Financial Services and Markets Bill - Second Reading

– in the House of Lords am 4:42 pm ar 10 Ionawr 2023.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Baroness Penn:

Moved by Baroness Penn

That the Bill be now read a second time.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury

My Lords, this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years. Perhaps it is a signal of the significance of this legislation that we have the pleasure of three maiden speeches during this debate. I welcome my noble friends Lady Lawlor, Lord Remnant and Lord Ashcombe to the House. I very much look forward to hearing their contributions.

I also pay tribute to the former Chancellor and Financial Secretary to the Treasury, my noble friend Lord Lawson, who has recently retired, having served Parliament in both Chambers for nearly half a century. While serving as Chancellor he transformed the tax system, unleashed the City and revolutionised the approach to macroeconomic policy, setting the economy on the path of growth. His voice, reason and perspective will be sorely missed in this Chamber, and I thank him for all his service.

The Bill represents the platform upon which much of this Government’s vision for financial services will be delivered—a vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across all four nations of the United Kingdom.

Effective, efficient and easily accessible financial services are a foundation for people’s everyday lives and the bedrock upon which our economy is built. They also make their own direct contribution to our economic growth, with financial and related professional services employing more than 2.3 million people across the UK and, in 2020, contributing nearly £100 billion in taxes. In recent decades, the UK has become a leading global centre for financial services and, as the Chancellor highlighted in the Autumn Statement, the sector is one of the UK’s five key areas of growth for the future. Our exit from the EU creates the opportunity to ensure that continues by implementing a more agile and internationally competitive set of rules, better tailored to the UK market, while ensuring the sector remains well-regulated and effectively supervised.

The Bill has five overarching aims. First, it implements the outcomes of the future regulatory framework review. Secondly, it bolsters the competitiveness of UK markets and promotes the effective use of capital. Thirdly, it takes steps to make the UK an even more open and global financial hub. Fourthly, it harnesses the opportunities of innovative technologies, enabling their safe adoption in the UK. Lastly, but by no means least, it promotes financial inclusion and enhances consumer protection.

I turn to the first aim, to implement the future regulatory framework or FRS review. Clause 1 revokes retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This approach builds on the existing model established by the Financial Services and Markets Act 2000 which empowers our independent regulators to set the detailed rules that apply to firms operating within the framework set by the Government and Parliament. The Government consulted extensively on how the UK’s approach to financial services regulation should be adapted following EU exit, and there was widespread support for the approach taken in this Bill. Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. These instruments will cease to have effect when the Treasury and the regulators have put into place the necessary secondary legislation or regulator rules to replace them as appropriate.

It is important for the House to recognise that putting this into effect will require a significant programme of secondary legislation to modify and restate retained EU law. As part of the Edinburgh reforms announced on 9 December the Treasury published Building a Smarter Financial Services Framework for the UK, which set out how the Treasury intends to use these powers. Alongside this we published several illustrative draft statutory instruments demonstrating how the powers in the Bill can be used to replace retained EU law.

As the regulators take on greater responsibility for setting rules following the repeal of retained EU law, the Bill makes changes to the regulators’ objectives to ensure that they consider the sector’s critical role in supporting the UK economy. For the first time the Prudential Regulation Authority and the Financial Conduct Authority will be given new secondary objectives to facilitate the international competitiveness of the UK economy and its growth in the medium and long term. The status as a secondary objective strikes the right balance and sets a clear hierarchy by ensuring that the FCA and the PRA must work to advance growth and competitiveness while maintaining their focus on their existing objectives.

The Bill also ensures that the regulatory principles of the financial services regulators require them to have regard to the UK’s statutory net-zero emissions target. This will embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the Government’s long-term commitment to transform the UK economy in line with their net-zero strategy and vision.

It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators. There are already a number of provisions in this regard, and the Bill makes further provision to support Parliament in carrying out this important role. It introduces new requirements for the regulators to notify the Treasury Select Committee of a consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee. In addition, the regulators will need to be transparent about all respondents to a consultation, subject to their consent. These measures were strongly informed by the views of this House, as expressed during the passage of the Financial Services Act 2021. The Bill also gives the Treasury the power to require the financial services regulators—or, where appropriate, an independent person—to review their rules where it is in the public interest.

I turn now to the Bill’s second aim of bolstering the competitiveness of UK markets and promoting the effective use of capital. The measures in Schedule 2 make important changes to the MiFID framework, which regulates secondary capital markets. They do away with burdensome rules such as the double volume cap and share trading obligation while maintaining high standards and protecting the smooth functioning of markets. High regulatory standards are an essential element of competitiveness in UK markets, and the Bill introduces a senior managers and certification regime for key financial market infrastructure firms, ensuring high standards of governance in these systemically important firms. The Bill also expands the resolution regime for central counterparties to align with international standards and enhances powers to manage insurers in financial distress.

The Bill’s third aim is to strengthen the UK’s leadership as an open and global financial centre. The UK is now able to negotiate its own international agreements, and the Government are currently negotiating an ambitious financial services mutual recognition agreement, or MRA, with Switzerland. While the MRA itself will be scrutinised under the procedures in the Constitutional Reform and Governance Act 2010, Clause 23 enables the Treasury to amend existing legislation to give effect to this and any future financial services MRAs once finalised. Schedule 2 will enable the UK to recognise overseas jurisdictions that have the equivalent regulatory systems for securitisations classed as simple, transparent and standardised, or STS, providing more choice for UK investors.

As its fourth aim, the Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure sandboxes, allowing firms to test the use of new and potentially transformative technologies and practices in the infra- structures that underpin financial markets.

The Bill’s final aim is promoting financial inclusion and consumer protection. The Government are committed to fostering a financial services sector that supports everyone, with appropriate consumer protections and measures to ensure that no one is left behind by the rapid advancement in financial technology. There is an extensive programme of work ongoing related to consumer protection, particularly in areas raised by noble Lords during the passage of the Financial Services Act 2021 such as buy now, pay later and the FCA’s new consumer duty. That Act also made legislative changes to support the widespread offering of cashback without purchase in shops and other businesses, following a proposal by my noble friend Lord Holmes of Richmond.

Clause 51 and Schedule 8 of this Bill go further and give the FCA responsibility for seeking to ensure reasonable access to cash across the UK. The Treasury will designate banks, building societies and operators of cash access co-ordination arrangements to be subject to FCA oversight on this matter. Clause 52 and Schedule 9 give the Bank of England new powers to oversee the wholesale cash infrastructure to ensure its ongoing effectiveness, resilience and sustainability.

Finally, the credit union sector plays a crucial role in providing access to affordable credit to its members. Clause 69 will allow credit unions in Great Britain to offer a wider range of products and services to their members. The Bill also strengthens the rules around financial promotions, requiring all authorised firms to undergo a new FCA assessment before they can approve financial promotions by unauthorised firms. This will reduce the risk of consumer harm. Additionally, Clause 68 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers for all payment systems it regulates. It also places a duty on the PSR to mandate reimbursement in relation to the Faster Payments system specifically.

This is a substantive Bill; in opening this Second Reading debate I have been able to touch only briefly on many of its main measures. I have no doubt that, when we enter Committee, noble Lords will subject the Bill to the level of scrutiny that it deserves.

As I conclude, I think it is worth reflecting on the journey that we have taken to the production of the Bill. It is the result of several years of consultation with industry, regulators and the public. The Government first consulted on the future regulatory review in October 2020, with a further consultation in November 2021 setting out detailed proposals for reform. It will enable a programme of essential reforms that will help drive our economy, including reforms to Solvency II and the prospectus regime and changes resulting from the wholesale markets review. So, as we conduct the important work of scrutinising this Bill, I hope that the Government’s broad approach will draw support from across the House and that many noble Lords share the Government’s ambition to ensure that the UK’s financial services continue to be an engine of growth for our economy. I beg to move.

Photo of Lord Hunt of Kings Heath Lord Hunt of Kings Heath Llafur 4:55, 10 Ionawr 2023

My Lords, it is a great pleasure to open the Back-Bench debate by thanking the Minister for her opening address and, like her, welcoming the maiden speeches of the noble Lords, Lord Remnant and Lord Ashcombe, and the noble Baroness, Lady Lawlor. I reassure the Minister that I support the Bill and the intent to modernise our financial services and ensure that the City retains its competitiveness in a global marketplace. However, this has to be done in parallel with measures to promote financial stability, inclusion and consumer protection as well as—I hope—recommitting the Government to making the City the first net-zero aligned financial centre.

Like the Minister, I can concentrate on only three or four aspects of this. First, I want to talk about financial inclusion. How is the Government to address the poverty premium—the extra costs that poorer people pay for essential services such as insurance, loans or credit cards? This is closely linked to the ease of access to cash and banking services, to which the Minister referred. The fact is that the Bill does nothing to protect essential face-to-face banking services, which the most vulnerable in our society depend on for financial advice and support.

Indeed, on this Government’s watch, almost 6,000 bank branches have closed since 2015, yet there is a significant overlap between those reliant on cash—estimated at about 10 million people—and those who need in-person bank support. Those without the digital skills to bank online, people with poor internet connections and people who are unable to afford wi-fi are at risk of being left behind.

The Government have committed to protecting access to cash, but will free access be protected? The key to this is ensuring that the ATM network is sufficiently funded by the interchange fee. Since 2018, this funding has seen successive real-term cuts, which is risking the closure or the conversion of an estimated 37,000 free-to-use ATMs. I believe that the regulator must be mandated to consider the funding of ATMs through legislation in this Bill.

I hope that we will do more to protect people from the buy now, pay later industry. We know that many millions of people are borrowing to pay their mortgages, and to put food on their table and clothes on their children’s backs. A quarter of all buy now, pay later users have been unable to pay for at least one essential item because they are having to make repayments on buy now, pay later products. Many did not realise what they were getting themselves into because buy now, pay later is currently so pervasive on websites. Users have nobody to complain to; they cannot go to the ombudsman if they feel they have been mis-sold this type of credit. I understand that the Government have accepted proposals to regulate, yet regulation has not come. Why is that, and why cannot this Bill be the vehicle?

I turn now to financial fraud. The Bill offers protection for victims of authorised push payment scams but little to address the growing problem of financial fraud. According to the latest figures from the NAO, 41% of all crime against individuals in the year ending June 2022—with an estimated 3.8 million incidents—was actual or attempted fraud. Yet, the number of fraud offences resulting in a charge or summons is pathetic. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Moreover, less than 1% of police personnel were involved in rendering fraud investigations in the year ending March 2020.

I am particularly concerned about the impact on older people. As Hourglass has pointed out, suffering economic abuse as an older person can have really life-changing effects leading to trauma, mental health problems and, in some cases, death. I do not understand why the Government continue to fail to take fraud seriously and why we cannot see a fully fledged fraud strategy. Again, this Bill provides an excellent vehicle for us to ensure that that happens.

Finally, one other area where the Bill could have done so much more is in relation to cryptocurrency. Recent events following the collapse of FTX have shown the risks in the Government’s aim to make the UK a global hub for cryptocurrency assets. It is true that the Bill contains measures to bring stablecoins into the scope of regulation, but surely they could be doing much more. I say to the Minister: overall, the Bill is welcome but it is certainly ripe for improvement.

Photo of Lord Sharkey Lord Sharkey Democratiaid Rhyddfrydol 5:01, 10 Ionawr 2023

My Lords, we welcome the overall objectives of the Bill but have some significant reservations. In the absurd five minutes allowed, I will focus on the reservations rather than the merits of the Bill.

We have very serious reservations about the wholesale bypassing of parliamentary scrutiny that the Bill could bring about. We are sceptical about the merit of the proposed new growth and competitiveness objectives. We are concerned about the extension of the SMCR, and disappointed by the imbalance in the Bill between regulatory modifications in the interests of the financial services sector and measures to protect the interests of consumers.

Schedule 1 sets out what retained EU law is to be revoked, modified or replaced. I counted at least 250 items. Some will be subject to the negative SI procedure, some to the affirmative SI procedure and some to no parliamentary procedure at all. What all this means is that this wholesale transposition, modification, repeal and replacement exercise is not subject to any meaningful parliamentary scrutiny. We need to find a way of allowing the relevant Select Committees to initiate proper inquiries into the drafts of proposed changes that they see as important and have this done before any instruments are laid before Parliament or changes are made without reference to Parliament. Parliament should not be used as a kind of consultee. The structure of our financial services regime is far too important to be left to the Treasury and the regulators alone.

I turn to Clause 24 and to the proposed addition, as a secondary objective, of growth and competitiveness to the existing FCA and PRA objectives. There does not seem to be much in the way of compelling evidence for this. In fact, much of the evidence and testimony points in the other direction. This has all been tried before. Many commentators laid a part of the blame for the 2008 crash on these objectives; that is why we repealed them in 2012. Andrew Bailey said then that it did not work out well

“for anyone including the FSA.”

Writing in the Financial Times a month ago, Sir John Vickers, who was the fons et origo of some of this, concluded:

“For the UK economy, it would be best to reject this addition to regulators’ objectives.”

Over 50 economists and policy experts wrote to the Government in May with similar misgivings; so did Which? and, tellingly, so did the FCA’s own consumer panel. We will return to the issue in Committee.

The next area I want to touch on is the extension of the SMCR. The proposal is to extend, mutatis mutandis, the existing regime to FMIs—a good idea if the current SMCR had worked, but it has not. The current version of the SMCR has not produced the results intended or envisaged. In fact, I can recall only a single case of a truly senior manager being held to account: that was the egregious Jes Staley at Barclays. This is not because the financial services sector has forsworn misbehaviour. We will want to return to this issue in Committee.

I now turn to measures to protect consumers. The last time we discussed imposing a duty of care, it was agreed that the FCA would examine the case. The FCA has decided that preferable to a duty of care was a new set of rules for firms’ behaviour called the new consumer duty. This consumer duty is due to come into effect at the end of July, a year after the final rules were published in a 90-page paper, helped by a 114-page guidance note. Not only is this extremely complex and yet another very heavy burden on firms, but it is very unclear that the new duty is superior in any way to a simple duty of care. Critically, it omits private right of action provisions. We will bring forward amendments to replace this consumer duty with a duty of care and a private right of action. We will also bring forward amendments to extend the FCA’s perimeter to cover lending to SMEs, which have suffered at the hands of predatory and unscrupulous lenders.

We will bring forward an amendment to relieve the plight of the mortgage prisoners. These are people who, in the collapse of 2008, had their mortgages acquired by the Treasury and then sold on to various inactive lenders and American vulture funds. Since then, these people have been trapped on very high SVRs. This is entirely the Treasury’s fault. It has caused and still causes immense suffering to many thousands of families. We will try to put that right.

Photo of Lord Vaux of Harrowden Lord Vaux of Harrowden Chair, Finance Committee (Lords), Chair, Finance Committee (Lords) 5:05, 10 Ionawr 2023

My Lords, I first draw attention to my interest in the register as a shareholder of Fidelity National Information Services, which owns Worldpay. Like others, I generally support what this Bill is trying to achieve. There is much that is good here, but there are areas for improvement. It is a pleasure to follow the noble Lord, Lord Sharkey, who chaired the EU Financial Affairs Sub-committee of this House, which I sat on. In its last publication before it was wound up following Brexit, that sub-committee stated that

“Delegating more powers to the financial regulators will require increased parliamentary oversight of their activities”.

It suggested that

“This might require a change in the way that parliamentary committees are structured and an increase in resources to enable effective scrutiny”.

While the Bill gives strong rights of oversight and direction to the Treasury, it does very little to provide increased parliamentary oversight. Frankly, informing the Treasury Select Committee of consultations does not really cut the mustard, nor are the performance reporting requirements strong enough. Treasury oversight and parliamentary scrutiny are not the same thing. Our financial services industry is so important and its regulation so complex that I continue to believe that this House—possibly jointly—should create a committee specifically for this purpose and to provide the systematic scrutiny of the decisions, actions, policy-framing and impact of the financial services regulators and of HM Treasury. Financial services regulation is too big a topic to be a part of a wider committee such as our existing Industry and Regulators Committee; it needs dedicated coverage.

Importantly, the systematic scrutiny should be forward-looking. Historically, the regulators have tended to be too reactive after the event and have not done enough to identify future risks. Most of the financial scandals of recent years were foreseeable—indeed they were foreseen by some. I do not see anything in this Bill that will improve that.

I welcome the secondary objective to support growth and international competitiveness. Our financial services industry is such an important part of our economy that it must not be held back by overzealous regulation. It is not possible or even desirable to eliminate all risk. I do not understand, though, why the net-zero objective should not be given equal importance. It is welcome that the regulators should “have regard” to net zero, but I would be keen to hear from the Minister what the practical difference is between a secondary objective and a “have regard” requirement, and why net zero should not have equal billing to growth, given that the Government agree about its fundamental importance to our future. I do not believe that the two are incompatible.

I welcome the introduction of the sandbox rules, which should enable innovation. I have one question: when rules are disapplied for this purpose, who will be liable for any losses suffered if things go wrong? Consumers should not bear that risk.

I am pleased that crypto assets are at last being brought into the regulatory environment, although in a small way—only stablecoin when used as a means of payment. The Bill allows for further regulation in the future, which is welcome. But crypto has become the wild west, increasingly used by fraudsters both as a scam in itself and as a means of extracting value from other scams.

The Government’s stated objective is that activities having the same risk should have the same regulatory outcomes. Crypto is clearly of the highest risk, but it is almost entirely unregulated. That feels like a missed opportunity. When will we see crypto assets being properly regulated?

The Bill requires the PSR to consult and to regulate for the mandatory reimbursement of victims of APP scams which used faster payments. That is very welcome, but it is only a very minor step in addressing the huge and growing fraud epidemic to which the noble Lord, Lord Hunt, referred earlier. Why does it include only faster payments and not all forms of payment? Faster payments themselves are part of the problem, so where is the ability to slow down payments in certain circumstances? What about the sharing of the liability, preferably with all those who facilitate the crime, such as social media and telecoms companies, or at least the sharing of the liability between the victim’s bank and the bank which received and processed the money for the fraudster? Has the Minister read the recent report from the Fraud Act 2006 and Digital Fraud Committee, of which I am a member? When will we see real action from the Government to address fraud, not just consultation?

The inclusion of access to cash is welcome, but access to cash is meaningless if cash is not accepted. The main reason why businesses stop accepting cash is the closure of nearby bank branches where it can be deposited. I again agree with the noble Lord, Lord Hunt, that we need to find a solution to the closure of bank branches.

Overall, this is a necessary Bill, and I generally support it. However, there are areas where it could be usefully improved, and I hope the Government will be receptive to constructive suggestions during the next stages.

Photo of The Archbishop of Canterbury The Archbishop of Canterbury Bishop 5:10, 10 Ionawr 2023

My Lords, this year marks the 10th anniversary of the final report of the Parliamentary Commission on Banking Standards, Changing Banking for Good. I declare my interest having served on that commission, and I welcome the presence in this debate of the noble Baroness, Lady Kramer, who also served, as did the current Lord Speaker. I also welcome the maiden speeches of three noble Lords today: the noble Lords, Lord Ashcombe and Lord Remnant, and the noble Baroness, Lady Lawlor.

We need to remember that the extraordinary crisis in 2008—which led to the various commissions, reports and changes in regulations, including the financial services Act 2013, in which the Parliamentary Commission on Banking Standards played a part—caused huge and ongoing crises. While welcoming the Bill very strongly, I join some of the hesitations mentioned by the noble Lords, Lord Hunt, Lord Sharkey and Lord Vaux. It has been estimated that the financial services industry, and particularly the major banks, have an effective subsidy as a result of the implicit government guarantee that they receive, which is worth approximately £30 billion a year. If there is £30 billion a year going spare, many other industries and not a few churches would welcome that very warmly. However, that subsidy, which is at the risk of the taxpayer, as we saw in 2008 and 2009, is what gives the result of the banks having heavy social obligations; we must look carefully at that when the Bill reaches Committee, as has already been said. The issues of inclusion, stability and access at all levels, especially for micro-businesses, are very important, not least for levelling up.

I will raise three particular and short issues, the first of which is the human factor. The banking standards commission commented that, in the rapidly changing science of the financial markets, regulation is a vain hope, as the noble Lord, Lord Vaux, has already said. By the time regulation is brought in to address a problem, all but the doziest horses will have long since fled the stable. The commission highlighted that the question of culture is at the heart of good banking practice: attitudes of greed, the socialising of losses and the personalising of profits, the kind of legacy people wish to leave, and the issues of virtue. Is the mindset and approach of key leaders in the industry one of casino banking or banking for the common good? That is essentially a moral question.

Some of that is addressed very well in the Bill. I particularly welcome Clause 69, addressing credit unions, and the opportunity that that will give for levelling up and extending the range of financial access to small businesses. But we see in the recent crypto-market crash a perfect example of the failure of culture, as well of regulation, and of technology moving infinitely faster than any regulation. We need a system that is agile and keeps regulation light, so that the industry is competitive, but keeps principles tough and flexible, with heavy consequences for breaking them.

On the importance of capital adequacy and the ring- fence, this was clear at the time of 2008, when one of the major banks had 2% capital to support a more than £1 trillion balance sheet. We need to recognise that banks go under because of bad lending and bad dealing, and the remedy to that is adequate capital and adequate principles and culture—otherwise, we will get back to the point, as we did in 2008, where the taxpayer bears the burden.

Finally, we need competition and an effective industry but not a race to the bottom. There needs to be a race to the top, to the best-quality services, which serve people and the common good both now and in future generations through its green aspects. There has been a tendency over the years to say how much the City contributes, but let us be clear that, if we take into account the roughly £250 billion pumped into the banking system in 2008, it is not so obvious that the City is in credit to the taxpayer—it may well be that it is in significant debit. Nevertheless, this Bill is very positive. As long as it ends up reminding financial services that they are services for all and has principles at its heart, it will be welcomed and make a significant difference.

Photo of Lord Bridges of Headley Lord Bridges of Headley Chair, Economic Affairs Committee, Chair, Economic Affairs Committee 5:17, 10 Ionawr 2023

My Lords, I declare my interest as an adviser to and shareholder in Banco Santander.

This Bill touches on many topics, but I want to focus on two big questions: what are the objectives of financial services regulation, and who holds the regulators to account, and how?

On the first question, we know that the main objectives of regulation are ensuring that markets function well and that there is market stability, market integrity and consumer protection. As has been said, this Bill adds a secondary objective of competitiveness and growth. I support that new objective entirely, not because I want a race to the bottom—quite the reverse. I believe that simple, proportionate and robust regulation, applied by regulators in a timely, consistent way, is the bedrock of a competitive financial centre. To achieve that, regulation must reflect developments in finance.

We all know how much finance has changed over the past decade or so, since the financial crisis: crypto, AI and blockchain—technology in all its guises—turbocharging areas such as payments; green finance and ESG; not to mention the rise in Asian markets. All this has dramatically reshaped the financial sector, not just here but across the world. For us, obviously we have had Brexit, raising challenges but also opportunities. We need our regulators to be mindful of this new world in all they do, so that our financial service sector continues to attract capital, investment and talent—and, yes, that means change. But regulations are judgments; they are made at a moment in time. We should not get into the mindset of treating them, dare I say it, as tablets of stone, brought down from the mountain and never to be changed.

To ensure that our regulatory framework is fit for purpose, we must remember the lessons learned in previous crises, but we must not regulate via the rear-view mirror but for the world as it is and for emerging risks. My concern is not that the new objective goes too far but the reverse: that it will not have any meaningful impact. One reason for that is that it is a secondary, not a primary, objective. Another reason is that I question how it is going to sit alongside the new regulatory principle contained in the Bill that regulators must be mindful of the Climate Change Act 2008. How many trade-offs, should they arise, would be made between the green objective and competitiveness?

This brings me to another concern and my second big question: who holds the regulators to account? There is of course the specific issue of how regulators will be held to account in implementing the new secondary objective, but there is a much broader issue, raised a moment ago by the noble Lord, Lord Vaux. The Bill will give ever more power to unelected regulators; how are they going to be held to account? Of course, they are independent, but independence and accountability must go together hand in hand, and by accountability I mean regular systematic processes whereby the main actions of the regulators are thoroughly scrutinised by Parliament. As has been said, we have no such effective system at the moment.

I know the Bill stipulates that the Treasury Select Committee will scrutinise consultations, but consider just one fact: last year, on my reckoning, the FCA, the PRA and the Payment Systems Regulator between them launched 75 consultations—and that is just consultations, not policy statements or anything else. On my reckoning, there is no way that one parliamentary committee, under the current system as currently resourced, can possibly scrutinise this torrent of regulation; it will simply be washed away by the flood. Of course, we need to avoid politicising the regulatory process, which would undermine the confidence we all want. We also need to avoid parliamentary scrutiny making regulators so nervous that they become excessively cautious in all they do, gold-plating regulation and creating the stability of the graveyard. That said, we need to have an answer to this simple question: who regulates the regulators? At the moment, as the Bill stands there is no clear and effective answer.

Photo of Baroness Twycross Baroness Twycross Llafur 5:22, 10 Ionawr 2023

My Lords, I look forward to hearing the maiden speeches of the noble Lords, Lord Remnant and Lord Ashcombe, and the noble Baroness, Lady Lawlor. I join others in welcoming them to the House. I declare an interest as London’s Deputy Mayor for Fire and Resilience, as the points I shall raise relate to an issue identified as a risk to the resilience of individuals and vulnerable groups—a societal risk—in the London City Resilience Strategy in 2020. This strategy, published shortly before the first Covid lockdown, identified the trend in digital transactions and away from cash:

“A proliferation of digital payment technologies allow individuals to all but avoid the use of cash on a day to day basis. According to the AT Kearney Global Trends 2019-2024 Report ‘the growth of digital applications, e-commerce, and online payment technologies will keep growing over the next five years and beyond’ and we are ‘likely to see the emergence of the first truly cashless society in the next five years. A move away from cash may pose a risk to certain vulnerable groups, notably those facing barriers to digital transactions, or those more likely to be excluded from the mainstream banking system. This could affect the resilience of these groups, as well as … the personal resilience of isolated people, including older generations who are more likely to be reliant on cash.”

During the pandemic, there was a clear acceleration of cashless services, with the organisation LINK identifying that use of cash has reduced by 40% compared with pre-pandemic levels. More recently, however, there has been a subsequent increase in the use of cash by consumers during the cost of living crisis, with 10% of people saying they plan to use cash more than previously to help them budget. This alone demonstrates a clear continued need for cash by the public, despite what has been described as the turbocharging of a move away from cash since 2020. It is welcome, therefore, that the Bill includes a requirement on the Treasury to publish a cash access strategy and a requirement on the FCA to ensure reasonable provision of cash access services—and “reasonable” should, must, mean “adequate”.

The requirements must also ensure that older people, those with disabilities and those on a lower income who rely on cash are not adversely affected. We have a tradition in this country that the public are not charged for withdrawing their own money. This is a good tradition and should become an explicit right. This legislation should make it clear that there should be a default right to access cash free of charge and a right to use cash to buy basic goods and services for those for whom other forms of payment are not an option. This group, which is at risk of being marginalised, includes more than 5 million people who rely on using cash for their normal spending—a significant minority who should be protected.

Equally important is that there is no poverty premium on cash users and that the decline in free-to-use ATMs and the increase in pay-to-use ATMs—all too often found in some of our most deprived communities, as well as many rural communities—are halted. The closure of almost 6,000 bank and building society branches since the start of 2015, as has been noted, has left many consumers without easy access to a bank branch and is exacerbating the issue.

There have been some imaginative approaches to piloting ways to address these issues, but more needs to be done to assess the pilots to make sure they work and to roll out measures that can address this issue. The Bill provides the ideal opportunity to do this. I agree with the noble Lord, Lord Hunt, that it could go further in this regard. As the consumer organisation Which? has said, we need to avoid sleepwalking into

“a situation where cash users struggle to make purchases or are excluded from certain services.”

Without ambitious plans to ensure that all those who require cash can still use it and that they have easy and free access to it, there is a clear risk of further increasing the impact of financial exclusion, which is all too widespread in our society already.

Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Democratiaid Rhyddfrydol 5:26, 10 Ionawr 2023

My Lords, I declare my financial services interests in the register and my membership of the international Systemic Risk Council.

This Bill falls short on accountability. During the passage of the 2021 FSA, I suggested regular independent reviews akin to the Australian system—a more advanced vision than the sporadic reviews in this Bill, which are reliant on government initiation. Why not have rolling and thematic reviews and regulators reporting to Parliament under independent assessment criteria, such as from the NAO?

The framework consultation touted parliamentary scrutiny as a safeguard, but that is deceptive when the Government have blocked adequate parliamentary influence. Committees have modest power through public interrogation, and Ministers now regularly avoid attending Lords committees. Should parliamentary reports not get specific attention in review processes, not least to reflect public interest, which is left faint among the numerous industry hotlines to Downing Street? The Government cannot hide behind regulatory independence when they fix the regulatory perimeter and key policies, appoint regulators and control reviews. Failure is on the tab of government—maybe a different one further down the track, but the collective reputation of the UK in financial services is on the line.

We have just had an example of that with the market turmoil from DB pension schemes. At its root is the setting aside since 2005 of EU rules requiring pension scheme investment to be vanilla because pension schemes have only light-touch supervision and trustees are mainly ordinary folk and not financial experts. Trustees were thus left at the mercy of unregulated, liability-shirking advisers and the hapless Pensions Regulator.

I have been involved in investigations through the Industry and Regulators Committee, giving evidence to the Work and Pensions Committee and participating in conferences, where polling on the biggest loser in the debacle put the reputation of the UK top. Gilt turmoil is a named issue in papers for international organisations looking at systemic risk.

The timid excuse is that we are waiting for international agreement relating to non-bank systemic risk—that is outrageous, given that this is a UK-created and UK-specific issue of financial stability, with a regulators’ muddle, gaps and an issue that the Financial Policy Committee should have been all over. In evidence to the Economic Affairs Committee, Sir Paul Tucker questioned the point of the Financial Policy Committee if all it does is report. Now, there is some pulling up of socks, again after the event. Systemic risk exists in many funds, but the corralling and correlation of risky investment strategies in pension schemes with emphasis and concentration in gilts is uniquely ours, uniquely crafted and well-known where it should have mattered. It is not black swans and larger buffers; Bank of England yield tables show turmoil well under way at under 40 basis points’ change, and the transposition dirty secret has long been protected by the Treasury and its alumni.

The Bill also touches on issues of cryptocurrency and critical third parties, a reminder that financial services are not really penned in to entity and activity-based perimeters. As the IMF said, we are already into the era of reimagining regulation, otherwise it is not possible to cope with fintech or big tech which blur and exploit the boundaries of regulation. Online brokerage mimics the addictive features of social media, targeting the vulnerable. We regulate gambling but we do not even have robust age verification for online investing. Fraud is at epidemic levels and respects no regulatory boundaries. Far from having agile principles and simple regulation, we have a rigid perimeter and rule dinosaur, which is fostering fraud and revelling in the abuse of position and asymmetry of information. Regulators are operationally inefficient, underfunded, late and thwarted on enforcement.

Financial services are the food of the economy. Where there is harm, there should be justice—and not just where it is regulated. I will be offering amendments.

Photo of Lord Cromwell Lord Cromwell Crossbench 5:32, 10 Ionawr 2023

My Lords, how do I follow that? It is always a pleasure to follow the noble Baroness, Lady Bowles, with her knowledge and her forensic contributions. I also look forward to the three maiden speeches we are going to hear this evening.

In the time available, I will speak about two things—including, perhaps perversely, one that is not yet in the Bill—and then say a few words about crypto. I saw in the Financial Times today that the new chair of the Treasury Select Committee rather humorously described crypto as:

“The freedom for people to do silly things with their money”.

The absent area is the urgent need to tackle the use of dirty money to prevent public interest investigations into market participants. It is widely recognised that the UK legal system is used, often with money very questionably obtained and possibly laundered in UK markets, to suppress the publication of matters in the public interest. We discussed these activities—which have become known as SLAPPs or lawfare—during the passage of the economic crime Act, so I do not propose to repeat what was said then. Nevertheless, the use of such intimidation to suppress, in the context of this Bill, matters of keen investor need-to-know interest is a distortion of the information and accountability that should underpin efficient financial markets in the UK.

The Bill seeks to address the senior managers regime standards and conduct rules. It should also address this area of coercion, which prevents markets and investors being properly informed about the activities of some leading business figures, illegal activities, market abuse and corruption. For example, there are newspapers which today will not publish stories about so-called oligarchs for fear of the lawfare that will then be waged against them. The consultation following the economic crime Act resulted in a statement from the Secretary of State on 20 July last year that primary legislation would be introduced at the earliest opportunity to enable an early dismissal of such cases. This was recently and vigorously reiterated in response to an Oral Question in this House.

There is both government and cross-party support for cleaning up this abuse of our financial markets and the associated legal system. I should inform the House also that the necessary clauses to give effect to this government commitment have already been drawn up by lawyers and could be included in the Bill. So far, so good. However, the noble Lord answering the Oral Question I referred to a moment ago described the selection of the right legislative vehicle to bring this into effect as “above my pay grade”. Therein lies the problem. It seems that everyone agrees that this legislation is needed, but where is the government impetus to get it done? The matter has become a legislative Cinderella, but the pantomime season is over and it is high time that the promised legislation was enacted. I therefore ask the Minister, when she winds up today’s discussions, whether she will agree to meet with me and others to review the clauses proposed, with a view to arriving at an appropriate amendment to the Bill.

I turn briefly to digital assets, and declare my membership of the APPG for crypto. Blockchain and digital assets are already here, and here to stay. I have long advocated UK regulators getting a better understanding of them, so it is encouraging to see the Bill making some steps in that direction. The Bill introduces a new term, “digital settlement assets”, and appears to put the regulator’s toe in the water with stablecoins, albeit only as a medium of exchange. However, it then makes provision for going far wider—and using secondary legislation—to enable engagement, seemingly with any other digital and crypto assets. Despite my interest in this area, I must sound a note of caution. The constant evolution of digital assets represents not just a financial revolution but a technological and conceptual one that will not fit simply into existing regulatory categories and approaches. Managing emerging innovation and opportunities while preventing abuse is going to pose serious capacity and structural challenges to the regulators. I say candidly that I have my doubts as to whether the FCA is really ready for this.

Today, in brief, I have just two questions for the Minister. First, stablecoins sound so inviting, do they not? However, in reality some have proved to be far from stable, and even those backed 100% by a fiat currency are subject to fluctuations in that underlying currency. I therefore ask the Minister to clarify whether the Treasury is concerned about this and, in particular, whether it has a clear definition of what tests an asset must pass to be truly worthy of branding itself to retail investors as a stablecoin. Finally, and more succinctly, the Treasury surprised us all some time ago by announcing that it was going to produce its own non-fungible token. Can the Minister confirm that this is still the case, and if so, why, or was it just a passing fancy of the Government to be down with the crypto bros?

Photo of Lord Hill of Oareford Lord Hill of Oareford Ceidwadwyr 5:38, 10 Ionawr 2023

My Lords, I declare my interest as both the lead NED at the Treasury and an adviser to financial and professional service firms in Europe and the UK. My real interest today is in talking about the accountability of the new regulatory framework proposed in the Bill.

The underlying purpose of the Bill is clear enough: to give our financial regulators more independence and more flexibility in setting the regulatory framework for our financial services. As someone who was responsible for financial regulation in the EU and who saw some of the downsides of that rather clunky, consensus-based system, I fully support that objective. The ideal regulatory framework is flexible and dynamic. Risk is not static, and regulation should not be static either.

But if we are to give our regulators more independence and more control day to day over an industry that is so important to the well-being of our country, that surely has to go hand in hand with more accountability. The question that follows is whether this Bill does enough to increase the accountability of our regulators alongside the increase in independence that it clearly gives them. The answer at the moment is that it does not.

To say we need more accountability is not, by the way, to attack our regulators or question the importance of independence. They have an incredibly difficult job and have gradually had more responsibilities dumped on them by politicians who have outsourced their own responsibility for managing risk. If we get it right, clear accountability should strengthen our regulators and protect their independence.

When we talk about accountability, we first need to be clear on our terms. I draw a distinction between the regulations themselves on the one hand and the application of those regulations on the other. Very often, the two are conflated and we just talk loosely about regulation, but the UK’s overall regulatory environment, and our competitive position, are shaped by both the detailed law and what we might call regulatory culture or behaviour. Both affect sentiment in the marketplace and shape the decisions that companies take as to where they want to base their business. When people grumble about regulation in the UK, it is often the process—the length of time it takes to get approvals, inefficiencies, a box-ticking mentality—rather than the rules themselves which infuriates them.

I draw this distinction because we need accountability mechanisms which cover both points—both the rule-making and the application of those rules. When we talk about holding the regulators to account, I am sure we will have a lot of discussion about the proper role of Parliament in the process. As has already been asked, does a session in front of the Treasury Select Committee amount to proper accountability? Is the TSC properly set up and resourced to provide proper scrutiny? Clearly, the answer to both questions is no.

We also need to look at non-parliamentary mechanisms for increasing accountability. Should the regulators publish how long it takes them to process approvals, for example? Should an independent body provide some comparative statistics on how UK regulators do compared with other jurisdictions? Can we beef up the annual “state of the City” report which the then Chancellor, Mr Sunak, committed to publish once a year? Should we think about establishing a body modelled on the OBR which could provide some independent validation of the work the regulators are doing? After all, their decisions have a massive impact on the functioning of our economy and thus our ability to fund public services. If it is good enough for the Treasury goose to have the OBR, why not for the regulatory gander?

This is a vital Bill which will set the framework for one of our most important industries for years to come. I am all for the independence for the regulators it contains, but we will need to do better on accountability.

Photo of Lord Frost Lord Frost Minister of State (Cabinet Office) 5:43, 10 Ionawr 2023

My Lords, as has been said by many, this is very important legislation. It is crucial to giving effective support to the City and our financial services sector more broadly, and there is a lot of good stuff in it. I want to begin by highlighting three of those good things.

First, I welcome the broad approach taken to the onboarded EU legislation on our statute book. It has taken the Government a long time to get here, but the powers to revoke and replace with genuine UK legislation and rules are very important. They show that it is entirely possible to take an ambitious and potentially sweeping approach in this area, which I hope the Government will follow more generally in the other reviews of aspects of our domestic legislation which are under way, if perhaps not taking quite so long about it.

Secondly, the secondary objective on competitiveness is a very good thing. I fear it will be undermined by the duty of compliance with net zero as a regulatory principle as well, but nevertheless it is a very good secondary objective. Obviously, it is correct that regulators should have to pay due regard to our economic prospects in their actions.

Thirdly, the proposals in the Bill to support access to cash are very important. I support much of what the noble Baroness, Lady Twycross, said on this subject. Access to cash is important not just for practical and social inclusion reasons but also to preserve a bit of personal freedom and the ability to conduct transactions without the Government or institutions looking over your shoulder. There is of course no point in financial institutions ensuring access to cash if there is in practice nowhere to spend it, so I hope the Government will look in due course at the other side of this problem—the withdrawal of cash in the retail sector more broadly. Getting this right is in the interests of a free and inclusive society.

As others have not mentioned it yet, I mention in passing the commitment made by the Minister in the other place to keep under close scrutiny the PayPal issue—the withdrawal of financial services for essentially political reasons. I welcome the Minister’s commitment to follow up on that and possibly to use the powers in the Bill if necessary.

As with others, my main concern with the Bill is on the accountability of regulators. I have two concerns. The first issue is the quality of regulation. It seems a little pas comme il faut nowadays to criticise the independence of the regulators, but independence is not the same as immunity. It is right to acknowledge the concerns that the FCA and PRA potentially have powers that are too wide-ranging already and sometimes appear to act with impunity, and that sometimes firms are reluctant to challenge because of their relationship with the regulator. There is no statutory requirement on the regulators to make clear rules or act predictably or consistently and, as others have said, sometimes they are slow, risk-averse and reluctant to commit themselves, and that in itself can harm competitiveness.

The second issue is the politics of regulation. The way the regulators fulfil the objectives they are given is in practice highly political. There are many ways of fulfilling those objectives and in choosing how to do so they reflect a political view. They have to make such judgments; for example, and most obviously, on whether the City’s prospects are best protected by divergence—my view—or relative alignment with the way things are done in the EU. That is a political judgment, influenced by the Government’s view, yet the Bill gives the Government no way to compel regulators to act in line with such a political view. The prickly reaction of the regulators to the call-in power, which is now dropped—in my view, mistakenly—shows clearly that they want to keep discretion in this area. I worry that the Bill will create a system in which all the incentives are to go along with what regulators want in order to avoid public arguments.

To conclude, giving new rule-making powers to the regulators against this backdrop, without corresponding duties and genuine accountability, is pretty risky. The system it would put in place of only post-facto accountability involving only the Treasury Select Committee is not good enough. There are likely to be amendments on this subject and I hope the Government will look carefully at them. With those caveats, I am happy to support the Second Reading of the Bill, but I hope the Government will look to improve it in Committee.

Photo of Lord Davies of Brixton Lord Davies of Brixton Llafur 5:48, 10 Ionawr 2023

My Lords, I should mention that I am a fellow of the Institute and Faculty of Actuaries and, in one way or another, have worked in the financial services industry throughout my professional career, albeit generally on behalf of consumers.

The Bill is in effect a Brexit Bill, as emphasised by the two previous speakers, but the Government are taking the opportunity to pursue wide-ranging changes in the way the industry is regulated. This has led to the concerns which have been expressed and will be expressed subsequently in the debate. For my part, my main concern is to ensure, given any changes, that the interests of consumers are fully protected. The industry owes a duty of care to consumers, and how this should be implemented needs to be set out clearly and directly in the Bill.

Against that background, I want to highlight one aspect of providing care for consumers where more needs to be done. Mental health and financial circumstances are clearly linked. Problems with your mental health can make it harder to earn money, to manage spending and, crucially in the context of financial services, to get a fair deal on products and services. Facing financial difficulties should not result in needing mental health treatment, but too often those things come hand in hand. Financial difficulty itself causes stress and anxiety, but this is often made worse by, for example, collections activity or having to go without essentials. It is important, therefore, to understand the scale of the problem. In any given year, one in four people will experience a mental health problem, and the pandemic and the cost of living crisis have made things worse.

Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, can make managing money significantly harder. Those symptoms can also make it more difficult to interact with financial services. For example, four in 10 people say that they find it difficult or distressing to make phone calls. Experiencing a mental health problem can also make people more vulnerable to fraud and scams. People with mental health problems are three times more likely to report that they have been the victim of an online scam than other people.

The relevance of all this to the Bill is that the financial services industry needs to be placed under an explicit obligation to act responsibly towards its customers who have mental health problems. The industry needs to recognise and understand the nature and scale of these problems, it should be placed under a duty of care towards its customers, and it should be required to take active steps that will minimise the potential difficulties faced by those who have or are at risk of having mental health problems that are associated with their finances. Obviously, this will be of benefit to the individuals concerned, but it will also relieve much of the pressure on our mental health services, and, finally, it will be of benefit to the financial services industry itself in not accumulating bad business.

Photo of Baroness Sheehan Baroness Sheehan Democratiaid Rhyddfrydol 5:52, 10 Ionawr 2023

My Lords, I declare my interest as a director of Peers for the Planet. The public want action on climate change. When people are given a choice, they are voting with their feet—the uptake of electric cars, which is beating all expectations, is a case in point. It is clear that businesses and financiers also want a robust net-zero framework. The UK Sustainable Investment and Finance Association, an organisation of over 300 financial services firms with over £19 trillion in assets under management, published recommendations of a number of “critical actions” to move the UK’s financial sector towards net zero. The Aldersgate Group business alliance, which has a collective global turnover of over £550 billion, has noted how the

“lack of clarity on the direction of public policy confuses businesses and investors and leads to an ineffective allocation of money.”

People and businesses want action because the dire impacts of climate change are visibly here with us now, and the increasing ferocity of climate events has taken even pessimistic scientists by surprise. The Met Office has confirmed that 2022 was the hottest year on record in the UK, and 2023 is set to be even hotter. This legislation should reflect that concern.

I will leave it to others far more knowledgeable than myself to speak on the technicalities of the regulatory framework for financial services and to say whether the Bill is fit for purpose. I will confine the rest of my remarks to what I believe to be a serious shortcoming of the Bill, which is its almost dismissive approach to the role that money plays in safeguarding the health and natural capital of our planet.

To start with deforestation, the agriculture, forestry and land use sector produces almost a quarter of all global greenhouse gas emissions. The Global Resource Initiative task force, established by the Government and comprising finance and private sector leaders, has independently recommended the introduction of new legislation applying deforestation and human rights due diligence obligations to UK financial institutions. Its report is worth reading—the stakes are high. It states:

“No pathway to 1.5 degrees is possible without addressing forest loss”.

However:

“If properly protected and restored, forests and other ecosystems could provide more than one-third of the total CO2 reductions required to keep global warming below 2° C. This decade provides a narrowing window of time to act.”

Deforestation is a “top priority area” in the UK’s net zero strategy, yet the UK is a major financier of global deforestation. The Government could have used the Bill to follow through on the GRI’s recommendation and stop UK financial institutions bankrolling forest destruction abroad to the tune of hundreds of billions of pounds. Why did they not do so?

I have a list of other concerns, which include: the regulators’ requirement to “have regard to” climate goals is inadequate to support net zero and nature; the removal of sustainable disclosure requirements from the Bill is causing concern; there is a need for a better interpretation of “fiduciary duty” to help clarify that climate change is financial risk; and, last but not least, the implications of the abolition of Solvency II rules and the safeguarding of environmental targets by a replacement regime—information on that would be welcome.

In conclusion, the markets serve a societal function, but they are there to serve us, and it is up to the Government to set the parameters within which the market will deliver the social and environmental values without which we cannot thrive.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Ceidwadwyr 5:57, 10 Ionawr 2023

My Lords, I declare my interest as set out in the register as chairman of a publicly quoted bank. I am also regulated by the PRA and the FCA under the senior managers regime, so I am putting a book down my trousers for the rest of my speech.

I welcome the Bill and its commitment to supporting our financial services sector by creating competition and removing needless bureaucracy and regulations which were made for Europe but were wrong for Britain. There is, however, a fundamental weakness that needs to be addressed in Committee. That is, while the Bill gives regulators more powers and independence, it is shockingly weak on ensuring their accountability to Parliament. These points have been made by the noble Baroness, Lady Bowles, and my noble friends Lord Bridges, Lord Frost and Lord Hill, so I think there is a degree of consensus across the House on this matter.

That accountability is vitally important to ensure that we achieve the growth and wealth creation our country desperately needs after the ravages of Covid lockdown. We have already seen the undermining of Parliament’s role in voting means of supply, with the Bank of England’s expansion of its balance sheet through quantitative easing—money created out of thin air on an industrial scale. Quantitative easing amounts to just short of £1 trillion—in fact, almost 40% of our GDP—in which Parliament was a bystander and the Chancellor unable to be held to account because we are told the Bank of England is independent.

Your Lordships’ Economic Affairs Committee warned that QE was a dangerous addiction in 2021 and that the Bank’s view that inflation was a transient phenomenon while continuing with QE risked serious inflation. Its own chief economist resigned while expressing similar concerns. The committee was ignored, and it turned out to be right and the Bank wrong. The consequences have been inflation, higher interest rates and a bill in excess of £100 billion for taxpayers to allow the asset purchase facility of the Bank of England to pay interest to the banks under an indemnity agreement with the Treasury, which the Treasury has insisted on keeping secret.

I voted for Brexit, to coin a phrase now so popular with the leader of the Opposition, because I wanted to take back control. I wanted to restore to Parliament, particularly the elected House of Commons, the ability to make our laws and be held to account for them at every general election. Frankly, this Bill seems to pass control of regulation from one unelected European bureaucracy to other unelected bureaucracies in the form of the Treasury, the PRA and the FCA. Parliamentary scrutiny and accountability in a thicket of Henry VIII provisions and regulatory powers, whose purpose is unclear, is derisory.

The fact that we have only five minutes each to discuss this Bill is an absolute abuse of the House. Also, as I discovered this afternoon, thanks to the noble Baroness, Lady Bowles, that we are expected to deal with this Bill in a Grand Committee, not on the Floor of the House. Whatever was the Official Opposition thinking in agreeing to such a matter?

Of course, Clause 36 purports to tackle this issue by providing that the FCA and the PRA would have to notify the Treasury Committee when they published a consultation and responded to any committee replies to their consultations. We do not need a clause in the Bill to do that; such a measure already exists. It is already part of custom and practice. Is that really accountability? Is that it? Surely, at the very least, we need a Joint Committee of both Houses made up of Members with the necessary experience and properly resourced, with informed and expert advice for overseeing what is a Herculean task.

There is no timescale associated with achieving the Bill’s objectives and it is not inconceivable that little, if anything, will change. I do also worry about how all this is going to be resourced. It can already take months for regulators to approve senior appointments and transactions in regulated businesses, damaging their ability to operate effectively. The FCA has itself acknowledged that it is underresourced to perform its existing responsibilities. This House and the other place have, on numerous occasions, raised the politically exposed persons regime as it affects Members of Parliament and their families to no clear purpose, but nothing has changed. Nothing has been done about it.

The ECB rules on capital, which limit lending by smaller banks to housebuilders as a result of abuses in Spain and Ireland, continue to apply in the UK at a time when the Government’s policy requires more housing. It is far more profitable for banks to lend money for mortgages than to build houses, so why are we surprised by the consequent increases in house prices? The countercyclical capital requirements now being introduced as the country experiences recession will require banks to hold more capital, restricting increased lending by smaller banks when so many good businesses need a lifeline. It seems unwise to me but neither the Treasury nor Parliament can do anything about it as the regulator’s independence is not to be questioned. I hope that, during the remaining stages of this Bill, my noble friend the Minister will address these issues.

Brexit presents us with many opportunities, including the chance for Parliament to unleash the talent and expertise of the City. However, I fear that this Bill needs to focus more clearly on execution and delivery. “Doing nothing often leads to the very best of something” might have been good enough for Winnie-the-Pooh but it will not be for us if we are to succeed as a nation.

Photo of Baroness Hayman Baroness Hayman Crossbench 6:04, 10 Ionawr 2023

My Lords, I declare my interest as co-chair of Peers for the Planet. It is a pleasure to follow the noble Lord, Lord Forsyth; I absolutely agree with his comments and those of other noble Lords as to the importance of taking action during the passage of this Bill in terms of the parliamentary accountability gap that currently exists.

At COP 26 in Glasgow, the then Chancellor—now the Prime Minister—pledged to make the UK

“the world’s first net-zero aligned financial centre.”

That pledge reflected both the necessity and opportunity for this country to embrace green growth. The potential benefits of the UK being a global centre for financial flows, which will power the economy of the future, are huge. Embracing innovation and private investment to scale up new technologies can bring sustainable jobs and growth, far from being a barrier to growth, as the noble Lord, Lord Frost, suggested.

According to analysis by McKinsey, the supply of goods and services to enable the global net-zero transition could be worth £l trillion to UK businesses by 2030. However, the UK financial services industry will not be able to fulfil the Prime Minister’s pledge unless it has both the right regulatory framework to support it so to do and the policy certainty and long-term trajectory that give business the confidence to invest. As the helpful briefing for this debate from Aviva makes clear,

“a booming UK green finance sector requires a transparent and trusted market that combats greenwashing, has clear standardised metrics, and levels the playing field to reward rather than penalise early action.”

I fear that, as currently drafted, this Bill is a missed opportunity. For example, consideration of nature appears to be entirely absent from the Bill, and with it the chance for our financial sector to scale up the nascent and fast-growing nature-based solutions market. While we delay, other countries are making leaps ahead in green finance. Both France and Germany have given their regulators statutory objectives linked to climate change and sustainability.

I know that the Minister spoke in her opening speech about the inclusion of a climate change regulatory principle but, as others have said, this is just one of seven regulatory principles that sit beneath the regulator’s main strategic and operational objectives and is much weaker than if the Bill had contained a clear climate objective. I am sure that the issues as to the hierarchy of priorities and the trade-offs between the objectives, the secondary objective and the principles contained in this Bill—the noble Lord, Lord Bridges, mentioned these—are matters to which the Committee will give great attention during the Bill’s passage.

I fear that the Bill also misses the opportunity to progress previously announced policy steps to align our financial services sector with net zero, notably the commitment to require all UK-regulated financial institutions and publicly listed companies to publish net-zero transition plans by 2023. This Bill is the obvious place to legislate for that policy yet it is silent. Progress has also stalled on taking forward the UK sustainability disclosure requirements and the UK taxonomy. An updated green finance strategy has been promised but not yet published. All this delay risks sending a signal to our financial sector and internationally that the Government are unsure about whether they are truly committed to being a leader in green finance.

Yet businesses are calling for clear, consistent policy and long-term financing frameworks. The CBI has said that

“the big policy lever that’s missing is around green growth” and that businesses are “confused and disappointed” that the Government appear to be going backwards on their green growth agenda. We need strong leadership, a sense of direction and clarity from the Government. With so much to be gained from creating the right regulatory framework to allow our financial sector to capitalise on the green transition and the many investment and growth opportunities, I am really worried that we will not move at pace to become the world’s first net- zero financial centre. If we do not move at pace and decisively, others will beat us to it; all the competitiveness objectives in the world will not change that.

Photo of The Bishop of St Albans The Bishop of St Albans Convenor of the Lords Spiritual 6:09, 10 Ionawr 2023

My Lords, theologians sometimes discuss the personal and social ethics in the teaching of Christ under the three headings of money, sex and power, those three areas which can be the most extraordinary gift and blessing when used rightly and for the common good but which, when they are an end in themselves, can become extraordinarily disruptive. Of these three areas, Christ had most to say about money, as its use reveals our values as individuals and as a society, often in a very stark way. A close reading of this Bill reveals a set of cultural assumptions and values about what is considered important and valuable. There are four areas that I want to highlight and which we need to consider if a growing and vibrant financial sector will work for the common good.

First, on crypto asset regulation, as others have said, we need to act fast both to protect our citizens and so that we do not fall behind the rest of the world. The problem at the moment is that the almost complete lack of regulation means that, for many people, crypto- currencies are just another form of gambling. The recent collapse of FTX has demonstrated the volatility of this market and its vulnerability to fraud. Some have made a fortune, while others have lost their life savings and will now be looking to the state to provide for them. Just as we need a sensible and balanced approach to the regulation of online gambling, so we need sensible, balanced regulation of crypto- currencies. The provision in this Bill to ensure that crypto is treated as a regulated activity and giving the FCA and the PSR the power and, as others have noted, the resources to do their work and to protect customers, is welcome.

Secondly, His Majesty’s Government’s laudable levelling-up agenda needs to ensure access to cash. Here I declare my interest as president of the Rural Coalition. Over 8 million people across the UK rely on cash, primarily the elderly or those who live in rural areas or not-spots, where you cannot get online. Poorer areas are being dominated by pay-to-use cash machines, which hit poorest people the hardest. Research indicates that the most deprived areas are dominated by private operators charging those most affected by the cost of living crisis to withdraw cash. This is the poverty premium, where the poorest are forced to pay more for essential services. When the Minister sums up, can she tell us whether the FCA is under the same obligation as government departments to rural-proof the regulations that it makes about access to cash? If not, will this requirement be introduced?

Thirdly, I welcome the proposal for credit unions and urge His Majesty’s Government to explore ways in which we can encourage their growth. The Church of England has been involved in a very large project using the insights of credit unions in our secondary schools to teach financial literacy, and to teach young people how to handle cash and their money and how to plan responsibly. We need to build on this work urgently.

Fourthly, on green and zero carbon, it is more urgent than ever that we introduce mandatory net-zero transition plans, so that large companies report on how they will manage the transition to net zero. We are told that the Bill will update

“the objectives of the financial services regulators to ensure a greater focus on long-term growth and international competitiveness.”

However, if we are to fulfil our COP 26 commitments, it will also need a secondary statutory objective to protect and restore nature and deliver a net-zero economy. There is much to be welcomed here, but there is a great deal more work to be done.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Ceidwadwyr 6:14, 10 Ionawr 2023

My Lords, I draw attention to my financial services and legal interests as set out in the register, and that I am co-chair of the All-Party Parliamentary Group for Insurance and Financial Services.

As many speakers have pointed out, this Bill represents a golden opportunity to adapt to the new reality of post-Brexit and, we hope, post-pandemic life. Financial services provide over a million jobs directly across the UK, amounting to 8% of GDP. It is a success story and vital to our welfare. However—we must stop deluding ourselves about this, if any of us still do—the UK is not pre-eminent in the world of financial services. Too much of the big reinsurance work in particular is going elsewhere. There is far too weak a partnership between government and the sector, if indeed there is any meaningful partnership at all. We still await a definitive sustainable financial services deal with the European Union. We also need the right infrastructure and the right tax system.

It is all about having a vision, but it is also about regulatory culture. I use “culture” advisedly. If this legislation fails to address not only the letter of regulatory law but the culture of the regulators, it will have failed. Effective, proportionate, efficient and good regulation is about having the confidence to strip away unnecessary redundant regulation as well as policing necessary regulation. That in turn is about having the right people and the right relationships. I refer not to cosy deals over the third cognac in the Reform Club but to brisk, efficient, timely, professional, mutually respectful regulation, with each side having a lively but robust appreciation of how the other operates.

I strongly welcome the new objectives on competitiveness and growth. Effective regulation should enable the sector to burnish its reputation for efficiency, innovation and integrity. It can also reduce costs, thereby improving access to goods and services. I hope that the necessary metrics can be crafted to provide reassurance that the regulators really do act on these new secondary objectives. I acknowledge and respect the concerns of those who feel that the commitment to growth feels a little bald and even old-fashioned in the light of climate change. I reassure the noble Baronesses, Lady Sheehan and Lady Hayman, that I am constantly struck by how seriously climate change is being taken by a sector that is literally, as well as figuratively, right in the eye of the storm. Financial services growth is increasingly, of necessity, green growth.

Finally, as senior independent director of LINK, I welcome the fact that for the first time ever the concept of access to cash and a right to access it will be enshrined in law. As the noble Baroness, Lady Twycross, pointed out, and the right reverend Prelate the Bishop of St Albans has just mentioned, for millions of people cash is a vital part of day-to-day life. Younger consumers may brush off credit card fraud and the panoply of pins and passwords as a necessary if tiresome aspect of modern life, but for many older citizens all that is an undiscovered country, and one that will remain undiscovered. Sadly, there is no such thing as a free cash withdrawal. The banking hubs have been slow to get moving, bank branches continue to close, and the economic situation squeezes the independent ATM providers more and more.

This Bill barely marks the end of the beginning for this task. I hope that it will be seen as an important milestone. I wish it safe passage and a successful arrival in port.

Photo of Baroness Bryan of Partick Baroness Bryan of Partick Llafur 6:19, 10 Ionawr 2023

My Lords, the Second Reading of this Bill in the other place on 7 September was just one day after Liz Truss became Prime Minister, and just two weeks before her disastrous mini-Budget which has left millions of families facing frightening hikes in their mortgage payments. The reaction of the markets caused far more damage in one day than industrial action has over months. Markets are not democratic or accountable and, even before this Bill, are only lightly regulated.

The 50 leading economists who signed the letter to the now Prime Minister when he was Chancellor of the Exchequer in May 2022 warned that competitiveness is an inappropriate objective for regulators. They called it a recipe for excessive risk taking that could harm the real economy and reduce economic growth, and said that it was a poorly defined and confusing objective to give a regulator. The most worrying comment coming from across the spectrum of economists was that encouraging competitiveness as outlined in this Bill could result in the same conditions that led to the crisis of 2007.

The case for giving the FCA the task of ensuring competitiveness is at odds with its primary function of regulation. Few are convinced by the Government’s claim that this will not result in a race to the bottom. Evidence shows that lack of regulation results in bigger risk taking for short-term financial gain, at the expense of the rest of society. As Einstein warned us, insanity is doing the same thing over and over again and expecting a different result.

I move on to access to cash. The Government have stated that the Bill will ensure that people across the UK continue to be able to access their own cash with ease. However, there is no end in sight to bank branch closures and the removal of free-to-use ATMs. The seven big banks have already earmarked 193 branches for closure during 2023. There is overwhelming evidence, as has been cited from around this House, that the less well-off suffer most from difficulties in accessing cash.

So it was with dismay that I heard the then Economic Secretary to the Treasury, Richard Fuller, say at Second Reading:

“When I say ‘access to cash’ I mean access to cash. My hon. Friend raises the question of whether that access should be free … I cannot give him that assurance at this stage.”—[Official Report, Commons, 7/9/22; col. 285.]

That, together with the dismissive response from Sheldon Mills from the FCA to the Bill Committee on 19 October, when he was asked about having regard to inclusion, demonstrated a lack of understanding of the impact on people in more deprived areas. That is not acceptable. We expect a much greater commitment to free access to cash to be included in the Bill.

I am sure that, after today’s debate, the Minister will understand that there are some aspects of the Bill that are unacceptable and need to be substantially amended. I look forward to seeing these concerns addressed in Committee. I also look forward with interest to the maiden speeches today, particularly at this point to that of the noble Lord, Lord Remnant.

Photo of Lord Remnant Lord Remnant Ceidwadwyr 6:24, 10 Ionawr 2023

My Lords, it is a great honour and privilege to make my maiden speech today on this important Bill, in which I declare my interest as a director of Prudential and chairman of Coutts. When I remarked to a friend that I was waiting to speak on a topic of which I had some knowledge, if not expertise, he rather acidly observed that it would then be a very long time before your Lordships heard from me.

I thank noble Lords from all sides of the House for their support and encouragement in the last few months. I am also extremely grateful to all the officers and staff, particularly the doorkeepers and police officers, who have been so helpful in their advice and guidance.

The first Lord Remnant was my great-grandfather. He represented Holborn in the Commons for 28 years, from 1900 to 1928. He is perhaps best known for introducing successfully—but against much opposition, I regret to say—a Bill guaranteeing members of the police force one day’s rest off duty in every seven.

My father was a more infrequent attender, but I well remember sitting on the steps of the Throne, as my son does now, listening to his maiden speech in a debate on invisible exports, which I hope meant more to their Lordships at the time than it did to me as a callow youth.

As for myself, I followed my father into the City, as a chartered accountant and then an investment banker. Since then, I have sat on the boards of major listed financial services companies and so have long been subject to the rules of our financial regulators. I have also been a regulator myself: last year, I stepped down from the Takeover Panel after 10 years as deputy chair.

At the time of the financial crisis, I was working within government as chairman of the Shareholder Executive. I then sat on the board of UKFI, which was responsible for the Government’s shareholdings in the banks, and I was also appointed to the board of Northern Rock as one of the two Government-appointed directors. I can then perhaps view this Bill through the lens of both a regulator and a regulatee, and from the perspective of government, setting a framework which strives to find the right balance between the two.

The overarching objective of this Bill must be to deliver positive change and protection for individuals and business. To achieve this, we must maintain the high regulatory standards that are a cornerstone of the current regime and boost the competitiveness of the UK globally. These two aims need not conflict with each other. Indeed, they should be complementary. Further, there is a quid pro quo for the independence of our regulatory regime which underpins its effectiveness, and that is appropriate scrutiny and accountability of the regulators and their powers.

My main focus is on the regulatory framework proposed and its implications. Of particular note is the introduction of a secondary objective for the PRA and the FCA to promote the sector’s international competitiveness to support long-term growth. This will give business the confidence to expand and invest in the future.

This is an objective which would be by no means unique to the UK. Indeed, it is established globally. My own current experience is in the Far East, where Hong Kong, Singapore and others all have the promotion of economic growth and/or competitiveness as a key objective. This leads to a congruence of interests between industry and regulators, promoting greater access to financial services and improved client offerings.

So, this is a very positive additional dimension to the conduct and capital and solvency rules which should be the prime role of a regulator. Importantly, the Bill proposes economic growth and international competitiveness as a secondary objective. I believe this to be an appropriate balance. All investments carry risk. If the system is such that it effectively mandates regulators to use their powers only to reduce, if not eliminate, risk, the result is likely to be reduced innovation, increased costs and less consumer choice.

The prime responsibility for taking appropriate risk within established risk appetite must lie with companies themselves, in accordance with rules made by regulators and those within a framework set by Parliament. This new secondary goal will mandate our regulators, in the exercise of their powers, to consider proportionality and global competitiveness.

This Bill transfers significant additional powers to our regulators, as EU regulation is transferred from the statute book to the regulators’ rulebooks. So, it is also right that there should be a commensurate increase in accountability and transparency. We need a regime which balances consumer benefits with regulatory burden and cost. Too often, rules expand in response to a perceived problem but there is little analysis of the often greater cost of regulatory intervention.

Therefore, I am very much in favour of the additional reporting requirements which have been introduced into the Bill at this stage, and the strengthening of cost-benefit analysis through the creation of new CBA panels. At a later stage there will be the opportunity to clarify and strengthen these specific proposals further, and to enhance the scope of parliamentary scrutiny. I hope that my noble friend the Minister will be receptive to this.

I believe that these proposals overall are balanced and pragmatic. The Bill lays the foundation for a more competitive financial services sector, without compromising the UK’s high regulatory standards, which can now be tailored to our own specific needs.

Photo of Lord Grimstone of Boscobel Lord Grimstone of Boscobel Ceidwadwyr 6:30, 10 Ionawr 2023

My Lords, it is a special pleasure to follow my noble friend Lord Remnant. His eloquent maiden speech clearly demonstrates his deep expertise in financial services. This should be of no surprise to your Lordships, because the City is truly part of his DNA. I had the pleasure of serving on the board of the Shareholder Executive under my noble friend’s chairmanship, and I have witnessed at close quarters his knowledge and integrity. His presence in your Lordships’ House will contribute massively to our wisdom and expertise. I welcome him.

This is an important Bill. The financial services industry is our most important industry. It is a huge driver of economic activity, it creates high-quality jobs throughout the UK and the taxes it pays underpin our ability to provide public services. It is therefore even more remarkable that Governments have paid so little attention to the City in recent years. For example, too little priority was given to the City in the Brexit negotiations, and in general Ministers have shown a marked reluctance to support the industry through either words or deeds. At times, I have even felt that Ministers were almost ashamed of the City’s existence. Partly as a consequence of this, it is no longer the global force it was. This decline will continue unless something is done about it. Action is urgently needed. Speaking as a former chair of TheCityUK and of two of our largest financial services firms, I have to say that this is a very sorry state of affairs.

This Bill provides the potential to remedy matters. Whether it succeeds in this will depend critically on whether the secondary legislation and rulebooks which will come in its wake, as well as ensuring financial stability and consumer protection, will allow the industry to flourish and remain globally competitive.

Enacting this Bill will, though, mean that the success of our most important industry will rest more than ever on the shoulders of its myriad regulators. The challenge is that our regulatory regimes are not best in class and, despite the many talented people who work for them, neither are our regulators. We have to do something about this. We have created a culture, not just in financial services but elsewhere in our economy, that too often has allowed and, indeed, encouraged regulators to operate in a bubble of their own making. This has no doubt often been rather convenient for Ministers because they have been able to hide behind this bubble.

Your Lordships know what a strong supporter I am of regulatory autonomy, but that autonomy must be exercised within an envelope set by Parliament, with proper accountability and transparency and subject to strong and continuous independent oversight by people who know what they are talking about. No regulator is an island.

Late last year, the Economic Secretary to the Treasury exchanged letters with the CEOs of the PRA and the FCA about the need for world-leading levels of regulatory operational effectiveness. I congratulate him on this initiative. It is interesting that, in his reply, the CEO of the FCA highlighted that it is the FCA board that has statutory responsibility for overseeing the effective use of the FCA’s resources. As an exemplar, this caused me to look at the membership of that board. Although I have no doubt that its independent members fulfil their roles diligently and exercise due care and attention, it is striking that, according to their bios on the FCA website, not one seems to have served on the board of any UK-listed company. I also note that the incoming chairman of the FCA, who again is no doubt very able, has spent the last 20 years of his professional life in Hong Kong—a city I know well, but which is, to say the least, a rather different environment from the City. It is all rather surprising.

I would be very interested if my noble friend the Minister, in responding to this debate, could let us know whether she is satisfied that the FCA board and the other boards that oversee our regulators have the firepower to carry out their appointed tasks.

Photo of Baroness Tyler of Enfield Baroness Tyler of Enfield Democratiaid Rhyddfrydol 6:36, 10 Ionawr 2023

My Lords, I refer to my registered interests as president of the Money Advice Trust and as a member of the Financial Inclusion Commission. I congratulate the noble Lord, Lord Remnant, on his excellent maiden speech.

Although I welcome the Bill overall as an opportunity to strengthen and improve the regulation of the UK’s financial services, in too many places it feels like a missed opportunity. I will focus my remarks on financial inclusion, where I feel the Bill currently falls shorts in important respects. I make no apology for this emphasis, given the huge power imbalance that exists between banks and other financial services providers, who have plenty of people to speak on their behalf, and vulnerable customers, who have far less of a voice in these debates.

As highlighted so compellingly this afternoon, the lack of focus on improving the transparency and accountability of the regulators, and on giving Parliament greater powers of scrutiny, sadly runs through the Bill like a stick of rock. I hope we will be able to redress this balance as it progresses.

The 2017 Lords Select Committee on Financial Exclusion, which I had the privilege to chair, called on the Government to set out a clear strategy for improving financial inclusion in the UK. Without such a strategy, it is simply not possible to make the progress needed to ensure that everyone can access the financial services they need at a price they can afford. The committee also recommended that the Government expand the FCA’s remit to include a statutory duty to promote financial inclusion as one of its key objectives. These key recommendations were reiterated in the 2021 follow-up Liaison Committee report. I readily acknowledge that setting up a Financial Inclusion Policy Forum in response to the Select Committee report provides welcome discussion of some of these issues, but it is no substitute for a government-led strategy, alongside a regulator that has statutory responsibility for ensuring that financial inclusion plays a part in its everyday operations.

We now have the opportunity to plug the “black hole”, as I often call it, that exists between social policy and financial regulation. We have heard time and again how consumer groups are passed between government departments and the FCA, with no one institution willing to act; and how the Treasury refuses to act on well-known issues such as the poverty premium, which we have heard about this afternoon, until enough data is collected, when the only organisation able to obtain this data is the FCA, which in turn says it is not its remit to collect such data.

The Bill provides the opportunity to plug this gap and prevent the most vulnerable falling through the cracks. By giving the FCA a cross-cutting “must have regard” to financial inclusion duty, along with a requirement to publish findings, it will have the ability and incentive to ensure that the needs of those currently denied access due to affordability issues are considered. This will allow clarity on how far market regulation can address financial exclusion and where government-instigated social policy is needed. I will bring forward amendments on this in Committee.

Turning briefly to the duty of care, another Select Committee recommendation, I concur completely with the sentiments expressed by my noble friend Lord Sharkey. A consumer duty as brought forward by the FCA is not a duty of care. The former has many exemptions and does not provide wronged consumers with the right to secure monetary redress through litigation. For accountability and parliamentary sovereignty, it is a matter of real concern that, after Parliament passed the Financial Services Act, placing a duty on the FCA to consult and bring forward rules on a duty of care, it chose not to. This Bill provides an opportunity to remedy this unsatisfactory state of affairs.

Finally, I turn briefly to access to cash. I welcome the commitment to legislate to give consumers greater protection in accessing and depositing cash. It is long overdue. Difficulties in accessing cash by the 5 million people—I know other figures have been quoted, but that is the figure I have—who still rely on it have grown hugely in recent years. The UK has lost half its bank branch network since 2015 and there has been a 25% decline in free-to-use ATMs since 2018. It is a particular problem for many of the elderly, those with certain physical disabilities and mental health conditions, and those in deprived communities who are digitally excluded and financially vulnerable. I hope to see more action in this area, including extending the FCA’s remit to consider other services that should also be protected. I would like to see the Bill guaranteeing a minimum level of free cash access services and local authorities having the right to request a review of local cash provision.

Photo of Lord Butler of Brockwell Lord Butler of Brockwell Crossbench 6:42, 10 Ionawr 2023

My Lords, it is a particular pleasure to start by congratulating the noble Lord, Lord Remnant, on his maiden speech. As it happens, I have often heard him speak before, but always in a frivolous context, so I was awaiting his speech today with particular interest—and he did not disappoint. As the noble Lord, Lord Grimstone, said, his expertise will be a great asset to this House as we consider the Bill.

The regulatory issues have been well identified in the speeches that have been made. There seems to me to be three types of balance: the balance between freedom and regulation; the balance between regulatory independence and the role of the Executive; and the balance between the Executive and Parliament. It is particularly important that we get this balance right in debating this Bill about an industry which is of such huge importance to the British economy and where international competition is so very strong.

I welcome the Bill; it has much to be commended in it. In the first place, it is based on a proper examination of the regulations inherited from the EU. That included extensive consultation with practitioners in the future regulatory framework review between 2019 and 2022. In this respect, it is markedly different from the cavalier attitude taken by the Government in other areas of inherited EU law in the Retained EU Law (Revocation and Reform) Bill. Secondly, although I have not always agreed with the noble Lord, Lord Forsyth, on Brexit, I think it is a particularly important and welcome benefit of Brexit that the United Kingdom has the freedom to establish our own regulatory regime without being bound by some of the more ponderous regulations of the European supervisory authorities. However, that freedom needs to be exercised with prudence.

There has been much reference to the provision in the Bill to give regulators a new statutory objective to promote the international competitiveness and growth of the UK economy with special reference to the financial services industry. That objective has been generally welcomed, but as the noble Lord, Lord Sharkey, said, the Government owe us an explanation. Before the 2008 crisis, the Financial Services Authority, the predecessor of the FCA and the PRA, had a duty merely to “have regard to” the competitiveness of the UK financial services sector. In the post-mortem on the 2008 crisis, the Treasury recognised this obligation as a factor in regulatory failure leading up to that crisis and, as the noble Lord, Lord Sharkey, said, it was consequently removed from the regulatory remit by the Treasury and Parliament. Just over a decade later, Ministers are seeking to give the regulators a stronger statutory requirement to make sure that their regulatory activities promote the international competitiveness of the financial services sector, not just to have regard to it. I ask the Minister to explain, in replying to the debate, why the Government have concluded that this reversal is safe.

In the proceedings on the Bill we will be debating the degree of delegation of powers to regulators, the balance between the Treasury’s power to make recommendations to the regulators and the regulators’ independence, and the mechanisms for Parliament to oversee these important operations. However, we have to recognise that parliamentary control, to which there has been much reference, is made worse by Parliament’s own procedures. Even when Parliament is given a role in approving statutory instruments, Parliament’s inability to amend such instruments, and its unwillingness to reject them, makes such power purely nominal. The remedy for that lies in our own hands.

Having said that, I believe that there is much to support in the Bill. Although there are plenty of issues for the House to consider and debate, I regard this as an important Bill, and I welcome it.

Photo of Lord Naseby Lord Naseby Ceidwadwyr 6:47, 10 Ionawr 2023

My Lords, I too congratulate my noble friend Lord Remnant on his maiden speech and, in particular, on the depth of that speech in relation to the Bill we have before us this evening. I hope he will contribute in Committee.

My primary congratulations go to His Majesty’s Government. I have had the privilege of serving in the other place and here for 48 and a half years, and I do not think there has been a Bill as helpful to the City of London as this Bill has the ability to be. I say to my noble friend on the Front Bench, and to the whole of her team, well done on actually producing a Bill that is going to help the City of London. There have been a whole lot of positive reactions from the financial services market and from the City itself. I shall pick out just two that I received. First, “The City welcomes the creation of a more nimble, agile and proportionate regulatory regime for the implementation of the FCA’s and PRA’s growth and competitive secondary objective, alongside improving the speed of FCA authorisation turnaround times”. That is a bit mechanical, but it is very important. Equally, and even more important, probably—the noble Baroness, Lady Hayman referred to this—on the issue of the green area, “The world’s financial system through engaging internationally has to facilitate international standards and global alignment, ensuring that the ESG taxonomies are interoperable”. That seems to me absolutely vital. So much for the congratulations.

The other dimension that I noted the other day is the 30 Edinburgh reforms that the Chancellor has brought forward, almost—but not—on the sly. There is no doubt that they are important. One will drive investment into UK growth companies, in particular the new guidance for asset pooling of local government pension schemes—I declare an interest as a trustee of the parliamentary pension scheme. I can assure my noble friend that it is much needed and to be welcomed. I noticed that the leaders involved in this have got together and set up an organisation called the UK Capital Markets Industry Taskforce. That in itself is enormously welcome.

I want primarily to comment on an area that nobody has mentioned to date, thankfully. For some 25 years, I have been involved in the mutual movement. I had the privilege of being the chairman of the Tunbridge Wells Equitable Friendly Society for just over 10 years. As my noble friend on the Front Bench knows, at the moment a Private Member’s Bill from Sir Mark Hendrick, the Co-operatives, Mutuals and Friendly Societies Bill, is going through the Commons. It is there to deal with the scandal, frankly, of the demutualisation of mainly our building societies, which was not to the benefit of investors in the building societies but for somebody else to turn a penny—or several pounds. In its present form, that Bill will match the best legislation that exists in many other countries. It also introduces a voluntary power to enable a mutual to choose a constitutional change so that its legacy assets would be non-distributable, details precisely the destination of any capital surplus on a solvent winding up, and outlines the procedures in the mutual’s moves. That is a major step forward, and I very much hope His Majesty’s Government get it on the statute book. It will certainly have my support.

Secondly, there is the position of raising capital for the mutual movement. I had a Bill, which is on the statute book as the Mutuals’ Deferred Shares Act 2015. It was welcomed by all parties but unfortunately has been bogged down somewhere in the system and very little capital, if any, has been raised by the mutual movement. I understand that the Government are thinking of asking the Law Commission to look at that. I say to my noble friend that that is kicking it into the long grass a bit. I hope we can look at it again.

Finally, we come to the regulatory dimension. It seems to me, as one who sat on the Public Accounts Committee in the other place for some 12 years, that the reason that succeeds is that it is basically backed up by a government body providing the evidence. Maybe that framework is something we should look at. Something certainly needs to be done. We have listened enough this evening to know that movement in that area is absolutely vital.

Photo of Lord Sikka Lord Sikka Llafur 6:52, 10 Ionawr 2023

My Lords, I too welcome the noble Lord, Lord Remnant, to the House and thank him for his excellent maiden speech.

This is not a Bill that will clean up the City, enhance its accountability or streamline the regulatory architecture. There are at least 41 overlapping and buck-passing regulators. These include the Bank of England, the FCA, the PRA, 25 anti-money laundering regulators, OPBAS, the Pensions Regulator, the Pension Protection Fund and sundry others, all poorly co-ordinated. The enforcement architecture is also fragmented. It involves the SFO, the Crown Prosecution Service, the FCA, the National Crime Agency, the Bank of England, the Treasury, the Home Office and God knows who else. Can the Minister explain why this potholed regulatory architecture will not hinder the Bill’s objectives?

The FCA has been severely criticised for its failures in episodes such as Connaught, London Capital & Finance, Blackmore Bond, the Woodford fund and Link Fund Solutions. The Work and Pensions Committee’s July 2021 report relating to protecting pension savers said that the FCA’s evidence lacked integrity. John Swift KC’s December 2021 review into the supervisory intervention on interest rate hedging products criticised the FCA. The National Audit Office investigation into the British Steel Pension Scheme was also critical of the FCA. Can the Minister tell us why the Bill has not been preceded by an inquiry into the operational efficiency of the FCA?

The regulatory apparatus in this country is adept at sweeping things under its dust-laden carpets. Indeed, the Government themselves have done that. They have a history of shielding banks engaged in “criminal conduct”. A good example is that of HSBC, which the Bank of England, the Treasury and the then banking regulator colluded to cover up. This week the Times reported that Barclays, HSBC, NatWest, Standard Chartered and Lloyds are facing nearly 100 lawsuits, mostly in the US, for violating competition law, fixing prices, interest and exchange rate violations, sanction busting and terrorist financing, yet we have not heard a peep about it from anybody in the UK. As usual, they think things will go away. The Bill dilutes the current regulatory system and even eliminates the modicum of independence enjoyed by regulators by empowering Ministers to direct the FCA. Ministers’ objectives are entirely different from the regulators’.

Since 2015, 4,685 bank branches—almost half—have closed. Many districts and villages do not have a physical bank branch and millions cannot access online banking, so it is hard to see how the FCA is promoting effective competition when people just cannot access banking services. Can the Minister explain how the Government are dealing with disappearing bank branches?

The Bill adds an international competitiveness element to the FCA’s remit—something that was removed after the last crash, as others have said. This really opens the floodgates to reckless practices. The regulator would need to look at what Cayman, Bermuda, Belize and other jurisdictions are doing and use those as a benchmark to recalibrate UK regulation. This is ultimately a race to the bottom and will surely undermine the prime objective of securing financial stability.

The collapse of FTX and other companies has led to losses of nearly $1 trillion, which shows that crypto assets and currencies are highly dangerous. Yet instead of banning these dreamt-up currencies, the Bill legitimises the trade. That will send a message to ordinary people that it is perfectly safe to hold and trade in those assets. After all, it is regulated. The ultimate result will be that, before long, the regulators will be paying millions of pounds in compensation. I urge the Minister to reconsider this part of the Bill, because it could well be the beginning of the next crash. In due course, I will table a number of amendments.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Chair, Secondary Legislation Scrutiny Committee, Chair, Secondary Legislation Scrutiny Committee 6:58, 10 Ionawr 2023

My Lords, I need to begin by reminding the House that I have two interests. I am an approved person under the FCA rules, and I chair a regulated firm.

The Bill is big and important. I always felt that the task of trying to create a Europe-wide regulatory structure to deal with the many different types of financial markets—from quite small and unsophisticated to quite big, as we see in London—was going to be a big ask. Therefore, I was not surprised when we found a number of pinch points, many of which did not operate to London’s advantage. Given that the Bill’s strategic objective is to onshore our regulation, to get rid of one size fits all and to operate within a risk-based assessment framework appropriate to London, I support the Bill.

There are lots of things I would like to talk about, but I have only five minutes. I would like to talk about cash and the role of MiFID II, but I will focus on process. Here I follow the noble Lords, Lord Sharkey and Lord Butler. How do we get from here to there? What is the process to be followed? How is it envisaged that Parliament will play a role in the process envisaged under Chapter 1, Revocation of Retained EU Law? As the noble Lord, Lord Butler, pointed out, this Bill is a carve-out of a much larger Bill that will come before your Lordships’ House in a few weeks.

I chair the Secondary Legislation Scrutiny Committee and we have been taking evidence from Ministers on some of the practical aspects behind the Government’s thinking. I suspect that not many of us—not even my noble friend Lord Forsyth—who voted for Brexit thought that this risked handing powers from Brussels to Whitehall without any serious effective parliamentary scrutiny or involvement along the way.

I have made a rough count of the number of regulations listed in Parts 1 to 3 of Schedule 1; there are, I think, 246. Some of these will be technical and of no significance; others will not. It is this fact that makes the Bill a framework Bill. At the moment of passing the Bill, Parliament will not know what it is signing up to. That is really important. Will all of these 250 or so regulations be treated in the same way? There appears to be no triaging process to sort the important ones from the less important ones. I fear that the idea of saying “Affirmative resolutions go this way, and negative resolutions go that way” may not be sufficient in as complex an exercise as this.

There is a widespread view—again, pointed out by the noble Lord, Lord Butler, in his remarks—that the existing parliamentary powers for scrutinising secondary legislation are inadequate for the increasingly heavy weights being placed upon them. When my noble friend the Minister comes to wind up, will she tell the House what supporting documentation will be made available in respect of each regulation, to aid parliamentary scrutiny? Under current law, any regulation that carries an impact of more than £5 million is required to have a specific impact assessment, tabled at the time the regulation is laid. If this is now not to be the case, there is a real danger of Parliament being effectively muted.

Secondly, an important statutory requirement is the provision of post- implementation reviews. Post-implementation reviews decide where hope and expectation met reality and how they clashed. If we are not going to have post-implementation reviews—PIRs—then the opportunity for improving government performance will be greatly missed.

Finally, there is the question of tertiary legislation. Tertiary legislation is where the Government hand away the pen to another body, usually having very little if any democratic accountability. Despite that, the laws and regulations that these bodies produce bind us all just as tightly as any other law. Can my noble friend the Minister confirm my understanding that, under Clause 4, all tertiary legislation will be subject only to the negative procedure? If I am right about that, then I am afraid I shall regard this as a very disappointing response.

To conclude, I support the direction of travel of the Bill but, as we enter this brave new world, we should at the same time not allow the role of Parliament to examine, scrutinise and hold the Government to account to be further reduced.

Photo of Lord Ashcombe Lord Ashcombe Ceidwadwyr 7:03, 10 Ionawr 2023

My Lords, it is a great honour to speak to you today for the first time, concerning the Financial Services and Markets Bill being introduced by the Minister, my noble friend Lady Penn. Before continuing I must declare my interest as an employee of Marsh Limited, the insurance broker.

I would like to take a moment to thank the many who have shown me huge kindness on my arrival in the House feeling like the new schoolboy all over again. I thank the doorkeepers, clerks, special advisers, librarians and Black Rod for their generous advice on so many issues. In particular, I would like to thank my noble friends Lord Glenarthur, Lord Ashton, Lord Borwick and Lady Sanderson, who have encouraged me and given me great help and guidance. Finally, without the help of the Opposition Chief Whip, I think I would still be wandering the passages of this labyrinthine building even now, two months later, yet to be discovered, totally lost. I hope he does not regret it.

The Cubitt dynasty was founded by Thomas Cubitt, who was the first to establish the building contracting business as we know it today. In the process, he became one of the great developers of early 19th century London, including in the development of the Grosvenor estate from Belgravia to the Thames. Two of his best-known buildings are the east front of Buckingham Palace and Osborne on the Isle of Wight. It was not he who was awarded the Ashcombe peerage but his son, my great-great-grandfather, in 1892. George Cubitt served in the House of Commons for over 30 years followed by 25 years in this House. His son Henry followed in his footsteps but was very unfortunate in that he lost his first three sons in the Great War. They are remembered on the Royal Gallery memorial. In 1920, the family building company built the Lutyens-designed Cenotaph in Whitehall.

I inherited not from my father but from his first cousin. I was brought up in the Republic of Ireland and took a civil engineering degree here, then entered the world of insurance where I have spent 35 years working in the energy sector. It is the insurance aspect that brings me here today. Many of us have experience dealing with personal insurance but there is a great deal more to the subject than that. Insurance is one of the country’s greatest economic strengths and a source of vital capital to an increasingly fractious global risk landscape.

Indeed, without the abilities of the London insurance market, grain and other vital foodstuffs trapped in Ukraine would not have been exported last year to those countries desperately in need of food; as the sanctions start to bite there have been many restrictions put in place, but the market has responded by continuing to provide insurance on a humanitarian basis. Also, development and investment in new technologies would be significantly reduced. An example of the London market innovation is the provision of insurance for the surge in green and blue hydrogen prototypical initiatives to reduce carbon footprints and combat climate change.

Insurance has often been portrayed as the poor relation of the City of London. However, this financial sector today employs almost 50,000 people. We have the highest concentration of insurance-related intellectual capital, experience, insurers, brokers and affiliated professional services. This is what makes London a world-leading global insurance market. Using 2020 data, the London market share of the worldwide premium is in excess of $120 billion, although the market share of 7.6% has been static over the last five years. It is larger than its next three competitor markets—Bermuda, Singapore and Zurich—combined but is continually being challenged. The sector generated 24% of the City’s GDP and just under 1.8% of the United Kingdom’s GDP.

One of the secondary objectives of this Bill is for the regulators to promote the growth and competitiveness of the UK economy. An area where the London market has no participation is captive insurance companies. This would certainly be an opportunity for growth as it is a $54 billion industry. Even UK companies such as Network Rail and Transport for London have their captives in foreign jurisdictions. These captive insurance companies are designed to provide insurance to their parent company or its entity. It is no longer the tax legislation, an oft-cited reason for this being the case, but the regulatory hurdles, as the regulators treat them as commercial insurance companies.

Regulators will always remain an important part of the checks and balances of financial business, but they need to be proportionate in recognising that personal consumers need a greater level of protection than the more sophisticated companies, which have significant experience and take professional advice on how to manage their risk protection. It should not be one size fits all.

Secondly, the Bill currently allows the regulators to determine how they believe they have met the requirements of the competitiveness objective. This suggests that they can mark their own homework. Would it not be preferable to have a set of key performance indicators laid down in the Bill, by which they can be measured when reporting back to the Government and Parliament?

With these thoughts in mind, I thank noble Lords for this opportunity and look forward to supporting this Bill, promoting growth and competitiveness for our financial services industry and, ultimately, growing this vital sector of the economy.

Photo of Lord Altrincham Lord Altrincham Ceidwadwyr 7:09, 10 Ionawr 2023

My Lords, it is an honour to follow my noble friend Lord Ashcombe, to welcome him to this House and to reflect that it really is a blessing for this Bill that there are three maiden speeches. My noble friend has spent his whole career in insurance. We nearly met around the age of 30, when he was working at Lloyd’s of London but he has always otherwise been at Marsh. He brings expertise to us in financial services that is often, as he said, a little overlooked.

In addition to insurance experience, it is worth adding that my noble friend brings us experience in energy. His whole career has been around energy, which we quite often talk about in this House. Energy and energy infrastructure are important, as is understanding how that infrastructure in this country is laid out. My noble friend brings us expertise in that area. Finally, I would mention that three noble Lords have already asked him for insurance advice. At this time of year, we all have to work out endorsements and exclusions in policies, with the small print and all the rest of it. We may have only one Peer—certainly one Peer in the Chamber today—who really understands this stuff. He would be welcoming of any inquiries as well. He is very welcome and I look forward to working with him for many years ahead, and indeed on the Bill.

Turning to the Bill, I declare my interests as a director of South Molton Street Capital, Financial Services Capital and, in Manchester, the Co-Operative Bank. In the Autumn Statement, the Chancellor reminded us of the importance of growth. He specifically referenced energy, broadband, road and rail. The shadow Chancellor has made some very similar comments, so it is particularly important that we reflect on how the Bill, among the other financial Bills that we have seen, can help to support that growth, in particular with reference to infrastructure. We see Bills come through the Chamber and imagine that they will be financed by somebody, but there is going to be a limit to how much the Government can really support infrastructure investment. The OBR has already said that the Government will need to reduce infrastructure spending in two years’ time.

This means that spending on infrastructure will rest on the private sector and unlocking that private sector capital really rests on the Bill, so it is very welcome that Chapter 3 makes reference to growth. As we know and have heard from many Peers, the regulators have been somewhat cautious and prudent, for the reasons well expressed. At this point, we need to find ways to unlock capital to support infrastructure and for the wider economy. We might look carefully at Chapter 3 and reflect on how to address the growth opportunity, but also some of the concerns expressed about adding risk, or the prudential issues, which have been well covered.

The regulatory environment needs to be a little refreshed. Nearly immediately after this Bill was started in the House of Commons, on 7 September, we ran into the extraordinary pension LDI debacle. This was around the time when the Bill was going into Committee. It is worth reflecting on how we got to this extraordinary situation, which in some ways arises from an abundance of caution; that is to say, it goes in several steps.

Step 1 was to require companies to reflect actuarial changes in the valuations of their pension funds in their annual accounts. These are modelled changes of future liabilities and, because rates were very low, those liabilities felt very high at the time. It was a prudent thing to do; at the same time, it was not commercial and did not reflect a broader commercial understanding.

Step 2 was, remarkably, to de-risk these funds—that is to say, de-risk them from the point of view of the company and not, incidentally, necessarily that of the beneficiaries—by moving them into gilts. There not being sufficient long-dated gilts, they were moved into derivatives of gilts. These funds were suddenly hugely invested in derivatives for the purpose of de-risking. Again, this de-risking looked somewhat prudent. It is not, as we know, but it looked somewhat prudent then. At the same time, these enormous funds, which are effectively closed—they are in run-off and are barely supervised, while their beneficiaries have little control of them—were invested in an enormous amount of financial derivatives.

Had this growth chapter been in place, some of this error might have been caught. We had an extraordinary situation whereby very large captive funds were not invested in long-dated investments in this country or in infrastructure; we also had the savings of Canadian public schoolteachers making long-dated investments in UK infrastructure, while the savings of our own teachers were put into financial derivatives. This extraordinary debacle is an illustration of how prudent, cautious, step-by-step regulation can lead you into enormous risks.

I commend and support the Bill, which is extremely well thought through and, as the Minister explained, has been broadly consulted on. But regarding Chapter 3 and growth, I hope we will discuss in Committee the opportunities to invest in infrastructure and perhaps to meet the green agenda, which has been mentioned—again, that is often infrastructure. In Chapter 3 lies an opportunity to direct financial regulation for the benefit of the economy and of this country, and to meet the needs of this Government and indeed the next Government.

Photo of Baroness Northover Baroness Northover Democratiaid Rhyddfrydol 7:16, 10 Ionawr 2023

My Lords, I too congratulate those who have just made their maiden speeches. Their expertise will be very welcome. The most reverend Primate the Archbishop of Canterbury spoke of values; others have made it clear that values and self-interest can and should be aligned.

My focus here will be on climate change and the transformative role the financial services sector can and must play in combating this. My question is therefore whether this comprehensive Bill helps to deliver the UK as a green finance centre, as the Government have promised. I noted that the Minister emphasised in her speech that our financial services need to be open and green, as well as technologically advanced.

We are familiar with the pledges agreed by Governments in 2015 in Paris, seeking to keep global warming below 1.5 degrees. We know how far we are from meeting that. Developed countries’ money and pledges are vital but will not deliver on the scale required. A key change that occurred at the Glasgow COP in 2021 was business and finance becoming involved, with outstanding leadership from Mark Carney. That is potentially transformative.

As the noble Baroness, Lady Hayman, pointed out, at COP 26 the Government committed to creating the world’s first net-zero-aligned financial centre and announced that they would mandate large companies to publish their net-zero transition plans and climate reporting standards. Rishi Sunak described the UK as

“the best place in the world for green finance”.

As a trade envoy, I noted the high reputation of the City of London. It needs to maintain that leading role. The Government also committed to match the ambition of the EU on green finance, with particular reference to disclosures of sustainability impacts and the development of a green taxonomy. The UK became the first G20 country to mandate its largest companies to disclose climate-related data.

At COP 26, the International Sustainability Standards Board was announced, to seek global harmonisation in this area. The UK needs to continue to play a leading role in that. Consumers, the public and investors are increasingly scrutinising the green credentials of companies and looking at what banks and funds are investing in. This is where the world is heading. The noble Lord, Lord Ashcombe, has just made clear that the insurance industry is already addressing this. Just as we have seen that the decision to end the sale of new petrol and diesel cars by 2030 has given a major boost to the EV sector, because the automotive industry can see which way it needs to head, the same clarity of intention is required in the financial sector. We need to ensure that regulation shows the direction of travel.

As Chris Skidmore has said in relation to his net zero review for the Government, we may be committed to net zero by 2050, but are the guardrails in place to deliver that? Those guardrails must include regulation. Therefore, what do we see in this legislation? As others have pointed out, the Bill states that regulators should only “have regard” to climate goals. There are seven other principles to which the regulators must also have regard. These are subsidiary to the strategic and operational objectives, as the noble Lord, Lord Vaux, my noble friend Lady Sheehan, the noble Baroness, Lady Hayman, and the right reverend Prelate the Bishop of St Albans have all pointed out. That must be addressed as this Bill goes through.

Shortly before this Bill was announced, it was reported that the Government had removed from the Bill the expected sustainable disclosure requirements. These would have required large companies and financial institutions to disclose and justify their environmental impacts, their alignment with the UK’s green taxonomy and their net zero transition plans. With the publication of their Greening Finance road map in 2021, the Government reaffirmed their commitment to developing a green taxonomy and sustainable disclosure requirements, yet these are delayed.

In the meantime, the EU has legislated in this area. We have already fallen behind, despite the Government’s declared ambitions. HSBC has just announced that it will no longer finance new oil and gas fields. That is the future. Others need to do likewise, with the transformative effect that will have. Regulation can spur that on. This Bill, replacing EU regulation with specific UK regulation, needs to make sure that the UK and London are forward looking, leading the way, modern and drawing in green investment and jobs. I can assure the Minister that there will therefore be amendments to this Bill in this vital area, so I suggest that she starts writing round now.

Photo of Lord Thomas of Cwmgiedd Lord Thomas of Cwmgiedd Chair, Consolidation, &c., Bills (Joint Committee), Chair, Consolidation, &c., Bills (Joint Committee), Chair, Electronic Trade Documents Bill [HL] Special Public Bill Committee, Chair, Electronic Trade Documents Bill [HL] Special Public Bill Committee 7:22, 10 Ionawr 2023

I congratulate the noble Lord, Lord Ashcombe, on his maiden speech and in particular on drawing our attention to the importance of the insurance industry to London’s financial centre—which is often overlooked. I too welcome the Bill warmly and express my interest as chairman of the London Financial Markets Law Committee. I draw attention to that interest because, in the few minutes I have, I would like to ask some questions about the central issue in the Bill: the extent of delegation. How do we do it? How to we make it accountable? One must bear in mind that regulators have two functions. The first is to make law that is binding on us; the second is to interpret and enforce that law when there is a dispute.

I wish to ask four questions. First, are the powers that Parliament is giving to the regulators and delegating to them ones that they can exercise more appropriately than Parliament? The answer to that is generally “yes”, but when we look at certain detailed provisions we must ask: are they being asked to make political decisions—which would be wrong—or are we consigning decisions where we just have to hope that they do what they are asked because there is no accountability? The first question is intricately linked to accountability and a judgment on what is right.

Secondly, have we given the regulators a sufficiently clear mandate for the regulations they are to make? As the noble Lords, Lord Butler and Lord Sharkey, pointed out, there are some contradictions in the Bill. Should we examine those and give clearer guidance? We should not complain hereafter if they tell us, “We’re independent, go away”. Another question which particularly interests lawyers is: are we to give more clear direction as to the type and format of regulation? Are they to follow what has become the traditional European and, to an extent, British Government way of writing long screeds of guidance rather than following good, Victorian principles of short, clearly drafted legislation? It is a question we ought to ask ourselves. Vast rulebooks are a complete disincentive to proper regulation. The more we delegate, the clearer the answer to that question has to be.

The third question we have to ask ourselves is: are we sure that enforcement and punishment for breaches are sufficiently independent of the regulators that make law? When we make law, we do not interpret it or punish people for breaching it; we give that to independent people. The more power we give regulators, the more we have to be satisfied that the interpretation is independent. You do not want a rulebook where people turn around and say, “I know it’s not clear, but we know what it means because we wrote it”. That is bad lawmaking. Of course, if we have not got that bit right and we do not have proper accountability, there is another problem.

That ties in with the fourth question. We must ask, in respect of all these provisions: is there sufficient accountability to Parliament, to outside bodies or through an independent enforcement agency separate from the lawmaking part? Having spent much of my professional life dealing with the fallout of regulatory failure, I have no doubt that most regulators are competent and hard-working and that they try their hardest to achieve a good result. However, their life is extremely difficult and, if I were a regulator, I would welcome with open arms proper scrutiny. They need all the help they can get. If you are truly independent—having spent much of my life as a judge, I have had to be independent—you always welcome people who cast a critical eye from the outside. The regulators, therefore, ought to welcome scrutiny and not oppose it.

Photo of Baroness Noakes Baroness Noakes Ceidwadwyr 7:27, 10 Ionawr 2023

My Lords, I draw attention to my interests in the register, in particular that I hold shares in a number of listed financial services companies. This Bill could certainly have been bolder, and it needs to be improved, but it also has my broad support. I would like to touch on just four aspects of the Bill in the short amount of time we have been allowed.

First, the competitiveness and growth secondary objective is welcome, if overdue. We must never forget that, without a strong economy—and in the context of the UK that inevitably means a strong financial services sector—there will be nothing worth regulating. The financial crisis led to a series of risk-averse reforms and a decade of regulatory gold-plating. It is no coincidence that the last decade has been disappointing in economic terms. We need a period of rebalancing.

However, whatever we do in the Bill will come to nought unless the regulators themselves change. I fear that they will find ways to marginalise the new secondary objective. We need them to put the interests of the UK ahead of the comfort blanket of precautionary regulation and, if necessary, to stand against the consensus in international regulatory fora, however comfortable that seems. The PRA’s public statements to date on what it will do with the new secondary objective and the FCA’s radio silence on the subject do not give me any comfort that they get what is needed.

The Government were right to bring forward amendments in the other place to strengthen the regulators’ reporting arrangements to reinforce the new objective. We will need to explore that in Committee to see how it will work in practice, and I suspect that we will conclude that it will need more teeth.

My second point relates to the role of Parliament. I am glad that the Government have finally accepted that there is an important role for Parliament in holding the regulators to account alongside the transfer of huge new rule-making powers. Most of us argued strongly for that in the passage of the Financial Services Act 2021. My noble friend the Minister will not be surprised that I am disappointed that the role of your Lordships’ House is something of an afterthought in Clause 36. I promise her that I will return in Committee not only to the role of your Lordships’ House but to the narrow construct of the remit for Parliament in that clause.

My third point concerns getting rid of retained EU law. Chapter 1 of Part 1 of the Bill is very welcome. I fully accept that replacing retained EU law with something tailored to the circumstances of the UK is a large task, but the Bill needs the discipline of a deadline. The approach of the Retained EU Law (Revocation and Reform) Bill is what we should be seeking to replicate in this Bill.

My final point relates to access to cash, and I fear that I shall disappoint my noble friend Lord Holmes of Richmond, who will speak after me. I fully accept that cash remains important to many people, but the fact is that the use of cash is in permanent secular decline. UK Finance expects only 6% of transactions to be in cash form by 2031, down from around 15% now. The Bill imposes costs on all consumers to maintain access to cash for a decreasing proportion of the population. The Access to Cash Review estimated the cost of providing cash at around £5 billion per annum—to put that in context, that is roughly equivalent to 1p on the basic rate of tax. Trying to preserve cash in our society, as if it is part of our national heritage, is just crazy. The Bill goes too far.

I end with a plea for the Government to bring forward a consolidation of financial services legislation. Most of the Bill comprises yet more alterations to FSMA 2000, which is itself already heavily amended. If now is not the right time for consolidation, will my noble friend the Minister say when that time will come?

Photo of Lord Holmes of Richmond Lord Holmes of Richmond Ceidwadwyr 7:33, 10 Ionawr 2023

My Lords, it is a pleasure to take part in this Second Reading debate and to follow my noble friend Lady Noakes, about whose points I will say more in a moment. I congratulate the two maiden speakers from whom we have heard. I am very much looking forward to my noble friend Lady Lawlor’s maiden speech; I will not detain her much longer. I also congratulate my noble friend the Minister on the eloquence and erudition she showed in introducing the Bill. I declare my interests in the register, particularly those pertaining to fintech advisory work.

I will focus on two areas: financial inclusion and the regulator, mainly because nobody has mentioned the latter yet. Financial inclusion matters not just for those who find themselves on the wrong side of it. If we can drive financial inclusion, there are not just economic but social and national benefits for each and every one of us. That is why I am pleased to see the access to cash clauses in the Bill. It is important because cash still matters; it matters materially to millions. Looking at the reasonableness terms in the Bill, can my noble friend the Minister say what factors will be taken into account when we look at reasonable access to cash? It is a question of both distance—whether that distance is covered by public transport links— and cost. There are many factors to be considered, and I would welcome more detail on that in her wind-up speech.

As many other noble Lords have commented, access to cash is but one part of this. If there is no acceptance of cash, what currency does cash have if there is no place to spend it? In Committee, it is incredibly important that we look at the whole question of acceptance: which businesses are included; what size they are; what line of business they are in; and business clusters. There are so many issues to consider on how we nail the question of cash acceptance, because, without it, access does not go very far at all, as other noble Lords have commented.

The cashback amendment I tabled to the now Financial Services Act 2021, which my noble friend the Minister was kind enough to reference in her opening speech, demonstrates the enduring importance of cash. Evidence so far, since the introduction of cashback without the need for a purchase, clearly demonstrates that most of those transactions are for £20 or below, and therefore clearly serving individuals who were massively underserved or unserved before the passage of that legislative change.

Finally, on cash, does my noble friend the Minister believe it is time to consider cash as critical national infrastructure, and not just for financial inclusion? In the current uncertain world in which we exist, if there were to be a serious and sustained cyberattack on our financial systems, it seems that cash would provide a pretty robust first line of resilience.

Before noble Lords think that I am all about cash, I am interested in cash only while millions still rely on it and while we have not moved fully to the digital world. The future is inexorably digital, not least for payments. There is nothing necessarily problematic or negative about that, but that future has to be inclusive for all—and the transition to that future has to be similarly inclusive. Is it not high time to build on the work of the Access to Cash Review that the Government commissioned with, crucially, a review of access to digital payments?

On the regulator, as others have said, Parliament needs to consider seriously and urgently what we want our regulators in this space to do, without in any sense encroaching on their independence. What do we want them to do? How do we fit them out to do that? How do we put the structure and resource in place to set them up to succeed? How will we then hold them to account on all the principles which have been set out in that structure? It cannot be the case that it takes nine months for an overseas CEO to be able to come over to work in our financial services. It cannot be that it takes over a year for a start-up business to get a licence to operate in this country. It cannot be the case, as my noble friend Lord Ashcombe pointed out in his excellent maiden speech, that one size fits all. In insurance, how can it be that the same regulatory regime applies whether you are insuring a pet or a plane?

We know how to get this right with regulators. We saw that in the first part of the 2010s with our approach to fintech, and with the sandbox and with GFIN, which came as result of that. There was no better measure of success from the sandbox, and no better KPI, than the fact that it has been replicated in well over 50 jurisdictions around the world. That was all under Project Innovate; we need a second, third and fourth version of that project to drive forward all the opportunities which currently exist, combining common law, new technologies, and the potential geographic and historical benefits for London and the rest of the UK. As everybody in financial services knows, history is no guarantee of future success.

On the international competitiveness objective and the international perspective, what have the Government looked at in taking the best from around the world in this area—not least the MAS in Singapore, the Swiss regulator, and those in Bermuda and Australia, to name but a few?

In conclusion, this is the most important financial services Bill in a generation. It has extraordinary potential—but it is potential; it will not inevitably drive economic social good for citizens, cities, communities and our country. This is an extraordinary opportunity to make things better. In Committee and on Report, let us all work to make it even better.

Photo of Baroness Bennett of Manor Castle Baroness Bennett of Manor Castle Green 7:40, 10 Ionawr 2023

My Lords, having been in your Lordships’ House for a little over three years, I am now on my second financial services Bill, and I have to welcome the level of engagement we are seeing today. I was quite new when the last one happened, and it was in the depths of Covid, but the breadth and quality of debate was not an advertisement for the House. There seemed to be a view that financial services regulation could largely be left to the bankers, hedge fund managers and insurance brokers, yet already today we have heard from the noble Lord, Lord Forsyth of Drumlean, how anyone concerned with house prices should be looking to regulate the financial sector to prevent it being an accelerator of prices rather than a funder of secure, affordable homes. The most reverend Primate the Archbishop of Canterbury said that anyone who wants the banks actually to serve the real economy of small businesses, to which lending has effectively stopped, should be concerned with financial regulation; and of course, anyone who wants a liveable planet with a healthy natural world should be concerned with financial regulation, as the noble Baronesses, Lady Sheehan and Lady Hayman, among others, have highlighted.

We have a financialised economy, including everything from care homes to health provision, public transport to housing, tax dodging to serving oligarchs and plutocrats. Every Member of your Lordships’ House, whatever they regard as their speciality, whether it is alleviation of poverty or delivery of better health education, should be concerned with this Bill, and every member of the public should be concerned with this Bill. So I am going to agree for a second time with the noble Lord, Lord Forsyth, that the official Opposition would be letting the Government and the financial sector off the hook if our Committee stage was consigned to the murky obscurity of the Moses Room. That is, of course, perhaps unsurprising behaviour, given the Times report that the leaders of our official Opposition are heading off to Davos to send a message to the super-rich that Labour is the party of business.

Noble Lords might expect me to focus on nature and climate, but others, most notably the noble Baroness, Lady Sheehan, have already covered at length the “dismissive view” that this Bill takes of the very foundation of our economy, that on which every penny of our banks and every pound in a worker’s pocket depends: functioning ecosystems. But I shall take a more systemic and structural view: what is the financial sector for and what is the economy for? The economy should be in the service of a healthy, prosperous and sustainable society. The financial sector should be a tool for that type of economy, and this Bill should redirect our financial sector towards that. Instead, we have a primary objective of competitiveness. More finance is the aim—snatching it from other nations and growing what we have when we already have too much finance.

The noble Baroness, Lady Penn, in her introduction, proudly boasted that 2.3 million people are employed in the financial sector. We really need to change our thinking here. Human resource is a scarce resource and should be used well. A holder of a maths PhD creating the next complex financial instrument to break the global economy is not an example of it being used well. That person could be improving our health, securing our food supply or increasing the sum of human knowledge. Letting the financiers rip, seeking to lead a global race to the bottom on regulation, when lack of regulation is a huge threat to the security of us all, is heading 180 degrees in the wrong direction.

I could illustrate that point in many ways, but I am going to pick one example—the proposals on position limits in Schedule 2, on page 124 of the Bill. For those in the know, I mention the London Metal Exchange nickel debacle. Some might have read the recent European Economic and Social Committee cry from the heart about much greater regulation of food and commodity trading. As it and many others are identifying, that is a major factor in inflation, hitting every household in the UK and around the world today. A few are profiting while the rest of us pay.

Many commentators—among them I highlight Ann Pettifor, in the Financial Times and elsewhere—are suggesting that commodity derivatives could be the next big systemic risk, because they are so under-regulated. Global commodity markets involve an annual volume of at least $700 billion in buying and selling, with trillions in derivatives piled on to that.

Finally, if we grow the financial sector, we also grow corruption. The City of London is the global centre of corruption. If you do not want to believe me on that, I quote from a debate secured by my noble friend Lady Jones of Moulsecoomb. The noble Lord, Lord Evans of Weardale, chair of the Committee on Standards in Public Life, said that

“we have clearly, as a matter of policy, turned a blind eye to the perpetrators of corruption overseas using London for business”.—[Official Report, 13/10/2022; col. 156GC.]

If we grow the financial sector, we grow global corruption —that is the reality.

Photo of Baroness Lawlor Baroness Lawlor Ceidwadwyr 7:46, 10 Ionawr 2023

My Lords, it is an honour to address this House for the first time. I thank all who have so kindly helped in my introduction—Black Rod and her team, the Clerk of the Parliaments, the Doorkeepers and your Lordships, as well as my two supporters, my noble friends Lord Balfe and Lord Black of Brentwood, and my mentor, my noble friend Lady Eaton.

I am grateful to the former Prime Minister, Boris Johnson, for nominating me, and pay tribute to his remarkable achievement in opening a new chapter in Britain’s constitutional and political history. One consequence, this Bill to revoke retained EU law and provide for a homegrown alternative, has won the broad support of the Opposition. It was anticipated in 2018 by the then Chancellor, Philip Hammond, now my noble friend Lord Hammond of Runnymede, who explained that the laws for such an important sector of our economy should be made in this country and under the jurisdiction of our courts.

The Bill reflects the continuity of recent political history and therefore links to my own working life, which began as a historian in Cambridge, where I had moved from my native Dublin. I later switched to contemporary policy, initially education, and then founded and established a think tank in London, Politeia, to bring academic and other specialist attention to broad matters of social, economic and constitutional policy, working with different parties and politicians. More recently, we have published material on the financial sector as part of our work on the future legal framework for trade in goods and services. I therefore declare a special interest in this subject and have written on it, although not at great length.

The Bill aims to revoke retained EU law for the sector and replace it with legislation that builds on the UK’s approach. Under it, UK regulators will have certain powers but also obligations to promote competition and medium to long-term growth. It envisages that the regulators will be accountable to Parliament via the House of Commons Treasury Select Committee and will report on their policy, consult, and engage with statutory bodies.

The Bill, therefore, is concerned in a practical way with a more abstract problem: the role played by officials operating the system under the laws made by Parliament. It aims for regulator accountability, something that will be music to the ears of many, often small businesses which are reluctant to act competitively because they fear they may fall foul of the regulator, although observing the law, and do not understand the mysterious application of the rules.

I hope we shall consider how the Bill’s approach to these two central regulator aims, accountability and competition, can be further strengthened, to avoid the erosion of one of the most dynamic sectors the world has ever known. Competition, the rule of good, clear law and a free economy encouraged businesses to start up and flourish in the City of London, a port and commercial centre to which merchants, shipowners, insurance underwriters and other entrepreneurs flocked, establishing banks and businesses. In this country, small entrepreneurs who staked their future on a start-up could enter the market knowing where they stood in law, and that the laws of this country would act as fairly for them as for established businesses. The Bill opens a new era in the story of this dynamic sector. Providing competition and regulator accountability can be achieved, it will help the sector to be a world leader. I welcome this measure and its aims, with one caveat: that Parliament, in giving the regulators greater powers, does not give them a blank cheque.

Photo of Lord Blackwell Lord Blackwell Ceidwadwyr 7:52, 10 Ionawr 2023

My Lords, it is a great pleasure to follow the excellent maiden speech of my noble friend Lady Lawlor, and to welcome her to the House. I have had the great good fortune to collaborate with her on policy issues over what now amounts to several decades in her role as founder and head of a major think tank with a well-deserved reputation for well-researched and detailed reports—perhaps the hallmark of somebody who started her career as an academic historian. I know that she has wise but spirited and forthright views on many topics, and I have no doubt she will bring that sharp intellect and independent mind to the business of the House. We look forward to her future contributions.

Before I speak on the Bill, I should note my role as a former chairman of Lloyds Bank, but I have no current interests other than as a continuing shareholder. I welcome the Bill, in particular the proposal to add competitiveness to the objectives of regulators, but my fear is that the Bill does not go far enough to redress the overly burdensome nature of the regulatory system that has built up over the last decade. I am not proposing that we turn the clock back to the inadequate regime prior to 2008—many of the reforms introduced then were necessary and are effective—but as my noble friend Lord Hunt of Wirral argued, the excessive regulatory burden on the financial services industry comes not so much from the regulation itself as from the overly bureaucratic way it has been implemented by the UK regulators.

This culture stems from the regulators’ overriding internal objective to avoid the risk of being blamed for failing to do something, with little incentive to balance that against the costs that their intervention may impose on the industry. I fear this tendency to gold-plate is fuelled by the current superficial nature of the parliamentary scrutiny by the Treasury Select Committee in the other place, which tends to focus on naming and shaming someone for anything that has gone wrong. Furthermore, the growth in staff numbers means that much of the regulation of major institutions is undertaken by relatively junior staff who are more likely to stick to a rigid interpretation of the regulatory rules because they simply do not have the confidence or experience to make balanced supervisory judgments.

The senior managers regime, for example, is, in principle, a sensible safeguard to ensure appropriately qualified people are in key industry roles and are held accountable. However, when a major institution has gone through a responsible and exhaustive recruitment process involving an external search firm, it is simply unnecessary and damaging to then have the appointment held up for further lengthy scrutiny by often far less experienced staff at the PRA and FCA. The overly forensic attempt by regulators to pin every mistake on some individual and require consequential penalties has had a corrosive impact, discouraging individuals from making difficult decisions or taking on difficult roles that carry a risk of failure. It has led to a huge increase in bureaucratic processes and documentation, as managers seek to syndicate responsibility and cover their backs.

Another example is the tendency of the regulators to apply a one-size-fits-all approach, unwilling to recognise this may be disproportionate for some sectors or firms. The FCA’s fair pricing review is a case in point: in seeking to address certain consumer pricing practices, the review spread across the whole industry and imposed burdensome data collection on sectors such as the wholesale insurance market, where the participants are skilled professionals. Ring-fencing is another example where the overly rigid application of something which is in principle a sound idea has had a disproportionate impact on banks with relatively small non-ring-fenced activities. The FCA’s worthy objective of protecting the customer has been developed under the customer duty approach to the point where firms fear that even negligent or unreasonable customers will claim redress for buying a financial product that, after the event, causes them a loss. As a result, many products and helpful financial guidance have been withdrawn or repriced out of many people’s reach. This overly protective approach to customers needs to be replaced by a more even-handed objective of simply ensuring fair trading. Caveat emptor has been replaced too much by caveat venditor.

The downside of this overly intrusive regulatory approach is not just the direct costs but, more significantly, the diversion of management time and IT resources away from transforming businesses to better serve their customers. The introduction of competitiveness as a regulatory objective may be helpful to provide a counterbalance. I also welcome the provisions in this Bill for the Treasury to require regulators to review their activities and to set up independent cost-benefit panels, but these measures will not solve the problem without a fundamental shift in attitude, skills and culture within the regulators. I welcome the Chancellor’s commitment in Edinburgh to bring forward further measures to address some of these issues, including reviews of ring-fencing, the senior managers regime and the boundary between advice and financial guidance, but even then, I am not sure we will transform the regulatory approach without a more fundamental reshaping of the organisations and their accountability.

I think it is worth considering whether smaller regulators with fewer and more experienced staff would do a better job of providing supervision, with more considered judgments, and whether the benefit of having two separate regulators outweighs the burden of having two overlapping supervisory teams for major institutions. Finally, while I support the Bill, as other noble Lords have argued, given the powers it transfers to regulators it is important that it is accompanied by a more informed and balanced structure of parliamentary scrutiny that can also hold regulators to account for their new objective of the competitiveness of the industry. I ask my noble friend whether the Leader of the House has any plans to bring such proposals before the House.

Photo of Lord Balfe Lord Balfe Ceidwadwyr 7:59, 10 Ionawr 2023

My Lords, I draw attention to my entry in the register and I begin by welcoming my noble friend Lady Lawlor. I was one of her sponsors. I am delighted to see her here; she will add huge intellectual firepower to our Benches. I hope not too much of it will be turned on me, as I do not think we agree very much on the European Union. I also thank my noble friends Lord Remnant and Lord Ashcombe, who will also add considerably to these Benches.

This is an interesting Bill. It is a good basis for a debate, and it follows a good deal of consultation. I am afraid that I disagree with my noble friend Lord Holmes, who is not in his place, on the subject of cash. Things move ahead. In 2020, I went to our local Turkish shop just after Covid started. I offered the shopkeeper some money and he said, “We’ve stopped accepting money, sir. We might get Covid.” I thought, “This is interesting.” Believe it or not, I stopped using money. Of course, the difficulty for poorer people is that they do not have access to credit or debit cards that they can just hand over all the time, so we need to retain the ability to pay in cash. But shops will maintain that for us, because they will want to continue to sell their goods, which is a pretty good thing.

As I see it, the growth of cryptocurrency, which I regret, is the next big scandal on the horizon—I thank the most reverend Primate for giving me a drink of water; it is jolly good to be given one by the Archbishop of Canterbury.

I warn us against cryptocurrency. We need to look at regulating it, because it is totally out of control, and it is meaningless. I discovered the principles of Warren Buffett before they were popular; if you want an investment, you should be able to see it, understand it and answer the question, “Does it do anything useful?” If you cannot get positive answers to all those points, you are likely to be investing in a dud. All these bubbles over the last umpteen years have been about things that do not exist. They did not have any benefits and most of them did not pay any dividends. You need to be very careful. I predict that anyone investing in cryptocurrency will come to regret it pretty shortly.

I welcome Clause 69 of this Bill, in particular the ability to develop credit unions further. We often forget the role that they play, particularly in providing secure finance for poorer people and in the trade union and working people’s movement. Anything we can do to strengthen credit union regulation, while making them dependable, is something to be gained. Enabling them to extend cautiously into hire-purchase agreements and insurance, and to lend to and borrow from each other, is extremely good. I hope that, as we pass this Bill, we can look carefully at how to support credit unions.

Finally, we need to look at the dangerous “buy now, pay later” phenomenon. Problems are already beginning to arise with the idea that you can go into a shop and say, “I’ll pay in three months.” This sector needs bringing under some sort of financial regulation. I hope that we can get some sort of outline during the course of this Bill of how we can get a regulatory framework.

Photo of Lord Mountevans Lord Mountevans Crossbench 8:04, 10 Ionawr 2023

My Lords, it has been a great pleasure to hear the three maiden speeches this evening. The noble Lord, Lord Remnant, was a fellow alderman in the City of London; I remember we all thought that he was first-rate material to be lord mayor, but unfortunately the City assumed him and took him away from us. We have seen tonight just how valuable his contribution will be. I equally congratulate his colleagues. Our House has been enriched this evening.

This is an important Bill, which I welcome and support. There is much that is valuable in it, such as enshrining that regulators exercise their new powers in the service of public policy objectives, set by Parliament, which maximise the industry’s contribution to society. I warmly welcome moves to build a robust regulatory regime for digital assets and to support digital innovation in distribution ledger technology, employing the sandbox technology that has been so successful in fintech. The introduction of references to economic growth and competitiveness has long been on the industry wish list.

Bringing the marketing of crypto assets under the existing financial promotion rules is highly desirable, as are the introduction of a new regulatory principle for the FCA and the PRA to have regard to the need to contribute towards achieving the UK’s net-zero obligations and steps to ensure that domestic legislation is amended to ensure that mutual recognition agreements can be fully implemented. This should reduce the cost of doing business and facilitate more competitive client service and offerings.

Some noble Lords have regretted that the Bill is not more proscriptive and wider ranging. However, the UK’s regulatory regime is a key factor in its perceived attraction as a global financial centre. With respect, profound changes are unappreciated and unhelpful. As we saw as recently as last autumn, it is important to be perceived as predictable, stable and strategic. Profound changes are to be avoided.

I am not an expert in regulation and have not worked in banking, insurance or, for example, the LSE. I was elected 11 years ago in the City and worked there for 45 years. From my contacts there, I think there is contentment with the Bill and its contents. These are steps in the right direction. It is a very important sector; as I and others have said, from research, it is critical that financial services flourish in this country.

I too would have liked to see more action on fraud and regulatory accountability, and opportunities for consumers have been missed. Hopefully, the Government can address this. The principal concern is the speed at which reform is proceeding. We have suffered the negative impacts of leaving the EU but are not succeeding in enhancing and improving our offer fast enough to compensate. Can the Minister say in summing up whether the regulatory organisations, with their immensely demanding and complex responsibilities, are fully equipped with the staff and resources required for the discharge of their duties and functions? This is more critical than ever at this time, as underlined most eloquently by the noble Lord, Lord Grimstone.

Photo of Lord Randall of Uxbridge Lord Randall of Uxbridge Ceidwadwyr 8:08, 10 Ionawr 2023

My Lords, a few hours ago, before this debate started, one of my noble friends saw that I was down to speak and said something in terms similar to, “What on earth do you know about this?” He hit the nail on the head. That feeling has been only heightened by the quality of the speeches we have heard from noble Lords who really know what they are talking about, not least the three maiden speeches. I am delighted to have such erudite noble friends joining us on these Benches—I will probably have to keep quiet now, unless it is a subject that I know a little more about.

I say that I do not know much about this but, listening to some of the speeches, I realised that—as the noble Baroness, Lady Bennett, who is not in her place at the moment, said—I represent the man or woman in the street who does not understand these things but needs to because they are really important. As a former retailer, I have something to say on the subject of cash. Also, I say to my noble friend Lady Noakes, who is not here, and others that, if there is any spare cash she does not want, I have various charities—I will put a bucket outside and we can take it. That would solve that problem.

I declare an interest as a director of Peers for the Planet. I was going to emphasise the point about net zero and so on, but that has been amply discussed and there is no point in overdoing things. The noble Baronesses, Lady Sheehan and Lady Hayman, and others have mentioned this, so I will just add my voice to that. I can almost hear one or two of my noble friends in particular thinking that this will somehow be a burden, but it will not: these very institutions and businesses are asking for it to make sure that there is a level playing field.

However, there is one amendment I hope to table in Committee—unless I can persuade my noble friend the Minister that the Government need to take this on, which would save me the job of having to make a further speech on the Bill—and it is on deforestation. This amendment would echo one tabled by my right honourable friend Chris Grayling on Report in the other place, which had a great deal of cross-party support. My amendment would introduce a mandatory due diligence obligation for UK financial services to prevent the financing of commodities, businesses and activities that destroy climate-critical and biodiversity-rich forests, and indeed the lives of the local communities and indigenous peoples who depend on them. I tabled a similar amendment to the Environment Bill as it went through this House. It was a rather good amendment but, to my astonishment, the Government did not seem to agree with me entirely on it. I did cry myself to sleep that night, but I woke up again and thought, “There will be another opportunity”—and that is what I hope we will have in Committee, where I am sure the Government will realise the error of their ways and accept this, because it is incredibly important. I do not believe that Schedule 17 of the Environment Act is enough to stop the UK’s role in global deforestation.

I fully support the Bill but, like so many others have said, I am sure that there is room for improvement. It may not be down to me to do it; I think I have found the experts we need. I salute the Government for bringing this forward, and I salute my noble friend the Minister—not just because I want her to accept my amendment but because her stamina in sitting through this debate has been fantastic. With that, I think I will sit down.

Photo of Lord Carrington of Fulham Lord Carrington of Fulham Ceidwadwyr 8:12, 10 Ionawr 2023

My Lords, it is a great pleasure to follow my noble friend Lord Randall, but I am not planning to follow him into the woods and forests and deforestation. I find myself in a situation which many noble Lords in this Chamber will have been in at various times of their career, where you have prepared a speech which is, frankly, brilliant, and you have all the points laid out with wonderful clarity, only to find that the second speaker makes your points, and the fourth speaker makes your points—I lost count after that. Everybody has talked about regulation, which is what I was planning to talk about. So, noble Lords will be extremely relieved to hear that my speech is going to be quite short, because nearly everything that can be said about regulation has been said—but, I have to say, not quite everything.

I do not have any interests to declare; I used to have interests to declare in financial services. I used to be a regulated authorised person by the PRA and the FCA, and I used to be the chairman of a very small bank, so I have had some experience of being regulated and recognise the importance of regulation. I recognise the very important role that the regulators play in keeping London as a premier financial centre. One of the principal reasons we are still a major financial centre in the world and manage to fight off the competition, which now comes from Europe as well as from New York and Singapore—China may well become competition again, but Hong Kong has largely disappeared —is our honesty and probity through regulation. That is very important, and we need to preserve it. For that reason, I also very much support the part of the Bill which gives the regulator further duties, particularly the duty in relation to international competition and growth, and to the green agenda. All this is very important, but it raises quite serious issues about what we want the regulator to do.

Perhaps I could digress for a moment and say a little bit about what I think regulators ought to be doing. This follows on a bit from what the noble and learned Lord, Lord Thomas, who sadly is not in his place at the moment, said earlier about large and detailed rulebooks being a disincentive to effective regulation. In fact, I would say—only he is a lawyer—that the great danger is getting the lawyers involved in regulation at all.

The point about regulation is that it is there to stop the villains and to stop people doing things that they should not do, but it is trying to do that in markets that are extremely fast-moving and highly inventive and innovative. A regulator that has rules that were set in stone 20 years ago and stretch from here to eternity will never catch those people. Indeed, there is a very strong argument, which I have seen written up by people who know much more about it than I do, that the great crash of 2007-08 was caused largely by regulators being hidebound by what they had seen in the past, rather than understanding what was happening and developing for the future—not just in this country, I have to say, but principally in the United States as well.

Regulators have to be very close to their markets and understand what is going on in them. They have to see the trades being done, know the participants and hear the gossip. In all markets, whether traded or over-the-counter, the participants know who is good, who is stupid and who is bad. They may not get it 100% right but they get it pretty nearly right, which means that we have to get the regulation of the regulators right. That is desperately important.

I do not believe the Treasury can do it, because it is too close to the regulators. The Bank of England clearly is a regulator and cannot do it. The Treasury Select Committee, of which I have some experience, having been a chairman many years ago, cannot do it. We have to find a way of doing it which is effective. It may involve parliamentary committees, but my guess is that it will involve another regulator, to regulate the regulator. We need little fleas on the backs of big fleas to bite them. I am afraid that that is what we will have to do. We need to find a solution, because the regulators are becoming too powerful and too important, and they need to change.

Photo of Lord Moylan Lord Moylan Chair, Built Environment Committee, Chair, Built Environment Committee 8:18, 10 Ionawr 2023

My Lords, I was worried that my noble friend Lord Carrington of Fulham would take away the very last thing I might have said that has not already been said, but happily he has left a little scope for my contribution to the debate. I will start by saying something which has been widely said, by offering congratulations to all my noble friends who made their maiden speeches today and saying how welcome their contributions were, as their many contributions in future will be, adding to the quality of debate and the experience of your Lordships’ House.

There have been many points of consensus around the whole of the House as we have debated this, and I share those points. Among them is the astonishing lack of parliamentary scrutiny of what is in fact lawmaking. Whether this constitutes taking back control and whether it could be done better need to be explored in Committee. A second point of consensus is the need to ensure that a cash option remains available, not just for those who need it but for those who want to exercise it. There is broad consensus on that around the House. A third point on which there is consensus—I do not intend to put this too controversially—is that there appears to be a shared mild uncertainty around whether the current regulators are up to managing the new jobs that are about to be thrust upon them. That is something else that I am sure we will want to explore in Committee.

I would like to add one item, which I hope will command widespread support in your Lordships’ House. Over the last 20 or 30 years, retail access to regulated investments has practically dried up. It used to be the case that one could buy government bonds, gilt-edged securities, at the Post Office. It used to be the case that one could bid, non-competitively, for new issues of gilts through clipping a coupon in a newspaper—even the Daily Mail—and put one’s money into government bonds, as a safe, secure investment that one could hold over the long term. It used to be the case that new issues of equities were widely available to retail investors. All these had different risk profiles, but we need to trust that retail investors understand to a degree what they are doing—and they do.

Over the last few years, investors with money in their pockets which they would like to put into savings have been precluded by regulation from these markets and have instead put their money into dodgy schemes and things calling themselves bonds that have been marketed in a way that sometimes gives the impression that they are regulated by financial regulators. Sometimes there has been sufficient justification for that claim, such that we had to pass legislation only last year to authorise the Treasury to bail out the investors in one of the schemes—I believe it was called London Capital & Finance, but I may have that slightly wrong. We are saying that investors are going to be regulated out of nice, secure, sensible investments, but in effect encouraged to go into dodgy investments. It is all completely wrong.

A large part of it comes from the European Union’s prospectus directive. One thing it said was that, for investment in corporate bonds, the minimum denomination for a new bond issue has to be €100,000, and that denomination stays with the bond for the whole of its life. So unless you have a sum of roughly €100,000, you cannot buy. Most retail investors do not have that. The prospectus directive is included in Schedule 1 and is listed to go. It is vital that we put the retail investor at the heart of this.

Furthermore, treasurers are discouraged from giving a retail offer in new issues of equities because they have additional regulatory requirements to meet. We should be able to address those. All those things could be done if they were an explicit objective of the Bill and if the Government committed to doing them. The Investor Access to Regulated Bonds Working Group in the City has been talking to the FCA about this. The working group represents the industry; I have had some briefing from it, but have no interest to declare. There is a definite opportunity, but it needs to be taken up and pressed by the Government.

Finally, my noble friend Lord Forsyth of Drumlean mentioned the outrageous way in which politically exposed persons are dealt with in this country in the domestic regime. I put it to my noble friend on the Front Bench that this Bill, dealing as it does with financial regulation, would be the perfect mechanism for sorting out that problem once and for all, through any necessary amendments to primary or secondary legislation required, so that we cease to have the humiliating prospect of watching the Front Bench go off and beg the Financial Conduct Authority to treat us reasonably.

Photo of Baroness Fox of Buckley Baroness Fox of Buckley Non-affiliated 8:23, 10 Ionawr 2023

My Lords, I welcome the three new Peers and their thought-provoking contributions so far to this crucial Bill. I want to focus on one fairly narrow but I think important consequence of an increasingly cashless society: that is, that a handful of mainly US tech giants now have unprecedented power over the public square.

Consider how any civil society organisation has to operate today. Consumer campaigns, pressure groups, NGOs, the third sector—all will be dependent on payment processes such as US fintech PayPal to operate in order to organise online payments for goods, services, events, and to receive membership fees and donations, et cetera. Can your Lordships imagine if these digital corporates took it upon themselves to freeze assets and suspend accounts with no notice or explanation, all because some big-tech apparatchik disapproved of the aims of such organisations? Surely such censorious demonetisation would be a threat to democracy. Yet this is not some dystopian future—it is happening now. So I urge the Government to use the Bill to protect civil society organisations’ ability to conduct basic commerce regardless of their political views.

Noble Lords will remember the media coverage of events in September last year when PayPal deplatformed a number of UK organisations. Suddenly the Free Speech Union—I declare an interest as a member of the advisory board—the Daily Sceptic, Law or Fiction, and UsforThem, an advocacy group set up by mums who opposed school closures during lockdown, had no way to process membership or access their own funds, had no ability to raise money and were made to feel like criminals. All their processing services were just switched off abruptly, risking their whole financial viability. Toby Young, who heads up two of the targeted organisations, explained at the time:

“PayPal’s software was embedded in all our payment systems, so the sudden closure of our accounts was an existential threat.”

Indeed, even PayPal’s co-founder Peter Thiel told the Free Press in December:

“If the online forms of your money are frozen, that’s like destroying people economically, limiting their ability to exercise their political voice.”

Such financial censorship reminded me of when the Canadian Prime Minister Justin Trudeau froze the Freedom Convoy protesters’ bank accounts last February. That was shocking, but at least it was clearly a political act. The problem when payment process organisations defund based on content is that they are often evasive and opaque about who it is targeted and why. PayPal gave contradictory and vague explanations last September, initially citing its acceptable use policy associated with criminality and hate speech, and later telling the Times that the accounts were guilty of misinformation about vaccines. Few were convinced. Miriam Cates MP told the other place:

“It is … hard to avoid interpreting PayPal’s actions as an orchestrated, politically motivated move to restrict certain views within the UK”,—[Official Report, Commons, 7/12/22; col. 430.]

or, in the FSU’s case, even defending those expressing such legal but dissenting views.

After high-profile press coverage and Members from both Houses—across parties and of none—causing a fuss, PayPal eventually backed down, reinstated the accounts and denied that there was any political interference. However, there is no room for complacency. When Sally-Ann Hart MP proposed an amendment to this very Bill in the other place, seeking to legally prevent financial service providers refusing to provide services if related to the exercise of the right to free speech, the Minister Andrew Griffin gave a robustly positive response. He stated that the Government respected

“the balance of rights between users and service providers’ obligations … whether of the Free Speech Union, the trade union movement, law-abiding environmental movements or anyone else expressing lawful views.”—[Official Report, Commons, 7/12/22; col. 395.]

However, he seemed rather reluctant to agree with the need for primary legislative change and stated that the PayPal incidents did not represent a wider pattern. I beg to disagree.

We need to look at what has happened in the US over recent years—and think about whether it might happen here—where big tech companies regularly use defunding to regulate speech, so much so that in June 2021, a large coalition of US civil liberties groups wrote to PayPal and its subsidiary Venmo asking for transparency, due process and clarity behind this escalating practice of economic limitations on multiple varied accounts, from WikiLeaks to News Media Canada’s payment to submit an article about Syrian refugees for an award. The coalition, comprising eminent organisations such as Article 19, the ACLU and the Electronic Frontier Foundation, never even got a reply from PayPal. Also, less high-profile instances of deplatforming dissenting views are happening in the UK, for example with Patreon, CrowdJustice and GoFundMe affecting our citizens. What is more, the majority of major payment providers grant themselves the right to block accounts of those whose views clash with Silicon Valley’s increasingly ideological corporate values.

I intend to table an amendment to say that, while I understand that private companies have a right to choose who they do business with and should be vigilant about fraud and illegal transactions, they should never discriminate on the basis of an organisation’s political, philosophical or religious beliefs. This Bill might be a place where we can put that right.

Photo of Lord Northbrook Lord Northbrook Ceidwadwyr 8:30, 10 Ionawr 2023

My Lords, first, I declare an interest as a consultant to an FCA-regulated investment management firm. Overall, I strongly welcome this Bill, as do important UK financial institutions, including the Investment Association, UK Finance, TheCityUK and Linklaters’ Financial Regulation Group, to name but four.

Politically, the Bill seems to be generally supported by all major parties. I particularly welcome the provision to establish a regime to regulate stablecoins. I also like the idea of bringing in measures to allow regulators to reduce regulations in order to enable technological innovation in a sandbox. I also approve of the measure allowing regulators to make rules for entities deemed to pose systemic risks to the UK’s financial markets. As the Prime Minister said in his Back-Bench speech at Second Reading:

“Why does all this matter? It matters for three specific reasons. The first is jobs. The industry provides more than 1 million jobs, and not just in London and the south-east; two-thirds of those jobs are in places such as Southampton, Chester, Bournemouth, Glasgow, Belfast, Edinburgh and Leeds. It is incredibly important. Secondly, it is one of the most important industries for our economy in terms of contribution to our GDP and tax revenues, and it is something that we as a country are genuinely world-class at.”—[Official Report, Commons, 7/9/22; col. 292.]

I recognise that the City is now in a very different place from where it was in 2016. The consensus view is that the ship has now sailed on regulatory equivalence with Europe. However, the fact is that, since 2018, the volume of financial exports to the EU has fallen by 19% in cash terms. Some £1.3 trillion of UK assets have reportedly moved to the EU and there has been little progress on securing trade deals for our financial services around the world—although Switzerland was mentioned earlier.

Still, in 2021, exports of financial services to the EU were worth £20.1 billion—33% of all UK financial services exports. So is it wise just to repeal all the 200-plus pieces of retained EU law en bloc rather than identifying which are helpful and necessary? Also, the sector is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory co-operation or negotiate with the EU for the mutual recognition of professional qualifications for our service sectors. In her winding-up speech, will the Minister tell us what impact she believes this Bill will have in securing these important agreements with the EU and boosting financial services exports more generally?

I move on to what has not been included in the Bill. I agree with my noble friend Lord Balfe: I feel that the Bill lacks ambition in its lack of support for the mutual and co-operative sector. Although Clause 63 contains some welcome and long-overdue provisions, such as enabling credit unions to offer a wider range of products, the Bill does little to address the outdated regulatory regime faced by credit unions, building societies and co-operative banks. We have seen numerous building societies threatened with demutualisation in recent years, while the number of mutual credit unions has plummeted by more than 20% since 2016. Unlike the USA—and many other European countries, as I understand it—the UK is uniquely lacking in co-operatively or mutually owned regional banks. That lack of diversity in the financial services sector has had bad consequences for financial inclusion and resilience, with many desperate families forced into the arms of unethical lenders.

Next, like the noble Lord, Lord Hunt of Kings Heath, and other noble Lords, I find it disappointing that the Bill fails fully to address the growing problem of financial fraud. Clause 62 only partially addresses the issue. It enhances protections for victims of authorised push payment fraud, which, according to the Labour Treasury Minister in the other place, quoting UK Finance figures, reached an all-time high of £1.3 billion in 2020. The Government in the other place promised a review without giving a timescale, but more immediate action is needed. The Bill ignores the fact that digital-savvy criminals are increasingly exploiting a range of financial institutions such as payment system operators, electronic money institutions and crypto asset firms to scam the public. According to UK Finance, in 2020, 45% of the £1.3 billion was payment card fraud, while 38% was authorised push payment and 16% was remote banking.

Last November, our House of Lords Fraud Act 2006 and Digital Fraud Committee released a report stating that the Government should introduce a new corporate criminal offence to ensure that big tech platforms and telecom companies tackle financial crime. While online platforms will face a duty of care to protect their users from fraud under the Online Safety Bill currently going through its stages in the other place, it does not cover telecoms and other related sectors:

“‘It’s a very good step but I do think that more needs to be done,’ said Sian McIntyre, a managing director at Barclays UK, including requiring tech companies to publish data on the nature and volume of scams on their platforms.”

I support other noble Lords’ views on the limitation of Treasury Select Committee scrutiny, general clarity on crypto regulation, regulators’ requirements to focus on international competitors, problems of buy now, pay later, and the opportunity to still have a cash option. In summary, I welcome the Bill and look forward to scrutinising it further in Committee.

Photo of Viscount Trenchard Viscount Trenchard Ceidwadwyr 8:35, 10 Ionawr 2023

My Lords, it is a pleasure to follow my noble friend Lord Northbrook. I thank my noble friend Lady Penn for her impressive introduction of this Bill and declare my interest as set out in the register as a director of two investment companies. I welcome the Bill. I wish to place on record my strong objection to the imposition of a five-minute so-called advisory speaking time at Second Reading. I add my congratulations to my noble friends Lord Remnant, Lord Ashcombe and Lady Lawlor on their excellent maiden speeches.

I was a member of the Joint Committee on Financial Services and Markets, which reported in 1999 on the need for the Financial Services and Markets Act 2000. At the time, we did not appreciate how much of the responsibility for framing financial services regulation would be transferred to the European Commission, as Union competence steadily increased its reach. We were powerless to prevent the entry into force of AIFMD in 2013. We did not resist the adoption and eventual entry into force in 2018 of MiFID II, which requires fund managers and brokers to set separate charges for trade execution and research, and fund managers to pay for research themselves or agree a separate research contract under which they may recover their costs. These and other legacy EU regulations, such as PRIIPs and its requirement that companies produce consumer-friendly kids, have had the opposite effect on consumers from that which was expected.

A return to the FSMA 2000 model, balancing responsibilities between Parliament, government acting through the Treasury and the regulators, makes a great deal of sense. I was never sure that the decision following the financial crisis of 2008 to create the PRA as a second regulator, which was neither an independent regulator nor fully a department of the Bank of England, was the right one. The creation of the FCA, with its one strategic objective, that markets function well, and three operational objectives, which include a competition objective but one limited to promoting competition in the interest of consumers, has contributed to the emergence of a culture within the institution which is overcautious and generally perceived by the industry as anti-innovation. Participants in London’s insurance markets have explained to me that this is the principal reason why our share of the global insurance markets is stagnant at around 7%, whereas those of other jurisdictions such as Bermuda and Singapore are growing.

From the point of view of your Lordships’ House, Clause 36 of the Bill, governing engagement with parliamentary committees, is very unsatisfactory. It is very far from even-handed between your Lordships’ House and another place. I question whether the Treasury Committee, as it currently operates, can conduct the required level of oversight. Surely a Joint Committee of both Houses should be established for this purpose. We need a committee resourced well enough to replicate the activities of the ECON committee of the European Parliament.

I welcome the Government’s decision to act in accordance with a recommendation of the Listing Review, undertaken by my noble friend Lord Hill of Oareford, to create a competitiveness and growth objective. Clause 24(2) makes clear that this objective is secondary. However, as I mentioned, the FCA has one strategic objective and three operational objectives. Could my noble friend the Minister please inform the House whether the new competitiveness and growth objective is to be a secondary strategic objective or a secondary operational objective? Could she explain why the Government does not recognise that, if the FCA’s new objective is only secondary, it will not be effective in changing the FCA’s culture and behaviour to the extent necessary to achieve the Government’s ambition for the UK to be the world’s most innovative and competitive global financial centre?

The regulators are required to report on how well they are performing their new objectives, but Clause 26 suggests that the FCA sets its own homework and then marks it. Unlike the PRA, it is not required to undertake public consultation. Could my noble friend the Minister tell the House whether she thinks that the empowerment of the FCA to regulate Stock Exchange listings through the designated activities regime will make admissions more, or less, expensive and cumbersome than they have become over the past 14 years—during which, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%?

I welcome the Bill and look forward to working with other noble Lords to make it a better one.

Photo of Lord Lilley Lord Lilley Ceidwadwyr 8:41, 10 Ionawr 2023

My Lords, I begin by paying tribute to my noble friend Lord Lawson. As his researcher in my spare time before I entered Parliament, then his PPS for four years, then his Economic Secretary to the Treasury for two more, I learned my politics at his feet. I also learned to admire his immense intellect, his sound judgment, and—what may be less well known to others—his incredible, uncanny insight into human psychology, enabling him to forecast in advance the reactions of individuals and the public to events long before they occurred. When I saw him in the summer, his intellect, judgment and insight were undimmed. They will be sorely missed in this House.

I want to make five simple points. First, the four major global financial centres, London, New York, Hong Kong and Singapore, are all based on common law, as are the three newest players, Dubai, Abu Dhabi and Astana. By contrast, the largest European financial centre, based on civil law code, is Frankfurt, which clocks in at number 18 as the most significant globally. That is not a coincidence; it is because common law is uniquely suited to financial markets. In recent decades, layers of civil law code have been added to Britain’s financial system, so the objective of this Bill, to return rule-making to a more common-law-based approach, is very welcome.

Secondly, it is not clear whether the Bill will achieve that objective. Historically, the common-law approach involves laws and regulations made by Parliament and explicated by the courts by the accumulation of precedents. The Bill at present will effectively hand over rule-making to independent regulators, with minimal accountability to Parliament or involvement of the courts.

Thirdly, the economic analysis of regulation is a comparatively new discipline, but its seminal conclusion is clear: we cannot rely on the beneficence of regulators. Left to their own devices—and I stress this—regulators regulate in the interests of regulators, without accountability. That is why, in practice, they mind their own backs by taking a bureaucratic, box-ticking approach to every decision, rather than focusing their resources on areas of genuine concern. As a result, bona fide businesses face pointless delays to obtain the least contentious decisions; regulators refuse to offer advice on how they will apply specific rules in specific cases, leaving businesses to face uncertainty and risk; and regulators refuse to publish reasons for their decisions, with the result that there is no coherent body of case law for firms to follow. Finally, regulators tend remorselessly to extend their remit, increasing their own importance.

I understand that amendments are likely to be proposed to make regulators more accountable to Parliament, or at least to a powerful Joint Committee of both Houses. Having chaired the Joint Committee scrutinising legislation following the great financial crisis, I can vouch for how much value the Members of this House give to such committees, as well as those of the other House, to which I then belonged. It is also important that there are amendments to require regulators to apply common law disciplines and to enable tribunals to ensure that a body of publicly available case law develops to give practitioners greater legal certainty. I am predisposed to support such amendments, as I hope will the Government.

Fourthly, I understand that the regulators have been arguing that their independence is sacrosanct. To quote Mandy Rice-Davies, “They would say that, wouldn’t they?” Of course politicians should not meddle in how regulators apply rules to specific practitioners, but the Bank of England was given independence to set interest rates for a very specific reason: because the timing of interest rate changes is electorally sensitive. There is no equivalent reason to allow the financial regulators to be immune to influence and oversight from Parliament or the courts.

Fifthly, finally and rather differently, there is no reason to extend the regulators’ competence to include climate change. The sensible path to net zero, which we have adopted in this country, is to reduce demand for fossil fuels, not to reduce their supply. If businesses overinvest in producing fossil fuels ahead of declining demand, they will lose money. That is their problem, not the regulators’. If the UK unilaterally bans investment in fossil fuels, which would be a bizarre thing to do given that we do not ban their import, other people will supply them, both here and abroad. If the world collectively restricts the supply of fossil fuels faster than we phase out demand, there will be shortages, prices will shoot up and fossil-fuel producers will make enormous profits; we will have done to ourselves what Putin has just done to the world. Giving regulators a climate objective would be either pointless or disastrous. In all other respects, I support the Bill.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 8:46, 10 Ionawr 2023

My Lords, I begin the first of the winding-up speeches by saying how much I welcome our three maiden speakers and by remarking on the excellence of their speeches. I look forward to their further contributions.

This a significant Bill. There are aspects of it that I strongly support. I do believe that we should tailor regulation to the UK market, although I am of the community that thinks this refers much more to the efficiency of the way that rules are applied than to the removal of gold-plating. I hope that I do not misspeak for the noble Lord, Lord Mountevans, when I say that the absence of profound change would be rather welcomed by most of those I talk to in the financial services industry. I support protection for access to cash, protection against push payment scams, greater scope for credit unions and beginning attempts to regulate crypto assets. In some of these areas, we on these Benches will have amendments to strengthen those changes.

There are missed opportunities. My noble friend Lord Sharkey is leading for us to introduce an effective duty of care, unlike the box-ticking of the consumer duty, and to adjust the regulatory perimeter to properly include small businesses. My noble friend Lady Tyler will lead for us on an objective of financial inclusion, as well as dealing with issues around access to cash and to services. My noble friends Lady Northover and Lady Sheehan are leading on strengthening the net-zero and biodiversity elements of the regulators’ roles. And I think the House is now prepared to understand that my noble friend Lady Bowles is proposing changes to make the regime far more effective at enforcement, including against fraud; to drive regulatory efficiency; and to significantly improve monitoring of systemic risk and financial stability across the financial sector. I suspect that yet more amendments will be coming from her pen.

All of us on these Benches are concerned with accountability. I was going to list everyone who spoke on this issue, but I would have to read out virtually every name engaged in the debate. From my perspective, powers that had democratic oversight in the EU system will be transferred wholesale to regulators with pretty much no engagement with a meaningful democratic process once this Bill is passed. As many have said, the Treasury Select Committee has taken steps to improve its oversight, but it is far too little and I agree with those who say that it is retrospective, which is not what we need. I look to my noble friend Lady Bowles in particular to craft a series of amendments.

In this Second Reading, I want to take a step back and ask to what extent the changes introduced in this Bill, combined with what the Chancellor calls “the Edinburgh reforms”, which are, of course, largely coming through secondary legislation, reintroduce risks to the sector and to financial stability that existed prior to the 2007 crash and set us up for the next major crisis. The financial crash was driven by the deliberate disguise of risky assets and irresponsible management by major banks. Consumers endured abuse from extensive mis-selling and, astonishingly, Libor was corruptly manipulated for at least a decade.

Today, we have a shadow banking system—I have to thank the noble Baroness, Lady Hayman, and the noble Lord, Lord Butler; I am afraid this glass of water will not turn into wine, as happened for the noble Lord, Lord Balfe—which now almost matches the formal banking system in size and has embedded new levels of risk. I think LDI, is an example and I say to the noble Lord, Lord Altrincham, that it was the leveraging of those instruments using a loophole that caused the problem. Give them an inch and they take 10 miles, and it continues to be true of the sector.

I accept that some change to Solvency II makes sense, but many insurers see its replacement by solvency UK, which will be empowered by this Bill, as the gateway to extensive investment in high-risk illiquid assets, sub-investment grade—I have talked to the industry—without compensating capital requirements. I am very concerned at the weakening of the matching adjustment. I think the Government are mesmerised by the hope that these investments will fund upscaling of new companies, net-zero projects and high-risk infrastructure with somehow no real risk involved. I suspect a lot will go to remuneration and dividends, frankly. I am constantly referred to the Canadian Pension Plan Investment Board as evidence that a fund can safely invest in high-risk illiquid assets without being burned. I quote from the S&P Global Ratings Review of the CPP:

“The rating also reflects the agency’s opinion of a moderately high likelihood that the Canadian government would provide extraordinary support in the event of financial distress.”

I wonder how much the UK taxpayer wishes to stand behind our insurance industry—and in many senses it also involves the pension industry—with a moderately high likelihood of extraordinary support in the event of financial distress? Taxpayers cannot keep bailing out the financial sector.

The financial services sector, especially the City, is also aggressively behind the international competitiveness objective in this Bill. Many want it elevated to a primary objective. This was discussed by the noble Lord, Lord Bridges, and the noble Lord, Lord Remnant, in his maiden speech. Actually, I may do injustice to the noble Lord, Lord Remnant, on that. He may have said that he is happy with it as a secondary objective. They believe that the regulators—again, I talk with the industry extensively—will find that this objective combined with the mutual recognition agreements in trade negotiations, which, of course, do not come to Parliament for approval, will force UK regulation to be lowered to match that of trade partners, and I suggest that that is very dangerous.

I quote from Paul Tucker, former deputy governor of the Bank of England, in evidence in November to the Economic Affairs Committee:

“please do not, as the UK Parliament, give the Prudential Regulation Authority a competitiveness objective. Someone would only do that if they really disliked the City of London and wanted to damage the City of London in the long run ... I can summon the

We are of course bleeding financial services business to the EU and other global financial centres. Financial services exports to the EU are down more than 6%, and it will get seriously worse when euro clearing leaves in 2025, but regulatory arbitrage is not the answer. I am with those who are convinced that a strong rulebook is essential to the reputation and success of the financial services industry as well as the necessary bulwark against a repeat crisis which would create years of damage to the UK economy and bring many further years of austerity.

But the Chancellor has gone farther. The Edinburgh reforms set up processes to weaken the ring-fencing of core retail banking from investment and international banking. I urge the House to stop this in its tracks. Like the most reverend Primate, I sat on the Parliamentary Commission on Banking Standards for nearly two years. Few things fuelled irresponsible behaviour more than the banks’ ability to use what they saw as the free and insured money sitting in personal bank accounts to roll on high-risk casino banking. Add to that the lifting of the cap on bankers’ bonuses and we set up actual incentives for another risk and greed-fuelled crisis.

The Edinburgh reforms also set up a process to change the senior managers and certification regime. My dispute with the SMCR is that the FCA has made it into a box-ticking exercise that does not fulfil its primary purpose to act severely against individual senior managers who fail in their duties, either deliberately or through mismanagement and incompetence. My noble friend Lord Sharkey discussed this. Instead of returning that regime to its original purpose, the industry is very confident that the Edinburgh reforms will remove individual responsibility completely. I suggest that Members of the House visit the evidence given to the commission. Virtually every senior manager, including the CEOs, pleaded a mix of incompetence and collective responsibility to explain away the failures in their institution and why they could not be held to account.

This is a Bill we have to get right. Risk applies asymmetrically in the financial services industry. In the 2007-08 crash, almost no senior manager or executive was hurt and, indeed, almost every one of them walked away with years of bonuses based on what were really false profits. The taxpayer and ordinary people, coping with the austerity that followed—never mind the funds that had to go into the banking system—bore the real cost. On the Parliamentary Commission on Banking Standards, we were very afraid that after a few years the lessons of the crash and the abuse would be forgotten and the new safeguards watered down. This is an industry that knows how to promote itself and speaks with a great sense of invincibility. As we work our way through the Bill, we should keep at the front of our minds the concern that those safeguards, which were so necessary, will be pushed to be watered down.

Photo of Lord Tunnicliffe Lord Tunnicliffe Shadow Spokesperson (Defence), Shadow Spokesperson (Treasury), Shadow Minister (Transport) 8:57, 10 Ionawr 2023

My Lords, I thank the Minister for introducing the Bill and for the positive engagement we have had with government. Today has been a constructive and considered debate, and I congratulate the three maiden speakers.

In the other place, Labour gave broad support to the Bill. Some regulatory divergence with the EU, and a more outcomes-based approach to regulation, will create some important opportunities for industry. For example, long-awaited reforms to Solvency II, if done well, will unlock capital for investment in productive assets, including those that will be needed for the green transition.

However, my party’s support had one glaring exception: the intervention power. The Government mooted this and then wisely abandoned it following widespread condemnation. This was not just the Opposition opposing it, as noble Lords might expect. The Treasury Committee, the Bank of England, the FCA and every serious City stakeholder and commentator expressed profound concern about the risk of any interference with the independence of our regulators. The foundation of the City of London’s success as a financial centre is precisely its robust regulation, shielded from the political caprices of Governments of all stripes.

Our world-class financial services sector needs its reputation as a safe and stable place to do business. The Prime Minister and his Treasury threatened that when they flew their amateurish intervention power kite, gambling with over 1 million UK jobs. Now that this threat has been removed, I am happily able to support what has made it into the Bill, with a number of important changes.

As has been outlined, the Bill implements the outcomes of the future regulatory framework review and attempts to set out a clear direction of travel for financial services regulation now that we have left the EU.

I welcome Chapters 1 and 2, which will allow us to both revoke remaining retained EU law and strengthen the regulators’ powers and oversight of important areas, such as central counterparties and financial promotions, now that we have left the EU. I look forward to scrutinising these measures in detail in Committee.

Clauses 21 and 22 allow for the regulation of stablecoins. Crypto is no longer a niche investment but is widely popular with retail investors. Many currencies are big enough that their collapse can cause systemic shocks in the “real economy”. Can the Minister give an update on the Government’s current strategic approach to crypto, in light of the FTX collapse? Clause 24 establishes new regulatory objectives of medium-term growth and competitiveness, which will help to tackle our chronically stagnant economy.

I believe that these measures have successfully struck a difficult balance between protecting financial stability and unlocking the potential of the sector to boost the UK’s growth and international competitiveness. I have to note serious concerns from stakeholders, however, that the new objectives risk encouraging bad behaviour or, indeed, that they do not go far enough. As we know from the excesses of the 2008 financial crisis, there are unscrupulous actors in the system.

If, in pursuit of growth and competitiveness, the PRA even slightly deprioritises

“promoting the safety and soundness of PRA authorised persons”, or if the FCA deprioritises

“ensuring that the relevant markets function well”, consumers and the markets will once again be under serious threat. It is a fact that the last crisis is now a relatively long time ago and many have forgotten the extent to which the taxpayer was required to save the London financial system and, indeed, to a large extent, the world’s financial system. I would therefore appreciate it if the Minister could assure us that the regulators’ primary objectives will and must remain their utmost concern and, crucially, of the mechanism by which she will guarantee this. If not, we will consider tabling or supporting a Committee stage amendment to this effect.

Clauses 27 to 46 provide for the accountability of the regulators to the Treasury, Parliament and the public. Clause 36, in particular, will formalise the role of the Treasury Committee.

I commend the hard work of all the parliamentarians who made efforts to secure these clauses. This is a positive step and good for the scrutiny of government policy. I was involved in the 2021 efforts to introduce scrutiny when we got relatively limited support. I am therefore pleased to see the extent of support for improved scrutiny in today’s debate. It is particularly important that there should be such consensus on this point. We may have to move well beyond equality with the Commons in our activity towards a firmer, more powerful approach, which will need to be of high quality and properly supported; the essence of much of today’s debate has been about balance.

I therefore also ask the Minister to give the House of Lords’ expert Economic Affairs Committee an equal statutory scrutiny role—or, indeed, as I have just said, going beyond that. Although it is welcome that regulators will have to reply formally to any responses the EAC gives to their consultation, I will look to amend the Bill to ensure that this House is given a similar, thorough oversight role.

As concerns the rest of this section, new powers allowing greater involvement from government in the FCA’s and PRA’s rule-making process must be carefully balanced with the need to protect their independence, which has already been threatened by the intervention power. I know that HMT works closely with the regulators informally, but I can see how a statutory right to request rule reviews and reports, on any matter and at will, could tempt overreach by an activist Chancellor. This will need careful scrutiny once again from your Lordships’ House. I would appreciate an assurance from the Minister that these new powers will be used only sparingly. An example of when she imagines they might be necessary would be useful.

Turning to what is not in the Bill, a lot of these provisions, though important, probably feel quite distant and specialist to members of the public. This is not so regarding access to cash. I strongly welcome Clauses 51 and 52 which will finally, after years of delay, protect cash access. Regrettably, the Bill does nothing to protect face-to-face banking services, nor free-of-charge access to cash. The most vulnerable in our society depend on these for financial advice and support. Again, this is not a niche issue, as 15% of transactions by volume are still made in cash. I recognise the forces referred to by the noble Baroness, Lady Noakes, that will bring about the eventual end of cash, but we are not there yet. Cash will be very important for at least a couple of decades and it will need preserving in law.

However, because almost 6,000 bank branches have closed since 2015, small business owners in particular have to travel longer distances to deposit any cash they accept. This is a huge disincentive for them to accept cash; consequently, we see more and more businesses now being unwilling to do so. We must ensure that small businesses can deposit cash easily, which is why we will table an amendment guaranteeing a minimum level of free-of-charge access to cash services for the UK’s SMEs. I hope the Minister will agree that both face-to-face and free-of-charge cash access are absolutely crucial for financial inclusion. I therefore hope we can work with her and colleagues across the House to implement robust guarantees.

It is equally disappointing that the Bill misses the opportunity to address the gigantic problem of financial fraud, which costs the economy over £1 billion every year. The Bill hints at it with Clause 68, which enhances protection against authorised push payments. On this measure, reimbursement is eligible only for Faster Payments system payments and not others. The reason for this demarcation is not entirely clear. I would appreciate any light the Minister can shed.

Scammers are outpacing the Government. As the last National Fraud Strategy came out 12 years ago in 2011, since when vast billions have been lost by this Government to Covid fraudsters, I would have thought action in this area would be a quick win. I urge the Minister and her officials to think about how the Bill might be used to be proactive on this. Your Lordships’ House can expect an amendment from us to compel the Government to produce a national fraud strategy for this decade, and update it at least every five years.

Another area in which we feel the Bill lacks ambition is support for the mutual and co-operative sector. Clause 69 contains some long-overdue provisions, such as enabling credit unions to offer a wider range of products. But the Bill does not otherwise address the outdated regulatory regime faced by credit unions, building societies and co-operative banks. We have seen numerous building societies threatened with demutualisation in recent years, while the number of mutual credit unions has plummeted by more than 20% since 2016.

The UK stands apart from other advanced economies. We lack a strong system of mutually and/or co-operatively owned regional banks. A lack of consumer choice in this area has driven many people to high-interest or unethical borrowing options and is part of our financial inclusion problem. I venture that a helpful first step might be to require the FCA and PRA to report on how they have considered the needs of credit unions, building societies, mutuals and co-operative regional banks. Does the Minister agree that these models deserve parity of esteem and should be encouraged? Would she be sympathetic to an amendment to facilitate this?

Furthermore, the Bill has very little to say about green finance. Clause 25, which codifies the regulators’ responsibility under the Climate Change Act 2008, is welcome. However, the Government have promised much more radical action. It was suggested that the UK would become the world’s first net-zero financial sector. In contrast, there is still no updated green finance strategy after years of promise. The Government have had enough chances to produce it, to introduce sustainability disclosure requirements and, particularly importantly, to produce a plan for green taxonomy. I fear it now falls to this House to help the Government by amending this Bill.

Finally, turning to the Edinburgh reforms, if amendments are to be introduced through the Bill to facilitate these proposals, it is essential that the House has a full appreciation of the reforms. The Government should produce a comprehensive briefing document to avoid the requirement to move many probing amendments to clarify government intentions. We must fully understand the package and, in particular, the extent to which it may enable a weakening of the senior managers and certification regime, or a reversal of the essential ring-fencing measures designed to protect the UK from the catastrophe of a financial crash. We must keep reminding ourselves that the UK’s financial stability is essential to encouraging investment and growth. To abolish ring-fencing and the stability it brings to facilitate growth is a contradiction in terms.

In sum, I hope I have made clear my support for the Bill, which marks an important step in the journey of our financial services sector outside the European Union. In this debate there has been an amazing degree of consensus. Outstanding issues in each of these areas have, in general, been issues of balance. No serious, obvious political divisions have arisen—I even found myself agreeing with the noble Baroness, Lady Noakes, so it could not have been too bad. I ask the Minister to recognise that there will be a need for significant change to adjust those balances and that force, I hope, will come from overwhelming consensus.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury 9:12, 10 Ionawr 2023

My Lords, I thank all noble Lords who have spoken in this debate for their valuable contributions, which reflect the breadth and significance of this Bill. I will try to get through as many points as possible but, looking at the stack of papers before me, I think I have been overambitious—so I will dive straight in.

Turning first to the future regulatory framework review, which is a once in a generation opportunity to update our rulebook and tailor it to UK markets, as I have said before, the Bill revokes retained EU law relating to financial services so it can be replaced by a coherent and agile approach designed for the UK, building on the FiSMA model. I reassure my noble friend Lord Hodgson that, when the repeal of retained EU law commences and the Government lay secondary legislation to replace it, the Treasury will fully assess the impacts of the exercise of these powers in secondary legislation. We will conduct impact assessments and post-implementation reviews in line with the Cabinet Office guidance and the Government’s Better Regulation Framework.

My noble friend and the noble Lord, Lord Sharkey, probed further on the process for replacing the different regulations and Clause 4 and the procedures associated with it. The affirmative procedure applies to statutory instruments made under Clause 4, except where the power is used to restate either EU tertiary legislation or legislation which was originally made under the negative procedure, or where there is no modification of retained EU law. In this case, it is appropriate to follow previous precedent and apply the negative procedure. EU tertiary legislation is technically complex and the same is true where the negative procedure was used for UK statutory instruments—these were technical SIs. Given the thousands of pages of retained EU law to deal with, as has been referenced in this debate, it is important that we ensure that Parliament can focus on potential policy implications from the changes we may make to retained EU law.

I turn now to the debate on the objectives for the regulators which are the starting point for the framework we will be taking forward. Those objectives are set out in FSMA and are amended in this Bill in two key ways: the introduction of the secondary objective on international competitiveness and medium and long-term growth, and a new regulatory principle to have regard to the Government’s net-zero commitment. The noble Lords, Lord Sharkey and Lord Tunnicliffe, the noble Baronesses, Lady Kramer and Lady Bryan of Partick, and others raised concerns about ensuring that the secondary objective does not dilute the regulators’ focus on the primary objective, whereas many other noble Lords spoke in favour of the new secondary objective. Noble Lords such as my noble friend Lord Bridges were perhaps concerned that it may not go far enough. The Government believe that having growth and competitiveness as a secondary objective strikes the right balance between providing a new focus on advancing medium to long-term growth and competitiveness while maintaining the regulators’ focus on their existing objectives. It provides a clear hierarchy of objectives to consider, and the regulators will need to balance those objectives and consider them in a way which respects that hierarchy.

The PRA’s existing secondary competition objective provides the model for how that hierarchy operates: the regulators must advance their secondary objectives in so far as that is compatible with their primary objective. However, with the introduction of the secondary objective, the Government expect that it will fulfil the expectations of many of those who have spoken in this House in support of delivering a step change in how the regulators approach growth and competitiveness, resulting in more proportionate rule-making while still ensuring high regulatory standards. As my noble friend Lord Remnant said in his excellent maiden speech, the UK is not unique in giving its regulators such an additional objective. He demonstrated the expertise that he will bring to this House, particularly in debates on this Bill.

The noble Lords, Lord Sharkey and Lord Butler, and the noble Baroness, Lady Kramer, spoke of the context for some of their concern around the introduction of the secondary objective and the previous structure we had for regulating financial services prior to the financial crisis. The FSA’s objectives prior to the financial crisis were market confidence, public awareness, consumer protection and the reduction of financial crime. The FSA did not have a financial stability objective. Noble Lords are right that one of the regulatory principles that the FSA had to take into account was the international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom. However, the post-crisis reforms focused on the institutional design and allocation of responsibilities, with the FSA abolished and replaced by both the PRA, which focuses on the safety and soundness of the financial sector, and the FCA, which focuses on market integrity, consumer protection and competition. The Government’s view is that those post-crisis structural reforms, along with the regulators’ existing primary objectives, mean that the environment in which the regulators are considering competitiveness is very different from that which has gone before.

The noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and the noble Lord, Lord Vaux of Harrowden, questioned the Government’s decision to make the net-zero commitment a regulatory principle rather than an objective. The noble Lord, Lord Vaux, asked about the difference between the two, while my noble friend Lord Bridges asked what would happen if objectives and principles are in tension with each other. On the question of objectives versus principles, the FCA and the PRA are required to advance their objectives when discharging their functions. The regulatory principles, on the other hand, are principles that the FCA and the PRA are required to take into account when discharging their functions. Having the net-zero target as a regulatory principle ensures that the Government’s commitment to achieve net zero will be embedded across the FCA’s and the PRA’s considerations when they discharge their general functions. The net-zero target is a cross-cutting government policy that we have seen in many different pieces of legislation that we have taken forward through this House. On the specific goal, many of the levers sit outside financial services regulation, so it is appropriately progressed by the FCA and the PRA as a regulatory principle, which means that they will consider it in advancing their own objectives.

Another significant focus of today’s debate has been, rightly, on how we hold the regulators to account for their progress in furthering their objectives and regulatory principles and their broader approach to regulation. Any Minister would be wise to listen carefully when an issue draws such a diverse set of voices from across the House as we have heard today.

It is worth setting out the parliamentary scrutiny and oversight procedures that are already a key part of the FiSMA process and how the Bill builds on those. There are already robust mechanisms to ensure appropriate parliamentary scrutiny of the regulators. Select Committees play an extremely important role in this process, as we have heard. As noble Lords know and have pointed out, they have the power to call for persons, papers and records that they consider relevant, and committees in both Houses regularly exercise this power to hold the regulators to account. Senior officials from the regulators attend general accountability hearings. For example, the FCA chair and chief executive appear before the Treasury Select Committee, or TSC, twice a year, and the chief executive of the PRA appears before the TSC after the publication of each annual report.

Parliament, through the TSC, conducts the pre-commencement hearings following the appointment of the chair and chief executive of the FCA, and the chief executive of the PRA. Most recently, the TSC held a pre-commencement hearing for the new FCA chair on 14 December before he takes up his role next month. FiSMA requires the Treasury to lay the regulators’ annual reports before Parliament.

The Bill builds on and strengthens these existing mechanisms of parliamentary scrutiny. First, the Bill requires the regulators to notify the Treasury Select Committee when they publish a consultation. Secondly, the Bill requires the regulators to respond formally to representations made by any parliamentary committee. I note the suggestion from the noble Lord, Lord Tunnicliffe, that the Economic Affairs Committee of the House of Lords should also be notified, and I am happy to discuss that proposal with him as the Bill progresses. I note that the noble Lord, along with many other noble Lords, proposed alternative committee structures, including Joint Committee structures, to scrutinise the work of the regulators. But here it is Parliament’s responsibility to determine the best structure for its ongoing scrutiny of the regulators, and the Government do not intend to make any recommendations to Parliament on this matter. In response to the noble Lord, Lord Blackwell, and others, I am sure that those responsible for determining those structures in Parliament will follow our debate on this question very carefully.

However, I would add that the additional accountability and reporting mechanisms provided by this Bill are designed to assist Parliament and government in holding the regulators to account. For example, when the regulators make rules using the powers that FiSMA gives them, they are required to do so in a way that advances their objectives. When notifying the TSC of a consultation, the regulators will be required to set out the ways in which their proposals advance the objectives and are compatible with their regulatory principles. This will support ex ante scrutiny of proposed rules at a point in the process where there is scope to influence the final outcome.

The changes that the Bill makes regarding cost-benefit analysis, including the additional challenge provided through the formation of a new cost-benefit analysis panel, will ensure that Parliament has access to high-quality information on the expected costs and benefits of new regulatory proposals to inform their scrutiny. The Treasury may also make recommendations to the regulators on aspects of the Government’s economic policy to which the regulators should have regard, known as remit letters. The new provisions in Clause 33, with equivalent provision made elsewhere in the Bill for the Bank of England and the Payment Systems Regulator, will require the regulators to respond in writing to these recommendations and the Treasury to lay the responses before Parliament. Clause 37 enables the Treasury to require the regulators to publish relevant information on a more frequent basis than in their annual reports, or in greater detail. This can also be used to support parliamentary scrutiny and oversight. For example, it could be used to publish further information on authorisation decisions, as highlighted by my noble friend Lord Hill.

These changes are designed to support Parliament in fulfilling its existing role in scrutinising the work of regulators. If there is a concern that any of the regulators’ rules are not operating effectively, the Bill gives the Treasury a power to require the regulator to review its rules when this is in the public interest. When appropriate, the Treasury may specify that the review should be carried out by an independent person rather than the regulator.

I reassure the noble Lord, Lord Tunnicliffe, that the Government expect that this power will be used only exceptionally, and that any such direction must be laid before Parliament, but I think noble Lords will agree that it is an important element of these reforms. I also expect that, in considering the exercise of this power, the Treasury will consider representations from relevant parties, including within Parliament.

The provisions we have put forward in the Bill seek to balance the operational independence of the regulators with clear accountability mechanisms and appropriate democratic input. We have heard a range of views on where that balance should lie, and the Government are confident that we have struck it in an appropriate way. We will continue to listen and will discuss further ideas in Committee in a thoughtful and constructive way, and will welcome suggestions from noble Lords in this area, including from my noble friend Lord Ashcombe, who I congratulate on his maiden speech, as I do my noble friend Lady Lawlor on her contribution to the debate today.

More broadly, on the regulators’ capacity to take on their further responsibilities, my noble friend Lord Grimstone asked about the FCA board. The Government believe that the board comprises members with extensive and broad experience in financial services, consumer advocacy and governance, among other things. The Government are further strengthening the FCA board this year, with Ashley Alder starting as the new FCA chair, as I already referenced. The Government are also running a campaign to appoint at least two new non-executive directors.

The noble Lords, Lord Sikka and Lord Mountevans, asked about FCA capacity more broadly. As noble Lords will be aware, the FCA is part-way through a transformation programme designed to make it a more innovative, assertive and adaptive regulator. Among other things, it aims to ensure that the FCA can make fast and effective decisions and prioritise the right outcomes for consumers, markets and firms. The Government continue to engage the regulator on its work here.

On innovation more broadly, many noble Lords asked about the Government’s strategic approach to crypto assets. We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin. My understanding is that it is still the intention for the Royal Mint to create a new NFT, and an update on this work will be provided in due course. It will be the regulations under the Bill that will allow for the regulation of stablecoins, backed by fiat currency. I can say in response to the noble Lord, Lord Cromwell, that specific definitions will be provided for that in secondary legislation.

The noble Lord, Lord Vaux, asked about the operation of regulatory sandboxes. The Government have emphasised that the testing of technology and practices in an FMI sandbox should not compromise existing regulatory outcomes, including market integrity and financial stability. The Treasury and regulators will very carefully consider what sort of investors should be able to use platforms in a sandbox. If consumers are allowed to use a platform participating in a sandbox, it is essential that the platform operates in a way that is consistent with existing regulatory objectives relating to consumer protection.

I turn to consumer protection and financial inclusion, an issue raised by a number of noble Lords, many of whom have done very important work in this area, and I am grateful to them for that. The noble Baronesses, Lady Twycross, Lady Bryan and Lady Tyler, the noble Lord, Lord Tunnicliffe, my noble friend Lord Holmes and others highlighted the important role that cash continues to play for many. The Government are committed to ensuring through the Bill reasonable access to cash across the UK. The FCA is best placed to deliver an effective, agile and evidence-based approach to regulating access to cash that can endure over time, and the Bill will allow for that. In approaching the policy statement that will inform this, the Government will consider how effective industry schemes have been in ensuring reasonable, free access to cash for individuals, and the policy statement is the right place to consider this matter further. The Government will reflect on the views of parliamentarians when crafting that statement.

The right reverend Prelate the Bishop of St Albans asked how rurality will be considered in that process. The FCA will be obliged to consider local as well as national deficiencies in cash, which would be relevant in rural areas; even if it is not subject to the same rural-proofing guidance, it will be subject to the equality duties around protected characteristics in undertaking that work. Where closure of bank branches affects access to cash, intervening in a closure would be within the scope of the FCA’s new powers in the Bill, provided that this fulfilled the purpose of seeking to ensure reasonable provision of cash access services. More broadly, decisions on in-person banking services are made by the providers of those services. However, that is still governed by the FCA’s existing powers and recently strengthened guidance on actions that must be taken when people seek to close branches to ensure that customers are treated fairly.

Financial fraud was raised by the noble Lords, Lord Hunt and Lord Tunnicliffe, my noble friend Lord Northbrook and many others. In financial services specifically, this Bill takes a crucial step forward in protecting victims of APP fraud. I emphasise that the measure enables the Payment Systems Regulator to take action in relation to any payment system that it regulates, not just faster payments. However, the initial focus is on faster payments because that is where the vast majority of APP fraud currently takes place. The Government expect protections for consumers in other payment systems to keep pace with those established for faster payments.

More broadly, noble Lords are right that tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector. I attended a meeting of the Joint Fraud Taskforce, which brings those different players together, just before the end of last year. The Government are committed to publishing their national fraud strategy later this year.

The consumer duty versus the duty of care was raised by many noble Lords. The FCA’s consumer duty consultation paper explains that there is a lack of consensus on exactly what constitutes a duty of care in this context. It cannot be exhaustively defined, but the FCA’s view is that a duty of care is a positive obligation on a person to ensure that their conduct towards others meets a set standard. It believes the consumer duty meets that definition.

The noble Lord, Lord Davies of Brixton, rightly and powerfully raised the challenges those with mental health issues can face when accessing or using financial services. The Government have taken quite a bit of action in this area, such as the introduction of the breathing space scheme for problem debt. The FCA has also been clear about the need for firms to respond flexibly to the needs of customers with characteristics of vulnerability, which includes mental health.

Buy now, pay later was raised by the noble Lords, Lord Hunt and Lord Balfe. We committed to bring this into regulation and will publish a consultation on draft legislation very soon. We intend to lay secondary legislation in mid-2023, so action on that is under way.

Finally, I am conscious of time, but I must turn more broadly to sustainability and green finance issues, as raised by the noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and many others. They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.

I will not dwell on that any further, except to respond to a point made by the noble Baroness, Lady Hayman, on the French and German regulators having climate change objectives. The codes and objectives for French and German regulators focus on instances of financial risk and greenwashing; the FCA can already consider these issues through advancing its operational objectives to ensure appropriate consumer protection and protect market integrity, and the PRA can similarly consider climate-related financial risks under its existing objective to ensure the safety and soundness of its regulated firms.

More broadly, noble Lords asked about measures that go beyond those in this Bill. I reassure them that work continues on taking forward the policies in the Greening Finance road map, including introducing economy-wide sustainability disclosure requirements—the FCA has launched its consultation on this already—and introducing transition planning requirements. We have also launched the transition plan task force, which has published its consultation, which will close next month. We are committed to updating our Green Finance Strategy early this year, setting out our approach on the green taxonomy and having a net-zero aligned financial sector. I am sure we will have many more discussions on this topic in Committee, which I look forward to, including on deforestation, which was raised by the noble Baroness, Lady Sheehan, and my noble friend Lord Randall.

On deforestation, financial institutions rely on the information disclosed by companies trading in these forest-risk commodities in order to take action, so a global framework for this disclosure is needed to make any action by UK financial services and firms overseas workable. That is exactly why we are a leading backer on the Taskforce on Nature-related Financial Disclosures. I was really happy to meet the task force in Montreal at COP 15 to discuss its work and how we are taking it forward.

I am out of time. I will pick up further questions from the debate in writing; I have not been able to cover them all here. To conclude, this is a landmark Bill, which I think many of the speakers in this debate have recognised, and the most ambitious reform of our regulatory framework in over 20 years. The Government are committed to building an open, green and technologically advanced financial services sector to deliver better outcomes for consumers and businesses. I am confident that the Financial Services and Markets Bill delivers on this commitment.

Bill read a second time.