Financial Services and Markets Bill (First sitting)

Martin Docherty-Hughes Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Martin Docherty-Hughes (West Dunbartonshire) (SNP)]

I am chair of the all-party parliamentary group on blockchain.

[Gareth Davies (Grantham and Stamford) (Con)]

I am a vice-chair of the APPGs on environmental, social, and governance and on financial markets and services. I also spent 14 years in financial services and my wife works in financial services.

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[Stephen Hammond]

Q So, like you have just said with regard to the first question, we should look at ways of making sure that that is firmly set down, rather than just a principle.

Emma Reynolds: Indeed.

[Martin Docherty-Hughes]

Q May I ask you both about clauses 21 and 22, and digital settlement assets? Ms Reynolds, you talked about high standards. I wonder if you could both say whether you agree that the definition of a digital settlement asset is satisfactory and robust enough to safeguard consumers. It is rather broad.

David Postings: I think it needs to be broad, because the digital asset environment can change quickly, and if you define things too narrowly, you risk missing the next wave of change. Yes, I think it is good and wise to define it broadly.

[Martin Docherty-Hughes]

Q But if the technology is moving that fast, how is Parliament—and, therefore, any legislation—going to keep up with it? That is a concern.

Emma Reynolds: The definition is broad and, as I understand it, it gives both the Government and the regulators a way to regulate in this area and bring things into the regulatory perimeter. It is our understanding that stablecoins will be the first of those digital assets. This is a very fast-moving area; the EU has its MiCA—markets in cryptoassets—regulation, which you will be aware of, which is a very broad framework. I think there is some advantage for the UK in being the second mover here, because there is some concern about some of the things MiCA has closed down. For example, it is not allowing stablecoin wallets to accrue interest. We are watching very carefully in this space, but I understand your concern about consumer protection. I think that is front of mind for our firms, and they want a level playing field as well.

[Martin Docherty-Hughes]

Q Would that include the smaller and medium-sized companies that might be involved, not just the big players? That halo effect is a concern for others, because the definition is literally to safeguard them, not the smaller and medium-sized players in the market.

Emma Reynolds: That could be a concern, yes.

[Emma Hardy]

Q David, may I ask you about the role of banks in tackling fraud? The legislation focuses narrowly on APP scams. Would you welcome the introduction of a broader national strategy to tackle fraud, delivered by key Government Departments and agencies, law enforcement, major banks and wider partners in the financial services sector? Would you welcome something on fraud that is a bit broader than what is in this Bill?

David Postings: I am not sure this Bill is the right mechanism for it. We have been working closely with Government and regulators on a fraud strategy for some time, so anything that takes the agenda forward has to be welcomed, because fraud is a huge burden on society and a rising crime, but I am not sure that this Bill is necessarily the right Bill.

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[Tulip Siddiq]

Q I hear what you are saying, but it is not the same thing. I know those issues still exist with other forms of payment, but for stablecoin and digital assets, consumer protection levels need to be monitored more; consumers are more vulnerable, just because of the lack of knowledge. I am trying to get to whether you have specific tactics to ensure access, consumer protection and competition.

Chris Hemsley: We need to continue working closely with the two other principal regulators that tackle these issues—the FCA and the Bank of England—as we do today. We do that today with other technologies. We want the full framework to be turned on. With the FCA, we for example ensure that individual payment firms protect people’s money. You are absolutely right; in a world where people might not understand what a particular asset is, and its potential to reduce or substantially change in value, there is a really important role for the FCA in ensuring that firms are dealing with their customers properly. There is then a role for us in ensuring that the systems work, and that the rules are open, transparent and protect consumers, system-wide. The Bank of England ensures there is sufficient security and resilience, so that the systems actually work when we need them to, as we increasingly rely on them.

[Martin Docherty-Hughes]

Q Perhaps we could come back, Mr Hemsley, to the issue of stablecoin. Some countries have actually banned its use; the European Union, as we have heard from the markets in cryptoassets regulation, is going ahead, along with the United States in terms of the Commodity Futures Trading Commission and the Securities and Exchange Commission, both at state and federal level, with getting regulation in process.

I am glad to see that there is some regulation in the Bill, but you used terms such as “future-proofing”. With this technology, we bandy around terms such as “innovation” and “future-proofing”. What does that actually mean, in real financial terms? Frankly, it is not the type of language that I, as a legislator, would like to see used in regulation of a market. It is not just that it is unfamiliar; it does not seem like the correct kind of language or descriptives to use when we can have an impact, predominantly on consumers who might use these commodities and assets digitally. What do you mean by “future-proofing”?

Chris Hemsley: That is a very good challenge. I want to ensure that the full regulatory framework that we have in the UK is turned on and applies properly, so that we can manage consumer protection and competition risks. That is what I mean in terms of that definition. That applies particularly to how payment systems regulation works. We have some relatively broad definitions of what can be covered. The Bill helpfully clarifies that those broad definitions of where regulation can apply are sufficiently broad. The way that the regulation works is that it still requires the Treasury to issue a designation—the Minister issuing a designation of a system—and our statutory duties and checks and balances then kick in. It is shorthand. If I try a slightly more precise framework, you need to ensure that the initial definition is sufficiently broad, so that those subsequent decisions on if and how something should be regulated can apply.

[Martin Docherty-Hughes]

Q Forgive me, but you said there are similar issues. Frankly, there is nothing new under the sun. I am a fan of the technology, but it is the technology that has changed, not the issue. My concern is that these broad definitions, using terms such as “innovation” and “future-proofing”, do not give us the proper ability to scrutinise what is in front of us, because we are not talking about the reality on the ground. You face the same issues either in a fiat currency or a digital fiat currency.

Chris Hemsley: I agree with what you said. There are some familiar risks, and some new ones, that we need to be alive to. The fact that for the first time we could see the use of mass payment systems that are not linked to fiat is a new issue, and one that we need to manage.

I come back to an earlier point, which may help you to take decisions on the elements around definitions of what can be regulated. There is a series of gateways, almost: before something is regulated, it needs to fall within the definition of the Bill, and the Bill helps with that. There is then a test in the Financial Services (Banking Reform) Act 2013 that turns on the PSR’s powers: something needs to be designated by the Secretary of State for it to be regulated, and then our powers can apply. I want that to work. I want the definitions, the designation and our powers to work in this new context. I can see these new issues, as well as the familiar competition access issues that we have had to deal with in the past.

[The Chair]

I call Emma Hardy. You have five minutes.