Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024

Temporarily modifying the STRs and GSRs will enable us to support a digital gilt issuance through the digital securities sandbox. The MLRs will be modified to facilitate an exemption from the MLRs crypto asset regime for digital securities sandbox participants; this is on the basis that digital securities sandbox activity will involve regulated securities and conventional anti-money laundering legislation will be applied. The new UK prospectus regulation will be modified as part of the PISCES sandbox so that prospectus requirements can be disapplied in favour of bespoke disclosure requirements in the PISCES sandbox.

I should note at this point that this statutory instrument does not make any temporary changes to the enactments themselves. Under the procedure stipulated by Financial Services and Markets Act 2023, this will be done as part of further negative SIs to be laid before Parliament, which will provide all the relevant explanatory information for the changes being made to each enactment. For example, the Government published a draft of the instrument that will set up the PISCES sandbox in November for public comment. Similarly, the digital securities sandbox has already been established by a statutory instrument laid last December, although changes to the MLRs will require a further statutory instrument.

In closing, this statutory instrument will make changes consistent with the powers established by the Financial Services and Markets Act 2023 and will support the continued development of the digital securities sandbox and future financial market infrastructure sandboxes, such as the PISCES sandbox. The Government believe that this will help support innovation through each of these financial market infrastructure sandboxes. I hope that noble Lords will feel able to support these regulations and their objectives. I beg to move.

My lack of knowledge in this area led me to contact a friend in the industry to seek advice, and I was stunned by the response. In summary, I was told that the innovators who bring new and innovative models to the regulator’s sandbox are the smartest people in the room, but the regulator views the sandbox as a means to decide on monitoring procedures, compliance algorithms and approaches to enforcement. The innovators, by contrast, use the sandbox to identify the regulator’s points of weakness and then build them into their models to escape regulatory control. Innovators in the sandbox explore the regulatory perimeter, for example, to design products that will fall just outside; the mini-bonds are an example. They identify transaction sizes that will slip under the radar and coding approaches that will prevent multiple transactions that are essentially identical to be linked together and therefore escape both supervision and action. Those are just examples, but, increasingly, the industry seems to regard observing the intent of the regulator as purely voluntary. Does the Minister have any concerns that the regulator is outmanoeuvred, underpowered and underresourced?

I will end on my hobby-horse, which applies very much in these circumstances. Does the Minister recognise that, in this very fast-changing world, when so much is global and so much is digital, an effective whistleblowing system is absolutely vital, and our current system is a serious weakness?

The FMI sandbox scheme commenced under the previous Conservative Government and was a success, with the digital securities sandbox—the DSS—proving useful to business. Three of the pieces of legislation being brought into scope would facilitate activity in the first FMI sandbox, known as the DSS: the STRs, the GSRs and the MLRs. Bringing the GSRs and the STRs into the scope of the FMI sandbox powers under the Financial Services and Markets Act 2023 would facilitate the possibility of sovereign debt issuance, using distributed ledger technology, under the DSS.

The noble Baroness asked about money laundering. Potential applicants to the digital securities sandbox will need to submit an application to, and be assessed by, the regulators. Even after activity in the sandbox is exempted from the crypto asset regime and the money laundering regulations, activity in the DSS will continue to be subject to the existing anti-money laundering regime for non-crypto markets. The DSS excludes unbacked crypto assets and is focused on regulated activities. The Government will lay in the new year a negative SI that puts in place the changes to the MLRs, and will provide further information and a de minimis impact assessment as part of that.

The noble Baroness also asked whether I consider the regulator outmanoeuvred and underpowered. As I think she would expect me to say, no, I do not accept or believe that.

Finally, the noble Lord, Lord Altrincham, asked whether the Government will bring more legislation into the scope of these powers. At the time these powers were granted to the Treasury under the Financial Services and Markets Act 2023, it was envisaged that additional legislation would likely be required to be brought into the scope of Section 17(3). This is because the testing of new technology and practices is uncertain, meaning that new issues that necessitate new legislation being brought into scope may be identified. Future FMI sandboxes may also have a different focus, again requiring changes to legislation not previously considered.

I hope that I have addressed all the points made. If not, as I said, I will write to noble Lords.