoo and eventually got so exasperated that it divested itself of its shares in the company. That is what we want to see more of from major investors and shareholders. It is not happening enough at the moment. The fine words on corporate websites are not matched enough by that kind of action.

Adding what is in the amendment to the regulators’ “have regard to” list and the accountability framework in the Bill would send a powerful signal about the character of post-Brexit financial services. That is why we have tabled it today.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Dr Huq. I rise to support the amendments tabled by the Labour Front Bench. It is really important to hold financial services firms to account; the example of boohoo given by the right hon. Member for Wolverhampton South East is a perfect example. Standard Life Aberdeen really should not be the exception rather than the rule. All financial firms should take their duty seriously, look all the way through their supply chains and act responsibly. It is clear that if the carrot of “doing the right thing” is not working, we need further means to hold companies to account.

The amendment is one of those that make me ask myself, “Why wouldn’t the Government want to do this? Why wouldn’t the Government want to support these things? Whose interests do they serve if they do not want to put this in the Bill?” The Scottish National party feels strongly that, although ESG is not the end of the movement towards a fairer, more sustainable future, it is certainly a vital part. We support the growing trend in the private sector towards greater corporate responsibility. By taking a greater stake in the communities where they operate, firms can become partners for social progress.

I was struck by the evidence given by Fran Boait in the session last week. She said:

“The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash”.––[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 112.]

The amendments set a good example of that change in direction and responsibility, and of the strong message that the Government need to send out.

To an extent, we have been able to do that in Scotland. We have promoted social responsibility in corporate culture, not least through actions such as the Scottish business pledge. We welcome a wider framework, which would encompass the financial sector and encourage them to do their bit. The partnership between the Scottish Government and business is based on boosting productivity and competitiveness through fairness, equality, environmental action and sustainable employment. It is a commitment to fairness, with businesses signing up to mandatory elements of the Scottish business pledge such as paying the real living wage—not the pretend-y living wage that the Government like to promote: the real living wage, as set by the Living Wage Foundation—and closing the gender pay gap, which has slipped during covid and may well fall back.

--- Later in debate ---

[John Glen]

Unfortunately, I do not share that view. Given the arguments that I have made about the complications that it would bring, because of the overlap with existing provisions, I do not think that would be the right way to go. I am very sympathetic, however, to many elements of the speeches made concerning the aspirations that we should have to improve the overall quality of corporate governance and behaviour across the City.

[Mr McFadden]

I am sure that the Minister is completely genuine when he says that he supports this agenda and the aims behind the amendment, but anyone who has followed the issue over the years will realise that we have had taskforces galore on it in the City. We have had taskforces on women on boards and on diversity; now we have a new one on social mobility. I wish that well but, after all those taskforces, do those in the top jobs in this sector—the real pool of decision makers—reflect the country as it is today?

[John Glen]

Yes.

[Mr McFadden]

Of course they don’t. We cannot conclude that, for all the taskforces and all the well-meaning, great people who have been involved in them, they have made enough progress.

This is not just a British agenda by the way. I read in the news the other day that the upper echelons of German industry are having exactly the same debate about whether to mandate quotas on boards for so many women and about the broader equalities agenda that my hon. Friend the Member for Erith and Thamesmead referred to.

[Stella Creasy]

If we are recognising that, it is worth noting that other nations that we compete with have already put gender quotas into legislation and beyond doubt, so we are behind our economic competitors. Ultimately, as we all know, the point about such regulation is that it would also make us more competitive. Blasting through the discrimination that has stopped us doing it would help our economy as well as our society.

[Mr McFadden]

My hon. Friend is absolutely right. For those reasons, we made specific mention of equalities legislation in the amendment.

It comes down to one’s view of the difference between encouragement, taskforces and all that, and legislation. This amendment is not particularly prescriptive. It calls for high standards of social and corporate governance. Hon. Members might say, “How do you define ‘high’?” and so on, but it is no less defined that talking about the relative standing of the United Kingdom as a place for internationally active investment firms to do business.

Once we have been through two or three of these debates, we begin to see a pattern in the way that the Committee works. I find myself a bit unconvinced that voluntary action will do this. There is not just an opportunity but a duty on us to start to define the post-Brexit financial services sector and what its characteristics will be. I want to put a few teeth behind all the fine words we have heard about the commitment to high standards, having no race to the bottom and all the rest of it. I always remember the plea of the former Chancellor, George Osborne: anybody in politics should be able to count. I look around the room and I can count, but I still want to press the amendment to a vote.

[The Chair]

We move to a vote—how exciting.

Question put, That the amendment be made.

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I feel that that fits neatly within the change that we propose to schedule 2. I just want to add this bit in to make sure we do absolutely everything we can to prevent any trade disputes or frictions and anything that makes it more difficult for the financial services sector to trade, to make deals and to keep people employed in this country, rather than taking the easy option of shipping it over to mainland Europe. We need to take all of these things into account to make sure that we protect the jobs and economy that we have here and prevent anything spiralling out of control. We see from other trade disputes just how easily that can happen. The regulators should be mindful. If they are being mindful of other things, they should be mindful of this as well.

[Mr McFadden]

I will speak briefly in support of the amendment. I think it adds an interesting new angle to our considerations on the schedule. There is quite a lot in the schedule about the UK’s standing as a place to do business. Proposed new section 143G(1)(b) to the 2000 Act talks about the

“relative standing of the United Kingdom as a place for internationally active investment firms”.

Proposed new section 143G(2) says that

“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”

None of us has argued that those are not completely legitimate considerations. Of course we want to consider our standing in relation to other countries, but that is different from the trading aspect.

The amendment points out that decisions can be taken that are facilitated by the Bill, for example on divergence, which we have discussed and will discuss further, and those decisions can have one impact on competitiveness but a very different one on the ability to trade. That is particularly important when this equivalence decision is still on the table. I think these amendments on considering our trading position usefully add to the job description of the regulators, which should be about not just competitiveness, but market barriers, market access and our ability to trade into other countries. Considering both of these proposals would be a good addition to the “have regard to” list set out in schedule 2.

[John Glen]

It is a pleasure to respond to the hon. Member for Glasgow Central and the right hon. Member for Wolverhampton South East. The hon. Members for Glasgow Central and for Aberdeen South propose to introduce a new “have regard” for the FCA and PRA when making rules for the new investment firms prudential regime and implementing the Basel standards respectively. That would require the regulators to consider the likely effect of their rules on trade frictions between the UK and the EU, as the hon. Lady set out.

Again, I understand and share the ambitions for frictionless trade between the UK and one of our biggest trading partners, the EU, but, as I am sure the Committee will understand, I am not able to discuss the details of our ongoing negotiations. We want a free trade agreement outcome with the EU that supports our global ambitions for financial services, and we have engaged with the EU on the basis that the future relationship should recognise and be tailored to the deep interconnectedness of those relationships across financial markets. The EU has made it clear that it does not support such an approach. We remain open to future co-operation with the EU that reflects our wide, long-standing, positive financial services relationship, and we will continue to engage in a constructive manner.

The regulators do not have oversight beyond their financial services remit. It would therefore be highly disproportionate to require them to assess the impact of their rules on all trade matters, covering goods and services. Furthermore, trading partnerships with overseas jurisdictions are the Government’s responsibility, not the regulators’. We consider that regulators should not be asked to go beyond the scope of their capabilities and duties. We have already discussed the capacity of the regulators; the amendment would really go beyond that.

We agree that financial services firms care about the UK’s relationship with overseas jurisdictions, which has a real impact on them. That is why the accountability framework that the Bill will introduce already requires regulators to consider the likely effect of their rules on financial services equivalence granted by and for the UK. Financial services equivalence will be the main mechanism underpinning financial services relationships between the UK and overseas jurisdictions. I believe therefore that the accountability framework, as proposed, meets the aim of the hon. Member for Glasgow Central.

In addition, the amendments focus solely on the relationship between the UK and the EU. That is obviously a matter of enormous concern, but we need to make legislation that accounts for the future. Equivalence or trade in financial services considerations must relate to all jurisdictions. It is crucial that we recognise that in the context of financial services firms, which often have a global footprint and global operations. That also reflects the UK’s present and future ambitions.

The accountability framework recognises the importance to UK firms of our relationship with overseas jurisdictions in financial services matters, while upholding broader international obligations. The Bill already supports the intentions behind the amendment, and for that reason I ask the hon. Lady to withdraw it.

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Division 4

Ayes: 5

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Labour: 4
Scottish National Party: 1

Noes: 10

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Conservative: 10

[Mr McFadden]

I beg to move amendment 22, in schedule 2, page 63, line 10, at end insert—

‘(2A) The FCA must not make Part 9C rules unless—

(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules, and

(b) any such committee has expressed a view on the draft of those rules.’.

This amendment is designed to enhance the accountability framework for the FCA by requiring it, prior to making Part 9C rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.

[The Chair]

With this it will be convenient to discuss amendment 26, in schedule 3, page 79, line 35, at end insert—

‘(2A) The PRA must not make CRR rules unless—

(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules; and

(b) any such committee has expressed a view on the draft of those rules.’.

This amendment would enhance the accountability framework for the FCA by requiring it, prior to making CRR rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.

[Mr McFadden]

We slightly change tack with this amendment. We have had some discussion of the “have regard to” list in the schedule, but the amendment covers a different aspect, dealing with the relationship between the enhanced role that regulators are to be given under the Bill and the role of Parliament. There are two important aspects to the role. First, in which way should Parliament be involved? Secondly, when should Parliament be involved? By that I mean, at what point in the regulatory process is it appropriate to have parliamentary involvement?

On Second Reading and several times today, the Minister has encouraged us not to look at the Bill in isolation but to see it as part of a process of reform, possibly involving other such Bills in the future. This may be only the starter and, if hon. Members are really lucky, they could be invited back here next year for the main course—who knows? In particular, he has asked us to look at the Bill alongside the consultation document on the future regulatory framework review, which was published a month ago. That document, which is I think 30 to 40 pages long, has a whole chapter devoted to accountability, including parliamentary accountability.

To anticipate the Minister’s response to the amendments, of course the document does not yet reach conclusions because it is a consultation inviting responses. In the part about parliamentary accountability, the document sings the praises of the Select Committee system and the Treasury Committee in particular. My hon. Friend the Member for Wallasey had to pop out, but we have at least another three members of the Treasury Committee in the room, and I am a former member of it. There is no doubt that it is an esteemed Select Committee, which we all accept does a great job in this House, but the work of that Committee is very stretched. It has to cover a huge amount of business: not only banking and financial services more generally, but taxation, fiscal policy and everything else that the Treasury does.

I do not want to be unfair, but when I read that part on parliamentary accountability, I found it hard to escape the conclusion that it was written to give the impression that not a lot should change—the system we have at the moment is just tickety-boo; it is just fine. The underlying assumption seems to be that we can take this huge exercise in onshoring—this large-scale set of regulations, directives and all the rest of it—expand in a very significant way the role and remit of our regulators, and just tack that on to the present framework. I hope the Minister does not think I am being unfair, but that is the impression that I got when I read the future regulatory framework review.

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[John Glen]

I am very pleased to address the points raised by the right hon. Member for Wolverhampton South East, the hon. Member for Walthamstow and the hon. Member for Glasgow Central. I have listened carefully to what they had to say, and their remarks go to the heart of the distinction between the provisions of the Bill that we are scrutinising in Committee and the broader questions around the future scrutiny mechanism, and the necessity to ensure that we do not undermine the legitimate and appropriate scrutiny by Parliament of our regulators.

It is critical that we ensure sufficient accountability around the new rules of the UK’s financial sector. Capital requirements for firms are extremely detailed and technical. It is right that we seek to utilise the expertise of the regulators to update them in line with international standards.

In return for delegating responsibility to the Financial Conduct Authority, this Bill requires it, under proposed new clause 143G of the Financial Services and Markets Act 2000, to publish an explanation of the purpose of its draft rules and of how the matters to which it is obliged to have regard have influenced the drafting of the rules. The Bill introduces a similar requirement for the Prudential Regulation Authority, under proposed new clause 144D of the Financial Services and Markets Act.

These matters concern public policy priorities that we consider to be of particular interest to Parliament. I have looked carefully at the amendments proposed by the right hon. Gentleman, and the amendments envisage Select Committees reviewing all investment firms prudential regime and capital requirements regulation regulator rules before they can be made. Under that model, Parliament would need to routinely scrutinise a whole swathe of detailed new rules on an ongoing basis. That is very different from the model that this Parliament previously put in place for the regulators under the Financial Services and Markets Act, where it judged it appropriate for the regulators to take these detailed technical decisions—where they hold expertise—within a broader framework set by Parliament.

It should not go unnoticed that, if Parliament were to scrutinise each proposed rule, the amendment does not specify a definite time period in which any Committee must express its view on them. That could bring a great deal of uncertainty to firms on what the rules would look like and when they would be introduced. That makes it more difficult for these firms to prepare appropriately for these changes. Ultimately, there is currently nothing preventing a Select Committee, from either House, from reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations. That is a decision for the Committee.

My officials have discussed this amendment with the regulators, and they have agreed that they will send their consultation draft rules to the relevant Committee as soon as they are published. The FCA and the PRA both have statutory minimum time periods for consultation and will take time to factor in responses to consultation—so this is not a meaningless process—providing a more than reasonable window within which the Committee can engage the regulators on the substance of the rules, should it desire to.

The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.

Before I conclude, I would like to address the point the right hon. Gentleman made concerning the document that was published a month ago on the future regulatory framework, and to address the supposition he very courteously made that, somehow, the Government believed that everything was fine and little needed to change.

The purpose of this extensive consultation is to do what it says: to consult broadly to ensure that, through that process, the views of industry, regulators and all interested parties and consumer groups are fully involved, such that, when we then move to the next stage of that process—I would envisage making some more definitive proposals—it would meet expectations on a broader and enduring basis. This Bill is about some specific measures that, as I explained earlier this morning, we need to take with an accountability framework in place, but I do not rule out any outcome.

The right hon. Gentleman made some observations about the prerogative of Government over mandating Parliament and Select Committee creation. I think we are some way away from that. We want to do these things collaboratively and end up with something that is fit for purpose, and I recognise the comments he made about the resourcing of such Committees with respect to the role they would play.

I do believe that this scrutiny process, as set out in the Bill, is extensive, and, for the reasons I have given, I again regret that I must ask the right hon. Gentleman to withdraw this amendment.

[Mr McFadden]

I cannot resist the irony of pointing out that the Government are resisting what could be termed the “take back control” amendment and do not want to add it to the Bill. There are many illustrious Members of this House we could name this amendment after; they have been arguing to take back control for many years.

The Minister said that the amendment would cause a lot of uncertainty; that it might be too much work; that it might require a Committee—whichever Committee it was—to look in too much detail at rules, when it would probably be more concerned with the broad direction. He also pleaded with us to allow the consultation to play out.

There is a serious point at the heart of this about the sovereignty agenda. There will be some kind of consequence at some point, possibly a backlash, that will draw attention to how this is done and the new powers that the regulators have. At that point, people will ask, “What was Parliament doing? What role was Parliament playing?”

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[John Glen]

Investment firms have a significant role to play in enabling investors to access financial markets, but the current prudential framework that applies to FCA investment firms was made for banks, which is why we need a new bespoke investment firms prudential regime. Schedule 2 contains relevant provisions that enable the FCA to implement a tailor-made prudential regime for non-systemic investment firms.

The new regime will set out new capital and liquidity requirements that will ensure that firms can wind down in an orderly way without causing harm. The right hon. Member for Wolverhampton South East and the hon. Member for Walthamstow are rightly concerned about consumer harm, so I draw their attention to the fact that the FCA will have to set those requirements in relation to the risks that firms pose to consumers, as well as the integrity of the financial system.

The FCA will also be required to make rules for parent undertakings of investment firm groups, because appropriate regulation and supervision are as important at the group level as at the individual firm level. Parents, as heads of the group, should be held responsible for the prudent management of the group.

It is right that specific rule-making responsibilities should be delegated to the FCA as an independent expert regulator, but those responsibilities must come with enhanced accountability. Schedule 2 requires the FCA to have regard to a list of important public policy considerations when making its rules in relation to the new investment firms regime, including any relevant international standards and the relative standing of the UK as a place for internationally active investment firms to carry on activities. To support scrutiny, the FCA will need to report publicly on how its consideration of those matters has affected its decisions on the rules in relation to the IFPR.

The FCA will also have to consider the impact on financial services equivalence, both by and for the UK, and consult the Treasury on that. Consulting the Treasury ensures that the FCA has appropriate accountability for technical choices that might have an impact on firms, while recognising that the Government retain responsibility for international relations and therefore equivalence. These three considerations are those that we have deemed to be immediately pertinent to the new investment firms prudential regime today. 

However, as I have mentioned previously, the accountability framework is meant to reflect the changing context. That is why the Treasury will have power to add additional considerations, which would be done following discussions with the regulators and industry, and following parliamentary scrutiny. That is the overall framework that will allow greater scrutiny and transparency, and provide the direction the FCA will take in implementing the new regime in the UK, while rightfully leaving the detail to the experts.

In the longer term, any wider deregulation will need greater debate and the proper scrutiny of Parliament. The Government intend to address that part through the future regulatory framework, as I have discussed, which is now out for consultation. I therefore recommend that that this schedule stand part of the Bill.

Question put and agreed to.

Schedule 2, as amended, accordingly agreed to.

Clause 3

Transfer of certain prudential regulation matters into PRA rules

[Mr McFadden]

I beg to move amendment 23, in clause 3, page 4, line 31, at end insert—

“(9A) The Treasury must, within six months of making any regulations under this section, prepare, publish and lay before Parliament a report setting out—

(a) the reasons for the revocation of the provisions of the Capital Requirements Regulations being made under the regulations;

(b) the Treasury’s assessment of the impact of the revocation on—

(i) consumers;

(ii) competitiveness;

(iii) the economy.”

This amendment is intended to ensure the Treasury reports to Parliament on the impact of divergence from CRR rules.

In debating this amendment and this clause, I am hoping the Minister will be able to explain the relationship between this clause and clause 1. Clause 1 specifies the certain type of investment firms to which CRR rules need not apply, and he was at pains to say that that was a specific, targeted approach, but clause 3 looks to range very widely on the Treasury’s powers to revoke aspects of the capital requirements regulation.

The list in clause 3(2), on page 2 of the Bill, has many different headings, including business lends such as mortgages, retail investments, equity exposures and so on. Without getting into the detail of the technicalities of the Basel rules, not all capital is treated as equal. A pound is not just a pound. It depends against which line of business it is weighted. For example, financial institutions will argue that mortgages pose a particular category of risk, probably quite low risk, compared with another line of business where they may be lending against business loans, commercial property or some other activity. The Basel rules do not judge all these activities equally and they apply what are known as risk weights to them.

The clause allows the Government pretty sweeping powers, as far as I can see, to depart from and to revoke aspects of the capital requirements regulation, against all these different types of business. I would be very interested for the Minister to set that out and clarify it.

Through this process, the capital ratios are allocated. Again, I draw the Committee’s attention to the important paragraph (m) at the bottom of page 3 of the Bill, the leverage ratio. That is described in the notes on clauses as the “backstop.” I hope that that term does not cause too much excitement in the Committee. Like all backstops, it is there in case the list from paragraph (a) to paragraph (l) does not prove sufficient.

This particular backstop of the leverage ratio casts aside all this stuff about risk ratings. It takes the whole lending book and the whole lending business, and says that a certain proportion of capital must be held against the whole thing. It is a bit of an insurance policy in case the risk ratings do not do the job. It is true that the risk ratings are where this is open to all kinds of lobbying, as people will say that one line of business is less risky than another.

At the core of this is a debate between regulators who must consider the safety and resilience of the system as a whole, and individuals who will argue that if only they did not have to hold all this capital, they could lend more, stimulate more economic activity, and so on. That is the debate that takes place. Without wanting to go over all the ground that we covered this morning, the amendment asks for a report on the degree to which the divergence—the leeway powers, as we might call them—will be used, and the Treasury’s assessment of the impact on the economy. As I said this morning, we believe it is important that such a report should consider the impact on consumers, because they do not want to be on the hook for decisions that allow capital levels to fall too much, thereby weakening the resilience of the financial institutions in question.

This is a “lessons learned” amendment. It is important that the debate about capital ratios does not take place altogether in the dark—that it is exposed to what my hon. Friend the Member for Erith and Thamesmead called the daylight of scrutiny—and that we do not hear just from financial trade bodies. If they all genuinely have no intention of lobbying for a less safe system, have no desire for a race to the bottom and want the highest possible global standards on regulation, they have absolutely nothing to fear from this amendment. It does no more than ensure that we have reports from the Treasury on what happens when these powers are passed to UK regulators, and what happens if the divergence that is facilitated in clause 3—in this long list on pages 2 and 3 of the Bill—takes place.

[Alison Thewliss]

I agree very much with what the right hon. Gentleman has said. It is important that we are kept up to date, in the absence of other scrutiny mechanisms. At the very least, within six months of Royal Assent, we should find out the impact of any revocations. The point was well made about consumers, because in many ways they are very far away from where this Bill is, and they may not see any issues that are coming up. It is important that we, as parliamentarians, are sighted on what those issues might be and have some degree of scrutiny over what happens with the regulations.

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[The Chair]

You both look too young to have been here all your adult life.

[Mr McFadden]

The Minister said that he does not want to accept the amendment because he thinks it is in the wrong place. I would find that a little bit more convincing if I really thought he would accept it if he thought it were in the right place, but so far today, Members on the Government Benches have steadfastly voted against this kind of reporting back and reviewing of things to do with the capital rules, as well as the other amendments tabled. I am sure that the Minister has read the whole amendment paper, and will have seen that I have tried to come at the same issue from a number of different angles and different timetables. This morning, we pressed to a Division an amendment asking for a report after three years, which was defeated. I will not press this one, Dr Huq, but we will be coming to other, similar amendments very soon. I therefore ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[John Glen]

The 2008-09 financial crisis led to significant economic hardship. Since then, post-crisis regulatory reforms set by the Basel Committee on Banking Supervision have supported financial stability, which underpins our economic prosperity. We in the UK intend to uphold our international commitment to the full, timely and consistent implementation of these reforms, alongside other major jurisdictions, and clause 3 creates the space in legislation for the financial regulator—the Prudential Regulatory Authority—to implement the remaining Basel standards. Like our approach to investment firms, our intention is to delegate the responsibility of implementing these to the PRA with enhanced accountability, as I have described. This is the right thing to do: the PRA has the technical expertise and competence to implement these post-crisis reforms as they should be implemented.

However, in delegating this responsibility, this Bill ensures that checks and balances are in place. First, clause 3 ensures that we transfer only some elements of the capital requirements regulation, or CRR, to the PRA, and that the extent of the Treasury’s powers to delete will be constrained to those areas of the CRR that are necessary to implement the Basel standards and ensure the UK upholds its international commitments. Secondly, this clause ensures that the deletions the Treasury makes take place when it is clear that adequate provision has been made by the PRA to fill the space. Those deletions will also be subject to the draft affirmative procedure, providing the opportunity for Parliament to scrutinise the Treasury’s actions. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and other PRA rules, amounting to a clear prudential rulebook that industry can follow.

Further, clause 3 enables the Treasury to make transitional and savings provisions to protect cliff edges from the deletion of certain provisions on the operations of a firm. This will allow the Treasury to save permissions already granted by the PRA, to modify capital requirements and avoid the need for firms to reapply for those permissions under new PRA rules where they are being replicated in the rulebook as a result of the Bill. This clause is essential to the delivery of our international commitments, and I therefore commend it to the Committee.

[Mr McFadden]

I do not want to force the Minister to go over the same ground again and again, but I am just trying to fully understand this. He used a phrase something like “the clause allows for departure from the CRR in order to implement Basel”, if I have understood him correctly. I am not trying to be obtuse, but I want him to explain fully to the Committee what that means. Why do we have to “depart” from the capital requirements regulation in order to implement the Basel rules? On the face of it, the list contained in clause 3 is a very wide list of things from the CRR that the Treasury is taking powers to revoke, and I am therefore trying to fully understand what the effect of this clause is. Is it just to implement Basel, or does it give a wider, ongoing power to the regulator to change capital ratios against these lines of business that are set out in the amendment? I genuinely want to understand that.

My second question is about the potential impact on risk weightings and how capital ratios can look. There is a potentially perverse effect here—almost a mathematical one. Because these things have risk weightings attached to them, if the regulator makes a decision to reduce that weighting—from 50% to 40%, for example, or whatever it is—but the bank still holds the same amount of capital against that stream of business, it has the effect of making the bank look more safe and secure, even though it does not have any more capital—even though nothing has changed.

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[John Glen]

I thank the right hon. Gentleman for his points. On the first point about why we are deleting what we are deleting, we are deleting elements of the capital requirements regulation to the PRA so that it can implement the provisions of capital requirements II, which the EU is commencing, in the appropriate way for our firms—that is basically it. The EU is on a journey of implementing CRR II, and we need to do what is appropriate for our firms, as I have discussed.

[Mr McFadden]

And the future?

[John Glen]

The future in terms of the evolving rulebook of the EU and other jurisdictions and how we seek to do that here will be subject to the future regulatory framework. We cannot anticipate the future evolving regulatory direction of new directives that have not yet been written elsewhere. What we have to do is to build the right framework for origination of rules in the Treasury and from the regulators, with the right accountability framework in place.

The problem we have conceptually in this discussion is that we are coming out of an embedded relationship in which we have auto-uploaded stuff that we have discussed, crudely, elsewhere. We have a legacy set of issues over which we have not had complete control this year that we are obliged to implement, but as we approach the end of the transition period, we have to make provision for things that actually make sense and we want to do anyway, in an appropriate way.

The driver of the right hon. Gentleman’s remarks— I understand why—is this desire to scrutinise the appetite for a sort of ad hoc, and I do not mean to be pejorative, but almost opportunistic, divergence, when what we are trying to do is to enable the regulator to do what is appropriate for a set of entities that will not naturally conform to the enduring direction of travel of the CRR II within the EU, because of the different nature of our firms and, as we have discussed, the different treatment of capital that is appropriate, given what they are actually doing vis-à-vis banks.

Secondly, he asked some detailed questions about risk weight.

[Mr McFadden]

Before the Minister moves on to the potentially perverse effects, does clause 3 simply give the regulators the powers to implement Basel 3.1, or does it give the regulator broader powers to change risk weightings against those lines of business in ways other than under Basel 3.1?

[John Glen]

My understanding is that the licence to operate given to the PRA is to make it consistent with Basel 3.1, in the context of the evolving rules that are being implemented elsewhere, but the notion that there is a single downloadable format of the Basel 3.1 rules in every single jurisdiction is a false proposition. Every regulator in different jurisdictions will do that in different ways. It is important, therefore, that whatever decisions they come to around the specific decisions on different entities will be published and scrutinised, such that it could be justified against the international standing and the other factors that we have put in place as a meaningful accountability framework.

I am probably close to the limit of my capacity to answer further on this point, but I am happy to reflect further and to write to the right hon. Gentleman and make it available for the Committee, to clarify anything that would be helpful to the Committee.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Clause 4 ordered to stand part of the Bill.

Clause 5

Prudential regulation of credit institutions etc by PRA rules

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

New clause 1—Annual review of the CRR rules—

“(1) The Secretary of State must, once each financial year, prepare, publish and lay before Parliament a review of the changes to CRR rules made by the PRA in the relevant financial year.

(2) The review must include an assessment of the impact of any changes to CRR

rules on—

(a) consumers;

(b) competitiveness; and

(c) the wider economy.”

This new clause would require regular reviews of any departures from the current regime of capital requirements.

[Mr McFadden]

This is my third attempt to get the Government to commit to reporting on the impact of these measures. Clause 5 and the accompanying provisions in schedule 3 insert new part 9D into the Financial Services and Markets Act 2000. This new part 9D will empower the PRA to make changes to capital requirements regulation rules. Schedule 3 also sets out the accountability framework, which we have discussed quite a lot throughout the day.

New clause 1 is an attempt to understand and explain the effect of changing these rules. It calls for an annual review to be published of changes to the CRR rules and their impact on consumers, competitiveness and the wider economy. As with similar amendments, all of this is an attempt to ensure that we do not simply pass all these powers from the EU to UK regulators without having processes in place, making clear what the changes we are making do and giving Parliament a proper voice in debate over these matters.

As I have said in relation to other amendments that, as things stand, unless we strengthen the parliamentary side of this, we could end up having less input to these issues in the future than we do at present. All these capital rules are there for a reason. We have thrashed it out today. It is important that we have proper transparency and a full understanding of the consequences if we depart from these rules in a significant way in the future.

My hon. Friend the Member for Walthamstow described these amendments as mild. I think they are mild. None of them say even that we should not have any of these departures. They simply ask for some process to understand the effect of them, which is open to Parliament. That is what new clause 1 would do.

[John Glen]

I really respect the right hon. Gentleman’s approach to this. It is very constructive. I accept his frustration with what I am saying, but I do respect his patience with me through this process. Each time, I will try to justify what we are doing.

This Bill enables the implementation, as the right hon. Gentleman understands, of the Basel standards. That will be done by deletion of parts of the capital requirements regulation that need to be updated, so that the PRA can make those Basel updates in their rules. As a result, we will see a split in this prudential regime, perhaps temporarily, depending on the end result of the future regulatory framework across legislation and regulatory rules.

The regime is already split in this way to an extent, with some rules for firms set directly by regulators and others contained in retained EU law or law that has originated in this Parliament, and it will continue to work in this way. However, we will seek to ensure that this is done as effectively as possible through clause 5. Clause 5 ensures that cross-references between legislation and PRA rules work properly on an ongoing basis. It also requires the PRA to publish an explanatory document outlining how it all fits together. Finally, the clause introduces schedule 3, which contains further detail to ensure that the regime works. As the elements contained in the clause help to ensure a workable framework for the UK to remain Basel-compliant, I recommend that the clause stand part of the Bill.

New clause 1 seeks to add an annual reporting requirement, as the right hon. Member for Wolverhampton South East said, for the Government to carry out and publish a review of PRA rules that implement the Basel standards, including an assessment of the impact of changes to the rules on consumers, competitiveness and the wider economy. The Bill will require the PRA to demonstrate how it has regard to several considerations: the international standards that it seeks to implement, the relative standing of the UK and the ability to finance businesses and consumers sustainably.

However, I regret that the amendment has the potential to duplicate the PRA’s reporting duties. I respectfully contend that this additional annual reporting requirement is not necessary, because through the Bill the PRA will also be required to publish a summary of the purpose of the rules it makes when implementing the Basel standards and an explanation of how it has complied with its reporting duties. Furthermore, the Financial Services and Markets Act 2000 already requires the PRA to make an annual report to the Chancellor on its activities, including on the extent to which its objectives have been advanced and how it considered existing regulatory principles in discharging its functions. The Chancellor must lay that report before Parliament.

I therefore question whether the proposed review would really provide much more insight than what the current reporting arrangements already achieve. I have myself checked whether there are no reporting requirements and we are entering some sort of wild west environment, but I do not think that that is the case. The amendment duplicates efforts that are already in place. Ultimately, to require the Treasury to undertake such an assessment would undermine this delegation and the regulator’s independence. I therefore ask the right hon. Gentleman not to move the amendment.

[Mr McFadden]

The Minister has given a pot 3 defence. I apologise for using that in-joke from this morning’s session; I am happy to explain it to you later, Dr Huq. A pot 3 defence means that it is already covered. It is my pleasure not to move the amendment.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Schedule 3

Prudential regulation of credit institutions etc

[Alison Thewliss]

I beg to move amendment 40, in schedule 3, page 79, line 25, after “activities” insert

“in the UK and internationally”.

This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.

This is quite a modest amendment. The Bill is supposed to ensure that Scotland, the City and the rest of the UK remain internationally competitive but robustly regulated, as the sector and everyone beyond a few marketeer ideologues are looking for. The amendment seeks simply to ensure that the FCA has regard to the standing of the UK as a base for financial firms that operate internationally. It is a kind of reflection amendment. It is common sense. It is really a drafting amendment. There is not terribly much more to it.

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[Alison Thewliss]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Mr McFadden]

I beg to move amendment 27, in schedule 3, page 80, line 8, at end insert—

“(7) The PRA must, at least once every five years, review the provisions of this section.

(8) The Treasury must lay before Parliament a report setting out—

(a) the outcomes of this review; and

(b) any changes the Treasury proposes to make as a result of this review.

(9) The Treasury may by regulations make any changes identified in subsection (8)(b).

(10) Regulations under subsection (9) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.”

This amendment would ensure there is a review of the accountability framework for regulators once in each Parliament and give it a role in approving subsequent changes to the accountability framework.

This will be my last attempt. I have tried to get reviews after six months, one year and three years; this is the attempt at once in every Parliament. Of all the mild amendments, this has to be the mildest. Once in every Parliament, we are asking for the PRA to review the provisions of proposed new section 144C in schedule 3, and for the Treasury to lay before Parliament a report setting out the outcomes of that review and any changes that it proposes to make as a result. I really think it reasonable to expect that as a minimum, given the sensitivity and potential combustibility of the provisions, which is why we have tabled the amendment.

[John Glen]

On a human level, I have found this process quite challenging, because my instincts are to try to accommodate the right hon. Gentleman when he sounds so reasonable and plausible. The amendment seeks to introduce a requirement to review the PRA’s accountability framework for Basel implementation and, as he said, it would require the PRA to conduct a review every five years, which is the least demanding of his requests today.

It is right to ensure that the accountability framework is fit for purpose and up to date. Indeed, that is one of the aims that we want to achieve through the Bill: flexible and agile regulation. The Bill’s purpose is to enable the implementation of the Basel standards, and the international deadline for Basel 3.1 reforms is 1 January 2023. By 1 January 2023, the bulk of Basel-related rules made as a result of the Bill should therefore already be published. The accountability framework that the Bill introduces for the PRA to make rules to meet Basel requirements relates only to the implementation of the specific so-called Basel 3.1 rules and does not relate to the ongoing prudential regulation of financial service firms that is being considered by the future regulatory framework review. The review is consulting on the important split of responsibilities between Parliament, Government and the regulators now that the UK has left the EU.

Reflecting the wisdom of the right hon. Gentleman with respect to the value of reviews, in that context a five-year review would clearly be appropriate. However, in the current context, it would be inappropriate to ask the PRA to report on an Act of Parliament given that the Bill already includes a more appropriate reporting requirement for the PRA, as set out in proposed new section 144D, that is adapted for the CRR rules. That requirement is to publish an explanation of how the matters in the accountability framework have impacted on the PRA’s rules whenever it consults on and publishes final rules to implement Basel. That will directly attend to the logic and rationale for what it has done.

The amendment would also add a new power for the Treasury in relation to the accountability framework. The Treasury already has a similar power in the Bill to add additional matters for the PRA to consider. The power proposed in the amendment goes further, allowing the Treasury to amend the list, including removing matters from it. It is not clear to me why the Treasury should ever remove, for example, the requirement for the PRA to have regard to the Basel standards. Such matters are immediately pertinent to the prudential regime and would have been agreed by Parliament through the Bill process. Therefore, the existing provisions in the accountability framework already appear to achieve the aims intended in the amendment in the best way possible and, as such, do not need to change. For those reasons, I regret to ask the right hon. Gentleman to withdraw the amendment.

[Mr McFadden]

Is the Minister saying that if there were a Basel 3.2 or a Basel IV process—that is quite likely, because at some point there will be a revision to the capital rules because things change and the system has to evolve—somehow the part 9D provisions cannot be used? Are they only for Basel 3.1? That is the implication of his response. I would have thought that giving the regulator powers over all those areas would be applicable to future Basel revisions and not just this one. In other words, we are not making a regulatory snapshot; we are creating a movie. This is a genuine question: the part 9D rules must be applicable to any future revisions of the Basel process, too. If so, there is a strong case for a once-in-a-Parliament review of how that is going.

[John Glen]

Those rules will have regard to future Basels. The reporting mechanism we have and the accountability to Parliament when those rules are published is more immediate and comprehensive. My contention is that a five-year provision would be out of date because we would have done it by then. That is why I am apprehensive about the right hon. Gentleman’s suggestion.

However, within the context of the future regulatory review—I cannot be bound on the outcome of that, because it is genuinely consultative—and what would be the appropriate reporting, there is a difference between short-term reporting on a particular measure or decision and a more fundamental review of the strategic dynamics of the relationship between the regulators, which we have seen evolve over decades. On the principle, there may be the need to have something like that. I am straining to be positive and constructive in my engagement with the right hon. Gentleman.

[Mr McFadden]

The truth is that there is no science about what is exactly the best timetable for reviewing these things. I am not pretending that one of the various timescales that we have mooted is perfect, and there is probably a legitimate debate to be had about that. However, as the Minister has just confirmed that we have given the regulator the power to make rule changes regarding future Basel changes on an ongoing basis—I am sure he is right about that—having a review and a report on this once every five years is a reasonable timescale to say what the impact of these things has been. I therefore wish to push the amendment to a Division.

Question put, That the amendment be made.

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[Mr McFadden]

I have a couple of questions, because credit rating agencies did not cover themselves in glory in the financial crisis, so I want to be clear about what clause 6 does and does not do with regard to them. How does the credit rating agencies regulation regulate them at the moment, and how will that be altered by the provisions in clause 6? For example, does clause 6 deal with the situation where a credit rating agency charges a fee to those who are asking for a rating and with the potential conflicts of interest involved in that process? That played out in the financial crisis, as anyone who has watched the movie “The Big Short” will have seen. The clause does talk about the regulation of the credit rating agencies, so I wonder if the Minister could explain a bit more how they are regulated and how that would be altered by the clause.

[John Glen]

I am happy to do my best. In terms of the changes and why they are not set out in the Bill, the changes that need to be made to the CRA regulations stem from “Basel III: Finalising post-crisis reforms”—the Basel document—which is part of the most recent Basel 3.1 package of reforms. Most of those have not been legislated for in the UK or the EU, and it makes sense to consider changes to the regulation as part of the wider implementation of the 3.1 package, which will be done through the future rules. They will be consulted on prior to the deadline.

The power to amend the regulation will be used solely to implement Basel 3.1. There are a number of minor amendments contained in that “Basel III: Finalising post-crisis reforms” document of December 2017. The two eligibility criteria that credit rating agencies need to satisfy are added. The power in clause 6 safeguards that intent as it requires the Treasury to have regard to the standards rather than making other amendments for unrelated reasons.

In terms of the other limited changes made in schedule 4 as part of the implementation of the UK regime equivalent to the EU’s second capital requirements regulation, they again relate to earlier Basel III standards. I do not think I can answer with enough specificity to do justice to the right hon. Gentleman, so I think I will need to write to him on this matter.

In what I have said, I hope that I have explained the confines and drivers of the reform; the powers that we are giving to the regulator; and the consistency with which they will be exercised to the Basel 3.1 proposal. I have previously spoken about accountability for that. I need to write to the right hon. Gentleman to give more clarity, and I am happy to address the issue at further stages in the Bill’s passage.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7 ordered to stand part of the Bill.

Schedule 4

Amendments of the Capital Requirements Regulation

[John Glen]

I beg to move amendment 32, in schedule 4, page 89, line 11, at end insert—

“11A (1) Article 500d (temporary calculation of exposure value of regular-way purchases and sales awaiting settlement in view of COVID-19 pandemic) is amended as follows.

(2) In the heading, omit ‘Temporary’.

(3) In paragraph 1, omit ‘until 27 June 2021,’.”

This amendment removes the time limit on the availability of the derogation under Article 500d of the Capital Requirements Regulation.

This is a minor amendment. In 2017, as I mentioned, the Basel Committee on Banking Supervision introduced favourable treatment for firms in how they calculate the leverage ratio. The EU was due to introduce that treatment through its second capital requirements regulation on 28 June 2021. Given that the revised calculation will reflect the leverage of a transaction more appropriately, and at the same time increase the capacity of an institution to lend and to absorb losses amid the covid-19 pandemic, the EU brought this provision forward through a derogation to the first capital requirements regulation that is currently in effect. The UK supported that approach. This derogation is time-limited in the EU to 28 June 2021, as that is when the relevant EU CRR II comes into force, which will put in place the new permanent provisions on leverage ratio.

As the Committee will be aware, the European Union (Withdrawal) Act 2018 provides that EU law, as it is in effect at the end of the transition, will continue to apply in the UK. This means that the first capital requirements regulation as it exists on 31 December will remain in place in the UK until it is amended by this Bill. That means that the derogation would also cease to have effect in the UK on 28 June 2021, because we will have adopted it on the terms that it is now live in the EU. The UK has not legislated a date by which to update its prudential regime in this Bill, because it is most important that our regulators get the rules right and have enough time to consult and finalise them, and also to minimise disruption.

The UK is targeting 1 January 2022 for firms to have implemented the PRA CRR rules. This decision was made after introduction of the Bill, in response to industry concerns about the general volume of regulatory reform in 2021. I referred earlier to the future regulatory framework review. The first stage of that was a piece of work that the Treasury did with industry and the regulators following Chancellor Hammond’s work 18 months ago, which sought to rationalise and understand the range of regulatory interventions that were ongoing.

UK financial services providers would have to revert to the previous rules from June for a period of approximately six months, which would be costly for industry and inconsistent with the EU regime during that period. This amendment therefore removes the time limit on the derogation, so it will remain in place until the new permanent provisions are in place in the UK, giving clarity and certainty, and not seeking to cause disruption. That is why I ask hon. Members to accept this amendment.

[Mr McFadden]

Can I ask a question about this? The Minister said that the leverage ratio had been changed so that institutions could lend more. I assume that means it is being reduced as a temporary measure during the covid crisis. He then said that, while at EU level that was to be for six months, the UK had not decided when such a change should end. The implication is that we are allowing a reduction in the leverage ratio without an end date. That is potentially very significant in terms of the discussions that we have had about capital today.

I appreciate that it is late in the afternoon and all the rest, but having listened to the Minister, and given how sensitive this issue of leverage ratio is—how can I best put this?—I would be grateful if he could undertake to write to the Committee with more detail on how this will operate. A permanent or long-term reduction in the leverage ratio would be a very big regulatory decision and would be precisely the kind of thing that we have been talking about all day, and precisely the kind of thing that we have been saying should have proper reports back, which those on the Government Benches have been resisting all day. I would like to find out more about what exactly this means and how long it will last for.

[John Glen]

To the right hon. Gentleman’s point, the UK has not legislated a date by which to update the prudential regime in this Bill, because it is most important that our regulators get the rules right. On the amendment made for the covid crisis that we have aligned to, which essentially ends next year, he is asking about the potential for us not to end it and therefore to be at odds with the prevailing new situation in the EU after 28 June.

[Mr McFadden]

It is not an EU point.

[John Glen]

Well, whatever the enduring reversion environment is in the EU following the end of this special measure. I will be happy to write to the right hon. Gentleman on that, but the key point is this: it would not be appropriate for the UK to determine where we would be beyond 28 June in advance of the regulator’s looking at those matters, when at the same time the EU’s definitive position at the end of June is not yet known. I will write to him, because I recognise that he is saying that he is apprehensive about the fact that we will have an apparent 18-month period from next June until January 2022 where we are at odds with the prevailing norms, and that is a risk. If I have understood him correctly, I am happy to address that point.

[Mr McFadden]

I am grateful to the Minister, but it is not an EU alignment point that I am making. He is right that, yes, this has arisen because of a disalignment with the EU, but my point is not that we have to always look at this through the lens of being aligned with the EU on capital requirements. I am talking about a public safety point; I am talking about a UK regulator taking a view on the leverage ratio, not necessarily in the light of what the EU is doing after June, but precisely because of all the points we have been making about the importance of capital after the financial crisis.

[John Glen]

I am happy to restate what I said. We have inherited an environment and indeed we have been obliged—quite reasonably—to absorb into law where the EU has got to at the end of the transition period. My point is that, in order to get the right enduring solution for our capital requirements for the UK, as it is in the UK, we have to allow a regulator to do that work.

The point the right hon. Gentleman is making is about the potential deviation of that enduring solution, and the gap between its implementation and the capital requirements that are normative globally, next June. I will undertake to clarify how we consider, in essence, the trade-off between that potential deviation and the disruption to firms. However, what I have tried to convey throughout today’s proceedings is that our desire is not to deregulate or to deviate from international norms, but to set out a UK framework that is necessary and appropriate for the institutions that exist in the UK.

Financial Services Bill (Seventh sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 7th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[The Chair]

Before we begin, just a few reminders: please switch electronic devices to silent; no tea and coffee during sittings; and, again, I thank everybody for observing the social distancing regulations. As you have seen, the spaces are marked and now cannot even be moved, so there is no excuse for not social distancing. The Hansard reporters would be grateful if Members emailed any electronic copies of their speaking notes to [e-mail].

We continue now with line-by-line consideration of the Bill.

Clause 8

Review of which benchmarks are critical benchmarks

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I beg to move amendment 28, in clause 8, page 7, line 38, at end insert—

‘(7) In reviewing critical benchmarks in accordance with Article A20 of the Benchmarks regulation as amended by this Act the FCA must have regard to—

(a) ensuring a benchmark is based on actual trades or contracts;

(b) preventing a benchmark from manipulation for the benefit of anyone submitting information to that benchmark; and

(c) robust sanctions up to and including custodial sentences for anyone found to be engaged in manipulation or attempted manipulation of a benchmark.’

This amendment would require the FCA to have regard to ensuring a benchmark is based on actual trades or contracts, that it is not open to manipulation and that robust sanctions are in place for those who manipulate, or attempt to manipulate, a benchmark.

Thank you for your chairmanship today, Mr Davies. Perhaps with your indulgence I may, as I did the other day, explain how I shall try to approach this morning’s sitting. I believe that within a sometimes impenetrable Bill the clauses we are to debate this morning may be the most impenetrable. That is often the case when clauses change provisions elsewhere, as in this instance. I shall, as I go through my remarks on the provisions, ask the Minister some questions. The real meat will come at about clauses 13 to 16, and I will speak for a bit longer. I just want to give the Committee the shape of my approach.

To return to the amendment, it begins, I guess, with LIBOR. I want by way of illustration to ask the Committee to think about the price of bread. If we were all asked what the benchmark price of a loaf is, it would be easy to establish it. We would go to a supermarket, look on the shelf, and see the price of a loaf. If we were keen shoppers with a good eye for a bargain, we might go to two or three supermarkets and compare the price of a loaf. I could pop-quiz the Committee, but I shall not put anyone through that.

The price of a standard loaf in one of our supermarkets is roughly £1.10, give or take; people who want to go for one of those sourdough loaves can pay a bit more if they want, but for what I would call a normal brown loaf it is about £1.10. That is the benchmark price of a loaf, dictated by the supply and demand of a competitive supermarket environment.

Now I want Members to imagine a different way of setting prices, where we were setting the price of a loaf and could all submit our opinion on what the price of the loaf might be—and we owned bakeries, and were selling loaves. We would have a debate every day to set the price of bread. Perhaps the Minister and I would converge on about £1.10, but someone else might say, “Look, could we just edge that price up? Could you do me a favour and make today’s price £1.11 or £1.12? It would be a really good favour and, by the way, if you do it I might send you a case of champagne at Christmas.”

The trader might be saying those things in the knowledge that they had a lot of loaves to sell that afternoon—maybe millions. The penny difference in price could make a great difference to the profit. Alternatively, a benchmark price of £1.09 instead of £1.10 could mean that they would lose a lot of money on the bread they had to sell. That is basically what was happening with LIBOR. That is the problem that was unveiled.

The problem is exacerbated where there is not a liquid market for bread and where the benchmark relies more and more on what our oral witnesses last week called “expert judgment”. That is one phrase for it, but we could also call it opinion, and if we did not have supermarkets selling millions of loaves every day and the price of bread was down to the opinion of only the bakers, we can see there would be the potential for price manipulation.

That is what was happening with LIBOR and what was uncovered as traders around the world shaved tiny proportions off the daily rates. The volume of money being traded meant that even a tiny proportion—0.01% or something like that—could make a huge difference to their own trading account over the course of the year. That is the problem that this set of clauses is trying to deal with.

How do we deal with the problem? We focus a lot on what the Bill calls the representativeness of the benchmark, because there is not really a problem when millions of loaves are being sold and there is a competitive environment; if I do not like the price at Tesco, I can go to another supermarket and try my luck elsewhere. But when wholesale markets were not very liquid and relied more and more on expert opinions, there was the potential for—indeed, the reality of—manipulation. That is what happened.

That matters because this benchmark underpins trillions of pounds’-worth of trades, yet was found to be vulnerable to the kind of manipulation I have just tried to illustrate. I have tried to show that even the tiniest movement in the daily benchmark could make a big difference to traders because of the volumes of money that they were trading. The benchmark’s flaws were exposed a number of years ago, yet its use to underpin trading has persisted because of the volume of contracts linked to it.

One of the problems in the complexity of this set of clauses is that it takes us into the area of contract law, which is both complex and, in this case, international. Huge volumes, contract law and international jurisdictions are involved, so—to be fair to the regulators and the Treasury—it is not easy to get this right. Our amendment does not try to get into the contract issue, which we will come to later when we debate a few clauses further on, but rather tries to set out some ground rules for the regulator in establishing and sanctioning successor benchmarks to LIBOR.

The criteria that we have set out ought to be uncontroversial. The first is that the benchmark should be based on actual trades in the market for which real prices were paid. I confess I have been away from the issue for a while, although I served on parliamentary inquiries into it some years ago, but we learned last week that those so-called expert judgments are still being used to set LIBOR prices. That is someone’s opinion of what a trade might cost, not necessarily what it does cost in a real marketplace. That use of expert judgments has created the potential—and, as we have seen, more than the potential—for manipulation.

We also learned that SONIA, the sterling overnight index average and the favoured successor to LIBOR in the UK, is based on much more liquid markets. That is a good thing, but there is also a potential problem. LIBOR is an internationally used benchmark. While we are debating this legislation, the United States is also legislating, the European Union has parallel legislation and the Swiss have parallel legislation—and they have all gone for slightly different successors. That raises the problem, which the Minister and I will get into discussing: how to take contracts based on an internationally used benchmark and try to ensure fairness to those who signed up to contracts under it when the countries legislating for successors to it are all choosing slightly different overnight rates for those successors.

The amendment, therefore, goes with the grain of how trades are moving. We all agree that a benchmark based on large liquid markets will be more accurate than one based on opinion. The second and third elements of the amendment give the regulator a duty to prevent manipulation by those submitting information to the benchmark and to have robust sanctions, including custodial sentences, when that occurs.

We will get back to debating that elsewhere in the Bill. When the LIBOR scandal unfolded some seven or eight years ago, I remember that both the Treasury Committee and the Parliamentary Commission on Banking Standards heard evidence from chief executives of the major banks. Often, their defence was, “I had no idea what my traders were doing. I did not know that they were doing this.” There was a constructive ignorance built into the system. Although that did not make the chief executive look good, it was far better than the chief executive admitting that they knew what the trader was doing but they looked the other way because it was making more profit for the bank and the trader. The sanctions and the responsibility up through the institution are very important.

All that is hugely important for trust in the system. The average constituent probably does not know much about LIBOR or what it does, but the truth is that the financial products they buy are often related to this benchmark, so it does have an impact in the real world. No matter how esoteric the financial products are—they have become too esoteric—in the end there is a customer, and the customer should only pay a fair price. The imbalance of information should not result in the customer being fleeced or the trader being unfairly enriched, and it is the job of the regulator and the financial institution for which that trader works to ensure that is the case. That is the intention behind our amendment: to set that as a clear goal for the regulators before we get into the meat in the clauses of how we will transition from LIBOR to other kinds of benchmarks.

[The Economic Secretary to the Treasury (John Glen)]

It is a pleasure to serve under your chairmanship again, Mr Davies. I appreciate the opening remarks of the right hon. Member for Wolverhampton South East and his compelling attempt to contextualise the complexity of the scrutiny of the clauses that we will undertake this morning. In that spirit, it might be helpful if I contextualise for the Committee what benchmarks are, what the LIBOR benchmark is and where we are with the EU benchmarks regulation before I respond to the Opposition amendment.

A benchmark is a standard against which the performance of a fund can be measured or by reference to which payments can be calculated. They are most commonly found in financial instruments, but are used to compare a variety of products, from commodities—oil, gold and diamonds—to the weather. The most widely used benchmarks are interest rate benchmarks, such as LIBOR, the Euro Interbank Offered Rate and SONIA. They reflect interest rates for inter-bank lending and borrowing. They are regularly calculated and made publicly available. As was mentioned, they are used in a wide array of financial instruments used in global financial markets. They also have a use in trade, finance, valuation, accounting and taxation.

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[Stephen Flynn (Aberdeen South) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Davies. I will be brief. The Minister has made a compelling case, but perhaps not as compelling as that made by the right hon. Member for Wolverhampton South East, who made illuminating remarks on the potential price of bread, although I encourage him to go to Aldi, where he will get it for a lot cheaper than £1.10.

What is proposed here is a common-sense approach that would give the wider public confidence that the Government are taking this matter seriously, notwith- standing the Minister’s remarks thus far. In general terms, I do not think there is a huge difference between the two positions, but looking at both sides, I think the common-sense approach would be to tighten this process and make it more robust; that would provide the public with the confidence they feel they need on these matters, particularly given the scale of past scandals.

[Mr McFadden]

I listened carefully to what the Minister said. I do not think anyone looking at the issue would conclude that the responsibility for these actions had been fairly allocated, so there is an issue. I am not saying we want to go around looking to put people’s heads on spikes—we do not want that sort of politics—but it does rankle with our constituents when certain types of crime that are, candidly, easier to understand are met with heavy punishments while somebody who does a very complex crime that is more difficult to understand can somehow get away with it.

Having said that, I accept that legislation for criminal offences, and particularly for custodial sentences, needs to be very carefully drafted in exactly the right way, and I cannot say that I am 100% certain that my amendment is, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[John Glen]

Clause 8 is the first of 14 clauses that amend the benchmarks regulation in order to provide the FCA with the powers it needs to oversee the orderly wind-down of critical benchmarks such as LIBOR. Critical benchmarks are benchmarks that meet certain criteria—for instance, they are used in a significant volume of transactions, or the benchmark is based on submissions by contributors, the majority of whom are located in the UK. A number of powers in the benchmarks regulation are limited to the oversight supervision of critical benchmarks or the administrators of such benchmarks.

Clause 8 adds new criteria for what may be designated as a critical benchmark. As a result, a benchmark will be considered critical if its cessation would cause significant and adverse impacts on market integrity in the UK, even where the benchmark has market-led substitutes, provided one or more users of the benchmark cannot move on to a substitute. The new test means that, as a critical benchmark winds down, the value of contracts that use the benchmark diminishes. The powers available to the FCA to manage the wind-down of critical benchmarks will remain available, provided that the benchmark meets the relevant tests to remain designated as a critical benchmark.

In addition, one of the existing tests for what may be designated as a critical benchmark has been changed. The test originally stated that a benchmark would be designated as critical where it met either both a qualitative and quantitative threshold of use in more than €400 billion-worth of products, or the qualitative threshold only. The quantitative threshold has now been removed, as it has become redundant. This measure has been welcomed by industry as an important development in managing LIBOR transition, and will ensure that the FCA has the powers it needs to manage the orderly wind-down of this critical benchmark.

I am aware, as a result of my engagement with industry—indeed, the Committee heard evidence of this last week—that there is support among market participants for additional safe harbour provisions to complement the provisions in this Bill. I can assure the Committee that we are committed to looking into that further issue and providing industry with the reassurance it needs. That conversation is ongoing and, I think, is to the satisfaction of the industry; we are working to a conclusion with it. However, given what I think the Committee will concede is the complexity of the matters involved, I cannot commit to an outcome, and I think the industry recognises that.

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[John Glen]

I thank the hon. Lady for her question. The evidence from the ICMA last week underscored the ongoing complexity and challenges of this. It may be that legislation will be required in a future Session, but that would be subject to a resolution. There is no point of crystallisation from the industry; it is not compelling us to bring something forward. There is no resistance on the part of the Treasury to doing that; it is a question of working out what would be appropriate for the market. That dialogue will continue, and the Government will respond in the appropriate way in due course. I think the gentleman who gave evidence last week was appropriately making the Committee aware of that ongoing additional dialogue regarding that safe harbour provision. But there is no point of conflict between the Treasury and the industry on this matter.

[Mr McFadden]

The questions asked by my hon. Friend the Member for Erith and Thamesmead expose the potential for litigation if the Government and regulators are moving contracts from one basis to another; some of the people involved will have deep pockets and expensive lawyers. The Minister tells us that it will all be sorted out—thrashed out—and I hope he is right; but I am not sure that we can guarantee that.

I have a couple of questions about the clause and those clauses that follow. First, is it all about LIBOR, even though it talks about critical benchmarks, or is it more general? For example, might the provisions be used on a benchmark related to the price of a particular metal, or something like that? For our understanding of the matter, should we, wherever the provisions refer to a critical benchmark, just be thinking about LIBOR—because that is what we really mean; and is there some parliamentary drafting reason why the Bill does not say that?

Secondly, the clause deals with a review of which benchmarks are critical benchmarks. The Minister said, and the clause says, that that seems to be a benchmark for which a market-led substitute exists, although for some reason it is not practical to transfer activity to such a market-led substitute. That is what is confusing about the clauses. We are told that the policy decision, and the regulatory decision, is to move away from LIBOR and to cease using it by the end of 2021. That is my understanding. Yet it seems that the clauses both facilitate that and facilitate the continued use of such benchmarks.

My reading of the clause and the one that follows is that the FCA will retain the power to compel organisations to submit information to a critical benchmark, even though the policy decision has been made to move away from that benchmark. The question then is why the regulator would want to do that, and what the power means for the 2021 LIBOR end date. Does the power mean that the FCA could compel submitters to keep submitting information to LIBOR, and is that because so many contracts depend on it? Is that really why the power to continue submitting information to critical benchmarks is engaged in this? What I am really asking is whether the clause is putting the brakes on LIBOR or, in some ways, continuing a facilitation of LIBOR after the end of 2021, for some things.

[John Glen]

In the UK, LIBOR is the only critical benchmark. However, for reasons that the right hon. Gentleman has alluded to, we do not want the provision to be on just the LIBOR benchmark. For reasons to do with the type of legislation that that would mean—private legislation referring to something specific—a different process would be created. We have to use benchmark legislation—benchmark regulations; but LIBOR is what it pertains to. That is the only critical benchmark in the UK.

A mechanism to compel panel banks to continue to submit data beyond the end of 2021 does not exist. We have to be able to wind down in an orderly way and make provision for continuity, which is needed for the tough contracts that continue to exist and will need some reference point. We need to do that in a way that satisfies the market and maintains stability. It is in that context that we are giving the FCA the powers.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.        

Clause 9

Mandatory administration of a critical benchmark

Question proposed, That the clause stand part of the Bill.

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[John Glen]

Clause 9 amends article 21 of the benchmarks regulation, which concerns the mandatory administration of a critical benchmark.

Article 21 gives the FCA the power to compel the provision of a critical benchmark where the administrator notifies the FCA of its intention to cease providing the benchmark. Clause 9 amends article 21 to increase from five to 10 years the maximum period for which an administrator can be compelled by the FCA to continue to provide the benchmark. This will increase the time which the FCA has to manage the wind-down of a critical benchmark.

Under the clause, if the FCA decides to compel an administrator to continue publishing the benchmark, the FCA must assess the capability of the benchmark to measure the underlying market or economic reality and inform the administrator in writing of the outcome of this assessment. The FCA’s assessment that a critical benchmark is no longer representative of its underlying market, or is at risk of becoming unrepresentative, is the first step in providing the FCA with its wider powers to manage the wind-down of such a benchmark. We therefore wish to ensure that the FCA can take steps towards starting the managed wind-down of a critical benchmark in circumstances where the benchmark administrator itself proposes to cease the benchmark. I recommend that the clause stand part of the Bill.

[Mr McFadden]

The clause takes us, in a sense, to the next step after a review. Again, I have a couple of questions. First, subsection (2) refers to a period of 10 years. The Minister made clear a few minutes ago that LIBOR is definitely winding up by the end of 2021, so to what does 10 years refer? With something that is supposed to be winding up in one year, I still cannot quite understand why we are giving the regulator powers to continue it in a form for up to 10 years. I am confused about that, and I do not know if I am the only one.

Secondly, subsection (3) refers to an assessment of a benchmark. That assessment revolves around the question of the representative nature of the benchmark. It says that the FCA will always give either

“a written notice stating that it considers that the benchmark is not representative of the…economic reality”—

perhaps it has become too illiquid, in the way we discussed, or too reliant on expert opinion—or

“a written notice stating that it considers that the representativeness of the benchmark is not at risk.”

In other words, we have a good competition going here for the price of the bread. Does the 10-year period of extended mandatory information apply when the FCA has judged that the benchmark is not representative, or could it apply in cases where it is judged that it is representative as well? Subsection (3) seems to indicate that the assessment could go either way. I am trying to get at what this 10-year power is for and to which kind of benchmark it applies.

[John Glen]

I thank the right hon. Gentleman for his entirely reasonable and appropriate questions. The compulsion period of 10 years is about having a timely period to continue with the revised methodology of the synthetic LIBOR. One of the main aims of the Bill is to provide an appropriate mechanism for the wind-down of LIBOR and to reduce the risk of contractual frustration in the event of an unplanned or sudden cessation of LIBOR. To enable a managed wind-down of LIBOR, it may be necessary for the FCA to compel the benchmark administrator to continue to provide the benchmark for a period of time, to allow a portion of LIBOR-referencing contracts to mature and end. We expect a significant number of outstanding LIBOR legacy contracts at the end of the five-year compulsion period, and those outstanding contracts will still pose a material financial stability risk, as the Financial Stability Board noted in 2014.

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The right hon. Gentleman asked me about the representative nature of the benchmark and the mechanism by which it will be deemed unrepresentative. I cannot say that I am absolutely certain on that point, but my assessment would be that the dialogue with the market actors, and what was actually happening with the live transactions and the material evidence they were submitting to provide the basis for the benchmark to be constructed, would inform the decision on the need for an alternative—basically, whether it was functioning properly. That would not be a matter of a market-driven outcome; it would be clear from a regulatory and market security need, and that would be a conversation the FCA would have with the industry. However, we are getting into territory that I would need to look into further if I was going to give more satisfaction to the right hon. Gentleman, which he absolutely deserves.

[Mr McFadden]

The Minister’s phrase, “synthetic LIBOR”, helps us to understand this. I think it might mean something like this: that the regulator has the power to designate a benchmark as critical when it is unrepresentative of market reality, but in a way LIBOR is not really ending at the end of 2021, because we have synthetic LIBOR—the ghost of LIBOR, we might say—and the ghost of LIBOR is necessary because of those legacy contracts.

Where I still get confused is that the reason LIBOR is being wound up, and the reason that the FCA can designate it in this manner, is that it is unrepresentative—yet for the ghost of LIBOR, or synthetic LIBOR, to have any validity, the FCA has to continue to compel submitters to submit information to it. I do not know what the implications of that are for the quality of the ghost of LIBOR; we must remember that the reason it has been designated in the first place is that it is failing the market representativeness test. How is it, therefore, that for up to 10 years we can compel submitters to submit information to something that the regulator has judged invalid?

[John Glen]

The right hon. Gentleman has accurately summarised the issue around synthetic LIBOR, but we are getting into suppositions about the time period for which that synthetic LIBOR would be necessary. The FCA recently published a paper on this. It is about evolving circumstances in the market. It is very difficult to be prescriptive, hence the 10-year provision. We are now getting into the realm of market operating realities at some point in the future. We have to have something that references the fact that we have a considerable volume of contracts that reference the historical LIBOR and we have to have a reference point going forward. I hope that is helpful.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10

Prohibition on new use where administrator to cease providing critical benchmark

Question proposed, That the clause stand part of the Bill.

[John Glen]

Clause 10 inserts article 21A to the benchmarks regulation. This article provides the FCA with the power to issue a notice prohibiting some or all new use of a critical benchmark by supervised entities. The FCA may use this power where the administrator has stated that it wishes to cease providing the benchmark and the FCA has assessed the administrator’s plans to cease the benchmark or otherwise transfer it to a new administrator.

The FCA can exercise this power only if it considers that it is desirable to advance its consumer protection objective or its integrity objective under the Financial Services and Markets Act 2000. The notice will contain the reasons for the prohibition, the date when it is to take effect and any further information that the FCA considers appropriate to allow supervised entities to understand the decision. The FCA’s ability to prohibit new use in circumstances where the administrator is seeking to cease to provide the critical benchmark is an important step in preventing the pool of contracts referencing a benchmark from growing ahead of its possible cessation. I therefore recommend that the clause stand part of the Bill.

[Mr McFadden]

I thank the Minister for his explanation. This clause is about the prohibition of the use of benchmarks. Again, I have a few questions. Is it the case that prohibition can take place only after the kind of assessment of the representative nature of the benchmark that we discussed under clause 9(3), or are there other grounds for issuing a notice prohibiting the use of a benchmark, such as suspected criminal activity or manipulation in some other way?

My second question is about use. New article 21A prohibits “new use” of a benchmark. I think the Minister is saying that there should not be new use of a benchmark, but there may be continued use for the reasons that we have discussed—for legacy reasons. Could the Minister confirm that existing contracts referenced in the benchmark would not be covered by this “new use” provision?

My third question is about paragraph 4 of new article 21A, which says that the FCA must have regard to effects outside the UK of any decision to cease use of a benchmark. I can see why such a provision would be there, because LIBOR is used to underpin contracts all over the world. However, what can the regulator, which only has jurisdiction in the UK, do to stop the use of a benchmark elsewhere in the world? To what degree does this require work with other regulators through, for example, the Financial Stability Board, or is the judgment that action by the FCA alone would be enough, even though that action might have international effects, because of the importance of UK benchmarks? I suppose it is as if some jurisdiction has a particular influence in a sport, so when they change the rules, everybody else has to change the rules, too.

I assume that those criteria about the protection of the consumer and so on that the Minister referred to are in the Bill to protect the FCA from litigation risk by making clear that in acting on this, it was doing so in line with its statutory objectives, because the danger of litigation risk runs right through this.

[John Glen]

The right hon. Gentleman raises a number of questions, and I should start by making it clear that we in the UK cannot stop use overseas. The provision applies to UK-supervised entities working with international partners. He is right to say that there is interconnectedness between those institutions, and the FCA has a significant role in terms of LIBOR.

The simple purpose here is that, where a benchmark is to be ceased, the pool of contracts referencing that benchmark should stop growing. The prohibition power that the right hon. Gentleman referenced is available only at the point at which the benchmark administrator has informed the FCA that it is planning to cease to publish it and the FCA has considered whether it is realistic for the benchmark to be ceased or transferred to a new administrator. Clearly, it would not be desirable for the pool of contracts that reference the benchmark to continue to grow in circumstances where it is likely that that benchmark is on a pathway to ceasing to be used. It is therefore appropriate at that stage to stop supervised entities entering into new contracts that reference the relevant benchmark.

In terms of the rules broadly governing the FCA in exercising this power, it can do that only if it is desirable to do so in order to advance this FSMA consumer protection objective or the integrity objective, so it would have to be confident that it would secure an appropriate degree of protection for consumers or advance the integrity of the market, and it would have to publish a statement along those lines. I recognise that this is complex, but we are really trying to give an appropriate toolkit to the FCA to do what is necessary not only to safeguard the appropriate ongoing construction of benchmarks, but to ensure that it has the authority to justify the management of the wind-down in circumstances where that is necessary.

Question put and agreed to.

Clause 10 accordingly ordered to stand part of the Bill.

Clause 11

Assessment of representativeness of critical benchmarks

Question proposed, That the clause stand part of the Bill.

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[John Glen]

Clause 12 amends article 23 of the benchmarks regulation, which concerns the mandatory contribution to a critical benchmark by supervised entities. Article 23 already provides the FCA with certain compulsion powers over the administrator and supervised entities, which contribute to a benchmark, including the power to compel supervised contributors to continue to contribute to a benchmark. These powers were previously only available where the representativeness of the benchmark was judged to be at risk.

The clause amends the article to ensure that it works with the new representativeness assessments we are introducing under the Bill, and that these powers are available either where the benchmark is at risk, or where the benchmark has actually become unrepresentative. The changes mean that, for instance, the power to compel a contributor will now become available whenever the FCA has made a finding that the benchmark is unrepresentative, or its representativeness is at risk.

The clause also extends the compulsion powers to supervised third country contributors and requires that if a contributor gives notice that it intends to withdraw on a specific date, it may not cease contributing on that date without written permission from the FCA. It also clarifies that the FCA’s compulsion powers and other powers in paragraph 6 of article 23 are available specifically for the purpose of restoring, maintaining or improving the representativeness of a benchmark.

These powers are important in ensuring that a critical benchmark does not simply cease in circumstances where the representativeness of the benchmark could reasonably be maintained or restored through appropriate FCA action. I recommend that the clause stand part of the Bill.

[Mr McFadden]

I have one or two questions to the Minister. The clause gives the FCA the power to mandate contributors, including those outside the UK—it will be interesting to see how that works—to continue to submit information to a benchmark for up to five years. However, clause 9 states that synthetic LIBOR—the ghost of LIBOR—can be kept going for up to 10 years. Why is it five years in this clause but 10 years in clause 9?

[John Glen]

I thank the right hon. Gentleman for his question. He draws attention to the discrepancy between the provision for five years in clause 12 and 10 years elsewhere. It is important to remember that the powers in the Bill are not just for LIBOR but will be relevant to benchmarks that are designated as critical in the future. The changes in the clause ensure that the existing compulsion powers work with the amendments made to the wider regulation. Where we have a benchmark that is unrepresentative or is at risk of being unrepresentative, the FCA should have access to these powers.

With respect to LIBOR, the amendments ensure the FCA will have the required time to implement the various processes that we are introducing, to access their new powers, and to mitigate the risk of the rate simply ceasing due to insufficient input data. The 10-year provision is a contingency about the ongoing use of the benchmark. The timeframes are constructed with respect to both the LIBOR provision and the wider needs of benchmarks and have been constructed in consultation with the FCA over quite a long period.

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[Mr McFadden]

I am not sure that that is entirely convincing, because neither clause refers specifically to LIBOR, for reasons that the Minister has explained. They both refer to benchmarks in general.

The different timescales used throughout this section are somewhat confusing. There are reviews every two years; other timescales of three months are mentioned here and there. I am genuinely confused about why clause 9 gives the power to compel contributions for up to 10 years, yet here we are a few clauses on talking about five years. I accept that the Minister says that the 10 years might be a maximum, but if these powers are to deal with the issue of legacy contracts, I am still not sure why we have this discrepancy. It could be that I am not understanding something or that I am missing something. That is certainly possible. Is this an arena where the Government may come forward with an amendment during the later stages of the Bill’s passage?

[John Glen]

I am always open to looking at the possibility of amendments, as I have demonstrated during the sittings we have had so far. The 10-year reference was under the revised methodology for LIBOR to be produced by the administrator. It will probably be useful for me to reflect on this exchange, and to write to the right hon. Gentleman and the Committee to clarify the apparent discrepancies and rationale for this. I recognise that this is genuinely complicated. I want to bring satisfaction to the Committee and I am happy to do that.

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[John Glen]

The clause inserts a new article into the benchmarks regulation that, in essence, provides the FCA with the power to designate a critical benchmark as an article 23A benchmark, if they consider that the representativeness of the benchmark cannot reasonably be restored, or there are not good reasons to restore and maintain its representativeness. This designation allows the FCA to use a number of the new powers that are set out later in the Bill, such as the ability to require that the administrator change the benchmarks methodology.

Given the significant impacts of making such a designation, we have included a number of safeguards to the designation power. First, if the FCA considers it appropriate to designate a benchmark, they must inform the administrator and allow 14 days for the administrator to make representations before proceeding with the designation. If the FCA decides to proceed with the designation, they must publish a notice. That should include, among other things, the reasons for their decision, the date it takes effect and any further information that the FCA considers appropriate to assist supervised entities in understanding the effects of the designation.

In summary, clause 13 sets out the procedure by which the FCA can designate a benchmark and access the powers detailed later in the Bill. I therefore recommend that the clause stand part of the Bill.

[Mr McFadden]

I am grateful to the Minister. Before I begin, I say to the hon. Member for Hertford and Stortford that we are under a duty here to try to understand what we are doing. It is in that spirit that I am asking these questions. I was reminded by a colleague about a different kind of Standing Committee, which some years ago was considering the Hunting Bill. He told me that after a month they were still on clause 1, which was about the title of the Bill, so I do not think we have gone over the top in asking these questions.

With your and the Minister’s indulgence, Mr Davies, I would like to make a few points about the next few clauses; I think they go together and get to the heart of what this area of the Bill is about. As I said, the Opposition understand why LIBOR is being wound down; we have gone over the history of the manipulation and so on. It is why the Bill rightly places such an emphasis on benchmarks being representative of market activity: so far, so uncontroversial.

However, there is a problem in the transition from LIBOR to SONIA or other new benchmarks. As we have referenced several times, there will clearly be some impact on the value of LIBOR-based contracts. That impact is openly acknowledged by the FCA when it says:

“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”

Remember that, given the volume of money involved—we are talking about not millions or billions but trillions—this is a systemic risk, as well as a risk to individual parties to contract.

My understanding of the provisions in clause 13 and a few that follow is this. When the FCA feels that a benchmark is no longer representative of the market to which it relates or that that representativeness is at risk, it can designate the benchmark under article 23A of the benchmark regulation. Then there are various provisions about notices being published, reasonable fees being charged and so on; we can leave those aside. When such a benchmark is designated by the FCA, that can only be done in line with the statutory duties, to which the Minister referred, of consumer protection and market integrity. When a benchmark is designated in that way, new use of the benchmark is prohibited, but—this is the critical “but”—the FCA can mandate continued legacy use of that benchmark. The Minister may come back to me about timescales—five years, 10 years or whatever it is.

Finally, if the potential disruption brought about by the discontinuation of LIBOR—or a critical benchmark, if we want to refer to it in that way—is too great, it is suggested in the Bill that the FCA may compel its continuation, as we have discussed. How realistic is it for the FCA to continue to compel administrators to submit information to something that they have said they want to phase out in a year’s time? The provisions are intended to allow the FCA to wind down a critical benchmark but in a way that protects these legacy contracts, which are based on the old benchmark. That brings us to those legacy contracts and what is or is not included, and to the potential legal risks.

As I understand it, there might be two issues. First, what is the definition of a legacy contract? Is it one where there has not been agreement between the two parties to transfer to the new benchmark, or is it something different? What are we talking about when we discuss legacy contracts? What would we do if there were a dispute between the parties about whether something should be treated as a legacy contract or not?

Secondly, how will the provisions cope with the potential legal action and/or market disruption as a result of parties feeling aggrieved, for one reason or another, about the switch from one benchmark to another or, in consequence, taking action that results in disorderly markets? In other words, to what degree is the process subject to disruption through legal action by the parties involved, which could feed into market operation, given the volume of money involved in these contracts?

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[John Glen]

Thanks.

[Mr McFadden]

However, I thought it better to take these next few clauses together and raise those points with him in this way.

[Alison Thewliss]

I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.

I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.

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[Mr McFadden]

Is the parallel legislation in the United States and the EU part of that consideration? When we received the oral evidence last week, I confess that I had not appreciated that parallel legislation on this subject, with safe harbour provisions, was going through in those two jurisdictions. Given the co-operation that already exists through the FSB, involving in the Federal Reserve Bank of New York and the Bank of England, is that part of the consideration?

[John Glen]

We are looking and working internationally. We have an active dialogue with the US through a regulatory working group, and we will be monitoring that. There is no question of us seeking to find some competitive advantage in this; there will be a need to find as much alignment as possible to give as much clarity and certainty to the market actors. However, the conversation is not at that stage yet here. There is no sense that that is jeopardising the integrity of this process. This is the first step, but we reserve the right to do other things further to the conclusion of those conversations.

As for accountability to Parliament, as raised by the hon. Member for Glasgow Central, the legislation requires the FCA to produce statements of policy and notices when exercising the powers. There is also a requirement to review the exercise of its methodology every two years and to publish a report following that review. The FCA is required to exercise its powers in accordance with the two statutory objectives: consumer protection and market integrity. That is the relationship to parliamentary accountability.

Turning to the other matters raised by the right hon. Gentleman around the administrator challenging a designation, if the FCA decides to designate a benchmark under this article, the benchmark administrator has the option of referring the matter to the upper tribunal. The FCA is required to inform the administrator of its right to refer the decision to the upper tribunal and the procedure for doing so.

As for the continued publication of a benchmark that has been deemed unrepresentative, in the case of a critical benchmark such as LIBOR, the benchmark is so widely used that its discontinuation would represent a risk to financial stability and create disruption for market participants. Therefore, this Bill provides the FCA with the power to require a change to how a critical benchmark is determined, including input data, to preserve the existence of the benchmark for a limited time period to help those contracts that otherwise would not realistically transfer to an alternative benchmark.

I hope I have done justice to most of what the right hon. Gentleman raised. I will seek to review what we have exchanged and, if there are outstanding matters, to write to him. I am relieved we have moved beyond clause 1.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Ordered, That the debate be now adjourned.—(David Rutley.)

Financial Services Bill (Eighth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 8th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move amendment 3, in clause 16, page 23, line 13, leave out “latest” and insert “most recent previous”.

This amendment clarifies what the FCA has to review before re-exercising the power under Article 23D(2) of the Benchmarks Regulation.

Clause 16 introduces a new provision: article 23E of the benchmarks regulation. It requires the Financial Conduct Authority to conduct and publish a review of an exercise of its article 23D powers to direct the administrator of an article 23A benchmark to change the methodology rules, or code of conduct, of the benchmark. Where the FCA has exercised a power under article 23D, the FCA is required to conduct and publish a review of the exercise of that power two years after the power is first exercised. The FCA must then conduct and publish such a review in each subsequent two-year period until the benchmark ceases to be published.

The FCA will also be required to review the exercise of this power under article 23D whenever it intends to re-exercise its power in relation to the same benchmark. The FCA must conduct and publish a review of the latest exercise of its article 23D power before re-exercising the power where that is reasonably practicable. In circumstances where it may not be reasonably possible for the FCA to conduct its review prior to the use of the power, the FCA must conduct and publish its review as soon as is reasonably practicable after the re-exercise of its article 23 power. For instance, it is possible that the FCA may need to take such a course of action when it needs to access its article 23D powers urgently to prevent significant market disruption or financial stability risks.

In concluding the review, the FCA will be required to consider whether the exercise of its power has advanced, or is likely to advance, its statutory objectives to protect consumers and market integrity. It must also have regard to the statement of policy that the FCA has published in respect of the use of its article 23D powers. The clause provides a statutory mechanism through which the effectiveness of the FCA’s exercise of its powers under article 23D can be evaluated. It also serves to increase the accountability of the FCA in the exercise and re-exercise of the powers.

I apologise for not acknowledging you in the Chair, Dr Huq; it is a pleasure to serve under your chairmanship. I recommend that the clause stand part of the Bill.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I thank you, Dr Huq, for chairing this afternoon’s session. For clarity, we had a fairly extensive debate on clauses 13 to 16 together, hence the speed of our progress at the beginning of this session.

[The Chair]

Thank you.

[John Glen]

Amendment 3, which stands in my name, is a technical amendment. As the explanatory note says, it is intended to clarify the scope of the review that the FCA is required to undertake where it re-exercises its article 23D(2) powers in relation to the same benchmark. Article 23D(2) provides the FCA with the powers to direct the administrator of a critical benchmark to change the methodology rules or code of conduct of the benchmark. The amendment serves to put beyond doubt which exercise of power the FCA is required to review at this point in time.

I would like to address the point raised by the right hon. Member for Wolverhampton South East just before we broke for lunch on the international LIBOR transition. The Government have followed related global regulatory developments closely, including what is going on the United States, as he mentioned, with the US Alternative Reference Rates Committee’s legislative proposal. We continue to work with regulators to engage our international counterparts directly, as well as through the Financial Stability Board’s official sector steering group and the International Organisation of Securities Commissions.

It is quite clear that, as the right hon. Gentleman stated, we will need a co-ordinated global approach, and we aim to provide consistent outcomes for users. The Government are committed to ensuring that their dialogue with international counterparts continues, and aim to firmly limit any unhelpful divergence to outcomes. I hope it will be helpful for the Committee to have that put on the record.

[Mr McFadden]

I am grateful to the Minister; I suspect that is a harbinger of a Government amendment at some point, because of the debate we had on safe harbour provisions. If they are coming in in the US and the EU, I suspect, given what he has just said about marching together on this internationally, we may see an amendment from him on this at some point.

[The Chair]

It sounds like fine-tooth comb stuff this morning.

Amendment 3 agreed to.

Clause 16, as amended, accordingly ordered to stand part of the Bill.

Clause 17

Policy statements relating to critical benchmarks

Question proposed, That the clause stand part of the Bill.

[John Glen]

Clause 17 introduces a new provision, article 23F of the benchmarks regulation. This clause requires the FCA to publish statements of policy and to have regard to those statements when exercising certain new powers set out in the benchmarks regulation. The FCA is required to publish a statement of policy with respect to the exercise of this power to designate a critical benchmark as an article 23A benchmark. This is the designation the FCA can make where it determines that a benchmark’s representativeness cannot be restored or maintained, or that there are good reasons not to restore or maintain representativeness.

The FCA must also publish a statement of policy with respect to the exercise of its powers under article 21A, which allow it to prohibit new use of a critical benchmark when the administrator of that benchmark has notified the FCA of its intention to cease providing the benchmark. The FCA is also required to publish a statement of policy in exercising its powers under article 23C, which allow it to permit certain types of legacy use of an article 23A benchmark by supervised entities. Finally, the FCA must also publish a statement of policy in exercising its power under article 23D, which allows the FCA to impose requirements on the administrator of an article 23A benchmark to change the methodology, rules or code of conduct of the benchmark.

The Bill states that the FCA’s duty to prepare and publish those statements of policy can be satisfied before as well as after this legislation comes into force. On 18 November, the FCA published two consultations inviting industry feedback on statements, which ask for views on how the FCA intends to exercise its article 23A and article 23D powers granted under this Bill. It has also stated its intention to engage with industry stakeholders and international counterparts in the development of its statements of policy with respect to its powers under articles 21A and 23C.

This clause increases transparency regarding how the FCA will exercise certain new powers set out in the Bill to support the orderly wind-down of a critical benchmark. In developing statements of policy, the FCA will be able to engage with industry and international counterparts. The clause also requires the FCA to have regard to those statements when exercising its new powers, reducing uncertainty for market participants. Therefore, I recommend that the clause stand part of the Bill.

[Mr McFadden]

I just have a question about these policy statements. We have been through quite a lot about how the FCA will designate, compel and continue the submission of information and all the rest of it. What role do these policy statements play in all of that? Is the policy statement simply putting into law a requirement on the FCA to say why it has acted as it has, or is it, as part of what I think is behind some of the stuff in these clauses, insulating the FCA against the threat of legal action because of the possible effect on contracts? Is this a nice to have, best practice or is it something that helps to protect the FCA against the threat of litigation, which has been a thread through this discussion?

[Ms Angela Eagle (Wallasey) (Lab)]

Obviously, this is a very technical area, to say the least. I just want to ask a couple of questions so that I can get my head round how the FCA will use the power. We have different regulators who could make different determinations as to what constitutes benchmarks going forward, and yet those benchmarks write contracts worth trillions of pounds and dollars into the future. Any arbitrage opportunity in the way that those contracts work could make some people very rich and ruin others. This will be decided as one goes along. Some of these contracts are being made, but some are already projected into the future.

To ensure that markets are not distorted and the potential for nefarious profit by some with insider information is minimised, we need reassurance about how the FCA will perform the task, particularly in its interactions with the other regulators. I am not sure what the Government’s intention is, apart from saying they are going to liaise with other regulators. Is it the Government’s intention that these benchmarks ought to be similarly designed and defined across different regulatory jurisdictions, since this is almost a currency, or are we seeking divergence here as well in order to perhaps increase our chances of being the place where some of this business is written?

Perhaps the Economic Secretary could reassure me on that, because the FCA’s powers are pretty strong, but what is the intention? That might be in all of the many consultations, which I confess I have not read, so it might be set out there. If the Minister could put a little more on the record, we might at least have some certainty there, not least for Pepper v. Hart purposes.

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Consequently, under the current regulations, UK firms are at risk of losing access to important third-country benchmarks after the end of 2022. Those benchmarks are relied on for key business functions, such as risk management, Treasury financing and overseas investment. The Government will consider changes to the third-country regime so that it is proportionate for third-country benchmarks and appropriate for the needs of the UK economy. By extending the transitional period for third-country benchmarks to the end of 2025, the clause will provide legal and economic certainty for UK firms that rely on third-country benchmarks. That will also allow the Government to fully consider and operationalise an appropriate third-country benchmarks regime for the UK. I will update the House on that in due course.

[Mr McFadden]

I just want to ask the Economic Secretary a question to ensure that we have properly understood the clause. All through this part of the Bill, we have talked about the different timescales in different clauses, and here we have another, which extends the transition period for benchmarks with third-country administrators until the end of 2025.

For my clarity, and perhaps for that of colleagues, will the Economic Secretary clarify whether the measures are different—I think they are—from the five and 10-year timescales in clauses 9 and 12, relating to the FCA designating what the hon. Member for Glasgow Central called zombie LIBOR? Is this five-year period about something different or does it relate to that?

Having debated this matter for a couple of hours, I am not sure that we have resolved it. My feeling is that we are leaving quite a lot to the FCA. I hope that the clause minimises the risk of harm. We have talked a lot about the risk of litigation, but there is also the risk of harm to those who have entered contracts based on LIBOR in good faith. The Government and regulators are trying to move away from that system for reasons that we understand are to minimise harm to those who signed up in good faith, but I suspect that there is still a fair bit of work for the regulator to do to ensure that that is the case.

[Ms Eagle]

Will the Economic Secretary share with the Committee the intention behind the extension to 2025? He said that it was to create certainty—I can understand that. Is the intention to transition to something different—the new third-country regime—after the extension, or is it to develop and introduce it earlier if it looks like there are advantages to doing so? I know that I am asking him to gaze into the future, but this will be in the Treasury and regulators’ work list and they will presumably schedule it at some stage. Does he expect the creation of a third-country regime to be difficult or quite easy? Are the Government thinking of basing it on the existing regimes or diverging from what we are used to? Will he give us a little more information about how the Treasury intends to proceed with this piece of technical but very important work.

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[John Glen]

I allowed myself a moment of light-heartedness, but I can see that that was not appropriate.

In financial services, the Financial Services and Markets Act 2000 allows for several categories of authorised persons to carry on regulated activities in the UK, such as firms with domestic part 4A permission or, until the end of the transition period, EEA passporting firms. The clause provides a regime through which firms authorised for activities in Gibraltar can be recognised as authorised persons in the UK.

When significant areas of financial services regulation were set at EU level, that meant that the UK and Gibraltar followed the same rules. Now that the UK and Gibraltar have left the European Union together, the legal framework that provides for mutual market access and aligned standards needs amending. Without new permanent arrangements, Gibraltar will lose its current breadth and depth of access to the UK market, which not only would damage Gibraltar’s economy and our special and historic relationship but could lead to disruption and more limited choice for UK consumers.

The detailed application of the regime is set out in two schedules, which in turn insert two new schedules into the Financial Services and Markets Act 2000: schedule 2A, as inserted by schedule 6, governing the operation of the arrangements for Gibraltar-based firms; and schedule 2B, as inserted by schedule 7, which provides for the requirements that outgoing UK-based firms must meet before accessing the Gibraltarian market.

I should clarify that we are not legislating for Gibraltar. The measure is primarily about Gibraltar-based firms’ access to the UK. The Government have a responsibility to ensure financial stability and the correct operation of the UK financial services system, particularly when we open our markets to other jurisdictions. The clause therefore also requires the Treasury to lay a report before Parliament about the operation of the regime every two years.

The report will explain the Treasury’s assessment of whether the three conditions in the clause—that is, compatibility with the objectives in the clause, the alignment of law and practice, and co-operation—have been met during any reporting period, and whether the Treasury therefore proposes to enable market access for particular activities. That will give Parliament confidence that regulatory and supervisory standards are being applied in a consistent manner by UK and Gibraltarian institutions, so that UK consumers can benefit from products from a wide range of providers without additional risks.

Given that clause 22 is central to the creation of permanent market access arrangements between the UK and Gibraltar, I recommend that it stand part of the Bill.

[Mr McFadden]

Like the Minister, I too bid a fond farewell to LIBOR. Clauses 22 and 23 and schedules 6 and 7 establish the Gibraltar authorisation regime, which could be described as a sort of mini-single market in financial services between the UK and Gibraltar. The Government have set out many detailed pages in the schedules in particular about how that mini-single market should work.

Up until now, Gibraltar has been regarded as a European territory that was a member of the EU through its status as a British overseas territory. That meant that Gibraltar had full access to single market rights, including those in financial services. Given that Gibraltar, as well as the UK, has now left the EU and is coming towards the end of the transition period, the Government clearly felt that they had to put a regime in place to be the basis of future trade in financial services between Gibraltar and the UK.

Such a regime was, to some extent, necessary, because of the volume of trade in financial services that already exists between the UK and Gibraltar. We heard during last week’s oral evidence that roughly one in five car insurance policies in the UK is held by Gibraltar-based insurance companies. As I said during an oral evidence session last week, there is great good will towards Gibraltar on both sides of the House. The people of Gibraltar voted to remain in the EU by an overwhelming margin—I think it was about 95%—so we could describe the clauses and the accompanying schedules as the consolation prize to Gibraltar for having to depart the EU at the same time as the UK.

I know that under clause 22 the Treasury will report every two years on how the regime is operating. I cannot fail to reflect that that is precisely the kind of regular reporting mechanism that the Minister so stoutly rejected about four times on Tuesday when we were trying to insert it into the clauses on capital requirements. Why is it right and necessary for the Treasury to review this regime every two years but not to review the impact of change in the capital requirements on major parts of our financial system?

According to schedule 6, the report must have particular regard to paragraphs 7, 8 and 9 of that schedule, which set out the details of the new regime. Paragraph 7 tries to instil protections for the UK into this process, including for the soundness and stability of our own system, and, according to paragraph 7(c),

“to prevent the use of the UK financial system for a purpose connected with financial crime”.

It goes on to talk about ensuring markets work well, the protection of consumers and, interestingly, according to paragraph 7(h), about the need

“to maintain and improve relations between the United Kingdom and other countries and territories with…significant markets for financial services.”

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[Stella Creasy (Walthamstow) (Lab/Co-op)]

My right hon. Friend is making a powerful and important case about the importance of ensuring that we do not inadvertently support money laundering or standards that could enable that by accident. It is worth reflecting that in February this year, the EU anti-money laundering watchdog, MONEYVAL, called for Gibraltar to do more. One question for us in this legislation is whether there are things we can do to ensure that we are not inadvertently creating access that would enable such behaviour, now that we are leaving the European Union, which might have been offering that level of scrutiny. Does my right hon. Friend have a view on joining up those dots?

[Mr McFadden]

My hon. Friend is absolutely right.  In fairness, I do not think that the UK system on money laundering and financial crime is perfect—we have our own issues, which we have debated before and will debate later in our consideration of the Bill—but these findings should be taken seriously, particularly as we are creating a new situation. In the past, both the UK and Gibraltar were part of the EU and we operated under the single market rules, including those on financial services. I do not know whether what we are creating is unique—I will ask the Minister about uniqueness—but it is certainly a new concept: a mini-single market in financial services between two territories.

What is the Minister’s response to the report’s findings? In particular, given that protection from financial crime has been written into the Bill through the Government’s two-year review process, what contact has there been between the Treasury, the relevant regulators and the financial institutions in Gibraltar since the report was published a year ago? What actions do the authorities propose to take? I certainly believe that the Gibraltar authorities will want to act in good faith and try to uphold proper standards, but some of the report’s findings are concerning.

Another issue raised last week was the difference in corporation tax between Gibraltar and the UK: Gibraltar’s main corporation tax rate of 10% is significantly lower than our own. The Minister from Gibraltar said in his evidence, with some charm, that corporation tax would not be a factor in location—that, if anything, quality of life was more important. I have no doubt that the quality of life in Gibraltar is very good; looking out on a slightly gloomy London autumn afternoon, I have no doubt that the weather and climate is a big attraction, too. I am sure that he was right about that, but it is a big tax difference. He also pointed out—again, quite fairly—that the corporation tax differential predates our departure from the EU and has been in place for some time. However, this is a new situation, with a new, specially designed market access regime for Gibraltar being enshrined in UK law. Has the Treasury made any assessment of the likelihood of corporate relocations from the UK to Gibraltar as a result of the new measures under discussion?

I also ask the Minister about the condition, which I have described as interesting, about relationships with other territories with significant financial services markets. Why has it been written into schedule 6 as something that the Government should consider in their biennial review? Is it considered that this mini-single market will create some sort of vulnerability in those other relationships? Why is it thought possible that the arrangement might affect our relationships with other territories?

Finally, how unique and specific to the Gibraltar situation is the new regime? Could it conceivably be extended to other territories such as Jersey and the other Channel Islands? As the Minister will know, some Crown dependencies have been accused of being tax havens or of being susceptible to money laundering. Is it possible that such a regime could, in effect, be used to extend the reach of UK regulators to territories other than Gibraltar? This is a very big topic that has been debated quite a lot over recent years. I suppose I am asking about the Treasury’s thinking, rather than just about the Bill: might the arrangement with Gibraltar be a model for the treatment of other Crown dependencies or overseas territories, or should we view it as specific and purely a consequence of Gibraltar having to leave the European Union? I would be grateful if the Minister considered and responded to some of those points.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Dr Huq. I just have a few quick questions, mainly coming from the evidence we heard last week. During the fourth sitting, at column 125, the Minister, Albert Isola, said that the Bill is akin to enabling legislation, and that other things would need to be worked through in relation to other aspects of the financial services that are currently dealt with. If the Minister could clarify what would happen about those other areas, that would be useful.

Secondly, perhaps the Minister could give further assurances about access to the Financial Ombudsman Service. It is important that consumers here should have adequate protections in the new arrangements, and that those should be made clear. That is the kind of scenario that would not be found out until a consumer needed to make a complaint. Something would have to go wrong for it to be addressed, and I would not want to be such a consumer, feeling in those circumstances that I did not have recourse to the protection that I would have had if I had chosen an insurance policy not based in Gibraltar. It would be useful to hear about that.

Lastly, it would be helpful to have any further clarity that the Minister can give about what would happen to UK businesses and customers if market access were suddenly withdrawn, and where that would leave consumers in the UK. Would they be left without policies and protection? What would happen as a reaction to that, should market access be withdrawn for a period of time? Would it mean that businesses would dry up, withdraw their UK services and go somewhere else, or does the Minister envisage other scenarios happening in that case? I appreciate that it is a scenario that he would want to avoid at all costs, but it could well arise, and I want to ask what state the Government’s preparations for such a scenario are in.

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[John Glen]

The clause introduces the new overseas funds regime, which delivers on the Government’s commitment to introduce a simpler way for large numbers of investment funds from other countries to be marketed to retail investors, including the general public. The OFR will promote openness to overseas markets, allowing the UK to offer broad market access to investment funds from other countries. It will also allow consumers to benefit from the widest possible choice of funds, while maintaining existing levels of investor protection.

The new regime could provide a more efficient way of allowing large numbers of investment funds from the EEA to market to retail investors on a more permanent basis. Many EEA funds are marketed into the UK through the EU’s passporting regime, which will end after the transition period. Although the Government have introduced a temporary marketing permissions regime to allow existing EEA funds to continue marketing after the transition period, these funds will need to apply for permission to market on a more permanent basis. If the OFR were not legislated for, the funds would have to apply for recognition under the existing regime; that regime allows overseas funds to be marketed to the general public, but it requires an assessment of each individual fund. Establishing the OFR could therefore provide a more permanent basis for these EEA funds to continue marketing in the UK, provided that the EEA member states are found equivalent. It will also allow for the possibility of funds in other countries gaining easier access to the UK if they meet the criteria set out in the schedule. The new regime has been welcomed by the UK’s asset management industry, and the majority of consultation respondents were highly supportive.

I will now detail how clause 24 introduces the new OFR. The clause adds to the legal definition of a recognised scheme, so that it includes funds recognised under the OFR. That will allow the funds to market to the general public in the UK. The clause also introduces schedule 9 to the Bill, which comprises the main operational elements of the OFR and any minor and consequential amendments needed to ensure the new regime is fully functional. Compared with the current assessment of individual funds, the OFR enables the Treasury to make equivalence determinations which allow specified categories of funds from other countries and territories to be marketed in the UK. Therefore, the OFR has the potential to promote the interconnectedness of financial markets and consumer choice, to provide a more appropriate basis for recognising the large number of EEA funds currently marketing through the temporary marketing permissions regime, and to support bilateral agreements with other countries.

The clause is necessary to ensure that the OFR is inserted into the relevant legislation and can fulfil its potential. I recommend that it stand part of the Bill.

[Mr McFadden]

I thank the Minister for his explanation. As he said, this clause, schedule 9 and clause 25 create an overseas fund regime for establishing the recognition of collective investment schemes based outside the UK. It is estimated that there are about 9,000 such schemes, which are often known as UCITS.

Up until now, those schemes have operated under the European Union’s passporting provisions, as have UK-based schemes operating in other countries; it has been a two-way street. It was not inevitable that passporting had to end when the UK left the EU. There were models of leaving that could have preserved those rights for UK-based firms. Indeed, there were votes in Parliament that sought to guarantee the continuation of passporting rights, but the Government set their face against that, so the first thing to say about these provisions is that the need for them has arisen out of choices made by the Government.

That there would be an adverse impact on services from this decision was acknowledged. It seems the dim and distant past now, but back in the halcyon days of 2018, we had something called the Chequers plan. That document was issued in July 2018 with—I noted when I had another look at it—a foreword from the current Foreign Secretary. The Minister could usefully remind him of that the next time he bumps into him. The document said that the Government

“acknowledges that there will be more barriers to the UK’s access to the EU market than is the case today.”

It went on to note that

“these arrangements will not replicate the EU’s passporting regimes”.

Let us look at what the document’s verdict was on equivalence, which is the thing that we are trying to achieve and in part legislate for today. This is the Government’s own verdict on the kind of regime in clauses 24 and 25 and schedule 9. It said:

“The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:…institutional dialogue…a mediated solution where equivalence is threatened by a divergence of rules”—

we have discussed divergence of rules quite a lot in this Committee—

“or supervisory practices…sufficient tools for reciprocal supervisory cooperation…This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or…phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.”

That is not my verdict on equivalence; it is the Government’s verdict on equivalence when they published their own plan two years ago. So there we have it in the Government’s own words. That which they have been as yet unable to secure from the EU was dismissed as inadequate for the UK’s financial services sector even if we were able to secure it, which we have not, or at least not yet. The Government were aiming for something different, because it was deemed by them to be inadequate. They were aiming for

“a bilateral framework of treaty-based commitments to…ensure transparency and stability”,

because, as the document goes on to say, equivalence

“is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities”.

The Government wanted common principles, supervisory co-operation and

“a shared intention to avoid adopting regulations that produce divergent outcomes”.

Where did all that go? What happened to all of that? That was the aim. Why is it now the summit of the Government’s ambitions to achieve an outcome for the UK’s globally significant financial services sector that they dismissed as inadequate only two years ago? Why is this not at the heart of the UK-EU negotiations, in this crucial period? We have just over a month left—less, in real terms—to strike a deal. We must think of the significance of this sector to the UK economy and look at the employment, the investment and the tax revenue.

[Stella Creasy]

The shadow Minister is making a powerful case, and I suspect he is about to move on to this point. In layman’s terms, the Government are asking financial companies, which represent hundreds of thousands of jobs in our country, to deal with more paperwork, more bureaucracy, more regulation and a tougher business environment in which to operate. Does the shadow Minister think that these major financial companies are going to adhere to that because they are rather fond of London, or might they make different commercial decisions because we have not secured the kind of regulation he is talking about as yet and move themselves to other parts of the European Union?

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[Mr McFadden]

We will come on to their reaction. It is extraordinary that a sector this important has been relegated so far in the Government’s priorities. It is absolutely extraordinary that in these final days of renegotiation this is not front and centre. We just need to look at the employment, the investment and the tax revenues, and the role that the sector can play in global standards. Yet it has been relegated by the Government to an outcome that they admit is inferior and which, right now, they have not even been able to achieve.

All we can legislate for here is what we do. The fact that it is not front and centre of the negotiations right now speaks volumes about how far we have drifted from talk of achieving all the same benefits and securing a free trade zone from Iceland to the Urals—do hon. Members remember that? All of that has gone.

[Ms Eagle]

Is my right hon. Friend therefore surprised or unsurprised that the Office for Budget Responsibility documents yesterday said that the cost of the end of the transition period will be an economy that is permanently 2% smaller?

[Mr McFadden]

That is the OBR’s estimate of the additional cost of a no-deal scenario, on top of the already long-term hit in the deal scenario. My hon. Friend is absolutely right to set that out.

The fact that this has happened slowly over the past couple of years, and maybe the fact that the industry has become weary of arguing about it—as, perhaps, have all of us—should not disguise the importance of what has happened. It is important to set that out and to put these clauses in perspective. The Government chose to relegate the importance of UK financial services industries in the Brexit negotiations. Having made that decision, they then relegated financial services even further by aiming for an outcome that they openly admitted was inadequate, and they have not even been able to achieve that outcome. That is the context of these clauses.

I have a few questions on the details of the regime being established by the clauses. First, how does this relate to the Chancellor’s statement on financial services on 9 November? The clause and schedule 9 set out a country-by-country approval system for equivalence decisions, but in his statement on 9 November the Chancellor said that he was publishing a set of equivalence decisions for the UK and the EEA member states—those member states who still have access to these passporting rights, even though they are not EU members. Clause 24, as I said, implies a country-by-country process. Does the Chancellor’s statement mean that in policy terms, the equivalent recognition has already been given to all EU and EEA member states? Is that for all the financial products that are produced to which such equivalence might apply—that is, those traded on a cross-border basis?

Financial Services Bill (Ninth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 9th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[The Economic Secretary to the Treasury (John Glen)]

Thank you for your continued chairmanship of this Committee, Dr Huq.

The clause makes changes to section 272 of the Financial Services and Markets Act 2000, which allows individual investment funds from other countries and territories to be marketed to the general public, including retail investors, in the United Kingdom. Although we have separately introduced a new overseas funds regime to allow specified categories of overseas funds to market to retail investors, section 272, the existing provision, will remain and will be available for investment funds that do not fall within the scope of an equivalent determination under the OFR, but still wish to market to retail investors in the UK. Investment funds that are eligible to apply under the OFR will not be able to make an application under section 272. This is to ensure that funds always apply through the most efficient route possible.

We have proposed simplifications to section 272 and sections relating to it, which are supported by both the Financial Conduct Authority and industry. First, the changes will streamline the FCA’s assessment of individual investment funds from other countries. In making its assessment, the FCA would now need to consider only issues that are subject to existing rules on UK authorised funds rather than potential laws that do not yet exist. Secondly, we will simplify when the fund operators have to notify the FCA of changes to their funds and, thirdly, we will make wider changes so that section 272 is compatible with the new OFR.

Also, provisions are added to FSMA, mirroring the ones in the OFR, to enhance consumer protections and ensure consistency in comparability between the two regimes. This includes requiring fund operators to notify such persons as the FCA may direct, such as investors, if the fund’s permission to market is suspended or revoked. The FCA will also have the power to make public censure if certain rules and requirements are breached. Finally, we are also making it clear that sub-funds can be recognised under section 272 if investment funds are part of an umbrella and sub-fund structures.

As I noted earlier, an umbrella fund is a legal entity that groups together different sub-funds where each sub-fund has a separate pool of assets that typically has its own investment strategy. The changes set out in clause 25 will improve the process in section 272, reducing the administrative burden for the FCA and asset management firms. I therefore recommend that the clause stand part of the Bill.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

It is a pleasure to serve under your chairmanship, Dr Huq.

I want to ask the Minister where the clear water is. In simple terms, is this about granting equivalence recognition to individual companies from countries where we do not grant the overall country the equivalence recognition? The Minister nods, so perhaps that is what it is about. That implies that those firms might need a higher level of monitoring or observation, given that they are from countries that have not been granted equivalence recognition—presumably, we think that the regulatory system in the country in which they are based is perhaps not quite of the standard of some other countries. Will he tell us a little more about how that would work? Will there be a set of firms that the FCA keeps an extra eye on? If the FCA decided that equivalence recognition permission should no longer be granted to an individual firm, how would the process work? Is it something that can be withdrawn quite quickly if we think things have changed?

[John Glen]

I thank the right hon. Member for Wolverhampton South East for his questions. His characterisation of what this is about is absolutely right: the clause provides a mechanism to ensure that funds that are not eligible for the new overseas fund regime may still apply and secure access. In terms of the FCA, monitoring and protection, it is important to point out that the FCA’s online register shows that there are currently four stand-alone funds, seven umbrella funds and 27 sub-funds that have permission to be marketed to UK retail investors under section 272. Some of those funds have been carried over from a previous regime for overseas funds marketing to the UK, set out in section 270 of FSMA.

To give some comfort about investor protection, the FCA is required to examine whether the fund gives adequate protection to investors in the scheme. It will examine whether the fund’s arrangements for constitution and management are adequate; the powers and duties of the fund’s operator, trustee or depositary must also be adequate. It is another mechanism to be applied in conditions where a country as a whole is not given the adequacy equivalence decision.

Under the clause, the FCA has suitable powers to verify the full context of the fund’s operations and to take account of the risks associated with the fund. It would make a determination based on the full range of factors available to it.

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[Mr McFadden]

We will be discussing a couple of similar clauses very soon, but it strikes me that quite a big role is envisaged for the FCA in advising the Government on equivalence recognition and regulation in other countries. It has not performed such ongoing monitoring up until now. It is quite easy to go through the Bill clause by clause, subsection by subsection, and think that each change is a nothing more than a small change here and a small change there that do not add up to much, but the impression gained is that the Bill creates a big job for the FCA. Is it properly resourced and equipped to carry out that role?

[John Glen]

As ever, the right hon. Gentleman makes a very reasonable point. In this context, the obligations on the FCA and the Prudential Regulation Authority will continue to be considerable. They will have significant responsibilities. In previous sittings, we talked about the necessity of having a clear framework for the regulator to be accountable to Parliament, subject to Parliament’s determination of what that will be. The resourcing of the FCA with the right sort of skills to carry out the proposed functions will be an issue that its new chief executive will consider in due course. We will seek to co-operate with him to ensure that he has those resources.

The section 272 provision is extant and I outlined the number of funds that are using it, but I accept the right hon. Gentleman’s general point about the FCA. It is something of which we are very aware.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Clause 26

Money market funds authorised in approved countries

Question proposed, That the clause stand part of the Bill.

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[Mr McFadden]

We have met the capital requirements regulation, we have met undertakings for collective investment in transferable securities, and now we meet the money market funds regulation. I have a couple of questions for the Minister on this issue. First, new article 4A(2) of the money market funds regulation says that the Treasury must be satisfied that the requirements on money market funds

“have equivalent effect to the requirements imposed by this Regulation.”

The key phrase here is “have equivalent effect”. That is the yardstick by which judgments will be made. How will this be assessed? What exactly will the Treasury be looking for when it makes such an assessment? How are we judging equivalent effect?

Secondly, article 4A(4) says that when considering the revocation of equivalence,

“the Treasury may ask the FCA to prepare a report on the law and practice of the country”

that is involved. That harks back to what I said a moment ago. Will preparing reports on the law and practice involved be a new task for the FCA? The Bill states only that the Government “may” ask the FCA, but I would have thought that if the Treasury were to consider the revocation of one of the equivalence recognitions, it would be pretty essential that the FCA be involved in that.

Thirdly, there is nothing in new article 4A that requires the UK to continuously monitor the law and practice of other countries once equivalence has been granted. That is important, because we grant the equivalence recognition on the basis of a view at the time that a country’s regulations have equivalent effect. However, how can we guarantee that there might not then be a process of regulatory or deregulatory change in the country that had been deemed equivalent, with consequential risks for UK consumers if—to put it in lay terms—the rules become a lot more lax in that country? Really, I am asking how this will all be monitored again in the future, and I would be grateful if the Minister has some comments on that.

[John Glen]

I thank the right hon. Gentleman for those questions. Essentially, there are two parts. The first is about how the assessment will be made. The UK is committed to what we describe—I have said it before—as an outcome-based approach to equivalence. That is based on the principles of FSMA, which means acknowledging how different regulatory practices can combine to achieve the same outcomes, as opposed to the prescriptive rule-by-rule-based approach that our friends in the EU have often preferred. We would not expect to see identical line-by-line regulations.

The OFR does not require countries to have those exact rules and regulations, but they must have laws and practices that have an equivalent effect in terms of the outcomes achieved. Obviously, there is considerable expertise involved in evaluating that and a particular group of people who are capable of doing that within the FCA. We believe that that outcomes-based equivalence can provide a high level of consumer protection while also allowing the UK to maintain a competitive market for overseas funds.

The second part of the right hon. Gentleman’s question addressed the issue of future evolution and divergence in standards, and how that would be monitored. The monitoring would be conducted in line with the equivalence guidance document that the Government published on 9 November. It sets out the framework for ongoing monitoring, recognising this outcomes-based approach, but being cognisant of changes in the underlying regulatory regime. This would not be a question of going through a gateway, gaining approval and that would be it forever. There would be some monitoring proportionate to the nature of the risks and the assurance that we had around the regime. I hope that answers the right hon. Gentleman’s question.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Clause 27

Provision of investment services etc in the UK

Question proposed, That the clause stand part of the Bill.

[John Glen]

Clause 27 gives effect to schedule 10 and amends the markets in financial instruments regulation. MiFIR is a piece of retained EU legislation that will continue to have effect in the UK after the end of the transition period, with amendments made under the European Union (Withdrawal Agreement) Act 2020 to ensure that it continues to operate effectively.

In summary, the amendments that the Bill makes to MiFIR broadly reflect the changes that the EU has introduced to its own third country regime, so it makes sense for us to do so. The third country regime in MiFIR established the basis on which overseas investment firms will be able to offer investment services and undertake investment activities in the UK. It allows overseas firms to apply for recognition that will allow them to provide cross-border services to more sophisticated clients, without establishing a local branch, if there has been an equivalence in respect of their home jurisdiction.

The changes made in this Bill will ensure the effective operation of the equivalence assessments and the subsequent operation of the recognition regime. That will mean that we can access the EU and treat EU investment firms in the same way that the EU will assess the UK and treat UK firms in the future. I will detail the specific amendments that this Bill makes to MiFIR during my explanation of schedule 10. I recommend that the clause stand part of the Bill.

[Mr McFadden]

I have two questions about schedule 10. The Minister has set out what it is intended to do, but I want to ask a few questions on the theme of monitoring and compliance.

New paragraph 5A of article 46 of the regulation defines reverse solicitation, and therefore an exemption from the equivalence rules, as when a business is not initiated at a client’s own initiative. Is the Minister confident that this is a tight enough turn of phrase to mean that firms cannot solicit business in the UK while dodging the stricter regulations that come within such marketing activity?

Secondly, and more important, new paragraph 1C of article 47 of MiFIR says that when making an equivalence determination the Treasury must take into account whether a country is classed as high risk for money laundering. Surely that is not strong enough. We will talk more about money laundering shortly. Why do we not say outright that the UK should not consider any such jurisdiction as equivalent until it is no longer considered a high-risk location for money laundering?

New article 48A of the regulation gives significant powers to the Treasury to impose additional requirements on third-country firms, but there are no details of what those requirements might be. Again, I would be grateful if the Minister said a bit more about that.

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[John Glen]

I thank the right hon. Gentleman for his comments. He raises a number of specific points around drafting, and if there is anything that I cannot answer, I shall write to him today.

On the first point, the FCA needs to register overseas firms, which will give the right oversight, and also needs to monitor the overseas framework on an ongoing basis. From June 2021, the EU will be able to assess the UK and treat UK firms under a new regime. These changes are necessary to ensure that the Treasury is well equipped to assess the EU and that the FCA can exercise the appropriate level of oversight over overseas investment firms operating in the UK under this regime.

The core thrust of the right hon. Gentleman’s questions relates to the apparent weakening of the UK’s position. The Treasury has not yet determined which additional requirements, if any, would apply to overseas firms; that will be done when an equivalence determination is made, after the Government have fully considered the views of the FCA and other relevant matters.

The point the right hon. Gentleman makes about protection for consumers is obviously a critical one. Firms operating on a cross-border basis under this regime are not allowed to service UK retail consumers. The regime only applies to more sophisticated professional clients such as other financial services firms. None the less, I recognise that it is clear that we need to ensure that firms that are accessing UK markets from overseas are subject to similarly robust regulatory standards to those we place on our firms at home, and these amendments will do exactly that.

The Treasury will be able to determine whether a third country has a regulatory framework that has an equivalent effect to the UK’s, meaning that we can be confident that these third-country firms are regulated to the same level as our own. For firms that do not play by the rules, it is important that we have the right mechanisms to call that out, and the FCA will be able to step in where needed to protect UK investors and the integrity of our financial system.

On the right hon. Gentleman’s last point about money laundering specifically, we need to assess a jurisdiction’s regulatory framework as equivalent. That provides a high bar for anti-money laundering risks, and that is reflected in the guidance document that I referred to earlier. I will make the general point, though, that I understand the sensitivity to this fear and anxiety around wilful divergence to have a less regulated and less secure environment. I want to put it on the record that the Government do not see the changes as a mechanism to achieve some loosening. However, we will need to take account of the new directives that the EU continues to develop without our being at the table, and we will also need to develop our own response. Even though it will not be identical, that does not mean that we will not observe the high standards.

[Mr McFadden]

I think the Minister is getting to the heart of it. I asked detailed questions, but at the core of them is this one: is there a policy intent in these little changes of words, when we transpose the regulation, to have a loosening in some way, or are those little changes almost incidental—with no policy intention to have a less rigorous regime than MiFIR proper would apply to money laundering, recognition or any of the other things that I asked about?

[John Glen]

There is no intention to moderate or significantly alter the effect of the regulation. This is about doing what is necessary to ensure that we regulate the services and activities of overseas investment firms following an equivalence determination. The changes are designed to be consistent with the direction of travel that we have pursued within the EU, but making changes that are necessary for the different outcomes-based approach that we have always taken in the UK.

--- Later in debate ---

[Mr McFadden]

I asked some questions about this matter in relation to clause 27, so I do not intend to speak again.

[Ms Eagle]

The powers are necessary to prevent not only exploitation that might pose some systemic risks to the financial system, but catastrophic loss to UK investors due to rogue investors or investments. Regulators are reluctant to use the more draconian end of their powers, and there is little evidence that they actually go there.

Is the Minister satisfied that the practical effect of the changes will be that the FCA is determined to use those powers, if need be? It seems to be reluctant to go to the stage of closing firms down. That would be a huge decision that may involve considerable disruption. Is he convinced that the FCA has the resources, the aptitude and the determination to do that if necessary?

--- Later in debate ---

[John Glen]

As far as I am aware, the Companies House register is a separate entity run from the Department for Business, Energy and Industrial Strategy. A considerable amount of work is going on at the moment to look at how the data around Companies House registration works, reflecting concerns raised in the December 2018 Financial Action Task Force report. The hon. Lady makes a very reasonable point about the alignment of the two registers, and I will need to come back to her on that matter. Clearly, it would be perverse to remove an FCA-registered entity but not have a forfeit of registration from Companies House. I shall write to the Committee and to the hon. Lady on that matter.

I want to ensure that consumers can take informed financial services decisions. To achieve that, we need to ensure that the financial services register is accurate and that consumers are not exposed to unnecessary risk. This new process will sit alongside the existing process, to allow the FCA to streamline cases in which it suspects that a firm is no longer carrying on an authorised activity, enabling the FCA to more quickly cancel the firm’s authorisation and update the financial services register accordingly. In cases in which the FCA is looking to cancel a firm’s authorisation for another reason, this will continue to pass through the existing process.

I therefore recommend that this clause stand part of the Bill.

[Mr McFadden]

I suspect that I am going to follow up on the question from the hon. Member for Glasgow Central. As the Minister has explained, the problem that this clause and schedule are intended to resolve is dormant companies that no longer do the things that they were doing when originally registered with the FCA. Regulation is sometimes described as a needle-in-a-haystack problem, because there are so many companies and there is so much going on. Okay, it is not a massive number; it is 300 or 400 among 59,000 companies, but if we can strip those out, we make the job of the regulator that little bit easier because it is monitoring fewer companies and there is less danger of the cloning activity that the Minister described.

However, this does prompt a question: if 59,000 companies are regulated by the FCA and some 4 million to 5 million are registered with Companies House—we will come on to this under other clauses shortly—surely the process that the Minister has just outlined for clause 28 and schedule 11 should apply to companies there, if we find that they are simply paper organisations that may be designed as much to deceive as to actually carry out any business. Where they are engaged in activities that they should not be, they should be taken off the register, too, but that would of course imply a change in job description for Companies House. It has traditionally regarded itself more as a register and library rather than a real regulator or what might be called a partner in law enforcement. Therefore, can the Minister at least—he will hear this more than once today—talk to colleagues in BEIS to encourage a parallel approach with Companies House? It seems to me that what is being done in clause 28 is sensible, but it is only part of the picture of clamping down on illegal activity.

[John Glen]

The point here is that clearly a business could be registered at Companies House, could historically have done regulated activity under the FCA and that regulated activity could have ceased; it may have other business activities that are completely compliant with Companies House law, but it should not be registered for doing financial services regulated activity. The question would then be this: what would be the obligation on Companies House to make an interaction so that, as the right hon. Gentleman said, the definition of its activities would be amended?

Obviously, there are complex legal issues here. This is associated with the review that BEIS will be coming back to, responding to. I think it is important that we acknowledge that issue about not doing a regulated activity but continuing to trade legally in other realms. But the point that I hear and recognise needs to be clarified is this: what is the interaction between the two processes? I undertake to examine that and to make clear to my colleagues in BEIS what the risks are and what the view of this Committee is.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill.

Schedule 11

Variation or cancellation of Part 4A permission on initiative of FCA: additional power

Question proposed, That the schedule be the Eleventh schedule to the Bill.

--- Later in debate ---

[Mr McFadden]

The clause before us increases the penalty for insider dealing, and I do not think any Opposition members of the Committee will have a problem with that. The obvious point to make is that sentencing is effective only if there is a reasonable chance that someone will get caught, and if there is a proper and effective system of enforcement of the rules, as well as an overall regulatory system that properly polices such activity.

The Financial Times reported last year that the FCA had prosecuted only eight cases of insider dealing, securing just 12 convictions over a five-year period between 2013 and 2018. There is a big contrast between the prosecutions and the investigations, because the same newspaper, reporting on the figures ending in March this year, said that there were a relatively high number of ongoing investigations—more than 600. However, only 15 resulted in financial penalties or fines.

There are few prosecutions and few fines. Why does the Minister think so few of those 600-plus investigations lead to any kind of punishment? Can we conclude that, after all, there is little insider dealing and only a handful of people do it? Alternatively, would the conclusion be that there are flaws in the investigatory process or, perhaps, resource issues that make it difficult to pursue a case to an unquestionable conclusion?

We should acknowledge that the regulator’s task is difficult, because the people doing insider dealing will be clever, and will take every step they can to cover their tracks. For example, they might not trade in their own name. They might trade in a relative’s name. They might set up a company to trade, and register it either here or somewhere else, which would make the paper trail all the more difficult for the regulator to follow. They might try all sorts of things to blow the regulator off the scent.

There is no problem with increasing the sentence from seven to 10 years, but it strikes me the relevant provisions of the Bill might be too narrow in scope for the problem that we are dealing with. It would be a big mistake to think that approving the clause is job done on insider dealing, and we can tick the box, thinking it will make a big difference. The low rate of prosecutions suggests that there is a need for a much deeper look under the bonnet.

Does the Minister accept that general premise, and will he undertake to carry out that deeper look? Will he make sure that the increased sentences are matched by the resources that the regulators need and, probably more importantly, by other changes in their powers or the regulatory system or the legal basis? That will ensure that more cases are brought to some sort of action at the end and that we do not carry on with such a huge contrast between the number of investigations launched and the small number resulting in a fine or prosecution.

[Alison Thewliss]

I want to come in briefly, on the back of what the right hon. Member for Wolverhampton South East has said. What analysis have the Government done on whether the increase will be any more of a deterrent than the current seven-year maximum? I note that that is a maximum, and relatively speaking not a huge amount of time, given the severity of some of the crimes that may have been committed. What is the average sentence handed out at the moment? Is it closer to seven years, or is it closer to a couple of years and just a slap on the wrists?

As the right hon. Gentleman mentioned, few cases get to that stage anyway. To help increase the number of people who are prosecuted, what additional resourcing will be put into the policing of financial crime? It is clearly an area that needs significant expertise. If we are going to catch people who are looking to circumvent the system, we need to have people at least as good on the other side of the balance sheet to make sure that they are catching up with them. What recruitment schemes are being put in place to attract the kind of people who will be able to investigate, prosecute and see processes through to the end, to make sure that there is a proper deterrent and people feel that they are going to get caught, fined and locked away? There needs to be sufficient expertise to make sure that that really does happen.

--- Later in debate ---

[Ms Eagle]

To some extent, this is illustrated by the fact that the enhanced sentence was in a 2015 report but we are only just legislating for it now. Five years later, we are still only talking about a sentence that is highly unlikely ever to be used, based on the past record—the Minister just quoted it himself. I wonder whether he might increase the confidence that some of us have that this is being tackled in a coherent way—we will get on to some of this later—by talking about the fragmented supervisory system and what he is doing to help bring that together so that the fragmented regulation of this whole area can actually be done more coherently, so that we can get enforcement on abuse. We all know that, prior to the big bang in the City, this was all done informally anyway, by gentleman in their clubs. It seems to me that we never really got a grip, after the big bang, in dealing with that informal networking that goes on, where a lot of the gaps and a lot of the potential insider dealing actually lurks. Perhaps he could give me a little bit more confidence about that.

[Mr McFadden]

rose—

[John Glen]

I give way to the hon. Gentleman.

[Mr McFadden]

I want to double check something that the Minister said a minute ago. I think he said that there have been 36 prosecutions since 2009.

[John Glen]

I did.

[Mr McFadden]

That might illustrate the point that we are making, because by my rudimentary maths, that would suggest—

[John Glen]

Three a year.

[Mr McFadden]

Something between three and four a year, which is hardly the sign of a system that is working, unless we think that only three or four people a year are doing insider dealing. However, for those who do not believe that, and who believe that hundreds of investigations go on but only three or four people are prosecuted a year, that illustrates the point that increasing the sentencing alone will not deal with this problem.

--- Later in debate ---

[The Chair]

Just a note of caution: these amendments have not been formally moved yet, but on Thursday, when we reach that point, the hon. Member can move them.

[Mr McFadden]

Sometimes, when I look at this Bill and all the different things it attempts to deal with, I have an image in my head of somebody cleaning out a cupboard in the Treasury, finding lots of policy things and looking for a legislative truck on which they can be loaded.

[John Glen]

It is described as a portmanteau Bill.

--- Later in debate ---

[Mr McFadden]

Otherwise known as a portmanteau Bill. It is a shame that they could not find more in the cupboard. A couple of small measures are not objectionable in themselves, but we have to ask whether they are up to the challenge. This measure deals with money laundering and trustees based overseas. I do not think that Opposition members of the Committee will object to that, but we must ask, given the scale of money laundering, whether the Government could not have done more.

The membership of this Bill Committee includes a few illustrious members of the Treasury Committee, which has looked into this issue. In fact, it reported on it last year. In compiling that report, it took evidence from witnesses who suggested that the scale of the problem could run to hundreds of billions of pounds. Of course, by definition, as the Minister said a few minutes ago, it is difficult to pin down the size of an unknown, and we cannot be certain, but these were credible witnesses. Even the Government’s then Security Minister, the right hon. Member for Wyre and Preston North (Mr Wallace), told the Committee in his evidence that the figure of £90 billion was probably “a conservative estimate”.

The Treasury Committee’s report highlighted that in a post-Brexit situation, new trading opportunities could also

“provide opportunities to those wishing to undertake economic crime in countries that are more vulnerable to corruption.”

That is why I am asking the Minister how these things will be monitored and how we will insulate ourselves against the temptation to strike trade deals here, there and everywhere and, in so doing, perhaps not always looking as deeply as we would into the regulatory systems and so on. The Committee pointed out in its report:

“There is a clearly identified risk that company formation may be used in money laundering.”

The Treasury Committee heard evidence that there had been no fines or criminal proceedings relating to the issue of beneficial ownership. As the hon. Member for Glasgow Central pointed out, the one Companies House-related prosecution that took place was simply intended to show how weak the system of scrutiny was. In discussing the role of Companies House, the report concluded that it represented “a weakness”. That is quite a damning conclusion for a very eminent Committee of this House to reach, and it painted a picture of an organisation that saw its role as keeping a register—being a librarian rather than a partner in law enforcement.

There is a history to this, of course. We have always prided ourselves on being a country where it is easy to set up a business—it is a fast process and there are not many barriers. That approach has a lot of strengths, but given that only a few individuals control literally thousands of companies on the register, we cannot afford to be so lax. The Government have to some degree recognised that. In September, just before this Bill was published, the Department for Business, Energy and Industrial Strategy in September made an announcement, in which it recognised the problem with the current structure of Companies House and proposed some changes.

The three most important proposals were compulsory identity verification, which has not been happening up until now, a greater power to query false information, and powers on data. The Minister for Security, the right hon. Member for Old Bexley and Sidcup (James Brokenshire), said that those changes would make it easier

“to crack down on dirty money and financial exploitation, to protect our security and prosperity.”

That is all good, but the Royal United Services Institute, a respected think-tank, had a look at the Government announcements and tested them against the problem, noting also that 3,000 potentially suspicious UK company structures were cited in what was leaked from the recent Financial Crimes Enforcement Network files.

Let us look at the proposals, starting with mandatory ID verification for the directors of companies or persons of significant control. It would be good if that is done, but there is a big, gaping loophole in it. The proposal will apply only to those incorporating companies directly with Companies House, rather than to the estimated 60% that choose to incorporate via third-party agents. It is a good measure, but it applies only to the minority of companies that register with Companies House.

The second proposal is to give the registrar and CEO of Companies House the power to query information. Up until now, the registrar has had no legal power to do that and has had to accept all information on trust. It is simply astonishing that that has been the case up until now, given that they hold a register of 4 million companies. The scope of the power and how it will be operationalised remain subject to future consultation, so we do not really know how far it will go in allowing the Companies House registrar to probe what they are being told when people come along to register a company.

Thirdly, the proposals about data sharing are welcome, including for bulk data sharing between Companies House and other public sector datasets. The reason that they are important relates to what I asked earlier about the job description of Companies House: is it a register, or is it an organisation that sees itself like any kind of regulator?

The Government proposals are stark. A big hole has been identified in them, but they are also a recognition of the scale of the problem and that we cannot adequately crack down on the big money laundering problem unless we do something about Companies House, too. Global Witness, a charity that the hon. Member for Glasgow Central referred to, estimates that more than 336,000 companies have not disclosed their beneficial owner. It also found that 2,000 company owners had been disqualified directors. The September proposals are a start, but what more can the Minister tell us about how they will be taken forward?

I have mentioned the Treasury Committee, but we also have the Intelligence and Security Committee’s report on Russia, which referred to “the London laundromat”. That report exposed the weaknesses in unexplained wealth orders and, in particular, their applicability to people who may have been here for some time and invested in property. Property is at the heart of clause 31, because it is through investment in property that those who may not have come by their money legitimately can cleanse their property and say that their wealth is explained, after all. In evidence to the Intelligence and Security Committee’s inquiry, the National Crime Agency called for amendments to the Sanctions and Anti-Money Laundering Act 2018, specifically using serious and organised crime as a justification for sanctions.

Reference has also been made to the draft Registration of Overseas Entities Bill, and I would be grateful if the Minister could update us on where we are with that, because that is another important piece of this jigsaw. As I said, since the Russia report, we have had the FinCEN files, which once again place a number of British financial institutions at the centre of further allegations of money laundering.

Financial Services Bill (Tenth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 10th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[The Chair]

Before I call Pat McFadden, it might be helpful if I give a bit of guidance so that we do not go off-piste from the scope of the clause.

To clarify, the scope of the clause takes in the debt respite scheme, similar schemes to assist individuals in debt, and measures to stop people getting into debt in the first place, where these are specifically connected to businesses regulated by the Financial Conduct Authority. Items outside the scope of the clause include: personal insolvency, including reforms to debt relief orders, and any other matter set out in the Insolvency Act 1986; the provision of advice to the public about personal finance decisions; corporate debt, and measures to stop people getting into debt in the first place that do not concern businesses regulated by the FCA. I hope that is helpful.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I beg to move amendment 29, in clause 32, page 38, line 22,  leave out subsection (2) and insert—

“(2) Section 7 of that Act (debt respite scheme: regulations) is amended in accordance with subsections (2A), (3) and (4).

(2A) For subsection (2), substitute—

(2) After receiving advice from the single financial guidance body under section 6, the Secretary of State shall make regulations establishing a debt respite scheme within 12 months of this Act coming into force.”

This amendment would require the debt respite scheme to come into force within 12 months of this Act being passed.

I cannot think that anyone on this Committee would try to push the boundaries of what it is legitimate to include in our debates, Mr Davies. That would be a truly shocking thing for anybody on a Public Bill Committee to do, so I hope that we will not see any of that in the next few hours.

I will not push amendment 29, which I am sure is in scope even if it is not perfect, to a vote; rather, I will use it to ask the Minister a question. The purpose of tabling the amendment was to make the point that we want to get a move on with this debt respite scheme, which has support on both sides of the House, because of the current pandemic situation and the difficult economic impact it is having on the household finances of a large number of people. Unfortunately, this will lead to increased problems of debt and to more people looking for the kind of help that is envisaged in the clause. People should have access to thr debt respite scheme, so I would be grateful if the Minister set out a little more about the timetable for introducing the scheme after Royal Assent.

[The Economic Secretary to the Treasury (John Glen)]

Let me see if can get straight to the right hon. Gentleman’s point. The statutory debt repayment plan is an option that will be available to people who go into the breathing space scheme. That will be up and running on 4 May next year, and the SDRP is an option that we would move the regulations for as soon as possible after this Bill is passed. After Royal Assent, we will consult on those regulations. Given the challenges and complexity involved, we need to work very closely—as we did on the breathing space scheme—with the debt advice sector, creditors and regulators to ensure that we deliver the policy successfully.

The regulations that come from this work will need to be developed and consulted on over a longer timetable, and we will consult on those draft regulations as soon as possible after the Bill receives Royal Assent. In the meantime, we are pushing ahead with the implementation of the breathing space scheme, which will come into force on 4 May next year. Other voluntary and statutory debt schemes will continue to be available to debtors in the meantime. This is an option to add to the list of options available to those who go into the breathing space scheme.

Amendment 29 would require the Government to make regulations establishing a debt respite scheme within one year of the Financial Guidance and Claims Act 2018 coming into force. As that Act has been in force since 1 October 2018, that would make it a retrospective requirement and I do not think that is quite what is intended. The regulations establishing the first half of the Government’s debt respite scheme—the breathing space scheme—were made in November 2020, and the right hon. Gentleman participated in the debate on that statutory instrument. That part of the scheme will commence in May 21, as set out in those regulations.

Leaving aside the drafting issues, I understand that hon. Members are keen that the Government do not delay introducing the second part of the scheme, the statutory debt repayment plan. I assure the Committee that it is our intention to support those who are experiencing problem debt swiftly and effectively. The Government will consult on those regulations as soon as possible after the Bill receives Royal Assent. We set out our outline policy in the June 2019 consultation response, but there is significant ongoing work to be done. In the meantime, the breathing space scheme will be up and running from next May and all existing statutory and voluntary debt solutions remain available to those in problem debt. I respectfully ask that the amendment be withdrawn.

[Mr McFadden]

As I said, I do not intend to press the amendment today. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I beg to move amendment 34, in clause 32, page 38, line 23, at end insert—

“(2A) After subsection (3) insert—

(3A) Where, by virtue of subsection 2, the Secretary of State makes regulations establishing a debt respite scheme, the time period that the debtor protections provided for by virtue of section 6(2)(a) and section 6(2)(b) shall be no less than 120 days.”

This amendment would require the breathing space to provide debtors with a minimum of 120 days protection from the accrual of further interest and charges and enforcement action.

--- Later in debate ---

The amendments are about how to make the breathing space work for everyone. There may absolutely be people seeking help for whom 60 days is enough time to get things sorted and make some difficult decisions about what assets—if they have any—they can sell.

[Mr McFadden]

My hon. Friend has done a huge amount of work on this over the years. Amendment 34 seeks to extend the breathing space period to 120 days. Does she think that covid factors add to the case for having a longer period than was initially envisaged?

[Stella Creasy]

My right hon. Friend is right, and that was one of the points I was going to make. If we are dealing with a new group of people who have never been in financial difficulty before, one of the sources of help and support for them may well be our welfare system. Anybody who has ever dealt with people trying to make new claims in our welfare system knows that 60 days is an incredibly tight timeline for that to happen—to deal with any appeals and paperwork, and to even get a response to the claim that has been made. Yet experience tells us then when people do get into problem debt, sometimes they do not know what support they are entitled to.

The amendments speak both to the reality of people and to the practicality of making a breathing space work. I hope the Minister will see them in that way and recognise that that is why so many debt advice providers support the amendments and say, “Yes, actually, what’s proposed does feel too tight to get things right.” Some people’s situations can be resolved in 60 days; others’ will take longer. It is not right to close off the opportunity of a breathing space by setting a deadline or threshold that means that for some people who are waiting for information it will be too late. The amendments speak to how we can make the process work for everyone, giving debt advice providers the discretion to be able to work with people and to use the breathing space for its intended purpose, which is to give those who recognise they have a problem the chance to get it sorted before we go into some of the more serious options.

The brutal reality is that we know that, with jobs thin on the ground, debt already mounting up and the cost of living not reducing any time soon, not everybody who gets a breathing space is going to be able to breathe again. I know the Minister would be frustrated if, rather than the financial position of the people involved, it was that timing, that threshold, that meant the breathing space did not work in the way in which it is intended.

The Minister will have seen that I have tabled other amendments on we make this breathing space work. I know he cares about getting this right. In these Committees, there is always pressure on Ministers to say no to amendments, but I hope he will acknowledge that this is about making the policy work, recognising the evidence on the ground about what works with people who are in problem debt and how long it takes them to see that they have a problem. If he does not accept the timescales, if he does not accept the intentions of myself and the hon. Member for Edinburgh West in acknowledging the distress people feel when they have to front up and talk to a stranger about the financial position they are in and their fears in an environment where unemployment is widespread. Goodness knows, getting people to take debt advice at the start of this year, when there seemed to be jobs in our economy, was difficult—anybody who tried to refer a constituent to Citizens Advice knows that. Getting people to a point where they have the chance to breathe again means making this process work.

If the Minister does not think the extension is right, I am keen to hear what he thinks we should do to make sure that that threshold is not a cliff edge over which people fall and cannot come back from. We are all going to be seeing a lot of people in financial difficulty in the coming months in our surgeries—people who have nowhere else to turn, people who are very frightened, and people whose families, homes and mental welfare depend on us getting this right.

--- Later in debate ---

The policy intent may not have changed, but the context has, as I hope the Minister recognises. It is therefore right to remove the mandatory review. Perhaps it could be put into statutory guidance or something as a good idea; StepChange was relatively flexible about that in its evidence to us. Mandating the review, though, and saying to debt advisers that they have to police people during a time of economic restriction, when we know the shame that comes with debt, is a retrograde step.

[Mr McFadden]

Is my hon. Friend’s fear about the midway review that it is too onerous a burden on the debt advisers, or that it may exclude from the breathing space people who still need it, but who are pushed out halfway through?

[Stella Creasy]

My right hon. Friend raises a real concern. If we have a large influx of people needing to speak to a debt adviser, and there are no appointments, will they get access to help? One reason why they will not be able to get an appointment is because debt advisers will have to do a midway review with people. We should simply trust debt advisers. Anybody who has worked with them, as the Minister has, will know that they are part Martin Lewis, part Alison Hammond from “This Morning”—a kind person who makes jokes so that a person feels better about themselves. They are trying to help people in distress. Through the legislation, we are asking them to do a job; we should let them do it as they see fit.

I hope that the Minister will listen to the sector when it says, “Let us hold those reviews when we need to, rather than telling us that we have to hold them, because if we are overwhelmed by people, we can’t do the job that you are asking us to do.” I do not disagree on the policy intent, but the context is different, and if we do not react to the context, all this good work, and all the legislation, will be for nothing, because there will not be appointments. There will be a negative relationship between debt advisers and the people whom they are trying to help, which will affect whether people listen to what advisers are saying; debts will continue to rise; creditors will go unpaid; and for people, the breathing space will feel like holding their breath, rather than coming up for air.

--- Later in debate ---

[Alison Thewliss]

I rise to support new clause 25, which appears in my name and that of my hon. Friend the Member for Aberdeen South. I also want to speak in favour of new clause 12, because what it asks for would be quite useful.

Our new clause on the debt respite scheme review asks for the Government to take a wider look at the impact of debt and the effects of changes on debt held by households, individuals with protected characteristics and small companies, as defined by the Companies Act 2006. The Government should do so across different parts of the United Kingdom, because there may well be differential impacts in different parts of the country in terms of support schemes and what is happening on the ground. It is important to look at the matter in this wider context. It looks to the very complexity of people and their businesses, and how they organise their finances and their debt.

I will start by giving an example involving some of my constituents. They are a couple who live in socially rented accommodation. He is a taxi driver and she is a wedding and events planner. Covid has hit them incredibly hard because he cannot go out and earn the same way that he could. He was able to access some Government support, but she was not. She did not have a premises or a shopfront, but just a small unit where her wedding kit was kept. She has not been able to access any Government support at all. She was told to go on to universal credit, but the people at the Department for Work and Pensions did not understand what she did in her business and how that support ought to have worked for her, and she feared she would have to give up her business altogether.

The point of raising this example is the decision she made in the circumstances. She looked at the debts that she had and the bills she had to pay, and decided that the most pressing and dangerous debt was her credit card. She paid down the credit card because she knew if she did not paid that, the consequences would be financially much greater. However, when she went to the Glasgow Housing Association and said she was having trouble paying her rent, they said “Well, how did you pay your credit card?”. She said, “I think you’re not going to evict me.” That was her gamble and her choice.

My constituent thought that there would be some way of managing her housing debt better than her credit card debt. That was the decision she took. It might not be the decision she would have taken had she had financial advice, but she was looking at the different balances and debts, as well as looking to the months ahead and not knowing whether her business would be able to get up running. She was not able to access any Government grants for business support, and it was a difficult time for her husband as a taxi driver as well.

Families and businesses are often one and the same. My constituents are two individuals but also a business and a family together, and their debts are all wrapped up together. That is why I am asking the Government to look at these different things in a holistic way. She is a woman and she is disabled, so she would fall into that characteristic as well. She is doing a brilliant job trying to run her business and balance things, but it is important that the Government understand all these intersecting things that are going on for people right across the UK.

The hon. Member for Walthamstow talked about some people being able to pay back their debt. There is evidence to suggest that because some people have been able to keep working and have less outgoings—because in many cases there is nothing much to do and to spend money on—they have been able to pay back their debt and make quite a dent in it, or to put money towards a mortgage or other things. However, some are very much unable to do so. There is evidence of a growing division between those who have been able to keep working, and those who have had no support and are not able to work. It would be useful for the Government to do a wee bit more work on that and on how it affects people.

The Minister talked about Government debts and debt to Government Departments. I want to reflect a wee bit on how the Department for Work and Pensions often treats debts. I have constituents who are struggling to pay back overpayments of tax credits to the DWP, to the point where it is making it difficult for them to put food on the table or pay their other bills because so much is being wheeched off at the start and they have very little income coming in.

I have another constituent who had issues with HMRC wanting additional money. Again, they went through all his finances and started taking money back. He was fairly well off, having worked in a sector that was reasonably well paid, but HMRC was going through his finances pretty much the point where it was questioning whether he should be giving his children money for their school dinners. These are the kind of outgoings that are being questioned, and that makes it incredibly difficult for people to plan for the future.

The other aspect of Government debt that I will pick up on is the vast cost of people’s immigration status in this country. I have constituents who put their and their children’s leave to remain applications or citizenship applications on credit cards. That is a vastly expensive way to try to pay for status in this country. If they do not do that, they will not have all the freedoms that the rest of us enjoy, so they take that difficult choice of paying an absolute fortune for citizenship. Some of that was down to their child wanting to go on a school trip with their classmates, so they had to pay for citizenship and a passport for that child so that they can go on a school trip with their school pals. That is a horrible choice for families to have to make, but that is the expense of the immigration system and the impact that it has on the debts of many people who have a protected characteristic. The Government need to be aware of what the different parts of Government are doing in that regard.

The last point I will make on that is about people who have no recourse to public funds who end up going into huge debt, either on their housing or bills or other things. For many of my constituents, it is people who are out working every hour that they can, but because they have no recourse to public funds, they do not get the social security support that their next-door neighbour would get. Again, those protected characteristics come into play here. It is worth the Government looking at what they are doing to force people into debt, to force them into difficulties and to force them into situations that make it difficult to live a normal life and deal with the debt that the Government are causing through the costs of the DWP, Home Office and HMRC systems.

Lastly, I will speak to new clause 12. It is important that we look specifically, as the hon. Member for Edinburgh West (Christine Jardine) asks for, at the impact of covid- 19 on the debt respite scheme. It is important that the Government understand exactly what has happened to those people who I mentioned at the start, who do not have any income coming in, who have not been eligible for support schemes and who cannot work, perhaps because they or a member of their family are shielding, and plan for future pandemics and shocks in a similar way. While I think an awful lot of work was done on the public health aspects of pandemics, very little—nothing really—was done on the economic impact on households and individuals and on how people can get themselves back out of this.

It is worth considering the long-lasting effect of having or being affected by covid and on the impact on people’s ability to work in the future if they or a family member have had long covid, for example. That will completely change a family’s financial circumstances in a way that they could not possibly have anticipated. It may force that family into debt, and a long-term debt at that. It is worthwhile the Government doing a bit of extra work, as new clause 12 pretty much gets at, to see what the impact of that is, because we will need to understand that going forward. We should not be pushing people into a circumstance that they cannot easily get out of. The Government need to understand that better and to do some further the work on that, so I very much support new clause 12 and what it asks for.

[Mr McFadden]

I should begin by acknowledging that the Minister has put an awful lot of work into the debt respite scheme. He has encouraged it, consulted the sector widely and really tried to get it right. As I said at the beginning, the Opposition support it. It is a valuable addition and a source of help for people in debt.

The new clauses call for a review of the scheme at some point in different ways, which is the right thing to do with a new scheme. It makes sense to look at how it works and see if any changes need to be made to it. We have already had a debate about whether 60 days or 120 days is the best timescale, and a review could consider that sort of thing. Of course, there is also the covid impact, which new clause 12(2) specifically references. Covid will have an impact on household finances. We had an exchange in Treasury questions an hour or two ago about corporate debt and small business debt. I therefore do not think that the new clauses on review are in any way a threat to the basic integrity of the scheme. They simply ask for a look back at the scheme after a year or so of operation.

I could give the Committee a long and enthusiastic speech about the merits of the third way, but I suspect I will fall foul of your instructions about scope, Mr Davies. I award the prize for word of the day to my friend the hon. Member for Glasgow Central who has given Hansard the challenge of spelling “wheeched”, which I can roughly translate as forcibly or speedily removed. I think we would agree on that definition, but I look forward to seeing how that appears in our record.

[John Glen]

We are considering several amendments and I turn first to new clause 12. Its effect is to require a report to be published by 28 February 2021 on the impact of covid-19 on the debt respite scheme. That would include statements on the impact on levels of household debt and financial resilience, and what that might mean for how the scheme works, and consideration of the incorporation of a no interest loan scheme. 

As the Committee knows, covid-19 poses many uncertainties. The Government have responded dynamically to the challenges posed and taken unprecedented action to support individuals and businesses during this time. With that in mind, teamed with the fact that both elements of the debt respite scheme are new policies, arriving at any sort of meaningful estimate of the impact of covid-19 on the scheme’s expected usage and operation will be very difficult. 

Expected demand and take-up of both elements of the debt respite scheme have been quantified to the extent possible and published in the appropriate impact assessments, which have been approved by the Regulatory Policy Committee. A more detailed impact assessment will be developed alongside implementing regulations establishing the statutory debt repayment plan to a longer timetable, which will of course need to consider the full impact of covid. We will be more able to evaluate it over that period. The Government will of course closely monitor both schemes’ usage once they are up and running, and consider the impacts of covid-19 and the wider economic recovery. 

Turning to the suggestion for the report to explore financial resilience more broadly, I point towards the Government’s annual financial inclusion report, which was published only last week. We also work closely with the Money and Pensions Service, which was established in the last two years, the FCA and other stakeholders to monitor personal finances, including financial resilience. Earlier, I mentioned some of the measures I have been engaged in as the Minister for this area with the Pensions and Financial Inclusion Minister.

Finally, the new clause also requires a report exploring the incorporation of a no-interest loan scheme into the debt respite scheme. The Committee will be pleased to hear that the Government are working closely with stakeholders towards a pilot of a no-interest loan scheme, building on the findings of a feasibility study published earlier this year. I am personally passionate about that. It will be an amazing breakthrough if we can institutionalise the scheme and establish its credibility. That will have to be on the basis of international comparisons, establishing which groups of people would benefit most from it, and how we can establish a protocol around the cost. Clearly, given the vulnerability of the people to whom we seek to apply it and make it available, it will be expensive to deliver, but I continue to persist with it.

Any pilot will take time. Of course, it is urgent, but I would rather ensure that it is credible and can be supported more broadly. Reporting by February 2021 on the viability of a no-interest loan scheme risks coming to a premature judgement based on inadequate evidence—I say that with some experience, given that I have been working closely on this for some while. I can assure the Committee, however, that I will keep Parliament updated on progress as we continue that work over the coming months.

--- Later in debate ---

Clause 32 accordingly ordered to stand part of the Bill.

[Mr McFadden]

I think there is some confusion about why the new clauses were not put. Can you clarify that, Mr Davies?

[The Chair]

The new clauses are determined at the end, so although we have debated them, I will put the question at the end of the process. The opportunity to divide the Committee on the new clauses has not been lost, should that be the wish of those who have tabled them—that applies to all new clauses. I hope that helps.

Clause 33

Successor accounts for Help-to-Save savers

--- Later in debate ---

[John Glen]

Understandably, this topic brings out some very deeply held beliefs about the sort of society that we live in and the inequalities and challenges we face. I very much respect the points made by the hon. Member for Walthamstow and the hon. Member for Erith and Thamesmead.

I will try to respond to new clause 3 and new clause 14, but before I do, I think it would be helpful to clarify a few points about the Help-to-Save scheme. It is open to new entrants until September 2023 and those individuals will then be able to have it open for four years from that point. It is possible to save between £1 and £50 a month, so various modest savings can be made.

The hon. Member for Erith and Thamesmead asked about the schedule of promotion activities. Some of the full schedule was curtailed for this financial year because of covid, but we anticipate resuming our promotional activity early in 2021. We promoted Help-to-Save through Talk Money Week, we have engaged with Martin Lewis, who is also a key advocate of this scheme, and we will continue to work with the DWP to target those in receipt of universal credit and on working tax credits. The other point I would like to make clear to the Committee is that if somebody is in receipt of either of those benefits for just one week, they are eligible to open an account that is then valid for four years.

New clauses 3 and 14 require the Government to publish reports into the Help-to-Save scheme. Of course, the Government are prepared to inform Parliament on the progress of the scheme. Indeed, the Government committed to Parliament in 2018 to monitor and evaluate the scheme and has been publishing data every six months, in February and August. Therefore, we do not consider it necessary to enact these amendments as a statutory requirement. The latest statistics, published this August, show that by the end of July 2020 more than 222,000 accounts had been opened, with over £85 million in deposits between them. This has been a 37% increase in the total number of accounts opened by the end of January 2020, and a 57% increase in the total deposits into the scheme, compared with in the previous six-month period from August 2019 to January 2020. I am sure the Committee will agree that this is excellent progress, despite the difficult economic period.

The Government already work closely with stakeholders to monitor personal finances, including financial resilience; the Money and Pension Service monitor financial difficulty through an annual survey; and the Financial Conduct Authority undertake the biannual financial lives survey. It is not clear that this amendment would improve the data available to the Government in shaping policy. The Government are also working with stakeholders to raise awareness and encourage eligible individuals to open an account and benefit from the scheme, and I indicated some of the ways that is happening earlier. In fairness to the hon. Member for Walthamstow, who made a passionate and wide-ranging set of observations about these matters, I do not think I can fully do justice to them today. However, I share her belief that there are significant inequalities and certain obligations on people who have more to do more to support those who are more vulnerable in society. This measure is a good policy that we should all be able to promote and I am committed to promoting it further. I would ask the hon. Members to withdraw the new clauses.

Question put and agreed to.

Clause 33 accordingly ordered to stand part of the Bill.

Clause 34

Amendments of the PRIIPs Regulation etc

[Mr McFadden]

I beg to move amendment 30, in clause 34, page 40, line 33, after “performance” insert

“including information relating to environmental, social and governance standards.”

This amendment would require that consumers are given information about the environmental, social and governance standards of PRIIPs.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 31, in clause 34, page 40, line 33, at end insert—

“(4A) The FCA shall ensure that in practice the amendment made as a result of subsection (4) does not result in consumers having a reduced understanding of the risks associated with a particular investment product.”

This amendment would require that consumers are not left with a reduced understanding of the levels of risk involved in buying products covered by this clause.

[Mr McFadden]

In this portfolio Bill we now move on to another different subject, that of PRIIPs—packaged retail and insurance-based investment products. Clause 34 amends the consumer information requirements for the sellers of these products. These requirements are also known as key information documents—or KIDs—and we heard in the oral and written evidence that the current information requirements can be misleading for consumers. It is said that this is because they imply that past performance can be too much of a guide to future performance, which we know is not the case. At the European level, where the regulation of these products has taken place, there has also been a big debate about these key information documents and their deficiencies, so this has been an ongoing issue for some time now. It is in no one’s interest to defend misleading or potentially misleading information for consumers.

Removing or substantially altering the requirements of the key information documents does prompt the question of what should be put in their place. It is important that the Government and the regulators take this seriously. In selling anything like this, there is always a major information mismatch between what the seller knows about the product and what the consumer knows. The products are sold and designed by professional staff working for financial services companies, and bought by retail investors. Unless those investors have a professional background in the industry, they are likely simply to be looking for somewhere safe for their money that can hopefully earn them a decent return. There is a major information mismatch in these situations. Who can the consumer look to, to redress that to some extent? It has to be the Government and the regulators, through legislation on the kind of information to which consumers are entitled before making a purchase.

How do the Government and the regulator equip the consumer to make a reasonably informed choice? That is where amendments 30 and 31 come in. Earlier, when talking about capital requirements and the regulator’s duties, we had a debate about environmental, social and governance criteria being part of the regulator’s remit. The Minister rejected the idea, and the Committee voted it down, but what about making this information available to consumers? More and more investors want to invest in a way that helps, rather than damages, the planet. People care about the working conditions under which goods and services are produced, and about good governance—about companies being well run. So why not make this information available to investors? That is what amendment 30 calls for.

If the argument against making that the regulator’s job is that investors are making these decisions for themselves, let us at least give investors the tools to do that job—the information to make those judgments. The Chancellor has spoken warmly about the Task Force on Climate-related Financial Disclosures, which was set up by the Financial Stability Board a few years ago precisely to help companies inform investors about risks related to climate change in investments. The founding statement of that organisation says:

“Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly”.

The Financial Stability Board wants this to happen, and has set up the TCFD to advise companies and market regulators on how to do it. Why not take the opportunity in the Bill to ensure that consumers are provided with this kind of information? They can, of course, still make their own investment choices. They can ignore the information and say, “I don’t care about any of that; all I care about is the rate of return.” Investors are completely free to do that, but an increasing number of them do not want to, partly because they see the rate of return and the sustainability of their investments as being closely related. This is not about interfering with investor choice; it is about helping investors to make a choice, and giving them the information to do that.

Amendment 31 deals with the broader issue of the information balance that I spoke about between sellers and buyers. It is a no-detriment clause. It does not seek to prevent the abolition of the performance scenarios referred to in clause 34; it seeks to ensure that whatever replaces these scenarios does not result in consumers having less understanding than at present of the risks involved in a particular investment.

Both amendments are about the regulator taking seriously its duty on consumer information. They are about trying to make sure that public bodies are on the consumer’s side when it comes to making decisions about buying these kinds of products, and that the consumer has someone to look to for help with the information mismatch inherent in the sale of these kinds of products. They are modest and sensible amendments, and I commend them to the Committee.

[John Glen]

Amendment 30 seeks to require that information about the environmental, social and governance standards of PRIIPs products be included in the key information document, the KID. Now is not the time to address this, as I shall explain, but I have a lot of sympathy with the intent behind the amendment proposed by the right hon. Member for Wolverhampton South East. The reason I do not believe it is the right time to address this is that it would result in significant uncertainty for industry.

Clause 34 makes changes to the PRIIPs to address the potential for unintended consequences for consumers. The PRIIPs were created by the EU to improve the quality of financial information given to retail investors purchasing PRIIPs, by introducing a short, consumer-friendly and comparable disclosure document. The Government are committed to the original aim of the regulation and has proposed changes in this Bill to ensure it functions as intended.

In particular, there is not a fixed definition of environmental, social and governance standards and no standardised precedent for how such disclosures could be made in a comparable way for PRIIPs products. That is why I sincerely say that I agree with the sentiment, but I do not think we are yet at a level of maturity in definitional terms for such a measure to work. To put this in place, and ensure that the ensuing disclosures are appropriate and useful for consumers, significant policy development would be required.

As a result, the amendment would bring significant industry uncertainty, as they do not report in a standardised way on environmental, social and governance issues at a product level, which is what this would be, and have minimal guidance on how to do so. That would come at a time when the Government are intending, through the Financial Services Bill, to provide more certainty to industry on PRIIPs disclosures.

I recognise that high-quality sustainable finance disclosures that enable investors to take environmental impacts into account in their investment decisions will be crucial in facilitating the growth of green finance and supporting the transition to a lower-carbon economy. As I have previously stated, it would also be premature to adopt an environmental, social and governance amendment in the specific context of PRIIPs when the Government are considering the requirements for legislation relating to the sustainable finance disclosure regulation.

Amendment 31 also seeks to amend the PRIIPs disclosure regime, to require that changes to performance information that will be made by the FCA do not leave consumers with a reduced understanding of the levels of risk involved in buying PRIIPs products. I respectfully submit that the amendment would have little or no effect. The Bill is already intended to address concerns about the information provided to consumers in order to avoid the potential for consumer harm. The issues with the PRIIPs regulation, addressed by the Bill, include concern that the requirement to include performance scenarios in the key information documents may result in potentially misleading disclosures. That has been the key concern that has led to that measure being included.

Clause 34 will replace

“performance scenarios and the assumptions made to produce them”

with “information on performance”. That change will allow the FCA to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided. The FCA already has a statutory objective to secure an appropriate degree of protection for consumers and, as the expert regulator, is best placed to work with consumers and industry to understand issues and respond to them effectively. Moreover, changes the FCA makes to the information provided to consumers in the key information document are subject to a consultation, which it expects to publish next year. Requiring the regulator to ensure that changes to the KID do not reduce consumer understanding of risk would have no effect.

The changes we are making to the Bill address the potential for consumer harm and the FCA is best placed to ensure the appropriate degree of consumer protection. I hope that offers reassurance to the right hon. Member for Wolverhampton South East. I therefore ask that he withdraw the amendment.

[Mr McFadden]

At this stage in our proceedings we begin to recognise the debates that we are having, because we have had them more than once. I find the Minister’s answers on the subject of ESG slightly circular. He says—and I believe him—that he has great sympathy with the intent, but now is not the time or this is not the quite the way to do it, and so on. The reason I find that unconvincing is that I think the Government will do this, or something quite close to it, and will then claim credit, saying that doing it makes the UK a more friendly environment for environmentally sustainable investments. Because of that, I will press the amendment to a vote. Then, as is the way of these things, what we did when we had the chance to make a decision about this, both at the level of the regulator and at the level of the investment product, will be on the record.

[John Glen]

May I express my regret at the right hon. Gentleman’s decision? I acknowledge that this country is going on a journey, and it is very important that we make progress with regard to such disclosures, but this specific measure in this specific Bill at this time would not be in the interests of consumers or the regulation. I respectfully disagree, and I look forward to the vote.

Question put, That the amendment be made.

--- Later in debate ---

[John Glen]

Clause 35 makes two small technical amendments to the UK’s version of the European market infrastructure regulation. This is important to help improve the overall functioning of the UK’s regulatory regime for derivatives.

The first amendment to UK EMIR will promote transparency and accessibility in the clearing of derivatives transactions, by ensuring that the clearing members of UK central counterparties and their clients offer clearing services on

“fair, reasonable, non-discriminatory and transparent”

commercial terms. Clearing contributes to the safety of the UK’s financial markets, especially our derivatives markets. It does this by ensuring that a trade will still be honoured if one party to a contract does not fulfil their side—for example, if a firm goes bust. This will reduce barriers to accessing clearing services, which will in turn make it easier for firms to fulfil their clearing obligations. It will strengthen incentives to clear centrally and reduce systemic risk in financial markets.

The second amendment to UK EMIR will increase transparency in derivatives markets. Such transparency is vital to ensure that regulators in the UK can monitor risks in financial markets and ensure financial stability. This amendment will also make the environment in which trade repositories operate more competitive. This is achieved through ensuring that trade repositories put in place procedures to improve the quality of the data they collect, and establish policies to transfer their data to other trade repositories in an orderly fashion when it is necessary to do so. Trade repositories collect and maintain records of derivatives trades with the aim of helping regulators to monitor the build-up of systemic risk.

Overall, these two sensible technical amendments to UK EMIR will bolster the UK’s regulation of derivatives markets, further delivering on the UK’s G20 commitments in this area. I therefore recommend that the clause stand part of the Bill.

[Mr McFadden]

I have just one question. As the Minister said, this clause deals with the EMIR directive, which governs the sale of over-the-counter derivates. To add to our joys, we have EMIR and something called EMIR refit. The clause is about access to clearing for people dealing in these products. Over-the-counter derivates are perhaps among the more opaque financial services products on the market, but we learnt during the financial crisis that whatever their other qualities, these products exposed the interconnection between different companie, and the vulnerability of that interconnection. That is why clearing is important. It acts as what could be called a circuit breaker to ensure that if one party to the transaction gets into trouble, we do not have a domino effect right throughout the system, so the clause is designed to ensure that smaller traders have access to this circuit breaker or clearing activity. I ask the Minister: is what we are doing here mirroring what the EU have done through this EMIR refit process, or are the two measures in this clause—the data one, and the fair and transparent one—a departure in any way from that?

[John Glen]

The changes are almost identical to those made through EMIR refit in the EU. The UK played a pivotal role in the design of the EMIR refit and previously voted in favour of this legislation. Now that the UK has left the EU, we continue to believe that these measures are helpful to UK industry and will improve the financial stability of the UK. As I said, the FCA will design the implementation of the new frameworks in a way that works best for the UK. In making these observations, I underscore the comments I have made throughout that we will always seek to maintain the highest standards but to make them work optimally in the United Kingdom.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Clause 36

Regulations about financial collateral arrangements

Question proposed, That the clause stand part of the Bill.

Financial Services Bill (Eleventh sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 11th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[The Chair]

Before we begin, I have a few reminders. Please switch electronic devices to silent, tea and coffee are not allowed in sittings, and I thank everybody for your respect of social distancing. The Hansard reporters will be grateful if Members could email any electronic copies of their speaking notes to [e-mail]. If Members wish to press any of the new clauses that have already been debated to a Division, some prior indication would be helpful, although not compulsory.

Today, we continue line-by-line consideration of the Bill. New clause 1 has already been debated. Does Pat McFadden wish to press it to a Division?

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

No.

New Clause 2

European Union regulatory equivalence for UK-based financial services businesses

‘(1) The Treasury must prepare and publish a report on progress towards regulatory equivalence recognition for UK-based financial services firms operating within the European Union.

(2) This report should include—

(a) the status of negotiations towards the recognition of regulatory equivalence for UK financial services firms operating within the European Union;

(b) a statement on areas in where equivalence recognition has been granted to UK based businesses on the same basis as which the UK has granted equivalence recognition to EU based businesses; and

(c) a statement on where such equivalence recognition has not been granted.”—(Mr McFadden.)

This new clause would require a report to be published on progress towards, or completion of, the equivalence recognition for UK firms which the Government hopes to see following the Chancellor’s statement on EU-based firms operating in the UK.

Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

[The Chair]

With this it will be convenient to discuss the following:

New clause 28—Pre-commencement impact assessment of leaving the EU Customs Union—

‘(1) No Minister of the Crown or public authority may appoint a day for the commencement of any provision of this Act until a Minister of the Crown has laid before the House of Commons an impact assessment of—

(a) disapplying EU rules;

(b) applying rules different from those of the EU as a consequence of any provision of this Act.

(2) A review under this section must consider the effects of the changes on—

(a) business investment,

(b) employment,

(c) productivity,

(d) inflation,

(e) financial stability, and

(f) financial liquidity.

(3) A review under this section must consider the effects in the current and each of the subsequent ten financial years.

(4) The review must also estimate the effects on the changes in the event of each of the following—

(a) the UK leaves the EU withdrawal transition period without a negotiated comprehensive free trade agreement,

(b) the UK leaves the EU withdrawal transition period with a negotiated agreement, and remains in the single market and customs union, or

(c) the UK leaves the EU withdrawal transition period with a negotiated comprehensive free trade agreement, and does not remain in the single market and customs union.

(5) The review must also estimate the effects on the changes if the UK signs a free trade agreement with the United States.

(6) In this section—

“parts of the United Kingdom” means—

(a) England,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland; and

“regions of England” has the same meaning as that used by the Office for National Statistics.”

This new clause would require the Government to produce an impact assessment before disapplying EU rules or applying those different to those of the EU; and comparing such with various scenarios of UK-EU relations.

New clause 36—Regulatory divergence from the EU in financial services: annual review—

‘(1) The Treasury must prepare, publish and lay before Parliament an annual review of the impact of regulatory divergence in financial services from the European Union.

(2) Each annual review must consider the estimated impact of regulatory divergence in financial services in the current financial year, and for the ten subsequent financial years, on the following matters—

(a) business investment,

(b) employment,

(c) productivity,

(d) inflation,

(e) financial stability, and

(f) financial liquidity,

in each English region, and in Scotland, Wales and Northern Ireland.

(3) Each report must compare the analysis in subsection (2) to an estimate based on the following hypothetical scenarios—

(a) that the UK leaves the EU withdrawal transition period without a negotiated comprehensive free trade agreement;

(b) that the UK leaves the EU withdrawal transition period with a negotiated agreement, and remains in the single market and customs union;

(c) that the UK leaves the EU withdrawal transition period with a negotiated comprehensive free trade agreement, and does not remain in the single market and customs union; and

(d) that the UK signs a comprehensive free trade agreement with the United States.

(4) The first annual report shall be published no later than 1 July 2021.”

This new clause requires a review of the impact of regulatory divergence from the European Union in financial services, which should make a comparison with various hypothetical trade deal scenarios.

--- Later in debate ---

[Mr McFadden]

Thank you for your chairmanship, Mr Davies. I rise to speak to new clause 2, in my name and the names of my hon. Friends. We discussed equivalence when we were debating clause 24 or 25, so it might relieve the Minister and the Committee to know that I will not repeat everything I said about how we got to this position, but let us look at what the current situation is.

First, we have withdrawn from the EU, and in so doing we have withdrawn from any joint decision-making process about mutual access to financial services. Secondly, a few weeks ago the Chancellor announced a unilateral move on the UK’s part to grant equivalence recognition to EU member states and their firms. Thirdly, there is a legislative mechanism to do that in the Bill. Fourthly, we now await decisions on equivalence from the EU. Finally, in terms of the regulatory picture, we have spent a lot of legislative time in this House—probably no one more than the Minister in the past two years or so—legislating to onshore various EU directives. That is where we are.

The aim of onshoring that vast body of legislation was to have a parallel position, or as near to one as we could reach, on day one of the end of the transition period. At the same time, though, we have given our regulators powers to diverge in various ways from the terms of these directives in future. We have discussed that quite a few times in Committee, and the Minister said that the Government are not interested in diverging for the sake of divergence, but of course there are many in the Government, and in his party, for whom divergence is the whole point of the exercise, because it is all about sovereignty. Although we may be almost totally in line on day one—new year’s day—what about day 100 or day 1,000?

Nothing in new clause 2 alters the power to diverge. If the package of onshoring and granting new powers to the regulators that the Minister is taking through is there, nothing in the new clause alters that, but it asks for a report on where we have reached in that process. We know that a positive outcome of this process could have a very significant bearing on the UK financial services industry. It would mean better access for our firms than without that process. It certainly would not give them what they have at the moment, but that is water under the bridge—we debated that earlier in Committee.

The converse is also true, of course: if we do not get equivalence recognition, it would have implications for jobs, tax revenue and how the UK is viewed as a home for inward investment in the financial services industries. All that the new clause does is to ask for a report on where we have got to in the process or, alternatively, a statement on who has refused to grant equivalence of recognition.

I hope the Economic Secretary does not mind if I point out that I cannot be the only one who is struck by the clamour, particularly on the Government Benches, for economic evidence to justify covid-protective measures. Everybody wants the exact detail of how that will affect their local economies. If that is the case, it is only right that the Government report on the economic consequences of the other major process that we are going through. That is the intention behind the new clause.

The sector is hugely important for the United Kingdom, as has been mentioned many times during our debates over the last couple of weeks. All that the new clause does is to ask for a report on where we are on market access. I very much hope that we have a positive outcome on that. Some of it may be about good will, and it might depend on what is agreed in the next week or two—we do not know. It is certainly in the interests of the sector to have a positive outcome. The least we can ask is that the Government report to the House on that.

Finally, if the outcome is positive, the Government will probably want to report back anyway. If the outcome is not positive, Parliament has a right to hear about that, too.

[Stephen Flynn (Aberdeen South) (SNP)]

Just to be clear, Mr Davies, do you wish me to speak to new clause 2 or to new clauses 28 and 36?

--- Later in debate ---

The Government are fully committed to ensuring accountability and scrutiny around new rules for the UK’s financial sector. That will include following the usual requirements for impact assessments related to both primary and secondary legislation, giving Members of Parliament the opportunity to consider and scrutinise Treasury decisions as part of the legislative process. Where the responsibility falls to the financial services regulators in the form of regulator rules, it is accompanied by robust accountability and scrutiny mechanisms, as I have set out to the Committee in previous sittings. The Government will ensure that Parliament is kept informed with the analysis of regulatory changes at the right times and in a way that does not impede the UK’s ability to strike the best deals with international partners. I therefore ask for the new clause to be withdrawn.

[Mr McFadden]

I want to respond to a couple of things that the Minister said. As I said when I moved the new clause, nothing in it stops divergence. There is no attempt to make sure that we are in lockstep with EU regulations for ever and a day. The new clause is completely silent on that.

Nor does the new clause pretend that the equivalence decisions that we seek can be within the gift of the Government. In fact, from the point of view of some of us, that is the problem. We would have a say over that at present, but we will no longer have a say in future. That is precisely why we are discussing this issue.

All that the new clause does is ask for a report on the outcome. What is the outcome for our financial services? It is like we are back on day one of our proceedings, when we talked about the different reasons for turning amendments down. The Minister has said that the Government will report regularly to Parliament, in which case the new clause would be entirely harmless. That is why we will press it to a vote.

Question put, That the clause be read a Second time.

--- Later in debate ---

Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

We are by definition entering a new world for UK financial services. Whether it is a brave new world, I do not know, but it is a new world. The measures in the Bill are a small part of that. We are onshoring EU regulations and, although we will still be part of globally agreed standards such as the Basel regime, we will have to decide what future we want in this sector. As the Minister has advised us several times, we should not see the Bill as the totality of what the Government are doing in financial services. There will be a future regulatory review, and there might even be future Bills, so this is one part of the picture. That creates difficulty for the sector, and perhaps for us, in trying to divine where we are going.

That is important because the UK has possibly the most globally significant financial sector of any country in the world. We learned the hard way what the risks of that were in the financial crisis, when the sector ran into trouble. However, the converse is that if the sector is properly regulated, if it pays its way in terms of its taxation contribution, its contribution to innovation, its capacity to bring inward investment to the country and the employment it provides, and if it is properly run, it can also be a huge advantage for the UK. The new clause asks the Government to pull all of that together and take the pipeline of changes that they have in mind, together with the new context, and produce a strategy that gives clarity to the sector, the public and Parliament about where we are going.

That is not particularly unusual for the Government. They do that for other sectors. In the automotive sector, the Department for Business, Energy and Industrial Strategy has the Automotive Council UK, which brings together different players in the industry and looks at everything from supply chains and skills to inward investment. Over the years, it has played its part. The last couple of years have been pretty rocky, for reasons that we all know about, but up until then the UK had a growing, successful automotive industry. We were producing more and more cars each year, and we were very successful at winning inward investment.

If we take the parallel of financial services, there is plenty that such a strategy could cover. To name just a few obvious areas, we have a growing FinTech sector in the UK, which we want to succeed. It is doing more innovation, and we might hear more about that later. We have the development of cryptocurrencies, and it is in the public interest that we have a greater understanding of what that phenomenon is and what it means for investors, consumers and so on.

We have the green finance debate, which we have discussed a number of times over the past couple of weeks. If we really want the UK to be the leading force in green finance over the coming decades, what do we need to do to ensure that that is the case? We have also had an ongoing debate for some years about competition and about the challenges of getting new banking players into the UK market, which is, at the retail level, dominated by four or five high street names that account for the vast majority—90%-plus—of current accounts, deposits, savings and so on.

Then we have more difficult issues, which we have touched on, such as money laundering, fraud and so on. They are an ongoing challenge, and we will be talking more about them later this afternoon. There are probably a lot more, but those are the kinds of things that a financial services strategy might cover.

There is also the regulatory approach. Now that we are no longer going to be part of a common European rulebook, what is the philosophy behind the rulebook that we will have? What will it say to assure people that there will not be a race to the bottom? What will it say on capital to get the balance right between allowing innovation and protecting consumers from organisations that do not have enough resilience? Would there, for example, be a shift away from the traditional British strong focus on property investment to more investment in research, development, manufacturing technology and small business lending? That has been a constant theme. There is nothing partisan about it. There are many strong voices in the Conservative party as well as the Labour party speaking up for small businesses and raising the difficulties with lending and so on. That is also something that could be governed.

We spoke about the environmental, social and governance agenda. The Minister has been resistant to all our amendments on that. All the votes are on the record—we have had three or four of them. The Government do not want anything added to the Bill on environmental sustainability or anything like that. I have also said several times that the ESG agenda is really important for the UK, and the Government have said, at least in rhetorical terms, that they believe the same thing, so exactly how would it be advanced if not in the ways that we have tried to suggest—through the various amendments we have tabled to the Bill?

We have a lot of rebuilding to do as we recover from this pandemic. Many people have described it as a great acceleration in trends. There will be job losses, as the Chancellor tells us, and business closures. Many of the behavioural changes that we have seen in how people live, work and purchase things are likely to stay for a long time. A differently shaped day-to-day economy will emerge from this. Financial services will have a huge role to play in that, and Treasury Ministers will quite rightly want to say something about it.

--- Later in debate ---

[John Glen]

I very much appreciate the sentiment behind the new clause. The right hon. Member for Wolverhampton South East set out all the different areas of focus involved in financial services, taking me through all our different calls for evidence and ongoing pieces of work—there are a number of others, too. However, the new clause is unnecessary.

Only a few weeks ago, the Chancellor made a statement to Parliament on the future of the UK financial services sector. Indeed, Miles Celic from TheCityUK described it as an “ambitious vision” for financial services. Across the range of different elements that the right hon. Gentleman set out, a lot of activity is ongoing. Indeed, a number of consultations are out at the moment. As the Chancellor stated, we are at the start of a new chapter for the industry, and our having an open, green and technologically advanced industry that serves the consumers, communities and citizens of this country and builds on our existing strengths, including our world-leading regulatory system and standards, was the essence of that vision. The UK will remain the most open and competitive place for financial services in the world by prioritising stability, openness and transparency.

The Chancellor set out new proposals to extend our leadership in green finance, including by taking the key step of introducing mandatory requirements for firms to disclose their climate-related risks within five years, making the UK the first country to go beyond the “comply or explain” principle. He also announced plans to implement a green taxonomy and, subject to market conditions, to issue the UK’s first ever sovereign green bond next year. He set out his intention that the UK will remain at the forefront of technological innovation, to provide better outcomes for consumers and businesses.

The UK’s position as a global and open financial services centre will be underpinned by a first-class regulatory system that works for UK markets. The Government already have several reviews under way, including the future regulatory framework review and the call for evidence on Solvency II, to highlight two. We also have the FinTech review, which will report early in the new year. That is the Government’s strategy for financial services now that we have left the European Union.

I hope that I could not be accused, as the City Minister, of being unwilling to come before the House to provide updates on the Government’s work relating to financial services, whether in the Chamber, Select Committees—I think I have made about 12 appearances now—or in Westminster Hall, or of doing that infrequently. The Chancellor and I will continue to provide updates at the appropriate times in the normal way.

Having considered the issue carefully, I ask the right hon. Gentleman to withdraw the new clause.

[Mr McFadden]

The Minister is right to refer to the Chancellor’s statement on 9 November, which was called a vision. While it touched on the green finance things the Minister mentioned, it did not touch on many of the things that I mentioned. He is also right to say that lots of reviews are going on. While it may be unfair to say that that is the problem, there is nothing that really brings them together with clarity about where we are going. I will not press the new clause to a vote today, but we may return to it, so I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 5

Regulation of lead generators for debt advice and debt solution services

“(none) In section 22 of the Financial Services and Markets Act 2000 (regulated activities), after subsection 1A insert—

‘(1AA) An activity is also a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and relates to—

(a) effecting an introduction of an individual to a person carrying on debt advice and debt solution services, or

(b) effecting an introduction of an individual to a person who carries on an activity of the kind specified in paragraph (a) by way of business.’”—(Mr McFadden.)

This new clause would empower the FCA to regulate activities such as paid search and social media advertisements, including the impersonation of reputable debt management charities.

Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

This new clause is directed at reducing harm to heavily indebted people by clamping down on imposter or clone websites that might direct people away from legitimate avenues of advice without their knowledge. It was suggested to us by the charity StepChange, which reports a serious, large-scale and ongoing problem with imposter or clone sites posing either as StepChange itself or as another reputable charity and preying on vulnerable people in debt. In fact, StepChange estimates that as many as one in 10 people searching for the organisation online are inadvertently led to someone else.

This is not just one of the traditional issues of having time-consuming and frustrating discussions with web providers to get them to take some responsibility for what is on their platforms; it is also a matter of regulation. The new clause proposes to close a regulatory loophole: the activity of introducing an individual to a credit provider is regulated by the FCA, but the activity of introducing an individual to a debt advice or debt solution service is not. That loophole represents a gap in the picture, and the new clause seeks to close that gap by bringing lead generators for debt advice and debt solution services clearly within the FCA’s remit.

The new clause is, perhaps, about quality control. It would protect consumers from clone sites and from unscrupulous operators who would prey on their financial problems. I argue that that becomes all the more important in the context of clause 32 and the establishment of statutory debt repayment plans, because the gateway to them will be through seeking advice from reputable debt advice and debt solution services. It would be entirely with the grain of the Bill, and the Government’s policy intent, to ensure that that gateway is properly regulated by the FCA.

The Minister has been consistent in resisting every amendment and new clause over the past couple of weeks, and I appreciate that he has probably come armed with advice not to accept any amendments, even if they look okay, because there may be a drafting issue or something. However, if there is some reason in his folder why he cannot accept this new clause today or—hopefully this is not the case—if the optics of doing so, because it has been suggested by the Opposition, are somehow too difficult to contemplate, will he at least take the matter away and consider introducing a provision either on Report or at a further stage in the Bill’s passage?

It is very much in the interests of the statutory debt repayment plans, for which he feels—I credit him for this—a big degree of personal ownership, that this regulatory loophole is closed, and that we do what we can to prevent people seeking that kind of help from being led away by unscrupulous operators on the internet. Instead, we must ensure that they are channelled to reputable advice organisations and solution providers—be it StepChange or somewhere else.

[Alison Thewliss]

I rise to support the new clause. It is typical of the eagle-eyed way that the right hon. Gentleman has approached this Bill that he found this particular loophole. I am not sure which of his pots he thinks the Government might think it falls into, but it is a sensible, minor change. The Government would do well to take it on now or bring it back at a later stage. We want to protect people who have fallen into that situation in every way we can. We all know that there are vultures on the internet who want to cut a share of that and exploit people. The new clause is a sensible and reasonable way of addressing that and I commend it to the Minister.

[John Glen]

I take this issue very seriously. I recognise the work of StepChange and I note the letter from Marlene Shiels, chief executive officer of the Capital Credit Union and her support for this. She makes a significant contribution to the Financial Inclusion Policy Forum that I chaired just last week.

The Government are taking strong steps to ensure that lead generators do not cause consumer harm.  As the right hon. Member for Wolverhampton South East said, lead generators identify consumers in problem debt and refer them to debt advice firms and to insolvency practitioners. That can help consumers access appropriate debt solutions and support their recovery on to a stable financial footing. However, I readily recognise the risk that unscrupulous lead generators could act contrary to their clients’ interests. To mitigate that risk, debt advice firms and insolvency practitioners are already required to ensure that any lead generators they use are compliant with applicable rules to prevent consumer harm in the market.  

Under Financial Conduct Authority rules, that includes ensuring that lead generators do not imitate charities or deliver unregulated debt advice, and that they are transparent with clients about their commercial interests. As such, the FCA, as the regulator of debt advice firms—and the Insolvency Service, as oversight regulator of insolvency practitioners—already influences lead generators’ impacts on consumers.

New clause 5 would not materially improve the FCA’s influence over lead generators. Its scope would be incomplete, applying only in respect of lead generators’ referrals to debt advice firms, not to insolvency practitioners. The Government have already issued a call for evidence on whether changes are needed to the regulatory framework for the insolvency profession and will publish a response next year. In the light of our recognition that the matter needs a focus and that work is being done on a response, I ask the right hon. Gentleman to withdraw the motion.

[Mr McFadden]

I am happy to do that. I just appeal to the Minister to try to find a way that he is comfortable with of closing the loophole. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 6

Duty of care for financial service providers

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) In section 1C, after subsection 2(e) insert—

“(ea) the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices;”

(3) After section 137C insert—

“137CA  FCA general rules: duty of care

(1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.

(2) The FCA must make rules in accordance with subsection (1) which come into force no later than six months after the day on which this Act is passed.””—(Mr McFadden.)

This new clause would introduce a duty of care for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty of care.

Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

[The Chair]

With this it will be convenient to discuss the following:

New clause 15—Financial Conduct Authority: regard to consumer detriment—

‘(1) The Financial Services and Markets Act 2000 shall be amended as follows.

(2) In section 1C(2), after paragraph (h), insert—

“(i) the prevention of consumer detriment, including but not limited to the promotion of unaffordable debt.”

This new clause would require the FCA to have regard to consumer detriment, including the promotion of unaffordable debt, when exercising its powers.

New clause 18—Duty of FCA to investigate and report on possible regulatory failure—

‘(1) Section 73 of the Financial Services Act 2012 shall be amended as follows.

(2) In subsection 1(b)(ii), at end insert—

(iii) a failure of the FCA to intervene earlier or otherwise act effectively to protect consumers.”.”

This new clause would require the FCA to carry out an investigation into the events and circumstances surrounding any significant failure to secure an appropriate degree of protection for consumers and make a report to the Treasury on the result of the investigation.

New clause 21—Assessment of risks of consumer detriment—

‘(1) Schedule 6 of the Financial Services and Markets Act (2000) is amended as follows.

(2) After paragraph 2D(2)(c) insert—

(d) the risks of consumer detriment associated with the firm’s business model and the likelihood for compensation claims from consumers.”

(3) After paragraph 2D(3), insert—

“(3ZA) When assessing whether the firm has appropriate financial resources to meet the risks of consumer detriment and the likelihood of compensation claims from consumers, the Financial Conduct Authority must ensure that, at all times, firms hold sufficient financial resources to meet any likely compensation claims from customers in full.””

This new clause would ensure that the FCA considers the likelihood of consumer detriment arising from the firm’s business model prior to, and following, authorisation, and that firm’s hold sufficient financial resources to meet potential compensation claims from customers in full.

New clause 23—Consumer redress schemes: FCA reporting requirements—

‘(1) In section 404A of the Financial Services and Markets Act 2000, at end insert—

“(10) Where the Financial Conduct Authority initiates a consumer redress scheme by virtue of the powers conferred in section 404 of this Act, and makes any provisions for its operation by virtue of this section, the Financial Conduct Authority must—

(a) provide an initial written report to the Secretary of State detailing its reasons for any of the provisions it has made for the redress scheme under section 404A;

(b) ensure that any instructions provided to an appointed ‘competent person’ under subsection (1)(k) are included in the above report; and

(c) provide a further written report to the Secretary of State detailing the outcomes from any consumer redress scheme, including copies of any “competent person” assessments relevant to the redress scheme.””

This new clause would require that the FCA provide written reports to the Secretary of State setting out the reasons for any decisions made regarding the parameters decided, and approaches taken, in designing, investigating, and implementing consumer redress schemes, and requires a report on the outcomes achieved for consumers to be made.

New clause 38—Duty of care specification—

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) After Section 1C insert—

“1CA Duty of care specification

(1) In securing an appropriate degree of protection for consumers, the FCA must ensure authorised persons carrying out regulated activities are acting with a Duty of Care to all consumers.

(2) Matters the FCA should consider when drafting Duty of Care rules include, but are not limited to—

(a) the duties of authorised persons to act honestly, fairly and professionally in accordance with the best interest of their consumers;

(b) the duties of authorised persons to manage conflicts of interest fairly, both between themselves and their clients, and between clients;

(c) the extent to which the duties of authorised persons entail an ethical commitment not merely compliance with rules;

(d) that the duties must be owned by senior managers who would be accountable for their individual firm’s approach.””

This new clause would mean that the FCA would need to ensure that financial services providers are acting with a duty of care to act in the best interests of all consumers.

New clause 39—Duty of care specification on all financial services providers—

‘(1) The Treasury must by regulations require all financial services providers to act within a duty of care overseen by the FCA.

(2) The FCA may make rules to ensure all financial services providers act within the duty of care.

(3) Matters the FCA should consider when making duty of care rules include but are not be limited to—

(a) the duties of authorised persons to act honestly, fairly and professionally in accordance with the best interest of their consumers;

(b) the duties of authorised persons to manage conflicts of interest fairly, both between themselves and their clients, and between clients;

(c) the extent to which the duties of authorised persons entail an ethical commitment not merely compliance with rules; and

(d) that the duties must be owned by senior managers who would be accountable for their individual firm’s approach.

(4) If before the end of December in any year the Secretary of State has not introduced a requirement for all financial services providers to act within a duty of care, the Treasury must—

(a) publish a report, by the end of December of that year, explaining why regulations have not been made and setting a timetable for making the regulations, and

(b) lay the report before each House of Parliament.”

New clause 40—Duty of care specification on all financial services providers (No. 2)—

‘(1) At least once a year, the Treasury must review the case for instructing the FCA by regulations to produce rules requiring all financial services providers to act within a duty of care.

(2) If, following the review, the Treasury decides not to introduce such regulations, the Treasury must publish and lay before Parliament a report setting out the reasons for its decision.”

New clause 41—Duty of care on all financial service providers—

‘(none) The Treasury must instruct the FCA to impose a duty of care on all authorised persons providing financial services activity regulated by the FCA by the end of 2021.”

New clause 42—Report on FCA’s progress on duty of care consultation—

‘(1) The Treasury must prepare and publish an annual report setting out the FCA’s assessment of the need for a duty of care and lay a copy of the report before Parliament.

(2) A Minister of the Crown must, not later than two months after the report has been laid before Parliament, make a motion in the House of Commons in relation to the report.”

[Mr McFadden]

New clause 6 is about a duty of care for financial service providers and several other new clauses push in the same direction. It is fair to say that this has been under discussion for some time. A private Member’s Bill was introduced on the subject in the other place about a year ago and the FCA has been involved in a long process of ongoing discussion about it for the past two or three years. The FCA produced a paper on it in 2018 and there was a response in April last year, although it did not reach a definitive conclusion.

Those who argue for a duty of care—I refer again to the charity StepChange—suggest that the current regulatory framework, even with the duty to treat customers fairly, which is part of the FCA’s current advice and regulations to providers, does not provide adequate protection for consumers. They seek to prompt the question from a financial service provider, “Is this right?” rather than just, “Is this legal?” That is a helpful way of considering what difference a duty of care might make.

The legal definition of a duty of care, as quoted in the FCA’s discussion document is,

“an obligation to exercise reasonable care and skill when providing a product or service.” 

Those who favour it believe that it will help avoid conflicts of interest, too and oblige service providers to act in the customer’s best interests rather than, for example, putting the interests of the company above those of the customer it serves.

--- Later in debate ---

[John Glen]

There is ongoing work and ongoing evolving action by the FCA. The Government have taken strong steps to prevent problem debt from occurring and to support those who fall into it. We want to make sure that people have the guidance, confidence and skills to manage their finances. That is why we established the Money and Pensions Service last year to simplify the financial guidance landscape, to provide more holistic support for consumers, and to give free support and guidance on all aspects of people’s financial lives. I welcome the publication of its UK strategy for financial wellbeing, which will help everyone to make the most of their money and pensions.

I have already mentioned the role played by the FCA’s principles of business. Further to that, the FCA has recently concluded a consultation on guidance for firms on the fair treatment of vulnerable customers. The protection of vulnerable customers and consumers is a key priority for the FCA. Although many firms have made significant progress in how they treat vulnerable consumers, the Treasury and the FCA want the fair treatment of vulnerable consumers to be taken seriously by all firms so that vulnerable consumers consistently receive fair treatment. I think that was the key point made by the hon. Member for Walthamstow.

Despite those preventive measures, I recognise that many people still fall into problem debt. Professional debt advice plays a vital role in helping people to return to a stable financial footing. That is why in June the Government announced £37.8 million of extra support, which brings the budget for free debt advice to more than £100 million this year. From May, the Government are delivering the first part of the new breathing space scheme, as discussed in Committee, for problem debt. That gives eligible people a 60-day period in which fees, charges and certain interest are frozen and enforcement action is paused.

We discussed on Tuesday the importance of the statutory debt repayment plan, as part of the debate on clause 32. The Government believe that sufficient protections are in place without expanding the FCA’s statutory consumer protection objective. However, I reassure the hon. Lady that the Government will continue to work closely with the FCA to keep that issue under review.

New clause 18 would introduce a duty on the FCA to launch investigations in situations where there is suspected regulatory failure as a result of inaction or a lack of effective action by the FCA, but that is already covered by section 73 of the Financial Services Act 2012. That section imposes a duty on the FCA to investigate where it appears to the FCA that events have occurred that, among other things, indicate

“a significant failure to secure an appropriate degree of protection for consumers”

either by the FCA or otherwise, and where those events might not have occurred but for a serious failure in the regulatory system, or operation thereof, established by FSMA 2000.

Further, section 77 of the 2012 Act enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so, for example under section 73. The section 77 powers are broader than those set out in section 73, in that the Treasury can require the regulators to conduct an investigation into relevant events where it considers that it is in the public interest to investigate them. In addition, section 77 investigations can consider aspects outside the regulatory system as established by FSMA, which allows a comprehensive review to be undertaken in the public interest. Those existing powers ensure that, in cases where section 73 does not apply, a mechanism remains to ensure that investigations can be conducted in the public interest.

If I understand new clause 21 correctly, it reflects the ongoing concerns of the hon. Member for Walthamstow that she has raised in Parliament previously, specifically about circumstances where a firm fails but compensation is owed to a consumer. While I am sympathetic to these concerns, the Government believe that the FCA, as the independent regulator, is best placed to judge the resources that authorised firms need to maintain in order to carry out regulated activities.

I should explain that the FCA is already required by schedule 6 of the Financial Services and Markets Act 2000 to consider whether a firm’s resources are appropriate to the activities it carries out. It is obliged to take into account the nature and scale of a firm’s business, as well as the risk to the continuity of the services it provides to consumers, and must consider whether the business is to be carried on in a sound and prudent manner, with particular regard to the interests of consumers. The legislation also already requires the FCA to consider how a firm’s potential liabilities might impact the resources it should hold. The Government therefore believe that this new clause does not add anything further to the FCA’s requirements that already exist in legislation.

Once again, I would mention the FCA’s principles for businesses, which already require firms to maintain adequate financial resources and organise their affairs with adequate risk management. The FCA has recourse to take disciplinary action against firms that breach these principles. Therefore, the Government believe that there are sufficient provisions in place to ensure consumers can access compensation where they have suffered detriment.

Finally, I turn to new clause 23. I should first note that the launching of any consumer redress scheme is a significant undertaking, and it is right and proper that the process be open and transparent. The new clause proposes making amendments under section 404A of the Financial Services and Markets Act 2000, referred to as FSMA, which provides the FCA with rule-making powers for consumer redress schemes.

However, the existing legislation already sets out a number of requirements governing the actions of the FCA, including provisions to ensure that its actions are transparent. Rules made under section 404 by the FCA are subject to a formal public consultation before a scheme is put in place. The FCA also publishes a policy statement explaining its decision and the rationale for the provisions in any proposed scheme. That consultation also includes any decision to appoint a competent person, and the scope of the competent person’s responsibilities, which are documented in the policy statement. Finally, it is right that any scheme is monitored and assessed, to ensure that it has delivered its intended outcomes. Given the importance and impact of consumer redress schemes as good regulatory practice, the FCA would as a matter of course monitor the progress of the scheme as it is implemented, which would include assessing the scheme against its stated objectives.

Introducing a statutory requirement for a process that the FCA already undertakes introduces an additional and unnecessary hurdle. I appreciate that there is a desire to ensure that the regulators are properly accountable to Parliament, and I reassure members of the Committee that such an accountability mechanism already exists. As part of the requirements under FSMA, the FCA must already provide an account of its activity to the Treasury on an annual basis, and that account is shared with Parliament.

I regret that I have spoken for some time, but this is an important set of questions, and some more will come up later this afternoon. I hope I have satisfied the Committee, and therefore I ask the right hon. Member for Wolverhampton South East to withdraw the new clause.

[Mr McFadden]

I want to press new clause 6 to a vote.

Question put, That the clause be read a Second time.

Financial Services Bill (Twelfth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 12th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[The Chair]

Just a word of warning—we are a little bit behind time. There are still 11 groups of amendment on the selection paper to debate. We have the room until 5 pm, but I think there were some murmurings about moving that forward a bit. Hint hint: if we make progress, that would help.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Forgive me, Dr Huq. I might have got this wrong, but I think there might be one more vote on the previous group before we move on.

[The Chair]

When we reach it on the amendment paper, so not quite yet.

New Clause 8

Money laundering: electronic money institutions

‘(1) The Proceeds of Crime Act 2002 is amended as follows.

(2) In section 303Z1(1) after “bank” insert “, authorised electronic money institution”.

(3) In section 303Z1(6) after “Building Societies Act 1986;” insert—

““authorised electronic money institution” has the same meaning as in the Electronic Money Regulations 2011.”

(4) In section 340(14)(b) after “Bank” insert “, or

(c) a business which engages in the activity of issuing electronic money”.’—(Abena Oppong-Asare.)

This new clause would update definitions in the Proceeds of Crime Act 2002 to reflect the growth of financial technology companies in the UK by equalising the treatment of fin tech companies with banks on money laundering and Account Freezing Orders.

Brought up, and read the First time.

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[Stella Creasy]

Absolutely. We know who such companies are targeting, and they are doing so deliberately. I hate to say this, as I do want to win over the Committee, but we might not be their target audience at this point in our lives, because we might not be actively reading the social influencer media posts. I might be completely wrong—I am sure some Government Members are regularly on their Instagram accounts looking at posts by ASOS.

Some 20% of those young people say they have missed a payment in the last year—the figure has doubled in the last year—because they thought that a purchase would cost a certain amount and that they had an income, but that income has gone. The companies will say that they are very good to their customers because they do not lend more than people need and they do not charge interest—the companies’ interest is in people paying back the money—but those companies go silent on what they do when people do not pay back. What happens to people’s credit references? How do they chase money? Do they use debt collection agencies?

Those companies are growing rapidly, just as the payday lending industry did. We watched that happen and, in that Cassandra-like way, all tried to warn of it, but it took too long for us to act. In 2019 Klarna was boasting that it had signed a partnership with a new merchant every eight minutes in this country. By the end of 2019, 6 million people had used its product, and it said that 55,000 were using it weekly. Imagine what it is like now, with people having been stuck at home and stuck on their phones.

The Money and Mental Health Policy Institute found that more than 3 million people with mental health problems have found it harder during the pandemic to control their online spending, and two in five said the BNPL industry has been “harder to resist”. Because it is not regulated, it does not have to follow any of the rules we might want to point to that protect consumers. That is why we see all those adverts saying, “No interest, no fees—don’t worry about it.” The industry does not have to provide the normal financial information we see in other forms of credit because it is not regulated in that way.

Just as with the payday loan industry, as soon as we started talking about these companies, along came the offers of dinners and discussions and talks, where the industry says it is in fact a misunderstood new technology. Those of us who are not regularly on the internet have obviously missed them.

[Mr McFadden]

rose—

[Stella Creasy]

I am sure the shadow Minister is about to tell us about his Instagram account.

[Mr McFadden]

No, I am not, but I am interested to hear that my hon. Friend got an offer of dinner. All I got was an email.

[Stella Creasy]

Sadly, during the pandemic, none of us has been able to take up any of those offers to explain our concerns to these companies directly, as opposed to on Zoom. It is a simple concern: the way in which these products are marketed encourages people to spend money as a way of dealing with the emotional and social impacts of the pandemic. The adverts, using those social influencers, say, “When you’re feeling low, sat at home by yourself with nowhere to go, there is something to make you feel better.” Essentially, the message is, “Get into debt. Don’t worry about it. You can spread the payments. Don’t worry about whether you can afford it.” They get away with saying and doing that because they are not covered by the regulations.

I know the Minister is looking at this issue—he said so—and that the FCA is doing so. I have made a series of complaints to organisations such as the Advertising Standards Authority about these issues, because, just as with payday lending, we have seen the rapid expansion of these companies. My worry is that if we take 18 months it could be too late in terms of consumer detriment. I do not doubt these companies when they say they want to have a sustainable business model, but it is for us in this place, in crafting the Bill, to decide what sustainability is and how they make their money. Otherwise, we are handing them our young consumers, in particular, on a plate to be exploited. The new clauses speak to those issues.

New clause 16 would ensure that all forms of consumer credit are covered by regulation, because the gap that Klarna and company have fallen into is arguing that they are not a form of consumer credit so they do not need to be regulated. We should always apply a sniff test: if somebody is giving us money to buy things on tick, that is a form of credit. If it walks like a duck and talks like a duck, it should be regulated like ducks should—see, we have moved on from the dinosaurs to ducks.

New clause 17 would make rules explicitly about the buy now, pay later industry. I do not believe we can wait another year or so before we do something. It makes sense to bring the industry under the FCA’s umbrella so that the FCA can act. The new clause would ensure that Ministers could act based on the industry’s actions, given the risks that come from them. Unlike customers of Amigo Loans or indeed the remaining payday loan industry—or even the credit card industry—nobody who uses buy now, pay later can go to the ombudsman for redress, so what do they do if they get into difficulty? I pay tribute to Alice Tapper from Go Fund Yourself, who has been collecting the evidence about young people getting into debt from unaffordable forms of spending with such companies and not knowing how to get out of it.

--- Later in debate ---

Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

Although it is late in our proceedings, this is the first chance I have had to say what a pleasure it is to serve under your chairmanship, Ms Huq. New clause 24 introduces an offence of failing to prevent economic crime. I should make it clear that it is a corporate offence for companies.

The Committee will know that we have received written evidence on this issue from Spotlight on Corruption. In previous debates, we have all agreed that money laundering and fraud are big problems for the UK, although they are difficult to quantify. As I have said, I appreciate that the Minister has very likely been advised not to accept any amendments to the Bill. When a party has been in power for 10 years, that tends to reinforce itself, because it can become more difficult to admit that things are wrong. I should say in all candour that I am not suggesting that fraud or money laundering only started in 2010.

These are big, difficult and long-term issues for all Governments, so this is not a game of gotcha. It has been a problem for a long time, and Governments and regulators have to adapt constantly to deal with it. As we have been discussing this afternoon, as the pattern of business, trade and company ownership changes, so must the law and the regulatory rulebook. There is no embarrassment in acknowledging that we have a problem with money laundering or fraud, or, indeed, in introducing changes. Doing so is a strength.

The problem that the new clause deals with is twofold. First, there is the straightforward issue of fraud or crime—positive acts of wrongdoing—being committed. Secondly, there is the situation where breaches of the law take place in a company and it is impossible to hold the company to account because there is no duty on the company to prevent such acts in the first place. We saw that kind of thing graphically during the LIBOR scandal, which we have discussed in our proceedings. One chief executive after another—some of the highest-paid people in the world, it should be said—professed their profound shock at what their traders were doing. They knew nothing about it until they read about it in the newspapers, and they were absolutely dumbfounded at what was going on several floors below them in the same company. It worked for them: there were no corporate prosecutions in the UK.

I have already spoken to the Committee about the incentive to look the other way that this situation entails. It is better for a senior director of a financial institution to appear to be a fool than a knave, because the defence that they did not know what was going on is usually better for them than saying that they did know what was going on, but they did nothing about it. Not only that, but further down the chain it creates a disincentive to report wrongdoing further up the hierarchy, because doing so may mean that the ignorance defence is not available to those at the top of the hierarchy. That creates a mismatch between how small companies and large companies are treated, because small companies are assumed to have a directing mind, so that, if wrongdoing is identified, professing ignorance is not a defence for senior managers.

What would creating an offence of failure to prevent economic crime do? It would create a level playing field between small and large companies; it would send out a strong signal about the kind of financial sector that we want as we come to the end of the transition period; and it would equalise how different kinds of economic crimes are treated, because such a liability—I stress that it would be a corporate liability—already exists when it comes to, for example, bribery or tax evasion. Why should the ignorance defence be available for some offences but not for bribery or tax evasion? The Treasury would never accept it if senior members of a company said, “Oh, we didn’t know we were supposed to pay those taxes.” That would not be a legitimate defence, and yet it can be used for some other kinds of wrongdoing.

Let me return to the point about the signal that we want to send. A lot of the Bill is about onshoring EU directives. The sixth anti-money laundering directive requires EU member states to have corporate criminal liability for money laundering. Under the directive, corporate liability must include an offence that occurs owing to a lack of supervision or control by a person in a leading position in a company. We do not have that at the moment. The Bill is an opportunity to correct that. Remember, we are waiting for an equivalence decision. Do we really want our first big signal on divergence to be a departure from the rules on money laundering? Is that really the message that we want to send?

However, we should not do this only because the EU is doing it. We should do it on its own merits. The Treasury Committee reported last year on how difficult it is to prosecute multinational companies, saying that

“multi-national firms appear beyond the scope of legislation designed to counter economic crime. That is wrong, potentially dangerous and weakens the deterrent effect a more stringent corporate liability regime may bring.”

I anticipate the Minister’s response—that he thinks there are a lot of strong points here, and that he is sympathetic to the argument, but that he wants to wait for the Law Commission consultation. I cannot remember which pot we would put that in. [Interruption.] If it is pot three, I will take his word for it.

The focus of the Law Commission’s consultation is what is known as the identification doctrine, or what we might call the question of a directing mind. However, nothing in that consultation should prevent the Government from introducing a “failure to prevent” offence that could apply to small and large companies alike. Indeed, it is already implicit in the way that small companies are treated. Why should larger companies continue to be able to wield an excuse that is not available to smaller firms? When it comes to the treatment of small firms, I suspect that the Minister will hear that argument in the Chamber, if not in the Committee, from Members on his side of the House as well as on ours.

Furthermore, the Law Commission may take some time. We heard oral evidence that the pace on this has been glacial. However, our transition period ends in less than a month. It is not as though we do not have an ongoing problem with money laundering and financial crime, so what are the advantages of waiting? Corporate liability is not a new or revolutionary idea; it already exists for bribery and tax evasion. HMRC has said that it

“does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law.”

The lack of such an offence was also pointed out in the Financial Action Task Force 2018 UK evaluation, which pointed out the difficulties in proving criminal intent.

There are a number of reasons to act: the size of the problem, the unfairness between small and large companies, consistency in the way we treat tax evasion, our desire for equivalence recognition, the signals that we want to send about the character of our post-Brexit financial regulatory system and, perhaps most of all, because it is a good thing to do. For those reasons, I hope the Minister will consider the proposals in the new clause.

[John Glen]

The new clause proposes to create a new criminal offence, for FCA-regulated persons only, of facilitating economic crime and of failing to prevent economic crime.

In recent years, the Government have taken significant action to improve corporate governance and culture in the financial services industry. Following the financial crisis we introduced the new senior managers and certification regime. The regime is now in place for all FCA-regulated firms, and it requires firms to allocate to a specific senior person a senior management function for overseeing the firm’s efforts to counter financial crime. If there is a failure in a firm’s financial crime systems and controls, the FCA can take action against the responsible senior manager where it is appropriate to do so. That enforcement action includes fines and prohibition from undertaking regulated activities.

As well as creating the senior managers regime, through the Money Laundering Regulations 2017 and subsequent amendments, the Government have recently strengthened the anti-money laundering requirements that financial services firms must adhere to. Failure to comply with these requirements can be sanctioned through either civil or criminal means. Recent FCA regulatory penalties related to firms’ anti-money laundering weaknesses include a £102 million fine for Standard Chartered in April 2019 and a £96.6 million fine for Goldman Sachs in October 2020.

I hope that recent action demonstrates to the Committee that the Government are committed to upholding a robust framework that deters and sanctions any corporate criminal activity in the financial services industry. It is only right that we challenge ourselves on whether we need to go further, and I listened very carefully to the right hon. Gentleman. Regardless of our tenure, the Government must always take that responsibility seriously.

In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. It is fair to say that the findings of the call for evidence were inconclusive. As such, the Government’s response to the call for evidence determined that a more comprehensive understanding of the potential options and implications of reform was needed. As the right hon. Gentleman acknowledged, the Government have therefore tasked the Law Commission to conduct an expert review on this issue.

Through the Bribery Act 2010 and the Criminal Finances Act 2017, the Government have demonstrated we are open to new “failure to prevent” offences. These offences, however, were legislated for because there was clear evidence of gaps in the relevant legal frameworks, which were limiting the bringing of effective and dissuasive enforcement proceedings.

Before any broader new “failure to prevent” offence for economic crime is introduced, there needs to be strong evidence to support it. It will also be important that any new offence is designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business. The scope of who a new offence applies to must also be holistically worked through.

The Law Commission’s work will take some time, but it is clear that we are zoning in on that aspect of the problem. In the light of that response, I ask the right hon. Gentleman to withdraw the new clause.

[Mr McFadden]

I am happy to withdraw the new clause today, but I suspect the Minister might meet a very similar amendment later in proceedings on the Bill. I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 26

Legal protections for retail clients against the mis-selling of financial services

‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.

(2) In paragraph 1(a), after “individual”, insert “, partnership or body corporate that is or would be classified as a retail client”.

(3) In paragraph 1(b), leave out “who is not an individual”, and insert “not within the definition of paragraph 1(a)”.

(4) For the purposes of this regulation, a “retail client” means a client who is not a professional client within the meaning set out in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.’—(Stephen Flynn.)

This new clause seeks to give retail clients greater legal protections against the mis-selling of financial services products.

Brought up, and read the First time.

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Division 17

Ayes: 6

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Labour: 4
Scottish National Party: 2

Noes: 10

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Conservative: 10

[Mr McFadden]

On a point of order, Dr Huq, I would like to thank you and Mr Davies for your chairmanship during the proceedings, and the Clerks from the Public Bill Office for helping all of us with our amendments in recent weeks. I would like to thank my colleagues on the Opposition side of the Chamber; I believe we approached this in the right spirit. We set out at the beginning the way we would approach it and I think that is the way that we have carried through: trying to improve the Bill, to give it proper scrutiny and to try to point to some kind of future direction for UK financial services as we come to the end of the transition period. Some of us here are Front-Bench Members and this is part of our terms of appointment, so, with their indulgence, I would particularly like to thank my hon. Friends the Members for Wallasey and for Walthamstow, who I believe both brought considerable experience and value to our proceedings.

I would like to thank the Minister for his patience and forbearance. We did not set out to torture him, I promise, but I appreciate that for him, taking through a Bill like this is a substantial piece of work, and I am grateful to him for the spirit in which he responded to amendments, questions and so on as we went through. Finally, I thank the Back Benchers on the Government side. For the most part they took a rather passive approach to the proceedings. There is a mixture of experience and new MPs on that side. To the new MPs in particular I will say that I hope the last three weeks have been an important part of their learning about what it means to be a Government Back Bencher.

[John Glen]

Further to that point of order, Dr Huq, I thank the right hon. Member for Wolverhampton South East for the courteous and constructive way in which he led the Opposition scrutiny of the Bill. I thank all members of the Committee for their contributions. I looked carefully at all amendments, and I did not categorise them in buckets. I thank you, Dr Huq, and your colleague Philip Davies, and the team of Clerks, as well as my officials from the Treasury, who sit silently at the end and do a great deal to support me and the much wider team back in the Treasury who have helped to prepare the Bill. Clearly, we shall now move on to its further stages, and there is more work to do. I thank my hon. Friend the Member for Macclesfield for his support, in particular, as well as my hon. Friend the Member for Montgomeryshire, who has given me enormous support throughout.

Financial Services Bill

Pat McFadden Excerpts

Report stage & 3rd reading & 3rd reading: House of Commons & Report stage: House of Commons
Wednesday 13th January 2021 Commons Chamber

[Madam Deputy Speaker (Dame Rosie Winterton)]

Before I call the shadow Minister, I should say that we have until 6 o’clock for this debate and a number of colleagues want to get in. I have introduced a five-minute time limit to start with, to try to accommodate some of the main people behind other amendments, but it is very likely that I will quickly have to take that down afterwards; I just warn colleagues that that may well happen.

I remind hon. Members that when a speaking limit is in effect for Back Benchers, a countdown clock will be visible on the screens of hon. Members participating virtually. For hon. Members participating physically in the Chamber, the usual clock in the Chamber will operate.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Madam Deputy Speaker, may I wish you, the Minister and the House a happy new year?

The Bill returns to the House at a very important moment for the country’s economy and our financial services industry. We have just come to the end of the transition period with the European Union, and we are of course in the teeth of the battle against the virus. Against a background like that, the business of legislating can seem even more prosaic than usual, and perhaps that is even more the case with a Bill such as this one. It is a mixed bag of measures dealing with everything from onshoring various EU directives to the length of the term of office for the chief executive of the Financial Conduct Authority. Some of it is a necessary consequence of our withdrawal from the European Union, and other parts look as though they have been sitting in the Treasury waiting for a legislative home, like policies hoping for a passing bus.

I want to focus on the amendments tabled in the name of the Leader of the Opposition and then turn to some of those tabled by my right hon. and hon. Friends. The first amendment I want to speak to is our amendment 1 on the UK’s net zero commitments. The Bill sets out, in schedules 2 and 3, a list of things that the regulators have to have regard to in the exercise of their new and expanded functions under the Bill. It talks of international standards and competitiveness, yet nowhere is there a mention of the overarching goal that will shape so much of our economy in the decades to come.

In this place, we have rows and arguments about all manner of issues, but sometimes the things that generate the most heat, if the Minister will pardon me the pun, are not always the biggest or most important issues. Conversely, just because an issue has bipartisan support does not make it less significant, and there is no doubt that the Climate Change Act 2008, as amended by the Climate Change Act (2050 Target Amendment) Order 2019, is one of the most significant pieces of economic legislation to pass in this country for many years.

To achieve our net zero goals will require wholesale change in many walks of life. The briefest of looks at the Committee on Climate Change’s report on how this should be done shows what the main areas will be. On energy, we need to find replacements for fossil fuels, we have to invest in the shift to hydrogen and we are still trying to make carbon capture and storage a practical reality. On transport, the transition to battery power will have to proceed at an ever-increasing pace. On housing, we need not only to build new zero-carbon homes, but to retrofit millions of existing homes with zero-carbon heating systems. Agriculture, food production and even the clothes we wear—all these things will undergo big change, and all of them will require significant financial investment.

The UK financial services sector has a huge role to play. In seeking a post-Brexit role, what better long-term mission could there be than empowering the change that we need to make to preserve the planet for future generations? This is not just my view—the Chancellor himself has said as much. In his statement on the future of financial services, given two months ago from the Government Dispatch Box, he not only announced the first green gilts, but said he wanted to see

“the full weight of…capital behind the critical global effort to tackle climate change”.—[Official Report, 9 November 2020; Vol. 683, c. 621.]

Yet this Bill, which empowers the regulators in so many other ways, is totally silent on that issue. The Minister says we might do it in the future. [Interruption.] He says from a sedentary position that we will do it in the future. He has an opportunity to do it today—he could just accept the amendment. What is the point of waiting until the future to do this, as he has indicated he will, when there is an amendment that does not seek to add any new commitments but simply to make this part of the remit of our financial services regulators?

There are many reasons, as my newly ennobled—if that is the correct word; newly honoured, perhaps—hon. Friend the Member for Wallasey (Dame Angela Eagle) said, to say no to amendments, but “not invented here” is one of the worst if the Government have indicated they are going to accept it.

The Government say they want the UK to be the centre for green finance globally, but their first legislative outing on this sector since we left the European Union says nothing about mandating the regulators of the industry to make that part of their mission. As I said, our amendment does not seek to add to the commitments on net zero that the UK has already made, which are already set out in legislation and enjoy the support of all sides of the House, but to make these part of the remit of the regulators that shape our financial services industry. There is already a move towards greater environmental investing from investment funds and from consumers who want to invest in this way, and there is a desire for these products, so why do the Government not back that up by making it part of the regulators’ remit?

We know that these commitments cannot be met without large-scale investment. To anyone who says to just leave it to the market if there is an investor desire, we also know that it cannot be done by the private sector alone. This will take both the private sector and the public sector working together and pulling in the same direction. It is in that spirit that we put forward the amendment. We ask for something that has bipartisan support, is in line with the post-Brexit goal for the sector as set out by the Chancellor himself and will make it easier for the country to achieve its commitments.

Further to that, we are also asking for something that the Minister said in recent minutes that the Government will do at some point anyway. We very much hope that, between now and six o’clock, the Government will reconsider and accept the amendment, which they said they agree with and will bring forward in some way themselves at some point.

Just two weeks ago, the House approved the post-Brexit trade and co-operation agreement, but for financial services this is basically a no deal agreement. The references within it do no more than repeat standard pledges of co-operation in every free trade agreement. The Prime Minister himself acknowledged that, for this sector, he did not achieve as much as he hoped. Indeed, within a few days of the agreement, £6 billion-worth of euro-denominated share trading shifted from London to European exchanges—an immediate response to the new situation.

[Dame Angela Eagle]

Does my right hon. Friend agree that the way the Government approached the Brexit negotiation means that there is literally no incentive for the EU to agree equivalence arrangements, because the lack of them means exactly what he just pointed out—jobs and trading formerly done in London migrating to the EU? Does he also agree that, in this new environment, any move by the Government to give the City a competitive edge is likely to lessen the chances of progress on equivalence in the EU, and the market access that comes with it? That is another threat to jobs in the City and to tax revenue for the Exchequer.

[Mr McFadden]

My hon. Friend is absolutely right that this throws into sharp relief the claim that we hold all the cards. It also throws into sharp relief the debate about divergence, as that remains undecided. The fact that the agreement approved by this House two weeks ago did not cover financial services in any meaningful way was not an accident; it was a choice that the Government made. Step by step, the Government abandoned any attempt to prioritise the market access that the financial services sector, and indeed services in general, had until the end of last year. I remind Conservative Members of the Chequers paper published in 2018, of which they may have more or less fond memories. It acknowledged that on this issue,

“there will be more barriers to the UK’s access to the EU market”

than there are today. On equivalence regimes, it said:

“These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes”—

that is, the equivalence regimes—

“do not provide for…institutional dialogue…a mediated solution where equivalence is threatened by a divergence of rules or supervisory practices”.

That which was deemed insufficient by the Government two and a half years ago has now become the height of their ambitions, and even that has not yet been achieved. With each step back from what they aimed for before, the incentives to shift funds and people become bigger.

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[Kevin Hollinrake]

The right hon. Gentleman is speaking to an important amendment that not only allows for corporate prosecution but allows for a person who is registered with the FCA to be prosecuted. Is that not a critical point? Unless we start holding individuals to account for these wrongdoings, we will never stamp out these corporate failures and this corporate abuse.

[Mr McFadden]

The hon. Gentleman makes a very strong point, and it is why we believe these are strong amendments. We should do this because it is right in itself, and it is an important signal to send about financial services in this post-Brexit world. We do not want to send a signal that we are going for relative weakness in anti-fraud and anti-money laundering laws. Instead, the signal should be that we insist on the strongest possible measures.

New clause 21 seeks to establish a duty of care. This is a long-running debate, and we tabled a similar amendment in Committee. The new clause is intended to make companies ask not just whether their products are legal but whether they are right and are in the consumer’s interest.

New clauses 25 and 26 seek to address the plight of mortgage prisoners. These are people who are stuck on very high standard variable rates and have no ability to switch. All I would ask is, if the Minister cannot accept these amendments, will he continue to work on this issue to try to help these people who are trapped, through no fault of their own, on very uncompetitive rates? He mentioned 3% or 4%, which is much higher than is available in a mortgage environment where the base rate is 0.1%. That can mean paying thousands of pounds more per year, depending on the size of the mortgage, so this is a real material difference for people.

We have a global financial sector in this country that, if properly regulated and paying its way, is a huge asset to the people of this country. We want it to be innovative and successful, but we also want to ensure the public are properly protected against risks if things go wrong. That is the spirit in which we tabled these amendments, and it is the spirit in which we have approached the Bill throughout. I hope the Minister will consider that when it comes to the votes in a couple of hours’ time.

[Sir Iain Duncan Smith (Chingford and Woodford Green) (Con)]

I rise to support amendment 7, in the name of the hon. Member for Bethnal Green and Bow (Rushanara Ali), myself and 41 other Members. The Minister knows well, because we have had this discussion before—just in case it was to be private, I want to make it public, not because I do not trust him, but I just think it is helpful for him to know that—that the amendment seeks to bind or hold those involved in financial trade and investment to a definition of who they should not trade with and why. To that extent, it introduces the concept of a genocide definition. This measure is also in the Trade Bill, which is coming back to the House, and I make no apology for supporting the hon. Member for Bethnal Green and Bow in this. She will speak later, but as I understand it, she may not move the amendment. However, that is not the point. The point is that it is time to air this argument.

For too long, we have allowed ourselves to walk away from the issue of genocide without ever managing to hold any country guilty of this. Successive Governments have found it impossible to act because these issues are apparently referred to the International Criminal Court. The Government say to me, “It’s a matter for the international courts,” but they know full well that any reference to the ICC has to come from the Security Council, and it will never come from the Security Council because at least two of the nations there will always block it, particularly if it is to do with them or their allies. That is a distinct weakness, and I refer, of course, to the Chinese Communist party and Russia.

Let me give a couple of examples. We have discussed many times—the Foreign Secretary made a statement on it this week—the fact that many companies invest in, take trade from and take goods from areas of the world that are using slave labour. We know that this is happening in many places. For example, what is happening to the Rohingya is, in my view, likely to be defined as genocide. We can also look at what is happening to the Uyghurs in China. It is becoming more and more apparent every day that between 1 million and 3 million Uyghurs have been moved into labour camps. They are used as slave labour. They face forced sterilisation. There has been an 85% drop in their birth rate in that area. They have been moved out of their original area of work, and they are no longer allowed to speak their own language.

That is just one aspect, but a very brutal one, of what the amendment tries to deal with. After the Rwandan genocide in 1994, nothing happened. After the Bangladesh genocide in 1970, nothing ever happened. After the Cambodian genocide, nothing ever really happened. We still do not know what will happen, if it ever does, about Daesh’s genocide against Christians, Yazidis and so on, and companies will never be held to account for what they were involved in.

I realise that time is short, so I will conclude. Neither this amendment nor the one to the Trade Bill ties the Government’s hands. It does not give courts the right to proceed with investigations without reference. It does not give them the power to make criminal punishment, and it does not strike down trade deals or force criminal prosecutions. It would raise to the attention of the Government and the world that, at last, a domestic court here in the UK—the High Court or maybe the Court of Session—will be able to rule that, by all probability, genocide has taken place, and any financial institution, company or organisation involved with that area where genocide has taken place or with that country would no longer be allowed to do so. The Government would have to make that decision; that is the point.

I understand that, this week, the Board of Deputies is coming out in support of the amendment to not only this Bill but, importantly, the Trade Bill. I also understand that the US Senate, having seen what we have put forward, now plans to do the same. We have a chance here for leadership in the world. I thought we left the European Union to empower our courts and to give leadership. Again and again, I have been told by Ministers, “Not this, not now, not here.” The simple question I ask is, “Exactly when, what and how?” because that is never answered.

I finish by reading this:

“First they came for the socialists, and I did not speak out—

Because I was not a socialist.

Then they came for the trade unionists, and I did not speak out—

Because I was not a trade unionist.

Then they came for the Jews, and I did not speak out—

Because I was not a Jew.

Then they came for me—and there was no one left to speak for me.”

We need to speak out for all these oppressed peoples, whether it is in finance or in trade, and take the moral high ground.

--- Later in debate ---

[Mr McFadden]

I will not detain the House for very long. As this is my last contribution to the debate on this Bill, I begin by thanking the Minister and his Bill team for their patience and forbearance throughout our proceedings—it feels like we have been dealing with this for a few months now. I also thank the SNP spokesperson, the hon. Member for Glasgow Central (Alison Thewliss), who has gone through the Bill assiduously and tabled many amendments.

I thank the Clerks in the Public Bill Office, Kevin and Nick, for helping us. They play a particularly important role in helping Opposition Members to draft and discuss amendments. The ideas are our responsibility, but they give us very good and important technical advice.

I thank the Committee Chairs, the hon. Member for Shipley (Philip Davies) and my hon. Friend the Member for Ealing Central and Acton (Dr Huq), and all the Members who have taken part in the debates, tabled amendments or spoken in any way. I make particular mention of my hon. Friend the Member for Wallasey (Dame Angela Eagle), whom I congratulate on her recently awarded damehood. Finally, Mr Deputy Speaker, I thank you and your colleagues in the Chair.

We have not opposed the principle of the Bill, and we will not vote against Third Reading tonight, because we recognise the need for post-Brexit stability in regulation. We also recognise that this is possibly the first of a number of pieces of legislation of this type. We have sought to improve the Bill in various ways, either in Committee or today on Report.

With the exception of the FinTech and financial crime amendment, the Minister has been, for the most part, resistant to these amendments, but a number of key issues have been raised. I hope that he and the Treasury will consider the broad sweep of issues raised around things such as: crime and money laundering—there is a real desire in this Parliament not to see our financial sector being regarded as an easy place for those things to happen; consumer debt and protection—Members have voiced quite passionate concerns, particularly given the year that we have just been through and the impact on household finances, that consumers are given help with what for many is a growing debt burden, and protection against mis-selling or inappropriate treatment by financial services providers or companies; mortgage prisoners, who we have heard about tonight, many of whom are locked into very difficult and disadvantageous mortgage products; plus the broader issues that we have raised about post-Brexit financial services, equivalence, green finance and so on.

The Government made a big decision—a big choice—particularly in their reincarnation, or incarnation, since December 2019: to place the issue of sovereignty above considerations of market access. We might go further and say that they chose to place the issue of sovereignty above considerations of economic prosperity, although perhaps Ministers and Members abroad would contest that. None the less, a choice like that was certainly made and it has big implications, potentially, for a sector that contributes a significant proportion of our GDP, employs around one in 14 people in the country, earns a lot of export revenues for the country and is a very significant contributor to tax revenues that pay for public services. We all have a great deal of interest in how this sector will be run as we have come to the end of the transition period. As I said earlier, we want this sector to be successful, to be innovative, and also to be responsible.

We want to ensure that the sector does well, but also that the public is properly protected against the risks inherent in an economy like ours, having such a globally significant financial services sector, and the risks if things go wrong, which we saw in our recent history. We certainly do not want to see a slash-and-burn approach to regulation in order to compensate for the decision—I stress the word “decision”— to lose at least a proportion of the market on our doorstep. It is in that spirit that we have approached the Bill, that we have tabled the amendments, and that we have chosen the amendments that we have put to the vote. Thank you.

Financial Services

Pat McFadden Excerpts

Consideration of Lords amendments
Monday 26th April 2021 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

As we pass the midnight hour, we turn to the subject of money laundering. I am grateful to the Minister for his remarks and note that, alongside this statutory instrument, we had the statement earlier—I was going to say today, but it is now yesterday—by the Foreign Secretary, announcing sanctions against a number of named individuals. In that statement, the Foreign Secretary said that

“Our status as a global financial centre”

had made us both an attraction for investment and also a

“a honey pot—a lightning rod—for corrupt actors who seek to launder their…money through British banks or…businesses.”

It is precisely because we are a global financial centre that there is a special responsibility on the United Kingdom to ensure that each part of that sector always operates to the highest standards. We cannot build a future as a laundromat for dirty money, we cannot turn the other way when wrongdoing takes place and we cannot take part in the denigration of institutions. Of course, we also need the highest possible standards in our own public life if we are going to talk to other countries about corruption. That means allegations being properly investigated; it means a duty of propriety with public money; it means procurement based on open criteria, not on inside connections; and it means that those at the very top of our Government should tell the truth.

We support this instrument, which updates the list of third countries where extra due diligence is required in relation to money laundering and terrorist financing. We understand that these matters lie at the heart of national security and financial security, and we want systems as robust as possible in place to guard against money laundering and terrorist financing. Our defences against money laundering are not just a matter of law and regulation, vital though those things are; they are also a matter of enforcement, so I have a couple of questions for the Minister. Why does he think that in the recent FinCEN reports the UK was considered to be a higher-risk jurisdiction? Why does he think that so many shell companies are based in the UK? What are the authorities doing about that?

Both the Royal United Services Institute and Spotlight on Corruption have identified Companies House reform as an urgent issue in the tackling of corruption and money laundering. What are the Government doing to drive this? Where are we with the draft Register of Overseas Entities Bill? There was nothing about it in the most recent Queen’s Speech. Will there be anything about it in the next Queen’s Speech? A foreign property register was supposed to be established this year. Will the Government meet that deadline? Finally, where are the Government on implementing the findings of the Intelligence and Security Committee’s Russia report, which used the phrase “the London laundromat” in the first place?

Effective action against money laundering, terrorism and fraud is about a lot more than maintaining a list of countries; it requires action on all fronts if we are to fight these problems effectively. That is what we need to see.