Financial Services Reforms

With permission, Mr Speaker, I will update the House on the Government’s latest efforts to make the UK the most open, innovative and competitive financial centre in the world.

We know how important financial and related professional services are to this country. They employ more than 2.5 million people and generate more than £100 billion in tax revenue. Two thirds of those jobs lie outside the south-east and London. As we lay the foundations for long-term growth, it is vital that these sectors continue to succeed.

Last night, at Mansion House, the Chancellor made clear some of the policies that this Government will pursue, building on last year’s Edinburgh reforms. The full package of policies was published this morning, and I am pleased to share some of them with the House at this first opportunity. They fall under three themes: first, through a series of measures, improving outcomes for long-term savers and increasing investment in high-growth companies by reforming the UK’s pension market; secondly, incentivising companies to start and stay in the UK by strengthening our position as a listings destination; and thirdly, reforming and simplifying our financial services rulebook to ensure that we have the most growth-friendly markets possible, without compromising our commitment to high-quality regulation.

I begin with our pensions market, which is the largest in Europe and worth more than £2.5 trillion. The market is meant to provide safe retirement income for later life. In many cases, it does a very good job of that, but it can do so much more. I pay huge tribute to the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Sevenoaks (Laura Trott), for her crucial work on this.

In laying out our plan, the Chancellor has set three golden rules: first, that in everything we do, we will seek to secure the best possible outcomes for pension savers, with their needs first and foremost; secondly, that we will always prioritise a strong and diversified gilt market as we seek to deliver evolutionary change in our pensions market; and thirdly, that the decisions we take must always strengthen the UK’s competitive position as a leading financial centre.

Today, however, UK institutional investors invest less in UK high-growth companies than their international counterparts. While many defined-benefit funds are in surplus, their returns are lower than some international peers, and some may still be underfunded. At the same time, on their current trajectory, some defined-contribution schemes may not provide the returns that their pension fund holders expect.

Critically, DC schemes also invest less than 1% in unlisted equity. Australian schemes, for example, invest around 5%. To bridge that gap, the Chancellor joined the Lord Mayor and chief executives of many of our largest DC schemes to sign the Mansion House compact. Its signatories, who represent around two thirds of the entire market, are committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030, unlocking up to £50 billion of investment in high-growth companies by that time—helping companies to grow while improving rates of return for investors.

To further boost returns, we will facilitate a programme of DC consolidation. As the Department for Work and Pensions, Pensions Regulator and Financial Conduct Authority response to the value for money framework consultation makes clear, investment decisions should be made based on long-term returns and not simply on cost. Pension schemes that are not achieving the best outcome for their members will face being wound up by the Pensions Regulator, and we will set out a road map to encourage new collective DC funds.

To help schemes access a wider range of investment opportunities, we have launched the LIFTS—long-term investment for technology and science—competition, which enables them to invest quickly and effectively in unlisted high-growth companies. Bids have already started to come in for up to £250 million of Government support, and we are considering them closely. We will also explore the case for Government to play a greater role in establishing investment vehicles, building on the skills and expertise of the British Business Bank’s commercial arm.

Meanwhile, on defined-benefit schemes, we recognise that the regulatory landscape is too fragmented and believe that there is scope for consolidation. We have launched a call for evidence on the role of the Pension Protection Fund and the part that defined-benefit schemes play in productive investment.

Taken together, our pensions announcement will have a real and significant impact. For an average earner who starts saving at the age of 18, these measures could increase the size of their pension pot by 12% over their career. That is more than £1,000 a year in retirement. That is a real upgrade to the power and the outcomes of our pension schemes.

We already have the largest stock market in Europe, and, in 2021, we attracted the most IPOs—initial public offerings—outside the US, but we want the world’s fastest growing companies to grow here and to list here. We have now published our near-final draft legislation on prospectus reforms, which will create a more effective regime than its EU predecessor, giving companies more flexibility to raise even larger sums from investors more quickly. We welcome Rachel Kent’s excellent Investment Research Review, which was published this morning, and the Government are accepting all the recommendations made to us.

As we continue to free ourselves from outdated retained EU laws, we have abolished protectionist rules, such as the share trading obligation and double volume cap, so that UK businesses can access the best and most liquid markets anywhere in the world.

Finally, we are ensuring that our financial services sector has the regulatory freedom to innovate at a speed that matches our modern world. To that end, the House recently passed the Financial Services and Markets Act 2023, which requires our regulators to facilitate growth and international competitiveness alongside their other objectives. With it, we have published today legislation to repeal almost 100 pieces of retained EU law for financial services that are irrelevant to our markets, such as payment account regulations and long-term investment funds, and we say farewell to the unloved packaged retail and insurance-based investment products. This is not divergence for divergence’s sake, but sensible reforms working with the sector.

This is a significant body of work. This Government’s vision for the UK is one of long-term growth, fuelled by strong British finance, providing returns for savers, funding for businesses, and investments for our economy. That is what we are focused on, and that is what these reforms deliver.

I thank the Minister for an advance copy of his statement. However, after 13 years of a low growth, low investment economy, these promises are too little, too late. On this Government’s watch, far too many high growth firms, particularly in the tech sector, have been bought by foreign competitors or have chosen to list in the US, in order to scale-up and grow.

Arm holdings, a UK tech success story, is now set to float in New York rather than in London. The Chancellor has been completely silent on this. When alarm bells were ringing, the Ministers shrugged their shoulders. Capital held in pension funds is vital for the growth of our most innovative companies. In the US, approximately 70% of venture capital funding comes from pension funds, while in the UK the figure is below 20%. That is just not good enough. This Government’s failure to mobilise pension money into productive assets comes at a cost. British pension savers have not been getting the returns that they should expect. It seems that a person is more likely to own a share in UK infrastructure today if they are a Canadian teacher rather than a British citizen.

Time and again, the Conservative party has promised action to unlock the patient capital that British firms need to thrive and grow, but has failed to deliver. There would surely be greater confidence given to savers, growing firms and financial services if the Government had provided more detail yesterday on how to turn this around. The Chancellor’s compact for DC pension funds lacks any plan to ensure that this will increase investment in UK assets rather than simply going overseas. What guarantee can the Government provide that British high growth firms will be able to access the capital they need to thrive and create good jobs in every part of the UK? With no clear roadmap, how will that be achieved?

I turn to what the Chancellor said last night about wanting to make London a listings destination. It is as though his party had not been in government for 13 years now. I remind the Chancellor that he was sitting around the Cabinet table for the best part of a decade during that time. Labour has been calling for action on listing for months and the Government have refused to listen. In the first quarter of this year there were just four London listings, raising only £81 million, the sixth-worst quarter for IPOs in London since 1995. That is pitiful.

It is always a pleasure to listen to the hon. Lady. In general, what I learn is that the Opposition have no plan. It is all critique and no counter-proposal. She talked about this being too little, too late, but this Government are moving at pace, in what the sector acknowledges as one of the fastest rates of implementation of financial services reform for a generation, taking advantage of our Brexit freedoms and the regained control of our rulebook, which she and her party seek to oppose again and again.

The hon. Lady talked about the lack of growth, but under Labour I am told that the percentage of the workforce with a private pension declined by 20%. She also talked about patient capital, which should not be a point of disagreement between us. This Government have done an enormous amount to support British patient capital, with £2.3 billion of investment, and we have recently increased the length of the British patient capital scheme for a further period.

The hon. Lady also talked about capital going overseas, but that is nothing to the degree to which capital would be flooding overseas were her party ever to return to power, accelerating us to the point where once again the Chief Secretary to the Treasury is writing notes to remind us there is no money left. I potentially discern a point of difference between us, which perhaps in due course she will clarify, in the approach to the compact. It is not the position of this Government to mandate where people’s pensions should be invested. Indeed, the last time a Labour Chancellor decided what was good for our pension schemes, it did not end well.

Finally, the hon. Lady talked about green finance. This Government are doing a copious amount on green finance; only yesterday my right hon. Friend the Secretary of State for Energy Security and Net Zero met some of the world leaders in green finance, and earlier this year we published an ambitious green finance strategy, continuing the UK’s progression to being one of the world’s first net zero-aligned financial centres.

I call the Chair of the Treasury Committee.

I should probably note in this context that I am a trustee of the Parliamentary Contributory Pension Fund.

I warmly welcome the work that the Economic Secretary and the pensions Minister have done in this important area, and strongly endorse what the Economic Secretary says about its meaning that future pensioners will be able to retire with higher pension incomes. However, he will know that I have put another piece of urgent work in his inbox, about helping the 93% of our constituents who are unable to afford access to financial advice and have to rely on bog-standard generic guidance. Can he update the House on how his review of the advice-guidance boundary is going and how he will help the majority of people who save in defined-contribution schemes to get access to some sort of personalised coaching or guidance?

It is always a pleasure to respond to my hon. Friend and to the work of her tremendous Treasury Committee, which rages across this broad financial sector. She is right to raise the question of access to financial advice; I am afraid the world of financial services regulation is fraught with unintended consequences, and one unintended consequence of financial regulation and a growing compensation culture is to move financial advice beyond the financial ability of so many people who would benefit from receiving it. That is called the advice gap. I and my officials continue to work on that and I look forward to sharing proposals with the House and with my hon. Friend and her Committee in the autumn.

I call the SNP spokesperson.

I thank the Economic Secretary for his statement. I agree with him on regulation, where he said that regulators would be required to facilitate growth and competitiveness alongside their other objectives. However, as he knows, unless the central bank is obliged to do the same, we might end up in the rather odd and undesirable position of regulators and the central bank taking contradictory actions. I want to ask mainly about pension reform: under the Mansion House compact, potentially 5% of the DC funds are to go towards unlisted equities. There is huge potential in that for growth, for innovation, for jobs, for global competitiveness and for scaling up to compete, but that comes with a commensurate risk, which is presumably up to 5% of the value of the DC fund, should the value of that unlisted equity be wiped out.

While I hope the scheme succeeds, what liability would fall on the Pension Protection Fund should it fail? What liability might there be on the taxpayer? If the scheme works and the value of the funds increases, what guarantee is there that the pension holder will receive the entire value of that increase and it will not be gobbled up by unnecessary and excessive fees?

I thank the right hon. Gentleman for his support for growth and competitiveness. We have talked regularly about the need for regulators to improve their performance and deliver better outcomes for those whom they regulate. He talked about the 5%, and I emphasise that, ultimately, it is a voluntary pact; it is for the individual trustees to make those decisions, and the Government continue to have in place a strong programme of regulation. However, I hope he respects the fact that there is risk in inaction as well—the risk that our pension beneficiaries do not receive the pensions that they deserve or the sort of performance from their pension that other international long-term savers benefit from. He raises the issue of defined contribution and the liability for the taxpayer. Of course, that does not attach to defined-contribution schemes, which is why it is so important that they continue to benefit from the highest-quality regulation. I and my colleague the pensions Minister remain very committed to that and will continue to work with TPR and the FCA to ensure that that remains the case.

I refer the House to my entry in the Register of Members’ Financial Interests. Like my hon. Friend the Member for West Worcestershire (Harriett Baldwin), I warmly welcome the work that my hon. Friends on the Front Bench have done. The Mansion House compact is a huge step forward, but does my hon. Friend the Minister agree that getting the Kent investment review reforms right, particularly on unbundling, will also help us to have high-quality research, enabling better decisions and more investment into high-quality firms?

My hon. Friend, who knows so much about this topic and has engaged so lucidly on it, is absolutely right about the importance of investment research. It provides access to markets, makes our UK stock exchanges an attractive international venue, narrows spreads and drives fair valuations for investors and companies seeking investment. This is one example of where we inherited a European fact pattern that was not quite right for the UK. I look forward to pensioners, investors, savers and companies benefiting from our research review.

I call the Chair of the Work and Pensions Committee.

Defined-benefit pension funds have long been under pressure to invest in Government gilts rather than the productive economy, so I welcome the change of direction that the Minister has announced. He has indicated how much extra pension fund investment will go into high-growth companies in future. Will he indicate what share of that he expects to go into UK high-growth firms rather than overseas? He has indicated, I think, a replacement for the current charge caps on pension funds, with a wider value-for-money assessment, but can he indicate when we are likely to see the detail on what exactly he and the Under-Secretary of State for Work and Pensions, the hon. Member for Sevenoaks (Laura Trott), have in mind for that?

I thank the right hon. Gentleman for his contributions on how we can deliver the best pensions for long-term savers. There are no estimates for the share of the UK. We are mobilising an additional £50 billion of assets over time. That is evolution, not revolution. We would expect—and it is the job of this Government—to present that investment capital with a wave of attractive options across some of the fastest-growing sectors, as the Prime Minister and Chancellor have laid out, and to remove frictions and obstacles as people seek to invest in the UK, creating a conducive environment for that investment but falling short of mandating it, in the knowledge that the allocation to international investments for some of our actively managed schemes already exceeds that of other comparable companies. On the charge cap, we are this morning publishing a consultation on the new value for money framework. Clearly, we want to continue ensuring that pensioners benefit from fair charges, but also that that does not come at the expense of the underlying performance that they receive.

I welcome this set of measures, particularly the ending of the packaged retail and insurance-based investment products regime and the introduction of the Mansion House compact, on which some of us have lobbied the Government. I will share two key concerns with the Minister. On fintech and early-stage businesses, we have a problem in this country because the pension fund industry has divested itself of UK equities, to the detriment of the London stock exchange and, ultimately, of financial services generally. It troubles me that that 5% is not focused on early-stage start-ups in the UK, unlike many other domestic pension funds, which do support their own. More generally, a bigger piece of the jigsaw is missing in my view. Pension funds have generally divested themselves of UK equities to such a great extent—some estimates suggest a 90% reduction since 2000—that we need to see more encouragement by Government to get the pension funds to use their wealth by putting it into UK equities for the betterment of the UK economy. After all, they do benefit from tax breaks.

I thank my hon. Friend for his, as ever, apposite points. That encouragement is exactly what the proposals are all about: working voluntarily with the sector and encouraging it to lean in. I want people to see 5% as a potential floor, not a ceiling. Many will seek to go much further forward. The broad objective of the Government is to provide good access to capital at every stage of a Government’s life, whether it is our support for the seed enterprise investment scheme, the enterprise investment scheme or the venture capital trust; the expansion of the pool of individual investors who are able to invest directly in the stock market; and some of the opportunities that he talked about, all the way through to ensuring that our listed and private capital markets work extremely well. That is the objective of the reforms.