Financial Services and Markets Bill (First sitting)

Peter Grant Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Craig Tracey (North Warwickshire) (Con)]

I chair the insurance and financial services all-party parliamentary group and am a former insurance broker.

[Peter Grant (Glenrothes) (SNP)]

I have money saved and invested with Nationwide building society, which has submitted evidence on its own account. I am also with a credit union that I believe is affiliated to the association of one of the witnesses.

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[Tulip Siddiq (Hampstead and Kilburn) (Lab)]

Q I thank the panel for coming today. The Government announced on Second Reading that they intend to introduce an intervention power enabling the Treasury to direct a regulator to make, amend or revoke rules in matters of significant public interest. Do you think such a move would represent a significant departure from the UK’s model of regulatory independence, and would such a power affect your regulatory decision making process? Sheldon Mills, you touched briefly on that, so may I ask you first?

Sheldon Mills: Of course. It is a matter for Government as to what amendments they put to Parliament, and it is then a matter for Parliament as to what you do with them. You always have to be careful as a regulator not to tell Parliament what to do, but I will put some thoughts forward.

Independence needs to be at the heart of the regulatory system, so I think it will be important, if and when that amendment is put forward, to think about how the independence of the regulators is sustained. I understand from Government pronouncements that there is a commitment to the independence of the regulators, and that the proposed amendment, which I have not seen, is meant to ensure that where a public interest mechanism is needed—where the Government wish to think about the public interest—there is one to bring forward.

I have worked in regimes with public interest tests. I ran the mergers division at the Office of Fair Trading and the Competition and Markets Authority, and my learning from that is that, if put in place, such a test should be used exceptionally and with care, and that there should be specificity about the matters of public interest—in this case, financial services—on which it would be used.

We are working constructively with HMT in relation to this, and we would do so if such a power were introduced. The only point I would make—Vicky may come to this—is that the standing of the UK financial system is also built on its independence and its consistency of regulation, and it is important that we think through that as we design this regime.

Victoria Saporta: I very much agree with what Sheldon said. We have not yet seen the amendment, so we have to reserve judgment on it, but it will depend on the formulation.

A formulation whereby the Government can force or direct us to make or amend rules that we have already made, and that fall squarely within the statutory objectives that Parliament has given us, may be perceived as undermining operational independence and all the benefits that I talked about earlier. That could have adverse implications for our international standing and, ultimately, our competitiveness.

A formulation that is squarely outside our objectives—for matters of national security, for example—and does not have to do with safety and soundness, or the other objectives and “have regards”, could be a different matter if it is tightly done.

Finally, sometimes I have read in the press and in previous ministerial comments that it makes sense in a parliamentary democracy to ask the regulators to take another look. I just want to say that in clause 27 there is a review power that gives the Treasury powers to force us—to direct us—to take another look and, indeed, to appoint a third party to do so.

[Peter Grant]

Q Good morning to the witnesses. Mr Mills, you mentioned to Ms Siddiq that you had not seen the proposed amendment. Has the FCA been consulted at all about the text or the principle behind that amendment?

Sheldon Mills: Of course we have had discussions with HMT in relation to the proposed amendment. I personally have not seen it.

[Peter Grant]

Q Thank you. When you appeared before the Public Accounts Committee earlier this year about the British Steel pensions scandal, you and your colleague indicated that many of the things that MPs might have expected you to do to protect British Steel pension holders, you did not have the power to do at that time. Does the Bill, as it currently stands, give you sufficient powers to intervene in the way that we would have liked in the event of another pension scheme getting into difficulty?

Sheldon Mills: That was some months ago, but I recall that in the context of the British Steel pension scheme we have a power that allows us to do some particular things that provide redress en masse for British Steel pension holders. That is what we are using. We have most of the powers that we need to support British Steel pension scheme holders. The Bill does not interfere with any of our existing powers. I do not think it gives us any additional powers that are relevant to the British Steel pension scheme holders issue.

[Peter Grant]

Q I was thinking particularly about the powers to stop the damage from being done, rather than simply the power to pay financial redress, which usually takes a long time, is very stressful for victims and sometimes comes too late for victims who do not live long enough to see the compensation. The gross misbehaviour of a large number of financial advisers led to that scandal and many others. Are you telling us that, as it stands, the Bill does not give you significantly greater powers to intervene and get these people out the market as soon as you realise there is a problem?

Sheldon Mills: I think that what we would have said—I would need to look at the record to see the context—is that, effectively, we have to go through due process and understand the evidence and the data that would be there to see how those independent financial advisers are behaving. Therefore, the speed and processing of that may be what we were referring to.

If I remember at the time in relation to the British Steel pension scheme, the law was changed to allow people to exit their pensions under pensions freedoms. There was a range of issues in relation to understanding how independent financial advisers were going to respond to that. The speed and pace with which they did respond led to issues such as some of the challenges that British Steel pension holders have now. To confirm: there is nothing the Bill that specifically gives us additional powers in relation to those individuals.

Sarah Pritchard: I want to come in on a slightly broader point, which is that in the transfer of retained EU files, which encompasses part of the Bill, there are some EU files where, at the moment, the FCA will have limited lawmaking powers. The Bill will provide a framework that, file by file, the FCA will need for rule-making and enforcement powers to be considered at that time. That does not answer your question specifically in relation to British Steel, but it provides a mechanism, so you go through that analysis and assessment file by file.

[Stephen Hammond]

Q I thank the panel for coming this morning. I have two questions. Can we be clear that in the UK regulatory landscape and the international financial regulatory landscape there are public interest tests that are operated but do not affect the operational independence of regulators?

Victoria Saporta: In the financial regulatory space, the only example I know of where there is a test whereby the Government—I am not talking about Parliament—can intervene and revoke regulatory rules is in Australia. APRA—the prudential regulatory authority in Australia—has never been exercised. Whenever the IMF has done financial sector assessments, it has been critical. There are provisions, again in Canada, but the US system does not have any. It is Congress who can revoke material pieces of regulatory standards within 60 days. This is my understanding of it in financial regulation, which is separate to how it might exist in other types of regulation.

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[Gareth Davies]

Q Thank you. Do you have a view on that, Emma?

Emma Reynolds: I defer to David.

[Peter Grant]

Q Clause 1 proposes to repeal around 250 pieces of European legislation, pretty much at the stoke of a pen. The rest of the Bill then expects the Treasury to replace all those bits of legislation by a process that will allow for very minimal parliamentary oversight. Do you have concerns either that there may be a period where parts of the market are inadequately regulated or, alternatively, that there is uncertainty as to what the regulations are, because of the process of repealing something before you know what is going to replace it?

Emma Reynolds: From what is in the Bill, I do not think that is the Government’s intention. As I understand it, the Bill gives the power to the Treasury to transfer—restate—EU legislation, and we have encouraged the Treasury to think of this as a sequence, because we do not want big regulatory change in one go, as the compliance costs are quite high. We absolutely see that there is an opportunity to tailor EU legislation to our markets, so I do not think it is the case that this legislation would not apply; I think this is going to be done in a phased way.

[Peter Grant]

Q You are using terms such as “transpose” and “translate”, and the representatives from the FCA that we heard from earlier used similar terms. Are we talking about almost literally translating all these documents into the English of the United Kingdom or are we talking about significantly changing the legislation as part of that process?

Emma Reynolds: That is a matter for the Government. The Bill gives the Government broad legislative powers to amend the legislation that they have transferred, as I understand it.

[Peter Grant]

Q I have another question for both you. There have been suggestions that the Bill should place responsibility on the regulator to promote competitiveness. There have been suggestions that matters such as consumer protection and compatibility with the UK’s climate change obligations should be given the same importance in the regulator’s responsibilities as international competitiveness. If the Bill was amended to put that in place, would it cause significant difficulties for the financial services sector?

David Postings: It is not in the Bill at the moment. We would need to see the wording of what was proposed and the timescale. If you think about your first point, which I did not respond to, the difference is that the regulation will now be through rules rather than in legislation. We have had a fruitful working relationship with the Treasury and the regulators over the past year and a half since Brexit to produce what is in the Bill. Those changes have been well thought through with industry involvement and therefore get the balance right between protection, regulatory stability and the ability to be commercial. I would hope that, as the rules get translated over time, that process would continue.

On the green agenda, it is difficult for me to comment on something that is not in the Bill at the moment. What I would say is that we need to be thoughtful about the transition to net zero, as opposed to just the taxonomy and the drive to get to net zero. There is a danger that, in prescribing that financial institutions have a balance sheet in a particular form by a particular day, you risk not having a transition to net zero, so that whole thing needs to be well thought through. We risk financial exclusion on the back of that for consumers as well. I would urge caution rather than lumping something into the Bill at this late stage.

[Peter Grant]

Q Are those comments made within the context that achieving a permanent change in net zero targets is not optional? It is absolutely necessary.

David Postings: The banking industry is 100% behind that transition, but the transition is the important point, not just greening the balance sheets of the firms.

Emma Reynolds: May I add to that? There is a huge commitment from financial services, and we also represent related professional services, in playing a part in enabling the transition to net zero. Financial services and financial regulators are an important part of a much broader picture, which is why green finance is actually led by the Department for Business, Energy and Industrial Strategy, not His Majesty’s Treasury. It is about not just the supply of green finance, but the demand for such products. If we have a transition to net zero, it has to be about every sector pursuing a transition. Financial services has a critical role to play, but that has to be done in tandem with the transition in other sectors too.

[Sally-Ann Hart]

Q Good morning. Looking at the culture in the regulatory system and the culture of the regulators, do you think our regulators need a culture change? For example, do they need more commercial experience? We are looking at rules. There is a need for speed. Speed is of the essence when trying to make decisions or make things happen. Is that something we need to focus on?

Emma Reynolds: I certainly think there is room for a more commercial mindset in the regulators. This is not just about regulation by the way; it is about operational efficiency. One of the things we have been working on is delays in authorisations for senior managers, which can slow things down. There are other authorisations as well. We are encouraging the regulators to have a more commercial mindset and to be aware of the businesses’ priorities. It is not just about regulation; it is about how efficient they are. If, for example, you want to bring in a senior manager to a bank or other institution in the UK and it takes you 18 months to 2 years, you could be doing that elsewhere, and that puts us at a competitive disadvantage. So, absolutely, we think that there is room for improvement in having a commercial mindset in the regulator.

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[Stephen Hammond]

Q The Bill intends to do that; it is not intending to rip up regulation. It intends to make us more competitive, while ensuring the primary objective.

Karen Northey: Absolutely, and I think the process that comes has to be done in a way that is sequenced in the right way to allow proper consultation and proper input.

[Peter Grant]

Q Ms Clark, can I come back to your comment earlier about insurance companies having been set up in Gibraltar and elsewhere offshore but not in the UK? Do you have reasonable grounds to believe that the UK regulatory environment has been a significant factor in those decisions? Can you point to particular regulatory requirements that are preventing people from setting up insurance companies here?

Charlotte Clark: Why would you set up in Gibraltar and sell into the UK market? There is not a big market in Gibraltar.

[Peter Grant]

There could be a number of reasons why UK business owners choose to set up companies offshore, including in Gibraltar, and they are not always reasons that have the best interests of consumers at heart.

Charlotte Clark: I think that is fair. I am certainly not casting aspersions on the Gibraltar regime, because they should have the same regime as the UK—equivalence with Gibraltar was in the last financial services Bill. The question would be: why would they do that if we haven’t got the right regulatory environment for companies to set up here and to have the oversight of our regulators?

Bermuda is probably a good example. If you speak to the regulators there about how they think about it, how they work with businesses and what they need to do, they have a slightly different culture. I do not think that is to the disadvantage of consumers. The Bermuda market is very similar to the London market in insurance. I do not think it is to the detriment of consumers; it is to the advantage of business, and I do not think that those two things are necessarily against one another.

[The Chair]

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and the end of this morning’s sitting. I thank our witnesses on behalf of the Committee. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue to take oral evidence.