Financial Services and Markets Bill [HL]
Tuesday 19th May 2026
(2 months, 1 week ago)
Lords ChamberRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text
Financial Services and Markets Bill [HL]
Monday 8th June 2026
(1 month, 2 weeks ago)
Lords ChamberRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Lord Stockwood
That the Bill be now read a second time.
Northern Ireland and Scottish legislative consent sought.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, the financial services sector is one of the UK’s greatest economic success stories: we are the world’s largest net exporter of financial services, and it makes up around 20% of UK exports. The sector made 8% of UK GVA in 2025, totalling £224 billion. It plays a vital role in our economy, underpinning services that households and businesses rely on every day. It provides high-quality jobs throughout the country. It was in recognition of this that the Chancellor announced a significant set of reforms in her speech to the sector in Leeds.
I am very happy to take this Bill because I worked in the sector in the past. I was the CEO of an insurance technology firm offering protections to small businesses, and I have been on several boards of businesses in the financial services sector. While I no longer hold these roles, perhaps this is the right moment to declare my interests as set out in the ministerial register, in particular, a number of my investments in funds that are managed by FCA-regulated firms. In my role as Investment Minister, I see and hear first-hand just how far our financial services sector reaches and the extent to which our institutions, regulation and rule of law are respected overseas.
The Financial Services and Markets Bill will modernise how the sector is regulated, enable it to grow and lend more to businesses and make consumer protections fit for the digital age. It will achieve these objectives while maintaining high standards of regulation and oversight, ensuring that consumers and businesses continue to engage with the sector with confidence and that it will meet their needs. I am pleased that the Bill has been welcomed by a range of stakeholders operating across and alongside the sector. There is general recognition, as there was in an All-Peers meeting that I hosted last week, that it is a question of the balance we are trying to achieve.
As noble Lords would expect, this is a large, technical Bill, so I will briefly set out its purposes and why the Government have adopted the measures they have, and why we believe they strike that balance of promoting innovation and growth while managing and mitigating risk and, of course, protecting consumers.
Turning first to consumer protections and redress arrangements, Clause 1 and Schedule 1 repeal large parts of the remaining provisions of the Consumer Credit Act 1974 so that many of them can be recast into the rulebook of the Financial Conduct Authority, known as the FCA, continuing the changes introduced as part of the Financial Services Act 2012. The Consumer Credit Act was designed for the pre-digital age where everything was done on paper forms. It predates the smartphone by more than 30 years. Research shows that parts of the Consumer Credit Act can be harmful to potentially vulnerable customers, as lenders are often required to send complex communications that result in individuals feeling disempowered, confused and reluctant to seek help. This shows how bad regulation can harm consumers. The FCA is already responsible for making rules that protect consumers and has already made rules to replace some parts of the Consumer Credit Act. It has the expertise needed to perform this role and the powers needed appropriately to police compliance within the rules. Repealing more provisions of the Consumer Credit Act will ensure that it can make rules fit for the digital age.
Moving on, Clauses 4 to 12 reform the operation of the Financial Ombudsman Service, known as the FOS, to improve the consistency and predictability of its decision-making. At the moment, in a small but significant minority of cases, the FOS is acting as a quasi-regulator, by which I mean that rather than simply resolving individual complaints between consumers and firms as intended, its decisions have the effect of setting minimum standards for firms. This can lead to uncertain and inconsistent expectations and outcomes for consumers and firms, which undermines confidence. The Bill is reforming the “fair and reasonable” test as well, which guides FOS decision-making, introducing a mechanism to ensure greater coherence between the FOS and the FCA, and makes a number of other reforms to allow the FOS to successfully fulfil its original role as a quick and informal dispute resolution service.
Clauses 23 to 28 improve protections for consumers who purchase financial products through an “appointed representative”, for example, when purchasing insurance from a retailer acting on behalf of an authorised firm. The Bill will require the FCA to check that an authorised firm is up to the job of ensuring that its appointed representatives operate with high standards of conduct. When something goes wrong, the Bill will ensure that consumers of appointed representatives will be able to bring a complaint to the FOS, which is not always the case at the moment.
Now let me turn to the regulatory framework. I thank all Members of the House of Lords Financial Services Regulation Committee for their Growing Pains report that I read over the weekend. There is a strong alignment between the committee’s conclusions in the report and the Government’s perspective and actions. The Bill will consolidate the regulatory framework to deliver stronger co-ordination and clearer responsibilities.
Clause 13 and Schedule 2 will abolish the Payment Systems Regulator, known as the PSR, and consolidate its functions within the FCA. The PSR has been effective in driving competition and innovation among payments firms, but the current framework is too fragmented. The Bill will reduce the number of regulators that firms need to engage with.
The Bill also makes a number of reforms to support effective operation of the two largest financial services regulators, the Prudential Regulation Authority—PRA—and the FCA. The actions of the FCA and the PRA are absolutely critical to ensure that the UK has the right regulatory environment, as a key part of the Government’s financial services growth and competitiveness strategy. Clause 21 speeds up the regulators’ decision-making by reducing the statutory deadlines for determining a number of key applications, including authorising new firms. Clauses 29 and 30 create a new provisional licence regime, which will support innovative new firms by allowing them to begin operations on a temporary and limited basis while they apply for full authorisation.
The Bill also makes a number of changes to the internal operations of the regulators, to ensure that they are focused on their activities in the right places, and to support effective oversight and scrutiny of their work. The Government have looked at the wide variety of requirements currently applying to firms—some overlapping, some obscure and some simply of low value. Clause 16 requires the regulators to develop and publish long-term strategies. Clause 17 requires them to consider their existing eight regulatory principles when preparing or revising their long-term strategies, while removing the requirement to consider them every time they exercise one of their functions. Clause 18 removes a number of requirements on the regulators that are duplicative or impose a burden on them that is disproportionate to any transparency benefits that they bring.
Collectively, these changes are designed to ensure that government and Parliament can give clear direction to the regulators at a strategic level and support scrutiny of their broader approach in a way that is meaningful and impactful, rather than focusing on the minutiae or clogging up the regulators with process that adds no value. The Bill also supports the international competitiveness of our world-leading financial services sector, including through Clause 37, which enables the Treasury to create overseas recognition regimes to make business across borders easier without compromising consumer or financial protections.
I turn to the section relating to administrative burdens on firms. I have said the Bill ensures that the administrative burden that regulation puts on firms is proportionate, without compromising on core consumer, prudential and market protections. At the core of this objective are reforms to the senior managers and certification regime in Clauses 31 to 36. This regime holds senior leaders in financial services firms personally accountable for their actions. It is a vital regime that was introduced after the failures of the financial crisis, following the report of the 2012 Parliamentary Commission on Banking Standards. Many Members of the House were on that commission, including the noble Baroness, Lady Kramer, who I look forward to hearing from today. This regime has vastly improved the standards of governance and conduct across the financial services sector, and we have the noble Baroness and others to thank for that.
However, the way that the regime operates in 2026 results in significant regulatory burdens, costs and operational inflexibility. Following careful consideration, the Bill will reduce those burdens while retaining the core guardrails that the regime introduced. The Bill gives the FCA and PRA flexibility in how senior manager appointments are overseen and removes the certification regime which applies to roles below senior manager level. In its place, regulators will be able to make appropriate rules in their rulebooks.
Last week, I met many noble Lords, including the noble Lord, Lord Sharkey, the noble Baroness, Lady Bowles of Berkhamsted, and my noble friends Lord Davies of Brixton and Lord Pitt-Watson. They asked me for assurances that the Bill does not weaken the core protections of this regime. I am happy to give those reassurances. Firms will remain responsible for ensuring that those they appoint are fit and proper, and individuals will remain individually accountable for their decisions. This is not about deregulation but about ensuring that the rules operate in a more proportionate and targeted way.
I will now speak to the opportunities for credit unions. The Bill will enable credit unions to serve more people and communities, something I know will be strongly welcomed by many in this House. The Government are committed to supporting the growth of the mutual and co-operative sector, recognising the important role that credit unions play in promoting financial inclusion and providing affordable credit.
Clause 2 expands the common bond requirements for credit unions. It enables credit unions to reflect modern arrangements in our living conditions, allowing them to admit relatives of existing members who live outside the same household and members of the same household who are not relatives. It enables credit unions to permit retirees to remain as fully qualifying members, and to join after retirement. It also enables credit unions to admit students as eligible members under the locality bond, even where they do not live or work in the same place as they study. This delivers on a long-standing ask of the credit union movement, which the Chancellor is proud to be able to deliver, and is part of the Government’s ambition to double the size of the co-operative sector.
On lending and investment, Clauses 39 and 40 update the statutory framework underpinning the ring-fencing regime. This regime requires major banks to separate their UK retail services from riskier investment banking activities. I pay tribute to the Parliamentary Commission on Banking Standards, whose work was instrumental in establishing this regime. I want to be clear: ring-fencing has played a central role in strengthening the resilience of the UK retail banking sector since the financial crisis, but it is also true that the wider prudential and resolution regime has developed significantly since then. In particular, the UK now has extensive resolution powers to protect depositors and taxpayers in the event of future failure. The UK is therefore now in a much stronger position to respond to banking failure than during the global financial crisis.
The 2022 independent Skeoch review concluded that ring-fencing should be retained but identified areas of rigidity and recommended better alignment with the resolution framework. At Mansion House last year, the Chancellor announced a further review of the ring-fencing regime, and last month the Government set out a package of reforms designed to support growth while maintaining financial stability. The Bill makes changes to deliver the outcomes. It clarifies that the regulator need not duplicate rules where protections are delivered elsewhere, and it updates the statutory purposes to reflect how banks could fail today. Overall, these changes create a more coherent and adaptable regime that supports a more efficient environment for banks to lend and invest in the UK economy, while upholding financial stability and protecting depositors.
The Bill will also enable the Treasury to update existing legislation to help small and medium-sized enterprises, known as SMEs, to access lending through a wider range of lenders. Legislation already requires certain banks designated by HM Treasury to share credit information about their SME customers—subject to consent—with designated credit reference agencies to encourage greater lending. Since that regime was introduced, the probability of SMEs establishing new borrowing relationships has increased by over 25%.
However, almost 70% of new lending to SMEs now comes from outside those core designated banks, including from newer challenger banks and fintechs. Clauses 41 to 43 allow the Treasury to expand the scheme to a wider variety of lenders. For the first time, the Government are also extending the scheme to support the provision of credit to the charity sector.
Clause 44 advances the Government’s ambition to make the UK the location of choice for specialist and complex insurance by enabling the PRA to set more appropriate funding requirements for specialist insurance undertakings, known as transformer vehicles. Clause 45 advances the Government’s ambition to establish a new, globally competitive captive insurance framework.
I turn to anti-money laundering. I have spoken about the importance of maintaining the UK’s pre-eminent global position as a global financial centre. However, being a financial hub means that we now face heightened vulnerability to illicit finance. Money laundering firms harm legitimate businesses by distorting competition, increasing costs and enabling organised crime. The UK has a robust set of anti-money laundering rules, but the supervision of those rules is not consistent. So, in October 2025, the Government announced their intention to reform the supervision framework, with the FCA becoming the supervisor of compliance with anti-money laundering and counterterrorism financing rules for professional service firms. The detailed implementation will be through secondary legislation.
Clause 14 will allow the FCA to take responsibility for supervising anti-money laundering and counterterrorism financing among these professions. This will mean more consistent and effective supervision and improved collaboration with law enforcement. Financial crime increasingly takes place via crypto assets, which are increasingly held outside the UK. Several pieces of legislation enable the Government to seize illicit crypto assets with a connection to the UK. However, these powers have not been working effectively. The Bill enables the Government to ensure that they work as intended and can be modified as criminal practices evolve.
Finally, Clause 3 gives the Government the power to act on access to banking services. The way people access banking services in the UK has changed significantly over recent years. More and more of us are banking online and banks are closing branches in response. The Government are committed to ensuring that those customers who need it retain sufficient access to essential banking services in person. Banking hubs play a critical role in this ambition, and we remain committed to supporting the financial services industry’s rollout of 350 banking hubs by the end of this Parliament.
Last month the Government launched an independent review into access to banking services led by Richard Lloyd, former Which? director and former board member of the FCA. This review is to better understand the impact of the current trajectory, including the scale of any detriment to consumers, particularly vulnerable groups. The Bill contains a power to take action on access to banking services, including implementing the outcomes of the review should the evidence demonstrate that this is necessary.
I have been able to touch only briefly on what is clearly a wide-ranging Bill; I look forward to discussing it all in more detail. This Bill will help the financial services sector to grow and lend more to businesses, and importantly, it will make consumer protections fit for the digital age. When I began my speech, I said that the Bill is a matter of balance. I hope noble Lords will agree that it achieves its modernising objectives while maintaining the UK’s high standards of regulation and oversight. I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, it is a pleasure to follow the Minister as we begin our deliberations on the Financial Services and Markets Bill. Like him, we believe that the financial services sector is one of Britain’s great success stories. It accounts for around 12% of GDP, supports 2.5 million jobs and contributes roughly £110 billion in tax each year. It is not simply a sector to be regulated; it is a national asset to be championed. We need the sector to grow because that will benefit us all.
Turning to the economy overall, we have unfortunately had a lengthy period of low growth following the financial crisis of 2007-08, and there is no sign of imminent recovery. Expectations are now for low UK growth in 2026. This continuing trend must be reversed. The Government’s rhetoric on the importance of growth must now be matched by serious action. Too often, warm words have been followed by policies that pull in the opposite direction. The Bill comes after a tidal wave of anti-growth measures, of which the Employment Rights Act is only the latest example.
It is our view that a major factor in our low rate of growth is overregulation, and that this is especially true of the financial services sector. Our Financial Services Regulation Committee agrees, and it is good to see the chair, my noble friend Lady Noakes, here today. Its excellent report, Growing pains: clarity and culture change required, which the Minister has already referenced, warned that
“the regulatory pendulum has swung too far towards elimination of all risk”.
That matters because an economy that seeks to eliminate all risk will, in the end, eliminate growth as well.
The consequences are already being felt. International firms are looking elsewhere. Businesses already operating here face costs that make the UK less attractive and less competitive. The CEO of Marsh McLennan told the committee that, from a regulatory perspective, the UK is at least six times more expensive than our next most expensive country. That is an extraordinary warning, and one the Government should take seriously. The question is whether this Bill measures up to what is required to meet the concerns of the committee and the wider needs of growth. I fear that, once implemented, the Bill will not lead to the step change required. As we take it through the House, a major perspective from which we will be judging it is its likely effect on growth.
However, in several respects the Bill is moving in the right direction. There is a broad consensus that reform is needed. The Treasury itself has acknowledged that the United Kingdom has been left with an overly complex system, and the National Audit Office has pointed to delays between problems being identified and regulatory action being taken. Industry has been saying the same thing. UK Finance has made it clear that the Consumer Credit Act 2006 is outdated and no longer reflects the protections needed in a modern digital market, and TheCityUK has called for a more coherent, streamlined post-Brexit framework.
We therefore welcome in principle the proposed changes to credit unions and the proposed transfer of the Payment Systems Regulator into the FCA. The changes outlined to the Financial Ombudsman Service are also positive, and we expect that this will bring some further clarity to its role and the regulatory landscape more widely. We also welcome measures designed to reduce approval timelines and to reform the senior managers and certification regimes.
Accordingly, the greatest problem with this Bill is not what is in it but what is missing from it. For example, it contains nothing on financial education—so key to improving our savings and investment culture and performance. More importantly, while this legislation removes significant amounts of old regulations, it hands extensive powers to the Treasury and to the regulators to design what comes next. Yet Parliament is being asked to approve that transfer of power without seeing in sufficient detail the regulatory framework that will replace what is being repealed. The incredibly broad powers in Clause 3, on in-person banking, are a good example. The repeal of a large volume of consumer credit architecture, with the expectation that much of what is removed from statute will later be recast into FCA rules, transfers responsibility for policy-making from Parliament to the FCA—that is another example, We believe that this is unwise.
Moreover, the obscure provisions in Clause 14 on anti-money laundering appear to give the FCA and PRA new powers to extend regulations and impose burdens on a number of professions not currently so regulated.
We are told by some that this is a deregulatory Bill, which is welcome, but deregulation ought not to mean removing rules from primary legislation and recreating them elsewhere, beyond proper parliamentary scrutiny. The test is not just whether the statute book looks thinner but whether the burden facing firms is actually reduced.
I am sure the Minister will point to the regulators’ growth and competitiveness objective, but the Financial Services Regulation Committee was clear that this objective has not yet translated sufficiently into policy or practice. Recent history does not give us confidence that a culture of risk aversion, delay and excessive caution will correct itself without stronger statutory direction, clearer accountability and more effective parliamentary oversight.
There is also a wider question about whether the regulatory framework being created will be fit for the future—the Minister touched on this. Financial services are changing at extraordinary speed, led by remodelling overseas, especially in the US. Digital assets are becoming more sophisticated and more integrated into mainstream finance. We are now discussing sovereign bonds on blockchains, digital settlement systems, tokenised assets and new payment technologies capable of transforming everyday transactions.
Yet industry is warning that the Government still lack a clear strategy for digital assets. As a result, firms face uncertainty, innovation is delayed and businesses connected to digital asset activity risk being debanked. I fear that other countries are moving faster in this area. The United Kingdom should be leading in this space; we have the legal system, the financial expertise, the history, the capital markets and the international reputation to do so.
We also need to have regard to the competitive interest of our UK firms. One very senior banker has warned me that the last-minute proposals on ring-fencing would be welcomed by his overseas competitors, since it would reduce his competitiveness. There is also concern from our huge insurance industry, where the UK is a true world leader, with 69% of income coming from overseas. It fears that downgrading the proportionality duty and confining its application to long-term strategies rather than regulatory decisions will make the UK a less attractive place to do business.
Before I close, I will ask some questions of the Minister. First, are present Ministers determined that the regulations made under this Bill will prove less onerous in practice than the architecture they replace? Secondly, what assessment have the Government made of the FCA’s operational readiness to take on the additional responsibilities conferred by the Bill? Thirdly, is the Minister confident that the measures in the Bill will materially reduce delays in authorisations and approvals, particularly for smaller firms, challengers and new entrants? The ability to stop the clock without an independent arbitrator undermines the targets. Fourthly, is the Minister confident that, following the adoption of the Bill, regulator behaviour will become more growth-focused?
There is a missed opportunity at the heart of the Bill. It contains measures that we welcome, as I have said. It moves in the right direction. It recognises, at least in part, that the current system is too complex, too slow and too burdensome. For that reason, we will approach the Bill constructively, and I look forward to working with the Minister on many of the details, not least given his background in the sector that we are discussing. I hope and believe that there are medium-scale issues on which we can reach agreement in this House, but there are two broad problems, as I see it.
The first is that this is a Bill that begins the process of reform but does not, on its own, meet the scale of the challenge. The test for the Bill is not simply whether it makes technical changes to the financial services framework, but whether it helps make the United Kingdom once again the most dynamic, competitive, innovative and attractive financial centre in the world. The second is that we are being asked to take a lot on trust, because of the remarkable degree of delegation in the Bill. We are required to trust that the regulators will deliver in a timely and effective way, that the Treasury will deliver the necessary framework and that Treasury Ministers will oversee the step change that we need. Looking to the past and to the volatility of current politics, can we really put so much trust in the proposals before us?
Lord Sharkey (LD)
My Lords, I welcome this Bill and the growth in competitive objectives that inform it. I thank the many organisations that have provided us with briefings, especially the APPG on Investment Fraud and Fairer Financial Services. Its 70-page analysis deals with each part of the Bill in depth and reaches an important overall conclusion, which is that the case for protecting consumers within any reform of financial services is not merely a moral case, although the moral case is strong, it is an economic case, grounded in a clear-eyed analysis of how trust works, how it is destroyed and what happens to markets when it is lost. The report also notes that the Bill should not simply make complaint handling faster or more predictable for institutions; it should ensure that ordinary people can get the real issue investigated, decided, escalated where necessary and put right. It is not at all clear that the Bill does this or does this sufficiently.
A look at Part 2 illustrates the problem. It contains a number of significant reforms: Clause 5, for example, which concerns the appointment of the chair of the FOS scheme operator. Under this clause, the chair is appointed directly by the Treasury. This is a major structural shift that was not included in the original consultation. The clause also states that the terms of appointment must secure the chair’s independence from both HMT and the FCA. The ombudsman scheme occupies a unique position within our regulatory architecture. It must command the confidence of consumers while maintaining credibility with the industry. Independence is therefore essential: it is not merely a matter of statutory wording; it is also a matter of perception. Where appointments are made directly by the Government, questions inevitably arise about whether sufficient distance exists between Ministers and those exercising important quasi-judicial functions.
Clause 6 also contains significant reform proposals. It addresses time limits for complaints under the compulsory jurisdiction. It introduces a long-stop period of 10 years from the relevant act or omission, while preserving the possibility of alternative limits set through rules and allowing exceptions in specified circumstances. This is a process which, though critical, allows no meaningful parliamentary scrutiny. It is of course true that there is a strong case for providing greater certainty. Financial firms should not face indefinite exposure to complaints relating to events that occurred decades earlier. It is also true that financial misconduct can sometimes take years to emerge. Consumers may not discover that they have suffered detriment until long after the original transaction occurred. The challenge is one of balance. Parliamentary involvement will be helpful.
Still in Part 2, Clause 7 introduces one of the most consequential innovations in the Bill: the referral of matters from the FOS to the FCA. The ombudsman may also seek the FCA’s opinion of FCA rules where ambiguity exists. This proposed reform reflects the concern that individual complaints can sometimes raise wider questions affecting thousands of consumers and firms. The proposed reform also reflects long-standing industry criticism that the ombudsman has occasionally interpreted regulatory requirements differently from the regulator. In reality, however, it is hard to see this as a well-founded or convincing criticism of the current set-up.
The FOS resolves over 200,000 cases each year, upholding about 30%. We are told that the FOS is acting inconsistently and that it has strayed into becoming a quasi-regulator. If that were true—if this were really a systemic problem—the Government should be able to produce a substantial body of evidence. If it were true, there should be hundreds or even thousands of FOS decisions demonstrating this pattern. If such a list exists, HMT and the FCA have not published it—it is certainly not in the impact assessment. If such a list does not exist, the case for much of the reforms to the FOS rests on assertion rather than evidence. I invite the Minister to point us towards the specific FOS cases that justify the proposed sweeping reforms.
As things stand, the Government appear to be jumping to conclusions that will reduce access to the FOS, reducing access to free and impartial redress; introduce extra bureaucracy and costs; and, ultimately, damage confidence and trust in the financial services industry. We must guard against any risk that the ombudsman becomes subordinate to the regulator or loses the independence that has been central to its legitimacy. There is a strong case for removing Clause 7.
Clause 8 reforms the test used when determining complaints under the compulsory jurisdiction. This may well be the most controversial provision in Part 2. Historically, the ombudsman has determined complaints according to what is fair and reasonable in the circumstances. Critics have argued that this has sometimes allowed decisions to diverge from the regulatory rule book, creating uncertainty for firms that believed that they had complied with the FCA requirements.
We should ask ourselves whether strict alignment with regulatory rules could weaken consumer protection in cases where the rules themselves are incomplete, outdated or silent on emerging risks. The strength of the ombudsman system has been its ability to look beyond technical compliance and to consider fairness in a broader sense. If that flexibility is narrowed too far, some consumers may find that conduct that was plainly unfair nevertheless escapes effective remedy.
There are already voices, such as the Centre for Responsible Credit, calling for the removal of Clause 8. StepChange has said:
“The ‘fair and reasonable’ test was carefully designed by Parliament”,
requiring FOS to consider
“all the circumstances of the case”.
In contrast,
“FCA rules are often high level and permissive”.
StepChange believes that:
“The scope and flexibility of the test is essential for FOS to decide cases in a manner that is … fair”.
Shifting this to be based on compliance with FCA rules risks creating a tick-box exercise and weakening consumer protection. Martin Lewis has warned that:
“Restricting … access to free and fair redress is not a recipe for economic growth. Once consumers are warned about the erosion of their rights, it’s possible it will lead to disengagement from … financial services … and diminishing trust”.
On this issue, as on others in the Bill, Parliament must ensure that in pursuing regulatory certainty, we do not sacrifice fairness; that in pursuing efficiency, we do not diminish accountability; and that in strengthening regulatory co-ordination, we do not weaken the independence of the ombudsman. The UK’s financial services sector thrives not merely because it is competitive but because it is trusted. To be trusted, consumers must have confidence that when things go wrong, there is an independent, accessible and effective route to redress.
The Bill may not expressly repeal consumer protections or statutory rights; the concern is more subtle. Rights created by Parliament may be diminished in practice if access to redress depends on FCA rule compliance, FCA intent, FCA interpretation or Treasury-made conditions rather than independent interpretation of the underlying legal issue.
I close by quoting Which?:
“The proposed reforms to the FOS and the FCA appear to come at the expense of consumer protections. Any benefits arising from weaker consumer safeguards are likely to be temporary while longer term costs could be significant, particularly for vulnerable who rely most on access to redress and effective regulatory protections”.
I agree with that.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, before we move on to the Back Benches, I remind noble Lords that the advisory time limit is eight minutes. If we all stick within that, we can get everybody in, it is fair to everybody else and we will be able to finish at a reasonable time.
Lord Burns (CB)
My Lords, this Bill is another example, I am afraid, of my past catching up with me. It is 27 years ago that I was asked to chair a Joint Select Committee of both Houses to scrutinise the draft Financial Services and Markets Bill that was introduced back then. The committee met for three months and published two reports. I believe the noble Lord, Lord Eatwell, is the only other member of the committee still in this House. That became the Financial Services and Markets Act 2000, and all the subsequent changes that have taken place, including in 2012, have been amendments to that Act. I also note my interests in this legislation as outlined in the register. I own shares in Banco Santander and Flagstone Group. Furthermore, I was chairman of Abbey National and then Santander UK from early 2002 until 2015.
It is worth recalling some of the factors that lay behind the need for the Bill back in 2000. The first, of course, was the decision by Chancellor Gordon Brown to remove banking supervision and regulation from the Bank of England and to transfer those responsibilities to the proposed Financial Services Authority. Secondly, this provided the opportunity to consolidate various financial regulatory bodies that had previously operated independently, including—and this is just the beginning of the list—the Building Societies Commission, the Securities and Investments Board, several self-regulating bodies and various ombudsman schemes. In fact, it is really quite astonishing to think back at how complicated and complex the arrangement was before the 2000 Act. Thirdly, there had been—as there always seem to be—problems with a number of financial institutions during the time I was Permanent Secretary, including the closure of BCCI, the collapse of Barings and some difficulties with smaller banks; before that, there had been the collapse of Barlow Clowes. So there were quite a lot of lessons to be learned, and the Bill aimed to put those into a comprehensive framework.
The committee agreed with the Government, and one of the significant issues that came up was that the appropriate approach to this legislation was that it should be principles based rather than rules based. Even then, the financial services industry was growing rapidly. The building societies were in the process of becoming banks, the banks were getting involved in the mortgage market, and a principles-based approach was seen as the most practical way to ensure that the regulatory process remained fresh and relevant as these changes progressed.
As explained in the Explanatory Notes, this approach involves a three-stage process, and it can make it look very complicated. Some of the issues we have already heard from the noble Baroness, Lady Neville-Rolfe, are the product of the way in which this was designed. It remains the case that Parliament sets the overall regulatory framework in primary legislation, including the regulator’s objectives. The second step is that the Treasury then sets the regulatory perimeter through secondary legislation, including specifying which activities are regulated and in what circumstances. The third step is that the PRA and the FCA operate as independent statutory bodies responsible for setting and enforcing the detailed rules for firms engaged in regulated activities.
Some of these issues about when and what should come to Parliament, what should be in delegated responsibilities and how far the regulators are allowed to set the rules are always going to overlap each other, and people will worry about them at various stages. But it is important to recognise, through the discussion and debates that will take place, that from the beginning this three-stage process has been in mind.
I believe the principles-based legislation has been effective for this fast-moving industry. However, achieving the right regulatory balance, as we have heard this afternoon already, is very challenging at any time. Sometimes, regulation becomes overly burdensome and the economy suffers. At other times, insufficient regulation can lead to consumer harm, detriment or the failure of firms. Lots of factors influence this balance, including external development, product innovation, the expectation of customers and the level of effective competition. Therefore, it is important to periodically review these various components of the principles-based approach, to assess their effectiveness and to determine whether any rebalancing is necessary.
I regard many of the changes proposed here as very sensible rebalancing of the factors involved. In the past, of course, rebalancing has happened on several occasions. Following the financial crisis, it became clear that banks’ capital requirements had been insufficient during the run-up to the crisis. It was demonstrated clearly in a subsequent FSA report into RBS. Banks had held too little capital against the complex products that they were dealing with, and many banks were overly reliant on the interbank market for funds, with lending overconcentrated in the real estate market. Subsequently, the FSA and the FCA rightly raised capital and liquidity requirements. The question is: did they change them by the right amount? Was it sufficient or was it excessive? At the time, of course, it was understandable—we had been through this very painful process—but the later evidence suggested to me that the response had been excessive. It contributed to a sharp reduction in bank lending to the private sector, particularly to SMEs. This in turn has had some substantial knock-on effects. Given the subsequent evidence, my view is that some rebalancing of the capital requirements is appropriate. The ring-fence banks should also be looked at to adjust the size of the ring fence around which they operate.
It is also important to recognise that the rapid growth of new products also led to underregulation of some products at times, leading to consumer detriment. Product details were not always clearly communicated to customers, as we would expect today, but this has to be seen against the huge success of the introduction of internet banking. It is also important to ensure that senior people working in the financial industry are fit and proper, but again the question is of balancing bureaucracy against—the question has been raised—a less onerous approach.
This is a dynamic system; getting the level of regulation right has to evolve over time, but it is never going to be a straightforward task. I regard this Bill as an important part of trying to move forward that rebalancing.
The Lord Bishop of Manchester
My Lords, I declare my interests as set out in the register. As with all my colleagues on these Benches—not that there seem to be many of them here today—my stipend, pension contributions, housing and working costs are provided by the Church Commissioners for England. As an issuer of bonds, something we started when I was chairing, it is a regulated body.
I welcome the intention behind the Bill to modernise our financial services and to support economic growth. However, our aim must be to enable economic opportunity for all communities. Amid what is still a cost of living crisis, we must measure economic success not only by the growth of the economy itself but by how it promotes the dignity of those most in need and protects individuals at times when the system fails. It is a large Bill, so I will focus on just a few main aspects: access to credit, credit unions, consumer protection, and access to wider banking services. These are probably the issues that are most appropriate for one who is a bishop, not a banker.
Access to fair and affordable credit is not simply a financial issue but a matter of dignity, equal opportunity and participation in community life. Deepening poverty across the UK is making it more difficult for people to break free from debt. Almost everybody needs to borrow money at some point in their life, yet too often it is those with the least who end up paying the most. They face a poverty premium; they have fewer options. Christians Against Poverty, a wonderful charity, has found that its clients are now borrowing money simply to pay for food, clothing, rent and utility bills. For many, credit has ceased to be a tool for flexibility; it has become a necessity for meeting basic needs, and that drives them deeper into debt.
Debt fosters feelings of shame, fear and hopelessness, which often prevent families from then reaching out for support. Christians Against Poverty states that 46% of clients it surveyed had gone as far as considering ending their own life because of debt-related pressures. We cannot overlook the emotional toll of financial insecurity on real lives. The inaccessibility of credit for underserved communities creates a significant gap in financial policy, where these effects could be alleviated. As such, I strongly welcome measures in the Bill aimed at addressing the problem. These efforts must be sustained and targeted, and we must ensure that those facing the greatest barriers are not left behind.
I was first involved in setting up a credit union almost 40 years ago. It astonished me just how small the sector was in England. It has grown a bit since then: 2.16 million people in Great Britain are now members of a credit union, and we have a credit union for Church of England and other clergy. But Britain still compares poorly with other similar economies in what is, across many nations, a network of trusted, community-based saving and borrowing solutions, particularly for those communities least well served by conventional banking. Hence, I strongly welcome the measures in the Bill to promote the expansion of credit unions, including, critically, the broadening of common bonds to increase the number of people able to access this kind of credit.
This measure is particularly important for serving those in more deprived areas, where they may not previously have had access to banks or similar opportunities. While expanding credit unions will go a long way towards improving access for many customers, it remains the case that certain communities, such as migrants or individuals with less financial literacy, remain excluded from the credit opportunities offered by the mainstream banks. What might the Government consider doing further to improve transparency and accountability among mainstream lenders in how they serve marginalised groups alongside an expanded credit union sector?
I turn to financial protections. Increasing credit availability is an important step forward, but it must be met with adequate protections to prevent mis-selling or overborrowing and to ensure proper redress when things go wrong. While I understand that the proposed changes to the Financial Ombudsman Service are designed to streamline the process, I am concerned that stricter criteria there may make the whole process more inaccessible and less robust. Some proposals, such as stricter time limits on making complaints, may present barriers to certain consumers making claims in the first place, particularly when they discover the issue only after many years.
I also echo concerns expressed by the noble Lord, Lord Sharkey, on the proposed reforms to the Consumer Credit Act. While modernisation is clearly needed, the shift away from detailed legal protections towards regulator-led rules may, as others have said, reduce parliamentary scrutiny and weaken established routes to redress. It may also reduce certainty for consumers, making it less clear when they are entitled to redress and how they can secure it. Again, that is likely to have the greatest impact on those who are less financially literate and who may struggle to navigate complex financial systems alone.
Furthermore, existing protections, such as those offered by the consumer duty, do not provide protection to communities which are excluded from credit access in the first place. Without real efforts from mainstream providers to incorporate underserved groups in credit opportunities, those most in need of support will continue to fall through the cracks. Therefore, it is essential that protections evolve alongside access, ensuring that increased participation in financial services does not come at the expense of security. I will follow with interest the debate about how much ought to be in the Bill and how much can safely be left for later regulation. I welcome the Government’s proposed scheme to improve financial literacy in schools by 2028, but that is no replacement for adequate routes to redress, democratic accountability, and fair and equal access to credit for everyone who needs it.
Finally, while I suspect that, nowadays, many of us in your Lordships’ House access all our banking services electronically—I cannot remember when I last went into a bank or even rang one up—there are those in our communities who need access to in-person banking services beyond mere cash. Financial exclusion fosters real-world isolation. Many of the communities that the Church supports, such as elderly and disabled populations, face greater barriers to financial independence in an increasingly digital age. I am not sure that we are doing quite as much as we should in the Bill to ensure that in-person services, beyond cash, are available in both urban and rural settings.
The Bill presents an important opportunity, not only to modernise our financial system but to ensure that it serves the common good. We must reflect not only on how the Bill will enable growth but on how it might promote justice, equality of opportunity, and dignity for the communities that are the most in need. I look forward to engaging with its progress through your Lordships’ House.
Baroness Hodge of Barking (Lab)
My Lords, I thank the Minister for his excellent introduction to what is a complex and technical Bill. I will focus, as the Prime Minister’s Anti-Corruption Champion, on a part that may not be at the top of everyone’s agenda—it was not in the Minister’s top half. For those of us engaged in efforts to tackle the challenge of dirty money, it comprises an important and welcome proposal set out in Clause 14.
Tragically, over recent decades, Britain has become the destination of choice for too many wanting to hide or launder their dirty money. The National Crime Agency estimates that £100 billion is laundered into the UK annually. Academics estimate that, if you add this to the money lost through fraud, the cost of economic crime to the UK rises to £350 billion. That is more than five times what we spend on schools in England, or nearly six times the amount Britain currently spends on defence. It is huge and a loss that harms our economy, undermines trust in the integrity of the financial services sector, threatens our security and damages our public services.
However, the guilty criminals responsible for these crimes do not invent the schemes used to hide or launder their ill-gotten gains. They depend on the advice of professional enablers—accountants, lawyers, banks and company service providers—who devise the schemes and then enable, facilitate or collude with the economic crime. Most professionals work in both a lawful and an ethical manner but, sadly, there are some bad apples in the professions, who must be rooted out and punished. At present, the professionals are not adequately supervised and identified, and, too often, they are left free to pursue their highly profitable but immoral and, in some cases, unlawful practices.
Introducing a robust, efficient and effective supervisory scheme for vigilantly vetting the professionals should have a dramatic impact on the incidence of economic crime. Punish and get rid of the bad apples, and wrongdoers will lose their access to advice and support on how to hide or launder money. At present, 22 separate organisations supervise accountants and lawyers. Many of these bodies also act as advocates for their members and do not have effective systems in place separating their regulatory and advocacy functions.
There are a further three government bodies that supervise other relevant professionals. OPBAS, the body tasked with supervising the supervisors, recognises that the current system is inadequate. In its March 2026 report, it states that the supervisory bodies
“continue to perform poorly in their enforcement approach”,
and that some are not
“undertaking consistent, proportionate and sufficiently dissuasive disciplinary measures in circumstances where it would be warranted and justifiable”.
Statistics confirm this judgment. The Chartered Institute of Taxation found that 31% of firms it visited were not compliant with anti-money laundering regulation, yet only four were disciplined: three were fined and one was suspended. The Council for Licensed Conveyancers imposed no fines at all, despite finding that 62% of firms that it supervised were non-compliant. The Solicitors Regulation Authority cancelled the membership of just one professional body in 2023-24, and the fine imposed on Mishcon de Reya in 2022 for multiple breaches of the AML regulations was £232,500; it would have been £5.4 million had it been calculated by the rules used by the FCA. So, I strongly support the Government’s proposal to merge the supervisory bodies into one body that will operate within the FCA. This will create a simpler and more consistent framework that will be better placed to work with law enforcement agencies and will have access to data, allowing a joined-up approach across the professional disciplines.
However, I seek some assurances from the Minister to strengthen the effectiveness of the proposed change. To ensure that the FCA properly prioritises this work, will the Government ring-fence the funding the FCA will receive in fees from legal, accountancy and company service provider firms and ensure that those resources are used to fund its supervisory and enforcement duties on money laundering? Will the FCA maintain a register of supervised entities, as it does for financial institutions, so that companies providing unlawful services that are not registered can be identified? Will the Government ensure that data collected as part of the supervisory process can be shared with law enforcement agencies and that those agencies share their information with the supervisory arm of the FCA? Will the Government ensure that the FCA can access legally privileged documents from law firms, where that is required for regulatory purposes? Will the Government ensure that the FCA uses the enforcement powers in relation to professional services firms that it currently employs in relation to financial services firms? The threat of robust enforcement is always an effective deterrent to bad behaviour.
Finally, I am concerned that this excellent proposal will take time to implement, and I am worried about how effective supervision will be maintained during this period of transition. Will the Minister say what he proposes to do to ensure that the supervision of professionals is as robust as possible? I suggest that he gives OPBAS the power of public censure, so that it can name and shame those companies that deliberately fail to abide by the AML regulations, and the power to levy fines against supervisory bodies that fail to fulfil their obligations to remove supervisory responsibilities from those who fail to fulfil their duties. Will he consider creating a duty to ensure that the existing bodies co-operate with the FCA during the transition?
I welcome the proposal. I look forward to working with the Government to strengthen its effectiveness and to protect the supervision of professionals during the transition to the new scheme.
Lord Eatwell (Lab)
My Lords, I begin by drawing attention to my interests listed in the register. The financial crisis of 2007 to 2009 left lasting scars on the UK financial system. The costs of that crisis have reverberated in the form of embedded risk aversion, particularly among financial services regulators.
Yet, risk aversion has its uses. Since the 2009 crisis, the financial services industry has been battered by further successive crises: Brexit, Covid and the wars in Ukraine and the Middle East. It is to the credit of the Bank of England and the financial services regulators that the industry has displayed a remarkable level of financial stability throughout these storms.
Yet there remains a persistent dissatisfaction with the performance of the regulators. The costs of compliance are excessive. A PwC study puts the sector’s annual compliance bill at nearly £35 billion—roughly 13% of total operating costs. Regulators are said to take excessive time over crucial decisions, such as authorisations. There is no consistent cost-benefit analysis of regulatory measures, despite the fact that the 2023 FSMA required the FCA and the PRA to establish cost-benefit panels. Regulatory decisions often create uncertainty, stifling innovation and discouraging investment.
The fact that the Bill addresses some of these concerns is certainly to be welcomed. The simplification of the senior managers regime and other administrative requirements should reduce costs. The new provisional licences should speed up effective authorisation. The changes to the relationship between the FOS and the FCA will perhaps reduce regulatory uncertainty, although it may have other effects, as the noble Lord, Lord Sharkey, suggested. Moreover, the increased flexibility provided to the FCA and the PRA in several sections of the Bill must be used with care, lest flexibility generates uncertainty.
While I welcome these measures, I am concerned by the changes to ring-fencing. The claim in the Explanatory Notes that,
“updating the statutory framework underpinning the ring-fencing regime as part of a wider programme of ring-fencing reforms”,
sets alarm bells ringing. Updating may well be the origin of increased systemic risk. The protection of activities within the ring-fence must be a primary objective. Weakening the ring-fence in the name of financial innovation would be unacceptable.
Moreover, the claim that:
“These reforms will unlock more finance for the UK economy”,
sets alarm bells ringing even louder. When he sums up, could the Minister enlighten us about the content of the,
“wider programme of ring-fencing reforms”?
What exactly do the Government have in mind?
The Explanatory Notes claim that Bill,
“modernises how the financial services sector is regulated, supporting it to grow and to lend more to businesses”,
but overall, the Bill gives the impression of tidying up, rather than embedding greater financial commitment to investment and growth. Of course, the emphasis on investment and growth is surely correct. It is necessary for the economic well-being of the people of this country. In this vital respect, for many years the financial services industry has failed, and it is continuing to fail.
Since 2000, the share of financial services in GDP has grown by 50% from 6% to 9% of GDP. Over the same period, the share of investment in GDP has not grown at all and, indeed, has tended to decline and has been persistently lower than in other major industrial countries.
We have to reflect on the fact that the prosperity of the UK’s financial services sector is not solely a success of private enterprise; it is a success of a particular institutional framework in which public authorities and the market are deeply intertwined. The prosperity of the City of London depends upon the global prestige of English law and the public institutions that enforce it. Similarly, financial services depend on the public provision of a stable monetary framework and a respected code of financial regulation, ranging from the role of the Bank of England as lender of last resort and guardian of systemic stability to consumer protection and the prevention of financial crime.
Public provision defines the environment within which financial services prosper. In return, financial services should work in a way that serves society by funding the investment in innovation, productive capacity, research and skills that the country needs. That is the settlement between the public realm and financial services.
That settlement is not working. A new settlement is required but what might that look like? It should begin with a framework of financial institutions that are committed to the needed investment. I do not mean greater flows of funds into stocks, shares and bonds in secondary markets. Britain needs financial institutions that fund real investment, new research, new products and services, new infrastructure, new homes, new international competitive industries. The Government have made an attempt at this by creating the National Wealth Fund. However, that fund will invest only if a firm that seeks funds from it has already acquired private sector funding. In other words, an institution that exists because private markets have failed defers to those failing markets to guide its own investment decisions. That is just not good enough. The new settlement must not rely solely on government, regulators or even politicians. The financial services industry itself must play its part, building on current initiatives such as the Capital Markets Industry Taskforce, convened by the London Stock Exchange.
The Bill before us is not part of this new settlement to which I refer. It is worth while and sensible, but the task of building a financial services industry that truly serves our society needs to go a lot further.
Baroness Noakes (Con)
My Lords, I declare my interests in that I hold shares in a number of listed financial services companies. It is a pleasure to follow the noble Lord, Lord Eatwell, who is one of the select group of noble Lords who regularly take part in the scrutiny of financial services legislation. I welcome the Minister to our club.
There is much in this Bill which is good. I welcome clauses dealing with the SMCR regime, how the FOS works and the transformer and insurance vehicles. In addition, the changes to ring-fencing are positive, but they do not go far enough to roll back this burdensome regime which cost billions to implement and run and is so flawed that not a single other country has adopted it.
There are, however, several areas of the Bill which I shall be looking to improve in Committee. I will focus my remarks today on just one area: Clause 17. Currently, the PRA and the FCA must have regard to the regulatory principles in Section 3B of FSMA in everything that they do. Clause 17 downgrades this, so that the principles are rendered impotent. If Clause 17 becomes law, the regulators will merely have to talk about the principles in the new five-year strategies that are required by Clause 16.
The regulatory principles were certainly due an overhaul. However, neutering them is a shockingly bad decision by the Government. It is not surprising that many in the financial services sector have criticised it. I will frame my remarks around the regulatory principle of proportionality, though what I say also applies to other elements of the principles. Proportionality requires burdens imposed to be proportionate to the benefits that are expected to result. This manifestly should be uppermost in the mind of the FCA and the PRA when they are designing new regulatory burdens or updating existing ones. The lack of proportionality in how the regulators currently operate is one of the key criticisms made by financial services firms. I do not doubt that the proportionality principle is relevant when the regulators develop their long-term strategies. Strategies, however, tend to be high-level abstractions; they are not blueprints for how regulation works in practice. It is the detail of the rules and guidance, rather than strategic statements, that determines how regulation impacts the financial services sector.
The effect of Clause 17 is that the regulators no longer must consider how the detailed rules and guidance work in practice for the various firms that they regulate from a proportionality perspective. The regulators will be entitled to ignore representations about proportionality made during consultations. This downgrading not only directly affects how firms can engage with the regulators when rules or guidance are developed but impacts the accountability of the regulators, which is already problematic.
The regulators like to say that they are accountable both to the Treasury and Parliament. I have not yet found an example of how the Treasury has held the regulators to account. Focusing on strategic plans will not be enough. The regulators are masters of the art of wordsmithing documents to make them attack-proof. Parliamentary Select Committees try to grapple with holding the regulators to account, but it is an uphill battle—and this Bill makes that battle harder. The root of the problem is the FSMA model. As the noble Lord, Lord Burns, explained, under this model Parliament decides the principles of regulation and the regulators are left to get on with the detail of regulation. That worked well while we were in the EU. The quasi-democratic processes of the EU Parliament—in which the noble Baroness, Lady Bowles of Berkhamsted, played such a central role—meant that there was significant oversight of new directives and regulations.
Post Brexit, the previous Government decided to continue with the FSMA model when the huge body of retained EU law was repealed and replaced, so massive areas are now wholly delegated to the regulators. That is what the Financial Services and Markets Act 2023 enabled. It exposed a large accountability deficit. In partial mitigation, the 2023 Act ensured that the regulators’ consultations had to be sent to the Select Committees of each House of Parliament. That Act also paved the way for the creation of the Financial Services Regulation Committee in your Lordships’ House, which I currently chair.
Clause 17 not only excuses the regulators from having regard to the regulatory principles but repeals the need for the regulators to explain to the parliamentary committees how the regulatory principles apply to their draft regulations. This is a naked attempt to neutralise the work of the Select Committees of Parliament in holding the regulators to account. The FSMA model is a bureaucrats’ and politicians’ dream come true. The Treasury can always point to the regulators if something goes wrong—and the regulators are largely unaccountable. We must use this Bill to make the accountability of the regulators stronger and not, as it currently is, weaker. There will be much to discuss in Committee.
Baroness Bi (Lab)
My Lords, it is a pleasure to take part in this debate and to follow the remarks of the noble Baroness, Lady Noakes. I declare my interest as chair of Norton Rose Fulbright, a law firm.
I thank my noble friend the Minister for his comprehensive introduction to this Bill. The Bill contains an important balance of protections for consumers, from widening the scope of the common bond for credit unions to ensuring access to in-person banking services, while responding to the needs of the financial services industry. As your Lordships know, the financial services sector is important to the nation, domestically and globally. It provides well-paid jobs across the country and supports our international standing, since the UK is the largest net exporter of financial services. It is therefore important that we have a regulatory regime that is agile and proportionate. Many of us believe that the current burden of regulation is too high, with delays in costs affecting growth and competitiveness.
The Bill implements measures that the financial services industry has been calling for. I particularly welcome the changes to the senior managers and certification regime, as these will reduce administrative burdens on business and allow it to operate more efficiently. I am very glad to see the repeal of the conduct rules as proposed in Clause 35, as they are heavy-handed and do not reflect the approach adopted by many of our competitive markets.
The changes to the senior managers regime will, I hope, address the absurd situation I have seen of senior people who are running their firms in EU capitals moving to London and having to wait for many months before they are able to perform the same role in London pending FCA approval. Similarly, the temporary permission regime under Part 4A of FSMA is a welcome and pragmatic regulatory innovation that allows start-up and early-stage businesses to conduct regulated activities while they meet the threshold conditions.
It has been nearly two decades since the global financial crisis, and it is right that the Bill is updating the statutory framework underpinning ring-fencing to reflect the reality that banks are much better capitalised now compared with 2008 and we also have the resolution framework. Today, there are greater concerns about the systemic risk created by the growth of private credit and the valuations underlying it than concerns about retail banks. An indication of how much the broader financial marketplace has changed since 2008 and where consumers may be exposed is suggested by the FCA’s research in 2024, which found that 7 million UK adults, 12% of the population, owned crypto assets compared with just 9.3 million—17%—who owned a stocks and shares ISA. We cannot keep looking back when the world before us is so radically different.
There is much else in the Bill that is to be applauded, including the Financial Ombudsman Service reforms and the abolition of the Payment Systems Regulator with the transfer of its functions to the FCA. That has been welcomed by the PSR itself as,
“a pragmatic next step in simplifying and clarifying payments regulations”,
and is a rare example of reducing the number of regulators rather than merely increasing them.
However, I would like to indicate three areas where I suggest enhanced scrutiny as the Bill is considered in more detail. First, I really hesitate to disagree with my noble friend Lady Hodge of Barking, who highlights the scourge of economic crime, but I am not at all persuaded that Clause 14 will have the desired effect that she is looking for by giving the FCA supervisory responsibilities for anti-money laundering and counterterrorist financing for professional services. I can see why the Treasury thinks it would be tidier for the FCA to be the single supervisor in the place of 22 professional supervisory bodies, but if I apply this to law firms, which are currently supervised by the Solicitors Regulation Authority, which is a regulator and not an advocacy body, the outcome will be that we will simply have another regulator to answer to, in addition to the 15 we currently have, and one that has no experience of supervising professional services firms, let alone law firms.
I can assure your Lordships that solicitors are not currently an underregulated profession, and it is not a lack of regulation that contributes to financial crime. I suggest that where crimes are being committed, the law is enforced, and where schemes exist that are not currently illegal, they are made so. The fact that the FCA has no experience of professional services firms and will need to develop its expertise is reflected in Clause 48, which provides for additional funding for the FCA, exceeding £2.7 million a year for more than two years to,
“cover costs incurred as a result of the preparatory work for the expansion of the FCA’s AML/CTF supervisory responsibilities”.
May I suggest that we use this money to support legal aid instead, which is sorely needed?
Professional services firms are part of the ecosystem which makes the City so successful, and the likely lack of clarity, which may persist for some time as the FCA takes responsibility for a sector it is unfamiliar with, is likely to add to increased compliance costs and delay, which the Bill is seeking to diminish. I know the Law Society is extremely concerned about this proposal and has raised important issues about how legal professional privilege, client confidentiality and duties to the court will be protected, which will need to be addressed if Clause 14 is to apply to law firms.
Secondly, I am concerned about the extent to which Henry VIII powers are relied on in the Bill generally and suggest that we look carefully at the extent to which this is necessary in each case. One of the biggest concerns of business will be uncertainty while we wait for clarity about what new provisions will be introduced. There are, of course, broader concerns about parliamentary oversight with which I have sympathy. I understand that regulation needs to be agile in a fast-changing world and see the necessity, for example, in Clauses 46 and 47, of introducing a broad power allowing the seizure and forfeiture regime to evolve as technology and language develop to prevent criminals using crypto assets for illicit purposes, but I query whether this approach is needed in every case in which it has been proposed.
Finally, I believe there will also be concerns about whether the FCA has the capacity to take on all these additional roles and responsibilities at a time when it is under pressure to respond to the second competitiveness objective. I note that the FCA is receiving extra funding for taking on AML/CTF responsibilities for professional services firms, but I have not seen additional funding for the many other duties that the Bill will transfer to it.
As we have seen from a number of reports, not least from the Growing pains: Clarity and Culture Change Required report produced by the Financial Services Regulation Committee that has already been referred to, and the No Time to Lose: Reasserting UK Leadership in Financial and Related Professional Services report produced by PwC, there is a strong sense in our professional and services sector that it is currently overregulated and subject to compliance costs and delays that negatively impact its competitiveness. This Bill makes a start in addressing those concerns, so I welcome it, and I look forward to engaging constructively in the debate as it progresses through your Lordships’ House.
Baroness Hayman (CB)
My Lords, unlike many noble Lords who will contribute to today’s debate, I have no direct experience of working in the financial services sector, although I suspect I might even apply for associate membership of the club of Members of your Lordships’ House who take part in this legislation that was mentioned by the noble Baroness, Lady Noakes. Like pretty well everyone in the country, I have had experience, not always happy experience, of being a customer of the financial services industry, sometimes because of my status as a politically exposed person, which seems to bleed into my daughters-in-law and all sorts of people, and sometimes simply wrestling with the challenges of communication and relationships with banks, insurers and others.
However, I have experience as a regulator, not in this area but in relation to health. Initially—this was decades ago—in the approval of clinical trials and then in the setting up of the Human Tissue Authority, which I chaired. I also sat on the Human Fertilisation and Embryology Authority and was for six years a member of the General Medical Council. Those experiences have made me a firm believer that clear, effective and proportionate regulation can not only protect patients and consumers but protect those who deliver those services and who are committed to their growth and their success.
The Bill gives us the opportunity to take stock of whether the current frameworks are protecting consumers and properly supporting the smooth functioning of our financial services industry, ensuring that it will remain attractive and able to continue growing and contributing positively well into the future. So, it will be a matter of finding the correct balance, as it so often is on so many issues in your Lordships’ House.
The area that I want to explore today is the sector’s ability to prepare for and respond to the systemic impacts of climate change and nature loss. We took a similar approach in the previous Financial Services and Markets Act 2023, which introduced important regulatory principles that aligned governance of the UK financial services sector with the UK’s climate and environmental goals. The challenges those provisions sought to address do not follow national borders, and the threats they pose are no longer distant or hypothetical concerns but are impacting actors within the financial system now.
The Climate Change Committee and the Bank of England both warn that these types of risks can have tipping points, which could have serious implications for the UK’s financial stability, our ability to avoid or manage sudden shocks to the market, and long-term economic resilience. Some aspects of the financial ecosystem are particularly vulnerable. For instance, we are already seeing the effects on the insurance markets of drought, flooding, coastal erosion from sea level rises and extreme weather. We have seen the problems that arise from that for mortgage lending, affordability for homeowners, and infrastructure and supply chains in the UK and globally. According to the Swiss Re Institute, the global “protection gap” between insured and uninsured losses from natural catastrophes rose to an estimated $424 billion in 2025, up $29 billion from 2024, with wildfires and flooding accounting for more than 50% of the increase.
However, there is anxiety that, within the Bill’s objectives to drive growth and increase competition and innovation for financial services, the proposed new system does not account for the risks faced right now, and that the solutions to adapt to them, which are then not put in place, have the potential to undermine the Government’s goals.
One area where progress is urgently needed is on the Government’s stated intention to deliver their manifesto pledge to mandate UK-related financial institutions, including banks, pension funds, insurers and FTSE 100 companies, in order to develop and implement transition plans in line with the Paris Agreement. There was a consultation last summer, but we have not seen any plans and can ill afford further delay. The Taskforce on Nature-related Financial Disclosures—a global voluntary framework designed to help businesses and financial institutions assess, report and act on their nature dependencies and impacts—also remains only voluntary, in contrast to the requirements for some funds under the Task Force on Climate-related Financial Disclosures, so it would be helpful to understand what steps the Government are taking to expand coverage and adoption of the TNFD.
Then, of course, there is the concern raised by the noble Baroness, Lady Noakes: that it appears that the FCA and PRA will no longer be required to have regard to some of their regulatory principles, including climate and environment obligations, in their day-to-day functioning and will instead be asked to set out how they are adhering to them in strategy documents. There is a concern that this could water down a useful and necessary steer, at a point where we need to be asking regulators to do all they can to safeguard financial services’ preparedness to deal with and adapt to climate change. I look forward to debating Clause 17 in some detail.
Finally, I and many others were encouraged by the Government’s previous commitment to bring forward statutory guidance that will offer pension schemes clarity on how they consider investments for savers in relation to systemic risks such as climate change. I would be grateful if the Minister reassured me that schemes will not have to wait too long to see the detail on when and how these plans will be brought forward. I close by stressing that the Bill is about making sure that the financial sector can capitalise on all the economic and investment opportunities at hand. That includes adapting to the impacts of climate change, which are already being felt.
Lord Pitt-Watson (Lab)
My Lords, my professional background before I joined the House was as a finance practitioner. I still work pro bono with consumer organisations, including some who have a view on the Bill. Most relevant to what I will say is that I am a fellow at Cambridge, where I teach a course focused on how we create a purposeful finance industry that, like all good market institutions, prospers when it serves the outside world.
To help build such a purposeful industry should be the goal of this legislation. It is a profoundly important goal, partly because, as the noble Baroness, Lady Neville-Rolfe, said, this is the jewel in the UK’s economic crown. But it is more than that: we need a successful finance industry if we are going to solve the critical problems of the country and the world: growth, prosperity, looking after people in old age and, as the noble Baroness, Lady Hayman, was saying, addressing the growing climate challenge.
There is no successful finance industry without effective regulation. However, as the House of Lords Financial Services Regulation Committee noted, we do not have a blueprint for what the best regulation looks like, and we have made big mistakes in the past. The global financial crisis took place despite the then existing regulation; some might even argue that, in some ways, it happened because of the nature of that regulation.
I wonder whether the whole House might agree on a starting point: that we are trying to get a finance industry that will fulfil its purpose well in serving the outside world. That means keeping our money safe, helping us transact, allowing us to share risk, and, critically, allowing us to take our money from point A, where it is, to point B, where it is needed and can create growth and prosperity. But for that to happen, we need an industry that is trustworthy and trusted to carry out these purposes. Otherwise, people will not save or borrow.
That all seems pretty straightforward, but there is a problem which we should recognise. People do not express trust in the finance industry. According to FCA surveys, in 2024 only 36% of people felt that
“most financial firms are honest and transparent in the way they treat them”;
27% felt the opposite. Some years ago, the Bank of England asked British people to find one word to describe the finance industry. Do noble Lords know which word they chose? It was “corrupt”. The finance industry accounts for about 9% of GDP—the figure from the Minister was 8%, and 12% from the opposition Benches—and it is responsible for 42% of corporate fines that have been issued. The Local Government Ombudsman gets 22,000 complaints a year; the Financial Ombudsman gets 216,000. I could go on and on. This issue needs to be resolved.
Malfeasance is not the most concerning issue; it is productivity. On the best academic evidence we have, there is little evidence that the cost of getting money from point A to point B has fallen by very much, even over 100 years. No other major industry has such a poor productivity record over such a period. At the same time, 1.3 million British people do not have a bank account. According to the FT a couple of weeks ago, British bank lending to SMEs is the lowest percentage of GDP it has been this century. There are big gaps in our finance system.
These problems occur despite, or maybe even because of, the great amount of regulation we have. Robin Ellison was a pensions partner in one of the big law firms and has now retired. He reckoned that, in 1990, we had 3,000 pages of pensions regulation; a couple of years back, it had risen to 165,000.
We must be sure that we are not encouraging a world where finance practitioners spend their time thinking about how to get around the regulation. It is euphemistically called regulatory arbitrage, and it creates a game of whack-a-mole: there is a rule, and someone finds their way around it; we whack that, and they find their way around it again—and we end up with a burdensome and expanding rule book. As the noble Lord, Lord Eatwell, said, we need a new settlement.
But in that settlement, regulation is just one piece of the ecosystem. There are also institutions, markets, incentives, ethics, professionalism and technologies, all of which are changing rapidly day to day. Getting the regulation right means that it needs to fit into this much larger system. I would have that as a background—a background on which I hope we might agree—and I think that has implications.
I applaud many parts of the Bill—for example, the encouragement of credit unions and thinking about how we can get credit to the people who need it fairly—but one concern, which it might be helpful to clarify, is that as we change the rules by which the Financial Ombudsman Service adjudicates, we need, as the noble Lord, Lord Burns said, to keep them principles based. Why is that? Because these are dynamic markets and we are trying to minimise regulatory arbitrage. Maybe it could be made clear from the outset that, when reference is made to the Financial Ombudsman Service adjudicating only on breaches of the FCA rules, those rules include the principles of business and the code of conduct.
There are many other comments that one might make, but I think they are best addressed in Committee. For now, my key point is that in any effective market economy, success should be contingent on serving customers well. There is a deficit of trust in the financial services industry. Regulation should align consumer, producer and society. My broader point for this House is that, in debating the Bill, it might be helpful to express a consensus, shared with industry and with consumer groups, that we want a finance industry that is there effectively to fulfil its proper purposes to the world. I look forward to our coming discussions.
Baroness Bowles of Berkhamsted (LD)
My Lords, I declare my interests as a director of Valloop Impact Captive.
The Bill is a chunky addition to the impenetrable forest of financial services legislation, relocating key issues into the even larger forest of regulator rules. Who is it for? It cannot be only for business; it must also be for people, and that is how I will interrogate it. How are people affected when primary legislation is repealed and their rights are transferred to regulators? How will they feel when their MP says, “It’s out of the hands of Parliament, in fact it is often out of the hands of the Treasury and out of the hands of the courts”. That is what Clauses 1 and 17 do.
Fair for people means anchored in law, not left to discretion, not left to drift and not left to five-year strategies. Which? warns that the Bill removes vital protections without clarity on how or whether they will be replaced. Uncertainty for people is also uncertainty for business. While I understand well the pressures on firms and regulators to achieve more certainty over long-tail risks, that cannot justify Parliament removing statutory rights before we know what will replace them.
I share the aim for growth, investment and competitiveness, but growth cannot be built on taking advantage of people. Stripping primary legislation of fundamental protections—both rights and remedies—replacing them with yet-to-be-seen secondary legislation and removing Parliament from its past and future influence is not the route to stable, responsible growth. Three areas illustrate this: consumer credit; access to banking; and the removal of the “have regard” principles.
On consumer credit, the unfair relationship provisions, Section 75, unenforceability rules and protections for vulnerable borrowers are core statutory rights and remedies, not conveniences. The FCA’s conflicting provisions on motor finance, where it originally said there was no need to disclose commission arrangements unless asked, shows that the legislative line set by Parliament was not followed. The FCA did not get that right—will it get it right in future? Before the Consumer Credit Act is hollowed out, will the Government define in the Bill a core of statutory protections—the rights and the associated remedies that make those rights effective—that will remain in primary legislation?
Clause 3, on access to banking, raises a fundamental question about the balance between consultation, ministerial discretion and parliamentary scrutiny. The Government want to consult on access to banking services and then implement the outcome through regulations that amend primary legislation, including with FCA rules as they change over time. Parliament’s role becomes a take-it-or-leave-it vote on an unamendable instrument. Clause 3 could be more tightly framed—for example, linking it expressly to matters already consulted on or by avoiding automatic changes to the law when FCA rules are updated. Access to banking is vital. Members of the other place will not want to tell their constituents, “We have no influence”.
The consistent pattern is that this Government want to do without Parliament in future and eradicate its past. The next eradication of Parliament’s voice is the removal of the “have regard” principles that anchor regulators to law, proportionality and Parliament’s intent. In practice, regulators trivialised them. Then, in their consultation response, they said that these duties were burdensome. The Government did their bidding, removing them from operational decision-making and, fundamentally, the basis on which courts can test that delivery.
Administrative inconvenience is not a constitutional principle. If the issue is frequent or laboured reasoning, that can be solved without removing the duties. British Steel pensions showed why the “have regard” principles must stay. The FCA had full perimeter responsibility, yet the principles—vulnerability, transparency and proportionality—were treated as a box-ticking exercise. Parliament had to drag the issue into the open before the regulator acted. The answer is not to remove the principles on which we were able to drag but to insist that they are applied properly.
Dame Elizabeth Gloster’s report into LCF found the same pattern. The FCA failed to apply the statutory principles that Parliament had set, treated them as peripheral and did not understand the framework in which they were meant to operate. Its response was mechanistic “have regard” tables, which was defensive paperwork, not culture change. If anything, that shows why these duties must remain in law, be effective and not be removed at the regulator’s request.
Before anybody says that the consumer duty does it all, it does not. It does not replace statutory duties or bind the regulator in any way that Parliament can, and it certainly does not give courts the tools they need to test regulatory decisions. It is an FCA rule, changeable by the FCA, not a fair substitute for a statutory duty.
Proportionality, transparency and respect for the size and nature of firms must apply to regulators’ rule-making and operational decisions, not be pushed to high-level strategy with no legal bite. The same is very much true for addressing climate change.
This is not just the view of consumer groups. TheCityUK warns that Clauses 16 to 18 weaken Parliament’s ability to hold regulators to account. The London Market Group is equally clear that downgrading proportionality is a step backwards. When consumer groups, industry and parliamentarians all say the same thing, the Government should listen. I do not know how the Treasury has been suckered into suggesting that this is merely administrative, but I am not buying it. These are protections for people—the fiduciary bargain.
To conclude, this Bill has ambition but it removes safeguards, hands too much to regulators, disfranchises Parliament and leaves people without rights and without the remedies that make those rights enforceable and effective, grounded in law. That same uncertainty hurts responsible business, and I will submit amendments on which I hope we can work together.
Lord Davies of Brixton (Lab)
There is a thought experiment, a century old, that I think should be made compulsory for every financial regulator, every market reformer and, frankly, every politician who has uttered the word “modernisation”. It comes from GK Chesterton, writing in 1929. He is writing about why he was a Catholic, but he makes a critical point that applies more generally. Imagine you come across a fence in the road and cannot immediately see why it is there. The modern, progressive, efficient temptation is to conclude that because you cannot see the purpose, there is no purpose, and to tear it down. Chesterton’s counterpoint is simple and devastating: do not touch it until you understand why it was put there, because someone at some point thought hard enough about this road to put a fence on it. Only when you know why are you entitled to remove it. This is Chesterton’s fence and I hope people will understand its relevance to this Bill.
The timeline of financial markets is littered with wreckage where it was decided that a fence was no longer required. We have experienced a cycle of financial disaster, followed by stronger regulation, followed by the growth of complacency, followed by demands to remove restrictions on markets, followed by injudicious deregulation, followed by yet another disaster. We are seeing this playing out in real time with, appropriately enough, ring-fencing. After 2008, the Vickers commission recommended that retail banking be ring-fenced from investment banking, rebuilding in modified form something close to the fence that had existed back before big bang in 1986. But within a decade, within living memory, pressure has built to weaken the rule. The fence looks costly and complicated. The arguments are familiar: the fence is inefficient and other jurisdictions do not have it, affecting our competitive position and putting London at a disadvantage.
These are precisely the arguments that preceded the events of 2008. The fence was built because we had just watched what happens without it. Now we have this Bill, and I am pleased to see that the Government are not unaware of the need to maintain consumer protection. The Explanatory Notes state the need to make changes
“without compromising on core consumer, prudential and market protections”.
They also state the aim of
“ensuring that consumers continue to have access to effective redress”.
I thank my noble friend the Minister for his clear statement in introducing this Bill, in reply to questions asked by me and other Members, that consumer rights will be protected. Nevertheless, while I trust my noble friend, our aim during the passage of the Bill will be to verify that these aims are achieved.
We must all be concerned, therefore, that not everything in this Bill has been welcomed by organisations representing consumers, not least the Consumers’ Association itself. Given its record of defending consumer rights, it is worth highlighting some of its concerns.
First, there are the changes to the Financial Ombudsman Service that will restrict consumers’ access to timely redress. To my mind, the proposals too closely mirror what the industry has proposed without providing the adequate supporting evidence to move in that direction. The Treasury’s own assessment of the FOS is that it functions well in the majority of cases. This is a poor basis for such a fundamental reform. Secondly, the Consumers’ Association has concerns that the Bill removes enforcement sanctions under the Consumer Credit Act 1974 without introducing equivalent replacements and shifts other protections from statute into Financial Conduct Authority rules, which have not yet received any consultation. A third problem is the new 10-year time limit on FOS complaints. It is totally unsuited to financial products, a large proportion of which are long term, typical of mortgages, life insurance and pensions. The concerns of the Consumers’ Association are far from trivial and will have to be addressed in Committee. I look forward to the debates.
The Government have been clear that the legislation is driven by an economic argument to foster growth in our world-leading financial sector, but there is also a compelling case, made clearly by my noble friend Lord Pitt-Watson, that effective consumer protection has an economic rationale as well. It is a sector that requires consumer confidence and trust. Financial services are unlike other markets: products are complex, time horizons are long, and the information gap between the provider and the consumer is substantial. In those circumstances, consumer protection is not an impediment to a well-functioning market but a key to that market functioning properly. Remove the fence without checking why it is there, and the likely result is not greater efficiency but the familiar cycle of mis-selling, scandal and declining consumer engagement with the very products that are supposed to serve their financial interests. A reform agenda framed around growth should therefore be cautious about weakening conditions that make sustainable growth in financial services possible.
Lord Kamall (Con)
My Lords, I thank the Minister for his recent letter and the meeting he convened last week, but also for clearly laying out the ambitions for this financial services Bill. For many years, I sat on the Committee on Economic and Monetary Affairs of the European Parliament and worked closely with the noble Baroness, Lady Bowles. I also see the noble Baroness, Lady Gill. We worked on money market funds together. On that committee, we scrutinised a slew of regulation following the 2007 to 2008 financial crisis.
In each case, I asked four questions. First, do we need this legislation, given how much regulation we already have? What problem are we trying to solve? Are we just regulating to be seen to be doing something? Secondly, if a bank or other financial institution failed tomorrow, how do we make sure it would not be bailed out with taxpayers’ money? Thirdly, who takes responsibility for failure? We debated the merits of director liability and whether this would encourage directors to take more interest in what is on their banks’ balance sheets. Fourthly, how do we make sure, when it comes to complex financial instruments on balance sheets, that while banks might be willing to book the income up front, they make sufficient provision for potential losses, just as we saw with financial instruments such as CDOs and CDSs in the run-up to the financial crisis?
As others have said, it is nearly 20 years since the last crisis, but we should remember that, after each crisis, there is a temptation to regulate for the previous one. Then, after a while, there are calls to loosen rules, to increase liquidity or access to credit, which in turn raises concerns about whether this could contribute to the next crisis. With this Bill, I welcome the ambition to reduce complexity and inflexibility, to simplify what has become a complicated consumer credit regime, and to streamline regulations and reduce the number of overlapping regulators. Like my noble friend Lady Noakes, however, I remain concerned about regulator accountability. Although I generally support less regulation, I recognise that when things go wrong, quite often the public expect politicians to do something—just do something. We should remember why measures such as ring-fencing were introduced or, some would argue, reintroduced.
The Explanatory Notes to the Bill say that the benefits of ring-fencing vary across areas and can
“give rise to unintended consequences in practice”.
There is also some concern about the impact on the bank resolution regime. Can the Minister explain what those unintended consequences were and the impact of the reforms on the bank resolution regime?
On the overseas recognition regime, I welcome the Government’s intention to take a different approach to the EU. During my time in the European Parliament, much of the equivalence was driven more by protectionism than resilience, often limiting choice for investors and consumers. On accountability, I welcome reform to the senior managers and certification regime to approve accountability of appointed representatives, but I will also be looking to understand how proportionate or burdensome this requirement would be.
I now come to the area of financial services where I maintain a strong interest: that is, how do we increase access for those who many describe as financially excluded? Both the UK and then the EU brought in legislation to force banks to offer basic bank accounts. That may sound reasonable but, in reality, this was forcing banks to offer accounts to customers who they did not particularly want to serve—I wonder what that means in terms of customer service. An unintended consequence is that this squeezes out potential competition from non-banks, such as credit unions, which would welcome the ability to serve these customers and grow. I welcome the Government’s intention to increase the number of mutuals and co-operatives, and to wider the common bond requirement, but I wonder whether they could go further. Being slightly radical, I ask the Minister: have the Government looked at the feasibility of abolishing the common bond altogether? If so, what concerns were raised? Also, as we see more banking in hubs in response to high street bank branch closures, could we perhaps create a win-win situation where credit unions or CDFIs, which I will discuss later, run those banking hubs? Not only can they serve their customers, but they can earn additional revenue facilitating payments into, or withdrawals from, accounts held with banks.
I am disappointed not to see an explicit reference to microfinance, which in the UK we call community development financial institutions, or CDFIs—non-profit, community-based organisations that offer financial support and credit to individuals and financially excluded entrepreneurs who otherwise might turn to payday lenders. One of the most amazing CDFIs—one that I try to help where I can—is Purple Shoots. It was founded by Karen Davies who, when she worked in financial services in London, realised that entrepreneurs from poorer backgrounds were often being turned down not because of a poor business case, but because of their credit status. She therefore set up Purple Shoots to offer mentoring and loans between £500 and £3000. When it turns down a loan but thinks the idea has merit, it provides wraparound care to get the entrepreneur’s business case into a position where it merits a loan.
The impact has been amazing. When I hosted a parliamentary event for Purple Shoots, we heard from Trevor Palmer who turned up in a complicated electric wheelchair. Partly because of this, he had been written off by mainstream finance. Thanks to advice and a loan from Purple Shoots, he was able to start his enterprise, take himself off benefits and later employ others and take them off benefits. Organisations such as Purple Shoots are driven by both a belief in the spirit of enterprise and a real social purpose.
As Sam Rex-Edwards and Kay Polley from the Finance Innovation Lab said to me, talent, ambition and entrepreneurial potential are spread across the country; access to finance is not. While many larger organisations can access lottery funding, which in turn means they can offer much larger loans, Purple Shoots cannot access these funds to offer much smaller loans, often with a higher social impact. When it applied for lottery funding, it was told to raise their interest rates and, in effect, to lend to fewer entrepreneurs. While anyone who is unable to pay back on time is, quite rightly, counted as a default, and understandably so for mainstream banks, Purple Shoots instead prefers to give them a little more time to repay. For these reasons, it does not tick the right boxes for lottery funding. Although I understand that lottery funding is dealt with by another government department, DCMS, I ask the Minister: given that the Bill does not specifically mention CDFIs, what is the thinking in both departments on how to create the space for CDFIs such as Purple Shoots to grow, for others to enter the market, and to increase access to credit and advice for entrepreneurs from all communities, not only those who have easy access to credit?
Time is limited, so I end by saying that this Bill deserves support where it reduces needless regulations but does not reduce the accountability of regulators, where it strengthens financial resilience but does not reduce proportionality, and where it widens financial inclusion but does not reduce consumer rights.
Baroness MacLeod of Camusdarach (Lab)
My Lords, it is truly humbling to hear from so many noble Lords today with such expertise. As many have said, there is much to commend in this legislation. Any measure that strengthens the financial services in this country is welcome. As was laid out in the Leeds reforms last year, every encouragement should be given to banks or individuals who want to invest in the United Kingdom.
The ambitions of the Scottish financial services industry, a hugely important employer in Scotland—in fact, the biggest—chimes with the Government’s ambitions. It is incredibly important and it hopes that the new legislation will shake up the planning system and reduce red tape for investors. In this legislation, among other measures, emphasis is put on the Government’s support for lending and investment. We hope that the reforms will unlock more finance for UK businesses, and that improved competition in small and medium-sized enterprise lending will help small businesses to access finance.
I will not talk about regulation; I will leave it to the experts among noble Lords. Investment in SMEs, particularly in Scotland, is what I want to talk about today. Basically, it is not happening as it should and I am not exactly sure where this Bill will make the difference that is needed. This is a cri de coeur to the Minister. There are entrepreneurial, far-sighted men and women wanting to start a business, to contribute to their communities, to employ people in the communities, all the time contributing to the UK economy, but there are many obstacles in their way, not least accessing the financial support they often need to confidently take the first steps to create a business. Many areas of Scotland are struggling. Not only are they stranded where Scotland’s ferry system does not function but there is not enough housing and there are too few jobs. There will be even fewer jobs unless SMEs are able to access investment. Throughout Scotland, businesses are struggling to get investment. One of the reasons given is that it is too remote. Perhaps it is time that people in London or Edinburgh think of themselves as remote, rather than those who live beyond a metropolis.
We know that bank lending to British businesses has fallen to its lowest level for many years. Perhaps the banks and other lenders did not read the memo from Leeds but, until they change their behaviour, there will be little chance of stronger economic growth. It may be timely to remind the banks that they owe us: hardly one of them would be standing if it were not for the Labour Government’s Herculean support during the financial crisis of 2008. When bank lending fails, SMEs are disproportionately affected, and banks have pivoted away from SME lending because it can be riskier and less profitable. Banks do not want to invest in start-ups; they only want to help when business is established and any risk has been minimised. Surely it is not unreasonable to suggest that banks could take more responsibility to invest in the country’s most enterprising and entrepreneurial sector. Banks tell you that there is no lack of lending capacity but little demand. It seems that many SMEs are less like likely to apply for credit for fear of rejection, so it becomes a self-reinforcing loop. One senior figure at a UK bank, quoted in the Financial Times recently, said there was no lack of lending capacity:
“All the banks are issuing bold lending targets, but if there is no demand as no one wants to borrow there isn’t a lot we can do”.
I would suggest to that senior banker that they find out what more they can do to get money out the door.
Levels of investment in Scotland are typically lower than in the best-performing countries in the OECD. In areas such as research and development, investment has been chronically low in comparison with the OECD and below the UK average, yet Scottish universities’ contribution to R&D is among the best in the OECD countries.
SMEs form the backbone of the Scottish economy. There are 350,000 of these important companies, employing over 1.3 million people. They are hugely important in farming, retail and hospitality, and increasingly in life sciences and space technology. There is great innovation in AI, digital assets and tokenisation in Scotland, but these modern-day pioneers need investment. According to the business sector, they are underserved and, if they are ever to scale up and contribute meaningfully to our economy and the funding of public services, that needs to change.
Too often, start-ups have had to leave Scotland to seek investment since investment banks, venture capital and private equity no longer have offices in Scotland. The investment community is very heavily centred in London. That is a pity, and a blow to the Scottish economy, as it is to other parts of the UK outside the south-east of England. It is important that Scottish firms connect with London-based investors and that those investors visit Scotland to properly understand its vast potential—and there are huge opportunities, if only they knew about them. Nobody wants to undermine London’s economy, but it is a waste of potential if investment horizons in the UK remain so limited.
There is confusion about the responsibilities of the UK and Scottish Governments. There is a suspicion that too many UK civil servants think that Scotland’s machinery is completely separate from the UK’s, and that needs to be cleared up. The City of London joined forces with No. 11 to set up a single investment portal for the UK, which allows all potential investors to see what opportunities there are. Unfortunately, there has been little take-up in Scotland and it may be that politics are getting in the way, while business north of the border thinks Scottish civil servants may be too many sceptical about anything that comes from London. So I appeal to both Governments to work more closely together to take advantage of any facility that might help.
In conclusion, I have four specific asks for the UK Government, which I hope they can consider, in this legislation. Please set out a clear vision and structure for accessing funds to grow businesses. Please fly the flag for the whole of the UK when talking to overseas investors. Please encourage banks to be more courageous and take risks. Lastly, please tell investors to think beyond London and go to other places from time to time, as they will find opportunities. If the Government can embrace these asks, I am sure that this Bill will feel ever more relevant.
Lord Carlile of Berriew (CB)
My Lords, it is a privilege to speak in a debate with those who have such deep understanding of financial services and markets, including a Minister with transformational business experience, which we all respect. My own experience as a lawyer has been limited in this area largely to providing unwelcome and pessimistic advice in relation to large frauds, some of which have enriched the egregious fraudster to an extent that he—and it is usually a he—has gone on to lead a very successful financial life. This is not good for the reputation of the financial services industry.
In that context I remind your Lordships of something that my profession, the legal profession, does rather successfully and in an increasing amount as part of the informal part of financial regulation. That is the increase in private prosecutions which are used to bring fraudsters to justice. I remind your Lordships who are interested in this rather narrow subject of the successful prosecution in 2018 in what is called the Allseas case, in which the Director of Public Prosecutions at the time had twice refused to prosecute, but that private prosecution was successful.
To turn to the generality of this interesting Bill, I say that financial markets are living instruments, in the most literal meaning of that phrase. When we legislate, there is an imperative to provide flexibility to meet need, rather than waiting for reactive new legislation when something has to be done because it has gone wrong. This is a very important legislative opportunity, in which we have a duty to enact the new law with due anticipation of potential unpredictability—a difficult but important task.
Intrinsic to the Bill is the relationship between Parliament, regulators and the citizen. Over recent decades, we have witnessed a significant shift in the way that financial services are regulated. Increasingly, Parliament has established broad frameworks while regulators are entrusted with responsibility for detailed implementation. There are understandable reasons for this, and in this area, although I am rather against having regulations rather than a main Act provision, I think there is room for quite a lot of regulation so that that living instrument can survive, for technological innovation proceeds at extraordinary speed. Parliament can enable; the regulators are there to provide expertise and experience, which use the statutory foundation to enable proportionate reaction to whatever future challenges may arise.
I turn to three specifics. First, Clause 7 in Part 2 reforms the Financial Ombudsman Service. I support those changes in the round, but I urge the Government to give thought to enhancing them so that entities themselves have the ability to request a referral to the Financial Conduct Authority for advice on rule interpretation, rather than leaving it to the Financial Ombudsman Service on a case-by-case basis. Important principles can arise and it should not take so long to resolve them.
Secondly, I urge that additional attention be paid to authorised push payment fraud. This is a major and egregious fraud for consumers, costing about £450 million in losses annually, mostly to unsophisticated people. I hope that the Bill can be amended to strengthen safeguards to prevent that kind of fraud at source, specifically by requiring online marketplaces to apply know your customer checks to sellers and to have on-platform, traceable payment methods to defeat the cruelty of fraudsters.
Thirdly, there is the important issue of collective actions. Collective actions are funded by litigation funders, who are now part of financial services and recognised as such. I have played some part in collective actions and still do. Sometimes they may involve a dozen claimants; sometimes they involve 10,000 claimants. These are collective actions that give the opportunity for ordinary people to recover damages for frauds committed upon them—some by the financial sector, I am afraid—that they would not otherwise be able to recover from.
Litigation funding has been very damaged, inadvertently, by a Supreme Court case called the PACCAR case. Legislation was introduced in the previous Parliament, with the agreement of all three main parties, to push it through quickly, but the election came and that was not done. I and other noble Lords are happy to discuss with the Minister the PACCAR situation in the hope that it could be dealt with in this Bill, in which I believe it is in scope.
I return to more general matters. Parliament should never lose sight of the distinction between creating rights and administering those rights. The House must therefore carefully examine any provisions that may have the effect of transferring important questions of consumer protection from primary statute into a wood which we cannot see through for the trees. I illustrate this concern through the issue of consumer redress. One of the recurring themes in modern financial services regulation has been the recognition that consumers require effective mechanisms through which to enforce their rights. I have been waiting years to say this, but a right without an effective remedy qualifies as what the eminent jurist Hohfeld strikingly described as a no-right. The Bill should avoid no-rights.
Baroness Morgan of Cotes (Non-Afl)
My Lords, it is a great pleasure to follow such a thoughtful speech from the noble Lord, Lord Carlile, who picked up on a couple of points that I was going to mention. First, I draw the House’s attention to my interests as a non-executive director at Santander UK, a non-executive director at the Financial Services Compensation Scheme, which oversees consumer redress, and as chair of the Advertising Standards Authority, which is a regulator. Because of those interests, I do not normally talk about financial services in this House, but because this is a more general debate at the start of the legislation, I want to assist, I hope, with a couple of factual points and pick up two areas of policy on which the Bill is currently silent—the noble Lord, Lord Carlile, has just picked up one of them. I do not intend to take part in further stages but, depending on the Minister’s answer to the final policy issue I will raise, I may return.
I will start with ring-fencing reform. We have already heard from a number of noble Lords about why reforms were introduced. To keep this on a factual basis, and to give examples of the unintended consequences mentioned by the noble Lord, Lord Kamall, I have two examples of why ring-fencing can be unhelpful to consumers and economic growth. The first example is a travel company offering package trips that wants to mitigate its exposure to increased fuel and foreign exchange costs. It wants to take options on forward fuel or FX costs, but those cannot be offered within the ring-fenced bank that it banks with. Those options can be obtained from another financial institution, but that obviously means extra costs and takes longer, and consumers will ultimately pay those costs.
The second example is a UK energy company looking for investment. The ring-fence rules, as currently drafted, mean that lending to the holding company is not permitted, so lending must go to a subsidiary on a strict reading of the rules. Is that really what was intended? Are we serious about bringing down the cost of doing business in the energy sector, a sector that has very real resonance for households, as well as a link to national energy security?
Moving on to reform of the Financial Ombudsman Service, we have heard in the speeches from two noble Lords the significant strength of feeling on these proposed reforms among consumer groups. I will just say two things here. First, predictability of law and regulation is an important principle of doing business in the United Kingdom and is something that businesses want to see. Secondly, in the speeches I have heard so far about reform of the Financial Ombudsman Service, I have not heard anything about the actions taken or the way that certain claims management companies’ business models are based on bringing cases to the ombudsman. The Financial Ombudsman Service performs an incredibly important role, and financial institutions should be held accountable when they get it wrong for customers, but we should not lose sight of claims management companies making money from customers who do not need to use their services when they are looking for financial redress.
I now turn to one area—the noble Lord, Lord Carlile, mentioned it—about which the ombudsman has received, and rightly upheld, many complaints: fraud. In November 2022, I had the privilege of overseeing the publication of a House of Lords inquiry report entitled Fighting Fraud: Breaking the Chain, in which we said:
“80% of reported frauds are cyber-enabled”.
According to the Crime Survey for England and Wales, in the year ending June 2025, there were an estimated 4.1 million fraud incidents, a 14% increase compared with the figures for 2024. Out of those 4.1 million incidents, around 3 million involved a loss, and in 2.2 million cases, victims said they were fully reimbursed.
The reason I mention fraud is because the Bill does not contain anything about it affecting the financial services sector. I hope that the Treasury is not leaving it to the Home Office to lead on this. Fraud is not a victimless crime. As we have already heard, the role of online platforms and marketplaces is very important, and romance fraud is hugely costly to victims, both financially and personally. We heard earlier about the changes to the senior managers and certification regime. While I understand them in the context of this Bill, frankly, I would extend the senior managers and certification regime to the bosses of the tech companies to make them accountable for what is happening on their platforms. Since 2022, the world has moved on, and there is now the issue of deepfakes in relation to fraud. Today, I heard about ChatGPT recommending fake websites, which are costing their victims huge amounts of money. I am sorry that the Bill is silent on such an important issue for financial services.
I move on to the final policy area that I hope the Minister might say something about: economic abuse. This is a devastating form of domestic abuse used by abusive partners or ex-partners to control a victim survivor’s money and economic resources. It includes the routine misuse of financial products and services, such as a bank account, a mortgage or credit. Some 4.2 million UK women experienced economic abuse in the past year alone, leaving them carrying debts coerced in their name and trapped with abusers in joint financial products long after separation, while their credit scores are tarnished by the abuse, leading to immediate and long-term financial exclusion. A staggering 750,000 UK women experience economic abuse through the joint mortgage they share with an abusive partner or ex-partner. Perpetrators will routinely use these ties to coerce and control survivors long after separation, leaving their victim survivors facing arrears, repossession, credit destruction and even homelessness.
Financial services firms’ contractual obligations to both parties, through the concept of joint and several liability, limit the steps those institutions can take to prevent these harms through joint mortgages. It is clear that urgent legislative reform is necessary to address this. I welcome the Government’s financial inclusion and violence against women and girls strategies. Both make significant commitments to tackle economic abuse and ensure consistent responses from financial services to support victim survivors.
How will the Government ensure that the Bill’s implementation effectively supports good outcomes for economic abuse victim survivors as vulnerable customers? Will the Minister’s department use this Bill to remove the legislative barriers that still prevent financial services institutions safeguarding victim survivors against the harms caused through joint mortgage abuse? I fully agree with the comment that the Minister made at the beginning of this debate that this whole Bill is a question of balance. I look forward to hearing in the forthcoming debates how that balance is resolved.
Baroness Gill (Lab)
My Lords, as many have already highlighted, the financial services sector remains an absolute engine of the British economy. It contributes roughly £290 billion, or roughly 11% of the total UK economic output, with productivity at 2.6 times the national average. To maintain this competitive edge, our regulatory framework must prioritise nimble execution while reinforcing structural accountability. The Financial Services and Markets Bill is therefore a necessary modernisation of our economic architecture.
Like my noble friend Lady Hodge, I welcome this legislation directly addressing critical pressure points in economic crime and market efficiency. First, it combats financial crime. The expansion of FCA oversight across the legal and accountancy sectors tackles a severe risk channel. Financial institutions currently spend an estimated £38.3 billion annually on financial crime compliance. Unifying oversight directly addresses the structural fragmentation noted by His Majesty’s Treasury, where 25 separate supervisors have historically led to inconsistent enforcement across sectors.
Secondly, the Bill protects the infrastructure. Statutory protection for cash access secures vital banking functions for millions of people who depend on cash and face-to-face banking. Thirdly, it streamlines regulations. Merging the Payment Systems Regulator into the FCA eliminates costly institutional overlap and accelerates decision-making.
I particularly welcome that the Bill is empowering credit unions by reforming the historic “common bond” members’ requirement. This Bill allows credit unions to sustainably scale up and expand their services. Under the old 1979 limits, these rules became a restrictive postcode lottery. For example, a credit union was banned from growing if the population in its geographic area exceeded 3 million—that is most of London. Relatives who did not live under the exact same roof were also barred from joining. By reforming this historic constraint, the Bill drags these rules into the 21st century by raising the membership cap from 3 million to 10 million, by allowing credit unions to expand, merge and scale up, by adding students to the local criteria so younger people can access affordable community borrowing, and by updating family rules so relatives can join, even if they live in different households. As the Government state, the Bill provides a major boost to affordable community finance and directly supports the national goal to double the size of the mutual and co-operative sector.
We have already heard that the Bill also modernises the Financial Ombudsman Service, and I believe that disputes will be resolved faster with much greater operational certainty.
Again, as we have heard from various Members of your Lordships’ House, the proposals will unlock billions of potential lending to small businesses across the country through raising the primary deposit threshold from £25 billion to £35 billion, which would free retail-focused banking groups from overly restrictive ring-fencing rules.
The majority of financial organisations have welcomed this Bill, but there are some concerns. I have been contacted, like others, by UK Finance and TheCityUK, and Parliament’s own Treasury Committee has highlighted that Clauses 16, 17 and 18 are of concern as the balance of power shifts away from necessary democratic checks. It is good to see my friend the noble Lord, Lord Kamall, in his place because he and I, as he alluded to, served on the European Parliament’s Economic and Monetary Affairs Committee together. During the major post-crisis reforms, particularly when we were building the single rulebook, ECON faced these exact structural pressures. We learned the hard way that, when you delegate sweeping powers to independent regulators, you need to hardwire accountability into their operations. We had to fight to ensure that principles like proportionality were not pushed into vague, multi-year strategies but were applied to everyday policy-making. It is that specific, practical experience of balancing regulatory independence with democratic scrutiny that has informed my analysis today.
Referring to some of the clauses, I note that Clause 16 introduces a statutory requirement for the FCA and PRA to introduce long-term strategies at least once every five years. I accept that a long-term road map is incredibly useful for business planning, but markets move fast. A five-year plan can easily become outdated if there is not a required check-in point to adjust the strategy to new economic realities. Can my noble friend the Minister clarify how the Government will guarantee that the regulators formally consult with consumer, business and commercial panels during the development phase? Would a review at the three-year mark overcome this and prevent these road maps from stagnating if no new remit letters are issued?
Clause 17 removes the operational requirement for regulators to consider core statutory principles such as proportionality, transparency and risk-based regulation in their day-to-day functions, moving them exclusively into the five-year strategic loop. However, in March 2025 the Regulation Action Plan explicitly committed to introducing a streamlined, consolidated list of “have regards” via secondary legislation. Can the Minister confirm that the Government will use secondary legislation to establish a rationalised, daily checklist for regulators, ensuring that day-to-day policy-making remains structurally bounded by proportionality?
Finally, Clause 18 removes the obligation for regulators to consult on guidance and minor rule changes, while lifting the requirement to explain routine standard setting of their core objectives. In the financial sector, regulatory guidance serves as de facto rules. Firms alter compliance frameworks and deploy significant capital based on it. Without a statutory duty to consult on guidance, what mechanisms will protect market participants from unvetted, sudden shifts in regulatory expectations?
Lord Howard of Rising (Con)
My Lords, I declare an interest as a holder of listed shares and a director of a listed investment trust.
There is much to be commended in this proposed legislation. Any reduction in regulation and the consequential benefit on the wealth of the nation is to be applauded. I am, however, concerned about the proposed power which will enable new regulations to be introduced without scrutiny. Although introduced with the best intentions, regulations can do more harm than good—partly recognised by having the Bill in front of us today. It is not always possible to foresee the full consequences of regulation. Generally speaking, the more markets are left to themselves, the better off we all are.
An example of regulations having a negative effect is the Basel II agreement. This ruled that personal mortgages were safer than other types of lending and therefore banks would need a lower capital requirement for lending for house purchases. I will not waste your Lordships’ time with the full story—caravans in trailer parks being classed as houses and so on—but this was ultimately a major contributor to the 2008 financial crisis, brought about by a change in regulations. Because of the crisis, regulation in Great Britain was made for pension funds to invest a higher proportion of their funds into safer gilt-edged securities. The gilts gave a lower return than other types of investment. To compensate, pension funds used their gilt-edged securities as collateral to buy more gilt-edged securities to give an overall larger return—little risk as both instruments were Government-backed. Unfortunately, it slipped their minds that interest rates can go up as well as down and rising interest rates would result in losses. Interest rates did go up. Even the Bank of England’s own pension fund was caught out, as interest rates rose and its pension fund faced large losses.
With one regulation on top of another, it is not always possible to see the knock-on effect of regulations. I urge your Lordships, when taking this Bill forward, to have clearly in mind the inability of anyone to fully know what benefits or what collateral damage may result from new regulations. While flexibility may be desirable, it is very important not to delegate too much power without the ability for rule-making bodies to be questioned independently and firmly. It will not do everything, but it may put a brake on rules which impede or hamper the development and success of our financial services industry and reduce risk.
Baroness Hyde of Bemerton (Lab)
My Lords, I thank my noble friend the Minister for bringing this Bill and for its many important clauses. We have had some excellent contributions, but I particularly thank the right reverend Prelate the Bishop of Manchester for his powerful intervention on the nature of debt and its particularly devastating consequences, and the noble Baroness, Lady Morgan of Cotes, for raising the important issue of financial abuse and how this Bill may legislate to be firmly on the side of victims/survivors.
I wanted to contribute to this debate not because I am an expert in financial services, as many eminent speakers across your Lordships’ House today are, but because I care about fairness and the accessibility of financial services to all in our society, so that everyone in the country is able to access ethical and affordable finance. I welcome the measures in this Bill and particularly the clauses on credit unions and measures to protect face-to-face banking. As a member of the sister party to the Labour Party, the Co-operative Party, I declare an interest, and I was delighted to see the Labour manifesto commitment in 2024 to double the size of the UK’s co-operative and mutuals sector. This Bill puts legislative meat on the manifesto bones of how we might do that.
A financial system should serve the economy, and the economy should serve society. As last year’s Triodos Bank report noted, finance has too often become
“an end in itself, a self-referential network of balance sheets and algorithms, more focused on extracting value than creating it”.
This Labour Government are committed to growth, but not growth at any cost—not extractive slash-and-burn economics but growth that offers people in every part of the UK the opportunity to flourish.
Before I come to the proposed changes in the Bill, I will outline why these measures to increase the use of credit unions are so crucial. As other noble Lords have said, the UK has an affordable credit problem. Between 16 million and 20 million people, depending on the source you use, are underserved by the credit market. That is up to 20 million people in the UK who typically have a credit history that falls outside mainstream underwriting criteria. This is a large, non-standard population with a growing need for credit. They broadly fall into three groups. The first is those known as “thin file”: people with low or no credit history. The second is the credit impaired: those with a poor credit rating, which often may be linked to disruptive life events that are usually temporary, such as moving house repeatedly, divorce or loss of a job, which might lead to missed repayments. The third group is those who are highly indebted: people who have taken on too much debt and cannot afford to repay it. These households are facing material economic headwinds, and access to affordable credit is crucial to ensure the near-term economic well-being of those people, their families and communities, and to ensure that the near-term economic conditions do not become entrenched, affecting the long-term viability of these households and communities as credible borrowers.
Outside the realm of personal finance, SMEs and social enterprises also face a multi-billion pound finance gap, particularly those based outside London and the south-east. According to figures from the Federation of Small Businesses, over half of small businesses rate the overall availability and affordability of new credit as poor.
Those are some of the reasons why I am passionate about credit unions and their increased use. As has been said before in this debate, they are member-owned co-operatives with deep ties to local communities, and they are accountable to their members rather than to shareholders. They provide access to credit for people who may be excluded from high street banks, and they offer a more relationship-based model of lending—an essential quality of a financial system that works for everyone in society.
To illustrate this, I have picked a few thumbnail testimonials from Salford Credit Union. One example is the unemployed parent who was offered a free college course to train as a hairdresser. They could not afford the £200 needed to provide the equipment to undertake that course. Salford Credit Union stepped in and loaned them £200, and they were able to buy the kit, retrain and then pay that loan back when employed as a hairdresser. Another example is the person with two children made homeless due to domestic abuse. They were rehoused by a housing association—quite right too—but that property had no furniture. So they applied for and received a loan of £700 to buy furniture, which they were able to pay back at the reasonable rate of £15 per week.
Take the man who was living in a hostel and whose only income came from selling the Big Issue. He was desperate to move out of that hostel because of the difficult living conditions and the abuse he suffered. Over a number of months, the credit union helped him slowly save enough for his own deposit to rent a flat in the private rented sector. He would not have been able to do that without the assistance of Salford Credit Union. I could go on and on—credit unions are brilliant—but, crucially, the proposed reforms to the common bond will enable the credit unions to serve that wider membership. This is an overdue reform, and another reminder of how this Labour Government are working hard every day to improve things for all citizens nationwide.
To support even greater sustainable growth and use of credit unions, I ask my noble friend the Minister to consider capital reforms to credit unions—for example, enabling access to new forms of investment through them. There is also currently no overarching mechanism to assess how effectively banks are meeting the credit needs of underserved communities, and there is no mandate for the FCA to drive that change. So, again, I ask my noble friend the Minister whether the Bill could address this by requiring greater transparency and accountability from mainstream lenders, including formalising a referral pathway to credit unions or community development finance institutions where customers have been declined by them.
Credit unions and community development finance institutions are often best placed to support people and businesses excluded from mainstream finance. In 2025 alone, community development finance institutions lent over £389 million to small businesses, start-ups and individuals. That launched 5,741 businesses, created over 7,000 jobs and safeguarded over 6,500 jobs. Some 88% of those business customers had been previously declined by another lender. With CDFIs lending disproportionately to ethnic minority-led businesses, women-led businesses and businesses based in areas of high deprivation—demonstrating their growing contribution to inclusive economic growth and local resilience—I ask my noble friend the Minister to look again at these and how they might be used more.
Credit unions are a growing and increasingly important part of the UK’s community finance infrastructure, providing affordable lending, savings and financial resilience to millions of people. So let us noble Lords make the most of the opportunity presented by this legislation to turbocharge the potential of credit unions. Finance is not an abstract mechanism; it is a social relationship built on trust, shared expectations and collective institutions—a common bond indeed, at a time when the need is ever greater to spread more widely vehicles for all types of common bond, not just the kind found in credit unions, and to use them wherever possible.
Baroness Young of Old Scone (Lab)
My Lords, I declare my environmental interests as listed in the register, and I thank the Minister for his engaging introduction. He obviously knows something about this, and I look forward to discussing amendments with him in Committee.
I want to draw the Minister’s and the House’s attention not to the specific things in the Bill but to the specific things that are not. The Minister very adequately outlined how important the UK is as a financial centre. It is home to the biggest share of international bank lending and borrowing, it is big in insurance, it is big in pensions, and it has developed a reputation for being big in sustainable finance. UK financial services have major further potential to accelerate the transition to a climate-positive and nature-positive economy and to unlock green growth. I will focus on that today. It is disappointing that the Bill does not move that agenda forward, and the Short Title gives a bit of wriggle room to get some good stuff in.
One of the Government’s stated goals is to make the UK the green finance capital of the world, so I do not think I am trying to press for something that has not already been endorsed by the Government. I am simply lending a helping hand to get us on the road and to make sure that the Bill is not a missed opportunity. Let me give two brief examples and one more substantial one of the issues that the Bill could have tackled. First, the 2024 manifesto and the financial services growth strategy said that the Government intended
“mandating UK-regulated financial institutions—including banks … pension funds, and insurers—and FTSE 100 companies to develop and implement … transition plans that align with the 1.5°C goal of the Paris Agreement”.
These plans would state how each of these institutions would reduce emissions, reshape investments and business activities and manage climate-related risks. The Government consulted in 2025 on taking forward these requirements, but since then there has been silence. The Bill could have introduced legislative action on mandation, and I would like to press for that.
The second example is that the Bill could have made progress on mandating nature-related disclosures. The Institute and Faculty of Actuaries warns that too many financial institutions insufficiently account for climate and nature-related risks in their decision-making and risk management. I think that the insurance industry is very rapidly waking up to those impacts. Reporting on climate-related financial disclosures, TCFD, is mandated for the 1,300 largest UK-registered companies, but TNFD, the nature-related financial disclosures, is not, though these are mandated in the rest of the European Union. Sorry—I should not say “the rest of the European Union”, since we are not in the European Union any more, but you know what I mean. If we do not get some movement in the Bill, can the Minister tell us when and how the Government intend to bring forward nature-related financial disclosures in any way other than voluntarily?
The missed opportunity I really want to focus on most today is the action that we need to tackle the financing of international deforestation. I declare an interest as chair of the Forestry Commission. Deforestation and nature loss pose material risks to financial systems, as nature-related risks could reduce UK GDP by 6% over the next decade, according to the Green Finance Institute. The World Economic Forum ranks biodiversity loss as the second-greatest long-term risk globally. In the Environment Act 2021, we committed to bringing into force secondary regulations, under Schedule 17, to prevent businesses using illegally produced forest goods and to require them to exercise due diligence systems and introduce reporting. Ministers, if pressed, continue to state that an approach on this will be set “in due course”—I love that phrase. This is strange, because at COP 26 the UK positively led and brokered a deal to end and reverse deforestation by 2030. It was a real piece of global leadership.
Since then, we have had the Government’s own security assessment that deforestation-driven biodiversity loss and ecosystem collapse are high-level threats to the UK’s national security. If noble Lords have not read the security report Global Biodiversity Loss, Ecosystem Collapse and National Security, do read it. It is short but devastating, and I would have a stiff gin by your side while you read it. It is an official UK Government security assessment, so it is not just us greenies being alarmist.
The Financial Services and Markets Act 2023 requires that the Treasury
“carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities”—
a commitment to make sure that we deal with the issue of forest products. I ask the Minister whether the review committed to in that Act is happening and, if not, why not and when it will be undertaken, because its results could have been in this Bill by now. I urge the Minister, at the very least, to persuade his colleagues in other government departments to lay the regulation under Schedule 17 to the Environment Act, which would make it illegal to use commodities in the UK that have been produced on illegally deforested land. This would at least be a step in the right direction.
I do not know about you, but if noble Lords read the Government’s security report, which talks about terrorism, state threats, pandemic risk, economic insecurity and everything else including fallen arches, I think they would be pretty scared by it. I certainly am. Let us not miss the opportunity of the Bill to deliver on the Government’s environmental commitments.
Lord Sikka (Lab)
My Lords, this is primarily an enabling Bill and much of the substance will follow later, through the FCA and PRA rule-making and secondary legislation. Parliament will not have a proper opportunity to amend whatever the FCA agrees with the industry lobby. Consumer protection and confidence in the finance industry will be the biggest casualties. There is much to agree with and support in the Bill, but alas, it also omits crucial issues. There is no reform of short-termism in the City of London, even though for nearly 30 years the UK has languished near or at the bottom of the G7 and the OECD’s investment league. The investment gap cannot be addressed without reform of corporate governance, accounting and executive pay, a law on dividends and the empowerment of stakeholders. I hope the Minister will tell us why these issues are not being addressed.
Shadow banking is now bigger than retail banking, but there is no plan to regulate that either, even though shadow banking is likely to be the epicentre of the next financial crash. In this vacuum, the Bill continues with a deregulatory agenda while more of the post-2008 crash reforms are being dismantled. The weakening of the senior managers and certification regime and accountability is one such example. Currently, complaints can be brought to the ombudsman indefinitely, provided they are brought within three years of the date when the complainant became aware of, or should have reasonably become aware of, the event being complained about. The 10-year limit proposed by Clause 6 is a regressive step. How exactly are people supposed to become aware of the trigger events when Governments and regulators seek to bury them? The Bank of Credit and Commerce International was closed in July 1991 and, to date, there has been no investigation, so how does the 10-year period affect the victims of that scandal?
On numerous occasions in this House, I have referred to the plight of the victims of HBOS frauds, which go back to 2002 and 2007. The senior bank managers fleeced SMEs of around £1 billion. The regulators did little, and the SFO, the FSA and the police passed the buck. In 2017, the Thames Valley Police and Crime Commissioner secured six criminal convictions. Still, the FCA, the SFO and the police did not fully investigate. The Government of the day left it to Lloyds Bank, which owns HBOS, which then appointed Dame Linda Dobbs in 2017 to investigate and issue a report in 2018. To date, there has been no report and victims are still awaiting compensation. Without an investigation and a report, victims of bank frauds cannot approach the ombudsman. Taking HBOS frauds as an example, can the Minister explain when this 10-year window might commence under the clause in the Bill? Clause 6, in my view, harms customer rights and allows banks to escape liability, and that is unacceptable.
I am also concerned about restructuring the Financial Ombudsman Service. It was created in 2001 by Gordon Brown to adjudicate on financial services relationships that are inherently unequal. You have lay persons on one side and giant corporations with billions at their disposal on the other.
Clause 8 severely narrows the right to seek redress by requiring the ombudsman to prioritise whether firms technically complied with FCA rules, rather than whether their actions were “fair and reasonable” in the circumstances. The ombudsman here is being asked to find in favour of the firms if they ticked the right boxes, not according to whether they took fair and reasonable action.
Clause 8 also adds the concept of “consumer responsibility” when things go wrong. So, even when a breach of rules has occurred and the firm has acted unfairly, the ombudsman would be required to consider the general principle that
“consumers should take responsibility for their decisions”.
There are many kinds of consumers: individual versus corporate, amateur versus professional, those with or without expert advice, and diversified or non-diversified. I do not know what kind of consumers this clause seeks to address. The entire clause needs to be deleted; it is unacceptable that, in this day and age, consumer protection is being diminished.
I welcome the absorption of the Payment Systems Regulator into the FCA. I also welcome Clause 14 and the transfer of the regulatory powers of 22 trade associations to the FCA. This will eliminate duplication, buck-passing and ineffectiveness. It was a huge mistake by the previous Government to make accountancy, law and other trade associations AML regulators. In its 2018 report, the Office for Professional Body Anti-Money Laundering Supervision, OPBAS, said:
“the accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe – or don’t want to believe – that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny”.
In its follow-up report in 2024, OPBAS said that it
“has not seen any material improvement”
in its professional body supervisors. That is bad. This consolidation is totally justified and I will support it. I hope that Ministers extend this to the regulation of insolvency and auditing as well. I look forward to the Minister’s reply.
Baroness Lawlor (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Sikka; I always learn from his speeches. The Bill is laudable in its aim to promote growth by cutting regulatory barriers, compliance, duplication and fragmentation, and, in doing so, to reduce the burdens and costs for businesses and support innovation. It aims to achieve these objectives by giving the FCA new powers, as we have heard today. I thank the Minister for his lucid explanation of the powers of the Payment Systems Regulator, which regulates credit card transfers, faster credit and BACS transfers, and which is to be abolished. Other new powers include the Financial Ombudsman Service’s regulatory powers for alternative dispute resolution under FSMA 2000, and the anti-money laundering and counterterrorism duties of the existing 22 professional bodies. The FCA will also have, as we have heard, duties transferred from legislation such as the Consumer Credit Act.
But the transfer of so many powers and functions to the FCA will not be a magic solution, nor indeed a solution at all, unless there is reform to how this regulator operates and how greater accountability can be achieved. The Bill will therefore need some amendments if the FCA is to promote growth and cut regulatory barriers effectively, with better arrangements than those it replaces, since there are many queries about how the FCA operates.
In 2025, the Lords Financial Services Regulation Committee, in its very good report—which has already been mentioned—found that the failings of the two main regulators, the PRA and the FCA, include:
“The deeply entrenched culture of risk aversion … getting in the way of doing what these firms do best … competing, innovating and growing”.
One question here is whether, given such doubts, the changes proposed in the Bill to how the FCA itself works, particularly in Clauses 16 to 22, will lead to the regulator working to promote growth and competition, and whether there is, at the same time, sufficient accountability, predictability and transparency, as well as the checks and balances we need.
I comment on this in respect to the principles, which have had a good airing today so far—I hope that noble Lords will forgive me. The noble Lord, Lord Burns, for instance, referred to the background to the 2000 Act and how and why this solution was arrived at. The principles seem sensible enough. Firms are obliged, among other things, to conduct their business with integrity, skill, care and diligence, to take reasonable care with management and control, and to and pay due regard to the interests of its customers and treat them fairly—all of which seem sensible. But how they have been interpreted has often been a matter of subjective judgment. Smaller businesses especially have found aspects of the regulation baffling, lacking transparency, and unpredictable. They therefore play safe and avoid risk, often at the expense of growth. My noble friend Lady Noakes and the noble Baroness, Lady Bowles, referred to one of the proposals, which is to take out having regard to such principles. The noble Baroness, Lady Bowles, added that the problem is that they need to be applied properly.
I will say a few words about the application. The financial services lawyer Barnabas Reynolds has explained that the principles used, as applied by the regulators, can lead to considerable uncertainty, given the “subjective”, often idiosyncratic, judgments of the regulators. They are applied to
“pin blame on firms and senior personnel regardless of whether relevant rules or guidance existed when the event occurred”,
since the principles are not
“used in the manner of normal common law … to inform the interpretation of specific rules.”
As a result,
“the industry is unable to determine in advance whether many specific actions are permitted or not”.
This is a problem of application.
Indeed, the evidence given to the Select Committee bore this out. Take Principle 12, on the consumer duty, the intended outcome of which was for
“consumers to have confidence in retail financial services markets, with healthy competition based on high standards and … good customer outcomes”.
Witnesses explained to the committee that the implementation had generated uncertainty, saying that
“the FCA has provided insufficient clarity around how it expected firms to comply with the Duty, and that it had created duplication and complexity within the framework”.
They said that
“implementing the Consumer Duty has been difficult due to … ‘the ambiguity of the rules’ and the lack of clarity provided by the FCA”.
This is in respect of the application of these rules, about which the noble Baroness, Lady Bowles, has spoken as well.
The Bill’s accountability mechanisms should be strengthened, which could help deal with this problem of application. As we have heard, noble Lords have objected to removing them altogether and have spoken about the danger of nobody knowing what on earth they will be judged by. I will consider how we can insert clear obligations under law which can be judged in the courts—obligations for predictability, fairness, objectivity and transparency under law.
These could be further promoted by obliging regulators by statute to supervise and enforce predictably, in accordance with their rules, ensuring that their decisions are consistent between firms which operate businesses of the same size and scope. They should be obliged to publish examples of predictable rulings for firms and how they were reached. In this way, there would be greater transparency, predictability would be enforced and firms, as a result, would be encouraged not to be risk averse and would be certain in the knowledge that what the rules say they mean can be established and, if not predictably enforced, can be challenged in court under law.
Baroness Northover (LD)
My Lords, my focus here will be on climate change and, in particular, whether the climate risk to the financial system is adequately addressed—or addressed at all—in the new arrangements the Government are putting forward in the Bill. With the potential consequences of that, it is worth standing back on this.
We all know that, at the least, the complacency about the subprime market in the US resulted in the 2007-08 financial crash—something few were paying attention to. That crash had global effects. The City of London, and therefore the UK economy, were particularly badly affected. I recall the panic of ordinary people who feared their savings would be lost and queued to draw them out, with widespread retail bank failures on the cards. Strenuous and expensive efforts were made to prop up the banks to protect customers. The UK Treasury injected almost £140 billion into failing banks at the peak of the 2008 financial crisis. The Government provided a further £1 trillion in financial guarantees and liquidity backstops to stabilise the financial system. We need to remember that, and we especially need to remember the consequences: austerity for years, living standards frozen and people feeling left behind.
Many have argued that this contributed to Brexit as people thought that coming out of the EU would improve their financial position. As was predicted at the time, and has now been borne out, far from improving things, this actually led to major damage in the UK economy. Then came the expenditure on the pandemic, and the cost to the UK economy grew. People’s living standards have not improved for two decades. It is therefore not surprising that we now see moves to the populist right and left for simple and immediate answers. Economic challenges have their social and political effects, as we have seen before. Therefore, this Bill matters.
The Government are right to seek growth in the economy, and the financial sector is rightly identified as a potential source of growth. Clearly, where regulation is serving no purpose and is obstructing that growth or is out of date, it makes sense to reform it. However, we need to be acutely aware of the huge economic, political and social costs that have resulted from lax regulation and regulators not properly focused on real threats. That is what we need to guard against, and the noble Baroness, Lady Noakes, has decimated the proposals to reduce parliamentary engagement and the removal of regulations into various strategies.
Let me come to my focus here. Just as we have a new landscape in crypto, for example, we need to be aware of climate change as a current and future risk to the financial sector, over both the short and the long term. Clause 17 removes whole swathes of protection, to be replaced by as yet undefined strategies. The FCA has been given huge new responsibilities when we know that regulators have a poor track record in monitoring areas already under their responsibility, let alone horizon-scanning for new risks.
The deletions in the Bill take out regard for climate change, the need to focus on sustainable growth and the need to be compliant with the Climate Change Act, as the noble Baroness, Lady Hayman, mentioned. Yet, as the noble Baroness, Lady Young, said, the UK remains well positioned to capitalise on its reputation as a hub for sustainable finance. I would go further, however: we need now to be acutely aware of climate risk; therefore, we should be strengthening, not weakening, the rules here.
I hope that everyone has read, at the very least, the summary of the recent report produced by the Adaptation Committee of the Climate Change Committee, chaired by our colleague, the noble Baroness, Lady Brown of Cambridge. The world is currently on a path to be around 2 degrees above pre-industrial levels by 2050. We will not return to pre-industrial levels. Our aim has to be to stop further escalation in global heating, but also to seek to adapt to what is already our new climate. There will be parts of the world where this is far more acute than in the UK, but the financial sector is global, with implications going back to our own economy, society and politics. It is a global threat even beyond subprime markets.
The priority risks in the UK alone are intensifying heat, a growing flood risk, rising droughts and wildfire risk. The risk to the insurance industry is obvious. The Adaptation Committee report points out that flood-related insurance claims are rising; home insurers have paid out more in claims than they received in premiums for the five years to 2024. They conclude that by 2050, under 2 degrees centigrade of global warming, many homes and businesses may not be able to access insurance at all. This threatens the viability of the property market, the economy and the sustainability of communities. As the report states:
“A large insurance protection gap means many homes and businesses cannot access insurance due to lack of coverage or high premiums. It also puts stress on the financial sector, as banks face higher default rates on mortgages and business loans, and on public finances through disaster support needs”.
The 2039 end date for the Flood Re reinsurance scheme is also creating uncertainty in the property insurance market, which is having an effect on the housing market—as happened with subprime mortgages. As the report states, actions by financial institutions
“are needed to ensure that physical climate risks don’t disrupt the financial system. The actions will support the maintenance of essential financial services across the economy”.
The UK is home to the biggest share of international bank lending and borrowing. It is the largest market for international debt issuance and the world’s largest specialty insurance market, as well as the fourth-largest insurance market overall. One can see parallels with what happened leading up to the 2008 financial crash. The current risk to the housing market and to the insurance industry is clear. Therefore, it is vital that climate risk is included in the Bill, rather than excluded even from regulation. This is one challenge which, unfortunately, we can be absolutely sure will persist for many years to come—way beyond the life of this legislation—and therefore must be enshrined within this Bill.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a great pleasure to follow the noble Baroness, Lady Northover, and to agree with her warning. I add the phrase “carbon bubble” as a further financial risk. I also must cross-reference her contribution to the words in the Minister’s opening speech about increasing the insurance business in London. This seems like a very bad idea indeed in view of the risks we face in the climate emergency and nature crisis. I note that, at this moment, we are facing the risk of an extreme El Niño, with impacts we should well understand.
But here we are again: I join a small but merry band of financial services Bill veterans—this is my third—and I welcome the Minister to our group and look forward to our deliberations. I say “look forward” genuinely, because this is the most positive start to such a debate that I have heard. There was a great deal in the speeches thus far that I agree with, and more determination than I have heard previously in your Lordships’ House to at least start to tackle what economist Ann Pettifor has termed the “global casino” of which the UK financial sector is a significant part. We did not hear those powerful words just from the noble Lord, Lord Sikka—always welcome as they are—and that makes a welcome change.
When I first took part in the debates on what became the Financial Services Act 2021, I was new enough to be shocked at the narrowness of the debate, with a Conservative Government reducing regulation and controls, while the Labour Front Bench just nodded along. Amendment after amendment in Committee and on Report came from those who wanted the Government to go further and faster in deregulating, in letting the financial sector rip, even though it was little more than a decade since we had seen the cost of that in 2007 and 2008.
Today, though, we have heard from the right reverend Prelate the Bishop of Manchester powerful words not just about the financial sector’s failure to meet the needs of many parts of our society but also about the damage the sector does to many of the vulnerable. I have not yet persuaded the House’s champion against child poverty, the noble Baroness, Lady Lister, to take part in one of these debates, but I hope one day she and others will, because finance is far too important—and damaging—to be left to the bankers.
Today, the noble Lord, Lord Sharkey, was speaking up for the interests of consumers of financial products, so often the victims of predatory practices not just by the fringes of the sector but by the highly profitable giant organisations at its heart. I associate myself and the Green Party with those remarks, while declaring my membership of the APPG on Investment Fraud and Fairer Financial Services.
We heard from the noble Baroness, Lady Hodge of Barking, well known for her championing of action against corruption, about the need to tackle the rampant corruption and fraud. However, I do not agree with the noble Baroness’s conclusion that we are talking about a few “rotten apples” rather than structurally embedded corruption, with roots going back centuries.
After all, the City of London, and with Crown dependencies—so disturbingly highlighted last week in an exhibition in Portcullis House that, unsurprisingly, attracted a great deal of negative attention—is, as the then deputy Foreign Secretary Andrew Mitchell said in 2024, a conduit for nearly 40% of the world’s dirty money. As the noble Lord, Lord Evans of Weardale, said in 2022, in a debate on corruption secured by my noble friend Lady Jones,
“we have clearly, as a matter of policy, turned a blind eye to the perpetrators of corruption overseas using London for business or leisure purposes”.—[Official Report, 13/10/22; col. GC 156.]
That of course is being helped by those enablers to which the noble Baroness, Lady Hodge, referred.
Looking back to 2020, if fellow noble Lords had expected me to take part at all in the debate, they probably would have predicted I would make comments resembling those powerfully made today by the noble Baronesses, Lady Hayman and Lady Northover, work on which Peers for the Planet has been so prominent, in pointing out there is no financial sector on a dead planet, and that the economy is a complete subset of the environment.
However, the House was in for a shock in 2020—perhaps not for the last time. When I spoke then about corruption and the City of London’s place at the heart of it, I got more than the odd gasp, and fervent head shaking and opposition. This was when, for the Government, the noble Lord, Lord Agnew of Oulton, said:
“The UK is internationally recognised as having some of the strongest controls worldwide for tackling money laundering and terrorist financing”.—[Official Report, 28/1/21; col. 1880.]
Well, on these subjects, we have come a long way, as indeed the noble Lord, Lord Agnew, has in his views. The debate has shifted far closer to where the Green Party has always been, saying, as the noble Lord, Lord Eatwell, said, in the relationship between society and the financial sector, the settlement is not working. The financial sector is not providing the appropriate support to the real economy and is extracting excessive profits from its traditional sectors and from parts of our society in which it should have no place, such as children’s social care, aged care, water companies and many other public services. Excessive pay is also being extracted, as the High Pay Centre has been so prominent in highlighting, and the sheer size and risk-taking threatens the security of us all. We have too much finance, so the Bill should not be seeking to grow more—as well as of course, too much corruption and fraud. There is another way, as the Global Justice Report by Thomas Piketty’s World Inequality Lab demonstrated this week.
There is also an issue not yet raised by others: the cost of the speculation in the prices we all pay for the basics of life, for food and for fuel, and the impact of the financial sector’s bulking up of lending on house prices. Food security, as the Green Party is trying to get the Government to understand, is a huge and present issue in the UK, and the financial sector is a significant part of the problem.
The noble Lord, Lord Eatwell, said risk aversion has its uses—I can only agree. He questioned, however, the cost to the sector of regulation, but the cost to all of us in getting it wrong is of course enormous and possibly existential. We must not forget how close we got in October 2008 to total collapse.
It is customary at Second Reading to mention issues that one wishes to raise in Committee, and I have pointed to my areas of interest: making the financial sector work for the real economy; tackling corruption and fraud; protecting consumers; of course, nature and climate; and tackling the cost of speculation to us all. But I will raise one final issue, which I will be tackling within the Bill if I can find a way. It is an issue that politicians around the global North have been facing for a long time. I go back to US President Roosevelt in 1936:
“Business and financial monopoly, speculation, reckless banking ... had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob”.
We have, just down the road from us, the City of London and the City of London Corporation, which have a unique, archaic and dangerous place outside the rules that apply to the rest of society—rules about democracy and rules about transparency. This is a place where organised money rules. I mentioned the APPG on Investment Fraud and Fairer Financial Services, which I am working with now on a survey, asking for views on whether the corporation should be maintained as it is, reformed, or abolished, as a royal commission recommended in 1894.
We have come a long way in our understanding of the issues in the financial sector. We will have to see how far we can go, because we need to grasp, as I respectfully say to the Minister, that the City is not one of our greatest economic success stories but an entity that needs far tighter, stronger controls from the Government for the security of us all.
Lord Mann (Lab)
If we had green technology in households and businesses everywhere, then we would be less reliant on Russia, China and Iran. So, why is there no financial product that the householder can get hold of to put, say, solar panels on their roof, so they and the country benefit? Why is there not a product for schools to do the same thing or a product for an NHS trust to do the same thing? If the technology works and is sufficiently profitable, then a good financial product would make common sense. But I see none for schools or for NHS trusts, and those for householders and small businesses in particular are rather limited. I would be interested in the Minister’s observations, because it seems to me that is relevant to the Bill far more than it is relevant to the Energy Secretary.
Secondly, the Minister was very bullish about how mutuals and co-operatives are going to double. We are two years into five years of a Labour Government. I would be interested to know whether we are 40% towards that doubling now, and if not, which are the sectors that are going to lead the way in the next three years, and how. I would also be interested, perhaps in writing, to understand that, in the case of one small sector, county cricket clubs, whether it is the Government’s expectation that in the next three years, they will be as mutualised as they are now, or significantly less so.
My third and most substantial point is on financial mis-selling. I have previously raised the V11 group of working-class footballers who were done out of their investments by fraud. Exactly what happened to them is very similar to what happened to the coal miners—a separate case; it was not financial fraud but lawyers who were ripping them off and taking their money. There, the ombudsman did a special report in 2008. I managed to get 43 firms of solicitors disciplined and fined; I got 12 removed from practice.
Let us take the financial sector and what has happened to those former footballers, as well as to many other groups in society who have been mis-sold products. I do not see the same system. As vice-chair of the Treasury Select Committee in another House, I had to deal with the Financial Ombudsman Service for four years, and I found it lacking in purpose and losing skills and experience all the time. I did not see the level of leadership needed to take hold of things. How is that going to change—I hope it will—with a shift of power to the Financial Conduct Authority?
Looking at the V11 case as an example, the fraud was palmed off to the Serious Fraud Office and the City of London Police. Why? Why did it go to one specific police force? I had dealings with the SFO. When it came to the coal miners and the legal scandals, which were mega, I got money—millions of pounds—back for more than 2,000 of my then constituents. Why is that not being handled more effectively at the beginning? In this case, we are talking about financial mis-selling, which is a conduct issue, as well as fraud, which is a policing issue—and there is a mishmash in the middle. I want to be convinced that the Financial Conduct Authority will cut through that.
If working-class sports stars and musicians come into money and find others taking their money away from them—by mis-selling or, worse, by fraud and mis-selling—why would others invest in those products in the first place? In the case of the footballers and Kingsbridge Asset Management, that idea was brought forward by the Government and the then Chancellor Gordon Brown as a way to develop the UK film industry and as the right thing to do. If working-class people do the right thing and get some money and invest it, who is going to protect that? People are not surrounded by good accountants, if any, or by good lawyers, if any, when they first come into money.
If we look at the financial fraud cases, we see case after case where people are getting done over by people who appear to be cleverer than them, giving them advice and mis-selling—and the system is not helping them out. That is fundamental. That is the bit that I want to see more of in the Bill. If we are appealing to the country by saying, “Do the right thing and invest in the future”—whatever kind of investment—there have to be guarantees. The system has to be robust enough so that, when there is wrongdoing, somebody is going to sort it out. The mishmash of the SFO and the City of London Police is not a system; it is just a hope—and it has proven to be a failed hope.
I ask the Minister, if the FCA is taking that responsibility, what precisely will the Government say to the FCA on the systems, the skills and the reporting back, including to Parliament, that it is going to give, to show that it is up to the mark in being able to handle the mis-selling and the fraudsters? Has it got the powers it needs to prosecute? That seems to me to be fundamental. The separation of prosecution and those looking at financial mis-selling is one of the lessons from the V11 group, the loan charges and the other, multiple scandals that we have seen in the past two decades. People need to be confident in the system around financial services, and we need to make sure they are. I look forward to hearing from the Minister precisely what he is going to say to the FCA, should this Bill be passed and the FCA be given more power.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to take part in this Second Reading debate, and, in doing so, I declare my technology interests as adviser variously to the Crown Estate, Endava plc and Simmons & Simmons LLP. I congratulate the Minister on the clear and cogent way he introduced the provisions in the Bill. I will concentrate largely on what is not in the Bill now but what I hope may be included by the time we get to Third Reading.
First, AI is across our society, our economy and our financial services—be that in fraud detection, credit decisioning or algo trading—yet, currently, the Bill is strangely silent on it. The regulator is having to use existing powers that were never designed for these new technologies.
To that effect, what does the Minister believe is the right approach to AI in the Bill, given that the Government have stated that they will take a domain-specific approach, leaving it to the individual regulators? If one takes that approach, how can a consumer or customer of a financial services product be guaranteed clarity, consistency and a coherent approach when they avail themselves of financial services, not least because there are two regulators in this sector? A business may well have dual regulatory responsibilities, so how would not having horizontal and cross-sector AI regulation work?
There is no effective framework for cyber resilience in the Bill. In contrast to AI, the Government have decided that, on cyber, you can have a cross-economy and cross-society approach. I ask the Minister: what is different about cyber? Why can it be seen to be cross-sector, but AI cannot?
On financial inclusion, I welcome the provisions around access to banking and in-person services. Although, as other noble Lords have mentioned, the devil is largely in the detail as to what precisely is meant by the services, there is almost no point whatever in having a branch open if, when you go into that branch, you are told that there is machine or a screen in the corner that you can go and use. How is that financial inclusion or digital inclusion? When financial exclusion and digital exclusion all too often walk hand in hand, we need greater clarity in the Bill when it comes to these financial inclusion and access requirements.
We should consider what the third-largest economy in the world is. The United States is first, and China is second. In third place is fraud and economic, cyber and financial crime—it amounts to $10.5 trillion, which could affect hospitals, schools, teachers, nurses, doctors, defence or any element of state spending. One can be sure that the UK is losing its share of billions in financial crime and fraud. Yet where is the modern framework in the Bill to address these new fraud vectors, not least AI-enabled fraud? Why is there not more in the Bill that looks to address how AI can be deployed as a sword and shield against the nefarious use of AI?
There are a few nods and winks in the Bill to financial education, but we need to see much more on this. If there is to be less asymmetry between customer and firm, financial education is critical. How can the Government, the Financial Inclusion Committee, the Money and Pensions Service, which does such great work, and firms themselves can be brought together to have a far greater, coherent and consistent approach to financial education for all? How will this tailor with what is currently proposed, with the excellent Francis review of the curriculum? What will financial education look like in that?
There are many positive provisions in the Bill, but it is marked by errors and omissions excepted. There is so much that is not in the Bill that needs to be in it. It is a significant Financial Services and Markets Bill, yet it is silent on AI and cyber and it is quiet, if not completely silent, on financial inclusion, fraud and financial education. If this continues unamended and these issues unaddressed, individuals, our communities and our country will be the worse for it. They will be under-enabled and under-empowered and, as a consequence, there will be more than suboptimal economic activity. We have the Bill. We do not need to make it bigger, but we can make it better.
Lord Sahota (Lab)
My Lords, I welcome the opportunity to contribute to the debate on the Financial Services and Markets Bill, in particular to consider the implications for local authorities, local communities and the people who we are here to serve. At a time when high streets continue to face significant challenges, there are aspects of the Bill that deserve recognition and support.
One of the most important is the effort to preserve access to essential banking services. For many people, particularly older residents, small businesses and those who are less confident using digital services, access to physical bank branches remains vital. The closure of bank branches over the years has had a profound impact on communities across our country. A local bank is not merely a place to deposit money or seek financial advice, but often an anchor institution that helps sustain footfall, support local businesses and contribute to the vitality of the high street. In many of the communities that I have visited, the loss of local bank branches has been felt just as keenly as the loss of local post offices. Measures that seek to maintain access to cash and banking facilities therefore have benefits that extend far beyond the financial sector itself. They help to keep our town centres active, accessible and economically resilient.
The Bill also contains provisions aimed at strengthening consumer protection and promoting a more competitive financial services sector. If implemented effectively, these measures could improve access to affordable financial products, encourage innovation and help to ensure that customers receive fair treatment. Such outcomes would be welcomed by households facing continued cost of living pressures and by small businesses seeking access to finance and investment.
However, while there is much to commend in this Bill, there are also important questions that deserve careful consideration. Local authorities have long played a crucial role in supporting vulnerable residents, promoting financial inclusion and responding to local economic needs. They possess local, detailed knowledge of the challenges faced by their communities and are frequently the first to identify emerging problems. Will the Minister clarify how local authorities will be consulted as new regulatory frameworks and powers are implemented? What mechanism will exist to ensure that local knowledge will be used in decision-making? How will the council be able to raise concerns when changes in banking provision, financial services or regulatory practice have unintended consequences for local residents?
I would also welcome clarification of how the Government intend to measure the impact of these reforms on financial exclusion. What assessment has been made of the effects on rural communities, deprived urban areas and those who continue to rely heavily on face-to-face services? Furthermore, what safeguards will be put in place to ensure that the transition towards digital financial services does not leave behind those who are least able to access them? Finally, can the Minister explain how the Government will balance this regulatory efficiency with the equally important need for local accountability and community engagement?
The success of this Bill should ultimately be judged not on its effect on markets and institutions but on its impact on ordinary people. If it helps to maintain a vibrant high street, protect access to essential services and strengthen financial inclusion, it will make a valuable contribution. However, we must also ensure that local authorities retain a meaningful voice in shaping the outcome for the communities that they know best.
Lord Thomas of Cwmgiedd (CB)
My Lords, I, too, welcome this Bill as an important step in strengthening the position of London in the world’s financial markets. However, I also pay tribute to the regulators, particularly the FCA, who have had to cope with markets that have changed enormously over the years that the FCA has been in existence. However, the fact that one extends praise to them does not mean that things do not need putting right.
There are two areas that I wish to address. The first is the problem of climate change, which has been so ably addressed by the noble Baronesses, Lady Hayman and Lady Northover. I agree completely with what they said. I want to underline the effect that this is having. There is litigation in almost every country in the world about the risks of climate change. Central banks and regulators worldwide are concerned about its impact. We must therefore ensure that this Bill is fit to deal with this problem and that regulation of the financial markets, because of what is involved for the longer term, deals properly with this area.
The second area is the control—I use that word deliberately—that Parliament should exercise over regulators and their accountability. In doing so, I declare my interest as chairman of the Financial Markets Law Committee, though I speak in an entirely personal capacity. One symptom of the current problem can be taken simply from the volume of litigation. We all suffer in this House from, and complain about, the thickness of the Bills and statutory instruments that we have to look at. Perhaps the problem of our age is being unable to express ourselves concisely enough. However, it is an extremely serious problem in the financial markets. Last year, the FCA produced 1,918 pages of regulatory instruments. The fact that so much legislation is being produced—the noble Lord, Lord Pitt-Watson, gave an illustration earlier of the change—shows that someone needs to hold the regulators accountable and ask why we need it all.
There are five points I would like to make. First, there is a serious problem with Clause 17 because of the weakening effect it has on transparency and proportionality and, as the noble Baroness, Lady Noakes, so clearly demonstrated, the more insidious impact it will have on the ability of this House to scrutinise Bills. We must increase scrutiny and outside control, because fundamental to any body that makes laws or, as in the case of the FCA, also enforces them, is accountability, and I think there is a plain lack of accountability.
Secondly, I accept, as the Treasury rightly points out, that expertise is required to draft the regulations. These transactions, when I look at them, are of immense complexity, and you really need to understand the market to draft them, but that does not mean that you do not need someone looking over your shoulder to see whether you are getting it right. It is very easy to see just trees and forget the wood. What I cannot understand is why the regulator is not happy for someone to look over what it is doing, because if things go wrong, it is a mighty source of comfort. There is no doubt we shall have another financial crisis in a way none of us can anticipate.
Thirdly, there is a wider issue as to the form of rules. We have got to a stage now where we produce very detailed rules, and we have to ask ourselves: is this the right approach? Compliance departments like detailed rules, because if you have detailed rules, all you have to do is go through them all—tick, tick, tick, tick—and you have complied with your obligations. But that should not be the test. The test should be: “Have you complied with the principles?” We are in danger of transferring to the regulator the risk that market participants should have in complying with the underlying principles and not merely with the tick-box exercises of dealing with rules. I pointed this out when, with a co-inspector in the system of inspections we used to have many years ago, we said that one of the problems with the whole Maxwell case was a tick-box mentality, and we must always remember that.
It is also necessary to point out that, if you have very clever people, and one of the regulator’s difficulties is that the people he supervises pay so much money, you can always use rules to justify what is done. It is worth turning up what happened in Enron. Time does not permit me to explain, but Enron is a classic case of applying rules to produce a result that was completely contrary to the underlying principles.
Fourthly, there is cost. The point is, very shortly made, long and complex rules are very expensive. Fifthly, there is consultation. It is very important that we look very carefully at the provisions in the Bill relating to consultations with the market. When drafting, it is very easy, as long experience has taught me, to overlook the obvious. We have to be very careful in what we permit the regulators to do without consultation with the market.
For those reasons, therefore, I very much hope we will scrutinise these two areas of the Bill in particular, and again I pay tribute to the noble Baroness, Lady Noakes, for the extraordinarily lucid explanation she gave of the problems with Part 3, Clause 17 in particular.
Lord Tunnicliffe (Lab)
My Lords, for 14 years, I was the most junior opposition Treasury spokesman. A slight problem with that is I was occasionally—in fact, more than occasionally—the most senior opposition Treasury spokesman, largely because there was only one of me. Settling into being a Back-Bencher, I glanced at what was coming ahead and decided I had a duty to participate in this debate and learn. I have looked at the Bill and concluded it is what I am going to call “motherhood”. That is not to belittle it, but part by part by part, it attacks individual problems and proposes solutions. We will be very good at that; we will work at it; and we will, I hope, get a good result.
The only bits that hit my eyes were Clauses 39 and 40 on ring-fencing. The global financial crisis in 2008-09 was right at the beginning of my career as an ill-informed Front-Bencher. I have been through virtually all the Bills—I think only the noble Baroness and I have been there so consistently, although there was of course also the noble Baroness, Lady Kramer. We had the global financial crisis in 2008-09, and we really must remember that. It has been mentioned that there will be another one; we do not know what it is, but we should think about how we are prepared for it. I could not agree more with that.
In the 2008-09 financial crisis, the world teetered on the edge of financial chaos. It was solved by a lot of people, but I am particularly proud of Alistair Darling and Gordon Brown for what they did in those weeks when we really did not know what would happen next. After the crisis, we created the Independent Commission on Banking, the Vickers commission, which reported in September 2011 and proposed ring-fencing. I must say that the consensus view on our side was of a good report, a good commission and great people, and the output produced general approval, including from me.
In anticipation of this debate, and looking at ring-fencing as the most significant point that it would touch on, I decided to read a few reports. I read the Ring-fencing and Proprietary Trading Independent Review by Keith Skeoch. It is a fascinating document, which was published in March 2022. The Treasury produced A Smarter Ring-fencing Regime in November 2024 and Safeguarding Stability, Enabling Growth in May 2026. I am afraid I concluded that the ring-fencing regime was doing little good and, in many parts, harm. It has been overtaken in the area of protection by The Bank of England’s Approach to Resolution, of October 2017.
I became fascinated by this resolution stuff—funny things happen to you in old age—and managed to get somebody in the Bank of England, the official who is in charge of resolution, to give me a series of seminars on the telephone. He was a bit suspicious, so he said he had to have his solicitor with him throughout the conversation. I feel I understood it, and I think the claim made in some of these reports is this: all the good that ring-fencing produces is covered by the resolution regime, but the resolution regime, at the end of the day, takes years in preparation, as various banks are persuaded to take particular actions to make them more robust in a crisis. But it actually happens in about 60 hours over a weekend. It is a very elegant process, and they have enormous powers.
I feel that there is a strong case for a relook at ring-fencing, recognising that the resolution regime gives all the protection. We must not lose sight of what we were trying to do. We were trying to avoid the “too large to fail” dilemma. The resolution regime does that. It does not do it for just ring-fenced banks; it does it for all banks. It achieves almost certainly the minimum cost to the public purse—normally, no cost to the public purse. It prevents systemic impacts.
The reason I am making this so short is because the only Bill that goes into the details last about 40 minutes and I did not think this was the time of night to start on it. I simply say that I hope I will be able to find a way, I hope even some support, to produce amendments to the Bill so that we have a proper discussion that looks at whether ring-fencing is still fit for purpose and the extent to which the resolution regime can take over much of its work. The rest of its work, if any, can be distributed within the regime. We can take away the detailed problems that are all over the place in its application, which is a negative to the system, and remove the fact that there are two regulators, which is always a bad thing, especially when one is going to take over at the last minute, as the Bank of England has the power to do in the resolution regime.
Baroness Kramer (LD)
My Lords, as the first of the winding speakers, I thank the Minister for his willingness to meet. I suspect that after listening to what has been an extraordinary, exceptional debate with everything a powerful contribution, he now knows that this is not a small, technical Bill that will slide easily through this House.
We have agreed generally that the financial services sector contributes something like 10% of the UK’s economic output, and, consequently, that innovation and growth in this sector matters. However, I want to pick up the point, which others have made, that it is important that we do not repeat the mistakes of the past. This sector brought the UK economy to its knees. My noble friend Lady Northover, the noble Lord, Lord Davies of Brixton, and to some extent the noble Lord, Lord Tunnicliffe, gave us a feel of how damaging it was at the time. To say the world teetered was probably the right phrase, but the consequences have dragged on way beyond that and still have deep impacts today on ordinary people dealing with their cost of living.
Following that crisis, the revised regulation put into the books was based on precautionary principles. I never have objections to streamlining, efficiency and limiting duplication, and I agree that some measures went too far or were too broad, but this Bill fundamentally changes that precautionary approach and replaces the principle with assurances of enforcement action in relation to poor or corrupt behaviour, and with bank failures, as the noble Lord, Lord Tunnicliffe, described, resolution schemes come to the rescue. I question whether the Bill adequately structures the capacity to make the shift.
In the case of enforcement, I have asked the Minister directly to demonstrate to me that enforcement has teeth. I talked to the City again this morning and, frankly, it laughed. It is one of the reasons why, if we cannot have certification and precautionary principles around “fit and proper”, enforcement is critical. I want to hear much more from the Government on that issue, and that is just one example.
Picking up on the point made by the noble Lord, Lord Tunnicliffe—I disagree with him completely—that in the case of resolution, we do not need ring-fencing because we have a resolution regime in place or we can weaken the one because the other exists. Will the Minister be able to look me in the eye and say that he would activate a bail-in bond scheme if a big bank failed? The consequence would be huge financial instability among those who held those bail-in bonds—I am talking about the insurance companies and pension funds. Many would be on the verge of collapse if we ever exercised bailing in those bonds. That is one of the reasons why, in the financial crises that have happened, no Government have ever taken that step.
That is a minor issue around ring-fencing, though. There are lots of issues there. I will want to pick up the one on intrabank group services—I am just giving notice to the Government—because the removal of the ring-fence there allows services to be brought in from overseas bodies that are not regulated by any UK authority. We heard from the noble Lord, Lord Eatwell, who I know is very concerned about MREL and whether bail-in bonds could ever be used, the noble Lord, Lord Davies of Brixton, and others on these issues.
I join my noble friend Lord Sharkey in his utter frustration at the undermining of the FOS, the Financial Ombudsman Service, and the narrowing of protection, the narrowing of free and fair redress. We are going to take that on in this Bill. I also join the noble Baroness, Lady Noakes, in her brilliant speech. My noble friends Lady Bowles and Lady Northover spoke on the same issue, as did the noble and learned Lord, Lord Thomas, in some ways. The noble Baroness, Lady Noakes, used the word “shock” in relation to the regulatory principles applied by both regulators, which currently sit in primary legislation—proportionality, fairness, responsibility, transparency and, yes, regard to climate change—being removed from primary legislation by this Bill and reduced to elements in a five-year strategy document. Those regulatory principles are Parliament’s instructions to the regulators, but will now have no legal standing. If the regulator does not pursue them, there can be no action in court and no charge of judicial review. It is entirely up to the regulator whether those principles are observed.
I note that it is very clear in the Bill that the strategy document on which we will now depend can be revised at any time with no consultation; the regulators are merely required to note in their annual reports whether they have bothered to have any regard to the principles. The main purpose of this change—we have seen this pressure before from the regulator—is to cut Parliament out of any control over the principles of the regulator and make sure that there is no additional recourse when they are abandoned. This change has to go, and I suspect that will be the verdict of most of this House.
That brings me not just to the commissions in this Bill but to its omissions. I am really grateful to the noble Lord, Lord Holmes, who raised AI and cyber issues about which I am, frankly, not sufficiently informed, but I am sure he is right that they need to be addressed in this Bill. The omission that exercises my party most is around access to financial services for both small businesses and disadvantaged individuals who are very poorly served at present. These issues were eloquently addressed by the noble Baronesses, Lady MacLeod and Lady Hyde, the right reverend Prelate the Bishop of Manchester, and the noble Lords, Lord Kamall and Lord Sahota, in really powerful discussions.
This Bill takes some necessary steps on credit unions, credit data sharing, and permits action on the anticipated Lloyd review of in-person banking, but it could go so much further and bolster—I am so glad that the noble Lord, Lord Kamall, and others have mentioned this—community development financial institutions, including credit unions. With thanks to the fair banking movement, I will propose a rating system to show where there are shortfalls in lending and other financial services. I will then go beyond that to propose remedies, including mechanisms to provide investment into CDFIs for those banks that do not wish to change their lending practices. A revival of local banking, which has largely been discarded in the business models of the big banks, would drive up growth, jobs and living standards in all our communities.
The US tech sector is brilliant at not paying its way at the expense of British competitors. Online platforms facilitating fraud should have reimbursement liability; it should not just be for banks. We hope we can find a way to bring in that change. We also insist that across all recognised payment systems, including big-tech, participants—not just the banks—must be subject to the levy to support financial inclusion. Again, I hope we can bring in language for that.
We should also use this Bill to face up to the expected risks in financial stability. A key concern is the burgeoning private asset market—now $18 trillion strong—and the private credit market discussed by the noble Baroness, Lady Bi. It is interconnected throughout lending, investing and derivatives throughout the regulated financial sector. That private market is opaque; it is an intermingling of excellent credit and complete garbage, and it easily becomes illiquid. I want it to be a clear responsibility of the Bank of England and the PRA to assess the risks of a broad-based credit crunch in private markets. I am also concerned that the regulatory perimeter that excludes small businesses from most FCA protections, may become a serious issue in a private credit crunch. So I will seek to add to the regulators’ principles consideration of the risk arising from these issues.
Digital payments and finance are coming at us fast—we cannot be King Canute but, frankly, we have had enough of scams and money laundering. The noble Baroness, Lady Bi, and, very extensively, the noble Baroness, Lady Hodge, talked about the importance of taking action to deal with enablers, but I think this Bill should also be an opportunity to get the right guardrails in place for crypto. I am very much behind putting requirements on the tech sector, and requiring the stablecoin exchanges to act against fraud, sanctions busting and money laundering. But I am not sure this should be done through Henry VIII powers, and I will give you a reason. I am concerned, for example, that in exchange for putting these requirements on stablecoin exchanges, the Bank of England is proposing to step in as a backstop if they have liquidity problems—they have made that statement publicly. Even in the US and the EU, no Government will touch that offer of a liquidity backstop with a barge pole. It is such a big issue that this is an area where Parliament should be making the decision and not the regulator.
History tells us that those who cannot remember the past are condemned to repeat it. If we repeat 2007, we lose all our chances to seize the opportunities for the future. So, my colleagues and I will try to make sure that Parliament’s voice remains, the guardrails are in place for the financial sector and even for crypto, and with the tech companies paying their share, and we will see game-changing improvements that achieve access to finance for all communities, individuals and small businesses. Fair and sustainable growth is more than possible and it is what the public expects of us.
Lord Altrincham (Con)
I thank the Minister for hosting this debate with such courtesy and speaking so well at the start. I declare my interest as a director of South Molton Street Capital and also as former director of the Co-operative Bank. I follow the words of my noble friend Lady Neville-Rolfe in saying that we welcome this Bill. It addresses a widespread sense that financial regulation has become a little too complex. We have heard that this evening in debate, but that sense also seems to be held by the Treasury, the National Audit Office and, clearly, by the Government. The Government have generated multiple reviews and inquiries that underpin the clauses in the Bill.
To look at just a few of them, Clause 26 follows the committee on banking standards. This is the clause that looks at the senior management regime, where there is a huge need for reform and a reduction in bureaucracy. The Government have asked for a 50% reduction in bureaucracy, which we would welcome. The senior management regime itself is really quite a complex thing, and it probably does not quite do what Members of your Lordships’ House would expect—partly because some of the people who participate in it do not fully understand the regime themselves or what their obligations are.
Clauses 16 and 17 are the two quite controversial clauses that were spoken about today. One is on the five-year plan—the unsupervised five-year plan at the FCA—and the other is on weakening the link to the regulatory principles. Noble Lords have spoken today about the importance of oversight and of keeping an eye on what the FCA is up to. But going right back to the beginning of how the regulator was set up—the noble Lord, Lord Eatwell, reminded us of his participation in that, along with the noble Lord, Lord Burns—when the Financial Services and Markets Act 2000 set it up, it established that there would be a cost-benefit analysis that would essentially hold the regulators to account to be honest in how they develop regulation.
The FCA is running a review at the moment of cost-benefit analysis with Dr Felix Martin. We might, at the very least, hold the regulators to that part of their own obligation: proper cost-benefit analysis, and proper supervision of that analysis. That is even before we get to proper supervision in Parliament, which we have only just managed to put into the last Bill, as your Lordships know.
Clause 39 is on the ring-fence. It was interesting to hear the noble Lord, Lord Tunnicliffe, on that. The ring-fence clause also sits on a variety of reviews, in particular the Keith Skeoch review of 2022. It is worth remembering that his review in 2022 said that it supported the ring-fence but was very explicit on a few other points, one of which was that it is very expensive. There is an economic burden to running this ring-fence regime, in the order of £1.5 billion a year. But Skeoch also said that the benefits of the ring-fence regime would be diminishing, for the reasons we have just heard: because of the strength of the regulatory regime elsewhere, in particular the resolution regime. Then he added that the ring-fence might lead to ossification—quite a strong word—in retail bank services.
We might hope that that has not quite happened, but we know that there have been closures of hundreds of bank branches, so we might expect that all those closures would suggest at least a moderate reduction in retail bank services. That is before we even get to the provisions in Clause 3, which themselves are underpinned by a review into what is happening in retail banking at the moment. We might take quite a hard look at that, because it touches on the issues raised by my noble friend Lord Kamall—access to banking services for more vulnerable people—and by the noble Baroness, Lady Morgan: financial abuse and what is happening in the retail bank market. It just underpins the fact that so many of these clauses sit on quite careful inquiry.
This pattern, whereby there is a review and a recommendation, and it winds up in consequential legislation, means that the FCA acquires more powers every single time. Then we come back to why the FCA has all these powers, what it is doing with them and what we can do in Parliament about it, which is why in debating the last financial services Bill we spent so much time on oversight and accountability, so I will start there.
Oversight in Parliament for financial regulation has been improved with the previous Financial Services and Markets Act and, to the credit of Parliament and the Government, there have been quite important changes with the increase in the MREL threshold in September and the deposit threshold for the leverage ratio in November, and a reduction—for the first time since the financial crisis—in the Tier 1 capital ratio by the Bank of England in December. Oversight in Parliament was at least part of the reason for the change but, as a number of noble Lords have said, this Bill removes significant parts of the existing regulatory architecture. That was specifically of concern to my noble friend Lord Howard and mentioned by the noble Baroness, Lady Bowles.
In doing so, the Bill transfers considerable power to the Treasury, the FCA and the PRA to design and implement the new regime. Clause 3 adds Henry VIII powers that might create quite unintended consequences. Clauses 16 to 18 specifically tend to weaken supervision. We understand the argument the Minister is likely to make, which is that placing more of the framework outside primary legislation can allow for greater flexibility, speed and responsiveness. But flexibility must not come at the expense of accountability, and simplification must not become a means of transferring major policy choices away from Parliament and into the hands of regulators without proper oversight.
The FCA and the PRA rightly enjoy statutory independence from the Chancellor, but that independence makes parliamentary accountability even more important. Their principal democratic accountability is not to Ministers but to Parliament, and in practice that accountability is exercised largely through committees in both Houses.
I turn to regulatory proportionality. The second key concern I have is proportionality, which was discussed extremely clearly by my noble friend Lady Noakes and also by my noble friend Lady Lawlor. My noble friend Lady Noakes is right to say that proportionality needs to be uppermost in the minds of the regulators. It is the detail of rules, guidance and decisions that matter, not the broad-base strategies. Of course, lack of proportionality can arise for lots of reasons, perhaps starting with legislation itself, but it suggests a lack of regulatory judgment, which is rather unlucky.
Anti-money laundering rules have reached the furthest corners of English life. Alas, as we guard against wickedness in very small financial transactions in this country, there is a degree of quite significant capital flight out of the country going on. The timing of the Bill suggests that it may be the last chance for Parliament to set clear guidelines on proportionality before the next Government. Only Parliament can do this, because financial regulation will default to maximum caution in most instances, with consequences very clearly identified by noble Lords in the debate.
Clause 14 on AML, Clause 39 on ring-fencing, Clauses 16 and 17 on the five-year plans, and Clause 26 on changes to the senior management regime are all about proportionality. The Government’s own 2025 action plan recognises:
“Regulation can be too complex and duplicative”,
and that the cumulative effects of individually rational rules can impose significant burdens on business, smaller banks, challenger firms, wholesale firms and those caught by overlapping conduct and redress frameworks.
Your Lordships’ Financial Services Regulation Committee has also raised important concerns about whether aspects of the PRA’s capital approach may limit
“the commercial incentives and capital available to provide finance for growth”.
Overcalibration can reduce lending, particularly for SMEs, and productive investment, especially where requirements bear down on smaller, growth-oriented lenders.
The Bill touches on some of these issues of proportionality: reform of the Financial Ombudsman Service; simplification of the senior managers regime; faster application deadlines; and the consolidation of the Payment Systems Regulator into the FCA. Those are welcome steps.
We welcome the Bill. We hope that, through our deliberations in this House, we can help shape a Bill that restores confidence, competitiveness and momentum in our financial services industry for the wider benefit of our economy and our country.
Lord Stockwood (Lab)
My Lords, I thank everyone who has spoken in the debate for their valuable contribution. It has been an incredibly well-informed and courteous debate that, overall, recognised the balance that needs to be found to ensure that consumers are protected and risks are appropriately managed while avoiding an ever-increasing burden of regulation. Noble Lords have a range of views on where exactly that balance might be. In the time that I have, I will try to respond to as many of the points raised as possible. I will not be able to do justice to all the points raised today, but I have meetings scheduled with many people who have spoken. I reiterate that I am happy to meet anyone who would find it helpful to discuss any of the issues ahead of Committee.
As I have said, the Financial Services and Markets Bill will modernise how the sector is regulated. It will help the sector grow and lend more to businesses, and it will make consumer protections fit for the digital age. It will achieve these objectives while maintaining high standards of regulation and oversight. I remind noble Lords that this is why, as I mentioned when I opened the debate, the financial services sector contributes 8% of total UK GVA—although I have been corrected that TheCityUK estimates that, when related to professional services, this rises to 11%. We can all agree it is a substantial part of the UK economy.
The industry is a direct source of jobs and tax revenue, but it is, of course, much more than that. It is a key enabler of growth in other sectors, and it is the provider of payments, credit, insurance and investment services to households and businesses across the UK. A successful financial services sector is one that meets the needs of the broader economy and society at large, and that is what the Bill aims to deliver.
Before I turn to some specifics, I will set out the Government’s position on some of the broader points raised in the debate. A number of Peers, including the noble Baronesses, Lady Neville-Rolfe and Lady Noakes, asked whether it was appropriate to pass more responsibility to the regulators. FSMA 2000 gives the financial services regulators responsibility for making the detailed rules that apply to firms. The regulators operate within this regime set by the Government and Parliament, including a set of statutory objectives that they need to advance. As the noble Lord, Lord Burns, reminded us, this is a long-established approach and the Government believe that the regulators remain the most appropriate entities to make rules for the sector. Both the IMF and the OECD support the principle of regulators making rules independently from government. The delegation in this Bill is entirely in line with the approach that Parliament has repeatedly affirmed. The Government are in full agreement with the noble Lord, Lord Eatwell, when he notes that the success of the UK’s financial sectors depends in part on a highly respected system of regulation and strong, effective regulators.
The noble Baronesses, Lady Neville-Rolfe and Lady Bowles, also asked about the Government’s use of delegated powers, especially the power related to the banking services in Clause 3. The Treasury has submitted to the DPRRC a full delegated powers memorandum, which sets out the justification for each power. On Clause 3 in particular, the Government are taking this power now to ensure that we can respond swiftly to the independent review of access to banking services once it concludes. The Government are committed to keeping all aspects of the power under review as the Bill progresses through Parliament and as the independent review completes its work. We expect to narrow this power once the review is concluded.
On the matter of regulatory complexity, the Chancellor has been clear that the UK needs to regulate for growth and that regulation must be proportionate while adequately protecting consumers and ensuring we maintain the high standards we are known for around the world. This Bill targets unnecessary, burdensome regulation while maintaining those high standards, and we are focused on speeding up regulator decision-making and removing administrative burdens. The Government are committed to creating a regulatory environment that is proportionate and effective and supports growth. Good regulation also supports consumers. For example, the reform of the Consumer Credit Act is designed to ensure that consumers receive clearer and more useful information from lenders, empowering them to make better-informed choices on their finances.
The government framework is prescriptive and outdated. The literacy trust has found that one in seven adults has literacy skills at or below the level expected of nine to 11 year-olds, yet Fairer Finance has found that the reading age required for credit card providers’ materials is that of 11 to 20 year-olds. It is obvious that a simpler, more flexible regime, one focused on outcomes rather than rigid prescription, will enable firms to produce clearer, more accessible financial information, better meeting the needs of the significant proportion of consumers with lower levels of literacy or numeracy. The FSA has the experience to design the system to deliver this and the powers it needs to enforce compliance.
I have listened carefully to the concerns of the noble Baronesses, Lady Neville-Rolfe, Lady Noakes and Lady Gill, and others about changing the application of the regulators’ “have regards”, applying them to the long-term strategy rather than the day-to-day functions. It is vital that the regulators are subject to effective oversight and scrutiny so that Parliament can have confidence they are acting with the appropriate measures and achieving the outcomes required. Much like other areas of regulation that apply to firms, the reporting requirements on the regulator have developed over time and have sometimes laid on top of each other. What results is a detailed set of information, but there are also areas of overlap and duplication. To use a metaphor also used by the noble and learned Lord, Lord Thomas, at times it can be difficult to see the wood for the trees.
The changes will require the regulator to set out the regulation and supervision clearly, making it easier for Parliament and stakeholders to understand, engage with and challenge them. The “have regards” will remain in legislation. This will support the work of the Government and Parliament to hold the regulators to account, cutting out dense piecemeal reporting to focus on the bigger picture. The reforms will reduce unnecessary and duplicative burdens on the regulators, allowing them to speed up and focus on what is important while maintaining the important information needed for meaningful scrutiny. For example, the Bill will require the FCA and the PRA to continue to report annually on how they are advancing their competitiveness and growth strategies. This will support the Treasury’s biannual performance reviews held with the CEOs and the regulators, introduced as part of the Government’s wider regulation action plan.
I turn to reforms of the Financial Ombudsman Service—FOS. The Government are in full agreement with the noble Lord, Lord Sharkey, and my noble friend Lord Pitt-Watson about the importance of trust. It is essential that our regulatory system supports trust in the financial services sector and that people have confidence that they will be supported when things go wrong.
I can give my noble friend Lord Pitt-Watson the reassurance he asked for: when the FOS considers whether the firms have met their obligations under FCA rules, this will include principle-based rules, including the consumer duty. The new arrangements introduced by the Bill will bring in greater co-ordination between the FCA and the FOS and will mean that widespread issues can be spotted and addressed more quickly and effectively. For example, if the FCA spots that large numbers of firms are letting down their customers in a certain way, it can make the regulatory intervention to nip that issue in the bud, rather than waiting until consumers lose out.
I understand that some noble Lords have concerns about limiting claims to the FOS at 10 years. Concerns about potential long-term liabilities that are difficult to assess can hold back investment, making firms unwilling to invest or to serve certain consumer groups. However, historic complaints also pose significant practical challenges when we look at the lack of availability of relevant evidence on which to base a decision. The Government conducted a comprehensive cost-benefit analysis when designing this policy. Looking at recent history, only 11% of cases that are older than 10 years result in redress been paid, much lower than the overall rate. In order to assess these claims, the FOS has charged firms £18.1 million per year in case administration fees, while awarding only £600,000 to consumers, so the case fees are 30 times higher than the redress awarded.
However, I appreciate the point that some financial products are long-term by design, such as life insurance. Issues with these products may not come to light within the 10-year cut-off. so I am happy to assure my noble friends Lord Pitt-Watson and Lord Davies of Brixton that Clause 6 enables the FCA to make exceptions to time limit these types of products. This is aimed exactly at ensuring that holders of long-term products continue to be protected.
The noble Baroness, Lady Kramer, raised concerns that the Government are weakening the senior managers and certification regime. I assure noble Lords that this is not the case. These reforms are about improving how the regime operates in practice by removing unnecessary complexity to help increase efficiency and effectiveness while preserving the regime’s core focus on maintaining strong accountability standards. Firms will remain responsible for assessing the fitness and propriety of senior managers, and pre-approval by the regulators will still be required where regulators determine it necessary to advance their statutory objectives, targeting the regulators’ attention where it matters most. The regulators will continue to hold all senior individuals to account where standards fall short.
Where there is any tension between reducing the regulatory burden and maintaining high standards of senior-level individual accountability, regulators will be expected to prioritise the latter in accordance with their statutory objectives. Senior managers will remain responsible and accountable for the areas of their business that they oversee, including where they fail to take responsible steps to prevent regulatory breaches, regardless of whether they are approved or appointed.
My noble friends Lord Pitt-Watson and Lord Eatwell asked for assurances on the reforms to the ring-fencing regime. As I set out when I opened this debate, the independent review led by Sir Keith Skeoch in 2022 concluded that ring-fencing should be retained but recommended better alignment with the resolution framework. The Bill enables that alignment, meaning that the PRA will not need to duplicate efforts where protections are already delivered elsewhere, especially through the resolution regime. This fundamental safeguard—the separation of retail banking from riskier investment banking activities—is unchanged.
The Government will set out the wider reform programme in the ring-fence review, which will be published and will go beyond the measures in the Bill today. It focuses in particular on enabling ring-fenced banks to support growth, including consulting on a new growth allowance and expanding the range of products and services that they can provide to support UK businesses and the real economy.
My noble friend Lady Hodge asked a number of questions about the FCA’s new responsibilities for anti-money laundering, and I will try to answer them briefly. The Government are working closely with the FCA to ensure that it is ready and able to take on new responsibilities. On registration and legal privilege, the Treasury will shortly publish a response to the consultation on anti-money laundering supervision. This covers the FCA maintaining a register of supervised firms, access to legally privileged material and powers to ensure robust supervision during the transition period.
A duty of co-operation between anti-money laundering supervisors already exists in the money laundering regulations. OPBAS also has a censure power and can recommend that the Treasury strips PBSs of their supervisory role. The Bill provides authority to HMT to make payments to the FCA for proprietary work, therefore the FCA’s AML-CTF supervisory activities will be fully funded by fees paid by the supervised population. This funding for start-up costs will be fully ring-fenced for these purposes, and the Government intend for the FCA’s AML-CTF supervisory activities to be funded on a cost-recovery basis through its fee charges to supervised firms, consistent with the existing funding model. I expect the FCA to consult separately on the detailed structure and operating of these fees.
The noble Baronesses, Lady Young and Lady Hayman, and others raised sustainable finance. As they noted, the Government have clearly set out our ambition to position the UK as the leading hub for sustainable investment, leveraging our sustainable finance expertise to support transition and drive growth. The Government are working closely with the regulators to drive forward this ambition through work including the FCA’s recent consultation on aligning listed companies, sustainability disclosures with international standards, the launch of the Transition Finance Council and work to regulate ESG ratings. To answer the specific question of the noble Baroness, Lady Young, the Government consulted last year on how to implement our manifesto commitment to require financial services firms and listed companies to develop and implement credible transition plans. The Government are considering next steps and will respond to the consultation in due course.
I make the general point that noble Lords should not conclude that if something does not appear in the Bill, that means that the Government are not doing anything about it. The Government have a much broader programme of financial services work sitting alongside the measures in this primary legislation. I acknowledge the thoughtful questions from the noble Lord, Lord Kamall, the noble Baronesses, Lady Young of Old Scone, and my noble friend Lady MacLeod about business and community finance. In the interests of time, I will write to them following the debate. I will be happy to meet the noble Lord, Lord Holmes, to discuss the issues he raised related to technology and innovation. Finally, the noble Baroness, Lady Morgan, raised the important issue of economic abuse. Tackling economic abuse is a priority for the Government and a key theme of the financial inclusion strategy. Ministers will be happy to write to the noble Baroness with details of how we are working with industry, regulators and specialist organisations to tackle economic abuse and help victim survivors to regain financial independence.
I have rather breathlessly tried to answer as many questions as I can. I look forward to revisiting all these points in detail in Committee, and I beg to move.
Lord Stockwood
That the bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the bill in the following order:
Clause 1, Schedule 1, Clauses 2 to 13, Schedule 2, Clauses 14 to 31, Schedule 3, Clauses 32 to 53, Title.
Financial Services and Markets Bill [HL]
Monday 22nd June 2026
(1 month ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-I(b) Amendments for Grand Committee (Supplementary to the Marshalled List) - (22 Jun 2026)
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, before we start the debate on the first group, I remind the Committee of the rules on declaring interests. Noble Lords should declare any relevant financial interest the first time they speak at each stage of a Bill. This means that, in Committee, relevant financial interests should be declared during the first group on which a noble Lord speaks. Thereafter, the declaration does not need to be repeated in debates on later groups at this stage. Declarations should be specific and brief. Members should briefly indicate the nature of their financial interests, not simply refer to their entry in the Register of Lords’ Interests. I also remind noble Lords of guidance at paragraph 8.82 of the Companion: when withdrawing amendments, noble Lords should
“be brief and need not respond to all the points made during the debate”.
Clause 1: Consumer credit
Amendment 1
Baroness Neville-Rolfe
Member’s explanatory statement
This probing amendment, along with another in the name of Baroness Neville-Rolfe, seeks to allow for a debate on the Government’s intentions around a new regime to be laid down in the regulatory rule book in place of that established by the Consumer Credit Act and associated legislation.
Baroness Neville-Rolfe (Con)
My Lords, it is a pleasure to open our deliberations on the Financial Services and Markets Bill. I thank the Minister for his constructive engagement so far and I thank noble Lords across the House who have shared their initial views with us. These conversations have been very helpful and have underscored a shared objective: to improve financial services regulation in a way that promotes growth, attracts investment and supports innovation. Although there are differences between us, we all agree on the importance of the financial services industry across the United Kingdom: the contribution it makes to GDP, the 2.5 million jobs it supports and the £110 billion in tax it pays.
However, I think this first group of amendments will challenge the Minister on a very important issue that we will want to address at several points throughout Committee: oversight and parliamentary scrutiny. We have approached this with slightly different amendments, but I believe that the noble Baroness, Lady Bowles, shares the concern, which also applies to her amendments in group 2.
Clause 1 is short, but it is the gateway provision that introduces Schedule 1. It provides for the repeal and recasting of significant parts of the remaining Consumer Credit Act framework into FCA rules. The reasoning behind this desire for reform, as we said at Second Reading, is broadly understandable. The Treasury’s policy statement on CCA reform says that the current framework is increasingly out of date because it was designed for a paper-based credit market and now sits awkwardly alongside modern regulation. The Government say that the aim is to create a more “agile and proportionate” regime, and we do not disagree with that assessment. Certainly, that is the feedback we have been getting in our discussions with stakeholders.
However, identifying the right problem does not necessarily mean that the Government have chosen the right solution. Their approach has two serious consequences. First, Parliament will lose control and oversight of the core consumer protections currently contained in the CCA. Secondly, we are being asked to approve the repeal of these protections without being able to scrutinise the regime that will replace them. This sets a deeply concerning precedent. The purpose of your Lordships’ House is to scrutinise legislation, challenge the Government, ask questions and ensure that the law is workable, proportionate and effective. Yet there is nothing for us to scrutinise. The Government are dismantling the existing regime without showing Parliament what will take its place.
Both Houses contain a wealth of expertise—much of it is here today—including Members with extensive industry experience, who can identify unintended consequences and suggest more effective solutions. As we have frequently made clear, we want to work constructively with the Government on this Bill, but asking Parliament to surrender its powers to a regulator before it can examine the replacement regime is not meaningful scrutiny and it is not an approach that we can support.
Consumer credit in particular matters because it is woven into the everyday financial lives of millions of people. It allows households to spread the cost of major purchases, manage short-term cash-flow pressures and access funds when they are needed, all of which supports wider economic participation but needs to be done carefully and responsibly. This is a very important area and, as with the other parts of the Bill that delegate power, the Minister must take this opportunity to answer some key questions.
First, which core consumer rights and remedies do the Government intend to keep in primary legislation? By what principle have they decided which protections may safely be moved into the FCA rules? Secondly, when will Parliament be able to see the FCA’s replacement rules in draft? Will these rules be finalised before any repeal of the existing statutory protections is commenced? What transitional arrangements have the Government found? Thirdly, how do the Government intend Parliament to scrutinise future changes once the substance of consumer credit protection sits in the FCA rule book, rather than in statute? Finally, what assessment have the Government made of the effect of these reforms on smaller lenders, brokers and intermediaries, as well as on the availability of credit and related services more broadly? What effect is uncertainty on this point around the future regulatory regime having on economic activity and how much is that costing?
My amendment seeks to re-establish a basic constitutional principle that is being threatened by the Government’s approach in this part of the Bill. Parliament should not be asked to repeal important statutory protections before it knows what will replace them, how the new regime will operate and how it will be held to account. Modernisation and agility are worthwhile objectives, but they cannot justify Parliament legislating in the dark. Before Parliament agrees to transfer such significant powers, the Minister must show us not only that the destination is right but that the safeguards, accountability and route for getting there are right as well. I look forward to the Minister’s response and I beg to move.
Baroness Noakes (Con)
My Lords, as this is my first contribution in Committee, I declare my interests as recorded in the register, in particular that I hold listed shares in financial services companies and technology companies that may be affected by the Bill or amendments tabled to it.
I am going to use the opportunity of this first group of amendments to raise the issue of the accountability of the financial services regulators, which, as we have heard, are being given significant regulatory powers. This theme certainly applies to Clause 1 and Schedule 1, because of the vast new powers in relation to consumer credit being given to the FCA, but the theme is pervasive and we will debate it several times in Committee.
I should start by saying that I agree that consumer credit legislation needs a massive overhaul. The current legislation focuses on paperwork and processes. It was written in a pre-digital age and does not have a sophisticated approach to consumers—for example, it does not have the concept of a vulnerable customer. It is crying out for change. Indeed, when we scrutinised the Financial Services and Markets Bill in 2023, I tabled an amendment to give the Treasury significant powers to rewrite the legislation, including the ability to delegate to the FCA. My noble friend Lady Penn, who was the Treasury Minister at the time, convinced me that this was a step too far because of the many significant consultations that were needed. In withdrawing my amendment, I suggested that the extensive consultations sounded to me like an excuse for not making any progress. I am, therefore, supportive of the Government using this Bill as a vehicle to make some progress, although I regret that they still have not completed the task.
That support is qualified by issues that have become apparent since the 2023 Act was passed. At that time, I was a supporter of the FSMA model, which allowed Parliament to determine the overall principles of financial services regulation and left the detail to the regulators. Instead of challenging the huge burden being put on the FSMA model by the 2023 Act, which made provision for the repeal and replacement of retained EU law, a number of us focused on the accountability of the regulators. This was an error. I now believe that we failed to understand fully what that meant for democratic oversight of what the regulators do with the powers that they acquire. We also failed to appreciate the scale of the task of holding the regulators to account.
The FSMA model was set up by FSMA 2000 in an era when the most significant financial services regulation was set by the EU and either applied directly or incorporated by our own legislation. In either event, there was significant oversight through the processes of the European Parliament, particularly ECON, which was chaired by the noble Baroness, Lady Bowles of Berkhamsted. In addition, both Houses of Parliament had committees dedicated to oversight of the regulatory outpourings of the EU, and, in the case of your Lordships’ House, we had a Sub-Committee of the EU Select Committee dedicated to financial services.
The FSMA model was not designed to do the heavy lifting that it is now being asked to do, first via the 2023 Act and now via this Bill for consumer credit legislation. I do not advocate scrapping that model but I believe the time is right for re-examining Parliament’s oversight and the accountability of the regulators. The 2023 Bill initially provided for some additional oversight by the Treasury Select Committee in the other place but was amended during its passage to add what is now the Financial Services Regulation Committee of your Lordships’ House. I am a member of that committee, along with several other noble Lords present today, and I currently chair it.
These arrangements were designed to increase the accountability of the regulator, but I have to tell the Committee there remains a significant accountability deficit. Of more importance, committees of Parliament cannot and should not replace democratic oversight of the judgments made by the regulators. That is particularly important when we come to consumer credit law. The arrangement envisaged in the Bill passes to the FSA almost total responsibility for judging the complex balance between consumer protection and the need for innovation and competition in the market. Quite simply, that is not the right answer and Parliament needs more involvement.
The noble Baroness, Lady Bowles, has some amendments to Schedule 1 that we will be debating in the next group, and I believe they are designed to alter the balance between Parliament and the regulators. I look forward to that debate, but that measure alone would not be enough because any reasonable approach to modernising consumer credit legislation will still involve significant delegations to the regulators. That is why we need to use the Bill to revisit the mechanisms for the accountability of the regulators.
At a later stage in our Committee, we will be reaching some important amendments designed to tackle that: the noble Baroness, Lady Bowles, has a provision requiring a periodic independent review of the regulators, and my noble friend Lord Bridges of Headley has some amendments dealing with an office of financial regulatory accountability.
These issues of democratic oversight and regulatory accountability are unfinished business, and we must use the opportunity of the Bill to strengthen both and not sleepwalk into a situation where the regulators govern us rather than the other way around. We will be debating the accountability of the regulators again when we get to Clauses 16 and 17, when we reach the accountability amendments that I have just referenced.
Lord Goodman of Wycombe (Con)
My Lords, I will speak briefly as a member of the Delegated Powers Committee, which has produced a report on this Bill. That report concerns especially Clause 3, but it raises general issues that fall within the scope of the amendment that my noble friend has moved from the Front Bench. My noble friend is essentially asking what the purpose of the Bill is and what it will do.
On the committee we have heard again and again, where government Bills are introduced, quite correctly, that this is a fast-moving world, that the Government need the flexibility and room to move quickly, and that it is therefore appropriate to do these manner of things and those manner of things by regulation. That is far from being a contemptible argument. The Government have a good point, and I suspect that Ministers in other political parties have made the same point from the Dispatch Box in the past. However, there are some important general issues to consider.
First, as my noble friend indicated, it is not generally a good thing to bring in legislation if you do not know quite what the intention is and you propose to proceed by regulation. Secondly, Ministers at this point tend to say, “Trust us”, which is fine, but the Minister may change. Another Minister may come with a different approach, and we are about, I read, to have a change of Prime Minister, and the Government may decide that there is some alteration in their approach to these matters. Thirdly, you may have a change of political party, and quite another Government of a different complexion deciding what to do. I do not want to anticipate the debate on Clause 3, but, if I read the Bill rightly, as noble Lords will find when we get there, power is given to the Minister by regulation to pretty much close every bank account in the country.
Why is all this happening? The reason is that, down in the other place, things are changing. Members of the other place are besieged by WhatsApp messages all day in their groups and are drowning in constituency correspondence from people besieging them with matters that often would be better addressed by priests and psychiatrists. They are being drawn away from the Chamber by dealing with this on social media, at a time when, as my noble friend Lady Noakes has pointed out, the burden of what they consider has had to increase because of Brexit. Whether one is pro-Brexit or anti-Brexit is not the point here; the point is that there is simply more to do.
In short, there is a general attention deficit problem in our culture, which I am sure affects this House as much as anyone else but is particularly affecting the other place. Poorly drafted legislation is rushed through, it is then challenged successfully at judicial review, and then we all blame the judges. Why should we do that when the fault is literally and almost completely in our own House? I am grateful for the chance to raise these general issues and look forward to the Minister’s reply.
Lord Blackwell (Con)
My Lords, I declare my interests as a significant shareholder in Lloyd’s Banking Group, of which I was formerly chairman.
Although I recognise the concerns raised by my noble friends, it is important that we tackle the confusion caused by the dual roles of the courts and the regulator in the regulation of consumer credit. The regulation of consumer credit is not a black and white issue. A balance has to be made all the time between the level of protection offered to consumers and the costs of compliance borne by the institutions, and the risk that, if the courts are unpredictable in the way they interpret the Consumer Credit Act, suppliers will either withhold products or build an insurance premium into the costs.
We have had too many incidents over the past few years where what financial institutions thought was a settled issue, as determined by the regulator, has been altered retrospectively by decisions in the courts. We can have a choice one way or the other, but it is important that we tackle the confusion caused by the dual responsibility. As I see it, the Consumer Credit Act is an outdated piece of legislation, as the Government have set out. It was based on conditions that have changed radically. We have since set up the financial services regulator, with devolved responsibilities for regulation. We may or may not think that the regulator is doing well or want to increase supervision of it, but the Government should try to make it clear through these amendments to the Consumer Credit Act whether the result will be, as I hope, to make it clear that there is a single definitive source of regulation for the Consumer Credit Act, which is the balance struck by the Financial Conduct Authority, and that the courts, so far as possible, no longer have a role.
Baroness Bowles of Berkhamsted (LD)
My Lords, this and the following group dwell on the same territory; I will make my main intervention in the next group alongside my detailed amendments. I am sorry that I had to separate them out, but that was only because of the Chief Whip’s speaking-time restrictions on non-movers, which ironically mean that the debate will take longer overall. I have both general points and points on the substantive amendments. I agree very much with many other speakers, and in particular the noble Baronesses, Lady Neville-Rolfe and Lady Noakes. Overall, the Bill is extraordinary for the manner in which it does and undoes many things with questionable process.
My general approach on the point about the Consumer Credit Act is straightforward: I do not object to using the FCA to modernise and speed up redress mechanisms. We are already seeing that in practice with the motor finance commission cases, but that experience also contains a very clear warning. Here I depart from what the noble Lord, Lord Blackwell, would wish to have. In the first instance, the FCA made rules that were not in line with statute. It said that commission did not have to be disclosed unless asked about. We have ended up with a situation where firms which thought they were following the rules have been caught out because the statute said something different.
The moral lesson is simple: if you find yourself thinking, “Oh good, I don’t have to tell them about this nice little earner”, something is already unfair. In practice, some car salesmen discussed bonuses, quotas and commissions with customers, sometimes linking them to discounts. I have personal experience of that. But if the statute had not existed, what would have happened? The logic is that the old way, non-disclosure, might have continued because the FCA rules permitted it and it had not spotted the unfairness. For all that we have some very capable regulators, we have been shown that they are not infallible and they are not legislators—a point we will return to repeatedly as we go through the Bill. From time to time, they hit the barriers of their remits, perimeters and institutional roles.
Our system is not to delegate unconstrained power to regulators. Parliament sets the framework, regulators operate within it and, when necessary, the court interprets. Yet here, we are being asked to legislate for an automated substitution to set in train an unseen process that Parliament can no longer influence, that has no predetermined scope and whereby courts lose jurisdiction. That is constitutionally unsound and unsupportable. I will return to the detail in the next group but the principle is clear. As the noble Baroness, Lady Neville-Rolfe, said, Parliament should not sign away rights and protections without knowing what will replace them.
Baroness Kramer (LD)
It is a great privilege to wind up for the Lib Dems. People will know from Second Reading that I am very strongly of the same mind as the noble Baronesses, Lady Noakes and Lady Bowles, and I think the noble Baroness, Lady Neville-Rolfe, takes a very similar view on this first clause. The others speak with some sense of diplomacy; I will be slightly more direct, because, from my perspective, the Bill, by repealing the CCA, basically removes consumer credit protection from law and moves it to the FCA rulebook with no meaningful accountability and, frankly, little visibility.
Peers will remember that in 2021, many of us in this House and the other place were getting very frustrated with the FCA. It had some very good people but it was definitely neglecting consumer protection, and this House consequently passed an amendment to instruct the FCA to consult on a duty of care. The FCA chose not to consult on a duty of care, despite that direct instruction. It consulted instead on what it said was the equivalent, which was a consumer duty, the key difference being that a duty of care has a meaning in law, with a private right to action. In other words, an individual can turn to the courts if he or she believes that they have been wronged. This is a right that, as we heard from the noble Lord, Lord Blackwell, the FCA, at the behest of the industry, did not want the consumer to have, despite it being a long and very well-established tradition in English law.
The Bill now achieves the wholesale removal of credit protection from the law and into the rulebook of the FCA, and it is obviously an extension of that deliberate process to remove paths to redress for consumers. The Committee will be aware that consumers cannot take civil action against the FCA: it is immune. It is correct that it should be immune from action by those whom it regulates in the market, but it is also immune from action by consumers. As we go on through the Bill, will see that same process of undermining redress in future groups of amendments—very much so when we are dealing with the FOS.
When I have talked to members of the Government on this issue, they seem surprised at my comments because they see the FCA as a real champion of the consumer. Indeed, the industry will say the same thing. However, perhaps I have a longer memory, as does this Committee.
Do Members here remember the issue of payday lenders—the very widespread abuse of individuals who were entering into incredibly high-priced credit and were finding themselves continuously in debt trouble? When the issues were put to the FCA by Members of Parliament, by complainants and by whistleblowers, the only action that the FCA agreed to take was to make some minor adjustments to the rules on rollover. It argued that payday lenders had an important part to play within our credit system. It took action in this House in 2015, when a Minister broke with the Government’s perspective and decided to support a move that had been made from the Labour Benches by the noble Lord, Lord Mitchell. It was the noble Lord, Lord Sassoon, who spoke for the Government, and he decided that enough was enough and that the only way to deal with payday lenders was to shut them down. That action was put into law, and it improved the whole credit environment that we live in today and eliminated a really serious abuse. As I read the Bill, people will lose that opportunity. When people claim that the FCA is a champion of credit, and they cite the consumer duty, they do not realise that it does not incorporate that very traditional English right to turn to the courts.
Even if today one accepted that the FCA, in its currents design and with the relevant people in place, was indeed a consumer champion, that could easily change, because we are relying totally on FCA culture. In the 1990s—I often go back to that decade—the financial regulators demonstrated the most extraordinary degree of deference to the financial sector. Frankly, the 2007 crash could not have happened without that deference. Many of the lessons of that crash are being undermined by this Bill, throughout which there is a return to deference—this time in the name of growth.
Lord Ranger of Northwood (Con)
My Lords, I will make my first contribution to this Bill. This is also one of my first in Committee, so I beg noble Lords’ forgiveness for any errors I will make. I do not have vast experience in the banking sector, but I have spent almost 25 years in technology, during which I worked with a number of firms in the banking sector.
I support the comments from my Front-Bench colleague, my noble friend Lady Neville-Rolfe, and from the noble Lord, Lord Blackwell, on the impact of this broad-ranging Bill. Later, I will comment more on the technology aspect, but at this point I highlight that, as we move forward, a degree of regulatory burden is continuing to build, especially for the future of banking around fintech, innovators, start-ups and scale-ups, a world I have worked in significantly. I look at this Bill through that lens, seeking to understand what we are doing around the posture we are requesting from these new future banking institutions, as they see different requirements from different regulators based on a loose—or, sometimes, as in the case of this Bill, unclear—focus. I say that because we are hearing that from the industry.
The past couple of years have required significant consultation on start-ups and scale-ups, particularly in the area of digital assets. Regulators have undertaken extensive questioning of the industry, but there seems to be some gap between parliamentary oversight and regulatory direction. That has been fed back and has resulted in ad hoc approaches to intervention with regulators from parliamentarians, industry bodies and even parliamentary groups—I co-chair the APPG on Digital Markets and Digital Money—in order to provide a certain level of input about what the industry, particularly the digital asset industry and digital start-up banks, may be considering. There is a huge opportunity in this Bill to understand how we would like to set out frameworks and risk management for the future, but there is also considerable risk—as was mentioned by my noble friend Lady Neville-Rolfe—around where we lose oversight and potential control at this critical time.
Lord Davies of Brixton (Lab)
I will speak just briefly. I find myself in the unusual situation of agreeing with the noble Baroness, Lady Noakes, on the role and functioning of the Financial Services Regulation Committee, of which I am a member. The committee was created to undertake a particular task, and what is in the Bill makes that task virtually impossible. We very much hope that the Minister will listen to what the committee has said on this subject.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
I thank noble Lords for the opportunity to set out the Government’s position on this important set of issues and for the constructive nature of the debate so far. Before we start, my interests are set out in the ministerial register. I invest in a number of funds that are regulated by the FCA.
I start by addressing why Clause 1 and Schedule 1 should stand part of the Bill. The case for reform is straightforward. The Consumer Credit Act—the CCA—is more than 50 years old and was enacted long before the creation of the FCA. It no longer delivers as it should for today’s consumers, who engage with modern products in an increasingly digital world. It too often results in people being sent lengthy, complex documents that they do not read, do not understand and cannot use with confidence. It is important to say that one in seven adults has literacy skills at or below those expected of a 9 to 11 year-old and 34% of adults have poor or low levels of numeracy involving financial concepts, yet the CCA regime means that some of the information provided on credit cards requires a far higher reading age.
Debt advice charities have criticised the way in which the CCA requirements often result in borrowers being sent arrears notices even when they have agreed a repayment plan, causing confusion and alarm. To address the point raised by the noble Baroness in her amendments, this demonstrates that it is not just the content of the arrears notices that is the problem but the inflexible legislative triggers that mean they must be sent even when there is no clear purpose and they cause more harm than good. There are many more examples of where the CCA results in poor outcomes for consumers and anachronistic procedures for lenders.
That is why this Bill continues the work that began in 2012 of repealing this outdated legislation so that it can be replaced with updated rules that better meet the needs of consumers and are fit for the digital age. The Government strongly believe that those replacement rules should, in the main, reside in the FCA rulebook, not in primary legislation. The FCA has extensive experience in developing firm-facing rules for retail markets, including mortgages, insurance and investments. Its rule-making approach is underpinned by consultation and consumer testing so that protections remain robust, proportionate and relevant. The FCA’s new rules for buy now, pay later, which come into force next month, demonstrate what a modern, FCA rules-based regime can deliver for consumers.
I have heard the concerns of some noble Lords that the Bill does not set out how the repealed provisions of the CCA should be replaced and that this has been left to the FCA to determine at a future time. While I appreciate that concern, this is entirely consistent with the model of regulation established in the Financial Services and Markets Act 2000. These provisions sit in the CCA only because this model of regulation did not exist in 1974. Parliament has already vested the FCA with significant responsibilities in this space, objectives that include a primary consumer protection objective, powers to allow it to fulfil its role and a comprehensive system of transparency, governance and oversight.
Parliament will have a key role in scrutinising the FCA as it makes these replacement rules. The FCA is required to advance its objectives through its rules, including its consumer protection objective. The FCA is required to consult, to conduct a cost-benefit analysis on rule changes and to submit copies of those consultations to the relevant parliamentary committees. They include the Financial Services Regulation Committee, ably chaired by the noble Baroness, Lady Noakes.
The FCA has a comprehensive set of enforcement powers that will help it to ensure compliance with its rules and to act decisively where firms are failing to comply. As well as ensuring that an expert body with the right objectives, powers and resources can fulfil this function, this approach ensures that the rules can adapt as needed in the future to stay current and respond to future trends.
The noble Baroness, Lady Neville-Rolfe, asked when Parliament will see the replacement rules and how the transition period might work. The FCA will set out the detail of the new rules through its normal rule-making process. Repeal of legislation will be commenced only once the relevant FCA rules are in place. The Bill contains a power for HMT to allow for an orderly transition. In practice, Parliament, consumer groups and stakeholders will see the FCA rules at consultation stage before the new regime takes effect. I am aware that some noble Lords have tabled amendments to strengthen parliamentary scrutiny further. The Government believe that the current arrangements work effectively, but I look forward to debating them in more detail later. CCA reform is an important opportunity to create a clearer, more flexible and more accessible framework that better reflects today’s consumer credit landscape.
The noble Baroness asked what rights and protections will remain in legislation. Where rights and protections require legislation to work, they will remain in legislation. Criminal offences will remain, so canvassing to minors and doorstep selling will remain in legislation, along with other key protections such as Section 75.
The noble Baroness, Lady Neville-Rolfe, also asked about the impact on smaller firms, as the FCA replaces parts of the Consumer Credit Act. I can assure her that the aim of the reform is to create a more proportionate set of regulations for all firms, including smaller lenders. Everyone will benefit from this modernised regime.
I hope I have provided the Committee with some assurances that the CCA reforms are vital. I ask the noble Baroness, Lady Neville-Rolfe, to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I thank all noble Lords who have contributed to this debate and the Minister for his response. I particularly thank my noble friend Lady Noakes, the noble Baroness, Lady Kramer, and my noble friends Lord Goodman and Lord Ranger of Northwood, all of whom, I think, echoed the Opposition’s concern about overdelegation. In fact, I appreciated and enjoyed their interesting historical and contemporary perspectives, which brought the matter to light.
The discussion has demonstrated that the concern at the heart of these amendments extends well beyond the technical details of consumer credit regulation. It concerns a fundamental question about how Parliament performs its constitutional role, particularly when substantial powers are transferred from statute to regulators. I will not repeat all the points made by my noble friend Lady Noakes, but we need to look at Parliament’s oversight. There is a democratic deficit. We will no doubt debate her letter when we come to Clause 17. I noted the support of the noble Lord, Lord Davies of Brixton, for bottoming out the role of the committee and the points that he made.
We support the objective of modernising the consumer credit framework—I would like to emphasise that—but reform cannot mean that Parliament approves the removal of existing protections without seeing what will replace them. Nor should moving provisions into a regulator’s rulebook place it beyond meaningful parliamentary scrutiny. We will continue to apply these principles throughout our deliberations in this Committee. Wherever the Bill delegates new powers or expands the remit of the Treasury or the regulators, we will be asking the same essential questions. What safeguards will govern the exercise of these powers? Who will be accountable for the decisions taken? How will Parliament examine what is being proposed, assess whether it is working—because follow-up is important too—and intervene where it is not?
There must be a direct relationship between power and accountability, and when the authority, discretion or remit of a regulator is increased, the capacity for effective oversight must increase alongside it. It is constitutionally perverse for an expansion of regulatory power to be accompanied by a weakening of parliamentary scrutiny. The Government repeatedly invoke the need for agility, which I understand, and we recognise the value of a framework that can respond to changing markets and emerging technologies. My noble friend Lord Blackwell warned against the confusing dual responsibility that sometimes exists between the CCA and the courts and regulators, but the noble Baroness, Lady Bowles, pointed out that it is not as simple as delegating everything to the FCA, which is not a legislator. She was right to warn against automated substitution.
Agility cannot become a proxy for opaqueness and flexibility cannot become an excuse for removing important decisions from democratic oversight. The Government must demonstrate that each transfer of power is not merely convenient but necessary, proportionate and matched by effective accountability. If the Minister is willing to engage with us on this basis, we will do so constructively, but we will continue to challenge any provision that asks Parliament to surrender oversight without first showing how that oversight will be replaced. We will return to this issue on Report, unless we can find a better way of ensuring proper scrutiny, but for now I beg leave to withdraw my amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I oppose Clause 1 and Schedule 1 standing part of the Bill. I shall speak also to my detailed amendments to the schedule, which appear as Amendments 4 to 17.
We all know how consumer agreements work, whether for credit or anything else. There is always an asymmetry of power between the provider and the consumer. Nowadays, it is often impossible to speak to a person rather than a bot. If you do get a person, it is a call centre with scripted questions and answers, often including a recital of terms and conditions faster than it is possible to understand. You cannot get to the next stage without saying, “Yes, I have understood and agreed”, when, in truth, you have not. You do not even see the terms and conditions until after you have clicked “Yes”, then you are given a time-limited right to withdraw. This back-to-front impatience to get boxes ticked first is now a feature of the modern consumer environment—one that I fear we have now replicated in the legislative procedures in the Bill, only here, once Parliament ticks the box, there is no cooling-off period and no right to withdraw.
The Bill repeals parts of the Consumer Credit Act. It gives the Government open-ended regulation-making powers before there has been any consultation and before we have seen the shape or operation of any FCA rules. I cannot support that. It goes too far, too fast and too unseen. That is not the way to make irrevocable changes. So I will not tick the box. I want to know what I am signing up to, just as the consumer must. I want to know that what are presented as rights are, in fact, rights.
Clause 1 repeals statutory rights before replacements exist. The Government take powers to make regulations before consultation. At the very least, that is a reason to take a great deal of notice of what is being said by Parliament. I also question whether this approach meets the Government’s own statutory duties under the Legislative and Regulatory Reform Act 2006, which requires regulation to be proportionate, accountable and transparent. Repealing rights before replacements exist does not seem to meet those tests. This is a fundamental change from the status quo, where rights are in statute and rules are made to assist in negotiating the statute.
Clause 1 reverses that. It removes statutory protections now and offers only a possibility of regulatory rules later. Rules are not rights. Rules can be changed by the rule-maker, whereas rights bind everyone, including the regulator. The Government’s approach is, therefore, constitutionally backwards. Parliament is being asked to repeal rights without knowing what will replace them. It is like signing a credit agreement without knowing the terms, and we are being asked to sign it on behalf of the public.
My solution would be to preserve a statutory floor, both now and in future, and not a temporary one that could be slowly eroded at the whim of the Government or a regulator. My amendments to Schedule 1 are intended to show how this can be done; I thank Which? for its assistance in preparing them. They aim to preserve important provisions in relation to notices of arrears and default sums, as well as the unenforceability sanctions attached to them in the Consumer Credit Act. These are the legal backstops—the protections that ensure that rights are real.
I shall explain what my amendments do and why they matter. First, they would preserve the requirement to serve notices of arrears and default sums and the statutory consequences of failing to do so. These provisions apply, for example, where a borrower has fallen behind on payments. A default notice must be served before a creditor can take certain drastic steps such as terminating the agreement, demanding early repayment or recovering goods and land. Default notices also play an important part in determining when debts become statute barred, because, once served, lenders have six years to take court action. Secondly, they would keep these protections in legislation but allow the FCA to modernise the form and content of the notices. That is the right balance. Technology changes, as does the way in which information is presented, but the underlying rights do not and should not.
The Government’s approach is to repeal the majority of the CCA provisions with the suggestion that they could be recast into FCA rules at some future point, subject to consultation. That means there will be no parliamentary scrutiny of what these protections might look like once they are repealed. My amendments would guarantee that the core protections remained mandatory legal requirements while allowing the FCA to update the way in which information is provided. That is what the legislation should have done from the start—modernise the form, not abolish the substance.
I turn to sanctions, which is where the Consumer Credit Act is at its strongest and where the Bill is at its weakest. The sanctions in the CCA were included in 1974 because Parliament recognised the significant imbalance of power between a consumer and a creditor. Parliament wanted proactive compliance with the law, not a system where an individual consumer must detect a breach, voice a complaint, and then pursue slow and time-consuming legal or ombudsman remedies, particularly when those consumers are likely to be vulnerable, stressed or in financial difficulty.
The sanctions ensure that a creditor cannot take steps against a debtor while the creditor is non-compliant with the law. They are automatic. They work because they require compliance up front, not after the harm has occurred, and they cannot be replicated in FCA rules. Without those sanctions, consumers may face new threats from being pursued for debts, particularly when debts are sold to unauthorised debt purchasers. The burden shifts on to the consumer to detect breaches and seek redress. Vulnerable consumers are disproportionately harmed, and the automatic reprieve that Parliament deliberately created is lost.
My amendments would ensure that those sanctions on arrears and default notices remained in legislation while allowing the FCA to modernise the way information was presented. That would preserve vital individual rights while recognising that flexibility is needed in a digital age. That is not an unusual approach. The CCA and the FCA’s existing consumer credit rules already operate in a complementary way.
The amendments I have tabled focus on arrears and default notices because that is where the greatest harm would arise if protections were removed, but they are only exemplary. They show the balanced approach that should have been taken across the whole reform of the Consumer Credit Act: move form and content to the FCA rules where appropriate but keep the substantive protections in legislation. I am looking for that complete reform.
There are other areas, such as the form and content of credit agreements, the duty to provide information under fixed-sum and running-account agreements, and the sanctions for improperly executed agreements, where the same balanced approach could and should be taken. I would be happy to meet to discuss those. The Government’s own consultation on CCA reform was meant to have two phases. Phase 1, on information requirements and sanctions, took place, but phase 2, on key consumer rights, was scrapped. That is not a sound basis for repealing rights now and promising rules later.
The CCA was ground-breaking for creating automatic protections, even if at times those protections have been bitten for trivialities. That is a reason for modification, not cancellation. Their purpose is still relevant: ensuring active compliance, preventing regulatory creep and protecting vulnerable consumers. They cannot be replaced with certainty in FCA rules. Their removal shifts the burden on to consumers. This is a regression in consumer protection at a time when modern communications already curtail the time for circumspection.
If the Government were bringing forward a coherent replacement for the Consumer Credit Act, it would look something like this: statutory principles of fairness, transparency, good faith and protection against unequal bargaining power. Those are not exotic ideas; they exist in other jurisdictions. Australia’s unconscionable conduct regime is one example. At the end of the day, businesses must think and exert conscience and play fair, but that is not what Clause 1 does. It removes rights without replacing them. Modernisation is possible but I will not tick the box on behalf of the public until I have seen the replacement and until I know that it preserves rights now and in the statute. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I must apologise: I was not in the country for Second Reading, so this is my first intervention on the Bill.
I support wholeheartedly the amendments in the name of the noble Baroness, Lady Bowles, and the rationale that she has just explained. I thank Which? for the work that it has been doing on the Bill and to try to help consumers.
I cannot support this leap in the dark for parliamentary scrutiny and I cannot support imposing this leap in the dark on consumers. At the end of the day, that is what the provisions in Schedule 1 are at risk of doing. I believe that the noble Baroness, Lady Bowles, with her amendments, and the amendments that we have seen from other noble Lords in the first group, are seeking to help the Government to achieve their aims more safely for consumers. I believe that what the Government are trying to do has the right motive; it is about whether the manner in which this is being done is safe for us to agree to—and I do not believe that it is.
If we think one step ahead, what protection will consumers have against the FCA making a significant error in its regulation? What protection will consumers have if the asymmetry of information and power that we know already exists in the financial services industry, especially for retail customers, continues along its current lines? I hope that the Government and the Committee will recognise that leaving consumer protection to the regulators is not a safe thing to do if you want to improve consumer protection—and, as I say, I believe that is what the Government would like to do.
The FCA has a peculiar regulatory style. For example, if it has discovered or suspected wrongdoing, it does not, as you might expect, do mystery shopping on behalf of consumers. It will ask firms generally to investigate how they behave and then to report to the FCA. That may work but it will not always work, and there is no fallback protection such as we have in the Consumer Credit Act if the consumer experience is not as it has been portrayed or as the FCA might have expected. There is a consumer panel as part of the FCA, but, in my experience with a number of financial scandals or problems that have arisen for consumers, the FCA consumer panel has little or no power. It is not listened to and does not form part of the FCA regulatory decision-making process that perhaps one would need to be confident that it represents in the case of passing on this protection to the FCA.
I hope that the Minister and the Government will listen carefully to the arguments that have been made so far in the first two groups and recognise the damage that could be done by pursuing the proposed actions.
Lord Blackwell (Con)
My Lords, I am more sympathetic to the approach that the Government are taking here. I think that we need to be careful what we ask for when we interpret parliamentary oversight as potentially meaning Parliament being involved in the drafting and redrafting of every detailed regulation. Not only is that time-consuming and likely to lead to long delays, but I fear that the political process will inevitably mean that it is weighted to the highest level of consumer protection regardless of the costs or the side consequences. There are other ways of having parliamentary oversight of the regulator. The Government can appoint the chairman, the chief executive and the board members. It does not have to be ex ante writing and approval of all the rules in primary legislation or committee. Parliament can excise oversight by holding the FCA ex post to account on whether it is fulfilling its remit in a sensible and proportionate manner.
We have chosen this system of having regulators. We should allow those regulators to operate properly and then hold them to account. When Members refer to the long list of protocols that consumers are led through in order to buy products, a lot of that is belt-and-braces protection that the financial institutions have been forced to put in place because of the complexity of the regulation and the risks of action against them if they do not ensure that the consumer has satisfied every detail of the consumer protection. The role of the regulators here is to exercise proportionate regulation. I think that we should hold them to account ex post rather than trying to insert Parliament in the process ex ante.
Baroness Noakes (Con)
My Lords, I disagree with what my noble friend Lord Blackwell has just said. He has fallen into the trap of believing that an accountability process can be effective within Parliament. The experience that I and my committee have had is that there are limits to what can be achieved in terms of parliamentary accountability. That is one of the reasons why there are other amendments later in this Bill to find other mechanisms for improving accountability.
It is important to differentiate between those areas where Parliament has a right to be democratically involved in the decisions and those areas that can safely be left to the regulators to carry out the detail and to be held accountable for that. It is the balance that we are concerned about. I would probably end up with a different decision on whether certain of the protections in the existing legislation need to be retained as well as on improving the way in which the legislation works by updating it to a modern digital age. There is genuinely a case for looking again at whether the sanctions that exist in the consumer credit legislation are right for today’s world. I believe that some of them are too severe or can be disproportionate to the issues that are involved in practice—for example, minor breaches in relation to enforcement notices.
I would not necessarily end up with the view that what is currently in the legislation must be preserved for all time, but I think that Parliament needs an involvement in some of those key decisions about the parameters of where liability exists and what sort of sanctions can be applied. That is why I think that we must constantly differentiate between democratic oversight and parliamentary accountability. They are complementary but different things.
Lord Carlile of Berriew (CB)
My Lords, I speak with diffidence on this matter, as I am not an expert on consumer credit. I have been involved in many cases over the years when consumers have been dissatisfied with the consumer credit arrangements that they have undertaken and have felt that there was a serious breach of contract. I am concerned that we are suggesting here that parliamentary process is the answer to many consumer credit complaints, even though parliamentary process is just about the least living instrument in our possession. It seems that the purpose of Clause 1 and Schedule 1 is to ensure that what is created is a living instrument that will modernise the consumer credit framework—not weaken consumer protection—and will become more effective because it sits in FCA rules rather than in primary legislation. It has been suggested that FCA rules are not subject to the courts, but there is already an elaborate system in place in the FCA rules.
In this debate so far, no one has mentioned the Consumer Duty, an extremely detailed document that has been in existence for three and a half years and that has, in my view, served the FCA well. If you look at the comments from law firms, which one can find all over the internet, the result is that there has been a much more informal resolution of difficulties than relying on the old system before the Consumer Duty was created. Therefore, I believe that FCA rules are part of a living instrument: they are binding, enforceable and subject to consultation and scrutiny. At the end of the day, if someone breaks the law, they are of course subject to the courts as well. That goes without saying and to suggest the contrary would be nonsense.
Baroness Lawlor (Con)
My Lords, I hesitate to follow the noble Lord, Lord Carlile, who, although he is not a specialist in this area, is a lawyer. I will speak in support of this group of amendments; I would have done the same for the first group, had I been here. It is important that businesses and consumers alike have the protection of a law that is predictable and transparent and where no doubt arises about its interpretation. Many doubts have arisen around the judgments and rulings of the FCA and its lack of consistency. Therefore, I am sympathetic to the wish of the noble Baroness, Lady Bowles, to have something done on paper, so that we can see something before putting it through.
Both businesses and consumers are used to having a legal surround for such transactions. They go back to the 1850s in the Bills of Sale Act 1854, which was modernised throughout the end of the 19th century and then followed by the Money-lenders Act 1900, obliging the registration of moneylending and allowing the courts to be involved. It is important that we have judicial oversight, not just by updating the process—although I agree with noble Lords on that—but with a legal framework that is transparent and consistent and that allows people to see what is expected.
I am also concerned about the impact of rushing through legislation to empower an as yet uncertain regime of rule-making, about which nothing of substance is known. The FCA appears to be as unprepared for this as others. In its response last month to the Treasury’s announcement of the reform of the Consumer Credit Act, the FCA said that such reform
“is an important step towards a more flexible regime that supports effective competition and innovation, while maintaining appropriate consumer protection both now and in the future”.
It acknowledged that it would put
“greater emphasis on FCA rules and guidance rather than prescriptive requirements set out in legislation”.
It states that it intends
“to consult on the key elements of the … framework … set out in legislation”.
One problem with being flexible—or moving to what the FCA calls
“a more flexible regime that supports effective competition and innovation, while maintaining appropriate consumer protection both now and in the future”—
is that flexibility can be inconsistent and lack transparency. What is appropriate for one firm may not be so for another. It brings doubts into the minds of businesses. We have heard of businesses being concerned about the arrangements run by the FCA. For example, given that many of the requirements to disclose information in the CCA and associated regulations are to be repealed, how transparent will the rules be? How consistently will they operate? Will the FCA’s rulings be published? If they are to be less prescriptive and more in line with the FCA’s consumer duty principle, how certain can businesses be about what counts as being in scope?
Before closing, I would like to mention another concern: the considerable compliance costs. Most of the disclosure of information obligations on the CCA, and in the linked regulations being repealed and replaced by FCA rules, will bring costs. I am grateful to Addleshaw Goddard LLP for its analysis, published on its website, which suggests:
“Reforms in relation to arrears, default notices & in-life information are likely to create major operational impact for collections and arrears handling. Given the high litigation risks attached to these requirements firms should carefully consider these changes and monitor how these requirements will be re-designed in FCA rules”.
Here, we should think of the start-up costs for this new system, along with the continuing compliance costs, which will be considerable. Take, for instance, the information requirements. How will they affect the estimated 30,000 firms that will have to amend documentation that does not align with the consumer duty?
With those thoughts, I support the thinking behind the stand part notice in the name of the noble Baroness, Lady Bowles, with its question mark around the wholesale transfer of such powers without any information on how they will be operated or regulated—or, indeed, what they will be now.
Lord Altrincham (Con)
My Lords, I declare my interest in South Molton Street Capital, which is regulated by the FCA.
The amendments in this group reflect concerns similar to those raised in our previous debate. As the noble Baroness, Lady Bowles, and my noble friend Lady Neville-Rolfe have argued, it is for the Government now to set out a compelling case for moving Consumer Credit Act provisions into the FCA rulebook. This is a serious new precedent and they must meet it with an equally serious explanation. Regulatory flexibility, or, as we have heard from my noble friends, the living instrument arguments, may be appropriate for matters of form, process and technical detail. However, that flexibility comes with risks. Consumers, firms and the courts all benefit when substantive rights and remedies are stated clearly in law. Notwithstanding the comments made by the Minister, moving them into regulatory rules may reduce their visibility, create uncertainty about their permanence and make their enforceability less clear. I hope that the Minister will be able to assure us further on how the proposal before us will avoid that issue.
There is an important constitutional principle at stake. If rights established by Parliament can, in effect, be rewritten through regulator-made rules, Parliament’s role in determining the proper balance between consumer protection and regulatory proportionality is diminished. More broadly, public confidence depends on protections being visible, accessible and readily understood. This is particularly important in consumer credit, where people may be making difficult or significant financial decisions while facing difficult or vulnerable circumstances. Rights are of limited value if consumers cannot identify or understand them and cannot be confident about how they will be enforced.
Fundamentally, we need a lot more clarity on this process and on what the Minister described as the orderly transition. We shall listen carefully to his response on this group, in addition to his previous reply.
Lord Stockwood (Lab)
My Lords, I thank noble Lords for the opportunity to set out the Government’s position on this important set of issues. I start by addressing why Clause 1 and Schedule 1 should stand part of the Bill. However, I do not want to duplicate what I said on the previous group, where I set out at length the Government’s policy for the CCA. Suffice it to say that the case for reform is straightforward. The Consumer Credit Act is more than 50 years old and was enacted long before the creation of the FCA. It no longer delivers as it should for today’s consumers, who engage with modern products in an increasingly digital world. That is why the Bill continues the work that began in 2012 of repealing this outdated legislation, such that it can be replaced with updated rules that better meet the needs of consumers and are fit for this digital age.
I understand the strength of feeling on the question of delegation, but I note that the noble Lord, Lord Blackwell, said that this is not a consensus. As I have said, this is entirely consistent with the model of regulation established by Parliament in the Financial Services and Markets Act 2000. The Government strongly believe that those replacement rules should, in the main, reside in the FCA rulebook, not in primary legislation.
The noble Baroness, Lady Bowles, expressed concern about how the FCA will replace some key protections, including information requirements. In the last group, I already explained the process that the FCA will follow. As I said, in practice, Parliament, the sector and consumer groups will see the FCA’s detailed proposals at the consultation stage, before the new regime takes place. I am happy to assure the noble Baroness that the FCA’s recent public statement confirmed that it aims to consult on key information requirements, rights and protections, including cancellation and withdrawal, the termination of agreements, including early settlement, and on looking across the consumer credit journey, with this approach being underpinned by the consumer duty. This will be supported by consultation and cost-benefit analysis, consumer research and stakeholder feedback.
Amendments 4, 5, 7, 8, 9, 10, 11, 12, 13, 14 and 16 would retain information requirements and related sanctions in legislation or limit the FCA to prescribing only the form and content of notices. That would preserve the rigidity we are seeking to address. I cannot accept these amendments, as the provisions are not fit for the digital age. The Bill repeals these rigid statutory requirements so that the FCA can develop a more effective, rules-based regime. This is not about reducing information but about improving its timing, its quality and its clarity. The aim of the regime is that it provides consumers with better information in a clearer form and at a time that is most useful to them.
The consequence of repealing these information requirements is that certain related sanctions will fall away. These sanctions were designed for a different era. The Office of Fair Trading had limited powers for supervision and enforcement, so the regime was designed to be draconian to act as a robust deterrent. The sanctions apply automatically, regardless of the seriousness of any breach or whether any consumer harm has arisen. For example, a lender that used the incorrect wording in an arrears notice is required to refund any interest and fees charged from the point at which that breach was originally made, even if the error was in no way harmful to the borrower. Much has changed over the years since these sanctions were designed, and this approach is poorly suited to the modern approach to regulation. The FCA has strong supervisory and enforcement powers, and under consumer duties firms must deliver good outcomes. Unlike when the CCA was enacted, any consumer who suffers harm can straightforwardly access redress through the Financial Ombudsman Service, the FOS.
I recognise the concern behind Amendment 2, which seeks to ensure that FCA rules can supplement but not replace or diminish rights and remedies in the CCA. However, the Bill already preserves statutory rights that need to remain in legislation. Because FCA rules are not capable of eroding such rights, the amendment is not necessary.
I have already set out, in the last group, several examples of protections that remain in primary legislation, including Section 75 and provisions connected to criminal offences, which must of course remain in legislation. Amendments 6 and 15 would retain withdrawal, cancellation and early settlement rights in the CCA rather than allowing them to be recast into FCA rules. These rights are an important feature of consumer credit products that ought to be preserved. However, the current framework is complex and outdated and, as a result, not always well understood by consumers. The purpose of reform is to ensure that these protections work better for consumers, which is why the FCA has committed to consider cancellation rights alongside other rights including withdrawal, termination of agreements and early settlement, as part of its future framework. The amendments would prevent the FCA taking forward this vital work.
Lastly, Amendment 17 covers certain important rights, such as time orders, and seeks to retain these provisions within legislation without changes. However, changes to these provisions are necessary to ensure that they work together with the new information requirements recast into FCA rules.
I hope that I have been able to reassure noble Lords that the Government are taking forward these changes for the benefit of consumers, and convince them that the changes the Bill makes are necessary to modernise our protections and ensure that they are serving their intended purpose of protecting consumers. I acknowledge that we will come to the scrutiny of the regulators, especially the FCA, in future groups. I therefore propose that Clause 1 and Schedule 1 stand part of the Bill and respectfully ask the noble Baroness not to press her opposition to them.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the Minister and all who have spoken in this debate. I am sorry that, to some extent, having it in two separate bits has made it more awkward. We are at a kind of impasse here. The Minister replies as though we are saying that nothing in the Consumer Credit Act can be changed and it will all have to stay there. In fact, all I am saying is that there are some basic core rights in statute, similar to the sorts of core rights that exist in many other Commonwealth countries, that should remain, because you do not have rights with the regulator. As my noble friend Lord Sharkey explained, the consumer duty does not give you any rights. It is about the opinion of the FCA, and it can change how it will apply it.
The main thing that we are objecting to is that the Bill is shoot first, ask questions later: “Give us all the power now and we’ll consult and tell you what we’re actually going to do later”. That is not the way to make legislation right—it is not how you would hire a telly, for heaven’s sake. We are being asked to tick the box on behalf of the public for something that is fundamentally unseen. The Bill does not retain core rights. It says that some things will change and gives an open-ended power to change everything else automatically when the Government want to. The fact that the Government are not taking rights away now does not mean that they cannot take them away later.
That is the impasse that we are at. We need some core rights that stay. The rest can all be simplified, streamlined and handled by the FCA and made more modern. The two should be able to work together, but it is not a simple fix. This has been pushed through without that second consultation, and that is why it is now falling apart as unsatisfactory. I will return to this when we come to Report, but, for now, I will not press my opposition to Clause 1 standing part of the Bill.
Baroness Neville-Rolfe
“38A In section 140A (unfair relationships between creditors and debtors), after subsection (4) insert—“(4A) An application under section 140B(2)(a) shall not be made, and no action for an order under section 140B shall be brought, after the expiration of six years from the date on which the relationship between the creditor and the debtor ends.””Member's explanatory statement
This amendment would retain the six-year limitation period, running from the end of the creditor-debtor relationship, for applications or actions seeking relief under sections 140A and 140B of the Consumer Credit Act 1974 in respect of an unfair relationship.
Baroness Neville-Rolfe (Con)
My Lords, before I turn to the detail of these amendments, I should briefly set the scene. Noble Lords will be aware that last week the Conservative Party announced a new policy in relation to the Financial Ombudsman Service. An amendment on our proposal for an alternative approach, a financial adjudication service, is currently being discussed with the Table Office, and I do not intend to pre-empt that discussion. We will have the opportunity to debate that proposal at a later stage of the Bill.
The clauses before us, by contrast, change the landscape of dispute resolution in financial services in the immediate term. Our policy announcement does not prevent us engaging properly with the provisions before us now. Indeed, it makes it more important that we do so. We want whatever system Parliament agrees on now to work as well as it can. The amendments in this group are concerned with certainty, timeliness and fairness. They are intended to ensure that the framework being created by the Bill does not introduce unnecessary uncertainty for firms, does not allow yet further delay to become embedded in the system and does not create open-ended liabilities or an undesirable degree of retrospection.
I turn first to Amendment 17A, which relates to unfair relationships under Sections 140A and 140B of the Consumer Credit Act 1974. Its purpose is to retain the six-year limitation period running from the end—I emphasise “end”—of the creditor-debtor relationship for applications or actions seeking relief in respect of an unfair relationship. These can of course go back many years. This reflects a concern that has been raised with us following the Supreme Court ruling in THG plc v Zedra Trust Company (Jersey) Ltd, which found that unfair prejudice petitions under Section 994 of the Companies Act 2006 are not subject to statutory limitation periods. I appreciate that that judgment arose in a different statutory context, but it has prompted a serious and practical question. Does that reasoning have any implications for applications or actions seeking relief under Sections 140A and 140B of the Consumer Credit Act?
If there is any doubt about the applicable limitation period, the consequences could be significant. Credit agreements, and the relationships arising from them, may have ended many years earlier. Banks and other lenders do not keep records indefinitely. They cannot reasonably be expected to defend claims on the basis of files, communications, systems and decision-making processes from an indefinite period in the past. That is why limitation periods matter. They reflect a basic principle of fairness: that after a certain period evidence may be lost, as memories fade and documents are no longer available. Without a clear time limit, firms could be exposed to open-ended liability and a significant increase in vexatious or speculative claims, often fired up by claims management companies.
Amendment 17A therefore seeks to preserve the existing position that, where relief is sought under Sections 140A and 140B in respect of an unfair relationship, the relevant limitation period should be six years from the date on which the relationship between the creditor and the debtor ends. I would be grateful if the Minister could give some clear answers here. As my noble friend Lady Lawlor said in the previous group, it is important to have predictability. Does the Government’s understanding remain that the six-year period applies? Has the position been affected in any way by the Supreme Court’s reasoning in THG v Zedra? If the Government consider the position is already clear, will the Minister set that out on the record? If there is any doubt, will he commit to preserving the current six-year period?
I turn next to Amendment 36, which concerns referrals from the Financial Ombudsman to the FCA. The Bill creates a new mechanism by which the Financial Ombudsman may refer matters to the FCA where there is an issue of wider significance or where FCA rules may be ambiguous. In principle, that is sensible and an important mechanism, but one of the recurring criticisms of the current system is that firms can find themselves judged against interpretations or expectations that were not clear at the time.
A route for the FCA to provide clarity is therefore welcome. However, that mechanism will work only if it operates at pace. If a complaint is referred to the FCA and then sits there for months, the result will be uncertainty for everyone. The consumer is left waiting, the firm is left with a live and unresolved complaint and the ombudsman cannot proceed. The wider market may be left in doubt about the meaning or application of the rules.
Baroness Bowles of Berkhamsted (LD)
I would like to join in this discussion because it is probing thoughts. I shall make a few comments on Amendment 17A, because the issue overlaps with an amendment of mine that comes later in the main FOS group.
Amendment 17A raises an important point about limitation periods and the concept of when a relationship ends. It seeks to preserve the six-year limitation period for unfair relationship claims, running from the end of the creditor-debtor relationship. I understand the intention, but it exposes a deeper difficulty. The end of a relationship is not, or may not be, the same as the end of rights and it is certainly not the same as the end of enforcement powers. In many cases, firms retain continuing benefits or enforcement rights long after the consumer’s remedies have expired. Debts can be sold, pursued, securitised or enforced years after the practical relationship has ended, yet the consumer’s ability to challenge an unfair relationship may already have fallen away. That is an asymmetry.
As I said at Second Reading, while I understand the industry’s desire to get a grip on long-tail risk and liabilities, especially where regulators are interested in it, that cannot be done off the back of consumers. If we are to move parts of the Consumer Credit Act into the FCA rules, at the very least those rules must be required to secure, as far as reasonably practicable, symmetry between the duration of rights, remedies and redress available to consumers and the duration of rights, remedies, enforcement powers or continuing benefits to firms arising from the same act, omission or relationship. Without that symmetry, we risk creating a regime where firms retain long-tail powers but consumers lose long-tail protections. Limitation periods cannot be considered in isolation from the underlying rights. The two must move together or we distort the balance that Parliament intended. That is why the statutory framework has a place.
The FCA has already announced, a year or so back, a shift in emphasis to allow more risk in the interests of growth, which is a recurring theme. That was an important statement by the FCA and it feeds into the need for proportionate regulation and acceptance that there may be more failures, which Parliament must accept, but it cannot mean a bias advantage towards business in ways where firms retain recourse against consumers while consumers lose recourse against firms.
Under that process, companies may enjoy growth by escaping the consequences of some bad actions, but that gain is extracted from consumers and effectively added to the cost of living. Fleecing consumers is not growth, but I fear that this may be the consequence of the asymmetry in rights that could arise under Amendment 17A. I may return to this issue with my own amendment on Report.
Lord Davies of Brixton (Lab)
I just wanted to say that I have a lot to say on the Financial Ombudsman Service but I shall save it all for group 6.
Baroness Altmann (Non-Afl)
My Lords, first, I declare an interest, which perhaps I should have done at the beginning. I am a director of a pension company that is regulated by the FCA. I apologise for not having declared that earlier.
I will reflect on an issue that could arise because the Financial Ombudsman Service is in charge of complaints about pensions. We know that many people who are taking out pensions products may have problems that do not become apparent to them for six or 10 years or beyond. Perhaps we could consider an amendment that would carve out the extent to which the Financial Ombudsman Service deals with a pension complaint in relation to this element of the Bill.
Baroness Kramer (LD)
My Lords, I have only a few comments on this group. As I listened to the comments on Amendment 17A, particularly those of my noble friend Lady Bowles and the noble Baroness, Lady Altmann, I understood what reminded them of mortgage prisoners. In that case, people who held mortgages with banks that failed, and who were rescued by the Treasury, were then sold on to private holders who were not themselves lenders of mortgages. In effect, they lost the ability to refinance, and so they remained imprisoned in very high-rate mortgages at a time when everyone else was able to remortgage. We can see echoes of that in some of the limitations that would be introduced by these amendments. I am therefore always concerned about those time limitations, particularly in situations where assets can be sold on, as they often and increasingly are today.
Amendment 44, from the noble Baroness, Lady Neville-Rolfe, seeks to deal with the issue of consumer redress. If a consumer has been abused in some way and has a moral right to redress—a right in law—should that be lost simply because we have a regulator that fails to act promptly and within a reasonable time? I understand that it is tough for the industry, because it leaves it with uncertainty, but some of these products are life-changing for individual consumers and have life consequences. That is what made me think of mortgage prisoners; their lives were completely ruined by that process.
Where there are such consequences for the individual, it is very concerning to take away the right to redress because there was a delay in the functioning of the regulator. I understand that it means that the industry has to live with uncertainty, but my advice to it is to behave well to your customers. That really is the very best way not to get into these issues.
Lord Stockwood (Lab)
My Lords, I begin by considering Amendments 17A and 44. The Government’s reforms to the FOS are aimed at ensuring that the legislative framework in which it operates supports it to perform effectively the role that it was established to do, providing quick, informal and impartial dispute resolution between financial services firms and their customers.
Given the nature of the FOS and the way it operates, it can be effective at resolving the majority of disputes between customers and financial services firms, but it cannot do everything, and some things are more suited to other routes. The alternative routes include the courts and a consumer redress scheme established by the FCA. These routes are more appropriate when addressing systemic issues, such as widespread mis-selling. The reforms that the Bill makes to Section 404 of the Financial Services and Markets Act 2000 are designed to enable the FCA to act quickly to prevent disruption and uncertainty when it finds that a mass redress event has occurred.
Turning to Amendment 17A, I thank the noble Baroness for raising this important issue. I recognise that there have been questions about the time limits that apply to claims brought under Sections 140A to 140C of the Consumer Credit Act 1974 in the light of the Zedra ruling. The Government understand that there is an interest in and desire for clarity in this area. The noble Baroness, Lady Neville-Rolfe, asked me about the Government’s position following the Zedra ruling and its implications for the Consumer Credit Act 1974. The Government’s position remains that the limitation period runs from the end of the credit agreement. That approach provides legal certainty and reflects the nature of these claims. That understanding is consistent with existing case law, including the Supreme Court’s judgment in Smith v RBS.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to all noble Lords who have contributed to this brief debate and to the Minister for his response and clarification of THG v Zedra, which I will certainly consider.
My central point is that a redress and complaints system must be fair in operation. It must be capable of delivering justice for consumers, but it must also give firms a reasonable degree of certainty about the liabilities they face, the standards against which they are judged and the timeframes within which matters will be resolved. If we create a system in which liabilities are open-ended, where regulatory redress powers can go beyond ordinary limitation principles, and where referrals can remain unresolved for an indefinite period, I do not think it will produce a better system for consumers.
I agree that we must look after consumers—this is obviously a very important part of consumer law—but I worry that we will produce a slower, more uncertain and more contested system for everyone if we do not get these judgments right. I do not accept a bias towards business, as the noble Baroness, Lady Bowles, suggested. Actually, we are seeing a shift the other way in some of these areas, which is why I have had the representations I have had on these points and why I think is it is very important to find clarity.
I note what my noble friend Lady Altmann said about pensions. The Minister has answered and explained that he sees pensions in a slightly different way. I am not sure what the limitation rules are there.
I hope that the Minister will reflect further on the thrust of these amendments. In particular, I hope that he will consider whether the Government can provide a clearer statutory safeguard on limitation—clarity is certainly important—as well as a firmer timetable for FCA opinions. I worry that just delegating it to the FCA will mean it being in charge of its own timetable. If there were an enormous problem in the financial services industry that required the diversion of staff elsewhere, for example, things could slip, and redress for the consumer could then slip as well.
All of these amendments go in the same direction: towards fair, timely and certain decision-making, with predictability for both consumers and the businesses involved. For now, I beg leave to withdraw my amendment.
Baroness Noakes
“(1A) Before making regulations under this section the Treasury must consult persons which provide banking services and such other persons as the Treasury consider may be affected by the regulations.”Member’s explanatory statement
This amendment requires the Treasury to consult banks and others who might be affected by regulations on access to banking services.
Baroness Noakes (Con)
My Lords, in moving Amendment 18, I will also speak to my Amendments 19, 20 and 25 in this group; I am grateful to the noble Lord, Lord Vaux, for adding his name to them.
We now move on to Clause 3, which gives a very wide power for the Treasury to make pretty well any provision it feels like about providing access to banking services. It is a fact of life that major banks in the UK have been reducing their branch footprints for several years, in response to the massive shift from in-person banking to online and mobile banking. Branch visits have fallen by more than 90% since the 1980s, and debit cards overtook cash transactions in the 2010s. In 2024, only 9% of transactions were made in cash, while 93% of adults used online or mobile banking. At the same time, the activity that banks could conduct safely via branches diminished. Some might think nostalgically of the era of autonomous bank managers making lending decisions and offering investment advice, but those days have been largely risk-managed out of retail banking.
Noble Lords will be aware that the 2023 Act gave the FCA powers to protect access to cash services. I did not think that those powers were necessary, because I could see that cash was definitely on its way out, but I accept that banks have to continue to provide cash until cash-only users drop to an insignificant number. The banks have agreements with the Post Office and have voluntarily signed up to the provision of 350 joint banking hubs that provide not only cash services but, to a more limited extent, the services of community bankers.
I know that some consumer lobby groups have had statutory protections for more than cash services in their sights for some time, but it is far from clear whether more needs to be done beyond the banking hubs, which are still being rolled out. I have never seen a clear exposition of what services are missing, so I have no idea whether they are realistic in terms of continuing provision, hence I am unconvinced about the case for either statutory intervention or further regulatory powers.
The case may be made when the review being undertaken by Mr Richard Lloyd reports, but that is the time for the Government and Parliament to decide whether a statutory remedy is necessary. Frankly, it is bizarre that the Government set up the Lloyd review in the very month when they announced in the King’s Speech that they intended to legislate. Normally, we consider matters then determine whether legislation is necessary, but not in this case. Even if Mr Lloyd’s review finds that further banking services are needed, that does not inevitably lead to the need for further laws. The banking hub arrangements that I referred to are not in existence as a result of the 2023 Act, as the banks had already started to set them up. The banks are generally well aware that they are an essential part of the fabric of our society and that responsibilities go with that.
I turn to my amendments. Amendments 18 and 19 are straightforward. Amendment 18 says that the Treasury would have to consult the banks and anyone else who might be affected before making regulations. I am quite sure that Mr Lloyd will be diligent in discussing the issue of banking service provision with the banks during his review, but that is no substitute for the Treasury itself being required to consult the banks before any regulations are made. Whatever Mr Lloyd’s review concludes, it is the Treasury in the first instance that needs to decide what, if any, burdens to impose on banks, hence it is absolutely necessary that they are consulted. Amendment 19 would require the Treasury to be satisfied that the banking services which might be covered by regulations would not be provided voluntarily. There is no need to create regulatory burdens where the desired outcomes can be achieved by other means.
As I have already said, retail banks are aware of their societal responsibilities; they will also be aware of the Treasury’s power under Clause 3 to require them to do things. Hence it is highly likely that, if Mr Lloyd comes up with reasonable recommendations, there will be a voluntary agreement. That would in effect leave the power in Clause 3 to make regulations in place to make less than reasonable recommendations into law, which is particularly why Amendment 18, which requires consultation, would be essential.
My other amendments in this group, Amendments 20 and 25, are intended to ensure that any use of the regulation-making power in Clause 3 is rooted in the findings of independent reviews. At present, the regulation-making power is unlimited and its only restriction is to have regard to the findings of the Lloyd review. It does not even have to follow the findings of the Lloyd review. That review might make recommendations which the Treasury does not wish to pursue at this time. Amendment 25 would ensure that if the Treasury wished to resuscitate such recommendations at a later date, or indeed to pursue other approaches to the provision of banking services, then it would have to have another independent review to validate the necessity for using the power.
Amendment 24 in the name of the noble Baroness, Lady Bowles of Berkhamsted, would tie the use of the Clause 3 power to the Lloyd review. I see the rationale for that, but I wonder whether her amendment might ossify the concept of banking service provision into mid-2026. I am sure that the need for in-person banking services will carry on changing long after Mr Lloyd has submitted his report.
I predict that we will end up with only a very small number of bank customers who actually need in-person services. The last thing that we want to do is to make the banks carry on providing them if those services are not generally needed, because the costs would be borne not by the banks but by all bank customers, so we would be shifting burdens from one small set of consumers to another.
The noble Lord, Lord Vaux of Harrowden, has tabled a Clause 3 stand part notice, with which I have very much sympathy. The Government have stated in the Explanatory Notes, and the Minister repeated at the Dispatch Box at Second Reading, that the Government intend to narrow the power during the Bill’s passage. My own view is that it is unacceptable for the power to leave your Lordships’ House in its current wide form. The Government must narrow the power while we are scrutinising it in your Lordships’ House, since it is unacceptably wide as it stands. I beg to move.
Lord Vaux of Harrowden (CB)
My Lords, as this is the first time I have spoken on the Bill, I would normally apologise for not taking part in Second Reading but—how I can put this—I was enjoying my temporary retirement from the House.
Lord Vaux of Harrowden (CB)
It is very nice to be back to do another Financial Services and Markets Bill. As it is the first time I have spoken, I should declare a registered interest in Fidelity National Information Services, Inc., which is a large American company that provides services and software to a wide range of financial services companies around the world.
I have tabled Amendment 26 and given notice of my intention to oppose that Clause 3 stand part of the Bill. I have also added my name to a number of amendments in the name of the noble Baroness, Lady Noakes.
I have another interest to declare. I lost my local bank branch in my village some years ago, and I have just been informed that the last remaining bank in my nearest town is also about to close. To visit a bank branch for me will now involve a 100-mile round trip, so I am sympathetic to the idea that we need to do something to ensure continuation of access to banking services, especially in rural areas such as mine. At the same time, I am conscious that I probably visit a bank branch less than a couple of times a year, so I understand why banks feel it necessary to close them. They are not economic. We need to find a sensible balance to this. I accept that we may need to do something, but what?
There is the old joke: “We need to do something; this is something, so let’s do it”, but Clause 3 is not even something. It is just a vague—I was going to say promise, but it is not even that—intention to do something completely unspecified at an unspecified time, or indeed times, in the future. This Government have an unfortunate track record of putting sweeping powers into legislation before deciding what they actually intend to do with them, and this is yet another example. As the Delegated Powers and Regulatory Reform Committee pointed out really strongly, this is a very sweeping power with no meaningful limitations at all other than, as we have heard, the need to have regard, and only to have regard, to the independent review currently being undertaken by Richard Lloyd.
Clause 3(3), which has only examples rather than limitations, is one of the widest I have seen. It includes the express ability to make changes to any Act of Parliament, a really strong Henry VIII power. It starts by saying:
“Regulations under subsection (1) may (among other things)”
do the things listed below that. Will the Minister explain what these other things might be? Am I being old-fashioned to suggest that this is not the right way to create law? It would surely be better to wait until after the review has been undertaken, decide what is needed and then legislate—if legislation is actually necessary, since, as the noble Baroness, Lady Noakes, says, we got these banking hubs without legislation—and have the legislation subject to proper scrutiny by Parliament, which it will not be if we go down this route.
The Minister will no doubt try to reassure us about how this power will be used. Of course I—and, I am sure, everybody else in this Room—will have complete faith that the Minister would not try to misuse the power, but he will not always be the Minister. That may be a comment that has particular resonance today. Who knows? It is even possible that this Government may not always be the Government, but this power is unlimited and will be the law for the foreseeable future. Who knows what a future Government might wish to do with such an unlimited power? Indeed, as written, they could even use it to reduce the rights of access to banking.
I have a few specific questions for the Minister. First, will he explain in more detail how the Government currently expect, subject of course to the review, to use this power? What do they expect to do with it and when? Secondly, will he explain which Acts of Parliament he has in mind that might be changed under Clause 3(3)(b) and what changes he would expect to make to them? I put on record now that if I do not get a very convincing answer as to why this wide Henry VIII power is required, I will push Amendment 26, which would remove the power to amend primary legislation, to a Division on Report.
Finally, the Explanatory Memorandum recognises that this is a broad power. It says it is “necessarily broad”. At the same time, and in contrast to that, it also seems to recognise that it is broader than really needed, as it goes on to say,
“the Government would expect to narrow it once the review has concluded”.
I am somewhat baffled by that. We are in Grand Committee now, and the timetable for the Bill seems pretty tight. Will the Minister explain how it would be possible to narrow it, given that the Bill is likely to have completed all its stages before the review is completed and they have worked out what they want to do with it? Once the Bill has become law, the power cannot be narrowed.
This is another example of the Government trying to show they are doing something before they have decided what they want to do, and therefore giving themselves inappropriately broad powers that avoid proper scrutiny when they do finally decide. It is not the right way to make laws that will outlast this Government, and I do not believe this clause should stand part of the Bill without at least very significant narrowing and safeguards.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak briefly to Amendments 24 and 27 in my name. I support what has just been said by the noble Lord, Lord Vaux. To some extent, we are again fishing in the same constitutional pond that regulators are not Parliament. Parliament should not give away powers it cannot get back, and it should not make decisions before we know what we are deciding about.
Amendment 24 would ensure that any regulations made under this clause can only make provision that arises directly from the statutory review. A review is not a blank cheque. If Parliament asks for a review of access to banking services, the regulation-making power should be, if not confined to, at least in some way related to what the review identifies and not what a future Minister or regulator might wish to do. That is my real target. It may be that I have drafted he amendment a little too tightly but, as has been explained, this is a very open-ended power to do anything. Looked at constitutionally, the fact that the consultation has not yet been completed and assessed more than stretches proper procedure.
Amendment 27 addresses a different but related concern. As drafted, the Bill creates machinery in which FCA rules effectively drive changes to legislation, including primary legislation. The FCA pulls the lever, the Treasury presses the button and the law moves to reflect the regulator’s rulebook. The Government will no doubt say that Parliament can always reject the regulations, but we all know how that plays out: Parliament is presented with take-it-or-leave-it unamendable statutory instruments, and if it dares to reject them, we are told we are precipitating a constitutional crisis. That is not meaningful parliamentary control.
I am not opposed to the FCA modernising rules or streamlining processes—far from it—but where those rules have the effect of altering rights or obligations that were created by Parliament, the change must meaningfully come back to Parliament. Otherwise, we risk creating a system where the regulator can, in substance, rewrite Acts of Parliament by changing its rulebook. That is not proportionate regulation; it is law-making without accountability. Again, this seems not to be the sort of thing expected under the Legislative and Regulatory Reform Act. These amendments do not prevent modernisation; they simply ensure that modernisation happens within a statutory framework, with Parliament retaining oversight of the rights it has created. It does not mean going into the detail, but it does mean monitoring the rights. I hope the Minister will recognise that these are modest but important constitutional guardrails.
Baroness Tyler of Enfield (LD)
My Lords, I shall speak to Amendment 22 in my name. I apologise for not being able to speak at Second Reading, as I was overseas on a parliamentary delegation. I declare an interest as a member of the Financial Inclusion Commission and president of the Money Advice Trust.
My amendment is specifically about banking hubs, a subject I have been very interested in ever since they came on the scene. There is a need, as I see it, for a far clearer definition of what constitutes a banking hub. Looking at the range of other amendments in this group, I am pleased that we are having a broader and much-needed debate on access to banking and, in particular, in-person services than we managed to have on the 2023 Act, despite my best efforts, which did not really get us anywhere.
To explain why a definition of “banking hubs” is so important, I will briefly look at the context. As we all know, over the past decade banking in the UK has changed profoundly. More than 6,700 high street bank branches have closed since 2015. Of course, at the same time, the way that people pay for goods and services has shifted dramatically: 10 years ago, more than half of all payments were made in cash, and today that figure is closer to one in 10.
For many people, that transition has been quite manageable, and indeed welcome, if they like the convenience of digital banking online, apps or card payments. But, for others, the shift away from local branches and cash-based services has created real barriers. For someone who cannot use online banking, the closure of a local bank branch can mean losing independent access to their own money. For someone who is blind or partially sighted, inaccessible digital systems can make everyday banking difficult or, frankly, impossible. For an older person without reliable transport, the nearest banking services may simply be out of reach. For those who use cash to budget—a proportion of people still do—or to pay carers, support relatives and retain control over household spending, the disappearance of in-person banking is not just a minor inconvenience; it can affect that feeling of control, autonomy and financial security.
Banking hubs emerged as a response to this new reality, providing shared in-person access to basic banking services, including cash withdrawals and deposits, as well as a limited amount of face-to-face support. I welcome banking hubs, as I have throughout this debate. I have been pleased to visit one and see what it involved. The Government have committed to rolling out 350 hubs by 2029. For me, the questions around banking hubs are: what do they actually do? Are they doing enough and being rolled out quickly enough? Are they addressing the needs of the people who need them most? These questions are ever more pressing following the announcement, which I very much welcome, of an independent review into the impact of bank branch closures, looking at what further interventions might be needed to protect access to in-person banking services.
The noble Baroness, Lady Noakes, raised whether this is all about nostalgia and looking back to how it was in the old days—a sort of “Dad’s Army” view of banking—but we really need to recognise that it is not a question of nostalgia for traditional banking. Banking services have and will continue to evolve, and digital services will remain central, in my view, to the future of financial services, but inclusion has to be built into that transition. At the moment, we have not seen quite enough emphasis on inclusion. That key gap remained and was baked into the 2023 legislation, which is why it is so important that the independent review looks at this and comes up with good recommendations, so that the FCA can specify what a banking hub is and what qualifies as one.
Frankly, at the moment, the industry could meet all the terms of regulation without a single banking hub. It can offer services virtually, in theory—namely, through video conferencing—which might have some merit in setting out the minimum requirements for a hub and holding the industry to them in the long term. The FCA might also choose to define hubs to suit rural areas. It might be a lighter-touch model. We have to make sure that this does not impact on the Post Office and that it allows further rollout. All the evidence I have seen so far has pointed to the importance of sustainability for the Post Office and the basic banking services that it provides under the framework agreement.
Moving forward, there are big challenges. At a recent meeting of the All-Party Group on Fair Banking, there were strong calls for the FCA to prevent closures of banks—the last branch in town—until replacement access is in place. There was a feeling that the current approach is frankly too reactive, with a response often coming only after the closure occurs, and there were questions of whether communities losing their final branch should automatically receive a hub, so that there should not have to be a review. The Post Office was very much recognised as a key national asset in supporting access to cash and basic banking services.
The Lord Bishop of Manchester
My Lords, it is a great honour to follow the noble Baroness., Lady Tyler. As I listened to her speech, I was crossing off most of the things that I was going to say, because she said them much more eloquently than I could have, and I am thankful for that. We need to be able to provide everybody with the best possible services, locally available. As the noble Baroness said, when people are at their most vulnerable, at the most crucial moments of their lives and taking the big decisions, being face to face makes all the difference.
I gather that an article in the Spectator says that Bishops do not mention the word Jesus enough when we are speaking in your Lordships’ House—well, I have just covered that one, for Hansard’s benefit. In my theology, when God had something really important to do, He did not send an email or text message or put writing in the sky. He sent a person, in Jesus Christ, to meet other human beings face to face. We lose face-to-face services at our peril.
Occasionally, yes, I am involved with the closing of a church. But very few churches, certainly Anglican ones, have been closed in England over the past 40 or 50 years, because we recognise the importance of providing face-to-face encounters for people to meet other people. While I appreciate that we do not want to overregulate, I feel that, as I said at Second Reading, making face-to-face banking services available to people when that is what they need, because they have a big decision and are feeling vulnerable, gains priority over the convenience of the banks. They might pass some small costs on to the rest of us, and it might affect the bonuses that some bankers get and the shareholders’ dividends at the end of the day, but that is a price to pay for seeing that everybody is included in the banking world.
Lord Davies of Brixton (Lab)
I shall speak to Amendment 23 in the name of my noble friend Lord Sikka. He very much regrets not being able to be here, but I hope that the Minister will still respond to the point that it raises.
The key issue is that there is a public service element in banking. It goes beyond commercialism; it is reasonable to ask that the review which is taking place should consider that issue, and specifically whether it requires an amendment to the Bill to effectively pre-empt the issue and say that villages, towns and districts need some form of banking services. I think there could well be broad agreement on that—the issue is that banks are competitive commercial organisations and so are not going to do it. They will do it only if there is some sort of collective scheme, funded by a levy, that provides good services for people where they live. I very much enjoyed the contribution of the right reverend Prelate, and indeed churches have closed down far less frequently than banks and post offices. I hope my noble friend will respond positively to that point on the public service element.
Baroness Bennett of Manor Castle (GP)
My Lords, I speak for the first time in Committee on my third Financial Services and Markets Bill. I reflect on the curious circumstances in which we find ourselves and offer reassurances to those who do not like Clause 3 in particular. Surely under the new regime, which we expect to see in a month or so, we are unlikely to see the Bill in anything like its current form given that it aims overall to deliver the so-called Leeds reforms of Chancellor Reeves. Those intend to give the financial sector a boost of growth, at an inevitable cost to the real economy—a boost to London and the tax havens at a cost to the rest of the country—and to reduce the regulations which were brought in as protections for all our security after the last financial crash. However, there is still a point in all of us going through the Bill in detail as we are doing now, because we are also making bids for what a future Government will look like.
On that basis, I will speak in particular to Amendment 22, in the name of the noble Baroness, Lady Tyler, and Amendment 23, in the name of the noble Lord, Lord Sikka. We are expressing very important issues, as the right reverend Prelate put so well. He was speaking about religion but also about humanity and human need, which these amendments particularly address. Your Lordships do not need to listen to me with my radical voice; reading around this, I found an article in March from the Civil Service Pensioners Alliance. It quoted figures which state that about 53 bank branches close each month, and pointed out that this was forcing older people in particular into digital exclusion, stripping away their independence and leaving them highly vulnerable to scams. No one has yet brought that up, but speaking to local persons in a local branch can be an important prevention against scams, and there is also the premium on having to pay more for things because you are poor.
Picking up the point made by the noble Baroness, Lady Tyler, the pensioners alliance talks about circumstances of bereavement or the need for a power of attorney, which are circumstances that can happen to any of us. They will continue to happen, and technology cannot make them disappear. On that, I take issue with a couple of points made by the noble Baroness, Lady Noakes. The noble Baroness said that we can get rid of branches when cash users drop to an insignificant number. First, we should not be treating anyone in our society as insignificant, but more broadly, that assumes that we are heading—both as individuals and collectively—only in one direction. You may, at a certain age, be able to cope very well with digital banking and be perfectly comfortable with it, but that is not to say that later in life you might not want to use a different system. You might not be able to see the screen of your phone or manipulate its buttons, or you might not be able to hear on the telephone anymore. At that point, cash being available is an absolutely crucial thing.
Finally, I will pick up a point from the noble Baroness, Lady Noakes, which the right reverend Prelate also discussed. It is not the case that customers have to pay for the provision of these services. I point out that the big four UK lenders made £14 billion total profit in the first quarter of this year, and their profits last year were £46 billion. The financial sector depends on government support to survive. That is a licence, and we can comment on the conditions under which that licence is held. If this legislation goes forward, surely we can add a provision on local banking services—having a person to speak to when you really need it. Whatever future legislation comes in, there clearly needs to be action in this area.
Baroness Kramer (LD)
My Lords, there seem to have been two themes in today’s discussion; I will address both because I agree with them both.
The first is on whether we value banking hubs. There have been so many voices that say that we value them, but they are calling for a much-improved framework, including the noble Baronesses, Lady Tyler and Lady Bennett, the noble Lord, Lord Davies, and the right reverend Prelate the Bishop of Manchester. I suspect that there is a universal consensus that we need to think through this issue, which is exactly why the Richard Lloyd review is now anticipated. I think that most people who see the value of banking hubs in their community—most MPs have been asking for banking hubs in their constituencies—very much appreciate the direction of the Lloyd review. On the background and evidence for the need for banking hubs, I will address some of those issues much more when I discuss community development financial institutions in a later group, so I will not repeat all that.
That does not take away from the fact that we have a constitutional issue here. According to its report, the Delegated Powers and Regulatory Reform Committee is very concerned that the problem has not been clearly identified and that a power as extensive as the one provided for here in the Bill severely compromises effective parliamentary scrutiny. The Select Committee asks for the power to be removed from the Bill. I say to the Government that it is important that there will be some real clarity before this hits the Commons—otherwise, this clause will be very much in trouble.
I support banking hubs. I suspect that I will be very pleased when I read the Lloyd review. What is sauce for the goose is sauce for the gander. I cannot just say to Parliament that, if it is something that I like, we do not need oversight, scrutiny and a proper process and that we do not need to consider the role of the regulator versus the democratic decision-making that should be happening in Parliament. This is a very good instance where I suspect that I would be very much in favour of the Lloyd review, but I would be very sad if that is not brought before Parliament for discussion, scrutiny and proper oversight. It is unfortunate that the Bill follows a procedure and process that seems to be completely unnecessary and that does not allow for that oversight. Oversight is valid, whether or not you think you will like what the regulator will do.
Baroness Neville-Rolfe (Con)
My Lords, Amendment 21, in my name and that of my noble friend Lady Noakes, would ensure that any government intervention in the provision of in-person banking services is evidence-based, proportionate and properly balanced. It would require Ministers to consider not only the needs of consumers but the legitimate commercial reasons why firms may reduce their physical banking provision.
More widely, Clause 3 raises two distinct but closely related concerns. Our amendment speaks to the first: banks do not close branches simply on a whim. Consumer behaviour has changed profoundly, more banking is conducted digitally, and maintaining a physical network carries substantial costs. The Government may decide that wider social considerations justify intervention, but they cannot responsibly make that decision while ignoring the commercial realities facing the firms they intend to regulate.
Lord Stockwood (Lab)
My Lords, I will begin by setting out why Clause 3 should stand part of the Bill. The way that UK citizens bank has changed significantly in recent years, with many customers choosing to use digital channels such as mobile banking. As such, we have seen many firms reviewing how best to meet these changing needs, and banks are closing branches in response.
However, for some people who require access to in-person banking services, these changes may have resulted in detriment. The Government are committed to ensuring that people who need in-person banking, including vulnerable customers and those with specific needs, can continue to access essential services. Last month, as mentioned, the Government launched an independent review into access to banking services led by Richard Lloyd, former executive director at Which? and a former board member of the FCA. I encourage noble Lords to engage with him. As they have noted, he conducts this critical work. I am glad to hear much agreement from many noble Lords today as this is a critical issue and the Government are right to be exploring it.
Clause 3 ensures that we can act swiftly and proportionately if the evidence from the Access to Banking Services review supports intervention. Once the Access to Banking Services review has concluded and made its recommendations, the Government will assess whether any further legislative change may be required. I appreciate that the power is broad and that many of the amendments in this group are aimed at scrutinising or reducing the breadth of that power. I also recognise that the Delegated Powers and Regulatory Reform Committee has drawn Clause 3 to the attention of the House and recommended that the power be removed from the Bill. The Government have considered that report and will be responding in writing in the normal way before Report.
We accept that this is a broad power, but we consider that it is needed now so that, once the independent review reports, the Government can respond promptly and proportionately in light of the evidence and recommendations that it provides. As the review is still ongoing, it is not yet known what detriment exists, which customer segments are most affected, whether further intervention is needed or what form it should take. The Government are committed to keeping all aspects of this power under review as the independent review completes its work.
I pass on my personal welcome back to the noble Lord, Lord Vaux. His comments about Ministers changing is indeed pertinent on a day such as today. I am not casting too far in the future; indeed, I keep checking my phone just to see whether I make it through Committee stage.
The noble Lord whether this power could be narrowed. I can confirm that the Government expect to narrow the power once the review has concluded in October and we have had the opportunity to consider the recommendations. This will provide further clarity on any appropriate interventions that will allow the power to be refined.
Lord Vaux of Harrowden (CB)
If the review is going to be completed in October, presumably there will then be a period of time when the Government will consider it. In my experience, that usually takes several months, by which time the Bill will be law. I struggle to understand how the power can be narrowed, given that we are probably at the end of the year before proposals have come forward.
Lord Stockwood (Lab)
I was coming on to that point. The noble Lord asked what the power can do and how that scrutiny can take place. It allows the Government to introduce targeted secondary legislation or to confer functions on the FCA, including the power to make rules in the future. When using this power, the Treasury must have regard to the recommendation made by the Lloyd review.
I think the noble Lord made a point about what legislation could be amended. I can only answer this in part at this time: the Treasury expects to use the power if needed to amend relevant legislation, for example, financial services legislation.
Baroness Kramer (LD)
I would just like to clarify this. Is the Minister saying in effect these powers are going to be one time only? Is that the implication?
Baroness Noakes (Con)
My Lords, the Minister said that they may need the power to change financial services legislation. Since financial services legislation is in the hands of the Treasury, I think we are entitled to a slightly more specific explanation of how the power might be used to change primary legislation. Can he be more specific about which bits of financial services legislation the Treasury will likely use the power for?
Lord Stockwood (Lab)
With all these examples, I will have to come back in some detail at a later stage. The idea of narrowing the powers means that we can take into consideration the conversation and debate, while acknowledging that there will be some work to do in the intervening period. We believe we have the time to do that before the Lloyd review comes into play, allowing us to make the amendments necessary.
On Amendment 18, from the noble Baroness, Lady Noakes, I reassure noble Lords that the Treasury engages very regularly with the retail banking sector as part of its policy-making process. In addition to the Treasury’s ongoing regular engagement, the Access to Banking Services review will engage closely with as wide a range of stakeholders as possible, including the industry, consumers, local authorities, small and medium-sized businesses, and trade bodies. Furthermore, if regulations are made under this power to confer functions on the FCA, the Government would expect the regulator to follow its usual processes and to fulfil its statutory duty to consult before it imposes any new requirements.
Amendment 21, in the name of the noble Baroness, Lady Neville-Rolfe, contains a similar requirement for the Treasury to consult before making any regulations. It would require the Treasury to have regard to other sources of evidence, including the burdens that any regulations would place on banks, and for the Treasury to publish a statement alongside any draft regulation summarising its consideration of the evidence. The review will consider these sources of evidence, and, in considering the review’s recommendations, the Treasury will naturally take into account the impacts on banks and other relevant businesses. If the Treasury brings forward regulations under this clause, it will publish an impact assessment that will consider the impact on firms, as well as the proportionality of regulation.
Similarly, Amendment 23—in the name of my noble friend Lord Sikka and spoken to by my noble friend Lord Davies of Brixton—would require the Treasury to have regard to the need for local banking services when making regulations under Clause 3. I reassure my noble friends that the review will consider the need for in-person banking services and the impact on any specific cohorts or demographics. Funding will be considered once the review has identified the scale and nature of the consumer detriment and once the Government have considered how to respond.
Likewise, Amendment 22, in the name of the noble Baroness, Lady Tyler of Enfield, seeks to require the Treasury to have regard to several matters relating to the existing provision of banking services, including through banking hubs and the Post Office. The review will consider these sources of evidence when forming its recommendations. On her specific point on the time between bank branch closures and the opening of a banking hub, I reassure her that, if a banking hub is recommended, FCA rules already require banks not to close existing cash-access services, such as branches, until the recommended solution is in place.
Amendments 20 and 25 would require the Treasury to commission further independent reviews if it wishes to make subsequent regulations after first exercising the power in this clause. There is an existing requirement in Clause 3 for the Treasury to have regard to the recommendations of the current review when making regulations. The review was commissioned to bring together proactively the evidence from across the UK and to look at the trajectory for access to in-person banking services, not just the position as it currently stands. If the Government consider it necessary to make further provision in future, they would envisage this to follow the usual process of consultation and impact assessment, beginning from the baseline of evidence provided by the ongoing review. Further wide-ranging independent reviews are likely to be disproportionate.
Amendment 24, in the name of the noble Baroness, Lady Bowles of Berkhamsted, is similar: it would limit the power to be used only to implement matters arising directly from the independent Access to Banking Services review. As I have made clear, the Government’s intention is for the power to be used to implement the recommendations of the review. However, it is important that the power is not limited solely for this purpose, in case further relevant evidence outside the scope of the review comes to light as Ministers consider the review’s recommendations. The Government should be able to consider all relevant evidence, not just the review itself, before making any regulations.
Amendment 19 would require the power to be used to make regulations only if the relevant banking services would not be provided on a voluntary basis. The Treasury welcomes action taken by industry to support customers and welcomes the voluntary commitments, such as services provided in banking hubs, that the industry has taken forward. The Treasury will consider relevant information in determining any regulations to take forward following this Bill, including any relevant voluntary arrangements already in place.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who took part in this debate. A number of noble Lords expressed their views on what kinds of services should be made available, but we have the Lloyd review and we now await its outcome. That may or may not answer questions to all noble Lords’ satisfaction, but at least we will have a starting point.
That brings me to one of the key issues that arise from our debate: sequencing. It is normal to identify a problem, then decide whether legislation is required to deal with it, and then legislate. That has been how we have done business through Parliament for time immemorial. Not just in this case but in other cases as well, the Government are starting to flip that on its head: “Let’s take some powers. Then let’s see if we’ve got a problem and then see if we can use the powers to solve the problem”. That is not responsible legislation.
The Minister acknowledged the breadth of the powers but he has failed to articulate in a way that will satisfy the Committee the reasons or the rationale for having such a broad power. He referred to the DPRRC report, which gave a clear finding. The Minister will find that the House will generally take a lot of persuading not to follow such an explicit finding of the Delegated Powers Committee.
This will not rest here; the Minister will be aware of that. This power is being taken at the wrong time, without sufficient evidence or definition. In consequence of it being taken at the wrong time and without any evidence, it is being drafted in a way that is deeply offensive constitutionally. The only thing I need to say in closing is that we will return to this on Report. I beg leave to withdraw.
Baroness Kramer
“Access to affordable credit(1) The Financial Conduct Authority must—(a) within 12 months of the passing of this Act, establish, publish and maintain a framework for assessing and rating the performance of relevant deposit takers in providing access to affordable credit, and(b) annually publish updated ratings and scores produced by the Authority under the framework.(2) The framework must—(a) assess the extent to which relevant deposit takers serve the credit needs of individuals, households and small businesses, including those who are underserved by mainstream financial services, and(b) enable comparisons to be made between relevant deposit takers.(3) In developing the framework, the Authority must have regard to—(a) the distribution of lending across income groups, geographic areas and customer characteristics,(b) the availability of affordable credit to consumers who may otherwise be at risk of financial exclusion,(c) the provision of affordable credit to small and medium-sized enterprises, and social enterprises,(d) the extent to which a bank supports access to affordable credit through partnerships, referral arrangements and funding agreements, with credit unions, Community Development Finance Institutions or other community-based lenders, and(e) such other matters as the Authority considers relevant to the objective of promoting access to affordable credit.(4) For the purposes of subsection (2), the Authority may—(a) make use of regulatory data already collected by it, including product sales data,(b) require relevant deposit takers to provide such information as it reasonably considers necessary for the purposes of the framework, and(c) make different and proportionate provision for different sizes of business.(5) For the purposes of this section, “relevant deposit takers” are—(a) banks, within the meaning given of section 2 of the Banking Act 2009;(b) building societies, with the meaning of section 119 of the Building Societies Act 1986;which meet an Authority-set threshold for the total volume of personal and small and medium business lending.”Member’s explanatory statement
This amendment requires the FCA to establish a framework assessing banks’ and building societies’ provision of affordable credit, including via partnerships with credit unions and CDFIs. It uses existing regulatory data where possible, with proportionate requirements for firms of different sizes.
Baroness Kramer (LD)
My Lords, Amendments 28 and 29 are in my name. Amendment 30 is in the name of my noble friend Lady Bowles and I am very supportive of it, but I am going to focus my remarks on Amendments 28 and 29.
I thank the Fair Banking for All campaign, a coalition of 38 organisations co-ordinated by Finance Innovation Lab, bringing together civil society organisations, anti-poverty groups, community development financial institutions, fintech researchers and people with lived experience of financial exclusion. Their work on drafting Amendments 28 and 29 assures that these amendments work in law and in practice.
Access to affordable credit, which is the subject of these two amendments, is now one of the biggest challenges we face in the UK. Millions of individuals and businesses are excluded from fair and affordable credit despite being financially viable. More than 3.5 million people are handling this by taking out high-cost credit. The consumer duty on banks does not result in any attempt by banks to fill this market failure, nor have they been directed to do so by the FCA.
My focus has been very much on SMEs, which need credit to grow as the backbone of our communities and the source of new jobs. The Federation of Small Businesses records that more than half of all small businesses rate the availability of affordable credit as poor. When I talk to conventional banks about these customers, they say to me that they are very open to lending to small businesses, then I quickly find that they mean they will offer high-priced loans backed by property, not cash flow, and they want personal guarantees from the owners of the SME. It is a consequence of a change in the business model of the high street banks, as, in many ways, the noble Baroness, Lady Noakes, acknowledged earlier. Local banking as we once knew it has disappeared. Decisions are made by bankers or algorithms which do not know the customers or the businesses except on paper. They do not know that Jo has a convincing expansion plan or that Jane always repays her debts. They are detached from the reality of individual banking that is able to take individual proposals into consideration.
Adding to that, small businesses have become suspicious of the banks. The way the banks behaved to customers following the 2008 financial crisis—I mean small customers—shocked many people. They seized assets even when loans were being paid on time and in full, because various property-to-value or loan-to-value ratios had changed with the fall in property values in that era. Paying on time and in full would seem to me to suggest that you are a viable customer, and finding that your loan was called in and the asset seized was really destructive.
Many people thought that challenger banks and new fintechs would be willing to provide credit where conventional high street banks failed. That has not turned out to be true. The new players market themselves primarily to the same pool of SME businesses that the banks seek to service. Indeed, they have now taken a 60% share of that market, because new challenger banks and fintechs typically offer better products and efficiency. However, the access to finance problem has remained and indeed worsened. It has not been resolved by the entry of these new players.
I am pleased that the Bill makes some small moves to improve the situation by expanding the role of credit unions and mutuals and strengthening open banking but, frankly, it does not begin to touch the scale of the problem. My Amendments 28 and 29 follow the pattern of the United States, which dealt with the issue of exclusion head on with the Community Reinvestment Act 1977. In effect, the Act led to the creation of a layer of community development financial institutions, mostly CDFI banks and credit unions, which tackle the problems of exclusion by the big banks.
In the USA, there are now 1,400 CDFIs extending across the whole nation, which manage more than $450 billion in loans, both to small businesses and to individuals. They provide advice, financial education, patient lending and individual assessment. They are also the backbone of economic success in the United States by providing stability in any economic crisis, making sure that disadvantaged communities, including rural areas, are not ignored and growing the businesses of the future. The big American banks, which so opposed the scheme originally because they were required to fund it to remedy exclusion, are now strong supporters, realising that the CDFIs develop their customers of the future.
We have CDFIs in the UK and the British Business Bank, which is an enthusiast, has an ENABLE fund from the Government of £150 million over two years to expand the sector and an ENABLE growth guarantee scheme to reduce borrowing costs. But we still have only some 60 CDFIs in the UK, lending by different estimates something between £250 million and £400 million a year. That is an important contribution, as CDFIs report that 94% of the businesses receiving their loans have previously been rejected by a bank, but, frankly, it is a pathetic number compared to the US.
The Government have set up a UK community finance partnership taskforce to develop partnerships between banks and CDFIs. It is chaired by Bob Annibale, the former director of inclusive finance at Citibank who is a very strong advocate for this agenda, but frankly, I am fed to the teeth of small steps. My Amendment 28 follows the US pattern and would require the FCA to set up a rating system to measure the performance of banks and building societies in providing affordable credit to individuals, households and small businesses, and rating it against appropriate measures to test for exclusion. Rating systems such as this are not a US invention. Similar set-ups are used in the UK by the care inspectorate and the food and health inspectorate.
Amendment 28 would set up the framework of the rating system. Amendment 29 goes beyond that and would enable the FCA to require a proportionate remedy where any bank or building society falls below the threshold required by the FCA. Benchmarking is critical: the language permits the banks to avoid changing their business model. This speaks in a sense to something that the noble Baroness, Lady Neville-Rolfe, raised earlier, which is that banks have changed fundamentally and we are not asking them to change back. What we are doing with this system is giving them the opportunity to find another way to deal with the exclusion, so the language permits the banks to avoid changing their business model and instead allows them to support other arrangements for affordable credit, including credit unions and CDFIs. As I have said, the model is tried and tested in the United States and is understood by every major bank.
I anticipate that some people will say that this proposal is a burdensome data-gathering exercise for the banks, but it is not. In 2013, this House passed an amendment, drafted by me and my noble friend Lord Sharkey, to set up a voluntary scheme for banks to report most of the relevant data—and by postcode, so it was very granular—to UK Finance. With a few tweaks, the relevant data for the rating scheme proposed in Amendment 28 is already available and in usable format. The problem is that the data has not been used to create a remedy: another example of the way the FCA does nothing in the face of market failure without being dragged kicking and screaming, usually by this House. That is why the remedy amendment, Amendment 29, is so important.
At Second Reading, a number of Peers spoke out in support of CDFIs and credit unions. Many of us recognise that the high street banks will never return to their local roots and that dragging them to lend when it does not fit their business model means poor service. New challenger banks and fintechs have not filled the gap. The Government are committed to a growth agenda. I can think of few measures that would drive growth more rapidly and sustainably across all parts of the country to fix the loss of local and community banking than these amendments. I beg to move.
Amendment 29 (to Amendment 28)
Baroness Kramer
“(4A) Where a relevant deposit taker receives a score or rating below a minimum threshold prescribed by rules made under this section, the Authority must require the deposit taker to take proportionate remedial action to improve its rating.(4B) The Authority may—(a) make such rules or issue such guidance applying to designated persons as appear to the Authority to be necessary or expedient, and(b) give a direction under this section to a designated person if it considers that it is desirable to give the direction;for the purpose mentioned in subsection (4A).”Member’s explanatory statement
This amendment to Baroness Kramer’s amendment gives the FCA a duty to ensure, through rules and guidance, that relevant banks and building societies which fall short of a minimum threshold performance in providing access to affordable credit are required to take proportionate steps to remedy the situation.
Baroness Bowles of Berkhamsted (LD)
My Lords, I shall speak briefly to Amendment 30 in my name, which would introduce a fiduciary-style duty on firms in their dealings with consumers and small businesses.
This group is about affordable credit and consumer protection. The problem that we see time and again is not that firms set out to behave badly but that good intentions drift under pressure to increase revenue, under pressure from internal incentives and, sometimes, under pressure from government to deliver growth. When that drift occurs, the cost is pushed on to consumers and, as I said earlier, passing costs on to the people is not growth in any meaningful, national sense.
Motor finance, the example that keeps on giving, shows this clearly. The FCA did not intend to create misalignment, firms did not intend to breach the law, but because the rules were not anchored in a well-understood legal framework, the system drifted. The FCA’s rules permitted the non-disclosure of commission unless asked. The statute required disclosure. The gap widened over time and nobody noticed until the consequences were enormous.
We see similar patterns in insurance add-ons and premium finance arrangements. These products did not begin as bad faith practices, they began as convenience, but over time, margins accumulated, incentives shifted and the products drifted into a place where the consumer’s interests were no longer the anchor. That is not malice but drift, the same drift that we saw in motor finance, and it happens when rules are not anchored in well-understood legal principles. This is what happens in a rules-based system—that is what we have, however we may pretend—rather than a principles-based system.
Parliament has been here before. As the noble Baroness, Lady Kramer, has already explained, when this House supported my noble friend Lord Sharkey’s proposal of a duty of care, the intention was to create a principle, a relationship-based obligation, that firms must not exploit unequal bargaining power or information asymmetry. What emerged instead was the FCA’s consumer duty. Is it valuable? I suppose so, but fundamentally it is a rules-based construct, shaped in part by industry pressure for something that their compliance departments could tick. Rules can be changed, narrowed or reinterpreted. Principles such as duty of care and fiduciary duty are legally understood, durable and resistant to drift.
My amendment does not attempt to rewrite the consumer duty. It would simply provide a well-understood statutory anchor—a benchmark against which to assess products and detect the kinds that end up exploiting imbalance. The test becomes, “Is it fair?”, and not merely, “Is it the next step on a path that might already have drifted?” In other words, it is about fairness versus incrementalism.
Lord Massey of Hampstead (Con)
My Lords, I declare my interests as a shareholder and a director of financial services companies in asset management and wealth management.
I have considerable sympathy with the objectives that the noble Baroness, Lady Kramer, is seeking to advance. Access to affordable credit is a genuine problem in this country, as in many others, and the Committee is right to view financial exclusion as a problem. However, I am unable to support Amendments 28 and 29 on the grounds that the proposed solution will not solve the problem and may in fact exacerbate the issue that the Bill is partly designed to alleviate: excessive and complex regulatory demands on our financial institutions, which are making us less competitive.
My first concern is one of basic commercial economics. Banks and building societies are not lending to certain sections of the community, however deserving they might be, not because of a lack of understanding of the opportunity or a lack of data; they are not serving those clients at scale because the risk-adjusted returns of lending to higher-risk borrowers at affordable interest rates, and indeed the compliance risk of so doing, do not work commercially. A rating framework published by the FCA will not change that calculus, but it creates yet another compliance exercise, another box to be ticked and another issue to be managed without addressing the underlying economic reality that makes such lending unworkable.
My second concern is the risk of unintended consequences. A rule that would rate banks on their willingness to provide credit to financially-excluded populations—in some cases, very high-risk borrowers—could create an implicit incentive to lend more to people and companies who cannot really afford the loan. The amendment contains no credit quality safeguard and no minimum standard of affordability assessment, yet banks could be incentivised to lend just to improve their ratings. The pressure to improve ratings would not be cost free, of course. In practice, banks will not be carrying out this lending for solid financial reasons, so if they feel forced to extend credits into markets with reduced or zero margins, they will seek to restore those margins elsewhere, through higher charges on other products, reduced rates on savings or increased lending spreads in other parts of the business. The cost will not disappear; it will be redistributed invisibly to existing clients, who also deserve protection.
Moreover, I draw noble Lords’ attention to the stated purpose of the Bill, which is to reduce regulatory burden, not add to it. Yet here we are, being invited to add a new mandatory framework, new data collection requirements, new publication obligations and new performance ratings, all enshrined in primary legislation. This is precisely the regulatory ratchet: the cumulative, seemingly endless new measures that damage our competitiveness. The Financial Services Regulation Committee of this House, chaired by my noble friend Lady Noakes, concluded in its report last June that:
“The cumulative burden of regulatory compliance in the UK is perceived to be disproportionately high, diverting resources that could otherwise support … growth”.
As a serving practitioner in the sector, I strongly agree with this finding. Diverting lending from growing businesses to those effectively in financial need is not going to improve our economy. If anything, it will lead to loan losses for the banks and encourage excessive borrowing from those who cannot afford it, while piling even more costs and regulatory obligations on financial firms. We should resist the urge to reach for intervention every time a market imperfection is identified. Not every problem has a regulatory solution. Indeed, those solutions can often have unintended consequences that increase bureaucracy and undermine growth, so I cannot support the amendments.
The Lord Bishop of Manchester
My Lords, I support Amendment 28, to which I have added my name. As we have heard, the amendment would require the FCA to establish a framework assessing banks’ and building societies’ provision of affordable credit. I spoke at some length at Second Reading on the importance of equal access to credit. I welcome what is already in the Bill, as I did then, but we can and should do more.
We are witnessing a crisis of deepening economic inequality in this country. For the most vulnerable communities, it is worsened by a lack of choice. Struggling to meet their most basic day-to-day needs, long-term financial planning is not an option for many families today. Daily life is a battle to put food on the table and to keep the house warm in winter, though perhaps not today. It is often the most impoverished who are forced to accept riskier loans, to turn to loan sharks—many of those operate in my diocese of Manchester—or to enter credit agreements that they are unable to pay back. In doing so, they find that they are paying a poverty premium, which then exacerbates and ratchets the problem round and round, deepening the financial injustice.
As I said earlier, I am trying to be more overtly religious in my speeches on the Bill today, so I assure the Committee that this is not merely a modern phenomenon. I could point to specific places in the Hebrew and Christian scriptures where specific rules are set out to ban the most egregious practices around unfair credit arrangements—things like extortionate interest charges, or the taking of essential items like protective clothing or workers’ tools as a pledge for credit.
Yet the alternative to unfair credit cannot be no credit but instead must be fair and affordable credit. Across the country, in churches, food banks and charitable organisations, the impact of financial exclusion on human dignity—another important Biblical concept—and well-being is being made apparent. We also see how certain communities are at a particular disadvantage: this includes if you are a migrant without a long-standing credit history, or an adult with little financial literacy, unable to navigate complex financial systems on your own, or a family experiencing living pay cheque to pay cheque—and about 10 years ago we passed the point at which most families in poverty began to be working families, rather than families in which no person is in work. The services that community institutions provide to such communities are essential but are not enough. In order to truly flourish, individuals and households facing financial insecurity need access to credit which gives them choice and independence and creates opportunities for them to become full participants in economic life.
One thing I learned when I worked on responsible investment for the Church of England’s national investment bodies was the phrase “social licence to operate”. That is an important part of this conversation today, though I have not heard it mentioned yet. The banks—not only those which were bailed out so expensively to the taxpayer less than 20 years ago—are required to operate not simply as best turns a profit, but as fits the needs for the society in which they are working. That requires a willingness to provide social goods, not merely the most profitable products to the most eligible customers.
What is set out in Amendment 28 will not only enable us to measure where affordable credit is and is not reaching people but will lay the foundation to make targeted improvements. I am told that the banks already have much of that data and that it is simply a question of making it more available by providing and publishing it. With a clearer understanding of the barriers that minoritised communities face, we can work beyond this Bill toward financial policy which tackles financial exclusion at its very root, creates new opportunities for families in debt, and promotes economic growth on a wider scale.
Baroness Noakes (Con)
My Lords, I support what my noble friend Lord Massey said earlier on these amendments, and in particular on Amendment 28.
When people talk about affordable credit, what they mean is subsidised credit, because the terms on which financial institutions are prepared to advance money to the kinds of individuals and organisations which have been referenced so far are always provided on a risk-adjusted basis. That reflects the likelihood of default and the amount of loss given a default, which drives pricing and causes people to say that they cannot afford the prices at which a product is advanced to them. We must be clear on this: we are saying that some groups in society need to have access to credit at below a risk-adjusted rate. A fairly simple question is whether we think we should impose on banks the requirement to subsidise one way or another—whether through the vehicle of community finance organisations or directly by charging lower non-risk-adjusted rates to certain groups. My answer is that it should not be; the banks already have quite considerable costs imposed on them, such as the banking hubs which we discussed earlier and which would not be set up for pure economic reasons, or the provision of basic bank accounts. There must be a point at which we stop saying that the banks can just provide more things to groups of people who could not otherwise afford access to them, so I am very much opposed to Amendments 28 and 29, which are an unreasonable imposition.
On Amendment 30, in the name of the noble Baroness, Lady Bowles, I am very unclear as to how she sees her amendment relating to the consumer duty, which has been in existence only for a couple of years, and the full effect of which we have not yet seen. I assume the noble Baroness is trying to set up an actionable right for consumers, although she is not explicit in saying that. I think that would be taking regulation one step too far. We already have the complicated arrangements of the FCA overseeing consumer requirements with its enforcement powers to set up a parallel ability of giving individual consumers rights of action under a rather ill-defined fiduciary duty, and this amendment would be an unwise addition to the regulatory landscape.
Lord Altrincham (Con)
My Lords, I am grateful to the noble Baronesses, Lady Kramer and Lady Bowles, for bringing these amendments—and to the right reverend Prelate for his reference to scripture. They raise important questions and will facilitate a useful debate about access to finance, the responsibilities of financial institutions and the right way to support small businesses and underserved communities.
I will begin with Amendments 28 and 29 in the name of the noble Baroness, Lady Kramer, and in the case of Amendment 28 also in the name of the right reverend Prelate the Bishop of Manchester. These amendments seek to require the FCA to establish and maintain a framework for assessing and rating banks’ and building societies’ performance in providing access to affordable credit, including for underserved groups. Amendment 29 would go further and require firms falling below a minimum performance threshold to take proportionate remedial action.
Access to financial services and appropriate credit is of course extremely important. That is particularly true for small and medium-sized businesses, micro-businesses and those parts of the country where access to finance can be more difficult. If we can improve the flow of capital to productive businesses, we can simulate growth, increase employment, allow firms to develop and generally improve the health of our economy. Many of the most successful businesses in this country began as small enterprises. They require confidence, access to working capital and a banking system willing to support their growth. When credit is unavailable or available only on unreasonable terms, good businesses can be held back, investment delayed and opportunities for employment and innovation lost.
However, my concern is with the mechanism proposed. I am not convinced that this can or should be done from a centrally mandated position. Banks and building societies have to make lending decisions on the basis of risk, affordability, regulatory capital, commercial judgment and the circumstances of the borrower. They are complex assessments, not straightforward public policy levers that can simply be pulled from the centre. If banks are going to make these decisions on the basis of their commercial interests, in many cases they will already have done so. Where lending is not happening to the extent that the noble Baroness would like, there is a reason for that. It may relate to risk appetite, capital requirements, information gaps, the lack of security, regulatory burdens, compliance costs or wider economic uncertainty, but the answer, it seems to me, is to work out why that is the case and then address those underlying barriers.
The answer should not be to move towards a system in which the Government through statute begin to direct the lending priorities of banks from the centre. Once we go down that road, we risk blurring the line between commercial banking and public policy allocation of credit. That is not a small step. It could have unintended consequences for financial stability, risk management, and ultimately for consumers and taxpayers. This would also send a worrying signal that the UK is a jurisdiction in which private interests are essentially subordinate to political objectives.
I support efforts to promote investment into SMEs, micro-businesses and underserved communities, but I do not think the right mechanism is one enforced by the Government in statute through ratings, thresholds and mandatory remedial action. I would therefore be grateful if the Minister could explain what work the Government are doing with banks and financial service providers to improve access to affordable credit, particularly for SMEs and underserved groups. I hope he can reassure the Committee that this work is being done with those organisations rather than over them.
I turn briefly to Amendment 30, in the name of the noble Baroness, Lady Bowles, and follow the words of my noble friend Lady Noakes. This amendment would introduce a fiduciary duty requiring firms to act in the best interests of retail customers, including small businesses. It would include duties around avoiding exploitative practices, ensuring suitability and fairness and taking reasonable steps to prevent foreseeable harm.
I understand the concern that sits behind this amendment. We all want financial services to treat customers fairly, we all want to prevent exploitative practices and we all want suitable products, clear terms and proper regard to foreseeable harm. Those are important principles. However, I am against imposing a broad fiduciary duty of this kind across regulated financial services. The concept of fiduciary duty carries with it a particular legal character and a potentially very wide set of implications. If applied broadly to all retail customer relationships, including small business relationships, it could create significant uncertainty about the legal obligations of firms, the interaction with existing FCA rules and the extent to which ordinary commercial relationships are being recast as fiduciary ones.
We are also concerned that this step could lead to a serious increase in the regulatory and compliance burden, which would fall on firms that are already struggling. Indeed, there is already a substantial framework governing conduct, consumer protection, fairness, suitability and foreseeable harm. The question for the Government and the FCA should be whether that existing framework is operating properly and proportionately, not necessarily whether a new overarching fiduciary duty should be imposed on top of it.
My concern is that such a duty could invite litigation, uncertainty and defensive behaviour. It might also make firms more reluctant to serve marginal or higher-risk customers if they fear that any adverse outcome could later be characterised as a breach of fiduciary duty. That would be the opposite of what many of us want to achieve in this group, which is broader and better access to financial services. Indeed, it would make providers and regulators more risk-averse.
These amendments raise an important debate about access to credit, the treatment of customers and the role of financial institutions in supporting growth. I support the objective of improving access to finance for SMEs, micro-businesses and underserved communities and hope to hear support for this from the Minister, but we should not seek to achieve that by central direction of lending decisions or imposing broad new legal duties whose consequences would be uncertain and work against the Government’s broad objective of simplifying regulation and reducing burdens.
Lord Stockwood (Lab)
My Lords, Amendments 28, 29 and 30 are aimed at increasing access to finance and ensuring that the customers of financial services firms are protected. I recognise the intention behind these amendments. However, I do not believe that either solution is workable.
On Amendments 28 and 29, I agree that data on access to finance and holding the sector to account are important. However, these proposals would introduce a new, prescriptive and burdensome framework on the FCA and firms that I am not persuaded would deliver the desired output.
Amendment 28 would require the FCA to establish a framework to monitor, assess and publicly report on certain banks’ and building societies’ performance in providing access to affordable credit. Amendment 29 would require the FCA to take action against firms that do not meet a minimum standard. As the noble Baroness, Lady Kramer, said, this approach resembles the United States’ Community Reinvestment Act 1977, but we should not assume that it would have the same effect here. Our starting point is different: we are working nearly 50 years later, in a digital age, with a far more diversified credit market. In any case, lenders already publish significant data. Chapter 7 of the FCA’s Conduct of Business Sourcebook requires extensive disclosure on personal and business current accounts. We also have the FCA’s Financial Lives Survey, the SME Finance Monitor and the British Business Bank’s annual SME finance publications, among others.
Amendment 29 would require the FCA to act against firms that do not meet a minimum lending standard. Striking the right balance on access to credit has long been a challenge. We want consumers to be able to access credit where it supports financial resilience and businesses to secure the finance needed to grow, but inappropriate credit can lead to overindebtedness, with serious consequences. The amendment could, in effect, compel lending to more vulnerable groups or SMEs. Even a well-designed regime could be a blunt instrument, with a risk of unintended outcomes. It would also represent a significant intrusion into firms’ commercial decisions.
More fundamentally, it is difficult to see how firms could increase lending and take on greater risk without raising prices to reflect that greater risk. If firms do not price risk appropriately, it opens us up to financial stability risks. The FCA would be placed in the invidious position of having to mandate affordable credit, while the mechanism required to expand provision could increase costs and potentially increase risk for the borrower and the firm. That runs directly counter to the intended objective for vulnerable customers and SMEs.
Although I cannot accept these amendments, I stress to noble Lords that the Government are not complacent about financial inclusion or the availability of SME finance. The noble Lord, Lord Altrincham, asked me to set out what the Government are doing, and I am happy that noble Baroness, Lady Kramer, mentioned several of these interventions already. The Government published their Financial Inclusion Strategy last autumn, and we are supporting practical interventions for consumers, including a small sum credit pilot enabling mainstream lenders to test lending to customers outside their usual risk appetite. Monzo was announced as the first participant in the scheme earlier this month.
We have launched a transformation fund for credit unions, alongside common bond reforms in this Bill, to strengthen their lending capacity. We are also advancing targeted SME finance measures to improve competition and supply, including enhancing the consumer credit data sharing scheme through Clauses 41 and 43 of this Bill. We are supporting up to £150 million of lending through the Community ENABLE funding programme over the next two years. We are establishing a CDFI taskforce and working with industry to improve bank referrals. Indeed, tomorrow I am meeting several large asset managers as chair of the place-based impact investment scheme. We will set out next steps on open finance later this summer. This has significant potential to support SME lending across a wide range of providers, alongside broader work with the Bank of England on capital and ring-fencing.
I highlight community development finance institutions, which I know are a priority for the noble Baroness, Lady Kramer. In addition to the CDFI taskforce and the Community ENABLE funding programme that this Government have funded, the sector benefits from Fair4All Finance’s affordable credit scale-up programme, which has committed more than £40 million in social investment in England to date. The financial inclusion strategy further includes measures to strengthen community finance, including promoting partnerships with mainstream lenders. Taken together, these measures support access to finance in the UK in an appropriate and responsible way.
Amendment 30 would introduce a new fiduciary duty on firms when carrying out FCA-regulated activities. It would place specific legally binding requirements on firms. I agree with the noble Baroness that it is vital for firms to act in a way that delivers good outcomes for consumers. However, I believe that FCA regulation is able to achieve this, and I am concerned that this new duty would risk creating overlapping requirements, causing confusion and reducing consumers’ access to finance.
The FCA’s consumer duty is designed to set a high standard of protection for retail customers by requiring firms to act to deliver good outcomes in line with the outcome sought by this amendment. It requires firms to put consumers’ needs at the heart of their business, including by acting in good faith, avoiding foreseeable harm and supporting consumers to pursue their financial objectives. In practice, this means that firms must design products and services that meet consumers’ needs, provide fair value, communicate clearly and offer effective support.
I am concerned that the requirements set out in this amendment would risk making more vulnerable customers more expensive and risky to serve, which would reduce their access to products such as credit and insurance. Introducing a novel statutory fiduciary duty, the precise scope of which would fall to be settled through litigation over a number of years, would create significant legal uncertainty. That uncertainty would carry a cost, which firms would be likely to manage by withdrawing from, or repricing, services for higher-risk customers. I recognise that there is some precedent for a fiduciary duty in trust-based pension schemes. However, the dynamics of the market are very different from wider consumer financial services. Typically, employer pension schemes do not choose which individual customers to serve, and the fiduciary duty applies at the membership level.
I genuinely understand the importance of lending for all parts of the economy, and I understand the need for borrowers to be protected, but I am convinced that the Government are taking the right set of actions, and I am afraid that Amendments 28, 29 and 30 would bring significant unintended consequences. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Kramer (LD)
I thank the right reverend Prelate the Bishop of Manchester for signing Amendment 28 and for speaking so eloquently in this debate. The noble Lord, Lord Massey, and the noble Baroness, Lady Noakes, are both involved in the world of finance and meet international financiers. I will give them a challenge. When they meet American financiers and bankers, whether here or in the United States, will they please raise CDFIs? The noble Lord, Lord Massey, will find that basically everything he said flies completely in the face of the US experience, and I say the same thing to the noble Baroness, Lady Noakes.
Lord Davies of Brixton
(1B) Among other things, rules made under sub-paragraph 13(1) must provide in specified circumstances for the applicable time limit to end at a later time where—(a) in the opinion of the Financial Ombudsman, the failure to comply with that time limit was due to exceptional circumstances;(b) the complainant only became aware (or ought reasonably to have become aware) of material facts or detriment to them relating to the act or omission complained of after the expiry of that time limit.”Member’s explanatory statement
This amendment amends Clause 6 to ensure that the ten-year longstop is the default position for Financial Ombudsman complaints, in line with the preferred option in the Impact Assessment and as opposed to the six-year provision in current FCA rules (DISP 2.8).
Lord Davies of Brixton (Lab)
This extensive group of amendments is focused on the role and functioning of the Financial Ombudsman Service—the FOS. We have already had a taste of that debate with group 2, but I am concerned that there is not going to be enough time for me in my 15 minutes—perhaps the Whip is already thinking that I should get on with it—and I will not be able to finish it all. I have said that I will take the opportunity, if I have not been able to ask my noble friend the Minister all the questions that I want within my allotted time, to ask further questions when we get to Clause 8 stand part.
This group of amendments deals with three issues: time limits for taking cases to FOS, the proposed system for the referral of issues to the FCA and, significantly, the changes to the “fair and reasonable” test. This is a lot to deal with, and in fact it is about the interaction between these three different changes. They might appear separate, but their overall impact has led to real concern that the interests of consumers are not being given sufficient attention.
I must pay tribute to the support that I have received from the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services, of which I am vice-chair, as well as Which? Money and Fairer Finance. They have all expressed concerns that consumers’ interests are being adversely affected, and those concerns most definitely need to be addressed.
Starting with Clause 6 and my Amendment 31, I am concerned about the changes to the 10-year longstop on complaints to the Financial Ombudsman Service. The case for some kind of time limit is not unreasonable in itself. Firms do not wish to face indefinite exposure to complaints about events that happened decades earlier, and I understand why the Treasury wants certainty on that point. But Clause 6, as drafted, creates a hard structural barrier that applies regardless of when the consumer could reasonably have known they had grounds to complain. That is the flaw. It is not that a longstop exists; it is that it takes no account of discoverability. That matters most for long-term products such as pensions and mortgages, areas where I have personal and professional experience and where consumers often do not find out for years, sometimes decades, that they have been poorly advised or missold something.
The Explanatory Notes accompanying the Bill suggest that allowing complaints years later creates problems with data retention. I do not think that holds up. The appropriate rule, rule 9.5.2 in the FCA’s Conduct of Business Sourcebook, sets out the record-keeping requirements for firms that give personal recommendations on certain pension-related transactions. The rule as it stands requires firms to retain their records that were the basis of a personal recommendation indefinitely in cases of pension transfers, pension conversions, pension opt-outs and FSAVCs—which, for those who are not up on the jargon, are free-standing additional voluntary contributions. For other types of advice, COBS sets shorter retention periods, but these four pension categories are singled out precisely because of the long-term nature of the harm that can arise and, originally, because of the personal pensions misselling scandal of the late 1980s and early 1990s, a scandal that is too often forgotten but that led to £13 billion being paid in compensation.
The practical significance for the Clause 6 argument is that the justification for 10 years does not stand up. Firms advising on pension decisions are already legally required to hold the records, so the 10-year rule does not serve that data problem. The “indefinitely” formulation is worth noting. Most compliance obligations come with a defined shelf life, so the fact that the FCA made an exception here reflects a considered regulatory judgment that pension transfer advice is different from other forms of pensions advice. The consequences can take many years to materialise, and records need to be available when the problems are eventually seen.
Of course, I am most familiar with the issue in relation to pensions, but it is not just about pensions: endowment mortgages are a good past example where problems that arose for which compensation had to be paid were found outside the 10-year period. For the very products most exposed to long-delayed discovery of harm, firms already have the data that they need to defend themselves—they have to have the information that is being required.
It is worth asking how this is being played out against real cases. I believe, and I would be interested in a response from the Minister on this, that if a strict 10-year limit without proper exceptions had been in place during the PPI scandal, it would have blocked the mass redress exercise altogether. The worst mis-selling happened between 1998 and 2005, but public awareness did not peak until after 2011.
This was not a case of deliberate concealment; it was total misunderstanding and wishful thinking on the part of the people being sold to, but compensation was still due. A rigid longstop could well have disqualified millions of older claims in law before most of the consumers involved would have known that they were affected. I would be grateful if the Minister could say how these new arrangements will affect such cases and, as I mentioned, endowment insurances, appropriate personal pensions and the discretionary commission scandal in car finance, which is more recent.
As it stands, Clause 6 gives the FCA a power to create exceptions to the 10-year limit, but the legislation does not say what those exceptions must be at a minimum, so there is no statutory obligation on the regulator to build in protection for the consumers most likely to need it.
My amendment goes further than that in the name of the noble Lord, Lord Sharkey, by writing two specific circumstances into primary legislation itself, rather than leaving them to be worked out later in the FCA rules. First, it is just cases where the consumer faced exceptional circumstances, such as serious ill health or other incapacity, so people will know that they have a special claim in those circumstances. Secondly, there are cases where the consumer could not reasonably have known about the financial detriment within the 10-year window. These could be exercised on a discretionary basis, but my argument essentially is that those cases should be laid down in statute. It does not preclude the possibility of other exceptions being made, but for consumers it is a question of trust, and that trust requires consumers to know that those exceptions will be available. Putting these exceptions in the Bill removes the ambiguity, gives firms the certainty that they are after and makes sure that deserving consumers are not shut out of redress by an accident of drafting rather than a deliberate policy choice.
On Clause 8 and the powers of the ombudsman, I want there to be a proper debate about what is actually being changed here, and I look forward to guidance from my noble friend the Minister. The question underneath this debate is a simple one. What is the ombudsman for, and why do we have one, instead of just relying on the courts for people to get good tests? For the FOS, the “fair and reasonable” test is not something that has been put in and invented by the FOS itself; it comes from Section 228 of the Financial Services and Markets Act 2000 and provides that:
“A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”.
What the test displaces is important. The court applies the law strictly: the relevant statute, regulations, contract terms and case law. That is what the courts do. The ombudsman is not bound to decide a case the way a court would. That is the whole point of having the ombudsman—it is not a court that is able to take a view as to what in the overall circumstances is fair and reasonable.
The Deputy Chairman of Committees (Baroness Barker) (LD)
I have to advise noble Lords that if Amendment 31 is agreed, I cannot call Amendments 32 or 33 because of pre-emption.
Lord Sharkey (LD)
My Lords, I will speak to my Amendments 33, 35, 37, 42 and 43 in this group. All these amendments, and my Clause 7 not-stand-part question, relate to the FOS and its regime. I will try very hard not to repeat too much of what the noble Lord, Lord Davies, was saying a moment ago. The proposed reforms of the FOS regime are extensive and fundamental, but there is nowhere a clear and convincing explanation of why such fundamental changes are necessary. In fact, I see no real evidence at all of the need for reform on the scale being proposed here.
What we see, looking at the far-reaching proposals in the Bill, is an assault on the four key pillars designed into the FOS by Parliament: independence, speed and simplicity, time limits on bringing complaints, and the “fair and reasonable” test for determining those complaints. Taken together, Part 2 replaces each of those pillars with subordination to the FCA, a rather undefined change to time limits, and a heavy qualification of the “fair and reasonable” test amounting to its entire abandonment. This raises the question of why such a radical reform can be seen as necessary and/or beneficial. At Second Reading, I asked the Minister what evidence there was of systemic failure in the current operation of the FOS, and for evidence, for example, that the FOS was acting as a quasi-regulator. I have had no reply.
The obvious question in all this is: who benefits? The answer is: not the ordinary consumer. My amendments are aimed at eliminating, or at least reducing, the weakening of consumer protection. To that end, my Amendments 33 and 35, to Clause 6, address the time limits for complaints to the FOS, which the noble Lord, Lord Davies, has dealt with extensively; I agree with most of what he said. What my amendments offer as an alternative to his is that they are perhaps not quite as strong—that might be their virtue. It is often very difficult to get things written into a Bill; it is sometimes easier to deal with them via secondary legislation, as I do rather obliquely.
In Part 2, the Bill proposes other very substantive changes to the way in which the FOS operates. One of these changes, in Clause 7, sets out the circumstances under which the FOS must notify the FCA of a matter relating to a complaint, under which the FOS must request an opinion from the FCA as to the interpretation of FCA rules. It then sets out in detail how consultation should take place on the matter. There really is detail: five whole pages of the Bill set out in great detail the various stages required in the referral process. It adds complexity for no obvious gain and subordinates the FOS’s judgments to the FCA’s. I have no doubt that the byzantine array of subclauses or qualifications will, overall, introduce greater complexity for no foreseeable benefits and will greatly increase the workload of the FCA. The FCA is already under pressure and is planning to absorb the PSR. The last thing we need is the creation of new systems, rules and powers that show no clear promise of benefit, or at least no benefit to the retail complainant.
On necessity, we have to take into consideration whether the current FOS methods are faulty or unproductive. I have seen no compelling evidence that this is the case, only a rather unconvincing summary of the consultation responses. The FOS received 214,000 new complaints in 2025-26. It is projecting a resolution of 207,000 complaints in the coming year, of which 206,000 concern banking and consumer credit companies. It has a target of 70% of cases being resolved within three months and 90% within six. It does not seem as though it is having difficulty operating, and I am not aware of any significant problems for the average consumer. I hear from the industry that the FOS acts inconsistently and that it has strayed into becoming a quasi-regulator, but I have seen no evidence of that, and I am unconvinced by the simple assertion. Taken as a whole, Clause 7 in effect subordinates the FOS to the FCA, removing yet another foundational pillar: independence. We should remove Clause 7.
I turn now to the proposed amendments to Clause 8. I will speak to Amendments 37, 42 and 43, which deal with how a complaint to the FOS is to be determined. This is a controversial matter; the Bill proposes very significant changes. This has already provoked calls to have the whole clause removed from the Bill, and I recognise the strength of feeling behind that.
How the FOS decides on complaints is absolutely critical to its operations and to their general acceptability. At the moment and historically, the FOS rules on complaints on the basis of what is fair and reasonable under all circumstances. The Bill changes that. It says:
“A complaint may be determined in favour of the complainant only if, in the opinion of the Financial Ombudsman … at the time the disputed act or omission occurred, either … the act or omission did not comply with an FCA rule applying to the respondent, or … there was no FCA rule applying to the respondent that related to the act or omission, and the disputed act or omission was not fair and reasonable in all the circumstances of the case”.
This adds one of two requirements not present now, in addition to the “fair and reasonable” test. In essence, it removes the FOS’s current and critical independent status and reduces the FOS’s scope to a subset of FCA rules. If you ask who benefits from all this, the answer, it seems to me, is not likely to be the consumer.
The small print of the Bill makes the situation for the complainant even less attractive. The Bill specifies a long list of other requirements to be considered in making a determination, most of them tilting the scales in favour of FCA rule-based compliance. This long list includes
“any other matters specified in regulations made by the Treasury”
and the general principle that consumers should take responsibility for their decisions. Here, we are a very long way from the “fair and reasonable under all circumstances” test.
The net effect for the Bill’s proposals will inevitably be to increase bureaucracy and to increase a remoteness from practical circumstances and a reliance on box-ticking procedures. It will convert the independent FOS into a compliant subsidiary of the FCA. We have not seen spelled out any evidenced justification for such a radical narrowing of the FCA’s reach and independence. I ask the Minister again to provide the evidence that supports these radical changes. By “evidence”, I mean hard data, not simply a headcount of consultees’ opinions, as interpreted by HMT.
As I noted at Second Reading, the UK’s financial sector thrives not merely because it is competitive but because it is trusted. For it to be trusted, consumers must have confidence that, when things go wrong, there is an independent, accessible and effective route to redress. We have one of those already: the FOS. My Amendments 37, 42 and 43 would remove the new bureaucratic and complex restrictions, qualifications and subordinations in the Bill. In their place, the amendments would restore a simple and clear operating framework. They would restore the primacy of the “fair and reasonable” test, and they would update the list of things that the ombudsman must or may take into account.
Baroness Bowles of Berkhamsted (LD)
My Lords, my Amendment 34 again concerns symmetry of enforcement and redress periods. The Bill introduces a 10-year hard stop on complaints to the Financial Ombudsman Service, but the problem is that the 10-year figure is already riddled with exemptions: for long-dated instruments, for latent harms, for products with extended maturities and for situations where the consumer could not reasonably have known they had a claim. The Government have already conceded that the 10-year period cannot sensibly apply in a wide range of cases. I have a concern that, once Parliament writes “10 years” into statute, that becomes the headline. Consumers may assume they have 10 years, even when they are in one of the many categories where the long stop does not apply. That creates a real risk that people will time themselves out because they believe the headline rather than the detail.
Then there is the deeper structural issue that I have referenced before: firms’ enforcement rights do not end at 10 years. They can enforce debts, pursue arrears, securitise portfolios and benefit from long-tail revenue streams well beyond that period. Yet the consumer’s ability to challenge an unfair relationship or to bring a complaint may fall away far earlier. That is the same kind of asymmetry that I raised before. My solution is that at least the starting point should be that the duration of rights, remedies and enforcement powers for firms must be aligned with the duration of rights and remedies for consumers arising from the same act or relationship.
I have addressed only that aspect of asymmetry in my amendment; I have not attacked the 10-year hard stop and the impact that that might have on consumer perception. My amendment would not interfere with the exemptions that the Government have already accepted. It would simply ensure that, where a firm retains enforcement rights beyond 10 years, in various circumstances, the consumer retains the corresponding right to challenge the fairness of that relationship for the same period—in other words, symmetry. I need not say any more, as we have been around this loop, but it is the same argument in a different place.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to noble Lords across the Committee. I have noted the variety of concerns expressed on this part of the Bill. As noble Lords have heard, my party has announced proposals to remove the Financial Ombudsman Service and replace it with a new financial adjudication service. That proposal is not before the Committee in this group, but we have an agreed amendment; we will have the opportunity to debate it properly at a future stage.
I start by speaking to Amendment 32 in my name and that of my noble friend Lord Altrincham. The amendment would retain the existing six-year longstop rather than extending it to 10 years, as Clause 6 would do. As I have already said, I am concerned about this move, albeit for different reasons to some other Peers who have spoken. I accept that there is a balance to be struck here: consumers must have access to proper, effective and fair redress mechanisms. Where a consumer has suffered detriment because of misconduct, poor practice or a failure by a firm, there should be a clear route through which a complaint can be considered and, where appropriate, redress can be provided. However, this does not mean that time limits are unimportant. On the contrary, time limits are an essential part of a fair system. Claims can be heard fairly only when sufficient information is available to both sides to allow them to mount a proper case. That means records, correspondence, product documents, internal decision-making, staff recollections and the wider factual context in which the relevant decision was made.
The further back in time a complaint goes, the more difficult this becomes. Evidence may be incomplete and documents may no longer exist. The people involved may have left the organisation, systems may have changed, products may no longer be offered and the regulatory context may have moved on. A complaint may still be sincerely brought, but the ability of the firm to respond fairly and fully may be materially impaired. That is why limitation periods exist: they reflect the basic principle of justice that, after a certain period, it becomes harder to determine matters fairly and reliably. That principle applies in the courts, and I believe that it should continue to be properly reflected in the ombudsman’s framework. I am concerned that extending the longstop from six years to 10 years risks pushing the system beyond that fair balance.
I have noted the comments made by the noble Lord, Lord Davies of Brixton, in particular his references to pensions and endowment mortgages. I will be interested in the Minister’s response on how those products are dealt with and whether the exemptions are intended to cover that area.
On this occasion, I do not agree with the noble Lord, Lord Sharkey—although we often agree on other matters—because there is a genuine concern in the industry about vexatious or speculative claims. We should not be naive about this. There is a whole claims management industry dedicated to identifying and pursuing potential claims. Some of those claims may be legitimate, and consumers should not be denied redress where redress is due, but others may be weak, opportunistic or based on limited evidence. If the period is extended significantly, the volume of such claims may increase, so firms will have to devote more resource to investigating and defending matters from many years ago.
All this has a cost and makes all concerned more risk-averse, so it becomes more difficult for providers to accept customers at the margin. This matters for not only firms but the wider economy. We cannot stimulate growth, support lending, encourage investment and improve productivity if banks and financial services firms are pouring ever more resources into fighting historic claims, rather than serving customers, lending to businesses, supporting economic activity and innovating. There is a real opportunity cost here.
My noble friend Lord Roborough is unable to be here today, but I understand that his Amendments 38 to 41 are intended to probe whether the reforms in the Bill provide sufficient certainty for regulated firms that, where they have complied with the relevant rules and requirements, the Financial Ombudsman Service will not be able to go substantially beyond that framework in finding fault or imposing redress. This is not to question the proper role of the ombudsman in cases such as car finance commissions, where the courts have confirmed the relevance of undisclosed conflicts of interest; rather, it is to test whether the current “fair and reasonable” jurisdiction risks giving the FOS a quasi-regulatory role, including through inconsistent interpretation, the retrospective application of standards or decisions that go beyond the rules in force at the time. This is the core issue that has been raised time and again: the FOS needs to be reined in, but does the Bill do it?
At the same time, I recognise the number of views on this question. It is for the Minister to show that the proposed changes do not weaken the ability of consumers, including vulnerable consumers—particularly those in serious circumstances, such as terminal illness—to obtain fair redress. I have been told, for example, that there is a variance between companies over acceptance rates in such cases. The Minister might want to look into that.
Serious concerns have been raised. I look forward to hearing the Minister’s response to this group. My own concern remains that, as drafted, the Bill shifts the balance too far. It extends exposure to firms in a way that may appear consumer-friendly at first sight but risks generating delay, uncertainty and large volumes of contested claims. The six-year longstop strikes the right balance, so why 10 years? What evidence has led the Government to conclude that six years is insufficient? Can the Minister break that down by product or financial services type? What assessment has been made of the impact on firms, on complaint volumes, on the claims management sector and on the resources of the ombudsman itself? How will the Government ensure that extending the longstop does not simply create a larger backlog of older and more difficult cases?
I would be grateful if the Minister could also address the practical point about record-keeping. Do the Government now expect banks and other firms to retain detailed customer records for 10 years in anticipation of potential FOS complaints? If so, what assessment has been made of the cost and operational burden of doing so? I speak as a former company secretary in a large company; I know about the problems in keeping data. Indeed, what about doing it retrospectively?
I hope that the Minister will reflect carefully on the points I have made on the possibility of retaining the six-year longstop. I very much look forward to his response.
Lord Stockwood (Lab)
My Lords, as we have heard today, the Financial Ombudsman Service—the FOS—plays a vital role in providing quick, informal and impartial dispute resolution between customers and their financial services providers. It offers an accessible route for dealing with complaints that is designed to act as an alternative to resolving cases through the courts, which can be costly, lengthy and a process that often does not work for firms and consumers. The Government are clear that an effective ombudsman provides consumers with confidence in our financial services sector and is a key element of an effective system.
The Government’s review of the FOS found that, although the FOS fulfils its role in the majority of cases, in a small but impactful minority of cases, it has acted as a quasi-regulator. That conclusion was supported by the Financial Services Regulation Committee, chaired by the noble Baroness, Lady Noakes, in its report, Growing Pains: Clarity and Culture Change Required, which was published in June 2025. It recognised that the FOS’s
“actions have regulatory impacts by creating precedents that the FCA requires firms to follow”,
and that this
“generates an unacceptable level of uncertainty for firms, stakeholders, and investors”.
I want to be clear that the review was not suggesting that the FOS was acting improperly; rather, it concluded that the way in which the legislative framework operates made such issues unavoidable by creating a disconnect between the FCA’s rules and the FOS’s decisions, giving rise to unpredictability and a lack of certainty across the regulatory environment. That unpredictability is damaging for everyone and harms consumers’ confidence in the financial services products and services they rely on, as well as firms’ confidence to invest and innovate in the UK.
There is a large number of amendments before us. I will start with Amendment 31. This proposal would substantially extend the timeframe for bringing complaints to the FOS and would require the FOS to spend even more of its time and resources investigating, considering and attempting to resolve historic cases than it does today. We know from current experience that this would substantially increase costs while delivering comparatively limited increases in redress awarded. Further extending the timeframe beyond 10 years in an open-ended way to accommodate a complainant’s reasonable awareness of an issue would increase uncertainty for firms around historic liabilities, reducing appetite to invest in the UK’s financial services businesses.
The Treasury’s analysis of data from the FOS on historic cases is clear: they are more likely to be withdrawn or abandoned and have lower success rates than the average, often due to limited evidence and information being available. The Government’s analysis concluded that complaints to the FOS that are over 10 years old cost firms, on average, more than £18 million per year in case fees but deliver only £600,000 per year in redress for consumers. This is not a proportionate or balanced approach, nor is it consistent with the FOS’s quick and simple purpose. Extending the timeframes would slow down the FOS’s resolution of cases that are more recent and have a higher chance of being upheld, delaying consumers access to the redress they are owed.
Turning to Amendment 32, the Government considered carefully the options for different time limits to be set in legislation, including a six-year limit, and published their analysis in the impact assessment. Although this is a matter of judgment, the Government concluded that a 10-year time limit would strike the appropriate balance between consumer protection and providing certainty to firms, with a six-year limit resulting in too many people losing access to redress. However, I assure the noble Baroness and the noble Lord that the new limit introduced by the Bill is designed to act as a backstop to the existing limits set in rules made by the FCA. In most cases, the time limit will remain at the existing six years, with the 10-year backstop kicking in for cases where the customer could only reasonably have become aware of the problem at a later date.
On Amendments 33 and 35, the Government agree that, where the cause for complaint may take longer to come to light, such as with pensions, it is important that complaints can continue to be brought to the FOS. This is why the Bill gives the FCA discretion to make exceptions to the time limit in specified circumstances, where it is appropriate to do so. The Government carefully considered their approach to defining these exceptions and determined that the FCA is best equipped to develop proportionate and fair exceptions and to define these in its rules, given the FCA’s supervisory role and oversight of the sector and the level of technical detail that is required for the definitions.
The noble Lord is right to recognise the careful balance needed between ensuring that we do not undermine the certainty that this reform is intended to deliver while maintaining consumers’ trust and confidence that they will have access to redress when things go wrong. The Government are working closely with the FCA as it develops these exceptions and the FCA will set out its proposals in due course.
Amendment 34 relates to cases where there is an ongoing relationship between the consumer and a firm. Some complaints may be about acts or omissions that continue to occur or have effect in the context of an ongoing relationship between a consumer and a firm. The Financial Services and Markets Act 2000 does not place a restrictive definition on “acts” or “omissions”, so there is no reason why such an ongoing act or omission could not be the basis for a complaint within the time limit. The Government’s reforms in the Bill will not change the FOS’s discretion to identify the act or omission to which a complaint relates for the purposes of applying relevant time limits. It will continue to be for the FOS to make those judgments, based on the circumstances of the case and in line with the rules set by the FCA.
I will now explain the Government’s purpose behind Clause 8 and why it should stand part of the Bill. The noble Lords, Lord Davies of Brixton and Lord Sharkey, asked about the evidence base behind the Government’s policy. The Government’s review found that, in a small but significant minority of cases, the FOS has acted as a quasi-regulator. This means that, in some cases, the FOS has held firms to a standard that is different from those set by the FCA. The majority of responses to the Government’s consultation on the proposals to reform the legislative framework in which the FOS operates were broadly supportive of aligning the FOS’s fair and reasonable test with the FCA rules.
Baroness Kramer (LD)
Can the Minister clarify something? Is he saying that, provided you comply with an FCA rule, you are then always fair and reasonable? That is what I am taking away from this. I can list so many examples, such as Libor and mini-bonds—all kinds of things—where the perpetrators ticked every single compliance box. I am curious to know.
Lord Stockwood (Lab)
I apologise for taking a moment to ask my officials a question; I want to make sure that I give the right answer. Where the FOS has complied with the FCA rules, it still has the discretion to make judgments, as long as it believes them to be fair and reasonable.
Lord Stockwood (Lab)
Certainly. We are trying to align the FOS’s “fair and reasonable” test with the FCA rules, but it retains some discretion.
I apologise for taking another moment to consult my officials. For clarity, where the FOS has aligned with the FCA rules, it has to believe that that is the case, and that determination has to be upheld.
Baroness Kramer (LD)
For absolute clarification, “fair and reasonable” must be interpreted by the FOS as a standard that is met if there is compliance with FCA rules. I just want to understand because we can then go back historically and see where FCA rules might not have been perceived as fair and reasonable. It is interesting.
Lord Davies of Brixton (Lab)
To pursue that, are we being misled by the use of the word “rules” here? There is guidance as well as rules. The principles are not rules, but the principles have to be followed, and they include things such as treating the customer properly. Is that right? There are some general principles within what the FCA lays down—
Baroness Kramer (LD)
I am not sure that is what the legislation says; I think it says “rules”.
Lord Sharkey (LD)
Looking at the legislation itself, it seems clear that if the act or omission is in breach of the FCA’s rules or the consumer duty that absolutely qualifies it as being okay. There is no subordinate reference to “fair and reasonable”.
Lord Stockwood (Lab)
I will take the opportunity to write because this definitely needs clarification. The note that I have says that in cases where the omission being complained about is governed by FCA rules, if the firm has met its obligations under those rules, the FOS will be required to find that it acted fairly and reasonably. All the FCA’s handbook is relevant here, including the principles for businesses and, therefore, the consumer duty. There will be coherence between those determinations but only when the FOS believes that the fair test has not been met can it challenge the FCA. I will write to noble Lords because this is an important point that needs a definitive answer. I apologise for that.
On Amendments 37, 42 and 43, as I have set out, the reforms to the FOS’s fair and reasonable test are designed to preserve the FOS’s existing discretion in areas not covered by FCA rules. The Bill specifies the matters that the FOS must take into account when making determinations, taking this out of FCA rules and making it subject to parliamentary oversight. The matters listed include the law, relevant guidance, codes of practice and further materials published by the FCA or other regulators. This provides greater clarity around how the FOS makes its decisions. As I explained earlier, the Government’s view is that where there are relevant FCA rules, there are benefits from ensuring that FOS decisions are consistent with them. I will write to clarify further in case I have created confusion in this conversation.
On Amendments 38 and 41, the Government recognise the important role the FOS plays within the wider financial services regulatory environment. The reforms included in the Bill are about making sure that the FOS and the FCA are able to carry out their respective roles effectively, co-operating where necessary but maintaining their separate responsibilities. These amendments would go further and require the FCA to become involved in the determination of individual complaints. This is a role that the FCA is not designed or equipped to undertake. It is, and should continue to be, the role of the FOS as the independent, impartial dispute resolution service.
Turning to Amendments 39 and 40, the Government’s review of the FOS concluded that the “fair and reasonable” test works well in the majority of cases to enable a quick and fair resolution of complaints. Removing the “fair and reasonable test”, as proposed by these amendments would undermine the FOS’s quick and informal role and put in its place a more legalistic approach based on strict adherence to the FCA’s rules. This could introduce additional costs and delays, and reduce the FOS’s effectiveness as an accessible and simple alternative to the courts.
I turn to Clause 7 and the new referral mechanism, which will require the FOS to seek a view from the FCA where it considers that a matter relating to a complaint may indicate ambiguity in the FCA’s rules or have wider implications for consumers and firms. As well as enabling the FOS to make decisions that are consistent with FCA rules, the referral process will ensure that systemic questions and issues are identified at an early stage and the FCA can consider whether a regulatory or supervisory intervention may be appropriate, rather than continuing to consider each individual complaint separately. Alongside the new reporting requirements provided for in Clause 9, this will improve understanding of the FCA’s rules and the standards expected of firms, in turn improving confidence in financial services and ultimately reducing the number of consumers who experience poor treatment, which all noble Lords will agree is preferable to providing redress after the fact.
Given the important role that the FOS plays, this is a clearly a matter of huge interest, and there is a range of views on exactly what the best system would look like. Notwithstanding that, I will write on the specific things that I might have caused confusion about.
I have listened carefully to the representations. The Government’s view is that the reforms set out in the Bill strike an appropriate balance, improving the clarity and consistency of redress arrangements while allowing the FOS to continue to make fact-specific decisions on individual complaints. They ensure that both the FOS and the FCA are equipped to fulfil their respective roles and responsibilities so that consumers can have confidence in the key financial services on which they rely, and so that firms understand what is expected of them and can act on it. I therefore ask the noble Lord to withdraw the amendment.
Lord Davies of Brixton (Lab)
As one always says in this situation, I will read what the Minister said with care. I have to admit that I was a little disappointed on the “fair and reasonable” test, but on close analysis it may prove to be better. In particular, I hope I will have a copy of the letter. It is clear that the rules include the principles, such as:
“A firm must observe proper standards of market conduct”.
Is it the ombudsman who would decide what was the proper standard of market conduct, or is that one of the issues that will have to be referred to the FCA? I am not expecting an answer now, particularly as—
Baroness Kramer (LD)
I have a question for the noble Lord, Lord Davies. My understanding of the principles is that they sit at the top, and the rules are derived from them. But this is a focus on the rules, so it is only as derived. I do not know, and we will get an answer.
Lord Davies of Brixton (Lab)
That is what the Minister will need to make clear in the letter. I urge him to make that point clear. Who decides whether the principles have been followed—or is that one of the issues that have to be referred to the FCA under Clause 7?
On time limits, I am disappointed that the Minister did not address the specific cases that I addressed. Some figures were provided—I will start a war on people providing figures in this sort of debate, because they whistle past your ear and it is very difficult to make a quick assessment. The problem is the counterfactual: if the existing system did not exist, would those same figures apply? The Minister has effectively said that, under this change of rules, some people who previously would have received compensation will not do so. That is absolutely clear from the Minister’s statement, and that is reasonable because the providers will save an even larger sum of money. But of course that is under the existing system. We have to think about what those figures would be under the new system.
Again, I hope the Minister will write to me about the specific examples, which could be large sums of compensation—in the case of inappropriate personal pensions, £13 billion was paid in compensation. Would that have been possible under the revised rules? I say that because £13 billion is quite a figure to miss out on for ordinary policyholders. I beg leave to withdraw the amendment.
Lord Wilson of Sedgefield (Lab)
We are about to move on to the last group of amendments and we have 35 minutes to go. I hope we can finish this group before we finish at 8.45 pm. If we do not, unfortunately we will have to break mid-group and reconvene on the same group on Wednesday, so it is in noble Lords’ hands what we do.
Amendment 46
Baroness Kramer
“Reimbursement of fraud: liability of technology companies(1) The FCA must make rules providing that, where a person is to be reimbursed in respect of losses arising from an authorised push payment fraud, the cost of that reimbursement is to be borne, in whole or in part, by any relevant technology company on whose service the fraud was initiated, facilitated or communicated.(2) Rules under subsection (1) must provide for—(a) the apportionment of the cost of reimbursement between relevant technology companies and payment service providers, by reference to the extent to which each contributed to the fraud occurring,(b) a process by which a payment service provider that has reimbursed a victim may recover the apportioned cost from a relevant technology company, and(c) the information that a relevant technology company must provide to the FCA and to payment service providers for the purposes of the rules.(3) In making rules under this section, the FCA must have regard to the principle that the cost of reimbursing victims of fraud should fall, so far as is reasonable, on the persons best able to prevent the fraud.(4) In this section—“authorised push payment fraud” means a transfer of funds executed by a payment service provider on the instruction of a payer, where the payer was deceived into giving that instruction;“relevant technology company” means a person who provides—(a) a user-to-user service or a search service within the meaning of the Online Safety Act 2023,(b) an electronic communications service, or(c) any other online service by means of which an authorised push payment fraud may be initiated, facilitated or communicated.”Member’s explanatory statement
This new Clause would require the FCA to make rules placing liability for the cost of reimbursing victims of authorised push payment fraud, in whole or in part, on the technology companies on whose platforms the fraud originates, rather than solely on payment service providers, and to apportion that cost according to who is best able to prevent the fraud.
Baroness Kramer (LD)
My Lords, I will take that as an encouragement to speak only to my amendment, so I shall just say that the other amendments in the group from the noble Lords, Lord Faulks and Lord Hunt, make a great deal of sense to me, but mine is slightly different. They are dealing with the issues of reporting, review duties and requirements; I am addressing the same underlying issue of authorised push-payment fraud, coming from the perspective of who needs to act to prevent that and be on the hook when there is abuse.
The tech firms—and it is primarily the US tech giants—are now major players in the payments system. They are not merely an inanimate part of the plumbing; the way that they set up and police their systems, or fail to, makes them significantly responsible when their platforms are used to initiate, facilitate or communicate fraud. With AI, the risks become yet greater for ordinary people unless proper guardrails are put in place, so we have to look ahead, not just put in place protections for current circumstances and the past.
The financial incentive for tech firms to ignore fraud is huge. Some analysts have estimated that in 2025, in the UK alone, scam ads generated income of £3.8 billion for the tech companies. My amendment dealing with authorised push-payment fraud deals with a sector of that, but a huge one: authorised push-payment fraud in the UK exceeds £576 million a year. Under present legislation, victims are reimbursed most of that money by the banks, but the techs who have provided the mechanisms are off the hook. I think that is preposterous, because the techs are typically best placed to prevent the fraud.
Amendment 46 would require the FCA to apportion reimbursement by reference to which part each player contributed to the fraud occurring. I strongly suggest that, if passed, this amendment would lead to the tech companies suddenly finding that it is in their interest to prevent APP fraud. As I said, I have great respect for the other amendments in this group, but the payment system is a complex one. There are now many new participants and everybody, not just the banks, should be playing their appropriate role in providing both protection and reimbursement. I beg to move.
Lord Vaux of Harrowden (CB)
My Lords, I have a number of amendments in this group on the subject of fraud and scams. I have also added my support to the lead amendment, which was tabled by the noble Baroness, Lady Kramer, and to which she has just spoken. Most of my amendments arise, at least in part, from the abolition of the PSR and the absorption of its activities into the FCA; I will quickly run through each of them.
The noble Baroness, Lady Kramer, has already explained the need for her Amendment 46, which would require the FCA to make rules to ensure that the tech or communications company on whose platform or service the fraud arises is responsible for a proportion of the cost of reimbursing the victims. Whether or not the mechanism in her amendment is the right one, the principle here is obvious. At the moment, it is the banks that must compulsorily fully refund victims of fraud. There is some sense in the banks having to reimburse victims, because almost every fraud goes through some sort of bank account to allow the fraudsters to cash out. It is clear that the mandatory reimbursement requirement has incentivised banks to do more to protect customers. However, we also know that fraud does not originate from banks’ services. According to UK Finance’s latest report, some 66% of scams arise on online services and a further 17% originate via telecoms. Let us be clear: the highest proportion of that arises on Meta platforms.
Despite voluntary charters, this is not improving at all. Your Lordships’ Fraud Act 2006 and Digital Fraud Committee, of which I was a member, recognised this in its report nearly four years ago; if the Minister has not read it, I recommend it as some bedtime reading. It said:
“Until all fraud-enabling industries fear significant financial, legal and reputational risk for their failure to prevent fraud, they will not act”.
We were right. Nothing has changed since then to change that conclusion. If anything, matters continue to worsen as technology such as AI starts being used by criminals. It is time that the platforms were at last forced to step up and take financial responsibility for the losses that arise from their platforms, not just leaving it to the banks to pick up the full liability. I say this to the Minister: in your answer, please do not tell us that the Online Safety Act will solve this. It is too limited; it covers only directly paid-for advertising and is unlikely to make much difference.
The Government’s fraud strategy recognises all this. It says that,
“if industry partnership and market incentives alone remain insufficient to drive improvements, the Government will take legislative action within this Parliament”.
This has been going on for years. The voluntary online fraud charter was signed three years ago. Nothing material has improved. Fraud is still around 45% of all crime, and the percentage arising on tech platforms has not fallen; if anything, it has risen. The Bill is the perfect opportunity finally to take action on this and not leave it until thousands more people have fallen victim. We know that tech companies will not take action unless they have to—they continue to prove that—which is why the Government are at last taking action in respect of child protection. This is no different. It is now time to act without further delay.
My Amendment 47 would introduce a requirement for the mandatory reimbursement rules for APP fraud, which came into force in October 2024, to be reviewed after three years of operation. It is unlikely that we got everything right at the first attempt, so a review of how effective they have been in meeting their objectives of protecting consumers and incentivising the banks to improve protections—as well as, importantly, whether there have been any unintended consequences—must make sense.
I have tried to set out in the amendment—I will not go through all the detail—the key matters that were discussed when the requirement was introduced in 2022-23 as the matters that ought to be reviewed. I would have also included the tech platforms, but I did not want to duplicate the amendment that we have just discussed.
I completely agree with the noble Lord, Lord Holmes, who sadly is not with us at the moment, on his Amendment 58, which would add specific fraud prevention duties on payment service providers. I also have a lot of sympathy with the principle behind his Amendment 125, which would introduce a financial fraud prevention secondary objective to the FCA, although I caveat that by saying that I am not sure that adding yet more objectives to the regulators is necessarily the right way to go.
My Amendment 59 is designed to ensure that the FCA continues to collate and to publish the fraud data that the PSR has been collating and publishing for the past few years. This has been extremely valuable. It has identified several PSPs that were clearly not taking their fraud prevention duties seriously and led to action being taken against them. The pressure of shining a light on some of the bigger players has clearly incentivised them to step up and improve their systems. The information identifies very clearly which PSPs are protecting their customers best and which are doing it worst, which is important information for consumers when choosing a bank or payment provider.
To give just one example to show the value of this reporting, the last report by the PSR identified that, for every 1 million transactions received by Guavapay, 109,744 were APP scam payments—that is more than 10%. As a result of that information, the company has been forced to close by the FCA. In the meantime, consumers would have been able to see that this was an unsafe operator if the report had been issued in a timely manner—an issue that I will come to in a second.
This reporting was started as a result of efforts by Members of the House during the passage of FSMA 2023, and it followed undertakings by the then Minister. But there are already signs that, since moving the PSR’s activities into the FCA, this has started to slip. As I said, the last report of this nature was for the period up to 7 October 2024, when the mandatory reimbursement requirement was introduced. That was not published until February 2026, some 16 months later. My amendment would add a time limit of three months for the publication of these reports. No further report has been published since, so I hope that the Minister will recognise the value of this reporting, and that he will confirm that it should continue and that this amendment—which does not create any new burdens at all but just continues the status quo—should be accepted.
Amendment 64 would reverse the deletion of Clause 72 from FSMA 2023—it was the clause that introduced the requirement to introduce a mandatory reimbursement requirement. In the Explanatory Memorandum, the Government explain that this is being removed because it has already happened. But Clause 72 does not only introduce the requirement; subsection (9) also includes the ability
“to vary or revoke a relevant requirement”
or
“to impose further relevant requirements”.
So I am not sure that deleting it in full works—that is something to look at. Most importantly, can the Minister confirm that the mandatory reimbursement requirement is intended to continue, even if reviewed and amended in the future—particularly in relation to tech companies, which we have talked about—and that this Bill is not intended to change anything in that respect?
Baroness Neville-Rolfe (Con)
My Lords, for reasons that will become apparent, I start by referring to my register of interests, including my shareholding in Meta.
I am grateful to the noble Baroness, Lady Kramer, the noble Lord, Lord Vaux, and my noble friend noble Lord Holmes, who is absent, for bringing forward this important group of amendments. I am sorry that this debate is so late and that the Grand Committee is so thin under the new five-hour arrangements—of which I am not a fan—because, collectively, these amendments raise an important and timely point. As online retail platforms and digital marketplaces become more popular and AI makes fraud easier, there has been a concurrent increase in the risk that people face from online fraud, as we have heard from the noble Lord, Lord Vaux.
We have seen concerning figures suggesting that Facebook Marketplace is now the single most scammed UK consumer platform. Very large sums are stolen through it every day in the UK, and a very high proportion of UK purchase fraud begins there. We have also seen banks such as Santander taking active steps to block suspected Marketplace transfers to protect customers. Those examples raise very important questions: how easy is it for consumers to obtain redress when they are defrauded in this way? Who holds ultimate responsibility when a fraud is facilitated through an online platform, and how can the regulatory framework ensure that the firms best placed to prevent the fraud have a real incentive to do so? It is also important to consider how changes can be made without introducing new rafts of regulation that put up costs and prices.
Banks and payment service providers have significant responsibilities, and rightly so. They process the payment, have duties to their customers, and have tools available to detect and prevent suspicious transactions. Yet they are often not the place where the fraud originated, and may see only the final payment instruction, by which point much of the harm has already been set in motion. By contrast, technology companies and online marketplaces may be much closer to the source of the problem. They host the listings, provide the communications infrastructure, enable the interaction between buyer and seller, and in many cases have access to data which could help identify suspicious behaviour before money ever leaves a consumer’s account.
Amendment 46 is based on the principle that fraud should be paid for by those best placed to prevent it, not simply those who happen to process the payment at the end of the chain. If platforms know that they may share liability where fraud is facilitated through their systems, they will have a much stronger incentive to identify fraudulent listings, remove scam accounts, improve verification, share data and co-operate with banks and regulators, and indeed help consumers to avoid fraud, as we can do a lot ourselves as consumers. This is not about saying that technology firms should always be liable in every case, nor is it about absolving banks of responsibility. Yet it recognises that the current model may place too much of the burden on one part of the system, while allowing other actors, including very large and profitable tech companies, to avoid the financial consequences of fraud which often begins on their platforms.
The goal should be to stop fraud before it happens, which means better consumer warnings, transaction monitoring, real-time data sharing, and use of technology by all relevant firms. It also means transparency. If particular platforms, channels or types of transaction are consistently associated with fraud, that information should be visible. Sunlight is an important tool of accountability, which is why Amendment 59 is valuable in principle. As the experienced noble Lord, Lord Vaux, has explained, regular publication of data on APP fraud performance, including where fraud originates, would help Parliament, regulators, firms and consumers to understand the real shape of the problem. It would put pressure on firms whose systems are repeatedly linked to fraud to improve their performance.
Before we take a definitive view on these amendments, I would be grateful if the Minister could address several questions. First, what is the Government’s view on the principle of shared liability for APP fraud across the wider ecosystem, including technology companies and online marketplaces? Secondly, is there a place for greater transparency on APP fraud performance? Thirdly, what discussions have the Government had with tech platforms about fraud originating on their services, and what more does the Minister believe those firms should be required to do? Fourthly, does the Minister accept that online platforms should have stronger incentives to prevent fraud where they host the marketplace, the listing or the communication through which the scam takes place? Finally, how do the Government envisage tackling this problem? Do they have plans to introduce legislation on this issue, or do they believe that changes within the existing framework will be sufficient?
APP fraud causes real harm to individuals, families and businesses. It can undermine confidence in digital payments and online commerce, which is increasingly the direction of travel. It also imposes costs on the wider financial system. I recognise that this may go even wider than our Bill, but this is an important group and I look forward to the Minister’s responses, and to seeing how we can improve this important area.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness, Lady Kramer, and to noble Lords for tabling these amendments and to all noble Lords who have contributed to this important debate. The scale of fraud and the devastating impact of that crime on victims remains a concern for this Government. The Government take the issue of fraud very seriously and are dedicated to protecting the public and businesses from this appalling crime.
Baroness Kramer (LD)
My Lords, the noble Lord, Lord Vaux, and the noble Baroness, Lady Neville-Rolfe, both gave far better speeches then I could, and covered the whole area substantially. I am grateful to them, but this gives me a few moments to reply.
Did the Minister say that the financial responsibility that will fall on tech platforms is the cost of prevention, detection and removal, and does he consider that all they need to do? He did not answer the question on shared liability or full reimbursement, and I find that reasonably preposterous, to tell you the truth. If these firms were effectively putting in place prevention, detection and removal, we would not have very much APP fraud, and therefore they would not be making very much reimbursement. We are not asking them to double up what they pay but to pay effectively.
There is a lot more that the Government need to take note of on this. They must also remember that the victims are among the most vulnerable people in our society, as well as others who think of themselves as capable and then find they have fallen for a scam.
I suggest that something far more vigorous is required, and it must be effective in making the tech companies respond, because, as the noble Lord, Lord Vaux, said, the history is that tech companies simply absorb the various requirements on them and make little move to act, because of the income that comes when they simply look the other way.
Financial Services and Markets Bill [HL]
Wednesday 24th June 2026
(1 month ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-II(Rev)(a) Amendment for Grand Committee (Supplementary to the Revised Second Marshalled List) - (24 Jun 2026)
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, before we start, I ask noble Lords, as I did on Monday, to declare their interests before they speak. If they did not do that on Monday, they need to do it today. In addition, as per paragraph 8.82 of the Companion, when it comes to pressing or withdrawing amendments at the end of the debate, I ask noble Lords to keep that debate short. We are not supposed to rehash and repeat the whole debate, so please keep it succinct.
Schedule 2: Payment systems regulation
Amendment 47A
Lord Holmes of Richmond
“6A After section 1QA insert—“1QB The Payment Systems Panel(1) Arrangements under section 1M must include the establishment and maintenance of a panel of persons (to be known as “the Payments System Panel”) to represent the interests of—(a) participants in regulated payment systems, and(b) those who use, or are likely to use, services provided by regulated payment systems.(2) The FCA must appoint one of the members of the Payments System Panel to be its chair.(3) The Treasury’s approval is required for the appointment or dismissal of the chair.(4) The FCA must appoint to the Payments System Panel such persons to represent interests and expertise relevant to the FCA’s payment systems objectives.””Member’s explanatory statement
Schedule 2, paragraph 6 removes the Payment System Regulator from the FCA’s statutory panel composition provisions and does not replace it with any payments-specific representation. This amendment and another in the name of Lord Holmes of Richmond seek to provide such representation.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to open day two of Committee on the Financial Services and Markets Bill. As it is the first time I have spoken in Committee, I declare my interests as set out in the register around technology, as an adviser variously to the Crown Estate, Endava plc, Simmons & Simmons LLP, and as non-exec director of Avalanche BVI Inc and the Avalanche Foundation.
I had hoped to take part in day one of your Lordships’ deliberations on the Bill, but unfortunately there was a direct clash with the Sporting Events Bill in the Chamber. I was hoping to be able to perform some kind of Bill biathlon but, sadly, time clearly caught up with me and I found myself stuck on the track in there. However, it is a pleasure to open day two of the Bill. I will move Amendment 47A and speak to the other amendments in this group in my name. I give more than a nod to the other amendments in this group and I thank my noble friend Lady Neville-Rolfe for co-signing two of my amendments.
In essence, these amendments can be seen as a connected group. The intention set out in the Bill is clear that the PSR is no more and its functions are to move over to the FCA. That is a defensible and clear objective and it has been communicated. The difficulty is that it is not what the Bill currently achieves. In many ways, these amendments could be summed up by “Lost in Translation”, because key elements of the functions of the PSR, not least those critical elements around competition and innovation, have not come over and certainly have not been reproduced in the Bill to the same extent as they appear in their original statutory form. This is clearly a gap in the Bill that we have before us.
Amendment 47A suggests a payment systems panel. This goes to the second element of “Lost in Translation” in the Bill. Representation of those involved in and affected by payments has similarly disappeared and has not come across from the wording in the originating statute. This is critical, not only because it does not fulfil the Government’s stated intention with these parts of the Bill but because, when you think about it, so much in life involves a payment. Something is either started with a payment or ended with a payment and, if it is neither started nor ended with a payment, odds-on it is probably a payment in its own right. This needs to be put right in the Bill and I suggest that the payment system panel achieves that.
The remaining amendments in my name very much go to putting back those requirements and obligations, as set out in the originating statute, around competition and innovation. The Government have talked variously about the growth objective, not least the role that regulators have to play in it. Indeed, they summoned regulators to No. 11 for a regulators’ showdown— I am not sure what the collective noun for a group of regulators is, but it was certainly a gathering—focused solely on growth. Well, competition and innovation are critical to that growth objective.
I suggest that this suite of amendments fills the gap that is left in the existing draft of the Bill. I very much look forward to the Minister’s response and to the debate on this and the other amendments—those who have put them forward have all done so on similar and related issues. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I shall speak to my Amendment 48. It addresses a simple but important point: the quality of regulation depends on the quality of consultation. At present, consultation periods vary unpredictably. Some run for many weeks; others, even on significant policy shifts, have been compressed into days. That inconsistency makes a system difficult for firms to plan around, inaccessible for consumer groups and individuals, and challenging for Parliament to scrutinise. I am a serial responder to consultations—I have been for over 20 years, not just on financial services—and I have experienced this difficulty myself.
The Lords Financial Services Regulation Committee, on which I serve, along with several other Members who are present in this Committee, heard extensive evidence on this. In our report Growing Pains, we concluded that the FCA and PRA need a better understanding of the lived experience of regulated firms in coping with consultations, policy statements, “Dear CEO” letters and the plethora of regulatory tools now used. That is a polite way of saying that the system is overloaded and fragmented.
My amendment would introduce proportionate, predictable windows: four to six weeks for minor changes and six to eight weeks for material ones. I seem to recall that, in Brussels, the time allowed was two months and for more complicated things an extension was available of three months. It would also be in line with that, so not out of line with international thinking. The amendment also sets out the factors that regulators must consider when deciding whether a proposal is minor or material. That embeds proportionality but without rigidity. I envisage that there could be, again, the opportunity for extensions in difficult cases. The FCA quite often does that, but usually quite late, after you have had a panic. Crucially, regulators may depart from these windows in exceptional circumstances, as I have said, but they must explain why. That is transparency, not constraint. It ensures that urgency can be accommodated but not used as a blanket justification for compressed consultation.
Predictable consultation matters because it is the only point where Parliament, industry, consumer groups, individuals and civil society generally can influence policy and rule-making. If windows are unpredictable or too short, smaller firms and resource-constrained consumer bodies are effectively excluded. Trade associations cannot consult their members, but their responses are important, as we know that many firms are reluctant to respond directly, for fear of being seen as criticising regulators and suffering supervisory consequences.
The various advisory panels have their place, of course, but they are not a substitute for open consultation. They rely on the knowledge of individuals, not the pooled experience of the market or the public. Industry has asked for this amendment, which tells us something important: the current system is not working as it should. Consultation should not be a matter of luck or timing; it should be predictable, fair and transparent. This amendment would support better engagement and better outcomes. It is a modest but essential part of the culture change that the Lords committee called for, and I hope that the Government will look on it favourably.
Lord Vaux of Harrowden (CB)
My Lords, I have a number of amendments in this group that relate to the PSR. Before I run through those, I want to comment on Amendment 47A, moved by the noble Lord, Lord Holmes of Richmond. I must say that I am attracted by the idea of a payment systems panel. Payment systems are such a critical part of our financial services structure. They are used more often by more people and more businesses than any other financial service. If they go wrong, or become too expensive, or fail to prevent fraud or error effectively, the impact on individuals and businesses would be very significant. The abolition of the PSR risks dilution of attention to payment systems, so the creation of a panel has very real merit, and I will listen to the Minister’s answer with interest. I will also be interested to hear why the payment systems competition objective in the Bill is missing elements originally included in the Financial Services (Banking Reform) Act 2013, as the noble Lord, Lord Holmes, has pointed out.
I move on to my Amendment 49, which is simply a request for clarification and understanding. I have read new subsection 131Z3(2)(d)(ii), inserted by Schedule 2, a number of times, but have been struggling to understand the double negative in it. I think I now understand that it means that any system that includes any arrangements using digital settlement assets may be a payment system even if that system’s primary purpose is not that of enabling persons to transfer funds. Is that correct? If so, why is that? Why do we treat systems not primarily intended to be used for the transfer of funds, but which include digital settlement assets, differently from systems that do not include digital settlement assets?
Amendments 50 to 53 are all related and designed to reduce the discretion of the Treasury to designate or not designate a payment system as a regulated payment system. As it stands, the Bill gives the Treasury complete discretion. The Bill sets out when the Treasury may designate a payment system to be regulated, but whether it does so is entirely at its discretion, subject only to some consultations. If it does not wish to designate a payment system as a regulated payment system, it does not even need to consult. Similarly, new Section 131Z6 gives it complete discretion to withdraw any designation at will at any time. Why does that matter? That might be best illustrated by a completely hypothetical and obviously completely made-up example. Stablecoins are generally recognised as being primarily a payment system. Let us imagine that there might be a politician who has received a donation of, shall we say, £5 million from an overseas billionaire who is a major shareholder in the world’s leading stablecoin issuer. Perhaps that politician may not have registered such a donation. Let us imagine that that politician gains a position of influence over the Treasury and feels that the interests of his benefactor might be assisted if stablecoins, or indeed a particular stablecoin, were not designated as a regulated payment system. The Bill, as drafted, would allow exactly that to happen. Does the Minister agree that this feels somewhat inappropriate and open to potential abuse?
My amendments would reduce that discretion so that the Treasury must—“must”, not “may”—designate a payment system as a regulated payment system if it is satisfied that any deficiency in the design of the system, or any disruption of its operation, would likely have serious consequences for those who use or are likely to use the services provided by participants in the system. It would have to withdraw a designation if satisfied that those grounds are no longer met.
My Amendment 55 is another request for clarification; I recognise that it may not be required. Prior to being abolished, the PSR does not have a secondary competitiveness and growth objective such as that of the FCA. It has an objective to promote effective competition in the market for payment systems and services and an innovation objective, but those are different things. It was not clear to me when I read this whether, as the PSR becomes part of the FCA, the regulation of payment systems will become subject to the FCA’s wider set of objectives or not. This amendment aims to put that beyond doubt, but perhaps the Minister could confirm the position.
Baroness Kramer (LD)
My Lords, I will make a few comments on amendments in this group and speak particularly to my Amendments 54 and 57. I say very gently that I agree with the other amendments in this group. My noble friend Lady Bowles is looking for consistency in the consultation period. Unless someone has been on the other side of a consultation period—not setting it but trying to respond to it—they may not know that the real-life difficulties of the inconsistency, frankly, are often a barrier, not just an annoyance. Amendment 47A is in the name of the noble Lord, Lord Holmes, and yes, it makes sense to have a payment systems panel on an issue such as this: we need to make sure that a full range of views and experience is taking a look at such a crucial piece of the financial plumbing.
On Amendment 55, I could not understand why ease of use should have been removed from the competition objective. That made no sense if we are thinking about people and consumers. I do not know whether the Government could explain that. I very much support the noble Lord, Lord Vaux. It had struck me but I did not do anything about it and I should have. His Amendment 49 deals with this capacity to exclude digital payment assets from definitions in payment systems, which just seems fundamentally wrong. We are moving in the direction of digital, these are coherent parts of the payment system and it is going to be relevant to the two amendments that I am about to discuss.
My Amendment 54 recognises that we are in a fast-changing world. We are increasingly in a time in which the payment system is made up of many more entities than just the conventional players. New schemes, platforms, exchanges and all kinds of services are coming on stream; these are key and many are digital. Amendment 54 emphasises that the FCA must, in its service-user objective, focus on “consumers”, a much clearer term than “users”. We have seen in the past that consumers get lost in this overall definition of users. It would require the FCA to look at the issues of inclusion, redress, access to cash, choice and interoperability from the perspective of the consumer in this increasingly complex world. As we move forward, many consumers will simply be bemused.
A simple example arose for me when, very recently, I spoke to an American firm planning to offer payroll services in the UK using 100% stablecoin. The firm is very confident that this will be in place shortly after the regulations are approved by the FCA. How does an employee receiving 100% of their salary in stablecoin turn that into cash at an ATM? Obviously, there are huge issues of access to cash, interoperability and who will pay for the necessary software and hardware changes.
Amendment 57 carries on with this theme and picks up an earlier group, addressing the need for all participants in the payment system, including tech companies, to pay their fair share. That is why the definition of “payment system” really matters and should not exclude digital assets. As the payments world changes so significantly, financial inclusion will be a far more complex issue, and it is untenable for the costs of this to fall just on the banks. My amendment makes it clear that every participant across all recognised payment systems must step up: we need a level playing field.
The intent of these really quite simple amendments is to help overcome the incredibly fragmented and confusing payments landscape in the UK, particularly when we look at it from the perspective of the consumer. It is an obstacle course and, frankly, general confusion and fragmentation let overseas entities take advantage of us. I am very troubled that the National Payments Vision of the Bank of England does not have digital assets in scope. The Bank issued its policy announcement on systemic stablecoin on Monday, and it says that its work will be in parallel with the National Payments Vision, but I am still trying to work out why the two are not properly linked together and coherent. There are new players in this field, and some are asserting that we need a single sovereign payments system to respond to core consumer needs and to join up the dots with consumers at its heart. I met the Canadian company Interac, and that is exactly what happens in Canada, so there are international examples, which do not seem to be under consideration in any of the material that I have been looking at.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to noble Lords for bringing forward this group of amendments, which raises several important questions around the future shape of payments regulation once the Payment Systems Regulator is brought within the FCA. I am particularly grateful to my noble friend Lord Holmes for introducing Amendments 47A and 101A with simplicity and clarity; I note the support from the noble Lord, Lord Vaux, and the noble Baroness, Lady Kramer.
Despite the arguments of the noble Baroness, Lady Kramer, I do not favour extending the FCA’s service user objective to include consumer redress or access to cash; indeed, I am against a levy for such purposes. In any event, payment system operators do not deal with customers. That is done by financial services firms.
I am more receptive to the amendment from the noble Lord, Lord Vaux, on applying the secondary growth and competitiveness objective to the regulation of payment systems. Does the Minister intend to do this? If so, can it be done by the proposed regulations or does it need to go into the Bill? I should add that, as with so much in the Bill, the framework is broad while the substance is left to later regulations. That is a real concern, as it leaves a lacuna in parliamentary accountability.
We have been through the arguments on consumer credit and in-person banking, but I log them again for good order. I want also to address two central themes running through this group: first, the need for proper industry engagement and accountability in regulation-making; and, secondly, the question of whether the new regime is sufficiently clear and future-proofed.
On the first point, we welcome the amendments that seek to strengthen the consultation requirements and ensure adequate time for meaningful industry engagement, as the noble Baroness, Lady Bowles, set out in her Amendment 48. That would have a dual effect. First, it would increase transparency and accountability for regulators. If regulators are required to consult properly, explain their reasoning, engage with those affected and publish clear strategies, we have a better chance of understanding not only what they are doing but why they are doing it. One point that is clearly of concern to other noble Lords is the extent of the discretion afforded to the Treasury in designating and de-designating payment systems.
The second effect is that this would ensure that those affected by regulation have a meaningful opportunity to have some input in our deliberations on the Bill and our discussions with industry. It has become clear that the regulatory environment seems to be planned and developed at some distance from the firms that are expected to comply. New regulations, handbooks and guidance may make sense to the people sitting in the FCA or the PRA, but they do not always make sense to those at the coalface: firms, compliance teams, payment providers and market participants. They have to interpret them to implement them and live with the operational consequences.
In this case, those with an interest go way beyond the regulators’ normal clients. For example, concerns have been expressed by retailers, which are usually quick to spot practical problems. I remember well that, when I was at Tesco, we were introducing the euro into our businesses in Ireland and elsewhere. Because of inadequate consultation, the timing was wrong, with training and IT changes needed during the busy Christmas period—a recipe for cost and chaos.
This is a real problem. If regulation is developed in a silo, away from the experience of market participants, even well-intentioned regulation can become impractical, disproportionate or poorly targeted. We end up with the regulator and the regulated working from different understandings of how the market actually functions. That is why I hope that the Minister will look constructively at the amendments that seek to strengthen consultation, transparency and meaningful engagement both with professional bodies and with market participants. Without proper planning, there will be a risk to growth—and, indeed, to the UK’s reputation on payment systems, which has generally been good.
The second major issue is the question of what exactly is covered by the regime. Is the Bill regulating the market as it exists today or preparing the UK for the market as it will exist in a few years? We will speak about digital finance and digital assets in later groups, but the point is highly relevant here, as the noble Baroness, Lady Kramer, mentioned. If the Bill is to modernise and improve regulation, why does it feel in places as though it is being designed for a market that may already be out of date? We have the legal system, the financial services expertise, the markets, the professional services ecosystem and the technology capability to be a world leader, but leadership requires clarity and confidence from the Government and I do not think we are yet seeing enough of either in this Bill.
That brings me to the wider point about accountability and scope, which was raised on Monday. If the PSR’s functions are to be absorbed into the FCA, how will this new regime be properly held to account? How will the Government ensure that payments regulation does not become simply one more area lost within the wider FCA structure? I would be grateful if, in addition to my initial questions about growth, competitiveness and the level of delegation, the Minister could address three points.
First, how will the Government ensure that industry and professional bodies are brought into the regulation-making process early enough for their input to make a meaningful difference? Secondly, how will the Government ensure that the new regime is sufficiently clear and future-proofed to capture new forms of payments and digital finance, rather than regulating for the market of the past? Thirdly, how will the new payments regime be held to account once it sits within the FCA and what mechanisms will exist to ensure that Parliament, industry and consumers can properly scrutinise its operations? A lot of clarity is needed on this part of the Bill, which we of course support in principle. I very much look forward to the Minister’s reply.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, I am grateful to the noble Lords, Lord Holmes and Lord Vaux, and the noble Baronesses, Lady Kramer and Lady Bowles, for tabling these amendments, and to the noble Lords who have spoken in this debate. I will speak first to the amendments concerning the regulation of payment systems and then turn to Amendment 48 tabled by the noble Baroness, Lady Bowles, which raises a separate issue concerning the consultation processes of the FCA and PRA.
There is no doubt that payment systems are critical economic infrastructure. They must be secure and resilient, but also support competition, innovation and good outcomes for the households and businesses that rely on them. That is the purpose of the Bill. It consolidates the Payment Systems Regulator’s functions within the FCA to create a more coherent framework. This is an institutional reform and should not be seen as weakening consumer protection, competition regulation or regulatory standards. The PSR has been effective in driving competition and innovation among payments firms, but the current framework is too fragmented. The Bill will reduce the number of regulators with which firms need to engage.
It is worth stating that the Government have not rushed into this. We consulted on this proposal almost a year ago, in September 2025, and have been working on the details ever since. We published a detailed response in April this year. Throughout this process, the Government have been clear: the intention is not to fundamentally change how this part of the sector is regulated; it is about changing who regulates it to produce a more streamlined system. When I respond to each amendment, I hope that noble Lords will keep this in mind. I hope to reassure noble Lords that the Bill already provides the right framework.
I understand that the desire of Amendment 47A is to ensure payments-specific expertise and that the interests of users and the industry are heard in the FCA. However, the Government do not consider a new statutory payments system panel to be necessary, because the Bill ensures that the FCA’s general duty to consult in relation to its general policies and practices includes participants in regulated payment systems, including those who use or are likely to use services provided by participants in payment systems. We believe that this will ensure that their views will be considered without needing to recreate separate structures within the newly simplified regulatory framework.
I understand the concern in Amendment 49 about whether systems that involve digital settlement assets fall within the definition of a payment system. The Bill attempts to be clear that they can and are capable of designation, even where enabling the transfer of funds is not their primary purpose, reflecting how they may support payment activity within wider platforms.
Amendments 50 to 53 seek to make designation mandatory once the relevant payment systems definition and designation threshold is met, and to restrict the Treasury’s discretion to revise or withdraw designation notices. The Government do not consider that appropriate. As I have already stated, payment systems are technologically dynamic. The Treasury must retain discretion to assess the circumstances and to regulate proportionately, taking into account the relevant factors. Making designation automatic, or withdrawal too restrictive, could introduce rigidity and unintended consequences. Therefore, the Bill preserves the existing position whereby the Treasury may designate a system where it meets the definition of a payment system, and only where the relevant threshold is met. The Government have determined that it is appropriate to maintain a designation regime for payment systems because it facilitates more targeted and proportionate regulation.
Lord Vaux of Harrowden (CB)
I am not sure I fully understood the Minister’s response to Amendment 55. Does the FCA’s secondary growth and competitiveness objective apply to payment service systems under the Bill? That was the clarity I sought.
Lord Stockwood (Lab)
It does indeed. Returning to Amendments 55A, 55B and 55C, I agree that the FCA must be able to consider user access and market entry by infrastructure and payment service providers. The Bill already achieves that. The FCA’s payment systems objectives are intended to be equivalent in substance and scope to the PSR’s existing objectives.
The noble Lords, Lord Holmes and Lord Vaux, asked about drafting differences between the FCA and the PSR objectives. Changes in drafting of the FCA’s payment systems objectives are for simplification only. The FCA’s payment systems objectives retain the substance of the PSR’s objectives.
Turning to Amendment 57, the Government are committed to improving financial inclusion, but a new levy on payment system participants is not the right mechanism. The better course is targeted and proportionate action, including through the Government’s financial inclusion strategy and the recent allocation of £132.5 million in dormant assets funding to Fair4All Finance.
On Amendment 101A, the Bill already provides for the secondary competitiveness and growth objective to apply to the payment systems’ general functions. Any reporting on that secondary objective would include its application to payment systems’ regulation, as appropriate. Therefore, the Government consider the amendment unnecessary and are satisfied that the Bill already gives the FCA the right objectives to support innovation, competition and growth.
Finally, Amendment 48 seeks to introduce maximum and minimum lengths for the consultations undertaken by the FCA and PRA. I understand the desire to ensure that, where regulators consult on proposed rule changes, stakeholders have a fair opportunity to consider the proposals and respond properly. However, this amendment would impose a rigid statutory timetable on consultations, which will cover a very wide range of issues that vary considerably in complexity, urgency and market impact. The Government’s view is that it is appropriate to allow the regulators to determine the appropriate consultation period, rather than being bound to timings set in primary legislation.
The noble Lord, Lord Vaux, is right on how we describe the interpretation of the drafting; I commend him for his skill in reading a very technical provision that I have had difficulty reading. He asked why payment systems that involve digital settlement assets are treated differently. This reflects the particular characteristics of digital settlement assets and the way the market is developing. It also reflects the existing arrangements under the PSR framework.
The Bill preserves flexibility to bring relevant systems within the scope of payment systems regulation, where they support payment activity. That does not mean automatic regulation. The system must still be designated by HMT before the FCA’s main powers apply. This approach ensures that the new framework is both future-proofed and proportionate. The noble Baroness, Lady Neville-Rolfe, raised the issue of consultations with industry. The FCA works closely with industry, and the Bill sets out clear consultation requirements on the FCA to support this as it takes on this new role.
As I said at the start, I cannot accept these amendments, but I appreciate the spirit of where they come from. The Bill is aimed at ensuring that we have the right institutional framework for this part of the sector, while ensuring that we do not weaken those consumer protections. I therefore ask the noble Lord to withdraw his amendment.
Baroness Neville-Rolfe (Con)
Before the Minister sits down, may I come back to the question of consultation? We are being asked to have a high degree of delegation with this change of governance for the Payment Systems Regulator. The Minister seems sure that the regulator will meaningfully consult the right people at the right time. It seems extraordinary to leave so much discretion with the regulators, particularly, as I explained, when they are moving into very new areas. He has rejected the idea of a panel, which would be one way of getting expertise into the system, and I wonder if he will think further about this.
Lord Stockwood (Lab)
To come back on that, we have heard the criticism of the FCA loud and clear. The intention is for further debates to come back to what we believe is the current state of oversight and governance, and we are open to the conversations that the debates will lead to.
Lord Holmes of Richmond (Con)
I thank all noble Lords who have taken part in this important debate. One of the key themes that ran through it and the Minister’s response is the question of clarity, or the lack thereof. Certainly, as a consequence of these changes as currently drafted, there is less clarity on payment systems regulation and on how the competition and innovation requirements will be satisfied in a broader context. I fully support the comments of the noble Lord, Lord Vaux, on his amendments, and I will come to the important amendment of the noble Baroness, Lady Bowles.
I am disappointed that the Minister did not take the opportunity to offer a consultation about consultations. The reality is that the Minister could take this opportunity to bring clarity to increasing and varying levels of opacity and unnecessary levels of control in the hands of the regulator, where they currently exist. We have seen this in financial services in recent Bills that we have considered; it goes beyond financial services to this sense of leaving regulators with greater powers as a consequence of significant statutes passed, as opposed to Parliament debating and determining these decisions, which in no sense would tie the regulators’ hands. In fact, the amendment of the noble Baroness, Lady Bowles, would assist the regulators, because it would bring clarity on how to operate these consultations. There is a significant issue with consultations in financial services, and a significant issue with government consultations across the piece. It is not a party-political point; it has been the case for years. This is an opportunity to bring clarity to this and enable more firms, more individuals and more perspectives to be brought into what would then be better consultations and better outcomes as a result of that consultation process. I very much look forward to the noble Baroness, Lady Bowles, bringing her amendment back on Report. It is strong; it would not let too many cats out of too many bags—even though I stand with a Labrador at my feet—and I do not think that this will be the last we see of a number of these amendments. For now, I beg leave to withdraw my amendment.
Lord Stockwood
Member’s explanatory statement
This amendment would remove a subsection which duplicates section 131Z19 of the Financial Services and Markets Act 2000 (inserted by paragraph 18 of Schedule 2).
Lord Stockwood (Lab)
My Lords, the purpose of the government amendments in this group is to ensure that the relevant provisions of the Bill operate clearly, consistently and in line with the Government’s original policy intent. They are technical and corrective in nature and do not change the underlying policy of the Bill. However, it is important that noble Lords understand the purpose of the amendments so that they can agree that they are minor and technical, so I will explain them briefly.
Amendments 56, 60 and 63 make minor, technical corrections to Schedule 2, which, taken with Clause 13, abolishes the Payment Systems Regulator and gives broadly equivalent functions to the FCA. Amendment 56 removes a duplicative provision from new Section 131Z9 to the Financial Services and Markets Act 2000 that is already covered by new Section 131Z19. Amendment 60 corrects a cross-reference so that the Bill refers to the correct FCA payment system powers when setting out how the Competition and Markets Authority is to determine an appeal.
Amendments 61, 62 and 63 ensure that references to the chair of the PSR, which will be obsolete after the PSR is abolished, are deleted in the correct places in Schedule 1ZA to the Financial Services and Markets Act 2000, which concerns the FCA’s constitution and governance.
Amendments 143 to 145 are also minor and technical amendments. Amendment 143 and 144 ensure that Section 66A of FSMA is amended in a coherent and orderly way, regardless of whether the amendments to that section made by Clause 27 are commenced first or the amendments to that section made by Clause 36 are commenced first. Amendment 145 amends subsection (4) of new Section 55AA, inserted by Clause 29(3), to ensure that the language used there is consistent with the language used elsewhere in FSMA. The amendment simply replaces the words “is in force” with “has effect”. These amendments do not change the policy or legal effect of the affected clauses. They are drafting amendments for the purposes of coherence and consistency only.
I now turn to Amendments 147 to 150, to Clause 33. Clause 33 allows firms to apply for senior approval, subject to conditions or a limited period; they are known as permitted conditional applications. This helps support a more flexible approvals process. Amendments 147 to 150 are technical amendments that fix an error in the original drafting and will ensure that the framework operates as intended. Without these amendments, there is a risk that decisions will not be properly formalised and that the period for determining applications will not be applied consistently.
Amendments 147 and 149 provide that the period for determining permitted conditional applications is the same as for other senior manager applications. Amendments 148 and 150 provide that regulators must give written notice when they approve a permitted conditional application. Taken together, these amendments will ensure that the statutory framework works clearly and consistently in practice.
In summary, this group of government amendments makes technical corrections to ensure that the Bill works as intended. I hope that noble Lords will join me in supporting them.
Baroness Noakes (Con)
My Lords, I have given the Minister notice that I intend to object to these amendments, so if he presses them, I will object and therefore they will not pass. It has been the custom of our House that when the Government table amendments to Bills, they notify all Members of the House—because the Government cannot determine which Peers might be interested in which amendments—and explain the amendments. It may well be that some of these amendments are technical and mean simply the correction of errors, but Members of your Lordships’ House should have the opportunity to consider them properly.
I became aware of this only late last week, when I suddenly realised that several government amendments had been put down—these and others—and that I had had no letter. I do not believe that anybody else has had a letter. Because of that, we ought to maintain the customary practices of your Lordships’ House. As I said, I will object to these amendments if they are put.
Lord Altrincham (Con)
My Lords, I will speak briefly to the government amendments in this group and declare my interest as a director of South Molton Street Capital, which is regulated by the FCA. I thank the Minister for explaining so clearly these amendments. He has described them as minor technical amendments and as descriptions around making language consistent with FSMA. Notwithstanding that, at the outset, we welcome these amendments in so far as they are intended to make the Bill clearer, correct cross-references, remove duplications and ensure that the legislation works as intended. The amendments before us are technical in character and, where they improve the coherence and operability of the Bill, we do not object to them.
However, following the words of my noble friend Lady Noakes, I want to raise a broader procedural point, because I think it matters for how this Committee is able to scrutinise the Bill properly. We understand that not all noble Lords who have taken a close interest in the Bill were engaged by the department on these government amendments. That is a concern. I would be grateful if the Minister could give us a clear commitment that, ahead of future stages, the Government will make every effort to engage with not only the Opposition Front Bench but noble Lords across the Committee who have raised substantive concerns, and to provide timely, written explanations of any further government amendments.
I understand that my noble friend Lady Noakes will be writing to the Minister about the way in which the Government have handled engagement and oversight around these amendments. Given the reservations of my noble friend and of her committee, it is right that we do not agree to these amendments today but rather see them reintroduced on Report, as a matter of principle.
Lord Stockwood (Lab)
My Lords, I am happy to apologise to the noble Baroness for any mix-up. It was my understanding that it was not necessary to do an all-Peers letter for only a handful of technical amendments. With that in mind, we believe that the amendments we have proposed are minor and technical in nature and were tabled in good time before the Committee’s first debate. They are on drafting errors and remove duplicate and obsolete provisions, ensuring that the relevant provisions in the Bill and FSMA operate clearly and consistently. I trust that my explanation has given the noble Baroness the information she needs, but I will withdraw the amendment for now and bring it back on Report.
Lord Holmes of Richmond
“(1C) Regulations made under subsection (1A) may make provision in relation to— (a) the Financial Conduct Authority, in respect of its functions under the Financial Services and Markets Act 2000;(b) the Financial Conduct Authority, in respect of its functions relating to payment services or electronic money;(c) Ofcom;(d) the National Crime Agency;(e) the National Economic Crime Centre;(f) law enforcement agencies.”Member's explanatory statement
The amendment seeks to require more effective intelligence sharing between supervisory authorities.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to open on this group of amendments, which in many ways builds on the first group. This Bill is light on the use of technology and on the use of intelligence between the regulators which are spread across the financial services landscape. As my noble friend Lady Neville-Rolfe said in responding to the first group, in many ways the Bill feels as if it is written for a time which is already rapidly evaporating. There are new payment mechanisms and new financial instruments. In fact, there are new products which are already dominating key parts of the market.
It would seem to make sense to have provision for more intelligence-sharing across the regulators, and indeed the broader landscape. Modern technologies are deployed by both participants and bad actors in this arena. Thus, it would seem to make sense to have combined activity, connected action and shared intelligence among the regulators and, within that, to bring technologies such as AI and others to bear in achieving it. I look forward to the debate on this amendment and others in this group, and to the Minister’s response.
Lord Hope of Craighead (CB)
My Lords, I should like to speak to Amendments 64B and 69AA in this group, which are in my name. They direct attention to matters arising from the provisions in Clause 14 that are of great concern to the Law Society and the Law Society of Scotland. I apologise to the Minister for their late arrival; they are based on draft amendments that were not sent to me until Monday of this week. I am grateful to the Table Office for its help in drafting them at short notice.
The background to these amendments is as follows. The Law Society and the Law Society of Scotland are both regulatory authorities. Their current regulatory roles include responsibility for supervising compliance by solicitors, in their respective jurisdictions, with the UK’s anti-money laundering and counterterrorism financing frameworks. They are, therefore, supervisory authorities of the kind referred to in the amendment to Section 49 of the Sanctions and Anti-Money Laundering Act 2018, as set out in Clause 14(2).
However, the regulation of anti-money laundering and counterterrorism financing is only part of the responsibilities that these two societies exercise as regulators. Solicitors play an important role in tackling economic crime. The societies’ roles as AML supervisory bodies are a key component of their functions as regulators of the solicitor profession. This is a task that both societies take very seriously. I am told that the Law Society of Scotland employs a team of dedicated specialists with detailed, up-to-date knowledge of the trends in economic crime and the risks that are associated with the provision of legal services; I have no reason to think that the way in which the Law Society of England and Wales handles its responsibilities is any different.
The effect of the amendments proposed in Clause 14 would be to transfer, through regulations that we have not yet seen, the front-line AML supervision of the solicitor profession to the Financial Conduct Authority, as the single professional services regulator. The Law Society believes that this will amount to a seismic shake-up as to how law firms and their AML/CTF obligations are regulated, which risks sending shockwaves through the sector. It also says that adapting to this change has the potential to divert attention, resources and time from supporting clients and developing solicitors’ businesses, with effects that it would be quite hard to cope with.
The Law Society of Scotland strongly opposes this change. Its point is that it will lead to the duplication of systems of regulation. On the one hand, the society will continue to have its role as the profession’s regulator; on the other hand, there will be the FCA. Solicitor firms, large and small, will have to deal with them both in future, increasing the time spent and the cost of being regulated. This will bear heavily, especially on small firms in the remoter areas of Scotland, which often operate on very narrow margins. The population is thinly spread in these areas, as are the firms that exist to provide essential legal services there to the people who need them. Much will of course depend on how the FCA approaches its task, but anything that might lead to the disappearance of these firms due to the consequences would be very much to be regretted. That is what lies behind the Law Society of Scotland’s objection.
The Law Society of England and Wales, for its part, is concerned that, without a clear statement of their position by the Treasury and the FCA, Parliament is being asked to legislate for powers to enable the detail of the reforms to be enacted that remain unclear and which the sector has not yet seen.
My Amendment 64B focuses on the points that are of particular concern. I shall mention in relation to each one, as briefly as I can, the questions for which answers are sought from the Minister. Proposed new subsection (1C)(a) asks that the regulations be “proportionate and risk-based”. The question is whether the FCA intends to import its banking model into the process for all solicitors’ firms, small as well as large, or instead to take a risk-based approach. Should not the supervision in regard to this profession be tailored to the risks posed by the different sectors within it? Firms vary from the very small, with perhaps just one partner in a remote part of Scotland, to the very large international firms found in the City of London. How will the Government ensure that the small high street firms up and down the country are not disproportionately burdened by the system that they propose to operate?
Proposed new subsection (1C)(b) seeks appropriate protections for legal professional privilege and client confidentiality. Can the Minister confirm that nothing will be done under Clause 14 that will weaken legal professional privilege, which has a vital role in securing access to justice? The Solicitors Regulation Authority of the Law Society of England and Wales at present keeps all LPP material confidential. It may be used only for investigation and enforcement proceedings against the solicitor or the firm that it regulates. It may not be used in relation to proceedings that may be taken against its clients. Will the FCA follow the Law Society’s practice? Will it also accommodate the duty of confidentiality that underpins much legal work? Further, will it respect the obligations of the solicitor or the firm to the court?
Proposed new subsection (1D) seeks to avoid duplication. It is feared that the Treasury will introduce a broader system of regulation than the current regime, with the risk that this will duplicate the Solicitors Regulation Authority’s oversight, create unnecessary burdens and delay routine transactions. What practical mechanisms can be put in place to prevent solicitors from being subjected to overlapping requirements from both the FCA and the SRA?
Proposed new subsection (1E) calls for an impact assessment. How can the appropriateness of these powers be judged without seeing the underlying regime? Will the regulations be accompanied by assessments of their impact on those to be subjected to the system of supervision for which they provide? What estimate has been made of the compliance costs for these law firms? Will the powers be compatible with the way that legal services are regulated in Scotland, which has a different legal system from that in England and Wales?
My Amendment 69AA asks for a review of AML and CTF supervision within three years and a report that includes an assessment of each of the points to which I have drawn attention. I do not expect the Minister to answer my questions this evening. I have set them out because I hope that they may form the basis of some discussion, if the noble Lord is willing to meet me at some point before Report to go over these thoughts at greater leisure and in more detail.
Lord Mackinlay of Richborough (Con)
My Lords, I add some comments to what the noble and learned Lord, Lord Hope, has said and what he is trying to achieve. I put on record my interests in the register as a chartered accounts and chartered tax adviser—I am very well versed in the burdens, I suppose, of the AML regulations in smaller practice. These are burdens that we all suffer almost daily if attempting to move money between one very regulated institution in the UK to another very regulated institution in the UK. We have all suffered it: you transfer funds from one to another, yet the receiving institution asks the same questions all over again, including proofs of source of funds, as the original organisation, in the UK, asked when you put those funds into that institution.
Frankly, the AML regulations have got out of control. We could do it in this Bill, and I think it is time to streamline what has become a real blockage in the UK. I had a quite ridiculous situation recently in purchasing a property: they wanted proof of funds for a transaction that I conducted in 1992. I struggled to find it, because it had long gone through the shredder, as one might imagine.
Baroness Kramer (LD)
My Lords, I will make some comments on the amendments that have been discussed and then speak to the amendments in my name. I have some sympathy with the issues raised by the noble and learned Lord, Lord Hope, and I very much hope that the Minister can clear up this issue of professional privilege and client confidentiality, because it seems to me that it is not in any way interpretable from the legislation or the Explanatory Notes, and it is key.
I also see that the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, have tabled Amendment 69A to require a report on the transfer process, which seems very sensible. The noble and learned Lord, Lord Hope, has an amendment calling for a review of anti-money laundering and counter- terrorism financing supervision within three years. All those make some sense to me.
I will look particularly at Amendment 64A from the noble Lord, Lord Holmes of Richmond, because it hits part of the problem on the head. It seeks to require more effective intelligence sharing between supervisory authorities. It is that failure of intelligence sharing that many people consider to be the fundamental underlying cause of many of the problems we have today. It is not very clear that the proposals the Government are bringing forward are the easiest way to remedy that. I will say more on that later.
For my amendments in this group, I thank the Chartered Institute of Taxation and the Association of Taxation Technicians for both clarifying issues and proposing legal language. Despite all the steps we have taken over recent years, London remains the global centre of choice for laundering dirty money, whether from crime, sanctions busting or political corruption. Estimates suggest that 40% of all laundered money globally goes through the City of London or the Crown dependencies—up to £325 billion a year. The primacy of the London money laundromat is not an accolade we wish to retain.
Part of the problem has been the fragmentation of oversight by 25 separate public and professional bodies, supervising not just financial institutions but the many enablers, ranging from accountants to solicitors, property agents and service companies. In 2018, the Government set up within the FCA what they hoped would be the answer: the Office for Professional Body Anti-Money Laundering Supervision, which the noble Lord, Lord Mackinlay, described as the OPBAS—I thought it was an acronym, not an initialism. It was put in place to oversee the 22 professional body supervisors, not the public ones. We need to acknowledge that it has had some real successes, but it has not been as effective as we had hoped. That goes back to the issue raised by the noble Lord, Lord Holmes, who is no longer in his place: the primary reason for this, in most people’s opinion, seems to be relatively poor communication and co-operation between OPBAS and the law enforcement agencies. Frankly, I cannot find anything in this Bill that begins to deal with that.
One approach to remedying this situation would have been to have given OPBAS proper resources and more teeth. Instead, the Government have decided that the FCA should take on directly all supervisory responsibility for anti-money laundering and counter- terrorism financing. Many in the professional bodies are very correctly worried that the FCA lacks the expertise and capacity to carry out the role it is being given, which is much more complex than just enforcement.
Many of the firms that the FCA will supervise on these AML issues are small to tiny. The FCA has no significant history of supervising small and tiny firms, and no understanding of the different operations and pressures of these entities or their specialist activities. The firms—this has been one of the strengths of the professional bodies—need compliance support, education, expert helplines, hand-holding and guidance from a supervisor that knows their business model.
My Amendments 65 to 69 should be seen as part of a whole. They are collectively intended to try to tackle that problem, and to clarify and ensure a workable transition process. Amendment 65 addresses education guidance and compliance support. Amendment 66 requires a proper transition timetable. Amendment 67 requires the FCA to have the necessary expertise and experience in tax, accounting, legal services, trust and company service provision—it does not have that at the moment. Amendment 68 requires transparency on supervisory costs and the fees that the FCA will levy. Amendment 69 requires a report in six months on how effective the new anti-money laundering system is.
Frankly, all of that should have been in the Bill, and none of it should be controversial. Once again, we have a situation where the Government seek to pass primary legislation that gives Ministers and regulators a blank sheet of paper to fill in as they wish with secondary legislation. At this point, as far as I can understand— I looked but could not find it—we do not even have a promise to publish the regulations for consultation.
Baroness Neville-Rolfe (Con)
My Lords, I will speak to the stand part notice on Clause 14 and Amendment 69A in my name and that of my noble friend Lord Altrincham. I am also grateful to my noble friend Lord Holmes, to the noble and learned Lord, Lord Hope of Craighead—whom it is a particular pleasure to welcome to the Committee on this Bill—and to the noble Baroness, Lady Kramer, for bringing forward a number of useful amendments in this group. My noble friend Lord Mackinlay of Richborough is right to summarise the concerns about and nonsenses of the money laundering regulations in general, which we should try to address as part of reform. We certainly support that.
The question we have to ask is whether the Government’s chosen mechanism is sufficiently clear, proportionate and workable. At present, I am concerned that it is not. Clause 14 represents a major structural change, moving front-line AML supervision for professional services from the existing professional body supervisors to the FCA. The Bill will allow FCA supervision of money laundering to be extended to several new areas—to 22 bodies in all, as we have heard, including solicitors, law firms, accountants, trust and company service providers and, in practice, estate agents. Yet, as with so much in this Bill, the framework is broad while the substance is left to later regulations. That is a real concern.
My Amendment 69A seeks to address that in part by requiring the Treasury to report to Parliament on the process for transferring responsibilities under Clause 14. That report would force the Government to set out how the transfer will work in practice, what steps will be taken to manage the transition, how costs will be assessed, how duplication will be avoided and how the FCA will acquire and maintain the necessary sector expertise—all points that have been raised in the debate.
We have heard serious concerns from industry and professional bodies about spiralling costs, duplication and regulatory uncertainty. The Law Society described the proposal as
“a seismic shakeup to how law firms and their AML … obligations are regulated”.
It warned that the change risks diverting
“attention, resources and time from supporting clients and growing their businesses”
towards adapting to a new and uncertain compliance regime. That concern should be taken seriously. The Government and the FCA should be seeking to simplify requirements, reduce duplication and minimise the compliance burden, while maintaining strong safeguards against economic crime.
The risk of duplication is particularly important. Solicitors are already subject to a distinct regulatory framework. They have professional obligations, ethical duties, responsibilities to the court, duties under the rule of law and obligations around client confidentiality and legal professional privilege. If the FCA is now to be added to that landscape as a supervisor, the Government must explain precisely how the new system will avoid overlapping or conflicting expectations.
Like the noble Baroness, Lady Kramer, I am particularly concerned about sector expertise: if the FCA is to take on these responsibilities, it must have people within it who understand the professions and bodies that they will be supervising. It must understand how law firms operate, how client accounts work, how professional privilege functions and how smaller or high street firms differ from large practices.
Costs are another major concern. I emphasise that small and high street firms are worried that a move to FCA supervision may result in higher fees and new compliance costs. Many of these firms are already under pressure. They serve individuals, families and small businesses in communities across the country. If the effect of this reform is to impose disproportionate new costs on them, it could have real consequences for access to legal services. The FCA does not understand how to deal with thousands and thousands of such firms.
We also need to understand how regional capacity will be maintained. Professional services are not confined to London; it is one of their charms. AML risks and compliance responsibilities exist across the whole country. The existing professional body model has the advantage of sector-specific and, in many cases, locally embedded knowledge.
There is also a specific territorial issue here, as we heard from the noble and learned Lord, Lord Hope. The Law Society of Scotland has opposed the change and raised concerns about the compatibility of FCA supervision with the regulation of legal services in Scotland. The Government need to explain how these reforms will interact with devolved and existing statutory frameworks, as well as how they will avoid creating a two-track or conflicting regulatory regime. The noble and learned Lord also emphasised the SME issue, which seems to be a particular difficulty in Scotland.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, the noble Lords, Lord Altrincham and Lord Holmes of Richmond, and the noble and learned Lord, Lord Hope of Craighead, for tabling these amendments relating to the implementation of anti-money laundering and counterterrorism financing supervision reform. I would be more than happy to meet the noble and learned Lord to discuss his points in detail before Report. I thank him for that kind offer. I am also more than happy to write to the noble Baroness, Lady Neville- Rolfe, on her questions, although I will cover professional privilege in my response.
I recognise the broad concerns that sit behind these amendments. We all want to get this right. However, the Government do not believe that these additional statutory requirements are necessary. I will start by setting out why Clause 14 should stand part of the Bill. Because the UK is a global financial hub, we face heightened vulnerability to illicit finance, as has already been mentioned. The UK has a robust set of anti-money laundering rules, but the supervision of those rules is simply not consistent. The Government understand the burden of compliance, but their recent statutory instrument made money laundering regulation more proportionate by ensuring that requirements are enforced when and where the risks are highest, and reduced where they are not.
In October 2025, the Government announced their intention to reform the supervision framework, with the FCA becoming the supervisor of compliance on anti-money laundering and counterterrorism financing rules for professional services firms. Clause 14 is designed to support this transition and ensure that the new supervisory regime can function effectively. It is worth restating that we believe that the vast majority of companies take seriously their responsibility to ensure that their clients’ funds are clean. We are grateful for their efforts; they are important gatekeepers, protecting the integrity of the UK economy. This reform will bring professional services firms in line with other regulated sectors, such as financial services, which are already overseen by a public sector supervisor. This is fair and proportionate.
The Government have recently published their updated anti-money laundering and counterterrorist financing national risk assessment. It found that all professional services in scope of this reform remain high risk for money laundering, based on an extensive analysis of the available evidence and intelligence. Clause 14 is essential to ensure the effective implementation of these supervision reforms. Without it, the Government would lose the ability to make important provision in respect of co-operation and information sharing between the FCA and professional bodies.
Ongoing co-operation between the FCA and professional bodies will be key to ensuring that firms’ reform is effective; it has been mentioned by many noble Lords today. It will mean that additional burdens on firms, including dual regulation and issues around enforcement, are minimised. Without this, implementation of reform will be less effective, and firms will likely face additional burdens, which the Government are determined to avoid.
The Government’s objective is to simplify and strengthen the fragmented supervisory system, improve consistency across sectors and support more effective action against economic crime. Effective supervision depends on robust co-operation and information sharing between supervisors and other partners across the wider AML/CTF framework. Co-operation and information-sharing mechanisms will ensure that additional burdens on firms, including dual regulation and issues around enforcement, are minimised, addressing key concerns raised by stakeholders. Clause 14 provides the basis on which those future arrangements can be established. The Government therefore consider Clause 14 essential and strongly support its inclusion in the Bill. To re-emphasise the objective here, this is about simplifying and strengthening a fragmented supervisory system, improving consistency across the legal and accountancy sectors and ensuring that firms are supervised to a consistently high standard. There is no proposal to introduce new anti-money laundering obligations on businesses.
I turn now to Amendments 65 and 67, which are concerned with whether firms will continue to receive appropriate support and whether the FCA will possess sufficient sector-specific expertise, which has been raised by many noble Lords today. The Government agree that these are important issues. However, they are already central to implementation planning. The Treasury’s recent consultation on the FCA’s duties, powers and accountability demonstrated the importance that stake- holders place on sector expertise, guidance and engagement. The Government have been clear that implementation must involve the development of specialist expertise within the FCA and close engagement with existing supervisors and representative bodies.
The FCA also starts from a strong foundation. It already supervises firms for AML/CTF purposes and oversees legal and accountancy professional body supervision through the Office for Professional Body Anti-Money Laundering Supervision. This gives the FCA substantial experience of both AML/CTF supervision and the professional services landscape. The FCA will also ensure that there is clarity for practitioners on sector-specific issues, such as guidance on the treatment of documents covered by legal professional privilege.
The Government have also recognised the value of practitioner expertise. Consultation responses strongly supported practitioner-led guidance, and the Government have indicated in their response to the consultation, published on 18 June this year, that engagement with sector experts and existing guidance bodies will remain an important feature of the future regime. The Government therefore agree with the importance of preserving sector expertise and ensuring that firms continue to receive effective support. However, these issues are already being addressed through implementation planning, continued engagement with existing supervisors and representative bodies, the development of specialist capability within the FCA, and future guidance arrangements. The Government do not believe that additional statutory obligations on either the Treasury or the FCA are necessary to achieve those objectives.
Amendments 64B and 69AA reflect important stakeholder concerns surrounding the need for proportionality and a risk-based approach, appropriate protections for legal professional privilege and client confidentiality, and the need to minimise duplication and impact on supervised persons. These concerns were raised by respondents to the recent consultation, and the Government agree that they are very important issues. Amendment 64B would require regulations made under new powers to consider proportionality and a risk-based approach to supervision, provide appropriate protections for legal professional privilege and client confidentiality, and avoid duplication between regulators. It would also require the Treasury to publish an impact assessment prior to making regulations.
However, the money laundering regulations, or MLRs—the legislation that provides for our supervision regime—already provide protections in respect of the need for a risk-based approach and legal professional privilege. The risk-based approach underpins our supervision regime and is already set out in the legislation. The Government took additional steps to ensure that the existing regulations are proportionate through changes made via statutory instrument on 9 June 2026. The MLRs are kept under regular review to ensure that they are proportionate.
The noble and learned Lord, Lord Hope, and the noble Baroness, Lady Kramer, particularly asked me to cover this point, so I take the opportunity to do so. The FCA will not be able to compel disclosure of legally privileged material under new responsibilities. It will provide guidance to ensure that privileged material is appropriately protected during supervisory activity. That is because this Government are committed to respecting the distinctive obligations that the legal sector has. Regulation 72 of the MLRs provides explicit protection for legal professional privilege. This will apply to regulations made under the new power conferred by Clause 14.
Finally, the power in Clause 14 will ensure that reciprocal co-operation and information-sharing between supervisors and professional bodies is central to the new regime, minimising duplication. Regulations made under the new power in Clause 14 will be subject to the draft affirmative procedure. In making regulations, the Government consider the impact on firms; this is formally set out in our published regulatory impact assessment. Therefore, the additional requirement introduced by Amendment 64B would be duplicative of this process.
Amendment 69AA would require the Treasury to review regulations made under the new power in Clause 14 within three years of them being made, and to lay before Parliament a report summarising the conclusions of that review. The Government are already required to review the MLRs at intervals not exceeding five years, a requirement that would also apply to regulations made under the new powers in Clause 14. As a result, the Government regularly review the regulations to ensure that they are effective and proportionate, and to respond to emerging threats. This is evidenced by regular updates made to the regulations via secondary legislation, with the most recent changes made this month.
The Government’s aim is to minimise duplication and burdens on firms and to protect legal professional privilege and client confidentiality. These will be the most important factors when considering reviewing existing regulations. Consideration of these issues is already fundamental to our supervision regime, and the regulations are consistently reviewed to ensure that they continue to be fit for purpose. Therefore, the Government consider these additions to be unnecessary.
Amendments 66 and 69 are ultimately concerned with readiness and implementation. They seek assurances that the FCA will be capable of supervising professional services firms across different regions of the UK, and that the reform will proceed according to a clear timeline. The Government share the objective of ensuring the implementation is successful. While significant implementation planning has already taken place, substantial work will continue ahead of commencement. The Government have consistently recognised that this requires careful preparation, phased delivery, detailed transition planning and close collaboration with existing supervisors.
The Government have also been clear that effective implementation will require the development of sector-specific and jurisdiction-specific expertise, including a strong understanding of the legal sector, as mentioned, and of professional services firms of all sizes across all parts of the United Kingdom. HMT will work closely with the relevant bodies in Scotland and Northern Ireland to ensure that implementation reflects the distinctiveness of their legal systems and is aligned with existing legislative and regulatory frameworks. This is already managed through governance and business planning. The FCA already operates nationwide and has confirmed that it anticipates having a significant presence for the new regime in its offices outside London, to ensure it has the capacity to supervise these additional sectors.
However, the Government do not believe that placing reporting requirements or implementation timetables in primary legislation is the right approach. Implementation of this reform is a complex programme involving systems development, recruitment, training, funding arrangements and transition planning. The Government must retain sufficient flexibility to ensure that these activities are delivered effectively. However, that does not mean firms will be left without certainty. The Government are already working closely with the FCA, HMRC and existing supervisors to ensure reform is implemented in an orderly way, including ensuring that businesses are clear about when transition will occur and have sufficient time to prepare for change. A statutory timetable risks becoming outdated and may constrain the Government’s ability to manage implementation in the most effective manner.
Furthermore, the detailed provisions on supervision reform will ultimately be delivered through future secondary legislation. This means that the Government will retain control over commencement and can ensure that functions are conferred only once appropriate implementation preparations have been completed.
Baroness Neville-Rolfe (Con)
Since it is Committee, I have a couple of points to raise with the Minister before we finish this important section. First, I think the industry needs some idea of the timeframe for these reviews and for the implementation of these changes. That may already exist in ministerial statements, but it would be extremely helpful if the Minister could look into that and let us know. We have had the experience of the defence investment plan, and the uncertainty that can be created when you do not know when major changes are being made is bad for the sector.
Secondly, on parliamentary privilege, a very niche point, do the plans to protect it apply to in-house counsel as well as external legal counsel? Small companies, such as estate agents, would not want to have to employ expensive solicitors and lawyers if they do not need to.
Lord Stockwood (Lab)
I will have to write to the noble Baroness on those points, to make sure that my answers are correct.
The Deputy Chairman of Committees (Baroness Bull) (CB)
My Lords, as the noble Lord, Lord Holmes, is not here to withdraw his amendment, I will take it that his amendment is withdrawn.
Lord Ashcombe
Lord Ashcombe (Con)
My Lords, unfortunately, I was unable to speak at Second Reading—like the noble Lord, Lord Vaux of Harrowden, as he mentioned on Monday—but I am delighted to be back in time to speak in Committee. I declare my interest as an employee of Marsh, an FCA-regulated firm.
The amendment in my name in this group, Amendments 69B and 73A, propose that our financial regulators move from a five-year to a three-year strategic planning cycle. At its heart, this is a straightforward proposition: regulators must keep pace with the world they regulate. In financial services, the rate of change has accelerated to such an extent that a five-year strategy can quickly become outdated. When the FCA and the PRA last set their strategies, few could have anticipated the speed and scale of the developments that followed. The volatility seen in digital assets, the rapid emergence of artificial intelligence in financial decision-making, the growing importance of cyber resilience to financial stability and the impact of geopolitical tensions on global markets have all evolved far more quickly than expected. Yet regulators remain bound by frameworks conceived for a very different environment.
A three-year cycle offers a more realistic and proportionate approach. It is not an arbitrary shift. It better reflects the pace of change in financial services, aligns more closely with the Treasury’s spending review cycle and mirrors the planning horizons adopted by many firms. It also corresponds more closely to the time it takes for innovation to move from novelty to something requiring clear regulatory oversight. Some may argue that a five-year cycle provides greater stability, but stability should not be confused with rigidity. A strategy that is clearly out of date does not offer certainty; it risks losing credibility. True stability lies in a framework that is regularly reviewed and refreshed, so that it remains relevant and dependable. Nor would a shorter cycle create unnecessary disruption. It would not require regulators to constantly change direction; rather, it would ensure that their strategies are revisited at appropriate intervals and updated where necessary. That strikes the right balance between continuity and responsiveness.
There is a practical consideration. Industry participants have consistently highlighted that five-year strategies can be overtaken by events well before their conclusion, making it harder for firms to plan with confidence. In reality, regulators have already had to adapt to unforeseen shocks—whether economic, geopolitical or technological —outside the normal review cycle. For that reason, this is not a radical proposal but a pragmatic one.
It is important that financial regulation does not rely on a planning horizon that no longer reflects the realities of the market. The FCA and the PRA are strong institutions, but even the most capable regulators cannot be expected to operate effectively within five-year strategies in a period of such rapid change. A three-year cycle is a measured reform. It would help to ensure that regulation remains responsive, credible and accountable, while fully respecting the independence of our regulators.
These are probing amendments. As such, can the Minister say why the Government chose to fix five-year periods for strategy reviews? I believe that is too long, so I look forward to hearing his thoughts on that. I also support the amendments in the names of my noble friend Lady Noakes and the noble Baroness, Lady Bowles of Berkhamsted. I beg to move.
Baroness Noakes (Con)
My Lords, I will speak to Amendments 70, 71, 73, 74 and 76 in my name. I thank the noble Lord, Lord Vaux of Harrowden, for adding his name to Amendments 70, 73 and 76.
At first sight, Clause 16 looks like a bit of “motherhood and apple pie” legislation. After all, what is not to like about five-year strategies, which are what most businesses do in the UK and internationally? A closer look at Clause 16, however, reveals a bit of a mess. The position we have at the moment is that the PRA is required to determine a strategy, and it does this by way of annual business plans. There is no requirement in statute for the FCA to do anything but it has routinely issued annual plans; last year, it issued a five-year strategy as well. So this is clearly a slightly messy area, and the Government are right to try to tidy it up.
I fear, however, that the solution in Clause 16 will make things worse. First, the requirement for a strategy seems to be a static one, requiring a five-year strategy to be set and then replaced when the five years have nearly run out. The subsections of new Sections 1JZA and 2E, to be inserted by Clause 16, envisage that the strategies can be revised or replaced, but it is unclear what the trigger for that is other than when the Treasury issues new recommendations in a remit letter. In the business world, strategies are kept under review and are often revisited annually—certainly more often than every five years. I believe that Clause 16 needs a positive requirement for the regulators to keep their strategies under review, if only to confirm their continuing validity. My noble friend Lord Ashcombe’s Amendments 64A and 73A would partly get round the problem by shortening the period, but they still envisage a static strategy; it would be three years and then, at two years and nine months, you would do another one, which is not a satisfactory approach to drawing up strategies.
The Explanatory Notes explain that these strategies are expected to be
“high level and focus on the FCA’s and PRA’s top priorities”.
That is fine, but it is not very useful for the regulated firms that want to know how the regulators’ actions will affect them in practice. If these five-year plans are anything like the FCA’s five-year strategy—all 20 pages of it are full of drawings, photographs and big letters—firms will be very disappointed. The FCA’s four priorities of being a smarter regulator, fighting financial crimes, supporting growth and helping consumers are so high level that they mean nothing to regulated firms.
At the moment, both regulators annually set out the detail of what they plan to do for the following year. Can the Minister say whether this will continue once the Bill becomes law? There will be no requirement in law for either the FCA or the PRA as a consequence of the Bill, and, given the lightweight content of the FCA’s five-year plan and the Government’s intentions for only high-level strategies, it would be a serious error if the regulators were not required to publish their detailed annual plans as well.
These are deficiencies in Clause 16 but they are not covered by specific amendments, mainly because, when I drew up my amendments, I was working on the naive premise that asking for a five-year strategy was a sound, if unexciting, proposition. As I have explained, I now see that as flawed in many ways. For this reason, I fully support the Clause 16 stand part notice in the name of the noble Baroness, Lady Bowles; I am sorry that I did not have time to add my name to it.
On the amendments that I have tabled, I will start with Amendment 70, which requires the FCA’s strategic priorities to include its secondary competitiveness and growth objective. The equivalent provision for the PRA in new Section 2E, inserted by Clause 16, says that the strategic priorities of the PRA include secondary objectives, whereas the drafting of new Clause 1JZA for the FCA does not extend to the secondary objectives. The Minister has helpfully written to me today to say that the Government sort of accept that but that they will work up their own amendment. I thank him for that and I look forward to seeing the text of that ahead of Report.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak to Amendments 72 and 75 and to my opposition to Clause 16 standing part of the Bill. I also support the other amendments in this group and their intentions: I think we could talk quite a lot longer about them all.
My Amendments 72 and 75 would require the regulators’ long-term strategies to include a review of their rulebooks, with the aim of identifying outdated or unnecessary requirements. That is a sensible and uncontroversial idea. No one disputes that the regulatory rulebook should be kept under review or that unnecessary or duplicative requirements should not be removed. Indeed, the FCA’s own handbook review consultation acknowledges that parts of the rulebook are outdated, unclear or internally inconsistent. I hope that this review idea can be taken up.
However, these amendments presently sit within Clause 16, which is where the problem lies. Clause 16 creates a statutory duty for the FCA and the PRA to produce long-term strategies. In principle, that is not objectionable; regulators have produced strategy documents before, and it is entirely proper that Ministers should be able to input as long as it is transparent, but there are other problems that have been elaborated on by the noble Baroness, Lady Noakes, which I do not need to repeat. In practice, however, Clause 16 is the delegation engine for Clause 17. It is part of a process of downgrading the day-to-day requirements, the regulatory principles on rule-making, into a commentary in a five-year strategy document. This is a profound change in the constitutional architecture of financial regulation. What were once operational regulatory principles, enforceable by judicial review—even if that route is rarely pursued—become strategic aspirations, influenced by Ministers, unchallengeable by others and reviewed only every five years. The long-term strategy is being used as a vehicle to downgrade regulatory principles and apply them in a minimalist, non-operational way—just talk, no walk. If Clause 16 is to remain, it must be made significantly better and not simply operate as a Trojan horse.
The key thing about regulatory principles is how to make them sensibly relate to operational matters— I say sensibly because that has not happened. That is the problem. It may work for some of them to be dealt with more thematically and rather more regularly than five-year intervals, but others need consideration at the rule-making and supervisory level. While Ministers are meant to stay clear of day-to-day operational interference, like the noble Baroness, Lady Noakes, I query whether Clause 16 overly restricts ministerial input. FSMA 2000 has always had a difficult settlement to keep government away from day-to-day decisions, but—as the financial crisis showed—it is inescapable that the buck stops with government. Clause 16 does not strike the right balance there.
My Amendments 72 and 75 point to rulebook review. As I said in a previous group, and as noted by the Lords Financial Services Regulation Committee, it is effectively the regulators’ system that is cluttered, fragmented and difficult to navigate. It is a lot harder to navigate than a few regulatory principles that the regulators complain about, but which are the only way to challenge that regulatory clutter. In the Lords committee report, a central finding was that culture change, not structural tinkering, is what is needed. Regulators must be clearer, more predictable and more proportionate in how they exercise their powers. The Clause 16 regulatory strategy does not deliver that; it substitutes what were enforceable operational requirements about proportionality with unenforceable talk.
It rather looks as though the regulators will avoid having to step up to the mark. They did not much like the committee’s report or its suggestions of culture change, and, as we will discuss when we get to Clause 17, in the words of one City commentator, it looks like the regulators have done a job on Parliament. Clause 16 is not about transparency, nor is it new in suggesting a strategy document. It is just a vehicle to diminish the accountability and effectiveness of the regulatory principles, and I oppose it.
Lord Vaux of Harrowden (CB)
I have added my name to three of the amendments tabled by the noble Baroness, Lady Noakes, in this group. To be honest, I am not quite sure why I did not add my name to her other two; I should have done, so I apologise. The noble Baroness has already explained those with her usual clarity, so I will try hard not to repeat what she said.
Briefly, on Amendment 70, I was going to say that I assumed that the omission from the FCA’s strategic priorities of its secondary objective was an oversight. The noble Baroness, Lady Noakes, has kindly shared with me an email she has received from the Minister that effectively confirms that, and that it will be sorted out at a later stage. Can I very gently say to the Minister that when he writes to noble Lords, it should be copied to all who have signed an amendment? On Amendments 73 and 76, I will listen with interest as to why the Treasury should be able to make recommendations to the FCA and the PRA only in relation to the long-term strategies—that is, every five years. I suspect that the Treasury will come to regret that restriction.
I have also added my support to Amendments 72 and 75 in the name of the noble Baroness, Lady Bowles, both of which would require the FCA and PRA to carry out a review of their regulations as part of the five-year strategy process, with a view to eliminating any unnecessary regulations. Rulebooks have a habit of growing—being added to—and scope has a tendency to creep, so a five-year spring clean must be a good thing and would be a good discipline that I would wholeheartedly support. I finish by saying that I share the reservations that have already been raised about the whole of Clause 16.
Lord Massey of Hampstead (Con)
My Lords, the Bill reflects the very substantial transfer of power, as mentioned by my noble friend Lady Neville-Rolfe, from Parliament and from existing regulators, such as the PSR and the 22 professional bodies with specialised knowledge of the sectors, as we discussed earlier. This reflects a high degree of centralisation of regulatory supervision, which may lead to a lack of clarity and, in some cases, as my noble friend Lord Mackinlay mentioned, double regulation for small firms. As the noble Baroness, Lady Bowles, said earlier, the system is also already overloaded. In that context, given the extensive proposed changes and the real possibility of unintended consequences, it seems that the Government should consider the setting of strategy for the future as an important component of the Bill.
Although I support all the amendments in this group, I emphasise the need for consultation with regulated firms and the regular review of the rulebooks as provided for in Amendments 71, 72, 74 and 75. The Bill indeed provides for the publication of a document and consultation with one party—the Court of Directors of the Bank of England is specifically mentioned as a party that will be consulted—but seemingly not with any regulated firm, despite the fact that regulated firms could clearly be very helpful in the setting of long-term strategy. Amendments 71 and 74, proposed by my noble friend Lady Noakes, therefore seem essential additions to the Bill, as would Amendments 72 and 75, proposed by the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux.
Baroness Lawlor (Con)
I say a word of support in favour of these amendments. This industry, financial services, is one of the most innovatory and dynamic industries in this country and has led the world in its imaginative, entrepreneurial approach for centuries. What we are seeing—I am glad to follow my noble friend—is the centralisation of regulation in one ever greater regulatory body. This will mean that the slowest ships of the regulatory convoy will determine the pace.
For these reasons, it is imperative that the strategic review takes account, much more regularly than every five years, of the updating of business actions, business transactions and the tools used by the sector; and that, as my noble friend Lady Noakes pointed out, it talks to the people who are the wealth creators whom it will regulate. For all the reasons that have been enunciated in the course of this short debate, including those from the noble Baroness, Lady Bowles, I support these amendments.
Baroness Kramer (LD)
My Lords, I am going to be exceedingly brief. I support the amendments in this group.
My noble friend Lady Bowles has hit on the fundamental reason for my strong opposition, which is the constitutional issue. By chance, I happened to speak to a senior regulator in the financial services sector—I am not going to use their name because it would not be fair to do so—shortly after the Bill came out. We started looking at its clauses, and that person said to me, “Ah, but, in the long-term strategy, we will be able to explain to people in detail why we are doing what we choose to do”. To me, that absolutely summed up the issue as a whole. There was no concept at all that there would be parliamentary insight, parliamentary oversight or engagement; it was simply going to be a much better vehicle to explain to people why certain things that had been identified as necessary were necessary and were going to happen. There was no sense of challenge anywhere at all. That is a really dangerous way for us to move our legislation.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to all who have taken part in this short debate. We are sympathetic to the broad purpose of requiring regulators to think strategically, but, if the regulatory strategies are to be meaningful, they must not simply become static documents published every few years then left on the shelf. As my noble friend Lady Noakes said, that is not the way we do it in business. Common practice is for five-year strategies, reviewed annually, and annual plans.
The amendment tabled by my noble friend Lord Ashcombe would reduce the strategy period from five years to three years. He is right that markets can change very quickly, as we keep hearing. A five-year strategy risks being set in stone for too long, unless the Minister is able to clarify that the plans will be updated regularly. If not, a shorter period, such as three years, would have real benefits. Perhaps the Minister can explain why the period of five years has been chosen and how he believes the strategies will remain agile and flexible.
I am delighted that the Minister said that he was prepared to accept Amendment 70 on competitiveness and growth. As I have said several times, the growth of the UK financial services sector is key to growth more generally. Regulation should say how the Government—or the regulator—understand that objective, how they are giving effect to it and how their regulatory approach is supporting growth in the market, because the UK has a large and dynamic financial services sector. My noble friend Lady Lawlor emphasised that point, which we should not forget, and we cannot assume that its international position is guaranteed. Regulation has a direct effect on investment, innovation, listings, lending and market depth, as well as on the attractiveness of the UK as a place to do business, so, if regulators are not required to think explicitly about this, the growth objective risks being honoured in theory but neglected in practice.
Amendments 71 and 74 on consultation are very welcome. As we have said in our debates on previous groups, bringing experts into the room in a timely way is a vital part of the regulatory process.
In my view, the boards of regulators have a part to play in the strategic plans, but my recollection is that those engaged in regulated companies were excluded from the non-executive roles on the PRA and the FCA. Is this still the case? My own board experience is that conflicts of interest can be managed. I believe that regulators will benefit from current knowledge from the industry, particularly given these new statutory strategies, the digital changes to which we keep referring and the expansion of the scope of the FCA. I would like to hear from the Minister what the current rules are—perhaps in a letter, as I have not raised this point with him before.
I also support the principle behind Amendments 72 and 75 in the name of the noble Baroness, Lady Bowles. They would require the FCA and the PRA to review their rulebooks and explain how they will simplify or remove rules that are outdated, unnecessary or duplicative. Regulation, as has been said, tends to accumulate. New rules and duties are added, but old rules are not always removed. Guidance, expectations and supervisory practice develop over time. A long-term strategy is not only about what new initiative the regulators want to pursue; it should also be about what the regulator can simplify. If a regular rulebook review is done with a view to making regulation less burdensome, cheaper to operate and supportive of growth, that will be a very positive step.
The amendments on Treasury recommendations also raise a serious question around accountability and regulator independence. There is, of course, a balance to be struck. We do not want day-to-day political interference in regulatory decisions but nor should independent regulators operate without clear strategic accountability to Parliament and the Government of the day, as my noble friend Lord Massey and the noble Baroness, Lady Kramer, explained better than I can. The Government should explain why the Treasury’s recommendation-making power is framed as it is, why it is limited in the way proposed and how Ministers expect it to operate in practice.
Finally, on the Clause 16 stand part notice, I understand the concerns raised in the debate. The value of that clause will depend entirely on whether the strategies produced are meaningful, responsive and capable of being scrutinised. If they become generic documents with broad statements of aspiration, they will add little. If they provide clear commitments, measurable priorities, proper engagement with growth and competitiveness, and a disciplined approach to reviewing the rulebook, they will be useful.
I very much look forward to a full response from the Minister to the points that have been made.
Lord Stockwood (Lab)
My Lords, I begin by explaining the Government’s purpose behind Clause 16 and why it should stand part of the Bill.
The Government have often heard feedback calling for the regulatory system to have an overall long-term strategy with clear goals, where the regulators consider the cumulative impacts of their policies and the interaction between supervision and rule-making. The reforms introduced by Clause 16 are intended to address this feedback and will improve transparency around the regulators’ long-term direction and focus, which the Government consider will support effective oversight and scrutiny of the regulators.
Clause 16 requires the FCA and the PRA each to prepare and publish long-term strategies so that stake- holders, including regulated firms, can better understand the regulators’ approach to the sector, and so that the Government and Parliament fully understand the regulators’ priorities and can more effectively hold them to account on how they are translating their objectives into actions and results. When the Government consulted on this proposal, it received strong support: 83% of respondents supported it and agreed that the regulators taking a more strategic and cohesive approach would benefit the sector by helping firms know what to expect.
I have listened carefully to the concerns raised by noble Lords. However, the Government remain firmly of the view that Clause 16 will support scrutiny. By requiring a clear long-term strategic overview, Clause 16 will help the sector understand and plan more effectively for regulatory initiatives and will help interested parties engage with the regulators at a strategic level. Without Clause 16, there would be no requirement for the regulators to set out, in one place, their long-term priorities and approach in advancing their objectives. The aim of the strategies is to make it easier, not harder, for Parliament and stakeholders to scrutinise whether the regulators’ actions are coherent and aligned with the framework that Parliament has set.
On Amendment 70, the Government agree with the noble Baroness, Lady Noakes, that the FCA’s secondary international competitiveness and growth objective should be central to the formulation of its long-term strategy. Growth is the number one priority for this Government and the financial services sector, as many have noted, is key to delivering this. The Government always intended the FCA’s long-term strategy to set out its priorities for advancing our international competitiveness and growth objective. We are looking into this point to determine if this is fully clear within the drafting of the clause, and we are open to tabling an amendment on Report should we determine that it is needed. I thank the noble Baroness for bringing this to my attention and commit to keeping her and other noble Lords informed as this consideration progresses.
I turn to Amendments 69B and 73A. The noble Lord, Lord Ashcombe, and the noble Baroness, Lady Neville-Rolfe, asked me to explain the Government’s thinking behind the time periods here. The Government have set the length of this strategy as five years because, as has been noted, it is the standard time period for organisational strategies and is very common in the business world, as many noble Lords will appreciate. It also aligns with standard parliamentary terms and therefore the requirement for the Treasury to issue recommendations to the regulators at least once per Parliament. However, the Government recognise that financial services markets can evolve quickly and it is important that the regulators’ strategic documents remain current and useful.
The noble Baroness, Lady Noakes, asked me how the strategies would be kept under review. The Bill provides flexibility for the regulators to revise or publish a new strategy within the five-year period if circumstances require it, or to publish a strategy for a shorter period of time than five years. If they do the latter, it will need to be with an explanation about why this is appropriate. Five years is therefore a maximum interval, not a requirement to wait five years before making a change. For example, the Bill requires the regulators to consider whether they need to update their strategy or issue a new one whenever new Treasury recommendations are issued. The Government’s view is that this strikes the right balance between providing a long-term, stable framework and allowing regulators to respond when market, economic or regulatory conditions change.
On Amendments 73 and 76, the Government’s approach here is deliberate. The need for the regulators to take account of Treasury recommendations at a strategic level, rather than at the level of general functions, has been carefully considered. Under the new framework, the Treasury’s recommendations to the regulators regarding its economic priorities will inform the development of their strategic priorities. This is aligned with the change to the way that the regulatory principles will be applied, and I hope it demonstrates the Government’s confidence that influencing the regulators’ strategies is an effective mechanism for ensuring that they have an appropriate focus and are performing well.
Further to this, the framework has been carefully designed to ensure that Treasury recommendations are taken fully into account. As I mentioned earlier, regulators must consider updating or producing a new strategy whenever the Treasury sends a new recommendation letter. The regulators will continue to be obliged to respond annually to the Treasury on their actions in response to the recommendations separately from the strategy document. This will support continued transparency and accountability regarding how the regulators are taking government recommendations into account.
Baroness Kramer (LD)
I just ask for clarification. The Minister talked about the way in which the Treasury will make recommendations and the regulator must take them into account. I did not hear the word “Parliament” anywhere in that. Where is the capacity for parliamentary recommendations and oversight to make sure that they are taken into account? Or is the purpose of this legislation to make sure that that does not exist?
Lord Stockwood (Lab)
I think this is part of a broader discussion. I am informed that this takes into account existing practices for how the reviews and overviews take place. Unless we decide, in the following debates, that we need an amendment to provide parliamentary overview, this will apply to the current regulatory framework as the oversight currently exists.
Baroness Noakes (Con)
I may be being a bit dumb, but I did not understand that at all.
Lord Stockwood (Lab)
I do not want to get confused about this. My understanding is that this is already existing practice, but I will take this away and write to the noble Baronesses just to confirm that this is exactly correct. We are trying not to defer from the practice as it exists today, but I will write to clarify that.
Baroness Kramer (LD)
I just add that the point of the principles is that they are, in effect, Parliament’s recommendations set in law. I am struggling to see how that fits into the question of who can recommend from this point in time.
Baroness Bowles of Berkhamsted (LD)
I do not understand what happens when the strategy is right but the rules are wrong. What happens then? That does happen. We have, as I have called it before, the example that keeps on giving: when the FCA got the motor finance rules wrong. What happens then, when there is no way to correct that? The strategy, to treat customers fairly, might be right, but the rules produce something that is patently unfair. How can that be changed? There is nothing to measure against that now —the principles have gone.
Lord Stockwood (Lab)
Again, we are trying to stress that the oversight that exists today will not be changed. The Treasury’s annual review should be able to take that into account. We believe that what we are putting forward here should not change the existing profile.
Baroness Bowles of Berkhamsted (LD)
I am sorry, but if you change something in primary legislation and rub out what is happening in existing processes, you have changed it. You cannot change something at a higher level than primary legislation.
Lord Stockwood (Lab)
We will have to come back to these points at a later date. This is a broader conversation on oversight, and points have been made on this subject outside the Room. I hope noble Lords will allow me to come back to these points, as I think this will come up in further debates both during and after Committee.
Turning to Amendments 72 and 75, the Government agree that regulation should be proportionate and support the objectives behind these amendments. Indeed, the Bill forms part of the Government’s broader effort to reduce the burden of regulation on businesses, ensuring that the UK has a regulatory environment that supports growth while maintaining high standards. The Government have made a commitment to cutting the administrative burden of regulation by 25% by the end of this Parliament. The financial services regulators are actively contributing to this agenda. For example, the PRA is implementing new insurance reporting requirements that will cut paperwork by one-third, contributing to savings for firms of £66 million per year, and the FCA has proposed removing some transaction reporting that would save firms over £100 million per year.
However, the Government do not think it would be appropriate to impose a requirement that every long-term strategy must include a full review of all regulations and a plan for eliminating them. A universal rule review exercise each time a strategy is prepared or revised would not be proportionate and would reduce the regulator’s capacity to focus on other priorities. There are existing requirements in FSMA which require the regulators to keep their rules under review and to publish statements on policy and on their approaches to reviewing the rules. The Government consider that this is a proportionate approach.
Amendments 71 and 74 seek to require the FCA and the PRA, when preparing and revising their long-term strategies, to consult persons they consider would be affected, including those they regulate. I understand the intention behind these amendments. If the regulators are to produce long-term strategies that are meaningful and credible, it is clearly important that they are informed by engagement with those who are affected by them. The Government have a clear expectation that the regulator’s strategies will be informed by that engagement.
Baroness Noakes (Con)
Can the Minister explain why that is not included in the Bill? The Government expect them to engage with the industry. One would normally write consultation expectations into legislation. That is the normal practice. Why was it not done in this case?
Lord Stockwood (Lab)
Again, we will have to come back to that point. One of the things we are trying to consider is how we do not overburden by creating more regulation, but we will have to review that point and come back to the noble Baroness.
Baroness Bowles of Berkhamsted (LD)
On that point, it seems to me that nothing is being done to challenge the burden of regulation on firms—instead, the obligations on the regulator are being reduced. When you reduce the obligations on the regulator—for example, to be proportionate—the corollary of that is that they are unrestricted in the way that they can then increase the burdens on firms. That may not be the talk, but that is the consequence of the legal construct that we are now looking at.
Lord Stockwood (Lab)
There is a broad philosophical point being made about trusting the FCA and the regulators. Again, we will come back to this in further debates. It is a view that I understand, and we need to develop this through the process of the debate, but it is definitely not the intention to give them free rein to make laws randomly. I think we will have to come back to that later in Committee, if that is okay.
Baroness Kramer (LD)
My Lords, I ask for some clarification on this complex area. Under Clause 16, new Section 1JZA(7) states:
“A strategy may be revised by publishing a revised version of the strategy”.
Is the Minister confirming that, as it says in the Explanatory Notes, no consultation goes with that revision process?
Lord Stockwood (Lab)
That is correct.
Amendments 71 and 74 seek to require the FCA and the PRA, when preparing or revising their long-term strategies, to consult persons they consider would be affected, including those they regulate. The Government have a clear expectation that the regulators’ strategies will be informed by engagement with industry, consumer representatives and other stakeholders. However, adding a statutory consultation requirement could lead to long delays between a new Government setting direction through a recommendation letter and the regulators putting a strategy in place.
The noble Baronesses, Lady Kramer and Lady Noakes, asked how the Government’s remit will work under the new system. The FCA and the PRA will now be required to have regard to their remit letters when producing or updating long-term strategies. The regulators will continue to be required to respond annually to remit letters, setting out the actions to which they will respond. The noble Baroness, Lady Neville-Rolfe, asked about non-executive directors; I will write to her on that as I do not have the answer to hand.
The accountability of the financial services regulators is clearly an important matter of huge interest to the Committee. I have heard a range of views today on exactly what this should look like, and we will continue to debate this issue in relation to subsequent clauses. However, regardless of views on the wider matters of transparency and accountability, I am confident that the majority will agree that long-term strategies will add to our understanding of the regulators’ strategic priorities and approach, which must be a good thing. I therefore ask that Clause 16 stands part of the Bill.
Baroness Noakes (Con)
I have some questions for the Minister. Does he believe that the FCA’s five-year plan provides a model for what the Government have in mind for compliance with Clause 16, if it becomes law? I will start with that question.
Baroness Noakes (Con)
Does the Minister believe that the FCA’s five-year plan, which started last year, is the model on which Clause 16 has been based? Is the Minister expecting that sort of document to be produced in response to Clause 16?
Lord Stockwood (Lab)
What the clause is trying to represent is that this is the starting point. There is definitely work to do and it needs to be improved.
Lord Stockwood (Lab)
What we have set out in answer to that question is that there is clearly a need for greater transparency and thinking about what the five-year plan looks like. In terms of the interaction with the Treasury, the hope is that we can get it into a position where it has greater clarity and certainty about long-term planning. It will be an emergent process, to ensure that it is improved on.
Baroness Noakes (Con)
I put it to the Minister that this clause has no specificity around it: no ability for the Treasury to agree the format or content of a five-year plan; no requirement for consultation; and no requirement for the involvement of parliamentary committees. We are being asked to give a blank check with these rather vague requirements. There are words in the Explanatory Notes about the Government expecting these to be “high level”, which is why I asked for the Minister’s reflections on what is clearly a very high-level document from the FCA. I am not getting any sense of what is likely to come out as a response to that.
Linked to that is my second question. I asked earlier what the Minister’s response would be to the question of whether annual plans were required. At the moment, both regulators produce annual plans for what they will do in the year, which provide a very rich source of information for the regulated community on what they can expect. If we are to have those levels of detail, it may not matter at all if an airy-fairy five-year strategy document is produced, full of drawings, pictures and stuff like that. If, however, we will not have anything else, and if the Bill takes out the one existing requirement on the PRA to produce annual plans, then we have a problem.
Lord Stockwood (Lab)
I can clarify that an annual plan is required and will still be required. Let me write to the noble Baroness to confirm that.
Baroness Noakes (Con)
Can I conclude my remarks with a plea to the Minister? He has taken away a number of issues arising from this debate, on which he will be writing one big letter or several medium-sized ones. It is normal, when something as contentious as this arises, for all Members of the Committee to be copied in on any such letters, not simply the one noble Lord who raised a specific query.
Lord Massey of Hampstead (Con)
May I ask the Minister for a clarification? In his answer to the question about not having consultation in the Bill itself, I think he said that the FCA would engage with firms but that he did not want this in statute. Do I understand that correctly?
Lord Stockwood (Lab)
The sense is that it creates an administrative burden. We are trying to cut down on regulation as part of trying to accelerate growth, and we believe that that is the right balance.
Baroness Noakes (Con)
Do we not want to reduce regulation on regulated firms, rather than regulators?
Lord Ashcombe (Con)
My Lords, what an interesting debate this turned out to be. There are a number of flaws, which have been extremely well demonstrated by all noble Lords on this side of the Room. I thank the Minister for his answer to my question. I am also extremely grateful to my noble friend Lady Noakes for improving my amendment significantly by talking about annual plans, which is quite correct. However, it is imperative that we continue to have parliamentary oversight of the regulators. From the discussion we have had this afternoon, there is no doubt that this clause still has a number of legs in it, and the horse race will continue for some time. I am sure we look forward to coming back to this on Report but, with that, I beg leave to withdraw my amendment.
Baroness Noakes
“Review of regulatory principles(1) Within 12 months of this Act coming into force, the Treasury must carry out a review of the regulatory principles in section 3B(1) of the Financial Services and Markets Act 2000.(2) The review must in particular consider whether—(a) the regulatory principles duplicate other requirements in the Financial Services and Markets Act 2000 or elsewhere, or(b) are no longer required.(3) The review may make recommendations as to whether section 3B(1) needs to be amended or whether there are other mechanisms which can achieve the same result.(4) The review must be laid before each House of Parliament.”Member’s explanatory statement
This amendment calls for a review of the regulatory principles in section 3B(1) of FSMA.
Baroness Noakes (Con)
My Lords, Amendment 77 calls for a review of the regulatory principles in Section 3B of FSMA 2000. I am grateful to the noble Lord, Lord Vaux, for adding his name to it. My amendment calls for the Treasury to review the regulatory principles and, in particular, identify those that are duplicated or no longer required. As we have already discussed in outline and will discuss further in a later group next week, FSMA currently requires the FCA and PRA to have regard to the regulatory principles in their general functions, but Clause 17 downgrades this by confining them to the new five-year strategy documents.
When your Lordships’ Financial Services Regulation Committee reported last year on the secondary competitiveness and growth objectives for the PRA and the FCA, it took eight pages of our report to describe the web of objectives, principles and “have regards” that the regulators have to live with. In fact, the eight pages covered only some of the “have regards”. The FCA told us that it had around 80 “have regards”, on top of the Chancellor’s remit letters and the regulatory principles themselves. The PRA said that its number was 25. My Amendment 77 should probably have required a review of all the “have regards”, and if I bring it back on Report I may well extend it to that.
In Committee, my amendment is focused on the regulatory principles, because, via Clause 17, these have become a contentious part of the Bill. There are currently eight regulatory principles in Section 3B, plus a vestigial reference to a ninth, and they include some very significant ones, such as proportionality, which we will also be discussing later in Committee. There were seven in the first iteration of FSMA, but they have been changed many times over the years and only three of the current principles directly read across to the original list—namely, efficiency and economy, proportionality and consumer responsibility—which suggests that not all the Section 3B principles are enduring in nature. We should expect the regulatory principles to represent the essential elements of how regulation should operate in practice and have some form of enduring quality. It is relatively clear that Section 3B of FSMA does not meet that test.
Lord Vaux of Harrowden (CB)
My Lords, I hope to keep the noble Lord, Lord Wilson, happy by being very brief. One of the things that came out of the committee’s report was the proliferation of principles and “have regards”, et cetera. It is ripe for a review and an overhaul, and I agree with the noble Baroness, Lady Noakes.
Baroness Kramer (LD)
My Lords, I very much suspect that the noble Baroness, Lady Noakes, and I would find significant differences in our ideal list of the regulatory principles in Section 3B(1) of FSMA. I will argue in the next group for a “have regard” to the risks of the private credit market to financial stability. In group 8, my colleagues will argue for a “have regard” on sustainability and in group 10 for a “have regard” on financial inclusion.
These are all probing amendments, but they reflect the need for principles to be reviewed, debated and potentially changed by Parliament, so that a review would have input from the regulators and from the Government, but the final decision would rest with Parliament, as it has always done in primary legislation.
To pick up one of the issues that the noble Baroness, Lady Noakes, made about durability, constant churn is unacceptable and would leave the regulators and the financial sector in confusion, and none of us wishes for that. But I think that on the whole, we can look back and say that Parliament has behaved responsibly. Not everybody likes all the principles, but the financial system and the regulators have not had difficulty in delivering, or considering and making sure it is having regard to, those particular principles, particularly when financial stability is at stake.
To me, what underlies all this is the democratic process. I do not believe that principles can be abdicated to a regulator, which is what happens with the Bill—they go off into the long-term strategy. I believe this is for Parliament, and I would very much always support a review. Parliament has that right and that responsibility.
Some of us rather suspect that the removal of the principles to the five-year strategy has been to provide a covert way to diminish the climate change principles. The noble Baroness, Lady Noakes, whom I respect, would move them through the front door, but for many of us there is a strong suspicion that this is removing them through the back door so that the Government do not get the opprobrium that would follow from groups that are concerned about net zero and climate change. Some in the financial services sector are actually very dedicated to achieving climate change targets, but there are also plenty of voices that regard every climate change target and every net zero as a cost and a regulatory burden, and it seems to me that those voices have had very strong sway with the Government.
I suspect, frankly, that we would never have had climate change in among the principles had it not been for Mark Carney, and I very much doubt they will survive in any substance as part of the long-term strategy unless there is something of a volte- face in attitudes as we keep going through very extreme weather conditions and it becomes apparent that there is a huge financial cost and a huge risk to financial stability from the extreme weather conditions and the consequence damage to our overall economic circumstances.
As I say, if the Government wish to change the principles, they should do it through the front door in the way that the noble Baroness, Lady Noakes, proposes: raise the issues, tell Parliament that they wish to make changes and argue in favour of those changes. But that is a fundamentally different approach from taking principles, which I suspect they dislike, and moving them to a long-term strategy so that they will, over time, dwindle but without visibility or any parliamentary input.
Lord Altrincham (Con)
My Lords, this is a welcome amendment because it raises important questions about the structure of our regulatory framework and in particular about whether the regulatory principle set out in Section 3B of FSMA—the eight principles—remain coherent, useful and properly calibrated to the circumstances in which we now find ourselves.
Over time, FSMA has accumulated objectives, secondary objectives, regulatory principles, “have regard” duties, reporting requirements and consultation obligations. Some of those are individually sensible and many were introduced for good reasons, but taken together, there is a real risk of regulatory layering. Duties and principles are added and new obligations are placed on regulators, but very little is ever taken away. The result is a framework that is increasingly complex and it is not always clear which duties genuinely drive regulatory behaviour and which simply sit on the statute book without translating into meaningful change.
The amendment asks the Treasury to review whether those principles are duplicative or remain necessary, and whether the framework could be simplified or improved. There is also a wider question, which was raised by the Financial Services Regulation Committee in its report last year, about whether these sorts of duties actually translate into anything meaningful in practice. It is one thing for Parliament to place a duty on a regulator to have regard to a particular principle or consideration—as my noble friend Lady Noakes mentioned, that is exactly what the Leeds reforms are trying to streamline—but quite another for that duty to shape decisions in a clear, measurable and accountable way.
Needless complexity matters for firms as well as for regulators. A complicated regulatory framework does not stay confined to the regulator; it filters down into consultations, supervisory expectations, compliance systems, legal advice and business decisions. If the statutory framework is unclear or duplicative, the burden ultimately falls on the firms that have to comply with it. At a time when we are asking financial services to support growth, investment and competitiveness, we should be especially alert to unnecessary regulatory complexity. The UK’s high regulatory standards are not in question, but there is a question as to whether the framework through which those standards are delivered is as clear, efficient and proportionate as it can be.
I therefore hope that the Minister will engage constructively with the amendment. I would be grateful if he could explain how far the principles have already been reviewed in preparation for this Bill, in the light of the comments from the Financial Services Regulation Committee. Do the Government accept that the accumulation of regulatory principles and duties can create complexity, and do they believe that the existing Section 3B principles remain fit for purpose? This amendment raises a valuable point; I look forward to hearing the Minister’s response.
Lord Stockwood (Lab)
My Lords, I am grateful to noble Lords for their thoughtful contributions to this debate. This clearly animates a lot of discussion. I particularly acknowledge the noble Baroness, Lady Noakes, and the work of the Financial Services Regulation Committee in effectively scrutinising the work of the regulators. It is important work, and we intend through this process to support that and not diminish it in any way. As was clear from those contributions at Second Reading, noble Lords place a strong emphasis on getting the regulatory principles right. The Government also take this matter very seriously.
Amendment 77 would require the Treasury to carry out and lay before Parliament a review of the regulatory principles in Section 3B(1) of FSMA. I am sympathetic to efforts to streamline the process of making regulation and to giving regulators a clear and manageable set of issues on which to focus. However, the Government have already considered this question and have carried out a review of the regulatory principles, as well as the other “have regard” provisions mentioned by the noble Baroness, Lady Noakes. The Government committed to this review in the Regulation Action Plan published in March 2025, and carried out the review with a view to identifying opportunities to rationalise those principles.
As a result of that review, the Government concluded that each of the regulatory principles in the Financial Services and Markets Act 2000 is individually important; that they do not materially overlap with each other or with other requirements set out in legislation; and that they play an important role in providing transparency and supporting the Government and Parliament’s oversight of the regulators. However, the Government also found that the “have regard” provisions can reduce regulators’ ability to act strategically and with a clear focus.
Currently, the way that the principles operate results in the production of large volumes of information that do little to support effective overall scrutiny of a regulator’s performance. The Government have drafted the measures in this Bill with a view to rationalising how the regulators take these regulatory principles into account, without amending the principles themselves. We recognise that this is an area where there is significant interest; issues related to this amendment will continue to be debated during the passage of the Bill, when there will be an opportunity to discuss this area in greater detail. A further statutory review, beginning after Royal Assent, would duplicate the work that the Government have already undertaken.
I will come back to noble Lords’ specific questions in writing if I do not cover them later in the debate. I ask the noble Baroness to withdraw her amendment.
Baroness Noakes (Con)
My Lords, I thank noble Lords for taking part in this brief debate on what is, I think, an important area.
The Minister said that the Government have already reviewed the regulatory principles and found them to be absolutely fine. I find that quite remarkable, given that they clearly duplicate other requirements and that some are, frankly, almost incomprehensible; they have grown up over the years in various ways. As the Minister knows, the burden on my remarks was on the proliferation of have regards and not just the regulatory principles, which we will be debating in the context of the Government’s clear desire to downgrade the way in which they operate and to reduce the ability of Parliament to hold the regulators to account. We will return to that issue.
This is an important area for the Government to look at again. They say that they have reviewed all the have regards—there are many of them throughout FSMA—but I cannot believe that they have concluded that no change to the legislation is required. It beggars belief, because the have regards clearly overlap in some areas and are restated in others. I continue to believe that a proper review should be undertaken. I will remind myself of what the Government’s so-called review has already found, because I am not sure that I remember the details of it at the moment—I will check up on it between now and Report—but, as I indicated earlier, I may well return to this theme on Report, if not with this specific amendment. With that, I beg leave to withdraw the amendment.
Baroness Kramer
“(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), at the end insert—“(i) the need to consider—(i) the interconnections between private credit vehicles and PRA-authorised banks, insurance companies and pension fund, and(ii) the limitations of the FCA’s regulatory perimeter in managing the interconnection between private credit vehicles and non-regulated financial organisations.””Member’s explanatory statement
This probing amendment would replace the removal of the regulatory-principles duties in Clause 17 with a new “have regard” to risks to financial stability arising from the interconnection of private credit markets with banks, insurers and pension funds, as well as with non-regulated institutions.
Baroness Kramer (LD)
My Lords, this is very much a probing amendment, but I thought that we ought to raise this issue; the Bill seemed an appropriate place to do so. Frankly, it is an issue on which we have hardly touched in Parliament.
Private credit markets are a phenomenon that has surged since the crash of 2008. Market-based finance accounts for around half of the UK and global financial sector assets, according to the Bank of England. Global private market assets were estimated at $18 trillion in 2025. As Sarah Breeden, a deputy Governor of the Bank of England, said in a speech made this year:
“They have not yet been tested, at that scale and complexity, by a broad based macroeconomic shock in a higher rate environment”.
At the same time, public debt is close to post-war highs, not just in the UK but globally, making it more difficult to respond to any financial shocks.
People sometimes see the private credit sector as distinct from other parts of finance. In the UK, the banking sector has lent to private credit funds at a scale to provide them with liquidity, with pretty much no transparency to evaluate the quality of funds. There is clearly co-investing and interconnections through derivatives. I cannot find good data to work out where the exposure lies, but there have been enough articles raising warning signs to convince me that there is something serious here that must be looked at.
UK pension funds have invested heavily in private assets. The Universities Superannuation Scheme has £7.8 billion in private credit exposure. Institutional providers such as TPT Investment Management have launched schemes specially for the use of UK pension schemes, and the Mansion House Accord encourages even more investment into these private markets. As I listened to the Pensions Minister during the passage of the then Pension Schemes Bill, I heard what sounded like claims that these private assets are high-return, low-risk assets and perfect for pensioners with very little savings. It is because of such a naive understanding of private credit, among other things, that that Bill was so important. That is why protecting the fiduciary duty of pension trustees dominated its passage; the noble Baroness, Lady Noakes, and my noble friend Lady Bowles were instrumental in making sure that that fiduciary duty remained primary.
The insurance companies are deep into this, too. According to the Bank of England, in evidence given to the Lords Financial Services Regulation Committee:
“The interconnections between private markets and the life insurance sector have grown considerably, with analysis by the IMF … showing that approximately 35% of assets held by US life insurers and approximately 23% of those held by UK life insurers were allocated to private credit”.
It is clear that if the private credit market goes wrong, it goes wrong for the whole financial sector. It is not an exaggerated fear: the sector has serious liquidity issues. Anyone who picks up a newspaper can see that firms such as Blackstone, Oaktree, Apollo and Morgan Stanley, to name but a few, are now limiting or refusing redemptions. We cannot ignore the canary in the coal mine.
The Lords FSR Committee published a report on this sector in January, entitled Private Markets: Unknown Unknowns. At the end of that process—I give some credit to the committee—the Bank of England announced that it would conduct a system-wide exploratory scenario that will involve the banks, insurers, private equity companies and pension fund investors, but on a voluntary basis. It will report in 2027. The committee is to be commended for focusing on the issues in this sector, but I do not think that this satisfies a reasonable standard of parliamentary scrutiny or reflects a parliamentary responsibility to the public to make sure that we avoid another major financial crash. Therefore, my amendment is designed simply to put pressure on the Bank of England in order to get proper answers. I am still disturbed that it thinks it will do so only on a voluntary basis. I hope that the Bill as a whole can be amended to restore proper democratic oversight, and then Parliament could engage with finding a solution. One of the reasons so few people in both Houses are aware of the concerns about the issue is that there is virtually no vehicle for a debate, for consideration and for action.
The second part of my Amendment 78 addresses a problem that I have never heard widely discussed. If the private credit market goes bad—and the banks, because they are entangled with that market, begin to divest loans—what happens to small businesses dependent on bank credit? We saw this behaviour in 2008. After the crash, banks continued to fund the big companies but found every way possible—many of them legal but I would consider unethical—to call in loans to small companies. In loan agreements that were being paid in full and on time, there would be a covenant somewhere in the documents that said that if loan-to-property values fell below a certain level, the loan could be called. I am pretty sure that the small business never really thought that that was a significant paragraph in its loan agreement, but it proved the trigger and we saw basically every major bank exercise it.
The FCA refused to act and has always held the line that the regulatory perimeter means that it cannot offer protection to small businesses and that, instead, caveat emptor applies. To me, this is untenable in the complex world of finance that we have today. I want the regulators to take a proper look at the whole issue of the regulatory perimeter, if we are to go into a cycle of financial shocks.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a great pleasure to follow the noble Baroness, Lady Kramer, on what may be the most important amendment that we will discuss in Committee, and I hope we might discuss it on Report as well. As she said, there is a huge lack of discussion of this issue in Parliament, whereas if you go to the pages of the Financial Times, for example, you will see, pretty well every day, alarming reports and strong headlines expressing concern about the issue. I am aware that we are operating under heatwave conditions, as is the rest of the nation. As with our credit system, we have all been puffed up by a lot of hot air, much of which has indeed been financed by our financial system, so I will be quite brief, but I want to pick up a couple of points that the noble Baroness made.
The powerful argument about a voluntary engagement with the stress test is just laughable—with a sick kind of laugh. We know what voluntary regulation has done in so many different areas of our business sectors, and that is not the way to go forward. The noble Baroness also talked about pension funds, particularly about investing in private credit and the grave concerns that it raises. There is quite a bit of research that indicates that the people profiting from this are the managers and companies, and pension funds are getting the same or lower returns as they are from other investments.
The most useful way I thought I could add to this was to go through the Financial Times private credit headlines for this month alone. I will give a representative selection of them. The first is:
“Are insurers becoming dangerously addicted to private credit ratings?”
It is a question-mark headline, to which the answer is clearly given as “yes” in the article. Here are some of the others:
“Apollo’s flagship private credit fund hit by 17% redemption requests”,
“BlackRock private credit fund honours less than 40% of redemption requests”,
“Partners Group limits withdrawals at private equity fund for wealthy individuals”,
and
“Cliffwater’s flagship private credit fund redemption requests hit 17%”.
Rather than expound at length, I refer noble Lords to a single book: This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff.
There is no reason to think that what we are doing now will be different from where we have been before. Private credit is a new structure of a very familiar form, and we have seen what happens with these new financial-engineering structures. The noble Baroness is doing an important job here of at least starting a discussion on this. That discussion should be held at much greater length in the main Chamber, and its subject should worry us all.
Baroness Noakes (Con)
My Lords, the noble Baroness, Lady Kramer, was kind enough to refer to the committee I chair. I will offer a few comments on this area.
First, in line with what I said on the previous group of amendments, I do not believe that this is a regulatory principle in any real sense. It is certainly not one directed just at the PRA and the FCA; for example, the system-wide exploratory scenario, which the noble Baroness referred to, is being undertaken by the financial stability arm of the Bank. She referred to Sarah Breeden—that is her area, and she is not in the PRA or the FCA.
The noble Baroness, Lady Bennett of Manor Castle, read out some headlines from the Financial Times. She is right that there is a lot of noise around private credit. It is all based in the United States at the moment. It is often said that what starts in America comes to the UK, but there are a lot of differences between what has happened in the US, including what has gone seriously wrong, and what has happened here. It is encouraging that the Bank of England has taken the initiative to carry out the system-wide exploratory stress scenario—it is the only central bank in the world to do so.
There was criticism that this was voluntary, and that is because the players in the private credit market are not regulated organisations and so they have no obligation under existing law to provide information. However, it is my understanding that the degree of involvement of the organisations taking part that are not directly regulated by the PRA or the FCA—or are not involved in the activities we are discussing—has been satisfactory.
One thing I considered tabling for this Committee was the question of whether the Bank of England has sufficient powers to get the information from the non-regulated sector if it needed to do so. I would be grateful if the Minister could reflect on that question. All the time the information is being adequately obtained voluntarily, I do not see any need to legislate for it; I am just not aware of whether there is a backstop power, and I ran out of brain power for drafting an amendment to find out about that. I am grateful to the noble Baroness for giving me a cue to raise this issue.
A lot of issues arise in relation to the impact of private credit on the existing regulated organisations—banks and insurance companies—but it is also fair to say that, although there is not complete transparency on what the second-order impact would be if there was a stress in this situation, there is a lot of awareness and supervisory engagement with the key players, as was explained to us during the conduct of the inquiry that my committee undertook. The committee did not find such a scary situation as has been portrayed by other Members of the Committee this afternoon.
Lord Altrincham (Con)
My Lords, this amendment raises an important question around private credit and how our regulatory framework should respond to emerging risks in modern financial markets. I look forward to the Minister’s tactful comments on this amendment, given that the noble Baroness, Lady Kramer, spoke so well in favour of private credit in our debate on the fifth group on our first day in Committee. Here we are with the problems of private credit on our second day in Committee. The Minister will be extraordinarily tactful in handling that.
We will have a wider debate on Clause 17 and the regulatory principles in future groups, but this amendment touches on some of those broader questions. The specific issue raised here—private credit—is an important and timely one. Private credit has grown considerably as a feature of modern financial markets; it has, in fact, grown partly as a consequence of regulation. We are dealing now with regulation of a consequence of regulation as the markets have evolved. It can provide an important source of finance outside traditional banking channels, supporting businesses that need capital to invest, develop and grow. For that reason, we should be careful not to respond to its expansion in a way that unnecessarily restricts access to safe and productive credit; indeed, the Financial Services Regulation Committee concluded in its report earlier this year that private credit has developed rapidly and plays a useful economic role.
That is particularly important at a time when we want firms to invest, expand and access the finance they need. We should not create a regulatory environment in which the answer to every emerging market development is simply more regulation without proper regard to the consequences. Indeed, the Government have been keen to support private equity through greater investment from assets such as pension funds in the UK. If they want this sector to continue developing, they must ensure that regulation supports, rather than restricts, access to credit for consumers who choose to use these products.
At the same time, it is right to recognise that financial markets do not stand still. The system changes over time, and the regulatory framework must remain alert to those changes. Areas such as private credit, non-bank finance, digital finance and other fast-moving parts of the system demonstrate the need for regulation that reflects the market as it is developing, not simply the market as it looked when earlier legislation was drafted.
The key point, therefore, is one of balance. We need a market that is dynamic, innovative and capable of providing finance to the businesses on which growth depends, but we also need a regulatory framework that is sufficiently up to date to understand and monitor emerging risks. We should keep in mind, though, that risk can never be eliminated entirely. The role of regulation should be not to remove all risk from the system but to ensure that risks are properly understood, proportionately managed and developed with an eye to supporting economic development and growth.
For those reasons, we will listen carefully to the Minister’s response.
Lord Stockwood (Lab)
My Lords, I welcome the focus of the noble Baroness, Lady Kramer, on the vulnerabilities in the private credit system.
Although the Government are clear that the growth of private credit has brought benefits to the real economy, we and the financial regulators are very conscious of the potential vulnerabilities in this sector. Just last month, the Chancellor and the Governor of the Bank of England joined their fellow G7 Finance Ministers and European Central Bank governors in agreeing that potential risks in the private credit ecosystem call for continued monitoring, including that of the interconnections with banks and insurers.
The amendment from the noble Baroness, Lady Kramer, would require the PRA and the FCA to consider private credit’s interactions with the wider financial system in all cases where the regulatory principles are engaged, or else their decision-making could be unlawful. I assure her that the regulators are already working to understand these vulnerabilities deeply and to address them where necessary. This work does not require placing additional duties on the regulators.
I will highlight the existing work of those regulators. First, the Bank of England’s Financial Policy Committee has been focused on the risks of private markets for many years, and the Chancellor’s most recent remit letter to the FPC asks that that work continues. I specifically note the Bank’s system-wide exploratory scenario on private markets, the SWES—as if we needed another acronym. It is examining how a stress scenario could affect the UK’s private markets ecosystem and interconnected banks, insurers and pension funds, with significant participation across the industry. The UK’s system-wide regulator, the Bank of England’s Financial Policy Committee, is the right authority to carry out this work, and its findings will be laid before Parliament when it is complete.
For its part, the FCA also maintains a close focus on these risks, including in its firm-level supervision. Where specific issues are identified, targeted interventions follow. We also welcome the FCA’s work to improve the visibility of risks and data availability through its reviews of the alternative investment fund managers directive framework, and its efforts to raise standards on conflicts of interest, valuation practices and risk management.
I note the noble Baroness’s concerns about the FCA’s regulatory perimeter, but I emphasise that the marketing of funds in the UK is indeed subject to UK regulatory requirements, protecting UK investors. Further, the PRA continues to assess and mitigate risks from private markets to the banks and insurers it regulates. This includes its 2024 thematic review of private equity-related financing activities with banks.
Finally, given the cross-border nature of the private credit ecosystem, the Bank and the FCA are actively engaged in international work, including at the Financial Stability Board, which is chaired by the Governor of the Bank of England. The Government believe that, under our regulatory framework, vulnerabilities in private credit are being understood and addressed where needed, but there is of course much room to improve. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Kramer (LD)
My Lords, I will of course withdraw this amendment, but I wanted to get this issue on the agenda, and we need to continue to do so. I say to the Government: do not be complacent in this situation. A few weeks before the crash in 2008, everybody in government would have told you how well the financial sector was functioning. Being a cynic can be quite helpful.
I am particularly concerned about the impact on small businesses when we run into the next financial shock, because there will be one. That regulatory perimeter is a serious issue that the Government should be looking at. I do not know whether you can get the regulators to look at it voluntarily. As far as they are concerned, you go to Parliament only to explain; it is not where you take instruction. I am concerned about these issues. I look forward to the amendment in the name of the noble Baroness, Lady Noakes, on private credit, which will come later. With that, I beg leave to withdraw my amendment.
Baroness Kramer
“(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), at the end insert—“(i) the need to assess the impact on the taxpayer of any provision of backstop arrangements by the Bank of England to private stablecoin.””Member’s explanatory statement
This probing amendment would replace the removal of the regulatory-principles duties in Clause 17 with a new “have regard” to the risks to taxpayers should the Bank of England provide a liquidity backstop to private stablecoin.
Baroness Kramer (LD)
My Lords, here I am again with another issue that I want to raise. It does not necessarily look like it, but this is another constitutional amendment. Digital money and stablecoin are coming. As I have said in the House before, I am not King Cnut but I am concerned that both the industry and the regulators treat stablecoin as merely a change in plumbing in the payments system. I understand the desire for the UK to be an attractive place for stablecoin companies and the need to build a substantial sterling stablecoin sector. What concerns me is that, at scale, it has huge consequences for the taxpayer to carry the liabilities, and it determines who has their hands on the levers of economic power. I will not pursue that last issue; it would take about 10 minutes and the Committee is beyond coping with that.
In October, the FCA will publish regulations for the non-systemic stablecoin players but, on Monday, the Bank of England launched its policy statement and draft rules for systemic stablecoin. The document is clearly a loosening of rules previously under discussion, but my attention was grabbed by the Bank’s confirmation that it will introduce a central bank liquidity facility for systemic stablecoin. In other words, if there is a run on stablecoin, the taxpayer is on the hook. It is true that liquidity facilities are offered to the banks but to extend this to stablecoin is a major decision. I am not saying that it is right or wrong, but a decision on this scale, with the liabilities that are consequent, is above the pay grade of the regulator. This should be a decision in which Parliament is fully engaged. I beg to move.
Baroness Noakes (Con)
My Lords, the Financial Services Regulation Committee has also been looking at stablecoin, so I have a few words to say on the topic.
I go back to my earlier point: this is not a regulatory principle that can be applied by the FCA and the PRA. It has very little to do with them, as it is the financial stability part of the Bank of England that has issued the policy. The backstop is just one part of the arrangements, as the noble Baroness, Lady Kramer, will be aware. A very significant part of the assets of stablecoin issuers also need to be held in unremunerated form at the Bank of England—30%, which is a significant amount of money. If the noble Baroness is worried about the cost to the taxpayer, she might also reflect on the gain to the taxpayer for all the time that there is not a crisis because the Bank of England has access to free money, which is part of the whole deal.
The stablecoin package needs to be looked at as a whole, rather than one small part of it being picked out. The noble Baroness may still disagree with it, but it is a calibrated package which balances the risks, including keeping one-to-one asset backing, which will also go a long way to allaying her concerns.
Baroness Neville-Rolfe (Con)
I agree with the noble Baroness, Lady Kramer, that digital assets are a serious issue and that they deserve proper scrutiny. We come at it from a slightly different perspective. I note the point made by my noble friend Lady Noakes that this is not a matter for regulatory principles.
This week, as we have heard, the Bank of England published its final policy statement and draft code of practice for sterling-denominated systemic stablecoins. This may go some way to supporting institutional scale-up, but we are concerned by the general reaction, which has been that the fundamentals have not changed and that the prevailing regime we are left with could still leave UK issuers less attractive internationally.
We are very grateful for the work of the Financial Services Regulation Committee, under my noble friend Lady Noakes, with the help of her very distinguished committee. Yet again, it features in almost every part of this Bill. Its report, Stablecoins: Waiting for Regulation, makes it clear that the UK, in its view, is lagging behind the US and EU on stablecoin regulation. Stablecoins and other forms of digital money are no longer simply niche products or theoretical innovations; they have the potential to become part of the wider payments and financial infrastructure.
The danger now is that we risk creating, or at least allowing to persist, a regulatory grey zone. Firms need clarity on the duties, expectations and requirements that they will have to meet. That is why we are calling for a much clearer digital asset strategy from the Government. We need Ministers to take a position of leadership in this area. It is not enough to simply respond to developments as they arise in different parts of the digital stratosphere. We have tabled amendments alongside the noble Lord, Lord Ranger, who is somewhat expert in this area and is not here today, to probe the Government on the wider question of digital assets and digital finance strategy. We will come to those amendments in a later group. I do not want to pre-empt that debate now—not at this late hour, with so few people in Committee on such a hot day.
This amendment touches on the same underlying point: that the Government need to provide clarity and certainty. They need to provide leadership, whatever that is. I would be grateful if the Minister can briefly explain the Government’s position on stablecoins, and— in response to the point that the noble Baroness, Lady Kramer, has rightly raised—explain how stablecoins will help growth and competitiveness.
Lord Stockwood (Lab)
Amendment 79 would require the FCA and PRA to assess the impact on the taxpayer of any provision of backstop arrangements by the Bank of England to private stablecoin when exercising their general functions. I support the noble Baroness’s goal of ensuring that all government and Bank of England activity provides good value for the taxpayer. The Bank of England already has a duty, established in the joint memorandum of understanding with HMT, to
“ensure value for money by minimising financial costs and risks to its capital”.
Baroness Kramer (LD)
At this hour, the only thing to do is to withdraw the amendment. I thank the Committee.
Financial Services and Markets Bill [HL]
Monday 29th June 2026
(4 weeks ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-III(a) Amendments for Grand Committee (Supplementary to the Third Marshalled List) - (29 Jun 2026)
Baroness Northover
“(2) In section 3B (regulatory principles to be applied to both regulators), in subsection (1), at end insert—“(i) the need to consider climate risk;(j) the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term.””
Baroness Northover (LD)
My Lords, in moving Amendment 80 I shall also speak to Amendment 103. My name is also on Amendment 140, and I have no doubt that the noble Baroness, Lady Hayman, will expertly present that. I also support the other amendments in this group.
We experienced, of course, the most extraordinary heatwave last week, made so much more intense because our climate has already changed. It is now anticipated that we will never return to pre-industrial levels, yet, we have gone backwards on climate change and climate risk in this Bill. The Government may say that they have not, and that they want to ensure that the regulators are flexible in how they can tackle this challenge, but Clause 17 strips out all sorts of accountability arrangements in a number of areas. My noble friend Lady Bowles rightly argues that it simply should not stand part of the Bill.
The noble Baroness, Lady Noakes, said on day one in Committee that she concluded that in the Financial Services Act 2023, we failed to understand what the lack of EU oversight, as passed into UK law,
“meant for democratic oversight of what the regulators do with the powers that they acquire. We also failed to appreciate the scale of the task of holding the regulators to account.””.—[Official Report, 22/6/26; cols. GC 193-4.]
This has to be a major cause for concern to us across the broad range of powers we are passing to the regulators, especially as we do not even know what new rules will be drawn up for them. As my noble friend Lady Bowles said, again on the first day of Committee:
“Our system is not to delegate unconstrained power to regulators. Parliament sets the framework, regulators operate within it and, when necessary, the court interprets.””.—[Official Report, 22/6/26; col. GC 197.]
I know there will be a number of objections to what Clause 17 seeks to do, but in this group, we focus on the steps backwards that this represents in terms of climate risk, climate change and nature loss. I am extremely grateful to my noble friend Lady Kramer, who directed me towards the relevant page in an absolutely enormous tome which details the Financial Services and Markets Act 2000, with all the subsequent amendments, so that I could see exactly what Clause 17 does. If you simply read the Bill or the Explanatory Notes, you would never quite know what was being deleted. Knocking out the regulatory principles eliminates the explicit reference to the desirability of sustainable growth in the UK economy in the medium to long term, and the need to contribute to achieving compliance with the Climate Change Act 2008, on net-zero emissions, and with Section 5 of the Environment Act, on environmental targets.
I am sure the Minister will say that when the rules are drawn up, or when the regulators work out their strategies, they are bound to look at climate risk, for example. But as the earlier debates on this Bill have shown, we are removing protections that were in place and handing them to the regulator, when regulators are so often found lacking. That is why I put down Amendment 80, and I am very grateful to the right reverend Prelate the Bishop of Manchester and the noble Baroness, Lady Griffin, for their support on this amendment.
Our concern here is to reinsert the desirability of sustainable growth in the economy of the UK in the medium and long term, something we managed to get into the 2023 Act. Of course we should be doing this. These are the industries of the future, and that is what we need to do if we are not to drive climate change further, but we have added climate risk. As I mentioned at Second Reading, we know that a lax attitude to regulation helped to bring about the financial crash of 2008 with all its economic, political and social consequences; so, it is all very well saying that of course the regulators will do this, but we know that that is not necessarily so. Climate change is a current and future risk to the financial sector over both the short and long term. Therefore, we should be strengthening, not weakening, the regulations here.
This comes across very clearly from the report of the Adaptation Committee of the Climate Change Committee. The priority risks in the UK are intensifying heat, growing flood risk and rising drought and wildfire risk. The risk to the insurance industry is obvious. There is a report in today’s Times on subsidence and the likely increase in its incidence. It points out that the summer of 2025 was
“Britain’s hottest on record and also its most expensive for homeowners: insurance companies paid out £307 million for subsidence claims over the year, the highest ever amount, according to the Association of British Insurers”’
Moreover, many insurers are now becoming so risk-averse that they no longer cover subsidence, so that leaves the poor home owners on the hook. The Adaptation Committee points out that flood-related insurance claims are rising and that home insurers have paid out more in claims than they received in premiums for the five years to 2024. It notes that this will put stress on the financial sector as banks face higher default rates on mortgages and business loans, and this will then affect the housing market, just as happened with subprime mortgages. As the report states:
“Actions by FIs are needed to ensure that physical climate risks don’t disrupt the financial system”.
Therefore, it becomes vital that we ask the regulators to assess for climate risk. This should be in the Bill as this issue, sadly, is not going to go away.
For this reason, in Amendment 103—I thank the noble Baroness, Lady Griffin, for her support— we propose that the regulators make annual reports to the Treasury on how they have upheld their climate risk and environmental principles. The reports must explain what action they have taken to ensure that climate risk is embedded in their operations, processes and decision-making, and what rules and guidance they have therefore promulgated. The way this is done takes as its template the proposals in Clause 20. Moreover, it should not be just a matter of “having regard” to these issues; it should be informing their day-to-day work, due to the negative impacts already being witnessed on price stability, financial stability, market functioning and growth.
As I have said, I also support the other amendments in the group—which will be fully explained by others—to ensure that UK-related financial institutions develop and implement credible transition plans, as well as those in the name of my noble friend Lady Sheehan. I beg to move.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise to speak to Amendments 83B and 86A, which appear in my name. It is a pleasure to follow the noble Baroness, Lady Northover, and to agree with a great deal of what she said. It is almost as if in the past week or so, the planet itself has been speaking to us and sending us a message that should direct the Committee’s deliberations on this Bill.
I will restrict myself to my two amendments, in the interests of time. I have been asked to table them by people who are gravely concerned about issues of corruption, dirty money, the “London laundromat” and associated security concerns. These are issues on which I do a considerable amount of work, and that is why I have this focus on this group.
These amendments are related. They seek to add both climate risk and the laundering of criminal gains causing environmental harms to the regulatory principles to which the FCA and PRA must have regard. I can pretty well hear the concerns about to be expressed some time soon about “have regard” amendments, but surely these are things that we have to think about. We have to make sure that we direct the regulators to think about climate and the laundering of criminal proceeds through the City and associated institutions.
I note that the Financial Action Task Force recognises environmental crimes as predicate offences for money laundering. The European Union has strengthened its criminal law framework through the environmental crime directive, requiring member states to publish a national strategy on combating environmental criminal offences by 2027.
Looking around the world, in 2018 the United States Treasury sanctioned the Zhao Wei transnational crime organisation and listed wildlife trafficking as one of the many illicit activities undertaken by the network. In Zambia, the economic and financial crimes division of the high court recently forfeited to the state a vast array of assets associated with a major illegal logging operation. Diplomatic momentum for a fourth protocol under the UN Convention Against Transnational Organized Crime to address crimes against the environment is also advancing, with the support of the UK.
As a global financial centre, the UK has a particular responsibility to ensure that it is not supporting financial and environmental crimes globally and it should play an important role in achieving a stronger global approach. Evidently, however, although environmental crimes are recognised as serious at present, without an explicit recognition of this in the regulatory principles, the FCA and the PRA will not be equipped or directed to respond with the necessary action.
It is important to stress that this is also very much a security issue. There is clear evidence that environmental crime is not only associated with financial and organised crime but with terrorist and armed groups as well. For instance, the proscribed terrorist group al-Shabaab has historically benefited from the illicit charcoal trade in Somalia, with state actors also being complicit. More generally, Interpol has found that the proceeds of environmental crime have become the largest source of income for non-state armed groups and terrorist organisations. Without sufficient regulatory framework, the UK could be contributing to these very dangerous, deadly, human rights-abusing forces around the world.
So much of what is happening in the world is criminal. Between 2013 and 2019, about 69% of tropical forest agro-conversion was conducted in violation of national laws and regulations. This, of course, is also associated with human rights abuses. Perhaps this is sometimes less considered, but Interpol says that illegal mining generates up to $48 billion annually, frequently breaching environmental regulations and contributing again to deforestation, pollution, biodiversity loss and harm to local communities.
I have already mentioned illegal wildlife products. Interpol found that the black market for those is worth up to $20 billion annually, and up to 100 rangers are killed by poachers each year while protecting wildlife and habitats. It might seem a very long way from the City of London to the ranger desperately trying to protect the wildlife population in a national park in Africa, but those two things are linked. We bear responsibility here. I urge the Government to consider these amendments in order to put this back into the directions for the FCA and the PRA.
Baroness Hayman (CB)
My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett, and to say that I broadly support the action that she is suggesting in Amendment 83B. Organised environmental crime, including illegal deforestation and wildlife crime, is increasingly acknowledged as a major source of illicit finance and money laundering. It is therefore important that the FCA and the PRA have the ability properly to take account of these risks within their existing anti-money laundering framework. I hope that we will get a positive response from the Government on that.
This group of amendments deals with the gaping hole, frankly, in the Bill on nature and climate considerations. I was going to speak more broadly about the importance of taking these into account—I may still do so in our stand part debate on Clause 17—but the noble Baroness, Lay Northover, did the Committee a great service in setting out very clearly, in her opening speech, the issues that we need to address with some urgency.
Baroness Sheehan (LD)
My Lords, first, I apologise for being unable to take part at Second Reading due to other commitments. However, my interest in nature and climate-related issues in previous Bills on financial services and markets is a matter of record. Two amendments in this group are in my name. I thank my co-signatories, the noble Baronesses, Lady Boycott, Lady Young of Old Scone and Lady Coffey, for their support because cross-party support sends an unequivocal message to government that this is not ideological but concerns the health of our environment and the future of our natural world.
I will speak first to Amendment 142 on the Taskforce on Nature-related Financial Disclosures. In essence, it seeks to insert a duty into the Financial Services and Markets Act 2000—FSMA—so that regulators must
“make rules requiring such regulated persons as they consider appropriate to disclose information relating to nature-related dependencies, impacts, risks and opportunities”.
Nature-related dependencies are things from nature on which businesses rely, such as water, soil, pollination and healthy ecosystems. Nature-related impacts are harms or pressures that companies themselves put on nature, such as through land use change, pollution or deforestation.
Clearly, nature is financially material, and nature is under threat. Investors are demanding comparable information on how nature loss, biodiversity, water, land use and similar issues could affect companies and profits. This amendment would deliver just that. It would tell the regulators to write the rules and decide which regulated persons should be in scope, shifting TFND reporting from a mainly voluntary framework towards a mandatory requirement. The Dasgupta review clearly showed us that nature is not an externality but an economic foundation. It is, quite frankly, utterly barmy to degrade the very assets on which markets depend.
Deforestation-driven biodiversity loss and ecosystem collapse are high-level threats to UK national security, according to the Government’s own assessment in their report, Global Biodiversity Loss, Ecosystem Collapse and National Security. Four out of the six ecosystems identified as critical to the UK’s security are forests. I utterly endorse the excellent speech made by the noble Baroness, Lady Young of Old Scone, at Second Reading, in which she said that having
“a stiff gin by your side”—[Official Report, 8/6/26; col. 1190.]
is necessary before reading the report.
Nature loss is no longer an environmental issue. It is a national security and market stability risk, and it must be treated with the urgency it deserves. Climate change is accelerating, as borne out last week by temperature records being broken daily. The measured carbon dioxide levels in the atmosphere serve as the single best real-time signal of whether the world, as a whole, is on track to a safe future. It is currently at 430.52 parts per million. Pre-industrial levels hovered at around 280 parts per million and never went above 300 per million. We are in uncharted territory and we need urgent action. I look forward to the Minister’s response to Amendment 142.
Turning to Amendment 172, I again thank my co-signatories, the noble Baronesses, Lady Boycott, Lady Young of Old Scone and Lady Penn, each of whom has been a consistent and persuasive advocate for regulatory coherence in addressing the urgent challenge of deforestation. This is a crisis with profound implications for the health of our planet and for those who depend on forest ecosystems, particularly indigenous communities, which are both their most effective stewards and, too often, their greatest victims. This amendment would introduce three clear and necessary measures.
First, it would require that within three months of the passage of this Act
“the Secretary of State must lay before Parliament draft regulations under Schedule 17 … of the Environment Act 2021”
concerning the
“use of forest risk commodities in commercial activity”.
This provision addresses the unacceptable delay in bringing into force measures that Parliament has already approved five years ago. Secondly, it would ensure that at the point those regulations are laid,
“the Secretary of State must immediately commence”
the statutory review required under Section 79 of the Financial Services and Markets Act 2023. That review is essential to understanding how financial systems intersect with and potentially drive deforestation risk. Thirdly, the amendment specifies that the regulations must include provision for both “due diligence requirements” and
“reporting obligations for regulated persons”.
The intention is straightforward but critical: to place due diligence and transparency at the centre of the regulatory framework. By making these elements explicit, the amendment would signal Parliament’s clear expectation that businesses will be subject not merely to guidance but to enforceable obligations, both to undertake robust supply-chain checks and to report publicly on their compliance. Furthermore, by aligning the introduction of these regulations with the commencement of the Financial Services and Markets Act review, the amendment would promote better co-ordination across government and ensure that market implications, including those for regulated financial institutions, are considered alongside the development of the regulatory regime itself.
As Sir Ian Cheshire, former chair of Barclays and head of the Global Resources Initiative taskforce, noted in his open letter of 23 January 2023, addressed to the then Minister, the noble Baroness, Lady Penn, the then Economic Secretary to the Treasury and Members of this House, “regulating supply chains alone” is not sufficient. He recommended that the Government should make it unlawful
“for financial institutions to invest in or lend to … companies that are unable to demonstrate forest risk commodities have been produced in compliance with ‘local laws’”.
This amendment seeks in part to address that gap. It reflects the compelling case that it is more effective to require financial institutions to undertake due diligence at the point at which finance is first provided, rather than attempting to remedy harms further downstream.
Although I welcome the Government’s recent announcement that Northern Ireland will follow the EU’s deforestation regulations, due to come into force on 31 December 2026, and their stated ambition to align rules across Great Britain with those requirements, the position remains one of stated intent rather than concrete action. The commitment to consult on new regulations requiring larger businesses to ensure that forest-risk commodities are produced legally in their country of origin is a step forward, but it falls short of providing the firm timelines and enforceable measures that are now very overdue. It is, after all, five years since Parliament set out its expectation that illegal deforestation would be addressed in regulation. In that context, Amendment 172 remains both necessary and timely. I hope the Minister will accept that these measures are necessary now, not tomorrow—whenever tomorrow may be. My colleagues and I from across the House will push hard for that acceptance.
The Lord Bishop of Manchester
My Lords, I, too, support all the amendments in this group, but I will limit my remarks to Amendment 80, to which I have added my name. I note that I appear to be the only man to have signed any of the amendments in this group. I hope that does not mean that climate concern is now becoming divided on gender lines; climate risks are not sex specific. Perhaps I might encourage some other men to rise and support amendments in this group.
We have heard that Clause 17 will remove the requirement that the FCA and the PRA have regard to certain regulatory principles, including those relating to environmental obligations. As the climate crisis grows and public services are forced to adapt to a growing range of climate-related challenges, weakening such regulations is neither environmentally nor economically sustainable. The regulatory principles of the previous Financial Services and Markets Act 2023 were intended to ensure that climate risks were incorporated into regulators’ day-to-day decision-making. I am afraid that the evidence is not very good that they have been sufficiently incorporated in practice.
We have just heard from the noble Baroness, Lady Sheehan, about deforestation. In 2022, a report from the Make My Money Matter campaign found that over 30% of UK pension fund public equity and corporate bond investments were in institutions with a high risk of causing deforestation. When I was chair of the board of the Church Commissioners, I was very proud that it was one of the major investors in sustainable forestry across the world and was constantly seeking to increase our investment in that sector as something that was doing climate good at the same time as making the returns we needed as an investment institution.
Deforestation is already a priority in the Government’s net zero strategy, but weak regulation has enabled the UK financial system to fuel climate destruction directly. If we weaken the existing framework, it will only move us further in the wrong direction. As the climate crisis deepens, we have a responsibility to exercise wise stewardship over our planet to ensure that the consequences of environmental degradation are not simply passed on to future generations. That, for me, is a theological point as much as a practical one. It can be done only if we embed climate and nature implications in financial decision-making at every level.
It is not just an environmental imperative; it is an economic one as well. Climate change presents significant challenges to the Bank of England in meeting its primary objectives of controlling inflation and ensuring financial stability. As we have heard from the Energy and Climate Intelligence Unit, climate change was responsible for a third of the UK’s high street food price inflation in 2023. Meanwhile, the UK recently experienced its worst inflationary crisis in four decades due to the price volatility of fossil fuels bought on the global market. Without action, vulnerable communities, including those in my own diocese of Manchester, will tend to bear the greatest weight of fluctuating prices and economic insecurity. I have just come from the launch earlier today of a new inquiry by the Trussell Trust into the need for food banks and why that, sadly, continues to be a growth area in our community. Why are people finding it harder and harder to afford to feed their households week on week, year on year?
The General Synod of the Church of England has set out ambitious targets for attaining net zero, recognising our responsibilities as God’s stewards of the planet. I note that similar robust targets have been set by the former mayor of Greater Manchester, where much of my diocese lies. I wonder whether the honourable Member for Makerfield will have, and indeed express, a view in the other place. In the meantime, we need to use every lever we have to bring human-made climate change under control—including this Bill. We should not make any legislative changes that act in a contrary manner. What is set out in Amendment 80 would not only remove the deregulatory changes in Clause 17 but strengthen regulatory responsibilities by embedding climate considerations in decision-making and making environmental responsibilities clearer. I hope the Minister will set out how climate risks will remain central to the decisions that regulators make, should this clause remain in the Bill.
Baroness Coffey (Con)
My Lords, I will speak to Amendment 142, which I have signed, and Amendment 172, which I strongly support.
The whole concept of the TNFD follows on from the TCFD, but it has been driven and particularly supported by Defra over the past several years. As such, David Craig, who has been tremendous in promoting the TNFD, has started, just after another session of London Climate Action Week, to share the frustration of many that we already have the ISSB, which has made progress: at its April meeting, I think it agreed a way forward for its IFRS practice statement to start to be included automatically in accounting standards around the world. Indeed, we know that investors are now asking boards what they are doing about understanding their risk if certain things in nature start to change. That is, in effect, what the TNFD is about: it is not saying that you cannot do this, that or the other but about making sure that you think ahead. Why does it matter? Well, nature is at the very heart of the food we eat and pretty much every pharmaceutical we use. That is why it matters to start having this as a regular, ongoing way for the board of every business in this country to think about it.
I appreciate that there have been various difficulties over recent years when it comes to the subject of Amendment 172. I nearly got the regulations through, but then it was held up because of the issue involving Northern Ireland having to follow EU law and the then Administration finally deciding that they did not want, at the time, to try to work out a way for the two to be managed within the United Kingdom. That issue has been ongoing, and I appreciate that the Minister, Mary Creagh, announced a policy paper last week. I think it is fair to share with the Committee that the European Parliament itself voted to delay the implementation of the EUDR—which is about the forest risk commodities—and to start to restrict some of the elements that were being applied. Mary Creagh suggested that we would perhaps go further than our original suggestions on which commodities we would focus on to get these regulations into place.
Why does it matter? In values, the UK is second only to China in the importation of the products—the commodities—that risk deforestation. We took a pragmatic approach in the UK, in that we were not looking to do what the EU was trying to do, which was trying to make every product “deforestation free”. We took an approach of basically saying that you have to show that your products are not a result of illegal deforestation—at the time I thought that that was a pragmatic move, and I still do.
Again, it shows that we need to recognise the implications of what some of my noble friends may think unnecessary: we actually have responsibilities in a variety of conventions to which we have signed up, over the years, to recognise our role in supporting free trade around the world, while making sure that free trade is done in a responsible way. This is about trying to make sure that supply chains understand where their products have come from and to address that, if necessary, to make sure that their products are not, in effect, being sourced illegally.
On the basis of the two amendments tabled, I hope the Government will consider this further. Mary Creagh made an announcement last week about the Great British version of the EUDR, but apparently no regulation is due in your Lordships’ House until 2027. It is disappointing to hear about the slow work, especially as regulations were pretty much drafted three years ago. With that, I will support this amendment in Committee and if it is put to the test in the House on Report, I will support it then too.
Baroness Penn (Con)
My Lords, I will speak very briefly to Amendment 140 on transition plans and Amendment 172 on forest risk commodities, to which I have added my name. On transition plans, I do not think it is really an interest to declare, but a reason I signed that amendment is that I was a Treasury Minister—in some ways a similar position to that of the Minister now fielding friendly questions from noble Lords—on the previous Financial Services and Markets Bill, in particular on parliamentary accountability. At the same time, I was also acting as co-chair of the Transition Plan Taskforce that worked collaboratively with businesses as well as NGOs and academics to produce the transition plan disclosure framework now hosted by the ISSB. I would like to emphasise the collaborative nature of that work and those involved in it.
This was not government writing a framework for business. The task force was co-chaired by Amanda Blanc of Aviva. Its membership included the London Stock Exchange Group, NatWest, Diageo and many other businesses—and, I think, the Church of England Pensions Board—all working together to develop the content of a framework that worked for business.
I also reiterate my commitment to the importance of climate risk and nature risk to our financial institutions and our financial regulation, and the importance of finding a way to incorporate that into our approach. I believe that disclosure has been important in driving change and will continue to be so. However, it is one of many different approaches. One success that came with TCFD was that it was part of a global move led by the UK that got all G7 countries to sign up to the same disclosure standards, creating somewhat of a level playing field. There is a question as to whether that momentum continues today and whether further action on disclosure is the right thing at this time, versus many of the other different levers that we can pull beyond the UK’s SRS S1 and S2, which were published earlier this year, and on which the FCA is currently consulting.
It is a legitimate and open question to think about how much further at this stage we want to go on disclosure. The Government, though, have a commitment in their manifesto to go further, saying that there should be mandatory transition plans aligned to 1.5 for all UK businesses. They consulted a year ago on that position, and we have had nothing since. I really want to join others in getting some clarity from the Government on what they think the right approach is. Is it further action on disclosure? Is it further action in other areas? To me, the fundamentals remain the same: climate change and nature risk are material to our financial system and its stability. We need more investment in our transition to a low-carbon economy. The UK is a leader in green finance and can be one in transition finance, too. How do we want to maintain and build on that?
I should like to hear how the Government want to achieve those aims. It may be through the different policies contained in the amendments here—it may not be. We have to have a more open discussion about the trade-offs involved in some of these areas: how you get businesses and Governments to recognise these risks, who pays for them, and how you spread those costs. I am not saying there is a single answer or, much as I would like to, that the answer I was working on three years ago continues to be the right answer. But clarity and articulation of the Government’s position, rather than nearly a year of silence, would be helpful in moving us forward in what continues to be a really important area for our country and for financial services regulation.
Lord Pitt-Watson (Lab)
If I might talk on this point, I have huge sympathy with the overall direction of where people want to go on this. Climate risk is clearly relevant for any financial manager managing the assets—the cash—of any ordinary citizen, be they a vicar of the Church of England or simply a worker setting money aside, and that needs to be taken into account.
Even if you do not buy that argument, there are financial risks that go with climate that need to be recognised—for example, assets that will become stranded if we responded to the climate crisis, which should not be recognised as being valuable today. By the way, if I were to find an institution that is a mile ahead of the regulation in trying to make this take place, the Church of England pension fund is exemplary of what it is that we want to do.
As I look at this, I find it rather ironic that we are focusing on the FCA. In the past five years, if there is a financial regulator that has taken steps forward on this, it is the FCA rather than the others. I think—I have tried to check on the internet—the UK now has the highest number of transition plans by companies, and the highest standard of transition plans by companies, of any country in the world. I want to celebrate the companies doing that and the senior appointments that the FCA put in place to make these sorts of things happen.
It might be a good idea for us to scratch our heads about those regulators that, even where there are clear rules on reporting on financially material matters, are finding it difficult to see them enforced. We might want to raise those sorts of issues as well as additional reporting. If it is additional reporting, as the noble Baroness, Lady Penn, said, let us be sure that we know that the extra reporting is bringing about some good.
In Amendment 80, and perhaps in some other amendments, there is a question about parliamentary oversight. Does the Minister consider that parliamentary oversight might be kept under review so that we know that we have a financial services industry that is properly responding to the risk of climate change, and might perhaps do some other things as well?
Baroness Kramer (LD)
I shall be exceedingly brief because the position of my party has been so well-voiced by my noble friends Lady Northover and Lady Sheehan, and there is a great deal more to say in the clause stand part debate in today’s fourth group. My party has made it very clear that it has a deep commitment to the climate, nature and sustainability agenda. I am conscious that it has become quite fashionable in financial circles to say that this agenda should not be the concern of the Bank of England or of any of the regulators. Perhaps the noble Lord, Lord Pitt-Watson, can indicate to me where in the five-year strategy of the FCA he can find any reference to it, because I cannot.
Lord Pitt-Watson (Lab)
For five years, there has been a director of ESG at the Financial Conduct Authority who has specifically taken responsibility for ensuring that, where relevant, it is embedded in what the FCA is doing. Most of the feedback I get from the FCA and financial practitioners suggests that he is called Sacha Sadan, and that he had a senior role in financial services beforehand and has had considerable success in being able to do that. Is it perfect? No, I am sure it is absolutely not perfect. We have a long way to go, but I want to do something that says, “Let us celebrate some success when we have it”.
Baroness Kramer (LD)
I always join in celebrating success but, from our perspective, this is a pivot moment away from what has been the practice and emphasis over the past several years. Indeed, as the noble Baroness, Lady Hayman, said, there was consensus across the parties, with perhaps different strategies, but this appears to be a time when much of this has changed, or is about to change or is changing. I have to say that it makes absolutely no sense. Climate risk is so obviously a financial and economic stability risk, as indeed is the loss of nature and the issue of sustainable growth; surely “sustainable” belongs in growth programmes that we put in front of us.
I am also very conscious that the City and others, which have tended to have very short-term perspectives—typically the next quarter’s results—have voiced opposition to the inclusion of climate and nature in the financial regulators’ remit and that it should have the significance it has had to date, and I am very afraid that the Government are now responding to that particular set of views. Moving these regulatory principles from the Bill—from primary legislation—into a “have regard” for the five-year strategy strikes me as an acquiescence with those voices we are hearing from the City. To me, there is some confirmation in not finding a firm strand in the FCA’s own five-year strategy; that is its forward look, not its historic look backwards.
In a few minutes the Conservative Party will speak, and it will make its own position clear, but I understand that Kemi Badenoch has now said that her party, if in government, would scrap the Climate Change Act. That is a very significant change. I know it is motivated by fear of Reform, but it really has an impact on the overall discourse and the cross-party commitment we have had up to this point.
I agree with the right reverend Prelate the Bishop of Manchester—I think it was him, although I may have attributed this to the wrong person—that this is a very strange week in which to downgrade the significance of climate change. I happened to be in conversation with my daughter in the midst of last week’s heat. When I described what we were doing, she said, “I guess the universe has heard the intention and it’s decided to bite back”. I think it must have been the noble Baroness, Lady Bennett, who made the remark; I am so sorry not to have recognised that.
I think that both Labour and the Conservatives hope that by Third Reading, we will have forgotten the extreme heat and they can reassert a much more convenient and easy agenda of pretending that climate change is no longer an issue of urgency. It has now dropped down the scale and there are other issues of much greater urgency on which we must focus, and this one can be largely set aside. But I and my party continue to look at it as a series of risks that will cause extraordinary pain to ordinary people in Britain, both relentlessly and increasingly—and not just to people in the UK but to far more vulnerable countries across the globe.
The Bank of England and the financial sector have crucial and powerful tools in their hands. Those tools are vital if we are to redesign our world to limit nature loss and climate change, and to ensure that we grow sustainably in the future. As the Bill is now structured, it takes away from those tools and will encourage their being regarded as secondary or tertiary instruments, to be used only when it does not irritate certain voices in the City of London. That is not appropriate for the legislation we pass today.
Lord Reay (Con)
My Lords, I first declare that I own some shares in JP Morgan, where I used to work, and some energy shares, as set out in the register.
It will probably come as no surprise to the Committee that we broadly disagree with the approach taken in this group of amendments. Climate change is, of course, an important issue, but the question before us is not whether climate change matters but whether the answer is to place still more statutory duties, reporting requirements, disclosures and regulatory obligations on businesses and financial institutions in this country. I am not persuaded that it is.
Each of these amendments is no doubt well intentioned, but they point towards a model in which ever more public policy objectives are loaded on to regulators and then passed through into more paperwork, compliance, board time, legal advice and cost for firms. At a time when every week, the London Stock Exchange loses companies that decide to list in the US, is this really what we want to do?
Many of the businesses and organisations that would be affected by this kind of regulatory layering make very limited direct contribution to global emissions. Yet they may find themselves spending more and more time demonstrating compliance, producing reports, revising governance documents and satisfying regulatory expectations. That all has a cost. It takes resource away from investment, innovation, productivity and growth. It makes us all poorer.
We should also keep a sense of proportion. The United Kingdom’s territorial CO2 emissions from fuel combustion are around 292 megatons a year. Those of China are around 13,125 megatons. China’s historical emissions within its borders have now caused more global warming than the 27 member states of the EU combined.
The UK can make a meaningful global contribution by developing and commercialising the technologies that reduce emissions at scale. However, we risk doing precisely the opposite if our response is simply to increase bureaucracy and the cost of compliance and regulation. Indeed, I believe that growth and competitiveness in this sector will be virtually impossible if mandatory 1.5% transition plans are introduced. At one stage, growth was the Government’s prime mission, and it is urgently needed to pay for Labour’s costly plans. It would not make sense for them to go down that path.
There is also the question of regulatory purpose. The FCA and the PRA already have substantial responsibilities. They are responsible for financial stability, prudential soundness, consumer protection, market integrity, competitiveness and growth. We should not ask them to become the delivery mechanism for ever wider public policy objectives. The more duties we give regulators, the less clear their priorities become. The more principles we add, the more difficult it becomes to know which objective should prevail when they come into tension. That does not make regulation better; it makes it more complex.
The Government should instead focus on making the UK an attractive place for climate-related innovation and investment. That means clear rules, proportionate regulation, a competitive market and an environment in which firms are incentivised to deploy capital into the technologies and infrastructure that will reduce emissions. In our view, the cumulative burden of existing kinds of climate and environmental reporting obligations placed on firms is quite high enough; the FCA and the PRA should remain focused on their core financial regulatory functions. For those reasons, we oppose the proposals in this group.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, I am thankful to noble Lords for their contributions. I specifically welcome the noble Lord, Lord Reay, who is making his first contribution on the Bill from the Front Bench.
There is absolutely no denying that this is a critical issue. As set out by the Chancellor in her Mais Lecture, sustainable growth depends on resilient foundations. Action on climate, adaptation and resilience can help reduce exposure to future shocks and support long-term economic stability. At the 2025 spending review, this Government committed £65 billion in capital funding for clean energy, climate and nature, including nuclear, and an additional £3.6 billion in capital funding for flood defences. The National Wealth Fund has been capitalised with over £27 billion and plays a central role in mobilising private investment into priority sectors, including clean energy, and supporting the transition to a low-carbon economy, while contributing to growth and energy security objectives.
Before I turn to the amendments, I stress that sustainable finance is a core priority for the Government. It is also a key opportunity within the financial services growth and competitiveness strategy. The UK is one of the world’s leading sustainable finance centres, with London ranking first in the Z/Yen global green finance index. Our focus now is on how to evolve and expand.
Baroness Kramer (LD)
Let me ask a direct question of the Minister. He referred to the actions that he expects from the FCA. I take it at its word, with its five-year strategy, but I cannot find any reference to anything to do with the climate, nature or even sustainability anywhere in there. Have I missed a page? It is a bit difficult to do that when there are only 20 pages, with very little written language, but it seems to me that, if this matter were of any significance, it would have been somewhere in that document. Is the FCA just anticipating what it believes to be the direction that it is getting from the Government, as reflected in the actions that are being taken in the Bill?
Lord Stockwood (Lab)
We believe that the “have regards” give them the current position, which is that they should consult on the nature considerations. As my noble friend Lord Pitt-Watson mentioned, there is a substantial amount of work going on. There is room for improvement in the governance of that process, but we believe that the next five-year plan should be the place to review that even further.
Amendment 140 would require the FCA and the PRA to make rules mandating transition plans aligned with the Paris Agreement. The Government have committed to mandate UK-regulated financial institutions and large companies to develop and implement credible transition plans that align with the 1.5 degrees goal of the Paris Agreement, and we remain committed to that. We are reviewing responses to the Government’s consultation on the topic from a wide range of respondents and we will set out those next steps in due course.
I make it clear that we are mindful that firms do not approach transition planning in isolation, as this is closely linked to how firms identify, assess and manage climate-related risks. Any requirements must reflect this and sit within a coherent sustainability reporting framework. This policy is not confined to financial services alone; it must be done across the wider corporate landscape. We are therefore considering transition plan requirements alongside the wider modernising corporate reporting programme and discussions on what role the UK sustainability reporting standards should play in our corporate reporting framework. This amendment would risk pre-empting carefully considered and co-ordinated plans following our consultation, so I am afraid that I cannot agree with the noble Baroness, Lady Hayman, that the Bill is the right route forward to deliver this final commitment.
Baroness Hayman (CB)
I hear what the noble Lord says, but that terrible leaden phrase “in due course” was used. He says that there is a way of looking at this in the context of many other issues. Can he give me a little bit of comfort? We are one year into the consultation. Will we have another consultation that takes in all the wider issues that he discussed? How long is this grass?
Lord Stockwood (Lab)
I cannot pre-empt the timing of that report, but I will come back to the noble Baroness and have a follow-up meeting to get the specific details. I do not want to give her the wrong information today. This is important to this Government, as set out in the wider consultation and actions that we are taking. I might have to have a separate meeting to get a specific answer to that.
On Amendment 142, it is important that nature-related risks are properly understood and managed, given the material risks that they can pose to the financial system and wider economy, and we have already made significant progress in this area. As I mentioned, the Government have now finalised the UK sustainability reporting standards, and the FCA has consulted on aligning listed company disclosures with this framework. These standards, based on the International Sustainability Standards Board’s well-established global baseline of sustainability disclosures, require companies to disclose material sustainability-related risks, including nature-related risks where relevant. The Government recognise the important work of the Taskforce on Nature-related Financial Disclosures in this area and we welcome ISSB’s decision to advance further work on nature-related disclosures, building on TNFD’s recommendations. We will continue to ensure that the UK framework evolves in line with international best practice and we therefore do not support this amendment.
Amendment 172, on deforestation, seeks to require the Government to lay regulations on deforestation and undertake the review envisaged in Section 79 of the Financial Services and Markets Act 2023. I reassure the noble Baroness that the Government remain committed to this work. Just last week, the Government announced their intention to bring forward new rules to tackle deforestation. Later this year, we will consult on the proposed approach to bring in a due diligence framework in regulations under primary legislation, including the Environment Act 2021. We aim to require GB businesses using forest risk commodities to carry out appropriate due diligence, with secondary legislation delivered as soon as possible.
Action on deforestation must be co-ordinated across government to be effective. Therefore, the government commitment already made in the Financial Services and Markets Act 2023 is the right one. HMT will publish the deforestation-linked finance review within nine months of the Environment Act regulations being made, rather than laid. I do not accept that this can be speeded up, but I assure noble Lords that the Government will undertake this review. This approach will support coherent regulation across the UK, protect the internal market and support export-led growth. For these reasons, we do not support bringing forward these timelines.
Amendments 83B and 86A are related to climate risk and the financial gains from environment-linked criminal activity. I reassure noble Lords that, as set out in relation to Amendment 103, regulators are already required to take into account and monitor climate risk, including through the requirement that they have related to the UK’s net-zero and environmental targets, where relevant to their functions. This has already resulted in significant regulatory action.
Additionally, financial crime and money laundering, whether related to environmental crimes or not, is illegal and something that financial regulators, and this Government, already take extremely seriously. The FCA has a broad remit to tackle financial crime under its market integrity objective and requires authorised firms to take steps to ensure they are not used to further financial crime. The FCA has robust powers to supervise these controls and take action against firms which do not put adequate financial crime controls in place.
The Chancellor also announced on 21 October 2025 that the FCA will become the supervisor for professional services firms’ anti-money laundering and counterterrorist financing work. This will replace the existing complex system, involving 22 private sector bodies, and recognises the FCA’s effectiveness in tackling financial crime. Clauses 14 and 48 make necessary changes to primary legislation to enable this reform.
I hope this response clarifies why we believe the current framework is the right one. This has been an engaging debate. We have heard a range of views, and I hope I have convinced the Committee that the Government’s approach is the right one, and that we are making significant progress against our commitments, but that we should not rush to action. I ask the noble Baroness to withdraw her amendment.
Baroness Northover (LD)
I too thank everybody who has contributed to this debate. It is concerning, as my noble friend Lady Kramer anticipated, to hear the Conservative contribution, given the obvious risk to the financial sector of climate change and the devastating effects of ignoring risk, which led to the 2008 financial crash.
That said, the Minister will have heard the concern about Clause 17. I note that he has given a speech saying that the Government are doing this, that and the other in all sorts of different areas, and therefore this is not needed, which is a very familiar argument. I think he is about to discover, if he stops reading his note, that this area will come back on Report, because there is widespread concern right across the House about climate change, climate risk and nature loss. We will come back to this on Report. In the meantime, I beg leave to withdraw the amendment.
Lord Holmes of Richmond
“(2) In Section 3B(1) (regulatory principles to be applied by both regulators), in paragraph (b), for the words from “considered” to the end of that paragraph substitute “taking into consideration the nature of the service or product being delivered, the nature of risk to the consumer, whether the cost of implementation is proportionate to that level of risk and whether the burden or restriction enhances UK international competitiveness;””Member's explanatory statement
This amendment seeks to amend the existing regulatory principle for the FCA and PRA and require that the nature of, and risk to, the consumer and the service or product being delivered must be considered when imposing a new burden or restriction.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to open on this second group of amendments, to move Amendment 81, which is in my name, and to speak to Amendment 87. I thank the noble Baroness, Lady Altmann, and my noble friend Lord Hunt of Wirral for variously co-signing the amendments.
We ask a lot of our financial regulators—not least in recent times, with international competitiveness and the growth objective, and with the Chancellor calling all regulators, including financial regulators, into No. 11 to seek their commitments as to what they will do to advance the Government’s stated growth objective. My Amendments 81 and 87 seek to assist the regulator in bringing some clarity to how to approach these matters.
Amendment 81 looks to the nature of the financial product and of the risk to the consumer, and how the proposed regulatory intervention sits against those factors and the need to promote international competitiveness. It is entirely possible for our financial regulators to balance their objectives and to do right by consumers and by growth, but they need to consider those objectives alongside one another rather, than having a broad-brush, non-specific approach.
This brings me to Amendment 87, which seeks to put in the Bill the nature of the response the regulators could make in their supervisory activity and interventions. It sets out the difference between retail consumers and professional market participants, not least in wholesale markets. I have no doubt that the regulators are well aware of the different levels of knowledge and experience of people who participate in financial products and financial markets, be they retail, professional, or operators in wholesale markets. But it is potentially helpful to set this out in the Bill in order to assist and support the regulators in what they seek to achieve through this approach: to drive the effectiveness of their regulatory activity, to sharpen their supervisory activities and, not least, to have that sense of dialogue—always where appropriate—rather than reaching for more severe interventions at that stage.
I support the other amendments in this group and look forward to noble Lords’ contributions and to the Minister’s response. I beg to move.
Baroness Noakes (Con)
My Lords, I have Amendments 83, 84, 85 and 86 in this group, and I thank my noble friend Lady Neville-Rolfe for adding her name to the first three of them. We are continuing our examination of the role of the regulatory principles, which we debated to some extent on previous Committee days. To recap, Clause 17 proposes to downgrade the regulatory principles in Section 3B of FSMA so that instead of guiding the everyday work of the regulators, they will now feature in only an element of the regulators’ new five-year plans. Some of us have tried, but so far failed, to convince the Minister that this represents a constitutional assault on the effectiveness of your Lordships’ Financial Services and Regulation Committee. I am pleased that a meeting has now been arranged for the committee to discuss this in more detail with the Minister, together with the Financial Secretary, and I hope we can make some progress there.
On the previous day in Committee, I moved an amendment which called for the Treasury to undertake a review of the regulatory principles, because they are a mixture of important things concerning how regulations should be conducted, some duplicated areas and some special interest items. The Government resisted my amendment, with the Minister saying that they had already reviewed them and found them to be fine, which was a completely bizarre judgment.
My Amendments 83, 84 and 85 take a different approach. If Clause 17 is to remain in its present form—that is to say, downgrading the Section 3B principles to abstracts, to be wordsmithed into five-year plans—it is important to rescue the most important element of them: proportionality. Amendment 83 places the proportionality principle, using the rather wordy parent formulation in Section 3B(1)(b), into Section 1B of FSMA, which is about how the FCA should discharge its general functions. This achieves for proportionality the effect of ensuring that when the FCA draws up rules or guidance or does anything else, it will conform to the proportionality principle. That would allow the rest of Section 3B to head into strategic oblivion, but it would preserve proportionality as a matter that should guide the FCA’s work on a daily basis—for example, when drawing up rules or guidance. That, in turn, would allow the Financial Services Regulation Committee to focus on whether the FCA is indeed reflecting the principle of proportionality in its rules. Amendment 84 seeks to do much the same for the PRA. Lastly, Amendment 85 removes proportionality from Section 3B to avoid yet more duplication cluttering up FSMA.
The Financial Services and Regulation Committee received a lot of evidence for its first inquiry into the secondary competitiveness and growth objective. One of the enduring themes was that neither regulator lived out the requirement for proportionality. For example, the confidential round table that we held with mid-market and specialist banks, which are very diverse and very different from the big banks, reported that regulations are substantially similar for all sizes of banks. The confidential round table with insurers and reinsurers found that there were disproportionate responses to consumer issues, failing to differentiate between different business models or different types of firms.
As an aside, the committee had to hold these round tables on a confidential basis because of a widespread fear of regulatory repercussions if attendees articulated views that did not reflect well on the regulators. This is a serious cultural issue that cannot be dealt with directly in this Bill, but it underlines the need for parliamentary accountability mechanisms to be made stronger rather than weaker. We should make these mechanisms as effective as we possibly can.
As well as finding disproportionate regulations and supervision, the committee’s report also highlighted how thresholds, which can aid proportionality, were often used in a way that in practice impacted the willingness and ability of financial services businesses to grow. The proportionality is a very big ongoing issue in financial services regulation and has real-world consequences.
The noble Baroness, Lady Bowles, has tabled similar amendments to mine, which also include the regulatory principle currently found in Section 3B(1)(f). My own view is that paragraph (f) is a restatement of proportionality from a different angle. I agree that the things in it are important, but I hope that we can work to get some kind of streamlined definition of proportionality that incorporates both strands.
My other amendment in this group is Amendment 86, which seeks to import the regulatory principles of the Legislative and Regulatory Reform Act 2006 into the regulatory principles in FSMA. I did this in response to a statement in the Explanatory Notes that the Government intended to use secondary legislation to take the financial regulators out of the ambit of the 2006 Act, which I regard as a bad decision.
It is true that some elements of the very succinct expression of regulatory principles set out in the 2006 Act are already found in Section 3B, but not all of them. The 2006 Act requires all regulators to carry out their regulatory activities
“in a way which is transparent, accountable, proportionate and consistent”.
It also says that regulated activities should be taken only for
“cases in which action is needed”.
This goes beyond Section 3B in requiring accountability and consistency, and I cannot find anywhere in FSMA that says that the FCA and the PRA should regulate only when action is needed.
I cannot think that it is right to dilute the FCA’s and the PRA’s regulatory obligations. They are probably the most important regulators in the land; to let them off the regulatory principles in the 2006 Act is just plain wrong. Since Parliament is, in effect, powerless against secondary legislation, the only way to ensure that the FCA and the PRA remain subject to the 2006 Act principles is to hard-wire them into FSMA, which is what Amendment 86 seeks to do. It may well then be downgraded if the Government have their way on the regulatory principles and Clause 17, but it will not disappear completely from the requirements to which the FCA and the PRA will, in some measure, have to have regard.
Baroness Bowles of Berkhamsted (LD)
My Lords, before turning directly to proportionality, I will touch briefly on sustainable growth, because its meaning has drifted over time. Sustainable growth was not part of FSMA 2000. It was introduced later, in the post-crisis reforms, as a macroeconomic guardrail. Its purpose was to ensure that regulators did not focus solely on narrow consumer protection or market integrity but had regard to the wider economy. It was intended to counteract over-regulation, pro-cyclical rule-making and, in effect, to avoid killing the golden goose of financial services. It was, in fact, a pro-growth statement. Later, maybe since 2018-19, sustainability has expanded in understanding to include environmental concerns, although, of course, they now have their own place and, as debated earlier, will maybe have some further places in legislation.
I do not want the original macroeconomic point to be lost. It was designed as a counterpart to proportionality, a reminder that regulation must support durable long-term economic stability, not contribute to boom-and-bust cycles. In that sense, both proportionality and macroeconomic sustainable growth sit in the same family of “have regards”. They are deregulatory principles intended to prevent unnecessary burden and to ensure that regulation does not itself become a source of economic harm. Of course, climate change has macroeconomic effects, but they are of a different character and should not obscure the original boom-and-bust prevention purpose of this duty.
I turn to proportionality and Amendments 83 to 84A. I congratulate the noble Baroness, Lady Noakes, on Amendments 83 and 84, which would restore the proportionality duties to the regulators’ general functions, and Amendment 86, which would import the principles of the Legislative and Regulatory Reform Act into FSMA. These are thoughtful and constructive amendments, which would save something, but there is a great deal they cannot save—we will discuss that later. In particular, they do not save the second proportionality duty: the duty to have regard to the nature and objectives of businesses carried on by different persons. That is the proportionality principle that protects smaller firms, sole traders, mutuals, benefit companies and individuals. It is not just about cost-benefit or even size; it is about recognising that different types of firms have different objectives and experience regulation differently. To some extent, as the noble Baroness, Lady Noakes, said, this should all be understood within proportionality, but if we leave it out when it is still separately listed in the current regulatory principles, even when they are largely disregarded, that might lead to the wrong conclusions.
That is why I tabled Amendments 83A and 84A, which build on the formulation of the noble Baroness, Lady Noakes, and would restore the smaller and different business protections. As has been explained, these would be inserted into clauses that relate to the discharging of the regulators’ general functions so that they restore these duties to the operational level of rules and supervision. But this limb of proportionality does more than protect smaller firms; it may also protect firms whose objectives legitimately involve taking more risk in the interests of growth and innovation. Parliament’s role is not to eliminate risk but to ensure that it is understood, calibrated and supervised fairly. That is why this proportionality duty matters: it is one of the few operational tools that give Parliament visibility into how regulators weigh those differences in practice.
However, even with these amendments, we still would not save the principle of sustainable growth—growth that is durable, predictable and not a flash in the pan. As I have explained, that was a partner “have regard” to proportionality. I hope that during these proceedings I can persuade noble Lords and the Minister that sustainable growth should also be included. It chimes with competitiveness and growth, but it, too, needs to have a place in the real business part of these clauses, in the general functions. To echo my earlier comment, macroeconomic sustainable growth belongs alongside proportionality, as part of the deregulatory family of “have regards”.
These duties were originally conceived as guardrails to ensure that regulation supports the economy rather than constrains it. That operational balance is worth preserving. All the “have regard” duties were carefully designed and each has a purpose, and some of the others work together, as I have explained.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh, the insurance broker regulated by the FCA. A number of amendments in this group discuss the downgrading of the “have regard to” requirement for proportionality, which would be a backward step. At a time of intense global competition, the Bill should strengthen proportionality, not weaken it. These amendments do that by replacing Clause 17’s downgrading provisions with a clearer, more robust and more meaningful principle, based on the distinction between wholesale and retail markets.
There remains a clear need for a better balance between these two sectors. Evidence supports this. A survey of chief risk officers conducted by the City of London Corporation identified simplification of regulation as the single most important step that regulators could take to foster growth and innovation. Similarly, a recent Prudential Regulation Authority survey showed that fewer than 60% of respondents believe that its current approach to proportionality makes the UK a more attractive place to do business, with most of the remainder expressing neutrality. That is hardly a vote of confidence.
In practice, the current one-size-fits-all approach is flawed. London’s world-leading wholesale insurance market is increasingly subject to rules designed for retail consumers. These regimes impose additional compliance burdens and costs, yet offer little meaningful benefit to sophisticated corporate clients, who require flexibility to negotiate bespoke arrangements tailored to their risks. This is what I have spent my working career doing, and I have never dealt with retail consumers, other than being an insurance buyer myself. There is a massive difference between the companies I advise and seek insurance for and the consumers such as me. Indeed, their premiums are often significantly larger than what I am trying to insure. The two entities should not be regulated by a one-size-fits-all regime.
The Financial Services Regulation Committee has highlighted this issue, noting that failure to distinguish between wholesale and retail drives bureaucracy and costs. Evidence from the London Market Group revealed that one UK broker, for example, employs far more compliance staff domestically—almost four times more—than in the EU on a proportional basis. Stronger proportionality would not weaken consumer protection; it would enhance it, allowing regulators to focus on where risks are greatest. In short, we should seize this opportunity not to weaken proportionality but to make it work properly for growth, innovation and the effective protection of consumers.
Baroness Kramer (LD)
I very much support the two amendments of my noble friend Lady Bowles. There is often an assumption that those of us who feel that regulation plays an important role have no instinct or desire to see proportionality in place, which could not be more untrue. My history is as a commercial banker, back in the days when we used to participate intensively in writing the loan documents and creating the covenants associated with our lending, whether to small companies or to some of the largest on the globe. Frankly, covenants that were off the shelf were completely inappropriate for providing the protection we needed in many cases. They were just useless exercises in paperwork for the companies involved. We used to reshape the loan agreements on that basis and, frankly, it worked exceedingly well.
When I look at the amendments, I am glad that proportionality is being recovered from the scrapheap that would result from Clause 17. That is important, and the way that my noble friend Lady Bowles, framed it is particularly significant. Both for the PRA and the SRA, the focus is proportionate to the benefits expected to result from the imposition of the burden or restriction, recognising the difference in size, nature and objectives. I agree with her that this really needs to be considered through the lens of genuinely sustainable—as in durable as well as environmental—growth. That is a very important addition to the discussion.
I am disturbed by Amendment 81. I am not disturbed by most of it, but when I read
“proportionate to that level of risk and whether the burden or restriction enhances UK international competitiveness”,
I begin to get somewhat queasy, because the lowest common denominator is not where we should be headed. We need to genuinely assess risk—the cost of dealing with and understanding it—in a very direct way. I have always thought that a distortion was introduced by the competitiveness objective, and I am afraid that it is reflected in Amendment 81, in my reading at least.
I hope that the Minister understands that proportionality is not something for five-year strategies. It is central to the work, culture and behaviour of a regulator; as such, it clearly belongs in principles that sit on the face of the Bill.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to my noble friend Lord Holmes and other noble Lords for bringing forward their amendments in this group.
I was glad to hear that the Minister will meet the Financial Services Regulation Committee to discuss this part of the Bill. I am sure he will be as disturbed as I was to hear about the widespread fear of regulated businesses in expressing any criticism of the regulators—the most important regulators in the land, to quote my noble friend Lady Noakes. We certainly rely on financial services and good regulators for growth in this country.
The central theme of this group is the proportionality of regulation. That is an absolutely fundamental requirement for all regulation; it is particularly so when we are talking about small and medium-sized enterprises, which are less able to afford the costs of regulation—in terms of diversion of time, regulatory fees and legal fees—and are the most held back by excess regulation.
There were 5.6 million small businesses in the UK at the start of 2025. They account for three-fifths of employment and around half of turnover in the UK private sector. Total employment in SMEs was 16.9 million—60% of the total—with turnover estimated at £2.8 trillion, or 51% of the total. Having financial services that operate with proportionality and common sense is important to them; indeed, almost every single one of these firms will access and use financial services through the course of their operations. It is even more important to the thousands of SMEs that operate in financial services, whose remit is of course being extended by the Bill, and the thousands more SMEs in the legal and professional firms that advise on financial services.
In practice, regulation often falls most heavily on precisely those smaller firms least able to absorb it. The reasons are obvious: SMEs do not have large compliance departments or in-house legal teams; and they do not have armies of advisers whose job is to interpret regulatory requirements. In many smaller firms, people wear many hats, as I know well. This means that a regulatory requirement that may be manageable for a large institution can be a serious burden for a smaller firm. Above all, regulation should be designed in such a way that it protects consumers and supports market integrity without imposing unnecessary burdens.
Amendments 83 and 84 in the name of my noble friend Lady Noakes, to which I have added my name, go to this underlying point by seeking to elevate proportionality in the FCA and PRA frameworks; it is pleasing to have the support of my noble friend Lord Ashcombe and the Liberal Democrat Front Bench in this. Proportionality should not be a box that regulators tick after the main decisions have already been made; it should be central to how they think about regulation from the outset.
The amendments in the name of the noble Baroness, Lady Bowles, raise an important point about tailoring regulation to the size, nature and objectives of different firms. The regulatory framework should recognise that a mutual does not have the same objectives as a major bank, and that different business models can present very different risks; the noble Baroness explained all that eloquently.
I would also like to comment on Amendment 86 in the name of my noble friend Lady Noakes. As she said, the Legislative and Regulatory Reform Act 2006 requires regulators to act in a way that is transparent, accountable, proportionate, consistent and targeted, ensuring that regulation is effective without being unnecessarily burdensome. Those are fundamental points and likewise need to be protected as guiding principles.
In closing, I would be grateful if the Minister could assure us: first, that proportionality will be genuinely embedded in regulatory decision-making, ideally by amending the Bill on the lines of Amendment 83. We hope he will look at this issue very seriously. Secondly, can he assure us that the FCA and PRA will in future be expected to take account of the particular position of SMEs, mutuals and smaller firms when designing and applying rules? A proportionality duty would go a long way to fixing the problem and would seem to fit in well with government policy to support small business promoted by his other department, the DBT.
Lord Stockwood (Lab)
My Lords, this will be the first of many groups where we discuss the frameworks that the regulators operate under, so I will say a few words about that framework before turning to the amendments.
Many of these amendments, and those in other groups we will take today, focus on the regulators and their accountability to Parliament. Parliament has enshrined the principle of regulatory independence into primary legislation through the Financial Services and Markets Act 2000, which obviously everyone in the Room knows as FSMA. The Government continue to believe that this model best serves the UK’s long-term interests by delivering effective regulation, informed by evidence and free of political interference. It is absolutely right that financial services markets, firms and activities are overseen by operationally independent, expert regulators. The FSMA model sets out clear roles and responsibilities for Parliament, the Government and the regulators. Parliament sets the objectives for the regulators and holds them to account for how they further those objectives when discharging the statutory functions that Parliament has given them.
The Government and Parliament must be able to scrutinise the work of the regulators to evaluate how effective they are and the impact that their rules are having. It is important that the regulators remain independent and accountable for their actions. The regulators are directly accountability to Parliament, and there are a range of mechanisms within FSMA to support that accountability and allow Parliament to effectively scrutinise the regulators.
A critical part of regulatory independence is the idea that the regulators listen to legitimate criticism and scrutiny—and the regulators do listen. For example, the FCA decided not to progress some changes to its proposed enforcement policy following scrutiny from the House of Lords Financial Services Regulation Committee. However, it is clear from the debate today and from outside the Room that there is room for improvement.
On the recent publication by the Financial Services Regulation Committee, chaired by the noble Baroness, Lady Noakes, I recognise the important work of that committee in its Growing Pains report and share its ambition to see a regulatory culture that is more proportionate, more responsive and more supportive of growth. The committee’s recommendations were directed principally at how regulators exercise their functions rather than at the statutory framework itself. The Bill provides greater legal clarity and certainty but it remains for regulators, through their leadership, judgment and accountability to Parliament, to deliver the cultural change that the committee rightly called for.
On the amendments in this group, Amendments 81, 83, 83A, 84, 84A and 85 each seek to address various aspects related to the principle of proportionality. I recognise the concerns and strength of feeling that I have heard today and I agree that the principle of proportionality is extremely important and must remain central within the regulatory framework.
The Bill’s approach is not to remove proportionality from meaningful consideration. Instead, the reforms will require the regulators to have regard to proportionality in the development of their long-term strategies, ensuring that they are applied in a more coherent and visible way at the strategic level. This would mean that, for example, rather than considering if an individual proposal is proportionate, the regulators will be required to set out clearly how they have considered whether their strategy and workplan as a whole results in burdens on firms that are proportionate to the outcomes they achieve. This change will support more meaningful scrutiny of how the regulators are considering and responding to the regulatory principles, and will support greater overall scrutiny of the regulators’ work.
Amending the framework to prescribe in detail how the regulators must recognise differences in the size, nature and objectives of the firms it regulates goes far beyond the current framework and risks adding unnecessary complexity to the framework. It is for these reasons that the Government cannot accept these amendments.
Baroness Noakes (Con)
I am afraid the noble Lord is going to be assailed from all sides. I was glad to hear the Minister refer to the work that the committee did in relation to the enforcement proposals, otherwise known as naming and shaming. Is he aware that if the proposals in Clause 17 go through, we will be unable to interrogate the FCA, in this case, on the proportionality of particular examples of what they are doing, in this case to change the enforcement rules? Proportionality there related very specifically to a set of proposals. For example, those proposals, which were to name people much earlier in the enforcement process, could have had the effect of wrecking the businesses of very small players in the financial services market. That is something that we were very keen to draw the attention to.
Lord Stockwood (Lab)
I understand it, and I think I have demonstrated in the debate today and outside—I am looking forward to the meeting next week—that we remain open-minded. We are trying to achieve the balance between the regulatory oversight that we believe already exists and the feedback that we have had from the committee. I remain open to those conversations. We believe that the framework tries to keep that balance between the oversight that exists in Parliament and the independence of the regulators, but we genuinely look forward to that constructive discussion.
I turn to Amendment 87, which seeks to expand the regulatory principles and make them more detailed and directive. The Government’s view is that FSMA should provide a principled framework within which the regulators exercise expert judgment. This amendment goes far beyond refining the existing principles and would, instead, replace them with a highly prescriptive set of instructions that risks legal complexity, rigidity and dispute over interpretation.
The concepts highlighted in the amendment are important, but the Government do not believe they should be hardwired into primary legislation in this level of detail via the regulatory principles. The issue is not whether compliance costs, innovation, competition or post-implementation review matter—they clearly do—but whether it is right to place these requirements in primary legislation. The Government’s view is that it is not. It is not a sensible approach to grant the regulators significant powers and responsibilities, and to then overprescribe with how they must fulfil them.
Baroness Bowles of Berkhamsted (LD)
The Minister keeps saying that these things should not be in primary legislation, but they are in primary legislation, and they stay in primary legislation. Even if you try to take the effectiveness away by Clause 17, everything that I referred to in my speech, and that the noble Baroness, Lady Noakes, referred to in hers, is about the existing regulatory principles that are in the Act already. Therefore, I do not understand saying that they should not be in primary legislation—they are.
Lord Stockwood (Lab)
Let me get back to the noble Baroness on that. I believe the amendments were trying to change and streamline the regulation, but I want to make sure I give a precise answer rather than a quick judgment on that.
Let me turn to Amendment 86, which seeks to bring the regulatory principles of the Legislative and Regulatory Reform Act 2006 into FSMA. The Government recognise the importance of certainty in the regulators’ framework. FSMA already contains its own carefully developed set of duties, objectives and principles, designed specifically for financial services regulation. The Legislative and Regulatory Reform Act is very broad in scope, and the principles it contains are important ones. But there is significant overlap between these principles and those already in FSMA, so adding them here would bring duplication and legal complexity, rather than clarity. These will now be considered at a strategic level as a result of Clause 16.
In some way, the Government agree that proportionality matters, that unnecessary burdens should be avoided, and that the regulators must be held properly to account for how they exercise the significant powers Parliament gives them, but they should not be overly constrained in how they approach their work. We should have confidence in their expertise and regulatory judgment, and confidence in the mechanisms in place that allow us to ensure that they are performing as they should do so. Ultimately, an overly prescriptive approach that ties the regulators would not be in the interests of those they regulate, or those protected by their regulation.
This is not a question of whether Parliament should hold regulators to account. We all clearly agree that it should. The matter before us is where we think the right balance lies between democratic oversight and allowing regulators to carry out statutory responsibilities effectively. I recognise that not everyone will agree that the Bill strikes that balance in the right place, and I respect the arguments that have been made this afternoon and the continuing debate that we will have. I hope noble Lords will also accept that I have listened carefully to those arguments that have been made. I will respond either in writing or in meetings outside the Room to any points that I have not answered fully today. I therefore ask the noble Lord to withdraw his amendment.
Baroness Neville-Rolfe (Con)
Perhaps I might press the Minister on the subject of smaller businesses and the Bowles amendment to the proportionality proposal, which takes account of differences in the size, nature and objectives of businesses when the regulators are plying their trade. I am not quite clear what the Minister feels about these smaller businesses and whether he agrees that it is necessary to deal with them in a slightly different way.
Lord Stockwood (Lab)
My business insured a million small businesses, so I think they are vital to the UK economy. Let me come back to the noble Baroness with a full answer on that. It is critical that we make sure that they are protected.
Baroness Noakes (Con)
To return to the question of the 2006 Act, the Minister said that FSMA’s regulatory principles have been specially crafted for financial services. They have, over a period of time; they have changed rather a lot since they were first put into FSMA. However, when the 2006 Act was passed, there was a specific decision, by the Government, to include the FSA within its scope. They were all brought within scope by secondary legislation, just as the Government now propose to take them out by secondary legislation. Why do the Government take a different view from the Labour Government in 2006—who decided that those regulatory principles have, as I have explained, some important additional elements to those within Section 3B—and think that those additional principles are not now relevant?
Lord Stockwood (Lab)
It goes without saying that there are many things on which I do not agree with the Labour Government of 2006, but we will leave that for another day. We believe that this is already covered. I do not want to allow the noble Baroness’s expertise to be undermined by my relative inexpertise, so let me come back in writing on that. The advice I am getting is that we believe that it is already covered, but let me come back in writing before our meeting next week.
Lord Holmes of Richmond (Con)
I paused there in case somebody else wanted to make another point—I did not want to jump in. I thank all noble Lords who participated in this excellent, informed and important debate. I would never seek to offer a Minister of the Crown advice, but, having said that, when the noble Baronesses, Lady Bowles and Lady Noakes, speak on these matters, it is worth paying attention, reflecting, reading Hansard and reflecting again.
I thank the noble Baroness, Lady Noakes, for all the work she has done as chair of the FSR committee. It has produced excellent reports that always cut to the heart of an issue. At a time when, as she rightly identifies, more and more is coming before Parliament as regulation which, on the Floor of the House, we have so little role in which to play or influence to bring to bear, the role of her committee is even more significant and important.
My noble friend Lady Neville-Rolfe summed up with her usual brevity and precision. This is all about proportionality and common sense. The only tiny addition I would bring to that is specificity. In essence, all the amendments in this group have been tabled for the same reason that we debated these subjects on previous committee days. Strategies and frameworks are important, but events do not happen in strategies and frameworks. Events happen: they impact individuals and businesses, particularly small businesses, minute by minute, hour by hour—or, to quote a phrase apropos of nothing in particular, events happen on a day-to-day basis. All the amendments in this group are significant and worthy of reflection.
In conclusion, I apologise profusely to the noble Baroness, Lady Kramer, for causing her to feel queasy. I can only hope that my financial inclusion amendment in the next group can act as an effective antiemetic. For now, I thank all noble Lords who participated in this important debate and beg leave to withdraw Amendment 81.
Baroness Tyler of Enfield
“(2) In section 3B(1) (regulatory principles to be applied by both regulators), after paragraph (h), insert—“(i) the need to consider financial inclusion.””
Baroness Tyler of Enfield (LD)
My Lords, I rise to speak to three amendments I have in this group: Amendments 82, 95 and 97. This group is all about financial inclusion. It is a very important group. I am also very sympathetic to the amendments in the name of the noble Lord, Lord Holmes, and my noble friend Lady Kramer.
Amendment 82 would place financial inclusion where I believe it firmly belongs: among the regulatory principles set out in this legislation which the regulators must consider in carrying out their functions. This is not a novel idea. When I had the privilege to chair this House’s Financial Exclusion Committee back in 2017, we recommended that financial inclusion be given a firmer footing in the regulators’ duties. Indeed, when this House last legislated on these matters, in the 2023 Act, I am sorry to say that financial inclusion was not included as part of the regulatory principles. Despite a concerted effort at the time to put it on a statutory footing, we did not succeed, and my amendment would simply correct that. Financial inclusion, which determines whether millions of people can access the essentials of modern economic life, surely belongs in legislation.
However, the Bill as drafted moves in the opposite direction, confining the regulatory principles to strategic activities only, thus removing them from day-to-day decisions that impact the lives of millions of people, particularly those who are financially excluded. My amendment would ensure that financial inclusion remains a live consideration in the regulators’ day-to-day work. I say this to the Minister: if financial inclusion is genuinely a priority for this Government, why does it not sit among the principles the regulator must consider, and should these principles not be considered when implementing the activities that truly affect many people’s daily lives, rather than being set aside to apply only to more abstract strategic work?
I am conscious that, in the Committee’s debate last week, there were those who felt that any new principles should meet the “essential and enduring” test—I think the noble Baroness, Lady Noakes, said that. In my view, financial inclusion is essential and enduring. Whether people can access banking, credit, insurance and savings is not a passing policy priority but a permanent structural feature of how the system serves, or fails to serve, the population. It has been a concern for decades and will remain one.
I turn now to my Amendments 95 and 97, which would require the FCA to report each year on how the exercise of its functions has affected financial inclusion, and to be ready to account to relevant parliamentary committees, which would include the Treasury Committee and the Lords Financial Services Regulation Committee, which we have just heard about. My purpose here is specific and, I hope, constructive: to ensure that financial inclusion is reported on openly every year and that the public and Parliament can scrutinise the activities of regulators in ensuring that we all have access to the financial services and products we need at a price we can afford.
We all know that what gets measured gets done. What is reported on, transparently and regularly, is far harder to neglect than what is not. This is not an abstract concern. When I chaired the Select Committee, we found that 1.7 million adults were without access to a basic bank account; that communities were losing their bank branches at an alarming rate, as we focused on last week; and that households on the lowest incomes were paying more for credit, insurance and essential services simply because they had less money. Nearly a decade on, too many of these problems persist. An annual report will give this House and the public a clear and reliable picture, year on year, of whether the position is improving or deteriorating on things such as access to bank accounts, access to face-to-face banking services, affordable credit and insurance—the list goes on.
Such a duty asks the FCA to ensure that those who are excluded from financial products and services are taken into account, with their experiences seen and their problems addressed. It creates no new rules for firms, which is an important point. It simply ensures that the fundamental question—“How are the most financially excluded people in this country being served?”—is asked and answered each year, in public, before Parliament.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to follow the noble Baroness, Lady Tyler. I had the equal pleasure of serving alongside her during her excellent chairing of the Financial Exclusion Committee.
As the noble Baroness rightly identified, since we published our report, financial exclusion—or a lack of financial inclusion—has persisted. She rightly identified the Government’s financial inclusion strategy. There are a number of good things in it, but I ask the Minister: why was it so light on the potential role that fintech, as well as broader technologies, could play in addressing some of the elements of financial exclusion? It was largely silent on those issues.
I shall speak to Amendment 104 and all the other amendments in my name in this group. Similarly, I suggest having a financial inclusion objective and detailed reporting requirements therein. We have the Financial Inclusion Commission, which has some excellent members, but financial exclusion persists.
It is right to have our financial services regulator further empowered to be the lightning rod and the focus for this whole question of financial inclusion. To talk about the principles again, the Government are keen on growth, but financial inclusion does not run counter to that growth or the international competitiveness objective. Financial inclusion is essential to it: enabling people to have financial services and be financially included is likely to increase digital inclusion and social inclusion, as employees become self-employed and the employed become economically active. I ask the Minister: are these things—enabling and empowering financial inclusion—not what any Government should be about?
I suggest a financial inclusion unit for the FCA, so that it can be a powerhouse for innovation and research and a real regulator and driving force for financial inclusion. When the Minister comes to respond, can he identify how financial inclusion has changed in the almost two years of the current Government? Is it not time for greater focus and effort on this most significant of issues?
In many ways, the most significant issue when it comes to financial services is enabling and, in reality, empowering everybody to have a fair go, and to become active and enabled in our economy and our society. Amendment 161 builds on this, but in the specific context of broadening data-sharing requirements—always on a consenting and empowering basis—to look again at what we can do with new technologies. Let us look at other sources of data such as rental history, which can be so helpful in enabling financial inclusion—but currently are far from happening, never mind becoming the norm—to support those millions of individuals. Where is innovation when it comes to financial inclusion? Does the Minister not agree that these amendments would enable the Government to have a human lead on these technologies, with a far greater chance of much greater financial inclusion for all citizens?
My final amendment goes to KYC, or what passes for it. In many ways, you can see this within financial inclusion, where all too often, in whichever context one considers it, “know your customer” means almost completely the reverse or nothing of the sort. Does the Minister not agree that it is time to look again to innovation and the technologies that can be deployed to give us effective KYC and AML? Or does he believe that, because one is able to put a gas bill in paper form in front of a financial services business, it shows just what an upstanding citizen you must be and gives all that is required on KYC and AML? It is so gravely in need of transformation. We have the tools and technologies to achieve this, which would also add to significant financial inclusion. I look forward to the Minister’s response.
Lord Davies of Brixton (Lab)
This is an important and interesting debate. I want to draw attention to and base my remarks on Amendment 95, which refers specifically to the poverty premium in insurance. This is a theme that runs across financial services. It perhaps does not get the attention it deserves, because one of the main reasons for financial exclusion is of course poverty, and poverty is clearly an issue where the Government have a clear and central responsibility.
In practice, the approach taken by the FCA has been to use the obligation for the consumer duty as the primary vehicle for dealing with the poverty premium. The FCA has directly linked the consumer duty to the poverty premium, with the argument that firms are required to deliver good outcomes for retail customers and ensure that products and services offer fair value. The FCA has not itself specifically tackled the poverty premium head on; in effect it has passed the responsibility to providers.
The most obvious manifestation of the poverty premium arises with premium finance, whereby people have to pay premiums by instalments over the year instead of paying a lump sum at the beginning of the year. The terms on which they are financed have been open to significant criticism. People think they are paying the contributions monthly but, in practice, someone lends them the money to pay the initial contribution and they repay that loan over the year. There is a widespread lack of understanding that, in fact, they have two contracts: the insurance contract and the loan contract. The terms of that loan contract have been called into question. Figures from the FCA suggest that about four-fifths of customers in financial difficulty use premium finance and that, in 2024, 60% of motor insurance customers and 41% of home insurance customers paid by instalments because they could not afford to pay annually. There is probably a series of people who fail to do the sums and just pay monthly because that looks easier.
The FCA has found that the cost of premium finance has fallen since 2022, and made it clear to firms that they are under a clear requirement to ensure that fair value is offered. There is a technical problem here in that, as well as the financial issues, with some forms of insurance there is an underwriting issue. It is possible to argue that someone who pays monthly is not in the same underwriting position as someone who pays yearly. It is very difficult to pin down that aspect of the issue. The FCA accepts that this poverty premium exists and believes that some of the premium finance provides a poor product. It has accepted that
“financial regulation cannot tackle financial exclusion or the related ‘poverty premium’ alone. We must work together across government, regulators, industry and consumer groups”
to deal with it.
The Financial Inclusion Strategy published in November refers to the issue, and we now have the FCA’s 2026 insurance priorities, which include expanding access to insurance as a central priority and emphasise the importance of helping vulnerable groups. However, the campaigning group Fair by Design has argued that the FCA is not doing enough to deal with these issues. It points out that the FCA has said that it has the tools to deal with this but, in practice, is just leaving it to the individual companies to act responsibly.
Baroness Kramer (LD)
My Lords, I will speak briefly in general across this set of amendments and specifically to Amendment 141 in my name, supported by the noble Baroness, Lady Altmann.
In the general remarks, I say to the noble Lord, Lord Holmes, that I am excited and thrilled by his amendments in this group and I support every one of them—I would even open champagne; I am that pleased. I say to my noble friend Lady Tyler that I totally support the amendments that she has introduced here. I share with both of them the perception that financial inclusion is absolutely at the core of the requirement that we must place on our financial services sector and on the regulators that deal with it.
To pick up on a point that my noble friend Lady Tyler made, the consumer duty does not deal with financial inclusion, and that is exactly right. The consumer duty is very much a protection against mis-selling. It is not a duty of care, which could indeed have required that gaps left in the market are filled and the regulator take steps to fill them; the regulator was absolutely determined not to have that responsibility when this House attempted to make it address the issue, and the Government of the day were also very determined that the regulator should not play that role. We cannot look to the regulator to be a key player in financial inclusion.
In the five-year strategy of the FCA—I really have read that document—there is reference to financial inclusion; in fact, it is in big, black, bold letters. The problem is that what it anticipates as the role that it will play is to try to address how low financial capability holds people back from accessing financial services and how it could support them in managing their financial life. That is important and it matters, but the reality is that for many people who are excluded, the way to give them support is not to try to get them digital—it would be brilliant if you could but that is not the reality—but to deal with those people as they are in the world that they live in. There is absolutely no reference in this five-year strategy that you could in any way interpret as related to what has become the Richard Lloyd review—to things such as banking hubs. It is focused solely on the individual, whereas issues that we have addressed in previous groups have also been about the financial exclusion of small businesses from financial services. There is no reference to any of that.
I have had so many conversations with the FCA over the years, and it has said things like, “Yes, if we had a set of community banks, that would be absolutely brilliant; CDFIs are absolutely wonderful—not our job. If they appear, we will make sure that we regulate them appropriately, but it is not our job to fill that gap and we resolutely hold to that position”. That clarity needs to be here in this debate. I will not repeat what has been said because it was so well said by the three previous speakers, but I very much hope that the Minister will pay serious attention to this issue. From things that he has said in the past, I hope that he takes it to heart. It very much belongs in a very central way in primary legislation.
The issue I am raising is perhaps not an obvious one to raise in the context of this Bill, but it is in scope. It is dear to my heart, but I think it is widely supported. I am using this opportunity to deal with an issue that, frankly, the Government should have dealt with without any problem. It is child trust funds and the ability of young adults with learning difficulties to access those funds that sit in in their name. My party leader, Ed Davey, who, as I think all in this Committee know, has a son with very severe learning difficulties, has written of his eight-month battle to access the child trust fund put in place and invested in for the benefit of his severely disabled son, who is now 18. The fund should be easily accessible when a child turns 18, but, as the Davey family found out the hard way, this is not true for children with learning or other disabilities who lack the capacity to fill in the forms themselves.
The process of applying to the Court of Protection for a deputyship order is Kafkaesque, consumes endless time and places such a burden and cost that many parents give up altogether. The many steps, and my goodness there are many, include obtaining written permission from three different relatives to demonstrate that you are unlikely to abuse the funds that you will access, and obtaining various doctors’ assessments—well, perhaps that is fair—but then the courts kick in. The Court of Protection charges £412 for a deputyship order. It requires you to obtain insurance against misuse, and the Davey family found that that cost £48. Then comes the Office of the Public Guardian, which charges £100 for its assessment, and it then levies an annual supervision charge of £320. If you add this up, it basically becomes £1,000 to be able to access a child trust fund for your severely disabled child.
What is really extraordinary is that most child trust funds do not have a lot of money in them. I think the average amount is £2,000. You would have to spend 50% of it to be able to access that fund for your child. The people accessing it are parents whom the DWP already relies on to deal with a variety of much more significant pots of money to support that child. I use the Davey family not to ask for any kind of sympathy, but here is an MP whose wife is a lawyer, and they cannot work their way through this maze. How are people without those kinds of expertise going to work their way through this system?
Unfortunately, there is a new legal offering from specialists who will, for a significant sum, offer to negotiate the way through for you. That is a practice that none of us wants to encourage. There are a few child trust fund managers who handle the process a bit better and have been helping some of the people whose funds they manage to minimise the process, but it is a lottery in terms of finding that you have taken out your child trust fund with an entity that takes that approach. Charities estimate that 80,000 to 123,000 young adults are essentially locked out of their child trust funds.
I tried to look for what response the Government have been making to the overtures of the charities and other civic society groups that have been out there trying to speak for these youngsters. Two things came to my attention. The only response I could find from the Department of Justice was that it has now digitised the application form and provided a guide.
My amendment would force the FCA to simplify the whole process for CTFs paying out under £5,000 in any one year. It is formulated around an amendment put before the House in 2021—I am pretty sure that is the correct year—by the noble Lord, Lord Young of Cookham, who is really skilled in developing, designing and presenting the appropriate amendments. In speaking to that amendment, the noble Lord, Lord Blunkett, who was the Minister when child trust funds were put in place, made it very clear that no one had thought of this particular set of problems and that that was why the system was designed in a way that set up this obstacle course. It was not intentional or planned; it was simply a failure to recognise what could happen and has in fact happened.
I say this to the Minister: all the arguments we hear in support of the Bill are about deregulation; here is a piece of deregulation that I think no one could argue with, and which I would definitely and clearly support, as would my party and, I suspect, many others. If the Minister cannot control this himself, could he please go away and berate his colleagues? These youngsters need to be able to access their funds. We are talking about small pots. Simply digitising the 106 sections of the application form is not the answer.
Lord Pitt-Watson (Lab)
My Lords, if I might add to this debate, I begin by noting the huge cross-party agreement we have on lots of the issues the Bill raises, most particularly on this issue of ensuring access to financial services for everyone. That is what is behind so many of the amendments here. It is also the issue that was raised in the debate about affordable credit by the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Manchester, and at Second Reading by the noble Baroness, Lady Hyde, and the noble Lord, Lord Kamall. We all, from all parties, want to know that such services are available to everyone. The question is simply how we can make sure that that takes place and that the industry that has to be there to deliver it buys in to making sure that those services take place. We need to be sure that our actions as rule-makers are helpful in that regard.
At Second Reading, I heard a number of speeches about excessive regulation, all doubtless intending to encourage financial services to do their job better. But there is an issue with regulation and how much of it there is. If there is any concern about this amendment, that is absolutely not its objective. Critically, we need financial services to be available to everyone; the question is whether, by regulating them, that gets us to where we want to be. Maybe it will, but we might argue that, unless we have persuaded those whom we wish to influence that they will strive to improve performance in this regard, the danger is that it might just be another regulation. Whatever we ask the FCA to report, we need to first take a step back and think through how this will affect performance on the ground. It is the finance industry that has to deliver this, and we need to be working in partnership with it—with the industry, customers, potential customers, the Government and regulators, moving ahead together. There are also initiatives, some of which might work, and which, if they had real momentum, with everyone behind them, might start to deliver the sort of things we want.
As many noble Lords know, I have done quite a lot of work with the financial services industry in Scotland. Its industry body, Scottish Financial Enterprise, has laid out as its objective that it intends to
“have a financial services system that allows every citizen and business of Scotland to connect and access appropriate services”.
Wow. Is that not exactly what we are trying to get to happen? But who is following up to make sure that that statement, that vision is realised? It feels to me that we need a new settlement, and institutions to see that such a settlement is delivered.
Baroness Neville-Rolfe (Con)
My Lords, we understand the reasoning behind these amendments. Financial inclusion is, of course, an important objective, as the noble Baroness, Lady Tyler, explained so clearly. Indeed, that is precisely why we have tabled amendments on financial education, to be discussed at a later stage. We believe that one of the most effective ways to improve financial inclusion is to ensure that from a young age, people have the knowledge, confidence and capability to understand how to manage their money to avoid harmful financial decisions and to access the products and services that are right for them—and, I should add, to understand new technology, data and digital inclusion, as my noble friend Lord Holmes explained.
However, we are not persuaded that the mechanism proposed in these amendments is the right one. In particular, when it comes to proposals such as expanding the scope of Section 3B of FSMA and adding further regulatory principles, we encounter the same problem that I raised in previous groups: every time Parliament adds another principal duty, reporting requirement or objective to the regulator’s framework, it may sound reasonable in isolation but, cumulatively, these duties feed through into more process, more internal assessment, more reporting and more consultation paragraphs. That is more compliance requirements, more boxes to tick and less overall efficiency for financial services.
We should be careful not to assume that every social or economic objective is best delivered by placing a new statutory duty on the FCA or PRA. Regulators already have extensive responsibilities, so we have to make the choices with care because, at some point, the accumulation of such duties becomes counterproductive. It makes the regulatory priorities less clear and it can slow decision-making and create uncertainty for firms. In short, it is unwise.
As I have explained, we would improve inclusion via improved education, and we are about to introduce an amendment on debanking, which may be relevant. There is a lot of partnership and voluntary activity, as the noble Lord, Lord Pitt-Watson, hinted at—and as I remember from my time with Tesco Bank, which was centred in Scotland and did some terrific work.
The problem of child trust funds was mentioned by the noble Baroness, Lady Kramer, and it seems like a popular cause for deregulation by the Treasury and the regulators. I am sure the Minister will want to comment on that.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, the noble Baronesses, Lady Tyler of Enfield and Lady Kramer, of Richmond Park, and other Peers for drawing attention to the important issue of financial inclusion. As someone who grew up in poverty, it is not an abstract concept to me and the community I come from.
The noble Baroness, Lady Tyler of Enfield, asked if I would meet her to discuss this agenda further. I would of course be happy to meet her and any other noble Lords who would like to discuss the topic. I will write to her ahead of that meeting on the FCA’s consumer duty and what it means for financial inclusion, but I assure noble Lords that the Government are not relying on the FCA’s consumer duty as a catch-all solution. The Government agree that people should be able to access the financial services they need—that is an important objective—but we think that these amendments are not necessary to achieve that.
Amendments 124, 128 and 104 would give the Financial Conduct Authority a new statutory financial inclusion objective and require it to establish an independent financial inclusion unit. These amendments focus on action and measurement. Financial inclusion requires all parts of the system to work together. That is why it is important for the Government to lead this agenda, not the FCA. To secure action, we have published a Financial Inclusion Strategy, setting out an ambitious package of measures to improve access to financial services.
The FCA is closely involved in delivering this work. Sarah Pritchard, the deputy chief executive, also sits on the Financial Inclusion Committee, which monitors the strategy and supports its implementation. The Government have taken formal steps to reinforce the FCA’s role in this area. In her most recent remit letter, the Chancellor asked the FCA to have regard to reinforcing financial inclusion, and the FCA is responding to that ask.
The FCA’s 2025-2030 strategy identifies helping consumers to navigate their financial lives as one of its four strategic priorities. As part of this, it highlights an increase in the consumers who hold key products as a success metric for its work, and it is acting on this. For example, to advance the Financial Inclusion Strategy’s aim of boosting savings, the FCA developed a regulatory statement to support the uptake of workplace saving schemes. On measurement, the FCA already plays an important role in tracking progress on financial inclusion through its flagship financial lives survey, which provides a strong evidence base for monitoring outcomes over time.
I recognise Amendment 128’s emphasis on independent scrutiny and prioritisation of financial inclusion in the FCA’s work. As part of the FCA’s statutory framework, the consumer panel is in place to represent the interests of consumers and provide independent advice and challenge to the FCA. As already covered, the FCA’s strategy and membership of the Financial Inclusion Committee means that financial inclusion is embedded in its work. This is more effective than an operationally independent unit.
On oversight and transparency, I understand the intention behind Amendment 104, which seeks to require the FCA and PRA to report annually on financial inclusion, and Amendment 95, which would require the FCA to report on financial inclusion metrics and how it has acted to improve financial inclusion. However, these amendments are not necessary or appropriately targeted. The regulators already report publicly and are accountable to Parliament. Moreover, the FCA’s financial lives survey provides a biannual update on a wide range of financial inclusion metrics in the UK, including the numbers of unbanked people, those who have been declined for a product and the experiences of vulnerable customers. The FCA is also closely involved in the delivery of the Government’s Financial Inclusion Strategy, which is a public document and subject to public review next year. Amendment 104 would place reporting duties on the PRA, whose statutory role is prudential regulation, creating uncertainty about the PRA’s remit and what it would be expected to report against.
Amendment 82 would add financial inclusion to the regulatory principles that the FCA and the PRA must have regard to when discharging their general functions. The Government do not agree that this is the right mechanism to ensure that financial inclusion is prioritised. The amendment would require unclear action from the PRA. Parliament regularly holds the regulators to account for their work on financial inclusion. The Commons Treasury Select Committee recently held a session with the FCA’s deputy CEO for its Financial Inclusion Strategy inquiry. Amendment 97’s requirement that the FCA be prepared to demonstrate to relevant parliamentary committees how it has had regard to financial inclusion is therefore unnecessary. Any relevant Select Committee can call the FCA and hold it to account for its work on financial inclusion.
Amendment 141 seeks to require the FCA to establish a new legal route for third- party access to control another person’s assets, which goes well beyond its regulatory remit. The law requires parents or guardians to have legal authority to make decisions about the financial assets or property of their adult children. This includes accessing funds held in a mature child trust fund. Decisions about who may act on behalf of a person lacking capacity are governed by the Mental Capacity Act 2005 and are determined by the courts, reflecting the need for safeguards to protect vulnerable people. It is not appropriate for FCA rules to seek to substitute or override existing rules and processes. The Ministry of Justice recognises that the process of obtaining access can be challenging for the parents and carers of young people who lack capacity. It is exploring how the Government can best facilitate access for parents and carers to child trust funds on behalf of their children. I would be happy to raise this with the MoJ rather than berate it, as the noble Baroness suggests.
Turning to Amendment 161, I recognise how a broader set of data might support a more accurate assessment of underserved SMEs’ creditworthiness. However, it should be noted that the Treasury already has the ability in Section 4(5) of the Small Business, Enterprise and Employment Act 2015 to specify the SME information that must be shared. We are actively considering updates to the scope of data in the next phase of the CCDS reforms. However, it will not be expanded in line with this amendment, given that it would require redesigning the scheme entirely, expanding it beyond financial services participants, some of whom see little return for their participation, which already imposes a degree of burden. I do not think it appropriate for financial services legislation to impose regulatory obligations on non-financial market actors in this way, not least without consultation. That is not to say the ambition is misplaced. Indeed, these issues are potentially better addressed through the future development of open finance and smart data initiatives.
Amendment 169 seeks to require a review of know-your-customer requirements. I understand the concern that the current framework may not always operate as it should in supporting access to financial services. As the noble Lord, Lord Holmes, rightly stated, technology is already playing a part but can do better. Indeed, businesses such as Quantexa and Onfido are leading the way in this space. The Government do not believe that anti-money laundering requirements and financial inclusion are mutually exclusive. The money laundering regulations already provide firms with the flexibility to take a proportionate and risk-based approach to customer due diligence. As part of the financial inclusion strategy, major high-street banks have launched pilots on improving access to bank accounts, demonstrating how financial inclusion initiatives can operate within the existing framework.
Reforms to make customer due diligence requirements more proportionate and effective have already been made, including through amendments to the money laundering regulations made via statutory instrument earlier this month. The Government are also taking steps to support the effective use of new technologies, such as through the publication in February of guidance on the use of digital identities to support customer verification. Finally, the money laundering regulations also mandate a review of their regulatory provisions every five years to assess whether they are effective, appropriate and proportionate. The next such review will be published in 2027.
The noble Lord, Lord Holmes, asked how financial inclusion has changed under the current Government. In November, we published the Financial Inclusion Strategy, which supports access to banking for those with no fixed abode and small-sum lending to help people access credit and makes it easier for people to save. The noble Baroness, Lady Tyler of Enfield, noted that when a House of Lords Select Committee looked at this topic, it found that 1.7 million people were unbanked. Although it is still too high, I can report that the latest survey data shows that the number of unbanked people has fallen to under one million. As I already set out, with many of the actions we are taking, the Government hope to reduce this further. Financial inclusion is not a gap in the framework. It is an agenda already being delivered by the Government, with the FCA closely engaged in its implementation. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Tyler of Enfield (LD)
My Lords, I thank the Minister for his response and all noble Lords who have spoken on this group of amendments. The debate has been very thoughtful, and I very much appreciated the collaborative tone of the contributions. I thank the Minister very much for agreeing to meet me and other interested Peers, and I very much look forward to that happening before Report. I was also grateful to the Minister for emphasising the point that the consumer duty cannot be the be-all and end-all. As my noble friend Lady Kramer very clearly put it, it is not a duty of care.
Baroness Scott of Needham Market (LD)
I remind the Committee that when a group is led by a clause stand part debate, after the noble Baroness, Lady Bowles, has spoken, there is no second intervention from me at that point.
Baroness Bowles of Berkhamsted (LD)
My Lords, oppose Clause 17 standing part of the Bill. Before turning to the detail, I will explain how Clauses 16, 17 and 18 fit together. They are not independent clauses. They operate as a single, interlocking structural package—an unholy trinity. Clause 16, which we have already debated, starts the move of day-to-day statutory principles out of operational decision-making and into a five-year strategy document. Clause 17 is the moment where it cuts. It removes the operational duty to apply the principles and the duty to explain how they have been applied. The principles remain in the abstract, but the visibility of their application disappears. Clause 18 then seals the trio by removing the remaining statutory mechanisms through which Parliament once saw how those principles were applied.
I said in Committee last week that deregulation of regulators inherently increases the regulation of markets. A regulator’s default setting is caution, not proportionality. That is precisely why Nikhil Rathi asked Parliament for political cover to take on more risk, because he knows that the system will not shift itself.
However, removing the operational “have regards” does not reduce that institutional caution. It simply removes the focus that keeps it directed at the right things. It removes accountability and removes Parliament from the role or possibility of providing support or cover with its eyes open, a direction of travel that Clause 18 then completes. The result is that Parliament loses operational visibility at the very moment when regulators are being asked to take on more risk. This is the context in which Clause 17 must be understood.
By deleting the principles from their operational position, the Government remove the statutory reporting loop. That deletes the audit trail that allows us to test what the regulators have done and why. Crucially, it also removes the only lever of accountability we have. We do not possess direction powers or hold budgetary levers. We do not have judicial review that bites on the substance of expert rules. All Parliament has is the ability to see, to question and, ultimately, to embarrass. An embarrassment card is a fragile card, but it is the final line of democratic accountability in the UK’s financial regulatory system. Clause 17 strips even that card from our hands. This is not simplification. It is a cultural turnabout that systematically switches off operational accountability.
Parliament is not trying to run the regulators. Our role is that of a critical friend: the only body that can speak openly what industry dares not, and test whether the principles that Parliament set are being applied in practice. Under the current framework, regulators must have regard to statutory principles in consultations, rules and supervision. Have they done this perfectly? No. They adopted a tick-box matrix that has become tedious and uninformative, but nothing prevents them shifting to thematic reporting, highlighting where specific principles matter most. Where the system has fallen down most is on the supervisory side, with an explosion of excess communications, overbearing information requests and a proliferation of Section 166 investigations.
Explanations around the “have regards” are the audit trail of how Parliament understands how a regulator weighed proportionality, firm size and sustainability of growth, or where climate change held relevance. A thoughtful narrative is far more informative than a boilerplate matrix, yet Clause 17 removes all requirements to explain or to show the rationale. In its place, the principles are relocated to a five-year strategy document that cannot be specific or enforced by the courts, and cannot be used to test an individual rule or a heavy-handed supervisory decision. This is not simplification; it is opacity. I pose the question: is the role of Parliament wanted?
At the Treasury Committee on 24 March 2026, the FCA’s CEO, Mr Nikhil Rathi, was asked how the system would handle the blistering speed of financial innovation. His answer was striking. He said:
“That is why I asked for a risk appetite from the Government and Ministers and Parliament so that we all know … what guardrails we are operating within, with appropriate democratic input and oversight”.
He also told the committee during the Sexism in the City inquiry that if the FCA were to set thresholds below that which Parliament had established in employment law, it would need a degree of political cover and agreement through Parliament. This is two sides of the same coin. The FCA is actively asking Parliament for guardrails, oversight, democratic accountability and cover because it is being pushed to accept more risk, and with more risk comes more failure or challenge.
However, Parliament cannot share responsibility if we are blinded from seeing how the principles are applied, and we cannot endorse greater risk-taking if we are denied information on where those choices bite in practice. When scandals happen, what angers Parliament most is when the writing was on the wall for a long time. Woodford funds is a textbook example, and London Capital and Finance is another.
The Minister may point to strategies, outcomes reporting, cost-benefit panels and annual reports, but the FCA itself has conceded that these are visibility tools, not accountability tools. Reports describe outcomes after the event, long after the harm has occurred. A strategy document can say all the right, glossy things, while the actual rules produce disastrous outcomes. We have seen before how FCA high-level assurance, even on specific cases, can look immaculate, while operational reality goes badly wrong. We saw that with British Steel pensions, with motor finance and with Woodford. Clause 17 remains the only operational hook that Parliament has to test whether the principles guided the procedure.
Last week, the Minister indicated that perhaps proportionality would be restored. If so, that is welcome, but a verbal concession is not an amendment and patching one leak does not fix a broken hull. If proportionality cannot be functional in a five-year strategy document, how can other principles survive, exiled there? Clause 17 still deletes the operational requirement that regulators must consider the desirability of sustainable growth. Removing this is nonsensical. The Government cannot possibly want unsustainable growth—growth that does not last.
Let us not forget the legal hierarchy. The secondary objective of competitiveness and growth sits higher up the statutory ladder. Precisely because that objective sits higher, there is all the more need to keep the sustainable growth consideration anchored in the operational functions. Right now, we see a political dash to deploy capital productively. If we encourage a reckless sprint when the underlying assets are not yet created, we are building not prosperity but a bubble, creating systemic fragility. So, restoring proportionality but deleting sustainable growth from sight collapses the government logic. It says that an audit trail for a firm’s compliance cost matters but an audit trail for long-term stability of the economy does not.
The consultation spoke about rationalising the number of “have regards”. It did not propose removing them from rule-making. It did not propose isolating them in a five-year strategy. It did not propose weakening the basis on which the courts can test whether regulators have properly considered Parliament’s intent. It did not analyse the interaction with the secondary competitiveness objective. When the Government consult on one minor administrative tweak but legislate for a far-reaching structural overhaul, that raises serious questions of fairness and due process.
I can see what the Government thought they were doing here. They believed that, by removing the operational “have regards”, they would free the regulators from excessive caution and allow the system to move more quickly. But, in practice, this clause disturbs the balance in a way that the Government have not accounted for. It removes not the caution but the focus and visibility that allow Parliament to understand how risk is being taken, to understand where it is being borne and to play its part in the structural balance of the system, which includes giving cover to the regulators when appropriate. That is the constitutional gap at the heart of this clause and why it represents not a simplification but a weakening of the framework of accountability on which our financial regulatory system depends.
This clause, along with Clause 18, has a serious impact on parliamentary scrutiny, as has been raised by the noble Baroness, Lady Noakes—so I will not go further into that. But these things collectively are why I oppose that Clause 17 stands part.
Lord Vaux of Harrowden (CB)
My Lords, I have added my name to the Clause 17 stand part notice. As has been explained so clearly, the Government’s intention appears to be to put most of the consideration of the regulatory principles and “have regards” into the five-year strategy created by Clause 16. They believe that, having done that and thereby provided long-term clarity as to how those principles and “have regards” will be met at a strategic level, it is no longer necessary to apply them to the nitty-gritty of individual rule-making, which is why Clause 17 effectively removes them from that process. Rightly, the Government consider the secondary competitiveness and growth objective to be extremely important, so they have singled that one out for special treatment in Clause 20, and it alone must be reported on annually. That, at least, is to be welcomed but does have the somewhat odd effect of making the secondary objective more important than even the primary objectives, or any other principles which are not subject to specific reporting.
As we have heard, there are very real problems with this overall approach in terms of the impact on the ability of Parliament to scrutinise the activities of the regulators, including the committees that have been established for that purpose. As the Minister is aware, the Financial Services Regulation Committee of this House, of which I and a number of others in this Grand Committee are members, has taken the unusual step of writing to the Minister to set out our unanimous concerns in that respect. I very much look forward to the meeting that he will attend next week on that.
In passing, just before we started today, we received a letter and a Treasury note from the Minister. Point 15 in the Treasury note would slightly bring together the strategy and the Clause 17 elements, in that it says:
“The Bill will require the regulators in their annual reports to update on the extent to which, in their opinion, they have implemented their long-term strategy”.
I spent a fair bit of time since I received that trying to find where the Bill actually says that. I may be being very dim, but I cannot find it, so perhaps the Minister could point out specifically where that is. I may well have missed it, and I apologise if I have.
I also spent part of the weekend reminding myself of what the FCA’s existing 2025-30 strategy document looks like. I lead a very exciting life, as you can see. While “vacuous” might be too strong a description, it is a classic of its type, being full of motherhood and apple pie generalities and lots of attractive diagrams and pictures, but very little of real specificity or genuine measurability. Statements such as
“We will be a smarter regulator; predictable, purposeful and proportionate”,
sound great, but is this really something that could be meaningfully scrutinised? When I compare the rules in Clause 16 with what is actually in the current strategy, it appears to me that the current strategy would actually comply with Clause 16.
During the previous day in Committee, the Minister said, in reply to a question from the noble Baroness, Lady Noakes, about the existing strategy and whether it is the model on which Clause 16 is based:
“this is the starting point. There is definitely work to do and it needs to be improved”.—[Official Report, 24/6/26; col. GC 337.]
I cannot see how Clause 16 would improve it— I think it already complies—so I have no argument with the FCA having to have a longer-term strategy, but Clause 16 does not provide a sufficient basis on its own for parliamentary scrutiny and accountability, and that is where Clause 17 becomes such a problem. Clause 17 removes the need for the regulators to have regard to the regulatory principles and other “have regards” when going about its general duties, so apart from the annual report on competitiveness and growth in Clause 20 that I mentioned earlier, the only time the regulators will have to consider the regulatory principles—including, but not only, the critical issue of proportionality—will be in its five-year strategy. This would remove the need for regulators to explain how the regulatory principles apply to any draft regulations, at a time when they should be explaining not only the application to individual regulations but the cumulative impact of those regulations.
We debated last week how there is scope for an overhaul of the regulatory principles and other “have regards”, which have a tendency to proliferate. Perhaps that is where the Bill ought to be concentrating its efforts. Clause 17 represents a considerable downgrade on the ability of Parliament and indeed the Treasury to hold the regulators to account. Even as the Bill delegates ever-increasing activities to those regulators, this is a move in the wrong direction. So, by all means let us have a long-term strategy, but that does not substitute for the need for the regulators to have regard to the principles and other “have regards” when setting regulations, and to explain how they have been met. Clause 17 should be removed from the Bill.
Lord Eatwell (Lab)
My Lords, I want to follow on from the noble Lord, Lord Vaux, who commented that the committee was unanimous in its letter to the Minister. It was indeed: Conservative, Liberal Democrat, Labour and Cross-Bench Members were unanimous in rejecting Clause 17. The reason is that Clause 17 embodies the requirement to remove the principles from consideration by the committee. But those principles are the essential toolkit of the committee. This actually neuters the committee and leaves it just examining five-year strategies and annual reports, and without the ability to deal with specific proposals, which is the reason why the committee was established in the first place. By removing that ability, the Bill also weakens the regulators.
I am sure there are regulators in some office who thought that that was a neat way of getting rid of a very awkward committee. But it weakens, because, as the noble Baroness, Lady Bowles, pointed out, of the need for political cover—the need for a relationship between the political decisions and regulatory decisions. At the moment there exists this “proposal, accountability, critique” relationship between the regulators and the Financial Services Regulation Committee of your Lordships’ House. Remove that and the regulators are exposed to significant issues in a way they would not have been before.
I cannot see how in any way this measure improves a regulatory system that was built on the principles relationship established in FSMA at the beginning. It became particularly important once we left the European Union and the responsibility to examine the regulatory structure shifted from the European Parliament to this Parliament; and now, Clause 17 is taking away parliamentary accountability in any serious operational sense. It really should not stand part of the Bill.
Lord Bridges of Headley (Con)
My Lords, I will speak very briefly on this. I declare my interests as employee adviser to Banco Santander in Madrid and a shareholder in Santander. I also apologise to noble Lords, as I was unable to speak at Second Reading.
I will follow on from the noble Lord, Lord Eatwell. I think he and I may disagree on certain aspects of the regulatory and supervisory approach, but I fundamentally agree with every single syllable he has just said. I am very queasy about aspects of the Bill. Many of us spent some time in this Room several years ago trying to ensure that we can hold to account in Parliament, both in this House and the other place, the regulators and supervisors, who hold immense power. That was absolutely right. We put in place a number of measures, including the establishment of the new committee, so ably chaired by my noble friend Lady Noakes, to enable us to do that—just one measure. This clause goes very much in the wrong direction.
I read the letter, for which I am very grateful, from the noble Lord, Lord Stockwood, and I have to say that I am somewhat perplexed by it. My wife says that I have a very little brain, so I very much look forward to the noble Lord telling me that I am wrong—I am very used to it. Let me try to understand what it is saying.
It starts by saying—or, rather, several paragraphs in it says:
“Considering separate rules in isolation is not effective for assessing the cumulative effect of the regulators’ actions—both the benefits in terms of advancing their objectives, and the costs to affected businesses”.
It goes on to say, as noble Lords will no doubt have read, that the publication of the overall long-term strategy will somehow address this. It also says:
“Clause 16 is intended to address this feedback”
from the sector—I am not sure from whom—
“and improve transparency around the regulators’ long-term direction and focus”.
I am very happy to have a long-term strategy but we absolutely need to be able to call to account actions that the regulators take, case by case.
I have read the Explanatory Notes, which say that the long-term strategy will be once every five years. I see that as entirely insufficient. Furthermore, in paragraph 170, the Explanatory Notes go on to say:
“The Government expects that the strategies will be high level and focus on the FCA’s and PRA’s top priorities and the outcomes they aim to achieve over that time”.
I do not see this as anything like the accountability that we were looking for when we introduced the measures in the last Bill, now an Act, and in the new committee. As far as I can see, it is not the case that the Government dispute the need for this case-by-case analysis, for they say this three paragraphs down in the same letter that I quoted earlier:
“There appears to be broad agreement that, in some areas, regulatory requirements on firms have become overly prescriptive, in some cases duplicative, and that this results in high costs for firms, and means that they spend a large proportion of their time and resources focusing on regulatory requirements”.
I agree wholeheartedly. We need, therefore, to address these points case by case.
All these points tie up. We cannot see the regulatory oversight of this House and the other House diluted in the ways that these clauses do when you put them together. I therefore agree entirely with the noble Lord and those who back these two amendments. I will later press for other measures to tighten, not weaken, regulatory accountability.
Baroness Noakes (Con)
My Lords, I will be brief because much of what needs to be said on this topic has already been said. I will not detain the Committee for long but, as I have added my name to the clause stand part notice, I thought that it was worth me reiterating my strong opposition to Clause 17.
Picking up on what the noble Lord, Lord Eatwell, spoke about, in our debate on the first group, the Minister reiterated that the Government think that the FSMA model is the correct model. I do not think that any of us is seriously disputing that as a broad proposition. What we are focusing on is the detail of how the FSMA model can continue to work. When we left the EU, the huge amount of EU law that became assimilated law changed the name of the game around how financial services regulation is lived out in this country.
As we have heard, the 2023 Act tried to deal with that in part by increasing parliamentary accountability through the committees of each House, including the requirement for individual rules proposed by the PRA or the FCA to be accompanied by explanations of how the regulatory principles had been applied. I do not think that any of us clearly understood the scale of the problem back in 2022, when we were considering the Bill, but we thought that these were sensible moves in the right direction. The only thing that has changed is that, now, the Government are coming along and putting even more into the FCA by way of the consumer credit legislation, which is a good idea.
But this has seriously undermined what was still work in progress on how effective parliamentary accountability could be worked. There were never any discussions with either committee of the Houses of Parliament about how the arrangements for accountability following the 2023 Act worked. We suddenly got this decision by the Government to cut away the legs of the committee through its inability to engage with the individual regulations. It is clearly the case that looking at a five-year strategy will never replace the work that needs to be done at a granular level on some of the proposed regulations that come from the regulators. That is the time for interventions—not by looking back at whether actions have complied with a strategy.
We should use this Bill to refine the FSMA model, to make it workable for the scale of the task that is being given by Parliament to the regulators and to make sure that the strength of the accountability mechanisms matches the scale of that activity. That is all that we are trying to do. The direction of this Bill is the wrong direction.
Baroness Donaghy (Lab)
My Lords, I am tempted to say, “What she said” and sit down, but I want to emphasise the unanimity of the Committee on this crucial issue. Some of us think that the FCA has too much to do anyway. Some of us—probably fewer—think that successive Governments have used the regulators as a heat shield and that perhaps the balance has gone the wrong way.
Not to repeat the examples that have been given, the noble Baroness, Lady Kramer, mentioned the five-year strategic plan of the FCA. For some of us it was a glossy PR exercise. Examples have been given, naming and shaming. It took at least two meetings and several bits of correspondence before the FCA even hinted that it might have done it slightly differently had it given some consideration to what it did. In that case, you might argue that it was about a deregulatory issue, trying to hold companies to account. Our committee thought that it had gone too far.
One final example is the issue of cost-benefit analysis, which the Minister used on the first day in Committee. We tried very hard to pin down how the FCA conducted cost-benefit analysis and what was happening to the panels. We heard that they were work in progress. Had the panels met? No, they had not met. What approach did the organisation have to analysing cost-benefit analysis? I am sorry that the noble Lord, Lord Sharkey, is not here as he is the expert on the granularity of analysing cost-benefit analysis. It was a poor show. I am sure that it is working to improve, as it is improving in a number of other areas, but it is extremely important that the work of Parliament should not be inhibited by an attempt to tidy up regulation—which is in fact setting aside protections.
The Minister, on the first day in Committee, used the phrase “modernise protections”. I am sure that he meant to say, “Modernise the transparency, modernise the complexity and modernise the general approach so that people can understand them”. I hope that he did not mean “modernise protections” in the sense of setting them to one side.
Lord Davies of Brixton (Lab)
What she just said.
As the final representative of the committee in this Committee, I agree with what the other members of the Financial Services Regulation Committee have said. It is important. I remember sitting across the Room some years ago when the idea was being discussed. It is worth recalling that the original idea was, I think, a Joint Committee of both Houses but, for whatever reason, the Commons decided that it did not want to adopt that approach. I think there are rules about criticising what the other House does, but there is no doubt that the only effective manifestation of the belief that this sort of work is required has been the work of that committee. It is particularly important that we do not lose something that we achieved through cross-party agreement.
Baroness Bi (Lab)
My Lords, I declare an interest as chair of Norton Rose Fulbright. Some of my firm’s clients are regulated by the FCA and the PRA. I am not a member of the Financial Services Regulation Committee, which is why I am probably breaking what I have heard as unanimity by speaking in favour of Clause 17 remaining part of the Bill.
I note that the current accountability framework, including the role of the committee, was created only three years ago, pursuant to the Financial Services and Markets Act 2023 following Brexit. Before that, we have to remember that we were content with what was probably pretty limited oversight by the European Parliament, so hearing about the importance of very detailed parliamentary oversight when it comes to looking at every proposal that the regulators might have is a relatively new innovation for us.
I do not think it unreasonable for the Government now to consider how well that post-Brexit system has been working and to propose changes to a regime that the committee itself has criticised as overly complex and difficult to navigate. I note that the noble Baroness, Lady Noakes, commented at Second Reading how difficult it had been to hold the regulators to account under the current system. I am therefore curious about why noble Lords are keen to preserve a status quo that is far from ideal.
There has been significant opposition to Clause 17 and concern about the effect it could have on parliamentary oversight, but I am not convinced that that reaction is warranted. I do not think Clause 17 is a retreat from scrutiny, but it is looking to make it more targeted and effective by merely removing the obligation on the regulators to consider every step they take by reference to the eight FSMA regulatory principles for every day-to-day function. The obligation to notify all those processes to the parliamentary committee does not always lead to the kind of analysis or response and targeted feedback that we have been discussing. That volume of information that the regulators are producing has not led to a better system.
The result is that that documentation requirement has become a burdensome compliance exercise and not truly analytical. The Government’s consultation confirmed that the information produced is too granular to support effectively an overall assessment of regulatory performance, and nearly three-quarters of those who responded to that consultation were supportive of or broadly sympathetic to the approach the Government are proposing, and these are the customers, the regulated body, of the people that the FCA and the PRA are supposed to protect.
We should also acknowledge that Clause 17 does not abolish the Section 3B regulatory principles. The FCA and the PRA will continue to be bound to have regard to those principles when they are preparing or revising their five-year strategy plans, for which they will be held accountable not just by the parliamentary committee but by society as a whole. Those strategies will be subject to consultation and will create a public benchmark against which the regulators’ subsequent rule-making can be assessed and progress against the stated strategy can be monitored, in their annual reports if nothing else. I am not referring just to the glossy brochure that we have heard about.
It is also important to note that Clause 17 does not alter the requirement for the regulators to consider and document to the committee how they are pursuing their statutory objectives. In the case of the FCA, so much of the focus is on the competitiveness and growth objectives. That gives the committee a powerful accountability tool. There is nothing to stop the committee calling them in whenever it likes to talk to them about how they are meeting those objectives in line with the principles.
The requirement of the regulators to present their analysis to the committee on each of the eight regulatory principles in relation to each consultation is disproportionate. Its removal does not reflect a material dilution of the regulators’ obligations because the substantive matters of concern continue to bind the regulators in any event. Is it necessary for the committee to be involved in all the detailed work that the regulators need to do in order to exercise proper parliamentary oversight in what we all accept is a fast-changing financial services market in a post-Brexit regulatory environment where the FCA and the PRA now bear responsibility for significantly more rules than was contemplated when Section 3B of the original FSMA 2000 was drafted?
As a common law legal system, it is right that the Government ask the regulators to comply with broad principles and hold them accountable for the outcome without requiring parliamentary oversight of all operational steps and without expecting the regulators actively to consider and document their analysis of how they have complied with each principle every time they exercise their general functions, however routine they are. I know that there is a discussion about the system being modified and improved through this Bill, but that is not what we have at the moment.
The committee’s mandate is to scrutinise whether the UK’s regulatory framework and regulators operate effectively. That requires the committee to have access to meaningful information and a coherent standard against which to test the regulators’ conduct. The long-term strategy provides that broad standard, and the committee will still receive consultations and examine how individual proposals advance the strategy that the regulator has publicly committed to. Its constitutional role could therefore be strengthened rather than rendered ineffective. Clause 17 keeps the Financial Services Regulation Committee’s oversight where it should be: on the substance of regulatory performance, the delivery of publicly stated strategies and the real-world impact of regulation. It also frees the regulators from unnecessary procedural burden, so that they can focus on regulating well. The mechanism does not have to be the same as before, and keeping Clause 17 could materially improve it.
Baroness Kramer (LD)
My Lords, I did not intend to speak in this debate because the case has been put so well. However, having heard the noble Baroness, Lady Bi, I want to join the conversation because I think she has a very different perception of the role of Parliament from that of many others here. We have a responsibility as Parliament collectively—we are not the elected House but the appointed House—directly to the people of this country. The regulators are servants of that responsibility, not masters of it.
What the noble Baroness described is the ability for Parliament to intervene only at the very highest level in a very limited way and to pass huge authority over the financial sector, our financial stability and the economy to the regulators and then walk away. If we were to do that, we would be absenting ourselves from the very requirements that are at the core of a parliamentary system. She dismissed the pretty five-year strategy plan that we have from the FCA for 2025 to 2030, but it is exactly what is envisaged in this legislation: fairly high-level, simplistic comments of the kind that were probably developed by the public relations department.
The committee we put in place in 2023 was put in place not at the proposal of the Government or the regulators but by a Parliament utterly frustrated in not being able to carry out the responsibilities that it has as a Parliament. I have to say that the Labour Party was in a completely different place in 2023—it has now switched; I do not know why it has made such a volte-face. The Government of the day, the regulators and the financial sector were determined to narrow the capacity to scrutinise, to have a parliamentary view and to allow this Parliament to live up to its responsibilities. If we cannot have an expert committee able to look in detail at factors that so fundamentally affect the economy and well-being of the UK, we are, frankly, derelict in our duties. That is why this is a huge constitutional issue. If we were to repeat this in the area—
Baroness Bi (Lab)
I am not sure that we disagree very much on what the purpose of Parliament is and its relationship with the people of Britain, but the FCA asked for a risk metric from Parliament and did not get one. I have heard a lot about the obligations to the people but, if Parliament is so crucial to what the regulators need to do, why was no guidance given to the regulators about the extent of risk they should take in their operations?
Baroness Kramer (LD)
I am not on the committee, so I cannot answer that particular question—I am sure others would be able to consider this issue. However, if the noble Baroness thinks that, because Parliament did not, in her words, provide political cover for activity that the regulators wanted to carry out, Parliament should then be removed so that the regulators would somehow be exposed, who would they be exposed to? They would not be exposed to a committee. The public does not have the ability. I do not see the regulators going around the country talking to ordinary people in regular communities about what they are doing; they do not engage at that level. Many APPGs in this House have asked the regulators to come and talk to them. They are nearly always refused or somebody junior is sent, so it is only through a limited committee structure that this Parliament has been able to hold the regulators to account at all.
I give huge credit to the committee that sits under the chairmanship of the noble Baroness, Lady Noakes, which was created against the resistance of the regulators and the Government. This, now, is their attempt to try to unravel what is turning out to be a very effective committee that is raising really important issues, creating a requirement for proper answers and initiating real investigation. That is what lies at the heart of this: an attempt to negate the effectiveness of a committee that has been making its mark, and which leaves the regulator feeling uncomfortable because it has to answer questions.
Baroness Noakes (Con)
I shall make a brief comment on why Parliament has not offered any guidance on risk metric. The committee was well aware that the FCA sought to get clarity about the risk appetite that it was taking. The PRA had not made that request; it regards it as its responsibility to judge the balance of risk. There is no unanimity in the regulator community on this, but we reported the issues as we found them in one of our reports.
The noble Baroness asks why Parliament has not given its answer. The straightforward answer is that the Government have not brought forward anything. Parliament gives an answer only when it approves something that the Government bring forward. When we asked the Financial Secretary to the Treasury whether she intended to operationalise the giving of a more specific risk appetite to the FCA, she said pretty clearly that she thought that the Government would not do that.
If the Government do not bring forward something for Parliament to approve, it is not going to happen. Parliament does not act in the way that the noble Baroness seemed to think that we would act, which is that a committee would somehow produce an answer on risk appetite. The committee can comment on the issue of risk appetite and has done so, but it is fundamentally for the Government to take any action that is to change the way in which the risk appetite is specified for any regulator.
Baroness Neville-Rolfe (Con)
My Lords, this is an important clause, and I understand why noble Lords wish to probe the Government’s approach to Clause 17. It is always right that we scrutinise carefully any change to the statutory framework governing our financial regulators, and the sponsors have set out their case well. I note that they were introduced into the 2023 Act for good reason: to try to ensure that financial regulation in the UK is proportionate, accountable, flexible and aligned with economic and market objectives.
As I said earlier, I am glad that a meeting with the Financial Services Regulation Committee will take place next week. Certainly, I would like to get to the bottom of whether the change neuters the committee, as has been suggested by the noble Lord, Lord Eatwell, and my noble friend Lady Noakes; indeed, I think that committee was unanimous that there was a problem. I thought it was interesting that my noble friend Lord Bridges echoed concerns that key, case-by-case analysis by the committee would disappear, and that the noble Baroness, Lady Donaghy, expressed concern about the way that her questions about cost-benefit analysis had been answered, presumably under the existing system.
These are all very legitimate questions, but there are other considerations—the noble Baroness, Lady Bi, touched on some of them. Our position is that we do not want to perpetuate overburdensome regulation. In discussions with industry, we have heard repeatedly that the regulatory principles in Section 3B of the 2000 Act can themselves lead to tick-box exercises. That is particularly true where the principles require regulators to consider wider public policy objectives, which may have only a very indirect connection with the firms being regulated or the activities in question. For example, Section 3B(1)(c) includes
“the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act”—
the net-zero target—
“and … the Environment Act 2021 (environmental targets) where each regulator considers the exercise of its functions to be relevant to the making of such a contribution”.
My own experience of serving on a challenger bank’s board is that there is already a lot of climate-related activity required by the regulators that creeps into many aspects of governance. It is generally costly and sometimes of little worth. That was before the regulatory principles were added. That reflects, harking back to our earlier conversation, the extensive net-zero regulations that exist, the remit letters and the sustainability reporting network, all of which were cited earlier. Therefore, the real question is whether financial regulation is the right vehicle through which to pursue such goals and whether embedding such considerations produces better regulation or simply more process, as we suspect.
The Bill is meant to be deregulatory, and it is meant to simplify the regulatory environment and to support growth and competitiveness. I think the Government may be genuinely reducing a burden that has been identified by industry. We should be careful before assuming that every principle must remain in place. For me, the real tests are about what improvements are coming about here. I am interested in the detail. Does it make the FCA or the PRA more effective? Does it protect consumers? Does it support financial stability? Does it help growth? Alternatively, does it simply create another layer of process, the cost of which falls on firms?
I would be grateful if the Minister could explain more clearly the Government’s rationale for Clause 17. What burdens have been identified and what will the impact be of the changes proposed here? What evidence have the Government received from industry and regulators about the operation of the current Section 3B principles? How will the Government ensure that removing or amending such principles reduces unnecessary burdens, without weakening the core protections that consumers and markets expect?
As the Official Opposition, we are, in essence, in listening mode on this quite radical proposal. We would like to understand whether the “whereases” that are being partially abolished are a burden on only the regulators or whether that feeds through to industry and consumer protection—and, if so, how. I believe that, sometimes, a clearer, simpler and more focused framework is more effective. If Clause 17 helps move us in that direction, it may be needed in the Bill, as the noble Baroness, Lady Bi, suggested. However, it also seems very important to work out how the two parliamentary committees will exercise proper oversight going forward in a post-Brexit regulatory environment, and to ensure that any regulatory resistance, which we have been hearing about this evening, is minimised.
Lord Stockwood (Lab)
My Lords, it is clear that the Committee places a strong emphasis on getting the regulatory principles right. The Government also take this matter very seriously and genuinely value the contributions made in this debate.
Before I start, it is important to remember that the regulators have both principles and objectives. The regulators need to advance these objectives—regulatory principles are something that they consider only when doing so—and the Bill does not change that. The noble Lord, Lord Vaux, asked me whether the regulators will be required to report on the long-term strategy. Clause 16(6) amends Schedule 1ZA to FSMA so that the FCA must explain, in its annual report, the extent to which it has implemented its long-term strategy. Clause 16(7) does the same for the PRA.
The Government agree that the regulatory principles are an important part of the statutory framework. They are also aware that each of these principles has strong support, so, while there may be a view that some could be removed, there is no consensus on which ones it would be suitable to remove. This is why, when the Government reviewed the principles, they concluded that none of the individual principles should be removed from legislation. Instead, the Government concluded that the regulatory principles must continue to play a significant part and a central role in the work of the regulators through new long-term strategies. The regulators will be required to have regard to those principles when preparing or revising their strategies, ensuring that they are applied in a more coherent and visible way at the strategic level and in a manner that supports an overall assessment of the regulators’ performance and actions.
In our debates on other clauses, there has been a widely shared view that, in some areas, regulatory requirements on firms have become overly prescriptive and, in some cases, duplicative. The Government consider that, in some areas, this is also true of the regulators, and that, over time, various requirements have been added to and extended. This places the resourcing burden on the regulators, which is ultimately paid for by firms and can reduce their capacity to act quickly and effectively.
That is why the Government consider it appropriate to change the way in which the regulatory principles in FSMA are applied to the regulators. The Government consider that this new approach will support more meaningful scrutiny of the regulators’ strategy, as opposed to repetitive and fragmented processes across the individual exercising of their functions. As I explained earlier, it would mean that, for example, rather than considering whether an individual proposal is proportionate, the regulators will be required to set out clearly how they have considered whether their strategies and work plans as a whole will result in a proportionate burden on firms.
Let me be clear: the regulatory principles will remain central to the regulators’ work under the new framework. Parliament will continue to have the full range of statutory and constitutional levers through which it can hold the regulators to account, including scrutiny by parliamentary committees and review of the regulators’ publications, such as their annual reports, on how they have advanced their statutory objectives and their annual responses to the Treasury’s letters of recommendation on economic policy—both of which the Treasury is required to lay before Parliament. The requirements for the regulators to consult on proposed rules and demonstrate how they have advanced their objectives will remain. If the rules on which the regulators are consulting will impose costs, their cost-benefit analysis must also be published. The regulators must also notify the chairs of parliamentary committees when they issue consultations. This requirement is also unchanged. If a parliamentary committee writes to a regulator concerning a publication, the regulator must respond to that committee in writing. The Government consider that these are the most effective ways of holding the regulators to account.
The accountability of financial services regulators is a significant matter for this Committee—I have heard that loud and clear. The regulatory principles are important for shaping the work of the regulators, and I recognise the strength of feeling on how they operate. However, the way in which they currently operate can reduce the regulators’ agility while doing little to support effective overall scrutiny or to materially benefit firms. Reforming how the regulatory principles work will ensure that these principles continue to be central to the work of the regulators and will support enhanced scrutiny of their overall performance. I therefore move that Clause 17 should stand part of the Bill.
“Treasury statement of concern(1) Where the Treasury considers that rules or guidance made by the Financial Conduct Authority or the Prudential Regulation Authority are inconsistent with primary legislation or statutory objectives, the Treasury may publish a statement of concern.(2) Where a statement of concern is published under subsection (1), the Financial Conduct Authority or the Prudential Regulation Authority must, within 60 days, publish a response explaining—(a) whether it agrees with the concern, and(b) what action it proposes to take.(3) The Treasury must lay before Parliament any statement of concern published under this section, together with any response received from the Financial Conduct Authority or the Prudential Regulation Authority.”Member’s explanatory statement
This new Clause would enable the Treasury to publish a statement of concern where regulator rules or guidance appear inconsistent with primary legislation or statutory objectives, requiring a published response and Parliamentary transparency.
Baroness Bowles of Berkhamsted (LD)
In a way, it is a pity that I tabled this amendment, because it would probably be a whole lot more informative for us to go straight on to Clause 18. However, Amendment 88 would introduce a new mechanism that was suggested to me: a formal Treasury statement of concern. The idea is that it would fill a gap that has always existed—one that becomes all the more glaring alongside the opacity created by the Bill.
The FSMA 2000 settlement imagined a world in which Ministers were hands off and regulators were left to get on with it. That world has long gone. The Government are now highly interventionist in the name of growth. More generally, they signal priorities, express expectations and raise concerns, but almost all of that happens privately or through speeches and press releases that are approximate and not subject to parliamentary scrutiny.
My amendment would formally put the record straight. If the Treasury considers that
“rules or guidance … are inconsistent with primary legislation or statutory objectives, the Treasury may publish a statement of concern”
and the regulators must respond publicly within 60 days. That is all. It is not a direction, and it is not interference; it is a constitutional signalling mechanism. It would simply show that the Government have taken action on a concern, which otherwise might be unknown. The Government may say that they do not wish for such a mechanism—they do not have to use it—but legislation is not written for the preferences of a particular Minister at a particular moment in time; it is written for the system. The truth is that the Government already intervene with regulators, only informally, privately and without transparency. Why not have a formal system as part of escalation or as a pre-legislative tool?
There is also a practical point. Parliamentary time is limited, and correcting regulatory inconsistencies through statutory instruments can take months, if it happens at all. A statement of concern is a stage earlier. It would allow the Treasury to flag a potential inconsistency without immediately reaching for legislation. It would also allow the regulators to respond and, where appropriate, adjust course. It could also help resolve issues that arise when different things are said or interpreted differently in different places.
In that sense, this mechanism’s greatest strength may lie in its quiet deterrent effect: it would rarely need to be used because its existence would encourage early correction and avoid the need for statutory intervention later. A statement of concern provides exactly that. It would allow the elected arm of government to say transparently, on the record, “We see a potential inconsistency. We are not directing you, but we expect a reasoned response, and we think that this needs to be done publicly”. It would also have the benefit to the Government of them showing formally that they have taken a concern forward.
As I say, this was proposed to me, and I think that there is a point to it. There is a missing link. The Treasury often says that it does not interfere, but there has been an awful lot of correspondence and hugger-mugger between regulators and the Treasury recently in order to come forward with the growth strategy. This is a missing link. The power of Parliament has been eroded. I did not recognise a lot of the things that the noble Baroness, Lady Bi, said about how the system works. There is a missing link in terms of what the Treasury is able to do. I beg to move.
Baroness Noakes (Con)
My Lords, I will speak briefly in support of Amendment 88 in the name of the noble Baroness, Lady Bowles. It would be a useful addition to FSMA to have a specific power for the Treasury to issue a statement of concern; I particularly like the fact that it could be used without the full parliamentary process of regulations. As the noble Baroness may recall, when we debated the then Bill in 2023, the Treasury took a power to tell regulators to make rules. However, that power has to be exercised via regulation, so it needs to go through the whole statutory instrument procedure. It has not yet been used, as far as I am aware, but it is a useful backstop that the Treasury has if it wants to direct the work of the regulators, which is a perfectly reasonable thing for it to do in certain important areas.
The existence of the Treasury’s ability to issue a statement of concern would be particularly useful when interested parties were trying to get a point about things that were not working heard by the regulators. The ability to engage the Treasury in that would be very helpful, although I am sure that it would be used more as a background factor in the relationship than as an active part of the Treasury’s relationship with the regulators. I applaud the noble Baroness on her ingenuity in bringing this amendment forward.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to the noble Baroness, Lady Bowles, for bringing forward these amendments. They raise two very salient points about the accountability of the financial regulators and the mechanisms by which Parliament, the Treasury and the public can scrutinise how those regulators use their powers.
One of the core functions of the Bill is to increase the power and scope of the remit of the regulators, in particular the FCA. Across the Bill, more responsibility is being transferred, more detail is being left to rules and more of the practical operation of the regime will depend on regulatory judgment, rather than primary legislation. My concern is that although the Bill increases the power of the regulators, it does not always provide a corresponding increase in oversight or scrutiny of them; as an ex-Treasury Minister, I am slightly surprised that the Treasury is entirely happy with that.
To me, Amendment 88 seems a sensible and proportionate form of challenge. It would create a formal and transparent way for the Treasury to say that, in effect, a regulator may have gone beyond what Parliament intended or may have acted in a way that is not consistent with its statutory remit. This matters because the Treasury is directly accountable to Parliament in a way that independent regulators are not. If regulators are to exercise substantial powers delegated by Parliament, there must be some meaningful mechanism by which Ministers can challenge, explain and account for how these powers are being used. We will come back to this point again at a later stage in Committee; my noble friend Lord Bridges has tabled an amendment that speaks to this same broad issue.
The underlying point is simple: if regulators are powerful, they must also be accountable. How best to achieve this should be a key objective of our scrutiny in Committee and on Report. I would be grateful, therefore, if the Minister could set out the Government’s position on this wider issue. He wrote to us shortly before Committee—a little too shortly before Committee; I say that politely—but I am not sure whether what he sent us, including the Treasury memorandum, answers our outstanding questions. So do the Government accept that the Bill increases the powers and responsibilities of the FCA and PRA? If so, do they accept that stronger oversight mechanisms are called for? What formal routes currently exist for the Treasury to raise concerns about regulator rules or guidance that may not reflect Parliament’s intention?
Also, what is the Government’s objection, if any, to periodic independent reviews of regulator performance and burden? As a former Minister, I found that, although such requirements were unpopular with the department at the time they were put into law, they proved useful in helping me keep on top of the responsible regulators and their policies.
I very much hope that the Minister will engage constructively with the problem, answer my questions, on both the previous group and this group, and appraise in a constructive spirit the amendment tabled by the noble Baroness, Lady Bowles. Above all, we need reassurance that the Government recognise the importance of scrutiny, transparency and trust in the regulatory system.
Lord Stockwood (Lab)
My Lords, the accountability of our financial regulators is a serious matter, and Parliament rightly takes a close interest in how the FCA and PRA exercise their powers. We have extensively discussed the FSMA model of regulation today. It is the foundation of a system of regulation under which Parliament sets the regulators’ objectives, invests them with the powers that they need to further those objectives and sets out a clear system of governance and accountability under which the regulators are required to account for their actions and effectiveness in furthering the objectives that Parliament has set for them. As I said before, the Government remain of the view that this is the most appropriate and effective model of regulation available. It has served us well and is internationally respected.
The difficulty with this amendment, therefore, is that it would cut across the foundational principle of our regulatory architecture. The FCA and PRA are operationally independent bodies. That independence is not incidental; it is the source of their authority and credibility and, ultimately, their value to the consumers and markets they serve. Under the FSMA model, it is the responsibility of the regulators to interpret their statutory objectives. It is not the role of HM Treasury to do so. This amendment would, over time, erode precisely the independence that makes those regulators effective. Markets, firms and consumers need to know that regulatory decisions are made on the merits, free from political pressure. This amendment, however well-intentioned, risks compromising that assurance.
Of course, Parliament can and does challenge the regulators where it thinks they have done something wrong. Given that their authority ultimately flows from Parliament, the regulators take that incredibly seriously. Parliament can and does make its views known to the regulators on key issues. For example, after a highly critical report from the House of Lords’ Financial Services Regulation Committee, and in recognising the lack of consensus among the stakeholders, in 2024 the FCA dropped plans to change the way that it publicised ongoing enforcement cases.
The noble Baroness, Lady Neville-Rolfe, asked whether the Government are satisfied with the current framework. There is an appropriate requirement already set out in FSMA that is designed to support scrutiny and oversight and, in certain circumstances, to allow the Government to give the regulators some level of direction. For example, the Government can require a regulator to review one of its rules or to appoint an independent person to review those rules where they consider this would be in the public interest. The Government can also require the regulators to make rules but cannot direct their content or purpose.
The regulators have a statutory duty to keep their existing rules under active review. This is contained in Section 3RA of FSMA. Furthermore, the Treasury has an ability to direct regulators to launch an independent review of specified rules, with the outcome laid before Parliament. The regulators are also subject to robust wider parliamentary accountability, including through the information they are required to provide to relevant committees and the vital role those committees play in questioning the regulators and critiquing their work. Those are the appropriate channels for testing the consistency of regulators’ actions with legislation or statutory objectives, not a ministerial statement of concern, which starts to undermine the principles of independent regulation. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I still think that there is a missing link here, but I heard what the Minister said and it is what I was expecting: the Government are frightened that this would look as if they were going to undermine independence in some way. I fully understand that. There are other regulatory interventions that Ministers make with other regulators, so it is not an entirely off-the-wall idea. It certainly was not meant to be part of the routine kind of application of day-to-day accountability. A “very rare or never” kind of application is what was envisaged, but we have given it an airing. It is not going anywhere. With that, I beg leave to withdraw the amendment.
Baroness Noakes
Member’s explanatory statement
This amendment, together with another in the name of Baroness Noakes, ensures that the FCA and the PRA continue to give guidance about how they intend to advance their objectives.
Baroness Noakes (Con)
My Lords, we now come on to a bit of a ragbag group of amendments, which I should probably have split into more than one group. In moving Amendment 89, I shall also speak to Amendments 92, 93, 94, 96 and 98.
I will start with the FCA’s guidance. At present, the FCA has a power under Section 139A of FSMA to give guidance on, for example, the operation of specific parts of FSMA or its rules. Section 1K says that the guidance must—that is, must—
“include guidance about how it intends to advance its operational objectives … in relation to different categories of authorised person or regulated activity”,
and, inter alia, it has to consult on that guidance. What does this Bill do? Predictably, it eviscerates the provisions. Clause 18(2) removes Section 1K from FSMA, and Clause 18(8) takes all the substance out of Section 139A. This is part of the insidious pattern of this Bill, removing information that regulated persons might find useful—removing guidance about how a regulator would advance its objectives—and removing the requirement to consult on what is left of Section 139A. This is a Bill solely for the regulators’ convenience, regardless of the needs of those subject to regulation. Similarly, Section 2L of FSMA currently requires the PRA to consult those it regulates about how its general policies and practices are consistent with its general duties, and Clause 18(3) removes this. My Amendments 89 and 92 would remove these retrograde provisions from the Bill.
Amendments 96 and 98 are rather different. They concern statutory references to the Financial Services Regulation Committee, and I thank my noble friend Lady Neville-Rolfe and the noble Lord, Lord Vaux of Harrowden, for adding their names. The current FSMA wording about parliamentary committees derives from the 2023 Act, which, as initially drafted, referenced only the Treasury Select Committee in the other place, but that was amended during the passage of the Act to encompass any committee of your Lordships’ House set up to deal with financial services regulation or indeed any Joint Committee of both Houses. Following the passing of the Act, your Lordships’ House decided to set up the Financial Services Regulation Committee, to which I, like others, have referred several times in this Committee. Amendments 96 and 98 merely amend the 2023 wording inserted into FSMA to reflect the fact that your Lordships’ House now has a specific committee which should be referred to in legislation.
When the Bank Resolution (Recapitalisation) Act was passed last year, we managed to get it amended to incorporate a specific reference to the Financial Services Regulation Committee, and I am a bit disappointed that the Treasury, which agreed to those amendments last year, has already forgotten that the FSMA wording is out of date and needs to be amended. I therefore hope that Amendments 96 and 98 are non-controversial and that the Government will accept them. I should explain for those noble Lords who did not take part in the passage of the Bank Resolution (Recapitalisation) Act that the references in the amendments to the Chairman of Committees are in fact references to the Deputy Lord Speaker—when that role was created, it encompassed the function of the Chairman of Committees, but that nomenclature remains in statute. That is the Committee’s fun fact of the day.
My remaining two amendments in this group, Amendments 93 and 94, are pretty arcane for those who have not audited a bank or sat on a bank or insurer’s board. For my sins, I have done both. Following the Parliamentary Commission on Banking Standards, FSMA was amended to require meetings at least annually between the regulators and the auditors of PRA-regulated persons. This was definitely overkill, and I am pleased that the Government have decided to delete most of Section 339B of FSMA, through Clause 18(11). They have, however, retained the requirement for the PRA to do those meetings, even if it no longer has to report on them; my Amendment 93 would remove Section 339B in its entirety. This does not mean that the PRA will never meet the auditors of the bodies it regulates: it used to meet the auditors before Clause 339B was enacted in 2013 and can continue to do so if the clause is eliminated, but it would remove the obligation on the PRA to do so. Clause 339B has in fact spawned a small industry of the PRA thinking up questions to ask the auditors to report on. The auditors then go away and write a report, usually asking their client to produce a lot of information first, and then the auditors ask the client for a fat fee. It is not value-added activity. We should leave meeting auditors to the regulator’s discretion.
In a similar vein, my Amendment 94 would amend Section 340 of FSMA, which requires the PRA to make rules about auditor co-operation. It has a similar provision for the FCA, but that merely empowers the FCA to do so. My amendment is unlike most “may”/“must” amendments in your Lordships’ House. We normally seek to replace “may” with “must”. My Amendment 94 does the reverse, so that the PRA “may” make rules if it chooses to do so, and hence aligns with the FCA by giving discretion to the PRA, which is also what my Amendment 93 aims to do. I beg to move.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, before we continue the debate, we have started group 6 and we have one more complete group to do. We are going to finish at 8.45 pm and I would hate to think that we would finish mid-group, but I am in your Lordships’ hands as to whether we do that.
Baroness Bowles of Berkhamsted (LD)
My Lords, this is the third of the trio. Clause 18 is a deletion clause, the final clause in the trio that removes consideration of the regulatory principles from the context of actual rule-making. It strips out the guidance duties, reporting duties and consultation hooks that once gave Parliament visibility into how the regulators applied their objectives and principles. Let us look at what is being systematically dismantled here. There is some overlap here with some of the things that the noble Baroness, Lady Noakes, has addressed.
Clauses 18(1) and (2) delete the FCA’s and PRA’s guidance about their objectives—the very provisions which, as the Explanatory Notes admit, required the regulators to explain how they advanced those objectives. It is not a question that they still have to explain now; that has gone. Clauses 18(3) and (4) remove the explanations required on directions on consolidated supervision and authorised decisions. Clause 18(7) removes the FCA’s obligation to notify, consult or explain when issuing guidance relating to its objectives. Clauses 18(9) and (10) delete large parts of the FCA’s and PRA’s annual reporting requirements, one of the most sensible and accessible ways for Parliament to understand how objectives were dealt with in practice and would ideally be built upon. Clauses 18(12) to (14) remove linkages to other Acts of Parliament, including the auditor engagement duties that once provided an additional source of supervisory insight.
What is left? Guidance? Gone. Explanations? Gone. Participation? Gone. Annual reporting? Gone. Audit? Gone. These were the exact mechanisms through which Parliament and others scrutinised how the regulators applied their objectives and principles. Clause 18 removes them all. It is the inevitable consequence of the Clause 16 and 17 shift: the practical reality of decoupling principles from operational effectiveness and removing Parliament’s line of sight. It leaves us with no checks and absolutely no balances. For these reasons, I oppose Clause 18 standing part of the Bill.
Lord Pitt-Watson (Lab)
My Lords, I will speak to Amendments 93 and 94. I have not audited a bank or sat on a bank board, but I was a member of the Sharman committee that looked at the problems with auditing following the global financial crisis. I sat on the board of one of the big four auditors, chairing its public interest committee, and I talked to a number of partners who audited the banks.
I think that we agree that audit is absolutely a foundation stone for the integrity of the capital markets. For those who are interested, it was part of the settlement following the collapse of the City of Glasgow Bank in 1878 that we would have audits of limited liability banks. It is particularly critical where entities are highly geared or where there is a considerable element of judgment in determining their value. If we look at the banks, they are hugely geared. People like to talk about the common equity tier 1 ratio, but if we look at the gearing that most companies use, it is the equity versus the liabilities. For a typical bank, equity is about 6%: on the back of that, you can borrow £94 and lend £100. That means that, if you have overvalued your assets by 3% and undervalued your liabilities by 3%, you end up with no equity whatever.
This is a really sensitive calculation and, historically, it would have been made with a degree of prudence and conservatism. Prudence and conservatism have now gone as guiding principles, and valuations are done neutrally. For example, this would allow a bank to declare a profit on a zero-interest credit card, on the grounds that it can bring forward the profits it thinks it will make in future. The noble Baroness, Lady Bowles, has been great in raising these issues for some time.
There are of course huge temptations to optimism. Indeed, it is surely testament to the professionalism of our bankers, and the independent agents we employ to monitor and control bank behaviour, that banks have not got into greater trouble. There are four such agents: the independent non-executive directors; the auditors; the investors and the regulators. Many more resources are devoted to auditing banks than to regulating them, and vastly more than fund managers devote to their role as stewards. The auditors have inside knowledge and huge expertise, and it is precisely that insight, given independently, that regulators need in order to play their role.
I think that that was recognised by the noble Baroness, Lady Noakes, when she suggested that the PRA “may” ask to speak to the auditors. The problem is that the auditors have a delicate job: they are referees. The report is done for the investors, but they need the trust of the audited entity. Indeed, they are, in effect, appointed by the audited entity, and they even sometimes describe the audited entity as a client. They are unlikely to go to the regulator without having profound concerns.
Regulators may find it helpful to call in the auditors because of problems that are visible to them: the known knowns. Under those circumstances, this amendment would of course work. However, what the regulator really needs to know is the unknown knowns: something that is known by the auditor, who has gone inside, but not known by the regulator. That is why it makes sense to mandate that the regulator “must” talk to the auditor to hear their concerns, to pick up potential emerging problems before they become critical, and to understand how the auditor judged the numbers to be true and fair.
The audit is the foundation of the integrity of our capital markets. For auditors to have material knowledge of a bank’s position that is relevant to the stability of the system and for that not to be known by the regulator seems to be completely perverse and potentially very dangerous. With that perspective, I wonder whether the noble Baroness, Lady Noakes, might be content with Clause 18, on audit reporting, to remain as it stands.
Baroness Neville-Rolfe (Con)
My Lords, we are sympathetic to the concerns raised by noble Lords across this group. I was glad to add my name to several amendments tabled by my noble friend Lady Noakes. I entirely agree with her and with the noble Lord, Lord Vaux, that the role of the relatively new and very effective Lords Financial Services Regulation Committee should be added to the 2023 Act. We are lucky to have such an assembly of experts and effective questioners, as well as Lords clerks, to help with the enormous task of scrutiny in the financial services sector.
We have just been discussing the accountability of the regulators, the importance of scrutiny and the need to ensure that the FCA and PRA exercise their considerable powers in a way that is transparent, proportionate and properly justified. This group raises those same issues in the more specific context of guidance, consultation, cost-benefit analysis and the way regulators explain the impact of what they do. I look forward to the Minister’s response to the noble Baroness, Lady Bowles.
Our Amendment 90 asks a serious question about cost determination. The cost-benefit analysis panels within the regulators are an existing mechanism of accountability. They are designed to provide scrutiny of the costs and benefits of regulatory proposals and to help ensure that regulators properly consider the burden that their rules impose.
But there is a significant limitation. As I understand it, the cost-benefit analysis panels are engaged only where the regulator makes a rule change that the regulator itself considers to be materially significant. Should there not be a more independent mechanism for testing whether a regulator’s view that a proposal has no or minimal cost impact is actually correct? If the regulator decides that a proposal has no or only minimal cost impact, then the process may not trigger a cost-benefit analysis—but that judgment may itself be contestable, especially if it is a net threshold, hiding both the costs and the benefits. Firms may take a very different view about the practical cost of implementation, the operational burden, the systems changes required and the cumulative impact when viewed alongside other requirements. Indeed, cumulative effect is a concern rightly enshrined in my noble friend Lady Noakes’s Amendment 119, which we will discuss on a later group.
There is also a wider issue. The cost-benefit analysis panels are not generally able to assess changes in guidance or enforcement activity. Guidance can be hugely significant in practice. Enforcement activity can create powerful incentives and costs across the sector, even beyond the firm that is directly affected. So the question is not simply whether a formal rule change has costs; it is whether the regulators’ activity as a whole is proportionate, whether it is evidence-based and whether the burden it places on firms is properly understood. That is why we want to press the Minister on whether the Government will give thought to expanding the remit of the cost-benefit analysis panels. For example, how will they operate in relation to the FCA’s new powers on credit, on in-person banking and on payment regulation?
Equally importantly, should they not be able to consider whether guidance, supervisory expectations and certain enforcement-related approaches carry material cost implications? Cost-benefit analysis forces a discipline on regulators. It requires them to summarise what they are doing succinctly and clearly, and to ask whether the benefit justifies the burden, whether the same objective could be achieved in a less costly way and whether the cumulative effect of regulations is proportionate. I always turn to the impact assessment of a rule if it is available, as it allows one to get to the heart of what is happening.
The broader point is that transparency, consultation and cost scrutiny are not bureaucratic obstacles to good regulation; they actually help to prevent unintended consequences and excess red tape, and they sometimes draw attention to harm to SMEs. They give Parliament and industry confidence that regulatory powers are being exercised responsibly.
So I would be grateful if the Minister could address the specific issues raised by Amendment 90. I have five questions, to which the Minister may want to respond by letter if necessary. First, who in practice decides whether a proposed regulatory change has no or minimal cost impact? Secondly, what is the threshold, in millions of pounds, and is it gross or net of benefits? What safeguards exist to test that judgment? Fourthly, are the Government satisfied that the cost-benefit analysis panels have a sufficiently wide remit? Fifthly, will the Minister consider whether that remit should be expanded to include guidance, supervisory expectations and other regulatory activity that may impose material costs on our important financial services sector?
As we have said throughout Committee, accountability must keep pace with regulatory power. If regulators are to be given more responsibility, the scrutiny of their decisions, their processes and their costs must be strengthened. I will listen carefully to all the Minister’s responses on cost-benefit and, unless these are satisfactory, the Opposition will want to bring forward an amendment on Report.
Lord Stockwood (Lab)
My Lords, I begin by explaining the Government’s purpose behind Clause 18 and why it should stand part of the Bill. Over time many reporting and procedural requirements have been placed on the FCA and the PRA, increasing burdens, introducing duplication and in some cases complicating oversight, scrutiny and accountability. There is broad agreement that this dynamic is true for firms subject to regulation. I ask noble Lords to reflect on whether it might also be true for the regulators and on whether that is slowing them down and ultimately having a negative impact on firms and consumers.
These burdens are not without consequences. The regulators must follow the letter of these requirements, diverting time and resources away from other work. Ultimately the cost of that work is passed on to firms through the levy they pay and through their engagement with the asks of the regulator. The Government’s view is that there is scope to rationalise parts of this approach to enhance the effect of scrutiny and to help regulators become more agile and ultimately better support innovation and growth.
The Government sought feedback on which regulator publications stakeholders found most useful and then worked closely with the regulators to consider this feedback and further assess the range of requirements placed on them. Feedback to the regulatory environment consultation indicated very low engagement with certain types of regulator publications, and the regulators’ data confirms this. In recent years, the FCA and the PRA consulted on several proposals to which they received zero responses, although I accept that not all publications are created equal.
I have listened carefully to the concerns raised, particularly the argument that these provisions remove practical tools that help Parliament and stakeholders understand what the regulators are doing and why. I recognise that concern, and that is why the Government have approached this area carefully. Clause 18 is carefully targeted and relatively modest. The Government are retaining the vast majority of the existing transparency and reporting framework. Clause 18 is focused on removing a small number of requirements where the burden of complying is disproportionate to their value. These changes do not prevent the regulators undertaking any of these activities where they judge it useful to do so. Instead, they give the regulators greater flexibility to focus on delivering their strategic priorities.
This clause must also be read in the context of the wider framework. The Bill introduces new long-term strategies, maintains the requirement for regulators to respond annually to Treasury recommendation letters and provides for an additional annual report on how the FCA and the PRA have complied with their competitiveness and growth objectives. Taken together with the existing framework in FSMA, these measures are intended to strengthen overall transparency, not weaken it.
I turn to the amendments, starting with Amendment 89—
Baroness Noakes (Con)
Before the Minister moves on, can I just press him on the evidence of stakeholders that has been relied upon to sweep away so much stuff in Clause 18? Did the stakeholders specifically say they were not interested in guidance that was issued by the regulators or in the consultation on that guidance?
Lord Stockwood (Lab)
Unfortunately, the precise question was not asked in the consultation.
Baroness Noakes (Con)
So on what basis are the Government making the decision to remove the requirement under FSMA to issue the guidance, and obviously, therefore, to consult on it?
Lord Stockwood (Lab)
I will have to come back to the noble Baroness. The broader requirement is that we are trying to streamline the process to take the regulatory burdens away. We recognise that we need to give a precise answer on that.
Baroness Bowles of Berkhamsted (LD)
The Minister mentioned taking away regulatory burdens, but the Government are actually taking away regulator burdens. They are not the same thing.
Lord Stockwood (Lab)
They are not the same thing. The approach we are trying to take is to streamline duplication while not in any way detracting from the overall process. That is the principle we are trying to follow here.
Amendment 89 would preserve the statutory requirements on the FCA and the PRA to give guidance about how they intend to advance their objectives. This requirement was introduced by the Financial Services Act 2012, and since it came into force, both the FCA and the PRA have published guidance fulfilling this requirement, which is updated when necessary. For example, most recently the PRA updated this approach to policy statements in February 2025. Removing these statutory requirements will not prevent the regulators giving such guidance where they consider it beneficial to do so. These requirements would also be duplicative with the new long-term strategies, which will set out the regulators’ approach and priorities for advancing their objectives, as well as other statutory publications, such as the regulators’ annual reports.
Baroness Kramer (LD)
Is the Minister suggesting that, in dealing with the long-term strategy, there will be the same level of detail as is normally provided in guidance? I am somewhat confused when he explains that one is a substitute for the other.
Baroness Kramer (LD)
If I understood the Minister correctly—do correct me if I am wrong—the FCA or the PRA will have the opportunity to provide guidance if they deem it necessary. But if they choose not to, that should not be worrying, because the equivalent statement will occur either in the five-year strategy or in a report on how the FCA is achieving its five-year strategy. Is he suggesting that that will be at the same level of detail as the guidance that is required today? That is what I am trying to understand.
Lord Stockwood (Lab)
I believe that they still have to publish the full guidance, but let me come back with a written response on that.
Turning to Amendments 90 and 92, the Government recognise the impact that changes in rules and guidance can have on firms, particularly smaller firms and regulated persons trying to understand what is expected of them. The government reforms are intended to avoid imposing full consultation and cost-benefit analysis requirements where proposals are genuinely minor or low impact, while preserving the wider consultation framework for substantive changes. Minor changes to rules include corrections, clarifications or minor technical updates, and it will be for the regulators themselves to determine whether a rule change meets this definition, as they are best placed to assess the impact of such changes. For example, last year, the FCA consulted on reducing late filing charges from £250 to £100. Under this provision, the FCA would not be obliged to consult and could make these changes faster.
Baroness Kramer (LD)
What if the change had been in the other direction and had added an additional £100 pounds? Would the FCA have been in a position to decide that that was not material for consultation?
Lord Stockwood (Lab)
I think there is a broad principle: we are trying to give the FCA the power to make those small changes in both directions.
Baroness Noakes (Con)
Where does that power begin and end? I can understand it when we are talking about hundreds of pounds; I am not sure I understand how much flexibility is now being given to the regulators to do things. We can probably recognise, at one end of the spectrum, something that is very significant, but who is the arbiter of what is so unimportant that it does not have to be consulted on? The regulator. Are the regulators the right people to make that decision? No, they are not, because they are not the people affected by the change.
Lord Stockwood (Lab)
Our overarching principle is that we are trying to show trust in the regulators while recognising the significant feedback from the debate today. We are hoping that minor changes will be in their gift and their expertise.
I will come back to my notes here. The measure is about giving the regulators the flexibility to gather industry input in more efficient ways. It is not about bypassing industry, but rather about recognising that the industry’s time is valuable and should be focused on engaging with consultations that genuinely have impact. Other channels, such as round tables with firms, supervisor interactions, meeting with trade bodies and engagement with statutory panels, can provide a more efficient route to understand industry’s issues on what are minor or technical changes. The Government’s view is that retaining these specific requirements in all cases would preserve unnecessary process, even where it adds little value in practice, and that the Bill preserves consultation requirements in most cases and where there is genuine value for the sector, as well as regulatory oversight.
Amendments 93 and 94 seek to remove all requirements on the PRA to meet the auditors or PRA-authorised persons. As the noble Baroness, Lady Noakes, noted, the Bill removes the requirement for the FCA to meet at least once a year with the auditor of any PRA-authorised firm that has been designated as important to the stability of the UK financial system. Requiring both the FCA and the PRA to meet PRA-authorised firms is duplicative and unnecessarily burdensome in terms of the effective use of resources. However, the Government’s view is that removing all requirements around engaging this important group of auditors would go too far. It is vital that the PRA continues to engage with these auditors and plan for meetings to take place at least annually, to ensure that the PRA can secure the valuable insights into the health of systemically important, regulated firms that auditors can provide. It is for this reason that the Government cannot accept these amendments.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who have taken part in this debate. Clause 18, guidance, consultation and whether regulators can be trusted is unfinished business as far as this Committee is concerned. I look forward to getting the answers on questions that have been put, but my instinct is that the Government’s approach is going too far in favour of letting the regulators determine what their interactions will be with the regulated community. On the one hand, there are independent regulators which need forms of oversight, and this Bill is just chipping away all the time at those points at which there can be some interaction between those charged with the oversight of them. By constantly removing these points at which there can be some intervention, we end up with a weaker situation overall. I will need to think very carefully about what we do about Clause 18 in general when we get to Report. I think it is part of the issues that we have been developing. Clauses 16, 17 and 18 are all part of one picture that we need a more satisfactory answer to.
Turning to the auditors. I was not trying to stop auditor meetings—
Lord Wilson of Sedgefield (Lab)
I mentioned at the beginning of this afternoon that when an amendment is being pressed, noble Lords have to be short. The withdrawal of amendments is starting to take longer and longer, which eats into the time for the other groups.
Baroness Noakes (Con)
I hear what the noble Lord has said. I think it is important that we have the opportunity to comment before withdrawing amendments. It is not simply a case of getting up and saying, “I withdraw”.
Lord Wilson of Sedgefield (Lab)
I just say to the noble Baroness that it is clear in paragraph 8.82 of the Companion that noble Lords should
“be brief and need not respond to all the points made during the debate”.
Baroness Noakes (Con)
My Lords, I had no intention of responding to all points made in the debate. There are a number of different amendments in this group. They could have been degrouped into four or five separate groups, and we could have had a short winding-up on each one of them. We have effectively four groups here, so we are going to be talking about all of them.
On auditors, I was not trying to suggest that auditor meetings should not take place: of course, there is value in those meetings, which have taken place for decades. They were not invented when FSMA was being drafted; they were already part of the thing. The amendments are not that important; I was simply trying to give the PRA the same flexibility that the FCA has.
On the nomenclature in the Act and the Financial Services Regulation Committee, I give notice that I will return to that matter in Committee. My committee will think that it is important that, now that it exists, it is reflected in statute. I beg leave to withdraw my amendment.
Baroness Noakes
“FCA and PRA secondary competitiveness and growth objectivesThe Financial Services and Markets Act 2000 is amended as follows—(a) in section 1EB (competitiveness and growth objective) for “aligning with” substitute “consideration of”;(b) in section 2H (secondary objectives and duty to have regard to regulatory principles) for “aligning with” substitute “consideration of”.”Member’s explanatory statement
This amendment modifies the secondary competitiveness and growth objectives of the FCA and the PRA by requiring international standards to be considered rather than aligned with.
Baroness Noakes (Con)
My Lords, I will speak also to Amendments 100 and 102 in this group. I thank my noble friend Lady Neville-Rolfe for adding her name to Amendments 99 and 102, and I thank the noble Lord, Lord Vaux of Harrowden, for adding his name to Amendments 99 and 100. My noble friend Lord Hunt of Wirral is unable to be with us today, as he is on our Front Bench in the Chamber dealing with the Steel Industry (Nationalisation) Bill, so I shall also speak briefly to his Amendment 101.
Amendment 99 concerns the secondary competitiveness and growth objective, which applies to both the FCA and the PRA. When it was introduced in the 2023 Act, it was no secret that the regulators were less than enthusiastic. Our regulators have always been heavily involved with the international financial institution community. They often act as chairmen, as is currently the case with the Governor of the Bank of England and the Financial Stability Board. They are members of as many committees as they can get on, and they are completely embedded in the international standards infrastructure. It was unsurprising, therefore, when they managed to convince the Treasury that it should make the secondary competitive and growth objective subject to alignment with international standards.
During the passage of the 2023 Act, I tried to get this watered down, because I had a real concern that the PRA and the FCA would hide behind international standards when making rules, in a way that does not optimise UK competitiveness and growth. International standards are a good thing, but only if all the major countries implement them. In fact, there is a history of patchy adoption—not least by the United States of America, which is, of course, one of our main competitors in financial services. Unfortunately, the Treasury supported the regulators and kept alignment in the 2023 Act.
I return to this theme with Amendment 99, which would change the words of the competitiveness and growth objective so that the regulators must consider international standards only, rather than automatically aligning with them. We have had three years of experience of the operation of the Act. It is time, I believe, that we made growth and competitiveness an unambiguous part of the regulators’ objectives.
In the past three years, we have seen the continuation of US exceptionalism. It has not implemented Basel III, and we have to remember that it never implemented Basel II. To be fair to the PRA, it has found reasons to follow what other countries are doing to delay certain aspects of Basel III and has performed contortions to justify implementing other aspects in a way that does not fully hit smaller UK banks, but the fact is that other countries are implementing Basel III in ways that suit them, and it would be more honest if our own regulators were given that freedom.
Another problem area in bank capital is the requirement to hold MREL, the minimum requirement for eligible liabilities. This started as a European requirement that went way beyond the international rules for total loss-absorbing capital for global systemically important banks. The UK has just three G-SIBs out of 29. Unfortunately, the UK sets MREL for many more banks than three. This is not set by the PRA, which might have a problem justifying it by reference to international standards, because the international standards are clearly less than the European model which we are sticking to. It is in fact set by the Bank of England, which does not have a competitiveness and growth objective. This shows what happens when regulation is detached from the interests of the UK economy.
I turn to the FCA. When the Financial Services Regulation Committee looked at stablecoins, we asked the FCA about its work on stablecoins aligning with the secondary competitiveness and growth objective. The director of payments and digital assets at the FCA was keen to tell us what the FCA did on committees at IOSCO, how it helped to draft the FSB’s paper on stablecoins and how it brought together regulators and standard-setting bodies in London. Although the executive director for payments said that the FCA was trying to find solutions right for the UK, it is clear that the instincts of the regulators’ staff is to look to international standards bodies rather than to think about what is best for UK competitiveness and growth. I do not think that the secondary objective’s potential will be maximised while the comfort blanket of international standards is reinforced by the FSMA requirement to align with them.
Amendment 100 is much more straightforward and I hope that it is uncontentious. I fully support Clause 20’s requirement for the regulators to report annually on the secondary objective. The two initial reports required by the 2023 Act make it clear that the competitiveness and growth objective is not a finite event but a continuing challenge. This was also one of the key findings of the first report by the Financial Services Regulation Committee. My amendment would merely require the Treasury to lay the annual reports before Parliament. It is customary to lay key accountability documents before Parliament. If this is not a key accountability document, I do not know what is. I hope that the Minister can accept this amendment.
I was going to go on to Amendment 101 in the name of my noble friend Lord Hunt of Wirral, in anticipation of his absence, but I see that he is with us, so I will not speak to his amendment but will conclude with my final amendment in this group, Amendment 102.
Lord Wilson of Sedgefield (Lab)
I am afraid that the noble Lord, Lord Hunt of Wirral, was not here at the start as he came into the Room two minutes late, so the noble Baroness may go ahead.
Baroness Noakes (Con)
I thank the noble Lord for telling me about my noble friend’s disqualification from speaking; I will now speak to his Amendment 101. I find that it would be a useful addition to Clause 20, by imposing some modest requirements such as making the reports comparable with previous reports and covering things such as the cumulative cost of regulation and an explanation of how proportionality has been applied, including for SMEs. I do not think that any part of this amendment should be controversial, and I hope that the Minister will be able to accept it.
Baroness Noakes (Con)
My last amendment in this group, Amendment 102, is also about the secondary competitiveness and growth objective, but, this time, for the Financial Market Infrastructure Committee of the Bank of England. The FMIC was set up with a secondary innovation objective, and there is clearly a link between innovation and growth and competitiveness—but they are not synonymous. I am not sure why the FMIC was set up with innovation objectives rather than full competitiveness and growth objectives, and I do not recall a substantive debate on that during the passage of the 2023 Act.
Lord Bridges of Headley (Con)
My Lords, I agree with all the amendments to which my noble friend Lady Noakes just spoke, but Amendment 99 merits attention. I will speak to it very briefly, as I get a sense that everyone is wanting to get out of this lovely Room to eat something.
This amendment asks an interesting question; perhaps the Minister can answer it when he winds up. I am interested in what is more important. Is it the alignment with global international standards, or is it the competitiveness and growth objective? When one is thinking about these international standards, do we think that it is more important to align with those standards than it is to improve the competitiveness and growth of the financial services sector? I ask this as a genuine question. I can see an argument for saying that alignment with international standards adds to competitiveness and growth, but, if we believe that those international standards undermine growth, what is more important?
I ask that because—once again, I draw your Lordships’ attention to my entry in the register—every day, I am seeing, as my noble friend Lady Noakes alluded to, the fragmenting of international standards. Noble Lords may take very different views on that, but it is undeniably the case that the overall approach of the large financial sectors to adhering to those standards, if they ever really existed, is now under enormous pressure. Therefore, if we want to retain the competitiveness of the City and its contribution to the growth of this country, we need to be very mindful of that. If we want to continue to attract high levels of global capital here, we cannot, to my mind, just blindly say, “We must align with international standards”, without being fully cognisant of the consequences.
The amendment moved by my noble friend asks a very big question, which I look forward to hearing the Minister address.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly to speak against all of these amendments, but the noble Lord, Lord Bridges, has asked an interesting question here: are we making this legislation for the City or for the country? My question to the Minister, therefore, is: does aligning with international standards mean that we can actually set higher standards? That is certainly what I would like us to do in terms of money laundering and the other issues that I raised earlier, but I think that the assumption in this amendment is that we might set lower standards.
One of the things that aligning with international standards would do is improve our international standing in this uncertain geopolitical age. Undercutting standards would be severely damaging to our international standing in the world. That is a much broader question than just the City.
I will cover all these amendments collectively. It is no secret that throughout all the previous financial services Bills I have worked on, I have opposed competitiveness and growth objectives. I am sure the noble Lord, Lord Vaux, will be delighted to know that it was his earlier contribution to the clause stand part debate that helped me to see clearly that what we are doing here is singling out the growth and competitiveness objectives from everything else. One of the ways in which noble Lords tried to deal with that in earlier groups was by adding crucial issues such as climate. The other way of approaching the problem, which I may well be tempted to do on Report, is by proposing that Clause 20 does not stand part.
It is important to raise the issue again now, given that just this week the Bank for International Settlements has spoken about the financial risk associated with big tech’s AI spending spree—in its terminology—which could lead to a prolonged investment bust that could have significant impacts on financial markets and the global economy. It produced the figure that the five biggest hyperscalers expect to invest more than $1 trillion from 2025 to the end of 2026. We are in a position of risk, so I believe we should look at growth and competitiveness again.
Amendments 102 and 104 seek to extend further than the Government have gone on the growth and competitiveness agendas. That is an extraordinarily bad and extremely risky idea. I am happy to carry forward that idea and keep saying it on Report.
Lord Wilson of Sedgefield (Lab)
My Lords, we have come to the end of the time available for Grand Committee today. Although it is unusual, I beg to move that the debate on this amendment be adjourned. We will return to this debate on the next day in Committee. Only those noble Lords present at the start of this group can speak when the group resumes. I have asked the clerk to circulate a list of those present in the usual channels.
Financial Services and Markets Bill [HL]
Wednesday 1st July 2026
(3 weeks, 5 days ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-IV(b) Amendment for Grand Committee (Supplementary to the Fourth Marshalled List) - (1 Jul 2026)
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, I want to address a few key areas before we begin. First, we are starting today with the debate on an adjourned group. Only those noble Lords present earlier in the week at the start of the group should contribute. We have a list to help manage that. I am expecting, based on the adjourned debate, that debate will go straight to Front-Bench contributions.
Secondly, on the general rules, I remind noble Lords again that they should declare any relevant financial interest the first time they speak at each stage of the Bill. This means that, in Committee, relevant financial interests should be declared during the first group to which the noble Lord contributes. The declaration does not need to be repeated in debate on later groups at this stage. The declaration should be specific and brief. Members should briefly indicate the nature of their financial interests and not simply refer to their entry in the Register of Lords’ Interests.
I remind the Committee of the guidance in paragraph 8.82 of the Companion that, when withdrawing amendments, noble Lords should be brief, need not respond to all the points made during the debate and should not revisit points made when moving the amendment. A number of contributions made when withdrawing amendments on previous days were lengthy. I encourage all participants to keep their remarks short, in the spirit of the Companion.
Baroness Kramer (LD)
My Lords, I am sure everyone has reread the Hansard transcript and is fully on top of the debate that took place on Monday, so I will attempt to keep my remarks brief.
I am tempted to engage with the challenge from the noble Lord, Lord Bridges, on this group of amendments, to discuss in depth the issue of international rules on the one hand versus growth and competition objectives on the other. However, I say to the noble Lord, Lord Wilson, as the Whip, that I recognise that we are in Grand Committee and so will limit the comments that I make.
Looking at this group of amendments, it is important to say that my party believes in “better together” rather than “beggar thy neighbour”. International rules provide trust, confidence and certainty, which are key to long-term and sustainable growth. This country plays a key role in shaping international rules in sectors that we care about, including finance. The Bank of England is incredibly highly respected, as are our other regulators. There is extensive participation in key bodies, such as the Financial Stability Board, the Basel Committee on Banking Supervision and others. Indeed, the noble Baroness, Lady Noakes, gave a long list of the various committees in which regulators are engaged. I think she thought it might make them go native, but I consider that it is an important opportunity and area of their influence. We remain a player in making those rules, despite Brexit.
International rules need to provide flexibility, but they mean absolutely nothing if we pick only what suits us in the moment. The world is not thriving in the beggar-thy-neighbour world of Trump in the United States, of Russia and of China. The Committee will not be surprised that I am not sympathetic to Amendment 99, which would reduce international standards to a “have regard”.
As for the other amendments on this sector, I have no problem with the reporting amendments, but I am cautious of Amendments 102 and 104A, because they could easily be read as an instruction to waver on the Bank of England’s primary objective of financial stability. We must be careful not to abandon that focus on financial stability. Some people find volatility attractive—it is certainly a way in which the financial sector has frequently made much of its money. But the cost to ordinary people of both boom and bust and continuous volatility has been exceedingly high. The cost to businesses that need a significant measure of certainty is extremely high. Therefore, we will not be supporting these amendments, though, as I say, the reporting amendments make some sense to me.
Baroness Neville-Rolfe (Con)
My Lords, for me, the group speaks to the essential balance which underpins the purpose and function of effective financial regulation. Of course regulation must promote safety, stability and confidence in the system, but regulation must also support growth, competitiveness and innovation. It must help ensure that the United Kingdom remains one of the world’s leading financial centres.
We have often spoken about the contribution that financial institutions and financial services firms make to the UK economy; they provide employment, tax revenue, investment, lending, infrastructure and global influence. This group is about making sure that we put our money where our mouth is. If we say that competitiveness and growth matter then those principles must be reflected in the way regulators act, report and make their decisions.
That is why Amendment 99, to which I have added my name, is important. It would shift the requirement from “aligning with” international standards to considering international standards. That is an important distinction. International standards matter, and in many cases the UK will rightly wish to follow them, but we should not place ourselves in a position where we become passive rule-takers when it is not in our national interest to do so. We can see some rules, such as the unbundling of research in MiFID II, having totally the wrong effect—in this instance, regulating research so heavily that less research is produced, particularly for smaller firms. I know this from relatives who work in analysis; I do not think that is an interest to declare, but it is evidence. Another example is the EU’s sustainable finance disclosure regulation, which is now under review because it is too complex and burdensome.
The whole point of having an independent post-Brexit regulatory framework is that the UK should be able to design rules that work for our markets, our firms and our economy. The UK’s position in financial services is not secured by right. Other jurisdictions are moving quickly. We know the compliance costs are generally higher in the UK, so unless we offer a regulatory environment that is clearer, more cohesive, more predictable and more conducive to growth, it is likely that firms, capital and innovation will go overseas, the opposite of what we and the Government want. We are already seeing this risk in areas such as digital finance. Firms in digital assets, payments and new financial infrastructure need clarity and confidence. Where they do not find it in the UK, they look elsewhere. The Employment Rights Act is also having a chilling effect.
Amendments 100 and 101 are important because they would strengthen accountability around the competitiveness and growth objective. It is not enough for regulators simply to say that they have considered competitiveness. Parliament needs to see how that objective has been applied, what evidence has been used, what impacts have been assessed—for example, on SMEs, which are a key feature of my noble friend Lord Hunt of Wirral’s amendment—and how regulatory decisions have affected firms and markets over time.
Amendment 102, which I have also supported, would extend the secondary competitiveness and growth objective to the Bank of England’s financial market infrastructure functions. The same should apply to Amendment 104A on payment systems. If we want a dynamic payments ecosystem, competitiveness must be considered across the whole regulatory architecture.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, the Government share the views of many in this debate, particularly on the importance of ensuring that the secondary growth and competitiveness objectives are comprehensively embedded in the work of the regulators. That is why the Bill legislates to extend the requirement for the regulators to produce annual reports on their actions to advance competitiveness and growth objectives.
Amendment 99 would amend the secondary objective so that when carrying it out the regulators would need only to consider international standards, rather than to align with them. I recognise the desire to ensure that there are no unnecessary constraints on the secondary objective. However, the Government cannot accept this amendment. Aligning with international standards is central to the Government’s approach to supporting the international competitiveness of the UK as a global financial centre. These international standards underpin global financial resilience and support international trade. Stability, predictability and high regulatory standards are the cornerstone of the UK’s reputation as a global financial centre. Weakening the requirement to align would risk undermining the attractiveness of the UK as a place to do business.
However, it is worth noting that the UK is no passive recipient of international standards: we help to shape them. The Governor of the Bank of England is the current chair of the Financial Stability Board, and the UK authorities play leading roles in international bodies. I reassure noble Lords that international standards generally operate on a comply-or-explain basis. No standard trumps the objectives of the FCA or the PRA. Where it is right for the UK to go further, or where the nuances of our market require a different approach, the FCA and the PRA retain full flexibility to do so.
Amendments 100 and 101 would require the growth and competitiveness reports to be laid in Parliament and would prescribe their contents. These amendments clearly demonstrate the importance this House places on the growth and competitiveness reports. The Government absolutely agree about that. Since they were introduced in FSMA 2023, their value to stakeholders in Parliament and industry has been clearly demonstrated, which is why the Bill extends the original temporary requirement and will require the regulators to keep producing the reports on an annual basis. However, these amendments are not necessary: they are overly prescriptive and overlap with existing reporting mechanisms. For example, the regulators already provide ample public reporting on their authorisation metrics, which are published regularly and allow for year-on-year comparisons, and they already publish metrics along with their competitiveness and growth reports.
Amendment 102 would give the Bank of England a secondary objective to facilitate international competitiveness and growth in its regulation of central counterparties and central securities depositories. The Government recognise the importance of a dynamic and competitive UK clearing and settlement market. However, CCPs and CSDs have a unique role in managing risk at the centre of global financial markets and the value they provide is based on reliability and sound risk management. The UK’s success as a global centre for financial market infrastructure depends on its reputation for resilience, and regulation must reflect the roles of CCPs and CSDs as critical, globally shared infrastructure. The Government therefore do not believe that it would be appropriate for the regulatory framework for these firms to focus on international competitiveness or growth in the same way as other firms, or that the secondary objective for the Bank to facilitate innovation is the right one. However, the Chancellor made it clear in her remit letter to the Bank last year that it should consider how it can best support the Government’s growth mission when pursuing its objectives.
Lastly, Amendment 104A seeks to introduce new secondary objectives for the Bank of England in relation to payment systems. I am grateful to the noble Lord for raising this issue. The Government recognise that, where appropriate, secondary objectives can help the regulator to advance its primary objective in a balanced way. Payment systems are critical economic infrastructure and the Government agree that, alongside security and resilience, regulation in this area should support competition, innovation and growth.
However, the Government consider that the Bill already provides a framework that supports the aims of the amendment. Following the FCA taking on the responsibilities of payment systems regulations, it will retain the substance of the PSR’s objectives. This means that it will be responsible for promoting competition and innovation in payment systems and for protecting the interests of service users. The Bill also applies the FCA’s secondary competitive and growth objective to its general payment system functions and it includes provision to ensure that the Bank and the FCA co-ordinate effectively. I therefore ask the noble Baroness not to press her amendment.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who have spoken today and the previous day. These amendments all relate to the secondary competitive and growth objective. I think that we share the same desire to have an effective secondary competitive and growth objective, which my lead amendment, in particular, was designed to ensure. The Minister says that the regulators have flexibility to do what is right, whatever the international standards. I do not think that that is captured by forcing alignment with standards, but I will think again about that before Report. I was also disappointed by the Minister’s other replies, because it seems that the Government are not taking opportunities to ram home the importance of growth and competitiveness, which is something that we fully support. I will withdraw my amendment now and consider what I shall bring back on Report.
Baroness Neville-Rolfe
Member’s explanatory statement
These amendments ensure that the Treasury has the power to reduce various time limits for regulatory approvals, but not to increase them.
Baroness Neville-Rolfe
My Lords, I rise enthusiastically —we have to get going for the football—to move Amendment 105, in my name and the name of my noble friend Lord Altrincham. I will also speak to the other amendments in the group.
I am grateful to my noble friend Lord Holmes for his amendments, which seek to achieve broadly the same objective as ours. I am also grateful to my noble friend Lord Howard of Rising for Amendment 151, which raises an important question about whether experienced and well-regarded individuals with a strong regulatory track record should be able to benefit from a more streamlined authorisation process.
Fundamentally, the amendments in the group all seek to make regulatory approvals faster, clearer and less prone to delay. We have heard throughout our consideration of the Bill that delays in authorisations, approvals and permissions are a brake on growth. They affect firms’ ability to enter the market, to expand, to appoint senior people and to innovate and compete. The Government recognise the problem: Clause 21 reduces a number of statutory determination periods, including for Part 4A permission applications, senior manager approvals and other regulatory decisions. That is welcome. However, the question is whether the Bill goes far enough and whether the powers that it creates are sufficiently disciplined.
One concern raised with us by firms is that the authorisations process can feel driven by deadline, rather than workflow. The issue is not only whether the FCA or PRA technically meets the statutory deadline; it is whether substantive work begins early enough in the process. If a case is not allocated promptly, if an initial review takes place only late in the period, or if information requests are made close to the deadline, the firm bears unnecessary costs and uncertainty, even if the regulator ultimately meets the formal target.
My first set of amendments today—Amendments 105, 110, 113 and 114—would ensure that the Treasury’s power to alter these time limits could be used only to reduce them. If the purpose of the Bill—and, indeed, the Government’s wider financial services strategy—is to make the regulatory system more streamlined and fit for purpose, success must be measured in part by reductions in the time taken to make decisions. I hope that the Minister will be sympathetic to that principle. The Treasury should be able to shorten regulatory approval periods where experience shows that this can be done safely, and it should not be able to lengthen them without returning to Parliament with a clear and specific justification.
The amendments tabled by my noble friend Lord Holmes take a similar approach but go further by proposing an automatic ratcheting-down mechanism. Where regulators had met the applicable time period for a defined period, the Treasury would be required to reduce the time limit further. That is a sensible principle of continuous improvement. If regulators consistently demonstrate that they can meet a deadline, we should be willing to ask whether that deadline can become more ambitious.
Amendment 109 concerns the FCA’s ability to stop the clock during the senior managers approvals process. We have heard from industry that the power to stop the clock can be used repeatedly during an approvals process. That is extremely frustrating for firms. It makes workforce planning more difficult and can leave firms waiting for months without any real sense of when a decision will be made.
Stop the clock powers can render the headline statutory deadline almost meaningless. Amendment 109 would, therefore, allow the FCA to use the formal stop the clock mechanism only once in relation to a senior manager approval application. When it does so, the FCA would be required, as far as is reasonably practicable, to specify all the information that it requires at that point. The FCA could still ask for further information later, but that later request would not stop the statutory clock.
As I have said, delays in approvals can affect business decisions, market entry, expansion, restructuring and succession planning. They can discourage talented individuals from taking up roles in the UK if they fear that the process will be slow, uncertain or opaque, and they could even put at risk our reputation as a leading financial centre.
I welcome Amendment 151 in the name of my noble friend Lord Howard of Rising. It asks whether there should be a more streamlined or expedited Part 4A authorisation process where the applicant is managed or directed by individuals with an established FCA-approved—or PRA-approved, I assume—track record and good regulatory standing. A review could help to identify where duplication exists and where good regulatory history can be taken into account in a practical way.
I would be grateful if the Minister could address three questions. First, what do the Government see as a reasonable timeframe for the approval of new products, new services and senior managers? Those of us who are used to more dynamic sectors think that the new targets are insufficiently challenging, but let us hear what they are. Secondly, do the Government accept the principle that the Treasury’s power to change approval time limits should be used only to reduce them, not increase them? If the Government do not accept that, in what circumstances do they envisage the Treasury using this power to lengthen regulatory approval periods? Thirdly, what safeguards exist to ensure that the FCA’s stop the clock powers are used proportionately and not in a way that undermines the statutory deadline?
We cannot talk about growth, competitiveness and innovation while tolerating unnecessary delays in the basic processes that allow firms to operate and people to take up senior roles. We know from history that we need strong management, as well as strong and challenging non-executive directors for our banks, but we also need an efficient approvals system that supports that. I beg to move.
Lord Holmes of Richmond (Con)
My Lords, what a pleasure it is to follow my noble friend Lady Neville-Rolfe. I agree with everything she said, with all the principles she set out and with the amendments in this group.
I shall speak to Amendment 106 and the other amendments in my name. We are asking a lot of our financial regulators and it is only right that we offer help in the Bill. When we come to the Minister’s response —I do not want in any sense to pre-empt him—there may be comments around the amendments being overly prescriptive. I suggest that these amendments do not ask for prescription but, in fact, deliver clarity and, in a sense, are variously helpful to our financial services regulators.
My amendments seek to offer that help but also, as my noble friend Lady Neville-Rolfe said, to assist in driving that high-performance culture. Our regulators are well-regarded around the world. That is about high performance, but high performance in its turn is about continuous development and improvement. I think that this Bill can assist in that purpose.
In essence, this is all about the “E”s in this group: efficiency, effectiveness and economic activity. It is often said that delay defeats equity. In this instance, delay defeats economic activity and economic growth. It frustrates small, medium and larger businesses in what they are trying to do right across the United Kingdom economies. I believe that this suite of amendments offers clarity to the regulator and that, through that clarity, the regulator can give the right direction and the right support to all our businesses to do what they do best, which is to create economic activity and drive and deliver economic growth. I look forward to the Minister’s response.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh, an FCA-regulated entity. These amendments in the names of my noble friends Lady Neville-Rolfe, Lord Altrincham and Lord Holmes concern Clause 21, which I very much welcome in principle. The improvements to regulators’ approval timelines are a positive step, as are the powers within the clause that enable the Government to amend those timeframes over time. In effect, the Bill already recognises the need for a mechanism to drive improvement. However, the evidence suggests that we can and should go further. The fact that regulators have consistently met their existing targets—targets that have remained largely unchanged for some 25 years—indicates that there is clear scope for more ambitious deadlines.
These amendments are therefore designed to embed a culture of continuous improvement, as referred to by my noble friend Lord Holmes. They would ensure that any future changes to the timeframe set out in Clause 21 could move in only one direction, towards faster decision-making. Moreover, where regulators have consistently met revised targets over a period of two years, the Treasury would be required to reduce those timelines further. In doing so, we would place a statutory obligation on the system to evolve and improve. This matters greatly for the competitiveness of the United Kingdom, particularly for the insurance market in which I work. The speed at which regulators handle authorisations, variations of permission and approvals for senior managers has a direct impact on the ease of doing business. These processes define many firms’ day-to-day interactions with regulation and shape broader perceptions of our market. Firms today have choices about where to deploy capital, where to grow and where to locate talent. A regulatory system that is clear, predictable and timely is a key part of that decision-making calculus.
The UK must offer a compelling proposition. There are many other places to go. Evidence from the London Market Group reinforces this point. A recent survey of firms regulated by the FCA and the PRA shows that both institutions are respected with strong overall scores, yet concerns remain. More than half of firms believe that aspects of the FCA’s approach negatively affect the attractiveness of the London market, and nearly nine in 10 highlight slow approvals for senior managers as having a strong detrimental impact on their operations. Improving timelines is not about reducing standards; it is about ensuring that our system supports growth, innovation and competitiveness. These amendments help to achieve just that.
Lord Bridges of Headley (Con)
My Lords, I should like to speak briefly and, in so doing, declare my interest as an adviser to and shareholder in Banco Santander. I very much support these amendments. I think that we would all agree that we want our regulations and the entire process to be simple and robust, as that is the bedrock of a competitive global financial centre. I do not think that anyone here is arguing for a weakening to the extent that it would undermine confidence in the market, which is absolutely critical.
To support what has just been said, I draw your Lordships’ attention to a study that TheCityUK brought out a few years ago—I think in 2023. It highlighted in its survey concerns among those in the City about the speed of regulatory requirements. If I am reading it right, of those who responded to the survey and were undergoing FCA regulatory approvals, 92% were experiencing delay. If you look at the views on the opaqueness of the systems, which indeed adds to uncertainty and undermines investor confidence, an enormous percentage—almost 100%—saw the system as opaque or somewhat opaque. If one then looks further on in this study at the perceived overall impact that the efficiency of the regulators’ authorisation processes had on the attractiveness of the UK as a place to establish and do business, in terms of the FCA, if my maths serves me right, almost 90% saw it as detrimental or somewhat detrimental to the UK’s attractiveness.
I am sure that the FCA and others are doing their best to solve this issue, but these amendments would do a lot to add pressure to that process and would strengthen the resolve within the system to address what is a clear need if we are to build on the competitiveness of London as a financial centre.
Lord Howard of Rising (Con)
My Lords, my Amendment 151 seeks to enable employment in the financial services industry to be made more efficient. At present, Section 55V of FSMA requires the Financial Conduct Authority to determine a complete application for Part 4A permission within six months and an incomplete application within 12 months. These statutory limits provide certainty but do not distinguish between entirely new market entrants and applicants who have previously been authorised and regulated by the FCA.
Many experienced financial services professionals have already undergone extensive regulatory scrutiny, have held approved positions within FCA-authorised firms and possess established records of compliance, integrity and competence. Despite this, when establishing a new authorised firm, they are often subject to the same authorisation timetable as applicants with no prior regulatory history. This approach can create unnecessary delays, increase costs, discourage entrepreneurship and inhibit competition within the UK financial services sector. It is also inconsistent with the Government’s broader objective of promoting growth, innovation and international competitiveness within the UK financial markets.
I propose that His Majesty’s Government consider introducing a fast-track authorisation process whereby applicants who have previously been authorised by the FCA or who have held FCA-approved senior management or controlled functions for a substantial period, have no record of serious regulatory misconduct, meet all threshold conditions and prudential requirements and submit a complete application should receive a determination from the FCA within 90 days of the application being submitted.
Such a provision would not reduce regulatory standards. It would recognise that the FCA already possesses significant information regarding the applicant’s competence, conduct, fitness and propriety. The FCA would retain full discretion to refuse applications where concerns arise, but qualifying applicants would benefit from a more proportionate and efficient regulatory process. The United Kingdom’s reputation as a leading global financial centre depends on regulation that is not only effective but efficient. A targeted, expedited process for proven and reputable applicants would help reduce barriers to market entry, encourage innovation, support economic growth and make the UK a more attractive jurisdiction in which to establish regulated businesses. It would tie in with the Government’s declared interest in reducing burdensome regulation, which impedes growth in the economy.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord Holmes, for tabling these amendments on statutory deadlines for regulatory approvals. The Government agree that determining authorisations and other regulatory applications must be prompt and proportionate, while maintaining high standards, and they continue to push the regulators to be as ambitious as possible. This is why the Government are taking action to shorten a range of statutory deadlines through the Bill and, on top of this, have agreed voluntary stretch targets for the regulators to go further and faster to speed up the processing of the most crucial applications and facilitate growth. This focus is starting to pay off: for example, the FCA’s authorisation metrics for the last quarter show that the FCA determined 99.9% of senior manager applications within the existing three-month deadline, compared to 92.5% in the same quarter for 2022-23. In addition, the FCA determined 98.1% of senior manager applications within its two-month voluntary stretch target, determining 50% of authorisations within only 19 days.
Amendments 105, 106, 110, 111, 113, 114 and 115 seek to ensure that the Treasury can use the power under Clause 21 to reduce the deadlines for determining applications. The Government understand the intention behind these amendments. The Government are committed to keeping these statutory deadlines under review to ensure that they are as ambitious as possible to support firms. The intention behind this is primarily to allow certain deadlines to be shortened further if conditions change in future and the regulators can process applications faster. However, it is vital that the regulatory framework reflects the need for a robust approvals process and the high standards expected of firms operating in the UK. Limiting the Government’s ability to recalibrate the statutory deadlines in the other direction would limit our ability to react to unexpected circumstances and could risk those high standards being watered down or push the regulators to refuse more applications to ensure they are meeting their legal obligations. This is why the Government’s view is that the powers must remain flexible.
Amendments 107, 112 and 116 would oblige the Government further to shorten these statutory deadlines should the regulator meet these deadlines for two consecutive years. The Government understand the intention and ambition behind these amendments but do not agree that this is the right way to achieve it. Meeting an existing deadline for two consecutive years does not in and of itself mean that further shortening the deadline will be appropriate and could risk watering down standards. Such a ratcheting mechanism could also drive perverse behaviour, disincentivising the regulators meeting these deadlines to avoid further operational pressures. The Government’s view is that these amendments would prevent the exact outcome they are seeking to achieve.
On Amendment 109, I understand the concern that statutory deadlines are less meaningful if the FCA can repeatedly stop the clock and make rolling requests for information. The Government recognise the frustrations that firms feel when applications are paused or when they receive repeated requests for information. The noble Baroness, Lady Neville-Rolfe, asked about the proportionality of circumstances in which the FCA can indeed stop the clock. The FCA can stop the clock only in three specific circumstances under FSMA: for change of control, senior manager and appointed representative applications. This power allows the FCA fully to investigate issues that emerge only after an initial response has been received or where further clarification is needed on matters that were not reasonably identifiable at the outset. This is important for ensuring that robust standards are applied.
The Government think it is important that the regulators retain some flexibility to scrutinise senior manager applications properly. A rigid rule limiting the formal stop the clock power to a single occasion risks weakening the regulator’s ability to conduct proper scrutiny in more complex cases, which it does only on very few occasions when really necessary. It also risks encouraging broad, defensive and overly onerous initial information requests as the FCA seeks to adjust procedures to the new requirement, potentially making the process more onerous for all applications. However, I do not want to sound complacent: the Government will continue to engage with the regulators to ensure that they are processing applications as quickly as possible while maintaining standards and avoiding delays.
Lord Holmes of Richmond (Con)
I would like some clarification from the Minister. Does he have, at his fingertips, figures around the stop the clock function? Are the Government currently satisfied with how the function is being used?
Lord Stockwood (Lab)
Let me come back to the noble Lord with that data; I had it in the original draft, but it seems that we have passed it out. I will write to the noble Lord over the coming days.
Our belief is that the right answer is not to hardwire this procedural restriction into primary legislation but to continue improving operational performance and scrutiny of timelines through our wider framework.
Amendment 108 would insert detailed operational requirements into FSMA for the handling of authorisation applications. I recognise the attraction of measurable standards on case allocation, initial review, information requests, publication of monitoring data and limiting the use of the stop the clock mechanism. However, as we discussed earlier, the FSMA model delegates certain responsibilities to the independent regulators and, like any other organisation, they need to figure out how to fulfil those responsibilities. They are responsible for ensuring that they have the resources, systems and processes needed to discharge their functions effectively. The right approach for Parliament and the Government is to hold the regulators to account for speed, service quality and operational effectiveness, not to prescribe in primarily legislation the detailed mechanics of how an application must be processed.
I have been passed the data that was in the original speech, which answers the question from the noble Lord, Lord Holmes. In the year 2025-26, in 55% of FCA solo-regulated senior management applications there was no stop the clock and for 32% of cases the clock was stopped only once. Even when the FCA does use its stop the clock power, it continues to determine applications promptly. In Q4 of 2025-26, 50% of senior manager cases were determined within 19 days. As mentioned previously, 99% were determined within the new target of two months.
Lord Holmes of Richmond (Con)
I thank the Minister for those statistics and very much appreciate him having them in front of him. This ability to elucidate such detail is incredibly helpful. He set out the importance of enabling the regulator to continue to have the option to increase timelines, rather than just having them set as they are or being able to reduce them, as our amendments suggest. Would he be able to set out to the Grand Committee perhaps four or five examples of where it would be helpful for the regulator to increase timelines?
Lord Stockwood (Lab)
I understand that the regulator does not have the power to increase deadlines without our consent.
Lord Ashcombe (Con)
The wording in the Bill is “changing”, so it can go up or down, but we are asking for it to be reduced. That is significantly different.
Lord Stockwood (Lab)
The noble Lord makes an important point, but the regulator does not have that power. Only the Treasury can grant that power to increase the timelines.
Lord Ashcombe (Con)
Then the Treasury can do it, but it should be down and not up.
Lord Stockwood (Lab)
I think this requires some further detail. It is an affirmative power that the Treasury has to regulate, but I will write to the noble Lord in full to make sure that he understands that we are taking this issue seriously.
I turn to Amendment 151 and thank the noble Lord, Lord Howard, for raising this. I know that it reflects a long-standing frustration that credible firms, particularly those led by individuals already known to the regulator, may still face lengthy authorisation processes that can delay market entry and inhibit innovation and growth. However, while the previous approval and track record of senior individuals is clearly relevant to the regulator’s assessment, authorising a firm is not simply a matter of approving the people who run it. The regulators must assess the firm as a whole, including its business model, governance, systems and controls, and whether it is capable of operating safely and in the interests of its customers.
The Government recognise the importance of timely and effective authorisation processes, especially for new firms. This is why the Government are shortening the deadlines for new firm authorisation applications through this Bill. It is also why the Government are taking steps to establish a provisional licences regime, to reduce the barriers that firms face when seeking FCA authorisation and to help them get up and running faster. The challenges that firms face when seeking authorisation are real, and I am happy to discuss that further with the FCA, but imposing a statutory requirement on the Treasury to undertake such a review is disproportionate and not the right way to address them. As I committed to the noble Lord in our meeting prior to today, I will talk to the FCA about this and how it will ensure that this process is sped up.
I fully recognise the concerns that noble Lords have raised about delays, responsiveness and the need for an approvals regime that supports growth and competitiveness. The Government are actively addressing these through the shortening of a range of statutory deadlines in the Bill, in a way that is targeted, proportionate and will ensure competitiveness without compromising the rightly high regulatory standards that firms must meet to operate in the UK. I therefore ask the noble Baroness to withdraw Amendment 105.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to all noble Lords who have contributed to this debate and to the Minister for his response. I welcome that the Government recognise the problem of delay in authorisations and approvals. Clause 21 is clearly intended to make progress in that respect, but the existing approval figures suggest to me that the deadlines are insufficiently ambitious. Leaving it to the FCA and PRA feeds risk aversion, and it is disappointing to hear the Minister endorsing that.
Unless the powers in the Bill on the Treasury and the regulators are better disciplined, we may not achieve the cultural and operational shift that firms need and we all want. There will not be an incentive for continuous improvement, of the kind that my noble friend Lord Ashcombe described in the insurance industry, that is so badly needed. I am also not sure what the unexpected circumstances are, not on stop the clock but on the basic system. What is the detail of that? Is it Covid? Is it a war? I do not know. I am grateful for the Minister’s comments on stop the clock. It was interesting to hear that nearly half the cases involved stopping the clock—and that we have no idea how long the bad cases take. A statutory deadline is of limited value if it can be paused repeatedly or if firms feel that pauses are being used in a way that creates uncertainty. The FCA should, wherever possible, identify missing information early and comprehensively. I do not think I heard a satisfactory answer on that.
I welcome the points raised by my noble friend Lord Holmes on all granular performance data. My noble friend Lord Howard of Rising has also raised the idea of a fast track for established senior managers, and I very much look forward to hearing the results of the Minister’s conversations with the FCA, and perhaps the PRA, on that. I am not that hopeful, and I encourage the Minister to press these issues. They matter a lot to the industry. I know, from planning and other areas that I have been involved in during my long career, that speeding things up can lead to very positive feedback. I hope the Minister will reflect further, but for now I beg leave to withdraw my amendment.
“Section 166 reviews: threshold and proportionality requirements(1) Section 166 of the Financial Services and Markets Act 2000 (reports by skilled persons) is amended as follows.(2) After subsection (1) insert— “(1A) The regulator may not require a person to provide a report under this section unless it is satisfied that—(a) there is a material risk of serious detriment to regulatory outcomes, and(b) the use of a skilled person is a proportionate response, having regard to—(i) the scale and nature of the suspected issue,(ii) the expected burden on the firm, and(iii) whether the matter could reasonably be addressed through the regulator’s existing supervisory tools.”(3) After subsection (4) insert—“(4A) The regulator must publish, at least annually—(a) the number of reports commissioned under this section,(b) the sectors to which they relate, and(c) the aggregate cost to firms of such reports.”(4) In subsection (5), after “may” insert “, subject to subsections (1A) and (4A),”.”Member’s explanatory statement
This new Clause would introduce a statutory threshold for the use of section 166 skilled persons reviews, requiring the regulator to demonstrate a material risk of serious detriment and to consider proportionality, and would require annual publication of the number, sectoral distribution and aggregate cost of such reviews.
Baroness Bowles of Berkhamsted (LD)
My Lords, in moving this amendment, I shall speak also to Amendment 123 in my name. As I have said before in Committee, when we have been talking about proportionality, it is at least possible to look at rules and assess whether they appear proportionate and growth-friendly, but it is far harder to understand what is happening on the ground in supervision and enforcement because that activity is not public and is, therefore, less visible. This is particularly so with Section 166 notices.
I seem to have once again hit on the same subject as the noble Baroness, Lady Noakes. I promise noble Lords that there has been no conferring, as they say on “University Challenge”. There was a time when a Section 166 notice was very rare. It was regarded as a serious matter and something you did not want others to know about, lest it suggest that you were doing something really wrong, you were in real difficulty, or you were in trouble over something. Now, the reaction is much more along the lines of, “Oh, you too?”, and the sense in the industry is that what was once a rare and targeted tool is becoming a routine, general-purpose device—sometimes even a fishing expedition.
These investigations are not small matters. They can go on for a very long time. They are intrusive, expensive and disruptive to normal operations. They require the appointment of external consultants, often at significant cost, and involve a lot of staff time; they even require the hiring of additional staff to deal with keeping day-to-day activity going. In 2023-24, there were 83 Section 166 notices and in 2024-25 a further 47. The cost of them in 2024-25 was £44.7 million, which is not trivial. There is a legitimate concern that the threshold for initiating a Section 166 notice has drifted downwards, and that matters that should be dealt with through the ordinary supervisory channels are now being dealt with through Section 166. They should be dealt with routinely, using the regulator’s own knowledge and expertise wherever possible, but it seems that some of that is now being outsourced through this Section 166 route.
What is needed is a pinning back to serious matters, as well as greater transparency around how and why these notices are used. My amendment aims to restore Section 166 reviews to what they were always understood to be: a tool for investigating issues that pose a serious detriment to regulatory outcomes. It would also introduce a modest reporting requirement for an annual statement setting out the number of notices issued, a breakdown by sector, the reason there was a material risk of serious detriment and the aggregate financial cost to firms. This is not an attempt to remove Section 166 or constrain the regulator’s ability to act; it is simply an attempt to ensure that a powerful and intrusive tool is used proportionately, transparently and for the purposes for which it was originally intended. Too much use is harmful, and a reputation for routine use is itself a deterrent to locating businesses in the UK.
I turn to my Amendment 123, which concerns the information powers under Section 165 of FSMA. It aims to set a framework around the information demands that regulators can make. It is not intended to intrude on anything reasonably necessary for investigatory, supervisory or other statutory functions, or for advancing the regulator’s objectives. However, as the House of Lords Financial Services Regulation Committee heard in evidence, firms are receiving many requests for information that do not appear necessary or are duplicative or made without co-ordination across teams. These requests impose real cost and disruption and are not always proportionate to the matter at hand. This amendment seeks to put some structure and co-ordination around what can reasonably be expected, ensuring that information requests are targeted, necessary and proportionate, and that firms are not repeatedly asked for the same material by different parts of the same regulator. I beg to move.
Baroness Noakes (Con)
My Lords, I have Amendment 118 in this group. As the noble Baroness, Lady Bowles, noted, it is aimed at the same target as her Amendment 117. Both of us are focusing on the regulators needing to have some specific and serious concerns about regulatory breaches before triggering a Section 166 review. I have had some experience of being on the receiving end of Section 166 notices from my time on the board of a major bank. They are genuinely very burdensome: they cost a lot of money, and they divert a huge amount of staff resources and, more importantly, senior management time. They are not something to be undertaken lightly.
The consulting firms absolutely love them. The fees are set by the regulator, so they do not have to do anything awful, such as negotiating with a client around the fees. They often have some perverse incentives, and quite often are structured as phase 1 and phase 2. Phase 1 is where you see whether there is a bit of a problem, then you move on to phase 2. Phase 2 is where the real money usually is, so the consultants leave no stone unturned in their efforts to trigger phase 2, and they can end up creating more work than might perhaps have been needed. Like the noble Baroness, Lady Bowles, I am not saying that Section 166 reviews should not exist, but the use of them should probably revert to the use that existed before. That is why it is important to put a higher hurdle than is currently in the statute for the use of Section 166, so that the burdens are imposed only when there is genuine cause.
Lord Altrincham (Con)
My Lords, I am grateful to the noble Baroness, Lady Bowles, and my noble friend Lady Noakes for bringing forward these amendments. I declare my interest as a director of South Molton Street Capital, which is regulated by the FCA.
The amendments in this group focus principally on Sections 165 and 166 of FSMA. It is worth recalling that the very expression “Section 166” has become part of the language of financial regulation. When the history of financial regulation is written, it will be the most famous item of regulation for this period. It is part of the common language, because there are dozens and dozens of these regulatory interventions.
Section 166 gives the regulators the power to require a firm to appoint or to pay for a skilled person—often a very expensive law firm—to produce a report on specified matters. These reviews can be burdensome, expensive and disruptive for the firms concerned. The concern we have heard from industry is that Section 166 notices have become more and more common in recent years. They were, as the noble Baroness, Lady Bowles, pointed out, initially quite scarce and quite important—and quite quiet, incidentally. Now, they are talked about all the time, because they are as common as anything. The serious issue is that they can, in effect, be used by the regulator as a demonstration of the exercise of its supervisory function.
These notices are supposedly for an inquiry, but they look quite threatening: they can be written in bold and in caps and in different sized fonts. They arrive at the firm with a variety of different names—often the firm has not actually heard of the regulator—and the tone of the notices can be unintentionally discourteous. This, of course, touches on other amendments which reference the right profile for the UK in regulating international firms that may operate in this country.
A Section 166 review is not cost-free regulation; it can require substantial external expenditure, internal management time, legal advice, data gathering, citizens’ work and follow-on remediation. The direct cost of the skilled person report may be only one part of the total burden. This means that there is inevitably a presumption of guilt in these inquiries, without a balanced challenge to which the firm can fully respond. We must bear in mind that firms often do not even know what the inquiry is looking for, so the ability to seek legal protection or a balance in the inquiry is made impossible by this approach to regulation.
In the general insurance and protection sector, an FOI-based report suggested that firms paid around £2.7 million for FCA-mandated Section 166 reviews in the year to 31 March 2024. It noted that internal costs and remediation costs can exceed the external review cost itself. That illustrates the point clearly that the financial and operational impact on firms can be significant. There is also the problem that some firms are not clear on why they are being subject to Section 166 in the first place. The regulator may go on a “fishing trip”, as described by the noble Baroness, Lady Bowles, which really is a good expression for how these inquiries proceed—to find fault without disclosing precisely what they are looking for.
That is why these powers need guardrails. As my noble Friend Lady Noakes has argued, Section 166 notices should be reserved for serious circumstances. They should not become a routine supervisory practice; they should not be used where the same information could reasonably be obtained through less burdensome means; and they should not be imposed without proper consideration of proportionality.
Amendment 117, in the name of the noble Baroness, Lady Bowles, would require the regulator to be satisfied that there is a material risk of serious detriment to regulatory outcomes, and that using a skilled person report is a proportionate response. It would require the regulator to consider the scale and nature of the suspected issue, the burden on the firm and whether the matter could reasonably be addressed through existing supervisory tools.
That seems to be a sensible framework, as does that set out in Amendment 118, in the name of my noble friend Lady Noakes. It would restrict Section 166 reports to circumstances where the regulator considers that there is likely to have been a significant contravention of a relevant requirement, and where the information or documents could not reasonably be obtained without the report. These amendments speak to the same underlying principle: Section 166 should be an exceptional tool for serious cases, not a default mechanism.
I welcome Amendment 123, in the names of the noble Baronesses, Lady Bowles and Lady Altmann, which deals with Section 165 information-gathering powers and seeks to set sensible thresholds on access to information. If a regulator asks a firm for information or documents, it should be able to explain why that material is reasonably necessary, why the request is proportionate and why the information cannot be obtained from another source. Requests should not be duplicative and they should not be broader than necessary. Firms should not be left trying to satisfy vague or excessive demands without a clear understanding of the purpose behind them. That is a basic principle of good regulation, and it particularly matters for smaller firms.
The broader issue here is one we have returned to throughout the Committee: regulatory power must be matched by accountability and proportionality. The FCA and the PRA have significant supervisory tools at their disposal. Where those tools impose real costs on firms, there must be proper discipline in their use. These amendments raise important questions about the balance between effective supervision and regulatory burden. We will listen carefully to what the Minister has to say in response.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baronesses for these amendments, and I have listened carefully to the points made today. The principle of ensuring that the regulators take a proportionate approach to their work—in the case of these amendments, to skilled person reviews and regulatory information collecting—is one that the Government strongly agree with. We have previously debated that principle and how it applies more broadly to the work of the financial services regulators.
Amendments 117 and 118 relate to skilled person reviews under Section 166 of FSMA. It is an important supervisory tool, and the Government agree that it should be deployed proportionately. However, the Government are not persuaded that there is an issue here that requires us to further constrain the regulators’ ability to require these reviews when they consider it appropriate to effectively safeguard the markets and consumers. The regulators have existing procedures to ensure proportionality when considering whether to initiate a skilled person review. The FCA handbook sets out that it will first consider the circumstances of the firm, the costs involved and the availability of other supervisory tools to tackle the issue. The PRA has similar processes in place.
Layering additional statutory requirements on top of this risks creating burdensome delays over supervisory decisions. Skilled person reviews are often used precisely in circumstances where the regulator needs independent expert analysis. For example, requiring the regulator to satisfy a threshold test before commissioning a review could limit the regulator’s ability to direct a skilled person to investigate a potential consumer harm and implement a mitigation strategy.
The data does not suggest that the use of skilled person reviews has grown over time. I reassure noble Lords that the FCA’s use of them has been broadly consistent over the past 10 years, with an average of 48.5 commissioned a year. However, in 2025-26, only 31 were commissioned, down from a high of 83 in 2023-24. This increase reflected the FCA’s strengthened oversight in key areas, including financial crime and appointed representatives and, despite the increase in volume, overall costs to firms remained flat.
Amendment 117 would create statutory disclosure requirements relating to Section 166 skilled person reviews. The FCA and the PRA already provide transparency by publishing data on the reviews they have commissioned in their annual reports.
Amendment 123 seeks to raise the bar for regulators requesting information for the firms they oversee. The Government recognise the impact that regulation and supervision can have on firms, and agree that regulators’ supervisory activities, including information requests, must not create disproportionate burdens on firms. That is why the Government have committed to cutting the administrative burden of regulation by 25% by the end of this Parliament. The financial services regulators are activity contributing to this agenda. For example, the PRA is deleting redundant and duplicative data collections—its future banking data programme has reduced costs to firms by around £26 million annually so far—and the FCA has stripped out data requests for 36,000 firms. All this has been done without detracting from consumer protections or systemwide resilience.
Through the Bill, the Government are taking action to reduce the burden of regulation on businesses. This includes reforms to the senior managers and certification regime, which will enable the regulators to reduce the regulatory burden of the regime by 50% while maintaining its strong and effective framework for individual accountability. Imposing prescriptive statutory requirements on how the regulators gather information risks undermining effective supervision, which might bring serious risks. Regulators must be able to respond quickly to emerging risks, and sometimes that means requesting information in ways that cannot be neatly anticipated by legislation.
The Government agree that proportionality is hugely important, that unnecessary burdens should be avoided and that the regulators must be held properly to account for how they exercise the significant powers given to them by Parliament. But there is no evidence that these amendments are needed to ensure proportionality. They would risk constraining the regulators’ ability to do their jobs effectively, which would introduce risks into our financial system. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Noakes (Con)
The Minister made great play of the importance of proportionality, on which I think there would be considerable agreement. The Bill removes the requirements to have regard to the regulatory principles, including, importantly, the proportionality paragraphs, for anything other than the five-year plan. It is therefore incumbent on the Government to look at all other areas of the Bill to ensure that proportionality, where it is needed, is correctly referenced in the Bill. By taking it away at the outset from the requirement to have regard in areas other than the five-year plan, the Government are leaving the Bill wide open to the non-proportional use of powers by the regulator. This area has not been fully developed by the Government in their thinking on this.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank all those who have spoken in this debate, in particular the noble Baroness, Lady Noakes, for her last intervention; I presume that the Minister had finished speaking. Perhaps we need 200 amendments on Report saying, “This has to be done proportionately”. That is literally where we are. Anybody who has been near a Section 166 review will know that an awful lot about it seems awfully unfair. For instance, the regulator may not have its own expertise, so it makes you pay to hire it in. Some of these things should be done under the regulators’ ordinary duties. This needs to be looked at and, as the noble Lord, Lord Altrincham, said, some kind of proper discipline must be put around it. That is what we are asking for.
I am glad to hear that there is a target of cutting the administrative burden by 25%. We will see how that goes, but I do not think that everything can be left as open as it is now, which is the much-repeated message that we have been delivering. For now, I beg leave to withdraw my amendment.
Baroness Noakes
“Cost benefit panels(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In subsection (4) of section 138IA, insert after paragraph (a)— “(aa) keep under review the cumulative impact of rules issued by the FCA including those covered by subsection (3); and”(3) In subsection (4) of section 138JA insert after paragraph (a)—“(aa) keep under review the cumulative impact of rules issued by the PRA including those covered by subsection (3); and”(4) In subsection (5) of section 139A, omit “(e)”.”Member’s explanatory statement
This amendment allows the Cost Benefit Panels of the FCA and the PRA to keep the cumulative impact of regulation, including those rules which are not consulted on, under review. It also requires the FCA to prepare cost benefit analysis for guidance and for the Cost Benefit Panel to review it.
Baroness Noakes (Con)
My Lords, I thank the noble Lord, Lord Vaux, for adding his name. Unfortunately, he is not able to be in Committee today. The amendments in this group concern cost benefit panels, which were created by the 2023 Act to underpin the existing FSMA requirement for cost-benefit analysis to be undertaken and published when rules are consulted on by the PRA and the FCA. The panels were created a little under two years ago and they are doing good work, as their annual reports show. The Financial Services Regulation Committee had a private briefing session with the chairs of the two panels, and we were impressed by the progress that they have made.
My amendment has two elements. The first requires the panels to keep under review the cumulative impact of rules, including those for which a cost-benefit analysis was not required because the impact was expected to be less than the £10 million threshold used by both regulators in their cost-benefit analysis policy statements. Keeping track of the cumulative burden of regulation was a recommendation of the Financial Services Regulation Committee in its Growing Pains report on the secondary competitiveness and growth objective. It was also one of the provisional recommendations of the FCA’s panel in its first report for the period to the end of March 2025. The 2025-26 report is not out until next week, but I would be surprised if it did not feature again.
Ideally, FSMA should be changed so that the existing statutory requirement on the regulators, which is confined to cost-benefit analysis on the proposed new rules, is widened so that it will be the responsibility of the FCA and the PRA to keep the cumulative burden on regulatory activity under review. I have taken the slightly easier drafting route in my amendments by putting a narrower requirement for the role of the panels.
The second element of my amendment concerns guidance by the FCA, which was covered last time in Committee, and the PRA. I confess that proposed new subsection (4) of my amendment captures only one part of what I was trying to achieve. I realised that when I was preparing my speaking notes, but it was too late to do anything about it, so I will speak to what I intended to cover in my amendment rather than what it does cover. This is Committee, after all.
At present, the FCA and the PRA are required to issue guidance under Sections 1K and 3I of FSMA and the FCA has power to issue guidance under Section 139A. If the FCA issues guidance under Section 139A, it has to be consulted on, but no cost-benefit analysis is required to be done or published. Proposed new subsection (4) of my proposed new clause in Amendment 119 seeks to require cost-benefit analysis for Section 139A guidance. I intended, but failed, to require cost-benefit analysis for all guidance issued by both regulators—that is a difference not reflected in the amendments.
I am well aware of the Government’s plan in Clause 18 to remove all the guidance obligations from the regulators, as well as the requirement for consultation on the FSA’s guidance under Section 139A. This part of my amendment is predicated on the Government realising the folly of their ways in Clause 18 for the purposes of today’s debate.
One of the findings of the FCA’s cost-benefit panel last year was the minimalist approach taken to cost-benefit analyses by the FCA: they are undertaken only when required by statute rather than being seen as good regulatory practice underpinning the detailed actions of regulation. The Financial Services Regulation Committee, as part of our inquiry into the FCA’s naming and shaming provisions, which had a potentially very significant impact on certain firms, called for a cost-benefit analysis. However, the FCA refused, saying that it was not required to do it by law. Therefore, I believe that attaching cost-benefit analysis to pretty much everything that the regulators do is necessary. Guidance would have been a good start, but the changes required are even broader than I have tried to achieve in my amendment.
My noble friend Lady Neville-Rolfe’s Amendment 132 seeks to widen the work of the CBA panels, and I look forward to hearing what my noble friends on the Front Bench have to say on that. With that, I beg to move.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to follow my noble friend Lady Noakes. I congratulate her on her purposive, rather than literal, interpretation of her amendment. I support her amendment and everything she said, as well as the other amendments in this group. I will speak to my Amendment 129.
Many noble Lords here today were in the Grand Committee debates for the then FSM Bill 2023. As my noble friend Lady Noakes rightly identified, the CBA panels have done very good work in their first couple of years of existence. My Amendment 129 seeks to give them further clarity to assist them in doing that good work, to ensure that they have the materials they need to do it, and to bring an additional element around public awareness of the panels’ work. That speaks to greater transparency, awareness and engagement, which can help not only the work of the CBA panels but the wider work of the regulators themselves. I look forward to the Minister’s response.
Lord Altrincham (Con)
My Lords, I am grateful to noble Lords who have tabled amendments in this group, which all take broadly the same approach to the cost benefit analysis panels. The underlying point addressed here is simple: if we are serious about accountability, proportionality and reducing regulatory burden, the panels that already exist to scrutinise the costs and benefits of regulation should be able to look at the full practical impact of what regulators do.
Amendment 119, in the names of my noble friend Lady Noakes and the noble Lord, Lord Vaux, raises the important issue of cumulative regulatory burden. Amendment 129, in the name of my noble friend Lord Holmes, would give the panels a broader and more visible role, including through regular impact assessments, stronger access to information and greater transparency. Amendment 132, in my name and that of my noble friend Lady Neville-Rolfe, addresses a specific gap: the use of guidance and supervisory practices, which may have significant practical effects on firms, but which do not currently receive the same level of cost-benefit scrutiny as formal rule changes.
I start with the cumulative burden point, because it is extremely important. Regulation is not experienced by firms as a series of isolated events. New rules come on top of existing ones, including guidance, reporting requirements, supervisory expectations, data requests, “Dear CEO” letters and enforcement signals. Individually, each new intervention may appear manageable, but collectively they can become very burdensome. The effect is not only on cost but on management time, operational complexity, legal advice, compliance headcount, systems changes and a reduced capacity to focus on customers, innovation and growth.
Therefore, it seems ineffective that the cost-benefit process so often considers individual regulatory interventions, without proper reference to the wider impact of the regulatory environment as a whole. If the regulator is required only to ask whether one new proposal is proportionate in isolation, there is no real incentive to look back at legacy regulation and ask whether the total burden has become excessive. That is why there is real merit in allowing the cost-benefit analysis panels to look more strategically at the total regulatory load. If we want regulators to support growth and competitiveness, they must not only justify new burdens but have incentives to remove or reduce old ones.
Amendment 132 would extend the existing cost-benefit analysis and consultation framework so that it applies not only to formal rules but to materially significant general guidance and general supervisory practices or policies. That is important because, in practice, guidance and supervisory expectations can have effects that are very close to rules. If such a measure has a material effect on regulated firms, it should not be able to escape scrutiny simply because it is not formally described as a rule.
Our amendment would create a sensible check: it would require the regulator to notify the relevant cost-benefit analysis panel early where guidance or supervisory practice may be materially significant. The panel could then give an opinion on whether the proposal is likely to have a material effect and, where appropriate, request that a cost-benefit analysis be carried out. If the regulator disagreed, it would still be able to proceed, but it would have to publish a statement explaining why it did not accept the panel’s view alongside the panel’s opinion.
The purpose of this is to recognise that materially significant guidance and supervisory practices can impose real costs and that those costs should be scrutinised. This sort of reporting would provide valuable information to inform the work of our important committees, both in this House and in the other place. I do not see why the Government would resist this as a sensible expansion of the remit of the cost-benefit analysis panels, particularly where the regulators they are overseeing have had, and continue to have, a substantial increase in their remits. Indeed, the more power we give regulators, the more important these mechanisms become. If more of the regulatory framework is to be made through rules, guidance and supervisory judgment, rather than primary legislation, Parliament must be confident that there is proper scrutiny of the costs and proportionality of the cumulative burden. The cost-benefit analysis panels are already part of that architecture; these amendments do not create an entirely new body. They strengthen the role of an existing mechanism and make it better able to do the job for which it was created.
Could the Minister explain why, if firms experience regulation cumulatively and guidance or supervisory practices can have material effects, even where they are not formally binding, the cost-benefit analysis panels should not have a broader remit to examine those wider burdens? I hope the Minister will engage constructively with these amendments and particularly with the principle behind Amendment 132.
Lord Stockwood (Lab)
My Lords, the Government agree that cost-benefit analysis sits at the heart of good regulation, and are committed to ensuring that the FCA and PRA are transparent and rigorous when they assess the impact of their rules on firms and consumers.
FSMA 2023 introduced requirements on the regulators to publish a statement of policy for their approach to cost-benefit analysis—or CBA—and to establish CBA panels, as your Lordships know. CBA panels play an important role in the regulators’ work, acting as a critical friend to provide advice to the regulators on their CBAs, with the aim of improving their methodology and approach to CBA. They are required to include experts working at authorised firms to ensure that the regulators benefit from the insights of firms as they develop CBAs, and particularly to improve awareness of the impacts of regulatory proposals on firms.
Amendments 119, 129 and 132 seek to build on these existing statutory requirements to prescribe, in primary legislation, the precise functions, working methods and outputs of the panels. The CBA panels are still relatively new institutions. Their value lies partly in their ability to independently develop their own optimal working practices, to identify where their scrutiny has the highest value and to evolve as the regulatory landscape changes. Locking in their mandate in such detailed statutory provisions removes the very flexibility and ability to evolve that makes them effective.
Many of the detailed requirements set out here are already achieved as a result of normal principles of public law. For example, for the FCA to comply with its statutory requirement to establish and maintain a CBA panel with specified functions, it must ensure that its panel has the appropriate information and data to perform those functions. A further explicit provision is unnecessary.
Amendments 119 and 129 also seek to require the CBA panels to keep the cumulative impact of rules under review. The Government understand the motivation behind this: no single CBA tells the whole story of the regulatory burden facing firms. The PRA’s CBA panel has itself noted that measuring cumulative costs is inherently challenging and would require substantial industry input and resource; it would be subject to constant revision, given the pace of policy development. This could, perversely, add to burdens on firms, by requiring an extensive data-gathering exercise to understand the cumulative impact. Further, focusing exclusively on the cumulative costs could lead to discounting the benefits associated with certain regulations, whether they accrue to consumers, wider society or firms themselves.
The FCA is already making progress by reporting its cumulative regulatory impact through its secondary international competitiveness and growth objective metrics. These include the total value of the equivalent annual net direct cost to business across all CBAs for policy statements published each year and the aggregate benefits of its policy work. The PRA’s CBA panel is already helping the PRA identify where costs may be disproportionate and could be reduced, which is targeted and effective. The Government’s view is that the right response is for the FCA and the PRA to build on these early steps by working with their expert CBA panels to further understand and assess the cumulative impact of regulation, not to mandate the work of the panels through legislation.
Baroness Noakes (Con)
Can the Minister explain what the FCA and the PRA are doing about cumulative burden? Are they focusing on the cumulative burdens of the rules that they have assessed using a cost-benefit analysis, or is it for all of their activities? It is my understanding that they are both pretty clear that they will use cost-benefit analysis in the way the statute has prescribed—that is, they use materiality thresholds, so quite a lot of them are not required at all to be looked at—so the whole range of their activities, which covers anything that is not rule-making, does not get assessed for cost-benefit at all. Can I be clear on what the Minister thinks the regulators are doing?
Lord Stockwood (Lab)
I will have to write to the noble Baroness, because that is a very detailed question.
Lord Stockwood (Lab)
We are trying to be balanced and proportionate here. I recognise that these are important issues but, at the same time, it is about ensuring that the regulator has the flexibility to make those decisions. We are definitely making inroads on this, although I imagine that there is a lot more discussion to be had between now and Report. I want to make sure that I give the noble Baroness the right response.
Amendment 132 seeks to extend the CBA obligations to general guidance and supervisory practices—I take that to mean all guidance. The Government recognise the concern that regulatory burdens can be imposed on firms through guidance and supervisory practice, as well as through formal rules. Where guidance is about rules that have already been made, in most cases the underlying policy would have already been subject to CBA through the rule-making process, so requiring CBA for such guidance would be duplicative. In these cases, the guidance is to help firms understand what the rules require and how they operate. Where guidance may result in significant costs being incurred, the Government note and welcome the regulators’ work to voluntarily prepare CBA for guidance—for example, the FCA’s guidance on fair treatment for vulnerable customers.
Most guidance issued by the regulators does not impose material incremental costs on firms. Obligating the regulators to undertake CBA on guidance would impose heavyweight analysis where it is least meaningful. It would introduce delays for guidance being issued, undermining the regulators’ ability to respond quickly to market developments, risks or firm failures.
The CBA panels are a hugely valuable and still-developing part of our regulatory architecture. The right approach is to allow them to mature and to hold regulators publicly accountable for how they respond to input from the panels, rather than embedding a detailed operational rulebook in primary legislation that will be inflexible in the face of ever-evolving circumstances. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Noakes (Con)
My Lords, I thank the Minister for his reply, but I do not think that it dealt comprehensively with the nature of the problem. I do not think that any of our amendments deal comprehensively with the nature of the problem, actually, because the answer is not loading on extra things for the CBA panels to do; it is about looking again at the obligations of the regulators. That is not what we have put down in these amendments, although we have had a debate on the issue.
I was pleased to hear the Minister say that he was prepared to have discussions between now and Report. This is an area where a number of us would like to get together with the Minister to try to work out how we can make some improvements, because the law as it stands is narrowly drawn. I do not think we can assume that the regulators will voluntarily expand that into the areas that some of us think should be covered, so it is right that we look at the legal provisions—but perhaps not necessarily the ones covered by these amendments. With that, I beg leave to withdraw my amendment.
Baroness Neville-Rolfe
“Review of bank capital requirements(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report reviewing the effect of prudential capital requirements applicable to PRA-authorised banks and building societies, with particular reference to on lending capacity, borrowing costs, competition and economic growth, while also considering financial stability. (2) In preparing a report under subsection (1), the Treasury must consult—(a) the Bank of England,(b) the Prudential Regulation Authority,(c) the Financial Conduct Authority, and(d) such other persons as the Treasury considers appropriate.(3) The Treasury must published the report.”Member’s explanatory statement
This probing amendment would require a review of the effect of prudential capital requirements on lending capacity, borrowing costs, competition and economic growth, while also considering financial stability.
Baroness Neville-Rolfe (Con)
My Lords, my amendment concerns the impact of prudential capital requirements on lending capacity, borrowing costs, competition and growth. Since my amendment was tabled, His Majesty’s Opposition have announced a new policy position in this area, which I shall speak to now.
Our new policy is straightforward. The statutory basis for post-financial crisis bank capital requirements should be amended so that UK regulators are required to take proper account of equivalent capital regimes in competitor jurisdictions, and to identify, justify and, where not justified, remove any UK-specific overcapitalisation relative to equivalent international regimes. We want to consider the position in competitor jurisdictions, to benchmark equivalent regimes, to publish detailed analysis and to explain clearly where the UK is imposing requirements above international standards or above those imposed by comparable financial centres. That seems a basic requirement of a serious competitiveness agenda, on which the UK is particularly reliant. The UK is the world’s largest net exporter of financial services, whereas comparable jurisdictions, such as the US, rely much more on their domestic markets. It is therefore imperative that we remain competitive on the world stage.
Capital requirements matter, but there is a cost. Capital held solely for statutory compliance is capital that cannot otherwise be used to support lending, investment, home ownership, business expansion or economic activity. The central question is therefore not whether banks should hold capital but whether the UK requires materially more capital than comparable jurisdictions without a clear and evidenced stability justification. If we do, we are placing the UK at a competitive disadvantage: we are constraining lending, increasing borrowing costs, making it harder for firms to access finance and weakening growth, and doing so in a way that may not be required by international standards or by the actual risk profile of the system.
The analysis behind our policy suggests that the UK capital framework may materially exceed international Basel III requirements and competitor regimes. It has been suggested that the resulting constraint on UK banks’ lending and financing capacity could amount to £250 billion across overlapping capital requirements and £200 billion across leverage ratio constraints. Of course, not every pound of capital released would automatically translate into new lending—we understand that. Some may be used for business investment, dividends, buybacks or balance-sheet strengthening. The key point remains that capital deployed productively in the economy is preferable to capital trapped by a regulatory framework that is more restrictive than it needs to be.
We appreciate that the Government recognise this issue and have moved a little on it already. They have made the bank resolution regime more flexible, allowing the Bank of England to reduce or remove MREL for some firms where the new FSCS recapitalisation mechanism can substitute for pre-positioned loss-absorbing resources. Our proposal is a step to unlocking a lot more capital. We already require the PRA, in some contexts, to have regard to the UK’s relative standing against competitor jurisdictions, but that duty is incomplete. It does not apply across the whole capital framework and, in particular, it does not fully capture Pillar 2A, the PRA buffer or systemic buffers. The FPC has produced useful comparative analysis, but there is not yet a binding requirement for regular, systematic benchmarking against competitor jurisdictions.
Our proposed review is also about transparency. If regulators believe that the UK should impose higher requirements than comparable regimes then Parliament, industry and the public should be able to see the analysis behind that decision. That is how we preserve independence while improving accountability.
The amendment is part of a wider argument. Prudential regulation must be understood not only through the lens of stability but through the lens of growth, lending, and competitiveness. A capital framework that is more demanding than necessary does not make the economy stronger. It may make it less dynamic, less competitive and less able to support households and businesses, especially SMEs and scale-ups. I speak from experience as a director at a responsible and careful challenger bank, where the UK capital rules were a significant constraint on what we could do. They also consumed a great deal of management and board time.
I would like the Government to accept that the UK should not impose capital requirements above equivalent international competitor regimes, especially if there is no financial stability justification for doing so. The first step is to undertake the necessary analysis. Ours is a serious and responsible policy. It preserves regulatory independence and protects financial stability but recognises that excessive or unjustified capital requirements carry real economic costs. If we want growth, competitiveness and banks to support businesses and homebuyers, then we need a capital framework that is robust but not overrestrictive. That is the balance that our policy seeks to strike. I look forward to the Minister’s response.
Lord Pitt-Watson (Lab)
My Lords, both the amendment and the speech by the noble Baroness, Lady Neville-Rolfe, were sensible in terms of making us think about bank capital requirements and whether we have got them right. As she says, the first step is undertaking proper analysis to be able to work out whether that happens. I noticed she caveated everything that they may not be right. They may be right, but they may not.
My worry is that that is a sensible position to take but it did not sound like the position being taken by the Leader of the Opposition when she made her speech last week saying that she was going to reduce bank capital requirements to release £450 billion in capital. Where did the calculation that hundreds of billions are sitting idly on bank balance sheets come from? Where do those hundreds of billions come from? If we are going to release £450 billion, what is the calculation in the reduction of bank capital requirements that sits behind that calculation? While I feel quite supportive of the issues that the noble Baroness was raising, we need to be sure—I hope she will agree—that we do not jump the gun on this.
Baroness Kramer (LD)
My Lords, the noble Lord, Lord Pitt-Watson, was rather generous in his comments. Sometimes it is important to speak truth to power. This is a lowest common denominator strategy. We have heard it before from the Conservatives, and it is repeated with enthusiasm today. I heard so many of these arguments back in the early 2000s. It contributed and was a fundamental part of the reasons why we ended up with such a major financial crash with huge financial and political consequences that echo through to this day. I could see the argument being made that we need to take proper care that we are looking at capital requirements and that we need to assess them and look at the consequences and do so on a regular basis. That is already part of the programme and certainly would always need to be part of it.
I notice that in line seven of the amendment the phrase is,
“while also considering financial stability”.
If ever there was a phrase lowering the significance of the primary objective with which we tasked the Bank of England, that phrase does it—merely a consideration of financial stability. I was afraid when the growth and productivity objectives were introduced as secondary objectives that quickly the attraction of the phrases would cause them to cannibalise the primary objective. This is a very good example of the way in which that, frankly, has been happening.
I have seen across so many of the measures in the Bill a step away from the precautionary principle—in this case, of looking for appropriate capital requirements, whether in equities or in MREL—to a notion that we deal with all this through a resolution regime. I am suspicious of resolution regimes and of after the fact ways of ensuring financial stability. I would much rather we did not have a bank failure that we must then attempt to remedy through the use of something like bail-in MREL, which I do not think will ever work. Frankly, MREL is held by insurance companies and pension funds, and we are never going to wreck them to save a major bank. I am very concerned about the change in approach that we are hearing today from the Conservative party.
Lord Bridges of Headley (Con)
My Lords, I shall briefly speak in response to the noble Baroness, and I once again draw attention to my interest as an adviser to the chairman of Santander. I want to make three quick points.
First, I overwhelmingly agree with the thrust of the amendment. I think analysis of this critical issue is important for the reasons that the noble Lord, Lord Pitt-Watson, said. He will know much better than I do how notoriously difficult it is to compare the regimes of the United States, the UK and the EU. If noble Lords are interested in this and cannot sleep, I advise them to look online at recent reports that have come out. The Financial Times reports a law firm called Alvarez & Marsal pointing to the impact of the US’s current moves in prudential regulation and how that has unleashed a considerable amount of bank capital. Meanwhile, the ECB has pushed back with its own analysis showing that the US and the EU are broadly on par, so we cannot compare the others. The European Banking Federation has recently come out with its analysis of this issue.
As far as I can see—I stand to be corrected by others—a lot of this depends on how we measure not just the regulatory and prudential aspects but the supervisory actions, and how supervisors can put buffer upon buffer, depending on the banks, the GSIPPS and who you are looking at within the perimeter. This analysis will be very important, and it could be very worthwhile, but it has to try to overcome the enormous problem that exists, now matter we how bridge it. That is the first point.
The second point, flowing from that, is that the more I look at this, the more I think that the objectives—and, underlying those, the culture—of the regulators and supervisors seem to be almost more important here. When you look at the difference in regulatory approach, be it by the Singaporeans or the US, you find that it is largely a matter of the culture within those bodies, where they are coming from and the messages that the politicians are sending them.
I will cite just one example. Picking up on what the noble Baroness, Lady Kramer, said—we disagree on this violently, I know—I am very interested in the US approach. Secretary Bessent in the US Treasury gave a speech about eight months ago where he told the Financial Stability Oversight Council, which is a key body that brings together regulators and supervisors, that low growth was in itself a financial stability risk—let me repeat that: low growth was a financial stability risk—and that they needed to act accordingly. That sent a signal, as far as I can tell, throughout the entire regulatory and supervisory environment in Washington and the States, and they have acted accordingly. That has had more of an impact than necessarily what the capital requirements are for various bodies.
The final point is on SMEs. We will not have a long debate about this, but I would make one point here about the demand from SMEs for lending. We can debate the role of capital requirements—I think there is more of a role for and more impact from capital requirements on bank lending than perhaps the noble Baroness does—but where we would probably agree is that it is the overall general environment in which SMEs are operating that will stimulate demand for lending. If you have a Government who are piling pressure after pressure on SMEs—to be taxed more on employment, to have more regulation, et cetera—that will dent their demand for lending and for more investment. That is what will happen. Therefore, it is very important that we look at that issue per se in the round. With that, I will sit down.
Baroness Kramer (LD)
I probably have a right to reply, because it is Committee and we can speak more than once. The noble Lord, Lord Bridges, and I often find a whole lot of common ground, and I agree completely that the environment in which SMEs are operating is extremely difficult. However, if he goes back and looks at the numbers produced by the Federation of Small Businesses, he will find that there is significant demand for borrowing, which is continuously turned down and rejected. I just want to make sure that the noble Lord understands that side of the picture.
I have no problem with people going away, as I said, and doing proper analysis and trying to understand exactly what the picture is, but there is another side to that, and it is not included in this amendment. If I was amending it, I would add a line, because we need an analysis of the cumulative risk that has been reintroduced into the financial sector by everything from Solvency UK to the whole range of changes—I think I listed them once in a Second Reading speech, and it went on for nearly a page and a half—that have been made. Measuring that cumulative risk would be extremely instructive to us when we start to look at issues such as financial stability. But for goodness’ sake, if we are reducing financial stability to no more than a “have regard”, which is exactly what this amendment would do, we are stepping into really dangerous territory.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness for raising this important issue. Prudential capital requirements play a vital role in ensuring that our banking system remains resilient, supports sustainable lending and underpins confidence in the wider economy. We have heard a range of views on capital requirements today. The UK’s framework is internationally respected and has been carefully designed to balance growth with financial stability.
Amendment 120 would require HM Treasury to publish within 12 months a report reviewing the impact of capital requirements on lending, borrowing costs, competition and economic growth, alongside financial stability, drawing on consultation with the Bank of England and the regulators. I genuinely recognise the intent behind the amendment. However, it is unnecessary, as the Financial Policy Committee is already undertaking a comprehensive review of the UK’s bank capital framework through precisely the lens that the amendment seeks, including the impact on lending, growth and financial stability.
Baroness Kramer (LD)
Can I just check whether it is looking through the lens of treating financial stability as only a “have regard”? Is that what the Minister is saying? The amendment says “considering”. It is a “have regard” statement.
Lord Stockwood (Lab)
No.
The FPC has been tasked by Parliament with responsibility for the stability of the financial system overall. It is the right body to carry out this review, which needs to balance the economic impacts of capital requirements against the protections that they may offer. Getting the balance right in the prudential framework and bank capital requirements has been a key priority for the Chancellor and an issue she discusses frequently with the industry.
The noble Baroness, Lady Neville-Rolfe, raised the issue of international comparisons. The FPC set out its assessment of international comparisons when it reviewed this in December 2025. It found that the requirements are broadly in line with international comparators. In some areas, such as leverage requirements on domestic firms, the FPC noted that the requirements may be higher. However, I assure the noble Baroness that it noted leverage as an area for further reform that it plans to cover in next week’s update.
As noble Lords may be aware, the Chancellor sets out the annual remit and recommendations for the FPC. The most recent remit letter was sent last November and sets out clearly that the UK must regulate for both risk and growth, and remain competitive in a changing world. As part of that, the Chancellor recommended that the FPC’s review should ensure the UK’s capital framework strikes the optimal balance to deliver resilience, growth and competitiveness. I assure the noble Baroness that the FPC understands this balance. In December 2025, the Financial Policy Committee reassessed the optimal level of system-wide bank capital, reducing its benchmark from 14% to 13% of risk-weighted assets.
For these reasons, while I understand the objective, this amendment is unnecessary and risks undermining the clarity and credibility of the current regime. We will come back to this discussion over the coming weeks. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to noble Lords who have contributed to this debate and to the Minister for his response. I thank the noble Lord, Lord Pitt-Watson, for being generally supportive and for explaining that this is a matter of judgment. We now have the resolution regime, so things have changed. As I noted in my introduction, some changes in this direction have already been made. Indeed, I note the Minister’s summary of what is being done by the PRA and the FPC, and I want to look at that before Report. I am sure that we will come back to this issue at a later point, as he said.
Contrary to the suspicions of the noble Baroness, Lady Kramer, we recognise the importance of financial stability and why capital requirements exist. That is why I mentioned financial stability in my amendment—it was meant to be a positive. Perhaps she is overinfluenced by past failures, but they of course took place before we had the resolution regime.
My concern is that the current requirements go further than is necessary or further than the equivalent regimes in competitor jurisdictions, without proper justification. As my noble friend Lord Bridges said, there seems to be a gap. We have a different regulatory culture, and that may be having an effect. He quoted someone saying that low growth is also bad for financial stability—and I feel that strongly.
The cost is felt in lending capacity, in borrowing costs, in competition, in investment and, ultimately, in growth. It is also felt in the UK’s ability to remain one of the world’s leading financial centres. I want to make it clear that I and my party support the UK financial services sector. We want the UK to be the place where firms choose to invest, lend, innovate and grow. That is especially true for SMEs, which have been referenced in discussion.
I repeat that ours is a serious and responsible approach: it protects independence while strengthening accountability and preserving resilience. It recognises that unnecessary overcapitalisation can constrain productive activity in the wider UK economy. Given the objective of growth, which I think is shared across the political divide, we hope that there will be further consideration on what is the right way forward. For now, I beg leave to withdraw the amendment.
“Periodic independent review of financial regulatorsAfter section 1S of the Financial Services and Markets Act 2000 (reviews) insert—“1SA Periodic independent review of financial regulators(1) The Treasury must appoint a panel of at least three independent persons (“the Review Panel”) to conduct a periodic general review of the effectiveness of—(a) the Financial Conduct Authority,(b) the Prudential Regulation Authority, and (c) the Bank of England in respect of its functions under Parts 1 and 5 of the Banking Act 2009 and Part 2 of the Financial Services Act 2012.(2) A person may be appointed to the Review Panel only if—(a) the Treasury has proposed the appointment, and(b) the appointment has been approved by a resolution of the House of Commons and a resolution of the House of Lords.(3) A person is not eligible for appointment if, within the previous three years, they have held senior office in the Treasury, the FCA, the PRA, the Bank of England, the Payment Systems Regulator, the Financial Ombudsman Service, or in any firm or body materially affected by the review, unless the nature of the interest has been fully disclosed and the appointment has been expressly approved by both Houses.(4) A general review must take place at intervals of every two to three years and must include a review of—(a) internal operations and controls,(b) systems for responding to whistleblowers, parliamentary correspondence and reports, and public interest concerns,(c) regulatory perimeters and customer classifications,(d) the effectiveness of relevant legislation and rules and the regulatory burden,(e) whether statutory and public policy objectives have been met,(f) the operation and effectiveness of engagement practices before and during rule making,(g) the skills base of staff,(h) follow up from previous reviews,(i) access to redress and effective remedies,(j) the operation of the FCA/FOS relationship and systemic complaint escalation, (k) evidence handling, audit trails and responses to parliamentary, whistleblower and public interest concerns,(l) whether statutory rights and remedies transferred into regulator rules remain effective in practice,(m) redress shortfalls, repeat misconduct and deterrence,(n) any other matter the Review Panel considers relevant, and(o) any matter requested by a relevant Committee of the House of Commons or House of Lords.(5) The Review Panel must not determine the merits of any individual complaint, regulatory decision or enforcement case, but may consider individual cases, whether anonymised or otherwise, for the purpose of identifying systemic, procedural, evidential, perimeter, redress or accountability issues.(6) On completion of a review, the Review Panel must make a written report to the Treasury—(a) setting out the results of the review, and(b) making such recommendations as the Panel considers appropriate.(7) A copy of the report must be—(a) laid before Parliament within 30 days of receipt, and(b) published in such manner as the Treasury considers appropriate,subject only to necessary redactions for confidentiality, privilege or enforcement sensitivity.(8) The Treasury must publish a response to the report within 60 days of its publication. (9) The FCA, PRA and the Bank of England must each publish a response to the report within 60 days of its publication, including a statement of actions they will take as a result.(10) The Review Panel has a right of access (at any reasonable time) to all information which it may reasonably require for the purpose of performing its functions under this section.(11) The Review Panel is entitled to require from any person holding or accountable for such information any assistance or explanation which the Panel reasonably considers necessary for that purpose.(12) “Information” includes any document, record, data, correspondence, internal report, or other material held by the FCA, the PRA or the Bank of England.””
Baroness Bowles of Berkhamsted (LD)
My Lords, I am moving my Amendment 121, and I support the amendments in this group in the name of the noble Lord, Lord Bridges. My proposal is for an independent oversight mechanism for our financial services regulators. It builds on the ideas in Section 1S of FSMA 2000, under which the Treasury can require an independent review. This is usually triggered after a significant event: the most recent review, Gloster’s review published in December 2020, was triggered after the collapse of London Capital & Finance.
Baroness Bowles of Berkhamsted (LD)
Shortly after my proposal first surfaced, I was contacted by people involved in the Australian royal commission on financial services, because they had noted that I had reached the same conclusion as them: that it was too big a job for Parliament to do by itself, given everything else that national Parliaments have to do.
Australia introduced two-yearly reviews, and it is not the only country to have an independent review. A similar arrangement now exists in New Zealand, and in the US all regulators come under powerful scrutiny by the Government Accountability Office. One advantage of my proposal is that it follows a path we understand from Section 1S reviews, and it could be done quickly—maybe as an interim solution, for example, until an office such as that proposed by the noble Lord, Lord Bridges, could be formed. By having regular reviews, oversight of progress would also be possible. After her review, Dame Elizabeth Gloster told the Treasury Committee that we are left to “hope” that the regulator “implements” regulations. Hope is not a system.
Why did I propose this? It was the point at which the Government were looking at the post-Brexit future financial framework. As has already been rehearsed in this Committee, this Parliament does not have the structure and focus that was available in the EU Parliament. Having been chair of the ECON committee dealing with all the post-financial crisis legislation, I can safely say that I know what it takes and that it is not easy. That is another reason why I do not recommend a continuous process.
There will be more to it in the UK, because many issues arise from the execution of supervision post rule-making. Brexit created the first need, which we eventually tried to patch with a new committee. Your Lordships heard from members of that committee and in the report of the Industry and Regulators Committee, Who Regulates the Regulator?, that now the overwhelming conclusion is that significant independent review is needed.
Now we have a new, second need due to the changes in this Bill, which remove the “have regards” away from operational effectiveness and into a five-year strategy. How is that to be monitored? Is there any intention at all for follow-through? The changes make the already difficult acquisition of information even harder. Several things that the Minister has said in his replies ring alarm bells and show the absolute need for scrutiny. We need it because financial services regulation and supervision is too important to allow issues to creep up—all the more so in a higher-risk environment. LCF-type regulator risk needs even more guarding against.
The Minister has said that proportionality will now be tested only at the strategic level. Let us be clear: testing proportionality at only the strategic level is barely a nudge. Rule-level and supervisory-level proportionality is the real test, but that has been put out of reach of accountability, as there is nothing to measure against. Indeed, they are not even looking at it apart from every five years. From that, it is pretty clear that substantial follow-ups on the five-year strategy are necessary. The Minister says that annual reports and remit letters provide accountability. Some substantial upgrading and interrogation of those is needed. What actionable event flows from an annual report? It is judge, jury and public relations all in one place. Does the Minister genuinely believe that an example here and there constitutes accountability?
The Minister argues that principles remain central, yet they are being moved into a document that cannot be enforced by the courts and cannot be used to test a specific rule or supervisory action. They are applied every five years, when the future cannot really be seen. This is not lip service; it is just print service, and as my noble friend Lady Kramer has shown us from the current version of the five-year report, there is little substance. Will we get something detailed for every category and size of financial market business?
The Government’s rhetoric suggests that reducing the burden of accountability will unleash a more dynamic and agile regulator, but that does not demonstrate the stability that is a prerequisite for competitiveness. Stability is the best friend of a competitive financial sector. Whether you cite centuries of institutional experience or the second law of thermodynamics, left to their own devices, systems corrupt or tend to disorder. Someone has to be on their case. But the Government are making the regulators far more insulated from the procedures that keep them on their toes. Avoiding the burden of accountability today is like banking a much larger, more expensive crisis for tomorrow. Additional periodic or permanent oversight has become even more necessary. I beg to move.
Lord Bridges of Headley (Con)
My Lords, I will speak to Amendments 133 to 135 and 136 to 139 in my name, but not Amendment 135A, which is in the name of my noble friend Lady Lawlor. I thank my noble friends Lady Noakes and Lady Lawlor and the noble Baroness, Lady Bowles, for putting their names to my amendment. This little clutch of amendments is turning into déjà vu, because the noble Baroness, Lady Bowles, has just spoken about issues that she raised some years ago. My amendment is one that I raised in this very Room, sitting on the other side, exactly three years ago—so it is déjà vu all over again.
I start from a basic point, which picks up exactly where the noble Baroness left off. I believe that we here in Parliament need more powers and, critically, more independent analysis to hold financial regulators and supervisors to account. In fact, I just mention here that we need to do far more to hold the Bank of England to account, but that was declared out of scope. I had wanted to table an amendment calling for a regular, probably five- or six-yearly, review led by Parliament into the remit and performance of the Bank of England as an entity and as an institution. I believe that that is an enormous democratic deficit that we need to address. I was told that it was out of scope for this piece of legislation, but I very much intend to return to that at a future date. It is much to the Minister’s relief, I am sure, that we are not going to do that now.
We spent Monday debating clauses in the Bill that I see as weakening parliamentary accountability. My amendments and those of the noble Baroness will take us in the opposite direction, towards more accountability. A number of us, on all sides of the Committee, have been asking a very simple question: do we, in this House and in the other place, have sufficient means to hold our financial regulators and supervisors to account without compromising that operational independence? The answer keeps coming back, resoundingly: no, we do not.
It is not as though this is the first time we have said this. As the noble Baroness mentioned, in its excellent 2024 report, Who Watches the Watchdogs?, your Lordships’ Industry and Regulators Committee found that parliamentary scrutiny of regulators remains too fragmented, too reactive and—I stress this—too limited by the resources available to Parliament. It concluded that the balance between regulatory independence and democratic accountability needs to be strengthened. As I said, that report came after all the debates we had in this Room on the previous Financial Services and Markets Bill, now an Act. We warned then that the transfer of extensive rule-making powers from Parliament to the regulators had created an accountability gap. That is why I addressed this very same proposal then. My concerns about accountability have not diminished; if anything, they have grown in the years since I was standing over there, so I am trying again.
Noble Lords will be grateful to hear that I will not go line by line through what each of these amendments would do. I simply say that Amendment 133 would establish an office for financial regulatory accountability, OFRA, as an independent body to support Parliament in scrutinising the work of financial regulators. It is crucial to stress that I do not see this as second-guessing regulatory judgments or interfering with regulatory operational independence. Rather, as set out in Amendment 135, which is pretty key in this clutch of amendments, it would provide Parliament and the outside world with impartial analysis of regulation, the actions of regulators in the round and, crucially, their performance at meeting their objectives, as set by Parliament.
Why do we need this? For a very simple reason—my noble friend Lady Noakes will pay testament to this. The volume and technical complexity of financial regulations are now making this absolutely necessary. If Parliament is to fully and effectively scrutinise the hundreds of pages of regulation that our regulators keep churning out, we need to do more. My concern—I would be grateful if the Minster could put my mind at rest—is that the Government seem to be suggesting that we do not need to have a case-by-case analysis of regulations. That is wrong: it is absolutely critical to have that analysis. We cannot rely on a five-yearly strategic report, or overall impressions and analysis, from regulators. We need to be able to analyse regulation point by point.
If the Minister responds by saying, “Don’t worry. The regulators will reflect their objectives in their actions and decisions, so we have nothing to worry about here”, I will say, “Let’s prove it”. Let us have the independent analysis to make sure that it is indeed the case that our regulators are reflecting the objectives that Parliament has set them in what they do. Greater scrutiny and, with it, greater accountability, will surely strengthen trust, which is critical.
The Minister might go on to argue that my proposal is not needed for two other reasons, the first being the cost-benefit analysis panels that my noble friend Lady Neville-Rolfe and others talked about when discussing previous amendments. I completely accept that they perform a very important function, but I see their role as being very different. Their role is to improve the quality of individual cost-benefit analyses prepared by the regulators. They are advisory bodies to the regulators themselves. They are not designed to provide Parliament and others with an independent assessment of the overall effectiveness and proportionality of regulation, bit by bit. This amendment would therefore complement rather than replace those panels: the cost-benefit analysis panels improve regulatory decision-making from within; OFRA would strengthen parliamentary accountability from without.
The second reason the Minister might use to oppose my proposal is that the FCA introduced its rule review framework in 2024, with the stated aim of undertaking increasingly rigorous post-implementation analysis of what it does. I stand to be corrected, but my delving into this suggests that the results so far of this new framework are modest. As far as I can see, since its introduction, only one full impact evaluation has been published, and one other has appeared in the past five years—I think that is overall, pre the framework being introduced. I would like to know whether that is the case and how effective the rule review framework has been.
Either way, that underlines the point that Parliament needs access to independent analysis, especially as the Government want to give regulators more discretion. This seems to be the entire drift of the Bill: more discretion for the regulators. If that is the case, surely the quid pro quo for more discretion must be having more mechanisms for accountability. If we are being asked to entrust the regulators with more, we need greater ability to have independent scrutiny of what they are doing.
Baroness Noakes (Con)
My Lords, I have added my name to my noble friend Lord Bridges of Headley’s amendments creating OFRA. I also support the amendment from the noble Baroness, Lady Bowles, which would use a panel to look at how the regulators are performing. The key thing is that we need more external heavyweight oversight of what the regulators are doing. As noble Lords have identified throughout this Committee, accountability is the key issue that we are focusing on, in particular because of the way in which the Bill weakens the current accountability constructs.
My noble friend Lord Bridges referred to the previous time that we were debating the same amendments, when we were sitting on the other side of the Room—I remember it very well. At that time, as my noble friend knows, I did not support his amendments because I was dead set on trying to get either a House of Lords Select Committee or a Joint Committee of both Houses involved. The original version of what is now FSMA 2023 had the involvement of only the Treasury Select Committee in the other place and we were clear that this House had far more expertise in financial services, and that it was important to leverage that either through the use of a dedicated Select Committee in your Lordships’ House or a Joint Committee. There was no appetite for a Joint Committee from the other place. We ended up with a committee, but it took an amendment to the then Bill in 2023, on which I focused all my effort last time. Also, as I said to my noble friend at the time, I did not think that we needed yet another unaccountable public body.
The Financial Services Regulation Committee has been in operation for about two and a half years, and I am now clear that the scale of the task is very large and very hard to execute without the kind of independent analysis that we would get from having something such as OFRA or a panel to assist in the task. It is just too big a task for one Select Committee in your Lordships’ House to handle. We meet weekly, as is customary for all Select Committees, but we have limited staff resources, in common with all other Select Committees of your Lordships’ House. We do pretty good work on that basis, but we cannot cover the whole area, nor can we look at as many things as we would like; we have to be selective about what we look at. We cannot take a comprehensive look at the accountability of the regulators; that is the missing piece now. We need something that is resourced and able to look at it in the round.
I support all the amendments in this group because anything would be a big improvement on what we have to date. I bring good news for the Minister: I have, today, tabled another idea for improving accountability, based on discussions with some people in the industry, which some Members of the Committee already know about. I tabled that this afternoon so I hope that we will be able to debate that on Monday.
The only point I am trying to make is that we are looking for options to improve accountability, which was already under pressure, but we now have huge new consumer credit legislation coming in that will mean lots of regulations and rules being issued over the next couple of years. There is quite a big task coming down the line, and we have to do something about it in the Bill.
Baroness Lawlor (Con)
My Lords, I have added my name to Amendments 133 and 135, in the name of my noble friend Lord Bridges, and I shall say a few words about them. I have also tabled Amendment 135A, which amends Amendment 135.
Two of the questions raised by the Bill are how will the regulators operate, make, impose and judge the rules and how will Parliament’s proper role in the legislative process be ensured? In some cases, not only do we not know what we are supposed to be legislating on, as the Committee has discussed, but we do not know the basis on which the regulators will, in practice, be held to account. Indeed, as matters stand, the arrangements and the deployment of powers is not known, or not entirely, in many cases.
The amendments tabled by my noble friend Lord Bridges and supported by my noble friend Lady Noakes and the noble Baroness, Lady Bowles, to which I have added my name, would establish an office for financial regulatory accountability, which would have the specific duty of examining and reporting on the performance of the FCA and the PRA and how they perform on specific measures, would provide some of the essential answers. The office would assess how far the regulators meet their statutory objectives and principles under FSMA 2000 and, importantly, the effect of specific pieces of regulation. We need to know the impact of these regulations on the domestic development of the financial services and the market, as well as the impact internationally, and we need to know the costs and burdens of compliance. Amendment 135 contains very specific duties, and I think they have been very well thought out. I hope the Minister will take them into account and consider why we need this office, which will be independent of the process of regulation. It will be independent of Parliament, not just of the regulators, and it will help Parliament to do what it ought to do as the legislature.
My Amendment 135A would include in these independent reports examples of how the rules have been implemented and applied to different firms, including similar firms doing the same kind of activity, because we do not have an independent analysis of those rules and regulations, the process or the compliance. Very often, small businesses are at sea; they cannot look to Parliament because we do not have the basis for assessing them, they cannot look to our reports, and they cannot necessarily look to the regulators. They tell me about this and quite often explain that they are not sure. They want to take a step to grow their business, perhaps to develop some new instrument or to expand their market, but they are not quite sure how the regulators will treat it. They have no example of how these things have been seen in the past or of how the rules have been applied.
Requiring an independent office for financial regulatory accountability to provide some examples will help not only Parliament but businesses in being competitive and growing their businesses. They will see the precedents and be able to predict much more easily how the system operates. It is not an expensive way in which to make judgments. They do not have to get in expensive consultants or do little trials here and there and pilots. They would give security in knowing where the boundaries are set and judged and whether they are consistent with the opportunities they need to seize if they are to make their businesses grow.
Above all, such an office reporting and assessing these duties would encourage the regulators to be consistent and predictable and to focus on their statutory objects. As the Bill aims to focus on the competitiveness and growth objective—we have talked a lot about reporting requirements and the overall strategic plan—there is a problematic lack of transparency and accountability by the regulators, other than to the Treasury, and that relationship sometimes seems a little too cosy.
The amendments tabled by my noble friend Lord Bridges would promote an affective mechanism to ensure that we have objective, transparent and impartial evidence externally provided by an independent body. I support them for that reason but add my small amendment so we have greater transparency in how they are applied.
Baroness Donaghy (Lab)
My Lords, I do not want to get involved in the mechanics of the group in how we get this independent scrutiny, but I want to emphasise that it is important. We would welcome a discussion with the Minister about how it is done. We have had various inquiries over the past two and a half years, and I would ask the federations and organisations whether they thought having a concierge service would be useful to overcome some of the difficulties that the noble Baroness, Lady Lawlor, has outlined, especially to help the new boys on the block and the smaller companies to find their way around the complex barriers that they have to face. It seemed to be quite a popular suggestion, but nothing ever came of it.
The example was used was the Singapore settlement, although I am wary of international comparisons, and it is right not to follow too much because they are different, but it has a kind of concierge service to help new companies. Where we have a difficulty—I am thinking back on the history of the relationship between Governments and regulators—is that regulators are subject to political pressures. You might not agree, but that is the fact and the real politics. When things go bad, the regulator will be blamed, so they are cautious. Their very nature makes them cautious because they do not want to be the ones that go on holiday and get the sack because something has gone badly wrong. We need protections for the methodology that the regulator uses. I have to say that the cost-benefit analysis panels are on the nursery slopes. I was rude about them last week, as the Minister knows, and I do not want to be rude again, but they need nurturing. The work that they could do will be really good if they are given more clarity on their possible role so that they cannot be fobbed off by the regulator. I am not suggesting the regulator will fob them off, but there would be a tendency to stick to the law and not go beyond that.
I feel that we need to build this into a system not just because we want to protect the existence of a committee that we think is important, although I do, but because parliamentary scrutiny is important, and we sometimes search for the objective facts and figures, the granularity of why a regulator does something or neglects to do something and to what extent political pressures are involved. I know that no system, even the system that the noble Lord, Lord Bridges, has asked for, will ever get to the bottom of some of that—we are not naive—but I believe we need more transparency and, yes, less complexity, but we need a system that has more checks and balances. I think a lot in this legislation is going the wrong way and what we need to do is carefully assess what is working well, what needs to be nurtured in these very early days and what we need to be avoiding like the plague.
Baroness Kramer (LD)
My Lords, I shall be extremely brief on this. I and my colleagues take the position that from this collection of amendments in the name of the noble Baroness, Lady Bowles, and the noble Lord, Lord Bridges, the Government could craft something really effective and create the information base and the capacity for Parliament to have very appropriate oversight of the regulator. The point I particularly want to add is that this is not hostility to the regulator. Part of the regulator’s problem is that it is trying to communicate to so many different parts of the political framework, with very different levels of understanding.
We have all seen that five-year strategy from the FCA. Let us admit that it is a completely vacuous document, but I can understand that those who crafted it thought that they were dealing with people who had almost no grasp at all of how the finance sector works, operates and is directed or regulated. We have given it the absolutely impossible task of not knowing whom they talk to, in what level of detail, and what information to provide. I would say that, from a regulator’s perspective, having an educated oversight body would remove a huge burden and create a proper and constructive conversation, in the end benefiting both sides. I hope the Minister will take away that this is not some hostility to the regulator; this is a process that will make sure that Parliament can do its job but also that the regulator is far better positioned to be able to do its job and communicate and understand.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to noble Lords who have brought our attention to past debates on these knotty issues from a position of great expertise. All the amendments raise fundamental questions about how we hold our financial regulators to account. We fully support the principle that sits behind these amendments: that Parliament must have proper oversight over the way in which the regulators work. That includes their internal operations, their rule-making and their engagement with firms and consumers, the quality of their impact assessments, their effect on competition and competitiveness, and the burden they pose on the wider economy.
This point has been underscored by many noble Lords throughout our debates on the Bill. If the FCA and the PRA are to be given greater powers and a wider remit, as proposed, that must be matched by greater transparency and stronger accountability. Greater delegated power cannot simply mean more decisions being taken further away from Parliament, with fewer mechanisms for scrutiny. The Minister has written to noble Lords setting out existing mechanisms. That letter refers, among other things, to the ability of noble Lords to ask Parliamentary Questions and to the work of our excellent Financial Services Regulation Committee. Parliamentary Questions have their place, but they are not a systematic mechanism for reviewing the performance, effectiveness or proportionality of regulators. Committees do valuable work, but they cannot be expected to provide continuous expert institutional scrutiny of the FCA’s and PRA’s operations. What is needed is a mechanism through which the regulators can be reviewed, tested and held to account.
The problem is that we have an accountability gap. My noble friend Lady Noakes, from her unique position as chair of the committee, has highlighted the scale of the task that it now faces, so we need an independent source of analysis and expertise. The amendments in this group provide a number of serious and compelling proposals for how that might be done.
The amendment in the name of the noble Baroness, Lady Bowles, would provide for periodic independent reviews of the regulators. A recurring independent health check of the FCA, the PRA and the relevant Bank of England functions could help Parliament understand whether the regulatory system is working as intended, whether burdens are proportionate, whether the regulators are engaging properly, and whether firms and consumers are being treated fairly. I thought we had a good example of the problem in the earlier discussion on Sections 165 and 166.
The amendments in the name of my noble friend Lord Bridges propose a more permanent structure: an office for financial regulatory accountability. This is a valuable suggestion. As I understand it, the office would assess the FCA’s and PRA’s overall performance against their statutory objectives and regulatory principles. It would also analyse impact assessments for specific pieces of financial regulation in order to determine how those regulations contribute to the regulators’ objectives. As my noble friend Lady Lawlor suggested, their reports could include individual precedents and examples to bring problems to light. That is the sort of scrutiny we need.
The two parliamentary committees would have an important locus in scrutinising the reports from the office, improving overall parliamentary accountability while not getting in the regulators’ hair in a way that they are not set up to do. The proposed arrangements would also allow Parliament to see not only what concerns have been identified, but how the regulators intend to respond to them. Significantly, the office would be required to prioritise the analysis of regulations which restrict domestic competition, reduce the United Kingdom’s international competitiveness in financial services, create new compliance costs or have a significant impact on business and individuals in the UK economy —an excellent objective. As we heard from my noble friend Lord Bridges, it would not interfere with operational independence.
The regulators have become powerful institutions. They make rules, issue guidance, set expectations, supervise firms, authorise market entry, influence conduct and shape the competitiveness of one of the most important parts of the UK economy. As we heard from my noble friend Lady Noakes’s committee, they suffer from a culture of risk aversion, fuelled by the current system. It is no longer enough simply to say that the existing accountability mechanisms are adequate. There is clearly a deficit in oversight and that deficit becomes more serious as more power is transferred from Parliament and primary legislation to regulators and rulebooks.
If the Government are asking Parliament to accept that shift, they must accept the need for stronger accountability. Essential parliamentary scrutiny has to trump deregulation. The challenge is set for the Minister and I hope he will provide the clarity that we really need—a request that was echoed by the noble Baroness, Lady Donaghy, who, in another bit of history, I served under very happily on the EU Services Sub-Committee.
Lord Stockwood (Lab)
My Lords, we turn to the important topic of the accountability of the financial services regulators. I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Bridges of Headley, for tabling these amendments and for the thoughtful contributions made by noble Lords during this debate. I hear what the Committee has said on regulatory accountability and am glad to be meeting the Lords Financial Services Regulation Committee, chaired by the noble Baroness, Lady Noakes, next week. I have also written to noble Lords, as has been mentioned, about the existing framework that governs the accountability of regulators and a copy of the letter is available in the Library.
Amendment 121 proposes establishing an independent panel for periodic independent review of the FCA, the PRA and the Bank of England. The Government agree that it is important that regulators are held to account for their performance. This is why they have formalised biannual performance reviews, which the Economic Secretary to the Treasury holds with the CEOs of the FCA and PRA. The minutes of these are published on GOV.UK to support transparency.
A prescriptive, legislative requirement would duplicate this and would not be a good use of taxpayers’ money, as the purpose of such a review could be only to understand the regulators’ performance. But through FSMA, Parliament and the Government already have a large number of levers to understand and assess the performance of the regulators. There is of course nothing to stop the Financial Services Regulation Committee from calling up the CEOs of the FCA and the PRA, or the Governor of the Bank, to discuss their performance as frequently as that committee desires. It is also difficult to see where the panel would get its legitimacy from, when the Government and Parliament are responsible for democratic oversight and accountability for the regulators—the regulators that Parliament has vested with the responsibility for regulation of our financial services sector.
It is the Government’s view that the existing avenues for accountability are appropriate and sufficient, and that Parliament has the authority to do this in a way that no other body could. If Parliament wants to enhance the scrutiny of the regulators, it must consider how best to do that.
Amendments 133 to 139—including Amendment 135A —would, taken together, create a new statutory body, the office for financial regulatory accountability, charged with examining and reporting on the performance of the FCA and the PRA, supported by a charter setting out the Treasury’s regulatory objectives, with full information access rights and funding drawn from the regulators themselves. Such a body would complicate the accountability framework in a way that could dilute individual responsibility and accountability, and create significant additional costs. As such, the Government cannot support the amendments.
Since this proposal was last made, during the debates on the Financial Services and Markets Bill in 2023, the landscape has changed materially. The Financial Services Regulation Committee of this House was established precisely to provide sustained, expert parliamentary scrutiny of the regulators, and it has done so with considerable rigour. In the other place, the Treasury Select Committee continues to hold the FCA and the PRA to regular account. These are active, resourced bodies with the standing and powers to interrogate regulatory performance in depth. More importantly, as parliamentary committees, they have the constitutional authority to scrutinise and opine on the effectiveness of our independent regulators.
Creating a new statutory office alongside these structures would fragment accountability, rather than strengthen it. There is a risk that the existence of a parallel body would blur the lines of responsibility and create confusion about where the authoritative scrutiny sits.
Lord Bridges of Headley (Con)
I just do not understand this argument at all. The committees in this House and in the other place, as my noble friend Lady Noakes said, have the power to summon but, as far I know, they have one policy adviser and one expert adviser—and that is it—to analyse regulations and the actions of regulators and supervisors. As the Minister knows full well, that is nowhere near enough to fulfil what would be the purpose of OFRA.
As I said, OFRA would establish a means by which there is independent analysis of regulations—on the specifics and in the round—and of the performance of the regulators and supervisors. They are very different things. One is a means to hold regulators to account; the other gives parliamentarians the means, analysis and insights to do that. I do not understand how the Minister can say that that would dilute accountability.
Lord Stockwood (Lab)
The point I was making is that the structure that exists today gives the effective governance that we believe is required. We are open to a conversation about the noble Baroness’s options to improve accountability, but the noble Lord rightly raises a separate conversation about the requirements to make sure that those committees are sufficiently resourced. That is a separate conversation but, in our current position, we are trying to balance the accountability that already exists with the ability for the regulators to be flexible. As I have stated previously, we are open to that discussion, because we want to make sure that this process does not dilute that.
Lord Bridges of Headley (Con)
I completely agree, but this is not about making them inflexible; it is about giving Parliament the ability to hold them effectively to account. I do not hear anyone saying that there is that means at the moment, and I cannot think that there would ever be a committee, of either this or the other place, enabled to do that. It would require an enormous resource for a committee, which would be completely impossible, as far as I can see. That is why we need a separate body.
Lord Stockwood (Lab)
We are happy to have that conversation. We believe that the framework we have set out is the right one: it balances that ability to have oversight with the flexibility that we have empowered through FSMA. However, I agree that this debate has clearly illuminated that there is work to do, and I look forward to having that conversation with the Committee next week. I am sure that there are more conversations to be had on this issue between Committee and Report.
Amendment 139 would require the FCA and the PRA to fund this new body from their own resources, which are ultimately drawn from industry levies. The regulators would presumably need to increase their fees on authorised firms to cover this. Establishing a body of this kind, with its own membership, staff, legal powers of information access and publication obligations, would involve significant and recurring costs. We would be making industry pay twice to fund functions that have significant overlap.
Baroness Bowles of Berkhamsted (LD)
My Lords, I sometimes think that a useful thing to do with the Minister would be to sit down with him with the rulebook and go through some scrutiny. Perhaps he might then begin to see the scale of the task.
As I have said, when I chaired the ECON in the European Parliament, the committee there had nearly 100 full and substitute members. All of them were capable of doing work in specialist clusters, doing legislation and scrutinising everything. It was basically a full-time job—they did it all day, every day—and it did not even have anything to do with what was happening in supervision.
This task is not within the capacity of a national Parliament. The Minister was out of the Room when I explained that Australia had a royal commission, as part of its post-financial crisis review, to look at what went wrong with regulation. As royal commissions do, it took a long time. When it finally reported, it came to the consultation that an oversight body was needed; similar has been done in New Zealand and the United States, where they have powerful oversight over all of their regulators.
It is unreasonable to suggest that a committee that sits once a week for three hours could in any way touch this issue. Our committees are really good at doing specific inquiries into problem areas, but they cannot see things across the piece. That is what I described as our first need, when we left the EU. It has perhaps taken some people who do not have my experience a while to gain an understanding of how much it would take, but it happened pretty soon afterwards because, a year later, when the noble Lord, Lord Bridges, came forward with his proposals, the Industry and Regulators Committee had already realised that we needed more.
Then there is, as I said, a second need, following on from the Bill, which has distanced us further away because we do not even have the things we are supposed to measure. We do not have the information. Clause 16 creates the strategy—
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
Can the noble Baroness take a seat, please?
Baroness Noakes (Con)
I think that the Committee would like to hear from the noble Baroness.
Lord Wilson of Sedgefield (Lab)
As I said at the start of this session, when it comes to withdrawing an amendment, noble Lords need to be brief. We do not want them to rehash the whole debate. They have to be respectful to the Committee because we have other amendments to discuss.
Baroness Noakes (Con)
We are a self-regulating House, and this is such an important area that I would like to hear the end of the noble Baroness’s remarks.
Lord Wilson of Sedgefield (Lab)
The noble Baroness is absolutely right that this is a self-regulating House, but the other side of the coin is self-discipline.
Baroness Bowles of Berkhamsted (LD)
I am sorry, but I am replying to the Minister, and I have to say some things again because he was out of the Room. I am trying to explain that the Bill introduces a second need, because we will no longer have access to the information. It is going into a strategy and there is no link to operational duties, no reporting or guidance, and the annual report is only about competitiveness and growth. We are short of the basic information on which we are supposed to do this scrutiny: it is not coming to us; it is being rubbed out by the Bill. It is no good saying that a committee of this House—able, competent and hard-working though the committees are—can do it when you have taken the basic information away. That is the point. There is the fundamental size need, and then the removal of the information need. We need this independent body for the first need and, my goodness, we will jolly well need it if the Act ends up being anything like the Bill is now.
I think we will all want to return to this on Report, but for now, I will withdraw my amendment, even though the Minister seems to think that he has the equivalent of a perpetual motion machine and that something will happen with no input.
“Reducing regulator duplicationIn section 3R of the Financial Services and Markets Act 2000 (arrangements for provision of services), after subsection (3), insert—“(3A) In exercising functions in relation to—(a) a PRA-authorised person within the meaning of section 2B, or(b) a person performing a senior management function in relation to such person,the FCA may rely on analysis, findings, information, or judgments of the PRA, so far as it is reasonable to do so.(3B) In exercising functions in relation to a person falling within subsection (3A), the PRA may rely on analysis, findings, information, or judgments of the FCA, so far as it is reasonable to do so.(3C) Subsections (3A) and (3B) apply in particular in relation to— (a) rule-making,(b) supervisory activity,(c) investigatory functions, and(d) enforcement decisions.(3D) Where a regulator relies on the other regulator under this section, it must have regard to—(a) the need to ensure that its statutory objectives are advanced, and(b) the desirability of avoiding unnecessary duplication of work or inconsistent outcomes.(3E) Nothing in this section prevents either regulator from undertaking its own analysis or reaching its own conclusions where it considers it appropriate to do so.(3F) For the purposes of this section “a senior management function” has the same meaning as Section 59ZA.””
Baroness Bowles of Berkhamsted (LD)
My Lords, the Committee will be pleased to know that this will be very short. I will speak briefly to my Amendment 122, which is quite simple. It is intended to encourage the sharing of analysis, findings, information and judgments between the FCA and the PRA, particularly in relation to senior appointments, regulatory and supervisory activity and enforcement. The amendment would not make this binding in any way; it would apply only in so far as it is reasonable to do so and the regulators want to do so. The objective is to remove duplication and give encouragement to the regulators to rely on one another’s work where that is sensible.
I have not looked recently at their memorandum of understanding; they probably have enabled themselves to do some of this, but I am not sure that that enablement has extended to actually doing it. This meshes with some of the other amendments we have had around not duplicating things. If a person has already been approved as fit and proper by one regulator, why would they not be approved by another regulator to do the same thing?
However, I would not expect this to be done blindly or without review. It goes to what I said: everything should be tried to avoid unnecessary duplication, because duplications are leading to delays. This could help to shorten approval times under the SMCR for tried and tested individuals and to align rules or processes where the underlying purpose is the same. It is a modest, practical amendment aimed at reducing friction and delay in areas where both regulators are already engaged. I look forward to hearing from the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, on Amendment 166, which tilts in the same direction, to some extent. I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to the noble Baroness, Lady Bowles, for bringing forward Amendment 122. I will speak to Amendment 166 in my name and that of my noble friend Lord Altrincham. I know that we are all very excited by the result in the football but, as the Minister knows, this is an area of great concern to me, so I will make the case.
In our discussions with firms, we have repeatedly heard that regulation has accumulated over many years in a way that is often overlapping and unnecessarily complex. Firms are required to repeat similar information to different bodies, in slightly different formats, at different times and through different systems. They are expected to absorb new rules and expectations while older requirements remain in place. The result is a regulatory environment that becomes heavier and more expensive over time. This affects not just large institutions but smaller firms, new entrants and challengers, which do not have the same compliance teams, legal budgets or administrative capacity as the largest incumbents.
Amendment 122 raises an important point in this regard. Where both the FCA and the PRA are dealing with the same firm, it is sensible that they should be able to rely on one another’s analysis, findings, information and judgments where it is reasonable to do so. Our Amendment 166 follows the same principle but would apply it more broadly. It would require the Treasury, the FCA and the PRA, when exercising powers under the Bill, to have regard to minimising the overall regulatory burden on regulated persons. That burden is not only the direct cost of complying with a new rule; it includes administrative burdens, reporting requirements, the costs of delay and the disproportionate impact that regulation can have on smaller firms and new entrants. If the Treasury, the FCA or the PRA considered that an increase in burden were necessary, our amendment would require them to publish reasons and an assessment of the expected effects on growth, competition, innovation and market entry.
Regulation should be judged by its practical economic effects. Does it make it harder for firms to grow? Does it reduce competition? Does it deter new entrants? Does it slow innovation? Does it make the UK a less attractive place to do business? Those questions matter because financial services are an internationally competitive sector, as we keep emphasising. If we allow our regulatory environment to become too complex, too expensive and too slow, firms and capital will go elsewhere.
The Bill is presented as part of a wider effort to make our regulatory framework more competitive and more supportive of growth, which we support. Amendment 166 would help make that ambition real. It would require the Government and regulators to keep the burden of regulation in view and to justify increases where they consider them necessary. This sort of provision does not exist in this regulatory area, although we have had amendments of this kind in other areas, in my experience. I hope that the Minister will engage constructively with the amendments in this group.
Lord Stockwood (Lab)
My Lords, I thank the noble Baronesses and the noble Lord for the proposed amendments. These are both important topics. I continue to listen and will definitely try to continue to engage in constructive debate and discussion as the weeks develop.
Amendment 122 seeks to reduce duplication between the work of the FCA and the PRA. I thank the noble Baroness, Lady Bowles, for raising this important issue. The Government agree that it is important to identify and remove duplication between the FCA and the PRA. They have distinct objectives and functions, and each must remain clearly responsible and accountable for the exercise of its own statutory functions and the advancement of its own objectives. Co-ordination is important, but we must be careful about blurring accountability between the FCA and the PRA.
To support co-ordination, the FCA and the PRA have, as noted, a memorandum of understanding, which sets out the framework for how they will co-ordinate and co-operate while carrying out their respective responsibilities. The MoU covers their approach to rule-making, supervision and enforcement investigations under FSMA, as well as how and when they will consult and share information with each other. It is designed to ensure that they do not introduce incompatible requirements; that they share information from supervisory activity that is materially relevant to each other’s objectives; and that they avoid duplication in regulatory data collection. In particular, it makes a commitment that information available to one regulator, including regularly provided regulatory data that is relevant to the responsibility of the other regulator, will be shared where requested. If either regulator considers that the information gathered will be of material interest to the other, it will actively offer it.
Baroness Neville-Rolfe (Con)
I think that, in my amendment, I was trying to talk about when powers are exercised under the Act. Obviously, I appreciate the work that is being done to get the thicket out of the existing regulator. However, we are trying to introduce a system that, when regulations are being made—there will be many as a result of the Bill, because we are extending financial regulation into lots of new areas—that will be done in a way that really looks at the burdens. I am not sure that the cost-benefit panels and their work, which we discussed earlier, quite do that, so I ask the Minister to look at this constructively.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the Minister for his reply, and everybody else who has spoken in the debate—I do not need to go over any of it again. It was interesting that the Minister elaborated on some of the co-operation that already goes on. I think that it could be interesting for the Committee to ask the regulators to further explain to us how they do that. We hear from industry that if feels there is duplication going on, so maybe we can try to join up that loop. For now, I beg leave to withdraw the amendment.
Lord Holmes of Richmond
“Open finance framework(1) The FCA must establish and maintain a framework for open finance.(2) The framework must provide for—(a) secure and standardised data sharing interfaces,(b) rights of customers to direct the sharing of their financial data, and(c) interoperability between different categories of financial services providers, including digital asset providers.(3) The FCA may make rules to give effect to this section.”Member’s explanatory statement
This amendment gives the FCA the power to make rules in relation to open finance.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to speak to this group of amendments. Amendment 127 is also in my name, and I thank my noble friend Lady Altmann for co-signing it. These amendments are my latest attempt to get some focus on innovation and technology in a Bill that is currently, strangely, surprisingly and unfortunately largely silent on this subject. It is my latest effort, but it will not be my last.
If we take a step back when it comes to open finance, how have we got to where we are? It is something in which everybody across the UK should take incredible pride. Open banking was created here. I offer anybody who believes the false dichotomy that recurs with tedious inevitability—that you can have either regulation or innovation—open banking as a deliberate, willed and intended regulatory intervention to address a market failure. Has it had a measure of success? That is not for me to say, but open banking, which was made in the UK, has been replicated and taken up in just shy of 80 jurisdictions around the world, many of which have taken it much further and much faster than the United Kingdom.
Although open banking is an excellent, positive and inclusive innovation, it still has not come to fruition in terms of mass take-up. However, we should consider how these principles can apply to open finance. We have some good stuff in the Data (Use and Access) Act, but we need more to provide a focus on what open finance can do, not least in obviously adjacent sectors such as telco and energy. My Amendment 126 seeks to do exactly that by looking at what is possible with the data that is currently out there. This would not be a data grab. It would not push citizens off the ball, to give an up-to-the-minute analogy; it would enable and empower those citizens who are often at the sharpest end of financial services and who may even be unable to avail themselves of financial services at all. Imagine being able to look in real time, on a consented basis, at existing alternative data, such as rental history or other activity, to empower an individual to access financial services, perhaps for the first time, or to access better financial services. All too often, what happens is that those who have the least have to pay the most. How can anybody tolerate that in 2026? Open finance could be enabling, empowering and transformational. We have the technologies. I suggest that Amendment 126 would be a tiny element of the next step on that journey.
Amendment 127 suggests an innovation unit for the Financial Conduct Authority. I am well aware that the FCA already has an innovation unit internally; it does excellent work. In terms of the work of regulators across the piece on innovation, it is far more than market-leading. It goes back to the innovations on which the FCA has led for more than a decade: the excellent fintech regulatory sandbox, the digital security sandbox and the tremendous AI sandbox, which was announced last year. They are all market-leading not just in this country but internationally. It is fantastic work. It is similar on other emerging technologies, such as quantum.
Therefore, in no sense is this amendment suggesting that the regulator is not looking at emerging technologies. What this amendment seeks to do is to empower the regulator further by putting that innovation unit on a statutory footing and bringing in external voices and expertise to be part of it, not a board of the great and the good, white, male, pale, stale, but experts in the area of emerging technologies. What a fabulous addition that would be to the excellent work that it is already doing. It would be a minor change, but it would have a major impact. I very much look forward to the Minister’s response and the discussion on this group. I beg to move.
Baroness Kramer (LD)
My Lords, I am absolutely delighted with these two amendments from the noble Lord, Lord Holmes. To begin with Amendment 126, I have long been, as he has, a real supporter of open banking and see the potential for it to expand into open finance, and have been utterly frustrated that it languished for so many years. I am convinced that, under the current leadership, real change is happening and real progress is being made. I hope that is a correct assessment, and in other places the Bill continues to assist that process. It is absolutely logical that entities are looking for financial services and going to one provider that they presumably know or can access but are failing to find a satisfactory answer, and cannot then avail themselves of the ability to talk to the rest of the financial services provider world. Open banking and open finance provide those mechanisms.
I have one caveat. In proposed new paragraph (c) to be inserted by Amendment 126, the noble Lord, Lord Holmes, explained that the framework needs to provide for
“interoperability between different categories of financial service providers, including digital asset providers”.
I agree completely with that. The question is who pays. Traditionally, it has always been the banks that have paid. I took a position earlier in the Bill, and continue to take it, that all users of the payment system should be contributing. This should not be something that falls on the banks while the tech companies, in particular, end up with a free ride. That will leave us with an unsustainable system that is far less effective than it could be if it had the full resources of all those who participate and potentially benefit from it. It would also engage them in innovation, which is addressed in Amendment 127.
I can see the advantages presented by Amendment 127, but there is one more feature that I want to add. One of my permanent frustrations with the regulator has been that it does not step in when there is market failure. It always says that if a new company or business comes in that will fill a gap, it will regulate it appropriately—that is its contribution to encouraging players to come in and fill the space where there is market failure. One good example is lending to small businesses, but there are many more market failures that the FCA will happily acknowledge, but then say it is nots its job to get that gap filled.
The US regulators take a very different view: if there is a market failure, they will be proactive in trying to design incentives and opportunities to go out and, in effect, market to relevant players so that the gap is filled. A simple example in the United States, thanks to the regulators, is something I call “bank in the box”—I have to be careful because there is a company of that name. It was devised to enable small players to come into the lending space. In the box were all the regulatory pieces that a banking service needed to offer, so that it would be very simple for a new player to simply plug in the investors at one end and the particular customer base at the other. It also means that, in time of failure, that small bank can easily be recovered, because all the complex content of regulation and compliance is in the box in a way that that is understood by the others within the system.
I have talked to the FCA and asked about bank in the box. It says that if someone comes forward with it, it will gladly regulate it, but it will not take a step that would encourage the provision of some such service. I would love to see this approach to market failure incorporated in the innovation discussion. Regulators are incredibly influential; it is amazing what a few words from a regulator, or a proposal from a regulator, will do to make sure that action actually happens.
Lord Altrincham (Con)
My Lords, I am grateful to my noble friend Lord Holmes—and for his rather delicate comments on “pale and male”—for bringing forward these amendments. They raise an important set of questions about open finance, innovation, emerging technology and the extent to which the regulatory framework is preparing for the financial services market of the future.
We welcome the spirit of this group. My noble friend Lord Ranger of Northwood has tabled amendments in later groups which address digital assets specifically, so I will not pre-empt that debate now, but the broader question raised by this amendment is vital: how are we preparing for financial technologies which are on their way and, in many cases, already here? Regulation cannot be developed only for the market we have today. It must be developed with the market of tomorrow in mind. We need a forward-facing regulatory framework, not one that is constantly trying to catch up after innovation has already moved elsewhere. That means anticipating new technologies, understanding how firms are using them and creating a clear and proportionate regime before uncertainty drives businesses out of the United Kingdom.
It is worth reflecting, as we close this day in Committee, that this amendment touches on a very fundamental change that might be coming to financial regulation. All the earlier amendments really concern how credit is distributed within the UK in our current structure, which, let us remember, rests on fractional reserve banking and large customer deposits—Lloyds Bank currently holds £600 billion of customer deposits. This mixture of innovations, in open banking, open finance and digital currency, would completely upend the regulatory environment in which finance operates at the moment. While it might feel rather edgy to talk about an innovation unit, it is completely and fundamentally at the heart of where financial regulation is going. Many of the things we have been talking about might find themselves out of time quite quickly if some of these technologies were to advance.
If firms developing digital assets, tokenisation, AI-enabled financial services, open finance tools or new payment systems cannot get clarity in the UK, they will go to jurisdictions where the rules are clearer, faster and more supportive of innovation. We have already seen concerns that the UK risks falling behind in some of these areas. We want the United Kingdom to be a place where financial innovation can thrive, but that requires clarity, leadership and a regulatory framework that is designed for the future. I hope the Minister can provide a reassurance that this is the direction in which the Government are moving and the nature of drivers for innovation, as he sees it.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, for Amendments 126 and 127, and for raising the important issues of innovation, inclusion and the future shape of financial services. I spent 10 years building a business in this space for the insurance sector, so it is something that is dear to my heart. The Government recognise the importance of these themes and, as I said at Second Reading, the Bill is intended to modernise the way the sector is regulated, to help it grow and lend more to businesses, and to make consumer protections fit for the digital age.
On Amendment 126, the Government fully recognise the potential of smart data schemes, including open banking and open finance. The wide range of benefits from smart data was set out in the Government’s smart data strategy, published in March this year by the Department for Business and Trade. The FCA’s Open Finance road map, published in April this year, sets out steps for collaborating across industry and the wider ecosystem to explore extending the principles of open banking to a much broader range of products.
We have already made it clear that the long-term regulatory framework for open banking will help to secure the foundations for open finance, and that our ambition is for the UK to remain a world leader in this area. The Government will be consulting on the long-term regulatory framework for open banking in the coming weeks and intend to lay a statutory instrument by the end of this year. The FCA’s road map is an important step in exploring what is needed to support the development of open finance.
The noble Lord, Lord Holmes, has noted that the Government already have powers under the Data (Use and Access) Act 2025. This enables the Government to create a framework for open finance, including a wide range of financial data, not just current account data. It includes the power to require the FCA to regulate for open finance and make rules about the sharing of customer data with financial services providers through interoperable interfaces. The Government have already committed to set out further detail on their approach to open finance during the summer.
On Amendment 127, the Government agree that regulators must have access to the right expertise as financial services evolve, and that innovation and financial inclusion should be embedded in the approach that regulators take. The FCA’s innovation hub, which includes both the regulatory and digital sandbox, is designed to support firms to launch innovative products and services.
On payment systems, the Bill provides the FCA with objectives and powers that are generally equivalent to those of the Payment Systems Regulator, including innovation and competition objectives, alongside a broad service user objective. This will allow the FCA to respond to the interests of service users as markets and technologies evolve. The FCA is already well versed in considerations of competition, innovation and the interests of consumers and businesses due to its wider role as a regulator for financial services.
As the Committee discussed on Monday, financial inclusion is a key priority for the Government, and we continue to work closely with the FCA to ensure that individuals get the right support with their financial products and services. This includes working with the FCA on the delivery of the financial inclusion strategy.
The FCA already uses its innovation services to further innovation which supports financial inclusion. For example, the FCA ran a tech sprint which supported firms to develop innovative services, such as brand new apps to support people when they are declined for credit and AI tools to spot scams and to simplify terms and conditions.
The Government consider that the FCA must have the flexibility to determine how best to reflect expert input across its functions to deliver on its objectives in a fast-moving landscape. The Government are supportive of the broad objectives the noble Lord is pursuing—innovation, inclusion and a regulatory framework that keeps pace with change—but we do not consider these amendments to be the right mechanisms for achieving those aims. For the reasons I have set out, I therefore respectfully ask the noble Lord to withdraw his amendment.
Lord Holmes of Richmond (Con)
My Lords, I thank all noble Lords who have taken part in this short debate. I agree entirely with the points raised by the noble Baroness, Lady Kramer, about who pays and I agree with the noble Baroness’s earlier amendment on APP. When we have variety in our participants in this market, it is right that, if you are in the market, you pay alongside all other participants, rather than having the asymmetry which currently exists of banks being on the hook and others swimming freely. I also agree with the main thrust of the noble Baroness’s other points, none of which made me queasy at all.
I thank the Minister for his response. I agree largely with his comments. I delicately say that bringing in expert independent voices in a more formalised but flexible structure would further empower the FCA to take the excellent work that it does in innovation and go broader and faster. I ask the Minister to reflect on that and if there is more that the Government can do in concert with the FCA, without in any sense fettering its discretion. It would give the FCA even more power to increase the fantastic work it is doing across all these emerging technologies. For now, I beg leave to withdraw the amendment.
Financial Services and Markets Bill [HL]
Monday 6th July 2026
(3 weeks ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-V(b) Amendments for Grand Committee (Supplementary to the Fifth Marshalled List) - (6 Jul 2026)
Lord Holmes of Richmond
“Digital operational resilience of regulated firms(1) The FCA and the PRA must each make rules requiring authorised persons to meet minimum standards of digital operational resilience, including standards relating to—(a) ICT risk management frameworks appropriate to the nature, scale, and complexity of the authorised person's operations;(b) classification, reporting, and remediation of major ICT-related incidents, including cyber attacks, within timeframes to be specified by the regulator;(c) oversight and contractual requirements for third-party ICT service providers, including cloud service providers and critical technology suppliers; (d) regular digital operational resilience testing, including advanced threat-led penetration testing for systemically significant firms.(2) In making rules under subsection (1), the FCA and PRA must have regard to—(a) the need for proportionality with respect to the size and systemic importance of authorised persons;(b) international standards and frameworks, including those adopted by the European Union;(c) the need to avoid duplication with existing regulatory requirements.(3) The FCA must publish a consolidated digital operational resilience framework within 18 months of this Act coming into force, setting out how requirements under this section interact with existing obligations on authorised persons.(4) The FCA and PRA must review rules made under this section no later than every 12 months.”Member’s explanatory statement
This amendment seeks to require the FCA to make rules in relation to the digital operational resilience of financial services firms.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to open day 5 of Committee on the Financial Services and Markets Bill. In moving Amendment 130, which is in my name, I will also speak to Amendments 131 and 168. This is the latest round of AI and technology amendments to the Bill. It is a Bill that is curiously silent on these subjects. At least today there is something timely about my intervention in that, as I am on my feet, across town Sheldon Mills is launching his review into artificial intelligence in financial services—more of which presently.
Amendment 130 seeks to require financial services firms to have regard to all the issues around digital and operational resilience across all their activities. I know that the Minister in his response will refer to the cyber resilience Bill, which is coming to your Lordships’ House in a fortnight. Indeed, there is much in that Bill to commend. But in consideration of the significant impact and position of financial services in the UK economy, I believe that it would be helpful to have something about digital and operational resilience in this Bill.
We are not just talking about foreign states or negative acts from international adversaries; we are talking about issues around supply chain, third-party overreliance and concentration risk on particular providers—for example, in the cloud. Circumstances change and financial services institutions, believing that things will always be as they are, may find themselves extraordinarily exposed by the flick of a switch with perhaps only 90 minutes’ notice. I ask the Minister to consider this when he responds and state, in respect of financial service institutions’ significant contribution and place in the UK economy, whether he agrees that clauses in the Bill pertaining directly to these subjects would be helpful in our endeavours.
Amendments 131 and 168 are on artificial intelligence. Certainly, some of these concepts are covered in Sheldon Mills’ review. Given the proliferation and already deep penetration of artificial intelligence into financial services institutions—and, indeed, its use by not only sophisticated but retail and individual investors—will the Minister not agree that considering AI, not just in these clauses but throughout the Bill, would be beneficial to all those involved in financial services? When we say, “all those involved in financial services”, we could just as easily say “everybody”. The principles are clearly set out in Amendment 131, which takes us to the issue that I have raised on previous days around the Government’s approach to artificial intelligence. As stated, that is a domain-by-domain approach, yet there is nothing currently within this Bill.
Amendment 168 returns to an issue of which colleagues will be well aware, because I raised it when we deliberated on the Financial Services Act 2021 and FSMA 2023. That is to have an officer responsible for AI in all financial services institutions that develop, deploy and use AI—in other words, pretty much all financial services institutions. This is not cumbersome; it is not about compliance and it is certainly not about putting burdens on smaller firms—the proportionality principle would mean that we would be talking about a function rather than an individual—nor is this about delegation or abdication of the board’s responsibility, or indeed the senior managers’ responsibility, to the business. This is about having a point person: somebody who can orchestrate, who can co-ordinate and who can have that crucial horizontal view across an organisation, to assist internally and indeed present externally as to how AI is being used and deployed, for the benefit both of AI use internally and of customers.
To conclude, without having clauses on AI in the Bill, I believe that the legislation will be chronically insufficient for the challenges of our time. That is not the challenges of next year or five years’ time: AI is already impacting financial services right now. To give one example, how can we consider the consumer duty without considering how AI impacts on all elements of that? The Mills review has much good in it, but this legislation is before us today, and I believe that we have an opportunity to thread AI through it for the benefit of individuals, of institutions, of all of our financial services and, through that, of the entire economy of the United Kingdom. I look forward to the Minister’s response. I beg to move.
Baroness Kramer (LD)
My Lords, I was delighted when I saw that the noble Lord, Lord Holmes, had put down these amendments, because it is so apparent, as he has clearly stated, that the whole issue of digital and AI is missing from this Bill. Because of the pace of change and the impact—and strength of the impact—across all our financial services, this is an issue that has to be dealt with and grasped with some sense of urgency.
Like the noble Lord, I have been very interested in the Mills review, although, as it was published today, I have only had time to skim its summaries and some of the newspaper references to it. It is clear that, certainly from Sheldon Mills’ perspective—I think that most of us have, one way or another, dealt with Sheldon Mills over the years and very much respect his judgment—the FCA may well be short of relevant powers in dealing with AI. He noted particularly a lack of powers under the critical third-parties regime, which made sense to me. In his recommendations, he also raised issues around the regulatory perimeter, another area that we have raised on more than one occasion.
In recent years, it has not been uncommon—though I dread it—for the Government to present on Report amendments that deal with an area that has been missed from the body of a Bill in Committee. On this Bill, that would allow a period of thought and the opportunity to absorb and consider what is presented in the Mills review. Since financial services Bills do not come around that often, I very much hope that the Minister will seriously consider taking advantage of the Bill to get those kinds of protections in place. If he fails to do that, we might collectively have to come forward with something on Report. Frankly, given the intricacy, detail and complexity, this is an area where the Government coming forward with an answer would, I think, be welcomed across the House and very much, I hope, within the spirit and theme of the amendments presented by the noble Lord, Lord Holmes.
Lord Altrincham (Con)
My Lords, I thank my noble friend for his comments today on AI and digital resilience and for his comments on previous days. I declare my interest as the director of South Molton Street Capital, which is regulated by the FCA.
These amendments raise an interesting point about emerging technologies, digital resilience and the use of artificial intelligence in financial services, to be covered, as we have discussed, by the Mills review and the FCA itself. We will return to this subject in a later group, when my noble friend Lord Ranger of Northwood and the Opposition Front Bench will speak to our own amendments, particularly in relation to digital assets. We will also comment on supervision in a later group.
Both digital resilience and the proper use of AI are important. However, I am not convinced that this is the right way or the right place to tackle these issues. Our concern is that this could add another layer of regulation on firms that are already subject to a substantial body of obligations in this area. Financial services firms already operate under a wide range of frameworks relevant to AI governance, digital resilience and technology risk. The consumer duty, which we have touched on already, requires firms to deliver good outcomes for retail customers. The senior managers and certification regime provides a framework for accountability and governance. The FCA senior management arrangements and controls already require firms to maintain appropriate systems, controls, governance and risk management. Firms are subject to data protection law, including rules around automated decision-making and profiling. They are subject to equality law where discriminatory outcomes arise. They are subject to operational resilience requirements, outsourcing and third-party risk expectations, and, in some contexts, more specific requirements around algorithmic trading and market conduct.
We should therefore be cautious before adding new statutory requirements on top. That is particularly important because technology develops quickly and a prescriptive regulatory framework can rapidly become out of date. It can also lead to duplication, uncertainty and compliance activity that is focused more on satisfying the form of the requirement than managing the underlying risk.
I would be grateful for reassurance from the Minister about how Amendment 130 would interact with existing operational resilience and outsourcing requirements, and whether the Government believe that further statutory provision is needed.
On Amendment 131, the issues of transparency, bias, human oversight, and redress are all important, but they also overlap with existing duties on fair treatment, governance, data protection, discrimination and consumer outcomes. I would be reluctant to support an approach which simply adds a new AI-specific regime without first demonstrating that the existing framework is inadequate.
On Amendment 168, I understand the attraction of having a named individual responsible for AI governance. Accountability matters, but in financial services we have the SMCR regime to address supervision, and that regime is already quite complex, as we will address in a later group. A mandatory AI officer would probably cut across existing accountability structures in conduct, compliance, operations, risk, data and product governance. It could, in fact, cut across all existing supervisory positions.
This group raises important questions about the future of financial regulation. We must be alert to new risks, but we must also be careful not to respond to every emerging technology by simply adding another layer of regulation. The better approach is to ensure that regulation is proportionate, technology-neutral where possible and focused on real outcomes. I look forward to the Minister’s response.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, the Government recognise that the pace and significance of the current wave of technological change is already having an effect on the whole of society. For the purposes of this discussion, I will state that it is clearly having a notable impact on the financial services sector, as mentioned, and that it is set only to continue to grow. The Chancellor set out in her Mais Lecture just a few months ago the importance of the UK grasping the opportunities presented by AI to ensure that we are at the forefront of safe adoption and innovation, so we are entirely in agreement on how important this topic is.
On Amendment 130, the Government are committed to ensuring the operational resilience of the UK’s financial sector. Operational disruptions harm consumers and markets and have the potential to affect financial stability. That is why the FCA and the PRA have powers to ensure that firms have robust plans in place to deliver important business services, no matter the disruption.
Lord Holmes of Richmond (Con)
I thank all noble Lords who have taken part in this debate and the Minister for his response. I look forward to reading the Mills review in further detail and seeing where we take these issues between Committee and Report. For now, I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Baroness Pitkeathley) (Lab)
I cannot call Amendment 135A as it is an amendment to Amendment 135.
Lord Hunt of Wirral
“FCA: wholesale markets and firms division(1) The FCA must, within 12 months of the day on which this Act is passed—(a) establish and maintain a dedicated unit (a “Wholesale Markets and Firms Division”) within its organisation, and(b) appoint a Deputy Chief Executive to lead this division.(2) The FCA must ensure that its relevant functions in relation to wholesale markets and firms are exercised and discharged through a Wholesale Markets and Firms Division.(3) The FCA, in discharging its functions through a Wholesale Markets and Firms Division, must—(a) act in a way which advances the regulator’s operational objectives,(b) act, so far as reasonably possible, in a way which advances the regulator’s duties under section 1EB (competitiveness and growth objective) and section 3B (regulatory principles to be applied by both regulators) of the Financial Services and Markets Act 2000, and(c) have regard, in particular, to the desirability of—(i) reducing regulatory burdens on participants in wholesale markets,(ii) facilitating innovation in wholesale financial services, and(iii) promoting sustainable growth and international competitiveness of UK wholesale markets.(4) A Wholesale Markets and Firms Division must be responsible for—(a) the development, implementation and supervision of rules and policies relating to wholesale markets;(b) authorisation and supervision of wholesale markets and firms; (c) engagement with market participants active in wholesale markets, including international firms;(d) advising the regulator on the impact of its policies and rules on wholesale market activity, investment and competitiveness.(5) The FCA must, at least once in each calendar year, prepare and publish a report on the activities of its Wholesale Markets and Firms Division.(6) A report under subsection (5) must—(a) be provided to the Treasury, and(b) include an assessment of—(i) steps taken to reduce regulatory burdens in wholesale markets,(ii) progress in supporting innovation,(iii) the contribution of wholesale markets to investment and growth in the United Kingdom, and(iv) the extent to which the regulator has advanced its secondary competitiveness and growth objective in relation to wholesale markets.(7) In this section—“wholesale firms” means regulated firms whose customers, clients or counterparties are pre-dominantly not covered by the UK consumer duty;“wholesale markets” means such markets, activities or classes of regulated activity as may be specified for the purposes of this section by the Treasury by regulations, having regard to—(a) the nature of transactions undertaken primarily between market counterparties acting in a professional capacity;(b) existing distinctions within the FCA Handbook (including, but not limited to, provisions relating to wholesale market conduct, eligible counterparties, and professional clients);(c) the role of such markets in facilitating capital allocation, risk transfer and investment at scale.(8) A statutory instrument containing regulations under subsection (7) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”Member’s explanatory statement
This amendment seeks to require the FCA to develop a dedicated division to undertake their regulatory activities in regard to wholesale market participants.
Lord Hunt of Wirral (Con)
My Lords, in moving Amendment 142A and speaking to the other amendments in this group, which I also support, I am asking for the FCA to be able to develop a dedicated division to undertake its regulatory activities regarding wholesale market participants.
This amendment is all about ensuring that in what is a highly competitive global marketplace the FCA can balance its priorities and resources effectively to benefit the consumer or clients who use them in those markets that the FCA regulates. The FCA’s protection of the individual consumer is rightly prominent, but businesses that are customers of wholesale markets, such as our world-leading London insurance market, require a very different level of protection. Currently, the definition used by the FCA is very unclear and does not distinguish between these two very different sets of needs.
I declare my long-standing interest in financial services Bills over the last 50 years, particularly as a practising solicitor in the City of London and a partner in the firm DAC Beachcroft LLP. I have slowly but surely seen the evolution of regulation, but I am concerned that it is now inhibiting the growth of what is for us one of the great global centres, particularly for insurance. However, the definition of wholesale does not just apply to insurance; it applies to other aspects of financial services as well. The FCA is well aware of the issue. Indeed, it has been raised actively with the FCA over the last few years and there have been commitments to action. However, sad to say, progress is not being made. The FCA appears to be struggling with the definition of a retail consumer and has not found the best way forward.
Once again, we rely on our Select Committee to highlight the issue. The cross-party Financial Services Regulation Committee identified this as an issue, finding in its report last year:
“The FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision which … imposes unnecessary burdens and frictions on firms … These issues have fuelled an increase in bureaucracy and imposed significant monetary and resource demands on firms”.
Witnesses to that Select Committee gave key examples. They show that wholesale and retail markets serve fundamentally different customers. Retail regulation is designed to protect individual consumers, whereas wholesale markets are primarily used by professional investors, insurance firms, banks, pension funds and corporate entities. The London insurance market deals almost exclusively with corporate clients, but the regulations take a one-size-fits-all approach, applying consumer-focused rules to firms and activities for which they were never really intended.
We have a situation where pet insurance is essentially regulated in the same manner as marine or aviation insurance. Policies and services delivered in the London market are bespoke to the individual client or individually negotiated and tended, where there is no evidence of this type of market failure. They are not unit-based commoditised products that are offered within the retail market. The FCA’s implementation of what is described as the consumer duty has introduced considerable uncertainty for domestic and international firms operating in the London market. This uncertainty is driven by a lack of clarity on the FCA’s expectations as to how firms should comply with the consumer duty, including which markets and consumers it applies to.
I believe, therefore, that a dedicated wholesale division would help to ensure that regulation is proportionate to the sophistication of market participants. That is why I feel so strongly that this amendment and my noble friend Lord Ashcombe’s amendment should be contained in the Bill. I hope that the Minister will be able to address this issue for the first time as a Minister on a financial services Bill, recognising that, at the moment, we are dealing with two separate markets that are merged under the consumer duty, which is wholly inappropriate. I beg to move.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh, which is an FCA-regulated firm. I shall speak to Amendment 142C in my name, which seeks, in essence, to achieve something modest but necessary: equipping the regulator with a clearer and more effective framework within which to operate.
I am—as, I suspect, other noble Lords are—unequivocal in my support for well-judged regulation. It is the foundation of consumer protection, market integrity and London’s standing as an international global financial centre, particularly in insurance, as my noble friend Lord Hunt mentioned. However, the position in which we find ourselves today is one not of insufficient regulation but of fragmentation, with a system that in parts lacks clarity and coherence.
At present, the FCA operates without a clear statutory distinction between retail and wholesale clients. The distinction between wholesale and retail markets is not academic; it is fundamental, particularly in insurance. Retail regulation exists to protect individuals and small businesses. Wholesale markets are, by contrast, the domain of larger and corporate entities. These participants are not passive consumers. They are typically active, informed buyers engaging in complex and often bespoke transactions, as I said on Monday last week. This is very much in line with my noble friend Lord Hunt’s Amendment 142A, to which I have added my name.
This situation leads to a consequence: a degree of inconsistency that is, frankly, difficult to justify. Businesses of broadly similar scale and sophistication can find themselves subject to different regulatory treatments depending on the regime applied or the particular lens through which they are viewed. That uncertainty serves no one well. It imposes a cost on, first, firms, which must devote increasing resource to navigating overlapping and at times contradictory interpretations, and, ultimately, on consumers and smaller businesses, which bear that burden through higher costs and reduced access to services.
There is, however, a straightforward solution. Where my amendment takes that further than my noble friend’s is as follows. A turnover threshold of £6.5 million already exists in statute and is used by the Financial Ombudsman Service to reflect the size of companies. It reflects a determination made by Parliament of the point at which a business can reasonably be expected to possess a degree of financial sophistication and resource, and it could easily be adopted by the FCA.
My amendment does not seek to innovate for innovation’s sake; rather, it seeks to bring coherence by anchoring the distinction between retail and wholesale clients to that already established threshold. In doing so, it would provide the regulator with a clear statutory direction. It would also introduce a necessary discipline: that retail-style protections should not be applied to wholesale clients unless there is a demonstrable and proportionate case for doing so.
This is not about weakening regulation; it is about smart regulation. It is a call for regulation that is properly targeted and grounded in the realities of the market. This matters because we must allow the FCA to focus its efforts where they are most needed, which is on genuine customer protection for individuals—you and me when we are purchasing insurance, for example—rather than dispersing them across forms of compliance that add bureaucracy cost without delivering commensurate benefit.
There is a genuine competitive point here too. Post Brexit, we have the chance to move faster than Europe, but we can do that only if the industry has certainty. Businesses need to know where they stand. They cannot plan investment or hire teams based on regulatory guidance that shifts depending on whom you talk to and when. They need law. My amendment offers a measure of that certainty. It would reduce unnecessary friction and support the FCA in meeting its secondary objectives of growth and competitiveness, and it would do so without in any way diminishing the protection afforded to those who genuinely require it. This is a measured and pragmatic proposal that respects the importance of regulation while seeking to improve its application. I support the other amendments in this group.
Lord Vaux of Harrowden (CB)
My Lords, this group is really two separate groups as far as I can see, and I am not quite sure why they have been lumped together. One is on operational readiness and the other is on the different treatment of wholesale and retail activities. I will add my support briefly to the principles behind the latter, on wholesale and retail activities, and to Amendments 142A and 142C, tabled by the noble Lords, Lord Hunt and Lord Ashcombe. These bring us back to proportionality, which we have debated a number of times. The Minister can probably see a few themes coming through, and proportionality is definitely one.
In this case, the question is whether the regulators treat wholesale businesses with no retail customer exposure proportionately. By definition, wholesale businesses are dealing with sophisticated customers on a much more equal basis. It cannot be controversial to suggest that the regulation of these businesses could be lighter touch than for those dealing with retail customers.
The report of the Financial Services Regulation Committee on the secondary competitiveness and growth objective gave a number of examples where it appears that the FCA may not be doing enough to differentiate between these two parts of the market, while recognising that this is not always a clearly defined black and white boundary. Howard Davies put it well in his witness evidence:
“In wholesale markets, you are aiming to produce a fair contest, whereas in the retail markets you know it is not a fair contest because there is a significant information asymmetry problem between the consumer and the firm”.
The noble Lord, Lord Hunt, quoted the committee’s conclusion on this matter, so I will not repeat that. Whether this means that we need a separate wholesale markets and firms division within the FCA, as the amendments propose, is debatable, but I will be interested to hear how the Minister proposes to ensure that businesses that are primarily or wholly wholesale in operation are regulated proportionally.
Lord Holmes of Richmond (Con)
My Lords, I support Amendments 142A and 142C from my colleagues, the noble Lords, Lord Hunt and Lord Ashcombe. As has been said, this can be summed up in one word: proportionality. We have debated these themes on previous days in Committee and they are still as strong as they were when we mentioned them on day one. To “proportionality” I would add “specificity” and “applicability” because, without making this critical distinction—though difficult in some of the marginal cases—we are effectively saying that rules apply across the piece, which inevitably means increased burdens, increased costs, a lack of specificity, inapplicability, and holding firms and the UK economy back.
As the noble Lord, Lord Hunt, rightly said, we have the at least odd situation right now where pet insurance is treated the same as marine or aviation insurance. I can see only one potential case where this would be appropriate: if many people were petting flying fish. As I do not believe we have an increase in flying fish petting, I believe that proportionality, specificity and applicability would be achieved by embracing the principles set out in Amendments 142A and 142C.
Baroness Bowles of Berkhamsted (LD)
My Lords, I broadly support Amendment 142A, and I thank the noble Lord, Lord Hunt, for bringing it forward. I also think that the amendment in the name of the noble Lord, Lord Ashcombe, or something similar would obviously be needed as some kind of companion to it.
Whatever the FCA may have been intended to be, it is now proudly and explicitly a consumer protection body. For much of its work that is good, but some noble Lords will know that it has taken me and others four years to get incorrect cost disclosure descriptions for listed investment companies corrected, simply because consumers like the incorrect versions. Indeed, that saga led to a telling exchange at a meeting of the Financial Services Regulation Committee. The FCA chair insisted that consumer views always took priority, and I replied, “If you ask whether one and one makes two or three, and the consumer says, ‘I like three—it’s a bigger number’, is that what you use?” There was no denial. That is the scale of the problem: a regulatory culture where consumer preference for something factually incorrect overrides market integrity. It is a mindset that has already cost billions in potential investment in productive assets.
That was where it touched consumers; now let us move on to look at the wholesale areas. The trouble is that that mindset gets pasted across too. We do not need to debate whether the FCA went overboard in demanding that wholesale businesses had to proactively prove that they do no consumer harm in transactions that never touched consumers. The admission is there in consultation CP26/23 at paragraph 1.3, acknowledging overreach, as well as acknowledging
“unnecessary cost, complexity and uncertainty, without clear benefits for retail consumers”.
However, having finally identified the cancer, the regulator is merely applying a sticking plaster. All that is being offered is the mildest semantic tweak to guidance—effectively, a guide to guidance. It has no legal effect. It allows the regulator to continue its current trajectory with a slight adjustment to its vocabulary. We all know that this change was extracted only after heavy nudging by the Chancellor and intense parliamentary scrutiny. It is hardly being done with good grace and provides no guarantee of permanence.
The fact is, we must deal with the FCA as it is, not as it might have been. Since the advent of the consumer duty, the retail-first culture is irreversibly embedded into the psyche of staff, and in many instances it is the reason why they joined the regulator in the first place.
Perhaps one of the most telling things is to look at what is said about other regulators. On the Monetary Authority of Singapore, which I found a very enlightened body on my visit there some years ago, the comment is, “Although MAS is a unitary regulator, it splits its internal policy divisions strictly by target market rather than by trying to govern everything under an overarching outcomes-based code like the UK’s consumer duty”, and, “It works because the wholesale division, answerable to the MAS leadership, is judged primarily on market liquidity, innovation and international competitiveness. There is zero risk of a consumer advocacy group hijacking a wholesale policy consultation”. I wonder where they were thinking about. A ring-fenced, structurally separate wholesale unit within our regulator’s architecture must live up to that standard.
Some may argue that all wholesale activity impacts retail eventually, and I agree, but there is a massive, fundamental difference between regulating wholesale markets for the integrity of the system, which protects everyone, and regulating as if they are a high-street retail shopfloor. The former ensures safety, the latter ensures paralysis. For any noble Lord worried about this structural change, nothing being suggested would remove liability for wrongs or harms to consumers, should that occur. Let us be clear: this amendment is not an attempt to escape oversight; it is an attempt to ensure that oversight is competent, technically accurate and focused on the reality of the market being regulated. Let nobody forget that MiFID and other legislation already provides a rigorous framework governing transparency, best execution and conflicts of interest. This is no soft ride: this amendment is a necessary structural correction, and I support it.
Baroness Lawlor (Con)
My Lords, I support all the amendments in this group, but I shall confine my remarks to Amendment 165 and the linked Amendment 173 from my noble friend Lady Neville-Rolfe for an FCA operational readiness report presented by the Treasury. Amendment 165 would mean that Parliament has the opportunity to ensure, by a Treasury report, that we have an assessment of the FCA’s operational readiness to exercise any significant new regulatory function conferred by the Act of staffing, resourcing and the capability of the systems in place and of the impact expected on authorisations, supervisions and enforcement timeliness. This will be a formal report to Parliament. Until we have such a report from the Treasury that the FCA is operationally ready, Amendment 173 would ensure that the Act cannot start.
My Amendment 165A proposes that the report must also assess readiness in terms of preparatory training and the interpretation of the application of the Act. Such a requirement should prompt the FCA to deploy and train existing staff with the specific knowledge and understanding of the new powers they will operate under the Bill and to therefore be up to date and competent to regulate firms under the law. It would require the Treasury to report to Parliament and, in this way, there is a measure of accountability.
It might be contended that this requirement is otiose, but the FCA’s workforce is around 5,000, recruited from candidates with a diverse range of skills under different headings. Finance and operations make up 46%; engineering makes up 30% and sales and marketing make up 23%. The median employee tenure is 4.2 years. Regulators come to their post with a diverse range of skills; some are highly experienced and others less so. Today, 17 posts are advertised that cover a wide range of jobs and responsibilities for which different skills are required. For example, there is a senior insurance supervisor job, a financial crime marketing interventions associate, an L&D associate, a lead for global strategy and engagement, a primary markets supervisor, a senior crypto and payment supervisor and a technical specialist in AI—my noble friend Lord Holmes will be pleased to hear that.
The skills range required can include the common skills we would expect or generic skills, for instance, in data systems. The senior crypto asset and payment supervisor responsible for working in this developing sector, who will lead difficult cases, identify risks, deal with crossborder problems and help prevent crime, is also expected to “drive improvements in standards”.
These are important and demanding tasks. They also operate in a rapidly developing area. Given the nature of the system and that the principles still apply, regulators are internally accountable for what will be subject to interpretations and judgments. There should therefore be the requirement of at least general and specific knowledge, and competencies for each role but, as financial products continue to be developed and the framework of law continues to change, there must also be continuous learning and updating in the law and the powers given to the regulators under it, rather than assuming that somehow the regulators will be equipped and operationally ready to do the job.
Baroness Noakes (Con)
My Lords, I will just comment briefly. I completely agree with the notion that wholesale markets and retail markets should be dealt with separately for the reasons that have been given. I am less than clear that a structural solution, such as the one proposed by my noble friend Lord Hunt of Wirral, is the right one. I think that the problem is deeper; it lies in the construction of FSMA because the FCA is given a consumer protection objective that makes no differentiation between wholesale and retail markets . The meaning of “consumer” is generic and there is no understanding that there are radically different markets for retail and wholesale participants. All that means that the burden of treating these markets differently falls on the applicability of the proportionality principle in Section 3B, which we have discussed many times and is due to be downgraded under the current proposals. I do not know what the answer is, but I suspect that, in legislative terms, it is a deeper answer than simply setting up a separate division within the FCA because the construction of FSMA simply does not accommodate easily the fact that there are two quite different types of market.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to my noble friends Lord Hunt and Lord Ashcombe for bringing forward Amendments 142A and 142C. We have heard from industry that there is often insufficient clarity around whether retail or wholesale regulatory standards apply in particular cases. That lack of clarity matters because it means that firms can find themselves applying regulatory standards, processes and levels of prudence that go above and beyond what is required simply because they are concerned that the boundary is not clear. That is why the proposals from my noble friends Lord Ashcombe and Lord Hunt of Wirral for a clearer statutory distinction are important. Any threshold would, of course, need to be carefully considered, but the principle is right. Firms should know which rules apply to which clients. Regulators should avoid applying retail-style requirements to wholesale clients unless that is genuinely proportionate.
I also welcome the broader point behind Amendment 142A, which would create a dedicated wholesale markets and firms division within the FCA. The case for that amendment in a highly competitive global industry, as my noble friend Lord Hunt explained, is that wholesale markets require specialist expertise and a regulatory culture that understands institutional, professional and capital markets activity. If the FCA is regulating retail consumer markets, with lots of SMEs, and complex wholesale markets at the same time, it must have the internal structure and expertise to apply the right approach to each. The noble Baroness, Lady Bowles, a member of the Lords committee, rightly suggested that consumer preference has become a problem mindset in the wholesale area. My noble friend Lady Noakes explained that that followed from the way that FSMA was set up. Interestingly, the noble Baroness, Lady Bowles, cited MAS in Singapore, where regulation is split by target market. Another member of the committee, the noble Lord, Lord Vaux, rightly called for proportionality, which was endorsed by my noble friend Lord Holmes. This is complicated, but it is important that we look at these amendments seriously.
Amendments 165 and 173 are in my name and that of my noble friend Lord Altrincham. These raise the related but distinct question of whether the FCA is operationally ready to take on the significant new functions being handed to it under the Bill. This is a matter for the FCA, as it is an independent regulator, but the fact is that some do not trust it, including those in the payments and consumer credit industries who will be new or largely new to its fiat.
We need a plan to show what will happen and when in all cases where the regulator is taking over responsibilities from elsewhere—which, on reflection, I should have added to our amendment. We also need to know how many staff the FCA plans to add and the accommodation arrangements. The industry pays for our regulators, and the latter should spend every pound as carefully as if it were their own. In time, we would hope to see some economies of scale as the proposed changes drive efficiency. The Explanatory Notes for the Bill explain that because the FCA will take over AML supervision of legal service providers, accountants and trust company service providers, it will need significant preparatory work, including the hiring and training of staff and establishing necessary IT infrastructure. We need more clarity on that point, and particularly on ensuring service standards and value for money.
The point behind Amendment 165 is simple: before significant new FCA functions are commenced, a report would look at FCA staffing and resourcing; systems capability; the impact on authorisation, supervision and enforcement timeliness; the effect on service standards for firms and consumers; and any mitigation measures considered necessary by the Treasury and the FCA. That would have the benefit of allowing Parliament and its committees to examine the plans.
One example that has been raised with us is the movement of the Payment Systems Regulator into the FCA. Firms have told us that there is very limited clarity about the timeline for that transition, the operational arrangements, the treatment of existing PSR work, the continuity of functions and how the FCA will absorb these responsibilities without disruption. They do not see that as a satisfactory position.
I thank my noble friend Lady Lawlor for her support and for her amendment to my amendment. It makes a valuable point about the importance of training staff to ensure a smooth transition, and I very much agree with this from my experience in business and in government.
I look forward to hearing from the Minister, first, on how we can better avoid duplication and the excess caution that is sometimes caused by the existing overlap between retail and wholesale at the FCA, and, secondly, on his view on how Parliament and stakeholders can best scrutinise plans for the handover of new areas of responsibility to the FCA.
Lord Stockwood (Lab)
My Lords, the FCA currently regulates around 42,000 businesses of different shapes and sizes in the UK, across a wide range of different activities. It is incredibly important, therefore, that the FCA has in place the right structures, with adequate resources and governance, and the right people with the right skills to fulfil its role effectively.
Amendment 142A would require the FCA to develop a dedicated division to undertake its regulatory activities with regard to wholesale market participants. Amendment 142C would require the Treasury to introduce a statutory definition of “retail and wholesale clients”. The purpose of this would be to ensure that regulators avoid applying retail-focused requirements to wholesale clients, except where proportionate and appropriate.
I recognise the intention behind these amendments. I am aware that this point about distinguishing between retail and wholesale activities was made by the committee in its report, Growing Pains. Wholesale markets are a vital part of the UK’s financial services sector. The Government fully agree that regulation of those markets must be proportionate, targeted and internationally competitive. But we must be careful about embedding the distinction between retail and wholesale in law. The distinction between retail and wholesale activity is important, but it is not always absolute. For this reason, the FCA needs to be able to regulate proportionately across the markets it oversees, with it being called on to explain the decisions it makes so that they can be scrutinised properly.
The Government agree that the FCA must ensure that its retail-focused rules do not unduly affect wholesale activity. Last July, in her Mansion House speech, the Chancellor tasked the FCA with assessing the impact of the consumer duty to provide more certainty on its scope and application to wholesale firms, addressing a key concern raised by the wholesale sector. In response, the FCA committed to four workstreams aimed at removing disproportionate burdens on wholesale firms and giving firms the confidence to comply with their obligations in a proportionate way, avoiding overcompliance.
I remind noble Lords that those four workstreams were for the FCA, first, to clarify its supervisory approach when firms work together to manufacture products for retail customers; secondly, to consult on its client categorisation to reset how firms distinguish between retail and professional clients; thirdly, to consult on removing businesses with non-UK customers from the duty’s scope; and, fourthly, to consult on the wider scope and proportionality of the duty.
The FCA published consultations on the first two of these workstreams at the end of 2025. Last week, it published a further consultation proposing to remove businesses with non-UK customers from the duty’s scope, as well as proposing wider changes to the proportionality of the duty. In the light of the work that is under way, I do not think that we need to amend the Bill to embed a distinction on which the FCA is already acting.
I turn to Amendments 165, 165A and 173. I have listened carefully to the arguments that have been made. I agree that it is important that we are confident that the FCA is ready to take on its new functions. There are many benefits associated with consolidation: it reduces the number of separate regulators with which businesses need to deal, it promotes consistency of approach between different areas, and it builds on expertise within effective regulators.
As I said earlier, the FCA is responsible for ensuring that it has the resources and capability it needs to advance its objectives and implement any new responsibilities it is given. It also has the powers it needs to do so: it is able to set its own budget, in order to secure the resources it needs, and to set its own pay scales so that it can hire the talent and expertise it needs. However, I reassure noble Lords that the Treasury does not simply confer new additional responsibilities on the FCA without careful and close engagement between organisations.
For example, the Government and the FCA are working closely on reforms to anti-money laundering and counterterrorism supervision in order to ensure that the FCA is ready to take on this new responsibility. The Government are providing funding from the economic crime levy to support the implementation of the reform and to build the capability and sector-specific expertise that is needed, alongside close engagement with existing supervisors and stakeholders.
The Treasury has also worked closely with the FCA and PSR on the reforms to payment systems regulation. The FCA already has extensive familiarity with the payments ecosystem and is actively preparing for taking on its responsibilities for payment systems regulation from the PSR through a phased transition. The Government are confident about the FCA’s operational readiness and will continue to work with regulators to support them in implementing this change.
I hope I have reassured the Committee on how the Government have engaged with the FCA to make sure it is ready to take on the functions that this Bill will give it, and that the right set of actions is being taken on wholesale regulation. I ask the noble Lord, Lord Hunt, to withdraw his amendment.
Baroness Neville-Rolfe (Con)
I am grateful for some of the reassurances that the Minister has given, but the one area that it is difficult for business to cope with is not knowing when these things are going to happen; it is the timelines that are the problem. The Minister may want to reflect on that.
Lord Stockwood (Lab)
I am actually speaking to the FCA next week, so I will get some clarity on that and feed back to the Committee.
Baroness Noakes (Con)
The Minister referred to the four workstreams that the Chancellor set up last year. Can he say when firms might feel any difference?
Lord Stockwood (Lab)
I will come back on that after getting clarification on when those will come into effect.
Lord Hunt of Wirral (Con)
My Lords, what an important debate this has been. It has highlighted some of the difficulties facing the FCA in its wide remit, covering both wholesale and retail markets. I am grateful to my noble friend Lord Ashcombe; as he pointed out, industry needs certainty. I warmly welcome the contribution of the noble Baroness, Lady Bowles, with all her knowledge of this area. She readily reminded us that the FCA acknowledges overreach. So the problem is there, but what is happening about it?
I am delighted to hear from the Minister that all these workstreams are progressing. But from talking to those outside—the London Market Group, for instance—they point out that the UK has to compete with New York, Singapore, Bermuda, Hong Kong and the EU financial centres, and it just cannot do that with the system of regulation that we have at the moment governing the wholesale markets.
I agree with the noble Lord, Lord Vaux of Harrowden: it is all about proportionality. If I can pick up one point that the Minister made, it is to stress the need for proportionality or, as my noble friend Lord Holmes of Richmond called it, applicability. I just think that there is a way through here. My noble friend Lady Neville-Rolfe talked about the overlap between wholesale and retail. There must be a solution if we are to continue to be the global centre that we always have been.
At the moment, bearing in mind the growth and competitiveness objectives, and regarding a move by the FCA suddenly to take out wholesale, I would site it in Canary Wharf. That would send a message across the world that the UK really means to grow and be internationally competitive in this vital marketplace. We are bound to return to this on Report but, in the meantime, I beg leave to withdraw the amendment.
“Facilitation of inheritance tax payment before probate(1) The FCA must make rules to ensure that financial institutions facilitate the payment of inheritance tax by executors before probate is obtained through the Direct Payment Schemes for Inheritance Tax (IHT423) form.(2) For the purposes of this section, “financial institutions” include banks, building societies and investment account providers that—(a) are registered with the FCA;(b) are regulated by the FCA.”Member's explanatory statement
This amendment seeks to place the informal procedure of executors using the IHT423 scheme to pay inheritance tax before obtaining probate into legislation, and to require all financial institutions regulated by the FCA to facilitate that service. As things stand it is at the discretion of financial institutions to decide whether to facilitate the IHT423 scheme.
Lord Mackinlay of Richborough (Con)
My Lords, as noble Lords have noticed, this is a very skinny list of amendments; it is a group of one. I will put on record my registered interests: I am a chartered accountant and a chartered tax adviser, and, back in the day, I did the appropriate examinations that allowed me to be licensed for non-contentious probate work under the ICAEW. I suppose that it needs the ingenuity of a chartered tax adviser to get an amendment to the Financial Services and Markets Bill relating to inheritance tax.
Noble Lords may have noted the Economic Affairs Finance Bill Sub-Committee report of 28 January this year. It focused on the six-month rule for paying inheritance tax. It is not actually six months; it is six months after the end of the month of death. For instance, if somebody passed away in December 2025, the due date for inheritance tax would be the end of December plus six months: namely, the end of June 2026. The House of Lords Economic Affairs Finance Bill Sub-Committee was considering how, after next year, the system will deal with SIPP—self-invested personal pensions—coming within the scope of inheritance tax from 6 April next year.
As I hope to show the Minister this afternoon, the system of getting inheritance tax paid is lumpy at best and mixed at worst. It is also very complicated for personal representatives and executors to deal with, at some of the worst times that people have to deal with the state and the system for getting affairs settled. They say that there are three dreadful events in life—death, divorce and moving—but I think most would appreciate that death is a particularly difficult time for all concerned.
I have been administering probates for a very long time, and it is an area where the state really interposes itself to stop the administration of an estate until HMRC is happy that it will get its wedge. It is the absolute blockage, and at a time when the state and the individual are in some conflict, because the state will not move to allow probate to be achieved and those assets to be released until the tax is payable. I do not think there is any other area of tax where an absolute blockage comes into play. There is completely no trust between the state and the individual when administering an estate.
I could say that all used to be well, but it was not really. There was a painful hangover from the November 2025 disaster Budget. It increased interest on all overdue taxes to 4% above base. That is a hefty rate above base whereas, if you have overpaid your taxes, you get credit interest at 1% below base. So the Government enjoy a 5% spread, and there is a huge imperative to get taxes paid when they are due. I hope that is the underlying reason why we currently have a penal rate of 7.75% on taxes that are due.
For many executors, getting the cash together to pay that tax within six months, plus possibly a few days, after death is a very difficult procedure, because probate can rarely be obtained within that timeframe. A scheme has been presented over time, and it has developed quite well, but it is discretionary and varies from institution to institution: it is the direct payment scheme allowed by the IHT423 form, which has been in place for many years. Executors ask banks and building societies to pay the tax in advance of the due date, and often in advance of putting the appropriate forms in to HMRC, so that probate can be obtained smoothly.
If anybody has been involved with a probate situation, they will know that one cannot get probate until the tax is paid. How do you get the money out to pay the tax? Well, you could do it with probate, so we end up in this Catch-22 situation, which the IHT423 system was designed to help break. On 1 October 2024, the IHT423 arrangement, which used to apply only to banks and building societies, was widened to include a greater range of investments with traditional investment houses.
I might not have come across this problem had I not been administering my father’s estate—I am his executor. In my professional years, I had never come across an institution that refused to pay the tax due on an IHT423 request. Now, sadly, I have come across one: M&G plc group, now a dual structure between M&G Investments and Prudential. As huge names in the marketplace, they must have a significant percentage of all investment management in the UK.
My father’s estate is due to pay inheritance tax—I take the “my” away from this as it would apply to any executor—and I had relied on the IHT423 procedure to liberate an appropriate amount of IHT from an M&G Prudential investment that he had held for 24 years. The answer came back, “No, we don’t do that”. I asked why not, since I have been doing probate for many years and have never had a refusal of an IHT423 request. They simply said, “No, we don’t that”. That gets to the heart of what my amendment is all about. It states that all FCA-registered institutions doing business in this country must be part of the IHT423 scheme—no discretion, no “We don’t that”—because this a period of great difficulty for executors up and down the country.
This makes no difference to me, because I am done, but I will explain what many executors have to do. They can either borrow money—which in itself is a tough ask but, given the 7.75% interest rate levied by the Government, perhaps it is cheaper than having any amount outstanding and due—or they can pay the IHT personally, as I had to do. So there is an estate asset, an institution that just says, “No, we don’t do that”, and an estate liability of IHT that has to be paid, or you have to pay 7.75%.
As we go towards Report, I hope that the Government and the Minister will be keen to think about this and say, “Yes, we want to be part of smoothing the administration of estates for people at a tough time in their lives”. I can but guess, and I certainly hope, that the reason for the 7.75% interest rate is to encourage people to pay, and that it is not meant itself to be a receipt for the benefit of the Government. If this is not accepted as an amendment on Report—I would very much like the Government to consider it and draft one—I will be left with the conclusion that the Government are rather more keen on earning money at 7.75% than on helping the administration of estates.
That is a story that is probably being played out in tens or fifties, if not hundreds of thousands of households around the country as I speak. The fact that one of the giants of investment, M&G Prudential, with probably well over 10% of administered funds in this country, simply says no, is not good enough. We must therefore put this on a statutory basis, and this Bill seems to be an appropriate place to do so. I beg to move.
Lord Davies of Brixton (Lab)
The noble Lord makes a compelling case, but can he say what is meant by “facilitate” in the amendment?
Lord Mackinlay of Richborough (Con)
Facilitating means merely that any financial institution registered with the FCA in this country would have to use the IHT423 procedure—it could not say no. At the moment, we have a framework that is purely discretionary. In my professional life every single institution has always said yes, but obviously there are some out there which are saying no. So I want to put the facilitation not as a facilitation of choice but a facilitation of “must” on the request of an executor. There is no risk here. The risk is that either the funds remain in an investment account or they are in the account of HMRC, which, the last time I looked—despite my being a chartered tax adviser—is a safe place for people’s funds to be.
Baroness Kramer (LD)
My Lords, the noble Lord, Lord Mackinlay, makes so much sense to me on this issue. Having gone through the struggles of probate, I think that anything that will make it easier and more straightforward is good. I have worried since the announcement of the change that came with the last Budget, which brought pension pots into inheritance tax, that all kinds of consequences would significantly follow because most people who thought that they had a fairly straightforward settlement upon death will now find that they have handed a very complex picture on to their executors.
I want to put in a plea from personal experience: where there are people who have more than one nationality, or tax residency in one country and nationality in another, the nightmare becomes even more acute. I am not an adviser but I will give this advice: if one is aware that someone close is likely to die, it has almost become necessary to create a separate savings account to deal with all the relevant tax payments because it is so long before probate can be completed, particularly if that is in more than one jurisdiction. I felt at one point that I virtually lived at Kingston Crown Court because I was so often having to get new and updated copies of the death certificate to satisfy some new requirement from someone somewhere else. That is a painful and difficult time, but what the noble Lord, Lord Mackinlay, suggests seems straightforward and effective. Even if it deals with only one small piece, that is something.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to my noble friend Lord Mackinlay of Richborough for tabling Amendment 142B. I am especially sorry to hear of the difficulties that he faced with his father’s estate. That is typical. When people die, their loved ones and executors often have a difficult time, and one of those difficulties is the delay that they often encounter with probate, as I know from family experience, and as we have heard from the noble Baroness, Lady Kramer.
There is both an emotional toll and a worry as to how to pay any IHT within the six-month window. Hopes that this might be extended by the Chancellor to 12 months have now been dashed, so this is a timely amendment. As I understand it, the issue is that, when someone dies, their bank, building society or investment accounts are frozen. Executors may then need to pay inheritance tax before probate can be granted, but they may need probate in order to access the funds from which that tax would be paid. The IHT423 direct payment scheme is designed to address that problem by allowing inheritance tax to be paid directly from the deceased’s bank, building society or investment account to HMRC before probate is granted. The difficulty, as we have heard, is that participation in that scheme is not consistent across all relevant financial institutions. That situation may mean that people have to find funds elsewhere, use personal savings, as we have heard, arrange borrowing or enter into more complicated interim arrangements.
The amendment rightly seeks consistency. It would require the FCA to make rules ensuring that the relevant regulated financial institutions facilitated the payment of inheritance tax through the IHT423 direct payment scheme. There may of course be operational legal issues that the Government will want to consider, but the basic principle seems right: if inheritance tax must be paid before probate, it would be in the interest of all if this inconsistency could be sorted out as a matter of urgency.
We should bear in mind that the interest mounts up at a punitive rate—4% above base rate, so that is 7.75% at present—and that it affects thousands of households every year. The Minister will know that more generally it will be a difficult year for those paying IHT, with IHT payable on pension pots from April 2027. That is all the more reason to show flexibility and sort out this issue, and to use the Bill to do so if that is necessary. I look forward to hearing what the Minister has to say.
Lord Stockwood (Lab)
My Lords, Amendment 142B would require the FCA to ensure that financial institutions that are registered or regulated by the FCA facilitate the payment of inheritance tax by executors before probate is obtained through the direct payment scheme.
I appreciate that the purpose of this amendment is to make it easier for estates to pay inheritance tax. I am sorry to hear of the issues that the noble Lord, Lord Mackinlay, has had with the current system and I am very happy to take that up with HMRC to explore why M&G Prudential is not a member of the current scheme.
I can assure your Lordships from the research for this question that HMRC internal analysis suggests that most taxpaying estates are already able to fund at least a first instalment of inheritance tax before applying for probate. The direct payment scheme allows executors to ask banks, building societies or investment account providers to pay some or all of the inheritance tax due from the deceased person’s accounts. The scheme works well in its current voluntary form and provides an important mechanism to help executors pay any tax that is due.
We need to be very careful here. Releasing funds from a deceased person’s estate before probate is granted carries risk for financial institutions. Those institutions need to ensure that those payments can be made lawfully. The current system enables financial institutions to assess whether it is appropriate to make payments directly to HMRC on a case-by-case basis, ensuring that institutions make payment only if satisfied that the personal representative is indeed acting on behalf of the deceased’s estate and that they are releasing those funds correctly. FCA rules cannot put this issue aside as it is a matter of the wider law. Financial institutions would need to ensure that making these payments is appropriate whatever the FCA rules say. This would leave financial institutions on an uncertain legal footing.
I understand the spirit of this amendment but I do not agree that it is the right solution, and the existing voluntary scheme is working well on the whole. But I will definitely pass on the point the noble Lord raised about HMRC and will come back to him on that. I therefore ask the noble Lord to withdraw the amendment.
Lord Mackinlay of Richborough (Con)
I listened carefully to what the Minister had to say; I thought he was on a good track for a while but he finished rather poorly.
I am grateful for the very sensible words from my noble friend Lady Neville-Rolfe, who understood the situation completely and absolutely, and for the comments of the noble Baroness, Lady Kramer. If people actually listen to what happens in this Committee—I am sure the audience is fairly skinny—I will give a word of advice to them that is exactly on the tack of the comments of the noble Baroness, Lady Kramer. It is not a problem of a multitude of nationalities that might exist. I recommend to anybody who is getting a little older to make their affairs that little bit simpler, so that, once they depart, they are easier to unwind.
I will give your Lordships a very easy example—this is aimed at the point made by the noble Baroness, Lady Kramer. If one holds shares that are denominated in, say, Jersey—it is not uncommon, and there are listed shares on our stock exchange that are headquartered in an overseas territory, which is quite typically Jersey—one would then need to go through the whole probate procedure just for those Jersey-registered assets. There would be cost and aggravation, and my advice is to sell them.
I do not really have a criticism of HMRC, and I am sorry if my speech came across with any criticism. There are two systems. There are relevant assets, which are typically property that cannot be easily realisable into cash to pay IHT. The system has accepted that for many years, and one can pay the tax due on those types of not easily realisable assets such as property or land over 10 instalments over 10 years ahead. But the 7.75% interest applies, so most executors—I am particularly thinking about the beneficiary—would like to clear the inheritance tax as quickly as they possibly can, because 7.75% is not a good deal in terms of an interest payment. That has been flexed for the BPR/APR assets that come in next year, of £2.5 million each, where the 10-year instalment plan will be interest-free. But the point is that the 7.75% interest rate makes it essential that people try to pay.
I do not accept the Minister’s observation that there is risk for the financial institution. In my experience over many years, I have found that 99% of institutions are happy to take that very small degree of risk, because the money will be residing in HMRC’s bank account, which is a safe place for money to reside. The risk is not just small but extremely small. If things have gone wrong, you just ask for it back, or somebody will, from HMRC. Given the speed of operation of HMRC, it might take quite some time to get the money back, but at least it is somewhere safe. So I do not accept the risk, because it is somewhere where there is no risk. It is unfortunate that this has fallen in a family issue, but M&G Prudential is the only institution that I have ever come across that simply says no.
Can the Minister go back to his officials and consider it further? I would be very pleased to meet him or his officials for blue-sky thinking about this. We have Report ahead of us. I am happy to withdraw my amendment.
“Litigation funding as a regulated activityAfter paragraph 24 of Schedule 2 to the Financial Services and Markets Act 2000 (regulated activities), insert—“Litigation funding agreements
24ZA Rights under a litigation funding agreement.24ZB Entering into a litigation funding agreement as funder.24ZC Administering a litigation funding agreement.24ZD Arranging a litigation funding agreement.24ZE Advising on a litigation funding agreement.24ZF (1) For the purposes of this Schedule, a “litigation funding agreement” is an agreement under which—(a) a person (“the funder”)—(i) agrees to fund (in whole or in part) the provision of advocacy or litigation services (by someone other than the funder) to another person (“the litigant”), and(ii) the litigant agrees to pay a sum to the funder in specified circumstances, or(b) a person provides financial support to a firm of solicitors which is involved in contentious matters or to a claims management company.(2) The sum to be paid by the litigant may be—(a) an amount calculated by reference to a multiple (if any) of the amount of the funding provided by the funder,(b) an amount calculated by reference to a percentage (if any) of any specified financial benefit obtained by the litigant in connection with the matter in relation to which the funding is provided,(c) an amount calculated by reference to a rate of interest, or(d) such sum, or method of calculation, as is prescribed by the Treasury pursuant to sub-paragraph (3),provided that in respect of the sum to be paid, howsoever calculated, it must not exceed such sum as may be prescribed by the Treasury pursuant to sub-paragraph (3).(3) The Treasury may by regulations make such consequential, supplementary, incidental, transitional or saving provision as it considers appropriate in connection with this paragraph.”” Member’s explanatory statement
This amendment brings third-party litigation funding within the FCA regulatory perimeter by creating a new category of regulated activity under FSMA 2000.
Baroness Bowles of Berkhamsted (LD)
My Lords, my amendment proposes that the Treasury makes litigation funding a regulated activity, with a list of matters that I propose should be covered in the amendment.
Litigation funding has come into the spotlight for several reasons. There was the 2023 PACCAR decision, which held that litigation funding agreements were a form of damages-based agreement and unenforceable for failing to comply with the DBA regulations 2013. There has also been concern about the source of some litigation funding, especially when a significant proportion of funders who are active in this space are not headquartered in the United Kingdom and may utilise what can be described as dodgy derivatives.
The Conservative Government tried to address the PACCAR decision with a Bill that did not make it through the wash-up. They also proposed a wider review of litigation funding and asked the Civil Justice Council to assess whether the regime was effectively providing access to justice and whether regulation of commercial funders was necessary. An interim report and consultation were launched on 31 October 2024 and the final report was published on 2 June 2025. This was a substantial and diligent review with stakeholders across the spectrum, including litigation funders, welcoming and endorsing its recommendations. In December last year, the Labour Government made clear their intention to reverse the effect of the PACCAR judgment, so that litigation funding agreements would no longer be treated as damages-based agreements. At the same time, the Government said that they would take steps to regulate the third-party litigation funding sector—one of the central purposes of the review and its recommendations.
The issue is not whether there should be regulation but when and by what route. It is urgent. That urgency has been acknowledged by the previous and current Governments in commissioning the review. But a year has passed since the final report and we need fast delivery. At present, the sector is essentially self-regulated, which in practice means that it is unregulated. More than 70 funders operate in the UK, collectively deploying many billions. The Association of Litigation Funders covers only a small proportion of the market and cannot provide assurance about the rest.
Lord Carlile of Berriew (CB)
My Lords, Amendment 172B is in my name. I declare two interests. First, I was formerly, for several years, a part-time chair of the Competition Appeal Tribunal, which hears most collective actions; I heard several collective actions there. Secondly, in my professional life, I accepted membership of consultative panels in relation to two current collective actions in which litigation funding agreements are in place. As an aside, I can offer noble Lords a third, fascinating interest. If they are really bored between football matches, they can read my article on this subject in the Law Society Gazette of 30 June. I know that, as a distinguished lawyer, the noble Lord, Lord Holmes, will read it with fascination.
The points raised by the noble Baroness, Lady Bowles, and the points raised in my amendment are mutually exclusive. I am going to talk mainly about the PACCAR case, to which she referred. I do not disagree with her that there may be scope for further regulation, but I disagree with her on two points. First, paragraph (d) of proposed new subsection (2) and proposed new subsection (3), which would be inserted by the noble Baroness’s Amendment 142D, would give the Treasury the opportunity to fix the fees that are charged by litigation funders in litigation funding agreements. One has to bear in mind that that would potentially raise a massive conflict of interest because some of these collective actions are being, have been or will be brought against the Government. The idea that the Government could impose a low fee—indeed, too low a fee—to try to kill off one of those actions is not something that I would expect, but it is implicit in the noble Baroness’s amendment.
I turn to my Amendment 172B. I was in this Room on 29 April 2024 when Committee on the Litigation Funding Agreements (Enforceability) Bill was heard in its entirety in one day. I have that Bill in front of me. It is not a long Bill; in fact, it runs to a single page. The idea of that Bill was to reverse the decision of the Supreme Court in the case called PACCAR, which had damaged the working of litigation funding agreements. Second Reading had occurred only two weeks earlier, on 15 April 2024, and I hope I will be forgiven for referring to the excellent speech made in it by the noble and learned Lord, Lord Stewart of Dirleton, who was the Minister in charge of the Bill. Before I get to that speech, I remind your Lordships that, by the time we finished Committee, all parts of your Lordships’ House agreed that that Bill should become law, but it did not, because it was not dealt with in wash-up, probably because it had not reached Report, even though that stage would probably have gone through in a shorter time than Report on your Lordships’ House on the National Security (State Threats) Bill in which I was involved a few days ago.
It is my belief that the change in the litigation funding agreements Bill has waited for far too long. I believe we will find that the Government are not opposed to it. I do not expect to hear that from the Minister, because it may be more to do with the Ministry of Justice, but my belief is that the Government will try to find an opportunity soon to push a separate Bill through.
However, it is a bit puzzling. I tried to table as an amendment to this Bill the page that I have just held out, slightly altered to fit into the Bill. I had a fascinating discussion with helpful officials in the Public Bill Office about scope. I was told that putting in that page was out of scope but that tabling my Amendment 172B, which calls for a review of litigation funding agreements, was in scope. I find that difficult to reconcile. I think it is a circular argument. If Amendment 172B is in scope, then I cannot understand why my one-pager is not, but there we are. If a decision has been made that something is not in scope, it is difficult to challenge it. I believe that has only ever been done successfully once in the hundreds of years of existence of this Parliament. So, brave as I am sometimes in legal matters, I thought I would give that one a miss and try a different route.
I remind your Lordships of the importance of this. As the noble and learned Lord, Lord Stewart, said on 15 April 2024, the Supreme Court ruling in the case of PACCAR
“rendered many third-party litigation funding agreements … unenforceable by bringing them into scope of the regulatory regime for damages-based agreements, or DBAs”.
The result was that third-party litigation looked as though it might lose much of its important role in litigation in this country. When I was a baby barrister doing personal injury cases, small contract cases and so on, I used to do masses of small claims for which legal aid was given, and every month I received a cheque—yes, a cheque, a piece of paper—from the Legal Aid Board, with 10% deducted because it was publicly-funded work, and all those actions were paid for by legal aid. Now, in reality, none of them are paid for by legal aid, so litigation funding agreements are here to replace legal aid.
As the noble and learned Lord, Lord Stewart, said:
“The restoration of the previous funding position is needed urgently to reduce uncertainty for both the future of litigation funding and for”
litigation funding agreements
“that had been entered into previously. By rendering many”
of them unenforceable, the PACCAR judgment
“risks undesirable satellite litigation, an increased burden on the courts, and creating an unfavourable market for litigation funding, which, in turn, threatens access to justice”.
As he added:
“Third-party litigation funding plays a key role in enabling ordinary people and small and medium-sized enterprises to bring large, costly claims against better-resourced companies and institutions”.—[Official Report, 15/4/24; col. 798.]
Baroness Neville-Rolfe (Con)
My Lords, this has been an interesting discussion, with cases put forcefully by the noble Baroness, Lady Bowles, and the noble Lord, Lord Carlisle of Berriew, so I approach the issue with some caution. But I will be reading the noble Lord’s article, particularly in view of my contribution to getting to the bottom of the Post Office injustices.
I recognise that third-party litigation funding can support access to justice in some cases, but we also need to be clear-eyed about the risks. An expanded litigation funding and claims management industry could fuel speculative low-merit or mass litigation against businesses. It could increase legal costs, insurance costs and settlement pressure. The purpose of reform should therefore be to protect genuine claimants and promote access to justice, without creating a larger litigation finance industry.
Bringing litigation funding within the FCA perimeter would undoubtedly create a more formal framework of oversight, and we know that there are bad apples in the industry. However, there is a danger that FCA regulation could have the opposite effect to the one intended. It could professionalise and legitimise litigation funding as a normal financial service. It would give funders and claims management firms a form of regulatory kitemark, allowing them to say that they are FCA regulated and therefore giving the market a greater sense of safety, respectability and permanence.
That may sound attractive from an oversight perspective, but if the result is that the market expands, that more claims are funded and that more speculative group actions are brought against productive businesses, we will have solved one problem only by creating another. In any event—this is the important point—I do not believe that this is a matter for the FCA or for the Bill, nor am I sure that a Treasury review of claims management services is the right way to take this forward.
The noble Baroness, Lady Bowles, described some of the challenges that need to be addressed. The noble Lord, Lord Carlile, has highlighted the risk of a conflict of interest on fees. Any such review would need to look not only at the impact of the PACCAR judgment but at other forms of redress through the courts, ombudsmen, the criminal cases review board and public inquiries. We need to compare costs to those claimed against, including businesses, and the benefits to those who seek redress.
The implications for the legal system mean that it goes way beyond the reach of this Bill and it is not in the spirit of reducing unnecessary burdens or improving the regulatory framework for existing financial institutions and those coming under the FCA and PRA umbrella. It is more a matter, as we have heard, for the Ministry of Justice, as the Bill Office apparently seems to advise. I share the noble Lord’s frustration with scope in trying to put amendments down to Bills; we have all been there. Having said that, I look forward to hearing how the Minister views these things and what he thinks can be done.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness, Lady Bowles, and the noble Lord, Lord Carlile, for tabling these amendments on the regulation of claims management services and litigation funding agreements. I am grateful to the noble Lord, Lord Carlile, for bringing this issue to my attention when we spoke two weeks ago, and I will continue those constructive conversations outside the Room. I recognise the importance of clarity in the regulation of claims management services and litigation funding agreements, particularly in light of the concerns that have been raised following the 2023 Supreme Court judgment in PACCAR. The Government recognised the urgency of addressing these issues.
Amendment 142D is targeted at bringing litigation funding within the FCA’s regulatory perimeter. The Government agree that the proportionate regulation of litigation funding could improve standards, transparency and protection for litigants who may be in a vulnerable position, but I do not think the FCA is the right body to take this role. We should not move to what would be a significant decision lightly, especially as this issue has already been considered by the Civil Justice Council. Instead, the Government will introduce proportionate regulation of litigation funding agreements. This model is recommended by the respected, independent Civil Justice Council, where courts assess whether agreements meet regulatory requirements. If not, they would not be enforceable. This approach follows other methods for funding civil litigation.
Amendment 172B would require the Treasury to conduct and publish within 12 months of Royal Assent a review into the regulation of claims management services and litigation funding. The 2023 Supreme Court judgment on PACCAR introduced uncertainty about whether litigation funding arrangements remain enforceable. It also brought to light concerns about whether they are always fair and transparent for claimants using them. The Government have committed to remove this uncertainty and ensure these agreements work fairly for all.
Since the Supreme Court’s judgment, the Civil Justice Council has reviewed litigation funding and published its report in 2025. The Government are taking action accepting the council’s two primary recommendations. First, the Government will legislate to clarify that litigation funding agreements are not damages-based agreements and do not need to comply with the requirements of the regulatory regime for damages-based agreements to be enforceable. Secondly, the Government will introduce proportionate regulation of litigation funding agreements. This is the right approach, and we are working urgently to identify a new legislative vehicle to take this forward.
On claims management regulation more generally, the FCA has announced a market study into claims management services to assess how the market is operating and whether further regulatory intervention is needed. This study is in train. I know that the noble Lord, Lord Carlile, thinks that the Government should take the opportunity of this Bill to resolve the issue once and for all. However, the issue under consideration is primarily about litigation and access to justice, rather than the regulation of financial services and markets, so the Bill should not be used for that purpose. These judgments are made by Parliament, not the Government, just as the noble Lord said. We are working to identify a legislative vehicle to take forward the reforms I have mentioned.
I have a lot of sympathy with these amendments. The Government are seeking to legislate on the issue when they can, but we are not able to do so through this Bill. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the noble Lord, Lord Carlile, and the Minister for their comments in this debate. The noble Lord, Lord Carlile, may be interested to know that I am a victim of the PBO too. The reason that “Treasury” appears where I put “Lord Chancellor” is down to the PBO. My intention was correct, but it was one of those things where it was one minute to four—the last moment for getting it in—so I said, “I will make sure it is right if it goes to Report”.
I was inspired, if you like, to put this suggestion forward because I was rather alarmed at the fact of litigation funding becoming an asset class into which speculative and dubious investment was going on in overseas countries. Whichever side of the argument you are on, we do not want that kind of inflated funding meaning that cases are brought that possibly never should be, but the whole thing is just speculative. The more I looked at it, I thought, well, if we need any regulation, as I have explained, it belongs with the FCA. Then I looked further and discovered that Australia and elsewhere, as quite often is the case, have got there first and have already assigned it to being under their financial services regulators. That is my background. I think it has been interesting. I offered it as what I thought would be a faster route, especially if we could do it as a designated activity, but I also admit that, yes, I am stealing a march on what the Government will have to do, taking their time a little more. I hope that the possibility of this route has been noted and for now, I will withdraw the amendment.
“Building society governance standards(1) The Treasury must, within six months of the day on which this Act is passed, make regulations by statutory instrument requiring the Financial Conduct Authority to make rules establishing minimum governance standards for authorised building societies.(2) Regulations under subsection (1) must require the Financial Conduct Authority to make rules ensuring that—(a) elections of directors are conducted in accordance with minimum democratic standards, including—(i) equal treatment of candidates in election materials and communications;(ii) protection of candidates’ election addresses from alteration except with the candidate’s request or written consent or where alteration is required by law or for production purposes;(iii) minimum statutory duties and reporting requirements for independent scrutineers;(b) voting arrangements prohibit bundled voting instructions and require voting instructions to be determined separately in respect of each candidate and each resolution;(c) members approve, by ordinary resolution at intervals not exceeding three years, the remuneration policy for directors and senior executives; (d) every authorised building society whose total assets exceed £5 billion maintains not fewer than two board positions to be filled by member-nominated directors elected by Members; (e) every annual general meeting is held at a physical place whilst permitting additional participation by electronic means;(f) every question submitted by a member for an annual general meeting, together with the building society’s response or the reasons for not providing a response, is published following the meeting.(3) Before making rules under this section the Financial Conduct Authority must consult—(a) HM Treasury;(b) the Prudential Regulation Authority;(c) representatives of authorised building societies;(d) organisations appearing to represent the interests of members.(4) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”Member’s explanatory statement
This amendment requires HM Treasury to require the Financial Conduct Authority to establish minimum governance standards for authorised building societies. It applies governance principles already recognised by Parliament in relation to listed companies, occupational pension schemes and statutory democratic elections to member-owned financial institutions.
Baroness Bowles of Berkhamsted (LD)
My Lords, building societies occupy a unique place in the United Kingdom’s financial system. Unlike banks, they are not owned by external shareholders; they are owned by their members. That distinction is fundamental. It means that the legitimacy of a building society rests not only upon prudent management and financial soundness but also upon effective member democracy. The Building Societies Act 1986 established the statutory framework for that democracy. It has served the sector well for many years. However, Parliament has not stood still. During the four decades since the Act was passed, this House and the other place have progressively strengthened governance standards in many comparable areas of law—I mean company law, obviously.
For quoted companies, Parliament introduced binding shareholder votes on remuneration policy through the Enterprise and Regulatory Reform Act 2013. For occupational pension schemes, Parliament has required member representation on trustee boards. For statutory elections in trade unions, Parliament has established detailed protections to ensure that elections are conducted fairly, that candidates are treated equally and that election addresses are not altered without consent. Building societies, however, remain governed largely by a statutory framework dating from 1986 that has not developed in a similar way. My amendment does not seek to transplant those other regimes wholesale, nor to interfere with the independence of boards or with the mutual model itself—quite the opposite. The amendment is intended to strengthen confidence in mutuality by ensuring that members enjoy democratic protections comparable to those that Parliament has already recognised elsewhere.
The amendment is also deliberately framed as an enabling provision. Rather that attempting to prescribe detailed rules in primary legislation, it would require His Majesty’s Treasury to make regulations requiring the Financial Conduct Authority to establish minimum governance standards for authorised building societies. The FCA is plainly the appropriate body to consult on and develop those detailed standards.
This amendment identifies a number of areas where minimum standards should exist. The first is elections. Members should be able to choose between candidates through elections that are demonstrably fair. Candidates should be treated equally and have equal opportunity to communicate with members, and independent scrutineers should operate to consistent statutory standards.
Baroness Neville-Rolfe (Con)
My Lords, I will briefly speak to Amendment 142E. I can understand the intention behind the amendment, which has been very well described by the noble Baroness, Lady Bowles.
I am particularly sympathetic to the objections to the use of the quick vote, famously used by the National Trust to keep more challenging directors off its governing body. This is known as bundle voting instructions—as in proposed new subsection (2)(b) of the amendment—which not only is rightly prohibited in trade union elections but squeezes out minority views and arguably creates a democratic deficit. I also share the noble Baroness’s concerns about purely electronic AGMs.
However, our concern is whether this amendment is the right way forward to achieve reform. It would impose a new and quite detailed regulatory framework from the centre, requiring the Treasury to direct the FCA to make rules across a wide range of building society governance matters. That would inevitably increase the regulatory burden on building societies, which already operate in a heavily regulated environment. Many are not large, and they are certainly not listed banks with external shareholders and extensive governance departments. Many are regional, community-based institutions, and that is very good. They play an important role in mortgage lending, savings and financial services provision across the country.
There is also a question of proportionality. The amendment would apply a number of quite prescriptive requirements, including on AGM format, publication of questions and responses, voting procedures, remuneration approval and member-nominated directors for large societies. Some of these changes may be sensible in principle, but they could have practical consequences, which need to be carefully understood before being imposed across the sector. We would therefore be cautious before giving the Treasury and the FCA a wide power to regulate all this and things not listed in the amendment. We are, after all, seeking to limit such powers elsewhere in the Bill, in the interests of proper parliamentary oversight. I also have a question as to whether this would not be more appropriate for a corporate governance Bill.
Having said that, there are narrow proposals—for example, on the misuse of bundled voting—that could be put into the Bill without creating such problems or changing its deregulatory thrust. If so, we would be happy to discuss them. We should always ask whether the regulatory lever is the right lever to pull. In my view, central regulation should be a last resort, particularly where the desired outcomes might be achieved through existing government expectations, voluntary best practice, member engagement or a more targeted intervention where there is evidence of a problem.
For these reasons, although I very much understand the purpose behind the amendment and I am glad to have had this discussion, I remain cautious about whether this is the right regulatory mechanism.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness, Lady Bowles, for raising this important issue. Building societies are a key part of the UK’s financial services sector. The Government are committed to supporting the growth and long-term success of the mutual sector, including through our commitment to double the size of the mutual and co-operative economy.
Building societies are already subject to an extensive legislative and regulatory requirement. Building societies must comply with the Building Societies Act 1986, FCA and PRA rules, and the senior managers and certification regime. Of course, there is also wider company law and the financial services regulatory requirements where applicable. The FCA and PRA already have the powers to set and supervise governance standards where they consider it necessary.
However, I do not agree that we should make such detailed rules on things such as board composition, annual general meetings and reporting arrangements. The building society sector is diverse, ranging from small regional societies to large national institutions; this was mentioned by the noble Baroness, Lady Neville-Rolfe. The rules need adequately to reflect the different governance needs, operational models and challenges faced across the sector, and building societies need to focus their energies on serving members. Such governance matters are generally best determined by individual societies, taking into account their size, complexity and membership, while operating within the existing legislative and regulatory framework and ensuring that boards have the skills, experience and expertise needed to govern effectively.
The Government’s approach has been to modernise the framework for building societies while preserving flexibility. Consistent with feedback from the sector, we believe that governance arrangements should uphold high standards while allowing societies to adopt structures that reflect their individual circumstances, business models and memberships. The Government continue to engage closely with the mutuals sector and regulators to ensure that the framework remains proportionate and supports growth, including through the Mutual and Co-operative Sector Business Council and other stakeholder forums. We have welcomed the recent work undertaken by the FCA and the PRA on the mutuals landscape, which is helping inform future policy development as well.
Although the Government share the objective of strong governance and membership engagement, we do not believe that it should be delivered in this way. Building societies already operate within a robust framework, which we continue to keep under review and modernise where appropriate. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
I thank the Minister and the noble Baroness, Lady Neville-Rolfe; I might take the noble Baroness up on her offer to proceed further with something to do with blind voting. I accept that this is the “Full Monty” version, which I put in at this stage because I wanted to draw comments.
I do not think that you can have what is, in essence, a substantial financial institution with a board that can fiddle who gets on to the board and who does not. This is the nub of the issue: it is possible to block in a way that we do not allow for listed companies. Not all listed companies are as big as some of the institutions I am talking about—I accept the proportionality point; maybe one has a threshold—but the situation that has gone on is not acceptable. If we could start with the bundled blind voting point, we might begin to get somewhere. I thank everybody but, obviously, for now, I will withdraw my amendment.
Baroness Noakes
“Offices for regulatory evaluation(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 1RB (requirements in connection with public consultations), insert—“FCA Office for Regulatory Evaluation
1RC FCA Office for Regulatory Evaluation(1) The FCA must establish and maintain an office for regulatory evaluation, to be known as the FCA Office for Regulatory Evaluation (“the Office”), to provide independent evaluation of the FCA’s regulatory actions.(2) The FCA must appoint a person as Director of the Office who will be responsible for the activities of the Office.(3) Treasury approval is required for the appointment or dismissal of the Director.(4) The FCA must provide the resources that are required by the Director to carry out the evaluation of the FCA’s regulatory actions.(5) The Director must draw up a statement of policy of how the evaluation of the FCA’s regulatory actions will be carried out. (6) The Director must report to the governing body of the FCA at least every six months on the work of the Office and the report must be—(a) published,(b) sent to the Treasury, and(c) sent to the Committees of Parliament referred to in paragraph 28(7) of Schedule 1ZA (the Financial Conduct Authority).(7) The Director must report to the chair of the FCA and be independent of the FCA’s board of directors and its executive management.(8) The chair of the FCA will be responsible for the remuneration of the Director and for settling any disputes about the resources allocated by the FCA to the work of the Office.(9) “Regulatory actions” means any actions carried out by the FCA in discharging its general functions under section 1B and supervision, monitoring and enforcement under section 1L.”(3) After section 2NB (requirements in connection with public consultations), insert—“Bank of England Office for Regulatory Evaluation
2NC Bank of England Office for Regulatory Evaluation(1) The Bank of England must establish and maintain an office for regulatory evaluation, to be known as the Bank of England Office for Regulatory Evaluation (“the Office”), to provide independent evaluation of the regulatory actions of the PRA and the Bank of England in respect of its financial market infrastructure (FMI) functions.(2) The Bank of England must appoint a person as Director of the Office who will be responsible for the activities of the Office.(3) Treasury approval is required for the appointment or dismissal of the Director.(4) The Bank of England must provide the resources that are required by the Director to carry out the evaluation of the regulatory actions of the PRA and the Bank of England in respect of its FMI functions.(5) The Director must draw up a statement of policy of how the evaluation of regulatory actions will be carried out.(6) The Director must report to the court of directors at least every six months on the work of the Office and the report must be—(a) published,(b) sent to the Treasury, and(c) sent to the Committees of Parliament referred to in paragraph 36(7) of Schedule 1ZB (the Prudential Regulation Authority).(7) The Director must report to the chair of the court of directors and be independent of the court of directors, the Prudential Regulation Committee, the Financial Markets Infrastructure Committee and the executive management associated with those Committees.(8) The chair of the court of directors will be responsible for the remuneration of the Director and for settling any disputes about the resources allocated by the Bank of England to the work of the Office.(9) “Regulatory actions” means any actions carried out by—(a) the PRA in discharging its functions under section 2AB and supervision of PRA-authorised persons under section 2K, and(b) the Bank of England in respect of its FMI functions under section 30D of the Bank of England Act 1998.””
Baroness Noakes (Con)
My Lords, I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Bridges of Headley for adding their names to this amendment.
Last week, we debated the need for more extensive regulatory evaluation in order to hold the regulators to account effectively. The noble Baroness, Lady Bowles, suggested a Treasury-convened panel to undertake periodic independent reviews, and my noble friend Lord Bridges of Headley suggested an office of regulatory evaluation, which would assess the regulators’ performance in discharging their duties and meeting the regulatory principles. These would not replace the parliamentary committees in each House but would complement them by providing more in-depth and comprehensive analysis, which could then be built on within the framework of parliamentary accountability. My Amendment 142F would be another way of increasing the amount of the evaluation of the regulators.
I remind the Committee of the background. The volume of regulatory activity has grown significantly in recent years, as the matters that used to be dealt with in the EU have been added to the FSMA model. In addition, innovation is presenting major new challenges, which has the effect of increasing regulator activity.
The ability of Parliament to hold regulators to account was already under strain. For example, the Financial Services Regulation Committee of your Lordships’ House recently undertook a major piece of work on stablecoins, but it would not have been realistic to attempt to encompass all developments in digital assets. We cannot cover everything that we think should be covered.
The Bill is adding to that workload by adding the huge area of consumer credit to the FCA’s responsibilities, all of which will need to be implemented by way of new FCA rules. This will involve very significant issues: the balance between consumer protections; the supply of credit; and the efficiency of credit providers. I do not know how all that will be scrutinised effectively.
Instead of looking to solutions that are external to the regulators, which is what we discussed last week, Amendment 142F proposes that each of the regulators sets up an internal but independent office for regulatory evaluation. Apart from safeguarding the independence of the office and mandating regular reporting, the amendment is deliberately not prescriptive beyond that, leaving it to the new offices to work out how to carry out their work.
Baroness Bowles of Berkhamsted (LD)
My Lords, I support these amendments. They almost follow naturally from the debate that we had earlier about the need for a structurally competent wholesale function within the FCA. It is clear that you cannot produce a credible cost-benefit analysis without a credible evaluation capability. The PRA has understood that and already has the beginnings of an evaluation function, as the noble Baroness, Lady Noakes, said.
I can understand that in part, because prudential regulation requires modelling, capital assessment and an understanding of how rules transmit through markets. The PRA’s world is balance-sheet solvency, capital modelling and risk transmission, so it already employs actuaries, quants and economists, and the evaluation office therefore fits more naturally into that culture. The FCA is different; its culture, as we have discussed, is overwhelmingly consumer focused. That is appropriate for retail regulation but it means that the FCA has never developed the technical machinery for the evaluation of wholesale market impacts. Consumer protection does not require the modelling of liquidity, pricing dynamics or market structure, but wholesale regulation does.
It occurred to me only when I was thinking about this in the context of this amendment that the need for an evaluation office points again to the different sides of the FCA and why somehow upgrading, or separating the wholesale side, becomes more relevant because functions are missing due to the consumer focus. We have heard that the FCA tends to do the minimum of cost-benefit analysis required by statute and then largely ignores it—again, probably because it thinks that it is not relevant to consumer protection, but I would say it is to the particular detriment of the wholesale side. That is an additional reason for supporting these amendments.
Lord Vaux of Harrowden (CB)
My Lords, I am sorry that I was not able to be here last Wednesday for the debates on the amendments tabled by the noble Lord, Lord Bridges, and others that proposed the creation of an office for financial regulatory accountability. I have read the debates in Hansard and there is a remarkable similarity to three years ago when we debated similar amendments. This was a significant error in 2023 during the passage of the last Financial Services and Markets Act. It would have been a significant improvement to the ability of Parliament to hold the regulators to account—a complement rather than a replacement.
I shall touch briefly on the ability to scrutinise the proportionality of specific rules. I shall look closely in Hansard at the Minister’s comments during the second group, when he seemed to agree that the specific scrutiny of the rules is in fact important, contrary to the approach that the Bill now takes. This holding of the regulators to account by Parliament has become only more important and more difficult, I think, as we give yet more responsibilities to the regulators under the Bill with, as we have heard, the move of the PRS, the Consumer Credit Act and so on.
Amendment 142 would provide an alternative way of achieving something similar to the amendments that were discussed on Wednesday that might perhaps be easier for the regulators and the Government to accept. It proposes the creation of offices of regulatory evaluation within both the FCA and the Bank but, unlike the office for financial regulatory accountability proposed by the noble Lord, Lord Bridges, it would lie within the regulator, although it would probably have much the same role. Whichever way we do it, I am sure the Minister will have heard loud and clear the concerns that are shared across the Committee about the accountability of the regulators to Parliament, another of the main themes that are emerging as we load ever greater responsibilities upon them.
Baroness Kramer (LD)
My Lords, I cannot improve on the three speeches that have been made. I rise simply to make clear that on these Benches, we think that this amendment is really important.
We can see in Committee that it is purely random that we have the capacity to raise many of the issues. The noble Baroness, Lady Noakes, and my noble friend Lady Bowles have a deep understanding of the market, as does the noble Lord, Lord Vaux, but it is purely random that they happen to be in the Lords. If we did not have the noble Lord, Lord Holmes, we would struggle to deal with many of the issues around digital assets and the revolution that is taking place. We have no system of ensuring that, in any part of the parliamentary process, there is the capacity to get to the relevant pieces of information, understand the underlying issues and play the role that Parliament should be playing—whether at committee level, with a Special Standing Committee, or as associated with the passage of a piece of legislation. None of that can be done without genuine, adequate and well thought-through information.
Looking at other Parliaments around the globe, in the US, the Senate and Congress have vast numbers of staff available to make sure that those who represent the voice of the people are truly informed in great detail with proper understanding of the articles that are before them and the regulations that they seek to uphold or overturn. We lack this here. We are still an amateur body, which is not appropriate for a modern society. This is a very significant change, but it must be a change in the right direction. From these Benches, we very much support it.
Baroness Neville-Rolfe (Con)
My Lords, we support the principle behind this amendment. It follows the same broad logic as the amendment tabled by my noble friend Lord Bridges. If the financial regulators are to exercise very significant powers, there must be a proper mechanism through which they can be evaluated and held to account.
This amendment seeks to require the FCA, the Bank of England and the PRA to establish offices for regulatory evaluation. Those offices would review the regulators’ actions, including rule-making, supervision, monitoring and enforcement. Only the changes to rules are currently considered by the cost-benefit analysis panels. The offices would be led by directors with a degree of independence from the boards and executive structures of the regulators themselves. They would report regularly to the Treasury and to relevant parliamentary committees. My noble friend Lady Noakes quotes an interesting precedent of such arrangements at the World Bank, the IMF and the European Investment Bank—all long-standing pillars of the international economic community.
It is good to welcome the noble Lord, Lord Vaux of Harrowden, to the debate, but this amendment raises very much the same issues as those that we discussed last Wednesday—at col. 501GC in Hansard, for those who were not present—with regard to the amendments from my noble friend Lord Bridges and the noble Baroness, Lady Bowles. I was pleased to hear that the Minister has agreed to reflect further on the issues raised and to meet, with the Economic Secretary, the Financial Services Regulation Committee later this week. I look forward to the results but, in the interests of time, will not repeat what I have already said on the subject.
All these amendments raise a fundamental point. We are placing great trust in the regulators. That trust must be matched by transparency, evidence and accountability. Today’s cross-party amendment provides another route for the Minister to consider.
Lord Stockwood (Lab)
My Lords, I thank the noble Baroness, Lady Noakes, for notifying us during the debate last Wednesday that this amendment would be tabled. I reiterate that the Government share the view that accountability of the regulators is of great importance. This is why the Government have formalised biannual performance reviews for the regulators and other reporting mechanisms designed to support scrutiny and oversight. As the noble Baroness noted, the Bank of England already has an independent evaluation office which assists the Court of Directors in meeting its statutory responsibility to keep the performance of the bank under review.
Baroness Noakes (Con)
My Lords, I thank all noble Lords who have taken part in this short debate. I know that it is, in part, a repeat of debates we have held already in Committee, but it is bringing together such an important issue, which is the strength of the accountability mechanisms for the regulators. The Minister outlined the things that exist at the moment. I think I explained that the Independent Evaluation Office in the Bank does not do very much, although what it does is actually very interesting: its report on the secondary competitiveness and growth objective was a good piece of work.
Within the FCA there is no visibility, so anybody involved in external accountability of the FCA would know none of it, with the possible exception of the National Audit Office reports. The National Audit Office, as noble Lords know, will do those value-for-money reviews only very infrequently, and I am not sure that the one the Minister referred to would have had any impact on the work of the Financial Services Regulation Committee had we taken it into account.
I will not labour the points now, because obviously we are going to have more substantial discussions this week in the Financial Services and Regulation Committee, and of course I am sure there will be discussions when we get to Report, and I look forward to any other discussions that we have before we get to Report in the autumn. With that, I beg leave to withdraw.
Lord Stockwood
Member’s explanatory statement
This amendment, and my other amendment to this clause, would ensure that both clauses 27 and 36 can be commenced to amend one list in section 66A of the Financial Services and Markets Act 2000 while preserving the final “or”.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
I put on the record that parliamentary counsel has advised that this amendment and all the other government amendments in this group are all technical amendments. If the noble Baroness’s objection is based on the fact that she believes that an all-Peers letter should have been sent for a handful of technical amendments, then that is not normally the case. However, if she wants to object, we will not move them.
Baroness Noakes (Con)
The Minister and I had a meeting on this last week, so I am surprised that he is raising the issue today. I notified on Friday that I would be continuing the line that I had taken on the first Committee day.
Lord Massey of Hampstead
“Appointed representatives: impact assessment(1) Before any provision of this Act relating to the appointed representatives regime comes into force, the FCA must conduct and publish an impact assessment of the effect of those provisions on—(a) the number of principal firms choosing to maintain appointed representative relationships,(b) the total number of appointed representatives operating in the United Kingdom,(c) consumer access to regulated financial advice, with particular reference to consumers with modest investable assets who may be dependent on appointed representatives as their primary source of regulated financial advice, and(d) the viability of smaller principal firms for whom the costs of compliance with the new senior manager function requirement for appointed representative oversight may be disproportionate relative to the revenue derived from appointed representative relationships.(2) The impact assessment required under subsection (1) must—(a) have regard to the existing contraction of the appointed representatives population,(b) include a quantitative assessment of the likely further reduction in appointed representative numbers attributable to the provisions of this Act, and(c) assess the consequent effect on the availability and accessibility of regulated financial advice to retail consumers.(3) If the impact assessment concludes that the provisions of this Act are likely to result in a material reduction in consumer access to regulated financial advice, the FCA must publish proposals for mitigating measures before those provisions come into force.”Member’s explanatory statement
This amendment calls for an impact assessment to ensure that the measures in this Act do not lead to a large drop in the number of appointed representatives who often provide services to smaller clients thereby promoting financial inclusion.
Lord Massey of Hampstead (Con)
My Lords, I should again declare my interest as chairman of Canaccord Genuity Wealth Management, as set out in the register of interests, although I should also state that Canaccord has no appointed representatives, which is the subject of this amendment.
I do not oppose these reforms in principle, although we should recognise that in Clauses 24 to 28 and in other measures we are adding significantly to the regulatory burden of member firms. It can certainly be argued that there is a case for greater oversight of appointed reps, as too many principal firms have historically taken a light-touch approach to supervising the firms acting in their name. Where that has gone wrong, consumers have borne the cost. However, regulation of this kind is always a question of balance, and my purpose in moving this amendment is to ask whether the Bill has struck that balance correctly.
By way of background, this part of the financial sector, affecting mostly retail clients, is surprisingly large, and its fortunes bear directly on financial inclusion, a subject on which the Committee shares a common concern, mindful, as we all are, of the advice gap. The numbers are meaningful. There are approximately 34,000 appointed representatives, according to the FCA, and they generate £11.1 billion in regulated revenue and a further £27 billion in non-regulated financial services revenue, so some £38 billion in total is running through this part of the market. The number of appointed reps fell by 12% in the 3.5 years from 2022 to 2025, but there was a more pronounced fall in the numbers of principal firms—that is, those that appoint representatives. That population has fallen by 26% over the same period, so we are seeing quite a decline in participation in this space.
Why does that matter? Appointed reps are overwhelmingly small firms, often sole traders, regionally based, who work closely with smaller clients. They cannot afford the administrative and compliance burdens of larger firms, hence the need to operate under their regulatory umbrella. They are a significant channel through which smaller clients can access the markets and receive highly personalised service and advice. I am not sure we want this part of the business to be under threat of more serious decline as an unintended consequence of some provisions in the Bill.
Clause 24 introduces a new discretionary FCA gateway before a firm may act as a principal at all. Principal firms will now have to seek specific approval to have appointed reps, and if they enter the business—this is an important point—the FCA can remove their permission at its discretion for vague reasons. Alongside that, the FCA will gain the power to create a bespoke senior management function specifically for AR oversight, layering on a new form of personal regulatory liability to firms taking on ARs. ARs will now be brought into scope of SMCR and will therefore be subject to misconduct rules, so principal firms will have to carry out fit-and-proper tests on ARs, as they do now for their own employees. Furthermore, the compulsory jurisdiction of the FOS is now extended to ARs, which means that principal firms will be held responsible for complaints against ARs in most circumstances. These are significant new duties that represent potential liability risk and a lot of additional cost to principal firms.
We should bear in mind that some of these principal firms are not large organisations, and they may find these new exposures quite onerous, which in turn might render the economic risk-reward of having ARs less attractive. Overall, the clear direction of travel here is to have fewer but larger principal firms. Indeed, this might be the FCA’s agenda for this part of the business.
Amendment 144A calls for the FCA to look before it leaps. It calls for an assessment of the impact of the new rules on the number of principal firms, the number of appointed reps and, most importantly, consumer access to advice, particularly for those on modest means, and the viability of smaller principal firms.
I am not necessarily asking the Government to reverse course, but these measures represent a significant increase in regulatory burden and there is no getting away from that. I am asking for the regulator to measure the impact of what it is doing before the provisions take effect, and to bring forward mitigating proposals if the impact on consumer access turns out to be material. Given that the FCA’s own data already show a firm population in genuine retreat and the implications for the advice gap, this seems to be a modest, proportionate and uncontroversial request. I beg to move.
Baroness Lawlor (Con)
My Lords, I will say a few words in support of my noble friend Lord Massey’s amendment. We should not forget that many of these small firms coming into the market are to be valued in Britain’s highly competitive industry—until there was too much regulation, perhaps—and we rely on them. They are what distinguishes the UK’s financial services historically. From the 16th century on, the growth of financial services and the City of London depended on small people coming together to provide for a niche in the market that people wanted.
If we continue to put too much burden on these small firms, they will not emerge. We have heard from my noble friend Lord Massey how important they are, sometimes locally. They are small firms which meet a need, so it is a very good idea to have an impact assessment of what the costs will be for ARs before the law comes into operation, for the competitiveness of the UK’s sector.
Lord Reay (Con)
My Lords, we support the questions that this probing amendment is asking. My noble friend Lord Massey of Hampstead has put forward a sensible and important amendment, because it asks the Government and the FCA to consider the practical effects of the Bill’s changes on appointed representatives before those changes are brought into force.
This model is used widely across financial advice, mortgage broking, insurance distribution, wealth management and consumer credit. It is particularly important for smaller advisory businesses which may not have the scale, resources or compliance infrastructure to seek direct FCA authorisation themselves. There are good reasons why businesses use this model. It can reduce regulatory costs, allow faster market entry and give smaller firms access to compliance expertise, training and regulatory support. It can also allow advisers to spend more time serving clients, rather than navigating the full cost and complexity of direct authorisation. That has real consumer benefits.
Many appointed representatives are small local firms or regional advisory practices. They often serve clients who may have more modest assets and need mortgage advice, pension advice, insurance advice or investment guidance, but who may not be attractive to larger firms focused on wealthier clients, so we should be careful. If the effect of the Bill is that principal firms face significantly higher costs or liabilities, some may reduce their appointed representative networks or withdraw from the model altogether. That could mean fewer advisers, less competition, less local provision and reduced access to financial advice, particularly for retail customers with smaller portfolios or less complex needs. That is the concern which Amendment 144A seeks to test.
That assessment would consider the number of principal firms likely to continue AR relationships, the overall number of appointed representatives, the effect on consumer access to regulated financial advice, and the impact on smaller principal firms, whose compliance costs may be disproportionate. That seems to me to be a reasonable thing to ask. The policy objective should be to improve standards and reduce harm, without undermining a model that supports competition, market entry and access to advice.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Lord for raising the importance of ensuring that measures to make the appointed representatives regime safer do not undermine the benefits provided by that regime. This amendment would require the FCA to publish an impact assessment before the measures can take effect.
I am happy to assure noble Lords that the measures have already been assessed as part of the impact assessment completed for the Bill. That concluded that the measures for appointed representatives should result in a net benefit of £108 million over the next 10 years. Before implementation, the FCA will also need to publish proposals for new rules, including on the approach to bringing appointed representatives within the senior managers and certification regime. FSMA already requires the FCA to publish a cost-benefit analysis when it proposes new rules; this analysis may be scrutinised by the independent cost-benefit analysis panel to ensure that it accurately captures the costs and benefits that are likely to result.
I also want to provide some reassurance on the introduction of the senior management function within principal firms responsible for overseeing appointed representatives. The FCA will have the flexibility to apply the senior management function in a proportionate way; it will not be obliged to require this of every principal firm, and may judge that it is not proportionate for smaller principal firms.
The Government share the objective of ensuring that we have a safer regime that does not undermine the benefits provided by appointed representatives. That is why the approach to implementation is designed to minimise disruption and cost to firms, and will be subject to further consultation and cost-benefit analysis by the FCA. I therefore ask the noble Lord to withdraw his amendment.
Lord Massey of Hampstead (Con)
I thank the Minister for his response and take reassurance that some of the measures that I raised have been dealt with already by the FCA, as it has—hopefully—assessed the impact of these quite significant changes, which, as I mentioned at the beginning, do add to regulation, rather than taking away from regulation. I also thank my noble friends for supporting this amendment. I beg leave to withdraw the amendment.
Lord Stockwood
Member’s explanatory statement
This amendment would make section 55AA(4) of the Financial Services and Markets Act 2000 consistent with section 55A(3) of that Act (as amended by this clause).
Lord Wilson of Sedgefield (Lab)
Can I just ask the noble Baroness, Lady Noakes, on that basis—parliamentary counsel has advised that these are technical amendments, and therefore that Peers’ letters do not need to be sent out—does she not agree with the parliamentary counsel?
Baroness Noakes (Con)
I am merely keeping to what I said on the first Committee day.
Baroness Neville-Rolfe
“Review of notification arrangements for previously approved senior managers(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report on whether the new notification framework for senior manager appointments could be used in cases where an individual has already been approved for the same or a similar function, including within the same group.(2) In preparing a report under subsection (1), the Treasury must consult—(a) the Financial Conduct Authority,(b) the Prudential Regulation Authority, and(c) such other persons as the Treasury considers appropriate.(3) The Treasury must publish the report.”Member’s explanatory statement
This probing amendment would require a review of whether the new notification framework for senior manager appointments could be used in cases where an individual has already been approved for the same or a similar function, including within the same group.
Baroness Neville-Rolfe (Con)
My Lords, Amendment 146, in my name and that of my noble friend Lord Altrincham, is a modest and probing amendment. It follows the discussion we had last week on speeding up the senior management and certification regime. It does not seek to change the regime immediately. It would require the Treasury to carry out a review and publish a report within 12 months on whether the new notification framework for senior manager appointments could be used where an individual had already been approved for the same or a similar function, including within the same corporate group.
The amendment echoes my noble friend Lord Howard of Rising’s amendment on a fast-track authorisation process for applicants who have been authorised before, but it would look at how that was working in practice a year after the Act came into effect. The Minister gave a hint that he was sympathetic to my noble friend Lord Howard and would be talking to the FCA about this, so I am hoping we can make some progress on this amendment.
We have heard from the industry that there are several problems with the SMCR regime. One concern is that the regime was originally intended to apply to a relatively limited number of senior people within a firm. Over time, however, roles have become more complicated, responsibilities have overlapped and some organisations have ended up needing a much larger number of people to receive SMCR approval. Regulation should not make legitimate business harder to do and should not slow down sensible appointments where there is no obvious additional risk, yet that is too often the practical effect of the regime as it stands.
The specific issue is what has sometimes been described as SMCR passporting. Where an individual has already been approved, has a strong regulatory track record and is moving into a genuinely comparable role, it seems sensible to explore whether a streamlined notification process could be used. That would have several advantages: it would reduce duplication, it could speed up appointments, it could reduce costs to firms, it could make it easier for groups to move experienced people into appropriate roles and it could allow regulators to focus their resources on genuinely new, higher-risk or more complex appointments. That is the point of the amendment. It does not prescribe the answer. It asks the Treasury to review the position, consult the FCA and the PRA and other relevant parties and report back to Parliament.
If we want the UK to have a regulatory system that supports growth and competitiveness, we need an approval process that is rigorous but also efficient. We should not require firms to repeat the same process unnecessarily where the regulator has already assessed the individual and where the new role is substantially comparable. I would therefore be grateful if the Minister could give us some reassurance on this important matter and agree that an ex post review could be a helpful way of ensuring the direction of travel that I know we both want. I beg to move.
Baroness Kramer (LD)
My Lords, I am always in favour of trying to provide streamlining, and this amendment offers a common-sense approach to that. However, an issue that I want to take up with the noble Baroness, Lady Neville-Rolfe, is that the focus of the FCA should always be on new hires, not previous ones. The ongoing fit and proper process is crucial, particularly if we are going to have lighter-touch regulation as people move from one position to another, but that ongoing process is critical. Perhaps the Minister could expand on that because I am not quite clear about how all the various changes in FCA rules change what has been an annual review process but now gives more flexibility in what that means.
I shall give some examples. I am not sure that when Sir Fred Goodwin—he was not “Sir” then, obviously—was appointed as chief executive of RBS anyone recognised that he was going to get caught up in what I think most people would describe as an addiction to completely irrational acquisitions, which eventually led to the collapse of a major bank. I am not sure that when Jes Staley was hired to be CEO of Barclays people were aware of the significance of his extensive involvement with Epstein. I am not sure that when the Reverend Paul Flowers was approved as chairman of the Co-operative Bank people were conscious that he was potentially someone who would become seriously addicted to and affected by a number of drugs, notably crystal meth. In other words, there is an ongoing process that is critical; it should not be only a one-time process. I hope that will be absorbed into the thinking if this amendment moves forward. The ongoing process is vital. Fit and proper is not a one-time-only process.
Lord Massey of Hampstead (Con)
My Lords, I rise quickly to support this amendment, which is exactly the sort of streamlining amendment we are looking to achieve in this Bill. I politely take issue with the remarks of the noble Baroness, Lady Kramer, on people such as Fred Goodwin, Jes Staley or the Reverend Flowers. The FCA would not have picked up those problems; they all emerged much later. We should give credit to member firms for being able to judge who they should be hiring. If they are already licensed, why would notification not be sufficient?
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness, Lady Neville-Rolfe, for tabling this amendment. The Government agree that the regime should operate more proportionately where that can be done without undermining accountability—in fact, that is what the Bill aims to do. The core objective of these reforms is to reduce unnecessary regulatory and administrative burdens for firms, while preserving the accountability standards that underpin the regime. The changes will help to deliver the Government’s and the regulators’ ambition to reduce burdens from this regime by 50%, while retaining its core benefits.
As set out in the impact assessment for the Bill, the reforms to this regime alone are expected to reduce administrative burdens on the sector almost £600 million over 10 years. The Bill is already speeding up the target for the regulators to make these decisions. As I said in the debate last Wednesday, in Q4 of 2025-26, 50% of senior manager cases were determined within 19 days and over 99% were determined within the new target of two months.
The Bill moves to a more flexible system, led by regulators. Rather than requiring pre-approval for all senior managers, it allows the FCA and PRA to decide which senior management functions require approval and which can simply be notified to the regulators. The regulators will not take this decision without direction. Schedule 3 sets out the factors the regulators may use when designing the notification approach. These include whether an individual has previously been approved for a different role. The detailed operation of the new framework will be taken forward by the regulators through their rules, which are already subject to the statutory consultation and parliamentary scrutiny mechanisms. The regulators already operate a proportionate application process for individuals applying for a similar senior manager function to the one they are already approved for, including when within the same group. This usually allows for a faster and more targeted assessment.
I note the question from the noble Baroness, Lady Kramer. I will pick that up with the FCA. The continued accreditation assessment of senior managers needs to be something that is reported back on; she makes an important point about that.
Finally, I assure the noble Baroness, Lady Neville-Rolfe, that the Government will continue to engage closely with the regulators as they implement these changes, to ensure that the regime operates as intended and delivers a more proportionate approach in practice. I therefore ask her to withdraw the amendment.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to my noble friend Lord Massey for his support and to the Minister for his assurance that administrative burdens will be reduced by these changes. Of course, quite a lot of that is down to the dropping of the certification regime, which we have welcomed. Individual cases can make for bad rules. I think Fred Goodwin was approved—or not approved—before the SMCR regime came in. I am confident that our regulators learn from their mistakes in these matters of appointments; that is one of the features of having a proper, professional regulator. But I remain concerned that the system can still create delay and duplication. Delays affect hiring, promotion, succession planning, business continuity and the ability of firms to operate effectively in a sector where we are trying to support growth and competitiveness. I cannot emphasise that point often enough.
I hope that the Government will continue to look seriously at whether there is scope for some form of SMCR passporting or a more streamlined notification process in cases where a person has already been approved, has a good regulatory track record and is moving to a similar role. I and my noble friend Lord Howard of Rising would like to see progress before Report, ideally in a form that makes my proposal for a review redundant, but for now I beg leave to withdraw the amendment.
Baroness Noakes
Member’s explanatory statement
This amendment requires the Treasury to consult the regulators about regulations which designate countries or territories for recognition.
Baroness Noakes (Con)
My Lords, in moving this amendment, I will speak also to Amendment 153 and the Clause 37 stand part notice.
I am instinctively suspicious of Clause 37 because I think that the best people to judge whether overseas financial services firms should be able to operate in the UK, and to determine the terms on which they operate, are the regulators. The Bill hands major judgments to the Treasury, which means that they are likely, at least in part, to be political judgments. Although new Section 408A requires the Treasury to have regard to various things, that list is not exclusive, so there is nothing to stop the Treasury taking into account factors other than those listed in new subsection (2). Decisions could be made, for example, in pursuit of foreign policy aims against a wider background of international relations in relation to the EU reset. Financial services could also be traded away in the context of international trade agreements. Even if the Treasury sticks with the list of “have regards” in new subsection (2), that subsection has no hierarchy of criteria. Financial stability is on a par with international competitiveness and growth.
This is in stark contrast to the regulators, where international competitiveness, growth and competition are secondary objectives that cannot override their core objectives. I fully support the Government’s quest for economic growth and the pursuit of international trade agreements but, under new Section 408A, the Treasury could set aside any concerns about the integrity and stability of the UK’s financial system because it favours facilitating international competitiveness and growth. Is this really what the Government are trying to enable?
We know that some countries, such as China, seem to have technical compliance with many international financial services standards although, in practice, the degree of state control and the weakness of local regulators leave a lot of questions to be answered about the organisations in their financial services sectors. We know that the Treasury wants more trade with China. Will it let Chinese financial services firms freely into the UK in order to facilitate that? How will the Treasury ensure that it gets a good deal for British financial services firms? Some countries, such as India, give the appearance of allowing foreign firms to operate in them. However, in practice, India places many hurdles in their way, and many organisations give up the struggle after a while. Does the Treasury really have the granular understanding of what is happening in these countries?
My own view is that it would be dangerous to let the Treasury loose on this area, and that the independent financial services regulators are the best people to determine who can operate in the UK and on what terms. This is why I oppose Clause 37 standing part of the Bill. However, I have heard from some in the City that they welcome this new overseas recognition regime, because the regulators do not prioritise negotiations with their foreign counterparts and there is little faith that they ever will. That has a ring of truth to it. The FCA has far too many other things to do, and the Bank and the PRA are exceedingly cautious. For that reason, I have tabled Amendments 152 and 153 in order to emphasise the important role that the regulator should have in the process.
Amendment 152 would add a requirement for the Treasury to consult the regulators when it uses the power under Section 408B. As currently drafted, the Treasury has to consult the regulators only if it exercises the power to recognise overseas firms to operate in the UK under Section 408A. The Treasury does not have to consult the regulators if it uses the Section 408B power to recognise overseas territories. My amendment poses the question: why not? The regulators are likely to know more about financial services and regulation in the overseas countries than the Treasury.
Amendment 153 is aimed at improving the information given to Parliament when the Treasury brings forward regulations to use these new powers. It would require the Treasury to publish any information or advice received from the regulators in connection with the use of the powers. As I mentioned, the Bill requires the Treasury to consult the regulators on only one of the two powers, but then the Treasury could completely ignore the information or advice that it receives from the regulators and Parliament would be none the wiser. This should be more transparent. The Treasury must be prepared to say why it has ignored or overridden the advice that is received, if that is indeed the case. It must therefore be prepared to share any relevant information with Parliament.
We all know that secondary legislation processes give Parliament no effective power over the Executive. That does not mean, however, that Parliament can be ignored. I believe it is necessary to force a bit of daylight into the process and not tolerate the suppression of relevant information from Parliament. Consistent with the stance I have taken throughout this Committee, if the Minister wishes to move his Amendment 154, I shall call, “Not content”. I think even the noble Lord, Lord Wilson, will accept that this amendment is not a small technical amendment.
I had hoped that the Treasury would have organised an all-Peers letter by now. It has had two weeks to do so since I first raised the issue. I was informed on Friday that the Government think it is okay just to write to the Front Benches on some government amendments. Since I was the only Peer who had tabled amendments in relation to Clause 37, I believe it was, at a minimum, discourteous not to have written to me at the same time.
I do, however, stick to my broader point that the whole House should be informed. The scrutiny of Bills is not something that belongs in a cosy club of Front-Benchers. Someone needs to stand up for Back-Benchers and that is what I am doing in this Bill. I beg to move.
Lord Vaux of Harrowden (CB)
My Lords, I will be very brief. I am sympathetic to ensuring that the overseas recognition regulations are as pragmatic and seamless as they can be to enable easier international competition. But I have quite a lot of sympathy with the comments of the noble Baroness, Lady Noakes, about giving these powers exclusively to the Treasury.
I want to ask one question of the Minister. New Section 408A(2) sets out a list of areas that
“the Treasury must have regard to the importance of”
when making regulations. As an aside, that is quite odd wording; normally it is “have regard to”. I am still not sure I understand what difference
“must have regard to the importance of”
makes to the meaning. Maybe the Minister might explain that. New Section 408(1) does something similar but in a slightly different way. It seems that one area is missing from the lists of “have regards”: the question of economic crime, particularly anti-money laundering and the transparency of ownership in the relevant jurisdictions. Can the Minister say whether he agrees that those are important and explain why they might be missing from the list?
I will just finish with something I should have said earlier today, given that I think we are finishing early and the Minister is going to get some of his evening back: I wish him a happy birthday.
Baroness Lawlor (Con)
I endorse the concern of the noble Baroness, Lady Noakes, about the political pressure that the Treasury will be under to recognise certain countries. Without adequate scrutiny, wider advice and deep analysis, the problem of overleveraging in some banking systems, despite them appearing perfectly respectable, would expose the UK and its financial sector to the dangers of debt and contamination.
I therefore have doubts about the economic implications of the Treasury making these calls on account of political reasons. We see this all the time, whether on international agreements—I sit on that committee—or on European affairs, whose committee I previously sat on. There is constant pressure by Governments to sign treaties that are rather bad for the UK and its various sectors, including financial services. I would have concerns if there were no adequate scrutiny and no proper advice taken on whether such recognition is a good thing for our systems.
Baroness Kramer (LD)
My Lords, I will speak briefly. As the Committee will know, I have expressed before my concern about heading towards a lowest common denominator. The constraints on the engagement of the regulator and Parliament in a process of recognition of overseas regimes is crucial. It provides transparency and challenge, both of which are constantly necessary. So these are well-drafted amendments from the noble Baroness, Lady Noakes.
I want to go a little further. The noble Lord, Lord Holmes of Richmond, is not in his place, but he has tabled Amendment 164D, which would go further in seeking to instruct the Secretary of State to establish memoranda of understanding with a whole series of regulatory authorities. I have significant concerns about that, without the same set of constraints. We must be aware that, at the moment, there is fragmentation in the world in which we are living. International agreements are often treated as “pick and mix”. I object when we do that in the UK, but it is certainly a behaviour that we are watching in the United States at all times. We can see it with the development of AI and the various steps that the White House is taking. It is hard to work out whether or not it will go for AI licensing. A memorandum of understanding that passively accepted whatever the United States decided was the appropriate standard would trouble me hugely.
This is a very good set of amendments. Although the noble Baroness, Lady Noakes, and I often take very different positions on regulation and the primacy of financial stability, in this instance, she is absolutely right. There is nothing more troubling than reading all three objectives be put on a par. That has been my great fear. Anyone looking back on what happened in the 2008 crash will see that a focus on competition and growth without any focus on financial stability led to a crisis that I suspect nobody in this Room wishes to see again.
Baroness Neville-Rolfe (Con)
My Lords, as this is the last group, I too wish the Minister a very happy birthday. He will be glad to know that, on this side, we think this is an important part of the Bill. The overseas recognition regime, which would replace the arrangements put in place as we left the EU, could provide a valuable mechanism for recognising overseas regulatory regimes and allowing certain firms, services or market infrastructure from other jurisdictions to access the UK market without having to duplicate regulatory requirements unnecessarily.
Lord Stockwood (Lab)
My Lords, I thank noble Lords for their warm regards. The fact that this is the most attractive way to spend my birthday probably tells them something about how my life has changed in the past 11 months. I will turn first to Clause 37 and explain why it should stand part of the Bill. I will then cover the amendments, including the government amendment.
The UK is a truly global financial services hub. We are the largest global net exporter of financial services, totalling £103 billion in 2025, representing half of the UK’s services export surplus. Excluding the US, UK financial services exports in 2025 were greater than those of the rest of the G7 combined. Different counties have different rules for the same financial activities. As such, many countries have frameworks to recognise where rules are comparable to their own. For example, the EU has equivalence regimes, and the US has comparability determinations.
At EU exit, the UK assimilated more than 270 EU equivalence decisions across 40 EU equivalence regimes. However, the UK has no way to grant these kinds of decisions except where we have inherited that power from the EU. In new areas of regulation, such as stablecoins, the Treasury currently has no ability to create recognition regimes nor, consequently, to recognise overseas jurisdictions where they have high standards and our firms want to do business.
Clause 37 enables the Treasury to make new overseas recognition regimes. Creating these regimes is done through the affirmative procedure, meaning that no regime can be created without debate in Parliament. Designation under those regimes must then be made by regulations, with the evidence base clearly set out before Parliament each time.
A number of noble Lords, including the noble Baroness, Lady Noakes, and the noble Lord, Lord Vaux, asked me how the “have regards” that the Government must consider will function, and why they have been drafted in the way they have. I have been told that this is a complex piece of drafting, so I will write to them to explain the “have regards” in more detail and why the Government have taken the approach that we have.
Turning to the amendments, there are established processes in place that support the creation and operation of recognition regimes. I assure noble Lords that the points raised in Amendments 152 and 153 speak to matters for which current processes already exist, which support clear and balanced scrutiny of these regimes. The Treasury will always, as part of its designation process, summarise the evidence that it has received and considered in relation to other jurisdictions and their regulatory frameworks. That includes advice received from the UK’s financial services regulators.
The Treasury published, in July last year, guidance on overseas recognition and a memorandum of understanding with the regulators detailing the role of regulatory advice in the decision-making process for recognition designations. Within those documents, the Treasury has already committed to seeking advice from the relevant regulators in all but exceptional circumstances.
On Amendment 164D, tabled by the noble Lord, Lord Holmes, and spoken to by others, the Government recognise the potential benefits of working towards recognition arrangements on crypto assets with compatible jurisdictions. As I have mentioned, this supports the case for the Treasury to have the powers in Clause 37. However, the Government have the tools they need to be able to respond appropriately to international regulatory developments to facilitate the UK’s access to global markets and vice versa, while ensuring that consumers are adequately protected. These tools include the powers in Clause 37 alongside the existing power to create mutual recognition agreements that was introduced in the Financial Services and Markets Act 2023.
I reassure the noble Lord, Lord Holmes, that this does not reflect any desire on the part of the Government to be insular in the development of crypto asset regulation. The UK continues to play an active role in the development of international standards for crypto assets, including through the financial stability board and the work of the International Organization of Securities Commissions. The Government also remain committed to working closely with international partners through multilateral fora on our approach to crypto assets.
I turn now to the amendment in my name. When the Bill gains Royal Assent, there will already exist a number of overseas recognition regimes created using existing powers inherited from the EU. This amendment is a transitional provision that enables the Treasury to restate the existing regimes within the new overseas recognition regime framework. The power is narrowly framed; it can be applied only to regulations listed in a specific schedule to which the overseas recognition regimes are currently added once they are in force, and it can be used only to create substantially the same effect as the existing regulations. This is essentially a tidying-up exercise. Without this amendment, overseas recognition regimes created before and after Clause 37 comes into effect will be rooted in different legislation. As my noble friend Lord Wilson said, parliamentary counsel has agreed that this amendment is minor and technical. However, I understand that the noble Baroness, Lady Noakes, objects to this amendment, so I will not move it.
I thank noble Lords for this debate, and I hope that I have sufficiently explained the Government’s intentions. I ask the noble Baroness to withdraw her amendment.
Lord Vaux of Harrowden (CB)
The Minister has not answered the question I asked about why the “have regards” do not include the economic crime issues of anti-money laundering and transparency of ownership. If he wants to write on that, that would be fine.
Baroness Noakes (Con)
Before I decide what to do with my amendment, I ask the Minister—because I may not have been paying attention—whether he explained why there is a requirement to consult the regulators for powers under new Section 408A but not under new Section 408B.
Lord Stockwood (Lab)
Again, I will write to the noble Baroness to clarify that.
Baroness Noakes (Con)
The Minister is stacking up rather a lot of letters that need to be written.
I thank all noble Lords who have spoken in this debate. It raises important issues. The Minister said, in relation to consultation, that the Treasury would summarise the evidence. That is not the same as being transparent about the advice from regulators. Although I am quite happy for the Treasury to summarise most other evidence on any consultation it undertakes, I think the regulators are a special case here. However, I will read Hansard and consider what, if anything, I will do with this topic before Report. Before sitting down, I too add my birthday wishes to the Minister. I beg leave to withdraw the amendment.
Financial Services and Markets Bill [HL]
Wednesday 8th July 2026
(2 weeks, 5 days ago)
Grand CommitteeRead Full debate Financial Services and Markets Bill [HL] 2026-27 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 5-VI Sixth marshalled list for Grand Committee - (7 Jul 2026)
Baroness Neville-Rolfe (Con)
My Lords, our amendments in this group concern the future of the bank ring-fencing regime. I will start by setting out clearly the position that we have reached as the Official Opposition. Through our diagnostic work, we have found a consensus that the bank ring-fencing regime is no longer fit for purpose. It adds costs to banks and their customers and it has been superseded by other rules since its introduction. A regulatory regime should not be preserved simply because it exists. It must continue to justify itself against present-day risks, tools and costs. In our view, the ring-fencing regime no longer does so. The next Conservative Government would repeal the post-global financial crisis ring-fencing regime, bringing the United Kingdom more closely into line with other international jurisdictions. Amendment 160A reflects that policy.
It is worth reminding ourselves what ring-fencing is. The regime was created through the Financial Services (Banking Reform) Act 2013, which amended FSMA 2000. The implementing regulations and orders came into effect in 2019, more than 10 years after the onset of the global financial crisis. At its core, ring-fencing is the structural separation of certain retail banking activities from activities normally conducted by international wholesale investment banks. In practice, that means a separate legal entity, with restrictions on what it can do and how it can interact with the rest of the banking group. Retail and small business deposit-taking is placed inside the ring-fence, while certain other activities must be conducted outside it.
The regime was introduced for serious reasons. The Parliamentary Commission on Banking Standards, convened after the financial crisis, identified three broad objectives: to make it easier to deal with failing banks without taxpayer-funded solvency support; to insulate vital banking services used by households and SMEs from problems elsewhere in the financial system; and to curtail implicit government guarantees, thereby reducing risks to public finances and incentives for excessive risk-taking.
Since ring-fencing was designed, the wider regulatory landscape has changed profoundly. We now have a much more developed resolution regime. We have recovery and resolution planning. We have operational continuity arrangements in resolution. We have stronger capital and liquidity requirements. We have the leverage ratio, the liquidity coverage ratio and the net stable funding ratio. The Bank of England, the PRA and the FPC have a broad toolkit for reducing the risk of bank failure and dealing with failure if it occurs. Moreover, we have sounder management of banks as a result of the senior management regime.
That is precisely the point that we wish to highlight in our amendment. The risks that ring-fencing was designed to address are now addressed through other more modern, more targeted and more internationally coherent tools. The 2022 Independent Panel on Ring-fencing and Proprietary Trading, chaired by Sir Keith Skeoch, reported that the regime has an annual cost to the UK banking sector of around £1.5 billion, which comes from running multiple separate legal entities, duplicating governance systems and raising the cost of capital and lending conducted by non-ring-fenced bodies. This is because large retail deposits inside the ring-fence cannot be used as sources of finance elsewhere in a group to support lending and investment. That review also found that the reduction in the implicit government guarantee and progress in ending “too big to fail” were not attributable to ring-fencing but instead to the development of the UK resolution regime. Ring-fencing is therefore a good example of a broader problem in financial services regulation: rules that are introduced in response to a crisis which then remain in place long after the conditions that justified the change.
We are now left with two regimes that are not aligned in the way that they aim to address “too big to fail”. That adds complexity, cost and burden. It also risks making the United Kingdom less competitive than jurisdictions that rely on resolution, prudential supervision and capital frameworks, rather than structural separation of this kind. Clauses 39 and 40 show that the Government recognise that there is a problem. They seek to make changes to the ring-fencing regime and give the PRA more flexibility over ring-fencing arrangements, but in our view these reforms do not go far enough.
Amendment 160A would repeal Part 9B of FSMA and the core statutory ring-fencing provisions introduced after the financial crisis. It would require the Treasury, the PRA, the FCA and the Bank of England to take the necessary steps to unwind the related rules and guidance. It would require an orderly transition, with attention paid to financial stability, continuity of core banking services and the competitiveness of the United Kingdom. Consumer savings would continue to be protected. Banks would continue to be subject to prudential supervision. Resolution planning would remain in place.
This reform matters for competitiveness. Other major financial centres do not operate a UK-style ring-fencing regime. If UK banks are required to carry costs and structural constraints that their international competitors do not face, that affects the cost and availability of finance. It affects the ability of banks to deploy capital efficiently and it affects the attractiveness of the UK as a place to operate and invest in. It also matters for customers. Regulations that increase costs without delivering commensurate benefit feed through into pricing, service innovation and lending capacity.
If the Government believe that ring-fencing remains necessary, will the Minister explain precisely what financial stability objective it now achieves that is not already achieved through the resolution regime and other prudential rules? Ring-fencing was created in response to a particular crisis at a particular moment for reasons that were understandable at the time. But regulation must evolve. It must be reviewed against current conditions. It must be removed when it no longer serves its intended purpose.
Finally, I would add that whatever changes are made, it is right to have a proper process of consultation with business and stakeholders and a follow-up report to Parliament. That is the purpose of my Amendments 159 and 174.
Lord Pitt-Watson (Lab)
My Lords, if I may respond to that, I had thought until recently that what we were debating was a response to the Skeoch commission established by the last Government, but we have new amendments now, it seems—Amendment 160A and the abandonment of clauses—that are really throwing ring-fencing out. I guess that they are tabled in response to a speech by the leader of the Conservative Party, Kemi Badenoch—a speech underpinned by a policy document from her party. That speech, the policy document and this amendment are not asking to think things through further from the Skeoch report: they have made their minds up. Kemi Badenoch announced that a future Conservative Government will end ring-fencing—definitive end of discussion. That, I believe, would be a bad idea. So did the review by Keith Skeoch, who was commissioned by the Conservative Government to opine on this and whose recommendations we are now trying to take forward.
Worse still, the evidence for Mrs Badenoch’s statement is based on really questionable claims, numbers and Mickey Mouse logic. For example, the claim was that the Skeoch report reckoned that the cost of ring-fencing was £1.5 billion. In fact, the report notes that that figure was presented to the review and that
“it has not been possible to draw a strong conclusion based on aggregating these costs”.
The report recognises that there are some costs to ring-fencing, but notes that that was expected and acknowledged by the Independent Commission on Banking, which said that that would not be a cost to the economy, but rather
“a consequence of returning risk to where it should be—with bank investors, not taxpayers—and so would reflect the aim of removing government support and risk to public finances”.
The policy paper has a Mickey Mouse logic that costs should be placed on the taxpayer, when they should be paid by the banks and the investors in the banks.
We should of course be in favour of reviewing the ring-fencing regime to be sure that it is properly doing its job. This is what Skeoch did and, now, if this Bill follows that report, I ask the Minister to ensure that we are careful with definitions in the implementation. For example, we should ensure that, within the growth allowance, the definitions are very carefully drawn up. We do not in future want the taxpayer subsidising proprietary trading—what many refer to as “casino capitalism”.
Badenoch suggests that her reforms would release £450 billion in capital—another number from nowhere. I know that the noble Baroness, Lady Neville-Rolfe, will not have a lot of time to sum up, but I would be grateful if she might write afterwards on how these numbers have been derived and what reduction in bank equity capital they assume. If these numbers do not stack up, that pulls the rug from under the policy document and the speech that was made by the leader of the Conservative Party.
The policy paper suggests that we should abandon the Financial Ombudsman Service. In this industry, which represents 8% of GDP but attracts 42% of corporate fines, Mrs Badenoch has decided that the front-line institution that protects consumers should be abolished. We could say that this does not matter and that Kemi Badenoch is unlikely any time soon to be Prime Minister, but it should matter to us. As the noble Baroness, Lady Noakes, has pointed out, there is considerable expertise in financial services across all parties in the House. Although we have differences, we are united, I hope, in trying to set a framework for the industry that allows it better to serve its purpose: to serve the outside world; to help get money from point A, where it is, to point B, where it is needed; to keep our money safe; to help us transact; and to help us share risk.
If the Opposition Benches feel mandated to follow the policy documented last month, we have a problem. I could not find a single reference in that document to any input from any consumer group anywhere. It felt like a lobbyist document from the City, but I have talked to at least one lobbyist who said “No, it goes way further than we would ever suggest”.
Baroness Noakes (Con)
In Committee, it is normal to address the amendments and not opposition parties’ policy documents.
Lord Pitt-Watson (Lab)
The amendment has been put to us at the last minute. The points that it relates to have been there for weeks, indeed months, but I would argue that what has triggered the amendment is the speech by the leader of the Conservative Party and the policy document that underpins it. If the noble Baroness thinks, like me, that the policy document is lacking, I would be pleased to hear it because, as she knows, it would abolish the FOS and seek to mandate regulatory changes that come close to invading the independence of the regulator.
Lord Tunnicliffe (Lab)
I rise to speak to the Motion that Clause 40 does not stand part. As I explained at Second Reading, I have no professional knowledge of the banking industry but, because of circumstances, for more than 14 years I have been in this Room talking about the finance industry and doing my best to pretend to understand at least bits of it.
The one thing that I think I bring to this Bill is my long experience of concern about problems of little likelihood, even small likelihood, but with catastrophic results if the risks mature. It is on that theme that I am concerned that we are creating risks. In 2008 we had the crisis. It is now 18 years ago, just long enough for most people to have forgotten it. We had the Vickers review, which we all felt was pretty good, and after that came ring-fencing, and we convinced ourselves that this would solve most of the problems. There were some other things as well. There was the splendid clause that vested criminal responsibility on the boss of a subordinate who committed some criminal offence. Clearly this was too uncomfortable for the City, so it was changed. I led the opposition to the change and failed with a 200-vote tie. Because we were the Opposition not the Government, we failed.
The preparation for my consideration of this ring-fencing issue caused me to read through a lot of stuff. I came to the conclusion that the ring-fencing was not nearly as effective as we had felt it would be at the time, but, in a sense, I was reluctant to be overly concerned about it because I felt that the resolution regime developed by the Bank of England, in which I had personally taken a great interest, would be good enough to pick up the holes in the Bill.
I was comfortable in this position—almost willing to ignore it—until, at Second Reading, the noble Baroness, Lady Kramer, for whom I have immense regard, rather woke me up. I quote her speech:
“Picking up on the point made by the noble Lord, Lord Tunnicliffe—I disagree with him completely—that in the case of resolution, we do not need ring-fencing because we have a resolution regime in place or we can weaken the one because the other exists. Will the Minister be able to look me in the eye and say that he would activate a bail-in bond scheme if a big bank failed? The consequence would be huge financial instability among those who held those bail-in bonds—I am talking about the insurance companies and pension funds. Many would be on the verge of collapse if we ever exercised bailing in those bonds. That is one of the reasons why, in the financial crises that have happened, no Government have ever taken that step”.—[Official Report, 8/6/26; col. 1206.]
I do not have the weight of knowledge to be able to disregard such a statement.
The Minister was kind enough to facilitate a visit to the Treasury and the Bank of England to take me through the bail-in regime. It took four people from the Treasury and four from the Bank of England to try to persuade me that it was in good hands. I came out of that uncomfortable. If one is uncomfortable about a potential catastrophe, one feels that one has to pursue it, I am afraid.
Then one comes up against the mechanisms of legislation; here, I have to give notice of my concerns. If we are going to remove or take away activity from the ring-fencing solution and replace it with the resolution regime, it is important that that is tested much more intrusively than is proposed. I hope to persuade the Minister that, between now and Report, some mechanisms that are convincing to like-minded, fair-minded people have to be put together so that that balance will be achieved.
I was responsible for all sorts of safety, but particularly in the railway industry. You would not be able to do this in the railway industry. If you make a change that is of critical importance, there is a set procedure that must be gone through, and it must be signed off at the highest level. We should recognise that Clause 40 is of that magnitude. It just so happens that, in yesterday’s Times, there was an article that said:
“The Bank of England is planning to loosen rules it brought in to make the financial system safer after the 2008 crisis despite worries about the proposed changes voiced by some of its own officials … The central bank’s financial policy committee announced on Tuesday that it intended to revamp some regulations on the loss-absorbing capital that lenders must hold because it wanted to tackle the ‘unintended consequences’ of its rules and make it easier for banks to lend to households and businesses … Andrew Bailey, the Bank’s governor, insisted the overhaul would ‘make our capital regime more effective, proportionate and better calibrated to the risks in today’s financial system without unduly compromising the safety and soundness of firms’”.
“Without unduly compromising” is not nearly a powerful enough test. The limited test is that the risk should be lowered—as low as reasonably practicable.
We have all sorts of problems in this world, and all sorts of unprecedented things are happening. We have cryptocurrency. Now, I do not understand cryptocurrency; it seems a series of charades to me, but I suppose the purist would also point out that the dollar is a series of charades, because that is the essence of paper money. Nevertheless, things that can go and down up like that are fundamentally dangerous, given how large they are becoming in the banking world.
We also have the unregulated banking area. Without knowing the detail, but from listening to people who know about it talk about it, that seems to be an increasing threat. We also have wars all over the place. If we are moving to a regime where we give up ring-fencing, depending on resolution, we will need to subject it to a stronger set of tests through the processes of this legislation.
Lord Massey of Hampstead (Con)
I support Amendment 160A. I want to start by briefly addressing a couple of issues raised by the noble Lord, Lord Pitt-Watson. Most importantly, I want briefly to quote the conclusions of the Skeoch report. The panel judges that the ring-fence
“is worth retaining at present”
but adds a number of considerations:
“The Panel recognises that the regime’s benefit will likely diminish with time, especially as the resolution regime—designed to ensure the continuation of all critical functions … —is embedded. This is because … UK authorities become comfortable with the viability of the large banking groups’ restructuring capabilities”.
I mention this only because the impression was given—
Lord Pitt-Watson (Lab)
I did indeed talk to senior members of the Skeoch commission before writing my speech, and what I said is completely consistent with the conclusions of the Skeoch commission, which was set up by the previous Conservative Government, as I said.
Lord Massey of Hampstead (Con)
I am just reading the conclusions from the report, my Lords. They make it very clear that the continuation of ring-fencing made sense at the time the report was written, but the commission clearly envisaged that it might not be needed over the passage of time. I also remind noble Lords that Glass-Steagall was abolished some 25 years ago with no detriment to the American banking system. I say this just to make the point that it is not so obvious.
Lord Pitt-Watson (Lab)
I find it difficult to believe that someone has told me that the withdrawal of Glass-Steagall, which took place 13 years before the global financial crisis, had no detriment to the American banking system. As I say, I have read the Skeoch report and discussed it with senior members of Skeoch, and I believe that what I said is entirely consistent with the recommendations that they made to the Government and this House, which is recognised in the Bill.
Lord Massey of Hampstead (Con)
I also draw attention to the abolition of FOS, which the noble Lord mentioned. I draw the Committee’s attention to Amendment 172A, which discusses the changes proposed to FOS. It is to be abolished and replaced with something called the financial adjudication service, which is a broadly similar methodology to give redress to consumers and private clients, in the event of problems with the firms that serve them. While it is a change, it is a reform to FOS with an organisation with a different name, but it is not a straightforward abolition of that very important process. This will be dealt with in that later amendment—not in my name, I might add.
Governments, like some businesses, are very good at locking the stable door after the horse has bolted. Our reaction to 2008 was an example of just that. But we are now 18 years on and the banking sector has been solid during that time. However, as we know, growth has flatlined, despite many years of ultra-low interest rates. I am not suggesting that we are an exception here; there has been a similar experience across most of Europe. But we now have a substantial cost of capital for business to bear, with interest rates stuck at 3.75% and sadly not much prospect of a reduction in the near term.
Baroness Noakes (Con)
My Lords, I have some experience of ring-fencing as, in my capacity as the chairman of the risk committee of a major bank, I oversaw the implementation of ring-fencing. At that time, it was a significant risk to the bank that we would not be in compliance with the ring-fencing legislation and therefore this required considerable oversight.
I am clear that ring-fencing has been a very expensive element of the post-financial crisis reforms. The Skeoch report, which has been referred to, put the upfront cost at £2.9 billion and the ongoing cost at £1.5 billion, which amounts to about £14 billion to date. The noble Lord, Lord Pitt-Watson, tried to undermine those numbers, but, from my experience, I do not doubt that order of magnitude. More importantly, the implementation, and, to a lesser extent, the ongoing element—
Lord Pitt-Watson (Lab)
There were two points, one of which is that the Skeoch report says that the numbers given are not its numbers. The report is clear that whatever the cost of ring-fencing, it is not a cost to the economy—this is what the Vickers report said earlier —and that, by removing ring-fencing, it suddenly becomes a cost to the taxpayer rather than to the bank’s investor. That is the key point that Skeoch is bringing to our attention.
Baroness Noakes (Con)
My Lords, I understand the point that the noble Lord is trying to make, but I argue that the risk of the taxpayer picking up the tab is now considerably lower, which means that it is reasonable to re-examine whether ring-fencing should be an ongoing part of the regime.
I was about to say that, in addition to the cash costs, there was during the implementation, and to some extent on an ongoing basis, considerable diversion of scarce management resource, which will have damaged the banks in a number of ways. My noble friend Lady Neville-Rolfe has registered her opposition to Clauses 39 and 40 standing part of the Bill. I support Clauses 39 and 40 on the grounds that any improvement in the ring-fencing regime is better than none. The flexibility that will come with letting the PRA handle some of the changes via rules is a constructive solution. The PRA is, however, heavily invested in ring-fencing and no one should be under any illusion that the power will be used by the PRA to make significant changes to the regime. That is why I believe that we need to make provision to go further and I support the other amendments in this group.
As we have heard, since the implementation of ring-fencing, the parallel and very expensive requirement to maintain and develop resolution plans has been implemented, and the Bank of England has confirmed that the major banks are resolvable. In addition, bank capital levels are significantly above the levels that they were immediately after the financial crisis and well above regulatory minima. Regulatory capital is expensive and can restrict the ability of banks to lend to support the economy. I am always extremely sceptical about claims that reducing capital requirements on banks will immediately lead to masses of extra lending by the banks—there is some element of truth in it, but the effect is not as great as might be claimed.
We are hugely proud of the robustness of our financial regulation and what we do in the UK is often copied abroad. No one anywhere else in the world has ever copied ring-fencing and that is for a very good reason: it is a very expensive solution to a problem that can be and has been addressed in other ways. That is why I support the amendments from my noble friend, which pave the way for eliminating ring-fencing. It cannot be done away with overnight, so I support the measured approach taken in my noble friend’s Amendment 160A.
Lord Vaux of Harrowden (CB)
My Lords, it has been an unusual experience to have had a debate with two sides to it on the Bill; the Minister must be pleased about that. I am afraid that I sit firmly on the fence—indeed, on the ring-fence. I am in two minds on this issue. Ring-fencing requirements were put in place after the financial crisis for very good reasons. You can argue that they went too far and that, to some extent, they have been overtaken by other regulations and that they perhaps overburden and create some restrictions on the banks. But, in the Bill, the Government recognise that.
On the other side of the equation, the economy and the banking system are currently facing a whole range of threats, which are arguably greater than have been faced at any time since the financial crisis in 2008. We have the private credit situation and the impacts of AI, to name just a few. Is it really the right time to remove ring-fencing entirely?
I am also not entirely convinced by the argument that removing ring-fencing would have that much impact on domestic lending. Domestic lending is inside the ring-fence. In fact, you could argue that it would have the opposite effect, as banks could then use deposits for more risky non-lending activities. Therefore, I confess that I find that argument unconvincing.
I am open-minded, but I am more minded to support the government proposals to loosen the ring-fencing rules and introduce some flexibility to them. I do not think I am ready to support complete removal at this stage. However, I am drawn to Amendment 159, which requires a consultation and assessment to take place before the proposed changes can be made.
Baroness Lawlor (Con)
My Lords, I am delighted to have the debate, and I am very grateful to the noble Lord, Lord Pitt-Watson, for raising questions which have encouraged debate, but I support my noble friend Lady Neville-Rolfe’s opposition to Clause 39 standing part of the Bill. I also support her Amendment 160A about ring-fencing.
Clause 39 gives the Treasury powers to loosen the ring-fencing scheme. It has been anticipated, as others have said in this debate, by a number of announcements and reports, not least the Skeoch report—I hope I have pronounced it rightly, in the Celtic way—and the announcements this year by the Treasury itself. All of these point to and address a real problem. The question before us today is whether the Government’s solution in their Clauses 39 and 40 is sufficient to deal with the problems raised by reviews and announcements going back to the 1 March 2022 independent review of the working of the scheme.
I have a concern. The clause may seem to be the answer to some of the serious questions raised in that review and other concerns, and allow for the mitigation of problems arising from the ring-fencing regime—to allow for “proportionate” changes, to use a word which continues to recur throughout the assessments of how the scheme is working. However, in essence, it protracts the dominance of the regime and the regulators in what should be business decisions under good law, which is the spirit of the common law. It is a law which is permissive of risk-taking rather than prohibitive of the spirit of enterprise, or looking over the shoulder to the precautionary principle.
Officials and regulators can be very intelligent, competent and talented people, but it is not part of their skill set to drive through an entrepreneurial idea from the drawing board to production, sale, expanding their markets, developing a business, taking risk, and hiring and training people—which is an additional cost—while all the time keeping on top of the services sector, one of the fastest growing sectors in the UK and a jewel in the crown. Enabling officials to decide which activities should or should not be prohibited, and under which circumstances, does not tackle the fundamental problem to which the ring-fenced regime has given rise: the artificial and contrived structure. We are dealing with a structural problem—an artificially separated structure.
This structure inhibits the financial services sector from functioning in the best possible way, as an enabling hub for the whole UK economy, to allow small businesses, in particular, to grow and credit to flow. It is unlikely to remedy what we are dealing with, the fundamental problem of risk aversion imposed by ring-fencing law on businesses and the endemic risk aversion in the operation of the law.
Lord Pitt-Watson (Lab)
I wonder whether there might be some confusion here. The thing about the ring-fence is that there are activities within it that the Government are promising to bail out. Those things are being insured. By the way, the move in the ring-fence proposed by the Government will extend these a little, but they include lending to the small businesses that the noble Baroness has talked about. The question is: are we going to be rid of that? Is it the case that the implicit guarantee that the Government are giving can go to any other activity that the bank decides that it wants to undertake? That could include, although Skeoch would say it is not a problem right now, the sort of proprietary trading that brought the American banks down in 2008—of course, they had been allowed to do that because Glass-Steagall had been removed 10 years earlier. What we are talking about here is: how much of bank activity will the Government stand behind? As Mervyn King said, we must make sure that it is just the very most important things.
Baroness Lawlor (Con)
I thank the noble Lord, but it is about where the line is drawn in law, so that businesses can be certain and have predictability, because activities change day by day.
Lord Pitt-Watson (Lab)
With respect, that is what Skeoch is recommending and what is being allowed in what we are being asked to accept here—there is an extension of the ring-fence. He is saying, “Look, there are other important activities that go beyond the ring-fence that are administratively complicated for the banks. Please can you move this? Also, can you move this in a way so that it doesn’t need to go to primary legislation any time it needs to change, because all these things are moving?” What we are trying to do here is recognise that the independent commission is run by a senior financial businessperson—he used to run Standard Life—whom we are going to back. He indeed said that, in the long term, you may want to think about how ring-fencing goes together with the resolution regime, but that is not for now. He certainly did not say that we should abandon it.
Baroness Lawlor (Con)
I thank the noble Lord, but he was speaking about 2022, which was light years away for the financial sector. Things have moved on and have changed. We have different regimes in place now. As my noble friend Lady Noakes has explained, the banks are now resolvable. There are other schemes that will avoid the problems for the taxpayer. That should be borne in mind.
I had better finish quickly. That is my objection. It is about who decides for businesses. If you have a ring-fence, ultimately, no matter how much you relax it, the Government are never going to have the knowledge of the sector, and the detailed tactical and strategic ability, to be ahead of the game and make businesses grow. They will always play slightly safe, but maybe they are over-safe.
I will finish on why we need to repeal the ring-fence, not just why Clause 39 is not good enough. In a sense, we are seeing the inhibition of risk-taking and a structure that inhibits it. As other noble Lords have pointed out, we do not have parallels in other economies. I know that there is the Volcker rule in the US, but Switzerland has solved its “too big to fail” problem without a ring-fence and it has a very instructive banking sector. France and Germany have it individually but not the EU, which rejected it. Australia reviewed it again in 2019 and rejected it on the grounds that noble Lords have mentioned. It is well worth going back to the famous Skeoch review, which contends that, in the longer term, we will not need the ring-fence and we will have resolution schemes in place. For those reasons, I support my noble friend’s opposition to the clause standing part of the Bill and her Amendment 160A.
Baroness Altmann (Non-Afl)
My Lords, I support Amendments 159 and 174 in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham. I would be concerned about abolishing the ring-fence for similar reasons and concerns as those expressed by the noble Lord, Lord Vaux. However, I believe that a review of the workings of the alternative protections, such as the higher capital cushions and the bail-in regimes, would be appropriate. I also think that consultation would be advisable rather than simply removing these clauses. We are talking about taxpayer risk; that is basically what the ring-fencing is designed to mitigate. When it comes to consumer deposits, we have done an awful lot for retail savings to make sure that there is protection.
I apologise that I have been unable to participate fully in Committee, but I would like to put on record that there is another risk to the taxpayer in the form of retail pensions. In particular, I have concerns about the lack of any underpinning for the Financial Services Compensation Scheme around annuities, which are assumed to be 100% protected. There is a risk to the taxpayer, which I hope the Minister may consider or take back to the department to ensure that some of those issues are addressed through this Bill. Currently the implicit 100% guarantee can be met only by the taxpayer, and offshore operators of bulk annuities pose a serious risk to the retail pension sector.
Baroness Kramer (LD)
My Lords, I thought the Committee might like to be reminded why such a radical step as ring-fencing was taken after the 2008 financial crisis. It was in part because, in a universal bank encompassing both retail and wholesale banking, failure in the investment bank could and did destroy the viability of the retail bank. It was also in part because, as the noble Lords, Lord Tunnicliffe and Lord Pitt-Watson, said, the investment bank, able to access retail deposits at zero interest and protected by deposit interest, could now take risks that it never would have been able to take if it had had to raise that funding in the financial markets. That was a major factor behind the extraordinary and careless risk-taking that led us into the 2008 crash.
There was also a further reason: cultural contamination that led to irresponsible lending and funding in the retail banks and the abuse of customers as, under pressure from directors, they sought to catch up with the performance of their investment bank equivalents. We all, as a community, paid a very high price for that. Even at the time when the ring-fence was introduced and the Parliamentary Commission on Banking Standards recommended it as the best way to provide protection for the future, all of us knew that there would at some time in the future be a dangerous complacency. I quote from evidence to the PCBS:
“The classic problem for human institutions and for the design of our regulatory structures and our policy is how do we design against [delusion] in 25 years’ time, when … we have another: ‘This time it’s different. This time we’re cleverer than the previous generation.’”
Another quote is that
“financial crises don’t often happen immediately one after another; there tends to be a lag while those people who learnt lessons move out of the industry”.
In opting for ring-fencing, the PCBS warned of future pressures to weaken the separation:
“Those pressures will include the siren voices of those who contend that structural separation as implemented represents a barrier to financial innovation and growth”.
That was prescient indeed.
The noble Baroness, Lady Neville-Rolfe, said in a previous day of Committee that I look too much to the past. I accept that memory is inconvenient, but the amendments today from her and her colleagues come from a party that, perhaps with the exception of Nigel Lawson, never accepted its responsibility for light-touch regulation, the culture of hubris and the casino mentality that was quite heralded and led to the crisis in 2008. I still hear little sympathy, frankly, from those Benches for the ordinary people who bore the consequences. I do not want to denigrate the banking community—there are many good people in it—but most of them walked away largely untouched and with the personal rewards for the activities that led to the crisis still in their pockets. Respecting the positives of the financial sector always has to sit with a recognition that so much money can be made from a bending or an adjustment of the rules that guardrails are a necessity.
As I listened to the proposals in this group, I realised that growth has become an excuse and resolution has become a cover for eliminating the ring-fence and, essentially, the precautionary principle. Resolution for systemic banks is not just untested but—I was thankful to the noble Lord, Lord Tunnicliffe, for quoting my Second Reading speech—it has a poisonous side-effect for others in the financial sector, notably the insurance and pension funds that in this case hold most of the bail-in bonds through MREL, and for their customers.
In 2023, the Swiss financial regulator FINMA—I was reminded of this when the noble Baroness, Lady Lawlor, talked about the Swiss being so secure—saved the equity holders of Credit Suisse, a collapsing bank, in order to rescue it, but wiped out the bondholders, an issue that is still in litigation and has cost the Swiss very dearly in their bond issuances. FINMA took its decision on the grounds that any other action would have undermined financial stability, it was so conscious of the contagion that comes when you activate a resolution procedure. While the Bank of England has said it would not hesitate to activate resolution procedures and wipe out both equity and bondholders, I find very few people in the industry who actually believe it on those kinds of statements. No one should look with equanimity at the idea that we allow a bank to fail and be rescued only through the extreme activities of resolution, rather than looking at the precautionary principle.
Yesterday, the ground shifted even more. The noble Lord, Lord Tunnicliffe, referred to the financial stability report of July 2026 from the Bank of England. I have not had time to read it thoroughly. I have done only a first read but, frankly, it is schizophrenic. The first half of the report, as others have raised, is chilling in its assessment of the increased risk—the noble Lord, Lord Vaux, raised some of these questions—of private credit, the Iran war and AI, and especially of these crises crystallising at the same time. But the second half of the report explains policy decisions to weaken the regulatory capital buffers for banks—the regulatory system that several people have spoken about here as the reason why it is possible to remove the ring-fence. That was weakened in yesterday’s publication. The reasoning appears to be that regulators overseas are weakening their buffers and, for international competitiveness reasons, we should too.
Last Sunday, the Sunday Times ran a piece in anticipation of this change, saying that the Bank is set to relax capital rules for lenders again. My reaction to the report is mirrored by the quote from Sir John Vickers in that article, in which he cautions against reducing capital requirements:
“At a time when risk has plainly gone up, it would not make sense to dial down insurance”.
The Bank, I suspect encouraged by the Treasury, is weakening the resolution system. The noble Baroness, Lady Neville-Rolfe, and her party propose in addition to remove the precautionary protection of ring-fencing. All this is at a time of increased risk to financial stability. I came away from going through these amendments, frankly, in a mood of despair. We have to start once again to recognise the reality of risk.
The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab)
My Lords, I have enjoyed this exchange of views today. As the noble Lord, Lord Vaux, pointed out, it is refreshing and a little unsettling to find myself in the middle ground in a debate.
Before I turn to the specific amendments and stand part notices, it may be helpful if I briefly set out the Government’s approach to ring-fencing. The Government remain committed to retaining the ring-fencing regime as an important safeguard for financial stability and depositor protection. As the Chancellor set out in her 2025 Mansion House speech, the Government will uphold the regime while delivering meaningful reforms that support growth. Following a review undertaken by the Bank of England, and consistent with the conclusions of the independent Skeoch review, we concluded that aspects of the framework have become unnecessarily rigid and duplicative over time. The measures in the Bill address those issues by making the regime more flexible and proportionate while preserving its core protections.
I turn first to the question of whether Clause 39 should stand part of the Bill. Clause 39 addresses a key conclusion of both the Government’s review of ring-fencing and the Skeoch review: too much operational detail is fixed in legislation, meaning that even relatively minor and technical updates can require legislative amendment. Clause 39 therefore allows HMT, by order, to provide for certain detailed aspects of the excluded activities and prohibitions framework to be specified in the PRA rules, rather than in legislation. This will make the framework more flexible and responsive as market practice, prudential standards and firms’ business models evolve.
Importantly, the clause does not remove parliamentary oversight. Any future delegation would require secondary legislation and be subject to parliamentary scrutiny and approval. This allows the regime to evolve alongside market developments while ensuring that Parliament retains control of the overall framework. Where functions are delegated, the PRA will be subject to the same statutory tests and considerations as currently apply to the Treasury. The clause therefore preserves the existing safeguards while allowing detailed provisions to be updated more efficiently over time.
I now turn to the Clause 40 stand part notice, which was tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord Tunnicliffe. Clause 40 makes the ring-fencing regime more flexible and better aligned with the wider prudential and resolution framework. Since ring-fencing was introduced, those frameworks have evolved significantly and, in some areas, they now provide protections that overlap with ring-fencing rules. The clause reduces unnecessary duplication and helps the regime operate more coherently alongside the wider framework.
Some noble Lords have suggested that developments in resolution remove the need for wider ring-fencing altogether. I am afraid that I cannot agree. Ring-fencing and resolution perform different but complementary functions. Ring-fencing seeks to reduce risks and improve resilience before a firm gets into difficulty, while resolution provides the tools to manage failure if it occurs. Ring-fencing also complements resolution by creating simpler and more self-contained banking structures, which can support resolvability and make an orderly resolution easier to execute if a firm fails.
These resolution powers have been tested in practice, demonstrating that the framework can be used effectively. For example, the Bank of England used its resolution powers in relation to Silicon Valley Bank UK in 2023, facilitating its sale to HSBC without disruption to customers or the use of public funds. The independent review led by Sir Keith Skeoch concluded that ring-fencing has contributed towards the resilience of retail banks, while recommending reforms to improve its flexibility and align it more closely with the wider prudential and resolution framework. Clause 40 gives effect to that approach.
I turn to Amendments 159 and 174, which would require a further consultation and assessment before Clauses 39 and 40 could be commenced. I agree that it is important that proper procedures are followed. When exercising the powers in Clause 39, HMT will follow the better regulation guidance on consultation, and further legislation will be subject to parliamentary debate. The PRA is required by FSMA to consult and conduct cost-benefit analysis on most rule changes. So, in my view, the best point for detailed consultation and impact assessment is when specific changes are proposed.
Amendment 160A, tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord Howard of Rising, would repeal the ring-fencing regime in its entirety and require the Government and regulators to make arrangements for an orderly transition to a non-ring-fenced banking system. I am afraid I cannot agree with this. The ring-fencing regime was introduced following the global financial crisis in response to the recommendations of the Independent Commission on Banking. The commission concluded that separating core retail banking services from riskier activities would help protect the continuity of essential banking services and reduce the risk that taxpayers would be exposed to the costs of a bank failure. The Government’s view is that those objectives remain as relevant today as they were after the financial crisis. Ring-fencing continues to play an important role in supporting financial stability and protecting depositors by helping ensure that essential banking services remain resilient in times of stress. The Skeoch review recommended retaining the regime for now but reforming the regime, just as we are doing.
Several noble Lords highlighted the cost of ring-fencing. It is true that the regime results in costs, but those costs must be weighed against the benefits of a safer banking system, stronger deposit protection and a reduced risk for taxpayers. As I set out when speaking to Clause 40, the Government do not accept that developments in the resolution framework remove the need for ring-fencing. Ring-fencing and resolution perform different but complementary functions, and the Government remain of the view that both continue to play an important role in supporting financial stability. Our objective is therefore reform, not abolition, retaining ring-fencing’s core protections while ensuring that the regime remains effective, proportionate and, importantly, fit for the future.
Alongside the changes in the Bill, the Government are taking forward further reforms intended to support lending, investment and growth while maintaining financial stability. This includes a new growth allowance that will unlock significant additional financing for UK businesses and infrastructure. I assure my noble friend Lord Pitt-Watson that this will be subject to careful consultation.
This has been a genuinely fascinating debate. There has been a range of views, and I hope the Committee will agree that the Bill strikes the right balance between these different positions. For those reasons, I ask that Clauses 39 and 40 stand part of the Bill and respectfully ask the noble Baroness to withdraw her opposition to Clause 39.
Baroness Neville-Rolfe (Con)
I am grateful to noble Lords who have contributed to this lively debate, and to the Minister for his response. I am grateful for the support I have received, particularly for my Amendments 159 and 174 and, from some of my noble friends, for Amendments 160A. While I agree with the noble Lord, Lord Pitt-Watson, that this House is admirably expert, he tried to politicise the discussion in a way that I regret. I set out clearly why I think that ring-fencing should go. I want to be absolutely clear that our amendment is not about weakening financial stability or compromising the safety of firms. It is about looking forward, not backwards, as the noble Baroness, Lady Kramer, has done, and recognising that the financial stability framework has changed significantly since ring-fencing was first proposed and introduced. As my noble friend Lord Massey of Hampstead argued, we now have a much more developed resolution regime, stronger prudential supervision, capital and liquidity requirements, recovery and resolution planning, and operational continuity rules. They support financial services and consumers right across the country, as the noble Lord, Lord Pitt-Watson, rightly pointed out.
I am also going to quote from the Skeoch review, as I am winding:
“It was acknowledged at the outset that the regime would impose direct costs on the banks in setting up new structures and operating within the regime. Based on banks’ submissions, implementing the ring-fencing regime had a one-off cost for the industry of c. £2.9 billion, which has already been incurred, and has an annual aggregate ongoing cost of £1.5 billion”.
My noble friend Lady Noakes said that she thought that was a reasonable figure, and I think that is not something we are disagreeing on, which is good. She also said that the risk to the taxpayer is now much lower. The £450 billion figure came from UK Finance in its response to the FPC and the PRA’s capital assessment in April this year. That figure relates to the changes in capital requirements reform, which we have already debated.
I am very grateful to the Minister for his comments, including his reference to this new growth feature, which I will have a look at. But I remain concerned that the Government’s approach, while moving in the right direction, is too limited. Clauses 39 and 40 suggest that the Government accept that there is a problem with the current regime, but their answer is to adjust it rather than to ask the more fundamental question of whether it is still needed, following international practice, which has been quoted. In our view, ring-fencing has been superseded. It imposes real costs on banks, customers and the wider economy; it affects competitiveness, capital efficiency and lending; and it places the UK at a disadvantage compared with other international jurisdictions.
My noble friend Lord Massey of Hampstead rightly said that we will discuss the FOS on a later amendment, and he rightly referred to the risk-aversion problem in the sector, which I recall was a theme of the excellent report by our committee, now chaired by my noble friend Lady Noakes.
We will reflect carefully on what the Minister said, but my approach is a measured one, putting any unwinding in the hands of the Treasury and other stakeholders. But the central problem remains: if we are serious about growth, competitiveness and reducing unnecessary regulatory burden, ring-fencing cannot be exempt from scrutiny. Of course we must learn from the past and look after the consumers, but their savings would continue to be protected, and resolution and prudential supervision have changed our financial services framework since the financial crisis. For now, we have had a good debate, and I beg leave to withdraw my opposition to Clause 39 standing part.
Baroness Kramer
“(1) The appropriate regulator shall consider whether there is sufficient provision to ensure the effective provision to a ring-fenced body of services and facilities that it requires in relation to the carrying on of a core activity.(1A) Subject to subsection (1B), when considering whether there is sufficient provision for the purposes of subsection (1) concerning services and facilities that are provided to a ring-fenced body by another member of its group, the appropriate regulator shall take account of all relevant circumstances, including—(a) the appropriate regulator’s ability to assess and influence the terms on which such services and facilities are made available to a ring-fenced body,(b) the availability, continuity and sufficiency of such services and facilities, including in circumstances where the Bank of England would be entitled to exercise any of the stabilisation powers under the Banking Act 2009, and(c) any assessment that the Bank of England has made of a group of which the ring-fenced body is or proposes to become a member under a statement of policy that the Bank of England has issued pursuant to section 3B (safeguards relating to directions under section 3A) subsection (9) of the Banking Act 2009 and, where applicable, the absence of any such assessment.(1B) The appropriate regulator shall not consider that there is sufficient provision for the purposes of subsection (1) where a ring-fenced body is, or proposes to become, a member of a group for all or part of which the appropriate regulator is not responsible for consolidated supervision, and such services and facilities are provided to the ring-fenced body from outside the United Kingdom by a member of the group that is not in a part of the group that is subject to consolidated supervision by the appropriate regulator, unless the appropriate regulator has made rules to ensure that—(a) there is no less uncertainty concerning the availability, continuity and sufficiency of such services and facilities than there would be where they are provided to a ring-fenced body within a group that is subject as a whole to the consolidated supervision of the appropriate regulator, and (b) the ring-fenced body is not permitted to receive such services and facilities unless the provider of those services and facilities is adequately resourced and the arrangements under which those services and facilities are provided would facilitate the orderly exercise by the Bank of England of its stabilisation powers under the Banking Act 2009 in circumstances where the Bank of England would be entitled to exercise those powers.(1C) If, having regard to all the circumstances, including the matters referred to in subsection (1A), the appropriate regulator does not consider that there is sufficient provision for the purposes of subsection (1) or may not do so under subsection (1B), the appropriate regulator must exercise its power to make rules requiring a ring-fenced body to make arrangements to ensure the effective provision referred to in subsection (1).(1D) The appropriate regulator shall consider whether there is sufficient provision to achieve the group ring-fencing purposes.(1E) The appropriate regulator shall not consider that there is sufficient provision for the purposes of subsection (1D) where a ring-fenced body is or proposes to become a member of a group for all or part of which the appropriate regulator is not responsible for consolidated supervision, unless the appropriate regulator has made rules to ensure that there is no less uncertainty concerning the achievement of the group ring-fencing purposes in those circumstances than would be the case where the ring-fenced body is a member of a group that is subject as a whole to the consolidated supervision of the appropriate regulator.(1F) If the appropriate regulator does not consider that there is sufficient provision to achieve the group ring-fencing purposes, or may not do so under subsection (1E), the regulator must exercise its power to make rules for the group ring-fencing purposes that apply—(a) to ring-fenced bodies, or(b) to authorised persons who are members of a ring-fenced body’s group.”Member’s explanatory statement
This amendment, and others in the name of Baroness Kramer, seek to require the PRA to assess whether existing law and regulation makes sufficient provision in the case of regulated companies based outside the United Kingdom.
Baroness Kramer (LD)
My Lords, this group originally preceded the one we just debated. I noticed the change this morning. My points in this group on ring-fencing are quite narrow. I am not particularly happy about the changes in Clauses 39 and 40, but I do not feel strongly enough that we need to change the relevant clauses wholesale.
But I have a problem with a narrow area that feels to me like a Trojan horse. In easing ring-fencing in this Bill through giving the regulator greater flexibility to adjust the ring-fence, the Government are still taking greater risk. I find it frustrating that people who remove a protection then say that there is no additional risk. Let us be honest: there is greater risk. I am cautiously relieved that ring-fencing has not been holed below the waterline by the Government. But, in Amendments 155 to 158 and 160, I am trying to address a breach that has been identified in the ring-fence and that potentially has serious unintended consequences.
In the Financial Services (Banking Reform) Act 2013 and the SIs under FSMA, which implemented much of it, the structural separation between retail and wholesale banks within the same overarching bank group left few shared operational services. The ring-fencing rules prohibited receiving services or facilities that are regularly required from any entity or company within the group that is not a permitted supplier, so that, in case of failure—for example, the failure of the wholesale bank—the retail bank could continue unaffected. This Bill relaxes the rules on intragroup services, and it argues in the Explanatory Notes that the current situation causes duplication and overlap.
As far as I can understand, the Government think that there is no risk to changing the rules because the bank resolution process now includes the operational continuity in resolution regulation, OCIR, which ensures that critical banking services are provided to customers should a bank have failed and be in resolution. There are some problems because the ring-fencing rules and the OCIR rules do not fully match, and what happens to non-critical shared services is not clear. At the very least, we need to know the intention around that.
Much more seriously, if a banking group is not headquartered in the UK, so that the PRA is not the group supervisor and the Bank of England is not the group resolution authority, how can shared services to customers be assured in a crisis? It depends completely on the voluntary support of an overseas regulator. Given the fragmentation in international co-operation that we see today, that becomes a serious potential risk.
Lord Altrincham (Con)
My Lords, I speak briefly to Amendments 155 to 158 and 160 in the name of the noble Baroness, Lady Kramer, and hope that she will forgive me as a former banker with cultural contamination, perhaps. I notice a lot of quite warm language about banking in this debate, with references to the casino and the rest of it.
The concern behind these amendments is that a ring-fenced bank may depend on services, systems or facilities provided by other entities within its wider group. Those entities may be based outside the United Kingdom or supervised primarily by an overseas regulator. I very much hear what the noble Baroness says, but the PRA does look at intragroup services in protecting UK domestic businesses.
We of course have our own amendments on ring-fencing, which we have just discussed. However, as we have said before, our approach to this Bill is that it will regulate in the immediate term and, therefore, our wider policy ambitions can sit alongside proper scrutiny of the provisions before us. Even where we take a different long-term view of the future of ring-fencing, it is still right to test whether the regime, while it remains in place, operates properly and consistently. That said, I have some concerns about the effect of these amendments, even if they were to impose additional safeguards or burdens specifically on foreign-owned banks, as they could place those banks at a competitive disadvantage. That matters because foreign-owned banks contribute to competition in the UK market. If additional requirements make it harder or less attractive for them to operate here, the results could be less competition for deposits here and, ultimately, worse outcomes for consumers.
International supervisory co-operation has also been significantly strengthened since the financial crisis. Crisis management groups, co-operation agreements and regulator-to-regulator engagement are now central parts of the framework. Recent experience has shown that this co-operation can work in practice, including during the failures of Silicon Valley Bank, as referenced by the Minister, and perhaps also in the case of Credit Suisse, where co-ordination between overseas regulators and UK authorities helped to maintain continuity and manage risk. I just note that Credit Suisse was the fifth-largest bank by balance sheet in the UK at the time. I would therefore be grateful if the Minister could explain how the PRA currently assesses overseas group structures and whether he believes that any gap exists in its present powers. In particular, does the PRA already satisfy itself that critical services provided from outside the United Kingdom will remain available in stress or resolution?
We may differ from the noble Baroness on the broader future of ring-fencing, but the questions that she raises are important. My concern is that the proposed solution may be unnecessary and may risk reducing competition by placing foreign-owned banks at a disadvantage. I look forward to the Minister’s response.
Lord Stockwood (Lab)
My Lords, Amendments 155 to 158 and 160 all relate to Clause 40. As I set out in the previous debate, Clause 40 makes the ring-fencing regime more flexible and proportionate by allowing the PRA to take account of protections already delivered elsewhere in the prudential and resolution framework, when considering whether ring-fencing rules are required. The clause is intended to reduce unnecessary duplication, while maintaining the core protections and purposes of the ring-fencing regime. We have already debated this, and it was clear that there were a wide range of views.
The noble Baroness’s amendments focus principally on shared services arrangements, operational continuity and cross-border group structures. The Government recognise the importance of these issues and we have spoken to a couple of outside parties on this topic. Ensuring the continuity of critical services and managing operational dependencies are important objectives of the ring-fencing regime.
However, I am not persuaded that these amendments are the right route forward. They would introduce detailed statutory tests governing when the PRA may rely on protections delivered elsewhere in the prudential and resolution framework, particularly for shared services arrangements involving cross-border or non-consolidated groups. Their practical effect would be to make it harder for the PRA to rely on equivalent protections elsewhere in the framework, increasing the likelihood of additional ring-fencing rules, greater complexity and additional compliance burdens, even where the PRA considered that the relevant outcomes were already being achieved.
In contrast, Clause 40 is intended to make the regime more flexible, streamlined and proportionate by reducing unnecessary duplication while maintaining core protections. It does not allow the PRA simply to assume that protections provided elsewhere in the framework are sufficient. The PRA may rely on those protections only where it considers that there is sufficient provision to achieve the relevant ring-fencing purposes and ensure the effective provision of services and facilities to ring-fenced banks.
For example, the noble Baroness, Lady Kramer, asked whether the OCIR framework can be replaced by the PRA’s rule 9.1. This is a matter for the PRA, but it has indicated that it intends to consider these issues through consultation. Where the PRA does not consider that sufficient provision exists, including in relation to shared services arrangements or cross-border groups, it must act, including through making ring-fencing rules where necessary. The clause therefore preserves key protections.
If further details are required, I am more than happy to follow up before Report, but, for those reasons, I ask the noble Baroness to withdraw her amendment.
“(5) After section 284A insert—“284AA Tax treatment of risk transformation arrangements(1) The Treasury must, after consultation with the Commissioners for His Majesty’s Revenue and Customs, publish guidance concerning the tax treatment of investments issued in connection with risk transformation arrangements within the meaning of section 284A.(2) Guidance under this section must include the circumstances in which a risk transformation arrangement is to be regarded as having been entered into for genuine insurance risk-transfer and capital markets purposes. (3) In exercising functions relating to the assessment, collection and management of taxes, the Commissioners for His Majesty’s Revenue and Customs must ensure that arrangements falling within a description specified by guidance under subsection (2) are treated in a consistent and certain manner.(4) Where—(a) a risk transformation arrangement falls within a description specified in guidance under subsection (2), and(b) the arrangement complies with applicable requirements relating to authorisation and supervision,the arrangement is to be treated for all tax purposes as a commercial arrangement entered into for bona fide insurance risk-transfer and capital markets purposes, and not as having as its main purpose, or one of its main purposes, the obtaining of a tax advantage.(5) The treatment in subsection (4) applies without any requirement to consider the purpose of the arrangement other than by reference to the conditions in that subsection.(6) Subsection (4) does not apply only where the Commissioners can demonstrate that—(a) one or more of the conditions in subsection (4) is not met, or(b) there has been fraud, deliberate misrepresentation, or material non-disclosure of relevant facts.(7) The Treasury must review guidance published under this section at intervals not exceeding three years.””Member’s explanatory statement
The amendment requires HM Treasury to produce guidance in consultation with HMRC to confirm the tax status of Insurance-Linked Securities vehicles.
Baroness Bowles of Berkhamsted (LD)
My Lords, this amendment is about insurance-linked securities—ILS—which are the UK’s version of fully funded risk transfer vehicles, which were legislated for in 2017. They include catastrophe bonds, collateralised reinsurance, sidecars and other fully funded mechanisms used by insurers to transfer peak and speciality risks to the capital markets. Catastrophe bonds are the most visible part of the market, but they represent only a portion of a global ILS market now estimated at over $136 billion. The catastrophe bond market alone is estimated at somewhere between $35 billion and $65 billion.
When the regime was introduced, the hope was that London, as the world’s leading commercial reinsurance marketplace, would become a major provider but, almost immediately, Singapore copied the PRA’s work and moved faster. I recall hearing evidence about this when I was on the Industry and Regulators Committee before the formation of the Financial Services Regulation Committee. At that time, the PRA was being blamed for sluggishness. However, it is not the problem now. Since then, London has not built a substantial market, and we now have only 2% of the global market that we should have led.
Clause 44 on transformer vehicles is part of the reforms to which the Government have committed under the Leeds reform package. Those reforms are welcome. They will improve flexibility and the ease of delivering transactions, including allowing the PRA to widen the scope of permissions. But even with Clause 44, one major block remains: tax uncertainty. HMRC continues to rely on a main-purpose anti-avoidance test that is inherently subjective. Investors and sponsors are forced into a costly, months-long clearance process with the Treasury for every single transaction. This destroys the speed to market that is required for catastrophe bonds, so they are out of the game. There is no hope of competing with jurisdictions that do not impose this hurdle, which rightly puts more trust in these fully funded, transparent risk transfer mechanisms. They are not tax-driven structures, yet they must prove that fact afresh every single time for every single contract.
A competitive ILS market cannot grow while this situation prevails. The window of opportunity closes before HMRC’s clearance process reaches a conclusion. When Parliament created the ILS regime in 2017, it included a deliberately broad anti-avoidance clause because the market was new. Ten years on, HMRC should be comfortable that these are not avoidance vehicles. There are no cases of mass tax avoidance via these vehicles. They are, by definition, highly regulated and fully funded, yet HMRC appears unwilling to update its existing guidance. Some recent case law on avoidance purposes has only increased uncertainty. The existing guidance is non-binding and investors cannot rely on it. Amendment 162 would require the Treasury to publish clear guidance that provides a presumption of commercial purpose for vehicles that meet all regulatory and authorisation requirements. It would shift the burden of proof away from the investor and provide the certainty that our major competitors already offer as a matter of course.
This is not the only area where the clearance culture is acting as a drag on growth and competitiveness. It also affects infrastructure investment, and it casts a long shadow over the Mansion House Accord. How can we expect a trustee to back a vital infrastructure project if they fear that the tax status of the vehicle will be held hostage by a subjective, years-long tax process? The Government have recognised the need for certainty by launching the Advanced Tax Certainty Service this July, but that service is restricted to multi-billion-pound megaprojects; they are looking after their own. This might work for the largest infrastructure schemes, but what of the hundreds of medium-sized and local infrastructure projects and the ILS transactions that form the backbone of our growth agenda?
I recognise that tax avoidance is a sensitive subject, and that none of us wants a return to the abuses of the past, but there is a world of difference between a structure designed to extract value from a company—that is cheating—and a structure designed to ring-fence risk for a power plant or a catastrophe bond. One is misuse of corporate law and the other is a structural necessity of it. HMRC’s current main-purpose test fails to distinguish between the two and treats structural necessity as a potential abuse.
Lord Ashcombe (Con)
My Lords, I remind the House of my interest as an employee of Marsh, an FCA-regulated firm. I wish to speak in support of this amendment in the name of the noble Baroness, Lady Bowles, but before doing so, I would like to pick up briefly on something I said earlier this week about regulatory clarity. I talked about how firms need clear definitions so that they can plan investment with confidence. That principle matters across the Bill, for not just client definitions, but for how we approach emerging markets and new structures.
Amendment 162 is a good example of that. The amendment addresses tax clarity on insurance-linked securities. These are important instruments. They attract capital into insurance, help firms manage catastrophic risk and have become a serious part of global risk management practice. Since being created in the 1990s, the global market has grown to about £136 billion, making up close to 20% of the insurance/reinsurance industry. According to Swiss Re, one of the world’s leading providers of reinsurance, insurance and other forms of insurance-based risk transfer, 2025 was the busiest year in its history of this market.
The London insurance market is phenomenally well placed to lead here. We are larger than our five closest competitors combined. However, we need to be honest: our ILS regime has been somewhat underwhelming at best. That is not because we lack expertise or capital—we do not—but because the regulatory approach has been disproportionate and the legislation inflexible. Firms simply cannot transact deals here as efficiently as they can in Bermuda or other jurisdictions.
To the Government and the PRA’s credit, they have listened. This Bill moves us in the right direction: it gives the PRA flexibility on fully funded definitions, allows multiple contracts in protected cell companies and there is a consultation pipeline on further simplification. That is good. However, there is one thing that the Bill has not addressed, and, as mentioned by the noble Baroness, Lady Bowles, that is tax clarity. When the ILS regime was created in 2017, there was a broad anti-avoidance clause. That is fair enough, but a decade on, I think that HMRC and the Treasury should be comfortable that these are not tax avoidance structures, but are risk transfer vehicles.
Right now, firms have guidance from HMRC, but it is not legally binding. Therefore, every transaction requires a tax lawyer’s opinion every single time, as the noble Baroness mentioned. That cost, that time, that friction is the difference between doing a deal and doing it somewhere else. This amendment asks for something straightforward: a clear and legally underpinned directive that HMRC will presume that ILS vehicles are not being used to secure a tax advantage. That is not asking for exemption from anti-avoidance rules; it is asking for clarity so that legitimate risk transfer does not get caught up in unnecessary caution. That clarity matters because it removes the last barrier to this market. We have the regulation sorted and we have the expertise; what we really need is tax certainty.
This is about positioning London correctly in a competitive global market. It is about letting the PRA’s sensible reforms work, and it is about giving firms the clarity they need to invest with confidence in the United Kingdom.
Lord Altrincham (Con)
My Lords, I will speak to Amendment 162 in the name of the noble Baroness, Lady Bowles—perhaps from the Liberal Democrat risk-transfer derivative desk. This amendment raises what seems to be a sensible and practical point about certainty in the treatment of insurance-linked securities and related risk-transformation arrangements. Insurance-linked securities can play an important role in allowing insurance risk to be transferred into capital markets. Catastrophe bonds and similar structures can help insurers and reinsurers manage exposure to major risks, including natural catastrophes, while providing investors with a different form of capital markets instrument.
The United Kingdom has quite rightly sought to develop itself as a competitive centre for these structures, but for that to happen, firms and investors need clarity, as my noble friend just explained. As I understand it, the amendment would require the Treasury, after consulting HMRC, to publish guidance clarifying the tax treatment of these arrangements. It would also provide that where an arrangement falls within that guidance and complies with the relevant regulatory authorisation and supervision requirements, it should be treated as a bona fide commercial insurance and capital markets transaction, rather than as one entered into for tax avoidance purposes. It does not appear to be an attempt to protect fraud, misrepresentation or non-disclosure. HMRC would still be able to challenge arrangements where the conditions are not met or where there has been improper conduct, but it would give legitimate market participants greater certainty where they are using properly regulated structures for genuine commercial purposes. That certainty matters: if the UK wants to attract insurance-linked securities business, investors and firms need to understand the tax position in advance. Uncertainty can deter activity, reduce confidence and make other jurisdictions more attractive.
I would therefore welcome clarity from the Minister on this point. Do the Government accept that greater tax certainty would help to support the development of the UK insurance-linked securities market? Are they aware of the concerns that uncertainty about HMRC treatment may be limiting the attractiveness of the UK regime? Will they consider whether further Treasury or HMRC guidance is needed to ensure that properly regulated ILS vehicles are treated consistently as genuine commercial arrangements. This seems to me to be a practical amendment aimed at supporting competitiveness and certainty in a specialist but important part of the financial services market. I look forward to the Minister’s response.
Lord Stockwood (Lab)
My Lords, risk transformation is a key element of the UK’s insurance market, and the growth of this market is critical to the Government’s objective of making the UK the location of choice for specialist and complex insurance. The Government’s reforms in Clause 44 aim to support this market by increasing the attractiveness of the UK for establishing the legal vehicles used to undertake risk transformation. I am glad to hear the noble Baroness, Lady Bowles, and the noble Lord, Lord Ashcombe, broadly welcome these reforms.
The Government recognise the role that the bespoke tax regime for transformer vehicles plays in ensuring that the UK is competitive in this area. We also recognise, as does this amendment, the role that robust anti-avoidance measures and clear guidance have in ensuring a well-functioning regime for transformer vehicles. These anti-avoidance requirements are set out in the bespoke tax regulations for transformer vehicles, the Risk Transformation (Tax) Regulations 2017. HMRC has worked extensively with industry to produce guidance on how anti-avoidance measures apply to transformer vehicles.
I appreciate that some people consider that this guidance could be clearer, but it is important that any guidance does not constrain the Government’s ability to apply anti-avoidance rules. It must be aligned with the broader approach taken by HMRC to anti-avoidance. The current guidance allows HMRC the flexibility effectively to pursue instances where vehicles are established for the purposes of avoiding tax. It is important that we preserve that ability. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank all those who have spoken in the debate. I must say that I find the Minister’s response rather disappointing. He is saying that the status quo is all right, but the status quo is not all right, so we will not have the business. I think that is all there is to it. Surely, there must be a way in which you can have something that moves faster when you have to negotiate things faster: otherwise, the door is shut on these transactions. So I ask the Minister to engage with the industry on this and find out more detail, because it is being treated as if it is something dodgy. How will an investor invest in something that has a ticket on it saying, “Careful, I might be slightly dodgy”? That is in effect what is happening. How will we get these things into pension funds if the trustees are thinking, “Whoa, something might happen way down the track”?
These are very serious questions. I realise that it is very specialist, but we need to take action: otherwise, we are closing the door on opportunities for good investment and opportunities for pension funds. The fact that the ATCS solves the problem for really big infrastructure shows that the Government know what they are about when they are in the business of having to negotiate contracts, but the smaller people are being left out. That is just not the right way to proceed. So I hope that the Minister will report back to the Treasury and reread my speech and that of the noble Lord and come to a better conclusion. For now, I beg leave to withdraw my amendment, although I think that this is so important that I may wish to return to it on Report.
Baroness Neville-Rolfe
“Review of tokenisation in UK wholesale financial markets(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report on the development of tokenisation in UK wholesale financial markets.(2) A report under subsection (1) must consider, in particular—(a) the extent to which the existing legal and regulatory framework supports the safe adoption of tokenisation in UK wholesale financial markets;(b) the extent to which current arrangements provide sufficient legal certainty in relation to the issuance, holding, transfer and settlement of tokenised financial assets;(c) the prudential treatment of tokenised assets and the extent to which such treatment is consistent with equivalent non-tokenised assets, where the underlying risks are equivalent;(d) the availability and suitability of settlement arrangements for tokenised financial market transactions;(e) the progress of the Digital Securities Sandbox and the extent to which it is expected to support the development of any permanent regulatory framework;(f) barriers to interoperability between tokenised and non-tokenised market infrastructure, and between different tokenised market infrastructure arrangements;(g) the effect of the current framework on innovation, investment and the international competitiveness of UK financial markets;(h) any further legislative or regulatory changes which the Treasury considers may be required.(3) In preparing a report under subsection (1), the Treasury must consult—(a) the Bank of England;(b) the Prudential Regulation Authority;(c) the Financial Conduct Authority;(d) such other persons as the Treasury considers appropriate.(4) The Treasury must publish the report.”Member’s explanatory statement
This probing amendment would require the Treasury to review the framework for tokenisation in UK wholesale financial markets, including legal certainty, prudential treatment, settlement arrangements and barriers to innovation and competitiveness.
Baroness Neville-Rolfe (Con)
My Lords, I will speak also to Amendment 164 and thank my noble friend Lord Ranger of Northwood for his very interesting amendments. This is a really important group. It is clear that digital assets are becoming an accelerating part of our financial and economic landscape, yet the Government, for all their warm words and the work done by the FCA, still lack a clear digital asset strategy. More than one in 10 UK adults now owns a digital asset. Sovereign bonds issued on blockchains, digital settlement systems and collateral, tokenised assets and new payment technologies are all developing fast. They are part of the future of financial services. With financial services changing at extraordinary speed, we have to ask ourselves whether the regulatory framework being created is fit for the future.
We raised this point at Second Reading and we return to it today. This is an area where we see a real risk of regulatory grey zones. Firms are innovating, consumers are participating, institutions are exploring tokenisation and market infrastructure providers are looking at distributed ledger technology. Yet, too often, the answer from the UK regulatory system is uncertain, fragmented or slow. Major banks, asset managers and market infrastructure providers are now exploring tokenised bonds, tokenised funds, digital collateral, digital repo markets and blockchain-based settlement systems. These products are increasingly part of the future of wholesale finance.
Lord Ranger of Northwood (Con)
My Lords, I support my noble friend’s Amendment 164 and will speak to Amendments 164A, 164B and 164C in my name. I declare my interest as a non-executive director of Ecila.Group—an R&D-focused firm in digital assets and payments infrastructure. I am also a member of the UKUS Crypto Alliance and, for completion, the co-chair of the Digital Markets and Digital Money APPG.
The amendments in my name go some way towards the underlying point, which is that, if the United Kingdom wants to be a serious global centre for digital assets, tokenisation and digital financial markets, we need a regulatory framework and, as my noble friend Lady Neville-Rolfe mentioned, a strategy that is clear, coherent, proportionate and capable of supporting innovation. We do not have that at the moment. We have a lack of clear regulatory direction, too many overlapping areas of responsibility, regulators with differing priorities and, in some cases, different and changing levels of appetite towards digital assets. We also have firms that are trying to understand whether the UK is genuinely open for innovation or whether it will remain a jurisdiction where uncertainty and delay make it harder to invest, scale and launch new products.
I say this because I have heard it directly from industry, particularly over the last 18 months. During that period, I have engaged extensively with businesses in the digital asset arena. I have also travelled to other jurisdictions such as the US—I have been to Washington four times in that period—and the UAE. I have spoken to the US SEC chair, Paul Atkins, I have met with Commissioner Hester Peirce several times and I have spoken to policymakers in these jurisdictions to understand their approach, as well as what they think we should be considering.
These are issues, as my noble friend Lady Neville-Rolfe said, because we are looking for growth. Firms are developing products, consumers are engaging with digital assets, and institutions are looking at tokenisation, digital collateral, new settlement systems and digital market infrastructure. The world is changing; it is already happening. Other jurisdictions are therefore moving fast. If we do not provide clarity, firms and—as has been said—jobs, growth and investment will move and move fast. This is very much a global market change.
The problem is not simply too little regulation. In some respects, a deeper problem is that the regulatory landscape is not yet properly constituted to support the market. If we simply layer new regulation on top of old regulation, without first clarifying who is responsible, what the objectives are, what the vision is and how the different regimes fit together, we risk creating an even more complex framework, with more duplication and confusion, than the one we have already.
That is why Amendment 164A is important. It would require the FCA and the PRA to establish and maintain a defined and representative digital assets industry forum. The forum would be co-chaired by senior regulatory representatives and a senior industry figure, and would bring together regulators, digital asset firms, tokenised businesses, banks, payment firms, market infrastructure providers and relevant trade bodies. The point is simple: the Government and regulators need a proper, structured mechanism for engagement with the industry if we are to take sensible steps in this area.
This is a fast-moving and highly technical area. Regulation cannot be developed in silos by separate regulators. Regulators need to understand how these products work, where the risks are, where innovation is taking place and where proposed rules may have unintended consequences. Industry needs to understand what regulators expect and where the UK intends to go, if not lead. At the moment, that dialogue is not sufficiently structured and there is not the sort of ongoing forum that a market of this complexity requires. Without that, we risk regulating by assumption, rather than by evidence, and we risk fragmentation.
My Amendment 164B addresses a related issue: access to banking, payment and settlement services for digital asset firms. This is a very real concern. A digital asset firm may be regulated or registered—it may have compliance systems, governance and legitimate commercial activity—but still struggle to obtain the basic banking and payment services that it needs to operate. This is a serious barrier to growth and market entry, which again I have heard many times from businesses in the sector.
There is also a debanking point here. If the regulatory environment is unclear, banks and payment providers may respond by taking the most conservative approach possible. They may decide that it is simply easier not to serve digital asset firms at all, rather than navigate regulatory uncertainty. Financial crime risk, supervisory expectations and reputational concerns all build a very strong defensive risk posture. That does not support innovation. It does not support competition. It entrenches incumbents, disadvantages new entrants and pushes activities to other jurisdictions. This is a consequence of the regulatory environment that we have right now. Yes, we must balance the risks that are out there, but we must also seek to encourage innovation and the market.
My amendment would require the Treasury to review how access to banking, payment and settlement services affects competition, innovation and market entry into the sector. It would also require consideration of whether the current and proposed framework risks conferring an advantage on incumbent firms over new entrants and firms developing new products. That is an important question. If the UK says it wants a thriving digital asset sector but firms cannot get bank accounts, access payments infrastructure or access settlement services, policy ambition will not be delivered in practice.
Amendment 164C concerns consumer redress. This is another area in which clarity is required. Digital assets do not always fit neatly into existing financial services redress frameworks. Consumers need to know what protections they have, where complaints should go, what remedies may be available and how responsibility is allocated when something goes wrong. Firms also need to know what standards apply to them and the liabilities they face. The amendment would require the Treasury to review whether the existing consumer redress framework can provide a clear, coherent, proportionate and internationally competitive basis for regulated digital asset markets. The key word is “proportionate”. We need consumer protection, but we must not create a redress environment that is so uncertain or open-ended that firms decide that the UK is not a viable place to operate. Equally, we must not leave consumers in a position where they do not understand their rights or where harmful conduct falls between regimes.
The wider concern behind all three amendments is that the UK risks falling behind because of a lack of clarity. Industry is not asking for no regulation; it is asking for clear, proportionate regulation that reflects the pace of technological change and the markets that are beginning to exist. My fear is that if we carry on regulating digital assets in a piecemeal way, we will end up with a regime that is consistently playing catch-up or that delivers unintended consequences. It will be unpredictable, overly burdensome and difficult for firms to navigate—even more so than it is already. That would be a bad outcome for innovation, for consumers and for the competitiveness of the United Kingdom.
I will therefore be listening carefully to the Minister’s response to my noble friend’s amendment that calls for a digital assets strategy, to which I have added my name. We should be trying to streamline, simplify and clarify the regime, not add more layers of uncertainty. I would be grateful if the Minister could also address the following three points. First, will the Government commit to establishing a proper representative industry forum for digital assets so that regulators and market participants can engage continuously and constructively? Secondly, what assessments have the Government made of the difficulties digital asset firms face in obtaining banking, payment and settlement services, and the effect this has on competition and market entry? Thirdly, how will the Government ensure that the consumer redress framework for digital assets is clear, coherent and proportionate without making the UK an unattractive place for responsible firms to operate?
As has been said, the UK has a real opportunity in digital assets and tokenised finance. The opportunity will not be realised unless firms know where they stand, so we need clarity, co-ordination and confidence. These amendments are designed to help the Government to provide that.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to follow my noble friend Lord Ranger of Northwood. I agree with all the amendments that he has eloquently described. I support my noble friend Lady Neville-Rolfe, and particularly her Amendment 163, to which I have added my name. The Government rightly talk about growth. The reality is that digital assets, tokenisation and market dematerialisation are sources of growth in potentially a shorter time than some other sectors that have had greater focus.
Baroness Kramer (LD)
My Lords, we on these Benches in large part support the amendments in this group, with a few caveats. It is important to emphasise the frustration that we do not have today, and do not seem to see in the near future, that comprehensive regulatory framework that will draw together the UK approach to all these assets. It is a disservice to Parliament, because it makes it hard for us to investigate as we attempt to pull together a report from one committee or one regulator and try to mesh it with something that has come from another. The experience of even trying to do that demonstrates a lot of the fragmentation. Many of us thought that the Bill would be one of the mechanisms to create that framework, but it is not here. I very much support the amendments that begin to address that issue.
My caveats may seem minor but reflect some fundamental frustrations. For example, subsection (2)(g) proposed by Amendment 164, which is to “have regard” to various factors, puts financial stability and international competitiveness on exactly the same standing. That is an ongoing frustration that I have had through much of the Bill. We have to understand the primacy of financial stability. It is one thing to have a secondary objective but, in general conversation, and over and over again in amendments, we see the two merged as being essentially on a par. That is highly questionable.
We have a history of variations on the digital industry forum. In the early days of fintech, it was the industry that really pulled itself together into a representative body and then the Government indicated their willingness to negotiate with that body. Out of that came a coherent set of appropriate regulations, which met the needs of both sides and were developed by engagement with both sides. I would like to see that industry begin to pull itself together. I am always suspicious when Governments set up forums, because then they pick and choose who sits on them and who the voices are. When industry does it, it tends to be a far more inclusive and more effective group, but the Government need to indicate that they would wish to have such a body and to engage with it. That would move us very much forward.
The issue of interoperability is absolutely key, but I take it further: it also needs to be looked at from a consumer perspective. If you get your salary in sterling stablecoin going into your virtual wallet but then you, as an individual, want to be able to go and get pounds, how on earth can you do that at a current ATM? That is simply impossible, so interoperability in all kinds of ways is fundamental to developing the whole new digital direction. However, costs are always involved when you look at interoperability. I would like the Government—or the regulators, if they are the appropriate bodies—to establish a principle that those who use the payment system and are part of it all carry a part of the burden, rather than simply falling back on the traditional banks to carry the costs. That would get us a whole lot further and make the banking community far more willing to be engaged in this process.
I hope that the Government will take these amendments seriously. They seem to move us very much in the right direction. As I say, my caveats are fairly small and I will be looking forward to the Minister’s response. I thank the noble Lord, Lord Ranger, for engaging with the industry to be able to bring forward amendments that take us in this direction.
Lord Stockwood (Lab)
My Lords, I thank the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham, Lord Ranger of Northwood and Lord Holmes of Richmond, for these amendments and their contributions to this debate. It is an important discussion of how technology and finance will play an increasingly important role in global markets. I declare that I have been personally trading cryptocurrency since 2017; none of the gains have gone towards political donations—I think it is worth mentioning that at the moment.
Taken together, these amendments seek to support the UK’s focus on innovation, competitiveness and consumer protection in digital asset markets. The Government strongly support the digitisation of financial markets and share many of the objectives that noble Lords have set out today. However, before we turn to the detail of the amendments, it is important to recognise that the UK already has a comprehensive programme of work in train to support the development of digital assets and a tokenised market.
First, on the registry framework for crypto assets, the Government have legislated to establish a framework coming into force on 25 October 2027. This will bring a wide range of crypto asset activities within the registry perimeter, providing the legal certainty and consumer protections that noble Lords rightly identify as essential.
Secondly, I can assure noble Lords that we have a strategy on wholesale market digitisation and tokenisation and an expert to drive it forward within the sector. The Government published the Wholesale Financial Markets Digital Strategy last year, setting out an ambitious plan for government, regulators and the industry to support digitisation of the UK wholesale financial markets. As part of this work, the Government have appointed Chris Woolard CBE as the Wholesale Digital Markets Champion to provide market leadership and co-ordinate industry efforts on tokenisation. The champion has already established a cross-sectoral task force and will report to the Chancellor this year and next on progress on how the UK can further advance the adoption of distributed ledger technology in wholesale markets.
Thirdly, on payments, the National Payments Vision sets out our ambition for a world-leading payments ecosystem delivered on next-generation technology. The Government are working with regulators and industry to renew retail payments infrastructure and ensure that the regulatory framework keeps pace with innovation in digital settlement assets. There is clearly more to do in a fast-moving environment, but the Government see the opportunity and are moving to take advantage of it.
Turning specifically to Amendments 163 to 164A, these relate to the Government’s overall strategy for digital assets and engagement with industry. I agree that, as I said, the underlying objective has already been taken forward through the wholesale financial digital market strategy and the work of the Wholesale Digital Markets Champion. There are also a number of existing mechanisms via which the regulators engage with industry on the subject of digital assets and the wider strategy—whether that be joint Bank of England and FCA engagement with firms experimenting with new technologies in the digital security sandbox, or the recent Bank of England and FCA call for input on tokenisation, which is seeking views on opportunities and risks associated with the wider use of tokenisation in financial markets. I do not think that we need to push such engagement with industry on a statutory footing when it is something that regulators are already prioritising.
Amendments 164B and 164C seek reviews of banking access and consumer redress for digital asset firms. On banking access, the Government recognise the difficulties that some firms have encountered and we are engaged with the sector on those matters. While such decisions are commercial in nature, we also expect businesses to be treated fairly. Under the crypto asset regulatory regime, firms will need to be licensed by the FCA to provide relevant crypto asset services. We would not expect such licensed firms to be subject to the restrictions by banking service providers simply because of the sectors they belong to.
On consumer redress, the Government agree that consumers should have clarity about the protections available to them. However, the existing FSMA framework and the regulated activities orders are deliberately flexible. When new activities are brought within regulation, the relevant regulatory protections, including complaints handling and access to the Financial Ombudsman Service, can be considered as part of the process.
I therefore agree with the underlying objectives of these amendments but I think that the existing strategy and ongoing work provide the most effective route forward. I am a strong believer in the need to digitise financial markets, and I am confident in the actions that the Government are taking with this agenda, which is a key strategic priority for the UK. If I have missed any questions in my response, I will be happy to follow up and write. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I am very grateful to my noble friends Lord Ranger of Northwood and Lord Holmes of Richmond for their support and the amendments that they have tabled on this important topic of digital assets.
I am very glad to hear of the Woolard review of tokenisation and the progress on crypto assets. I hope that the Minister is right about that solving the debanking issue—we will see. However, I am slightly disappointed in his response, because I know that he comes from a sector where digital progress has underlined success. I think that the industry lacks the clarity it needs. That is what it has been telling us. Firms need to know what the Government’s overall strategy is and how the different regulators will work together—I am sure there are some good examples. There is also the question of what definitions will apply to digital assets, along with how the UK intends to remain competitive internationally. There has been a lot of progress around the world.
Therefore, the points that we have raised and those put forward by my noble friend Lord Ranger need to be addressed. I was very struck by the way that he has travelled the world in his international search for success and growth in digital assets. Listening to him, I believe that we can learn from what both Rishi Sunak and the current Government have done together to get behind AI. I also agree with the noble Baroness, Lady Kramer, that we can learn from the successes on fintech—which I remember being involved with probably nearly a decade ago.
If the UK wants to be a leader on tokenisation and digital assets, we need a clear strategy. We need a joined-up and proportionate regulatory approach and a framework that supports innovation, while—most important of all—protecting consumers. I think that we will want to return to this issue on Report. Progress is being made, but we would like to see a little more ambition. However, for now, I beg leave to withdraw my amendment.
Lord Holmes of Richmond
“Shared digital identity and compliance utilities(1) The Secretary of State must, within 18 months of the day on which this Act is passed, publish a specification for—(a) a shared digital identity utility (“the identity utility”), providing API-based identity verification services accessible to authorised persons and regulated institutions operating in both legacy and digital markets;(b) a shared anti-money laundering and know your customer compliance utility (“the compliance utility”), providing API-based access to customer due diligence data and screening services.(2) The specification must address— (a) governance arrangements, including whether the utilities are to be publicly owned, privately owned under public specification, or operated as industry utilities;(b) data standards and interoperability requirements;(c) access arrangements for legacy and digital ledger technology-based market participants;(d) privacy and data protection safeguards, including compliance with the UK GDPR;(e) the transition period during which legacy and digital know your customer processes will operate in parallel.(3) The FCA may make rules—(a) requiring regulated institutions to register with and use the identity utility or compliance utility once operational;(b) providing that compliance with compliance utility standards satisfies the customer due diligence requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.(4) Use of the identity utility or compliance utility by a regulated institution does not, of itself, discharge that institution’s obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 or under the FCA's financial crime rules.”Member’s explanatory statement
This amendment is modelled on Singapore’s MyInfo and the EU's European Digital Identity Wallet framework.
Lord Holmes of Richmond (Con)
My Lords, it is a pleasure to open this group of amendments in my name. I can only apologise to the Committee that I did not manage to get through the full alphabet and require Roman numerals to be used after some of the amendments —perhaps when we come to Report. I will take Amendment 164E first before moving to the substantive group, which all speak to tokenisation and market demat.
Amendment 164E goes to the digital opportunity that we have when it comes to many issues, not least what passes for KYC and AML. In many ways, KYC has failed to deliver for more than quite a long time in the UK. Indeed, as a jurisdiction, we are not alone in that fact. It would be a joke if it was not true that you can avail yourself of financial services and other products by demonstrating what a capital, stand-up character you are because you produce a paper gas bill. We can do better, and we need to do better not only in terms of KYC and AML, but in terms of being able to realise all the opportunities from digital assets, tokenisation and market demat. We need an effective system of digital ID, and that is what Amendment 164E is all about. It is uncontroversial and draws on systems already in place, such as the MyInfo system in Singapore and the EU digital ID wallet framework. I will be interested in the Minister’s response on Amendment 164E and, if he is not in favour of it, his thoughts on the current situation and how it is working in terms of the digital ID framework in the EU and, indeed, the MyInfo system in Singapore.
The remainder of the amendments in this group continue the discussions that we had on the previous group. My noble friend Lady Neville-Rolfe, in her Amendment 163, displayed brevity in what I have taken an entire group of amendments to do. I have sought to open up the detail: the critical factors and principles we need to consider and put into the Bill to enable tokenisation and market demat, to have the right frameworks in place, and to send the right signals across the UK and around the world that we, the UK, not only understand what is required but want to be market leaders, market shapers and market makers in this space.
Many colleagues joined me in this Room in 2021 for the Financial Services Bill, in 2023 for the Financial Services and Markets Bill and through these past six days on this latest Financial Services and Markets Bill. Is the conclusion we draw from that that we are having too many financial services Bills or do we see that given there has been a three-year gap since the last one they are becoming fewer and farther between? Whatever the right conclusion, if we have a sizeable Financial Services and Markets Bill in front of us now, why would we not take the opportunity to put in at least a clear framework for what is required: tokenisation, market demat and all the potential opportunities of digital assets for the United Kingdom? I will not try the patience of the Committee by running through every amendment in detail, so long as I can be assured that the Minister will address every amendment when he comes to respond. I definitely saw a nod from him.
However, the issues that I set out, and the underlying principles, are clear. We have to move to tokenisation. There will clearly be a period in which we have tokenised and traditional assets coexisting. They need to be able to interoperate; there need to be bridges between them, and from one to the other. They need to be clearly understood and set out. When many argue that we cannot legislate in time, I merely offer the Electronic Trade Documents Act and the Property (Digital Assets etc) Act. Both are very precise, clear and blessedly very short statutes that enabled clear opportunities in the similar area of what these emerging technologies can deliver.
Lord Ranger of Northwood (Con)
My Lords, I support my noble friend Lord Holmes’s amendments across the alphabet, particularly because he is right about the detail and the need for us to look at the ambition and see whether we are really targeting changes that will help us fulfil the ambition. When it comes to the point about regulation and whether or not it has worked, in terms of KYC, AML and even PEP, we know that these fundamental versions of regulatory burdens do not succeed. We hear constantly of their failings, so how are we going to adopt and adapt as we move into the digital assets universe, as I have been calling it, rather than naming each different type?
Fundamentally, one of the elements here is the use cases. These amendments speak to specific points and changes that could be brought through, but we must look at the use cases in which these will apply. We talk about tokenisation or how stablecoins will be used. We must talk about how property and assets might be traded differently. We must look at how services will be adapted and the wholesale settlement that international markets are looking at. We must talk about and consider the use cases around retail e-commerce. With that, I support my noble friend’s amendments.
Baroness Kramer (LD)
My Lords, I am going to be brief again: these are very interesting amendments. The breadth of the amendments put before us by the noble Lord, Lord Holmes, gives us a sense of the extensive work that must be done, right across the plumbing of the entire financial services sector, to move and take advantage of the opportunities of the digital world. There is no discussion here of some of the risks, namely about the levers of power shifting to different hands and whether we should be concerned about that or whether there are monetary sovereignty issues. Those are crucial issues, and we cannot walk away from them. Plumbing seems boring, but it is crucial. It seems that every aspect of that plumbing has been raised here, something that I hoped we might hear about in greater detail from the Government. I am particularly focused on the first of the amendments tabled by the noble Lord, Lord Holmes, which is Amendment 164C. I apologise, I have the wrong one.
Baroness Kramer (LD)
That was very good too. I meant Amendment 164E, which is headed,
“Shared digital identity and compliance utilities”.
I come from a party that is always very concerned about identity cards, whether they are digital or traditional, old-fashioned cards, and what they do to privacy and independence, so I have those caveats constantly in the back of my mind. It seems to me, however, that a series of fundamental questions are raised by the noble Lord, Lord Holmes, in subsection (2), where he talks about the various specifications, the governance arrangements, the very straightforward things such as whether utilities are to be publicly or privately owned, under public specifications or operated as industry utilities. There are issues of data, access to digital ledgers, privacy, data protection and how to cope with the transition period, which will be very complex and very different for different individuals. Some people will transition completely almost in the blink of an eye, and others will be very late adopters. That creates a whole set of issues around financial inclusion and exclusion. I hope very much that we will get the discussion that we need, particularly around subsection (2), which then sits as a foundation to all the other issues that are raised. These are issues that engage the regulator, of course, but many of them are above the regulatory pay grade, and we need to be engaged on those issues here in this Committee.
Lord Altrincham (Con)
My Lords, this group is a snapshot, in a sense, of where we are now in digital regulation for financial services in the UK, as discussed by my noble friend Lord Holmes. This group somewhat dovetails with the amendments that we discussed in the previous group, which sought to probe the Government’s strategy for digital assets, tokenisation, access to banking and payment services and consumer redress. However, I am concerned that this package rather jumps the gun. The issue is more profound than the absence of individual regulatory provisions.
As my noble friends Lady Neville-Rolfe and Lord Ranger of Northwood, and the noble Baroness, Lady Kramer, said, we do not yet have the basic architecture in place, and we do not yet have a clear digital assets strategy. We do not yet have a settled framework of engagement with the industry, and we do not have a proper industry forum through which the Government, regulators and market participants can work through these questions in a structured way. That matters because this is a fast-moving area: if we legislate too quickly, or in too much detail, without proper consultation and industry engagement, we risk creating a framework that is either obsolete before it is implemented, or misaligned with how the market is actually developing.
The point that we have been making throughout these debates is that the Government need to move from ambition, the Digital Markets Taskforce and their initiatives to strategy. It is not enough to say that the UK should be a global centre for digital assets or tokenisation: we need to know what that means in practice, who is responsible for delivering it, how the regulators are working together, what definitions will be used, and what sort of regime firms can expect. At present, the problem is not only a lack of regulation: in some respects, the problem is the way the regulatory system is operating, those overlaps between the Treasury, the FCA, the PRA, the Bank of England and other bodies. There are sometimes different emphases, different attitudes and different levels of appetite toward digital assets and tokenised finance. That creates uncertainty for firms.
Industry does not need more rules; it needs clarity, a coherent regulatory perimeter, regulators that are aligned with one another and confidence that the UK is developing a framework that supports responsible innovation, rather than simply adding new layers of process and permission. This is why we need to be careful before layering further statutory requirements on top of a system which has not yet been properly clarified. That said, the principle raised by my noble friend about looking to world leaders for inspiration is a good one. This is something we should be paying attention to if we wish to remain internationally competitive.
In addition, the principle for higher regulatory neutrality between traditional and tokenised assets is a sensible one. If two instruments have the same economic substance and risk profile, there is a strong case for treating them consistently. But before that principle can operate effectively, the Government and the regulators need to define clearly what counts as an additional asset—a tokenised security, a crypto asset, a stablecoin or a form of digital market infrastructure. That is why the industry forum proposed in the previous group seems so important. We need a better mechanism for engagement before we decide the detailed architecture, and we need to hear from banks, payment firms, digital asset businesses, market infrastructure providers, asset managers, lawyers, technologists and consumer representatives. Without that, we risk legislating for a market as we imagine it, rather than for a market as it is developing.
In summary, my noble friend Lord Holmes raises important issues and many of the ideas in this group may well form part of the future architecture for digital finance. The first task is to sort out the foundations. We need strategy, clarity, co-ordination and proper industry engagement before we start building further layers of regulations. For those reasons, I welcome the debate and the questions raised by these amendments. The Government must first address the more fundamental uncertainty at the heart of the UK’s approach to digital assets and tokenised finance.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, for tabling these amendments and for his contributions to this and the previous debate. I will not rehash the arguments I made previously. We believe that we have a strategy, and we believe that that has been executed. These amendments cover a wide range of issues. The noble Lord asked me to respond to all of them; I will try to do so but, if I miss any, we can follow up afterwards.
The amendments include proposals on shared digital identity, AML utilities, prudential treatment for tokenised assets, an additional digital financial markets sandbox, education and use-case libraries, issuer governance, common token and data standards, model contractual clauses, custody and bridge infrastructure, issuer pathways and payment rail neutrality. The Government agree that the development of tokenised markets depends on proportionate regulation, legal certainty and effective payment and settlement infrastructure. These are all important issues, and the Government are already taking extensive action to drive forward this agenda, which I set out in the last debate.
On Amendments 164E to 164H, the Government recognise the importance of trusted digital identity, effective AML processes, proportionate prudential treatment, testing environments and education. I am happy to assure noble Lords that these matters are already being progressed through existing frameworks, including the UK digital identity and attributes trust framework, guidance on the use of digital verification services under the money laundering regulations, the digital securities sandbox and wider government and regulator work on tokenisation and market digitalisation.
The Government also recognise the importance of market understanding. However, I have concerns about requiring in legislation for the FCA to maintain a detailed use-case library or to prescribe particular commercial models for the development of digital financial markets. The role of the Government and the regulators is to establish clear and proportionate frameworks that support innovation while protecting consumers, market integrity and financial stability. The development of specific use cases and business models is a matter for industry, operating within those frameworks. The wholesale digital markets champion, whom I mentioned previously, can look at these issues if this is raised with him.
Across all these areas, the Government’s approach has been to support innovation through enabling frameworks rather than prescribing particular models in legislation. The Government believe that it is preferable to continue building on these flexible frameworks rather than putting in place detailed statutory requirements.
Amendments 164J, 164K, 164L, 164N and 164P focus on the infrastructure needed to support tokenised markets. The Government recognise the importance of legal certainty, interoperability, custody arrangements and clear issuer pathways for tokenised financial instruments. These are precisely the issues currently being considered by the Government and regulators, including through a joint call for input published by the FCA and the Bank of England earlier this year on the future of tokenisation in UK wholesale financial markets. The regulators have made clear that this work will inform a joint road map of reforms developed in partnership with industry.
The digital securities sandbox was also specifically designed to provide that flexibility, allowing government, regulators and industry to test how legislative and regulatory frameworks may need to evolve before making more permanent changes.
Lord Holmes of Richmond (Con)
My Lords, I thank all noble Lords who have taken part in this debate. It certainly seems that I am getting more from the Liberal Democrat Front Bench than my own Front Bench at the moment—strange times, but there we are. For the time being, I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Lord Young of Cookham) (Con)
As Amendment 165 has not been moved, I cannot call Amendment 165A for reasons of pre-emption.
Baroness Neville-Rolfe
“Duty to promote public understanding of financial services and financial capabilityThe FCA must take such steps as it considers appropriate to promote public understanding of—(a) financial services and markets,(b) personal financial management,(c) saving, borrowing and long-term financial resilience,(d) financial decision-making and financial risk, and(e) pensions.”Member’s explanatory statement
This amendment would give the FCA a statutory duty to promote public understanding of financial services and financial capability, and to report annually on the steps it has taken, the groups most at risk of poor financial literacy or exclusion, and the contribution of improved financial capability to consumer resilience, competition and economic growth.
Baroness Neville-Rolfe (Con)
My Lords, in moving Amendment 167, I am grateful for the support of my noble friend Lord Altrincham and the noble Baroness, Lady Altmann.
Financial education is incredibly important, but it is unusually weak in the UK compared to, for example, Finland, the Netherlands, Singapore and Australia. The Times rightly has a campaign to improve it. Rishi Sunak has spent time and effort since leaving office trying to do so, citing how much better people do in life if they understand inflation, the magic of compound interest and the importance of diversifying risk. Financial education is an issue on which I have campaigned for a very long time, notably in my 2022 review of the state pension age. I believe it is central to how people live their lives, make decisions, protect themselves and participate responsibly in the economy. It helps them to make sensible decisions about borrowing, mortgages, insurance and pensions, to avoid scams and financial harm, and to understand basic financial and economic statistics. This is a mission that I hope noble Lords of all political perspectives can support.
Amendment 167 would give the FCA a new statutory duty to promote public understanding of financial services and financial capability. For example, it could produce succinct basic explanatory material on concepts such as compound interest, basic banking, and portfolio and asset diversification. The amendment would require the FCA to report annually on the actions it has taken to improve financial capability, the groups most at risk of poor financial literacy, the groups most vulnerable to financial exclusion, and how improved financial capability contributes to consumer resilience, competition and economic growth.
The reason this matters is that the FCA’s current objectives focus on consumer protection, market integrity, competition, and growth and competitiveness. There is not currently a primary statutory duty on the FCA to improve financial capability across society. Better-informed consumers are less vulnerable to fraud and more likely to save, plan for retirement, compare products, switch providers and exercise choice. That supports not only individual resilience but competition and growth. Poor financial literacy often falls hardest on those who are already vulnerable or excluded. If people do not understand the financial system then they are less able to access it, less able to challenge poor treatment, less able to avoid expensive mistakes and less able to make decisions which improve their long-term security.
One problem is that financial education provision is scattered and variable in quality. There are many good initiatives, some even by the private sector, as I remember from the work done by Tesco Bank in Scotland, but they are not joined up. The curriculum has been improved slightly, although mainly through citizenship and maths, with some schools doing very good work but others being less effective. As recent debates on student loans have shown, this is something that we really need to grasp. We ask 17 and 18 year-olds to make significant financial decisions with long-term consequences, yet we do not ensure that they are equipped with the skills and knowledge needed to make the decisions well.
Many teachers find financial education difficult, and, like people from all walks of life, they are not aware enough of it in their own lives, let alone skilled enough to teach the basics well. They need support, resources and confidence. Financial education needs to be included in teacher training and linked to university teaching. I echo the difficulties of the noble Lord, Lord Carlile, with the scope of the Bill, since an amendment I tabled on the subject was rejected.
The truth is we need a step change at every level. My amendment does not ask the FCA to replace schools, teachers, parents, charities, or the Money and Pensions Service—although that service is too divorced from most financial transactions to do a good job. Our amendment would impose a duty on the FCA to recognise that improving financial capability should be part of its mission, and would require it to report properly each year on what it is doing. That could have a catalytic effect.
I welcome Amendment 170, in the name of my noble friend Lord Holmes of Richmond, which would require the FCA to work with the Money and Pensions Service to produce a national financial education strategy. That is complementary to my amendment.
There is a strong case for a more joined-up national approach. Financial education should not be a patchwork of disconnected initiatives. We need a coherent strategy, covering budgeting, saving, investment literacy, pensions, debt, fraud prevention, digital finance and support for vulnerable groups. I was glad to have a positive response on this issue from the noble Lord, Lord Livermore, to a recent Question, and would be very grateful if the Minister could respond to our pleas. Better financial education could be a key pillar of consumer protection. This is an area where a legacy is waiting to be created. I beg to move.
Lord Holmes of Richmond (Con)
My Lords, it is an absolute pleasure to follow my noble friend Lady Neville-Rolfe. I support her Amendment 167, which, as she rightly identifies, has many common themes with my Amendment 170.
I have been working on financial education and financial capability for a long time. As my noble friend rightly identifies, and as we have mentioned in other groups, the need for a coherent cross-society, cross-economy financial education and financial capability strategy, covering every stage of life, could barely be more needed than it is today.
There are two pernicious forces striding our streets, walking hand in hand: financial exclusion and digital exclusion, one often causing and compounding the other. Becky Francis’s review found that it was absolutely key to have financial education and capability within the curriculum, but it is about how that naturally touches on digital capability, media literacy and capability, and AI literacy and capability. These threads all come together, and can do so a positive, additive fashion if they are seen as positive, and are personalised and focused on the individual at every stage of her or his life, to enable all of us to make choices and to be included. With so much in society going digital—to be fair, not much in the Bill is going digital, but that is perhaps an outlier—financial exclusion for want of financial education and capability could dramatically increase and exacerbate the exclusion already felt by those at the most extreme end of our society.
Education is not just about what happens with the curriculum; it is a matter for our regulator. Through that, when it is a primary concern for the regulator, it gives it a sharpness of focus, putting it right at the centre for the regulator responsible for our financial services. It works with the Government’s stated aims in other areas. If the Government constantly state that they want to take a domain-specific approach, a financial education and capability, together with a domain-specific approach, will mean that the FCA will bring in money advice and a pension service alongside that.
I add to this to ensure that financial education and capability go beyond traditional products. When one considers how many young people are engaging with and investing in—in some senses, I put quotes around “investing in”—crypto, it is clear that the financial education and capability need to cover all the financial products, instruments and assets that are currently out there and being used and traded, not least by young people, who need to be enabled, empowered and given the capability and capacity to choose which products they want to engage with in a meaningful and capable fashion.
Amendment 171 is a different matter. It is a very specific amendment on SME right of action with the FCA—a right of action that is currently not available to SMEs. One can see at first blush why this is the case, because there is a clear distinction between a private person and an SME. The difficulty is, as currently set out in Section 138D of FSMA on the definition of a private person, that a private person and an SME are, in reality, characters that represent a principle and policy that sit underneath them. That is what the amendment is all about. The principle being set out is the assumption that a private person is always in need of a right of action because of their circumstances, which an SME is not.
This is beguilingly appealing at first blush, but entirely wrong in being a coherent strategy that includes everyone. The reason is that it inevitably tends to the mean: the average private person on the famous omnibus or the average SME with levels of understanding, support and financial wherewithal. But that does not cut it. That should never have cut it, and it does not cut it for current situations, because, on the one hand, it is clearly entirely possible and a reality that thousands of small and micro entities out there do not have these assumed resources, capabilities and capacities. On the other hand, there are millions of private persons who are far more capable and economically sophisticated than these small and micro entities.
This amendment is specific, clear and coherent: it is to extend that right of action to small and micro entities. I am not suggesting that the drafting is perfect; there may need to be de minimis levels put in, or a clearer definition of what small and micro entities are. But again, if the Government want growth and to back our businesses, not least our small and micro businesses, it is a question of coherence, clarity and fairness. SMEs should have a right of action when it comes to the FCA. This should not be limited just to private persons, as currently set out. I look forward to the Minister’s response and I beg to move.
Lord Davies of Brixton (Lab)
I cannot but support the desire for greater public understanding of financial matters. The noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Holmes of Richmond, have made a powerful case for better understanding, but I am not convinced that they have made the case for it to be focused in the way that they have set out in their amendments, so I look forward to the response from my noble friend the Minister. I want to make two points about these amendments.
The first is that better understanding is not a magic trick. We can be in favour of it but we must never overstate what it can achieve. It certainly does not weaken the case for effective regulation or remove the need for it at all. We need to be clear about that because, sometimes, when the issue is discussed there is a slight—or sometimes more than a slight, perhaps an overt—suggestion that that is what it would achieve.
It is worth my quoting a bit from the interim report from the Second Pensions Commission, which is obviously about pensions but gets to the heart of the matter. It says in its report:
“As with the principles underlying automatic enrolment, the pensions system needs to work in the interests of savers as they enter retirement and protect those who do not, or cannot, engage”.
That is the bottom line: whether people choose to take education or are capable of taking it, they are still entitled to first-class financial services. I am sure everyone here would agree with that, but sometimes it is not front and centre to the way that people think about it.
Lord Holmes of Richmond (Con)
Just to be clear, is the noble Lord suggesting that in anything that I have set out—I will not speak for my colleagues—financial education and financial capability would then be used to weaken and have lesser regulation? I do not believe that that is what I said.
Lord Davies of Brixton (Lab)
No, I am not for one moment suggesting that. I am saying that, in other discussions, I have heard it said explicitly or by implication. It is a danger and, given what we are trying to achieve, it is one that we should recognise and take account of.
My second point is that both amendments refer to the FCA. The first amendment, from the noble Baroness, Lady Neville-Rolfe, specifically refers to pensions. Let us be clear: the FCA knows little or nothing about pensions. It is the wrong body to undertake any form of public information about pensions. I have heard the discussion on the regulation of pensions and people asking, “Why do we have two regulators?” Well, we do have two: one is the Pensions Regulator and the other is the FCA, but the FCA’s involvement is narrow and we should understand that it is dying. It is going because personal pensions are dead, and the FCA will have little or nothing to do with pensions in the future. The life companies have not quite realised this yet—they are fighting against it—but history will remove them from this market.
Clearly, pensions do not fall within the ambit of the FCA for these purposes. It can provide information about life insurance products and annuities, but those are not pensions. The word “pensions” is wrong in Amendment 167.
Baroness Kramer (LD)
My Lords, I suspect that nobody in this Room would not speak out very strongly in favour of financial education and that, in this House, we would be really grateful if there were some capacity for it, particularly in the ever-changing world that we are dealing with today, with all its complexity. I sign up totally to that underlying concept, although I think that the noble Lord, Lord Davies, alighted on an important point. I know that my noble friend Lady Tyler speaks a lot on financial inclusion and always talks about financial education as part of that, but she becomes extremely frustrated when people seem to think that, somehow, financial education is a substitute for the other actions that are needed, such as access to cash or to personal services. The noble Lord is completely right that we want financial education, and it is brilliant if we have good financial education, but that does not take away from the need to make sure that our financial services sector delivers proper, safe, first-class services, appropriately regulated.
Of all the bodies to choose to provide financial education, the FCA would be right at the bottom of my list. This is a body that has so many responsibilities already, and to take on another absolutely massive task—communicating with the ordinary person on the street, among other things—would be way beyond its capacity. It has plenty to do without this. Also, has anybody read letters from the FCA? It does not write human in its general communication. I think this is probably a government responsibility, and to me it makes a whole lot more sense to fund someone—I am picking this out of the blue—such as Citizens Advice, with people who speak with normal people and understand the issues they face and how they face them, if we are going to look for a financial education champion. I am sure people will come up with others.
I want to address Amendment 171 in the name of the noble Lord, Lord Holmes, because it is very important. It would provide a right of action to SMEs for breaches of the FCA handbook. I have from time to time, in this House and even in this series of debates, expressed my very deep frustration with the regulatory perimeter: the consumer protections that the FCA provides are limited to individuals—consumers. It now includes very small micro-businesses, but it does not include small businesses. Bad actors in the industry completely exploit that. We have seen that in example after example of mis-selling, whether back in the days of asset stripping or the mis-selling of derivatives or a play with mini-bonds. That perimeter has been used as a mechanism, because, on the far side of the perimeter, from the FCA perspective, there is not protection: it is entirely caveat emptor. In the complex world of today, where small businesses have to deal with so much and compete on a scale that they never had to if you go back a generation or so, I think it is wrong not to recognise that they will not have the capacity to be able to deal with some of that financial complexity.
I have always been keen on a right of private action; it is a very old and core tradition in British common law. One of my frustrations with the FCA has been that, in a sense, it went down the path of adopting the consumer duty to avoid doing what this House had intended it to do: look for a duty of care—because embedded in a duty of care is a right of private action. The FCA opted for a tick-box approach, rather than the principled approach that lies with a duty of care and the right of an individual citizen to get redress through the court system if they feel they have been damaged. For small businesses to now have a right of private action when they deal with the regulator seems to be an important step forward and a recognition of the reality of the challenges that small businesses face today.
Lord Stockwood (Lab)
My Lords, I am grateful to noble Peers for raising the important issues of financial education and the right of action for SMEs. On financial education, Amendment 167 would place a statutory duty on the FCA to promote financial capability, and Amendment 170 would require the FCA to publish a national financial education strategy. I am clearly supportive of the motivation, but I do not believe that new statutory duties on the FCA are the right way to achieve it.
The noble Baroness has already mentioned some of the good work that is being done by the Government on financial capability as part of their financial inclusion strategy, such as the work the Department for Education is doing in schools. The Government are also taking steps to improve financial education for adults. For example, we have announced the expansion of the Money Guiders programme, which is run by the Money and Pensions Service. This helps front-line workers, such as nurses and social workers, to have conversations about money with those they support. Fair4All Finance is also deploying £50 million funded by dormant assets in England to support financial capability initiatives. I assure the noble Baroness that the Money and Pensions Service already has a statutory function to develop and co-ordinate a national strategy to improve financial capability and education, as set out in the Financial Guidance and Claims Act 2018, and the FCA also carries out substantial work in this space. Helping consumers navigate their financial lives is already one of the FCA’s four priorities for 2025 to 2030.
Amendment 171 relates to SMEs and would significantly extend private rights of action. The Financial Services and Markets Act 2000 already draws a clear and deliberate distinction between general private law claims available to all parties, including SMEs, and the specific statutory right of action under Section 138D, which is limited to “private persons”—generally individuals and persons not acting in the course of a business. That reflects Parliament’s long-standing judgment that FCA rules are primarily regulatory and supervisory standards, rather than offering a comprehensive basis for civil liability for all market participants. SMEs can and do bring claims under contract, misrepresentation, negligence and other established causes of action.
I understand why the noble Lord is motivated to extend the right of action to SMEs for regulatory breaches. Historically, SMEs were often left with little option outside litigation, and I agree that those firms have fewer resources to seek redress. This was deliberately addressed in 2019 with the significant expansion of the Financial Ombudsman, which is now accessible to 99% of the UK’s small businesses.
I hope I have gone some way to reassuring noble Lords on the action the Government are taking on these important issues, and I therefore ask the noble Baroness to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to all noble Lords who have contributed to this important debate, and to the Minister for his response. I commend the remarks of my noble friend Lord Holmes of Richmond and the work that he has done on financial education, and I support his complementary amendment on that subject. This has been a useful discussion, because it is an area that deserves a great deal of attention. There is clearly broad agreement that financial education is too important to be left to a patchwork of uneven provision.
The Minister cited the Money and Pensions Service, which I think is based in the DWP. To date, I have not been terribly impressed by the speed or breadth of the education that it provides. It is not only individual groups that I am worried about. We could get an enormous improvement in growth and performance if financial education were spread much more widely, but I should be happy, if it could be arranged, to talk to the service to understand what it is doing before we get to Report. It may be that some of the plans it has are dealing with this wider problem.
Baroness Neville-Rolfe
“Reform of financial services dispute resolution(1) The Treasury must, within the period of 12 months beginning with the day on which this Act is passed, publish draft legislation containing provision—(a) replacing the ombudsman scheme established under Part XVI of the Financial Services and Markets Act 2000 with a scheme to be known as the Financial Adjudication Service;(b) removing the requirement in section 228(2) of that Act that complaints be determined by reference to what is fair and reasonable in all the circumstances of the case; (c) requiring complaints within the compulsory jurisdiction of the Financial Adjudication Service to be determined by reference to such statutory requirements as may be specified.(d) providing free access to the Financial Adjudication Service for complainants;(e) providing that the expenses of the Financial Adjudication Service are met by levies or fees imposed on regulated persons;(f) providing that determinations of the Financial Adjudication Service are binding on both parties unless appealed as described in subsection (2);(g) making such amendments to Part XVI and Schedule 17 of the Financial Services and Markets Act 2000, and any other enactment, as the Treasury considers necessary for the purposes of that provision.(2) Draft legislation published under subsection (1) must propose the establishment of a chamber of the First-tier Tribunal to be known as the Financial Services Chamber to hear appeals against determinations by the Financial Adjudication Service and make decisions which are binding on the Financial Adjudication Service unless and until overturned on appeal.”Member's explanatory statement
This amendment would require the Treasury to publish draft legislation to replace the Financial Ombudsman Service with a Financial Adjudication Service and to establish a Financial Services Chamber of the First-tier Tribunal to determine appeals according to law, to provide speed, expertise and high settlement rates.
Baroness Neville-Rolfe (Con)
My Lords, Amendment 172A is in my name and that of my noble friend Lord Altrincham. It would require the Treasury to publish draft legislation to replace the Financial Ombudsman Service with a new financial adjudication service, and to create a dedicated financial services chamber within the First-tier Tribunal. This is a significant amendment but also a serious and necessary one. As noted earlier, it follows the policy announcement made by the leader of my party, Kemi Badenoch, at TheCityUK’s conference last month.
The amendment reflects a wider concern about the way in which the Financial Ombudsman has evolved, and about the need for a consumer redress system that is fast, expert, accessible and legally certain. A little bit of history: the Financial Ombudsman Service was created to provide a low-cost and informal alternative to the courts. That purpose remains important. Consumers and SMEs need an effective way of resolving disputes with financial firms. Going directly to court can be expensive, intimidating and slow. There must, of course, be a route to redress that is accessible and free to use.
However, the FOS has moved far beyond a simple dispute-resolution function. It now operates in many respects as a quasi-regulator. Its decisions can set expectations for firms, shape market behaviour and influence the way in which FCA rules are understood. Yet it does not receive the same scrutiny as regulators such as the FCA, nor does it produce binding legal precedent in the way that a court or tribunal would. That creates a serious problem of legal uncertainty.
At the heart of this issue is the “fair and reasonable” test. The ombudsman is required to decide complaints, not simply according to law, but according to what it considers fair and reasonable in all the circumstances. That gives the FOS a broad discretion. It means that firms can comply with the law, the FCA rulebook and their contractual obligations but still be found against on the basis that the ombudsman takes a different view of what is fair and reasonable. That is not a stable foundation for a predictable regulatory system and that has been recognised, I am glad to say, by the Government but they are not going far enough.
Courts have confirmed that the FOS must take account of the relevant law but is free to depart from it. Firms do not know whether compliance with the FCA’s rules will be enough. They do not know whether the FOS will go further than those rules or whether an individual determination will be treated as an indication of wider expectations. That uncertainly drives gold-plating and overcompliance.
One example that has been raised with us concerns packaged bank accounts and the consumer duty. The concern is that the FOS may take the view that providers should look at whether a customer has used any of the benefits of a packaged bank account in the previous year and, if not, prompt them that this might not be the right account for them. That goes far beyond current FCA guidance.
The wider point is that if the FCA believes that its rules need to change, it should amend them prospectively. If Parliament believes that the statutory framework needs to change, it should legislate. We should not have a system in which major changes in practical standards emerge through a redress body applying a broad fairness jurisdiction.
There is also a serious performance issue, which we have touched on before. The FOS is under significant strain. The backlog has become very large and timeliness targets have been missed. The FOS is now being used as an instrument of mass redress when it was not designed to operate as a quasi-court, a quasi-regulator and a quasi-mass claims mechanism.
Our proposal is to reform the architecture. The financial adjudication service would retain the benefits of a specialist and accessible adjudication system. It would be designed to provide speed, expertise and high settlement rates. Consumers and SMEs would continue to have a route to redress without the cost and complexity of ordinary litigation. The key difference is that decisions would be made according to law. The “fair and reasonable” test would be removed. The new service would apply statute, FCA rules, contractual obligations and legal principles. Where the law is unclear, that uncertainty should be resolved through proper legal determination, not discretionary case-by-case judgment.
Where a dispute required appeal or authoritative determination, it would go to a dedicated financial services chamber of the First-tier Tribunal. That would create binding precedent. It would fill the gap that currently exists between the FOS and the courts, where the only meaningful challenge to an FOS decision is judicial review. Judicial review is not a proper merits appeal. It requires firms to show that the decision was not merely wrong but unlawful or irrational. In practice, this means that FOS decisions are rarely challenged.
A tribunal system would be different. It would allow principles to be determined clearly, openly and according to law. Over time, that would create a body of precedent that would help firms, consumers, advisers and regulators to understand what the rules mean in practice.
That is the point of our amendment. It is not about removing redress but about making redress clearer, faster, more expert and more legally certain. Nor is it about weakening consumer protection. Consumers benefit from certainty too. They benefit when firms understand their obligations, when decisions are consistent, when disputes are resolved quickly and when similar cases are treated in similar ways. This amendment therefore asks the Government to publish draft legislation for a new model. It would not require every operational detail to be settled in the Bill today. It asks the Treasury to come forward with the legislative architecture needed to move from an ombudsman model based on broad discretion to an adjudication and tribunal model based on law.
The purpose of the amendment is to begin a serious conversation about the future architecture of financial redress. We need a system that is accessible for consumers, fair to SMEs, predictable for firms and capable of generating clarity over time. The current model sadly no longer does that. It is too uncertain and discretionary. A financial adjudication service, backed by a dedicated financial services chamber of the First-tier Tribunal, would preserve access to redress while restoring legal certainty. That is the balance that we should seek to strike. I beg to move.
Baroness Kramer (LD)
I have one question for the noble Baroness, as my noble friend Lord Sharkey will speak for us on this. What will the cost be to the individual of going to the tribunal system? I am conscious that an individual needs to raise between £40,000 and £50,000 to get to preliminary hearing at the employment tribunal. Is that the kind of number that she has in mind?
Lord Massey of Hampstead (Con)
I support this amendment and just raise the point of the First-tier Tribunal. I have experience of dealing with the FOS as a firm. At the moment, if you want to appeal the decision of the FOS, you have to go to judicial review. Therefore, whatever the cost of this First-tier Tribunal, it would be very substantially less than going through a process of judicial review, which firms are reluctant to go through, as noble Lords can imagine, because of its cumbersome nature.
Baroness Lawlor (Con)
Can I ask the noble Lord to clarify? Judicial review can determine a matter only if there is a matter of law involved, not a matter of adjudication; is that right?
Lord Sharkey (LD)
My Lords, as the noble Baroness, Lady Neville-Rolfe, remarked earlier in our Committee discussions, we often agree about things, but not, I am afraid, about this amendment. There are three reasons for that: first, the amendment is not necessary; secondly, it probably would not work, although its lack of any real detail makes it quite hard to tell; and, thirdly, it would significantly bypass parliamentary scrutiny mechanisms. For example, proposed new subsection (1)(c) says that the determination of complaints will
“be determined by reference to such statutory requirements as may be specified”,
without actually specifying them. This does not make for proper scrutiny.
How complaints are determined is absolutely critical in how redress is obtained. The amendment tells us nothing about how that would be done, or on what criteria judgments would be made. Proposed new subsection (1)(g) contains what looks suspiciously like a Henry VIII power. None of these provisions is really necessary, and nor is the amendment as a whole. That is because there does not appear to be a convincing evidence base for the radical root-and-branch reform that abolishing the FOS would bring about. The nearest we have to evidence is in the assertion by the Minister that:
“The Government’s review found that, in a small but significant minority of cases, the FOS has acted as a quasi-regulator”.—[Official Report, 22/6/26; col. GC 260.]
That is all the government explanation there is for the proposed radical reform and, by extension, for the amendment before us.
I have repeatedly asked the Minister for more detail; I asked at Second Reading, and I asked again on the first day in Committee. I have had no response to what are essentially simple questions. How many cases are small? How was their significance assessed? How is the FOS, in this small number of cases, acting as a quasi-regulator? What we have currently is an assertion, but it certainly is not evidence. When he speaks, can the Minister tell the Committee what “small” means in this context? How many and what kind of cases were involved and how did they come to be characterised as significant? As for HMT’s rather bland consultation report, the frequent use of the phrase “broadly speaking” does not inspire a lot of confidence about the strength of its case.
The amendment before us is essentially skeletal and removes the complaints procedure to a wholly different legal arena. Given the grossly overstressed nature of our justice system, it is very hard to see any improvements being located there. The FOS is meant to be, and is, a quick, simple alternative to costly court processes for consumers. There is no hard evidence to support the proposals made in this amendment and, indeed, no clear sense of what kind of redress system and what criteria for determination are envisaged.
Last July, the FCA and the FOS signed a memorandum of understanding. Article 21(b) of the memorandum says that the two parties will
“seek to achieve a complementary and consistent approach, so far as that is consistent with their independent roles by consulting each other at an early stage (including on the interpretation of regulatory requirements where they are relevant to the resolution of disputes)”.
Article 24(c) says:
“For the Financial Ombudsman Service: seek a view from the FCA on the interpretation of its rules and how redress could potentially be assessed, as early as possible in advance of issuing a final determination, and provide the FCA with any relevant information and draft determinations it can share, to assist the FCA in formulating a view.”
The following article says that the FCA should try to respond to the FOS’ submission within 30 days.
Lord Stockwood (Lab)
My Lords, I am grateful to the noble Baroness for tabling this amendment and giving the Committee a further opportunity to discuss the FOS.
An effective ombudsman service ensures that consumers have quick and easy redress when things go wrong, improving customer confidence in, and engagement with, our financial services system. The FOS largely fulfils that vital role, and the reforms in the Bill will improve that further, ensuring that it provides a quick and informal route for resolving disputes in financial services.
The amendment would undermine this vital role entirely. We believe that replacing the FOS with a financial adjudication service alongside the new tribunal appeal structure would create a more formal, legalistic and adversarial system. That approach would move away from Parliament’s intention of providing consumers and firms with an accessible alternative to resolving disputes through the tribunal and courts system. The Government’s view is that this would not be the right outcome for consumers and firms. The Government’s reforms have been developed in response to issues identified through the review and consultation last year to stop the FOS acting like a quasi-regulator, to stop it taking the lead on mass redress events and to deliver a clearer, more consistent and predictable framework.
I thank the noble Lord for raising that issue and I apologise for not writing in answer to his question. I promise that I will get back to him as soon as we have that information to hand again.
Lord Stockwood
I do not have it to hand. My apologies, I will bring it to the noble Lord. We are confident that the changes will improve trust and confidence that the FOS acts fairly and impartially, while ensuring that decisions are closely aligned with the high standards of conduct and consumer protection set by the FCA where relevant.
The right approach is this careful, targeted reform that preserves the core strengths and benefits of the FOS model—quick, informal and accessible dispute resolution—while delivering the necessary changes to improve the overall operation of the framework. I therefore ask the noble Baroness to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I thank all noble Lords who have contributed to this debate. I also thank the Minister for his response.
I recognise the concern that replacing the Financial Ombudsman Service with a financial adjudication service could make redress more formal, more logistic or less accessible. I understand that concern, but it is not the intention of our amendment. I say this also in response to the noble Baroness, Lady Kramer. The purpose of our amendment is to retain a specialist, accessible and free-to-use route for consumers and SMEs while ensuring that decisions are made clearly, consistently and according to the law.
Clearly there will be set-up costs. However, the Treasury could advise on that because part of our proposal is to require the Treasury to look at the issue and publish draft legislation for a new model. I agree with the noble Lord, Lord Sharkey, that parliamentary scrutiny would be important. There are also other questions that he addressed that the Treasury could answer. Indeed, some of the points that he made also apply to the proposal from the Government for the FOS. Like the noble Lord, Lord Sharkey, I would very much appreciate replies on those points before we get to Report, so that we can make sure that we understand what the Government are proposing properly.
I remain concerned that the Government’s approach does not go far enough. Recalibrating the existing model may improve some aspects of the system but it does not solve the fundamental problem, as I tried to explain at length. Firms and consumers still lack a body of binding precedent that explains what the rules mean and how they will be applied. Consumers would gain from extra certainty. They benefit when firms know what is required of them, when similar cases are treated consistently, and, above all, when disputes are resolved promptly and predictably; I know that from other parts of the consumer market. A system that is unclear and overstretched does not serve consumers well.
We will consider carefully what the Minister has said and look at any follow-up material but, for now, I beg leave to withdraw my amendment.
“Review of the City of London Corporation(1) The Secretary of State must, within 12 months of the day on which this Act is passed, appoint an independent person or panel to undertake a review of the functions of the City of London Corporation in relation to regulation of financial services and markets.(2) The review must consider—(a) the arrangements relating to engagement between the City of London Corporation and the FCA and PRA, and(b) the extent to which the City of London Corporation contributes to the regulation of financial services and markets.(3) The reviewer must publish a report setting out their findings and recommendations no later than 18 months after appointment.(4) The Secretary of State must lay the report before Parliament and, within six months of receiving it, publish a response setting out what steps the Government intends to take in response to the recommendations.”
Baroness Bennett of Manor Castle (GP)
My Lords, this amendment would provide for a review of the City of London Corporation with regard to the regulation of financial services and markets. At Second Reading, I referenced my intention to address this issue—here it is.
In the interests of transparency, I note that my interest in the City of London Corporation extends beyond that. Noble Lords who read the Politico email newsletter may have noted that it has reported that I am working with the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services on a survey of people’s views of the City of London Corporation, including whether it should be retained as it is, reformed or abolished. That extends beyond the regulation of financial services and markets as covered by the Bill.
I also note that the survey’s existence has led to me being contacted by a significant number of both city residents who are unhappy with the way in which the corporation fulfils its local government-type functions and organisations that receive funding from it and are concerned about the way in which things are done. Those organisations are most keen that what I say does not identify them in any way, for fear of reprisals—I suggest that that is disturbing and telling in itself—but significant elements of the corporation’s operation not being covered by the freedom of information legislation makes it difficult to uncover exactly what is going on.
The survey and my expression of my personal views on the subject have sometimes been confused, as in a letter sent on 1 July by the corporation’s policy chairman, town clerk and chief executive to members of the APPG, including me. The letter seemed to be unable to distinguish between the questions in the survey and comments that I have personally made about the corporation. As the letter from the corporation notes, my views on its existence are well known. Indeed, when I was elected as leader of the Green Party of England and Wales in 2012, the city diary in the Evening Standard noted my calls for its abolition; that was the only record of the election result in that newspaper.
However, the letter of 1 July from the corporation contains powerful arguments for my amendment, which calls for an independent person or panel to be appointed by the Secretary of State to undertake a review of the functions of the City of London Corporation in relation to regulation of financial services and markets. The letter refers to the corporation’s place
“in the delivery of strategic, financial and professional services initiatives”.
It says:
“Mayors have helped to catalyse major initiatives such as the Mansion House Compact and Accord”.
As one industry commentator has noted, in seeking to channel pension fund capital into growth assets,
“private equity, infrastructure, private credit and venture capital are now firmly on the radar”
of pension funds. These are all sectors where we know that benefits are more likely to flow into the financial sector than to investors.
The corporation’s letter also points to its role in the Office for Investment: Financial Services, which describes itself on its website as providing
“international fintech firms with a single front door for regulatory assistance and wider business support”.
I direct noble Lords who want to explore the issues around this so-called foreign direct investment further to an excellent book by Angus Hanton, Vassal State: How America Runs Britain. It quotes a late Member of your Lordships’ House, Lord Myners, who said in 2021:
“Britain is open for business in the same way that a car boot sale is open for business”.
It is now even more open for business, with the Financial Times recently reporting that the value of acquisition by foreign buyers is now up to £128 billion this year—more than triple the level in the same period in 2025, and that was before the apparently pending sale of easyJet to yet another US private equity firm. That the last rotten borough in the country—finally otherwise removed by the Reform Act 1867, with non-residential votes removed from other council areas in 1969—operating under rules that would be unacceptable anywhere else in public life and that shield it from scrutiny, skewing democratic representation in favour of business, overwhelmingly financial businesses, can exercise privileged influence over our laws and their administration over regulation is surely something that should be examined, particularly over financial laws that, as we discovered in 2007-08, are so essential to our security.
That is all that this amendment asks for: to conduct an independent review of the corporation’s impact on financial regulations and markets. Surely, if the corporation is so confident about the claimed positive impacts that it likes to trumpet, it and the Government could have no objection to a review. Given the problem we have with trust in our politics and financial system, more transparency and consideration would surely be a good thing. I note a recent Public First survey that found that 40% of people think that financial markets have too much influence over decisions made by elected Governments. I also note—the Minister might like to consider this—that the same survey found that 52% agreed that the UK should prioritise financial stability and consumer protections, even if this limits investment and economic growth. When asked about the potential changes to the UK’s post-2008 bank ring-fencing regime, 64% agreed that financial stability should be the priority.
Questioning the City’s place is not, after all, new. The Royal Commission on the Amalgamation of the City and County of London recommended its abolition in 1894. It was Labour Party policy to abolish today’s City of London Corporation until Tony Blair took over the party, and he instead chose to give even greater weighting to the business votes against those of residents.
Defenders of the City of London Corporation tend to reach for the language of heritage, as does the letter of 1 July: the corporation is ancient. It is part of the fabric of London’s history. Reform would be complicated. These are not effective arguments against examination. Age alone does not confer legitimacy—just look at the UK constitution. The corporation’s structures were not designed for a modern democracy. They pre-date it and have been carefully preserved by those who benefit from them.
The corporation is not the financial sector, but it is its lobbyist, its defender and a power base enjoyed by no other part of our society. Its existence cannot be separated from the fact that the financial industry is in a privileged position in our society. Giant financial corporations do not need any further boost to their power; they have more than enough already. No other major financial centre has anything resembling the City of London Corporation—not New York, Tokyo, Frankfurt or Singapore. Surely we should be examining the impact of this singular entity on the state of the UK. I beg to move.
Baroness Bi (Lab)
My Lords, I remind the Committee of my interest as the chair of Norton Rose Fulbright. Although my firm was located in the City of London for more than 200 years, from its founding in 1794, we are no longer within the jurisdiction of the corporation, having ventured south of the river a few years ago. My current office at More London gives me what is probably the best view of the Tower of London, which, notwithstanding the imminent arrival of the Bayeux tapestry, has been a daily reminder that not even the conqueror had the poor sense to interfere with the freedoms of the City, which worked extremely well, and we should be careful before we consider doing so. I oppose this amendment, which contemplates a two and a half year process after Royal Assent, with the attendant costs and distraction for the Treasury that such a review would entail. We should therefore ask what the review is actually meant to uncover.
Lord Pitt-Watson (Lab)
My Lords, the noble Baroness, Lady Bennett, has suggested that we inquire into the City of London’s role with the regulators and regulation. My noble friend Lady Bi summed it up well: there is no direct role there. But I wonder whether we could send a message to the City of London, perhaps a little more collegiate and, as a result, more effective. We all recognise that the role and constitution of the City corporation is quite difficult to defend from 21st-century principles. Why does one square mile of the country have these unique privileges? It has billions of pounds worth of property and investment, and the Lord Mayor of London has the status of a Cabinet Minister, apparently, when he or she goes on trips abroad. Why is it charged with the powers of a local authority but also with promoting Britain’s financial services industry? I point out that your Lordships’ House bears witness to the fact that historic institutions can—and often do—do good and important work. I wonder whether, harking back to the traditions of the City of London, there is one that we could help revive, in the spirit of what the noble Baroness, Lady Bennett, may want to happen.
Historically, the City of London was responsible for the good conduct of the trades in the city, ensuring that the goods produced could be trusted to be of high quality. Indeed, I believe that Elizabeth I even had the goldsmiths of London check that the coinage that the Mint was producing was of a high enough standard, because the goldsmiths were more professional than the people at the Royal Mint.
Over time, that role of policing good conduct has passed to professional bodies and then to regulators, but we often forget that it is the professionalism that we need. Regulators cannot replace professionalism, for which so many people from Britain and around the world come to use Britain’s financial services industry. Professionals, whether individuals or institutions, are a disciplined group possessing special knowledge and skills in a widely recognised body of learning. They are prepared to apply this knowledge and exercise these skills in the interests of others. That professionalism, both for individuals and for institutions, harks back to that old role of the City of London: not regulation but professionalism. It is and should be the core and unique selling point of the UK financial services industry. I sense that that is what we in this Room would like to achieve.
The City of London promotes financial services, but surely, if it does that, it must be sure that the services it promotes—maybe not every financial service—serve a purpose in the world. There is still enormous room for the City to identify and help to encourage good practice, not just to promote financial services generally but to ensure that all the services it promotes deliver benefit to the customer and the world. That may, from time to time, involve talking to a regulator—I do not see that as a problem—but it should seek much more to ensure that professional good practice becomes a norm. The City already does some of this, but it could be so much clearer about its focus and role. There would be no better way to promote the success of financial services in Britain.
I have one last coda on this and a more immediate thought. Spokespeople from the City of London Corporation like to explain—correctly—that they represent the whole financial services industry of Britain, two-thirds of which works outside London. But those who work to promote the industry are exclusively employed in the square mile, and it is difficult to express the level of frustration that I have felt among some that the City talks the talk about employment around the country but maybe needs to walk the walk in its own practices on where people are employed. I hope that might be a constructive suggestion about how this venerable institution might serve its country better.
Baroness Dacres of Lewisham (Lab)
My Lords, I fear that Amendment 172C strays beyond the purpose of the Bill, which is concerned with improving the regulation of financial services and markets. It is not, in my view, the appropriate vehicle for reopening broader questions about the role and governance of the City of London Corporation. This amendment takes us into a rather different debate—it asks us to examine the role and function of the City of London Corporation—whereas the purpose of the Bill is to strengthen the UK’s financial regulatory framework, ensuring that it is effective, proportionate and capable of supporting growth, investment and innovation, while maintaining high standards. Our focus should remain on achieving those objectives.
It is important to be clear about the respective roles of the organisations involved. The City of London Corporation is not a financial regulator. It does not authorise firms, supervise markets or enforce regulatory rules. Those responsibilities rest with the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England, all of which are independently accountable to Parliament.
The City corporation performs a different, but none the less valuable, function. It acts as a convenor of expertise, an advocate for one of the United Kingdom’s most important industries and a champion of the UK as a global financial centre. Through its international engagement, it promotes inward investment, supports exports of financial and professional services, and works with industry to help maintain the UK’s reputation for high standards and innovation.
I question whether the amendment has demonstrated that there is a genuine accountability gap requiring statutory review. Before Parliament creates a new review mechanism, we should be satisfied that there is evidence of a problem that the existing arrangements have failed to address. I have not yet heard that case made. The City corporation is already subject to established governance and oversight arrangements, while the regulators are independently accountable to Parliament.
At a time when the Government are rightly seeking to promote economic growth and strengthen the United Kingdom’s competitiveness as a leading international financial centre, I am concerned that this amendment risks creating uncertainty without identifying a clear public benefit. Our efforts should be directed towards ensuring that regulators can carry out their duties effectively, while organisations such as the City of London Corporation continue to play their distinct role in supporting the wider success of the UK’s financial and professional services. For those reasons, I believe our attention should remain firmly on the purpose of the Bill: strengthening the United Kingdom’s financial regulatory framework. I cannot support Amendment 172C.
Lord Altrincham (Con)
My Lords, I shall speak briefly to Amendment 172C in the name of the noble Baroness, Lady Bennett of Manor Castle, on the promotional role of the corporation and the survey views of local residents. Let me also say how interesting the speeches of the noble Baronesses, Lady Bi and Lady Dacres of Lewisham, and the noble Lord, Lord Pitt-Watson, were on this.
I have some concerns about whether this amendment is necessary, proportionate or properly directed at the issues before us in this Bill. If the concern is about the regulation of financial services and markets, Parliament should scrutinise the regulators and the Government. Indeed, much of our debate on this Bill has been precisely about that: how we ensure that the regulators are accountable, transparent, proportionate and properly focused on growth and competitiveness.
The City of London Corporation, however, is not a financial services regulator and does not set prudential rules. I am therefore not persuaded that a statutory review of the City of London Corporation’s role is the right mechanism in this Bill. At a time when we are trying to strengthen the competitiveness of the United Kingdom, attract global capital, support innovation and ensure that financial services remain one of our national strengths, we should be cautious before creating unnecessary uncertainty around one of the institutions that help to promote that sector internationally. I think the noble Baroness would recognise that as one of its roles.
There is also a question of evidence. Has there been a regulatory failure caused by the City corporation? Has there been a financial stability concern arising from its role? Has there been evidence that its activities have distorted the regulatory process in a way that existing scrutiny mechanisms cannot address? Without that evidence, I am cautious about launching a statutory review through the Bill.
Nor do I think that the Bill is the right vehicle for a wider constitutional debate about the governance of the City of London Corporation. This Bill is about financial services regulation, market infrastructure, consumer protection, competitiveness and the regulatory framework. The governance of the corporation is a broader issue, and one that would need to be considered separately if Parliament wished to do so. That is not to say that scrutiny is unimportant, but we should focus scrutiny where regulatory power actually sits. In this Bill, that means the FCA, the PRA, the Bank of England and the Treasury. Those are the bodies whose powers are being expanded or adjusted, and those are the bodies that Parliament should be most concerned to hold to account. For those reasons, I do not support this amendment.
Lord Stockwood (Lab)
My Lords, I thank the noble Baroness, Lady Bennett of Manor Castle, for her amendment. I have listened carefully to the arguments presented both in support and in opposition. I want to put on record my respect for the expertise of the City of London Corporation. I have worked positively with the corporation over the last year while I have been in office. It is an institution that represents the interests of the financial and professional services sector and, in that role, it contributes hugely to our mission of strengthening our financial services sector and ensuring that it delivers for people across the country.
It participates in initiatives designed to promote the UK as a place to do business and attract vital investment into the UK that will provide good jobs and pay for vital public services. I am aware that the noble Baroness is keen to revisit the structure of the corporation. However, I can assure her that, as my noble friends Lady Bi and Lady Dacres have said, the corporation has no unique role or special access in designing or influencing the development of financial regulation. The Government engage with a wide range of interested stakeholders in the development of financial services legislation. This includes the regulators, firms, trade associations and consumer groups. The City of London Corporation can and does participate in that engagement on the same basis as other interested parties.
Baroness Bennett of Manor Castle (GP)
My Lords, I thank the Minister for his response and everyone who has taken part in this interesting and informative debate. We have engaged with some interesting and broad issues. I particularly commend the noble Lord, Lord Pitt-Watson, who gave us some interesting suggestions and proposals that I am certainly going to go away and think about. I do not think that continuing with the history is necessarily the right thing to do, but that does not mean we cannot learn from history. The idea of the City of London having responsibility for its tradespeople has an interesting comparison, which makes me wonder: had we held the City responsible for the financial crash of 2007-08, and if the City had paid some of the large expenses that were instead, by austerity, put on the shoulders of the poor, the disabled and the young around the country, how different things might have been.
I note that the noble Lord also said that the City should be responsible for seeing that these services should deliver benefit to the world. That is an interesting proposal that I will take away. In responding to what the Minister and the noble Baroness, Lady Dacres, said, questioning what influence the City has over the FCA and the PRA, I will refer to the contribution from the noble Baroness, Lady Bi—
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
The noble Baroness was not here at the start of this sitting, which started earlier this afternoon, almost five hours ago. I point out that, as far as the Companion is concerned, when noble Lords are withdrawing amendments, they must be short and not rehash the whole argument or make responses to all the points made during the debate. If the noble Baroness would move towards withdrawing the amendment, that would be good.
Baroness Bennett of Manor Castle (GP)
I thank the noble Lord, the Whip. I am not rehashing; I am engaging with the contributions.
Lord Wilson of Sedgefield (Lab)
No. Paragraph 8.82 of the Companion says that when withdrawing amendments, noble Lords should be short in doing so and should not engage, because they will have done that during the debate.
Baroness Bennett of Manor Castle (GP)
I was speaking for about a minute and a half before the noble Lord interrupted me. I think three minutes might count as short, and I have two short points to make. The first, as I was saying before I was interrupted, is that the noble Baroness, Lady Bi, said that the City—
Lord True (Con)
My Lords, I apologise to the noble Baroness, but I support what was said from the Government Front Bench. This matter was discussed again in our Procedure Committee this morning: arguments that have been put are understood by a committee or by the House, and there is often merit in moving on relatively quickly, so, from the Opposition Front Bench, I support what was said.
Baroness Bennett of Manor Castle (GP)
I note the noble Lord’s contribution. As I said, I would have finished by now had I not been interrupted multiple times. The simple point I want to make is that the noble Baroness, Lady Bi, said that the City engages constructively with regulators. She also said that it uses its convening power to promote the sector. I would argue that, put together, those two things make the case for this amendment.
However, I was going to be brief; I would otherwise have finished a minute ago. We have had an interesting discussion. I will think about where this might go on Report but, in the meantime, I beg leave to withdraw the amendment.
Baroness Neville-Rolfe
“Review of regulatory causes of debanking(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report reviewing the extent to which individuals, businesses, charities and other organisations have been refused access to banking services, had banking services terminated, or had the use of banking services materially restricted as a result of regulatory requirements, regulatory uncertainty or risk aversion arising from the operation of the regulatory framework.(2) A report under subsection (1) must consider, in particular—(a) the scale and nature of debanking in the United Kingdom;(b) the categories of individuals, businesses, charities and other organisations most affected by debanking;(c) the sectors, industries or lawful activities most affected by debanking;(d) the extent to which debanking decisions are attributable, wholly or partly, to—(i) anti-money laundering requirements,(ii) counter-terrorist financing requirements,(iii) sanctions compliance,(iv) financial crime prevention requirements,(v) regulatory reporting, monitoring or due diligence obligations,(vi) regulatory guidance or supervisory expectations,(vii) fear of regulatory enforcement or supervisory criticism,(viii) uncertainty or confusion as to the proper interpretation of regulatory requirements, or(ix) the cumulative cost or burden of regulatory compliance.(3) In preparing the report under subsection (1), the Treasury must seek evidence from, and consult—(a) the Financial Conduct Authority;(b) the Prudential Regulation Authority;(c) the Financial Ombudsman;(d) relevant financial institutions;(e) persons who have been refused banking services, had banking services terminated, or had such services materially restricted;(f) politically exposed persons, their family members and known close associates;(g) persons appearing to the Treasury to represent the interests of politically exposed persons, their family members and known close associates;(h) persons representing firms operating in the defence sector or sectors connected with national security;(i) persons representing charities, voluntary organisations and civil society organisations;(j) persons representing small and medium-sized enterprises, start-ups and new market entrants;(k) persons with expertise in anti-money laundering, counter-terrorist financing, sanctions compliance and financial crime regulation;(l) such other persons as the Treasury considers appropriate.(4) The Treasury must publish the report.”Member’s explanatory statement
This new clause would require the Treasury to review whether debanking has occurred as a result of excessive regulation, regulatory uncertainty, confusion, supervisory expectations, enforcement risk or risk aversion arising from the operation of the regulatory framework. The review would identify the sectors and customer groups most affected, including politically exposed persons and their families, defence firms, charities, SMEs and other affected persons.
Baroness Neville-Rolfe (Con)
My Lords, in moving this amendment in my name and that of my noble friend Lord Altrincham, I shall speak also to Amendments 172E and 172F.
Amendment 172D probes on debanking. It would require the Treasury to carry out a review into whether individuals, businesses and organisations are being denied, having restricted access or losing access to banking services as a result of the way in which the UK’s financial regulatory framework operates. The core issue is this: the regulatory environment we have at the moment, and the way in which it is constituted, can mean that people, firms and organisations are denied access to banking services. Without access to a bank account, payment services or basic financial infrastructure, people and businesses are severely constrained in their ability to trade, to invest, to employ, to grow and to participate fully in the economy. The amendment asks the Treasury to examine whether debanking is taking place because of excessive regulation, uncertainty, regulatory confusion, supervisory expectations, enforcement risk or general risk aversion.
We have heard concerns from a number of sectors that they are, in effect, playing it safe. They are not necessarily closing accounts because there is a clear requirement to do so; they are doing so because the regulatory environment has become so complex and uncertain that the safest option is to avoid certain customers and sectors altogether. This matters for SMEs. A small business that cannot obtain or retain banking services may be unable to trade properly, receive payments, manage cash flow or invest. It matters for charities, particularly those operating internationally or in complex environments. It matters for defence firms, which may face additional scrutiny because of export controls, sanction concerns or reputational sensitivity, even where their activities are lawful and important to national security. It matters for politically exposed persons and their families; I am sure that many noble Lords will have experienced this. As we have discussed in relation to digital assets, it also matters for innovative firms that are trying to build new products and services but cannot access the banking or payment infrastructure they need.
My amendment therefore underpins our broader calls throughout the Bill for simplification, streamlining and clarity. I appreciate that the regulators have done some work on this, such as a new requirement to provide notice before closing an account and the recent FCA reviews of account closures. The amendment therefore asks the Government to look at how the regulatory landscape interacts with this work, as well as what other steps can be taken to address this problem more effectively.
I turn to Amendments 172E and 172F, which are probing amendments on the protection of sensitive commercial information and the ending of the compensation cap for senior managers under the Employment Rights Act. They were born of a conversation with my noble friend Lord Howard of Rising; I thank him for his insight. The financial services sector depends heavily on confidential and proprietary information. Firms hold business plans, client data, pricing information, trading strategies, algorithms, models, methodologies, internal systems and processes. Such information, as I know well from my business career, represents a major part of a firm’s competitive advantage. These amendments are designed to probe the Government’s position on the protection of that information, including the continued ability of employers in the financial services sector to use non-compete clauses, which can be an important mechanism for protecting commercially sensitive information.
I know that the Government have issued a working paper on options for the reform of these clauses in employment contracts. However, I want today to explain that their use in financial institutions and firms is crucial. I would welcome clarification from the Minister that no provision in the Employment Rights Act will prevent employers in the financial services sector using appropriate and proportionate non-compete clauses. It is important not only for individual firms but for the integrity and competitiveness of the UK financial services market. We have heard that the change could lead some firms to close up in London.
Finally, I turn to Amendment 172F, which is designed to probe the Government on the impact of changes to the rules for senior managers and, in particular, the wider implications of the removal of the compensation cap. The Bill reforms the statutory regime governing the recruitment, approval, mobility and accountability of people working at authorised firms. The Government have, in their Explanatory Notes, identified slow senior hiring and internal mobility as barriers to operational agility.
In the Government’s own analysis of the Employment Rights Act, they accept that high-paying sectors may be affected by the removal of the compensation cap. However, some in the financial services sector have told us that the removal could affect decisions on the future of UK operations because of the risk of enormous million-pound or million-dollar payouts to those who have highly paid roles. Indeed, an article in the Financial Times last month reported that firms were seeking urgent legal advice on how to prepare for the changes. This amendment therefore raises a financial services competitiveness and regulatory agility issue that is properly connected to the Bill; we believe that it is vital that the Government consider this issue as a part of financial services policy.
I would be grateful if the Minister could address three points. First, what assessment have the Government made of the sectors and groups most affected by the loss of access to banking services? Would a review not be useful? This amendment looks backwards. Secondly, can the Minister clarify the Government’s position on the continued use of proportionate non-compete clauses in financial services, where they are necessary to protect commercially sensitive information? Thirdly, will the Government assess the effect of changes to the rules on the employment of highly paid senior managers, and consider changing the rules in the interests of growth and competitiveness? Those are the rules that relate to compensation. Both amendments look forward, and the Minister should be concerned. I beg to move.
Lord Howard of Rising (Con)
My Lords, I support Amendment 172E in the name of my noble friend Lady Neville-Rolfe. She expressed her support for it far more ably than I ever could, but I want to say that it would be unrealistic to think that sophisticated financial businesses with complex computer systems and programmes can continue to operate in this country if they cannot protect the secrecy of systems oh whose development they may have spent millions of pounds or dollars.
Whether this is carried out by non-compete clauses, which I imagine will be the easiest way to do it, or some other method, what must be achieved is the ability of financial companies to preserve the security of their systems—that is, if we wish these businesses to remain in this country and not go somewhere else where they will get security for what, as I say, may have cost them many millions to develop. In that context, they just do things that we do not know about. For example, the method of communication in the United States now is to bounce radio waves off the ionosphere. They do not want to come here and show everybody how to do it. So I urge the Minister to pay good attention to what my noble friend has said.
Baroness Lawlor (Con)
My Lords, I support my noble friend Lady Neville-Rolfe’s Amendment 172D. The problem of debanking has reached a serious level in the UK, with roughly half a million people reported to be affected last year alone. I welcome and recognise that the Government have moved on this and that the new rules require banks to give 90 days’ notice and provide a clear explanation. I also welcome the fact that there is a right to challenge unresolved disputes via the ombudsman.
Lord Stockwood (Lab)
My Lords, this is the final group before Committee stage is completed. I am grateful for the discussions so far, not just on this group of amendments but on each of the more than 220 amendments we have discussed over the past three weeks. I appreciate the insights and wisdom shared by everyone in the six sessions. As someone relatively new to the House, I come away from this stage of the Bill’s journey with renewed faith and belief in the importance of scrutiny in the House of Lords. I thank noble Lords.
These amendments propose that the Treasury conducts reviews into a range of important issues in financial services. I will first speak to Amendment 172D, which would require HM Treasury to undertake a review into the scale and nature of debanking in the UK. The Government recognise the serious impact the loss of access to those services can have, but there is already a significant amount of work under way. Parliament has legislated to ensure that domestic politically exposed persons and their family members and close associates are treated in a more proportionate manner under the anti-money laundering framework. The FCA has also undertaken significant work on account access, account closures and debanking as required by Parliament. The FCA has collected evidence to understand where account closures and refusals are occurring and why, and has undertaken further work better to understand the reasons behind account closures and refusals.
I am not sure that regulation is a principal driver of debanking. Decisions to refuse, restrict or terminate banking services may arise for a range of reasons, including commercial decisions, firms’ assessments of risk, legal obligations and financial crime concerns. The FCA has emphasised that when accounts are closed or denied, providers must adhere to their consumer duty obligations. They include ensuring that all communication with customers is clear and easy to understand. The Government have also legislated to address concerns around account closures. This includes ensuring that providers give customers at least 90 days’ instead of two months’ notice before terminating payment services and provide a sufficiently detailed explanation of their decision and signpost appropriate complaints routes.
The Government have also taken steps to reduce the impact of anti-money laundering rules on legitimate customers through recent changes to the money laundering regulations. This included measures to make customer due diligence requirements more proportionate and effective while maintaining robust protections against economic crime.
Amendment 172E would require the Treasury to conduct a review into whether financial services firms have adequate means to protect commercially sensitive information. Confidentiality and the protection of commercially sensitive information is vital to the strength of the UK’s financial sector, and the Government take the importance of this matter very seriously. Without robust protection of commercially sensitive information, investors lose confidence, consumers are at risk and the reputation of the sector is degraded.
The FCA and the PRA have rules and expectations that address the protection of commercially sensitive information by firms. However, I am afraid that I am not an expert in the Employment Rights Act and the contracts that were mentioned are not within the scope of the Bill. While I am aware that I am giving Charles Dickens a run for his money in the number of letters I have suggested I will write, I will write to the noble Baroness on the Government’s position on this as well.
Amendment 172F concerns the effectiveness and operation of the senior managers regime. The Bill already introduces reforms intended to make the regime operate more proportionately, while preserving the accountability standards which are central to it. As I mentioned on Monday, the changes will help deliver the ambition of the Government and the regulators to reduce burdens from this regime by 50%; the reforms to this regime alone are expected to reduce administrative burdens on the sector by almost £600 million over the next 10 years. The detailed operation of the reformed framework will be taken forward by the regulators through their rules, subject to their statutory consultation requirements.
In those circumstances, the Government’s view is that the right course is to allow those reforms to be developed, implemented and monitored through the existing framework. The Government will also continue to engage closely with the regulators as they implement these changes, to ensure that the regime is more proportionate in its approach.
I will write on the compensation cap for senior managers, which the noble Baroness also mentioned, as this is a matter of employment law. I thank her for raising that issue. For those reasons, I ask the noble Baroness to withdraw her amendment.
Baroness Neville-Rolfe (Con)
My Lords, I thank my noble friends Lord Howard of Rising and Lady Lawlor for their support, and the Minister for his response. These amendments have raised three distinct but connected issues: problems with access to banking services, protection of commercially sensitive information, and the ability of financial services firms to recruit, retain and deploy talent in the UK under the new Employment Rights Act. I hope the Government will reflect further on these issues before Report and provide more concrete evidence on what has been happening on debanking to those who have been involved in Committee. The Minister made some encouraging remarks, but some data would be useful. I very much look forward to his letter on the points that I have raised about the impact of the Employment Rights Act.
As the last speaker, I also thank all those who have been involved in the Committee. We have completed it on time and with great good humour, in general. I look forward to Report and, for now, beg leave to withdraw my amendment.