Oral Answers to Questions

Debate between Pat McFadden and John Glen

Thursday 29th February 2024 Commons Chamber

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

As the Minister has seen, many questions have been asked today on the infected blood scandal. Will he confirm that it is no part of the Government’s decision-making process on the timescale of granting compensation payments to create the fiscal headroom needed for the much anticipated pre-election tax cuts in next week’s Budget?

[The Minister for the Cabinet Office and Paymaster General (John Glen)]

I can confirm that is not the case.

[Mr McFadden]

Baroness Mone and her husband made a £60 million profit on a £200 million contract for personal protective equipment, much of which the NHS deemed unusable. The couple, reportedly, have had £75 million of assets frozen, but they also have a horse running in Britain’s favourite horserace, the grand national. That is not racing’s fault, but would it not be a grand national disgrace if the owners were able to walk away with winnings while taxpayers are still waiting to get their money back from being sold a mountain of unusable PPE?

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Thursday 23rd November 2023 Commons Chamber

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

I welcome my old friend and sparring partner, the right hon. Member for Salisbury (John Glen), to his post. Questions have been raised about whether all benefits in kind received by the Foreign Secretary while he acted as a lobbyist for Greensill Capital have been properly declared. Will the Minister confirm whether his tax affairs were examined and considered by the House of Lords Appointments Commission before approving his appointment? If not, will the Government now investigate to see if all such matters, including any use of offshore trusts, were properly declared and taken into account before the appointment was made?

[John Glen]

I thank the right hon. Gentleman for his kind words—it is indeed good to follow him to the Cabinet Office brief. I will not comment on media speculation, but I acknowledge and thank him for his letter of yesterday. Lord Cameron’s appointment followed all the established processes for both peerages and ministerial appointments. The ennoblement was approved by the House of Lords Appointments Commission in the usual way, and that included a check with His Majesty’s Revenue and Customs. Details of the way in which HOLAC works with HMRC are published on gov.uk.

[Mr McFadden]

I want to ask about an angle of the matter mentioned by my hon. Friend the Member for Mitcham and Morden (Siobhain McDonagh). The Foreign Secretary received fulsome praise from the China Harbour Engineering Company for his role in promoting the Port City Colombo project in Sri Lanka. Can the Minister tell the House who the ultimate client was when the Foreign Secretary received payment from KPMG Sri Lanka for his role in promoting that project? Was it the Sri Lankan Government or the China Harbour Engineering Company, which is owned by the Chinese state?

[John Glen]

That is a matter not for me but for the processes that I have set out, which have been complied with. I believe that Lord Cameron has made some comments with respect to those matters.

Public Sector Pay

Debate between Pat McFadden and John Glen

Thursday 13th July 2023 Commons Chamber

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

I thank the Chief Secretary to the Treasury for the advance copy of his statement. Let me begin by praising the efforts of our NHS staff, teachers, police officers and members of the armed forces. The nurse who looks after someone when they are ill, the teacher who opens up new horizons for a pupil, the soldiers and police officers who keep us safe—we owe them all a great debt of gratitude. They are what make the good society, and we all rely on the public services they provide every day. Like all workers, they deserve a decent pay rise, and like all workers, they are living in a wider economic context.

The Government set out a plan at the start of the year, and then the economy intervened on their plan. They say that a plan does not survive contact with the enemy, but this Government’s plan has not even survived contact with reality. Just a couple of hours before the Chief Secretary to the Treasury gave us his statement, we heard news that the UK economy shrank in size last month. Even more worryingly, that comes after four years in which there has been no meaningful economic growth at all. Today’s Office for Budget Responsibility fiscal risk report describes what it calls a “disappointing decade” for economic growth. That disappointing decade means that, in reality, incomes for households, including the workers we are speaking about today, have stagnated and sometimes fallen. The country is less prosperous and more exposed to shocks than it should be, and that is the backdrop to today’s statement.

Ministers want to claim that all these problems are global, but inflation in the UK is the highest in the G7. Every month when the figures come out, they are higher than expected. Core inflation was up last month, not down. Food prices are rising 20% faster in the UK than in France, and three times faster than in the United States. Low growth, high prices, creaking public services—that is the legacy we have after 13 years of the Conservatives in power, with longer waiting times and waiting lists, and more than 3 million days lost to industrial action this year alone.

In his statement, the Chief Secretary to the Treasury talked of sound money, but the Government’s failings on public services have become economic failings too. Let me give the House one example. As the OBR pointed out in its risk report today, if we got labour force participation back to pre-covid levels by reducing ill health, we could reduce borrowing by £18 billion. The long waiting lists and waiting times are not just a health issue, but an economic issue. After the Conservative party put a bomb under mortgage rates last autumn, UK homeowners are now paying £2,000 a year more than those in France, £1,200 a year more than those in Belgium, and £800 a year more than those in Germany. It is not all global.

The Chief Secretary to the Treasury made a contrast with the Labour party, but Labour’s record on public services, which are at the heart of his statement, was investment and reform in the NHS, shorter waiting times and waiting lists, the highest levels of public satisfaction with the NHS since its foundation in 1948, and a fraction of the days lost to industrial disputes that we have seen under this Government. We also had better economic growth. When it comes to sound money, I remind the right hon. Gentleman that if we had continued with Labour’s rate of economic growth, the Treasury would be tens of billions of pounds a year better off than it is today.

What is the Government’s estimate of the impact on public services of funding the rises in the way he has set out? The Chief Secretary to the Treasury talked of “reprioritising”. Does that mean that the Government will cut back on capital investment in schools and hospitals in order to fund those increases? What is the estimated impact of the civil service recruitment freeze that he announced for the Ministry of Defence? What will be the impact on the NHS recovery programme that has been set out, and what will it mean for the shocking level of waiting lists and waiting times that we see under this Government? He said there would be no new money, but he also said that the pay rise for teachers was fully funded with new money. Which is it, and can he clarify the two things that he said in his statement about that?

The economic backdrop colours everything in this statement. It is no longer a matter of judging whether the Conservative Government will fail; the fact is that they have already failed. That is why the general election cannot come soon enough.

[John Glen]

It is not clear to me or, I think, to the House as a whole whether the right hon. Gentleman accepts the Government’s acceptance of the pay review bodies’ recommendations in full today. He seems to have written his speech as a general critique of the Government’s economic policy, without addressing what matters most to public sector workers up and down the country, which is that we have listened carefully to the evidence-based advice, as is typical over the past 13 years, and agreed with all those recommendations.

The right hon. Gentleman paints a picture of the last Labour Government and projects forward, as if it were utopia. That is why Labour did not win the 2010 general election and why one of my predecessors said there was no money left. Labour did not take those difficult decisions between 2008 and 2010, and that was the situation we were in when, I believe, he was attending Cabinet.

The right hon. Gentleman made some other observations about the economy. I am aware of the record growth over the past two years. I acknowledge the challenges we face at this point in time, and I have set them out in full with respect to inflation, but we have gone through a pandemic, where we borrowed significant sums of money. When we came out of that pandemic, we found ourselves in the first war in Europe for several generations. That is the context that the people of this country understand.

I have set out clearly all the implications for each workforce, and there will obviously be a series of written ministerial statement from each Government Department. The right hon. Gentleman also sets out some questions about waiting lists. I recognise the challenges faced in the NHS, which is why it is one of the Prime Minister’s top priorities. We have made real progress with the virtual elimination of the two-year waits, and 18-month waits are down by 90%, but I acknowledge that there is more work to be done. The £2.4 billion invested in the workforce plan will make a considerable contribution to that. The productivity review that the Chancellor tasked me with leading a few weeks ago will look further at how we can drive more efficiencies in how we spend public money.

I will finish my initial response by reiterating to the House that the decisions we have made today mean no new borrowing, no cuts to the frontline, no new taxes and no negative impact on inflationary pressures.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 7th February 2023 Commons Chamber

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

Following the recent levelling-up round 2 announcements, in which all five bids from Birmingham were refused, as were both bids from the great city of Wolverhampton, but, miraculously, the one from the Prime Minister’s constituency was approved, the Conservative Mayor of the West Midlands Combined Authority, Andy Street, said:

“Fundamentally this episode is just another example as to why Whitehall’s bidding and begging bowl culture is broken”.

What is the Chief Secretary’s response to the Conservative Mayor’s comments?

[John Glen]

My response is to explain that there is a rigorous process of scoring and evaluating all bids very carefully, as there has been over both rounds. In rounds 1 and 2, 45% was given to constituencies held by Opposition parties and 66% was targeted at category 1 constituencies. I recognise the disappointment some colleagues will feel and, therefore, there is another round. Details of that will be made available in due course.

[Mr McFadden]

Right now in the United States, job opportunities and investments throughout the country are being driven by the Inflation Reduction Act. The European Union is responding with an incentive package of its own. But the new Energy Secretary describes both those policies as “dangerous”. Does the Chief Secretary agree that the Inflation Reduction Act is dangerous? Or does he think that the UK needs a response that makes sure that we do not lose out on the green transition and that we, too, need a Government who want to see investment and jobs from the green transition in every part of the UK?

[John Glen]

The Government are totally committed to meeting our net zero obligations. In the comings weeks, as we prepare for the Budget, the Chancellor will be considering these matters in the decisions he brings to the House. Every economy will have a different set of pressures, but we will do everything we can to address the need to find the conditions for growth, deal with inflation and ensure that we set the economy fair for the future.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 20th December 2022 Commons Chamber

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

I echo the good wishes to you, Mr Speaker, to the Minister and to the whole House for a very happy Christmas.

Last year, the then Prime Minister and the then Chancellor, who is now the Prime Minister, announced a star chamber to crack down on waste and fraud in public expenditure. How often has the star chamber met, and how much of the £6.7 billion estimated to have been lost to covid fraud and error has been recovered?

[John Glen]

As the right hon. Gentleman knows, we have instituted a range of interventions, investing in His Majesty’s Revenue and Customs fraud prevention measures to embed those in business as usual. I have been in post for the past eight weeks, and I will be having a series of meetings in January.

[Mr McFadden]

The Minister could not tell us whether the star chamber has met at all.

On top of all the examples that have been cited today, the rescue of the energy company Bulb is estimated by the Office for Budget Responsibility to be costing another £6.5 billion, partly as a result of our hedge fund Prime Minister’s failure to hedge against rising energy prices. Why do the Government not show more respect for public money and chase down every penny of these losses before putting up taxes for 30 million people at a time when the public already face the biggest cost of living crisis for generations?

[John Glen]

I agree with the right hon. Gentleman about the imperative of chasing down all waste. The Government are providing continued funding for the Bulb Energy special administration regime while the sale of Bulb’s customers to Octopus is pursued by the energy administrator as an exit route from the SAR, but I will look at what the right hon. Gentleman said and reflect carefully on what we can do further.

UK Gross Domestic Product

Debate between Pat McFadden and John Glen

Monday 13th June 2022 Commons Chamber

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

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on today’s GDP figures.

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

Like other advanced economies, the UK is affected by global economic challenges, including the unprovoked Russian invasion of Ukraine. As the Chancellor said a few weeks ago,

“A perfect storm of global supply shocks is rolling through our economy simultaneously.”

At the same time, the impact from the wind-down of the national covid testing scheme is dragging on UK GDP data. Overall, the figures for April, published by the Office for National Statistics this morning, show that output fell by 0.3% on the month, with the services sector falling by 0.2%, and production and construction declining by 0.6% and 0.4% respectively. As the ONS notes, the fall in GDP on the month is driven by the impact of the wind-down of the NHS covid testing programme. Testing volumes fell by 70% from March to April, which, alongside the impact from vaccines, detracted 0.5 percentage points from GDP growth in April. Looking through the impact of falling tests, we see that the rest of the economy actually grew by 0.1%. Importantly, GDP is still 0.9% above pre-pandemic levels, and support provided over the past two years has put the UK economy in a good position to deal with any economic headwinds, with record numbers of employees on payrolls and a strong economic recovery from the pandemic.

As the Chancellor has also said:

“The next few months will be tough. But where we can act, we will.”

The Government are taking significant action to support households this year, having announced an additional £15 billion of further support for households just over a fortnight ago, on top of the £22 billion announced at the spring statement. In the longer term, the Chancellor has set out his vision for a lower tax, higher growth, higher productivity economy based on the three pillars of capital, people and ideas. The plan for growth and the tax plan represent an ambitious strategy for boosting growth and productivity in the years ahead. The Government’s priority going forward is to put those into effect, including through significant investment in infrastructure, skills and innovation.

We will of course keep the data under close review, and that includes monitoring the economic impact of Russia’s illegal invasion of Ukraine, but our focus will continue to be on the best solution for all: a growing economy that supports high-wage, high-skilled jobs.

[Mr McFadden]

I am grateful to the Minister for his response. GDP down 0.3% in April. A fall of 0.1% in March. Services down 0.3%. Production down 0.6%. Construction down 0.4%. Inflation at 9%. Tax promises broken. The trade deficit at £24 billion. The pound falling against the dollar. The director general of the CBI saying business leaders are “in despair”. The OECD forecasting that, next year, the UK will have the lowest growth of any G20 economy, with the sole exception of—Russia.

That is what the Government are presiding over. Britain is going backwards under the Conservatives. Our businesses, universities and people are all great, but they do not have the partner they need in this Government. The chaos is affecting more and more areas of life: passports, driving licences, GP appointments, A&E waiting times, airports and delays in court trials. Time after time what we used to take for granted is now another feature of Boris Johnson’s backlog Britain.

Those on the Government Benches had a chance to change direction last week. They had a chance to install new leadership that might have given us some hope of a greater sense of grip on all this. But what did they do? They decided that the best person to turn the economy round, to sort out the chaos and the backlogs, and to bring the qualities of focus, attention to detail and sustained delivery to these matters was the current Prime Minister. That was the judgment they made.

The question for the Minister today is simple: after making that judgment—I do not know what he did, but that was the collective judgment—and choosing to continue with the leadership that brought us here, what will the Government do now to turn matters around, and why on earth should anyone believe that the result will be different from what went before?

[John Glen]

As ever, I am grateful to the right hon. Gentleman for his remarks. I do not accept his characterisation of the situation. What I said in my response to him was that today’s data point can be explained by the specific impact of the rapid fall-off in the testing programme. Mass testing ended on 1 April, and that constituted 0.5% of headline growth. We have also seen the impact of the Russian invasion and the impact on the supply chain across the economy. Many economies across the G7 are experiencing a significant impact on their economies and their level of growth.

The Chancellor has been clear in his long-term plan for growth and in his Mais lecture that the Government are committed to investing in research and development, investing in infrastructure and looking at how we can adjust the fiscal burden for business, in particular, to enable that growth to happen. Of course, in subsequent fiscal events, those options remain open to him.

Coronavirus Grant Schemes: Fraud

Debate between Pat McFadden and John Glen

Tuesday 18th January 2022 Commons Chamber

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

(Urgent Question): To ask the Chancellor of the Exchequer, if he will make a statement on fraud in the coronavirus grant schemes.

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

Since March 2020, the Government have delivered a comprehensive multibillion-pound package to support individuals and businesses during the pandemic. As the House would expect, the Government have taken the issue of potential fraud relating to covid grant schemes extremely seriously.

Robust measures were put in place to control error and fraud in the key covid support schemes from their inception. For instance, to minimise the risk of fraud and error and unverified claims, the coronavirus job retention scheme and self-employment income support scheme were designed in a way to prevent ineligible claims being made up front, and made grants for employees and businesses using existing data held on Her Majesty’s Revenue and Customs’ systems. That included cut-off dates around scheme eligibility and the need for customers to be registered for pay-as-you-earn online or self-assessment. In 2020-21, HMRC recovered £536 million of over-claimed grants.

To further bolster anti-fraud measures, at the spring Budget last year, the Government invested more than £100 million in a taxpayer protection taskforce of more than 1,200 HMRC staff to combat covid-related fraud. This taskforce is expected to recover between £800 million and £1 billion from fraudulent or incorrect payments during 2021-22 and 2022-23.

The Government’s bounce back loan scheme supported more than £46 billion of finance to 1.5 million businesses. We are continuing to actively work with the British Business Bank, lenders and fraud authorities to tackle fraud and to recover loans obtained fraudulently. The value of prevented fraud was £2.2 billion, and we continue to recover further funds through our counter-fraud work. In addition, as part of the spring Budget last year, we announced plans to significantly strengthen enforcement activity against fraudulent bounce back loans. That included introducing processes with the Insolvency Service to prevent the fraudulent dissolution of companies being used as a means to escape liabilities, granting the Insolvency Service new powers and investing further in the National Investigation Service.

Importantly, throughout the pandemic we have been transparent about the estimated level of fraud and error in the covid schemes, and HMRC’s annual report and accounts, which were laid before the House in November last year, included the latest information on error and fraud in the HMRC-administered covid-19 schemes. Figures on estimated losses and the bounce back loans, including those due to fraud, were published in the Department for Business, Energy and Industrial Strategy’s annual reports and accounts.

Given the unprecedented efforts that the Government have made to protect jobs and livelihoods during this pandemic, it would have been impossible to prevent all related fraud. However, we have taken reasonable steps, and will continue to do so, to deflect and combat that fraud, and we will continue to be vigilant.

--- Later in debate ---

[Mr McFadden]

I am grateful to the Minister. Last week, the Government confirmed that they expect to write off around £4.3 billion of the funds allocated to coronavirus help schemes. There was no press release, no Instagram video, no statement to this House and no sight of the vanishing Chancellor at all; it was just buried away on the Government website. The Government website states, and the Minister repeated the claim, that from the beginning:

“Robust measures were put in place to control error and fraud in the key coronavirus support schemes.”

If robust measures to prevent fraud were in place, why did they fail to this shocking degree?

In November, the head of HMRC estimated that around half the money lost could be recovered. Why has that estimate now been downgraded to only a quarter of the funds? Why are the Government giving up so easily and not doing more to track down the money, rather than allowing it to remain in the hands of the fraudsters and criminals who have stolen it from taxpayers?

Mr Deputy Speaker, £4.3 billion is a huge sum of money. It is enough to take hundreds of pounds off energy bills this year for every household in the country. It is about the same annual amount as the Chancellor took off people on universal credit in the Budget in November. It is roughly the same as half the annual policing bill for the whole country. This write-off of £4.3 billion comes as households face a cost-of-living triple whammy of rocketing energy bills, the Chancellor’s tax increases and a decline in real wages. Coming on top of the billions wasted on crony contracts and the amounts lost in loan schemes, these levels of waste destroy any claim that the Conservative party had of being careful stewards of the public finances. Will the Minister launch an investigation into how this happened and do more to recover this money from the fraudsters who stole it in the first place?

[John Glen]

I thank the right hon. Gentleman for his comments, which I am very happy to address. First, we are not writing anything off. The figures quoted are what we expect that taxpayer protection taskforce to recover in the next two years in which it will exist. HMRC has longer to address fraud in the schemes, which it will do in the context of wider compliance activity. HMRC did not produce the figure of £4.3 billion. I understand that it was an inference made by journalists who subtracted £1.5 billion from the estimate of the amount to be recovered by the taxpayer protection taskforce from the £5.8 billion estimated as error and fraud in 2020-21. That was published and Jim Harra and others from HMRC publicised all this before Christmas—in November. HMRC simply used the same numbers in a “mythbuster” article to be published later this week.

Those are the facts. There is nothing new here today, but I would like to address some of the underlying concerns. The right hon. Gentleman is absolutely right to say that fraud is unacceptable. We think that, which is why—as I said in my opening remarks—in March last year, the Chancellor dedicated £100 million to employ 1,265 people from HMRC to undertake these fraud checks and to bear down on the fraud. We have had 13,000 one-to-one inquiries and sent 75,000 letters to those thought to have incorrectly claimed.

I point out to the right hon. Gentleman, however, that many of these schemes were stood up, refined and adapted very quickly. In order to meet the needs of individuals, the self-employed and businesses up and down the country, £81.2 billion of payments were made across the three main schemes. Although I recognise that there has been an element of fraud, the Government have never been complacent about that. Grants for employees and businesses used data on HMRC systems. The design of the scheme was informed by expert advice from HMRC, which has extensive knowledge and understanding of where errors and fraud risks lay. We have implemented post-payment compliance to identify and recover overpayment, and we have invoked automated controls into digital claim processes, which have prevented 100,000 ineligible, mistaken claims.

The Government are not complacent at all about error and fraud. We will continue to bear down on it, and I urge Members of the House and members of the public to continue to contact HMRC, as they have done, as we seek to maximise the recovery of moneys lost.

Covid-19: Government Support for Business

Debate between Pat McFadden and John Glen

Thursday 16th December 2021 Commons Chamber

[Mr Speaker]

The Minister will answer the question, and then you can say your piece.

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

It is clear that omicron is much more transmissible than other coronavirus variants, which is why, as the Prime Minister announced on Sunday, we are offering every eligible adult a booster dose before the end of the year. To get more jabs in arms, we have taken the proportionate and responsible step of moving to plan B in England to slow the spread of covid-19.

The rapid spread of omicron means this is a challenging time for a number of sectors, including hospitality. The Chancellor will be speaking to UK hospitality representatives this afternoon to understand their concerns. The Government continue to offer considerable support to businesses that might require extra assistance into next spring, as part of the £400 billion of direct economic help that we have provided during the pandemic.

For instance, we have reduced the VAT rate for hospitality and tourism businesses to 12.5% until March. Eligible retail, hospitality and leisure businesses in England are also benefiting from 66% business rates relief until March. And at the recent autumn Budget the Chancellor introduced a further 50% business rates relief for eligible businesses into the 2022-23 tax year.

Businesses can continue to apply for the additional restrictions grant until March 2022, as part of more than £2 billion of discretionary business grant funding during the pandemic. Businesses can benefit from our extension to the recovery loan scheme, which helps small and medium-sized enterprises to build back from the crisis by providing guarantees to lenders on finance of up to £10 million. Firms are also protected from eviction until March 2022 if they fall behind on their rent.

Firms in the arts and culture sector, meanwhile, can access the £2 billion culture recovery fund, the sports recovery package and the film and television production restart scheme until the end of April 2022. And our £800 million live events reinsurance scheme is giving event organisers confidence to plan ahead. Furthermore, the devolved Administrations have received an extra £12.6 billion this year, including an additional £1.3 billion in the autumn Budget.

This Government are helping businesses in every region and nation of the UK during these difficult times. We are speaking to the most affected sectors, and we will continue to respond proportionately to the virus’s changing path to support jobs, businesses and individuals, just as we have since the start of this pandemic.

[Mr McFadden]

Forgive me for my Christmas eagerness, Mr Speaker.

I extend my best wishes to my hon. Friend the Member for Leeds West (Rachel Reeves), the shadow Chancellor, as she recovers from covid at home. We know where she is, but where is the Chancellor? Why did he decide to proceed with a trip to California on Tuesday, when it was already clear that UK businesses were struggling to cope with what the Prime Minister himself has called a “tidal wave” of omicron?

Even if the Chancellor is abroad, California is not exactly a communications desert. They have television, and I have even heard that they have the internet, but it is still radio silence from the Chancellor. There is tumbleweed rolling through the Treasury, which says he is in communication with officials, but what about some communication with businesses that are losing bookings by the hour and watching their December profits vanish into thin air? Last night the chief medical officer advised the public to deprioritise social contact. Adherence to that advice will have a clear and direct impact on the hospitality industry, live music, theatre and other public events across the country.

The Government documents for plan B say that the decision on economic support will be made

“based on the data at the time.”

That time is now, so let me ask the Minister this: what measures will the Government take to ensure that those who have to isolate at home have proper sick pay that enables them to follow the rules? What will the Government do to help hospitality businesses affected by the chief medical officer’s advice to deprioritise social contact? Will any support also apply to live music, theatre and other events?

What are the Government doing to maintain supply chains, should they be affected by staff absences in the coming weeks? What is the Government’s response to the hospitality industry’s call to maintain the value added tax rates for that sector at 12.5%? Will the Government also allow local authorities to release any unused funds they may have from previous covid aid packages to support businesses right now?

The principle here should be that the level of support should match the economic restrictions in place. It is not about a blank cheque; there has already been enough wasteful spending from the Government in the past two years. Any package should be timely, proportionate and properly targeted and must guard against fraud. That is why it needs the full and focused application of Treasury Ministers and officials.

We are not in lockdown, but it would be totally disingenuous to pretend that businesses can trade normally when the Prime Minister has used a special national broadcast to warn the nation of a “tidal wave” of covid infections and the chief medical officer has told us to cut back on social contact. The Government cannot pretend that nothing has changed. This is not the time to abandon businesses, so will the Minister commit to announcing a package of support by the end of today—I mean UK time, not California time—that matches the situation that British businesses and workers now face?

[John Glen]

I thank the right hon. Gentleman for his questions. The Chancellor has been deeply engaged with business representatives throughout this pandemic and he will continue to be so. He was on a long-planned business trip to the United States, conducting Government business, and he will continue to engage today with other Ministers, with representatives of the hospitality sector and others, to hear their concerns about what further support should be required.

However, I will not be taking lessons from the right hon. Gentleman on some of these measures. Last year, when we put in place the bounce back loans, it was the shadow Chancellor at the time, the hon. Member for Oxford East (Anneliese Dodds), who specifically engaged constructively with the Chancellor to agree the basis for those loans. We have continued to work constructively throughout on a range of interventions for multiple sectors. We put in a package of measures at the Budget offering additional support and as of yesterday the covid additional relief fund will provide £1.5 billion for those in the supply chain to deal with some of the additional challenges. Of course the Government recognise the additional pressures that these measures and this strain of the virus bring, and of course we will engage carefully and listen carefully to those business representatives this afternoon.

Draft Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021

Debate between Pat McFadden and John Glen

Wednesday 1st December 2021 General Committees

[John Glen]

I thank the right hon. Gentleman for his points, and congratulate him on his elevation to his new position. I am surprised, given the talent in the Opposition ranks, that he is still doubling up and wants to do this job as well, but I am delighted to see him here today, and hope that I will not have to see him here again. He raised six substantive points, which I am happy to go through. His characterisation of the draft regulations as being the grandchildren of the EU directives is reasonable and, as ever, puts things in a clear frame of reference.

First, the right hon. Gentleman asked me for some reassurance concerning the equivalent supervisory authority of the regime to deal with Basel III. I can totally reassure him that the authorities will ensure that they are not sub-equivalent to Basel. That means the Treasury working with the PRA and the FCA to place great importance on international standing, which will help to ensure that baseline level of resilience. As he acknowledges, the UK was critical in shaping the Basel standards, and we will continue, even in the new regime, to ensure that safety and soundness are at the core of our objectives.

The right hon. Gentleman’s second point related to the point made yesterday in the other place with respect to the “have regard to” amendments to the FS Act. Obviously, our amendment to include a requirement to have regard to the net zero carbon target will apply after 1 January 2022. That means that the PRA does not need to have regard to climate change considerations in making the Basel III rules, nor the FCA in making the IFPR rules for 1 January 2022. That was done to ensure that there was no delay in implementing the Basel III reforms and the IFPR, but it will be for the regulators to determine going forward how the new duty will operate in practice. The Government anticipate that it should function in much the same way as other obligations during the PRA’s implementation of Basel III standards, such as the need to have regard to the ability of firms to continue to provide finance to business and consumers in the United Kingdom. The key point is that, subsequent to the implementation agreed in the Act, they will have an ongoing obligation to have regard to these matters.

[Mr McFadden]

That sounds like quite an important omission. We do not need to go over the history of it, but the Government themselves tabled an amendment saying that the regulators had to have regard to our net zero obligations. If I understand the Minister correctly, he is saying that it does not apply to the draft regulations, which implement the Basel III regulations—the main international post-financial-crisis measure of regulating banks to ensure that the taxpayer is not on the hook in the future. Is that not quite an important omission from the green direction that both of us want to see for financial regulation?

[John Glen]

No, I do not think so. I think the Opposition accepted the Government’s amendment with respect to its provisions on the timescale. That should not withdraw the urgent need to implement the Basel standards and the consultation process, which would have to have been repeated should we have had to wait until 1 January. That does not mean to say that on an enduring basis that will not be a consideration that the PRA and the FCA will need to have regard to.

Thirdly, the right hon. Gentleman’s asked about the ongoing discussions around MREL for challenger banks. The Bank of England is leading that review, and is currently considering the responses to its consultation. I have received a number of representations and discussed the matter with several challenger banks. I am grateful to the industry for its engagement on that review. The Bank will respond in due course, but I should not imagine that it will be too far away.

The right hon. Gentleman moved on to ask about the classification of systemic and non-systemic banks, and used the expression “too big to fail” around how those definitions will work. There is no attempt to somehow manipulate those classifications for deregulatory effect; it is simply the case that there are much smaller firms that do not have that systemic risk. Therefore, it would be appropriate, within the context of the rules and frameworks of the FCA, for them to be under its jurisdiction. The same will not be true of those that are larger, but there is no motivation behind that other than to find the most appropriate regulator to do the most appropriate regulation.

The right hon. Gentleman then asked about the capacity of the FCA to deal with the new obligations, in the context of the outcomes of some of the challenges that it faced after LC&F. I obviously keep in regular contact with the chief executive of the FCA; indeed, I am speaking to him tomorrow afternoon. There is no question of its resourcing being somehow challenged to take on that responsibility. We discussed the matter with the FCA at length prior to the passage of the Financial Services Act earlier this year. That is a matter for the FCA, but I am convinced that it is in a good place to continue.

The right hon. Gentleman then asked a broader question about competitiveness, and characterised the motivation of the Chancellor and the Government as to perhaps offer a deregulatory pathway to industry. I know that the right hon. Gentleman was able to attend the UK Finance dinner last week. I hope that he noted the emphasis that I placed in my speech on the need not to differentiate our position on deregulation. Indeed, the consultation on a secondary growth and competitiveness objective does not in any way undermine, or seek to undermine, the primacy of high regulatory standards, which have distinguished our regulators and financial system for a very long time.

I hope that that addresses the points that the right hon. Gentleman raised, and I will conclude by briefly reiterating the purposes of the instrument. It enables the implementation of Basel III standards, which is key to the UK’s international standing. It updates and accounts for the new IFPR definitions and takes FCA investment firms out of the scope of the UK resolution regime to reflect the new proportionate IFPR regime. Finally, it irons out some of the wrinkles of existing EU regulation. The measures will give UK firms certainty over the final elements of the Basel III standards and IFPR regimes, and I therefore commend the order to the Committee.

Question put and agreed to.

Critical Benchmarks (References and Administrators’ Liability) Bill [Lords]

Debate between Pat McFadden and John Glen

Committee stage & 3rd reading
Thursday 18th November 2021 Commons Chamber

[Peter Grant]

I will not detain the House by repeating my comments on Second Reading. I am grateful to the Minister for his answers to a number of my questions, but one question he did not pick up, and on which I hope he can give some assurance, is what happens if something goes badly wrong with people’s mortgages. The small percentage of people who have mortgages covered by this legislation—although it could potentially be quite a big number of people—are now, through no fault of their own, quite literally staking their home on our getting this right. Although I appreciate that the Minister will not commit to a specific compensation scheme just now, will he at least give an assurance that the Government have not closed the door on that possibility should unforeseen circumstances lead to it being necessary?

I am also looking for clarity on the precise circumstances in which the administrator does or does not have immunity from legal action. The Minister has said the administrator is covered if it does something the law says it has to do, and it will not be covered if it does something it has chosen to do in a particular way. Does the administrator have discretion on the precise methodology it uses to calculate synthetic LIBOR, and can it exercise its judgment on the numbers it puts into the model? If the administrator has such discretion, nobody needs to sue it for using a synthetic LIBOR model; they can just sue it because of how it has carried out the calculation.

Given the nature of contracts of the value that the right hon. Member for Wolverhampton South East (Mr McFadden) mentioned, a slight change in the published rate can mean a lot of money. Every time the published rate is arguably a wee bit higher or a wee bit lower than somebody else thinks it might have been, one party will win and be quite happy, and the other party will lose and will potentially have a strong motivation to resort to legal action. Are administrators adequately covered against being sued simply because they have published a figure that says the current synthetic LIBOR rate is 1.2% rather than 1.25%? Are there grounds on which they might be sued because those 0.05 percentage points of difference in the published synthetic LIBOR rate either make or lose quite a lot of money?

[John Glen]

It is a pleasure to serve under your chairmanship, Mr Evans.

The right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glenrothes (Peter Grant) have raised a number of questions arising from what I said. The Government are clear that we support this transition away from LIBOR by providing additional legal certainty for contracts relying on LIBOR past the end of this year. The provisions of the Bill are vital to using the synthetic rate in an orderly winding down of LIBOR, and they provide protection to consumers and the integrity of UK markets, but there are four or five elements that I will address now.

The hon. Member for Glenrothes mentioned compensation, and we do not anticipate that being an issue. As with all matters, the Treasury keeps things under review. We will continue to monitor what happens as a consequence of this methodology.

Both the right hon. Member for Wolverhampton South East and the hon. Member for Glenrothes mentioned legal action, and it is possible that judicial review could be raised against the FCA on the synthetic methodology it is prescribing for ICE. We think that would be extremely unlikely, given that there has been an active exercise of listening to representations on designing a methodology that has broad credibility. That is fundamental to the integrity of the process. There has been no attempt to develop a methodology in isolation or separate from the consultation with the market.

The right hon. Member for Wolverhampton South East asked about both the future timetable and what will happen with contracts that have fall-back clauses overridden by the effect of this legislation. This Bill provides certainty where a fall-back provision is triggered by a benchmark ceasing to be published or made available. Neither the designation of a benchmark under article 23A of the BMR nor the imposition of a synthetic methodology would trigger the operation of the fall-back provision. Where a contractual arrangement has a fall-back provision that is triggered by other means, this Bill does not affect or override the operation of that clause. For example, it will not override a fall-back triggered by an assessment of unrepresentativeness or a prohibition on the use of the benchmark, provided that the circumstances in which the fall-back was triggered are met.

[Mr McFadden]

In layman’s terms, does that mean that a fall-back provision trumps synthetic LIBOR? That is what I am trying to get at. If there is a fall-back provision—some alternative already written into the contract—will these synthetic LIBOR continuity provisions not kick in?

[John Glen]

What we are saying is that the fall-back provisions, if they are without reference to LIBOR, would still apply. Where LIBOR is the reference, we are trying to ensure this synthetic methodology would not trigger that fall-back provision on the argument that it is distinct from the LIBOR provision in the contract. Essentially, we are trying to establish that the synthetic LIBOR methodology is synonymous with and continuous from the previous LIBOR rate, as set by the panel, but it does not intrude on the contractual issues around the fall-back on another basis. That goes back to our provisions dealing with the continuity of LIBOR rate setting through this new methodology—anything else is not the Government’s intention.

The right hon. Member for Wolverhampton South East reasonably probes me about the future timetable, and whether the provision of “moral persuasion” from the Financial Conduct Authority and warnings would be sufficient. We will keep these matters under review. What we are anticipating, and what we have seen, is a rapid and increasing move away from reference to LIBOR, and we expect that that will continue right up to the end of the year. We will look at what is required on an ongoing basis, but we think that it is quite likely that there may not be need for further legislative intervention. However, we reserve the right at a future point to legislate as needed. What we would do, as the FCA is doing, is encourage people to transition away from LIBOR.

I was also asked about the rate difference. It is possible that when the methodology of LIBOR changes from relying on panel bank contributions to using this synthetic methodology, there could be a small change in the rate of interest that borrowers with contracts that reference LIBOR will pay. I mentioned on Second Reading that we expect the synthetic LIBOR to replicate the economic outcomes achieved under the panel bank rate. Obviously, that was the intention throughout. It is difficult to say exactly what the synthetic rate will be when it replaces LIBOR. In the medium term, we would expect it to be matched to the existing LIBOR rate, but smoothed to reduce day-to-day changes.

Today’s LIBOR rate is at historic lows, and it is worth noting that the rate can fluctuate significantly. For example, if we look at the three-month LIBOR on GBP, we see that it has varied from 0.28% in September 2017 to 0.92% at the end of December 2019, and it is now 0.11%. We have seen a lot of volatility in the past few weeks because of speculation about what is happening with interest rates. So there have been some days during the past months when the synthetic methodology would have produced a lower rate than panel bank LIBOR and others when it would have produced a slightly higher one. Therefore, it is not possible to fully account for what would actually happen. I hope that that addresses the points that have been raised in Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

The Deputy Speaker resumed the Chair.

Bill reported, without amendment.

Third Reading

Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021

Debate between Pat McFadden and John Glen

Monday 13th September 2021 General Committees

[John Glen]

I am happy to address Members’ points.

It is the Government’s view that the amendment will ensure that UK legislation remains up to date and continues to protect the financial system from the threat by jurisdictions with inadequate money laundering and terrorist financing. The amendment enables the UK to remain in line with international standards on money laundering and terrorist financing, allowing it to continue to play its full part in the fight against economic crime. I agree with the right hon. Member for Wolverhampton South East and the hon. Member for Glenrothes about the need to retain high standards in our financial services regulation—the consistent duty I have put on our regulators in conversations with them, week in, week out.

The right hon. Member for Wolverhampton South East was absolutely right when he said that, because of the size and sophisticated nature of financial services in the United Kingdom, keeping to those high standards will always be an imperative for us. He asked me to comment on the listing of Malta and Afghanistan. At the June 2021 FATF plenary, FATF collectively agreed to include Malta on its list of jurisdictions under increased monitoring. As this is one of the FATF public lists that the UK list mirrors, Malta will be added to the UK’s list of high-risk third countries. The outstanding issues that Malta must address are outlined in FATF’s publicly available statement.

The hon. Member for Glenrothes made a point about this country’s past. FATF’s rules and processes are searching, rigorous and extensive. The British Government receive extensive lobbying on these matters but we defer to the rigour of the process, no matter how uncomfortable it might be given the strong relationships we might otherwise have. Part of today’s upgrading following the June decisions goes ahead of where the EU is on a number of these issues, and I am pleased that we are applying the highest standards.

The right hon. Member for Wolverhampton South East made a number of points about Afghanistan and the challenges that exist. Afghanistan is not currently identified on any of FATF’s public lists, but it is important to note that the money laundering regulations require enhanced due diligence in a range of situations that present a high risk of money laundering or terrorist financing, not just where a transaction or business relationship involves a country that is listed as high risk. When assessing whether there is a high risk of money laundering or terrorist financing, the regulated sector must take a number of factors into consideration, including geographical risk where countries have been identified by credible sources and alerts from supervisory and regulatory bodies.

There are at present various sanctions in place in relation to Afghanistan that include members of the Taliban. Targeted sanctions impose an asset freeze, including making directly or indirectly available funds or economic resources to or for the benefit of designated individuals or entities. Under the UN’s existing Afghanistan sanctions regime, 135 designated individuals are linked to the Taliban or the Haqqani network—which as Members will know is a UK-designated and proscribed organisation closely linked to the Taliban—and four Afghan Hawala businesses. Several other designated groups and individuals with links or possible links to the Taliban are also designated under the UN al-Qaeda/Daesh regime, UNSCR 1267.

As anti-money laundering and counter-terrorism financing supervisors, the Financial Conduct Authority and HMRC reminded obliged firms in their recent alerts about potential financial crime risks from Afghanistan and about their obligations to ensure that they appropriately monitor and assess transactions with Afghanistan to mitigate the risk of their firms being exploited for money laundering or terrorist financing purposes and to implement sanctions screening. Similarly, the Office of Financial Sanctions Implementation, which sits within the Treasury, issued an alert reminding businesses that UN sanctions are already in place against individuals and entities associated with the Taliban. The alert advised businesses to exercise caution given the changing environment and reminded them of the continued existing obligations to carry out customer due diligence and implement sanction screening.

FATF will continue to analyse countries at risk and will likely look at those matters during its next plenary, which I believe is in October. The United Kingdom will play an active part in that conversation.

[Mr McFadden]

If we were to think of a country at greatest risk of being used for terrorist financing, Afghanistan and its new Government would be high in our thoughts. The Minister tells the Committee that the list is based on FATF’s work. I understand that, but presumably the Government have the power to go beyond FATF and say, “We think Afghanistan should be on the list.” Is there anything to stop the Government adding Afghanistan to the list, according to their own timetable, before FATF looks at the issue again?

[John Glen]

The purpose of this statutory instrument is to update according to the last assessment. We would not want, as a response to immediate events and without analysis or rigour, to add additional countries. I have explained at some length the considerable sanctions regime against proscribed individuals and the upgrading of the advice on its obligations to the regulated sector from HMRC and the FCA. Other jurisdictions such as the EU are not even upgraded to the list that I hope the Committee will agree to today. We do not rule anything out in the future, but we believe that FATF is rigorous. Indeed, the UK experienced rigorous analysis in 2018. We stand by the assessment and will see what it will do in October.

The hon. Member for Glenrothes mentioned wider issues with Scottish limited partnerships. The registration numbers thereof have diminished significantly recently, but as this is a BEIS competence I hope he will not mind my writing to him on it. I hope that satisfies the Committee.

Question put and agreed to.

Draft Bank of England Act 1998 (Macro-Prudential Measures) (Amendment) Order 2021

Debate between Pat McFadden and John Glen

Tuesday 6th July 2021 General Committees

[John Glen]

As ever, I thank the right hon. Gentleman for his questions. He referenced the leverage framework, on which I will go into some detail in answering his second and third questions.

It is the Government’s view that this instrument is necessary to ensure that the existing macro-prudential tools that the FPC has continue to operate effectively in the light of the changes that we have made in that wider prudential regime. In so far as all those changes are consequential of decisions made five years ago, I suppose that there is a tangential link, but it is not a direct causal relationship.

The right hon. Gentleman also asked about the leverage framework. It may be helpful to the Committee if I set out that that leverage ratio is an indicator of a firm’s solvency relating to its capital resources and assets and, unlike the risk-weighted capital framework, a leverage ratio does not seek to estimate the relative riskiness of assets. The purpose of the leverage ratio requirement, alongside risk-weighted capital requirements, is to guard against the danger that the firm’s models or regulatory requirements fail to reflect the current riskiness of its assets. Currently, the leverage ratio framework requires that major banks and building societies satisfy a minimum tier 1 leverage ratio of 3.25% on a measure of exposures that excludes central bank reserves, along with various buffers that relate to those in the risk-weighted capital framework. Separately, the PRA also maintains a supervisory expectation that all firms maintain a minimum leverage ratio.

The FPC and PRA have undertaken a review of the UK leverage ratio framework in the light of the finalised international standards. The Bank published a consultation on the outcome of that review on 29 June and there are three main proposals incorporated in the FPC’s consultation.

The first is the level. The proposal is to keep the existing leverage ratio framework broadly unchanged for UK consolidated groups of major UK banks, apart from implementing the Basel 3.1 changes.

The second is around scope—to extend the framework to UK banks, building societies, investment firms with significant non-UK assets and, where relevant, certain holding companies, which reflects the importance that such firms have for the functioning of the UK financial market and that the Basel standards require the leverage ratio to be applied to internationally active banks. The PRA propose to extend the leverage ratio of firms with non-UK assets of at least £10 billion, which will capture the larger, non-ringfenced banks and international broker dealers, including Goldman Sachs, JP Morgan and Morgan Stanley.

The third element is the level of the application—the leverage ratio framework would generally be extended at the individual level, except where a relevant firm is subject to a requirement on the basis of its consolidated situation. The PRA would also have discretion to allow a sub-consolidated requirement, rather than an individual one, to be applied in certain circumstances.

The Bank believes that the extension of the leverage ratio framework to internationally active firms would only result in modest additional costs for firms, which reflects that, for many firms, their risk-weighted capital requirements remain more binding than their leverage ratio requirements, firms typically hold management buffers above their capital requirements or they are part of wider groups.

In addition, the PRA has proposed other less significant changes, which reflect updated Basel standards relating to the leverage exposure measure used for calculating the ratio, and reporting and disclosure requirements, aligning with the Basel III standards to ensure that the UK remains consistent with transparency requirements in other jurisdictions.

The review of the leverage ratio framework took place in the light of those revised Basel standards. They require the leverage ratio to be applied to internationally active banks and therefore the main change being proposed to the framework moves the UK closer to international standards.

If the consultation proposals are implemented, the FPC will argue that the UK leverage ratio framework would be equivalent to Basel standards on an outcomes basis—indeed, in some areas, super-equivalent. For example, the FPC requires the leverage ratio to be met with a higher quality of capital than the Basel framework and includes some buffers that are not mandated by Basel. However, the UK framework would potentially be sub-equivalent to Basel on a line-by-line basis, as, for instance, the FPC framework does not put restrictions on distribution —for example, the paying of dividends—if a firm breaches its leverage ratio requirements. It also has a lower leverage buffer for globally systemic important banks.

There has been little reaction to these measures at the moment, but we will continue to monitor that. These are obviously complex matters that the Treasury keeps under close review. The provisions essentially ensure that we have absolute alignment of the FPC’s responsibilities and discretions to the new environment that we passed in the 2021 Act.

I hope that addresses the questions that have been raised—I am happy to give way to the right hon. Gentleman if not.

[Mr McFadden]

I thank the Minister for that explanation. Does the instrument and what it does on excluding the Bank of England balances make any difference to what he has just outlined and what the leverage ratio is? I think the answer is no.

--- Later in debate ---

[John Glen]

No.

[Mr McFadden]

I want to press the Minister a bit on this. Does the Government have a view on these capital requirements that is any different outside the EU from when we were in the EU?

[John Glen]

I confirm to the right hon. Gentleman that we do not. Though we are outside the capital requirements regime of the EU, our objective is to align to the highest global standards—we will just do that in a way that reflects the nuances of our banking system. We will always maintain the highest possible standards. Indeed, our international reputation relies on it.

I hope that the Committee has found my observations helpful to some degree and will be able to support the order.

Question put and agreed to.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 22nd June 2021 Commons Chamber

[John Glen]

I thank my right hon. Friend for his representations on this matter, and I heartily agree with him. We are promoting the international role of the sector and developing ambitious trade and regulatory relationships with other jurisdictions. We keep all these matters under review. We have taken on board the work of the taskforce on innovation, growth and regulatory reform, and just after Question Time, the Chancellor and I will be meeting representatives of banks as we seek to work with them to make those interventions that our financial services sector needs.

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

Financial services were not even part of the Brexit agreement that the Government negotiated, because they never made them a priority. Equivalence arrangements are nowhere in sight, £1 trillion-worth of assets have been moved abroad, and now food and drink exports to the EU have fallen by 47% in the first three months of the year. The Government estimate their new trade deal will add just 0.02% to our GDP. Is the sight of Ministers doing a lap of honour for that trade deal not the equivalent of asking our export industries to give thanks for losing a pound and finding a penny? When will the Government actually help our industries with the red tape that is baked into the agreement that they negotiated?

[John Glen]

I do not accept the right hon. Gentleman’s characterisation of where we are. On financial services, as I hope he knows by now, we have deep dialogue across a number of jurisdictions. That is an ongoing process. If I think about the work we are doing with Brazil, India and China and the dialogues we are having with Switzerland, there is no end to this Government’s ambition to improve our financial services’ relationships and deepen the opportunities that Brexit has given us.

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Second sitting)

Debate between Pat McFadden and John Glen

Committee stage
Tuesday 15th June 2021 Public Bill Committees

[Mr McFadden]

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

[Mr McFadden]

--- Later in debate ---

[John Glen]

[Mr McFadden]

[John Glen]

[Mr McFadden]

--- Later in debate ---

[Mr McFadden]

[John Glen]

[The Chair]

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Second sitting)

Debate between Pat McFadden and John Glen

Tuesday 15th June 2021 Public Bill Committees

[Mr McFadden]

My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.

Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.

The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:

“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]

That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.

The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?

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

I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.

[Mr McFadden]

I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.

In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.

--- Later in debate ---

[John Glen]

I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.

[Mr McFadden]

I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.

--- Later in debate ---

[John Glen]

As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.

On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.

As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.

The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.

That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.

I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.

In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.

We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.

I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.

We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.

There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.

[Mr McFadden]

I am grateful for the Minister’s response.

I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.

The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.

--- Later in debate ---

[Mr McFadden]

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]

London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.

There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.

Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.

I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.

[The Chair]

I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 27th April 2021 Commons Chamber

[John Glen]

The Treasury has, as my hon. Friend will know, amended the CBILS rules to allow lenders to extend loan terms from six to a maximum of 10 years, and that would assist borrowers in that repayment. CBILS term extension will be offered at the discretion of lenders, unlike pay as you grow options for bounce back loans, because they are different in terms of the guarantees that the Government have offered. Extensions are limited to those borrowers that lenders assess are in difficulty and will benefit from that extension, and only for the duration required. That customised approach, as I am sure he would understand given his vast business experience, is appropriate given the nature and scale of that different intervention.

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

When Lex Greensill was given his No. 10 business card, he had no contract and no job description, and there have now been reports that during the pandemic, the financial empire that he built may have lent Government-backed money based on invoices to companies that had never done business with his client, GFG, some of which say they had no intention of doing so. Will the Minister look into the issue of how this financing was structured and ensure that hard-working British steelworkers do not pay the price for Greensill’s collapse?

[John Glen]

I thank the right hon. Gentleman for his question. I can assure him that this Government are fully committed to examining all those matters through the review process and complying with all requests for information in order to get to the bottom of this matter.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 26th January 2021 Commons Chamber

[John Glen]

My hon. Friend has a lot of expertise in this area. He will know that, alongside the trade and co-operation agreement, we had a joint declaration to establish a structured regulatory co-operation for financial services and to discuss a whole range of matters around equivalence determinations going forward. The memorandum of understanding will be agreed in discussions between the EU and UK by March 2021. That will establish a framework for that co-operation. It would not be appropriate for me to give a running commentary on that, but the plans will come to fruition over the coming weeks.

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

The Brexit deal was, in effect, a no-deal outcome for financial services. Already some trade has moved, and there is big uncertainty hanging over access to European markets for this vital UK sector. Can the Minister confirm that it is in fact a Government negotiating aim to secure equivalence recognition for UK financial services in the memorandum of understanding being discussed between now and the end of March?

[John Glen]

To clarify for the right hon. Gentleman, the equivalence granting process is an autonomous, separate process from the MOU discussion. The MOU is about a framework to evaluate the future direction of financial services across the EU and UK. I remain very ambitious for the financial services sector. The Chancellor and I are continuing to have a dialogue—with roundtables with representatives of the sector this week and next week, as well as one-to-one meetings—to ensure that we listen to the sector, and respond appropriately and ambitiously for the future.

Financial Services Bill (Twelfth sitting)

Debate between Pat McFadden and John Glen

Committee stage & Committee Debate: 12th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[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.

--- Later in debate ---

[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 (Eleventh sitting)

Debate between Pat McFadden and John Glen

Committee stage & Committee Debate: 11th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[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.

--- Later in debate ---

[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.

--- 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 (Tenth sitting)

Debate between Pat McFadden and John Glen

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

[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.

--- Later in debate ---

[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 ---

[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.

--- Later in debate ---

[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 (Ninth sitting)

Debate between Pat McFadden and John Glen

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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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 ---

[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]

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 ---

[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.

Oral Answers to Questions

Debate between Pat McFadden and John Glen

Tuesday 1st December 2020 Commons Chamber

[John Glen]

The Government cannot force lenders to open to new bank customers for bounce back loans, but we have repeatedly encouraged lenders to open when it is operationally possible for them to do so. Indeed, nine lenders have managed to open to new customers for a period, and two are currently open, although for limited services. Their efforts, combined with the fact that accredited lenders account for a very high proportion of business in personal current accounts, mean that the vast majority of businesses should be able to get a bounce back loan through their existing relationship. Following the decision by the Chancellor to extend the scheme to 31 January, there are now two and a half months left to apply for a loan, after which we will be introducing a new guarantee scheme.

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

This weekend, we will mark Small Business Saturday, when we all have the opportunity to praise the work of the fantastic small businesses that contribute so much to our local economies and have been through a tough time this year. Bounce back loans have helped small businesses, but because of the ongoing pandemic, they have, by definition, also left some businesses with debts that they may not be able to pay. What is the Government’s estimate of the likely rate of default on bounce back loans, and what further support can the Government give to small businesses whose trading conditions will continue to be severely impaired for months to come?

[John Glen]

The right hon. Gentleman rightly praises the work of small businesses up and down the country, and I echo his sentiments. He asks about the provision we have made for the future of bounce back loans. Those who have taken out the loans will not be starting to repay, because there is an interest-free period until May next year. Indeed, we have decided to extend the time to pay for up to 10 years. Clearly, we keep these matters under review and are very sensitised to the burdens that small businesses face. That is why, as the Chancellor said earlier, we have introduced a number of measures in addition to the bounce back loans to support small businesses at this time.

Financial Services Bill (Eighth sitting)

Debate between Pat McFadden and John Glen

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?

--- Later in debate ---

[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.”

--- Later in debate ---

[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.

Financial Services Bill (Seventh sitting)

Debate between Pat McFadden and John Glen

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

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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?

--- Later in debate ---

[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.

--- Later in debate ---

[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 (Fifth sitting)

Debate between Pat McFadden and John Glen

Committee stage
Tuesday 24th November 2020 Public Bill Committees

[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?

--- Later in debate ---

[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?

--- Later in debate ---

[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.

--- 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.

--- 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)

Debate between Pat McFadden and John Glen

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

[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?

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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?”

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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

--- Later in debate ---

[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.

--- Later in debate ---

[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 (Third sitting)

Debate between Pat McFadden and John Glen

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

[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)

Debate between Pat McFadden and John Glen

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.

--- Later in debate ---

[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.

DRAFT BANK RECOVERY AND RESOLUTION (AMENDMENT) (EU EXIT) REGULATIONS 2020 DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020 DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MACRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020 DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020

Debate between Pat McFadden and John Glen

Wednesday 18th November 2020 General Committees

[John Glen]

I listened carefully to what the right hon. Gentleman had to say, and he is, as always, the model of courtesy and constructive opposition. The substantive challenge that he offered was about the value, legitimacy and appropriateness of a four-in-one SI debate. It is vital that we deliver each of these financial instruments before the end of the transition period both to ensure continuity and a fully functioning and effective legal and regulatory regime from 1 January 2021 and, in the case of the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020, to ensure that the UK meets its international obligations.

Given the links across each of the financial services instruments and the importance of them coming into force before the end of the year, it is appropriate for the Committee to consider them together, and it is the most effective use of parliamentary time. It is also the case that the SIs could not have been brought forward sooner. Several of the provisions in the instruments fix deficiencies in changes to EU regulations that have only recently become applicable during the transition period.

The right hon. Gentleman asked three specific questions about the SIs and then one about the process. He first asked about the extent of the changes from the BRDD II resolution regime. Under the terms of the withdrawal agreement, the Government will implement EU legislation, such as this regime, that evolved during the transition period. In our transposition of BRDD II, we have considered which provisions would not be suitable for the UK resolution regime after leaving the EU, while still maintaining that prudential soundness and the other important regulatory outcomes, such as consumer protection and proportionality. We have also taken into account concerns raised in consultation responses about the potential risk to financial stability and consumers. Given the complexity of those considerations, I am happy to write to the right hon. Gentleman to set things out more clearly.

The right hon. Gentleman asked about the extent to which CRD V changes the capital requirements regime. The capital buffers instrument is being introduced partly to ensure that the current macroprudential flexibility is maintained. The purpose of the buffers is to allow the regulators to continue to be able to address financial stability risks, including those posed by large institutions.

The right hon. Gentleman asked about hidden charges in remittances and referenced an answer I gave on 3 July about their cost. I am sorry, but I will have to write to him on that matter as well. I am sorry that I cannot offer him a clear answer now. I do not want to busk it.

[Mr McFadden]

Will the Minister give way?

[John Glen]

I am happy to give way. Perhaps the right hon. Gentleman will say that that makes the point that he made earlier.

[Mr McFadden]

No, I am grateful to the Minister for giving way. I would be grateful if he clarified the point. Let me be clear why. A clarification from him that the intention is to make transparent the full cost of fees and charges will help the regulators to police the charging of the instruments. If the Minister clarifies the matter in that way, that might help stop some of the practices that we have seen in the past whereby charges are hidden, to consumers’ cost. Clarification would therefore be helpful.

[John Glen]

I respect that point and I am happy to give that clarification at the earliest opportunity.

The final process point that the right hon. Gentleman set out is the relationship between the onshoring programme and the Financial Services Bill that is now in Committee. The EU exit legislative programme, known as the onshoring programme—I seem to have been engaged with it all my life—is about ensuring a fully functioning legal and regulatory financial services framework at the end of the transition period.

The Financial Services Bill is an important step in taking responsibility for our financial services regulation, ensuring that we maintain the highest regulatory standard and remain an open and dynamic global and financial centre now that we have left the EU. It will deliver several existing Government commitments and ensure that the UK maintains that world-leading standard. It goes beyond the simple process of onshoring what we have had to date and what has gone live this year. It looks forward and sets out, with a new accountability framework, how the regulators will act. It also enacts a number of other smaller measures. However, I concede that it is a complex process—I do not mean that to sound patronising—whereby we have been trying to onshore and then look forward. The Bill, which we will hopefully take through Parliament, is the first in a series of steps that will involve legislation in subsequent Sessions.

I hope that I have substantively, if not exhaustively, addressed the points that have been made. As ever, I thank the right hon. Gentleman for the constructive way that he has brought his points to the Committee. I hope that the Committee is sufficiently satisfied to support the regulations.

Question put and agreed to.

DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020

Resolved, 

That the Cttee has considered the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020.—(John Glen.) 

DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MARCRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020

Resolved, 

That the Committee has considered the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020.—(John Glen.) 

DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020

Resolved, 

That the Cttee has considered the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020.—(John Glen.)

Financial Services Bill (Second sitting)

Debate between Pat McFadden and John Glen

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.

--- 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.

--- 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.

--- 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.

Financial Services Bill (First sitting)

Debate between Pat McFadden and John Glen

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?

--- 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.

--- 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.