Financial Services and Markets Bill

Debate between Baroness Noakes and Lord Sharkey

Committee stage
Monday 13th March 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.

I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.

Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.

I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.

My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.

In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.

I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.

Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.

I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.

Financial Services and Markets Bill

Debate between Baroness Noakes and Lord Sharkey

Committee stage
Monday 20th February 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.

I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.

I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.

I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.

Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.

[Lord Sharkey (LD)]

My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.

There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.

Financial Services and Markets Bill

Debate between Baroness Noakes and Lord Sharkey

Committee stage
Wednesday 25th January 2023 Grand Committee

[Lord Sharkey (LD)]

My Lords, the purpose of the amendment is to allow debate on the possible means of parliamentary scrutiny of the many legislative changes that will be brought about by the implementation of Clause 1 and Schedule 1.

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

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

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

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

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

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

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

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

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

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

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

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

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

[Baroness Noakes (Con)]

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

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

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

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

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

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