Financial Services and Markets Act 2023 (Capital Buffers and Macro-prudential Measures) (Consequential Amendments) Regulations 2025

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2023 (Capital Buffers and Macro-prudential Measures) (Consequential Amendments) Regulations 2025.

In moving these regulations, I shall speak also to the Markets in Financial Instruments (Miscellaneous Amendments) Regulations 2025.

These two technical instruments make practical changes that allow the Government to complete reforms to banking and wholesale markets regulation. Collectively, they ensure that our legislation for financial services remains effective and brings these areas of regulation in line with the model of regulation set by the Financial Services and Markets Act 2000—the FSMA model. The instruments do not introduce new burdens or policy for firms, and the changes have been widely supported by industry.

The Financial Services and Markets Act 2023 repealed assimilated law relating to financial services, subject to commencement by the Treasury. This approach allows our expert and independent regulators to replace detailed rules currently set in legislation with flexible, UK-tailored standards.

I will first address the Financial Services and Markets Act 2023 (Capital Buffers and Macro-prudential Measures) (Consequential Amendments) Regulations 2025. Noble Lords will be aware that banks are required to hold capital buffers, in addition to minimum capital requirements, to ensure that they have sufficient capacity to absorb losses while continuing to lend to the economy, even in times of stress. This short, technical instrument updates references to the capital buffer regulations in other legislation now that the underlying regulations have been restated through the powers in the Financial Services and Markets Act 2023.

The process to bring the capital buffer regulations in line with the FSMA model does three things. First, it revokes the 2014 capital buffers regulations—a piece of assimilated law that, under our FSMA model of regulation, is better situated in regulator rules. The Government are therefore replacing some of the revoked provisions with rules designed and maintained by the Prudential Regulation Authority and have restated a limited number of regulations that need to remain in legislation, with some operational improvements.

Secondly, it gives the Prudential Regulation Authority additional flexibility in setting two capital buffers that are derived from rules set internationally by the Basel committee: the capital conservation buffer and the global systemically important institutions, or GSII, buffer. Those buffers will now be set through PRA rule making rather than through legislation, upholding international standards while increasing the flexibility of regulation.

Thirdly, it preserves in legislation the policy frameworks of the two capital buffers that are set by the Bank of England’s Financial Policy Committee—the counter- cyclical capital buffer and the other systemically important institutions buffer—which will ensure that the FPC has a clear statutory basis on which to deploy these tools. It also makes operational modifications to improve the effectiveness of the framework by, for example, allowing the FPC to set the countercyclical capital buffer off-cycle, rather than being restricted to its quarterly setting, in case of a financial system emergency.

I now turn to the Markets in Financial Instruments (Miscellaneous Amendments) Regulations 2025. The markets in financial instruments directive, also known as MiFID, is an EU-inherited framework which governs the regulation of financial markets and the trading that happens on them. Under the wholesale markets review, the previous Government already undertook significant reforms to this framework.

At Mansion House 2024, the Chancellor committed to make further legislative changes to the MiFID framework as part of the Government’s wider work to reinvigorate capital markets. This included committing to revoke detailed firm-facing regulatory requirements in the MiFID organisational regulation for the financial services regulators to replace with their rules in line with the FSMA model of regulation.

The MiFID organisational regulation specifies how investment firms, such as investment banks or portfolio managers, need to organise themselves and operate their business. While highly technical in nature, these regulations are essential to these companies operating their core businesses. By delegating responsibility for setting these detailed regulatory requirements to the Financial Conduct Authority and the Prudential Regulation Authority, the regulators will be able to use their day-to-day experience of supervising financial services firms to ensure that these rules are tailored to the UK and proportionate for UK firms.

This approach will enable the regulators to cut red tape and remove any duplicative rules which hold UK firms back. However, alongside these detailed firm-facing regulatory requirements, the MiFID organisational regulation also includes key definitions that investment firms rely on to interpret the regulatory perimeter. As such, it is essential to maintain these definitions in legislation. This is what this instrument does; it ensures that key definitions from the MiFID organisational regulation are maintained in legislation. This ensures that, when the MiFID organisational regulation is revoked and the regulators replace firm-facing provisions in their rules, there are no gaps in regulation.

To conclude, these statutory instruments are a necessary step to complete reforms to our banking and wholesale markets regulation and ensure that our regulatory framework remains coherent, effective and tailored to the needs of the UK’s financial sector. They deliver the FSMA approach, delegating detailed rule-making to our expert, independent regulators, while Parliament sets the overarching framework and maintains oversight.

The capital buffers SI updates references to the capital buffer regulations in other legislation now that the underlying regulations have been restated through the powers in the Financial Services and Markets Act 2023. The markets in financial instruments SI ensures that key definitions are maintained in legislation so that investment firms have clarity over the regulatory perimeter when the underlying regulations are revoked. Together, these measures support the UK’s transition to a modern, proportionate regulatory regime—one that upholds high standards and supports the competitiveness of our financial services sector. I beg to move.

My Lords, I thank the Minister for outlining what he identified as a very technical and detailed set of two instruments. I came into the Committee not sure whether I was going to speak or not. I listened very carefully to the Minister’s tone and, as I was doing that, I was looking at the Bank of England’s financial stability report from July 2025. It said that uncertainty around the global outlook has intensified. It says of financial markets that they have been highly volatile. Weakness in non-bank finance can amplify risk. It says of UK households and businesses that, overall, they continue to be resilient. I am not quite sure that that, particularly the last one on households, reflects the experience that many people who are listening to this Committee have—if they are very bored this afternoon. None the less, there we are.

Some of the things that the Minister said in the introduction concerned me slightly. One of them started with “widely supported by industry”. We are hopefully thinking about the national interest rather than just the interests of the financial sector and, perhaps, the wilder reaches of the financial sector. It was described as essential for companies operating these core businesses. We are talking about complex financial instrument derivatives here. From the words of the Minister, it is clear that the Government are heading in the same direction as the previous Government.

Of course, not just the apparent complexion of the Government but the global situation has changed tremendously, so I have one question for the Minister. Are the Government keeping under constant review the foundational conditions in which the financial sector is operating and ensuring that everything they do is not increasing the level of risks that the financial sector presents to the security of us all?

My Lords, I recognise that these two statutory instruments deal with technical measures and in and of themselves have limited impact. They are essentially a tidy-up of the text to reflect broader changes made since Brexit to the financial regulatory system. The FSMA 2023 SI transfers to the PRA responsibility for setting the capital buffers that banks are required to hold in addition to minimum capital requirements. The PRA is a strong regulator, but it has taken a series of measures to move in the direction of lighter touch, motivated by its competitiveness and growth objective. I have spoken before about my concern that the PRA, for example, is increasingly willing to turn a blind eye to the illiquidity of assets. When powers are transferred to the PRA, as they are by this SI, a significant measure of transparency, accountability and parliamentary oversight disappears. Capital buffers are critical to the stability of the banking system, and I remain concerned when parliamentary oversight in this key area is significantly weakened, as it is by the measures that both surround and are then captured by this SI.

The second statutory instrument deals with the markets in financial instruments and again affects a transfer of power and responsibility, this time to both the FCA and the PRA. Once again, it is a move to a less transparent and less accountable system. The rules can now be changed, presumably in line with the smarter regulatory framework that the Government have put forward, and they both allow divergence from the EU and a lighter-touch approach. Divergence has its own risk, as it has implications for cross-border business, and Parliament will not have a voice any more than as a significant consultee. Frankly, experience suggests that the regulators look at Parliament’s views in these consultations and treat them as relatively irrelevant compared to the views of industry.

I note that the Minister described the regulators as expert, independent regulators. He would have used exactly that same phrasing before the 2007 crash, and we still live with the repercussions of that crash. Blind trust in the regulator is exceedingly inadvisable. I have tried in previous speeches to list some of the erosions of protections that were introduced after the crash. They include: the competitiveness and growth objective for regulators; the changing to matching adjustment; insolvency UK; significantly increasing the illiquidity of the insurance sector; the removal of the cap on bankers’ bonuses; the permanent permission for pension funds to transact derivatives without using central counterparties, thereby avoiding putting in place margin collateral, which puts them seriously at risk in any kind of financial volatility in unstable times; the watering down of the senior managers’ regime, which is key to accountability; the weakening of the financial ombudsman; the pressure on pension funds to invest in high-risk, illiquid assets; and the uncertainty that now exists around bank ring-fencing.

My Lords, I thank the Minister for his clear explanation of these statutory instruments and the noble Baroness, Lady Kramer, for her gloss on that.

Today we are considering the instrument on capital buffers as well as the Markets in Financial Instruments (Miscellaneous Amendments) Regulations. While each is described as largely technical, both help to shape the future of our financial regulatory framework. Obviously we on these Benches are happy to consider them together and to raise some questions about how they link to the Government’s wider ambitions for stability, innovation and growth.

We recognise that both instruments form part of the wider process of revoking retained EU law and restating and embedding that in the smarter regulatory framework under the Financial Services and Markets Act 2023. It is important that our regime is clear and coherent and reflects the institutional responsibilities of the regulators, whether the Prudential Regulation Authority, the Bank of England’s Financial Policy Committee or the Financial Conduct Authority.

For me, the most important current issue for the financial regulators is whether they are really adjusting their rules, their outlook and their culture to pursue growth and competitiveness, as they were recently required to do. Is the Minister in a position to assure us that the PRA and FCA have taken vigorous action to meet the Government’s requests and instructions on this vital point? I recall that the Chancellor wrote to them last autumn. What were the key demands, and what did they do in reply? What are the opportunities for growth, bearing in mind the current challenges outlined by the noble Baronesses, Lady Bennett and Lady Kramer? Although I do not agree with all that they said, I think it is important to debate that.

I have a few other questions. On capital buffers, while the instrument is described as technical, it involves substantive changes in transferring responsibility for buffers, such as the capital conservation buffer and the global systemically important institutions buffer, to the PRA. Can the Minister clarify how the Government will ensure sufficient parliamentary oversight of these crucial prudential tools, now that they will be set directly by the regulator? As the noble Baroness, Lady Kramer, said, it is now a less transparent system, so Parliament needs a strong voice in the post-EU world.

While, happily, neither the Joint Committee on Statutory Instruments nor the Secondary Legislation Scrutiny Committee raised concerns on these measures, the issue of regulatory accountability is wider than one or two statutory instruments. With so much detail now delegated to regulators, what steps are the Government taking to ensure that Parliament has the capacity, information and time to scrutinise those regulators’ decisions, whether on capital buffers or wholesale market rules, given their significance to stability and indeed to growth?

While we do not oppose the passage of these instruments, we are very glad of the opportunity to take part in this serious scrutiny in the interests of financial stability, innovation and growth. As a closing question, will the Minister say how far through the statement of EU law in financial services His Majesty’s Treasury has now got? It is a process that His Majesty’s Opposition support, and it would be good to know how much longer it will take to get to the end, much though I enjoy the opportunity to debate these statutory instruments.

I thank the noble Baronesses for their questions and remarks on what are really technical issues. There is no real policy change, but the issues are none the less important. As the noble Baronesses said, one of the key issues is that we want to ensure that the economy grows. As far as our financial regulation infrastructure is concerned, it is always welcome to have heard from the IMF that the architecture that we have now is some of the best of its kind in the world. The IMF also endorsed the Government’s fiscal plans as striking

“a good balance between supporting growth and safeguarding fiscal sustainability”.

In answer to the noble Baroness, Lady Bennett, the Government are committed to upholding financial stability, which is a prerequisite of our position as a leading global financial centre. This is about rebalancing our approach to risk and pushing back on some of the mission creep that we have seen over the past decade. There is scope to do this while continuing to protect financial stability, and obviously we will always keep this under review, which was one of the noble Baroness’s questions.

The noble Baroness, Lady Kramer, asked about parliamentary scrutiny and how Parliament will continue to scrutinise what the FCA and the PRA are going to do. They are independent non-governmental organisations and their independence is vital to their role. However, they are fully accountable to the Government and Parliament for how they exercise their functions, and this accountability is critical to ensure that they are advancing the objectives given to them by Parliament and performing at the optimum.

There were other questions about whether we are giving regulators too much power. We do not believe we are. We have a flexible system. Some of it is still going to be in legislation; some of it is going to be in regulation. The flexibility is there to ensure that the one thing that we create is growth in the economy. To the noble Baroness, Lady Neville-Rolfe, I say it helps to deliver growth because growth is our ultimate ambition. To achieve this, the Government have announced the most extensive package of financial service reforms in over a decade. Reform will unlock growth by increasing the global competitiveness of the sector, reducing unnecessary regulatory burden, spurring the sector’s confidence and boosting innovation and opportunities, which is one of the issues that the noble Baroness raised. Obviously, it is about flexibility, and we need to ensure that we remain flexible in our approach to these regulations and continue to keep them under review.

That was extremely helpful, especially the direction of travel in terms of reform. I would be very interested to know what the growth questions to the PRA and the FCA were. The letters were written last autumn. The Minister has repeated the vision, as it were, and has talked about flexibility, which can be very useful. If the Minister could reflect a bit further on that and on transparency—emphasised by the noble Baroness, Lady Kramer—that would be great. Are the regulators being transparent in the way that they move forward? That is another way that we are able to feed in and criticise if we are not happy.

My other point perhaps goes wider than this debate, but I asked how the Government were getting on with the process of making these post-EU regulations. I do not know whether the Minister can answer that now, but if not, it would be helpful to hear separately on that.