Financial Services Bill

The UK’s financial services regulators have the technical expertise and market understanding necessary to set complex rules for firms. I thank the Delegated Powers and Regulatory Reform Committee for its work in scrutinising the Bill’s approach to the delegation of powers and welcome its conclusion that there was nothing necessary to draw to the attention of the House.

The regulators will also be guided by the statutory objectives established in the Financial Services and Markets Act. Their independence ensures that they will not be swayed by political considerations. This Bill introduces a new accountability framework. It will require the FCA to consider the most significant public policy issues relevant to the regime, including the UK’s international competitiveness, and publicly report on how consideration of these factors has affected its rules. In addition to the existing accountability mechanisms in the Financial Services and Markets Act, this will allow Parliament to scrutinise the work of the regulators.

This approach aligns with suggestions made by the EU Financial Affairs Sub-Committee to the Chancellor in March last year, when it recommended giving the UK’s regulatory regime more flexibility. However, I can reassure noble Lords that systemically important investment firms and all banks will remain subject to internationally agreed prudential standards, namely the Basel banking standards. Clauses 3 to 7, along with Schedules 3 and 4, will enable the prudential regulatory regime for these firms to be updated in line with the latest Basel standards, endorsed by the G20. This will build on the existing regime and increase the UK’s resilience to economic shocks, meeting our international commitments to protect the global financial system. In a similar way to the prudential regime for investment firms, responsibility for making the detailed firm-facing rules will be delegated, in this case to the Prudential Regulation Authority. This will also be subject to a new accountability framework.

As noble Lords will be aware, promoting financial stability goes wider than prudential regulation. The Libor benchmark is referenced in upwards of $400 trillion-worth of contracts across the financial system and beyond—from complex derivatives to household mortgages. I am sure that noble Lords will recall the Libor scandal of 2012, which saw many banks attempt to manipulate the Libor benchmark for their own gain. Since then, significant improvements have been made to the administration of the Libor benchmark by its administrator, and to the regulation of benchmarks in the UK. This is in part due to the important work of the Parliamentary Commission on Banking Standards, which includes a number of Members of this House.

The Financial Stability Board—the international body that monitors the health of global financial markets—has made it clear that the continued use of certain interest rate benchmarks such as Libor represents a potentially serious source of systemic risk. The decline of the inter-bank lending market has meant that Libor and other similar benchmarks are increasingly reliant on the judgments of panel banks, rather than on actual transactions. The FCA’s voluntary agreement with the Libor panel banks, requiring them to continue contributing to the benchmark, so preventing the premature collapse of Libor, will expire at the end of this year. After this point, there is a risk that Libor will become unrepresentative, which may cause disruption. Clauses 8 to 19, and Clause 21, along with Schedule 5, give the FCA the powers it needs to oversee the orderly wind-down of critical benchmarks—including Libor—thereby reducing significant risks to market stability. This includes powers to provide for the continuity of Libor for those contracts which are unable to transition away from it. Alongside this, clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 to the end of 2025.

I turn to the Bill’s second objective: to promote openness to overseas markets. Clauses 22 and 23, together with Schedules 6 to 8, establish a framework to provide and effectively maintain long-term market access between the UK and Gibraltar for financial services firms, now that we have both left the EU. This delivers on a ministerial commitment made to Gibraltar and recognises our special, historic relationship. The arrangements will preserve Gibraltar’s regulatory autonomy and enable it to choose where it wishes to access the UK market, on a basis of alignment and co-operation.

Clauses 24 to 26, together with Schedule 9, simplify the process under which overseas investment funds obtain permission to be marketed in the UK. These changes will supplement the current regime, which requires the FCA to assess every individual fund. The changes will introduce a system under which the Treasury can determine whether a specific category of funds from another country has equivalent regulatory standards to those in the UK. This means that funds in this group wishing to market in the UK can undergo a simpler process, due to the confidence provided by the equivalent regulatory standards of their home country. This will increase choice for UK investors and maintain the UK’s position as a centre of asset management. The current regime will remain in place for overseas funds located in countries which have not been found equivalent. Clause 27 and Schedule 10 amend markets in financial instruments regulations to update the equivalence provisions for investment firms based outside the UK.

The Bill’s third objective is to maintain the effectiveness of the financial services regulatory framework and sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. This will improve the accuracy of the register and reduce the risk of fraud. Clause 29 will make small changes to market abuse regulations to make the regime more effective while reducing some of the administrative burden on firms. Clause 30 raises the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with other economic crimes.

I would like to pause at Clauses 31 and 32, along with Schedule 12. These clauses were added by the Government by amendment in the other place.

It has recently become clear that some provisions in the Proceeds of Crime Act 2002 are creating challenges for some e-money institutions and payment institutions, such as Revolut, Worldpay and TransferWise. They currently need to submit a defence against money laundering request to the National Crime Agency to seek consent before proceeding with any transaction where there is suspicion of money laundering, however small. Standard banks do not have this administrative burden. In certain circumstances they are exempt from submitting a request for transactions under £250.

The £250 threshold exemption was originally introduced to allow those with frozen accounts to pay for their day-to-day living expenses. While the transactions may be under suspicion, these low-value reports provide little useful information for law enforcement, so processing them is not a good use of resources. E-money and payment institutions must submit a large number of these requests for low-value transactions. This is burdensome and, again, a poor use of law enforcement’s time and resources. This Bill therefore equalises the treatment of banks and payment and e-money institutions in this respect. Importantly, e-money and payment institutions will still be required to submit reports of suspicious activity to law enforcement.

Similarly, we have expanded the scope of account freezing and forfeiture powers in the Proceeds of Crime Act 2002 and the Anti-Terrorism, Crime and Security Act 2001 to include accounts held at payment and e-money institutions. This will ensure that law enforcement agencies are able to quickly and effectively freeze, and activate forfeiture of, the proceeds of crime and terrorist property when held in payment and e-money institution accounts; this mirrors their existing powers with banks.

Clause 33 will ensure the continuation of existing powers assigned to HMRC to access information on who really owns and benefits from overseas trusts with links to the UK. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, including recent changes expanding the requirement for non-UK trusts to register with the HMRC trust registration service.

The Bill underlines the Government’s commitment to helping people in debt rebuild their finances. Clause 34 gives the Government the full range of powers they need to effectively implement statutory debt repayment plans, part of the Government’s breathing space debt respite scheme. These changes will mean creditors can be compelled to accept different repayment terms. They will also allow for the administration of the scheme and repayment plans to be funded by a charging mechanism and will allow debts owed to the Government to be included in a statutory debt repayment plan. This will support the Government’s work to ensure that those in problem debt can make repayments to a manageable timetable.

Clause 35 relates to the Help to Save scheme, which supports those on low incomes to build up savings. Help to Save accounts have a four-year term, during which the Government pay a bonus of 50% on up to £50 of monthly savings. At the end of the four years, customers will be asked to provide instructions about where they want their savings transferred to. This clause gives the Government the power to introduce successor accounts for Help to Save customers who do not provide instructions in future, where this is necessary. For now, the Government propose to support these disengaged customers by transferring their savings into the same account where the bonus has been paid, reuniting these customers with their savings.

Clause 36 makes amendments to the packaged retail and insurance-based investment products regulation, known as the PRIIPS regulation. This EU regulation has been widely criticised for its potential to mislead consumers. The Bill will allow the FCA to clarify the scope of the regulation, addressing significant uncertainty that exists now, along with some other helpful changes.

Clause 37 finalises reforms to the European market infrastructure regulation, which the UK supported as a member state. Clause 38 confirms the legal effectiveness of the financial collateral arrangements regulations and makes associated amendments to the Banking Act 2009. Finally, Clause 39 will make the appointment of the chief executive of the Financial Conduct Authority subject to a fixed five-year term, able to be renewed once. This is in line with other high-profile roles in the financial services regulation field.

In summary, this Bill is a necessary and important step in ensuring that our financial services regulatory framework delivers for the UK now that we have left the European Union and the transition period is over. It forms part of a wider programme of regulatory reform that will be guided by what is right for the UK’s financial services industry. It will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre. I beg to move.

“Given that their strategy is to build up the EU, why on earth would they?”

Why, indeed? We should not be surprised then that, so far as we now know, Brussels has granted the UK time-limited equivalence on only two of the roughly 40 different financial areas where London is seeking market access. The EU has, of course, given no further indication on when it will take more equivalence decisions.

I am afraid that the way the Government approached the Brexit negotiations means that there is now no incentive for the EU to agree equivalence arrangements, because their absence means jobs and trading formerly done in London migrating to the EU. Why do I mention this? Herein lies the paradox: the Bill is part of a process aimed at increasing our competitive edge, including vis-à-vis the European Union, but in our present, post-Brexit circumstances any move by the UK to enhance the City’s competitive edge is likely to lessen the chances of progress on equivalence in the EU and the market access that comes with it.

There are, of course, aspects of the Bill that we welcome. I welcome the preliminary agreement between Gibraltar, the UK and Spain, which the Minister mentioned, and look forward to further detail following review by the European Commission. This is of importance to our whole financial sector, not least to our insurance industry.

I also welcome the moves that have been made to tighten up the fight against crime, money laundering and fraud, but equally I wonder, despite the passage of this legislation, how that struggle against criminality will have been affected by the loss of 400,000 records from our criminal database. That has been a disaster that will overrule many of the measures in this Bill.

There are some strange and disappointing omissions from the Bill. I will mention only one, but it is significant. The UK financial services sector has a key role to play in empowering the changes that we need to make to preserve the planet for future generations. But the Bill, which empowers the regulators in so many other ways, is totally silent on that critical issue. The Government say they want the UK to be the centre for green finance globally. Why then, in their first major piece of legislation on this sector since we left the EU, do they say nothing about instructing the regulators to make that a part of their objectives? I hope that the Minister can respond to this.

Of course, the private investment sector is making strong moves towards greater environmental investing, and there is growth in public demand for these products. But this cannot be done by the private sector alone. It will take both the private sector and the public sector working together and pulling in the same direction. I wish the Bill well in its intent, but I fear that it will fall far short of its aims.

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

There is now an open Treasury consultation on the future of financial services. The call for evidence in this consultation contains 17 key questions. Three of these relate to the issue of parliamentary scrutiny. They are: through what legislative mechanism should new financial regulations be made?; what role does Parliament have to play in influencing new financial services regulations?; how should new UK financial regulations be scrutinised? The consultation closes on 18 February. In practice, it means that the Bill will have left this House by the time the consultation results are available to us. In any case, HMT has indicated that the results will inform yet another consultation, later in 2021, in which the Government will set out a package of proposals. By that time, of course, the provisions in this Bill will have become law and there will no longer be an opportunity for real parliamentary scrutiny of the legally binding rules they will generate.

The Minister emphasised in his closing remarks on Report in the Commons that this Bill is

“just one part of the wider long-term strategy for financial services.”—[Official Report, Commons, 13/1/2021; col. 398.]

Given the narrow and technical scope of the current contents of this Bill, I was glad to hear that, and take it to mean that a second and more comprehensive financial services Bill is in prospect. But the fact is that, by the time we get round to that, the “making laws by rulemaking” procedure will have passed into law. Parliamentary scrutiny of the new rules as laws will have been avoided. We will want to return at later stages to the question of what we can do about this bypassing of Parliament in such critical areas.

I turn briefly to Schedule 3 and the insertion of new Part 9D into the already overloaded and much-amended FSMA 2000, and in particular to new subsection 1(b) of Clause 144C. This seemingly innocuous subsection could bring about radical change in our regulatory regimes. It introduces as a “have regard” in the PRA’s making of CRR rules the notion of international competitiveness for our regimes. This is a highly contested area and the idea has been opposed by many leading figures, including from the party opposite, as being likely to promote conflicts of interest. We will want to examine this in detail at later stages.

During the passage of the Bill through the Commons, there was some discussion of more directly consumer-facing measures. These included imposing a duty of care on the financial services industry and providing significantly more relief for those mortgage prisoners trapped by the Treasury’s dereliction and carelessness in selling on mortgage books to unregulated entities. We will want to return to these issues later in our consideration of the Bill.

We will also want to discuss extending the FCA’s perimeter to take in more of the SME lending market. This is particularly urgent given the terrible position that many SMEs find themselves in as a result of Brexit and Covid-19. We will also want to debate the issue of preserving access to cash in the Covid and post-Covid world. I look forward to the Minister’s reply and to our future debates.

I moved on to defence in the dying days of the Libya campaign of 2011. The MoD is an extraordinary place, a military headquarters as well as a department of state. It is shaped by its unique blend of civilian and uniformed staff and the ethos of the Armed Forces that pervades it. It was an enormous privilege to work with it through a period of managed withdrawal from Afghanistan and majoring restructuring at home as we reconfigured the department and delivered a balanced Budget for the first time in a decade.

In July 2014, my next move was across the road to the grandeur of the FCO and by far the best office in Whitehall. I say to noble Lords that it is not for nothing that successive Foreign Secretaries have gone to extraordinary lengths to ensure that Prime Ministers do not enter that room. In two years as Foreign Secretary, I made 104 overseas visits to 78 countries, gaining an invaluable insight into how others see us and our contribution to their histories—for better or for worse, there are remarkably few in whose histories we have not played a role of some kind. What I learned is how much importance our many friends attach to the characteristics, structures and institutions that define our nation and of which we sometimes appear to be so careless.

In July 2016, my final move was to No. 11. As the guardian of Britain’s economic and fiscal interests, it is hardly surprising that, whatever the political arguments, the Treasury saw Brexit primarily as a threat to the UK’s economic success story. With storm clouds gathering over the economy and uncertainty rife, I set myself a four-point plan: first, to complete the rebuilding of our public finances as a bulwark against the next crisis, little guessing that the next crisis would come so soon; secondly, to soften the economic blow of exiting the single market by securing a transition period, which is uncontroversial now but was a heretical notion in the Brexit-intoxicated days of autumn 2016; thirdly, to shift the balance of public spending, albeit gently, from consumption to investment as part of a plan to unlock the productivity riddle that has bedevilled the British economy since the Second World War; and, finally, to protect our vital financial services industry, which despite the Treasury’s sometimes expansive view of its role is actually the only sector for which it has direct responsibility. That brings me neatly to the Bill.

I strongly support all the objectives that the Government have set out for the Bill, making it an ideal vehicle for a maiden speech by someone who has so recently recovered the Whip. I want to take the opportunity to note the importance of financial services not just to London but to the whole UK economy—it provides 7% of our GDP, 11% of tax revenues and millions of jobs across the length and breadth of Britain—to plead, even at this late stage, for a greater focus on it in our ongoing discussions with the EU and to suggest the inclusion of a duty on our regulators to promote competitiveness as some other countries have done. I hope that it will be the first of many measures designed to reinforce the stability and competitiveness of UK financial services as they absorb the challenge of what, for them, is a no-deal Brexit and the inevitable, albeit gradual, loss of EU business.

I enjoyed every minute of my nine years in Cabinet and I learned much from the many extraordinary people I encountered on my journey. I hope that the experience that I have gained leading four great departments of state will qualify me to contribute to your Lordships’ debates over the years to come.

“A gap in the original FiSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”

A partial move towards more activity-specific regulation is seemingly adumbrated in Schedule 3 to the Bill, which has been referred to by the noble Lord, Lord Sharkey. This would require the PRA, when considering capital requirements regulation, to have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”

A similar obligation is to be imposed on the FCA when making Part 9C rules in relation to internationally active investment firms. So competitiveness is edging slowly and surely back into the picture sector by sector and it is a process that I believe many of us want to see accelerate in the months ahead. I also hope that the Government will now come forward with a clear action plan to establish the UK not only as the world centre for broking—that is to say, the selling of insurance and reinsurance—but as the natural home for insurers and reinsurers.

I warmly welcome the Bill because it suggests a direction of travel that will deliver the high-quality, agile and responsive regulation that we need, putting the UK at the forefront of the world market in terms of competitiveness, consumer protection and innovation.

Of course, it is understandable that some time will be needed to pass regulations and ensure the necessary infrastructure is in place to introduce these repayment plans, but I hope that the Minister can assure the House that this will be an absolute priority for the Treasury. I ask the Minister to ensure that the Government set out a firm timetable for introducing the new plans.

I turn very briefly now to another important issue that I hope the Government will consider as the Bill progresses through this House. The Bill considers future regulation and rightly highlights the importance of maintaining high consumer protection standards. One area of current concern is that of “imposter” or “clone” websites which pose as legitimate free debt advice charities. Of course, the National Debtline or StepChange actually are free debt advice charities, but these imposter websites can be highly convincing and can mean individuals end up thinking they are speaking to a free debt advice charity when they are not. They may end up in inappropriate debt solutions or being charged significant fees. Will the Government use the Bill to close the regulatory loophole that allows this to happen by bringing forward an amendment to bring the activity of introducing an individual to a debt advice or debt solution service within the FCA’s regulatory remit?

Given the financial impact of Covid-19, it is more important than ever that people are offered safe routes out of debt, and I hope the Government will continue to make this a priority, through this Bill and elsewhere.

These arrangements predate our departure from the EU and, given the likelihood that Gibraltar continues to be used in this matter, I am not placing the blame on this new Financial Services Bill. However, during the progress of this Bill, there will be an opportunity to examine again what the appropriate rules would be, particularly within the financial sector, to prevent Gibraltar being simply a place where firms and companies are reducing their tax bill. Will the UK Government commit to publishing an annual report assessing the consequences of the Gibraltar authorisation regime on tax receipts from the financial industry, as well as outlining how they intend to work with the Gibraltarian authorities to ensure there is a fair tax settlement for both territories?

Of course—let me make this very clear—we should not forget the lessons that we learnt from 2008, nor should we race to the bottom in terms of regulations. Robust regulation is the bedrock of strong financial services but we must not get trapped in the past and regulate entirely via the rear-view mirror. Look overseas: regulators’ objectives have been adjusted since the financial crisis but without abandoning competitiveness altogether. Australia, Singapore, Hong Kong, Japan and Malaysia have competitiveness or growth as a regulatory objective or principle.

We need to look ahead and plan ahead. We must properly balance the need for stability with the need to be competitive so that the UK is innovative, dynamic and a great place to do business. I do not agree with the false choice contained in the Government’s consultation, which states that,

“a new competitiveness objective could distract from or dilute the key stability, market integrity and consumer protection objectives.”

We can and should strive to be both competitive and stable as a financial centre. Nor is the new so-called accountability framework sufficient. Requiring the PRA to consider the impact of its actions on competitiveness is no substitute for making competitiveness a core objective.

That brings me to the issue of accountability and scrutiny. Our regulators are getting more power and the Government are perfectly open about that. They have stated that they are,

“delegating a very substantial level of policy responsibility to the UK financial services regulators.”

If regulators are being given additional powers, there should surely be a commensurate increase in scrutiny. I therefore argue and agree with others that we need to look carefully at how regulators will be scrutinised by Parliament. Of course, getting the balance right is critical but we do not want Ministers or Parliament micromanaging regulators. There are questions as to whether enough is being done to hold unelected regulators to account.

That brings me back to where I began. The best way for Parliament to make regulators accountable is for elected MPs to set unelected regulators very clear objectives. At the moment, those objectives will not achieve our aim to strengthen our competitiveness. That needs to be addressed.