Lords Grand Committee
Monday 6th July 2026
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15:45
15:45
15:45
15:45
Speaker 2
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Speaker 2
Key areas. Before we begin. Firstly, we're starting today with debate. Are we on general rules?Remind noble Lords again that they should declare any relevant financial interest the first time they speak at each stage of a bill. This means that in committee, relevant financial interests should be declared during the first group in which a noble Lord contributes. The declaration does not need to be repeated on debate on later groups. At this stage, declarations should be specific and brief.
Members should briefly indicate the nature of their financial interests and not simply refer to their entry in the Register of Lords interests. We also want to remind the committee again of guidance in the companion at paragraph 8.82 that when withdrawing amendments, when withdrawing. Noble Lord should be brief. Need not respond to all the points made during the debate and should not revisit points made when moving the amendment. A number of contributions when withdrawing amendments on previous days have been lengthy, and I would encourage all participants to keep their remarks short.
In the spirit of the companion.
Members should briefly indicate the nature of their financial interests and not simply refer to their entry in the Register of Lords interests. We also want to remind the committee again of guidance in the companion at paragraph 8.82 that when withdrawing amendments, when withdrawing. Noble Lord should be brief. Need not respond to all the points made during the debate and should not revisit points made when moving the amendment. A number of contributions when withdrawing amendments on previous days have been lengthy, and I would encourage all participants to keep their remarks short.
In the spirit of the companion.
15:46
15:46
Speaker 3
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Speaker 3
I will move amendment 130 in my name and speak to amendment 131 and 168. My Lords, this is the latest round of AI and technology amendments on this bill. A bill curiously silent, 168, my Lords, this is the latest round of AI and technology amendments on this bill. A bill curiously silent on these subjects, and at least today, there is something timely about my intervention in that as I'm on my feet across town, Sheldon Mills is launching his review into artificial intelligence in financial services, more of which presently, my Lords Amendment 130 seeks to require financial services firms to have regard for all of the issues around digital resilience and operational resilience across all of their activities.
I know the minister in his response will refer to the Cyber Resilience Bill, which is coming to your lordships House in a fortnight, and indeed, there is much in that Bill to commend. But in consideration of the significant impact and position of financial services in the UK economy, I believe it would be helpful to have something about digital operational resilience on the face of this bill, because we're not just talking about foreign states or negative acts from international adversaries. We're talking about issues around. Supply chain, third party overreliance.
And concentration risk on particular providers. Say, for example, in cloud believing. That things would always be as they would be. Circumstances change and financial services institutions may find themselves extraordinarily exposed with the flick of a switch with perhaps only 90 minutes notice. I ask the minister when he responds to consider these points and state in respect of financial services institutions, significant contribution and place in the UK economy. Whether he would not agree that clauses on the face of the Bill pertaining directly to these subjects, would they not be helpful in our endeavors to amendment 131 and 168 artificial intelligence?There will be certainly some of these concepts which I know are covered in Sheldon Mills review.
But again, considering the proliferation of an already deep penetration of artificial intelligence in financial services institutions, and indeed used by not only sophisticated but retail investors and individuals, were the minister not agree that AI considered not just in these clauses, but throughout the Bill, would be beneficial to all those involved in financial services. And when we say all those involved in financial services, we could just as easily say everybody, my. Lords, the principles are clearly set out in amendment 131, and it takes us to the issue which I've raised in previous days, around what the government's approach to artificial intelligence.
A domain by domain approach, as stated. And yet nothing currently within this bill. Finally, amendment 168 returns to an issue which colleagues will be well aware of. Because I raised it when we did deliberation on the Financial Services Act now of 2021 and Fisma 2023, that is, to have an AI responsible officer in all financial services institutions that develop, deploy and use AI. In other words, pretty much all financial services institutions. This isn't cumbersome. This isn't about compliance.
It's certainly not about putting burdens on smaller firms. The proportionality principle would mean that we're talking about a function rather than an individual. Nor is it about delegation or abdication of the board. Responsibility, and indeed of all the senior managers responsibility to the business. This is about having a point person, somebody who can orchestrate, who can coordinate, who can have that crucial horizontal view across an organisation to assist internally and indeed present externally as to how AI is being used, deployed for the benefit internally of AI, but also for the benefit of customers.
My Lords, to conclude, without having clauses on AI, on the face of the Bill, I believe the legislation will be chronically insufficient for the challenges of our time. Not for next year, not for five years. AI already impacting financial services right now. One example how can we consider the consumer duty without considering how AI impacts on all elements of that?My Lords, the Mills Review has much good in it, but this legislation is before us today, and I believe we have an opportunity to thread AI through it for the benefit of individuals, for the benefit of institutions benefiting all of our financial services, and through that, benefiting the entire economy of the United Kingdom.
I look forward to the minister's response. I beg to move.
I know the minister in his response will refer to the Cyber Resilience Bill, which is coming to your lordships House in a fortnight, and indeed, there is much in that Bill to commend. But in consideration of the significant impact and position of financial services in the UK economy, I believe it would be helpful to have something about digital operational resilience on the face of this bill, because we're not just talking about foreign states or negative acts from international adversaries. We're talking about issues around. Supply chain, third party overreliance.
And concentration risk on particular providers. Say, for example, in cloud believing. That things would always be as they would be. Circumstances change and financial services institutions may find themselves extraordinarily exposed with the flick of a switch with perhaps only 90 minutes notice. I ask the minister when he responds to consider these points and state in respect of financial services institutions, significant contribution and place in the UK economy. Whether he would not agree that clauses on the face of the Bill pertaining directly to these subjects, would they not be helpful in our endeavors to amendment 131 and 168 artificial intelligence?There will be certainly some of these concepts which I know are covered in Sheldon Mills review.
But again, considering the proliferation of an already deep penetration of artificial intelligence in financial services institutions, and indeed used by not only sophisticated but retail investors and individuals, were the minister not agree that AI considered not just in these clauses, but throughout the Bill, would be beneficial to all those involved in financial services. And when we say all those involved in financial services, we could just as easily say everybody, my. Lords, the principles are clearly set out in amendment 131, and it takes us to the issue which I've raised in previous days, around what the government's approach to artificial intelligence.
A domain by domain approach, as stated. And yet nothing currently within this bill. Finally, amendment 168 returns to an issue which colleagues will be well aware of. Because I raised it when we did deliberation on the Financial Services Act now of 2021 and Fisma 2023, that is, to have an AI responsible officer in all financial services institutions that develop, deploy and use AI. In other words, pretty much all financial services institutions. This isn't cumbersome. This isn't about compliance.
It's certainly not about putting burdens on smaller firms. The proportionality principle would mean that we're talking about a function rather than an individual. Nor is it about delegation or abdication of the board. Responsibility, and indeed of all the senior managers responsibility to the business. This is about having a point person, somebody who can orchestrate, who can coordinate, who can have that crucial horizontal view across an organisation to assist internally and indeed present externally as to how AI is being used, deployed for the benefit internally of AI, but also for the benefit of customers.
My Lords, to conclude, without having clauses on AI, on the face of the Bill, I believe the legislation will be chronically insufficient for the challenges of our time. Not for next year, not for five years. AI already impacting financial services right now. One example how can we consider the consumer duty without considering how AI impacts on all elements of that?My Lords, the Mills Review has much good in it, but this legislation is before us today, and I believe we have an opportunity to thread AI through it for the benefit of individuals, for the benefit of institutions benefiting all of our financial services, and through that, benefiting the entire economy of the United Kingdom.
I look forward to the minister's response. I beg to move.
15:52
15:53
Speaker 1
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Speaker 1
Sir, I was delighted when I saw that Lord Holmes put down these amendments, because it is so apparent as he has quite clearly stated, that the whole issue of both digital and AI is missing from this bill, that because of the pace of change and the impact and the strength of the impact across all of financial services, this is an issue that has to be dealt with in an ethic that has to be grasped with some sense of urgency. Um, like him, sir, I have been very interested in the Mills review, which is published today, but have only had time to skim the summaries of it.
That and some of the newspaper references that. And it's very clear that certainly from Sheldon Mills perspective, and I think most of us have one way or another, dealt with Sheldon Mills over the years and very much respect his judgment that, uh, that the FCA may well be short of relevant powers in terms of dealing with Phi. And he noted, particularly a lack of powers under the critical third parties regime, which made sense to me and in his recommendations, he also raises issues around the regulatory perimeter.
Another area which we have raised, that on more than one occasion now, it's not uncommon that in recent years, though I do dread it for the government to come forward with amendments that deal with an area that has been missed from the body of the bill in committee stage and present them at report stage. That would allow quite a period of thought. It would allow the opportunity to absorb and consider what is presented in the Mills Report. And since financial services bills don't come around that often, I would very much hope that the Minister will consider very seriously taking advantage of this bill in order to get those kinds of protections in place.
Uh, that if he fails to do that, I think we may collectively have to try and come forward with something at report. But quite frankly, given the intricacy, the detail in the complexity, this is an area where the government coming forward with an answer would, I think, be welcomed from across the House, and very much, I hope, within the spirit and the theme of the amendments that have been presented by Lord Holmes.
That and some of the newspaper references that. And it's very clear that certainly from Sheldon Mills perspective, and I think most of us have one way or another, dealt with Sheldon Mills over the years and very much respect his judgment that, uh, that the FCA may well be short of relevant powers in terms of dealing with Phi. And he noted, particularly a lack of powers under the critical third parties regime, which made sense to me and in his recommendations, he also raises issues around the regulatory perimeter.
Another area which we have raised, that on more than one occasion now, it's not uncommon that in recent years, though I do dread it for the government to come forward with amendments that deal with an area that has been missed from the body of the bill in committee stage and present them at report stage. That would allow quite a period of thought. It would allow the opportunity to absorb and consider what is presented in the Mills Report. And since financial services bills don't come around that often, I would very much hope that the Minister will consider very seriously taking advantage of this bill in order to get those kinds of protections in place.
Uh, that if he fails to do that, I think we may collectively have to try and come forward with something at report. But quite frankly, given the intricacy, the detail in the complexity, this is an area where the government coming forward with an answer would, I think, be welcomed from across the House, and very much, I hope, within the spirit and the theme of the amendments that have been presented by Lord Holmes.
15:55
Speaker 5
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Speaker 5
I thank my noble friend for his comments today on AI and digital resilience and his comments on previous days, and declare my interest as the director of South Molton Street Capital, which is regulated by the FCA. My Lords, these amendments raise an interesting point about emerging technologies, digital resilience and the use of artificial intelligence in financial services to be covered, as we have discussed by the Mills Review and by the FCA themselves, this is a subject to which we will return in a later group. When my noble friend Lord Ranger of Northwood and the opposition frontbench will speak to our own amendments, particularly in relation to digital assets, we will also comment on supervision in a later group, both digital resilience and the proper use of AI are important.
However, I am not convinced that this is the right way or the right place to tackle. These issues. Our concern is that this could add another layer of regulation on firms, which are already subject to a very substantial body of obligations in this area. Financial services firms already operate under a wide range of frameworks which are relevant to AI governance, digital resilience and technology risk. The consumer duty, which we've touched on already, requires firms to deliver good outcomes for retail customers, the senior managers and certification regime provides a framework for accountability and governance.
The FCA Senior management arrangements and controls already require firms to maintain appropriate systems, controls, governance and risk management. Firms are subject to data protection law, including rules around automated decision making and profiling. They are subject to a quality law where discriminatory outcomes arise. Firms are subject to operational resilience requirements, outsourcing and third party risk expectations, and in some contexts, more specific requirements around algorithmic trading and market conduct. We should therefore be cautious before adding new statutory requirements on top. That is particularly important because technology develops quickly and in a prescriptive regulatory framework can become out of date very rapidly.
It can also lead to duplication, uncertainty and compliance activity, which is focused more on satisfying the form the requirement than managing the underlying risk. On amendment 130, I would be grateful for reassurance from the minister about how this interacts with existing operational resilience and outsourcing requirements, and whether the government believes further statutory provision is needed on a. On amendment 131, the issues of transparency, bias, human oversight and redress are all important, but these are also issues which overlap with existing duties on fair treatment, governance, data protection, discrimination and consumer outcomes.
I would be reluctant to support an approach which simply adds a new AI specific regime, without first demonstrating that the existing framework is inadequate. On amendment 168, I understand the attraction of having a named individual responsible for AI governance. Accountability matters, but in financial services we have the Smcr regime to address supervision, and that regime is already quite complex, as we will address in a later group, a mandatory AI officer would probably cut across existing accountability structures in conduct compliance operations, risk data and product governance. It could in fact cut across all existing supervisory positions.
This group raises important questions about the future of financial regulation. We must be alert to new risks, but we must also be careful not simply to respond to every emerging technology by adding another layer of regulation. The better approach is to ensure that regulation is proportionate, technology neutral where possible, and focused on real outcomes. I look forward to the minister's response.
However, I am not convinced that this is the right way or the right place to tackle. These issues. Our concern is that this could add another layer of regulation on firms, which are already subject to a very substantial body of obligations in this area. Financial services firms already operate under a wide range of frameworks which are relevant to AI governance, digital resilience and technology risk. The consumer duty, which we've touched on already, requires firms to deliver good outcomes for retail customers, the senior managers and certification regime provides a framework for accountability and governance.
The FCA Senior management arrangements and controls already require firms to maintain appropriate systems, controls, governance and risk management. Firms are subject to data protection law, including rules around automated decision making and profiling. They are subject to a quality law where discriminatory outcomes arise. Firms are subject to operational resilience requirements, outsourcing and third party risk expectations, and in some contexts, more specific requirements around algorithmic trading and market conduct. We should therefore be cautious before adding new statutory requirements on top. That is particularly important because technology develops quickly and in a prescriptive regulatory framework can become out of date very rapidly.
It can also lead to duplication, uncertainty and compliance activity, which is focused more on satisfying the form the requirement than managing the underlying risk. On amendment 130, I would be grateful for reassurance from the minister about how this interacts with existing operational resilience and outsourcing requirements, and whether the government believes further statutory provision is needed on a. On amendment 131, the issues of transparency, bias, human oversight and redress are all important, but these are also issues which overlap with existing duties on fair treatment, governance, data protection, discrimination and consumer outcomes.
I would be reluctant to support an approach which simply adds a new AI specific regime, without first demonstrating that the existing framework is inadequate. On amendment 168, I understand the attraction of having a named individual responsible for AI governance. Accountability matters, but in financial services we have the Smcr regime to address supervision, and that regime is already quite complex, as we will address in a later group, a mandatory AI officer would probably cut across existing accountability structures in conduct compliance operations, risk data and product governance. It could in fact cut across all existing supervisory positions.
This group raises important questions about the future of financial regulation. We must be alert to new risks, but we must also be careful not simply to respond to every emerging technology by adding another layer of regulation. The better approach is to ensure that regulation is proportionate, technology neutral where possible, and focused on real outcomes. I look forward to the minister's response.
15:59
Speaker 6
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Speaker 6
Although the government recognises that the pace and significance of the current wave of technological change is already having an effect on the whole of society. For the purposes of this discussion, I would start by stating that it's clearly having a notable impact on the financial services sector, as mentioned, and that it's only set to continue to grow. The Chancellor set out in May's lecture just a few months ago. The importance of the UK grasping the opportunities presented by AI to ensure that we are the forefront of safe adoption and innovation.
So we are entirely in agreement on how important this topic is. First, speaking to amendment 130, the government is committed to ensuring the operational resilience of the UK's financial sector, operational disruptions harm consumers and markets, and have the potential to affect financial stability. That is why the FCA and PRA have powers to ensure that firms have robust plans in place to deliver important business services, no matter the disruption. Me if the government agrees that the sector requires an operational resilience framework. I do agree, but I do not think that the regulator should be required to set the rules on this, given the rapidly evolving information and communication technology landscape, it is important that the FCA and PRA are able to maintain the flexibility afforded them by their existing powers to ensure that requirements and threat led penetration testing keep pace with the changing risks.
The regulators have shown that we can trust them to get this right by creating an operational resilience framework for the UK financial sector. This framework supports the sector to prevent, adapt and respond to and recover and learn from operational risk and disruption. Includes rules and supervisory expectations and operational resilience, and third party risk management for financial service firms. Incident reporting requirements. Advanced tools to assess firms cybersecurity and resilience, including threat led penetration testing for systemically important firms, and a new regime for third parties providing critical services to the financial sector.
On amendment 131 I agree that the regulatory system needs to reflect the change and challenge brought on by the significant increase in the use of artificial intelligence in the financial services sector. There are huge opportunities afforded by the AI, and we are committed to securing those for the benefit of the UK. But we also need to be aware of the risks technology can present to both consumers and financial stability, and are working closely with our regulators to monitor them. Amendment 131 requires the FCA to make specific rules for AI to manage a range of risks associated with the use of technology.
The government welcomes the FCA's proactive approach to the review, and we will work closely with the FCA to determine the next steps on this report. However, I am worried that the amendment would mean the FCA would have to draw up a range of new rules, which would replicate many of their current rules, including in relation to bias and discrimination. Our approach to regulate AI, sorry within the existing regulatory frameworks ensures that firms have clarity about how to meet the requirements relating to AI use, and ensures that the high standards that can apply across financial services also apply to the use of AI within them, and allows the rules to apply flexibility over time.
As these technologies and their applications inevitably involve, sometimes rapidly requiring the FCA to regulate ER use separately would remove that flexibility and agility from our approach. And finally, turning to amendment one, six, eight and the proposal of an AI officer, my Lords, the government is committed to ensuring financial services firms are alive to the potential risks associated with the use of AI and their governance and accountability mechanisms must reflect the new challenges presented by the technology. That is why, under the Senior managers and certification regime, firms are already required to allocate clear responsibility to senior managers for the activities and risks within their business.
This includes risks arising from the use of AI, which falls within the responsibilities for the relevant senior managers across the firm. The responsibility needs to sit with the senior managers responsible for the underlying activities, and the bill makes targeted reforms to the senior managers and certification regime to reduce the unnecessary burdens, but these do not affect the underlying requirement for firms to ensure clear accountability for risks, including those arising from emerging technologies such as AI. The government is conscious of the risks associated with cyber resilience and AI, and has been proactive with the regulators to ensure that the financial services sector is appropriately managing those risks to consumers and financial stability.
I hope I provided some reassurance that the government and the regulators are alive to the risks identified, and taking proactive steps to manage them, but I'd ask the noble Lord to withdraw his amendment.
So we are entirely in agreement on how important this topic is. First, speaking to amendment 130, the government is committed to ensuring the operational resilience of the UK's financial sector, operational disruptions harm consumers and markets, and have the potential to affect financial stability. That is why the FCA and PRA have powers to ensure that firms have robust plans in place to deliver important business services, no matter the disruption. Me if the government agrees that the sector requires an operational resilience framework. I do agree, but I do not think that the regulator should be required to set the rules on this, given the rapidly evolving information and communication technology landscape, it is important that the FCA and PRA are able to maintain the flexibility afforded them by their existing powers to ensure that requirements and threat led penetration testing keep pace with the changing risks.
The regulators have shown that we can trust them to get this right by creating an operational resilience framework for the UK financial sector. This framework supports the sector to prevent, adapt and respond to and recover and learn from operational risk and disruption. Includes rules and supervisory expectations and operational resilience, and third party risk management for financial service firms. Incident reporting requirements. Advanced tools to assess firms cybersecurity and resilience, including threat led penetration testing for systemically important firms, and a new regime for third parties providing critical services to the financial sector.
On amendment 131 I agree that the regulatory system needs to reflect the change and challenge brought on by the significant increase in the use of artificial intelligence in the financial services sector. There are huge opportunities afforded by the AI, and we are committed to securing those for the benefit of the UK. But we also need to be aware of the risks technology can present to both consumers and financial stability, and are working closely with our regulators to monitor them. Amendment 131 requires the FCA to make specific rules for AI to manage a range of risks associated with the use of technology.
The government welcomes the FCA's proactive approach to the review, and we will work closely with the FCA to determine the next steps on this report. However, I am worried that the amendment would mean the FCA would have to draw up a range of new rules, which would replicate many of their current rules, including in relation to bias and discrimination. Our approach to regulate AI, sorry within the existing regulatory frameworks ensures that firms have clarity about how to meet the requirements relating to AI use, and ensures that the high standards that can apply across financial services also apply to the use of AI within them, and allows the rules to apply flexibility over time.
As these technologies and their applications inevitably involve, sometimes rapidly requiring the FCA to regulate ER use separately would remove that flexibility and agility from our approach. And finally, turning to amendment one, six, eight and the proposal of an AI officer, my Lords, the government is committed to ensuring financial services firms are alive to the potential risks associated with the use of AI and their governance and accountability mechanisms must reflect the new challenges presented by the technology. That is why, under the Senior managers and certification regime, firms are already required to allocate clear responsibility to senior managers for the activities and risks within their business.
This includes risks arising from the use of AI, which falls within the responsibilities for the relevant senior managers across the firm. The responsibility needs to sit with the senior managers responsible for the underlying activities, and the bill makes targeted reforms to the senior managers and certification regime to reduce the unnecessary burdens, but these do not affect the underlying requirement for firms to ensure clear accountability for risks, including those arising from emerging technologies such as AI. The government is conscious of the risks associated with cyber resilience and AI, and has been proactive with the regulators to ensure that the financial services sector is appropriately managing those risks to consumers and financial stability.
I hope I provided some reassurance that the government and the regulators are alive to the risks identified, and taking proactive steps to manage them, but I'd ask the noble Lord to withdraw his amendment.
16:03
16:03
16:03
16:04
Speaker 8
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Speaker 8
In moving. Amendment 142 a. And in speaking to the other amendments in this group, which I also support, I am asking for the FCA to be able to develop a dedicated division to undertake their regulatory activities with regard to wholesale market participants. Now this amendment is therefore all about ensuring that in what is a highly competitive global market place, the FCA is able to balance its priorities and resources effectively to. To benefit the consumer or clients who use them in those markets that the FCA regulates.
The FCA's protection of the individual consumer is rightly prominent, but businesses who are customers of wholesale markets, like our world leading London insurance market require a very different level of protection. Currently, the definition used by the FCA is very unclear and does not distinguish between these two very different sets of needs. And I declare my interest, my long standing interest in financial services bill over the last 50 years or so. In particular, as a practising solicitor in the City of London and a partner in the firm DAC Beachcroft LLP.
So I have slowly but surely seen the evolution of regulation. But I am concerned that it is now inhibiting the growth of what is, for us one of the great global centres, in particular for insurance. But the definition of wholesale doesn't just apply to insurance, it's other aspects of financial services as well. Now, the FCA is well aware of the issue. Indeed, it's been raised actively with them. Uh, certainly over the last few years. And there has been commitments to action, but sad to say, progress is just not being made at the present time.
The FCA appears to be struggling with the definition of, a retail consumer, and has not so far found the best way forward. Now, once again, we rely on our own select committee to highlight the issue and indeed the cross-party Financial Services Regulation Committee clearly identified this as an issue finding in its report last year, and I quote the FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision, which imposes unnecessary burdens and. Frictions on firms. These issues, I continue the quote, have fuelled an increase in bureaucracy and impose significant monetary and resource demands on firms.
So therefore witnesses and um. To that select committee gave a number of key examples. And they I believe, show that wholesale and retail markets serve fundamentally different customers. Retail regulation is designed to protect individual consumers, whereas wholesale markets are primarily used by professional investors, insurance firms, banks, pension funds and corporate entities. The London insurance market deals almost exclusively with corporate clients, but the regulations take a one size fits all approach, applying consumer focused rules to firms and activities for which for which they were never really intended.
We have a situation where pet insurance is essentially regulated in the same manner as marine or aviation insurance policies and services delivered in the London market are bespoke to the individual client or individually negotiated and tendered. And where there is no evidence of this type of market failure, there not unit based commoditized products which are offered within the retail market. Now, the FCA's implementation, in particular, of what is described as the consumer duty, has introduced considerable uncertainty for both domestic and international firms operating in the London market, and this uncertainty is driven by a lack of clarity on the FCA's expectations as to how firms should comply with the consumer duty, including which markets and consumers it applies to, I believe, therefore, a dedicated wholesale division would help ensure regulation is proportionate to the sophistication of market participants, and that is why I feel so strongly that this amendment, and indeed the amendment moved by my noble friend Lord Ashton, should be contained within the bill, and I do hope the noble Lord the Minister will be able to address this issue for the first time as a minister in a Financial Services Bill, recognising that we're dealing with two separate markets at the moment, merged under the consumer duty, which is wholly inappropriate.
I beg to move.
The FCA's protection of the individual consumer is rightly prominent, but businesses who are customers of wholesale markets, like our world leading London insurance market require a very different level of protection. Currently, the definition used by the FCA is very unclear and does not distinguish between these two very different sets of needs. And I declare my interest, my long standing interest in financial services bill over the last 50 years or so. In particular, as a practising solicitor in the City of London and a partner in the firm DAC Beachcroft LLP.
So I have slowly but surely seen the evolution of regulation. But I am concerned that it is now inhibiting the growth of what is, for us one of the great global centres, in particular for insurance. But the definition of wholesale doesn't just apply to insurance, it's other aspects of financial services as well. Now, the FCA is well aware of the issue. Indeed, it's been raised actively with them. Uh, certainly over the last few years. And there has been commitments to action, but sad to say, progress is just not being made at the present time.
The FCA appears to be struggling with the definition of, a retail consumer, and has not so far found the best way forward. Now, once again, we rely on our own select committee to highlight the issue and indeed the cross-party Financial Services Regulation Committee clearly identified this as an issue finding in its report last year, and I quote the FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision, which imposes unnecessary burdens and. Frictions on firms. These issues, I continue the quote, have fuelled an increase in bureaucracy and impose significant monetary and resource demands on firms.
So therefore witnesses and um. To that select committee gave a number of key examples. And they I believe, show that wholesale and retail markets serve fundamentally different customers. Retail regulation is designed to protect individual consumers, whereas wholesale markets are primarily used by professional investors, insurance firms, banks, pension funds and corporate entities. The London insurance market deals almost exclusively with corporate clients, but the regulations take a one size fits all approach, applying consumer focused rules to firms and activities for which for which they were never really intended.
We have a situation where pet insurance is essentially regulated in the same manner as marine or aviation insurance policies and services delivered in the London market are bespoke to the individual client or individually negotiated and tendered. And where there is no evidence of this type of market failure, there not unit based commoditized products which are offered within the retail market. Now, the FCA's implementation, in particular, of what is described as the consumer duty, has introduced considerable uncertainty for both domestic and international firms operating in the London market, and this uncertainty is driven by a lack of clarity on the FCA's expectations as to how firms should comply with the consumer duty, including which markets and consumers it applies to, I believe, therefore, a dedicated wholesale division would help ensure regulation is proportionate to the sophistication of market participants, and that is why I feel so strongly that this amendment, and indeed the amendment moved by my noble friend Lord Ashton, should be contained within the bill, and I do hope the noble Lord the Minister will be able to address this issue for the first time as a minister in a Financial Services Bill, recognising that we're dealing with two separate markets at the moment, merged under the consumer duty, which is wholly inappropriate.
I beg to move.
16:10
16:10
Speaker 3
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Speaker 3
I. My interest as an employee of Marsh and FCA. Regulated firm and I rise to move amendment 142 C in my name, which in essence seeks to achieve something modest but necessary to equip the regulator with a clearer and more effective framework within which to operate. I, and I suspect others across the House, are unequivocal in our support for well-judged regulation. It is the foundation of consumer protection, of market integrity and indeed of London's standing as an international global financial centre and as my noble friend Lord hunt has mentioned, particularly in insurance.
But the position we find ourselves in today is not one of insufficient regulation, but of fragmentation of a system that, in parts lacks clarity and coherence. At present, the FCA operates without a clear statutory distinction between retail and wholesale clients. The distinction between wholesale and retail markets is not academic. It's fundamental, particularly in insurance, retail regulation exists to protect individuals and small businesses, wholesale markets, by contrast, are the domain of the larger and corporate entities. These participants are not passive consumers, but are typically active, informed buyers engaging in complex and often bespoke transactions.
As I spoke to you on Monday last week, this is very much in line with the amendment 142 a in the name of my noble friend Lord hunt, to which I added my name. However, this situation leads to a consequence of a degree of inconsistency that is frankly difficult to justify. Businesses have broadly similar scale and sophistication can find themselves subject to different regulatory treatments depending on the regime applied or the particular lens through which they are viewed. That certain uncertainty serves no one well.
It imposes a cost first on firms which must devote increasing resource to navigating, overlapping and at times, contradictory interpretations, but ultimately on consumers and smaller businesses who bear that burden through higher costs and reduced access to services. My Lords, there is, however, a straightforward solution to us and where my amendment amendment takes that further than my noble friend is as follows. There is already a £6.5 million turnover threshold that exists in statute and is used by the Financial Ombudsman Service to reflect size of companies. It reflects a determination made by Parliament of the point at which a business can reasonably be expected to possess a degree of financial sophistication and resource, and which could easily be adopted by the FCA.
Does not seek to innovate innovation's sake. Rather, it seeks to bring coherence by anchoring the distinction between retail and wholesale clients to that already established threshold. In doing so, it provides the regulator with a clear statutory direction. It also introduces a necessary discipline that retail retail style protection should not be applied to wholesale clients unless there is a demonstrable and proportionate case for doing so. That's not about weakening regulation, it's about smart regulation. It is a call for regulation that is properly targeted and grounded in the realities of the market.
This matters because we must allow the FCA to focus its efforts where they are most needed on genuine customer protection for the individuals, you and me, when we're purchasing insurance as an example, rather than dispersing them across forms of compliance that add bureaucracy cost without delivering constant, commensurate benefit. I think therefore, I think there's a genuine competitive point here to post Brexit. We've got the chance to move faster than Europe, but we have only we can only do that if the industry has certainty. Businesses need to know where they stand.
They cannot plan investment or hire teams based on regulatory guidance that shifts depending on who you talk to and when they need law. My Lords, my amendment offers a measure of that certainty. It reduces unnecessary friction, supports the FCA in meeting its secondary objectives of growth and competitiveness, and does so without in any way diminishing the protection afforded to those who genuinely require it. My Lords, this is a measured and pragmatic proposal. It respects the importance of regulation while seeking to improve its application.
And, I might add, my Lords, I support the other amendments in this group.
But the position we find ourselves in today is not one of insufficient regulation, but of fragmentation of a system that, in parts lacks clarity and coherence. At present, the FCA operates without a clear statutory distinction between retail and wholesale clients. The distinction between wholesale and retail markets is not academic. It's fundamental, particularly in insurance, retail regulation exists to protect individuals and small businesses, wholesale markets, by contrast, are the domain of the larger and corporate entities. These participants are not passive consumers, but are typically active, informed buyers engaging in complex and often bespoke transactions.
As I spoke to you on Monday last week, this is very much in line with the amendment 142 a in the name of my noble friend Lord hunt, to which I added my name. However, this situation leads to a consequence of a degree of inconsistency that is frankly difficult to justify. Businesses have broadly similar scale and sophistication can find themselves subject to different regulatory treatments depending on the regime applied or the particular lens through which they are viewed. That certain uncertainty serves no one well.
It imposes a cost first on firms which must devote increasing resource to navigating, overlapping and at times, contradictory interpretations, but ultimately on consumers and smaller businesses who bear that burden through higher costs and reduced access to services. My Lords, there is, however, a straightforward solution to us and where my amendment amendment takes that further than my noble friend is as follows. There is already a £6.5 million turnover threshold that exists in statute and is used by the Financial Ombudsman Service to reflect size of companies. It reflects a determination made by Parliament of the point at which a business can reasonably be expected to possess a degree of financial sophistication and resource, and which could easily be adopted by the FCA.
Does not seek to innovate innovation's sake. Rather, it seeks to bring coherence by anchoring the distinction between retail and wholesale clients to that already established threshold. In doing so, it provides the regulator with a clear statutory direction. It also introduces a necessary discipline that retail retail style protection should not be applied to wholesale clients unless there is a demonstrable and proportionate case for doing so. That's not about weakening regulation, it's about smart regulation. It is a call for regulation that is properly targeted and grounded in the realities of the market.
This matters because we must allow the FCA to focus its efforts where they are most needed on genuine customer protection for the individuals, you and me, when we're purchasing insurance as an example, rather than dispersing them across forms of compliance that add bureaucracy cost without delivering constant, commensurate benefit. I think therefore, I think there's a genuine competitive point here to post Brexit. We've got the chance to move faster than Europe, but we have only we can only do that if the industry has certainty. Businesses need to know where they stand.
They cannot plan investment or hire teams based on regulatory guidance that shifts depending on who you talk to and when they need law. My Lords, my amendment offers a measure of that certainty. It reduces unnecessary friction, supports the FCA in meeting its secondary objectives of growth and competitiveness, and does so without in any way diminishing the protection afforded to those who genuinely require it. My Lords, this is a measured and pragmatic proposal. It respects the importance of regulation while seeking to improve its application.
And, I might add, my Lords, I support the other amendments in this group.
16:15
16:15
Speaker 3
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Speaker 3
Very briefly, um, this group is really two separate groups as far as I can see. I'm not quite sure how they've been lumped together. One is operational readiness and the other is the different treatment of wholesale and retail. Um, uh, activities. And I wanted just to add my support briefly to the principles behind the latter, the wholesale and retail activities in 142 A and 142 C tabled by the noble Lord, Lord hunt and the naval Lord Ashcombe. These bring us back to the subject of proportionality that we've debated a number of times in.
In these debates, I think the noble Lord, the Minister, probably can see a few themes coming through. And I think proportionality is definitely one of them. Um, in this case, it's the question of whether the regulators treat wholesale businesses with no real retail customer exposure proportionately. And by definition, wholesale businesses are dealing with sophisticated customers on a much more equal basis. It can't be controversial, I don't think, to suggest that the regulation of these businesses could be lighter touch than those that are dealing with retail customers.
The reports of the Financial Services Regulation Committee on the Secondary Competitiveness and Growth Objective gave a number of examples where it appears the FCA may not be doing enough to differentiate between these two parts of the market, whilst recognising that this is not always a clearly defined black and white boundary. Um, I think Howard Davis put it well in his witness um evidence when he said in wholesale markets you're aiming to produce a fair contest, whereas in the retail markets, you know, it's not a fair contest because there is a significant information asymmetry problem between the consumer and the firm.
Um, the noble Lord, Lord hunt, has already read out and quoted our conclusion on this matter. So I won't repeat, repeat that whether this means we need a separate wholesale markets and firms division within the FCA. As the amendments proposed, I think is debatable, but I will be very interested to hear how the noble Lord, the Minister proposes proposes to ensure that those businesses that are primarily or wholly wholesale in operation are regulated proportionately.
In these debates, I think the noble Lord, the Minister, probably can see a few themes coming through. And I think proportionality is definitely one of them. Um, in this case, it's the question of whether the regulators treat wholesale businesses with no real retail customer exposure proportionately. And by definition, wholesale businesses are dealing with sophisticated customers on a much more equal basis. It can't be controversial, I don't think, to suggest that the regulation of these businesses could be lighter touch than those that are dealing with retail customers.
The reports of the Financial Services Regulation Committee on the Secondary Competitiveness and Growth Objective gave a number of examples where it appears the FCA may not be doing enough to differentiate between these two parts of the market, whilst recognising that this is not always a clearly defined black and white boundary. Um, I think Howard Davis put it well in his witness um evidence when he said in wholesale markets you're aiming to produce a fair contest, whereas in the retail markets, you know, it's not a fair contest because there is a significant information asymmetry problem between the consumer and the firm.
Um, the noble Lord, Lord hunt, has already read out and quoted our conclusion on this matter. So I won't repeat, repeat that whether this means we need a separate wholesale markets and firms division within the FCA. As the amendments proposed, I think is debatable, but I will be very interested to hear how the noble Lord, the Minister proposes proposes to ensure that those businesses that are primarily or wholly wholesale in operation are regulated proportionately.
16:17
Speaker 4
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Speaker 4
My lord, I rise. To support my colleagues Lord Hunt and Lord Ashcombe and their amendment 142 A and 142 C, because they can be done in one word, as has already been said, proportionality. These are themes that we've debated in previous days at committee, and those themes are still as strong as they were when we mentioned them on day one to proportionality, I'd add specificity and applicability because without making this critical distinction, though difficult at some of the margin cases, without making this distinction, we're effectively saying rules apply across the piece, which inevitably means increased burdens, increased costs, lack of specificity in applicability, and holding firms, and the UK economy back.
As Lord hunt rightly said, we have the at least odd situation right now where pet insurance is treated the same as marine or aviation insurance. I can see only one potential case where this would be appropriate if many people were petting flying fish. As I don't believe we have an increase in flying fish pet age, I. Believe proportionality, specificity and applicability would be achieved by embracing the principles set out both in amendment 142 A and indeed 142 C.
As Lord hunt rightly said, we have the at least odd situation right now where pet insurance is treated the same as marine or aviation insurance. I can see only one potential case where this would be appropriate if many people were petting flying fish. As I don't believe we have an increase in flying fish pet age, I. Believe proportionality, specificity and applicability would be achieved by embracing the principles set out both in amendment 142 A and indeed 142 C.
16:19
16:19
Speaker 10
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Speaker 10
I broadly support amendment 142 A and I thank the noble Lord, Lord hunt, for bringing it forward. And I also think something like Lord Ashton's amendment or similar would obviously be needed as some kind of companion to it. Whatever the FCA may have been intended to be, it is now proudly and explicitly a consumer protection body for much of its work. That is good, but some noble lords will know that it has taken me and others for years to get incorrect cost disclosure descriptions for listed investment companies corrected simply because consumers like the incorrect versions.
Indeed, that saga led to a telling exchange at a meeting of the Financial Services Regulation Committee, the FCA chair insisted that consumer views always took priority, and I replied, if you ask whether one and one makes 2 or 3, and the consumer says, I like three, it's a bigger number, is that what you use?And there was no denial. And that is the scale of the problem, a regulatory culture where consumer preference for something factually incorrect overrides market integrity. It is a mindset that has already cost billions in potential investment in productive assets.
And now. Let's move on. That was where it touched consumers. Now let's move on to looking at the wholesale areas. The trouble is that mindset gets pasted across to, and we don't need to debate whether or not the FCA went overboard in demanding that wholesale businesses had to proactively prove that they do no consumer harm in transactions that never touched consumers. The admission is there. In the consultation, CP 2623, paragraph 1.3 acknowledging overreach and also acknowledging unnecessary cost complexity and uncertainty without clear benefits for retail consumers.
Having finally identified the cancer, the regulator is merely applying a sticking plaster. All that is being offered is the mildest semantic tweak to guidance. Effectively. A guide to guidance. It has no legal effect. It allows the regulator to continue its current trajectory with a slight adjustment to its vocabulary. And we all know that this change was only extracted after heavy nudging by the Chancellor and intense parliamentary scrutiny. It is hardly being done with good grace and provides no guarantee of permanence.
The fact is, we must deal with the FCA as it is, not as it might have been since the advent of consumer duty. The retail first culture is irreversibly embedded into the psyche of staff and in many instances, the reason why they joined the regulator in the first place, perhaps. One of the most telling things is to look at what is said about other regulators. The Monetary Authority of Singapore, which I found a very enlightened body on my visit there some years ago. About then, the comment is, although mass is a unitary regulator, it splits its internal policy division strictly by target market.
Rather than trying to govern everything under an overarching outcomes based code like the UK's consumer duty. Says it works because the wholesale division, answerable to the mass leadership is judged primarily on market liquidity, innovation and international competitiveness. There is zero risk of a consumer advocacy group hijacking a wholesale policy consultation. I wonder where they were thinking about my Lords. A ring fence, structurally separate wholesale unit within our regulator's architecture must live up to that standard. Some may argue that all wholesale activity impacts retail eventually, and I agree.
But there is massive fundamental difference between regulating wholesale markets for the integrity of the system, which protects everyone and regulating as if they are a high tech high street retail shop floor. The former ensures safety. The latter ensures paralysis for any noble lords worried about it. This about this structural change. Nothing being suggested would remove liability for wrongs or harms to consumers should that occur. Let us be clear this amendment is not an attempt to escape oversight. It's an attempt to ensure that oversight is competent, technically accurate and focused on the reality of the market being regulated.
And let nobody forget that MiFID and other legislation already provides a rigorous framework governing transparency, best execution and conflicts of interest. This is no soft ride, my Lords. This amendment is a necessary, necessary structural correction and I support it.
Indeed, that saga led to a telling exchange at a meeting of the Financial Services Regulation Committee, the FCA chair insisted that consumer views always took priority, and I replied, if you ask whether one and one makes 2 or 3, and the consumer says, I like three, it's a bigger number, is that what you use?And there was no denial. And that is the scale of the problem, a regulatory culture where consumer preference for something factually incorrect overrides market integrity. It is a mindset that has already cost billions in potential investment in productive assets.
And now. Let's move on. That was where it touched consumers. Now let's move on to looking at the wholesale areas. The trouble is that mindset gets pasted across to, and we don't need to debate whether or not the FCA went overboard in demanding that wholesale businesses had to proactively prove that they do no consumer harm in transactions that never touched consumers. The admission is there. In the consultation, CP 2623, paragraph 1.3 acknowledging overreach and also acknowledging unnecessary cost complexity and uncertainty without clear benefits for retail consumers.
Having finally identified the cancer, the regulator is merely applying a sticking plaster. All that is being offered is the mildest semantic tweak to guidance. Effectively. A guide to guidance. It has no legal effect. It allows the regulator to continue its current trajectory with a slight adjustment to its vocabulary. And we all know that this change was only extracted after heavy nudging by the Chancellor and intense parliamentary scrutiny. It is hardly being done with good grace and provides no guarantee of permanence.
The fact is, we must deal with the FCA as it is, not as it might have been since the advent of consumer duty. The retail first culture is irreversibly embedded into the psyche of staff and in many instances, the reason why they joined the regulator in the first place, perhaps. One of the most telling things is to look at what is said about other regulators. The Monetary Authority of Singapore, which I found a very enlightened body on my visit there some years ago. About then, the comment is, although mass is a unitary regulator, it splits its internal policy division strictly by target market.
Rather than trying to govern everything under an overarching outcomes based code like the UK's consumer duty. Says it works because the wholesale division, answerable to the mass leadership is judged primarily on market liquidity, innovation and international competitiveness. There is zero risk of a consumer advocacy group hijacking a wholesale policy consultation. I wonder where they were thinking about my Lords. A ring fence, structurally separate wholesale unit within our regulator's architecture must live up to that standard. Some may argue that all wholesale activity impacts retail eventually, and I agree.
But there is massive fundamental difference between regulating wholesale markets for the integrity of the system, which protects everyone and regulating as if they are a high tech high street retail shop floor. The former ensures safety. The latter ensures paralysis for any noble lords worried about it. This about this structural change. Nothing being suggested would remove liability for wrongs or harms to consumers should that occur. Let us be clear this amendment is not an attempt to escape oversight. It's an attempt to ensure that oversight is competent, technically accurate and focused on the reality of the market being regulated.
And let nobody forget that MiFID and other legislation already provides a rigorous framework governing transparency, best execution and conflicts of interest. This is no soft ride, my Lords. This amendment is a necessary, necessary structural correction and I support it.
16:26
Speaker 9
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Speaker 9
My Lord, I support the amendments in this group, but I want to confine my remarks to one, six, five and links 173 from Baroness Neville-rolfe for an FCA Operational Readiness Report and presented by the Treasury. Baroness Neville-rolfe. Amendment one, six five will mean Parliament has the opportunity to ensure, by a Treasury report that we have an assessment of the FCA's operational readiness to exercise any significant new regulatory function conferred by the Act of staffing, resourcing and the capability of the systems in place and of the impact expected on authorisations, supervisions and enforcement timeliness and this.
Will be a formal report to Parliament until we have such a report from the Treasury that the FCA is operationally ready. The act cannot stop under Baroness Neville-rolfe amendment 173. My own amendment 165 A proposes that the report must also assess readiness in terms of preparatory training and the interpretation of the application of the act. Such a requirement should prompt the FCA to to deploy and and train existing staff with the specific knowledge and understanding of the new powers they will operate under the Bill and therefore be up to date and competent to regulate firms under the law.
It will require the Treasury to report to Parliament, and in this way there is a measure of measure of accountability. Now, my Lords, it might be contended that this is a notice requirement. But the FCA's workforce is around 5000 recruited from candidates with a diverse range of skills under different headings, finance and operations. There are 46% make up, 46%. Engineering and. 30% and Sales and Marketing 23%. The median, median employee tenure is 4.2 years. Regulators come to their post with a diverse range of skills.
Some highly experienced and others less so at the moment. Today, 17 posts are advertised which cover a wide range of of jobs and responsibilities and for which a different skills are required. Just to give you an example, um, there's a senior in supervisor job, a financial crime, marketing interventions associate an L associate, a lead for global strategy and engagement a primary markets supervisor, a senior crypto asset, um person and payment supervisor and technical specialist in AI. I think Lord Holmes will be pleased to hear that, um, the skills range required can include the common skills we'd expect or the generic skills, for instance in data systems, a senior cryptoasset and payment supervisor responsible for working in this developing sector and who will lead difficult cases, identify a risk, deal with cross border problems and help prevent crime.
Also expected to drive improvement in standards. Now these are important and demanding tasks. They also operate in a rapidly developing area. Given the nature of the system, regulators are internally accountable for what will. Given that the principles still apply, be subjective interpretations and judgements. Not only should there therefore be at least the requirement of general and specific knowledge and competencies for each role. But as financial products continue to be developed and the framework of law continues to change, there must also be continuous learning and updating in the law and the powers given to the.
Regulators under it, rather than assuming that somehow the regulators will be equipped and operationally ready to do the job. If we. If we don't go ahead with such an amendment. And that would add to the problem businesses experienced today. And we've heard a great deal about these problems throughout the Committee. And again today, a lack of regulatory predictability, a lack of transparency in applying the principles, a lack of consistency, and the overarching question of accountability, all of which exists now and may be exacerbated by this bill.
Will be a formal report to Parliament until we have such a report from the Treasury that the FCA is operationally ready. The act cannot stop under Baroness Neville-rolfe amendment 173. My own amendment 165 A proposes that the report must also assess readiness in terms of preparatory training and the interpretation of the application of the act. Such a requirement should prompt the FCA to to deploy and and train existing staff with the specific knowledge and understanding of the new powers they will operate under the Bill and therefore be up to date and competent to regulate firms under the law.
It will require the Treasury to report to Parliament, and in this way there is a measure of measure of accountability. Now, my Lords, it might be contended that this is a notice requirement. But the FCA's workforce is around 5000 recruited from candidates with a diverse range of skills under different headings, finance and operations. There are 46% make up, 46%. Engineering and. 30% and Sales and Marketing 23%. The median, median employee tenure is 4.2 years. Regulators come to their post with a diverse range of skills.
Some highly experienced and others less so at the moment. Today, 17 posts are advertised which cover a wide range of of jobs and responsibilities and for which a different skills are required. Just to give you an example, um, there's a senior in supervisor job, a financial crime, marketing interventions associate an L associate, a lead for global strategy and engagement a primary markets supervisor, a senior crypto asset, um person and payment supervisor and technical specialist in AI. I think Lord Holmes will be pleased to hear that, um, the skills range required can include the common skills we'd expect or the generic skills, for instance in data systems, a senior cryptoasset and payment supervisor responsible for working in this developing sector and who will lead difficult cases, identify a risk, deal with cross border problems and help prevent crime.
Also expected to drive improvement in standards. Now these are important and demanding tasks. They also operate in a rapidly developing area. Given the nature of the system, regulators are internally accountable for what will. Given that the principles still apply, be subjective interpretations and judgements. Not only should there therefore be at least the requirement of general and specific knowledge and competencies for each role. But as financial products continue to be developed and the framework of law continues to change, there must also be continuous learning and updating in the law and the powers given to the.
Regulators under it, rather than assuming that somehow the regulators will be equipped and operationally ready to do the job. If we. If we don't go ahead with such an amendment. And that would add to the problem businesses experienced today. And we've heard a great deal about these problems throughout the Committee. And again today, a lack of regulatory predictability, a lack of transparency in applying the principles, a lack of consistency, and the overarching question of accountability, all of which exists now and may be exacerbated by this bill.
16:30
16:30
Speaker 2
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Speaker 2
And we've heard that it's. been tellingly illustrated in the Financial Services Regulation Select Committee report. And again, I picked out many examples, one on the consumer duty, the FCA reported to have insufficient clarity around how it expects firms to comply with this duty. That duplication and complexity have been created, and the ambiguity of the rules, and the lack of clarity provided by the FCA makes things difficult for firms to know what is expected of them, and that was according to the evidence of the Investment Association.
There may be different reasons for the absence of clarity, predictability and consistency. We've discussed some of them, but it all raised the question of how knowledgeable are the regulators about the law and the legislative framework under which the system operates, and what is in their hands. Yes, there is accountability to the Treasury internally, but it is important, too, that the Treasury and. That through the Treasury, Parliament knows they are adequately prepared to operate the new powers. Oh, I'm so sorry. Sorry.
I beg your pardon. And that Parliament, through the Treasury, knows that they are equipped under the. To exercise the new powers under the Bill, in what is still a rather unaccountable quasi legal system. For this reason I support Baroness Neville's walls and table my own small addition that the Treasury must report that the FCA is operationally ready for the task, and that the FCA is operationally ready and the Treasury is satisfied that it is.
There may be different reasons for the absence of clarity, predictability and consistency. We've discussed some of them, but it all raised the question of how knowledgeable are the regulators about the law and the legislative framework under which the system operates, and what is in their hands. Yes, there is accountability to the Treasury internally, but it is important, too, that the Treasury and. That through the Treasury, Parliament knows they are adequately prepared to operate the new powers. Oh, I'm so sorry. Sorry.
I beg your pardon. And that Parliament, through the Treasury, knows that they are equipped under the. To exercise the new powers under the Bill, in what is still a rather unaccountable quasi legal system. For this reason I support Baroness Neville's walls and table my own small addition that the Treasury must report that the FCA is operationally ready for the task, and that the FCA is operationally ready and the Treasury is satisfied that it is.
16:32
Speaker 11
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Speaker 11
Comment briefly. I completely agree with the notion that wholesale. Markets and retail markets should be dealt with separately. Um. For the reasons that have been given. I'm less than clear that a structural solution such as the one proposed by my noble friend, Lord hunt will is the right one. I actually think the problem is is deeper. It lies in the construction of Fisma because the the FCA is given a consumer protection objective which makes no differentiation between um, different kinds of wholesale and retail markets.
The meaning of consumer is very generic and has no sense of understanding that there are radically different markets for retail and wholesale participants, and that all of that means that, uh. The whole burden of treating these markets differently falls on the applicability of the proportionality, um, regulatory principle in section three B, which we've discussed many times and is due to be downgraded under the current proposals. Um, I don't know what the answer is, but I suspect in legislative terms it is a deeper answer than simply setting up a separate division within the FCA, because I think the construction of Fisma simply does not accommodate easily the fact that there are two quite different types of market.
The meaning of consumer is very generic and has no sense of understanding that there are radically different markets for retail and wholesale participants, and that all of that means that, uh. The whole burden of treating these markets differently falls on the applicability of the proportionality, um, regulatory principle in section three B, which we've discussed many times and is due to be downgraded under the current proposals. Um, I don't know what the answer is, but I suspect in legislative terms it is a deeper answer than simply setting up a separate division within the FCA, because I think the construction of Fisma simply does not accommodate easily the fact that there are two quite different types of market.
16:34
Speaker 12
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Speaker 12
My Lords, I'm very grateful to my noble friend Lord hunt and Lord Ashcombe for bringing forward amendments 142 A and 142 C. We've heard from industry that there is often insufficient clarity around whether retail or wholesale regulatory standards apply. In particular cases. That lack of clarity matters because it means that firms can find themselves applying regulatory standards, processes and levels of prudence which go above and beyond what is actually required, simply because they are concerned that the boundary is not clear. And that is why I think the proposals from my noble friend Lord Ashcombe and Lord Hunt of Wirral for a clearer statutory distinction are important.
Threshold would, of course, need to be carefully considered. But the principle is right. Firms should know which rules apply to which clients. Regulators should avoid applying retail style requirements to wholesale clients unless that is genuinely proportionate. I also welcome the broader point behind amendment 142 A, which would create a dedicated wholesale markets and firms division within the FCA. The case for that amendment in a highly competitive global industry, as my noble friend Lord hunt explained, is that wholesale markets require specialist expertise and a regulatory culture that understands institutional, professional and capital markets activity.
If the FCA's regulating both retail and consumer markets with lots of SMEs and complex whole wholesale markets at the same time, it must have the internal structure and expertise to apply the right approach to each. And the noble lady. Lady Bowles, a member, of course, of the Lords committee, rightly suggested that consumer preference has become a problem mindset in the wholesale area. And I thought, interestingly cited mass in Singapore, where regulation is split by target market. Um, another member of the committee, the noble Lord, Lord Vokes, um rightly call for proportionality endorsed by Lord Lord.
Friend Lord Holmes and of course my noble friend Lady Noakes explained that that um followed from the way that Fisma was set up. So it's quite complicated all of this, but I think it is very important that we look at these amendments very seriously. I now turn to amendments one, six, five and 173 in my name and that of my noble friend Lord Altrincham. These rates are related, but distinct question of whether the FCA is operationally ready to take on the significant new functions being handed to it under this Bill.
This is, of course, a matter for the FCA, as it's. An independent regulator, but the fact is that some do not trust them, including those in the payments and consumer credit industries who will be new or largely new to their fiat. We need a plan to show what will happen and when. In all cases where the regulator is taking over responsibilities from elsewhere, which, on reflection, I should have added to our amendment. We also need to know how many staff the FCA plan to add and the accommodation arrangements.
For the industry pay for our regulators, and the latter should spend every pound carefully as if it was their own. In time, we would hope to see some economies of scale as the proposed changes drive efficiency. The explanatory note for the bill explains that because the FCA will take over AML supervision of legal service providers, accountants and trust company service providers, it will need significant preparatory work, including the hiring and training of staff and establishing necessary IT infrastructure. So we need more clarity on that point, and particularly on the point of ensuring service standards and value for money.
The point behind amendment 165 is simple. Before significant new FCA functions are commenced, a report would look at the FCA Staffing and Resourcing systems capability, the impact on authorisation, supervision and enforcement timeliness, the effect on service standards for firms and consumers, and any mitigation measures considered necessary by the Treasury and the FCA that would have the benefit of allowing Parliament and its committees to examine the plans. One example that has been raised with us is the movement of the payment systems regulator into the FCA. Told us that there's a very limited clarity about the timeline for that transition.
The operational arrangements, the treatment of existing PSR work, the continuity of functions, and how the FCA will absorb these responsibilities without disruption. They don't see that as a satisfactory position, and I'd like to thank the noble lady, Baroness Lawler, my noble friend Baroness Lawler, for her support and for her amendment to my amendment. It makes a valuable point about the importance of training staff to ensure a smooth transition, and I very much agree with this from my own experience in business and in government. So I look forward to hearing from the Minister both first, on how we can better avoid duplication and the excess caution, sometimes caused by the existing overlap between retail and wholesale.
At the FCA. And second, on his view as to how Parliament and stakeholders can best scrutinise plans for the handover of new areas of responsibility to the FCA.
Threshold would, of course, need to be carefully considered. But the principle is right. Firms should know which rules apply to which clients. Regulators should avoid applying retail style requirements to wholesale clients unless that is genuinely proportionate. I also welcome the broader point behind amendment 142 A, which would create a dedicated wholesale markets and firms division within the FCA. The case for that amendment in a highly competitive global industry, as my noble friend Lord hunt explained, is that wholesale markets require specialist expertise and a regulatory culture that understands institutional, professional and capital markets activity.
If the FCA's regulating both retail and consumer markets with lots of SMEs and complex whole wholesale markets at the same time, it must have the internal structure and expertise to apply the right approach to each. And the noble lady. Lady Bowles, a member, of course, of the Lords committee, rightly suggested that consumer preference has become a problem mindset in the wholesale area. And I thought, interestingly cited mass in Singapore, where regulation is split by target market. Um, another member of the committee, the noble Lord, Lord Vokes, um rightly call for proportionality endorsed by Lord Lord.
Friend Lord Holmes and of course my noble friend Lady Noakes explained that that um followed from the way that Fisma was set up. So it's quite complicated all of this, but I think it is very important that we look at these amendments very seriously. I now turn to amendments one, six, five and 173 in my name and that of my noble friend Lord Altrincham. These rates are related, but distinct question of whether the FCA is operationally ready to take on the significant new functions being handed to it under this Bill.
This is, of course, a matter for the FCA, as it's. An independent regulator, but the fact is that some do not trust them, including those in the payments and consumer credit industries who will be new or largely new to their fiat. We need a plan to show what will happen and when. In all cases where the regulator is taking over responsibilities from elsewhere, which, on reflection, I should have added to our amendment. We also need to know how many staff the FCA plan to add and the accommodation arrangements.
For the industry pay for our regulators, and the latter should spend every pound carefully as if it was their own. In time, we would hope to see some economies of scale as the proposed changes drive efficiency. The explanatory note for the bill explains that because the FCA will take over AML supervision of legal service providers, accountants and trust company service providers, it will need significant preparatory work, including the hiring and training of staff and establishing necessary IT infrastructure. So we need more clarity on that point, and particularly on the point of ensuring service standards and value for money.
The point behind amendment 165 is simple. Before significant new FCA functions are commenced, a report would look at the FCA Staffing and Resourcing systems capability, the impact on authorisation, supervision and enforcement timeliness, the effect on service standards for firms and consumers, and any mitigation measures considered necessary by the Treasury and the FCA that would have the benefit of allowing Parliament and its committees to examine the plans. One example that has been raised with us is the movement of the payment systems regulator into the FCA. Told us that there's a very limited clarity about the timeline for that transition.
The operational arrangements, the treatment of existing PSR work, the continuity of functions, and how the FCA will absorb these responsibilities without disruption. They don't see that as a satisfactory position, and I'd like to thank the noble lady, Baroness Lawler, my noble friend Baroness Lawler, for her support and for her amendment to my amendment. It makes a valuable point about the importance of training staff to ensure a smooth transition, and I very much agree with this from my own experience in business and in government. So I look forward to hearing from the Minister both first, on how we can better avoid duplication and the excess caution, sometimes caused by the existing overlap between retail and wholesale.
At the FCA. And second, on his view as to how Parliament and stakeholders can best scrutinise plans for the handover of new areas of responsibility to the FCA.
16:40
16:40
Speaker 7
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Speaker 7
My Lord, the FCA currently regulates around 42,000 businesses in the UK of different shapes, sizes and of course a wide range of different activities is therefore incredibly important that FCA has the right structures in place, adequate resources and governance, and the right people with the right skills to fulfil this role effectively. I mentioned 142 A would require the FCA to develop a dedicated division to undertake its regulatory activities in regard to wholesale market participants. Amendment 142 C would require the Treasury to introduce a statutory definition of retail and wholesale clients.
The purpose of this would be to ensure that regulators avoid applying retail focus requirements to wholesale clients, except where proportionate and appropriate. My Lords, I recognise the intention behind these amendments. I'm aware that this point about distinguishing between retail and wholesale activities was made in the committee's Growing Pains report. Wholesale markets are a vital part of the UK's financial services sector, and the government fully agrees that regulation of those markets must be proportionate, targeted and internationally competitive. But we must be careful about embedding the retail and wholesale distinction into law.
The distinction between retail and wholesale activity is important, but not always absolute. For this reason, the FCA needs to be able to regulate proportionately across the markets it oversees, with the FCA called upon to explain the decisions it makes so that they can properly be scrutinised. The government agrees that the FCA must ensure its retail focus rules do not apply unduly to affect the wholesale activity. In particular. In her mansion House speech last July, the Chancellor tasked the FCA with assessing the impact of the consumer duty to provide more certainty on its scope and application to wholesale firms.
Addressing the key concern raised by the wholesale sector. In response, the FCA committed to four workstreams aimed at removing disproportionate burdens on wholesale firms and give firms the confidence to comply with their obligations in a proportionate way, avoiding over compliance. Just as a reminder, those four workstreams were to, number one, clarify their supervisory approach when firms together, when firms work together to manufacture products for retail customers. Two to consult on their client categorisation to reset how firms distinguish between retail and professional clients. Three consult on removing businesses with non-UK customers from the duties scope, and four consult on the wider scope and proportionality of the duty.
The FCA has already published consultations on the first two of these workstreams at the end of 2025, and last week, the FCA published a further consultation proposing to remove business with non-UK customers from the duties scope, as well as proposing wider changes to the proportionality of duty in light of the work under way. I do not think that we need to amend the Bill to embed a distinction with the FCA is already acting on turn to amendments 165165 A and 173. I have listened carefully to the arguments made, and I agree that it's very important that we're confident that the FCA is ready to take on its new functions.
There are many benefits associated with consolidation, as it reduces the number of separate regulators that businesses need to deal with. It promotes consistency of approach between different areas, and it builds on expertise within the effective regulators. As I've said earlier, the FCA is responsible for ensuring that it has the resources and capability needed to advance its objectives and implement any new responsibility as given. It also has the powers it needs to do so, is able to set its own budget to secure the resources it needs, and to set its own pay scale so it can hire the talent and expertise it needs.
However, I would like to reassure my noble Lords that the Treasury does not simply confer new additional responsibilities on FCA without careful and close engagement between organisations, for example, the government and FCA are working closely on reforms to anti-money laundering and counter-terrorism supervision to ensure that the FCA is ready to take on this new responsibility. The government is providing funding from the Economic Crime Levy to support implementation of the reform and build the capability and sector specific, specific expertise needed, alongside close engagement with existing supervisors and stakeholders. The Treasury has also worked closely with the FCA and PSR on reforms to payment systems regulation.
The FCA already has extensive familiarity with the payments ecosystem and is actively preparing for taking on its responsibilities for payment systems regulations from the PSR through a phase transition, the government is confident that the FCA's operational readiness and it will continue to support the work with regulators to support them in implementing this change. I hope I've reassured you of how the government has engaged with the FCA to make sure it's ready to take on the functions this bill will give it, and that the right set of actions are being taken to wholesale regulations.
I asked the noble Lord to withdraw his amendment.
The purpose of this would be to ensure that regulators avoid applying retail focus requirements to wholesale clients, except where proportionate and appropriate. My Lords, I recognise the intention behind these amendments. I'm aware that this point about distinguishing between retail and wholesale activities was made in the committee's Growing Pains report. Wholesale markets are a vital part of the UK's financial services sector, and the government fully agrees that regulation of those markets must be proportionate, targeted and internationally competitive. But we must be careful about embedding the retail and wholesale distinction into law.
The distinction between retail and wholesale activity is important, but not always absolute. For this reason, the FCA needs to be able to regulate proportionately across the markets it oversees, with the FCA called upon to explain the decisions it makes so that they can properly be scrutinised. The government agrees that the FCA must ensure its retail focus rules do not apply unduly to affect the wholesale activity. In particular. In her mansion House speech last July, the Chancellor tasked the FCA with assessing the impact of the consumer duty to provide more certainty on its scope and application to wholesale firms.
Addressing the key concern raised by the wholesale sector. In response, the FCA committed to four workstreams aimed at removing disproportionate burdens on wholesale firms and give firms the confidence to comply with their obligations in a proportionate way, avoiding over compliance. Just as a reminder, those four workstreams were to, number one, clarify their supervisory approach when firms together, when firms work together to manufacture products for retail customers. Two to consult on their client categorisation to reset how firms distinguish between retail and professional clients. Three consult on removing businesses with non-UK customers from the duties scope, and four consult on the wider scope and proportionality of the duty.
The FCA has already published consultations on the first two of these workstreams at the end of 2025, and last week, the FCA published a further consultation proposing to remove business with non-UK customers from the duties scope, as well as proposing wider changes to the proportionality of duty in light of the work under way. I do not think that we need to amend the Bill to embed a distinction with the FCA is already acting on turn to amendments 165165 A and 173. I have listened carefully to the arguments made, and I agree that it's very important that we're confident that the FCA is ready to take on its new functions.
There are many benefits associated with consolidation, as it reduces the number of separate regulators that businesses need to deal with. It promotes consistency of approach between different areas, and it builds on expertise within the effective regulators. As I've said earlier, the FCA is responsible for ensuring that it has the resources and capability needed to advance its objectives and implement any new responsibility as given. It also has the powers it needs to do so, is able to set its own budget to secure the resources it needs, and to set its own pay scale so it can hire the talent and expertise it needs.
However, I would like to reassure my noble Lords that the Treasury does not simply confer new additional responsibilities on FCA without careful and close engagement between organisations, for example, the government and FCA are working closely on reforms to anti-money laundering and counter-terrorism supervision to ensure that the FCA is ready to take on this new responsibility. The government is providing funding from the Economic Crime Levy to support implementation of the reform and build the capability and sector specific, specific expertise needed, alongside close engagement with existing supervisors and stakeholders. The Treasury has also worked closely with the FCA and PSR on reforms to payment systems regulation.
The FCA already has extensive familiarity with the payments ecosystem and is actively preparing for taking on its responsibilities for payment systems regulations from the PSR through a phase transition, the government is confident that the FCA's operational readiness and it will continue to support the work with regulators to support them in implementing this change. I hope I've reassured you of how the government has engaged with the FCA to make sure it's ready to take on the functions this bill will give it, and that the right set of actions are being taken to wholesale regulations.
I asked the noble Lord to withdraw his amendment.
16:44
16:45
16:45
16:45
16:45
16:45
16:45
Speaker 9
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Speaker 9
My Lord, what an important debate this has been. It's highlighted. Of the difficulties facing the FCA in its wide remit, covering both wholesale and retail markets. And I'm very grateful to my noble friend Lord Ashcombe. As he pointed out, industry needs certainty and I warmly welcome the contribution of Baroness Bowles with all her knowledge of this area. And she quite readily reminded us that the FCA does acknowledge overreach. So the problem is there. And what is happening about it?Well, I'm delighted to hear from the noble Lord, the Minister, that there are all these work streams, uh, progressing at the moment.
But. Just talking to those outside in, for instance, the London Market Group, they point out that the UK has to compete with New York, Singapore, Bermuda, Hong Kong and the EU financial centres. And it just can't do that with the system of regulation that we have at the moment governing the wholesale markets. And I agree with Lord Vokes of Harridan. It's all about proportionality. And if I can pick up one point that the noble Lord the minister made, and that is to stress the need for proportionality, or as my noble friend Lord Holmes of Richmond called it, applicability.
Um, I just I just think that there is a way through here and my. Noble friend, Baroness Neville Rolfe did talk about the overlap between wholesale and retail. There must be a solution if we are to continue to be the global centre that we always have been. And at the moment, bearing in mind the growth and competitiveness objectives, a move by the FCA suddenly to take out wholesale. I would cite it in Canary Wharf that would send a message across the world that the UK really means to grow and be internationally competitive in this vital marketplace.
We are bound to return to this at report stage. But in the meantime, I beg leave to withdraw the amendment.
But. Just talking to those outside in, for instance, the London Market Group, they point out that the UK has to compete with New York, Singapore, Bermuda, Hong Kong and the EU financial centres. And it just can't do that with the system of regulation that we have at the moment governing the wholesale markets. And I agree with Lord Vokes of Harridan. It's all about proportionality. And if I can pick up one point that the noble Lord the minister made, and that is to stress the need for proportionality, or as my noble friend Lord Holmes of Richmond called it, applicability.
Um, I just I just think that there is a way through here and my. Noble friend, Baroness Neville Rolfe did talk about the overlap between wholesale and retail. There must be a solution if we are to continue to be the global centre that we always have been. And at the moment, bearing in mind the growth and competitiveness objectives, a move by the FCA suddenly to take out wholesale. I would cite it in Canary Wharf that would send a message across the world that the UK really means to grow and be internationally competitive in this vital marketplace.
We are bound to return to this at report stage. But in the meantime, I beg leave to withdraw the amendment.
16:48
16:48
Speaker 13
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Speaker 13
Thank you. Lords of notice. It's a very skinny um list of amendments. It is an amendment of one. And I will put on record my register of interest. I'm a chartered accountant and a chartered tax adviser. And in the day I did the appropriate examinations. Um that allowed me to be licensed for non-contentious probate work under the ICW so I suppose it does need the ingenuity of a chartered tax adviser to get an amendment in the Financial Services Markets Bill relating to inheritance tax.
Now, Lords may note the Economic Affairs Finance Bill Sub-Committee report that was dated on the end of January 20th 9th of January of this year, which was really focusing on the. The six month rule on paying inheritance tax. It's not actually six months. It is actually six months after the end of the month of death. So, for instance, if somebody passes away in in, say, December 2025, the due date for inheritance tax would be the end of December plus six months, i.e.
the end of June 2026. Now, the House of Lords Economic Affairs Finance Bill Sub-Committee was considering how the system will be dealing after next year when SIPP pensions, particularly those self-invested personal pensions, become within the scope of inheritance tax from 6th of April next year. Because, as I hope to show to the Minister this afternoon, the system of getting inheritance tax paid is lumpy at best, mixed at worst and very complicated for a personal representative, representatives and executives to deal with at some of the worst times that people have to deal with the state and the system and getting affairs settled.
They say there are three dreadful events in life. One is death, one is divorce, and one is moving. But I think most would would appreciate that the death one is a particularly difficult time for all concerned. Now I've been administering probate for a very, very long time, and I have to say it is the area where the state really does interpose itself to stop the administration of an estate. Until HMRC are happy that they will get their wedge. They are the absolute blockage, and I think it's a time when the state and the individual really are in some conflict, because the state will not move, allowing probate to be achieved and those assets to be released until the tax is payable.
I don't think there's any other area of tax where an absolute blockage comes into play. There is completely no trust between the state and the individual when administering an estate. Now, if I say all used to be well, well, well, it wasn't really um. There was a very painful hangover of the November 2025 disaster budget. Now it increased tax or increased interest on all overdue taxes. Um, to 4% above base. Now that's a hefty rate above base.
Whereas if you are have overpaid your taxes, you get credit interest at 1% below base. So the government enjoys a 5% spread. So there is a huge. Imperative to get taxes paid when they're due. I hope that is the underlying reason why we have a penal rate currently of 7.75% on taxes that are due. Now, I have to say for many executives, getting the cash together to pay that tax within six months and possibly a few days after death is a very difficult procedure because probate can rarely be obtained within that time frame.
So a scheme has been presented over time and it's developed quite well. But it is discretionary and it varies from institution to institution. It is the direct payment scheme allowed by a form called the IHT for two three form. It's been in place for many years. It instructs or executors ask banks, building societies to pay the tax in advance of the due date and in advance, often of putting the appropriate forms into HMRC so that the smoothness of getting probate can be obtained.
Because if anybody has been involved with a probate situation, one cannot get probate until the tax is paid. How do you get the money out to pay the tax?Well, you could do with probate. So we end up in this catch 22 situation and the IHT 423 system was designed to help break that catch 22 on 1st of October of 2024. The IHT 423 arrangement that used to only apply to banks and building societies has been widened to include a far greater range of investments, with traditional investment houses.
Now, I may not have. Come across this problem had I not been administering my father's estate. Because I am his executor, I'd never come across an institution. In my professional years that had refused to pay the tax due on an IHG for two three request. Now, very sadly, I've come across one and it's the M&G plc group now, a dual structure between M&G Investments and Prudential. Huge names in the marketplace. They must have a significant percentage of all investment management in the UK.
So I had relied. I take the the me away from this. This would apply to any executor. Because my father's estate is due to pay inheritance tax, I had relied on the IHT 423 procedure to liberate an appropriate amount of IHT from an M&G prudential investment that he'd held for 24 years. The answer came back no, we don't do that. I asked the question, well, why don't you do that?I've been doing probate for many years and I've never had a no answer from an IHT 423 request.
They simply said, no, we don't do that. So that gets to the heart of what my amendment is all about, that if you have an FCA registered institution doing business in this country, they must be part of the IHT 423 scheme, no discretion. No, we don't do that because this is a period of great difficulty for executors up and down this country. Now, this makes no difference to me because I'm done. And I'll explain what many executors have to do. Either borrow money, which in itself is a tough ask, but given a 7.75% interest rate levied by the government, perhaps that is cheaper than having any amount outstanding and due.
Or they can pay the IHT personally. And that's what I've had to do. So we had an. Estate asset, an institution just says, no, we don't do that. And we have an estate liability of IHT that. Has to be paid else pay 7.75%. So I certainly hope that the government, the noble Lord, the minister will be keen as we go towards report stage to actually think about this. And say, yes, we want to be part of smoothing the administration of estates for people at a tough time in their lives.
I can but guess, and I certainly hope, that the reason for the 7.75% of interest is to encourage people to pay, not for it to be a receipt to the benefit of the government in itself. And if this isn't accepted as an amendment at probably report stage, which I would very much like the government to consider itself and draft, then I think I'll be left with the conclusion that the government is rather more keen on earning money at 7.75%, rather than helping the administration of estates. So that is a story that is being played out probably within tens, 50s, if not hundreds of thousands of households around this country.
As I speak today. And the fact that one of the giants of investment, M&G, Prudential, probably well over 10% of administered funds in this country, simply say no is not good enough. So we must put this on a statutory basis. And it seems to me that this bill is quite an appropriate place for it to be put.
Now, Lords may note the Economic Affairs Finance Bill Sub-Committee report that was dated on the end of January 20th 9th of January of this year, which was really focusing on the. The six month rule on paying inheritance tax. It's not actually six months. It is actually six months after the end of the month of death. So, for instance, if somebody passes away in in, say, December 2025, the due date for inheritance tax would be the end of December plus six months, i.e.
the end of June 2026. Now, the House of Lords Economic Affairs Finance Bill Sub-Committee was considering how the system will be dealing after next year when SIPP pensions, particularly those self-invested personal pensions, become within the scope of inheritance tax from 6th of April next year. Because, as I hope to show to the Minister this afternoon, the system of getting inheritance tax paid is lumpy at best, mixed at worst and very complicated for a personal representative, representatives and executives to deal with at some of the worst times that people have to deal with the state and the system and getting affairs settled.
They say there are three dreadful events in life. One is death, one is divorce, and one is moving. But I think most would would appreciate that the death one is a particularly difficult time for all concerned. Now I've been administering probate for a very, very long time, and I have to say it is the area where the state really does interpose itself to stop the administration of an estate. Until HMRC are happy that they will get their wedge. They are the absolute blockage, and I think it's a time when the state and the individual really are in some conflict, because the state will not move, allowing probate to be achieved and those assets to be released until the tax is payable.
I don't think there's any other area of tax where an absolute blockage comes into play. There is completely no trust between the state and the individual when administering an estate. Now, if I say all used to be well, well, well, it wasn't really um. There was a very painful hangover of the November 2025 disaster budget. Now it increased tax or increased interest on all overdue taxes. Um, to 4% above base. Now that's a hefty rate above base.
Whereas if you are have overpaid your taxes, you get credit interest at 1% below base. So the government enjoys a 5% spread. So there is a huge. Imperative to get taxes paid when they're due. I hope that is the underlying reason why we have a penal rate currently of 7.75% on taxes that are due. Now, I have to say for many executives, getting the cash together to pay that tax within six months and possibly a few days after death is a very difficult procedure because probate can rarely be obtained within that time frame.
So a scheme has been presented over time and it's developed quite well. But it is discretionary and it varies from institution to institution. It is the direct payment scheme allowed by a form called the IHT for two three form. It's been in place for many years. It instructs or executors ask banks, building societies to pay the tax in advance of the due date and in advance, often of putting the appropriate forms into HMRC so that the smoothness of getting probate can be obtained.
Because if anybody has been involved with a probate situation, one cannot get probate until the tax is paid. How do you get the money out to pay the tax?Well, you could do with probate. So we end up in this catch 22 situation and the IHT 423 system was designed to help break that catch 22 on 1st of October of 2024. The IHT 423 arrangement that used to only apply to banks and building societies has been widened to include a far greater range of investments, with traditional investment houses.
Now, I may not have. Come across this problem had I not been administering my father's estate. Because I am his executor, I'd never come across an institution. In my professional years that had refused to pay the tax due on an IHG for two three request. Now, very sadly, I've come across one and it's the M&G plc group now, a dual structure between M&G Investments and Prudential. Huge names in the marketplace. They must have a significant percentage of all investment management in the UK.
So I had relied. I take the the me away from this. This would apply to any executor. Because my father's estate is due to pay inheritance tax, I had relied on the IHT 423 procedure to liberate an appropriate amount of IHT from an M&G prudential investment that he'd held for 24 years. The answer came back no, we don't do that. I asked the question, well, why don't you do that?I've been doing probate for many years and I've never had a no answer from an IHT 423 request.
They simply said, no, we don't do that. So that gets to the heart of what my amendment is all about, that if you have an FCA registered institution doing business in this country, they must be part of the IHT 423 scheme, no discretion. No, we don't do that because this is a period of great difficulty for executors up and down this country. Now, this makes no difference to me because I'm done. And I'll explain what many executors have to do. Either borrow money, which in itself is a tough ask, but given a 7.75% interest rate levied by the government, perhaps that is cheaper than having any amount outstanding and due.
Or they can pay the IHT personally. And that's what I've had to do. So we had an. Estate asset, an institution just says, no, we don't do that. And we have an estate liability of IHT that. Has to be paid else pay 7.75%. So I certainly hope that the government, the noble Lord, the minister will be keen as we go towards report stage to actually think about this. And say, yes, we want to be part of smoothing the administration of estates for people at a tough time in their lives.
I can but guess, and I certainly hope, that the reason for the 7.75% of interest is to encourage people to pay, not for it to be a receipt to the benefit of the government in itself. And if this isn't accepted as an amendment at probably report stage, which I would very much like the government to consider itself and draft, then I think I'll be left with the conclusion that the government is rather more keen on earning money at 7.75%, rather than helping the administration of estates. So that is a story that is being played out probably within tens, 50s, if not hundreds of thousands of households around this country.
As I speak today. And the fact that one of the giants of investment, M&G, Prudential, probably well over 10% of administered funds in this country, simply say no is not good enough. So we must put this on a statutory basis. And it seems to me that this bill is quite an appropriate place for it to be put.
16:58
16:58
16:59
Speaker 13
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Speaker 13
Facilitate is. Merely that any financial institution that is registered with the FCA in this country must. Use the IHT 423 procedure. They cannot say no because at the moment we have a framework which is purely discretionary, which in my professional life every single institution has always said, yes, there are obviously some out there who are saying no. So I want to put the facilitation, not as a facilitation of choice, but a facilitation of must upon the request of an executor, because there is no risk here.
The risk here is either the funds remain in an investment account or they're in the account of HMRC, which last time I looked, despite being a child of tax adviser, is a safe place for people's funds to be.
The risk here is either the funds remain in an investment account or they're in the account of HMRC, which last time I looked, despite being a child of tax adviser, is a safe place for people's funds to be.
16:59
Speaker 1
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Speaker 1
If I could just say that. That um, Lord Mackay. Makes so much sense to me on this issue. Having gone through the struggles of probate, anything that will make it easier and more straightforward and I have worried since the announcement of the change that came with the last budget that brought pension pots into inheritance tax, that all kinds of consequences would significantly follow, because most people who thought that they had a fairly straightforward that settlement that upon death, will now find that there is a very complex picture that they've handed on now to their executors.
And can I put in a plea very much from personal experience, that where there are people who have more than one nationality or tax residency in one country, nationality in another, the nightmare becomes even more acute that an. I think if anybody. I'm not an adviser, so I give advice. If one is aware that somebody close is is is likely to die, it's almost become necessary to create a separate savings account to deal with all the relevant tax payments, because it's so long before probate can be completed, particularly if it's in more than one jurisdiction.
And I felt at one point that I virtually lived at Kingston Crown Court because I was so often having to get new and updated copies, that of the death certificate to satisfy some new requirement from somebody somewhere else. This is a painful and difficult time, but Lord McKinlay suggests, seems very straightforward and very effective, even if it only deals with one small piece. That is something.
And can I put in a plea very much from personal experience, that where there are people who have more than one nationality or tax residency in one country, nationality in another, the nightmare becomes even more acute that an. I think if anybody. I'm not an adviser, so I give advice. If one is aware that somebody close is is is likely to die, it's almost become necessary to create a separate savings account to deal with all the relevant tax payments, because it's so long before probate can be completed, particularly if it's in more than one jurisdiction.
And I felt at one point that I virtually lived at Kingston Crown Court because I was so often having to get new and updated copies, that of the death certificate to satisfy some new requirement from somebody somewhere else. This is a painful and difficult time, but Lord McKinlay suggests, seems very straightforward and very effective, even if it only deals with one small piece. That is something.
17:01
Speaker 12
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Speaker 12
My Lords, I'm grateful to my noble friend Lord McKinlay of Richborough for bringing forward amendment 142 B. Sorry to hear the difficulties he faced with his father's estate. My Lords, this is typical. When people die, their loved ones and executors often have a difficult time. And one of those difficulties is the delay they often encounter with probate. As I know from family experience and as we have heard from the noble lady, Lady Cramer, there's both an emotional toll and a worry as to how to pay any IHT within the six month window.
Hopes that this might be extended by the Chancellor to. 12 months have now been dashed. So this is a timely amendment. As I understand it. The issue is that when someone dies, their bank, building society or investment accounts are frozen. Executors may then need to pay inheritance tax before probate can be granted, but they may need probate in order to access the France from which that tax would be paid. And the IHT423 direct payment scheme is designed to address that problem by allowing inheritance tax to be paid directly from the deceased's bank, building society or investment account to HMS before probate is granted.
The difficulty, as we have heard, is that participation in that scheme is not consistent across all relevant financial institutions. This situation may mean that people have to find funds elsewhere, use personal savings, as we've heard, arrange borrowing or enter into more complicated interim arrangements. This amendment rightly seeks consistent consistency, consistency. It would require the FCA to make rules ensuring that relevant, regulated financial institutions facilitate the payment of inheritance tax through the I 43 Direct Payment Scheme, and may, of course, be operational legal issues that the government will want to consider.
But the basic principle seems right if inheritance tax must be paid before probate, it would be in the interest of all. If this inconsistency could be sorted out as a matter of urgency, bear in mind that the interest mounts up at a punitive rate, 4% above base rate. So that's 7.75% at present. And that it affects thousands of households every year. The minister will know the more generally, it will be a difficult year for those paying IHT with IHT payable on pension pots from April 2027.
That is all the more reason to show flexibility and sort out this particular issue, and to use this bill to do so, if that is necessary. I look forward to hearing what the Minister has to say.
Hopes that this might be extended by the Chancellor to. 12 months have now been dashed. So this is a timely amendment. As I understand it. The issue is that when someone dies, their bank, building society or investment accounts are frozen. Executors may then need to pay inheritance tax before probate can be granted, but they may need probate in order to access the France from which that tax would be paid. And the IHT423 direct payment scheme is designed to address that problem by allowing inheritance tax to be paid directly from the deceased's bank, building society or investment account to HMS before probate is granted.
The difficulty, as we have heard, is that participation in that scheme is not consistent across all relevant financial institutions. This situation may mean that people have to find funds elsewhere, use personal savings, as we've heard, arrange borrowing or enter into more complicated interim arrangements. This amendment rightly seeks consistent consistency, consistency. It would require the FCA to make rules ensuring that relevant, regulated financial institutions facilitate the payment of inheritance tax through the I 43 Direct Payment Scheme, and may, of course, be operational legal issues that the government will want to consider.
But the basic principle seems right if inheritance tax must be paid before probate, it would be in the interest of all. If this inconsistency could be sorted out as a matter of urgency, bear in mind that the interest mounts up at a punitive rate, 4% above base rate. So that's 7.75% at present. And that it affects thousands of households every year. The minister will know the more generally, it will be a difficult year for those paying IHT with IHT payable on pension pots from April 2027.
That is all the more reason to show flexibility and sort out this particular issue, and to use this bill to do so, if that is necessary. I look forward to hearing what the Minister has to say.
17:04
Speaker 7
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Speaker 7
My Lords. 142 B would require the FCA to ensure that financial institutions that are registered or regulated by the FCA facilitate the payment of inheritance tax by executors before probate, as obtained through the Direct Payment Scheme, I. Note that the purpose of this amendment is to make it easier for States to pay inheritance tax. I'm sorry for the issue of the noble Lord. Lord McKinlay has had. With the current system. I'm very happy to take that up with HMRC.
Um to explore why Prudential or not, a member of the current scheme. Um my Lords I can assure you in the research for this question um HMRC eternal analysis suggests that most taxpaying estates already able to fund at least the first instalment of inheritance tax before applying for probate. That payment scheme allows executors to ask banks, building societies or investment account providers to pay some or all of the inheritance tax due from the deceased person's accounts. The scheme works well in it's currently in its voluntary form and provides an important mechanism to help Executers pay any tax that is due.
But we need to be very careful here. Releasing funds from a deceased person's estate before probate is granted carries a risk for financial institutions. Those institutions need to ensure those payments can be made lawfully. The current system enables financial institutions to assess whether it is appropriate to make payments directly to HMS on a case by case basis, ensuring that institutions only make payment if satisfied that the personal representative is indeed acting on behalf of the deceased estate, and that they are releasing those funds correctly.
FCA rules cannot put this issue aside as this is a matter of the wider law. Financial institutions would need to ensure that making these payments is appropriate. Whatever the FCA rules say, this would leave financial institutions on an uncertain legal footing. I really understand the spirit of this amendment, but I do not agree it's the right solution. I think the existing voluntary scheme is working well on the whole, but I will definitely pass on the point. He has raised HMRC directly and come back to the noble Lord.
I therefore ask the noble Lord to withdraw this amendment.
Um to explore why Prudential or not, a member of the current scheme. Um my Lords I can assure you in the research for this question um HMRC eternal analysis suggests that most taxpaying estates already able to fund at least the first instalment of inheritance tax before applying for probate. That payment scheme allows executors to ask banks, building societies or investment account providers to pay some or all of the inheritance tax due from the deceased person's accounts. The scheme works well in it's currently in its voluntary form and provides an important mechanism to help Executers pay any tax that is due.
But we need to be very careful here. Releasing funds from a deceased person's estate before probate is granted carries a risk for financial institutions. Those institutions need to ensure those payments can be made lawfully. The current system enables financial institutions to assess whether it is appropriate to make payments directly to HMS on a case by case basis, ensuring that institutions only make payment if satisfied that the personal representative is indeed acting on behalf of the deceased estate, and that they are releasing those funds correctly.
FCA rules cannot put this issue aside as this is a matter of the wider law. Financial institutions would need to ensure that making these payments is appropriate. Whatever the FCA rules say, this would leave financial institutions on an uncertain legal footing. I really understand the spirit of this amendment, but I do not agree it's the right solution. I think the existing voluntary scheme is working well on the whole, but I will definitely pass on the point. He has raised HMRC directly and come back to the noble Lord.
I therefore ask the noble Lord to withdraw this amendment.
17:06
Speaker 13
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Speaker 13
Thank you, I listen carefully to what the minister had to say. I thought he was on a good track for a while, but he finished rather poorly. Can I thank the very sensible words from my noble friend, Baroness Neville Rolfe, who understood the situation completely and absolutely, and also, um, from Baroness Kramer. Now, if people do actually listen to what happens in this committee, and I'm sure the audience is fairly skinny, but if I could give a word of advice to those listening, which is exactly on the on the on the tack that Baroness Kramer was saying, it's not a problem of multitude, a multitude of um, nationalities that might exist.
I would recommend to anybody who is getting a little older to make their affairs that much little bit simpler so that once they depart, the affairs are more easy to unwind. Now, let me give you a very easy example, Baroness in particular is aimed at your point. Uh, if one holds shares that are denominated in, say, Jersey, not uncommon. There are listed listed shares on on our stock exchange, uh, that are headquartered in an overseas territory jersey. Quite typically, one would then need to go through the whole probate procedure just for those jersey registered assets.
Cost aggravation, sell them is my advice. Now, um, the minister had I don't really have a criticism of HMRC and I'm sorry if my my speech came across with any criticism. Uh, there are two systems. There are the system called relevant assets. Relevant assets are typically property that can't be easily realisable into cash to pay IHT. Now the system has accepted that for many years and one can pay the tax due on those type of not easily realisable assets like property, like land over ten instalments over ten years ahead.
But the 7.75% interest applies. So most executors, particularly thinking about the beneficiary, would like to clear the inheritance tax as quickly as they possibly can, because 7.75% is not a good deal in terms of an interest payment. Now that has been flexed for the BPR Apr assets that come in next year at 2.5 million each, where the ten year installment plan will be interest free. But, um, the point is that the 7.75% interest rate makes it essential that people try and pay. Now, I don't accept the minister's observations that there is risk for the financial institution.
Now, in my experience, over many years, I've found 99% of all institutions are happy to take that very small degree of risk because the money will be residing in HMRC s bank account, which I think is a safe place for money to reside. So I think the risk is not just small, it is extremely small because if things have gone wrong, then you just ask for it back or somebody will from HMRC, given the speed of operation of HMRC, it might take quite some time to get their money back, but at least it is somewhere safe.
So I don't accept the risk because it is somewhere where there is no risk. And as I say in all my years and it's unfortunate that it has fallen in a family issue. The M&G Prudential are the only institution I've ever come across who just simply say no. So if you would like to go back to his officials and and just consider it further. And I'd also be very pleased to to meet with him or his officials so we can have more of a blue sky thinking about this.
But where we are at the moment we, we have, um, report stage ahead of us. Uh, I'm very happy to withdraw my amendment.
I would recommend to anybody who is getting a little older to make their affairs that much little bit simpler so that once they depart, the affairs are more easy to unwind. Now, let me give you a very easy example, Baroness in particular is aimed at your point. Uh, if one holds shares that are denominated in, say, Jersey, not uncommon. There are listed listed shares on on our stock exchange, uh, that are headquartered in an overseas territory jersey. Quite typically, one would then need to go through the whole probate procedure just for those jersey registered assets.
Cost aggravation, sell them is my advice. Now, um, the minister had I don't really have a criticism of HMRC and I'm sorry if my my speech came across with any criticism. Uh, there are two systems. There are the system called relevant assets. Relevant assets are typically property that can't be easily realisable into cash to pay IHT. Now the system has accepted that for many years and one can pay the tax due on those type of not easily realisable assets like property, like land over ten instalments over ten years ahead.
But the 7.75% interest applies. So most executors, particularly thinking about the beneficiary, would like to clear the inheritance tax as quickly as they possibly can, because 7.75% is not a good deal in terms of an interest payment. Now that has been flexed for the BPR Apr assets that come in next year at 2.5 million each, where the ten year installment plan will be interest free. But, um, the point is that the 7.75% interest rate makes it essential that people try and pay. Now, I don't accept the minister's observations that there is risk for the financial institution.
Now, in my experience, over many years, I've found 99% of all institutions are happy to take that very small degree of risk because the money will be residing in HMRC s bank account, which I think is a safe place for money to reside. So I think the risk is not just small, it is extremely small because if things have gone wrong, then you just ask for it back or somebody will from HMRC, given the speed of operation of HMRC, it might take quite some time to get their money back, but at least it is somewhere safe.
So I don't accept the risk because it is somewhere where there is no risk. And as I say in all my years and it's unfortunate that it has fallen in a family issue. The M&G Prudential are the only institution I've ever come across who just simply say no. So if you would like to go back to his officials and and just consider it further. And I'd also be very pleased to to meet with him or his officials so we can have more of a blue sky thinking about this.
But where we are at the moment we, we have, um, report stage ahead of us. Uh, I'm very happy to withdraw my amendment.
17:10
17:11
17:11
Speaker 12
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Speaker 12
My Lords, my amendment proposes that the Treasury make litigation funding a regulated activity with a list of matters that I propose should be covered in the amendment. Litigation funding has come into the spotlight for several reasons. There was the 2023 Packard decision, which held that litigation funding agreements were a form of damages based agreement and unenforceable for failing to comply with the DBA regulations 2013, and there has also been concerned about the source of some litigation funding, especially when a significant proportion of funders active in this space are not headquartered in the United Kingdom.
And may some of them utilise what can be described as dodgy derivatives. The conservative government tried to address the Packard decision with a bill that did not make it through the wash up. They also proposed a wider review of litigation funding and asked the Civil Justice Council to assess whether the regime was effectively providing access to justice and whether regulation of commercial funders was necessary. An interim report and consultation was launched on the 31st of October 2024, and the final report was published on the 2nd of June 2025.
This was a substantial and diligent review with stakeholders across the spectrum, including litigation funders, welcoming and endorsing its recommendations. In December last year, the Labour government made clear its intention to reverse the effect of the Packard judgment so that litigation funding agreements would no longer be treated as damaging damages based agreements. At the same time, the government also said that it would take steps to regulate the third party litigation funding sector. One of the central purposes of the review and its recommendations. So the issue is not really whether there should be regulation, but why?But when and by what route?I think it's urgent that urgency was acknowledged by both the previous and current governments in commissioning the review, but a year has now passed since the final report, and we need fast delivery.
At present, the sector is essentially self-regulated, which in practice means unregulated. More than 70 funders operate in the UK collectively, collectively deploying many billions. The Association of Litigation Funders covers only a small proportion of the market and cannot provide assurance about the rest. The Solicitors Regulation authorities review of the mass claims market found that around half of firms provided no advice to clients about funding arrangements, given the financial nature and the size of litigation funding, it is not appropriate for funding funders to remain outside the regulatory perimeter.
In an area with such wide ranging consumer involvement and complex commercial incentives, many claimants do not fully understand these arrangements, often entering them at moments of vulnerability. We do not allow this level of opacity for consumer loans or mortgages, and comparable safeguards should exist. We also need clear transparency about the capital itself, where it originates, how returns flow, who stands behind these vehicles, and how governance is structured. Some highly complex arrangements now support mass claims involving crypto related structures, sovereign capital, private investment vehicles and hedge fund money.
International capital is not inherently objectionable, but when it shapes litigation in our courts, the present framework must provide assurance as to transparency, oversight and accountability. Regulated, who should take responsibility?Civil Justice Council suggested that initial regulatory responsibility should rest with the Lord Chancellor. I understand why that was proposed, but I respectfully submit that the Financial Conduct Authority is better placed to do the job. Why the FCA?Because litigation funding is not an economic substance, a matter of court procedure. It is a financial product.
It. Prices, risk, transfers, risk pools, capital and generates returns contingent on future events. That is the territory of the FCA. Funders return is contingent on the outcome of litigation in any other contexts. That's the definition of a derivative. The FCA regulates every other form of contingent return instrument in the financial system. It is anomalous that this one sits outside the perimeter. Funders use financial risk models, portfolio diversification, capital adequacy calculations, and probability weighted outcomes.
These are not tools of the Lord Chancellor. They are the daily tools of financial regulation and the risks are financial risk. If a funder collapsed mid litigation, consumers are stranded, solicitors are exposed, defendants faced unregulated financial counterparties and mass claims markets become distorted. That is, conduct risk, market integrity, risk and transparency risk. All statutory FCA objectives. Internationally, litigation funding is treated as a financial service. Australia requires licensing, capital adequacy, disclosure and conflicts of management. Several EU jurisdictions treat it as alternative investment activity.
The UK is the outlier. The Lord Chancellor regulates procedure, not capital markets. He has no supervisory teams, no prudential oversight, no conduct oversight and no jurisdiction over offshore capital. The FCA does. We already ask the FCA to regulate claims management companies. Consumer credit used to finance finance claims and collective investment schemes. It is incoherent to regulate the periphery but leave the core funding mechanism outside the perimeter. This is the core expertise of the FCA and.
To be clear, this does not turn solicitors into financial intermediaries. They are not selling a financial product. They are simply entering into commercial arrangements on behalf of clients. The funder is the entity offering the product and it is the funder, not the solicitor, that should be subject to financial regulation. In fact, the Sra's own review, as I said, found that half of firms provided no advice at all about the funding arrangements. That is precisely why the FCA's oversight is needed, because solicitors are not acting as financial advisers and should not be expected to.
The regulatory responsibility belongs with the body that supervises financial products, financial conduct and financial risk. And that's the FCA. This is not regulation of litigation. It is regulation of the commercial funding arrangements that sit behind it. And there is a further advantage if we try to create an entirely new regulatory structure from scratch, there will inevitably be delay, duplication and further uncertainty. We would spend years arguing over architecture when what is needed now is a practical route to proper oversight.
By contrast, bringing litigation funding within the Fsma 2000 framework would set a. Would create a set of common rules within an established regulatory system, one that already knows how to supervise complex financial and conduct risks. I do not suggest that every aspect of litigation funding should suddenly be treated as if it were a mortgage or an insurance product, nor do I suggest that the courts would cease to play their essential role. They plainly would not. But where commercial third party funding is concerned, and especially where consumer claims or collective proceedings are involved, it is surely no longer credible to pretend that this activity lies wholly outside the ordinary expectations of transparency, resilience and accountability that apply elsewhere in the financial system.
The FCA is already being drawn into consumer harms arising in the wider claims market through further proposed Consumer Credit Act reform, so it is hard to justify leaving a major part of the underlying funding structure wholly outside the perimeter. The FCA is the leading agency for financial conduct risk, and at the bottom, at the bottom of this, what else is it?This is a practical way forward. It is also possible that an even faster way forward, or a stepping stone might be to make litigation funding a designated activity, but this cannot be left resolved.
I beg to move.
And may some of them utilise what can be described as dodgy derivatives. The conservative government tried to address the Packard decision with a bill that did not make it through the wash up. They also proposed a wider review of litigation funding and asked the Civil Justice Council to assess whether the regime was effectively providing access to justice and whether regulation of commercial funders was necessary. An interim report and consultation was launched on the 31st of October 2024, and the final report was published on the 2nd of June 2025.
This was a substantial and diligent review with stakeholders across the spectrum, including litigation funders, welcoming and endorsing its recommendations. In December last year, the Labour government made clear its intention to reverse the effect of the Packard judgment so that litigation funding agreements would no longer be treated as damaging damages based agreements. At the same time, the government also said that it would take steps to regulate the third party litigation funding sector. One of the central purposes of the review and its recommendations. So the issue is not really whether there should be regulation, but why?But when and by what route?I think it's urgent that urgency was acknowledged by both the previous and current governments in commissioning the review, but a year has now passed since the final report, and we need fast delivery.
At present, the sector is essentially self-regulated, which in practice means unregulated. More than 70 funders operate in the UK collectively, collectively deploying many billions. The Association of Litigation Funders covers only a small proportion of the market and cannot provide assurance about the rest. The Solicitors Regulation authorities review of the mass claims market found that around half of firms provided no advice to clients about funding arrangements, given the financial nature and the size of litigation funding, it is not appropriate for funding funders to remain outside the regulatory perimeter.
In an area with such wide ranging consumer involvement and complex commercial incentives, many claimants do not fully understand these arrangements, often entering them at moments of vulnerability. We do not allow this level of opacity for consumer loans or mortgages, and comparable safeguards should exist. We also need clear transparency about the capital itself, where it originates, how returns flow, who stands behind these vehicles, and how governance is structured. Some highly complex arrangements now support mass claims involving crypto related structures, sovereign capital, private investment vehicles and hedge fund money.
International capital is not inherently objectionable, but when it shapes litigation in our courts, the present framework must provide assurance as to transparency, oversight and accountability. Regulated, who should take responsibility?Civil Justice Council suggested that initial regulatory responsibility should rest with the Lord Chancellor. I understand why that was proposed, but I respectfully submit that the Financial Conduct Authority is better placed to do the job. Why the FCA?Because litigation funding is not an economic substance, a matter of court procedure. It is a financial product.
It. Prices, risk, transfers, risk pools, capital and generates returns contingent on future events. That is the territory of the FCA. Funders return is contingent on the outcome of litigation in any other contexts. That's the definition of a derivative. The FCA regulates every other form of contingent return instrument in the financial system. It is anomalous that this one sits outside the perimeter. Funders use financial risk models, portfolio diversification, capital adequacy calculations, and probability weighted outcomes.
These are not tools of the Lord Chancellor. They are the daily tools of financial regulation and the risks are financial risk. If a funder collapsed mid litigation, consumers are stranded, solicitors are exposed, defendants faced unregulated financial counterparties and mass claims markets become distorted. That is, conduct risk, market integrity, risk and transparency risk. All statutory FCA objectives. Internationally, litigation funding is treated as a financial service. Australia requires licensing, capital adequacy, disclosure and conflicts of management. Several EU jurisdictions treat it as alternative investment activity.
The UK is the outlier. The Lord Chancellor regulates procedure, not capital markets. He has no supervisory teams, no prudential oversight, no conduct oversight and no jurisdiction over offshore capital. The FCA does. We already ask the FCA to regulate claims management companies. Consumer credit used to finance finance claims and collective investment schemes. It is incoherent to regulate the periphery but leave the core funding mechanism outside the perimeter. This is the core expertise of the FCA and.
To be clear, this does not turn solicitors into financial intermediaries. They are not selling a financial product. They are simply entering into commercial arrangements on behalf of clients. The funder is the entity offering the product and it is the funder, not the solicitor, that should be subject to financial regulation. In fact, the Sra's own review, as I said, found that half of firms provided no advice at all about the funding arrangements. That is precisely why the FCA's oversight is needed, because solicitors are not acting as financial advisers and should not be expected to.
The regulatory responsibility belongs with the body that supervises financial products, financial conduct and financial risk. And that's the FCA. This is not regulation of litigation. It is regulation of the commercial funding arrangements that sit behind it. And there is a further advantage if we try to create an entirely new regulatory structure from scratch, there will inevitably be delay, duplication and further uncertainty. We would spend years arguing over architecture when what is needed now is a practical route to proper oversight.
By contrast, bringing litigation funding within the Fsma 2000 framework would set a. Would create a set of common rules within an established regulatory system, one that already knows how to supervise complex financial and conduct risks. I do not suggest that every aspect of litigation funding should suddenly be treated as if it were a mortgage or an insurance product, nor do I suggest that the courts would cease to play their essential role. They plainly would not. But where commercial third party funding is concerned, and especially where consumer claims or collective proceedings are involved, it is surely no longer credible to pretend that this activity lies wholly outside the ordinary expectations of transparency, resilience and accountability that apply elsewhere in the financial system.
The FCA is already being drawn into consumer harms arising in the wider claims market through further proposed Consumer Credit Act reform, so it is hard to justify leaving a major part of the underlying funding structure wholly outside the perimeter. The FCA is the leading agency for financial conduct risk, and at the bottom, at the bottom of this, what else is it?This is a practical way forward. It is also possible that an even faster way forward, or a stepping stone might be to make litigation funding a designated activity, but this cannot be left resolved.
I beg to move.
17:22
17:22
Speaker 10
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Speaker 10
I rise to speak to amendment 172 B, which is in my name. I declare two interests. One is. As a former part time chair for several years the Competition Appeal Tribunal, which hears most collective actions and. I have heard several collective actions there. The second is to declare an interest as having. In my professional life accepted membership of consultative panels in relation to two current collective actions in which litigation funding agreements are in place, and if I can offer you a third and fascinating interest.
Just as an aside, if you're really bored between football matches, you could read my article in the Law Society Gazette of the 30th of June on on this subject, I. I know that Lord Holmes is a distinguished lawyer. Will read it with fascination. Um, my Lords, the points raised by the noble lady, Baroness Bowles, and the points raised in my amendment are actually really mutually exclusive, and I'm going to talk mainly about the Packer case to which she referred as to regulation. I don't disagree with her that there may be scope for further regulation.
Where I do disagree with her is in two points. First of all, in relation to her amendment number 142 D, which in its subclause two D and subclause three gives the Treasury the opportunity to fix the fees which are charged by litigation funders in litigation funding agreements. One has to bear in mind that that would raise a massive potential conflict of interest, because some of these collective actions are, have been, or will be brought against the government. And the idea that the government could impose a low fee, two lower fee, to try and kill off one of those actions.
It's not something I'd expect, but it is implicit in the Noble Ladies Amendment. So I now turn to my own amendment. 172 B. I was in this room on the 29th of April 2024 when the committee stage of the um litigation funding Agreements, enforceability bill was heard in its entirety in one day. And I have it in front of me. It's not a very long bill. In fact, it runs to just a single page. And the idea of that bill was to reverse the decision of the Supreme Court in the case called Packer, which had damaged the working of litigation funding agreements.
Second reading debate had occurred only two weeks earlier, on the 15th of April 2024, and I hope I'll be forgiven for referring to the excellent speech made in that second reading debate by the noble and learned Lord, Lord Stuart of Dalton, who at the time was the minister in charge of the bill. But before I.
Just as an aside, if you're really bored between football matches, you could read my article in the Law Society Gazette of the 30th of June on on this subject, I. I know that Lord Holmes is a distinguished lawyer. Will read it with fascination. Um, my Lords, the points raised by the noble lady, Baroness Bowles, and the points raised in my amendment are actually really mutually exclusive, and I'm going to talk mainly about the Packer case to which she referred as to regulation. I don't disagree with her that there may be scope for further regulation.
Where I do disagree with her is in two points. First of all, in relation to her amendment number 142 D, which in its subclause two D and subclause three gives the Treasury the opportunity to fix the fees which are charged by litigation funders in litigation funding agreements. One has to bear in mind that that would raise a massive potential conflict of interest, because some of these collective actions are, have been, or will be brought against the government. And the idea that the government could impose a low fee, two lower fee, to try and kill off one of those actions.
It's not something I'd expect, but it is implicit in the Noble Ladies Amendment. So I now turn to my own amendment. 172 B. I was in this room on the 29th of April 2024 when the committee stage of the um litigation funding Agreements, enforceability bill was heard in its entirety in one day. And I have it in front of me. It's not a very long bill. In fact, it runs to just a single page. And the idea of that bill was to reverse the decision of the Supreme Court in the case called Packer, which had damaged the working of litigation funding agreements.
Second reading debate had occurred only two weeks earlier, on the 15th of April 2024, and I hope I'll be forgiven for referring to the excellent speech made in that second reading debate by the noble and learned Lord, Lord Stuart of Dalton, who at the time was the minister in charge of the bill. But before I.
17:25
Speaker 14
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Speaker 14
Finished the committee stage. All parts of your lordships House agreed that this bill should become law, but it didn't become law because it was not dealt with in wash up. I think probably because it hadn't reached report, even though report stage probably would have gone through in a shorter time than the state threats bill report stage in which I was involved a few days ago in your lordships House, and it is my belief that this bill has that bill rather has that change has waited far too long.
I believe that we will find that the government is not opposed to it, and I don't expect to hear this from the noble Lord, the minister, because it may be more something to do with the Ministry of Justice. But my belief is that the government will try and find an opportunity soon to push a separate bill through. But it's a bit puzzling because I tried to put down, as an amendment to this bill, that page that I've just held out, slightly altered to fit into this bill.
I had a fascinating discussion with very helpful officials in the public bill office about scope, and I was told that putting down that page was out of scope, but I was told that putting down my amendment 172 B, which calls for a review about litigation funding agreements, is in scope. I find that difficult to reconcile. I think it's a circular argument, and I can't understand why. If 172 B is in scope, my one pager was not in scope. But there we are.
It's very difficult if a decision has been made that something is not in scope to challenge it, I believe it has only ever been done, my Lords, and it ever been done successfully. Once in the hundreds of years of existence of this Parliament. So I thought, brave as I am sometimes in legal matters, I thought I'd give that one a miss and try a different route. Let me remind your lordships of the importance of this um as. As the noble and learned Lord said.
On the 15th of April 2024. And you can find it in Hansard at column 798 for that day, the Supreme Court, in the case of Pachar, rendered many third party litigation funding agreements unenforceable by bringing them into the scope of the regulatory regime for damage based agreements, or DBAs. And the result of that was that, um, third party litigation looked as though it might lose much of its important role in litigation in this country. When I was a baby barrister doing personal injury cases and small contract cases and so on, I used to do masses of small claims for which legal aid was given.
And every month I received a cheque. Yes, a cheque, a piece of paper from the Legal Aid Board, with 10% deducted because it was publicly funded work and all those actions were paid for by legal aid. Now none of them are paid for by legal aid in reality. So litigation funding agreements are here to replace legal aid. And as Lord Stuart said, the restoration of the previous funding position is needed urgently to reduce uncertainty for both the future of litigation funding and for litigation funding agreements that had been entered into previously.
By rendering many of them unenforceable. The Packard judgment risks undesirable satellite litigation an increased burden on the courts, and creating an unfavourable market for later litigation funding, which in turn threatens access to justice. And as he added, third party litigation funding plays a key role in enabling ordinary people and small and medium sized enterprises to bring large, costly claims against better resourced companies and institutions. Litigation funding agreements play a considerable role, he added. In our economy, running into billions of pounds which go into the courts of London and elsewhere in the United Kingdom, and give people access to justice, which they would not otherwise be able to obtain.
A very famous example, and I pay tribute to the work that the noble Lord, Lord Arbuthnot, did in this case was that a litigation funding agreement was used in the Post Office Horizon case. The celebrated case of Bates against the Post Office, which had the backing of a litigation funder. Some other examples of cases where litigation funding agreements have been used include equal pay cases, motorists bringing claims against the manufacturers of motor cars over false diesel emissions, and consumer bringing claims against multinational companies regarding data breaches and data misuse.
Litigation funded agreements fall into two categories. If you're really interested, read my article, opt in and opt out. It's utterly fascinating and opt in. And one example as a result of another Supreme Court decision is a case called Evans, which is the forex scandal, where, as a result of the Supreme Court's ruling, those who wish to sue have to opt in and say that they are going to be claimants. OPT out is a big consumer case in which it is assumed that a huge number of people are affected and if any who may be affected don't want to be involved, they can, if they wish, opt out.
There are more difficulties in the distribution of damages in opt out cases, but there are ways of doing it. So in conclusion, I say to your lordships and to the Minister that I hope that the government will return in early course, saying that this anomaly which has been created unintentionally, as I understand it, in the Supreme Court, will be resolved. And that one page or something like it will soon be made law.
I believe that we will find that the government is not opposed to it, and I don't expect to hear this from the noble Lord, the minister, because it may be more something to do with the Ministry of Justice. But my belief is that the government will try and find an opportunity soon to push a separate bill through. But it's a bit puzzling because I tried to put down, as an amendment to this bill, that page that I've just held out, slightly altered to fit into this bill.
I had a fascinating discussion with very helpful officials in the public bill office about scope, and I was told that putting down that page was out of scope, but I was told that putting down my amendment 172 B, which calls for a review about litigation funding agreements, is in scope. I find that difficult to reconcile. I think it's a circular argument, and I can't understand why. If 172 B is in scope, my one pager was not in scope. But there we are.
It's very difficult if a decision has been made that something is not in scope to challenge it, I believe it has only ever been done, my Lords, and it ever been done successfully. Once in the hundreds of years of existence of this Parliament. So I thought, brave as I am sometimes in legal matters, I thought I'd give that one a miss and try a different route. Let me remind your lordships of the importance of this um as. As the noble and learned Lord said.
On the 15th of April 2024. And you can find it in Hansard at column 798 for that day, the Supreme Court, in the case of Pachar, rendered many third party litigation funding agreements unenforceable by bringing them into the scope of the regulatory regime for damage based agreements, or DBAs. And the result of that was that, um, third party litigation looked as though it might lose much of its important role in litigation in this country. When I was a baby barrister doing personal injury cases and small contract cases and so on, I used to do masses of small claims for which legal aid was given.
And every month I received a cheque. Yes, a cheque, a piece of paper from the Legal Aid Board, with 10% deducted because it was publicly funded work and all those actions were paid for by legal aid. Now none of them are paid for by legal aid in reality. So litigation funding agreements are here to replace legal aid. And as Lord Stuart said, the restoration of the previous funding position is needed urgently to reduce uncertainty for both the future of litigation funding and for litigation funding agreements that had been entered into previously.
By rendering many of them unenforceable. The Packard judgment risks undesirable satellite litigation an increased burden on the courts, and creating an unfavourable market for later litigation funding, which in turn threatens access to justice. And as he added, third party litigation funding plays a key role in enabling ordinary people and small and medium sized enterprises to bring large, costly claims against better resourced companies and institutions. Litigation funding agreements play a considerable role, he added. In our economy, running into billions of pounds which go into the courts of London and elsewhere in the United Kingdom, and give people access to justice, which they would not otherwise be able to obtain.
A very famous example, and I pay tribute to the work that the noble Lord, Lord Arbuthnot, did in this case was that a litigation funding agreement was used in the Post Office Horizon case. The celebrated case of Bates against the Post Office, which had the backing of a litigation funder. Some other examples of cases where litigation funding agreements have been used include equal pay cases, motorists bringing claims against the manufacturers of motor cars over false diesel emissions, and consumer bringing claims against multinational companies regarding data breaches and data misuse.
Litigation funded agreements fall into two categories. If you're really interested, read my article, opt in and opt out. It's utterly fascinating and opt in. And one example as a result of another Supreme Court decision is a case called Evans, which is the forex scandal, where, as a result of the Supreme Court's ruling, those who wish to sue have to opt in and say that they are going to be claimants. OPT out is a big consumer case in which it is assumed that a huge number of people are affected and if any who may be affected don't want to be involved, they can, if they wish, opt out.
There are more difficulties in the distribution of damages in opt out cases, but there are ways of doing it. So in conclusion, I say to your lordships and to the Minister that I hope that the government will return in early course, saying that this anomaly which has been created unintentionally, as I understand it, in the Supreme Court, will be resolved. And that one page or something like it will soon be made law.
17:32
Speaker 4
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Speaker 4
This has been an interesting discussion with cases put forcefully by the noble lady, Lady Bowes, and the noble and learned Lord, Lord Carlile of Berriew. So I approached. This issue with some caution, but I will be reading Lord Carlisle's article, particularly in view of my contribution to getting to the bottom of the Post Office. Now I recognise that third party litigation funding can support access to justice in some cases, but we also need to be clear eyed about the risks and expanded litigation, funding and claims management industry can fuel speculative, low merit or mass litigation against businesses.
It can increase legal costs, insurance costs and settlement pressure, and the purpose of reform should therefore be to protect genuine claimants and promote access to justice without creating a larger litigation finance industry. So bringing litigation funding within the FCA perimeter would undoubtedly create a more formal framework of oversight. And we know that there are bad apples in the industry. However, there is a danger that FCA regulation could have the opposite effect to the one intended it could professionalise and legitimise litigation funding as a normal financial service, it would give funders and claims management firms a form of regulatory kitemark, allowing them to say that they are FCA regulated and therefore giving the market a greater sense of safety, respectability and permanence.
That may sound attractive from an oversight perspective, but if the result is that the market expands, that more claims are funded and that more speculative group actions are brought against productive businesses, we will have solved one problem only by creating another one in any event. And this is the important point. I don't believe this is a matter for the FCA or for this bill. Nor am I sure that a Treasury review of claims management services is the right way to take this forward. The noble lady, Lady Bowes, has described some of the challenges that would need to be addressed.
The noble Lord. Lord, Lord Carlile has highlighted the risk of a conflict of interest on fees, and any such review would also need to look not only at the impact of the Packer judgment, but. Also at other forms of redress through the courts, through ombudsmen, through the Criminal Cases Review Board and public inquiries. We need compare costs to those claimed against, including businesses and the benefits to those who seek redress, and indeed, the implications for the legal system. Um means that it goes way beyond the reach of this bill.
And I think it's not in the spirit of reducing unnecessary burdens or improving the regulatory framework for existing financial institutions and those that are coming under the FCA and PRA umbrella. I think it is more a matter, as perhaps we've heard, for the Minister of Justice. As the Bill office apparently seems to advise and I share the noble and learned Lords frustration with scope in trying to put amendments down to bills. We've all been there. Having said that, I look forward very much to hearing how the minister views these things and what he thinks can be done.
It can increase legal costs, insurance costs and settlement pressure, and the purpose of reform should therefore be to protect genuine claimants and promote access to justice without creating a larger litigation finance industry. So bringing litigation funding within the FCA perimeter would undoubtedly create a more formal framework of oversight. And we know that there are bad apples in the industry. However, there is a danger that FCA regulation could have the opposite effect to the one intended it could professionalise and legitimise litigation funding as a normal financial service, it would give funders and claims management firms a form of regulatory kitemark, allowing them to say that they are FCA regulated and therefore giving the market a greater sense of safety, respectability and permanence.
That may sound attractive from an oversight perspective, but if the result is that the market expands, that more claims are funded and that more speculative group actions are brought against productive businesses, we will have solved one problem only by creating another one in any event. And this is the important point. I don't believe this is a matter for the FCA or for this bill. Nor am I sure that a Treasury review of claims management services is the right way to take this forward. The noble lady, Lady Bowes, has described some of the challenges that would need to be addressed.
The noble Lord. Lord, Lord Carlile has highlighted the risk of a conflict of interest on fees, and any such review would also need to look not only at the impact of the Packer judgment, but. Also at other forms of redress through the courts, through ombudsmen, through the Criminal Cases Review Board and public inquiries. We need compare costs to those claimed against, including businesses and the benefits to those who seek redress, and indeed, the implications for the legal system. Um means that it goes way beyond the reach of this bill.
And I think it's not in the spirit of reducing unnecessary burdens or improving the regulatory framework for existing financial institutions and those that are coming under the FCA and PRA umbrella. I think it is more a matter, as perhaps we've heard, for the Minister of Justice. As the Bill office apparently seems to advise and I share the noble and learned Lords frustration with scope in trying to put amendments down to bills. We've all been there. Having said that, I look forward very much to hearing how the minister views these things and what he thinks can be done.
17:36
Speaker 12
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Speaker 12
My Lords, I'm grateful to the noble Baroness Lady Bowles, and the noble Lord, Lord Carlile, for tabling these amendments on the regulation of claims management services and litigation funding agreements. And I'm grateful to Lord Carlile for bringing this issue to my attention when we spoke two weeks ago, and I will continue to, um, those constructive conversations outside of the chamber. I recognized the importance of clarity in the regulation of claims management services and litigation funding agreements, particularly in light of the concerns that have been raised following the 2023 Supreme Court judgment in Packer, the government recognised the urgency of addressing these issues.
Amendment 142 is targeted at bringing litigation funding within the FCA's regulatory perimeter. The government agrees that the proportionate regulation of litigation funding could improve standards, transparency and protection for litigants who may be in a vulnerable position. But I do not think the FCA is the right body to take this role, and we should not move to what should be a very significant decision lightly, especially as on this issue has already been considered by the Civil Justice Council. Instead, the government will introduce proportionate regulation of litigation funding agreements.
This model is recommended by the respected Independent Civil Justice Council, where courts assess whether agreements meet regularly. So where whether agreements meet regulatory requirements. And if not, they would not be enforceable. This approach follows other methods for funding civil litigation. Turn to amendment 172 b this amendment would require the Treasury to conduct and publish within 12 months of Royal assent, a review into the regulation of claims management services and litigation funding. The 2023 Supreme Court judgment on Packer introduced uncertainty about whether litigation funding arrangements remain enforceable is also brought to light.
Concerns about whether they are always fair and transparent for claimants using them. The government has committed to act to remove this uncertainty and to ensure these agreements work fairly for all. Since the Supreme Court's judgment, the Civil Justice Council has reviewed litigation funding published in this report in 2025, and the government is taking action accepting the council's two primary recommendations. First, the government will legislate to clarify that litigation funding agreements are not damages based agreements and so would not need to comply with the requirements of the regulatory regime for damages based agreements to be enforceable.
Secondly, the government will introduce proportionate regulation of litigation funding agreements. This is the right approach and we are working urgently to identify a new legislative vehicle to take this forward and on claims management regulation more generally. The FCA has announced a market study into claims management services to assess how the market is operating and whether further regulatory intervention is needed. This study is in train and I know the noble Lord, Lord Carlisle, thinks that the government should take this opportunity of this bill to resolve the issue once and for all.
However, the issue under consideration is primarily about litigation and access to justice rather than the regulation of financial services and markets. And so the bill should not be used for this purpose. These judgments are made by Parliament itself, not the government, just as Carlisle has said, and whether we are working to identify. We are therefore working to identify a legislative vehicle to take forward the reforms. I have mentioned, and, my Lords, I have a lot of sympathy with these amendments. The government is seeking to legislate on the issue when it can, but we are not able to do so through this Bill.
I therefore ask the noble Baroness to withdraw her amendment.
Amendment 142 is targeted at bringing litigation funding within the FCA's regulatory perimeter. The government agrees that the proportionate regulation of litigation funding could improve standards, transparency and protection for litigants who may be in a vulnerable position. But I do not think the FCA is the right body to take this role, and we should not move to what should be a very significant decision lightly, especially as on this issue has already been considered by the Civil Justice Council. Instead, the government will introduce proportionate regulation of litigation funding agreements.
This model is recommended by the respected Independent Civil Justice Council, where courts assess whether agreements meet regularly. So where whether agreements meet regulatory requirements. And if not, they would not be enforceable. This approach follows other methods for funding civil litigation. Turn to amendment 172 b this amendment would require the Treasury to conduct and publish within 12 months of Royal assent, a review into the regulation of claims management services and litigation funding. The 2023 Supreme Court judgment on Packer introduced uncertainty about whether litigation funding arrangements remain enforceable is also brought to light.
Concerns about whether they are always fair and transparent for claimants using them. The government has committed to act to remove this uncertainty and to ensure these agreements work fairly for all. Since the Supreme Court's judgment, the Civil Justice Council has reviewed litigation funding published in this report in 2025, and the government is taking action accepting the council's two primary recommendations. First, the government will legislate to clarify that litigation funding agreements are not damages based agreements and so would not need to comply with the requirements of the regulatory regime for damages based agreements to be enforceable.
Secondly, the government will introduce proportionate regulation of litigation funding agreements. This is the right approach and we are working urgently to identify a new legislative vehicle to take this forward and on claims management regulation more generally. The FCA has announced a market study into claims management services to assess how the market is operating and whether further regulatory intervention is needed. This study is in train and I know the noble Lord, Lord Carlisle, thinks that the government should take this opportunity of this bill to resolve the issue once and for all.
However, the issue under consideration is primarily about litigation and access to justice rather than the regulation of financial services and markets. And so the bill should not be used for this purpose. These judgments are made by Parliament itself, not the government, just as Carlisle has said, and whether we are working to identify. We are therefore working to identify a legislative vehicle to take forward the reforms. I have mentioned, and, my Lords, I have a lot of sympathy with these amendments. The government is seeking to legislate on the issue when it can, but we are not able to do so through this Bill.
I therefore ask the noble Baroness to withdraw her amendment.
17:39
17:39
Speaker 4
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Speaker 4
Thank the noble Lord Carlisle and the Minister for their comments in this debate. The Lord Carlisle may be interested to know that I am a victim of the PB02 um and the reason that Treasury appears where I put Lord Chancellor is down to the PBO so. So my intention was correct. Uh, and I but it was one of those things where it was, you know, a minute to four on the last moment for getting it in. So, so I said, well, I'll get, I'll make sure it's right for if it goes to report.
Um, I was inspired, if you like to put this suggestion forward because I was rather alarmed at the fact of litigation funding becoming an asset class, into which there was speculative and dubious investment going on in overseas countries. And I didn't think that that was whichever side of the argument you're on here. We don't want that kind of inflated funding. Um, meaning that cases are brought that possibly never should be. But the whole thing is just speculative. And then the more I looked at it, I thought, well, if we need any regulation, as I explained, it belongs with the FCA.
And then I looked further and discovered that Australia and elsewhere, as quite often is the case, have got there first and they've already assigned it to being under their Financial services regulators. So that's my background. I think it's been interesting. I offered it as what I thought would be a faster route, especially if you could do it as a designated activity. But I also admit, yes, that I'm stealing a march on what the government will have to do. Uh, taking its time a little bit more, but I hope that the possibility of this route has been noted.
Um, and for now, yes, I will withdraw the amendment.
Um, I was inspired, if you like to put this suggestion forward because I was rather alarmed at the fact of litigation funding becoming an asset class, into which there was speculative and dubious investment going on in overseas countries. And I didn't think that that was whichever side of the argument you're on here. We don't want that kind of inflated funding. Um, meaning that cases are brought that possibly never should be. But the whole thing is just speculative. And then the more I looked at it, I thought, well, if we need any regulation, as I explained, it belongs with the FCA.
And then I looked further and discovered that Australia and elsewhere, as quite often is the case, have got there first and they've already assigned it to being under their Financial services regulators. So that's my background. I think it's been interesting. I offered it as what I thought would be a faster route, especially if you could do it as a designated activity. But I also admit, yes, that I'm stealing a march on what the government will have to do. Uh, taking its time a little bit more, but I hope that the possibility of this route has been noted.
Um, and for now, yes, I will withdraw the amendment.
17:41
17:41
17:42
Speaker 4
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Speaker 4
Right. I hope this is building societies. My Lords, um, I'll speak to amendment 142 e um. Building societies occupy a unique place in the United Kingdom's financial system. Unlike banks, they are not owned by external shareholders. They are owned by their members. That distinction is fundamental. It means that the legitimacy of a building society rests not only upon prudent management and financial soundness, but also upon effective member democracy. The Building Societies Act 1986 established the statutory framework for that democracy.
It has served the sector well for many years. However, Parliament has not stood still during the four decades since the act was passed. This House and the other place have progressively strengthened governance standards in many comparable areas of law. I mean, in company law, obviously for quoted companies, Parliament introduced binding shareholder votes on remuneration policy through the Enterprise and Regulatory Reform Act 2013 for occupational pension schemes, Parliament has required member representation on trustee boards for statutory elections in trade unions. Parliament has established detailed protections to ensure that elections are conducted fairly, that candidates are treated equally, and that election addresses are not altered without consent.
Building societies, however, remain governed largely by a statutory framework dating from 1986 that has not developed in a similar way. My amendment does not seek to transplant those other regimes wholesale, nor does it seek to interfere with the independence of boards or with the mutual model itself. Indeed, quite the opposite. The amendment is intended to strengthen confidence in mutuality by ensuring that members enjoy democratic protections comparable to those Parliament has already recognised elsewhere. It is also deliberately framed as an enabling provision, rather than attempting to prescribe detailed rules in primary legislation.
It requires His Majesty's Treasury to make regulations requiring the Financial Conduct Authority to establish minimum government standards for authorised building societies. The FCA is plainly the appropriate body to consult upon and develop those detailed standards. This amendment identifies a number of areas where minimum standards should exist. First with elections, members should be able to choose between candidates through elections that are demonstrably fair. Candidates should be treated equally and have equal opportunity to communicate with members, and independent scrutineers should operate to consistent statutory standards.
Second, voting arrangements the amendment would require voting procedures that ensure members determine their voting instructions independently for each resolution. Modern electronic voting should, of course, continue. Boards should continue to make recommendations. Proxy voting should continue. Nothing in the amendment prevents any of those, but what it seeks to prevent are voting arrangements that diminish independent member choice by combining multiple decisions into a single instruction. The quick vote option is a good example. It enables a member to cast all their votes exactly as the board recommends in one action before they have seen any of the candidates or the resolutions that is bundled.
Blind voting, not independent decision making, even proxy voting agencies in listed company markets, which handle thousands of resolutions, require investors to adopt an informed voting policy and allow them to override recommendations. They do not encourage blind, preselected voting, so instead of encouraging people to quick vote, shouldn't boards instead be encouraging voters to take their time, consider the options and exercise their democratic right in a considered manner?In other words, shouldn't boards be asking people to slow vote instead?Third, executive remuneration. Parliament has already decided that shareholders have quoted.
Companies should have a binding vote on remuneration policy. Building societies have members rather than shareholders, but it's therefore entirely reasonable to ask whether members should enjoy comparable rights in relation to executive remuneration. Fourth member representation the amendment proposes minimum member non nominated representation on the boards of the largest building societies. That is not a proposal for representative directors. Any member nominated, um, any member nominated director would owe exactly the same statutory and fiduciary duties to the society as every other director.
Rather, it recognizes that democratic representation has become an accepted feature of governance in other member based institutions, including occupational pension schemes. And finally, annual general meetings. Technology should widen rather than reduce accountability. Hybrid meetings should therefore preserve both digital participation and the opportunity for members to attend and question boards in person. My Lords, I anticipate that some may ask whether legislation is necessary. I suggest that it is at least timely for Parliament to consider the question. Recent parliamentary questions have asked the government whether it intends to review the government's framework for building societies, and the answer has been that there are currently no such plans.
The House may be aware that concerns have recently been raised regarding the conduct of elections, with one of the UK's largest building societies. I do not intend to comment on the particulars of that case, but it is highlighted the wider question about whether the current statutory framework provides sufficient safeguards for members and candidates, and those wider questions are what this amendment seeks to admit. The amendment, therefore, provides an opportunity for Parliament to consider whether the framework established in 1986 remains adequate for today's mutual sector. I am Forsyth again.
This amendment does not prescribe detailed rules. It does not alter the mutual ownership model. It does not affect prudential regulation. It simply asks that government that the governance standards applicable to member owned financial institutions should be reviewed in the light of standards Parliament has adopted elsewhere over the last 40 years. Strong member democracy strengthens confidence in mutuality. Strong governance strengthens confidence in mutual institutions. I therefore hope that the Minister will give careful consideration to this amendment, and if he is unable to accept it today, explain how the government intends to ensure that the democratic governance framework for building societies keeps pace with modern expectations.
I beg to move.
It has served the sector well for many years. However, Parliament has not stood still during the four decades since the act was passed. This House and the other place have progressively strengthened governance standards in many comparable areas of law. I mean, in company law, obviously for quoted companies, Parliament introduced binding shareholder votes on remuneration policy through the Enterprise and Regulatory Reform Act 2013 for occupational pension schemes, Parliament has required member representation on trustee boards for statutory elections in trade unions. Parliament has established detailed protections to ensure that elections are conducted fairly, that candidates are treated equally, and that election addresses are not altered without consent.
Building societies, however, remain governed largely by a statutory framework dating from 1986 that has not developed in a similar way. My amendment does not seek to transplant those other regimes wholesale, nor does it seek to interfere with the independence of boards or with the mutual model itself. Indeed, quite the opposite. The amendment is intended to strengthen confidence in mutuality by ensuring that members enjoy democratic protections comparable to those Parliament has already recognised elsewhere. It is also deliberately framed as an enabling provision, rather than attempting to prescribe detailed rules in primary legislation.
It requires His Majesty's Treasury to make regulations requiring the Financial Conduct Authority to establish minimum government standards for authorised building societies. The FCA is plainly the appropriate body to consult upon and develop those detailed standards. This amendment identifies a number of areas where minimum standards should exist. First with elections, members should be able to choose between candidates through elections that are demonstrably fair. Candidates should be treated equally and have equal opportunity to communicate with members, and independent scrutineers should operate to consistent statutory standards.
Second, voting arrangements the amendment would require voting procedures that ensure members determine their voting instructions independently for each resolution. Modern electronic voting should, of course, continue. Boards should continue to make recommendations. Proxy voting should continue. Nothing in the amendment prevents any of those, but what it seeks to prevent are voting arrangements that diminish independent member choice by combining multiple decisions into a single instruction. The quick vote option is a good example. It enables a member to cast all their votes exactly as the board recommends in one action before they have seen any of the candidates or the resolutions that is bundled.
Blind voting, not independent decision making, even proxy voting agencies in listed company markets, which handle thousands of resolutions, require investors to adopt an informed voting policy and allow them to override recommendations. They do not encourage blind, preselected voting, so instead of encouraging people to quick vote, shouldn't boards instead be encouraging voters to take their time, consider the options and exercise their democratic right in a considered manner?In other words, shouldn't boards be asking people to slow vote instead?Third, executive remuneration. Parliament has already decided that shareholders have quoted.
Companies should have a binding vote on remuneration policy. Building societies have members rather than shareholders, but it's therefore entirely reasonable to ask whether members should enjoy comparable rights in relation to executive remuneration. Fourth member representation the amendment proposes minimum member non nominated representation on the boards of the largest building societies. That is not a proposal for representative directors. Any member nominated, um, any member nominated director would owe exactly the same statutory and fiduciary duties to the society as every other director.
Rather, it recognizes that democratic representation has become an accepted feature of governance in other member based institutions, including occupational pension schemes. And finally, annual general meetings. Technology should widen rather than reduce accountability. Hybrid meetings should therefore preserve both digital participation and the opportunity for members to attend and question boards in person. My Lords, I anticipate that some may ask whether legislation is necessary. I suggest that it is at least timely for Parliament to consider the question. Recent parliamentary questions have asked the government whether it intends to review the government's framework for building societies, and the answer has been that there are currently no such plans.
The House may be aware that concerns have recently been raised regarding the conduct of elections, with one of the UK's largest building societies. I do not intend to comment on the particulars of that case, but it is highlighted the wider question about whether the current statutory framework provides sufficient safeguards for members and candidates, and those wider questions are what this amendment seeks to admit. The amendment, therefore, provides an opportunity for Parliament to consider whether the framework established in 1986 remains adequate for today's mutual sector. I am Forsyth again.
This amendment does not prescribe detailed rules. It does not alter the mutual ownership model. It does not affect prudential regulation. It simply asks that government that the governance standards applicable to member owned financial institutions should be reviewed in the light of standards Parliament has adopted elsewhere over the last 40 years. Strong member democracy strengthens confidence in mutuality. Strong governance strengthens confidence in mutual institutions. I therefore hope that the Minister will give careful consideration to this amendment, and if he is unable to accept it today, explain how the government intends to ensure that the democratic governance framework for building societies keeps pace with modern expectations.
I beg to move.
17:50
Speaker 3
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Speaker 3
Amendment proposed after clause 22. Insert the following new clause building society governance standards and the words as printed on the marshalled list. My Lords, I rise briefly to speak to amendment 142 E, and I can understand the intention behind this amendment, which has been well, very well described by the noble lady, Baroness Bowes. I am particularly sympathetic to the objections to the use of the quick vote formerly used by the National Trust to keep more challenging directors off their governing body. This is known as bundled voting instructions to be of the amendment, which is not only rightly prohibited in trade union elections, but squeezes out minority views and arguably creates a democratic deficit.
I also share her concerns about purely electronic agm's. However, our concern is whether this amendment is the right way forward to achieve reform. It would impose a new and quite detailed regulatory framework from the centre, requiring the Treasury to direct the FCA to make rules across a wide range of building society governance matters that would inevitably increase the regulatory burden on building societies. They already operate in a heavily regulated environment. They are. Many are not large, and they are certainly not.
Listed banks with external shareholders and extensive governance governance departments. Many indeed are regional, community based institutions and good for good. And that's very good. And they play an important role in mortgage lending, savings and financial service services provision across the country. There is also a question here of proportionate proportionality. The amendment would apply a number of quite prescriptive requirements, including AGM format, publication of questions and responses, voting procedures, remuneration approval and member nominated directors for large societies. Now, some of these changes may be sensible in principle, but they could have practical consequences which need to be carefully understood before being imposed right across the sector.
We would therefore be cautious before giving the Treasury an FCA wide power to regulate all of this, and indeed things that are not listed in the amendment. We are, after all, seeking to limit such powers elsewhere in the Bill in the interests of proper parliamentary oversight. I also have a question as to whether this would not be more appropriate for a corporate governance Bill. Having said that, there are narrow proposals, for example, on the misuse of bundled voting that could be put into the bill without creating such problems or changing its deregulatory thrust.
And if so, we would of course be happy to discuss them. We should always ask whether the regulatory lever is the right lever to pull. And in my view, central regulation should be a last resort, particularly where the desired outcomes might be achieved through existing government expectations. Voluntary best practice, member engagement or a more targeted intervention where there is evidence of a problem. For these reasons, while I very much understand the purpose behind this amendment, and I'm glad to have had this discussion, I remain cautious about whether this is the right regulatory mechanism.
I also share her concerns about purely electronic agm's. However, our concern is whether this amendment is the right way forward to achieve reform. It would impose a new and quite detailed regulatory framework from the centre, requiring the Treasury to direct the FCA to make rules across a wide range of building society governance matters that would inevitably increase the regulatory burden on building societies. They already operate in a heavily regulated environment. They are. Many are not large, and they are certainly not.
Listed banks with external shareholders and extensive governance governance departments. Many indeed are regional, community based institutions and good for good. And that's very good. And they play an important role in mortgage lending, savings and financial service services provision across the country. There is also a question here of proportionate proportionality. The amendment would apply a number of quite prescriptive requirements, including AGM format, publication of questions and responses, voting procedures, remuneration approval and member nominated directors for large societies. Now, some of these changes may be sensible in principle, but they could have practical consequences which need to be carefully understood before being imposed right across the sector.
We would therefore be cautious before giving the Treasury an FCA wide power to regulate all of this, and indeed things that are not listed in the amendment. We are, after all, seeking to limit such powers elsewhere in the Bill in the interests of proper parliamentary oversight. I also have a question as to whether this would not be more appropriate for a corporate governance Bill. Having said that, there are narrow proposals, for example, on the misuse of bundled voting that could be put into the bill without creating such problems or changing its deregulatory thrust.
And if so, we would of course be happy to discuss them. We should always ask whether the regulatory lever is the right lever to pull. And in my view, central regulation should be a last resort, particularly where the desired outcomes might be achieved through existing government expectations. Voluntary best practice, member engagement or a more targeted intervention where there is evidence of a problem. For these reasons, while I very much understand the purpose behind this amendment, and I'm glad to have had this discussion, I remain cautious about whether this is the right regulatory mechanism.
17:53
Speaker 12
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Speaker 12
Although I'm grateful to know Baroness for raising this important issue, building societies are a key part of the UK's financial services sector. The government is committed to supporting the growth and long term success of the mutual sector, including through our commitment to double the size of the mutual and cooperative economy, my Lords, building societies are already subject to an extensive legislative and regulatory requirements. Building societies must comply with the Building Societies Act 1986. FCM rules and the Senior Managers and certification regime, and of course, wider company law and the financial services regulatory requirements where applicable.
The FCA and PRA already have the powers to set and supervise governance standards where they consider it necessary. I do not agree, though, that we should take such detailed rules on things like board composition, annual general meetings and reporting arrangements. The building society sector is diverse, ranging from small regional societies to large national institutions. The noble Baroness Relph mentioned. As well, the rules need to adequately reflect the different governance needs, operational models and challenges faced across the sector and building societies need to focus their energies on serving members.
Such governance matters are generally best determined by individual societies, taking into account their size, complexity and membership while operating within the existing legislative and regulatory framework and ensuring boards have the skills, experience and expertise needed to govern effectively. The government's approach has been to modernise the framework for building societies, while preserving flexibility. Consistent with feedback from the sector. We believe governance arrangements should uphold high standards while allowing societies to adopt structures that reflect their individual circumstances, business models and memberships. The government continues to engage closely with the mutual sector and regulators to ensure the framework remains proportionate and supports growth, including through the Mutuals and Co-operative Sector, Business Council and other stakeholder forums.
We have welcomed the recent work undertaken by the PRA on the mutuals landscape, which is helping inform future policy development as well. Government shares the objective of strong governance and membership engagement, we do not believe that it should be delivered in this way. Building societies already operate within a frame, a robust framework which we continue to keep under review and modernise where appropriate. I therefore ask the noble Baroness to withdraw her amendment.
The FCA and PRA already have the powers to set and supervise governance standards where they consider it necessary. I do not agree, though, that we should take such detailed rules on things like board composition, annual general meetings and reporting arrangements. The building society sector is diverse, ranging from small regional societies to large national institutions. The noble Baroness Relph mentioned. As well, the rules need to adequately reflect the different governance needs, operational models and challenges faced across the sector and building societies need to focus their energies on serving members.
Such governance matters are generally best determined by individual societies, taking into account their size, complexity and membership while operating within the existing legislative and regulatory framework and ensuring boards have the skills, experience and expertise needed to govern effectively. The government's approach has been to modernise the framework for building societies, while preserving flexibility. Consistent with feedback from the sector. We believe governance arrangements should uphold high standards while allowing societies to adopt structures that reflect their individual circumstances, business models and memberships. The government continues to engage closely with the mutual sector and regulators to ensure the framework remains proportionate and supports growth, including through the Mutuals and Co-operative Sector, Business Council and other stakeholder forums.
We have welcomed the recent work undertaken by the PRA on the mutuals landscape, which is helping inform future policy development as well. Government shares the objective of strong governance and membership engagement, we do not believe that it should be delivered in this way. Building societies already operate within a frame, a robust framework which we continue to keep under review and modernise where appropriate. I therefore ask the noble Baroness to withdraw her amendment.
17:55
Speaker 4
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Speaker 4
Um. I thank the Minister and the noble Lady, Baroness Neville Rolfe, and I might, um, take her up on her offer about proceeding further with something to do with blind voting. I accept that, um this is the the, um Full Monty version that I have put into, uh, at this stage because I want to draw comments. Um, I don't think that you can have what is essentially a substantial financial institution having a board that can. Who gets on to the board and who does not?And that is the nub of this, that it is possible to block in a way that we don't allow for listed companies.
Um, you know, not all listed companies are as big as some of the institutions I'm talking about. I accept the proportionality point and maybe, maybe one has a threshold, but I think the, the, the situation that has gone on is not acceptable. Um, and possibly if we could start by doing the bundled blind voting point, we might begin to, to get somewhere. Um, so I thank everybody and obviously for now, I will withdraw my amendment.
Um, you know, not all listed companies are as big as some of the institutions I'm talking about. I accept the proportionality point and maybe, maybe one has a threshold, but I think the, the, the situation that has gone on is not acceptable. Um, and possibly if we could start by doing the bundled blind voting point, we might begin to, to get somewhere. Um, so I thank everybody and obviously for now, I will withdraw my amendment.
17:57
17:57
Speaker 17
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Speaker 17
142 F. And I'm grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Bridges of Headley, for adding their names. Last week we debated the need for more extensive regulatory evaluation in order to hold the regulators to account effectively. The noble Baroness, Lady Bowles, suggested a Treasury convened panel to undertake periodic independent reviews. And my noble friend Lord Bridges of Headley suggested, suggested an Office of Regulatory Evaluation, which would assess the regulator's performance in discharging their duties and meeting the regulatory principles.
These would not replace the parliamentary committees in each House, but would complement them by providing more in-depth and comprehensive analysis, which could then be built on within the framework of parliamentary accountability. My amendment 142 F is another way of increasing the amount of the evaluation of the regulators. I remind the committee of the background, the volume of regulatory activity has grown significantly in recent years as the matters which used to be dealt with in the EU have been added to the Fisma model. In addition, innovation is presenting major new challenges, which has the effect of increasing regulator activity.
The ability of Parliament to hold the regulators to account was already under strain. For example, the Financial Services Regulation Committee of your lordships House recently undertook a major piece of work on stablecoins, but it would not have been realistic to attempt to encompass all developments in digital assets. We cannot cover everything we think should be covered. Now, this bill is adding to that workload by adding the huge area of consumer credit to the FCA's responsibilities, all of which will need to be implemented by way of new FCA rules.
And this will involve very significant issues of the balance between consumer protections, the supply of credit and the efficiency of credit providers. I do not know how that will be effectively scrutinised. Now, instead of looking to solutions which are external to the regulators, which is what we discussed last week, amendment 142 F proposes that each of the regulators sets up an internal but independent Office of Regulatory Evaluation. Apart from safeguarding the independence of the office and mandating regular reporting, the amendment is deliberately not prescriptive.
Beyond that, leaving it to the new offices to work out how they will carry out their work. My Lords, this is a tried and trusted mechanism within financial institution. Sorry. Financial services institutions, the world Bank, the International Monetary Fund and the European Investment Bank have them, as do several UN bodies and development banks. Internal evaluation offices do not replace external internal audit. They tend to work on the core activities. The core work of the bodies rather than their systems, controls and financial reporting.
They would also not replace the work of the cost benefit panels, which focus on the way in which the regulators approach the technical task of cost benefit analysis, supporting new rules. May be some overlaps, but that can always be managed out in a pragmatic way, as indeed already happens. Now, the Bank of England already has an internal evaluation evaluation Office, which was set up 12 years ago. And so the concept would not be alien to the bank. O has many of the features which appear in my amendment.
For example, it reports to the chairman of the Court of Directors. My amendment would, however, require the Bank to look again at its arrangements as they currently cover the whole Bank and relatively little resource has been dedicated to the PRA. Indeed, only three reports out of 14 in total since it was set up have concerned the PRA. So the. The bank's internal evaluation office has a relatively low output and a relatively small element of that output is dedicated to the PRA.
Now, our debates so far have revealed that there is not a meeting of minds between those of us who have tabled or spoken to amendments, and the government, and I should say that the Financial Services Regulation Committee greatly looks forward to their discussion with the Minister and his colleague, the Economic Secretary, later this week. The noble Lord, the minister has consistently described the task of accountability, oversight of the regulators in terms of overall performance against their objectives. We, on the other hand, believe it is necessary to interrogate rules, guidance, supervision and all the other activities that regulators carry out in terms of its proportionality and its impact on those affected by it, whether that's the regulated firms themselves or consumers or other market operators.
That was the vision of the 2023 act, with its carefully designed notifications of rules and guidance to the parliamentary committees, and we continue to believe that that model. Is an effective one and regard a framework which amounts to not much more than scrutinising five year plans as falling well short of what could be regarded as effective accountability. If the PRA stroke, Bank of England and the FCA had offices of regulatory evaluation, that could provide a rich source of material to the parliamentary committees without the necessity of creating further external organisations.
Which is why my amendment provides for the output of the offices to be sent to the parliamentary committees, thus building on Fisma 2023. I think at the end of the day, we are looking to. Enhance the ability of the existing parliamentary committees, which, as I have explained, are under some pressure already by finding some way of making parliamentary oversight of the regulators have real meaning in the scheme of Fisma. When it was originally set up 26 years ago, I beg to move.
These would not replace the parliamentary committees in each House, but would complement them by providing more in-depth and comprehensive analysis, which could then be built on within the framework of parliamentary accountability. My amendment 142 F is another way of increasing the amount of the evaluation of the regulators. I remind the committee of the background, the volume of regulatory activity has grown significantly in recent years as the matters which used to be dealt with in the EU have been added to the Fisma model. In addition, innovation is presenting major new challenges, which has the effect of increasing regulator activity.
The ability of Parliament to hold the regulators to account was already under strain. For example, the Financial Services Regulation Committee of your lordships House recently undertook a major piece of work on stablecoins, but it would not have been realistic to attempt to encompass all developments in digital assets. We cannot cover everything we think should be covered. Now, this bill is adding to that workload by adding the huge area of consumer credit to the FCA's responsibilities, all of which will need to be implemented by way of new FCA rules.
And this will involve very significant issues of the balance between consumer protections, the supply of credit and the efficiency of credit providers. I do not know how that will be effectively scrutinised. Now, instead of looking to solutions which are external to the regulators, which is what we discussed last week, amendment 142 F proposes that each of the regulators sets up an internal but independent Office of Regulatory Evaluation. Apart from safeguarding the independence of the office and mandating regular reporting, the amendment is deliberately not prescriptive.
Beyond that, leaving it to the new offices to work out how they will carry out their work. My Lords, this is a tried and trusted mechanism within financial institution. Sorry. Financial services institutions, the world Bank, the International Monetary Fund and the European Investment Bank have them, as do several UN bodies and development banks. Internal evaluation offices do not replace external internal audit. They tend to work on the core activities. The core work of the bodies rather than their systems, controls and financial reporting.
They would also not replace the work of the cost benefit panels, which focus on the way in which the regulators approach the technical task of cost benefit analysis, supporting new rules. May be some overlaps, but that can always be managed out in a pragmatic way, as indeed already happens. Now, the Bank of England already has an internal evaluation evaluation Office, which was set up 12 years ago. And so the concept would not be alien to the bank. O has many of the features which appear in my amendment.
For example, it reports to the chairman of the Court of Directors. My amendment would, however, require the Bank to look again at its arrangements as they currently cover the whole Bank and relatively little resource has been dedicated to the PRA. Indeed, only three reports out of 14 in total since it was set up have concerned the PRA. So the. The bank's internal evaluation office has a relatively low output and a relatively small element of that output is dedicated to the PRA.
Now, our debates so far have revealed that there is not a meeting of minds between those of us who have tabled or spoken to amendments, and the government, and I should say that the Financial Services Regulation Committee greatly looks forward to their discussion with the Minister and his colleague, the Economic Secretary, later this week. The noble Lord, the minister has consistently described the task of accountability, oversight of the regulators in terms of overall performance against their objectives. We, on the other hand, believe it is necessary to interrogate rules, guidance, supervision and all the other activities that regulators carry out in terms of its proportionality and its impact on those affected by it, whether that's the regulated firms themselves or consumers or other market operators.
That was the vision of the 2023 act, with its carefully designed notifications of rules and guidance to the parliamentary committees, and we continue to believe that that model. Is an effective one and regard a framework which amounts to not much more than scrutinising five year plans as falling well short of what could be regarded as effective accountability. If the PRA stroke, Bank of England and the FCA had offices of regulatory evaluation, that could provide a rich source of material to the parliamentary committees without the necessity of creating further external organisations.
Which is why my amendment provides for the output of the offices to be sent to the parliamentary committees, thus building on Fisma 2023. I think at the end of the day, we are looking to. Enhance the ability of the existing parliamentary committees, which, as I have explained, are under some pressure already by finding some way of making parliamentary oversight of the regulators have real meaning in the scheme of Fisma. When it was originally set up 26 years ago, I beg to move.
18:04
18:04
Speaker 4
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Speaker 4
Support these amendments and they are part of. It actually almost follows naturally from the debate that we had earlier about the need for a structurally competent wholesale function within the FCA. Um. I mean, one thing is very clear. You cannot produce credible cost benefit analysis without a credible evaluation capability. And the PRA has understood this. Um, and it's already got the beginnings of an evaluation function as the noble lady, Baroness Noakes has already said. Now I can understand that in part because prudential regulation requires modelling, capital assessment and an understanding of how rules transmit through markets.
And the pra's world is balance sheet solvency, capital modelling and risk transmission. So it's already employs actuaries, quants and economists, and therefore the evaluation office fits more naturally into that culture. FCA is different. Its culture, as we've already discussed, is overwhelmingly consumer focused. Um, which is appropriate for retail regulation. But it means that the FCA has never developed the technical machinery for evaluation of wholesale market impacts. Um, consumer protection doesn't require modelling of liquidity, pricing dynamics or market structure.
Um, wholesale regulation does. And I would say that actually it's only occurred to me when I was thinking about this in the context of this amendment, that the need for this evaluation office points again to the different sides of the FCA. And why, um, somehow upgrading, if you like, or separating the wholesale side becomes more relevant because functions are missing because of the consumer focus. Um. We've heard that the FCA tends to do the minimum of cost benefit analysis required by statute, and then largely ignore it.
Um, again, probably because they think it's not relevant to consumer protection. Um, but, but it is to the particular detriment, I would say of the wholesale side. And that is an additional reason for supporting these amendments.
And the pra's world is balance sheet solvency, capital modelling and risk transmission. So it's already employs actuaries, quants and economists, and therefore the evaluation office fits more naturally into that culture. FCA is different. Its culture, as we've already discussed, is overwhelmingly consumer focused. Um, which is appropriate for retail regulation. But it means that the FCA has never developed the technical machinery for evaluation of wholesale market impacts. Um, consumer protection doesn't require modelling of liquidity, pricing dynamics or market structure.
Um, wholesale regulation does. And I would say that actually it's only occurred to me when I was thinking about this in the context of this amendment, that the need for this evaluation office points again to the different sides of the FCA. And why, um, somehow upgrading, if you like, or separating the wholesale side becomes more relevant because functions are missing because of the consumer focus. Um. We've heard that the FCA tends to do the minimum of cost benefit analysis required by statute, and then largely ignore it.
Um, again, probably because they think it's not relevant to consumer protection. Um, but, but it is to the particular detriment, I would say of the wholesale side. And that is an additional reason for supporting these amendments.
18:07
Speaker 9
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Speaker 9
Um. My Lords, um, I was sorry that I wasn't able to be here last week on Wednesday to, for the debates on the amendments that were tabled by the noble Lord, Lord bridges and others that were proposing the creation of an office for Financial Regulatory Accountability. I have read the debates in Hansard. Um, there's a remarkable similarity to, um, three years ago when we debated very similar amendments. And, you know, this was a significant area in 2023, during the passage of the last Financial Services and Markets Act.
And it would have been a significant improvement to the ability of Parliament to hold the regulators to account a compliment rather than a replacement for. Um, I just wanted to touch briefly on, on the ability to scrutinise the proportionality of, of the rules of specific rules. Um, I just wanted to say that I'm going to look at Hansard, um, after this very closely at the comments that the noble Lord, the minister made during Group two when he seemed to agree that the specific scrutiny of the rules is, in fact, important, contrary to the sort of approach that the bill now takes.
Um, but this holding of the regulators to account by Parliament has just become, has become only more important, um, and more difficult, I think as we give yet more responsibilities to the regulators under this bill, as we've heard the the move of the powers in the Consumer Credit Act, etc., amendment 142 F provides an alternative way of achieving something similar to the amendments that were discussed on Wednesday, which might perhaps be easier for the regulators and the government to accept. It proposes the creation of offices of regulatory evaluation within both the FCA and the bank.
But unlike the office for Financial Regulatory Accountability proposed by the noble Lord, Lord bridges, this would lie within the regulator, but would have, I think, probably much the same role. But whichever way we do it, my Lords, I'm sure that the noble Lord, the Minister will have heard loud and clear the concerns of the shed across the House about the accountability. The regulators to Parliament. Another of the main themes, I think, that is emerging. Um as we load ever greater responsibilities upon them.
And it would have been a significant improvement to the ability of Parliament to hold the regulators to account a compliment rather than a replacement for. Um, I just wanted to touch briefly on, on the ability to scrutinise the proportionality of, of the rules of specific rules. Um, I just wanted to say that I'm going to look at Hansard, um, after this very closely at the comments that the noble Lord, the minister made during Group two when he seemed to agree that the specific scrutiny of the rules is, in fact, important, contrary to the sort of approach that the bill now takes.
Um, but this holding of the regulators to account by Parliament has just become, has become only more important, um, and more difficult, I think as we give yet more responsibilities to the regulators under this bill, as we've heard the the move of the powers in the Consumer Credit Act, etc., amendment 142 F provides an alternative way of achieving something similar to the amendments that were discussed on Wednesday, which might perhaps be easier for the regulators and the government to accept. It proposes the creation of offices of regulatory evaluation within both the FCA and the bank.
But unlike the office for Financial Regulatory Accountability proposed by the noble Lord, Lord bridges, this would lie within the regulator, but would have, I think, probably much the same role. But whichever way we do it, my Lords, I'm sure that the noble Lord, the Minister will have heard loud and clear the concerns of the shed across the House about the accountability. The regulators to Parliament. Another of the main themes, I think, that is emerging. Um as we load ever greater responsibilities upon them.
18:09
Speaker 1
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Speaker 1
I can't improve on the three speeches that have been given, so I rise just simply to make it clear that on these benches, we think this amendment is really important. But, um, we can. See in committee that it is purely random that we have the capacity to raise many of the issues random in the sense that, you know, Baroness Bowles, Baroness Nokes have a deep understanding of the market. So does Lord Faulks. But it's purely random that they happen to be in the Lords that, uh, if we didn't have Lord Holmes, that we'd be struggling to deal with many of the issues around digital assets and the revolution that is taking place.
We simply, at the moment have no system of ensuring that in any part of the parliamentary process, that there is the capacity to get to the relevant pieces of information that are to understand the underlying issues and therefore to play the role that Parliament should be playing, whether it's at committee level, as in the sense of the standing committees or whether it's at committee as associated with the passage of a piece of legislation. None of that can be done without genuine. That's adequate and well thought through information.
So when I look at other parliaments around the globe, for example, if I look at the US equivalents that in both the Senate and Congress, vast staff are available to make sure that those who sit there and represent the voice of the people are truly informed in great detail, with proper understanding of the articles that are before them and of the regulations that they seek to either uphold or overturn. And we lack this here. We are, in a sense, still an amateur body, and I don't think that is appropriate to a modern society.
So this is a very significant change, but it has to be a change in the right direction. And from these benches, we very much support it.
We simply, at the moment have no system of ensuring that in any part of the parliamentary process, that there is the capacity to get to the relevant pieces of information that are to understand the underlying issues and therefore to play the role that Parliament should be playing, whether it's at committee level, as in the sense of the standing committees or whether it's at committee as associated with the passage of a piece of legislation. None of that can be done without genuine. That's adequate and well thought through information.
So when I look at other parliaments around the globe, for example, if I look at the US equivalents that in both the Senate and Congress, vast staff are available to make sure that those who sit there and represent the voice of the people are truly informed in great detail, with proper understanding of the articles that are before them and of the regulations that they seek to either uphold or overturn. And we lack this here. We are, in a sense, still an amateur body, and I don't think that is appropriate to a modern society.
So this is a very significant change, but it has to be a change in the right direction. And from these benches, we very much support it.
18:11
Speaker 3
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Speaker 3
This amendment from my noble friend Baroness, notes it follows, as several have said, the same broad logic as the amendment tabled by my noble friend Lord bridges, that if the financial regulators are to exercise very significant powers, there must be a proper mechanism through which they can be evaluated and held to account. This amendment would require the FCA and the Bank of England. Um, and I think the PRA to establish offices for regulatory evaluation. Those offices would review the regulator's actions, including rule making, supervision, monitoring and enforcement.
As we said before, only the changes to rules are currently only the changes to these rules are currently considered by the cost benefit Analysis panel's. The offices would be led by directors with a degree of independence from the boards and executive structures of the regulators themselves, and they would report regularly to the Treasury and to relevant parliamentary committees. And my noble friend Lady Noakes quoted precedent that I thought was very interesting. Um, the precedent of such arrangements at the world Bank, at the IMF and at the European Investment Bank, all long standing pillars of the international economic community.
It is good to welcome the noble Lord, Lord Vogues of Harridan, to the debate, but I think this amendment really raises very much the same issues as those we discussed last Wednesday at Hansard, Co 501 GC. For anyone who wasn't present with regard to the amendments on the note by the note from the noble Lord, Lord bridges, and the noble lady, Lady Boz. So I was very pleased to hear that the Minister has agreed to reflect further on the issues raised and with the Economic Secretary to meet the Financial Services Regulation Committee later this week.
I look forward to the results and interest of time are not repeat what I've already said on the subject. The truth is that all these amendments raise a fundamental point. We are placing great trust in the regulators that trust must be matched by transparency and accountability, and today's cross-party amendment provides another route for the minister to consider.
As we said before, only the changes to rules are currently only the changes to these rules are currently considered by the cost benefit Analysis panel's. The offices would be led by directors with a degree of independence from the boards and executive structures of the regulators themselves, and they would report regularly to the Treasury and to relevant parliamentary committees. And my noble friend Lady Noakes quoted precedent that I thought was very interesting. Um, the precedent of such arrangements at the world Bank, at the IMF and at the European Investment Bank, all long standing pillars of the international economic community.
It is good to welcome the noble Lord, Lord Vogues of Harridan, to the debate, but I think this amendment really raises very much the same issues as those we discussed last Wednesday at Hansard, Co 501 GC. For anyone who wasn't present with regard to the amendments on the note by the note from the noble Lord, Lord bridges, and the noble lady, Lady Boz. So I was very pleased to hear that the Minister has agreed to reflect further on the issues raised and with the Economic Secretary to meet the Financial Services Regulation Committee later this week.
I look forward to the results and interest of time are not repeat what I've already said on the subject. The truth is that all these amendments raise a fundamental point. We are placing great trust in the regulators that trust must be matched by transparency and accountability, and today's cross-party amendment provides another route for the minister to consider.
18:14
Speaker 12
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Speaker 12
My Lord, I thank the noble Baroness Noakes for notifying during the debate last winter. This amendment would be tabled. I would like to once more reiterate that the government shares the view that accountability of the regulators is of great importance, and this is why the government has formalised by annual performance reviews for the regulators. Another reporting mechanism designed to support scrutiny and oversight. As a noble lady noted, the Bank of England already has an independent evaluation office which assists the Court of Directors in meeting its statutory responsibility to keep the performance of the bank under review.
Recent evaluations have focused on the bank's approach to supervision of financial market infrastructure and the PRA secondary competition and growth competitiveness objectives. The Bank of England has a statutory requirement to publish the outcomes of these reviews, unless there are public interest grounds for withholding, therefore supporting broader scrutiny. While the FCA holds well, the FCA does not maintain an equivalent office as a substantial framework for evaluation and assurance of its regulatory actions. That includes, through the National Audit Office, which the FCA auditor and in addition has a remit to carry out examinations into the economy, efficiency and effectiveness of the FCA under the National Audit Act, with the recent example being the knows.
So nos. 2023 report into the FCA titled Financial Services Regulation Adapting to Change. The proposed offices would create additional costs which would ultimately fall on the financial services businesses who pay the levy for the funds that funds are regulators. The Treasury has also has to the power to appoint an independent person to conduct a review of the efficiency, economy and effectiveness of the regulator's operations, with the resulting report being laid before Parliament, which serves as a further example of an existing accountability mechanism which this new amendment would sit alongside.
The Treasury also required the FCA to publish a report on matters typically covered by its annual report, or any other matter. The Treasury thinks useful and, my Lords, the government is fully supportive of enhancing the accountability of its regulators and is always keeping the current structures under review. However, I recognise this is an area where there has been a lot of discussion. Uh, the Economic Secretary to the Treasury and myself are meeting the Financial Services Regulation Committee later this week, as mentioned, and we're happy to continue these conversations.
There's much more discussion to be had between now and report. I therefore ask the amendment to be withdrawn.
Recent evaluations have focused on the bank's approach to supervision of financial market infrastructure and the PRA secondary competition and growth competitiveness objectives. The Bank of England has a statutory requirement to publish the outcomes of these reviews, unless there are public interest grounds for withholding, therefore supporting broader scrutiny. While the FCA holds well, the FCA does not maintain an equivalent office as a substantial framework for evaluation and assurance of its regulatory actions. That includes, through the National Audit Office, which the FCA auditor and in addition has a remit to carry out examinations into the economy, efficiency and effectiveness of the FCA under the National Audit Act, with the recent example being the knows.
So nos. 2023 report into the FCA titled Financial Services Regulation Adapting to Change. The proposed offices would create additional costs which would ultimately fall on the financial services businesses who pay the levy for the funds that funds are regulators. The Treasury has also has to the power to appoint an independent person to conduct a review of the efficiency, economy and effectiveness of the regulator's operations, with the resulting report being laid before Parliament, which serves as a further example of an existing accountability mechanism which this new amendment would sit alongside.
The Treasury also required the FCA to publish a report on matters typically covered by its annual report, or any other matter. The Treasury thinks useful and, my Lords, the government is fully supportive of enhancing the accountability of its regulators and is always keeping the current structures under review. However, I recognise this is an area where there has been a lot of discussion. Uh, the Economic Secretary to the Treasury and myself are meeting the Financial Services Regulation Committee later this week, as mentioned, and we're happy to continue these conversations.
There's much more discussion to be had between now and report. I therefore ask the amendment to be withdrawn.
18:16
18:16
Speaker 17
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Speaker 17
Who taken part in this short debate, I know it's a in part it's a repeat of debates we've held already in committee, but it's bringing together, uh, such an. Important issue, which is the strength of the accountability mechanisms for the regulators, the noble Lord, the minister outlined the things that exist at the moment. I think I explained that the Independent Evaluation Office in the bank is doesn't do very much. What it does is actually very interesting. Its report on the secondary competitiveness and growth objective was a was a good piece of work.
Within the FCA there is no visibility. So anybody involved in external accountability of the FCA would know. None of it. With the possible exception of the National Audit Office reports. But the National Audit Office, as you know, will will do those value for money reviews only very infrequently. And I'm not sure that the one that the noble Lord, the minister referred to would have had any impact on the work of the Financial Services Regulation Committee had they had they taken that into account?Um, I will not labour the points now because obviously we are going to have more substantial discussions this week in the Financial Services and Regulation Committee.
And of course, I'm sure there's going to be discussions when we get to report. And I look forward to any other discussions that we have before we get to report in the autumn. With that, my Lords, I beg leave to withdraw.
Within the FCA there is no visibility. So anybody involved in external accountability of the FCA would know. None of it. With the possible exception of the National Audit Office reports. But the National Audit Office, as you know, will will do those value for money reviews only very infrequently. And I'm not sure that the one that the noble Lord, the minister referred to would have had any impact on the work of the Financial Services Regulation Committee had they had they taken that into account?Um, I will not labour the points now because obviously we are going to have more substantial discussions this week in the Financial Services and Regulation Committee.
And of course, I'm sure there's going to be discussions when we get to report. And I look forward to any other discussions that we have before we get to report in the autumn. With that, my Lords, I beg leave to withdraw.
18:18
Speaker 16
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Speaker 16
That the amendment is withdrawn. The amendment is by leave withdrawn. The question is that clauses 23 to 26 on block stand part of the bill. As many as of that opinion will say content. The contrary, not content. The contents have it in clause 27. Amendment one, four three has already been debated. Moved formally, Lord Stockwood moved formally. The question is that amendment.
18:18
Speaker 8
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Speaker 8
Just refer to the. Put on the record that, uh, that the parliamentary counsel has advised that this amendment and all the government amendments in this section so far are all technical amendments. And if their objection is based on the fact that she believes that an LP is. Letter for an armful of technical amendments should have been sent out, then that's not normally the case. But if you want to object, we will withdraw them.
18:19
18:19
18:19
Speaker 16
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Speaker 16
Uh, my understanding there I will look towards the clerk is that if the noble lady wishes to object to this, then the government will not move this amendment. Is that correct?And amendment one, four, four is the same. Does the same situation apply?Uh, very well. Then we move on to, clause 27. Stand part of the bill. As many as of that opinion will say content. The contrary, not content. The contents have it.
Clause 28 stand part of the bill. As many as of that opinion will say content contrary not content. The contents have it after clause 28, amendment 144. A Lord Massey of Hampstead.
Clause 28 stand part of the bill. As many as of that opinion will say content contrary not content. The contents have it after clause 28, amendment 144. A Lord Massey of Hampstead.
18:21
18:21
Speaker 3
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Speaker 3
A standing in my name. I should first declare my interest again as chairman of Canaccord Wealth Management, as set out in the Register of Interests, although I should also state that Canaccord has no appointed representatives, which is the subject of this amendment. I am not opposing these reforms in principle, although we should recognise that in clauses 24 to 28 and other measures, we are adding significantly to the regulatory burden of member firms. Be argued that there is a case for greater oversight of appointed reps, as too many principal firms have historically taken a light touch approach to supervising the firms acting in their name.
Where that has gone wrong, it is consumers who have borne the cost. However, regulation of this kind is always a question of balance, and my purpose in moving this amendment is to ask whether the bill, as drafted, has struck that balance correctly. By way of background, this part of the financial sector, affecting mostly retail clients is surprisingly large, and its fortunes bear directly on financial inclusion, a subject on which the House shares a common concern. Mindful as we all are, of the advice gap.
The numbers are meaningful. There are approximately 34,000 appointed representatives, according to the FCA, and they generated 11.1 billion in regulated revenue and a further 27 billion in non-regulated financial services revenue. So some 38 billion in total running through this part of the market. The number of appointed reps fell by 12% in the three and a half years from 2022 to 25. But there was a more pronounced fall in the numbers of principal firms, those that appoint the representatives. This population has fallen by 26% over the same period, so we're seeing quite a decline in participation in this space.
Why does this matter?Appointed reps are overwhelmingly small. Firms, often sole traders, regionally based, who work very closely with smaller clients. They cannot afford the administrative and compliance burdens of larger firms. Hence, they need to operate under their regulatory umbrella.
Where that has gone wrong, it is consumers who have borne the cost. However, regulation of this kind is always a question of balance, and my purpose in moving this amendment is to ask whether the bill, as drafted, has struck that balance correctly. By way of background, this part of the financial sector, affecting mostly retail clients is surprisingly large, and its fortunes bear directly on financial inclusion, a subject on which the House shares a common concern. Mindful as we all are, of the advice gap.
The numbers are meaningful. There are approximately 34,000 appointed representatives, according to the FCA, and they generated 11.1 billion in regulated revenue and a further 27 billion in non-regulated financial services revenue. So some 38 billion in total running through this part of the market. The number of appointed reps fell by 12% in the three and a half years from 2022 to 25. But there was a more pronounced fall in the numbers of principal firms, those that appoint the representatives. This population has fallen by 26% over the same period, so we're seeing quite a decline in participation in this space.
Why does this matter?Appointed reps are overwhelmingly small. Firms, often sole traders, regionally based, who work very closely with smaller clients. They cannot afford the administrative and compliance burdens of larger firms. Hence, they need to operate under their regulatory umbrella.
18:22
Speaker 18
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Speaker 18
A channel through which smaller clients can access the markets and receive highly personalized service and advice. I'm not sure we want this part of the business to be under threat of more serious decline. As an unintended consequence of some specific provisions in the bill. 24 introduces a new discretionary FCA gateway before a firm may act as a principal at all. So principle firms will now have to seek specific approval to have appointed reps. And if they do enter the business, I think this is an important point.
The FCA can remove their permission at their own discretion for very, very vague reasons. Alongside that, the FCA will gain the power to create a bespoke senior management function. Specifically for AR, for AR oversight. Layering on a new form of personal regulatory liability. Two firms taking on Ares. So Ares will now be brought into scope of Smcr and therefore subject to the misconduct rules. So principle firms will have to carry out fit and proper tests on Ares as they do not as they do now, for their own employees.
Furthermore, the compulsory jurisdiction of the Fos is now extended to Ares, which means that principle firms will be held responsible for complaints against their Ares. Under most circumstances. These are significant new duties which represent potential liability, risk and a lot of additional cost to principle firms. We should bear in mind that some of these principle firms are, of course, not. Large organisations, and they may find these new exposures quite onerous, which in turn might render the economic risk reward of having Ares less attractive to them overall.
The clear direction of travel here is to have fewer but larger principle firms, and indeed, this might be the FCA's agenda for this part of the business. So this amendment calls for the FCA to look before it leaps. It calls for an assessment of the impact of the new rules on the number of principle firms, the number of appointed reps, and, most importantly, on consumer access to advice, particularly for those on modest means and the viability of smaller principle firms. So to conclude, I'm not necessarily asking the government to reverse course, but these measures do represent a significant increase in regulatory burden.
There's no getting away from that. So I'm asking for the for the regulator to measure the impact of what it is doing before the provisions take effect and to bring forward mitigating proposals. If the impact on consumer access turns out to be material. Given that the FCA's own data already show a firm population in genuine retreat, and given the implications for the advice gap, this seems to me to be a modest, proportionate and uncontroversial request. I beg to move.
The FCA can remove their permission at their own discretion for very, very vague reasons. Alongside that, the FCA will gain the power to create a bespoke senior management function. Specifically for AR, for AR oversight. Layering on a new form of personal regulatory liability. Two firms taking on Ares. So Ares will now be brought into scope of Smcr and therefore subject to the misconduct rules. So principle firms will have to carry out fit and proper tests on Ares as they do not as they do now, for their own employees.
Furthermore, the compulsory jurisdiction of the Fos is now extended to Ares, which means that principle firms will be held responsible for complaints against their Ares. Under most circumstances. These are significant new duties which represent potential liability, risk and a lot of additional cost to principle firms. We should bear in mind that some of these principle firms are, of course, not. Large organisations, and they may find these new exposures quite onerous, which in turn might render the economic risk reward of having Ares less attractive to them overall.
The clear direction of travel here is to have fewer but larger principle firms, and indeed, this might be the FCA's agenda for this part of the business. So this amendment calls for the FCA to look before it leaps. It calls for an assessment of the impact of the new rules on the number of principle firms, the number of appointed reps, and, most importantly, on consumer access to advice, particularly for those on modest means and the viability of smaller principle firms. So to conclude, I'm not necessarily asking the government to reverse course, but these measures do represent a significant increase in regulatory burden.
There's no getting away from that. So I'm asking for the for the regulator to measure the impact of what it is doing before the provisions take effect and to bring forward mitigating proposals. If the impact on consumer access turns out to be material. Given that the FCA's own data already show a firm population in genuine retreat, and given the implications for the advice gap, this seems to me to be a modest, proportionate and uncontroversial request. I beg to move.
18:25
18:26
18:26
Speaker 14
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Speaker 14
Forget that many of these small firms coming into the market are really to be valued in in Britain's um, highly until perhaps too much regulation, highly competitive industry. And we rely on them. They they are what distinguishes the UK's financial services historically from really the 16th century on the growth of financial services and indeed the City of London depended on small people coming together to prefer to provide for a niche in the market that people wanted. Now, if we continue to put too much burden on these small firms, they won't emerge.
We've heard from Lord Massey how how important they are, sometimes locally, and they're small firms who meet a need. So I think it's a very good idea to have an impact assessment of what the costs will be for Ares before the law comes into operation, for the competitiveness of the UK's sector.
We've heard from Lord Massey how how important they are, sometimes locally, and they're small firms who meet a need. So I think it's a very good idea to have an impact assessment of what the costs will be for Ares before the law comes into operation, for the competitiveness of the UK's sector.
18:27
18:27
Speaker 19
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Speaker 19
We support the questions that this probing amendment is asking. My noble friend Lord Massey of Hampstead has put forward a sensible and important amendment because it asks the government and the FCA to consider the practical effects of the Bill's changes on appointed representatives. Before those changes are brought into force. This model is used widely across financial advice, mortgage broking, insurance distribution, wealth management and consumer credit. It is particularly important for smaller advisory businesses, which may not have the scale, resources or compliance infrastructure to seek direct FCA authorisation themselves.
There are good reasons why businesses use this model. It can reduce regulatory costs. It can allow faster market entry, it can give smaller firms access to compliance expertise, training and regulatory support. It can also allow advisers to spend more time serving clients, rather than navigating the full cost and complexity of direct authorisation. That has real consumer benefits. Many appointed representatives are local, small local firms or regional advisory practices. They often serve clients who may have more modest assets who need mortgage advice, pension advice, insurance advice or investment guidance, but who may not be attractive to larger firms focused on wealthier clients.
So we should be careful if the. Effect of the bill is that principle. Firms face significantly higher costs or liabilities. Some may reduce their appointed representative networks or withdraw from the model altogether. That could mean fewer advisers, less competition, less local provision, and reduced access to financial advice, particularly for retail customers with smaller portfolios or less complex needs. The concern which amendment 144 seeks to test. That assessment would consider the number of principle firms likely to continue AR relationships.
The overall number of appointed representatives. The effect on consumer access to regulated financial advice, and the impact on smaller principle firms whose compliance costs may be disproportionate. That seems to me to be a reasonable thing to ask. The policy objective should be to improve standards and reduce harm without undermining a model that supports competition, market entry and access to advice. The wider issue is one we have discussed repeatedly in committee. Regulation can have unintended consequences. Measures designed to improve consumer protection can, if not carefully, carefully calibrated, reduce consumer access.
Measures designed to increase accountability can increase costs in a way that drives smaller firms out of the market. We must make sure that the cure does not create a new problem. I would therefore be grateful if the minister could provide clarity on this point.
There are good reasons why businesses use this model. It can reduce regulatory costs. It can allow faster market entry, it can give smaller firms access to compliance expertise, training and regulatory support. It can also allow advisers to spend more time serving clients, rather than navigating the full cost and complexity of direct authorisation. That has real consumer benefits. Many appointed representatives are local, small local firms or regional advisory practices. They often serve clients who may have more modest assets who need mortgage advice, pension advice, insurance advice or investment guidance, but who may not be attractive to larger firms focused on wealthier clients.
So we should be careful if the. Effect of the bill is that principle. Firms face significantly higher costs or liabilities. Some may reduce their appointed representative networks or withdraw from the model altogether. That could mean fewer advisers, less competition, less local provision, and reduced access to financial advice, particularly for retail customers with smaller portfolios or less complex needs. The concern which amendment 144 seeks to test. That assessment would consider the number of principle firms likely to continue AR relationships.
The overall number of appointed representatives. The effect on consumer access to regulated financial advice, and the impact on smaller principle firms whose compliance costs may be disproportionate. That seems to me to be a reasonable thing to ask. The policy objective should be to improve standards and reduce harm without undermining a model that supports competition, market entry and access to advice. The wider issue is one we have discussed repeatedly in committee. Regulation can have unintended consequences. Measures designed to improve consumer protection can, if not carefully, carefully calibrated, reduce consumer access.
Measures designed to increase accountability can increase costs in a way that drives smaller firms out of the market. We must make sure that the cure does not create a new problem. I would therefore be grateful if the minister could provide clarity on this point.
18:30
Speaker 4
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Speaker 4
My Lords, I'm grateful to the noble Lord for raising the importance of ensuring that measures to make appointed representatives regime safer do not undermine the benefits provided by this regime. This amendment requires the FCA to publish an impact assessment before the measures can take effect. My Lords, I am happy to assure you that the measures have already been assessed as part of the impact assessment completed for the Bill. This concluded that the measures of appointed representative appointed Representatives should result in the net benefit of £108 million over the next ten years before implementation.
The FCA will also need to publish proposals for new rules, including on the approach to bringing appointed representatives within the senior managers and certification regime. Fisma already requires the FCA to publish a cost benefit analysis when it proposes new rules. This analysis may be scrutinised by the Independent Cost Benefit Analysis Panel to ensure it accurately captures the costs and benefits that are likely to result. I also want to provide some reassurance on the introduction of the senior management function within principal firms responsible for overseeing appointed representatives.
The FCA will have the flexibility to apply the senior management function in a proportionate way. The FCA will not be obliged to require this of every principal firm, and may judge it is not proportionate for smaller principle firms. My Lords, the government has shared the. Objective of ensuring that we have a safer regime which does not undermine the benefits provided by appointed representatives. That is why the approach to implementation is designed to minimise disruption and cost to firms, and will be subject to further consultation and cost benefit analysis by the FCA.
I therefore ask the noble Lord to withdraw his amendment.
The FCA will also need to publish proposals for new rules, including on the approach to bringing appointed representatives within the senior managers and certification regime. Fisma already requires the FCA to publish a cost benefit analysis when it proposes new rules. This analysis may be scrutinised by the Independent Cost Benefit Analysis Panel to ensure it accurately captures the costs and benefits that are likely to result. I also want to provide some reassurance on the introduction of the senior management function within principal firms responsible for overseeing appointed representatives.
The FCA will have the flexibility to apply the senior management function in a proportionate way. The FCA will not be obliged to require this of every principal firm, and may judge it is not proportionate for smaller principle firms. My Lords, the government has shared the. Objective of ensuring that we have a safer regime which does not undermine the benefits provided by appointed representatives. That is why the approach to implementation is designed to minimise disruption and cost to firms, and will be subject to further consultation and cost benefit analysis by the FCA.
I therefore ask the noble Lord to withdraw his amendment.
18:32
Speaker 18
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Speaker 18
For his response and take reassurance that some of the measures that I raised have been dealt with already by the FCA as they've assessed. Hopefully the impact of these quite significant changes which, as I mentioned at the beginning, do add to regulation, not take away from the regulation. I'd also like to thank my noble friends for supporting this amendment and withdraw it.
18:32
18:33
18:33
Speaker 16
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Speaker 16
ObjectivesCan I just ask the noble Baroness on that basis?Does that mean these are technical amendments?And the parliamentary counsel has advised that they are technical amendments, and therefore that they shouldn't have been a. Need to be sent out. Is she actually. Does she not agree with the parliamentary parliamentary counsel?
18:34
18:34
18:34
18:35
Speaker 10
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Speaker 10
The amendment one for amendment 146. In my name, and that of my noble friend Lord Altrincham. This is a modest and probing amendment, and follows the discussion we had last week on speeding up the senior management and certification regime. It does not seek to change the regime immediately. It requires the Treasury to carry out a review and publish a report within 12 months on whether the new notification framework for senior management appointments could be used. Where an individual has already been approved for the same or a similar function, including within the same corporate group.
It echoes my noble friend Lord Howard of Rising's amendment on a fast track authorisation process for applicants who have been authorised before, but my amendment looks at how this is working in practice. A year after the act comes into effect, the minister gave a hint that he was sympathetic to my noble friend Lord Howard, and we'll be talking to the FCA about this, so I'm hoping we can make some progress on this amendment. We've heard from industry that there are several problems with the Smcr regime. One concern is that the regime was originally intended to apply to a relatively limited number of senior people within a firm.
Over time, however, roles have become more complicated, responsibilities have overlapped, and some organisations have ended up needing a much larger number of people to receive Smcr approval. Regulation should not make legitimate business harder to do. It should not slow down sensible appointments where there is no obvious additional risk. Yet that is too often the practical effect of the regime as it stands, the specific issue is what has sometimes been described as smcr passporting, where an individual individual has already been approved, has a strong regulatory track record and is moving into a genuinely comparable role, it seems sensible to explore whether a streamlined notification process could be used.
That would have several advantages. It would reduce duplication, it could speed up appointments, it could reduce costs to firms, it could make it easier for groups to move experienced people into appropriate roles, and it could allow the regulators to focus their resources on genuinely new, higher risk or more complex appointments. That's the point of this amendment. It does not prescribe the answer. It asks the Treasury to review the position, consult the FCA and the PRA and other relevant parties, and report back to Parliament.
If we want the UK to have a regulatory system that supports growth and competitiveness, then we need an approval process that is rigorous but also efficient. We should not require firms to repeat the same process unnecessarily, where the regulator has already set, assess the individual and where the new role is, is substantially comparable. I'd therefore be grateful if the minister could give us some reassurance on this important matter and agree that a review, an ex post review, could be a helpful way of ensuring the direction of travel that I know we both want.
I beg to move.
It echoes my noble friend Lord Howard of Rising's amendment on a fast track authorisation process for applicants who have been authorised before, but my amendment looks at how this is working in practice. A year after the act comes into effect, the minister gave a hint that he was sympathetic to my noble friend Lord Howard, and we'll be talking to the FCA about this, so I'm hoping we can make some progress on this amendment. We've heard from industry that there are several problems with the Smcr regime. One concern is that the regime was originally intended to apply to a relatively limited number of senior people within a firm.
Over time, however, roles have become more complicated, responsibilities have overlapped, and some organisations have ended up needing a much larger number of people to receive Smcr approval. Regulation should not make legitimate business harder to do. It should not slow down sensible appointments where there is no obvious additional risk. Yet that is too often the practical effect of the regime as it stands, the specific issue is what has sometimes been described as smcr passporting, where an individual individual has already been approved, has a strong regulatory track record and is moving into a genuinely comparable role, it seems sensible to explore whether a streamlined notification process could be used.
That would have several advantages. It would reduce duplication, it could speed up appointments, it could reduce costs to firms, it could make it easier for groups to move experienced people into appropriate roles, and it could allow the regulators to focus their resources on genuinely new, higher risk or more complex appointments. That's the point of this amendment. It does not prescribe the answer. It asks the Treasury to review the position, consult the FCA and the PRA and other relevant parties, and report back to Parliament.
If we want the UK to have a regulatory system that supports growth and competitiveness, then we need an approval process that is rigorous but also efficient. We should not require firms to repeat the same process unnecessarily, where the regulator has already set, assess the individual and where the new role is, is substantially comparable. I'd therefore be grateful if the minister could give us some reassurance on this important matter and agree that a review, an ex post review, could be a helpful way of ensuring the direction of travel that I know we both want.
I beg to move.
18:37
18:37
Speaker 1
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Speaker 1
So, um, just very quickly, the um. I'm always in favour of trying to provide streamlining and this, this amendment that, uh, offers a common sense approach to that. But I do want to say that there's one issue I wanted to take up that's with, uh, with, with Lady Neville-rolfe, which is that the focus of the FCA should be always on new hires and not on previous hires, but I think it's the ongoing fit and proper process is crucially important, particularly if we're going to have lighter touch regulation as people move from one position to another.
But that ongoing process is absolutely critical, and perhaps the minister could expand, because I'm not quite clear how all the various changes in FCA rules actually change. What has been an annual review process and now gives more flexibility in what that means. And the reason. Let me just give examples. I'm not sure that when Sir Fred Goodwin, who wasn't sir, then obviously that was appointed to chief executive of RBS, that people recognised that he was going to get caught up in what I think most people would have described as an addiction to completely irrational, uh, acquisitions that have.
Eventually led to the collapse that. Of, uh, of a major bank that I am not sure that when Jess Staley was hired that, apt to be CEO of Barclays, that, uh, that people were aware of the significance of his very extensive involvement with Epstein. But I'm not sure that when, uh, the Reverend Paul Flowers was approved as chairman of the Co-operative Bank, that people were conscious that he was potentially that, uh, someone who would become seriously addicted to and affected that, uh, by a number of drugs, notably crystal meth.
In other words, there's an ongoing process that is absolutely critical. It shouldn't be a one time process only. And I hope that that will be absorbed into the thinking as this report or if this if this amendment that, uh, in a sense moves forward because it's the ongoing process that is absolutely vital. This shouldn't be treated fit and proper. It's not a one time only process.
But that ongoing process is absolutely critical, and perhaps the minister could expand, because I'm not quite clear how all the various changes in FCA rules actually change. What has been an annual review process and now gives more flexibility in what that means. And the reason. Let me just give examples. I'm not sure that when Sir Fred Goodwin, who wasn't sir, then obviously that was appointed to chief executive of RBS, that people recognised that he was going to get caught up in what I think most people would have described as an addiction to completely irrational, uh, acquisitions that have.
Eventually led to the collapse that. Of, uh, of a major bank that I am not sure that when Jess Staley was hired that, apt to be CEO of Barclays, that, uh, that people were aware of the significance of his very extensive involvement with Epstein. But I'm not sure that when, uh, the Reverend Paul Flowers was approved as chairman of the Co-operative Bank, that people were conscious that he was potentially that, uh, someone who would become seriously addicted to and affected that, uh, by a number of drugs, notably crystal meth.
In other words, there's an ongoing process that is absolutely critical. It shouldn't be a one time process only. And I hope that that will be absorbed into the thinking as this report or if this if this amendment that, uh, in a sense moves forward because it's the ongoing process that is absolutely vital. This shouldn't be treated fit and proper. It's not a one time only process.
18:39
18:39
Speaker 18
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Speaker 18
I support this amendment, which I think is exactly the sort of streamlining amendment that we're looking to achieve in this bill. And, um, just to politely take issue with Baroness Kramer's remarks on on people such as Fred Goodwin and or Jess Staley or Reverend Flowers. Um, the FCA would not have picked up those problems. They all emerged much later. I think we've got to give we should give credit to member firms for being able to judge who they should be hiring and if they're already licensed, you know, why wouldn't notification be sufficient?It would be would be my assertion.
18:40
18:40
Speaker 4
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Speaker 4
That memorable. My Lords, I am grateful for the Baroness lady for taking. This amendment. The government agrees that the regime should operate more proportionally. Where that can be done without undermining accountability. In fact, that is what this bill aims to do. The core objective of these reforms is to reduce unnecessary regulatory administrative burdens for firms, while preserving the accountability standards that underpin the regime. The changes will help deliver the government and regulators ambition to reduce burdens from this regime by 50%, while retaining its core benefits, as set out in the impact assessment for this bill.
The reforms to this regime alone are expected to reduce administrative burdens on the sector by almost £600 million over ten years, and this bill already is already speeding up the target for regulators to make those decisions. And as I've said in the debate last Wednesday, in Q4 of 25, 26, 50% of senior managers cases were determined within 19 days, and over 99% were determined within the new target of two months. The bill moves to a more flexible system led by regulators, rather than requiring pre-approval for senior managers, it allows the FCA and PRA to decide which senior management functions require approval and which can be simply notified by the regulators.
And the regulators. Do not take this decision without direction. Schedule three of the bill sets out the factors the regulators may use when designing notification approach. These include whether an individual has previously been approved for a different role. The detailed operation of the new framework will be taken forward by the regulators through the rules, which are already subject to the statutory consultation and parliamentary scrutiny mechanisms. The regulators already operate a proportionate application process for individuals applying for similar senior management function to the one they already approved for, including the one within the same group.
This usually allows for a faster and more targeted assessment. Um, I know the question by the noble Baroness, Lady Cramer. I'm going to pick that up with the FCA. I think the continued um accreditation assessment of senior senior managers needs to be something that report back to because I think that's an important point that the noble lady makes. Um, finally I can show noble lady, Baroness Ralph that the government will continue to engage closely with the regulators as to implement these changes to ensure that the regime operates as intended and delivers a more proportionate approach in practice.
I therefore ask the noble lady to withdraw this amendment.
The reforms to this regime alone are expected to reduce administrative burdens on the sector by almost £600 million over ten years, and this bill already is already speeding up the target for regulators to make those decisions. And as I've said in the debate last Wednesday, in Q4 of 25, 26, 50% of senior managers cases were determined within 19 days, and over 99% were determined within the new target of two months. The bill moves to a more flexible system led by regulators, rather than requiring pre-approval for senior managers, it allows the FCA and PRA to decide which senior management functions require approval and which can be simply notified by the regulators.
And the regulators. Do not take this decision without direction. Schedule three of the bill sets out the factors the regulators may use when designing notification approach. These include whether an individual has previously been approved for a different role. The detailed operation of the new framework will be taken forward by the regulators through the rules, which are already subject to the statutory consultation and parliamentary scrutiny mechanisms. The regulators already operate a proportionate application process for individuals applying for similar senior management function to the one they already approved for, including the one within the same group.
This usually allows for a faster and more targeted assessment. Um, I know the question by the noble Baroness, Lady Cramer. I'm going to pick that up with the FCA. I think the continued um accreditation assessment of senior senior managers needs to be something that report back to because I think that's an important point that the noble lady makes. Um, finally I can show noble lady, Baroness Ralph that the government will continue to engage closely with the regulators as to implement these changes to ensure that the regime operates as intended and delivers a more proportionate approach in practice.
I therefore ask the noble lady to withdraw this amendment.
18:43
Speaker 10
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Speaker 10
Grateful to my noble friend for his support and and to the Minister for his assurance that administrative burdens will be reduced by these changes. And, of course, quite a lot of that is down to the, um, dropping of the certification regime, which we've welcomed. Individual cases, I think can make for bad rules. And Fred Goodwin, I think, was approved before the Smcr regime came in. Uh, approved or not. Not approved. Um, and I am confident that our regulators do learn from their mistakes in these matters of appointments.
So that's one of the sort of professional features of having a proper regulator. But I remain concerned that the system can still create delay, delay and duplication. Delays affect hiring promotion, succession planning, business continuity and the ability of firms to operate effectively in a sector where we're trying to support growth and competitiveness. I mean, I can't emphasize that point often enough. So I hope the government will continue to look seriously at whether there is scope for some form of SM passporting or a more streamlined notification process.
In cases where a person has already been approved, has got a good regulatory track record and is moving to a similar sort of role, we'd like to see progress before report. Both myself and Lord Howard of Rising. I mean, ideally in a form that makes my proposal for a review redundant. But for now I beg leave to withdraw the amendment.
So that's one of the sort of professional features of having a proper regulator. But I remain concerned that the system can still create delay, delay and duplication. Delays affect hiring promotion, succession planning, business continuity and the ability of firms to operate effectively in a sector where we're trying to support growth and competitiveness. I mean, I can't emphasize that point often enough. So I hope the government will continue to look seriously at whether there is scope for some form of SM passporting or a more streamlined notification process.
In cases where a person has already been approved, has got a good regulatory track record and is moving to a similar sort of role, we'd like to see progress before report. Both myself and Lord Howard of Rising. I mean, ideally in a form that makes my proposal for a review redundant. But for now I beg leave to withdraw the amendment.
18:44
Speaker 7
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Speaker 7
Is your lordships pleasure that the amendment be withdrawn?The amendment is by leave withdrawn. The question is that schedule three be the third schedule to the Bill. As many as of that opinion will say content. The contrary, not content. The contents have it. The question is that clause 32 stand part of the bill. As many as of that opinion will say content. The contrary, not content. The contents have it.
Government amendments 147 to 150 have already been debated. So are you moving them formally?
Government amendments 147 to 150 have already been debated. So are you moving them formally?
18:46
18:46
18:46
Speaker 8
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Speaker 8
I rise to move. Amendments 152 and 153, and will also speak to whether clause 37 should stand part of this bill. Uh, my Lords, I'm instinctively suspicious of clause 17 because I think that the best people to judge whether overseas financial services firms should be able to operate in the UK and to determine the terms on which they operate, are the regulators. This bill hands major judgments to the Treasury, which means that there are. They are likely, at least in part, to be political judgments.
While new section 408 A requires the Treasury to have regard to various things, that list is not exclusive. And so there is nothing to stop the Treasury taking into account factors other than those listed in subsection two decisions could. Be made, for example, in pursuit of foreign policy aims against a wider background of international relations. For example, in relation to the reset of the EU financial. Services could also be traded away in the context of international trade agreements. Even if the Treasury sticks with the list of.
Have regards in subsection two, that subsection has no hierarchy of criteria. Stability is on a par with international competitiveness and growth, and. This is in stark contrast to the regulators, where international competitiveness and growth and competition are secondary objectives, which cannot override their core objectives. Now, I fully support the government's quest for economic growth and the pursuit of international trade agreements. But under new section 408 A, the Treasury could set aside any concerns about the integrity and stability of the UK's financial system because they favour facilitating international competitiveness and growth.
Is this really what the government are trying to enable?Now, we know that some countries, like China seem to have technical compliance with many international financial services standards, but in practice, the degree of state control and the weakness of local regulators leave a lot of questions to be answered about organisations within their financial services sector. We know that the Treasury wants more trade with China. Will they let Chinese financial services firms freely into the UK in order to facilitate that?How will the Treasury ensure that they get a good deal for British financial services firms?Some countries, like India, give the appearance of allowing foreign firms to operate in India, but in practice, India places many hurdles in their way and many organisations just give up the struggle after a while.
Does the Treasury really have the granular understanding of what's happening in these countries?My own view is that would be dangerous to let the Treasury loose on this area, and that the independent financial services regulators are the best people to determine who can operate in the UK and on what terms. And that is why I tabled my opposition to clause 37 standing part of the Bill. I have heard, however, from some in the city that they welcome this new overseas recognition regime because the regulators do not prioritise negotiations with their foreign counterparts, and there is little faith that they ever will, and that has the ring of truth to it.
The FCA has far too many other things to do, and the bank stroke pra are exceedingly cautious and for that reason, my Lords, I have tabled amendments 152 and 153 in order to emphasise the important role that the regulator should have in the process. Amendment 152 adds a requirement for the Treasury to consult the regulators when it uses the power under section 408 B, as currently drafted, the Treasury has to consult the regulators only if it exercises the power to recognise overseas firms to operate in. The UK under section 408 a.
Treasury does not have to consult the regulators if it uses the 408 B power to recognise overseas territories. My amendment poses the question why not. The regulators are likely to know more about financial services and regulation in the Overseas Treasury, the overseas countries than the Treasury. Amendment 153 is aimed at improving the information given to Parliament when the Treasury bring forward regulations to use these new powers, it requires the. Treasury to publish any information or advice received from the regulators in connection with the use of the powers.
As I mentioned, the Bill requires the Treasury to consult the regulators at the moment on only one of the two powers, but then the Treasury could completely ignore the information. Advice that they receive from regulators and Parliament would be none the wiser. This should be more transparent. The Treasury must be prepared to say why it has ignored or overridden the the advice that it has received. If that is indeed the case, it must therefore be prepared to share any relevant information with Parliament.
Now, we all know that secondary legislation processes give Parliament no effective power over the executive. That does not mean, however, that Parliament can be ignored, and I do believe it is necessary to force a bit of daylight into the process and not tolerate the suppression of relevant information from Parliament. My Lords, consistent with the stance I've taken throughout this Committee, if the Minister wishes to move his amendment. 154 I shall call not content, and I think even the noble Lord, Lord Wilson, will accept that this amendment is not a small technical amendment.
I had hoped that the Treasury would have organised an all peers letter by now. It has had two weeks to do so since I first raised the issue I was in. Informed on Friday that the government think it's okay just to write to the front benches on some government amendments, and since I was the only peer who had tabled amendments in relation to clause 37, I believe it was as a minimum discourteous not to have written to me. At the same time, I do, however, stick to my broader point that the whole House should be informed.
The scrutiny of bills is not something that belongs in a cosy club of frontbenchers. Someone needs to stand up for backbenchers and that is what I'm doing in this bill. I beg to move. Amendment proposed in clause 37, page 43. Line ten. Leave out section 408 A and insert sections 408 A or 408 B.
While new section 408 A requires the Treasury to have regard to various things, that list is not exclusive. And so there is nothing to stop the Treasury taking into account factors other than those listed in subsection two decisions could. Be made, for example, in pursuit of foreign policy aims against a wider background of international relations. For example, in relation to the reset of the EU financial. Services could also be traded away in the context of international trade agreements. Even if the Treasury sticks with the list of.
Have regards in subsection two, that subsection has no hierarchy of criteria. Stability is on a par with international competitiveness and growth, and. This is in stark contrast to the regulators, where international competitiveness and growth and competition are secondary objectives, which cannot override their core objectives. Now, I fully support the government's quest for economic growth and the pursuit of international trade agreements. But under new section 408 A, the Treasury could set aside any concerns about the integrity and stability of the UK's financial system because they favour facilitating international competitiveness and growth.
Is this really what the government are trying to enable?Now, we know that some countries, like China seem to have technical compliance with many international financial services standards, but in practice, the degree of state control and the weakness of local regulators leave a lot of questions to be answered about organisations within their financial services sector. We know that the Treasury wants more trade with China. Will they let Chinese financial services firms freely into the UK in order to facilitate that?How will the Treasury ensure that they get a good deal for British financial services firms?Some countries, like India, give the appearance of allowing foreign firms to operate in India, but in practice, India places many hurdles in their way and many organisations just give up the struggle after a while.
Does the Treasury really have the granular understanding of what's happening in these countries?My own view is that would be dangerous to let the Treasury loose on this area, and that the independent financial services regulators are the best people to determine who can operate in the UK and on what terms. And that is why I tabled my opposition to clause 37 standing part of the Bill. I have heard, however, from some in the city that they welcome this new overseas recognition regime because the regulators do not prioritise negotiations with their foreign counterparts, and there is little faith that they ever will, and that has the ring of truth to it.
The FCA has far too many other things to do, and the bank stroke pra are exceedingly cautious and for that reason, my Lords, I have tabled amendments 152 and 153 in order to emphasise the important role that the regulator should have in the process. Amendment 152 adds a requirement for the Treasury to consult the regulators when it uses the power under section 408 B, as currently drafted, the Treasury has to consult the regulators only if it exercises the power to recognise overseas firms to operate in. The UK under section 408 a.
Treasury does not have to consult the regulators if it uses the 408 B power to recognise overseas territories. My amendment poses the question why not. The regulators are likely to know more about financial services and regulation in the Overseas Treasury, the overseas countries than the Treasury. Amendment 153 is aimed at improving the information given to Parliament when the Treasury bring forward regulations to use these new powers, it requires the. Treasury to publish any information or advice received from the regulators in connection with the use of the powers.
As I mentioned, the Bill requires the Treasury to consult the regulators at the moment on only one of the two powers, but then the Treasury could completely ignore the information. Advice that they receive from regulators and Parliament would be none the wiser. This should be more transparent. The Treasury must be prepared to say why it has ignored or overridden the the advice that it has received. If that is indeed the case, it must therefore be prepared to share any relevant information with Parliament.
Now, we all know that secondary legislation processes give Parliament no effective power over the executive. That does not mean, however, that Parliament can be ignored, and I do believe it is necessary to force a bit of daylight into the process and not tolerate the suppression of relevant information from Parliament. My Lords, consistent with the stance I've taken throughout this Committee, if the Minister wishes to move his amendment. 154 I shall call not content, and I think even the noble Lord, Lord Wilson, will accept that this amendment is not a small technical amendment.
I had hoped that the Treasury would have organised an all peers letter by now. It has had two weeks to do so since I first raised the issue I was in. Informed on Friday that the government think it's okay just to write to the front benches on some government amendments, and since I was the only peer who had tabled amendments in relation to clause 37, I believe it was as a minimum discourteous not to have written to me. At the same time, I do, however, stick to my broader point that the whole House should be informed.
The scrutiny of bills is not something that belongs in a cosy club of frontbenchers. Someone needs to stand up for backbenchers and that is what I'm doing in this bill. I beg to move. Amendment proposed in clause 37, page 43. Line ten. Leave out section 408 A and insert sections 408 A or 408 B.
18:53
Speaker 17
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Speaker 17
Be very brief. I am sympathetic to ensuring that the Overseas recognition regulations are as pragmatic and seamless as they can be to enable easier international competition, but I do have quite a lot of sympathy with the comments that the noble lady, Baroness Noakes, has just made about giving these powers exclusively to the Treasury. But I just wanted to ask one question of the noble Lord. The minister. Subparagraph two of the new 408 a sets out a list of areas that the Treasury must have regard to the importance of when making regulations and just actually, as an aside, that's quite odd.
Wording normally would have regard to. And I'm still not sure they understand what difference must have regard to the importance of makes to the meaning of that. Maybe the noble Lord, the minister might try to see if he can explain that, but the main question is, it seems to me there's one area that is missing, actually, subparagraph one of 408 B does something similar, but in a slightly different way. It seems to me there's one area that's missing, um, from those lists of have regards, which is the whole question of economic crime and in particular anti-money laundering.
And the transparency of ownership in the relevant jurisdictions. So could the noble Lord, the minister, please say whether he agrees that those are important and explain why they might be missing from the list. And if I could just finish with something I probably should have said earlier on today. But given that I think we're finishing early and the noble Lord, the minister is going to get some of his evening back, can I wish him a happy birthday?
Wording normally would have regard to. And I'm still not sure they understand what difference must have regard to the importance of makes to the meaning of that. Maybe the noble Lord, the minister might try to see if he can explain that, but the main question is, it seems to me there's one area that is missing, actually, subparagraph one of 408 B does something similar, but in a slightly different way. It seems to me there's one area that's missing, um, from those lists of have regards, which is the whole question of economic crime and in particular anti-money laundering.
And the transparency of ownership in the relevant jurisdictions. So could the noble Lord, the minister, please say whether he agrees that those are important and explain why they might be missing from the list. And if I could just finish with something I probably should have said earlier on today. But given that I think we're finishing early and the noble Lord, the minister is going to get some of his evening back, can I wish him a happy birthday?
18:54
18:54
Speaker 14
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Speaker 14
The concern. The noble lady, Baroness Noakes, raised about the political pressures which Treasury will be under to recognise certain countries with and without having done adequate scrutiny and indeed taken advice. And I would suggest even more widely and really deep analysis of the problems of, for instance, overleverage in some banking systems which, though perfectly respectable, are appearing perfectly respectable, would expose the UK and its financial sector to dangers of of debt and contamination, and I would therefore have doubts about the economic implications overall of the Treasury and.
Making these calls on account of political reasons and we see it all the time, whether it's international agreements on the Committee of which I sit on my previous committee, which was European Affairs. There is constant pressure by governments for um for signing really rather bad treaties for the UK and its various sectors, including financial services. And I would have concerns if there was no adequate scrutiny and no proper advice taken on whether such recognition is a good thing for our systems.
Making these calls on account of political reasons and we see it all the time, whether it's international agreements on the Committee of which I sit on my previous committee, which was European Affairs. There is constant pressure by governments for um for signing really rather bad treaties for the UK and its various sectors, including financial services. And I would have concerns if there was no adequate scrutiny and no proper advice taken on whether such recognition is a good thing for our systems.
18:56
Speaker 1
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Speaker 1
My Lord, I'm just speaking very briefly, but, um, that the committee will know that I've talked before about my concern about heading towards a lowest common denominator. And so the constraints of the engagement of the regulator, that and of Parliament. I think in a process that of, of recognition of overseas regimes is actually very crucial, that it both provides transparency, it provides challenge. But, uh, I think, uh, both of those are, are constantly necessary. So I. Think it's a very well drafted, uh, measurements that have been put down by Baroness Noakes.
I wanted to go a little bit further and just Lord Holmes of Richmond is not in his place, but he has. Amendment 164 D, which in a sense almost goes farther in instructing the Secretary of State to establish Memorandum of Understanding with a whole series of regulatory authorities. And I have significant concerns about that. Without the same set of constraints that, um, uh, you know, I, it's a, we have to be aware that, uh, in the world in which we're living at the moment, there is fragmentation that, uh.
Uh, international agreements that are often now treated as, uh, pick and mix that, uh, and I object when we do that in the UK. Uh, but it certainly is a behavior that we're watching in the United States at all times. And we can see it with the development of, of AI that, uh, and the various steps that the white House is taking, it's hard to work out if it's going to go for AI licensing or it isn't that a memorandum of understanding that passively accepted whatever the United States decided was the appropriate standard, would be one that would trouble me hugely.
So I think this is a very good set of amendments that, uh and although Baroness Noakes and I often take a very different position on the issue of regulation, that and on the primacy of financial stability, may I say that I think in this instance, she is absolutely right. And there was nothing more troubling than reading the objectives. All three put on a par. That has been my great fear that, uh, and I think anyone looking back at what happened in the 2008 crash will see very much that sort of a focus on competition and growth without any focus on financial stability.
That led to, um, a crisis, which I suspect nobody in this room wishes to see again.
I wanted to go a little bit further and just Lord Holmes of Richmond is not in his place, but he has. Amendment 164 D, which in a sense almost goes farther in instructing the Secretary of State to establish Memorandum of Understanding with a whole series of regulatory authorities. And I have significant concerns about that. Without the same set of constraints that, um, uh, you know, I, it's a, we have to be aware that, uh, in the world in which we're living at the moment, there is fragmentation that, uh.
Uh, international agreements that are often now treated as, uh, pick and mix that, uh, and I object when we do that in the UK. Uh, but it certainly is a behavior that we're watching in the United States at all times. And we can see it with the development of, of AI that, uh, and the various steps that the white House is taking, it's hard to work out if it's going to go for AI licensing or it isn't that a memorandum of understanding that passively accepted whatever the United States decided was the appropriate standard, would be one that would trouble me hugely.
So I think this is a very good set of amendments that, uh and although Baroness Noakes and I often take a very different position on the issue of regulation, that and on the primacy of financial stability, may I say that I think in this instance, she is absolutely right. And there was nothing more troubling than reading the objectives. All three put on a par. That has been my great fear that, uh, and I think anyone looking back at what happened in the 2008 crash will see very much that sort of a focus on competition and growth without any focus on financial stability.
That led to, um, a crisis, which I suspect nobody in this room wishes to see again.
18:59
Speaker 10
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Speaker 10
I. I, this is the last group. I would also like to wish the minister a very happy birthday, and he will be glad to know that on this side, we think this is an important part of the Bill. The overseas recognition regime, which would replace the arrangements put in place as we left the EU, could provide a valuable mechanism for recognising overseas regulatory regimes and allowing certain firms, services or market infrastructure from other jurisdictions to access the UK market without having to duplicate regulatory requirements unnecessarily.
However, as has been said, recognition decisions can be very significant. They can affect financial stability, market integrity and indeed the competitiveness of UK markets. They involve judgments about the quality, reliability and effectiveness of another jurisdiction's regulatory and supervisory framework. They require knowledge of other countries and other regulatory regimes, and the nature of negotiating with particular countries, whether it's India or whether it indeed is the EU who are tough to negotiate with. As I know from 40 years experience, this is why I welcome the amendments tabled by my noble friend Lady Noakes.
Once again, they speak to the important point about ensuring that there is proper oversight of the regulations which give effect to these policies. Amendment 152, which would require the Treasury to consult the regulators before making regulations designating a country or territory for recognition seems to me to be a sensible safeguard. The FCA, the PRA and the Bank of England will often be best placed to assess whether an overseas regime is generally comparable, whether the supervisory arrangements are robust and whether recognition could pose any risks to UK markets or consumers.
Amendment 153 raises a related transparency point if the Treasury receives advice or information from the regulators. I agree with my noble friend Lady Noakes and the noble lady, Lady Cramer, that Parliament should be able to see that material when considering the relevant regulations that would allow noble Lords and members in the other place to understand the basis on which a recognition decision has been made. Like my noble friend, I would welcome clarity from the Minister about how the regulators will be involved in the process and how he proposes to respond to the concerns raised by the noble Lord, Lord Foulkes, and my noble friend Lady Lawler.
I also want to say a word about amendment 154, tabled by the minister himself. We initially had some concerns about this amendment, but I now understand the intention is essentially transitional and consolidating to allow existing recognition arrangements to be brought within the new overseas recognition regime, where doing so does not materially change the legal effect. The minister will wish to respond to. My noble friend, Lady Noakes, concerns about process, particularly given her position as chair of the committee. My own view is that courtesy is a good principle.
Lady. Lawler mentioned the amendment in the name of Lord Holmes, which is not here, of course, to speak to. And he is seeking to encourage cross-border cooperation, particularly for digital. I have to say I'll take some convincing that this amendment is proportionate, but I do look forward to a fuller discussion on these digital issues on Wednesday, when I think we've got a group of amendments and the sort of considerations behind his amendment are probably more relevant to that discussion. In any event.
Finally, the overseas recognition regime could be a useful and important part of the UK's financial services framework. But if it is to command confidence, it must be supported by regulatory expertise and parliamentary scrutiny. And for that reason, I do hope the Minister will engage constructively with the amendments in this group.
However, as has been said, recognition decisions can be very significant. They can affect financial stability, market integrity and indeed the competitiveness of UK markets. They involve judgments about the quality, reliability and effectiveness of another jurisdiction's regulatory and supervisory framework. They require knowledge of other countries and other regulatory regimes, and the nature of negotiating with particular countries, whether it's India or whether it indeed is the EU who are tough to negotiate with. As I know from 40 years experience, this is why I welcome the amendments tabled by my noble friend Lady Noakes.
Once again, they speak to the important point about ensuring that there is proper oversight of the regulations which give effect to these policies. Amendment 152, which would require the Treasury to consult the regulators before making regulations designating a country or territory for recognition seems to me to be a sensible safeguard. The FCA, the PRA and the Bank of England will often be best placed to assess whether an overseas regime is generally comparable, whether the supervisory arrangements are robust and whether recognition could pose any risks to UK markets or consumers.
Amendment 153 raises a related transparency point if the Treasury receives advice or information from the regulators. I agree with my noble friend Lady Noakes and the noble lady, Lady Cramer, that Parliament should be able to see that material when considering the relevant regulations that would allow noble Lords and members in the other place to understand the basis on which a recognition decision has been made. Like my noble friend, I would welcome clarity from the Minister about how the regulators will be involved in the process and how he proposes to respond to the concerns raised by the noble Lord, Lord Foulkes, and my noble friend Lady Lawler.
I also want to say a word about amendment 154, tabled by the minister himself. We initially had some concerns about this amendment, but I now understand the intention is essentially transitional and consolidating to allow existing recognition arrangements to be brought within the new overseas recognition regime, where doing so does not materially change the legal effect. The minister will wish to respond to. My noble friend, Lady Noakes, concerns about process, particularly given her position as chair of the committee. My own view is that courtesy is a good principle.
Lady. Lawler mentioned the amendment in the name of Lord Holmes, which is not here, of course, to speak to. And he is seeking to encourage cross-border cooperation, particularly for digital. I have to say I'll take some convincing that this amendment is proportionate, but I do look forward to a fuller discussion on these digital issues on Wednesday, when I think we've got a group of amendments and the sort of considerations behind his amendment are probably more relevant to that discussion. In any event.
Finally, the overseas recognition regime could be a useful and important part of the UK's financial services framework. But if it is to command confidence, it must be supported by regulatory expertise and parliamentary scrutiny. And for that reason, I do hope the Minister will engage constructively with the amendments in this group.
19:03
Speaker 4
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Speaker 4
My Lords, first like to acknowledge and thank you for the warm regards, the fact that this is the most attractive way to spend my birthday probably tells you something about how my life has changed in the last 11 months. But, um, um, now turning to clause 37, um and why it should stand as part of the bill, I'll then cover two amendments, including the government's amendment. Um, the UK is a truly global services hub with the largest global net exporter of financial services, totalling £103 billion in 2025, representing half of the UK services export surplus, excluding the US, UK financial services exports in 2025 were greater than the rest of the G7 combined.
Different countries have different rules for the same financial activities. As such, many countries have frameworks to recognise where rules are comparable to their own. The EU has equivalence regimes and the US has comparability determinations. For example, at UK, EU exit, the UK assimilated more than 270 EU equivalence decisions across 40 EU equivalence regimes. However, the UK has no way to grant these kinds of decisions except where we have inherited that power from the EU. In new areas of regulation such as stablecoins, for example, Treasury currently has no ability to create recognition regimes or nor consequently to recognise overseas jurisdictions where they have high standards and our firms want to do business.
Clause 37 enables Treasury to make new overseas recognition regimes. Creating these regimes is done through the affirmative procedure, meaning no regime can be created without part. Debate in Parliament designation under those regimes must then be made by regulations, with the evidence base clearly set out before Parliament. Each time a number of the noble Lords, including noble Baroness Noakes and Lord Vaulks, asked me how they have regards. The government must consider will function and why they've been drafted in such a way that they are.
I've been told that this is a complex piece of drafting and so we'll write to them to explain. They have regards in more detail and why the government has taken. The approach has done. Turning now to the amendments. Um, there are established processes in place that support the creation and operation of recognition regimes. Let me assure the noble Lords that the points raised in amendments one, 52 and 153 speak to matters for which current processes do already exist, and which support a clear and balanced scrutiny of these regimes.
The Treasury will always, as part of its designation process, summarise the evidence that has received and considered in relation to other jurisdictions. Their regulatory frameworks. This includes advice received from the UK financial service regulators Treasury. Published in July of last year, guidance on overseas recognition and a memorandum of understanding with the regulators detailing the role of regulatory advice in the decision making process for regulation designations. Within these documents, Treasury has already committed to seeking advice from the relevant regulators in all but exceptional circumstances, and turning to amendment 164 D, tabled by the noble Lord, Lord Holmes, and spoken to by others, the government recognises the potential benefits of working towards recognition arrangements on crypto assets with compatible jurisdiction and as I have mentioned, this supports the case for Treasury to have powers in clause 37 of this bill.
However, the government has the tools it needs to be able to respond appropriately to international regulatory developments to facilitate the UK's access to global markets and vice versa, while ensures ensuring that consumers are adequately protected. These tools include the powers in clause 37, alongside the existing power to create mutual recognition agreements, which was introduced in the Financial Services Market Act 2023. I would reassure the Noble Lords that this does not reflect any desire on the part of the government to be insular in the development of crypto asset regulation.
The UK continues to play an active role in the development of international standards for crypto assets, including through the Financial Stability Board and the work of the International Organization of Securities Commissions. The government also remains committed to working closely with international partners through Multilateral Forum on Our Approach to Crypto Asset. I turn now to the amendment in my own name. When the bill gains royal assent, there will already exist a number of overseas recognition regimes created using existing powers inherited from the EU. This amendment is a transitional provision which enables the Treasury to restate the existing regimes within the new overseas Recognition Regime framework.
The power is narrowly framed. It can only be applied to regulations listed in a specific schedule to which the overseas recognition regimes are currently added. Once they are in force, and it can only be used to create a substantially the same effect as the existing regulations. This is essentially a tidying up exercise. Without this amendment. Overseas recognition regimes create created before and after clause 37 comes into effect will be rooted in different legislation. As my noble friend Lord Wilson have said, parliamentary counsel have agreed that this amendment is minor and technical.
However, I understand the noble lady notes object to this government amendment and so I will not move it. My Lord, I thank you for this debate and I hope they have explained the government's intentions. I ask the noble Baroness to withdraw her amendment.
Different countries have different rules for the same financial activities. As such, many countries have frameworks to recognise where rules are comparable to their own. The EU has equivalence regimes and the US has comparability determinations. For example, at UK, EU exit, the UK assimilated more than 270 EU equivalence decisions across 40 EU equivalence regimes. However, the UK has no way to grant these kinds of decisions except where we have inherited that power from the EU. In new areas of regulation such as stablecoins, for example, Treasury currently has no ability to create recognition regimes or nor consequently to recognise overseas jurisdictions where they have high standards and our firms want to do business.
Clause 37 enables Treasury to make new overseas recognition regimes. Creating these regimes is done through the affirmative procedure, meaning no regime can be created without part. Debate in Parliament designation under those regimes must then be made by regulations, with the evidence base clearly set out before Parliament. Each time a number of the noble Lords, including noble Baroness Noakes and Lord Vaulks, asked me how they have regards. The government must consider will function and why they've been drafted in such a way that they are.
I've been told that this is a complex piece of drafting and so we'll write to them to explain. They have regards in more detail and why the government has taken. The approach has done. Turning now to the amendments. Um, there are established processes in place that support the creation and operation of recognition regimes. Let me assure the noble Lords that the points raised in amendments one, 52 and 153 speak to matters for which current processes do already exist, and which support a clear and balanced scrutiny of these regimes.
The Treasury will always, as part of its designation process, summarise the evidence that has received and considered in relation to other jurisdictions. Their regulatory frameworks. This includes advice received from the UK financial service regulators Treasury. Published in July of last year, guidance on overseas recognition and a memorandum of understanding with the regulators detailing the role of regulatory advice in the decision making process for regulation designations. Within these documents, Treasury has already committed to seeking advice from the relevant regulators in all but exceptional circumstances, and turning to amendment 164 D, tabled by the noble Lord, Lord Holmes, and spoken to by others, the government recognises the potential benefits of working towards recognition arrangements on crypto assets with compatible jurisdiction and as I have mentioned, this supports the case for Treasury to have powers in clause 37 of this bill.
However, the government has the tools it needs to be able to respond appropriately to international regulatory developments to facilitate the UK's access to global markets and vice versa, while ensures ensuring that consumers are adequately protected. These tools include the powers in clause 37, alongside the existing power to create mutual recognition agreements, which was introduced in the Financial Services Market Act 2023. I would reassure the Noble Lords that this does not reflect any desire on the part of the government to be insular in the development of crypto asset regulation.
The UK continues to play an active role in the development of international standards for crypto assets, including through the Financial Stability Board and the work of the International Organization of Securities Commissions. The government also remains committed to working closely with international partners through Multilateral Forum on Our Approach to Crypto Asset. I turn now to the amendment in my own name. When the bill gains royal assent, there will already exist a number of overseas recognition regimes created using existing powers inherited from the EU. This amendment is a transitional provision which enables the Treasury to restate the existing regimes within the new overseas Recognition Regime framework.
The power is narrowly framed. It can only be applied to regulations listed in a specific schedule to which the overseas recognition regimes are currently added. Once they are in force, and it can only be used to create a substantially the same effect as the existing regulations. This is essentially a tidying up exercise. Without this amendment. Overseas recognition regimes create created before and after clause 37 comes into effect will be rooted in different legislation. As my noble friend Lord Wilson have said, parliamentary counsel have agreed that this amendment is minor and technical.
However, I understand the noble lady notes object to this government amendment and so I will not move it. My Lord, I thank you for this debate and I hope they have explained the government's intentions. I ask the noble Baroness to withdraw her amendment.
19:08
19:09
19:09
Speaker 8
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Speaker 8
Before I decide what to do with my amendment, could I ask the minister, because I may not have been paying attention if he had explained why there is a requirement to consult the regulators for powers under 408 A, but not under 408 B. I think the noble Lord, the minister is stacking up rather a lot of letters that that need to be written. Um, can I thank all noble Lords who have spoken in this debate?Um it does. Raise very important issues.
Um the minister said that in relation to consultation the Treasury would summarize the evidence. My Lords, that is not the same as being transparent about the advice from regulators. And while I'm quite happy for the Treasury to to summarize most other evidence on any consultation it undertakes, I think the regulators are a very special case here. However, I will read Hansard, um, and consider what, if anything, I will do with this topic before report and before sitting down. I too would like to add my birthday wishes to the noble Lord, the minister.
I beg leave to withdraw. Is it your lordships pleasure that this amendment be withdrawn?It is by leave withdrawn. Amendment 153. Baroness Noakes, amendment 154. Not moved. Uh, the question is that clause 37 stand part of the bill, as many as are of that opinion will say content the contrary, not content. The question is that clause 38 stand part of the bill. As many as are of that opinion will say content.
The contrary not content. The contents have it. That concludes the business of the Committee for today, and the Committee stands adjourned.
Um the minister said that in relation to consultation the Treasury would summarize the evidence. My Lords, that is not the same as being transparent about the advice from regulators. And while I'm quite happy for the Treasury to to summarize most other evidence on any consultation it undertakes, I think the regulators are a very special case here. However, I will read Hansard, um, and consider what, if anything, I will do with this topic before report and before sitting down. I too would like to add my birthday wishes to the noble Lord, the minister.
I beg leave to withdraw. Is it your lordships pleasure that this amendment be withdrawn?It is by leave withdrawn. Amendment 153. Baroness Noakes, amendment 154. Not moved. Uh, the question is that clause 37 stand part of the bill, as many as are of that opinion will say content the contrary, not content. The question is that clause 38 stand part of the bill. As many as are of that opinion will say content.
The contrary not content. The contents have it. That concludes the business of the Committee for today, and the Committee stands adjourned.