Financial Services and Markets Bill (Fourth sitting)

Tulip Siddiq Excerpts

Committee stage
Tuesday 25th October 2022 Public Bill Committees

[Andrew Griffith]

It is certainly not the Government’s intention to create anything other than opportunities for different participants to emerge and bring forward products in the sector. Those could include stablecoins, which are asset-backed cryptoassets. Over time, they could include central bank-issued currencies. The Government have indicated a desire to explore that, but have not yet confirmed that the Bank of England or the Treasury intend to issue.

Of course, we must ensure that products already out there being advertised to our consumers are appropriately regulated within the regulatory perimeter. We are not preferring or advantaging one or other part of that, but without the amendment and new clause we would not be able to bring forward the appropriate regulations, which the regulators will consult on with industry in due course. I hope that clarifies the Government’s thinking. Outwith the Committee, it will be appropriate in due course for the Government to update their set of policy objectives for this space. The subject that we are discussing today is somewhat narrower; it is just the remit of the Bill.

Amendment 22 clarifies that cryptoassets are within scope of the designated activities regime introduced by clause 8. We talked earlier about the designated activities regime—the DAR. By bringing cryptoassets within its perimeter for the first time, some of the societal outcomes and concerns that hon. Members have raised can be addressed. If we do not bring them within the perimeter, those concerns cannot be addressed.

New clause 14 clarifies that cryptoassets could be brought within the scope of the existing provisions of the Financial Services and Markets Act 2000 relating to the regulated activities order. The substance is that cryptoassets will be treated like other forms of financial asset: not preferred, but brought within the scope of regulation for the first time. That is the aim of the new clause. It will ensure that the Treasury is equipped to respond to developments in the crypto sector more quickly and deliver regulation in an agile, risk-based way that is consistent with our approach to the broader financial services sector.

The Treasury will consult on its approach with industry and stakeholders ahead of using the powers, to ensure that the framework reflects the unique features, benefits and risks posed by crypto activities. I think that is the assurance that hon. Members seek: that the Government will consult before seeking to use the powers. Any secondary legislation made to bring new cryptoasset activities into the regulatory perimeter would be subject to the affirmative procedure, so each House will have an opportunity to debate the legislation. That gives Parliament the appropriate oversight.

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

We welcome Government amendment 22 and Government new clause 14, which we recognise would extend financial protection to cryptoassets. It is a welcome and important move that will help to prevent high-risk cryptoassets from being falsely advertised to the public.

Does the Minister believe that the definition of cryptoassets is broad enough to capture financial promotions of as yet non-existent cryptoassets? I also wanted to ask him how the broad-ranging definition of “crypto” used in clause 8 takes account of the fact that the Bill only brings stablecoins into payment regulation.

[Martin Docherty-Hughes]

I draw the Minister and his Department’s attention to the work of Dr Robert Herian, who is one of the primary academics on regulation. I am mindful that he says it is the technology that underpins stablecoin and other related cryptoassets that we seek to regulate through the legislation. I welcome that—it is a step forward—but he has also said that the technology

“may offer an opportunity to recalibrate the powerplay between those who would engage in aggressive tax strategies and planning, and those charged with regulating them”.

Can the Minister advise Members whether he believes that this approach to stablecoin and future innovative technologies, which are already there, will enable a recalibration, so that finance is not utilised in some type of tax dodge? Could he reinforce that point? Every time we hear a discussion about stablecoin and cryptoassets, there is a certain element of finance that I do not think anyone here would really support.

--- Later in debate ---

[Shaun Bailey (West Bromwich West) (Con)]

I, too, support the intentions behind the amendment from the hon. Member for Glenrothes, which were very well articulated by the hon. Member for Wallasey. We often see these people swanning around the place with their ill-gotten gains, while many of our constituents have been on the receiving end of a scam. Even when there has been some form of regulatory investigation, some people do not feel that justice has been done. The amendment tries to make tangible something that may appear quite abstract to our constituents. I support the amendment’s aim but, to follow one of the Committee’s themes, perhaps this is not quite the place for it.

That said, I echo the request for reassurances from the Minister on how we will construct a regulatory regime that makes our constituents feel that there is a degree of responsibility. As Members on both sides of the Committee have said, many of our constituents, particularly those who have been victims of fraud and scams, feel that although the letter of the regulatory system may have been followed, justice has not been done. As we consider the Bill, we need to keep that at the forefront of our mind. I can get on board with the intentions behind amendment 35, but we have to first consider its practical effects. I hope that in his summing up, the Minister will give the Treasury’s thinking on this issue.

[Tulip Siddiq]

Later, I will come to my amendment on the Bill’s fraud provisions, but I want to express my support for the intentions behind amendment 35. Does the Minister oppose in principle the idea of nominated representatives being held liable for the carrying out of a designated activity when an organisation has been found liable?

[Andrew Griffith]

I thank my hon. Friend the Member for West Bromwich West for his reasoned response; I make common cause with him. The issue of liability compensation vexes the sector, and a huge number of regulatory interventions and compensation schemes are concerned with that. I say to all hon. Members that the battle against fraud and for recompense goes much wider than the Bill. It includes the Government’s fraud strategy, our endeavours on economic crime and the activities of various regulators, but I associate myself with colleagues’ remarks.

It is said that hard cases make bad law, and regrettably the Government feel that the amendment cannot be supported. We need to be conscious that limited liability is an important principle in UK law. Measures elsewhere in the Bill—we will come to them later in our discussions on clause 8—allow the Treasury to make regulations concerning liability and compensation in relation to designated activities. That goes some way to answering the question raised by the hon. Member for Hampstead and Kilburn. In principle, the Government are absolutely on the side of victims; sometimes it is just a question of bringing forward the appropriate regulations that will not have unintended consequences.

Given the breadth and variety of activities that can fall within the designated activities regime, we need a tailored supervision and enforcement framework for each type of activity, rather than over-generalising. The Treasury can use powers in the DAR to design and create separate supervision and enforcement frameworks.

Proposed new section 71P, which will be inserted into the Financial Services and Markets Act 2000 by clause 8, allows the Treasury to make regulations concerning liability and compensation in relation to designated activities. That means that the Treasury can make provision in secondary legislation for the Financial Conduct Authority to hold liable individuals—this answers the question—working for a company that is carrying out designated activity, where appropriate. We support that in principle, but it is for the FCA to bring forward the regulations for a particular type of activity.

Proposed new section 71Q to FSMA provides that designated activity regulations—

--- Later in debate ---

[Tulip Siddiq]

Am I right in thinking that new section 71R gives the Treasury powers to introduce criminal sanctions without reference to Parliament? Does the Minister think it is right to side-step Parliament in this way?

--- Later in debate ---

[Andrew Griffith]

That is a matter on which we would consult and be advised by the Bank. The Bank is the body with the expertise in this space. It would not be appropriate to try to pre-empt its views. This is an emerging area, and we have to be cognisant of how global clearing houses are developing. The UK hosts a number of the most systemic, but that market share cannot always be assured. This provision allows the regulation to follow the market share, or indeed follow the emergence of new CCPs and new clearing houses. The provision reforms the overseas framework so that the Bank has the power to apply domestic rules to CSDs and non-systemic CCPs as well.

Clause 10 provides the Bank of England with the power to direct individual CCPs and CSDs, requiring them to take action to comply with their obligations or to protect financial stability. Using this power, the Bank may either impose a new requirement or vary or cancel an existing one. The power is equivalent to those that the FCA and the Prudential Regulation Authority have under FSMA in relation to authorised firms, and it contains the same procedural safeguards. That includes, for example, a right of appeal.

Clause 12 ensures that the Bank’s regulation of CCPs and CSDs is undertaken in a way that is consistent with the wider financial services regulatory framework under FSMA. It does this by restricting the general power of direction, which the Treasury currently has over the Bank, to provide that it does not apply to its regulation of CCPs and CSDs. That is in line with the existing exemption that covers the exercise by the Bank of its functions as the prudential regulatory authority, in line with the PRA’s position as an independent regulator.

Turning to clause 11, the FCA is responsible for the supervision of certain other entities that help underpin the proper functioning of markets. Clause 11 gives the FCA general rule-making powers over two types of entity: data reporting service providers and recognised investment exchanges. Recognised investment exchanges are bodies such as the London stock exchange that are recognised by the FCA to facilitate the buying and selling of financial instruments and so help drive investment. Data reporting service providers make trade information public to help market participants make informed investment decisions. They also ensure that the FCA has the information it needs to monitor financial markets and protect against insider dealing and other forms of market abuse.

Despite their importance, both data reporting service providers and recognised investment exchanges currently sit outside the core FSMA regime, as they are largely regulated under retained EU law. To ensure that the FCA has sufficient powers to effectively regulate these entities once retained EU law is repealed, clause 11 brings them into the FSMA framework, in line with the approach taken for CCPs and CSDs in clause 9.

[Tulip Siddiq]

On clause 9, how does the Minister think third country central counterparties and CSDs will be adequately assessed by the Bank of England for the risks they pose to the UK’s financial stability?

I also have questions on clause 12. I am not sure if the Minister wants to answer those now or to come back to them.

[The Chair]

I suggest that you make all your comments and then we invite the Minister to respond to all of them at the end.

[Tulip Siddiq]

We support clause 12, which will empower the Treasury to give directions to the Bank where it considers it necessary in the public interest. Does the Minister not agree that such a mechanism is sufficient to direct the Bank of England when the Treasury believes it needs to do so in the public interest? Does he therefore feel that a so-called intervention power is necessary?

In our evidence sessions, which the Minister and other Members were at, we heard very clearly from the deputy governor of the Bank of England and the former chief executive of Barclays that a future intervention power would endanger financial stability and undermine the independence of the Bank of England. There were stark warnings from our witnesses. Does the Minister agree that it would be reckless to ignore that advice from the experts?

[Emma Hardy]

I want to add to the points made by my hon. Friend on our concerns around clause 12 and the independence of the Bank of England, given that the Treasury has such significant powers over it. I refer the Minister back to the evidence given by Sheldon Mills from the FCA. He said:

“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.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 7, Q3.]

That is the FCA asking for specificity—it is easy for them to say—on exactly when the power would be used and when it would not be used.

Victoria Saporta from the PRA stated:

“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.”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 7, Q3.]

Those were really stark warnings from two of our key witnesses from the FCA and PRA, talking about the difficulties they had with this specific clause and how this could be seen as undermining their independence.

Martin Taylor went further in his evidence, when I questioned him on these intervention powers. He said:

“One of the problems that led to the recent turmoil—a very English description of what has just happened—was that the Prime Minister and the former Chancellor chose not to subject the mini-Budget to the scrutiny of the Office for Budget Responsibility.”

He continued:

“However, international investors looking at London will have noted this and it has a bad smell, if I can put it that way.”

Later, he said:

“If you were in Singapore or New York, you might be more tempted to do that than you would have been a month ago. We should not do anything else to make this worse. Everything is being done by the new Chancellor to steady the ship…but moves like this proposed measure just go in entirely the wrong direction as far as I am concerned. I think it is very dangerous.”–– [Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 76, Q149.]

Every single witness seemed to talk about the concerns they have over the level of intervention the Treasury could have over the Bank of England. I would like to hear reassurances from the Minister that he has been talking to the FCA, the other regulators and the markets about this. What reassurance can he give us that this is not HMT trying to again overrule our independent regulators?

--- Later in debate ---

[Tulip Siddiq]

We strongly support the clauses. A sandbox for financial markets infrastructure will support innovations in the fintech sector, such as developments in blockchain, which has the potential to boost the transparency and productivity of the UK’s financial services. Could he please explain, however, whether clause 13 gives sufficient flexibility for the sandboxes to be used to support innovation in a wide range of financial technologies? The Bill says that sandboxing testing will occur “for a limited period”. Will the Minister further define that and set out the minimum timescales that he believes are necessary to adequately test a new innovation in financial technology?

On clause 14 and the reports on FMI sandboxes, which criteria will be used in the reporting of sandboxes, so that Parliament can transparently assess their effectiveness in safely supporting innovation? On clause 16, which sets out that prior to conferring such a power, HM Treasury must consult “the appropriate regulators” or such persons that it considers appropriate. Will the Minister please share his understanding of the definition of “consultation”? Which stakeholders would have to be consulted, and what is the estimated timeframe for such a consultation?

Clause 17 provides the Treasury with a power to amend the list of relevant enactments by way of the affirmative statutory instrument procedure. Will the Minister elaborate on how he sees that working in practice? Would every individual amendment to the list of relevant enactments be brought before the House for scrutiny? I presume so, but I want to have that on the record.

[Shaun Bailey]

The provisions in clauses 13 to 17 are incredibly welcome, because we are dealing with a financial services landscape that is constantly innovating and changing. I should declare that prior to becoming a Member of Parliament, I worked for the legal team at a major big seven bank and saw these developments as part of my role there. The provisions are very important because they will ensure that, as the fintech sector continues to develop and the regulatory framework continues to advance and change, they can do so within the perimeters of the sandbox arrangement introduced by the Government.

I particularly welcome the clause 16 provisions on consulting regulators, and the fact that there is going to be a discourse with them. We cannot cut regulators out of the conversation. The clauses do not seek to do that, but the hon. Member for Hampstead and Kilburn was right to raise queries. We need a bit more clarity on what the consultation will look like. I fully appreciate that it is not always possible to give instant clarity when introducing primary legislation, but it will clearly be incumbent on the Treasury to ensure that, as the process progresses, His Majesty’s Government are as transparent as possible about what the consultation will look like.

We should remind ourselves that the practical application of the clauses will change and develop as the landscape itself develops, because that is the subject matter that we are dealing with. On clause 16, with respect to the development and work with regulators, I urge my hon. Friend the Minister not to forget the important role that lawtech plays in the regulation and monitoring of a lot of the instruments that will be part of the sandbox regime. It is often not talked about, but fintech and lawtech work hand in hand, side by side, particularly in this financial services sector.

I support the clauses; they are the right thing to do. As hon. Members on both sides of the Committee have articulated, they allow not only the financial services sector to innovate and develop, but the regulation to be developed in tandem with them. I would, however, welcome clarity from my hon. Friend the Minister on the what the practical applications will look like, particularly as we build that framework.

--- Later in debate ---

[Andrew Griffith]

Financial services firms increasingly rely on a small number of critical third parties to provide services, such as cloud computing providers. Although outsourcing can have many benefits, the growing dependence of financial services firms on this small pool of critical third parties also carries risks. A failure or disruption at a critical third party could have systemic impacts affecting market confidence and threatening the stability of our financial system. To mitigate that risk, the Bill grants the financial regulators powers to oversee the services that critical third parties supply to the financial sector.

Clause 18 gives the Treasury the power to designate a third party to the finance sector as critical, bringing the services provided by that third party into the regulator’s oversight. Only third parties whose failure could have a systemic impact on the sector can be designated in that way. Designations will be done in consultation with the regulators, taking into account a clear set of criteria. The first is materiality—that is, how important the services are to the delivery of essential services, such as making payments. The second is concentration—the number and type of firms that rely on that provider. The clause provides the FCA, the PRA and the Bank of England with new rule-making powers to ensure the resilience of services provided by critical third parties. The regulators have published a discussion paper setting out how they may use the powers.

Clause 18 also grants the regulators a power of direction and targeted enforcement powers. As an ultimate sanction, the financial regulators may prevent or limit a critical third party from providing services to the financial services sector. Clause 19 then makes the necessary consequential changes to FSMA to ensure that the regime functions properly, in particular in relation to the Bank of England’s ability to make rules. This approach is flexible and proportionate, addressing the systemic risk posed by outsourcing to keep the UK’s financial system safe, while targeting only the services that critical third parties provide to the finance sector. I therefore recommend that clauses 18 and 19 stand part of the Bill.

[Tulip Siddiq]

On clause 18, could the Minister set out the range of disciplinary powers that the Bank of England, the FCA and the PRA have at their disposal short of preventing a critical third party from providing new or current services to the financial services sectors? I want some reassurance from him that the clause will not produce an all or nothing approach.

--- Later in debate ---

[Peter Grant]

The amendment is quite simple. I understand the reason behind the concept of the authorised person. The Financial Conduct Authority will never have the resources or capacity to authorise every single financial promotion that somebody wants to publish, so that role needs to be outsourced. My concern is that, in some of the scams that my constituents have fallen victim to, the authorised person has sometimes been a key part of the web of deceit and concealment that has been laid for my constituents and others to fall into. Very often, when it all goes wrong, we find that the authorised person who approved the financial promotion has gone out of business themselves, so there is nobody left to take responsibility.

I am concerned that something that I have seen happen in a small number of cases might become more common. If someone takes a financial promotion that is clearly not compliant with legislation to an authorised person, the authorised person might well say, “No, I am not going to authorise it.” There is nothing to stop the person from then shopping around and finding someone who will agree to approve the promotion on their behalf. Because these promotions are so common, and because there are so many of them being authorised and then issued, it is very difficult for the regulator or anyone else to pick up on the ones that should not have got through. We are relying on the integrity of the authorised person.

The intention behind the amendment is to ensure that, regardless of which authorised person someone goes to, they get a consistent answer—either yes or no. If one authorised person refused to give approval for a promotion, it could then be approved only with the consent of the Financial Conduct Authority. I am not sure that I am minded to press the amendment to a vote, but I hope that the Minister will be sympathetic to the intention behind it. If he feels that the amendment is not necessary, or that its purpose could be achieved by a better route, I would be quite happy to hear his reasons.

[Tulip Siddiq]

We welcome clause 20, which we recognise would introduce tighter controls on those who approve financial promotions for others, to ensure that consumers are better protected. How does the Minister foresee the clause facilitating improved approver expertise, due diligence and challenges in exercising appropriate regulatory oversight?

[Dame Angela Eagle]

Obviously this is an extremely important part of the Bill because it creates a regulatory gateway for financial promotions. We know from what the FCA has reported that there is an issue with misleading financial promotions. We all know it from our constituency casework; we know it from some of the scandals that have been carried out successfully.

Part of the trouble is the closeness to the perimeter of regulation. A firm can have part of itself in the perimeter, while other parts are outside the perimeter, but in the promotions, it gives the impression that all the firm is regulated and all of what it is doing is within the perimeter, while advertising in a very misleading way things that are actually unregulated and therefore much riskier. We know that a lot of scams have happened that way. The way in which the FCA tries to deal with this situation is like trying to hold back the tide. The fact that so many of the promotions that it has managed to get a handle on—4,226 of them—have been withdrawn or amended to make them less misleading demonstrates that the FCA is doing its best. However, members of the Committee know that there is a constant battle with scammers, who constantly change how they present information to consumers and potential consumers through an ever-increasing number of gateways, even on things like TikTok. It is difficult for any regulator to get a handle on that, so anything that helps to battle the problem more effectively will be welcomed by all of us.

Will the Minister explain in more detail why he thinks that this is the right way to proceed, and how effective he thinks the powers in clause 20 will be in tackling the problem? We know—I think we will come on to this later in our proceedings—that cracking down on fraud more effectively will also be important. With the financial promotions and unauthorised third parties that deal with granting permissions, we know that the current regime can cause problems. We know that it is failing and that the FCA cannot be expected to do all this work with the resources it has, so will the Minister go into detail about how effective he thinks the measures will be, and say how he will be assessing this approach’s effectiveness? Clearly we want a reduction in the amount of scamming and fraud, and the number of promotions that are misleading or downright lie about the nature of the products they are pushing, so I will be interested to hear how the Minister sees clause 20 as the solution to this difficult problem.