Committee (1st Day)
Relevant document: 23rd Report from the Delegated Powers Committee
Clause 1: Revocation of retained EU law relating to financial services and markets
Amendment 1
Moved by
1: Clause 1, page 1, line 6, leave out subsection (1) and insert—
“(1) The Treasury may by regulations revoke any legislation referred to in Schedule 1 provided that—(a) the regulators have drafted and, where necessary, consulted on rules that are ready to be enforced, where it is appropriate, to replace the legislation, and(b) any such revocation or replacement which represents a significant divergence from current rules or practice has had the opportunity to be scrutinised by the relevant Parliamentary select committee and the views and recommendations of that committee or those committees have been taken into account.”Member’s explanatory statement
This is a probing amendment to allow debate on possible means of Parliamentary scrutiny of the changes generated by the implementation of Clause 1 and Schedule 1.
Lord Sharkey Portrait Lord Sharkey (LD)
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My Lords, the purpose of the amendment is to allow debate on the possible means of parliamentary scrutiny of the many legislative changes that will be brought about by the implementation of Clause 1 and Schedule 1.

The question of meaningful parliamentary scrutiny was frequently mentioned in all parts of the House at Second Reading. There seemed to be consensus that there is nothing in the Bill that would enable proper scrutiny of the changes proposed by the Bill. The whole wider question of parliamentary scrutiny was debated at length in the Chamber on 12 January. That debate was on the report from the DPRRC called Democracy Denied? and the report from the SLSC called Government by Diktat. The titles of the reports accurately represent their urgent concerns.

The debate was led by the noble Lords, Lord Blencathra and Lord Hodgson of Astley Abbotts, the respective chairmen of the Select Committees. There were 35 speakers, 34 of whom were sympathetic to the notion that our system of dealing with delegation is defective and does not provide effective scrutiny. Regrettably, there is plenty of evidence that that is the case, and much of it is presented vividly in those two reports. There is also plenty of evidence to support the view that Governments try, when they can, to bypass real parliamentary scrutiny, and plenty of evidence that the balance of power between Parliament and the Executive has been shifting in favour of the Executive.

I noted at Second Reading, as did the noble Lord, Lord Hodgson, that the Bill seems likely to generate more than 250 pieces of secondary legislation or binding rules. That might seem like a lot, but, in reality, it is just a very small and very important subset of the estimated 4,000 pieces of legislation to be revoked, amended or substituted in the Retained EU Law (Revocation and Reform) Bill, and it may be more than that if the National Archives find any more down the back of their sofa, in addition to the 1,300 which the Government have already overlooked. The scales of 250 to the retained EU law Bill’s 4,000 plus may be very different, but the underlying problem is exactly the same: how can parliamentary scrutiny be effectively and proportionately applied to those proposed legislative changes?

As things stand, the Bill provides that some of the proposed changes will be subject to the negative procedure and some to the affirmative procedure; for others, it is not clear whether they will be subject to any procedure at all. In practice, that amounts to no parliamentary scrutiny at all. The negative SI procedure is not scrutiny of any kind, nor is the affirmative procedure. If SIs cannot be amended and are not voted down, they are not scrutiny. In reality, our SI procedures are legislative theatre. Our recent debates and comments at Second Reading have shown a strong feeling across the House that, as a means of scrutiny, our current SI procedures are simply not fit for purpose. It does not help to have the Government insisting, as I am certain the Minister will, that they do in fact provide meaningful scrutiny. I am equally certain that she will not provide us with any evidence that that is the case.

The amendment suggests a way of achieving a modest amount of parliamentary scrutiny over the regulation-making powers in the Bill. The first part of the amendment simply places in the Bill the exact text of an important commitment made by the Treasury in paragraph 16 of its memorandum to the DPRRC. It says that, as a condition of the Treasury’s power to revoke, the regulators must

“have drafted and, where necessary, consulted on rules that are ready to be enforced, where it is appropriate, to replace the legislation”,

and so on. I am not certain of the force of a Treasury commitment made in a memorandum to a parliamentary committee, and that is one reason why I think it should be in the Bill: to put beyond doubt that the commitment is legally binding.

However, there is another reason for inserting the memorandum text: that is, to be able to ask the Government what the tests are for “necessary” and for “appropriate”, who decides, and how, whether the tests have been satisfied, and how much of this will be transparent. Without such detail, the commitment may be completely meaningless. I would be grateful if the Minister could address those points when she replies.

The second part of the amendment says that before the Treasury can, by regulation, revoke any legislation in Schedule 1:

“any such revocation or replacement which represents a significant divergence from current rules or practice has had the opportunity to be scrutinised by the relevant Parliamentary select committee and the views and recommendations of that committee or those committees have been taken into account.”

That is a rather broad-stroke first attempt at triage and at inserting a scrutiny mechanism. It is intended to identify a subset of changes that represent significant alterations in policy or practice and to provide the opportunity for the relevant committees to scrutinise these if they choose and to require the Treasury to take into account any views or recommendations expressed by the committees. The word “significant” is obviously key. We will need some specified tests for significance or perhaps leave it to the discretion of the relevant committees to decide for themselves. The amendment is not prescriptive about what form any committee scrutiny might take; that seems best left to the committees themselves.

I am sure that debate will generate improvements on Report or entirely different and better methods of ensuring that Parliament can play a meaningful scrutiny role with respect to the provisions in the Bill and perhaps make a contribution to addressing the similar but numerically much larger problem presented by the Retained EU Law (Revocation and Reform) Bill.

I conclude as I did at Second Reading by saying that the structure of our financial services regime is far too important to be left to the Treasury and the regulators alone. Real parliamentary scrutiny is vital, but it is entirely absent from the Bill. I look forward to hearing the contributions of other noble Lords. I beg to move.

Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, as this is the first day of Committee, I declare my interests as recorded in the register, in particular that I hold shares in listed financial services companies. I will not comment on the government amendments in this group; I am taking those on trust.

I share the desire of the noble Lord, Lord Sharkey, for Parliament to be involved in the new rules that will replace retained EU law, but this is part of the larger issue of how there will be parliamentary accountability of the regulators. A number of us have tabled amendments of slightly different varieties on how to achieve that in the Bill. I for one will not contribute to that issue in this debate, because it is better saved until the various mechanisms that some of us have proposed are debated later in Committee.

I have two amendments in this group: Amendments 244 and 245. At Second Reading I acknowledged that the replacement of retained EU law on financial services would take some time, but I felt that the process needed the discipline of a hard stop along the lines of the Retained EU Law (Revocation and Reform) Bill. I have not copied that Bill, with its deadline of the end of this year, but I have instead proposed one three years later: that is, on 31 December 2026.

That will doubtless disappoint some hardliners among my Brexiteer colleagues, but I see that as a pragmatic compromise between getting the issue fixed and letting the regulators do a proper job in turning EU rules into something that works for the UK or indeed, whenever possible, removing the rules entirely.

I am not convinced that, left to themselves, the FCA and the PRA will prioritise the task of dealing with the full corpus of retained EU law, especially once the first batch of relatively easy issues has been dealt with. A deadline is a simple device in order to incentivise them to get on with it or risk losing the related law entirely.

If my noble friend resists the notion of a statutory deadline, even though it is government policy for retained EU law generally, perhaps she will explain what sticks and carrots the Treasury has at its disposal to get the job done within a reasonable timeframe. I do not think it reasonable to have this large body of EU law left in limbo for any considerable period of time.

Viscount Trenchard Portrait Viscount Trenchard (Con)
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My Lords, I share the views of the noble Lord, Lord Sharkey, to a large extent, but I agree with my noble friend Lady Noakes that the question of parliamentary scrutiny is better dealt with when we come to that part of the Bill to which her amendments are tabled.

I declare my interest as a director of two investment companies, as stated in the register. On the whole, I welcome the Government’s amendments in this group and look forward to hearing my noble friend the Minister explain them. Insofar as they increase the powers of the regulators, I welcome the improved clarity and transparency, but we need to improve the method of scrutiny and degree of regulators’ accountability to Parliament, as I have said.

I support my noble friend Lady Noakes in her Amendments 244 and 245. While the task of reviewing, revoking and replacing retained EU financial services law is monumental, it is important that there be a time limit to this process. Ideally, it should be completed this year, because more than four years have passed since the passage of the withdrawal Act and more than two years since the end of the transition period. We have not acted as fast as we should perhaps have done in moving to exploit the opportunities available to make bold moves away from the cumbersome, expensive and anti-competitive regulatory regime that has progressively constrained the competitiveness of the City of London and its innate ability to innovate. There has been some inbuilt resistance to making any changes, and I am glad that this Bill takes some significant steps in that direction.

I would have preferred the Bill to be more radical and to require that certain EU regulations automatically be repealed without replacement, such as the whole regime around the alternative investment fund managers directive and its subordinate legislation. That directive was opposed by the whole City establishment and has served merely to divert new and innovative fund managers wishing to launch new products for professional investors away from the City to other jurisdictions. However, too little work has yet been done, and I think that my noble friend’s suggested latest revocation date of 2026 is a reasonable compromise. I look forward to discussing that later, and I hope the Government will accept my noble friend’s two amendments.

Lord Hunt of Kings Heath Portrait Lord Hunt of Kings Heath (Lab)
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My Lords, I want to lend some support to the noble Lord, Lord Sharkey, for raising the issue of parliamentary scrutiny in relation to this clause and Schedule 1. Clause 1 and Schedule 1 are an extraordinary exercise in executive powers through regulations and the regulators. In a later debate some days down the line, we are coming on to that issue, but it is appropriate that we start this debate with a reminder to the Minister that the issue of parliamentary scrutiny is very important.

I just want to reflect on what the noble Lord, Lord Sharkey, said about regulations. The Minister will no doubt pray in aid the fact that Parliament has processes for dealing with regulations. In your Lordships’ House, praying against a negative SI leads to an affirmative debate, unlike in the other place, and we debate it in full—but to what end? I have tabled a Motion today in the Chamber relating to an affirmative Motion on a completely different issue, data use in the NHS. I have no doubt that we will have a very good debate, but the Government will just plough on without having to take account of any debate that has taken place.

We know we have a problem with SIs because the Parliament Act 1911 did not embrace secondary legislation—partly because secondary legislation was not used very much at all then—which means we have an absolute veto that, because it is absolute, we use very rarely indeed. A few years ago now, when the noble Baroness, Lady Meacher, developed the concept of a Motion that said the SI on working family tax credits could not come in for some months, until the Government had taken some action—and which your Lordships passed—the Government took great umbrage, although that was not strictly a veto. Indeed, I remember that the then Chancellor threatened the House of Lords with abolition because of its temerity in voting through the Motion from the noble Baroness.
The ultimate point here is that in the Bill there is a plethora of regulations that we will be asked to agree to in order to give Ministers essentially executive power and, at the end of the day, all we as a Chamber can do is raise questions but accept that the Government will always get their way. In that sense, the noble Lord, Lord Sharkey, has done us a great service in opening our debates on such an important issue.
Baroness Altmann Portrait Baroness Altmann (Con)
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My Lords, I too congratulate the noble Lord, Lord Sharkey, on his amendment. I agree with his explanation of why parliamentary scrutiny is so important and his interesting explanation of the choice of words he has used in his amendment. I accept that later on, as my noble friend Lady Noakes said, we will debate parliamentary scrutiny once again, but in my view it is absolutely vital that we in this House recognise the dangers coming at us from various legislation that is taking away Parliament’s future ability to oversee and scrutinise important legislation.

I also understand what my noble friend Lord Trenchard said about the importance of allowing competition. However, we must not lose sight of the fact that what is sometimes called regulation may of course be inconvenient for the financial services providers and hamper the ability for innovation and free-for-alls to try different things, but it is also relevant to think of regulation as consumer protection. These are rules that will stop financial services companies taking advantage of consumers.

Asymmetry of information in financial matters is obviously something we are all too aware of, but just doing away with regulation, rushing to get rid of all the EU regulations without proper scrutiny and saying that the Financial Conduct Authority must work to a deadline, otherwise it will drag its heels, misses the point. If there is a forced deadline that precludes scrutiny and consideration of what these regulatory changes will mean for the general public or even more informed investors, without considering those risks, one has to ask whether it is resourced enough to do that. If not, which most of us would probably suggest is the case, what other elements of its duties will not be attended to while it is rushing to perform this job to an artificial deadline? It is a massive task—I respect that.

We need to take seriously the thrust of the remarks by the noble Lord, Lord Sharkey. I also look forward to hearing my noble friend’s remarks about the Government’s own amendments.

Lord Naseby Portrait Lord Naseby (Con)
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My Lords, I was one of the 34 who took part in the debate on secondary legislation, and I previously had the privilege of being on the Public Accounts Committee for some 12 years.

The debate on those two reports was an absolute watershed. Here is a golden opportunity to ensure that this Bill, which is so fundamental to the growth of our country, particularly the City of London, at a particular time can be pioneering. I am sorry to load that on to my noble friend; at any other time it might not be loaded on to her.

The key elements are there: secondary legislation basically means that those of us here in Parliament, in both Houses, have an opportunity to debate any changes made to a Bill. If I had to take issue with the noble Lord, Lord Sharkey, it is that he has in his amendment, at proposed new paragraph (b), the word “significant”. One company’s “significant” might be insignificant to another, and vice versa, so I do not think that is quite the right word to use.

We will go through this Bill in detail. Others have made their points, but for me—I did previous work with two quoted companies and a friendly society in the role of chairman—this is an opportunity. We must recognise that growth for our country is fundamental. That fundamentality is, to a fair degree, influenced by the Bill before us.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD)
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My Lords, for the purposes of Committee I declare my interests in the register, in particular as a non-executive director of the London Stock Exchange.

I will comment only briefly in this debate because, as others have said, it touches on some issues that run throughout the Bill. This is a matter of great importance: how we transpose the legislation and get the benefits of that transposition into UK law. If we have the flexibility, we ought to be able to use it, but financial services are our largest-earning industry, and I believe it is right that Parliament has to be able to keep track of what is going on and why when there are changes, and, as has already been pointed out, to have its attention drawn to significant changes.

If this amendment comes round again on Report, I would also like to see in it a report on the resulting change to the regulatory perimeter. Quite a lot of change is already going on and it is not necessarily something that we have had our eye on. Some of this change will be entirely at the behest of the regulators rather than in the hands of government. We will come across this later. It was always clear with EU legislation—maybe irritatingly so, in some instances—that the regulator “shall” do something, which did not give it any room for manoeuvre if it thought something did not need to be done. It looks like we will give our regulators the bits of wriggle room and the flexibility that we want, but it is wholly right that there should a report back to draw to the attention of our House and those who scrutinise this the intended difference in the regulatory perimeter, among other things, so that we can watch it and see how it goes.

I will return to the regulatory perimeter in many ways, because one of the problems is that once something is inside that perimeter, a whole truckload of things that were not really necessary might come along. AIFMD might be a good example of that. It is a whole load of extra reporting: where has it gone, what has happened to it, and has it done anything?

At the same time, if bad things are going on, you want there to be some kind of powers of intervention. It should not be a whole caboodle, with lots of rules and regulations and reporting on one hand but nothing on the other. We need to be able to do the things that are in the middle and bridge that gap. Given the way the edges of what is or is not a financial service are getting more and more blurred, what with the big tech industries and so on as well as the more nimble fintechs, we need that ability to ensure that where there is harm there is a route for action, without it having to mean that the whole kitchen sink of reporting is thrown at it across the board.

Lord Davies of Brixton Portrait Lord Davies of Brixton (Lab)
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My Lords, I thank the noble Baroness, Lady Noakes, for pointing out that the process here differs from that in the retained EU law Bill. Could the Minister in her response set out more clearly the differences between the process here and the process in the other Bill, and the reasons for the differences?

Lord Thomas of Cwmgiedd Portrait Lord Thomas of Cwmgiedd (CB)
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My Lords, I have just one brief point. I agree with the comments so far made that this may not be the appropriate place to deal with the whole problem of delegation, because this deals with revocation, although the amendment sensibly deals with what is inevitable, which is the replacement. It seems to me that parliamentary scrutiny is essential. We need to come back to this time and time again.

It is essential because, unlike the position of a Minister or that of a Government, we have, first, the issue of the accountability of regulators and, secondly, we do not want to politicise regulators. That is Parliament’s job. Therefore, we have to scrutinise this whole area, where we are moving financial services to regulators and away from being dealt with largely through a political process in the European Union. We are hoping to make great improvements, but the one thing we are losing is the input of the political process. One cannot pretend that the direction of financial services policy is not a political question as well as a regulatory question. Politics should be for this House and, although I hate to use this word, we should not taint the regulators with politics.

Baroness Kramer Portrait Baroness Kramer (LD)
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My Lords, I must agree with every word that the noble and learned Lord, Lord Thomas, has just said. I thank my colleague and noble friend Lord Sharkey for putting this amendment where it is, because the fundamental constitutional issue that underpins this Bill is probably one of the most crucial that we will address, not just in the next days of debate but, frankly, as a Parliament. I think that if the public had any sense of the authority that is now, in a sense, being passed to regulators without accountability—and to some extent to the Treasury without accountability—frankly, they would look at us and say to Parliament, “That is a dereliction of duty. We expect you to be responsible”.

This is not just a political process but part of a fundamental democratic process. As others, including the noble Lord, Lord Naseby, have said, what could be more fundamental than framing an industry that not only determines so much of our national economy but, when it goes badly wrong, can completely undermine that whole economy. I very much support the amendment brought by my noble friend. I know that it was tabled to trigger discussion and I look forward to the further debate that we will have later.

However, I want to narrow in on one point that I simply do not understand; others may have a much better understanding than I do. I want to draw the Minister’s attention to her Amendment 28, which would, basically,
“authorise the making of subordinate legislation by the Treasury”—
I assume for the purposes of transition. I cannot work out exactly how extensive this power is. The explanatory statement says that it would
“include the power to confer new regulation-making powers on the Treasury”,
but, of course, the word “legislation” is in the amendment itself. Is this a permanent power for the Treasury, or does the Minister anticipate that this will be used just during a very brief transitional period? Does “subordinate legislation” mean that these are statutory instruments and, if so, are they negative or affirmative? What decides which of those they are? I am trying to get a sense of the scope of the power that is being transferred to the Treasury, and I do not think that the explanatory statement serves to expose that. I would like the Minister to give us a complete understanding of exactly what we are being asked to sign up to.
Lord Tunnicliffe Portrait Lord Tunnicliffe (Lab)
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My Lords, I too thank the noble Lord, Lord Sharkey, for tabling his amendment and provoking this discussion. It is interesting to find such a wide consensus on the general direction. I support the general direction which has emerged in the debate, but I question whether this is the right solution.

Nobody could be more sensitive to the meaningless process of the scrutiny of affirmative SIs; I have done hundreds over the years. It is a very nice little club. It is usually me and the Minister—and, I have to admit, the Liberals often provide the third person in the room, as it were. It is ridiculous at that level. There is a great attraction in saying that the House should consider secondary legislation as a whole and produce some solutions, but the problem is that that would take for ever.

We have a particular issue with secondary legislation in this Bill. As those of us who ploughed our way through the last financial services Bill will remember, there is a big chunk of EU legislation which, whether we like it or not, went through the democratic process in Brussels and was then put into UK law. That has been, effectively, removed and in this Bill we are creating the processes to substitute it. We are pretty well agreed that substituting 500,000 pieces of law—whatever the figure is; I do not know—through primary legislation is impossible, and that it has to be done by secondary legislation. However, because that intermediate level of legislation is so important, we must, for the purposes of financial services regulation, have a better scrutiny process than we do at the moment.

As the noble Baroness, Lady Noakes, pointed out, she, a number of other noble Lords and I have tabled a lot of amendments and we will have a good discussion. I see myself working with others, both in this Room and further afield, to see whether we can produce a consensual set of amendments to improve scrutiny in this area. In the meantime, I hope the Minister will listen to this debate and those that will follow and see whether the Government can come up with their own proposals to address this problem of scrutiny. Whether we like it or not, it is unfortunate that when the amendments we pass in this House get to the other end, they get chopped. If we can achieve some sort of consensus with the Government, that would be the best way through. If we cannot, I think we have to send something pretty powerful back to the other place, saying that this scrutiny process must be improved.

As an aside, I think it was yesterday when my colleagues at the other end said they had done an SI. I asked, “How long did you take?”, and of course the answer was, “Under 10 minutes”. Their level of scrutiny is worse than ours. At least we make useful points—not that anybody really listens to them.

I am pretty agnostic about the amendments in the name of the noble Baroness, Lady Noakes. My experience of deadlines is that they are real only in retrospect: you know of a deadline for real only when you have passed it. If you motor up to an impossible deadline—which is what these amendments may produce—you introduce a law to change it. I can see the benign nature of her intent but not what good it would do, in practice, somehow to punish an organisation that has missed a deadline by saying, “You won’t be able to make the rules, but we have to make the rules because we need the rules,” and so on. I am not going to get carried away about it, but I am not that seized of it.

The Minister will no doubt give us an appropriate assurance about her bucketful of amendments—that they are technical, minor and all that sort of thing—and I will listen. One is left wondering how many amendments will emerge from down the side of the sofa between now and Report, and even perhaps thereafter, because it seems there has been a failure to find all these amendments by the due date for the original procedures in the Commons. It is unfortunate that so many were missed that they have to be introduced now, but we will have no opposition to them.

Baroness Penn Portrait The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
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My Lords, I will speak first to Amendments 1, 244 and 245, before turning to the government amendments in this group.

With respect to Amendment 1, the Government are seeking the agreement of Parliament to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation, whereby the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.

As the noble Lord, Lord Sharkey, noted, it is not the Government’s intention to commence the repeal of retained EU law in financial services without ensuring appropriate replacement through UK law. That commitment was made by the Economic Secretary to the Treasury, including to the Treasury Select Committee and, as the noble Lord noted, in our memo to the DPRRC. His Majesty’s Treasury will commence a revocation only once appropriate secondary legislation and rules are in place.

Parliament will therefore play a key role in scrutinising any replacement secondary legislation. Where the Treasury replaces retained EU law through the powers in the Bill, this will almost always be subject to the affirmative procedure, with some limited exceptions specified in the Bill.

I recognise the wider debate in the House of Lords about secondary legislation and its scrutiny. I will resist the invitation from my noble friend Lord Naseby for this Bill to be the place where we address that wider debate. I point out to noble Lords that, in its report on the Bill, although the DPRRC did not bring to the attention of the House the delegated powers related to retained EU law, it did report on one specific issue regarding hybrid instruments, which I will respond to shortly. The committee commended the Treasury for

“a thorough and helpful delegated powers memorandum.”

That is not to say that the question of parliamentary scrutiny of the provisions in the Bill and the regulations that will be made under it is not important. I know that we will return to it many times during this Committee.

The Government have made efforts to set out how the framework provided by the Bill will work in practice. As part of the Edinburgh reforms, the Government published their approach in a document entitled Building a Smarter Financial Services Framework for the UK, which makes it clear that they will carefully sequence the repeal to avoid unnecessary disruption, and there will be no gaps in regulation. The Government have also recently published three illustrative statutory instruments under the powers in the Bill to facilitate scrutiny of the powers under which they will be made in Parliament.

It is also worth noting, as the noble and learned Lord, Lord Thomas of Cwmgiedd did, that large parts of retained EU law will be replaced by the regulators through their rules. The regulators have the tools and expertise to make rules at pace, in line with their statutory objectives, within a model of appropriate parliamentary scrutiny and oversight. Clause 36 of the Bill supports Parliament in that scrutiny and oversight, requiring the PRA and the FCA to notify the Treasury Select Committee when they consult on rules and to respond to any representations made by that Committee. That is a specific element of the provisions to which we will return at a later stage in Committee.

Ahead of considering the Bill, the Treasury Committee itself considered the appropriate model for parliamentary scrutiny of regulatory rules, concluding that effective scrutiny of regulatory proposals should be carried out through a targeted approach, with Parliament scrutinising proposals in more detail where there is a public interest in its doing so. The Government consider that the provisions of the Bill are consistent with the recommendations of the Treasury Committee.

I turn now to Amendments 244 and 245 tabled by my noble friend Lady Noakes. I can assure her that the Government intend to act at pace to complete the repeal and replacement of retained EU law, but we must also act in a way that allows everyone to adapt to the new model. That will often require the regulators to make replacement rules, which must be done in line with the appropriate procedures for consultation and engagement, as noble Lords have pointed out. As my noble friend Lady Altmann pointed out, there is a balance to be struck between the pace at which we undertake that work and the proper processes for consultation and scrutiny that that will need to be subject to.

Baroness Kramer Portrait Baroness Kramer (LD)
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I am sorry to interrupt, but perhaps the Minister could clarify something we discussed before. What she describes puts Parliament in the position of a consultee, which I do not believe is the appropriate role for a democratically elected Parliament. Can she confirm that that is exactly what she is saying?

Baroness Penn Portrait Baroness Penn (Con)
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No, that is not what I am saying; I am saying that we will have procedures in place to allow Parliament to scrutinise legislation. We will also have procedures in place to ensure that, as part of that, relevant parliamentary committees can be notified of work by the regulators. That is just one aspect of how Parliament will conduct its role in the scrutiny of financial services, legislation and regulation. While the notification of consultations is one aspect, there are many others, such as the procedures for secondary legislation, the other procedures that Select Committees have to scrutinise the regulators’ work, the procedures for the provision of annual reports laid before Parliament, and others. So Parliament will be notified of consultations, but that does not imply that the Government view Parliament simply as a consultee in the process.

Lord Tyrie Portrait Lord Tyrie (Non-Afl)
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The Minister has said that the use of Treasury powers under this Clause will normally be subject to affirmative resolution by Parliament. In the Minister’s experience—she could offer her personal view if she feels unable to offer a government view—does she think that that scrutiny is usually relatively effective or ineffective?

Baroness Penn Portrait Baroness Penn (Con)
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My Lords, standing here at this Dispatch Box, I would offer only a government view. I view it as entirely appropriate for the model we have set out today. I acknowledged the wider debate being had within the House of Lords on different mechanisms of scrutiny and lawmaking. As I have noted, the approach we have taken in this Bill has not been drawn to the House’s attention by the Delegated Powers and Regulatory Reform Committee.

In the model of financial services regulation that we seek to put in place, a large number of the rule-making powers flow to the regulators. We are delegating that further to the independent regulators that have the expertise to make rules in this area. This is the right model for the UK. We have consulted on it carefully and extensively, and we received broad support in that consultation. It reflects the careful approach we have taken and the choice we have made as to the model for the regulation of our financial services.

I turn to my noble friend’s Amendments 244 and 245 and seek to reassure her that we intend to work at pace, but also recognise that there is a balance to be struck with the need for proper consultation, engagement and scrutiny of replacement rules. The key thing here for the Government is to think about the priority we give to undertaking what is a large piece of work. As I said, the Government have set out which measures they attach priority to and which they will seek to address first in their forward look. That means we will be able to deliver changes where the benefit can be greatest, while also making sure we have the time to conduct the process properly.
Baroness Noakes Portrait Baroness Noakes (Con)
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I was interested in what my noble friend said about a forward look. Can she explain a little more what this forward look is and where one might find it?

Baroness Penn Portrait Baroness Penn (Con)
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In short, the approach is set out in Building a Smarter Financial Services Framework for the UK, which was published alongside the Edinburgh reforms. A number of those reforms set out where our priorities are. They set out where we have already done consultations and will be ready to move forward with new secondary legislation or regulator rules. They set out where we are starting consultations or calls for evidence in a number of areas where we seek to make changes. They also give a forward look at some of those other areas where we seek to make changes but have not yet published our consultation or call for evidence.

Baroness Noakes Portrait Baroness Noakes (Con)
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Does that represent a comprehensive analysis of what the Government expect to happen to all the retained EU law covered by the powers in this Bill?

Baroness Penn Portrait Baroness Penn (Con)
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No, it does not. This comes back to the point about prioritisation. It represents the Government’s initial prioritisation of the measures where they think that making amendments or using the powers under this Bill to repeal the retained EU law and put in place regulator rules under our new model would have the biggest or most important effect. There will be subsequent work to do after what is set out in that vision, but in sequencing it is important that we direct our efforts and resources to measures that will make the most difference.

My noble friend asked how the regulators and the Government can be incentivised to complete the replacement of EU law in a timely way. We are working closely with the regulators to co-ordinate the programme to deliver the rules and legislation that will be necessary to enact the repeal of retained EU law. Where necessary, the Treasury could use the power under Clause 28 of this Bill, which sets requirements on the regulators to make rules in specific areas of regulation. So there would be that option within the powers in the Bill.

The noble Lord, Lord Davies of Brixton, asked about the difference in approach in this Bill from that in the Retained EU Law (Revocation and Reform) Bill. Unlike the approach taken in that Bill, this Bill repeals retained EU law in financial services, as set out in Schedule 1. The Government will continue to repeal and replace the contents of Schedule 1 until we have an established a comprehensive FSMA model of regulation. It will take time for regulators to make, and for industry to adapt to, technical and less important rules, as well as delivering major reforms. The Treasury developed a bespoke approach to financial services, given the existing role of the regulations to preserve that and bring the regulatory regime into line with the FSMA model.

I hope I have addressed the points about the desire to complete this work in a timely way, the need to balance that with resources for regulators and, indeed, industry to adapt to this change, and the importance that the Government place on therefore prioritising the work so that those reforms that have the biggest impact will take place earliest.

I turn to the government amendments in this group, Amendments 20, 28, 29, 242 and 243, which are all in my name. The Treasury undertook an extensive exercise to identify retained EU law relating to financial services to be repealed by this Bill, listed in Schedule 1. Late last year, the National Archives identified additional pieces of retained EU law across the statute book, some of which relate to financial services. The Government have also, through their own work, become aware of a small number of additional pieces. Amendments 2 to 20 make changes to Schedule 1 as a result of this. Government Amendments 2 to 16 and 18 add a number of statutory instruments, and Amendments 19 and 20 place three provisions in FSMA into Schedule 1 to be repealed. Amendment 17 removes one statutory instrument from the schedule, which was included in error, due to containing a small amount of retained EU law alongside largely domestic legislation.

I reassure the noble Lord, Lord Tunnicliffe, that every effort has been made to identify all legislation that should be repealed though this process. If he looks at the balance of what we have identified and what is in these amendments, it was a comprehensive job. None the less, to be as transparent as possible, when we find further measures that would be provided for under this Bill, we have sought to include them by way of amendment.

Amendment 28 clarifies the legislative effect of Clause 3, ensuring that the Government have the necessary tools to create a comprehensive FSMA model of regulation. It does so by clarifying that the Treasury can use the powers in Clauses 3 and 4 to create powers to make further regulations. Under the FSMA model, the Government are responsible for setting the regulatory perimeter via secondary legislation. There may be times in future when, for example, the Treasury will need the ability to update key definitions that sit within legislation restated under Clause 4, to clarify what sits within the UK’s regulatory perimeter.

Amendment 29 makes a technical fix to the explanation requirement in Clause 6, requiring the Bank of England to explain how updates to its rules are compatible with its new regulatory principles, introduced by Clause 45.

Baroness Kramer Portrait Baroness Kramer (LD)
- Hansard - - - Excerpts

May I ask again for a bit more clarification, which I specifically asked for on Amendment 28? Is the Minister saying that this is a power for the Treasury to amend primary legislation outside the Bill through secondary legislation designed to enhance the powers of the regulators? Is that what this is? I tried reading the letter but it did not get me any further.

Baroness Penn Portrait Baroness Penn (Con)
- Hansard - - - Excerpts

My understanding is that Amendment 28 contains powers to provide for amending secondary legislation, not primary legislation. I will seek a fuller explanation and I suggest that we briefly degroup that amendment, if we reach it today, to provide that explanation for the noble Baroness, so that she has further clarity. I do not think I will provide it for her at this point.

Lord Tyrie Portrait Lord Tyrie (Non-Afl)
- Hansard - - - Excerpts

That would be very helpful. Before the Minister leaves Amendment 28, can she say whether she discussed with officials whether to add a sunset clause to what otherwise will be a very open and extensive power in the hands of the Treasury?

Baroness Penn Portrait Baroness Penn (Con)
- Hansard - - - Excerpts

No, that discussion was not had. The powers are constrained in that they relate to the provisions in place to transition away from and replace retained EU law, rather than going beyond that.

Amendments 242 and 243, put together, enable provisions subject to the negative procedure under an Act other than this Bill to be included in affirmative regulations made under the Bill. This is a procedural change with well-established precedent. Where any element of a statutory instrument is subject to the affirmative procedure, the combined instrument would also be subject to the affirmative procedure, so there will be no reduction in parliamentary scrutiny.

To conclude, the Bill will repeal retained EU law to establish a model of regulation based on FSMA. It will do so in a way that prioritises growth while moving in a sequenced and measured way, and through scrutiny, engagement and consultation. At this stage, I hope the noble Lord, Lord Sharkey, will feel able to withdraw his amendment and that other noble Lords will not move theirs when they are reached. Subject to providing that extra clarification to the noble Baroness, Lady Kramer, I intend to move the government amendments when they are reached.

Lord Sharkey Portrait Lord Sharkey (LD)
- Hansard - - - Excerpts

I thank all noble Lords who have spoken. I did ask the Minister about the Treasury’s assertion, or guarantee, that it will have replacements where necessary for the stuff that gets repealed, and about the tests for what is “necessary” and what is “appropriate”, how they will be applied and how transparently. I would be grateful if the Minister could write to tell me the answer to my question.

If we are to rely on SIs as a means of scrutiny of the measures in the Bill, that is the practical equivalent of having Parliament largely bypassed in this discussion. We need two fundamental mechanisms for effective parliamentary scrutiny: an effective means of triage and an effective means of revision. I am sure we will return to those issues either later in Committee or on Report. In the meantime, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.
Clause 1 agreed.
Schedule 1: Revocation of retained EU law relating to financial services
Amendments 2 to 20
Moved by
2: Schedule 1, page 94, line 12, at end insert—
“Official Listing of Securities (Change of Competent Authority) Regulations 1991 (S.I. 1991/2000)”Member’s explanatory statement
This amendment and the Minister’s other amendments to Schedule 1 (except for the amendment at page 100, lines 45 and 46) would add various instruments containing retained EU law relating to financial services to the list of subordinate legislation to be revoked in Part 2 of Schedule 1 to the Bill.
3: Schedule 1, page 94, line 16, at end insert—
“Official Listing of Securities (Change of Competent Authority) Regulations 2000 (S.I. 2000/968)Financial Markets and Insolvency (Settlement Finality) (Revocation) Regulations 2001 (S.I. 2001/1349)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
4: Schedule 1, page 94, line 18, at end insert—
“Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001 (S.I. 2001/2587) Public Offers of Securities (Exemptions) Regulations 2001 (S.I. 2001/ 2955)Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001 (S.I. 2001/2956)Financial Services and Markets Act 2000 (Official Listing of Securities) (Transitional Provisions) Order 2001 (S.I. 2001/2957)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
5: Schedule 1, page 94, line 20, at end insert—
“Electronic Commerce Directive (Financial Services and Markets) (Amendment) Regulations (S.I. 2002/2015)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
6: Schedule 1, page 95, line 1, at end insert—
“Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 (S.I. 2007/ 126)Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Amendment No. 2) Regulations 2007 (S.I. 2007/2160)Financial Services and Markets Act 2000 (Motor Insurance) Regulations 2007 (S.I. 2007/2403)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
7: Schedule 1, page 95, line 2, at end insert—
“Financial Services and Markets Act 2000 (Reinsurance Directive) Order 2007 (S.I. 2007/3254)Financial Services and Markets Act 2000 (Reinsurance Directive) Regulations 2007 (S.I. 2007/3255)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
8: Schedule 1, page 95, line 20, at end insert—
“Takeover Code (Concert Parties) Regulations 2008 (S.I. 2008/3073)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
9: Schedule 1, page 95, line 23, at end insert—
“Financial Services and Markets Act 2000 (Amendment) Regulations 2009 (S.I. 2009/2461)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
10: Schedule 1, page 95, line 26, at end insert—
“Financial Services and Markets Act 2000 (Market Abuse) Regulations 2009 (S.I. 2009/3128)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
11: Schedule 1, page 96, line 11, at end insert—
“Prospectus Regulations 2013 (S.I. 2013/1125)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
12: Schedule 1, page 96, line 42, at end insert—
“Payments to Governments and Miscellaneous Provisions Regulations 2014 (S.I. 2014/3293)” Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
13: Schedule 1, page 96, line 47, at end insert—
“Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014 (S.I. 2014/3350)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
14: Schedule 1, page 97, line 21, at end insert—
“Financial Services and Markets Act 2000 (Qualifying EU Provisions) (Amendment) Order 2016 (S.I. 2016/936)Financial Services and Markets (Disclosure of Information to the European Securities and Markets Authority etc. and Other Provisions) Regulations 2016 (S.I. 2016/1095)Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (S.I. 2016/1194)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
15: Schedule 1, page 98, line 13, at end insert—
“Banks and Building Societies (Priorities on Insolvency) Order 2018 (S.I. 2018/1244)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
16: Schedule 1, page 100, line 21, at end insert—
“Financial Services and Markets Act 2000 (Central Counterparties, Investment Exchanges, Prospectus and Benchmarks) (Amendment) Regulations 2020 (S.I. 2020/117)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
17: Schedule 1, page 100, leave out lines 45 and 46
Member’s explanatory statement
This amendment would remove from the list of instruments to be revoked under Part 2 of Schedule 1 the Payment and Electronic Money Institution Insolvency Regulations 2021 (S.I. 2021/716) which predominantly comprise domestic regulation.
18: Schedule 1, page 101, line 9, at end insert—
“Financial Services and Markets Act 2000 (Qualifying Provisions)(Amendment) Order 2022 (S.I. 2022/1252)”Member’s explanatory statement
See explanatory statement for the amendment at page 94, line 12.
19: Schedule 1, page 103, line 3, at end insert—
“(za) section 55J(7A) to (7C);(zb) section 55KA;”Member’s explanatory statement
This amendment would add sections 55J(7A) to (7C) and 55KA of the Financial Services and Markets Act 2000 to the list of legislation to be revoked in Part 4 of Schedule 1 to the Bill. The provisions implemented in part the Solvency 2 Directive and concern powers of the Prudential Regulation Authority to cancel permission of certain undertakings.
20: Schedule 1, page 103, line 9, at end insert—
“(fa) section 367(3)(za);”Member’s explanatory statement
This amendment would add section 367(3)(za) of the Financial Services and Markets Act 2000 to the list of legislation to be revoked in Part 4 of Schedule 1 to the Bill. The provisions implemented in part the Solvency 2 Directive and concern winding-up petitions where the Prudential Regulation Authority has cancelled permission of certain undertakings.
Amendments 2 to 20 agreed.
Schedule 1, as amended, agreed.
Clause 2 agreed.
Schedule 2: Transitional amendments
Amendment 21
Moved by
21: Schedule 2, page 124, line 12, leave out paragraph 45
Member’s explanatory statement
These amendments maintain the duty for FCA to set position limits on commodity derivatives and over the counter equivalents, and the associated powers to request information and intervene, whilst onshoring the power to set limits which are appropriate for the UK.
Baroness Worthington Portrait Baroness Worthington (CB)
- Hansard - - - Excerpts

My Lords, I am very pleased to speak to this group of amendments this afternoon, having sadly been unable to make Second Reading. I declare my interest as a co-chair of Peers for the Planet. I also declare my relative ignorance of this topic, as I am not steeped in the details of financial services. I very much approach this issue from a layperson’s perspective, guided by common sense. Much of my efforts here are to apply parliamentary scrutiny to this very complex issue and to seek reassurances from the Minister.

As we debated in the previous group, it is vital that we have proper scrutiny of proposed changes to laws and regulations governing financial markets. Potentially poorly regulated markets could have significant negative real-world consequences, as we have seen in the past. Complexity is now endemic in this sector and can catch regulators, and indeed parliamentarians and Ministers, out. Derivative markets are particularly complex and require especially careful scrutiny.

My Amendments 21 to 25 and 41 concern the proposed future regulation of trading in commodities and their derivatives. Many noble Lords will be aware of this, but to give some background, derivatives are used in the financial markets and the wider economy to hedge exposure to commodity prices in the future. However, this opens up the opportunity to speculate and seek profit from volatility. Roughly two-thirds of commodity trading relates to commodities in the energy and food markets. Therefore, unchecked speculation and poor regulation in these markets can have very real-world consequences. Some types of commodity derivative investment are of course socially desirable. For example, soft commodity or energy producers seeking to insure themselves against future risks arising from such things as weather and an unstable climate are making a necessary hedge to keep products economic. However, there are dangerous aspects of this as they relate to food and energy, which affect people’s lives and the affordability of living.

Momentum-based trading strategies can exacerbate steep price rises and the cornering of markets, by which I mean taking large positions that are disproportionate to your genuine participation in the market, which could force unnatural or artificial scarcity into the market and raise prices. More generally, increasing volumes of capital being tied up in future derivatives removes money from the real economy today, where it could be delivering much greater real-world impacts.

There is overwhelming evidence that unchecked speculation produces price bubbles. I do not intend to go into this in detail, but in relation to oil, a 2021 piece in Resources Policy looked back at a whole host of research dating back to 2009 in highly cited journals. So firm is the consensus that there is now a whole body of techniques dedicated to measuring and modelling bubbles. We are well past the point of discussion of whether there is a risk; it is now about how we manage it and its impacts.

The co-author of last October’s UN Conference on Trade and Development—UNCTAD—trade review said that a ratio of around 70% real hedging and 30% speculation might be seen as “healthy”. However, he added that what we see in the market today indicates that the ratio has been reversed: 70% speculation and 30% real hedging. The same report warned of a policy-induced global recession. The report said that insufficient attention has been paid to the “betting frenzies” on future markets in the current crisis and called on Governments to tighten rules on speculation. However, with this legislation we seem to be doing the opposite.

EU legislation on commodity derivatives was introduced, and it was not simply pointless bureaucracy. There was clear evidence in the run-up to and during the financial crash of 2008 that food and energy prices were being driven upwards not by shortages but by fevered speculation, so action was taken. Investment banks were seen to be profiting by around $16 billion a year from commodity trading. Thanks to these new approaches, we have seen that profit-making fall by around three-quarters, according to analysis from the research firm Coalition. So there was a reason for the EU regulations that we are seeking to modify as we translate to post-Brexit financial regulation.

The general point is that we should be seeking to allow the socially beneficial, but not allowing bubbles to be created in this market. We should not be making it easier to do that but keeping a careful eye and tracking trends, while requiring clear data and better disclosure. You could argue that the EU perhaps overreached or did not get it exactly right, and that we should seek to take our own approach, but I have some questions about the Government’s proposals in the Bill.

It appears to me, and I seek reassurance from the Minister on this, that Schedule 2 is handing the power of setting appropriate position limits and controls—and the maximum position any firm can take on trading on a commodity—to financial exchanges, or certainly taking the power to do so. But are those exchanges not incentivised commercially to maximise liquidity and volumes of trade, so does this not create something of a conflict if they are also setting their own limits?

These new arrangements would see the FCA retaining backstop powers to give directions, but only in certain fairly narrowly defined circumstances. It can request information and intervene, but the drafting suggests that the exchanges would be free to set their own limits. Is this the case and, if so, how does the Minister expect them to handle this potential conflict between their commercial interests and a more cautious approach to the prevention of harmful speculative bubbles?

There is also the question of what will be regulated in future. The current rules cover both over-the-counter trades and exchange trades but, as I understand it, this new approach is about simply deciding not to continue to seek oversight of over-the-counter trades. From what I have been able to read, this seems to be based on the fact that those consulted said it was too difficult to do. That does not seem a good enough reason to remove the oversight of OTC trades and focus simply on exchange trades.

There is also the point about exchanges having less oversight of systemic risks building up in the global market. Whereas the FCA engages via the IOSCO, the International Organization of Securities Commissions, and the FSB—

Sitting suspended for a Division in the House.
Baroness Worthington Portrait Baroness Worthington (CB)
- Hansard - - - Excerpts

I shall seek to remember where I was in my speech. I was talking about international co-ordination and how the FCA currently is part of a global network of regulators, and therefore has a more effective chance of spotting systemic risks building up in the global markets, and that the exchanges would not be plugged in at the same level of international co-operation and co-ordination. The FSB warned, in the aftermath of Russia’s invasion of Ukraine, that

“prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain”.

So I ask the Minister: in these uncertain times, how certain are we that UK exchanges can be patched into that wider market scrutiny and regulatory infrastructure, which the regulator currently has the power to do?

The powers retained by the FCA are limited to intervening on operational objectives and, most relevantly here, consumer protection and integrity, but I am concerned that that definition of consumer may be rather too narrow. It could refer, as it does in Section 1 of the 2000 Act, to the investor, rather than the man or woman on the street. I worry that “integrity” could simply refer to soundness, stability, orderliness and lack of crime. I would welcome the Minister’s view on how this maps on to the existing grounds for regulation that are to be revoked, which are much broader and relate to preventing market abuse and market distortion and try to ensure that there is no artificial inflation of commodity prices.

My concern is that we can have a sound and orderly market which works very well for investors but inflates prices for consumers and businesses and adds extra costs on to essential commodities. I believe the FCA should retain the power to intervene in these cases, and that the definition of grounds for intervention should be as broad as it is currently.

I mentioned the over-the-counter derivatives no longer being covered in regulation. I was rather worried to read in the Treasury’s consultation on wholesale markets that:

“The objective of including them as part of the regime was to prevent market participants from circumventing regulatory requirements that are applicable to exchange traded commodity derivatives by dealing in lookalike OTC contracts. However, in practice, identification of these contracts has proven difficult, and they have only been reported in a very small number of instances.”

Therefore, the Treasury concluded that

“the inclusion of these contracts and uncertainty about the scope of this requirement imposes increased legal risk and potential compliance costs for firms.”

To me, that sounds as though something important is proving difficult and, rather than seeking to solve it, make it easier and provide clearer guidance, we have decided to drop it altogether.

The consultation goes on to say:

“to ensure market integrity, the government proposes that the FCA and trading venues should continue to take account of relevant OTC contracts when monitoring markets.”

But amendments to Regulations 27 and 28 take away the power from the FCA to do this and to request information on these contracts. That is my reading of it, but I look forward to reassurance or clarification from the Minister. If the FCA is not able to monitor these transactions, how can we oversee them? Would it not be more desirable to have the FCA retain the powers it has?

I am grateful for the support of the noble Baroness, Lady Bennett of Manor Castle, for my amendments. Essentially, they seek to unhook the legislation from the EU but continue to require the FCA to maintain the same powers to set position limits and to intervene as widely as possible to ensure proper consumer protection and maintain international co-ordination, which is so essential in these markets.

Amendment 41 requires the FCA to make rules requiring listed companies to publish the revenue and earnings attributable to trading commodity derivatives and economically equivalent over-the-counter contracts. I think this is important because I have personal experience—and there is plenty of anecdotal evidence—of firms that are operating very significant trading activities but hiding their profits in their financial statements and in other parts of their accounts, because to disclose quite how much was being made from trading would bring a lot of questions about the nature of those companies. I am specifically talking about energy companies, which have very significant trading activities and are not, at the moment, required to disclose in their accounts the level of profit they are making from those activities.

This is important because it materially affects the ability of financial services to assess the health of these companies. If we are not seeing the extent to which they are engaged in these derivative-trading activities and we are unable to see where the profits are being made, how can we make fair and open assessments about the nature, success and propriety of their business? It is important that we give ourselves the transparency to see exactly how much of this is happening and the degree to which it is altering the balance sheets of companies in these sectors, which are so essential to maintaining our standard of living and, in the case of energy and food companies, have such a material impact on our environment and global climate.

I am sorry that that was a very long speech, but I look forward to hearing the Minister’s responses and to continuing the debate.

Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My Lords, I will speak to the amendments from the noble Baroness, Lady Worthington. I do not support them, because I think that what the Government are trying to do in this Bill is moving in the right direction.

We have to remember that derivatives are basically a success story. It is a huge financial activity. The total value of derivative trading is sometimes estimated to be a multiple of global GDP. Of course, commodity trading is only a relatively small part of that, but it is important because the advantages of trading allow effective risk management, price discovery and market efficiency. Those are the sorts of things that actually help consumers, at the end of the day, so we must be very wary of trying to interfere in what is fundamentally a successful part of our financial infrastructure.

Of course, speculation is involved in derivatives, there is risk for some counterparties—and sometimes systemic risk—in derivatives, and sometimes they are extremely complicated as individual instruments, even to understand. But they are part of and underpin something that works well for markets overall. We should intervene in that only if absolutely necessary.

My own view is that the changes in the Bill probably do not go far enough to take the dead hand of EU prescriptive regulation away, but they are a solid move in the right direction. As the noble Baroness, Lady Worthington, pointed out, they replace a mandatory regime with a permissive one that allows the rules to be designed for the particular markets. In particular, the changes in Schedule 2 will allow the FCA to transfer responsibility for setting position limits to trading venues, if indeed position limits are needed. For some time now, the FCA has not been enforcing excesses on position limits in respect of the majority of contracts, and the world has not come to an end.

I think Amendments 21 and 22 are a step backwards in trying to preserve a mandatory EU regime. So too is trying to drag over-the-counter derivatives into that regime, because—as the noble Baroness pointed out—it has been found that they are extremely difficult to identify. Their removal from the regime was almost universally supported in the consultation that the Government carried out on changes to the derivatives regime.

Amendment 41 from the noble Baroness, Lady Worthington, is about putting additional information in annual reports and accounts. There are already obligations on companies to report things that are material to an understanding of the financial position of those companies. They are required to describe their trading model and the operating segments that are relevant to them, but they are not required to identify income streams from particular instruments that they operate. There is a good reason for that. Annual reports are already very long, complicated and difficult to understand, and the noble Baroness is asking for information that in very many cases will be wholly irrelevant to an understanding of the financial position or operations of the companies that involve some trading. For many, it is embedded in their marketing activities for the products they engage in. I do not support any of the amendments put forward by the noble Baroness.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD)
- Hansard - - - Excerpts

My Lords, I congratulate the noble Baroness, Lady Worthington, on venturing into commodities. I remember many happy hours—I call them that—when I was chair of ECON, discussing commodities with the chair of the CFTC, Gary Gensler, in particular, and the chairs of the agriculture committees in the Senate, which deal with a lot of the derivatives. It is an impossible task to get a grip on everything, but that does not mean you should not try to get a grasp of things that might go wrong.

I share some of the concerns about the way this is being implemented. I am less concerned about exchanges doing the position limits: they have the trading and the information, and they can act more quickly, as long as there is a sound framework against which they make those decisions. The problem with commodities is that there are some with freely flowing markets and lots of participants, so they will not very easily corner the market. Then there are some with very few traders, and it is very difficult, and some where there are even fewer and it gets extremely complicated. Steps have to be taken, especially in times of upheaval, as we have just seen with the war in Ukraine, when you get demand for sensitive metals, for example.
My concern is that part 4 of Schedule 2 says:
“The FCA may by rules require relevant persons to establish and apply … position limits”.
There is no compulsion for anything whatsoever. That goes back to the point I made when we debated my noble friend Lord Sharkey’s amendment. This means that this policy and the scope of the regulatory perimeter is to be entirely determined by the Financial Conduct Authority. It does not say that we will have rules about what might be dangerous concentrations, cornerings and so on in the market; it says that it is up to the regulator to analyse and work out the rules for when it will intervene when certain things happen. It might sometimes decide that it is not possible to intervene and it will let things be, but it is the business of government to set the regulatory perimeter. That is what I am always being told. I would quite like it if it was a bit more flexible, but that is what we are told.
Then we come to the things the FCA has to take into consideration. The noble Baroness, Lady Worthington, has something in looking at the nested way in which we read through the different strategic and operational objectives and so on. I used to think that the integrity objective was strong, and governed behaviour and all kinds of things. Then you keep wandering through and discover that it has been redefined; in the end, it is only if the market is regulated. I do not think it is regulated when it is a “may”, so maybe nothing applies. Setting it back to where it was with the adjustments made by the noble Baroness, Lady Worthington, at least would mean that we would know what is regulated.
Schedule 2 says that, in making rules,
“the FCA must have regard to its competitiveness and growth objective in section 1EB of the Act”,
but it will obviously have to have regard to all its objectives. Why oh why are we singling out the competitiveness and growth objective when here, the fundamentals are humanitarian, not competition and growth? I cannot see anything in the objectives, and their nesting in the various principles that have to be followed, about sustainability or humanitarian issues. This means that, if the FCA does take any action, it has been directed to pay attention to the competitiveness and growth objective. It might set it aside, but it has been given some kind of priority when dealing with issues that do not even properly seem to be covered in what it is supposed to do.
There are various amendments later that try to set that straight, but it is now right at the top of the tree to say something about sustainability. In particular, we have to balance the competitiveness and growth objective with a reference to sustainability, otherwise the whole commodities set-up comes tumbling down and is saying, “We don’t care”. So I think that the formulation here from the noble Baroness, Lady Worthington, is safer for now. If it went to a vote I would support it, but I really hope that the Government will make some other amendments or adjustments to ensure that we have properly considered, and definitely got within the regulatory perimeter, the humanitarian, social and very basic issues that affect the everyday lives of everybody.
It is not a matter of looking at whether there might be public interest. This Parliament knows that the public interest is in the lives of people—the heating in their homes, the food they eat, the materials that make the things in which they live, the vehicles in which they travel and the electric cars they hope to buy. All these things come down to commodities, and therefore we need to pay a lot more attention here. I hope that, by the time the Bill finishes its passage, we have made changes.
Baroness Kramer Portrait Baroness Kramer (LD)
- Hansard - - - Excerpts

My Lords, I will speak very briefly to the amendments tabled by the noble Baroness, Lady Worthington, because my noble friend Lady Bowles has set out the position very well.

I am concerned that we see, in parts of this new legislation, a very libertarian view of how financial markets should be structured. Even libertarians will say to me, “Look, it all works in the long run, but in the short run there are an awful lot of victims and collateral damage”. Because of that, we are asking the Government to go back and relook at the changes they are proposing. The developing world, including some of the poorest people, will suffer from the volatility of many commodity prices. Particularly where that volatility is artificially created, it seems to me that we ought to expect the regulators to play a disciplined and effective role.

While I must admit that most of this legislation is beyond my comprehension—the markets are extremely complex—I am rather concerned that regulators, whom the Minister herself has said have great expertise, knowledge and understanding, should not be in a position to apply those to ensure that there is no market abuse. I will leave it at that, because all that has been far better said by others.

My Amendment 27 in this group amends the Minister’s Amendment 26. It is another probing amendment, because I am not quite sure exactly what the Minister’s amendment says. My noble friend Lord Sharkey and I were both very involved in the Financial Services Act 2012, which set in place the framework for regulation of behaviour by central counterparties. That was after the 2007-08 crash, which was, as much as anything, a severe liquidity crisis. The chaotic nature of the derivatives market meant that no particular financial institution knew whether the financial institution with which it would normally do business was about to collapse, because, in turn, it had complex derivative products with yet another financial institution that was about to go under.

I am very supportive of the decision that was made, obviously at a global level, to channel virtually all financial derivatives, particularly the standard ones, through central counterparties. The largest of those central counterparties was of course the London Clearing House. I think we all recognise that, in doing that, a great deal of risk cumulated at the central counterparty. That is mitigated by the central counterparties themselves by requiring collateral.

However, to give the Committee a sense of the size of this market, I was looking at a typical number for outstanding financial derivatives on any one day. It is approximately $600 trillion, so it is vast, and a good part of that is now run through central counterparties. The problem is that there is not enough quality collateral in the whole wide world to meet margin calls from the various central counterparties, even after they have gone through a compression or netting process, which of course was led by London. Part of the reason that London is so dominant in this arena is that it has such a large market share.

The way in which the sort of fiction works—that collateral sits in place to cover risk—is that low-quality collateral can be used in these cases through a mechanism of discounting it for its embedded risk. Frankly, there is a point at which you can discount junk as much as you like but that does not turn it into high quality. It might do so on paper or by calculation, but it does not in reality, so there is always a weakness and high risk at the central counterparties.

In that 2012 legislation, we were attempting to put in place a resolution mechanism for the moment when central counterparties went sour. It is easy to put a resolution mechanism in place when a single member fails, because the other members of the central counterparty bloc are usually in a position and have sufficient financial strength to step in, and there are requirements under that resolution waterfall to be able to do so. But when the problem is at a systemic level, the waterfall does you no good at all. Most of the amendments here are meant to strengthen the waterfall, but the reality is that when there is a systemic problem, the waterfall collapses in a matter of seconds—and the ultimate backstop is, basically, the taxpayer. With the numbers that I am talking about, your Lordships can see that the exposure for the taxpayer is very significant.

All central counterparties across the globe, no matter where they are located and what rules they sit under, tend to have exactly the same membership. So if one CCP goes, you can pretty much count on all the rest of them going. In that environment, I am trying to understand the changes that the Minister is bringing forward under Amendment 26. I had understood that it was the Treasury that gave equivalence status to third-party central counterparties—I could be wrong because I am so out of date—if advised by the relevant regulator, which in this case would be the Bank of England. If I understand Amendment 26 correctly, it effectively extends the equivalence recognition to EU CCPs from one year to three years and six months. That is in primary legislation and we can make the decision whether we think that is appropriate.

I am rather troubled by proposed new paragraph (4), to be inserted by proposed new sub-paragraph (3) in Amendment 26, which says:

“The period determined by the Bank of England in a particular case”

under the rule I just described

“may be varied by the making of a subsequent determination.”

Can the Minister help me understand what on earth that means? Does it mean that equivalence can be extended by a decision of the Bank of England, say from three and a half years to 10 years? Does it mean only that the Bank of England could shorten the period of equivalence recognition and that it is limited by the three years and six months? I can see no way that there is any mechanism at all for scrutiny around this issue, even though it can represent a very serious chain of risk.

I just need some help to try to understand what power is being given to the Bank of England. It is a little like the previous question on the earlier amendment. What exactly is this power? What does it enable the Bank of England to do? What kind of scrutiny is there? Is there a sunset clause to it? How open-ended is this? I am just trying to understand those implications, so I would be very grateful if I could have the Minister’s help in doing that.

Lord Tunnicliffe Portrait Lord Tunnicliffe (Lab)
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My Lords, I will not make a long speech on this group, largely because I do not have the knowledge or skills to do it. What I am seized of is that financial crises come relatively often, about a generation apart. It seems that those who suffer in a financial crisis then set about putting in controls to try to make markets more stable. Clearly, markets are intrinsically not stable; they need rules to be stable.

One has a sense in some of the debate about the Bill that somehow the crisis of 2008-09 did not happen, and anyway it will not happen like that again. I share the little bit of concern about the central counterparties. We had debates on it about four or five years ago, and I could not see how we were protected against a systemic collapse. Every time you make a set of rules, you create some other areas of potential crisis.

I did not come here with a particular mandate on this subject, but in the debate so far it seems to have been argued that regulators need to have the ability to step into a situation and set some rules that might help limit the damage in a crisis. We will await the Government’s argument and I will read Hansard with particular care to come to a conclusion, but so far a very good case for retaining the power to the regulators has been made.

Baroness Penn Portrait Baroness Penn (Con)
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My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.

Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.

While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.

The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.

Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.

Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.

The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.

Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.

On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.

However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.

To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.

The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.

I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.

On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.

The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.

I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.

Lord Sikka Portrait Lord Sikka (Lab)
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I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD)
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If I may drag the Minister back to where she was just finishing off, in her response to me and the noble Baroness, Lady Worthington, she said that the UK would continue to observe its G20 commitments, which I do not doubt, and that various agricultural products and so on would definitely still be within scope. However, it says here in legislation that the FCA “may”. It does not say, “Apart from the fact that we are observing G20, and agriculture is still in”—it just says “may”. Where does it say in primary legislation that there will be guidance—or whatever the appropriate word is—as to how these things will be dealt with by the exchanges in the circumstances that give rise to concern? Otherwise, looking at our legislation—at least, our primary legislation —I see that we would not have that certainty, and it is proper that we have it.

Baroness Penn Portrait Baroness Penn (Con)
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It might be wise for me to write to the noble Baroness to address that specific point. Under the overall framework for the regulators, they need to make their rules in a way that is consistent with international standards, to which the noble Baroness referred. That would be the additional way in which one would have that reassurance, but it is worth writing to set out the point for her with more clarity.

The noble Baronesses, Lady Bowles and Lady Worthington, talked about whether the FCA, in acting to advance its objectives, would have sufficient grounds to intervene in these markets. The Treasury is confident that it would, and an example of humanitarian grounds for intervention was given. We are confident that the FCA could intervene on humanitarian grounds, acting in line with its objectives, but perhaps I will also write to the Committee to expand on that further.

The noble Lord, Lord Sikka, somewhat pre-empted me: I was just about to turn to Amendment 41. I am afraid that the Government will disagree with the noble Lord and the noble Baroness. Arguments were advanced by my noble friend on this point. Amendment 41 would require all listed companies to disclose how much revenue they make from trading commodity derivatives. However, listed companies are already required to publish comprehensive information about their operations and finances as part of their annual reports. The Government view that as sufficient.

It may be worth turning to the questions asked by the noble Baroness, Lady Kramer, on government Amendment 28, if the Committee is happy for them to be addressed here. Does the power in Clause 3 allow the Treasury to amend primary legislation to give us or the regulator new powers? The power in Clauses 3 and 4 to modify legislation, including to create new powers for the Treasury or regulators, is limited to retained EU law, as set out in Schedule 1. Clause 3 powers cannot amend primary legislation.

The powers in Clause 4 can be used to move provisions from retained EU law into primary legislation. The power in Amendment 28 applies where the Treasury is making transitional amendments to retained EU law or restating it. It is designed to allow, for example, the Treasury to give itself a power to update a definition or threshold in legislation. This mirrors delegated powers for the European Commission in retained EU law. While it would be possible to deliver the same outcome by reuse of the powers in Clauses 3 and 4, the Government consider it more appropriate to create a specific power to allow for such updates to be made, where they consider it appropriate. When creating such powers, His Majesty’s Treasury will have the ability to specify the procedure for any statutory instruments made using the new power. The Treasury will follow the same approach to determining the appropriate procedure as it has in the Bill. Where the Treasury exercises the power to create further powers, the instrument doing that will be subject to the procedure specified in Clause 3(9), which, in the vast majority of cases, will be the affirmative power.

Baroness Kramer Portrait Baroness Kramer (LD)
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The Minister has been very helpful, but I will ask the question that I think the noble Lord, Lord Tyrie, would ask if he were still in his place: is there any kind of sunset clause on this?

Baroness Penn Portrait Baroness Penn (Con)
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There is no sunset clause on this power, just as there is no sunset clause on the powers in Clauses 3 and 4, so it is consistent with the approach we have taken with those other powers.

I thank the Committee for allowing me to address those points in this group. With that and the further information I shall deliver to the Committee on some of the questions from the noble Baroness, Lady Worthington, I hope that she will withdraw her Amendment 21 at this stage and will not move her other amendments.

Baroness Worthington Portrait Baroness Worthington (CB)
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My Lords, I am genuinely grateful to the Minister for her response, which was very helpful and contained information about which I was not aware—I thank her for that. I will read Hansard in great detail. In her letter, can she explain a little more about those 18 contracts that will be covered and the retained powers? I would find that very interesting, although I am sure I can also google it.

I will now sum up. I am very grateful to the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. Returning to the statements by the noble Baroness, Lady Noakes, I am sure it is seen as a great success that we have this $600 trillion market in stuff that exists in the future, which is hugely complex and can crash the global economy. Some people will have benefited hugely from it; I have no doubt that some of those people may be in this Room. The point is that there is someone paying at the other end of that profit, and often it is the people at the very end of the chain who are trying to buy food in supermarkets or heat their homes. If a bubble in that market is definitely benefiting some—even maybe benefiting the Government, if they are receiving revenues from it—it comes at a cost, so we should be very mindful of the need to regulate that market. There is evidence after evidence of these bubbles forming because, quite frankly, the incentives to make cheap money are huge. Compared with the real economy, where you actually have to do things, build things, sell things and employ people, the desire to make money fast is overwhelming, and I do not want the UK to become the home of ever more exotic derivatives that allow us to make money the quick and easy way. Let us make banking and the financial markets boring again by getting them back to basics: using money to further society’s aims. If we cannot do that individually, we should do it collectively. I do not want to get on my soapbox, but the fact that we are exiting Europe makes that more difficult, so even more scrutiny needs to be applied now that we are setting our own rules.

I am grateful for the responses. I will end by saying that I had the pleasure of meeting a gentleman who worked in a bank that was more than 500 years old. I asked him about its ESG policies, and he listed them. They started with, “We will make no profit at all from soft commodities”, then went on to the usual checklist about arms and whatever else. I asked him where that came from, and he said, “Oh, we can’t remember”. Because it was such an old-fashioned concept—that we should take a moral position that we will not engage in profiteering from soft commodities—it sort of lapsed into the history of time.

Banking was moral once. I am not saying it is immoral now, but it is incredibly complicated. The incentives to make money in ever more novel ways are always there. Even the noble Baroness, Lady Noakes, alluded to the fact that systemic risks exist. They have existed in my lifetime and I am sure they will come again.

I am glad that we are here to do this scrutiny and very glad of the Minister’s offer to write. I hope that we will revisit some of these questions, and I will end on Amendment 41. I have personal experience of how energy companies are loath to disclose how much of their profits rest on trading. If that is the case, the markets should care about it and disclosure is the most obvious step to address it. With that, I beg leave to withdraw.

Amendment 21 withdrawn.
Amendments 22 to 25 not moved.
Amendment 26
Moved by
26: Schedule 2, page 126, line 39, at end insert—
“PART 4AAMENDMENTS TO THE CENTRAL COUNTERPARTIES (AMENDMENT, ETC., AND TRANSITIONAL PROVISION) (EU EXIT) REGULATIONS 201850A (1) Regulation 19B of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184) is amended as follows.(2) In paragraph (2) for “one year” substitute “3 years and 6 months”.(3) After paragraph (3) insert—“(4) The period determined by the Bank of England in a particular case under paragraph (2) (whenever determined) may be varied by the making of a subsequent determination.””Member’s explanatory statement
This amendment would allow the Bank of England to extend the period during which third country central counterparties that have fallen out of the temporary recognition regime following IP completion day can continue to offer services to firms in the United Kingdom, from a maximum period of one year to a maximum period of 3 years and 6 months.
Amendment 27 (to Amendment 26) not moved.
Amendment 26 agreed.
Schedule 2, as amended, agreed.
Clause 3: Power to make further transitional amendments
Amendment 28
Moved by
28: Clause 3, page 3, line 15, at end insert—
“(aa) authorise the making of subordinate legislation by the Treasury;”Member’s explanatory statement
This amendment would ensure that the powers in clauses 3 and 4 of the Bill to make transitional amendments or saving provision in relation to the retained EU law listed in Schedule 1 for revocation, also include the power to confer new regulation-making powers on the Treasury.
Amendment 28 agreed.
Clause 3, as amended, agreed.
Clauses 4 and 5 agreed.
Clause 6: Restatement in rules: exemption from consultation requirements etc
Amendment 29
Moved by
29: Clause 6, page 6, line 39, at end insert “, and
“(ii) the Bank’s duties under section 30D(1)(a) of that Act;”Member’s explanatory statement
This amendment would ensure that when the Bank of England makes material changes to rules where consultation exemptions apply under clause 6, the Bank must publish a statement explaining how the rules are compatible with the Bank’s duties relating to the regulatory principles inserted by clause 45 of the Bill. (The words after “with” in line 38 become sub-paragraph (i)).
Amendment 29 agreed.
Clause 6, as amended, agreed.
Clause 7 agreed.
Clause 8: Designated activities
Amendment 30
Moved by
30: Clause 8, page 8, line 4, at beginning insert “If the condition specified in subsection (1A) is met,”
Member’s explanatory statement
This amendment, and another, would ensure that the designation of activities did not go beyond the FCA’s operational objectives (consumer, integrity and competition).
Baroness Noakes Portrait Baroness Noakes (Con)
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My Lords, in moving Amendment 30 I will also speak to Amendments 31 and 34 in this group. Amendments 30 and 31 would amend Clause 8 and Amendment 34 would amend Schedule 3. They all concern a new power in the Bill to designate activities that the FCA will regulate.

The power to designate activities in Clause 8 is a very wide one. I have no problem in principle with the designation of activities, as there have been too many instances in the past where activities went unchecked and where the FCA’s inaction was blamed on lack of powers. But it is not necessary to regulate absolutely everything in the financial services sector, and new Section 71K(3) of FSMA allows practically anything to do with finance to be regulated.

My Amendments 30 and 31 are modest, in that they say the power to designate activities can be used only if the Treasury thinks it necessary for the purposes of the FCA meeting its operational objectives. These operational objectives are consumer protection, enhancing the integrity of the financial system and promoting effective competition in the interests of consumers. That should not be a high bar, but it is important that when the Treasury brings forward designated activity regulations, it demonstrates that the activity is needed for these objectives and that it would not result in mission creep for the FCA.

I illustrate this with my Amendment 34, which would remove paragraph 4 from new Schedule 6B to FSMA which is introduced by this Bill’s Schedule 3. I am not at all clear why the Government have included Schedule 3, given that the unconstrained new power to designate activities expressly says that nothing in the schedule limits the power. I can conclude only that new Schedule 6B to FSMA contains the FCA’s wish list of areas that it wants to regulate.

My amendment, which deletes new paragraph 4, concerns short selling. I strongly believe that this should not become a designated activity, or should do so only if there is clear evidence that it is needed for one of the FCA’s objectives. Of the three objectives, I imagine that the only one that would be engaged is the market integrity objective, and I am not aware of any evidence that the regulation of short selling is necessary from a market integrity perspective. What enhancement of market integrity would be achieved? Is it actually necessary?

The FCA has not carried out regulatory activity in relation to short selling since the financial crisis. It requires some disclosures to be made, but only because it was required to do so by the EU. The FCA itself has said:
“Our focus is on maintaining open markets that operate with integrity. We note that an ability to short sell can contribute to this, including by supporting effective price formation, enhancing liquidity and enabling risk management.”
The Treasury’s own consultation in December 2022 made much the same point. Short selling is a healthy feature of functioning markets.
Yet the Treasury’s consultation document is clearly looking for reasons to create a full-blown regulatory regime once the EU-derived short selling regulations are withdrawn. In my view, this is the wrong direction of travel. Regulation should be evidence based and not precautionary. Regulation inevitably imposes costs, and costs are ultimately borne by consumers. The message that the Bill sends on short selling is the wrong one. I beg to move.
Viscount Trenchard Portrait Viscount Trenchard (Con)
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My Lords, I support all the amendments in this group introduced by my noble friend Lady Noakes, to many of which I have added my name. I do not need to repeat the arguments so powerfully put by my noble friend. Clause 8 amends FSMA 2000 through new Section 71K to create a designated activities regime, which allows certain activities related to financial markets to be regulated within a framework that is separate to the existing FSMA regime for authorised persons, while still being compatible with a comprehensive FSMA model. The intended purpose of the designated activities regime seems to be to enable the Government to perpetuate the various retained EU law regimes without adequate parliamentary scrutiny, particularly given earlier comments on the inadequate way in which we scrutinise SIs.

New Schedule 6B is an indicative list of designated activities. This regime may at first be used to replace the retained EU law being revoked under the Bill, but there is no apparent limitation to the Treasury extending it in future to new or different activities. The designated activities regime is almost completely unconstrained in scope and effect. As such, it could be used to ban all kinds of products and classes of provider, and/or to establish parallel licensing requirements for particular activities, for both authorised and unregulated firms. The Explanatory Notes to the Bill state:

“Initially, the government expects most designated activities to be activities which are currently regulated through retained EU law”,

suggesting that new designated activities may be introduced.

The market will be keen to ensure a level playing field for regulated activities among FCA-authorised, dual-authorised and unregulated firms. Can my noble friend the Minister confirm that FSMA 2000’s new Section 71N means that rule-making in relation to designated activities will be the sole competency of the FCA? Currently, the PRA and the Bank of England share regulatory responsibility with the FCA for a number of technical standards relating to the entering into of OTC derivatives, for instance. Additionally, if the requirements are set out in the FCA handbook for authorised firms and in separate instruments for unauthorised firms, there may be a risk of divergence and inconsistency.

I have tabled Amendment 35 as a probing amendment, on removing the admission of securities to listing on a stock exchange from the lists of designated activities. First, I would question whether listing should be a regulated activity at all, because many listings happen without an issue of new shares or other securities and may, for example, be undertaken by companies wishing to show that they are good corporate citizens that want their corporate information to be available to the public in the same way it is for other listed companies. This was certainly a major consideration when many major Japanese companies such as Toshiba, Fujitsu and Honda listed their shares on the London Stock Exchange in the 1980s and 1990s. They subsequently undertook capital-raising exercises involving the issuance of securities, but those were separate exercises. I see no reason why unregulated firms may not act as sponsors for stock exchange listings, and therefore would question why the arrangement of listings should be a regulated activity.

Do the Government intend as a matter of urgency to act on the recommendations in the listings review undertaken by my noble friend Lord Hill of Oareford? Does the Treasury intend to undertake a fundamental review of the prospectus regime, as recommended by the review? Does my noble friend agree with the recommendation that prospectus requirements should be changed so that, in future, admission to a regulated market and offers to the public are treated separately? Could she tell the Committee whether she thinks that the empowerment of the FCA through the designated activities regime will make stock exchange listings more expensive and cumbersome than they have become during the past 14 years, or less? In that time, as my noble friend Lord Hill pointed out, the number of companies listed on the London Stock Exchange has declined by 40%. I look forward to hearing the Minister’s comments.

Lord Stevenson of Balmacara Portrait Lord Stevenson of Balmacara (Lab)
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My Lords, I shall speak to Amendment 32 in name, which is part of this group, although it points in a slightly different direction from the speeches we have just heard. I declare an interest, as I was chair of StepChange, the debt charity, in the period 2010 to 2014, although I have no current connection with it.

This is a probing amendment aimed at ensuring that a particularly egregious form of high-cost credit, log-book loans, issued under the bills of sale legislation dating from Victorian times, is afforded the customer protection measures rightly offered to consumers who use other forms of credit. In that sense, it needs an extension of the power discussed in this clause. To be clear, I would much prefer it if the Bills of Sales Acts of 1878 and 1882, and their related legislation, could be repealed. One way or another, I hope that some speedy action can be taken to resolve this issue. Such efforts appear to have stalled, despite a lot of work nearly a decade ago by the Treasury and the Law Commission.

Over the past few years, the Government and the FCA have been largely successful at clearing up the high-cost credit market. It is true that they had to be pushed to get started, and many noble Lords present may recall this House playing a significant part in focusing attention on payday loans, for example. But there are still issues to be addressed. The consumer duty is also a valuable step forward, and I hope that it will be a great success. At the same time, the introduction of statutory backing for the debt respite—the breathing-space regulations—and the forthcoming statutory debt repayment plan will offer immediate and effective help to the many hundreds of thousands of people who face unmanageable debts each year. The Government have done well in this area, and I commend them.

However, the current credit squeeze and cost of living crisis are going to exacerbate this situation. Indeed, if past history is a guide, logbook loans may well become as prevalent as they were in in 2014, when 52,000 bills of sale were registered in one year at the High Court. As I said, logbook loans are issued under bills of sale, which are governed by two Victorian statutes that I have already mentioned: the Bills of Sale Act 1878 had immediately to be amended, so there is also the Bills of Sale Act (1878) Amendment Act 1882. Basically, they allow individuals to use goods they already own as security for loans while retaining possession of the goods. This legislation is archaic and, in the words of the Law Commission,

“wholly unsuited to the 21st century.”

It went on to say that

“it causes detriment to all those who use it, including logbook lenders, logbook borrowers, business borrowers and third party purchasers.”

Nobody, it seems, has a good word to say for them.

This is all set out in a substantial Law Commission Report commissioned by HM Treasury in 2016. In that report, the Law Commission went on to point out the following. Most people who take out logbook loans are borrowers who already have difficulty in securing other forms of credit. Its research revealed that the term is usually six months to three years, while the interest rates ranged from 60% to 443% APR but were usually in the range of 120% to 187%—high-cost credit indeed.

There are complaints that some lenders use the threat of repossession of the goods to demand unreasonable and unaffordable extra payments, even when the loan is substantially repaid—something which is not permitted in, for example, hire purchase agreements. However, logbook loans lie outwith modern consumer protection legislation. It is true that the Financial Ombudsman Service may provide redress after the event, but the FOS is not able to prevent repossessions. There is no protection afforded to private purchasers who buy goods subject to a bill of sale, even if they act in good faith. Those who buy a second-hand car without knowing it is subject to a car-book loan face an unpalatable choice: pay off somebody else’s loan or lose the car.

The 1882 bills of sale legislation requires all bills of sale to be completed on a complex standard form and registered with the High Court, which uses a paper-based record system. Failure to comply with any of the documentation requirements carries substantial sanctions, not least being that the lender loses any rights over the goods or money owed to them. Those sanctions clearly would be out of scope if current consumer protection standards applied, but—

Sitting suspended for a Division in the House.
Lord Stevenson of Balmacara Portrait Lord Stevenson of Balmacara (Lab)
- Hansard - - - Excerpts

As usual, I have forgotten where I was in my perorations, so the Committee might get a few words that it has heard already, which can be ignored. I think I was talking about the requirement in the 1882 legislation that all bills of sale have to be completed on a particularly complex standard form, and then registered with the High Court, which, of course, uses a paper-based record system. The sanctions for failing to comply with any of its documental requirements would be out of scope if current consumer protections applied, and lenders are understandably loath to amend them.

It costs about £45 to register a bill of sale with the High Court, and another £50 to search it. That does not happen very often, because you cannot search by vehicle registration number or any other useful form; it is just a simple list of all the registered cases.

I think most people would agree that the Law Commission makes the case very well for the repeal of the Victorian bills of sale legislation. What is so disappointing about all this is that, originally, the Treasury seemed to share that view. In a Ministerial Statement in February 2017, the Government accepted

“the overarching thrust of the recommendations”,—[Official Report, Commons, 7/2/17; col. 6WS.]

albeit warning that they would not proceed until they had further reflected on some of them. The reflection took the form of a limited consultation with stakeholders, which received 25 responses, after which the Treasury decided not to take forward the draft Law Commission Bill. The principal reason given was that several of the 25 respondents felt that some of the consumer protection proposals in the draft Bill prepared by the Law Commission did not go far enough. It is almost difficult to believe that.

That remains the position. I have tried to keep the pressure on: I took over the Law Commission Bill as a Private Member’s Bill. I got 10th place in the ballot one year, but then lost the Bill because of a snap election called by, I think, Mrs May—I forget now who was Prime Minister. However, I have had meetings; in 2019 I was kindly joined by the noble Lord, Lord Young of Cookham, and the then Economic Secretary to the Treasury, John Glen, but to no avail. In his last letter to me, he accepted that there was consumer detriment taking place but, as numbers of logbook loans were falling, he said he believed

“that the rationale of the Government’s decision not to proceed with legislative reform in this area still stands”.

John Glen is now promoted and in the Cabinet, and I am where I am. However, I respectfully disagreed with him then and still do today. Only a few months ago, I was written to out of the blue—they must have got my name from the news about the Bill when it was first introduced—by people who had been scammed, aided by logbook loan legislation. An elderly couple had put all their hard-earned savings into a motor home, which they wanted to use for their retirement. Just when they had completed the purchase and the renovations, spending almost as much again as they had on buying the vehicle, they discovered that it had mysteriously acquired an outstanding logbook loan, and they lost the vehicle and their capital. This is the sort of thing that happens.

I look forward to the Minister’s response today, and I remain willing to attend further meetings if she thinks that might help move this issue forward. I know from discussions with StepChange that consumer detriment is still happening in this area. I agree with the FCA, which I spoke to earlier in the week, that the credit squeeze, inflation and the energy cost crisis is going to make the return of logbook loans—and, indeed, many other forms of high-cost credit—as inevitable as it is undesirable. If accepted, my amendment would give the FCA the tools it needs to assist the many people affected by this egregious legislation—albeit I still believe that the right solution is for the Government to commit now to repeal the Victorian legislation as soon as reasonably practicable.

Lord Naseby Portrait Lord Naseby (Con)
- Hansard - - - Excerpts

My Lords, I am not going to repeat what my noble friends Lady Noakes and Lord Trenchard have said, but I certainly think that His Majesty’s Government—I am a very loyal member of the governing party—need to recognise that this is a once-in-a-lifetime opportunity in this Bill. Therefore, for me, the driving force should be to ensure that in doing what we are doing—I accept that it is important to mention designated activities—we should be driven by the need for growth for our economy, good competition and innovation. Those things are so key to the future of this country, the City and the whole of the financial services area that we need to be a little bit careful. I think that my noble friend Lady Noakes’ proposal is a perfectly valid one. The Government can have another look at it, but I do not think that it is necessary.

Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD)
- Hansard - - - Excerpts

My Lords, I have some questions which arise from what the noble Baroness, Lady Noakes, said. If we want to go back to before the EU had the single market in financial services, we need to know how it worked with short selling. Unfortunately, I do not know how it all worked in the UK back then. When we started to do, or were forced into doing, the short selling regulation, I was told repeatedly from all sides in the UK that we did not need it but that naked short selling was banned. A lot of the concern was about short selling when you had not actually located where you would be able to get the share from for delivery. After the regulation was done, you had to know where you were going to get it, and it was a little firmer. However, I was assured that the wording was more or less the same as was applied, so how did we apply it? We did not have a designated activity regime.

There may be lots of little snippets around in financial services where you just need a simple rule like that—that you cannot do naked short selling but covered short selling is fine—without having lots of regulation, reporting and things around it. How are we going to do this? Would we do a designation just for a one-line piece of information? This is a genuine question, because absurdities begin when you have to invoke something that then requires complex rules. As soon as you go beyond the simple principle of no naked short selling, it will become a much bigger thing, as the European regulation did. There are other drivers for that, and it may be that more than just not doing naked short selling is necessary. My question is, within this designated activities regime, how do you do just one simple, little thing?

Baroness Kramer Portrait Baroness Kramer (LD)
- Hansard - - - Excerpts

My Lords, I fear that if we were to follow the amendment from the noble Viscount, Lord Trenchard, we would indeed permit naked short selling. Like most people, I have no problem with short selling in highly liquid markets.

Viscount Trenchard Portrait Viscount Trenchard (Con)
- Hansard - - - Excerpts

I am a little surprised that the noble Baroness is taking my name in vain here. My amendment is not about short selling; it is about listing.

Baroness Kramer Portrait Baroness Kramer (LD)
- Hansard - - - Excerpts

I apologise; it was the noble Baroness, Lady Noakes. I have attacked the wrong conspirator, as it were. I say to her that my concern, from listening to various people argue for changes in the rules that govern short selling, is that that is exactly what they have in mind, the argument being that if we allow short selling then illiquid markets will suddenly become much more liquid because many more players will be attracted into that particular end of the market. There is a great deal of risk at play, so I am quite nervous about making that kind of change. We always assume that the investors who would engage in these products would be highly sophisticated and understand fully the risks they are involved in, but the practical reality that we see in everyday life is that many people get involved who, frankly, have insufficient understanding and find themselves very much at risk.

It is for a similar reason that I say to the noble Viscount —I think accurately this time—on ending regulatory criteria for listing, that the listing issue is quite complex. I was one of the people who agreed with the IoD—I do not agree with the IoD all that often—on the changes that the London Stock Exchange made to enable a secondary listing for Aramco. It did not end up with the business, but the IoD was very concerned that the LSE compromised its approach to corporate governance to get that listing, which would obviously have been a highly profitable activity. That issue made the IoD very irate. It described it as

“an opportunistic attempt at boosting short-term primary issuance which ignores the longer-term implications for the overall UK corporate governance regime.”

This is actually quite a contentious area, so removing it completely from the regulatory sphere strikes me as rather dangerous.

I will bring my comments to a halt, except to say to the noble Lord, Lord Stevenson, and to the Government that the noble Lord should not have to fight such a difficult battle to try to deal with such a potential abuse. I wonder whether the Minister might, on a very personal basis, take up the cudgels here, because Ministers sometimes are in a position to get the relevant action that has been sitting many pages back on the back burner. I remember the battles we had to get rid of payday lenders. In the end, the noble Lord, Lord Sassoon, working very closely with all parts of the House on a very personal basis, was able to bring in the legislation that brought an end to that kind of abuse of consumers. The Minister has a very good precedent in the noble Lord, Lord Sassoon, and his capacity to use financial services legislation to deal with an aberration that puts people at risk.

Lord Tunnicliffe Portrait Lord Tunnicliffe (Lab)
- Hansard - - - Excerpts

I am not persuaded by the amendments in this group, apart from the one from my noble friend Lord Stevenson. Obviously, I shall listen to the debate and check Hansard before we come to Report. My noble friend’s amendment may not be the right way to address this problem, but, in all honesty, it has been five and a half years since this issue was spotted. There has been a perfectly good Law Commission report, as I understand it, which makes a very strong case. It is no good saying that we will cover this elsewhere, or that it has to be integrated. There is a solution to this problem, and it is important that the solution happens in this Bill. I strongly commend to the Minister that she “does a Sassoon” and comes up with an acceptable compromise so that an end is put to what I would call almost an evil practice.

Baroness Penn Portrait Baroness Penn (Con)
- Hansard - - - Excerpts

My Lords, I shall briefly address government Amendment 33 in this group before I turn to the other amendments.

Government Amendment 33 fixes a minor drafting error in Clause 8, which introduces the designated activities regime, or DAR. Subsection (2)(a) of new Section 71P of FSMA states that contravention of a DAR rule does not constitute an offence except as provided under regulations made under Section 71R. These provisions allow the Treasury, when designating an activity, to apply existing criminal offences within FSMA to that activity. This amendment inserts a cross-reference to new Section 71Q, as it too makes provision for DAR regulations to apply existing criminal offences in FSMA.

Amendments 30 and 31 together seek to prevent the Treasury designating, and therefore bringing into regulation through the DAR, any activity unless the regulation of that activity is necessary for the FCA to further its operational objectives. I assure my noble friend that the FCA will be required to make rules relating to designated activities in a way which, as far as is reasonably possible, furthers one or more of its operational objectives. Simply put, the FCA will not be able to make rules about a designated activity unless doing so is in line with its objectives under FSMA. This approach is modelled on the way activities are currently regulated under FSMA, whereby the Government determine the regulatory perimeter by specifying which activities are regulated, and the regulators then make rules to advance their objectives.

Amendments 34 and 35 seek to remove short selling and the admission of securities to trading from the list of activities in Schedule 3. That schedule inserts new Schedule 6B into FSMA; Schedule 6B is designed to give noble Lords a sense of the types of activity that Treasury may designate under the DAR. However, my noble friend is absolutely right that this is an indicative list and does not mean that Treasury will designate that activity in future, or that it will do so in the way described in the schedule. Should the Treasury decide to designate short selling or the admission of securities to trading in future, it will be through a statutory instrument subject to the affirmative procedure, so that Parliament can fully consider and debate the implications.

I should say to my noble friend that the list included in Schedule 6B is not an FCA wish list: it is a set of activities currently regulated through retained EU law that may be appropriate for the designated activity regime. I should also be clear to my noble friend and to the Committee that the Government believe that there should be a regulatory regime for short selling in the UK.

My noble friend set out that short selling can play a role in the healthy functioning of financial markets. It provides essential liquidity to markets, helps to ensure that investors pay the right price when investing in shares, and allows investors to manage risks in their portfolios. However, there can also be risks associated with short selling. For this reason, all major financial services jurisdictions, including the UK, have some form of short selling regime. Noble Lords will know that the losses that short sellers can incur if prices increase rather than fall have no upper bound, making it riskier than a traditional investment. In exceptional periods, markets can be dysfunctional, and there is a risk that short selling can exacerbate volatility and undermine market integrity.

The UK intends to regulate in this area, and, as the noble Baroness, Lady Bowles, notes, the UK has a history of regulating short selling which predates the introduction of the EU’s short selling regulation. Parliament legislated to give the FSA specific powers over short selling in 2010 and, prior to that, the FSA took action to address instances of short selling in the financial crisis. The powers in the Bill will allow the Government to put in place a proportionate and appropriate short selling regime that is tailored to the needs of UK markets, companies and investors. The Treasury has issued a call for evidence to support this work, which will close in March.

To answer the question asked by the noble Baroness, Lady Bowles, on how you do just one simple thing, the DAR has been designed to be flexible and proportionate and would allow the Treasury to do something very targeted if appropriate. It removes the need to introduce a Bill every time something small but important arises, and it removes the need as potentially an alternative form of regulation for it to make a regulated activities order and for it to be regulated under that regime with the associated regulations of the authorised persons that come along with it rather than just the activity itself.

On regulation for companies listing on a stock market, the Government are in the process of a fundamental overhaul of the prospectus regime. There is clear scope to make this simpler and more effective and enhance the competitiveness of UK capital markets. I reassure my noble friend Lord Trenchard that the Government have committed to deliver the outcomes of the UK Listing Review from the noble Lord, Lord Hill. We published an illustrative statutory instrument in December showing how the Government plan to use the DAR to put in place a simpler, more agile and more effective listing regime. I therefore reassure my noble friend that the Government are fully committed to improving the attractiveness of UK markets, and that the powers in the Bill will be used to deliver on that objective.

My noble friend also asked whether the FCA is the only regulator able to make rules under the DAR. I can confirm that it is the only regulator that would have powers under this regime.

Amendment 32 from the noble Lord, Lord Stevenson, seeks to enable the DAR to regulate currently unregulated credit agreements secured by bills of sale. As the noble Lord set out for the Committee, the Bills of Sale Acts allow borrowers to use goods which they already own as security for a loan, while retaining possession of those goods. Today, they are most commonly used for logbook loans. Logbook loans are a type of high-cost credit regulated by the FCA in which a consumer uses their car as security, while allowing the consumer to keep using their vehicle. However, bills of sale are also used for other unregulated secured lending, such as businesses which wish to borrow against their assets, such as machinery.

I understand that the noble Lord would like to see the framework for these products modernised, and we have discussed this during the passage of previous Financial Services Acts, although his work on it predates that. He has suggested that the DAR might be the way to achieve this.

As the noble Lord noted, the Government previously considered repealing the Bills of Sales Acts and replacing them with a new goods mortgages Act. While there was support for this approach by many stakeholders, others raised significant concerns about the degree of consumer protection afforded by the proposed regime. The Government were also concerned that a modernised and streamlined regime could lead to more consumers using goods that they already owned as security for a loan, which is inherently a higher-risk form of borrowing.

Given the concerns raised in the consultation and the shrinking size of the market, the Government decided not to take forward the goods mortgages Bill. However, the Government are committed to a modern and well-functioning consumer credit market. That is why, in December 2022, the Government published a consultation on reform of the Consumer Credit Act, which asks stakeholders for input on the strategic direction of reform. The consultation also asks questions about how the consumer credit regulatory environment could be changed to ensure optimal performance of the regulation surrounding customer communications, consumer protections and sanctions for firms that do not adhere to regulatory standards. That work is ongoing; I reassure the noble Lord that the Treasury will carefully consider any representations received from stakeholders in response to that consultation regarding this important issue.
I should emphasise that, as the noble Lord will know, logbook loans are a declining market, with the number of bills of sale registered at the High Court falling from 52,000, as he noted, to 3,758 in 2020. Since then, it has shrunk further: last year, just 1,275 bills of sale were registered. None the less, we recognise the noble Lord’s concerns about bills of sale. If it is desirable to him, perhaps we could meet to discuss whether the reforms to the Consumer Credit Act represent a good way forward in addressing this issue. We might put our thinking caps on about whether any other avenues would be better suited. Although I really should emphasise that I cannot say whether I will achieve my noble friend Lord Sassoon’s levels of delivery in this area, I am more than willing to sit down and try.
That draws my remarks to a close. I hope that my noble friend will feel able to withdraw her amendment and that other noble Lords will not move theirs when they are reached.
Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My Lords, I thank my noble friend the Minister for her comprehensive reply to this short debate. I also thank all noble Lords who have taken part in it.

For my amendments, one was in relation to whether the Treasury’s power to designate activities should be constrained in any way. I understand that the FCA will of course be able to make rules only in accordance with its own objectives. I was trying to put an earlier hurdle in: that the Treasury should go in that direction only if it has had evidence that there was need in relation to the FCA’s objectives. I regret that the Minister indicated that she did not want to go down that route, so I will have to think carefully about that.

I was disappointed though perhaps not surprised on short selling, because there is a kind of prevailing view that if something moves in financial services, it ought to be regulated somehow. I can see that if it was regulated in the EU, it will end up being regulated again and some of the advantages of us having left the EU will simply not be realised because there is a mindset, in particular in the Treasury, which never wanted to leave the EU, that what happened in that era of our membership has to be preserved if at all possible. That is, as I say, disappointing to me.

When the noble Lord, Lord Stevenson of Balmacara, got up, I thought, “It’s déjà vu all over again”, because I too remember our debates on earlier financial services legislation. However, I believe that he has a good point and I was particularly glad to hear my noble friend offer a small possibility that some progress might be made. I think the whole Committee would be happy if that could be achieved, because it clearly does not seem like a happy state of affairs. With that, I beg leave to withdraw my amendment.

Amendment 30 withdrawn.
Amendments 31 and 32 not moved.
Amendment 33
Moved by
33: Clause 8, page 10, line 31, after “provided” insert “by designated activity regulations under section 71Q or”
Member’s explanatory statement
This amendment would insert a cross-reference to section 71Q to ensure that the exception in section 71P(2)(a) of the Financial Services and Markets Act 2000 as inserted by clause 8 of the Bill (on liability in connection with designated activities) also refers to designated activity regulations under section 71Q.
Amendment 33 agreed.
Clause 8, as amended, agreed.
Schedule 3: New Schedule 6B to FSMA 2000
Amendments 34 and 35 not moved.
Schedule 3 agreed.
Clauses 9 to 11 agreed.
Sitting suspended for a Division in the House.
Clause 12: Treasury directions to Bank of England: restrictions
Amendment 36
Moved by
36: Clause 12, page 19, line 25, at end insert—
“(4) Omit subsections (3), (6) and (7).” Member’s explanatory statement
This amendment probes why the power to make recommendations to and obtain information from “bankers” remains relevant.
Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My Lords, Amendment 36 would delete some subsections from Section 4 of the Bank of England Act 1946, the only nationalisation legislation that made any sense. Indeed, it was surprising that the Bank of England existed outside the public sector for as long as it did—the best part of 250 years. Section 4(3) says:

“The Bank, if they think it necessary in the public interest, may request information from and make recommendations to bankers, and may, if so authorised by the Treasury, issue directions to any banker for the purpose of securing that effect is given to any such request or recommendation”.

Subsection (6) says that a banker is any banking undertaking that the Treasury declares to be a banker for the purpose of Section 4. That is quite a sweeping power in relation to all kinds of banks: retail banks, commercial banks, investment banks and so on.

This is a probing amendment to find out why on earth this power is still on the statute book, given that we have a highly defined system of prudential regulation laid out in extensive detail in FSMA. In addition, the various Bank of England Acts deal with the Bank’s other functions. Collectively, the legislation gives extensive powers to the PRA, the Monetary Policy Committee, the Financial Policy Committee and the Bank of England itself. There is no deficit in powers related to bankers, as anyone operating in the financial services sector will attest.

Why does Section 4 retain these powers? How often have they been used? When was the last time they were used? If my noble friend cannot make a case for these powers still being needed—if they were ever needed—I invite her to agree to their removal from the 1946 Act. I beg to move.

Baroness Penn Portrait Baroness Penn (Con)
- Hansard - - - Excerpts

My Lords, my noble friend has just described what Amendment 36 probes and the power it is seeking to look at, so I will not repeat that. What I will say is that the power is designed to be used only when it is necessary to do so in the public interest, such as in an unexpected or emergency scenario.

The Government looked at some of my noble friend’s questions. We are not aware that the Bank has ever used this power, but it could be useful in some scenarios—for example, for the Bank to require certain actions from troubled firms during a period of financial crisis. As we saw in 2007-08, such crises can develop quickly and create novel policy challenges that may not be anticipated in advance. As such, the Government consider the power to be a useful potential backstop. Any changes to this power would require careful consideration and consultation before acting.

I have been brief, but I hope that I have answered my noble friend’s questions, at least in part, and that she feels able to withdraw her amendment.

Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My Lords, I rather thought I would get that answer—that the power has never been used—because I certainly could not recall any situation when it could have been used. My noble friend the Minister has put up a good case for keeping something that has been there since 1946—which is rather a long time—and has never been used but might be needed in an emergency, notwithstanding that, certainly for the last 20 years, we have been legislating on financial services and banks in extenso and there exists a range of powers that any intelligent person involved in this area thought that the Bank or the PRA would ever need to use. I think the case for removing these powers is unanswerable. I hope that my noble friend the Minister might think a little more about that between now and Report. It would be a good thing for the Government to bring forward something that would clean up our statute book. I beg leave to withdraw.

Amendment 36 withdrawn.
Clause 12 agreed.
Clause 13 agreed.
Schedule 4 agreed.
Clauses 14 to 17 agreed.
Clause 18: Critical third parties: designation and powers
Amendment 37
Moved by
37: Clause 18, page 29, leave out lines 34 to 36 and insert—
“(3) In complying with the duty in subsection (1) the relevant regulators must ensure that any information or other requirements imposed on a critical third party minimise, so far as is reasonably practicable, the burden placed on the critical third party.”Member’s explanatory statement
This amendment shifts the emphasis from burdens on regulators to burdens on third parties.
Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My Lords, I understand regulators’ desire to have more insight into the risks that critical third parties present to the provision of financial services. The regulators have been fretting about the provision of cloud services for some time—not always with good cause, because cloud providers offer some significant benefits to financial services firms in a range of areas. The PRA and the FCA have already increased their focus on critical third party suppliers by way of operational resilience requirements on regulated firms, and they already have the ability to get information via the regulated firms.

I was not hugely surprised to find a regulatory power grab regarding critical third parties in this Bill, but I was genuinely shocked to find 10 whole pages of legislation giving the regulators huge powers over critical third parties: the power to make rules, a power of direction, information powers, censure and disciplinary powers, and so on. This is typical regulatory gold-plating of the kind that I hoped we had left behind when we exited the EU. The Treasury ought to be on the alert against this kind of thing, rather than being complicit in it.

The regulators will have to exercise real care when they use these new powers. It would be a very bad outcome if some—for example, the cloud providers or the major ICT providers—decided to exit the UK financial services market because of heavy-handed regulation. If that happened it would likely increase the concentration risk within the financial services sector, as well as reducing competition in the provider market.

My Amendment 37 is in fact extremely modest. TheCityUK has called for one of the regulators to be in the lead for any critical third party, so that the likelihood of duplicative requirements and other burdens between the regulators involved would be minimised. TheCityUK is not comforted by the co-ordinating duty in the new Section 312U of FSMA because just about everybody who has been involved in financial services has been on the receiving end of unco-ordinated regulator action, despite the existence of co-ordinating duties already in FSMA. Those duties have not been a resounding success, and I may return to the idea of a lead regulator on Report.

For today, my Amendment 37 would delete subsection (3) of new Section 312U and replace it with a more third-party friendly version. Subsection (3) says that the duty to co-ordinate

“applies only to the extent that compliance with the duty does not impose a burden on the relevant regulators that is disproportionate to the benefits of compliance.”

This is typical of regulation, in particular financial services regulation. It sees things through the prism of the regulators, not the persons impacted by the regulation. My amendment would replace this with a requirement to minimise the burden placed on critical third parties so far as is reasonably practicable.

I do not regard this rebalancing of the new rules as a radical proposition in the context of the radical new powers that are being taken. The impact on third parties really does need to be taken into account, and it is curiously absent from the 10 pages of the Bill dedicated to the new powers over critical third parties. The need for rebalancing of the new regulatory provisions ought to go wider than the duty to co-ordinate, and I should probably have drafted something broader to consider in our Committee today. My purpose is to probe how the Government see the new provisions impacting on third-party suppliers, not just on the regulators, and whether they even acknowledge that they might have created something of a monster in these new rules. I beg to move.

Baroness Kramer Portrait Baroness Kramer (LD)
- Hansard - - - Excerpts

My Lords, I shall speak only very briefly, because I have a great deal of sympathy with the proposition that the noble Baroness, Lady Noakes, puts before us. The resistance in the industry to rules is not to the principle of the rules but to the way in which they operate, and the cumbersome methodologies—the dotting of every i three times and crossing of every t four times—that drives people completely insane. It has undermined respect for both the regulator and its effectiveness. The noble Baroness, Lady Noakes, said she had something broader in mind, and she will find amendments coming forward later, particularly in the name of my noble friend Lady Bowles, focusing on the issue of efficiency. I think that is something we would all like to see.

There are those who would like to see less regulation per se, and those like me who are very cautious about having less regulation. Obviously, less regulation may release animal spirits and innovation, as the noble Lord, Lord Naseby, pointed out earlier; in fact, he did not talk about animal spirits, but he talked about innovation. The downside is that light-touch regulation could leave you with a financial crisis, an awful lot of victims and, potentially, an undermined economy. It is very asymmetric. But efficiency ought to be built into the very heart of this, and regulation ought to be designed to put a minimum operational burden on the various parties affected. If we can adopt that somewhere as a principle in the Bill, it would be exceedingly useful.

Baroness Penn Portrait Baroness Penn (Con)
- Hansard - - - Excerpts

I thank my noble friend Lady Noakes for her amendment. It is a good opportunity to talk about the Government’s proposals for mitigating the systemic risk posed by critical third parties in the finance sector, such as cloud service providers. The Government agree with the spirit of what my noble friend and the noble Baroness, Lady Kramer, have said.

The critical third parties regime has been designed with the aim of minimising the burden placed on these parties, while mitigating the systemic risks that could be posed by the use of these services. Rather than bringing, for example, a whole cloud services provider into the financial regulators’ remit, the regime instead gives the regulators powers over only the services that a critical third party provides to the financial services sector. I believe that that approach contrasts with the EU approach known as DORA, which I thought was the name of my parents’ dog. DORA bears similarities to the UK’s approach, but I am told that it is less proportionate than our regime, which targets only the services provided to the finance sector and not whole firms.

Proportionality and resource-effectiveness are therefore built into the design of the regime. I draw all noble Lords’ attention to the obligations that the regulators already operate under, including those resulting from FSMA, and the Bank of England Act 1998. In addition to public law obligations to act reasonably and proportionally, the regulators must also have regard to their regulatory principles. These include the principle that burdens or restrictions imposed on a person should be proportionate to their expected benefits. As the noble Baroness, Lady Kramer, indicated, we will come back to this question of proportionality and effectiveness as we go through our debates in Committee.

In addition to this, the obligations in Clauses 138I and 138J of FSMA require the PRA or FCA to consult on proposed rules, meaning that third-party service providers, including those that might be designated as “critical” under this regime, will have an opportunity, through public consultation, to comment on and help to shape the requirements and expectations they will be subject to.
I hope that this goes some way to reassuring my noble friend that, in the wider regime, the intention of her proposed amendment has already been fulfilled through existing public law obligations and requirements in FSMA and the Bank of England Act 1998 around proportionality. I also pointed to the example that, in our design of the regime, we took the opportunity to make it more targeted than, for example, the EU regime. I hope that she will therefore withdraw her amendment now, although I feel we may return to it on Report.
Baroness Noakes Portrait Baroness Noakes (Con)
- Hansard - - - Excerpts

My noble friend correctly anticipates how I intend to conclude my remarks. We will return to this in Committee because, as she noted, I and other noble Lords have tabled amendments on proportionality. Although proportionality is in the legislation as a regulatory principle, there are considerable concerns among those who are regulated that proportionality does not mean much to regulators—or that it never seems to actually bite.

I am grateful for the information on my noble friend’s parents’ dog, and I have learned something about the EU that I did not know before—although I do not generally need to learn things about the EU. We will also return to the important issue of efficiency. I have added my name to at least one of the amendments on efficiency in the name of the noble Baroness, Lady Bowles.

The weight of this regulatory package that has been put together looks scary to those who may potentially be drawn within it, and there are concerns among those who wish to use the services of cloud providers in particular—but also some of the other ICT providers —that the UK regulators will scare off things that are important to them.

I will read carefully in Hansard what my noble friend has said, but I feel that we will probably need to return to one or more specific aspects of this on Report, as well as explore further the issues of proportionality and efficiency in Committee. However, for today, I beg leave to withdraw my amendment.

Amendment 37 withdrawn.
Clause 18 agreed.
Clauses 19 and 20 agreed.
Schedule 5 agreed.
Clause 21 agreed.
Schedule 6 agreed.
Clauses 22 and 23 agreed.
Committee adjourned at 7.49 pm.