Financial Services and Markets Bill (Second sitting)

Tulip Siddiq Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Andrew Griffith]

I thank the deputy governor for his comprehensive comments.

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

Q Thank you for coming to give evidence, Sir Jon. I wanted to ask a question about the intervention power, which you mentioned. We have seen in recent weeks the danger of Government signalling to markets that they are prepared to undermine or sideline national institutions. Is there a worry that, if intervention powers are brought in, the markets might think this indicates an undermining of the independence of the Bank of England?

Sir Jon Cunliffe: I have not seen the proposed amendment. I have only seen the Financial Secretary’s comments to the Treasury Committee and comments from the previous Economic Secretary at the Treasury, so I would need to look to see. I would say that the Bill as drafted gives the regulator primary and secondary objectives to make the difficult decisions that some of the witnesses this morning were complaining about. It requires us to balance different things before we come to a decision, but underlying that is the primary objective of financial stability and the safety of the system.

I do not know how often a call-in power or an intervention power would be used, and I do not know what frameworks would be around it. Of course, one cannot always assume that the intention when introduced is actually what happens five or 10 years down the line with different Governments. It is something that gives Ministers the ability to take a second judgment on the judgment the regulator has made in line with everything in the “have regards”—the secondary objective—so it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.

[Tulip Siddiq]

Q Andrew Bailey wrote a letter to the Treasury Committee in July, which I am sure you are aware of. It stated:

“Anything that would weaken the independence of regulators would undermine the aims of the reforms”

implemented by the Bill. Do you think he was referring to the proposed intervention powers?

Sir Jon Cunliffe: There has been a lot of discussion. There was discussion in the consultation about a number of aspects that might affect either the independence or balance of the regulators. I know there was a discussion on the competitiveness objective, and we think it has been drafted in a very sensible way. That came up in the consultation. At that point there was also talk of an intervention power, so it would apply to that as well, I guess.

[Craig Tracey (North Warwickshire) (Con)]

Q You mentioned credible regulation before, and I do not think anyone would argue with that. There seems to be a need to have proportionate regulation as well. The FCA confirmed in its evidence that it saw the Singapore regulation as robust, which was good to hear because, on things like insurance-linked securities, they took our regulation, but, because they have this competitiveness duty, there have been 18 new firms set up in Singapore as opposed to five here. That is about $700 million-worth of business. It seems to suggest that the competitiveness duty needs to exist. Do you accept that there are areas where we could do better and we could be more proportionate in how we regulate, particularly where we deal with more sophisticated customers?

Sir Jon Cunliffe: I should say at the outset that our responsibility is the prudential regulation. The FCA deals with a different market. On the prudential and infrastructure side that I deal with, there is not a huge amount of commerce with Singapore. Would I accept that the competitiveness of our financial sector relative to Singapore’s in the areas that I deal with has been damaged? No, I do not think I would. I do not know of any examples. I think the firms that you quoted were in the FCA area. The competitiveness of the financial system depends on many things. It depends on our openness to migration. One thing you hear most from international banks and the like is the overriding importance of getting the best talent. That is a huge advantage for the UK, which has been called into a little doubt recently, but I think is now being re-established.

The taxation regime plays a role, and then there are lots of things about the attractiveness of the location for people to live in. On making a comparison between two financial centres on how many firms have started one and how many firms have started another, and assuming that all of that is to do with the way regulation is designed, I would be careful about making comparisons on that basis. There is a lot more in it.

I will bring it back to my area if it helps. When I look at the technological changes that are coming, and when I look at the European Union, which is where we were, and look at areas where I know we have not had the flexibility to design the regulation that we would have wanted to design—there are pros and cons to being in the European Union, and we can argue about those—you have to be within a single market where the rules are pretty much set for everybody. On the rulebook as we have it now and instances where people have said, “We don’t like that part of the rulebook. We will set up somewhere else”, I do not have any instances where that has happened, but it probably has.

As these powers, which are now coming back to the UK and I think rightly coming into the regulator’s rules, are exercised, where does the regulator put the balance? What is the scrutiny of the regulator? Is there accountability? In the end, those decisions, if I can encapsulate it, lie in the way the Bill has been set up with the primary and secondary “have regards”, and those arrangements should ensure that we are competitive in future.

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[Andrew Griffith]

Between putting in place—I am not making a point; I am just trying to open this up for the Committee—good, valuable seatbelts and protections versus over-protecting consumers to the degree that large numbers of participants exit the market and then consumers are left with door-to-door, unregulated providers of credit.

Paddy Greene: Affordable credit is absolutely essential for consumers, but we need to make sure that, first of all, access to credit is regulated. We do have a particular form of credit that people are accessing now with buy now, pay later, which is not regulated at all, but consumers presume that it is. There are some basic protections we need to build in. One is to ensure that the parts of credit that people access are regulated themselves and that it is clear that consumers understand what is regulated and what is not. Then there is some basic information, such as key terms and conditions.

I am aware that some of the details in the Consumer Credit Act 1974, which is exceptionally old, are onerous, and there will be a chance to review that—I think later this year. It is about making sure we have efficient information presented to consumers. There is a balance there, but there is key information that we must provide them and there are key protections that must be baked in.

[Tulip Siddiq]

Q The Bill does have provisions for access to cash, but not many provisions for free access to cash. Do you think that is a cause for concern?

Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.

[Peter Grant (Glenrothes) (SNP)]

Q I do not know whether your responsibilities at Which? include consumer protection, particularly in relation to the financial services market, but from your perspective do the millions of small-scale retail consumers of financial services have confidence in the current regulatory framework of the United Kingdom?

Paddy Greene: I cannot speak for small and medium-sized enterprises—I am here to represent consumers—but fundamentally I do think that the regulatory framework in this country provides confidence. I think it has been robust, relatively speaking, over the years. If we compare it to some other international sectors, I think it is a framework that can provide people with confidence. We would be remiss to weaken that in any way.

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[Emma Hardy]

Thank you.

[Tulip Siddiq]

Q The Bill provides reimbursement only for fraud victims who send money using the faster payments system. Do you think other payment systems should be included? Will you tell us a bit about that?

Paddy Greene: Yes. Similar to the comments that were made before, it is right to start with faster payments. We need to move to a model where we are absolutely confident—I heard the tail end of the previous evidence about different payment mechanisms and those that are emerging. We must have consumer protection baked in. We want consumers to have confidence and we know people are going to use such systems but, as we have said previously, they do not necessarily understand what is backed and the type of payment mechanism that is used.

In terms of what we want to see next, we are delighted with faster payments, but £79 million is already lost on CHAPS, on-us items and international payments. First, we need to make sure that the PSR and the Bank are talking properly about CHAPS, because when we are talking about CHAPS, we are talking about house purchases. For the people who are scammed during such a payment, there is a huge detriment, not financially but emotionally, and we know that fraudsters will adapt.

Our next steps, after we have got faster payments, are CHAPS and on-us, and we need to look at international payments. We need to make sure the regulator is looking at all the other designated payments and those that will come down the line, because we are seeing innovation, in order to make sure that the appropriate consumer protections are built in from the very start.

[The Chair]

If there are no further questions from Members, I thank the witness for his evidence and we will move on to the next panel.

Paddy Greene: Thank you very much.

Examination of Witnesses

Natalie Ceeney and Martin Coppack gave evidence.

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[Andrew Griffith]

Thank you. I think you may get an invitation to some parts of the country.

[Tulip Siddiq]

Q Thank you for coming to give evidence. My first question, to Natalie Ceeney, is about the overlap between people who need access to cash and the people who require face-to-face banking services. I want to ask about the overlap between those pools of people, and whether you think the Bill protects banking services. I have a different question for Martin Coppack, but I will come to you later.

Natalie Ceeney: That is a very good question, and I am conscious that every time this issue is debated in Parliament or, frankly, every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population. If somebody needs face-to-face support with their money, which might be about getting money out, paying money in, a standing order or the fact that a payment they expected has not arrived, it is the same demographic group. We have recognised that in the voluntary scheme. When we set up a banking hub, it does not just have a counter where you deposit cash and get cash. There is also a private space where the banks provide a community banker to do basic banking services. As far as the legislation is concerned, the voluntary scheme we set up will cover that need on a voluntary basis.

There is one challenge that you might want to include in the legislation. I am going to stay neutral because of my members. The consumer groups and small business associations would say it should be included and the banks would say it should not, but if you do want to go there, defining what you mean by face-to-face banking services and particularly essential services is really important. I do not think anyone would expect you to offer wealth management or buy-to-let mortgage advice on every high street, but helping someone when they are stuck because a payment has not arrived or they have got locked out of their account feels different. Keeping that definition tight is important.

There is also a question about whether the FCA has the powers that it needs already. Those are the factors I would consider.

[Tulip Siddiq]

Q Thank you. My next question is for Fair by Design. It is about the additional costs that people on lower incomes face and the so-called poverty premium. Do you think the legislation in the Bill addresses the poverty premium, or could it be strengthened?

Martin Coppack: Absolutely not. I have worked in this sector for 20 years and we have the biggest opportunity right now to make a systemic change to how people who are excluded are addressed by both the regulator and the Government, and we need to take it. Recently I provided evidence to the Treasury Committee, which supported our call for a “must have regard to financial inclusion” for the FCA—importantly, alongside a requirement to publish once a year the state of financial inclusion, what it can do, what it cannot do, and who else can act. That is so important. If I could just give a little more context about why that is so important, I would appreciate it.

Thinking about where we are now, Governments of all different colours over the years have asked people to take responsibility for their own financial affairs—be a good citizen and look to the market, whether that is saving for a rainy day, saving for retirement, or protection products for insurance—but what happens if the market does not want you? What if the market says, “You are a higher risk and more costly to serve, so we are either going to make our products more expensive for you or we will just exclude you.”? I think everybody can recognise that situation.

With competition-driven markets, we can all agree that firms will naturally design products that are profitable. That is okay if it is not an essential service, but if it involves basic financial products and services that everybody needs, some intervention needs to happen. Over the last 20 years or so, we have been asking amoral markets to make moral decisions about who gets what product at what price and who gets excluded. The biggest issues in the financial exclusion area that are not touched by the FCA’s consumer duty coming out or by its consumer vulnerability guidance are those that lurk around income when people cannot afford a product.

I will give one example to bring this to life. It is on insurance—we have talked about this before, Craig. Increasingly, insurers are becoming ever so good at finding individualised risk per person. Technology is great for that. As a rule of thumb, the mark-up works really well if you are healthy and wealthy. If you are not wealthy and healthy, you are a higher risk, and increasingly you are asked to pay more for your insurance product. We know, for example, that people in poverty pay about £300 more a year for their insurance because of their postcode, and they pay another £150 a year on top if they cannot pay up front and have to pay monthly. Those issues go across insurance. I and many of my colleagues in different organisations spend all our time going to the Treasury and saying, “This is an issue.” The Treasury says, “We have not got the data. Go to the FCA.” We go to the FCA and it says, “The pricing of risk is social policy. It is not for us. Go back to the Treasury.”

Then you go to the Competition and Markets Authority, then the Equality and Human Rights Commission. Everybody points back to the FCA as the only body, often by law, that can get access to this information, but it refuses to because it is not a priority and not within its scope. So we are simply saying there should be a “must have regard to financial inclusion” with a requirement to publish—not to do social policy, but to allow the consumer market organisations to have a conversation about these issues that have been going on for decades. As an ex-teacher, I have a handout, which explains it in one slide.

[Dr James Davies (Vale of Clwyd) (Con)]

Q Many thanks for all your work in this area. I am interested in your thoughts on the increasing number of businesses refusing to accept cash. If that becomes commonplace and we become a virtually cashless society, will that not pose a risk for SMEs, if payment transaction costs rise, for example?

Natalie Ceeney: That is a really important question. When we look at some other countries, that has been the real crisis point. In Sweden, for example, the crisis point hit when shops stopped taking cash. If you are dependent on cash, there is no point having it if you cannot spend it.

I have spoken to literally hundreds of small businesses. The main reason that they do not take cash is not hygiene or anything like it; it is the ability to bank cash. If you go back three or four years, a small retailer used to shut up for 10 minutes at lunch time, pop over the road, deposit their cash in the bank and pop back. What they might now have to do, with the local bank 20 miles away and open between 10 and 3, is to shut up for an hour in the peak of the day, drive, park, queue and drive back. No wonder many shops say, “You know what? It is only 20% of my customers. I will go cashless.”

That is why in this legislation, deposit facilities are just as important as cash access. It is an area where the industry is behind. You can have deposit-taking ATMs—they are just as well tested as ATMs that issue cash. We do not yet have any mechanism in the UK for third parties to use them. It is something that I am working with the industry to solve, but this legislation is utterly critical. If small businesses can deposit cash easily, most will keep taking it.

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[Andrew Griffith]

Q Thank you very much for being with us this afternoon. I am asking each witness a general opening question before handing over to colleagues. To what extent do you think the Bill fully unlocks opportunities? We have not had ab initio financial services regulation for nearly a quarter of a century. In that period, technology and trade flows have changed, and the imperative for us to remain competitive as an economy remains constant. How well does the Bill meet that objective, and who are our competitive set in the world?

William Wright: Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.

Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.

On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.

[Tulip Siddiq]

Q Do you think there is a disconnect between the Government’s stated ambition to become the world’s first net zero financial centre and the actual levels of green finance in the UK today?

William Wright: Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.

We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.

We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.

There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.

[Tulip Siddiq]

Q On the catching up or lagging behind that you have mentioned, would you recommend any legislation? Is there a role that the Bill we are discussing could play to strengthen us and pull us forward?

William Wright: There is certainly a role for legislation; I am not sure that the right place for that role is this Bill in particular. It is important to step back and look at the huge amount of work that has already been done and is being done in and around green finance from a legislative perspective. The latest addition to that is the net zero review, and the green finance strategy is expected from BEIS early next year, maybe. There are sustainability disclosure requirements, the UK green taxonomy and the transition plan taskforce. That work, which is coming down the pipeline towards us, could contain a lot of the legislative impetus for the UK to close the gap.

More importantly, I think the industry is already beginning to fill the gap. Where the UK has a real opportunity in green finance in future is not so much in the level of capital raising by UK companies, but in the fact that it is in pole position to benefit from its existing expertise in markets such as risk management, derivatives and trading, as we see the emergence of a more sophisticated carbon market of green derivatives and green risk management, and in playing to its existing strengths, many of which have not been harmed or damaged in any significant way by Brexit.

[Peter Grant]

Q I know that your website describes one of your key aims as developing a larger capital market across Europe. There is a trick to be pulled off in encouraging all the right kinds of people to come and invest in your financial markets while keeping the wrong kinds of people out. How effective has the UK’s previous regulatory regime been at keeping Russian money out of our financial markets?

William Wright: On the substance of that question, I will have to put my hands up and say it is not an area that we have done a huge amount of work on, although we have recently hosted some events on that theme—for example with Edward Lucas, talking about Russia, Ukraine and links back to the City.

One point I will make is that back in 2007, in a previous life as a financial journalist, I was at the official launch of NYSE Euronext—this was the merger of the New York stock exchange and Euronext, the European-based stock exchange. The founding chief executive, John Thain, who was then chief executive officer of NYSE, said he thought that London would come to regret its campaign in the previous five or six years to attract Russian companies to list on the London stock exchange. If we look back on those comments with the benefit of 15 years of hindsight, he was probably correct.

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[Andrew Griffith]

Q Thank you, Robin and Robert. This is a general question. The Bill’s objective is to bring the rulebook up to date nearly quarter of a century after the last piece of ab initio financial services legislation, the Financial Services and Markets Act 2000. There is obviously a lot in this Bill; I invite you to comment in general on how you think it achieves the objective of creating a competitive, well-regulated and vibrant sector. The Government are very supportive of a diverse range of financial services providers, which includes both of you, representing building societies, credit unions and co-operatives, and I am personally very supportive of that.

I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.

Robin Fieth: Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.

On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.

On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.

Robert Kelly: Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.

In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.

There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.

There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.

Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.

I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.

[Tulip Siddiq]

Q Compared with the US or the rest of Europe, in the UK we lack mutually and co-operatively-owned regional banks. You have touched on this already, Robin, but I want to hear a bit more about why you think that is. What is the role of regulators when it comes to that lack of access?

Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.

As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.

The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.

Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.

We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.

[Peter Grant]

Q Mr Fieth, let me first come to you and the comment that you made previously about the UK not really having a tradition of mutually owned lending banks. Was not the first trustee savings bank set up in Dumfriesshire in 1810? There has been a very long and proud tradition of locally and community-owned banks, which survived for a long time. They were basically wiped out in a series of corporate takeovers in the 1970s and ’80s. Is that not the case?

Robin Fieth: Whether the term is “corporate takeover” or “demutualisation”, which was very much encouraged by the Government of the day, is a moot point, but you are absolutely right: there is or was a very proud trustee savings bank tradition, and of course it started in the lowlands—well, the borders—of Scotland. Sadly, the last trustee savings bank went into run-off within the last five or six years. That was the Airdrie Savings Bank. It is a tradition that we no longer have. Again, those institutions were not a full service of the kind that the shadow Economic Secretary was talking about. They were not a full service model. They were very much a savings and loans model, largely for retail purposes. That is the tradition we had, yes, but it is now sadly part of our economic history.

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[Sally-Ann Hart]

Q It is not a general question, but I want to ask about push payment fraud and APP. If we set a specific amount for APP fraud reimbursement, would a suggested £1 million limit encourage fraudsters to try to act like the victim? Would a limit set that high be an incentive for fraud?

Mike Haley: Yes. One of the issues with a contingent reimbursement model in any compensation scheme is that it is not a fraud prevention initiative in itself; it really just says who suffers the risk of the fraud. It passes the individual loss on to the banks. The emphasis is on a large amount that you could get away with without thinking that you have taken it out of an individual’s pockets; a faceless bank will pay up to £1 million. Any limit of that size reduces any moral questions a fraudster might have about who they are stealing money from.

[Tulip Siddiq]

Q Thank you for coming to give evidence. You do not need me to tell you the amount of money directly stolen from people’s bank accounts through fraud and scams—a record high of £1.3 billion, as you will know. Why do you think we have reached that amount?

Mike Haley: There are three interconnected reasons why scams have reached such frightening proportions. First, the reach of social media and online platforms means that scammers and fraudsters can reach millions of people—marks and vulnerable people—much more effectively.

Secondly, we have seen organised crime turn its hand to fraud because it is a low-risk, high-return crime. Their skills have grown in something called social engineering, which is how they to persuade someone that they are calling from the bank or from the police by impersonating others. They have become very skilled in that.

Thirdly, faster and instant payments mean that once a fraud has been successful, and you mandate a payment through your bank account, it is very hard for banks to tell that that is a fraudulent transaction, because it has been mandated by the customer. Then, there is a network of money mule accounts, which are either accounts that have been set up for those proceeds to go through, or accounts belonging to people who have been duped into allowing their accounts to be used for that money to go through. Instant payments mean that that is untraceable very quickly. I remember investigating a mass fraud—[Interruption.]

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[Andrew Griffith]

That is very helpful, thank you.

[Tulip Siddiq]

Q You have touched on this very briefly. I would like you to expand a bit more on the comparison between our approach and the EU’s approach to crypto regulation in general. You will be aware of the EU’s regulation deal, which effectively brings together cryptoassets and activity into regulations, whereas we, at the moment, are limited to stablecoins. Are we at some sort of risk of falling behind because we have not had that sort of regulation? Does it compromise our competitiveness in the fintech sector because we have not had that sort of regulation deal?

The other thing I wanted to ask about is investment in the UK fintech industry, which was down to £9.6 billion in the first six months of this year, which is three times less than exactly the same period last year. Do you want to comment on the reason for that decline? What should we be doing as politicians to try and help with that?

Adam Jackson: Taking your first question, it is worth looking at the EU MiCA regulation and possibly the approach of a territory such as Singapore. It links a bit to the investment. We did some analysis of investment in just crypto alone, looking at that as a vertical within fintech, and again, the UK has always been the second location for crypto investment in the world, after the US, until the first half of this year, when we fell behind to Singapore. That might be a blip, but when you then look at regulatory mapping, you will see that Singapore possibly has the most forward regulatory system, particularly for stablecoin. The EU has a very comprehensive approach, but is has not come into force yet. Singapore has an established system, so I think that shows that if you get it right and have a proportionate regime, you attract the industry and the investment.

Is the EU approach right? There are strong arguments to say that it is possibly too comprehensive, and we come back to the notion that trying to find something that works for all 27 does not fit our circumstances. The UK is right to take a more iterative approach. We obviously have a common law approach as well, which means there are certain things we can do through case law. It is absolutely right that we are focusing on stablecoin and that is where some of the biggest volatility in the market was this year. The Bill addresses that, which will be really important in providing confidence for consumers and, critically, for investors in technology firms in that space.

The EU rule applies to not just stablecoin but cryptocurrencies more generally and exchanges, so should we also have a regulatory regime for other cryptoassets? I think the answer is yes. The question is how it fits within the Bill. The Government have said that they will introduce proposals for wider regulation of other cryptoassets. We expect something at some point, possibly soon.

That begs the question whether the Bill already enables the introduction of regulations. We probably need to ask Treasury counsel about the definition of a digital settlement asset. The Bill allows for the definition to be changed. Do the rules enable it to cover other cryptoassets? If it does, the powers are there to enable regulators to introduce systems subject to the proposals. If not, will we have to wait another 20 years before regulators are given the powers to regulate cryptoassets?

On cryptoassets, the important things that our members, including exchanges and cryptoasset firms, emphasise are an authorisations regime, a set of rules for initial coin offering—essentially, clear guidance on what information should be provided to consumers about individual assets—and custody. The Bill provides for applying rules on custody for stablecoin. If we do not have a parallel system, we will start to see some question marks over why those custody rules do not apply to cryptoassets as well.

On investment, there are different ways of looking at the figures from the first half of this year. Some investment, particularly VC, has really held up, but we know that globally we can expect a fall in investment, and we are just starting to see that trickle through. It is therefore a question of how the UK holds up against other countries. We might even see more mergers and acquisitions. At the moment, the pound makes the UK a nice place to come to buy fintech firms, so there may be a bit of difference there. It comes back to maintaining that competitiveness. Our members tell us that the most important thing is to get the Bill through. It provides important powers. If we can strengthen it in some of the areas that I mentioned to the Minister, that is also critical.

The other thing that I would flag is that there are two other pieces of legislation that are either before the House or slightly in limbo. They are also important for the competitiveness of fintech. One is the Data Protection and Digital Information Bill, introducing digital ID and open data, which will really transform the open banking we have into open finance. Australia already has that, so there is a risk of us falling behind. That Bill is also really important.

We have heard a lot about fraud. The provisions in the Online Safety Bill around making the places where frauds are advertised—the social media platforms and search engines—responsible for fraud, as well as requiring banks to reimburse, are critical. That is starting to be a factor in investment decisions. Whatever happens to that Bill, ensuring that those provisions are introduced as soon as possible is key.

[Martin Docherty-Hughes]

Q Mr Jackson, you said earlier that Singapore had forward regulation. Some of us on the Committee might see that as meaning that it is less robust than what the EU is proposing. I have heard Singapore and offshore tax havens used as some kind of comparator for UK regulation. Do you think that it is useful for us to use, say, Singapore—a one-party state, effectively—and offshore tax havens as a comparator for good regulation?

Adam Jackson: I was not suggesting that we should necessarily compare the exact regulatory regime—the economy is a very different size—but I would take the wider point that a territory that has been seen to introduce some regulatory rules, as opposed to having none, is seeing increased investment.

The other place to look is the US. I was in Washington last month talking to policymakers, and the area where there is most likely to be a bipartisan Bill next year is regulating stablecoin. In terms of our international competitiveness, others are moving, and the Bill enables the UK to keep up.

--- Later in debate ---

[Andrew Griffith]

Thank you; that is very helpful. Nothing else to add.

[Tulip Siddiq]

Q Thank you for coming to give evidence. My question is very simple. It is about the intervention powers being proposed by the Government, which you will know about. I would like your opinion on whether you think the intervention powers will in any way undermine the independence of the regulators.

Martin Taylor: Let me speak plainly, because it is late in the afternoon. I think this is a shockingly bad idea. I think it will certainly undermine regulatory independence —without any doubt—simply because regulators who are subject to the whim of Treasury officials or Ministers are not independent. It is a major erosion of the institutional framework. One could even say it is a corruption of the framework. For me, the institutional framework is hard-won and very precious. I can only suppose that those proposing the powers either do not understand it or do not care about it.

[Tulip Siddiq]

I think that is quite clear. Anyone else?

[Stephen Hammond]

Q Good afternoon. That was a very clear expression of your views. I will ask three things. Do you think that we should wait and see how the intervention powers are actually defined, and how public interest is defined? Do you think there are other jurisdictions that use those powers? In terms of the definition, will it not matter how they are defined between “operational” and “strategic”?

Martin Taylor: The wording that I have seen is of course not final, but what I find strange is that it suggests the regulators are not acting in the public interest. If they have to be overruled in the public interest, clearly you think they are acting in some other interest. For me, the regulators are the public interest made flesh.