Financial Services Bill

Stephen Hammond Excerpts

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

[Stephen Hammond (Wimbledon) (Con)]

It is always a pleasure to follow my hon. Friend the Member for Strangford (Jim Shannon), as I have on many occasions in this House.

The ambition of the Bill is clearly stated:

“To make provision about financial services and markets; to make provision about debt respite schemes; to make provision about Help-to-Save accounts; and for connected purposes.”

The Minister was absolutely right in his opening remarks that financial services are a key industry for this country. If we are to have a global Britain and a globally successful Britain, financial services—and services in the widest sense—must thrive.

It is also right that the Bill is an important part of trying to ensure that we have the right regulatory framework at the end of the Brexit transition. If we are to remain a world-leading financial centre, it can be guaranteed only by having financial services that are underpinned by a strong and proportionate regulatory framework. The Bill, as the Minister conceded, is the start of that, not the end. I suspect that this is the first of several Bills that will come before us.

If the framework is to do anything at all, it must protect the consumer, enhance competitiveness and, as the Minister said, make the UK an attractive place in which to invest. I welcome the Bill because that is necessary, but it is right to recognise at the outset that, notwithstanding the equivalence regime or the new equivalence criteria that the Chancellor rightly set out this afternoon, as recently as February a briefing paper from the Government stated that the UK hoped to secure “permanent equivalence” that would last for “decades to come”. Indeed, at the time, the Governor of the Bank of England was campaigning for super-equivalence in order to allow a new standard to be set for multilateral collaboration. That would have been a better context in which to be considering these matters this evening; none the less, the Chancellor’s statement this afternoon was welcome. Everyone in this House must now deal with the world as it is, not the world as we would like it to be if it were more economically rational.

This Bill is necessary and it does a number of things to ensure that the regulatory regime is in place at the end of the transition period, and to allow financial services to prosper. It makes a start on sorting out the relationship between Parliament and the regulators, starts to define the accountability and objective of the regulators, and ensures that the regulation and legislation are in place. That will be important as we look forward to 1 January.

A specific of the Bill that I particularly welcome—the Minister touched on this in his opening remarks—is the prudential regulation of investment firms. That recognises, quite rightly, the differing risks between banking businesses and investment management businesses. The Bill aims to put in place a prudential regime that is fit for purpose. That in itself has been widely welcomed across the financial services industry. It sets out four principles, as well as how the implementation of that prudential regulation may recognise the differing capital risks. However, there are some concerns, which I hope the Minister might address later, or about which we will be reassured in Committee.

The first concern is how Parliament is going to scrutinise the principles. I will return to that point in a bit more depth later. The specific issue raised is that Her Majesty’s Treasury intends to revoke the capital requirements regulation with a view to replacing it with standards set out by the PRA that are to be guided by Basel II. However, the Bill contains little clarity on exactly what will be in the PRA regime, how it would differ from the capital requirements regulation or how the Government intend to implement these new measures. I trust that the Minister will set that out today or that it will be clarified in Committee, because it is hugely important to the success of those provisions.

I welcome the provisions on the onshored EU PRIIPs regulation. This has been widely welcomed. It gives the PRA powers to make clarification, but there is an important duty to ensure not only that the regulations put in place are effective, but that they help the investing community and the public, ensuring protection for the consumer. It is not yet clear how those powers are going to be enacted and what is going to be there.

As the Minister has acknowledged, this is a wide-ranging Bill, so I want to touch on a couple of other issues of concern that can probably be cleared up now or in Committee. It is clear that we need to safeguard the ability of our world-renowned investment management industry to offer investment funds from overseas jurisdictions into the UK post transition. As the Minister set out, that is the aim of the Bill. If that were not so, it is clear that 9,000 individual funds would have to seek separate registration. From my reading of the Bill, it is not yet clear whether the temporary permissions regime—the regime which would allow that to continue—must be extended or whether a new, fully functioning regime is to be put in its place. That is important, because it signals the free flow of capital into the UK and signals that the UK remains open for investment and business. I have spoken to a number of those in the investment management industry over the weekend, and there is still some concern in the industry that it is not fully clear how that will operate.

The Bill also clearly states that it is meant to maintain a world-leading regulatory system and, among other things, enhance the competitiveness of the financial services sector, yet if we look at the history of regulation in the United Kingdom, a large number of people believe that the system has often rightly sought to give the consumer extensive protection, but with the cost of over-specification, a lack of accountability and, in terms, a narrowness of focus from the regulator. If the Bill is to achieve its ambitions, the Government need to look at those faults and be clear about how they are going to change them during the Bill’s passage.

The Bill allows for the transfer of hugely increased powers to regulators. The question for us therefore is how we balance the extra powers with the necessary scrutiny and accountability, without encroaching on the necessary independence or eroding consumer protection. I suggest that the Treasury needs to consider carefully what performance objectives it sets the regulators and how it will then manage their measurement. Previously, it has been clear that the overriding objective has been competition, but secondary objectives have been in place, and all too often regulators have not given those the regard that many would have expected. The regulators’ attitude to risk will need further definition if the Bill is to achieve the objective of enhancing and maintaining the UK’s international competitive position.

Who exercises the judgment on whether the criteria are being met and how the trade-off of benefit and risk is determined will be key. Schedule 2 is the key part in determining that. New sections 143G and 143H link to the broader questions of the FCA’s mandate, role and accountability. The Treasury has rightly just recently published a consultation document on the broader review of the framework for financial regulation, so this Bill is the first exploration of the issues around the oversight of the FCA.

New section 143G identifies a number of “Matters to consider” and therefore matters that the FCA must “have regard to”, including the relevant international standards and the effect of the rules on the UK’s international standing. Those are all to be welcomed, but are they really effective? I suggest, first, that the obligation is too weak, as it only requires the FCA to “have regard to”. Secondly, the obligation is too narrow. A number of other issues, such as sustainable growth and employment across regions, should also be part of the mix and part of the consideration. Therefore, I suggest we need to be prepared to go further and consider changing the FCA’s primary objective, or at least strengthening the secondary objective, such that it ranks almost pari passu with the primary objective.

There also needs to be rigorous scrutiny of the regulators’ rule-making powers by Parliament. As I said earlier, the Bill puts in place some major increases in powers for regulators, so it is completely appropriate that Parliament sets the scrutiny and accountability objectives. There are many ways to do that, and I know colleagues will suggest other methods later, but it is clear that one of the great successes has been the OBR, which analyses, scrutinises and gives an independent verdict on financial policy. It may well be appropriate that one of the ways that Parliament holds financial regulators to account is a similar body for financial regulation.

I was encouraged to be short, and I have already taken rather longer than the Whips wanted me to take this evening. I think the Bill is absolutely necessary. Therefore, notwithstanding some of the issues I have raised, and others that I am sure the Minister recognises and will want to address as the Bill progresses, I wish the Bill well and look forward to supporting its Second Reading.