Financial Services and Markets Bill [HL]

Debate between Lord Altrincham and Baroness Bowles of Berkhamsted

Report stage
Wednesday 9th September 2026 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interests as chair of the ownership dividend inquiry into employee ownership and as director of Valloop Holdings Ltd.

Amendments 63 and 66 address a structural flaw in financing employee ownership, co-operative and mutual transitions—a problem sharpened by recent tax changes and incoming Basel prudential rules. Amendment 64 concerns the systemic misuse of Section 166 investigations. In the interests of time, I have not split this rather diverse group. Amendments 63 and 66 would not mandate outcomes; they would simply require regulators to consider a distinct exposure class and review lending to these entities. The PRA already possesses the power to do this, just as it does for infrastructure, but this asset class is too niche to attract regular focus without a push, so this is my push.

The Government’s manifesto commits to doubling the co-operative and mutual sector. Yet reducing capital gains tax relief for employee ownership trusts has already drastically reduced conversions. Basel 3.1 compounds the damage. Removing the SME supporting factor increases risk weights under the standardised approach used by challenger banks—the very lenders willing to finance these transactions. The large IRB banks could theoretically model lower charges but generally will not incur the cost for such a small market.

The result is clear: funding these transitions will become harder, if not impossible. Yet these business models carry lower default rates, higher survival rates and greater economic resilience. These are prudentially relevant characteristics that justify differentiated treatment, just like infrastructure, green mortgage or project finance do. Recognising this profile is cost-neutral, Basel-compatible and entirely within existing regulatory powers. Without it, I suspect that the Government’s own policy commitments will fail.

I turn to Amendment 64. Section 166 powers were designed for serious exceptional concerns, allowing regulators to appoint a skilled person—typically an expensive consulting firm—to investigate a business. As the noble Lord, Lord Altrincham, and I set out in Committee, Section 166 has suffered severe mission creep. It now seems to be used routinely, disproportionately and beyond its intended scope. These reviews impose high costs, disruption and management distraction on firms, often for issues that supervision could and should handle.

My amendment would restore the original statutory boundary. It would ensure that Section 166 is deployed only where there is material risk of detriment to regulatory outcomes and where its use is strictly proportionate, having regard to the burden on the firm and whether normal supervisory tools would suffice. The House must signal that regulators cannot delegate routine supervision to high-price firms at the expense of regulated businesses. I intend to seek the opinion of the House. I beg to move.

[Lord Altrincham (Con)]

I thank the Minister for hosting this second day of Report with such grace. I will focus my remarks on Amendment 64, to which I added my name. I am very grateful to the noble Baroness, Lady Bowles of Berkhamsted, for bringing this important issue before the House again.

“Section 166 review” is the name given to FCA investigations. These investigations were originally quite rare, but dozens are now launched every year and they are paid for by the target firms. These investigations are expensive and time-consuming. They can have a rather arbitrary regulatory purpose and are somewhat unconstrained. This regulatory power can be exercised without a statutory threshold requiring the regulator first to demonstrate that the matter is sufficiently serious and that using this particular tool is proportionate.

We hear consistently from firms that Section 166 reviews are increasingly becoming the norm rather than the exception. Without a degree of restraint or oversight, these powers may create regulatory uncertainty. Our amendment would not prevent the regulators acting where there is a serious problem, nor would it remove Section 166 from their toolkit. It would simply mean that such a costly and burdensome power is used proportionately where it is genuinely warranted. I very much hope that the Minister will accept the amendment, but if the noble Baroness, Lady Bowles, decides to test the opinion of the House as she has indicated, we will support her.

Financial Services and Markets Bill [HL]

Debate between Lord Altrincham and Baroness Bowles of Berkhamsted

Report stage
Monday 7th September 2026 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I rise briefly to support my noble friend Lord Sharkey’s amendments. Some years ago, I gave a speech on ethics in finance in connection with the international Robin Cosgrove Prize in which I outlined what I called my eggshell strategy. The premise was simple: we must force firms, boards and employees to think, not merely to comply. Worry is a warning system. The question is never “How close to the line can we sail?” but “How fair have we been?” The core issue here is exactly that: rule compliance is not a substitute for fundamental fairness. The FCA’s consumer duty expresses the same principle, but that does not mean that the FCA should become the sole repository of judging fairness. We have always had the courts as the backup, and the Financial Ombudsman Service more recently, because courts are financially inaccessible to most consumers.

The proposal to tie the ombudsman strictly to FCA rule compliance assumes that, if a firm follows the letter of a rule, it has acted fairly. The motor finance saga demonstrated the opposite. For years, firms relied on nuances in the FCA’s disclosure rules to argue that discretionary commission arrangements were permissible, but these were hidden discretionary commissions, and any reasonable person looking at those structures from a consumer’s perspective could see that variable hidden commissions, with costs levied on the consumer, were inherently unfair.

Honesty and transparency are always the best policy, irrespective of rule nuances. They are your defence. Firms must think like a consumer when considering what is fair, rather than asking their compliance officers how close to the line they can sail. If we shackle the ombudsman to technical rule compliance, we destroy its core statutory purpose to provide an independent, common-sense check where formal regulations have fallen short or lagged behind market practice.

Equally, imposing a rigid 10-year absolute long-stop creates a dangerous incentive. In long-tail products or hidden commission structures, unfairness may be actively concealed. A 10-year cut-off rewards firms that manage to keep material facts hidden for a decade, while shutting the door on consumers who discover the harm only years later. Under Section 32 of the Limitation Act, the courts do not allow time to run when material facts have been concealed. Why should the Financial Ombudsman be forced to do so? A regime that rewards concealment is not a regime that promotes fairness.

[Lord Altrincham (Con)]

My Lords, we take a different view on the Financial Ombudsman Service. Our position is that the present FOS model now requires more fundamental reform. We propose that the Treasury should publish draft legislation to replace the FOS with a new financial adjudication service, alongside a dedicated financial services chamber within the First-tier Tribunal.

We accept the need for consumers and SMEs to have access to redress that is fast, expert and affordable. Our concern is that the FOS has evolved well beyond a simple dispute resolution function. Its decisions can shape market behaviour and influence how FCA rules are understood, without the same accountability as a regulator or the legal certainty created by binding precedent.

At the heart of that concern is the fair and reasonable test. A firm may comply with the law, FCA rules and its contractual obligations but still face uncertainty about whether the ombudsman will take a different view. We simply cannot have this situation if we want a regulatory landscape that is conducive to business confidence. We therefore understand the position taken by the noble Lord, Lord Sharkey, but we start from a different premise. Our position has not changed. We want a redress system that remains accessible to consumers but is also more predictable, legally certain and consistent.