Financial Services and Markets Bill
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Baroness Penn
That the amendments for the Report stage be marshalled and considered in the following order: Clause 1, Schedule 1, Clause 2, Schedule 2, Clauses 3 to 8, Schedule 3, Clauses 9 to 13, Schedule 4, Clauses 14 to 20, Schedule 5, Clause 21, Schedule 6, Clauses 22 to 48, Schedule 7, Clauses 49 to 51, Schedule 8, Clause 52, Schedule 9, Clause 53, Schedule 10, Clause 54, Schedule 11, Clause 55, Schedules 12 and 13, Clauses 56 to 69, Schedule 14, Clauses 70 to 79, Title.
Insider Dealing (Securities and Regulated Markets) Order 2023
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Baroness Penn
That the draft Order laid before the House on 17 April be approved. Considered in Grand Committee on 16 May.
UK-EU Relationship in Financial Services (European Affairs Committee Report)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I thank the noble Earl, Lord Kinnoull, for securing this important debate on the report from the European Affairs Committee, which he so expertly chairs. I am grateful to all noble Lords for their contributions. Once again, I welcome the noble Lord, Lord Livermore, to his place on the Labour Front Bench.
I welcome the committee’s report on the UK-EU relationship in financial services, particularly its encouraging assessment of the UK financial services sector and the sector’s performance following Brexit. I also welcome the committee’s praise for the Government’s financial services agenda and reforms, including the future regulatory framework review.
Earlier this year, the Prime Minister welcomed President von der Leyen to Windsor to announce the Windsor Framework, achieving a decisive breakthrough. As the Prime Minister said, the UK and the EU may have differed in the past, but the two are allies, trading partners and friends. The Windsor Framework agreement restores the free flow of trade from Great Britain to Northern Ireland, protects Northern Ireland’s place in the Union, and safeguards sovereignty for the people of Northern Ireland. The Government also welcomed agreement at the Partnership Council on 24 March that we will shortly be able to move forward and sign the memorandum of understanding on regulatory co-operation in financial services and operationalise the forum.
I recognise that many noble Lords, including the noble Earl, Lord Kinnoull, my noble friend Lord Trenchard, the noble Lords, Lord Livermore and Lord Liddell, and the noble Baroness, Lady Kramer, asked for further detail on when that MoU would be signed. The Commission has today adopted the MoU and transferred it to the council for political endorsement, and we welcome this positive news. As we have previously said, the Treasury stands ready to sign the MoU, and we look forward to operationalising the forum as soon as possible this year.
I cannot comment any further on the EU process, but welcome movement has been seen today. This reflects the fact that the UK and EU’s financial markets are deeply interconnected, and building a constructive relationship is of mutual benefit. In the meantime, we continue to closely engage with EU authorities bilaterally and through multilateral fora. Indeed, the Chancellor and the Economic Secretary to the Treasury will meet Commissioner McGuinness next week.
The noble Earl, Lord Kinnoull, asked how the Government intend to support the financial services sector outside London, and the noble Lord, Lord Livermore, asked what we are doing to boost the competitiveness of the sector. The noble Earl is right that financial services are vital to the whole UK economy; they are important in not just London and the south-east or Edinburgh and Scotland. The Government’s vision for financial services will drive growth across the country. It is one for a sector that is open, sustainable, technologically advanced and globally competitive, and which acts in the interests of communities across the UK.
The Government are committed to delivering the Edinburgh reforms, which will take forward this ambition for the UK and ensure that the sector benefits from dynamic and proportionate regulation, that consumers benefit from high-quality services with appropriate protection and that the sector embraces the latest technology. This sector-wide plan will have benefits across the UK, both from direct jobs in financial services and through the role the sector has to allocate capital to grow our businesses, develop new technology and tackle climate change.
The noble Baroness, Lady Kramer, asked where the UK is relevant to other EU financial services centres, which picks up on this point about competitiveness. I do not have the figures that she asked for, but I can tell her that the UK is consistently ranked first or second among the world’s leading financial centres.
The noble Lord, Lord Livermore, asked about exports, and I have figures closer to those that the noble Baroness asked for on that subject. The UK is the world’s largest net financial exporter, slightly larger than the US and significantly ahead of the EU as a whole. The UK’s financial exports totalled $87.2 billion in 2021; the top five countries in the EU totalled $53.7 billion in the same year.
The noble Lord, Lord Livermore, asked what more we can do to promote financial services exports, and this is a focus for the UK. We are about to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership—CPTPP—which adds to the trade agreements with Australia, Japan and New Zealand, as well as the digital economy agreements with Ukraine and Singapore. The UK is looking to add to this list by making progress on negotiations to update our existing FTAs with Canada and Mexico, plus agreeing new FTAs with India and the Gulf Cooperation Council.
Several noble Lords, including the noble Earl, Lord Kinnoull, and my noble friend Lord Holmes, asked about the Swiss negotiations. A huge amount of progress has been made in that area. Given the ambition and novelty of the agreement, there are some complex and highly technical issues to work through. It is important that we get those right, given that this agreement is intended to serve as a new blueprint for financial services trade. We continue to work at pace, and we still aim to conclude those negotiations by the end of the summer.
The noble Earl, Lord Kinnoull, also asked about the publication of the Government’s updated green finance strategy. It was published on 31 March alongside a raft of documents setting out our vision for energy security and to tackle climate change more generally. It set out a vision for how the UK can continue to be a leader in green finance. A recent report reaffirmed our position as the number one global centre for green finance, but we cannot be complacent.
The noble Earl also asked about the State of the Sector report published last year. I confirm we are committed to publishing a second report this year, part of which will cover the opportunities the UK has to strengthen its position as a global financial services hub. That will reflect the Government’s ongoing commitment to this being an open market. I hope that also reassures my noble friend Lord Hannan about our approach to maintaining openness in this sector.
The noble Lord, Lord Liddle, was a little sceptical about the value of divergence, having left the EU. I will agree with him on one point: there is no value in pursuing divergence for divergence’s sake. But, if I may highlight just one example that other noble Lords have touched on, Solvency II reforms in the UK could unlock over £100 billion from UK insurers for productive investment, while maintaining high standards of policyholder protection. I believe that there are significant opportunities for us in charting our own way, having left the EU.
I believe that the noble Lord, Lord Liddle, also expressed some scepticism about the regulator’s new objective on long-term growth and competitiveness. I know that I heard that from the noble Baroness, Lady Kramer. I reassure them both that there is a clear hierarchy in the regulator’s objectives, which puts financial stability ahead of the new growth and competitiveness objective. I also say to my noble friend Lord Trenchard that we have included that new objective for the regulators because we believe that there are opportunities for smarter regulation to both maintain higher standards and drive growth, and that the inclusion of this objective will help to deliver that. I must disagree with my noble friend, however, about returning to the previous structure of financial services regulation. The changes that we made with the establishment of the PRA and FCA were not imposed by Brussels; it was a structure that the UK assessed as best preventing future crises. We continue to believe that it is appropriate in today’s world.
My noble friend Lord Holmes focused specifically on fintech. I was going to quote some statistics on the success of the UK’s fintech sector but the noble Lord, Lord Livermore, did that for me. However, I share my noble friend’s expectations about the promise of the FMI sandbox that is provided for in the Financial Services and Markets Bill. My noble friend also raised crypto assets; the Government have set out their approach towards crypto regulation in our recent consultation, and we will reflect carefully on the responses to that. Our approach is driven by embracing the opportunities of the technology that it represents while also protecting consumers against the risk. My noble friend talked of rational optimism and having the right regulatory framework; I believe that is a good way to describe the Government’s approach.
The noble Lord, Lord Bilimoria, and my noble friends Lord Hannan and Lord Holmes all raised talent and skills as a key component for our financial services sector. We recognise that maintaining a deep talent pool is integral to the UK’s continued success as a financial centre. The Government are committed to ensuring that the UK attracts and retains top talent. Since 2021, we have announced a set of targeted high-skilled visa reforms. These have included the global talent route, global business mobility, high potential individual, scale-up worker and reformed innovator visas. None the less, we continue to listen to the views of the sector. The Financial Services Skills Commission is a key industry body, working to take forward collective action to address the needs of the sector, whether it be in identifying and addressing emerging skills gaps, widening access to talent across the sector or promoting diversity and inclusion across it.
Many noble Lords also touched upon the debates that we have been having on the Financial Services and Markets Bill. I do not wish to repeat all of those debates today, as we will debate the Bill further when we reach Report. I should correct something I said earlier, when I misspoke: the green finance strategy was published on 30 March, not 31 March. I would not want to mislead those who might be googling the wrong date.
To return to the Bill, I once again reiterate the Government’s view that effective parliamentary scrutiny is valuable for consumers, firms and regulators, and that the new powers we are giving to regulators through the Bill should be matched by strengthened scrutiny and accountability of the regulators. There are provisions in the Bill to strengthen that scrutiny and accountability, and we are reflecting carefully on our discussions in Committee about how we can further build on those ahead of Report.
The noble Lord, Lord Desai, asked when we will finally get Brexit done. When it comes to financial services, we have onshored the previous EU regulations, but he is right that moving a set of laws from the EU to the UK statute book brings no benefit in and of itself. The Financial Services and Markets Bill, which is currently before this House—I look forward to it completing its passage—is the basis on which we will take forward a significant programme of reforms that we can implement once it is in place. The benefits of those reforms will not be felt overnight, and their scale means that we will need to phase their implementation over several years. However, that Bill and the reforms it will allow us to deliver are the basis on which we will build our vision for the future of financial services in the UK: a sector that is open, sustainable, technologically advanced and globally competitive.
Insider Dealing (Securities and Regulated Markets) Order 2023
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Baroness Penn
That the Grand Committee do consider the Insider Dealing (Securities and Regulated Markets) Order 2023.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this statutory instrument updates the UK’s criminal insider dealing regime to ensure that all market participants are held to high standards and that there are meaningful consequences for those who break the law. As noble Lords will be aware, insider dealing is a form of market abuse. In broad terms, it is where an individual trades in a financial instrument based on material, non-public information about a company. Insider dealing compromises the integrity and orderly functioning of financial markets. For this reason, it is both a criminal and civil offence in the UK.
The Financial Conduct Authority is responsible for identifying and taking enforcement action against cases of insider dealing. The FCA can impose a variety of criminal and regulatory sanctions under the criminal and civil market abuse regimes. The intention of this framework is to enable the FCA to take action against market abuse in a way that is commensurate to the seriousness and market impact of the abusive behaviour.
The legislation that defines the current criminal offence for insider dealing was first introduced in 1993. The Criminal Justice Act 1993 lists the securities and regulated markets to which the insider dealing offence applies. However, financial markets have evolved since the lists of instruments and regulated markets were last updated. As a result, these lists are narrower than the more recently updated civil market abuse regime.
Baroness Chapman of Darlington (Lab)
We agree with the Minister’s assertion that there should be serious consequences for those who break the law. We also agree with the comments from the Liberal Democrat Benches and echo the comments about the seriousness of insider dealing. We share the curiosity shown in the other place when this instrument was considered about the length of time it has taken to bring in this measure, given we understand that it came about as a result of a review that took place in 2015. I am not asking this to be facetious, but what assessment have the Government made of the number of criminal offences that would have been caught had this measure been in place sooner, which were treated under the civil regime because this instrument had not yet been brought? We want to highlight the consequences of leaving things quite this late, because we are concerned. That underscores our support for this measure. The Government are right to address this gap between the two regimes and we support this instrument.
Baroness Penn (Con)
My Lords, I thank both noble Lords for their support for this statutory instrument.
On the time it has taken to deliver this measure and the potential impact in the meantime of not having the criminal regime and the civil regime aligned, it is important to note that since the Fair and Effective Markets Review was published, considerable work has been undertaken to modernise the UK’s market abuse legislation. For example, the civil regime for market abuse was updated in 2016 by the EU market abuse regulation and the Government and UK regulators have implemented the majority of the recommendations from the Fair and Effective Markets Review, including making changes in the Financial Services Act 2021 to increase the maximum sentence for criminal market abuse from seven to 10 years, bringing it into line with comparable economic crimes such as fraud and bribery. The Government have also recently completed a broader review of the criminal market abuse regime as part of the 2019 to 2022 economic crime plan. While this measure has taken longer to implement, there has been other action in this space in the meantime, including delivering on other recommendations from that review.
On the impact of the length of time in which the scope of the criminal offences has been different from that of the civil offences, it is important to note that the FCA has a number of tools available to tackle market abuse, of which the criminal insider dealing offence is only one. In addition to prosecutions under the criminal regime, between 2013 and 2022 the FCA has had 36 regulatory outcomes relating to market abuse, with regulatory fines totalling more than £70 million in that period.
The Government do not have data on the number of criminal prosecutions that have not been pursued due to the difference in the scope of the regimes. The FCA does not routinely record and track cases that it cannot take forward. This includes cases taken forward under the civil regime that could have resulted in a criminal prosecution with the changes made by this SI. Moreover, it is important to remember that there are a number of reasons why the FCA may choose to pursue a civil rather than a criminal prosecution other than the scope of the two regimes. For example, the FCA will consider the severity of the offence in question and whether the evidence meets the higher legal threshold needed to secure a criminal conviction.
It is not possible to say with certainty whether the FCA’s decision not to pursue criminal proceedings in a particular case was due to the issues that this statutory instrument addresses or to other factors, and we do not believe that attempting to determine that retrospectively would be a good use of government legal resources. It is a perfectly legitimate question to ask but, given that other mechanisms were available to the FCA to tackle market abuse under the civil regime—and it has also continued to bring prosecutions under the criminal regime—we can be reassured that it has been able to take action in this period. The Government are confident that the FCA has a strong track record of identifying, investigating and prosecuting insider dealing.
The noble Lord, Lord Sharkey, asked why we include specific US and Swiss exchanges and why they are not covered under the more general definitions that have been used in this SI to avoid the need to update this list again as specific named instruments change. My understanding is that for the more general definitions there are commonly understood definitions used in the UK and EU markets that this can work for, but that when you are looking at other exchanges further afield outside that scope, there remains a need to name those trading venues. That is the difference between continuing to need to name some trading venues versus going for the more general definition-based approach that this SI has done.
As to why we have chosen to include specific US and Swiss exchanges in addition to the UK and EU exchanges that will be covered by this measure, the FCA has seen a persistent trend of organised crime groups recruiting UK insiders to disclose inside information relating to securities traded on those markets. While of course this abusive behaviour is also possible for other third-country venues, this SI includes the third-country markets where the FCA has observed the greatest risk of harm. With regard to other third-country trading venues, and indeed in respect of these ones too, you would expect the home regulator to take action to tackle market abuse in those cases.
I hope that with those remarks I have answered the questions put forward today.
Baroness Penn (Con)
I can write to the noble Lord on that. It is probably the standard implementation period for a change of this nature. As I said in answering on the assessment of the FCA’s tools and track record on being able to tackle market abuse before this update was made, we do not think that will have a substantial impact on the ability to tackle these issues in that implementation period. I think that that addresses the point but, if there is anything further to add to that, I shall also write to the noble Lord.
Energy Profits Levy
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Lord McNicol of West Kilbride
To ask His Majesty’s Government what assessment they have made of the impact of the Energy Profits Levy on energy companies.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
The energy profits levy was introduced to respond to extraordinary profits in the oil and gas sector and includes an investment allowance to encourage companies to reinvest their profits in the UK. It has raised £2.8 billion to date and is expected to raise almost £26 billion by March 2028, in addition to around £25 billion from the permanent regime over the same period.
Lord McNicol of West Kilbride (Lab)
I thank the Minister for her response. We have all seen the eye-watering profits of the oil and gas companies. The energy profits levy does not treat all companies the same. Many of the largest companies pay considerably less, with their profits and extraction being largely outside the UK. This is not the same for many of the smaller domestic UK producers. Moreso, the EPL has a more favourable capital relief than the electricity generator levy. How can the Government justify a levy that gives favourable treatment to oil and gas companies over renewable developers?
Baroness Penn (Con)
On the noble Lord’s first point, he is right that the energy profits levy is applied to profits made in the UK or on the UK continental shelf. That is in line with other profit-based taxes on companies that operate in the UK and overseas. On the difference between the energy profits levy and the electricity generator levy, they are structured in completely different ways. The headline rates of those two taxes are also completely different. We have different programmes in place to ensure that we incentivise continuing investment in our renewables, which is why we have such a great track record on delivering renewable energy in the UK.
Baroness Sheehan (LD)
My Lords, one of the peculiarities between the energy profits levy and the electricity generator levy is the huge difference in tax relief—80% and 0% respectively, as the noble Lord, Lord McNicol, alluded to. So why this preferential treatment for the oil and gas sector? It is not as though we need new sources of fossil fuels for domestic use—or are the IEA, the IPCC, the vast bulk of UK scientists and the Government’s own net zero tsar, Chris Skidmore, wrong on this?
Baroness Penn (Con)
My Lords, I disagree with the noble Baroness that there is preferential treatment for the oil and gas sector, which faces a far higher tax rate based on the extraordinary profits it is benefiting from. That is entirely appropriate. On the investment incentive, we will continue to need oil and gas as we transition to net zero. We need to encourage investment into UK oil and gas fields to help meet that demand, and that is something the Government will continue to do.
Lord Browne of Ladyton (Lab)
My Lords, in November 2022 the current Chancellor estimated that the levy would raise £40 billion over six years. Six months later, the Treasury’s estimate seems to have gone down to £28 billion. What is responsible for that? Is it by any chance the OBR’s estimate of the increase in oil and gas expenditure by these oil and gas companies, rather than renewables expenditure, which they released alongside the Spring Budget, and the consequential forecast increase in tax relief on those sectors’ windfall tax bills?
Baroness Penn (Con)
My Lords, a number of factors affect predicted revenues from the EPL, not least the high degree of volatility that we have seen in commodity prices. I say to the noble Lord that, if we do not have investment allowances in place and if we do not invest in the future of this industry in the UK, there will be less revenue in future coming from UK oil and gas fields to contribute to the Exchequer and our priorities in future.
Lord Kamall (Con)
My Lords, following that answer by the Minister, I completely agree that we still need oil and gas as we transition to net zero. We cannot have a modern digital economy with high-speed electric rail running on solar and wind only, as the technology stands. However, the issue with the levy is that there are companies that are now saying they will pull investment from the North Sea. So how do we encourage that investment, given that we need it in the transition to net zero?
Baroness Penn (Con)
My noble friend is right. That is why the Government have always sought to deliver a balance between a fair return for the UK from the use of its resources and providing the right conditions to attract investment in the North Sea. That is why we have the investment allowance in the EPL that provides an additional incentive for companies to reinvest profits in the UK. On the point about environmental impact, the level of tax relief available for upstream decarbonisation expenditure was increased from January this year to incentivise companies for the cleaner production of oil and gas.
Lord Livermore (Lab)
My Lords, the Government’s energy levy leaves billions in excess profits on the table while many households struggle through an unprecedented cost of living crisis. Only last week BP announced quarterly profits of over £6 billion while Shell recorded a quarterly profit increase of 22%, handing a further £5 billion to shareholders and now allocating more to dividend payments alone than to its entire investment in renewables. Given that, and with households and small businesses facing sky-high energy bills, how well does the Minister think the current levy is working?
Baroness Penn (Con)
I welcome the noble Lord to the Front Bench. He referred to figures that are the global profits of companies. As I have said to his noble friend, the UK applies its windfall tax to UK profits, and I think that is the Labour proposal also. Abolishing the investment allowance would be counter-productive. As I have said, the UK is still reliant on gas for its energy supply. Reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower future tax revenue—tax revenue that we have used to put in place unprecedented cost of living support to families, which is still going out to households at the moment, so that those who are worried about their bills who are on low incomes and means-tested benefits can look forward to more support coming from the Government over the next year.
Lord Woodley (Lab)
My Lords, while I am delighted that the Government took Labour’s advice to introduce the windfall tax that has been mentioned, there is no doubt that what is happening now, with the profiteering coming from these energy giants, is insufficient and is just not working. In fact, I would go as far as to say that it is almost peanuts when you look at the profits that were announced last week. So when will the Government fight back against “greedflation” and bring in a windfall tax with real teeth in it—something similar to what is happening across the rest of Europe at the moment?
Baroness Penn (Con)
I do not know whether referring to over £50 billion of tax take as “peanuts” reflects the broader Labour Party’s attitude towards public finances, but the Government consider that the measures we have put in place are working well. We need to balance the rightful approach of taxing the unexpected profits of these companies while ensuring that we have investment incentives in place that protect UK jobs and UK energy security.
Lord McLoughlin (Con)
Does my noble friend have any figures for the amount of money when profits are made that goes into pension funds and therefore to people who are earning pensions?
Baroness Penn (Con)
My noble friend makes an important point. Investors in these companies can come from all sources, including pension funds. It is right and proper that they think about the return they get from their investments when making those decisions.
Baroness Hayman (CB)
My Lords, I declare my interests. May I take the Minister back to her fundamental argument that the electricity generator levy, which applies to renewable energy, is completely different from the energy profits levy? She has argued strongly that the latter needs the additional investment allowance to encourage investment in oil and gas, but somehow the electricity generator levy does not need that additional investment incentive. Is she absolutely sure that that is true and is she in any way concerned about the report that we may lose some offshore wind projects because of it?
Baroness Penn (Con)
The electricity generator levy reflects a historic approach to how we pay for our electricity. New electricity contracts are often done, for example, under the contracts for difference process, which is not subject to this levy. We have also put in place a wide range of other measures to support investment in renewables. That is why we have such a great track record and why I have every faith that we will meet our stretching targets on decarbonisation in future.
Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023
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That the draft Orders laid before the House on 27 and 29 March be approved.
Relevant document: 36th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 2 May.
Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023
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That the Grand Committee do consider the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023.
Relevant document: 36th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this Government have a clear vision for financial services—that is, for an open, sustainable and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens by creating jobs, supporting businesses and powering growth across all four nations of the UK. The two statutory instruments that we are debating today complement some of the measures that are being delivered through the Financial Services and Markets Bill, which is currently before this House. I note that both statutory instruments were raised as instruments of interest by the Secondary Legislation Scrutiny Committee.
I turn first to the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023. In recent years, multiple reports from the Cryptoasset Taskforce and the Financial Conduct Authority have identified that misleading advertising and a lack of suitable information are key consumer protection issues in crypto asset markets. This statutory instrument seeks to address those issues by ensuring that crypto asset promotions are held to the same standards as broader financial services products carrying similar risk.
To do this, the SI expands the scope of the financial promotion restriction provided by the Financial Services and Markets Act 2000 by amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to include financial promotions in respect of in-scope crypto assets. This will mean that businesses that intend to make qualifying crypto asset promotions would need to have their promotions approved by an authorised person under the Financial Services and Markets Act if they are not FSMA-authorised persons or exempt.
At present, most crypto firms do not hold such FSMA authorisation in respect of their crypto activities under existing regulations, so the requirement to be authorised means that most crypto firms will not be able to communicate their own promotions, unlike other financial services firms. As set out in the February 2023 policy statement, there is also evidence of a lack of suitable FSMA-authorised persons in the market willing and able to approve crypto promotions.
In practice, the net effect of these issues would be to restrict significantly or amount to an effective ban on crypto asset financial promotions because there are unlikely to be FSMA-authorised persons willing to approve the promotions of unauthorised firms. To avoid the unintended consequence of an effective ban on crypto asset promotions, the SI introduces an exemption for crypto asset firms registered with the FCA under its anti-money laundering regime. This will enable qualifying firms to communicate their own crypto asset financial promotions without seeking approval from a FSMA-authorised person.
Crucially, the SI confers powers to the FCA to ensure that AML-registered crypto asset businesses relying on this exemption will still be subject to the same financial promotion rules as FSMA-authorised persons communicating equivalent promotions. Firms using this exemption will not be able to approve others’ financial promotions or to communicate their own financial promotions in relation to other controlled investments.
The Government intend this AML exemption to be temporary in nature. It will be in place only until the proposed broader regulatory regime for crypto assets is established. The Government are preparing to bring stablecoins used for payment into the scope of regulation and are also consulting further on their regulatory approach to unbacked crypto assets.
When in force, the SI and the FCA rules will apply to all businesses making crypto asset promotions to UK-based consumers, whether from the UK or abroad. The SI provides for a four-month implementation period, which will commence when this SI is made and on the publication of the FCA’s detailed rules subsequent to this SI. As set out in the policy statement published in February 2023, this period is intended to ensure that crypto asset firms have suitable time to understand and prepare for the financial promotions regime before it comes into force.
This SI will reduce a key risk to consumers, particularly that of consumers suffering unexpected or large losses without regulatory protection as a result of buying crypto asset products while being unaware of the associated risks. This complements and forms part of our wider, proportionate approach to regulation, harnessing the advantages of crypto technologies while mitigating the most significant risks.
Turning to the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023, this second instrument reduces the burdens that firms face when determining their trading in commodity derivatives and emission allowances by requiring them to be authorised as an investment firm. Effective commodities markets regulation is key to ensuring that market speculation does not lead to economic harm. The regulator should be able effectively to regulate and supervise firms that trade commodity derivatives for investment purposes.
As well as financial services firms, a number of corporates trade on commodity markets to protect their business from market fluctuations. In regulation, this is referred to as trading that is ancillary to the main business. The regime that we have inherited from the EU uses something called the ancillary activities test to determine whether the activities of a firm trading commodity derivatives are primarily for investment purposes or only support the firm’s commercial business. The ancillary activities test currently requires firms to undertake complex calculations; they are also required to notify the FCA about the outcome of these calculations on an annual basis.
Taken together, this regime is overly burdensome for firms. Prior to the implementation of the ancillary activities test in EU law, the UK had a simpler test for determining whether firms were trading in commodity derivatives or emission allowances as an ancillary activity. This regime was cheaper for firms to comply with and resulted in the same outcomes as the current regime.
In 2021, as part of the wholesale markets review, the Government consulted on reverting to a simpler regime while maintaining the same regulatory outcomes. The proposal was to remove the annual notification requirement and revert to a principles-based approach. Respondents to the consultation agreed with the proposed changes, stating that the current regime was onerous and complicated. Consequently, the Government committed to bringing forward these changes when they responded to the consultation last year.
This SI delivers on that commitment by removing the annual notification requirement and omitting references to the calculations, which are no longer needed in legislation. This will pave the way for the Financial Conduct Authority to adopt a simpler and more streamlined approach to determining whether firms need to be authorised, alongside this SI. To reflect the FCA’s adoption of a simpler approach, this instrument also amends part of the regulated activities order, which exempts firms from having to perform the current calculations. As the FCA’s new approach will be based on different information, this exemption is no longer relevant.
The SI will come into force on 1 January 2025. This will ensure that industry has sufficient time to reflect on the changes that the FCA will be making and to make the necessary system changes. I understand that the FCA plans to consult on these changes later this year.
Maintaining the ancillary activities test as it currently stands would impose continuing costs on both firms and the FCA, as evidenced by feedback received through the consultation process. The changes outlined will reduce costs for firms and make the UK a more attractive place to do business, while maintaining high regulatory standards. I beg to move.
Baroness Penn (Con)
My Lords, I thank noble Lords for participating in today’s debate. I turn first to the changes to the financial promotions regime in respect of crypto assets. Several noble Lords asked about the exemption that applies to anti-money laundering regulated firms. I set out some of this in my opening speech but it is worth returning to it now. As set out in the policy statement published in February this year, the anti-money laundering exemption will exempt firms that are not FSMA-authorised but are included on the FCA’s anti-money laundering register from the requirement to have their crypto asset promotion approved by a FSMA-authorised firm. This is subject to said promotions also complying with the same rules set by the FCA for equivalent promotions made by FSMA-authorised firms. The purpose of the AML exemption is to avoid the unintended consequence of an effective ban on crypto asset financial promotions as there are not currently sufficient numbers of FSMA-authorised firms in the crypto space.
Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023
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Baroness Penn
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.
Relevant document: 36th Report from the Secondary Legislation Scrutiny Committee
Banks: Closures and Shared Banking Hubs
Baroness Penn Excerpts(2 years, 11 months ago)
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Lord Holmes of Richmond (Con)
My Lords, in begging leave to ask the Question standing in my name on the Order Paper, I declare my financial services interests as set out in the register.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government do not make assessments of bank branch networks or intervene in commercial decisions to close branches. Banks should follow FCA guidance, including considering alternative access where appropriate. One example of this is shared banking hubs. More than 50 hubs have been announced, with four now open, and the pace of delivery is expected to accelerate over the coming months. People can also access everyday banking via their local post office.
Lord Holmes of Richmond (Con)
My Lords, in the past 12 months, 847 bank branches have closed or are set to close. Four shared banking hubs have opened. Does my noble friend the Minister agree that the Government need to act to ensure local banking provision, including deposit taking as well as withdrawals and advice? They must also act to ensure acceptance of, as well as access to, cash; otherwise, what currency is cash if there is no place to spend it? Finally, will the Government consider carefully commissioning a review into access to digital financial services to ensure that everyone can benefit from all the financial innovations in that space?
Baroness Penn (Con)
My Lords, as my noble friend will know, in the Financial Services and Markets Bill, we are legislating to protect access to cash. That covers withdrawal as well as deposit services. The Government do not plan to mandate the acceptance of cash. That would be an unprecedented intervention. However, the increased access particularly to deposit services for businesses should allow those who wish to continue to accept cash to be able to do so on a more sustainable footing. My noble friend makes an interesting suggestion. The Government are working hard to ensure financial inclusion, including digital financial inclusion. I will think about his suggestion very carefully.
Baroness Kramer (LD)
My Lords, getting a smart hub still requires the voluntary participation of the banks, which is part of the reason why the pace of progress has been so slow. Will the Government consider changing the rules so that any community that meets the standards to justify a smart hub, as assessed by LINK, then has an automatic right to that hub and can overcome bank resistance?
Baroness Penn (Con)
My Lords, the Government are not considering changing the framework. As I said in response to the Question, we expect the pace of delivery to pick up. Shared banking hubs are one initiative to ensure that communities can continue to access banking. I mentioned the Post Office as being another route: 99% of personal and 95% of business banking customers can carry out their everyday banking there, with more than 11,000 branches across the UK.
Lord Kirkhope of Harrogate (Con)
My Lords, my noble friend will recollect, no doubt, an earlier Question asked by my noble friend Lord Holmes about the nature of the facilities provided by ATMs and banks, particularly for those with disabilities. Will my noble friend therefore confirm that, in the establishment of these hubs, there will be a requirement on them to be careful to provide the sorts of facilities that are suitable for people with disabilities, as the banks were starting to do?
Baroness Penn (Con)
My Lords, in taking forward this work, I am sure that that is a consideration the banks have in mind. The banking hubs came out of a pilot programme that allowed banks to test out this model to ensure that it was accessible to all their customers. Of course, they are subject to the equality duty, which also means that they need to make proper provision for those with protected characteristics.
Lord Cormack (Con)
My Lords, legal tender is legal tender. I urge my noble friend to bear in mind that the Government have the opportunity, if they wish, to mandate the use of cash—people can use it when they want. Will she also bear in mind that a lot of people now are being discouraged from writing cheques? Many people like to pay their bills with cheques. All these facilities should remain, certainly for the next two decades.
Baroness Penn (Con)
My Lords, the Government acknowledge the important role that cash still plays in many of our lives, which is why we are taking unprecedented action on protecting access to cash. As I said, ensuring that businesses have access to deposit facilities will also promote ongoing cash acceptance by businesses.
Baroness Chapman of Darlington (Lab)
I do not think my children know what a cheque is, actually. The Social Market Foundation and the Treasury Select Committee in the other place have expressed some concern about the overreliance on post offices as a stopgap. Postal staff are wonderful, but they are not trained banking specialists. Does the Minister agree that we need that trusted expertise to be available on our high streets? Does she also agree that some post offices just are not suitable for many of the requirements of face-to-face banking, especially for more vulnerable customers, as they do not provide the privacy and dignity that many bank customers need?
Baroness Penn (Con)
I agree with the noble Baroness that the Post Office can play a really important role in ensuring ongoing provision, but it should not be the only provider of services. There are other services that are more appropriately delivered in other ways, including in person, which is part of where banking hubs come in. As I have said, we hope to see the delivery of those hubs accelerated this year. It is also reassuring to hear that several banks have committed that if their branch is the last in town, it will stay open until the relevant banking hub is up and running, to ensure continuity of service.
The Lord Bishop of Durham
In my local town of Bishop Auckland, Newcastle Building Society and Darlington Building Society have moved on to the high street as banks have moved off it. Will the Minister commend building societies for their commitment to local communities and to making things accessible to them, and will she encourage further work on that?
Baroness Penn (Con)
I absolutely commend building societies and all businesses that have a commitment to local communities and are thinking about how they can make their services as accessible as possible. There are many different routes to ensuring accessibility. We should focus on the outcome for the customer and embrace the different routes that this can be delivered by.
Lord Blunkett (Lab)
My Lords, the bigger the profit, the less customer service there is. This has happened over the last decade. There are still some banks pretending that they are disabled by Covid and that is why you cannot get through on the phone, and the local branch is closed so you cannot actually talk to anyone. Will the Minister ask the banks to start putting the customer first and ensure that there are facilities available, not just at the odd hub but in local communities, which, in the past, could rely on serious, person-to-person customer service?
Baroness Penn (Con)
My Lords, a process has been put in place to allow communities to make the case through LINK for where they need access to further services, and there is a commitment that if something is deemed necessary, it will be implemented. The noble Lord is right that it is essential that the interests of consumers are properly considered in all areas of financial services. There is the new consumer duty, which is due to be implemented later this year and will take forward some of his suggestions.
Lord Herbert of South Downs (Con)
My Lords, in contrast to my noble friend Lord Cormack, I do not know what a cheque is; I thought it was something one received in a restaurant in the United States. I do not carry cash and, in common with millions of people, I pay using contactless technology. Of course, some still need cash, including small businesses, but, as my noble friend says, is not the Post Office network a ready-made, available network for cash, which almost every business can use and is guaranteed in terms of proximity?
Baroness Penn (Con)
My noble friend is right about the breadth of the Post Office network, and I have talked about the high percentages of people who can access their everyday banking services through it. It is also geographically widespread; 93% of the UK’s population live within one mile of a post office and 99.7% within three miles of their nearest post office. There are other services that people need to be able to access, which is why it is important that we encourage banks to continue to innovate so that people can access the services in the way that is most appropriate for them.
Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023
Baroness Penn Excerpts(2 years, 11 months ago)
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Baroness Penn
That the Order laid before the House on 13 March be approved.
Relevant document: 35th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 19 April.