Financial Services and Markets Bill (Second sitting)

Andrew Griffith Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[The Chair]

We are now sitting in public and the proceedings are being broadcast. We will now hear oral evidence from Sir Jon Cunliffe, deputy governor of the Bank of England. For this panel, we have until 2.25 pm. Could the witness please introduce themselves for the record?

Sir Jon Cunliffe: I am Jon Cunliffe. I am the deputy governor for financial stability at the Bank of England.

[The Financial Secretary to the Treasury (Andrew Griffith)]

Q76 Thank you, Sir Jon, for giving us your time today and for the work you and your team have done on the financial stability side for the past fortnight. I am sure it is very much appreciated on both sides of the House. Sir Jon, in your role you have an understandable natural bias towards the prudential side. Notwithstanding that, we heard this morning, particularly from all the industry participants, that they perceive there to be a real problem with international competitiveness, both in terms of the rulebook and its lack of agility, but also sometimes with the application of that. There are two axes: the rulebook itself and the way in which that is applied by regulators.

I do not reach a conclusion on those matters myself, but I thought it would be helpful if we could start with your evaluation of the United Kingdom’s competitiveness in financial regulation, which is one of the core purposes of the Bill, and how well you think the Bill achieves that objective of improving our competitiveness. The other thing a number of our previous witnesses talked about was which markets in the world they consider to be our competitor set.

Sir Jon Cunliffe: I thank the Committee for allowing us to give some evidence on the Bill. This matters hugely to us. I will say at the outset—this goes to your questions, Financial Secretary—that the Bill is hugely important and it is hugely important for a number of reasons. This is relevant to the competitiveness question. The system we have at the moment is basically that we have onshored the European Union system. That system—I worked in it for many years in different jobs and have been involved in much of the legislation—is designed for, now, 27 member states. It needs to ensure the single market and, although the national competent authorities do the supervision, there is always concern in the single market that you will get differences among them. A huge amount of what in other jurisdictions’ best practice is done in regulators’ rules is hardwired in primary law, and you can see that if you look at the onshored law. That system is justified by the needs of the single market and the need to bring all these jurisdictions together. As a single jurisdiction, as the UK is now, we will have much more flexibility, and the ability to act nimbly and design regulation for our particular needs, than we had in the European Union.

I can give you some examples of that. For example, my colleague Sam Woods at the PRA has put forward ideas for a strong and simple prudential regulation framework for banking. We could not do that under the European Union because we were all locked in a maximum harmonisation phase. In the parts of the Bill that are more relevant to me, around payment systems, there is a schedule that deals with digital settlement assets, more generally known as stablecoins, where we can now develop a regulatory framework that is nimble and flexible on the financial market infrastructure side, where we will see huge technological changes brought about by some of the technology we now see around encryption and tokenisation. Again, we are developing a sandbox with the FCA and the Treasury, but we can bring those much more nimbly into rule. This is a much more flexible and adaptable system, which will help in competitiveness.

It will also help because many of the requirements and the processes in the legislation we have were designed for 27 or 28 countries, and not for one. We report on things—I was there when they were put into the legislation—that were important to other countries but not to us, so there is an on-cost in process. Things that are important to us are not always fully reflected, because all European legislation is a compromise. That flexibility and nimbleness will take time, because the European acquis is very large, but it is a huge advantage for us in designing the regulatory framework that we need.

But—and that is a very important “but”. I might not agree with all the people that have given evidence, and I know the Financial Secretary would probably not expect me to either, but this needs to be underpinned by a strong, credible, regulatory system, and the independence of regulators is a key part of that. It is best international practice, but I think it is particularly important for the UK in two respects.

You can measure our financial system in different ways. The last IMF measure was £23 trillion—that is about 10 times GDP. When that system goes wrong, the cost to the nation is huge. That is not theoretical; we saw that in the financial crisis over 10 years ago. The recovery from the financial crisis, in terms of growth, was slower than our recovery from the great depression in the 1920s. The objective of sustainable growth in the medium and long term is entirely right, but strong, credible regulation is a necessity for sustainable medium and long-term growth. In the short term, there might be trade-offs, but in the long term, we can see what happens to growth if you get a financial sector of the size of ours wrong.

I might touch on the question of a call-in power, because I know you asked my colleague, Vicky Saporta, about that this morning. We have seen the power or the proposed amendment the Government intend to bring forward. Of course, we are subject to Parliament and the framework that Parliament sets for us, and we will work within that framework. However, for the two reasons I gave, I think a power to call in and rewrite veto rules that the regulator had made would, frankly, give us—me, anyway—serious concern given the history I have seen over 30 years in the UK financial sector.

Actually, it goes to competitiveness. We are—I gave you my £23 trillion number—probably the largest international financial centre in the world and we are one of the largest exporters of financial services. Regulators and regulatory authorities of other jurisdictions need assurance and need to be comfortable; they need assurance that they will not import risk from the UK or by their firms using UK financial services. That credibility of the institutional framework is very important to the competitiveness of London as a financial centre.

Of course, it is also important to the firms that locate here. They want to ensure that if they use our infrastructure—I am responsible for clearing houses and settlement systems—and if their banks locate here or trade with our banks cross-border on financial services, then they can be assured of the robustness of the underlying system.

I beg your indulgence, Mr Sharma, as I have one last point. All of that—the nimbleness, flexibility and, on the other side, robustness of the framework—needs to be fully, publicly accountable and accountable to Parliament. We welcome what is in the Bill in this area.

To the question of where our competitors are, I think the US is a large competitor in wholesale financial services. We have competitors in Asia as well, but that is more niche. A lot of particular products, asset management and the like, are located in Ireland and Luxembourg and are used by the UK.

Financial services are not linear. A service will very often be a bundling of products that come from different jurisdictions. That is very important for competition. People need to be assured that they will not import risks by dealing with the UK, and that when financial services are put together with elements from different jurisdictions or when we are competing, we actually are in line with international standards.

[Andrew Griffith]

I thank the deputy governor for his comprehensive comments.

[Tulip Siddiq (Hampstead and Kilburn) (Lab)]

Q Thank you for coming to give evidence, Sir Jon. I wanted to ask a question about the intervention power, which you mentioned. We have seen in recent weeks the danger of Government signalling to markets that they are prepared to undermine or sideline national institutions. Is there a worry that, if intervention powers are brought in, the markets might think this indicates an undermining of the independence of the Bank of England?

Sir Jon Cunliffe: I have not seen the proposed amendment. I have only seen the Financial Secretary’s comments to the Treasury Committee and comments from the previous Economic Secretary at the Treasury, so I would need to look to see. I would say that the Bill as drafted gives the regulator primary and secondary objectives to make the difficult decisions that some of the witnesses this morning were complaining about. It requires us to balance different things before we come to a decision, but underlying that is the primary objective of financial stability and the safety of the system.

I do not know how often a call-in power or an intervention power would be used, and I do not know what frameworks would be around it. Of course, one cannot always assume that the intention when introduced is actually what happens five or 10 years down the line with different Governments. It is something that gives Ministers the ability to take a second judgment on the judgment the regulator has made in line with everything in the “have regards”—the secondary objective—so it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.

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[The Chair]

We will now hear oral evidence from Paddy Greene, head of money policy at Which?. For this panel, we have until 2.45 pm. Will the witness please introduce himself for the record?

Paddy Greene: Good afternoon. I am Paddy Greene, the head of money policy at Which?. I welcome the opportunity to speak today. What is probably pertinent is that we have had some long-standing campaigns on access to cash and authorised push payment fraud.

[Andrew Griffith]

Q Good afternoon, Paddy, and thank you. I commend the work that you do on behalf of consumers to protect them in this domain and others. I am starting each panel by asking a general question as the Minister, and we then throw it open. Could you just tell us this, starting from first principles? I am familiar with your work, but there is, I hope you would accept, always a balance to be struck—it is for this Committee to try to ensure we get the right balance in the Bill—between consumer protection and putting obligations on firms that are operating in the sector. There are sometimes firms lifting away and creating pockets where people go unbanked or unprovided for, because we have put burdens on them. I wonder whether you acknowledge that and whether you could talk about where you think the right balance lies between a vibrant, competitive sector and a sector that fulfils its social obligations.

Paddy Greene: I do accept there is a balance to be struck, so thank you very much. The simple thing is that we need to make sure, when we are talking about the financial services sector and consumer protection, that we have the appropriate consumer protection baked in, so that we have a basic level that means all consumers can participate with confidence and they know that whatever they are transacting in they are looked after and they have a form of redress. Then, once we acknowledge that we have that basic consumer protection, we obviously have some judgment to make on how far the other regulations go. I must add that when we are talking about consumer protections we mean that a protected consumer is confident, has trust in markets and will participate well, and that can lead to a competitive market, an innovative market and a market that can help with growth.

[Andrew Griffith]

Q Let me invite you to bring that to life a little more. There is a lively debate with others— I am not sure it is the point that you will be drawn on—about consumer credit, for example. Consumer credit can be life changing. It can give people opportunities. It allows them to access capital that lets them make better lives for themselves and their families. Consumer protection can also—the more forms, checks, tests and hurdles that people have to overcome to access that provision—leave people unbanked, because providers withdraw entirely and then people are left with something that none of us would want, which is the unregulated credit sector. Can you bring that to life a little bit for the Committee with some examples of where you see that trade-off?

Paddy Greene: The trade-off between protections and consumer credit?

[Andrew Griffith]

Between putting in place—I am not making a point; I am just trying to open this up for the Committee—good, valuable seatbelts and protections versus over-protecting consumers to the degree that large numbers of participants exit the market and then consumers are left with door-to-door, unregulated providers of credit.

Paddy Greene: Affordable credit is absolutely essential for consumers, but we need to make sure that, first of all, access to credit is regulated. We do have a particular form of credit that people are accessing now with buy now, pay later, which is not regulated at all, but consumers presume that it is. There are some basic protections we need to build in. One is to ensure that the parts of credit that people access are regulated themselves and that it is clear that consumers understand what is regulated and what is not. Then there is some basic information, such as key terms and conditions.

I am aware that some of the details in the Consumer Credit Act 1974, which is exceptionally old, are onerous, and there will be a chance to review that—I think later this year. It is about making sure we have efficient information presented to consumers. There is a balance there, but there is key information that we must provide them and there are key protections that must be baked in.

[Tulip Siddiq]

Q The Bill does have provisions for access to cash, but not many provisions for free access to cash. Do you think that is a cause for concern?

Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.

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[The Chair]

We will now hear oral evidence from Natalie Ceeney, chair of the Cash Action Group, and Martin Coppack, director of Fair by Design. We have until 3.10 pm for this panel. Could the witnesses please introduce themselves for the record?

Natalie Ceeney: I am Natalie Ceeney. I authored the independent access to cash review four years ago. I now chair the Cash Action Group, which is leading the industry’s work to provide a voluntary solution, prior to legislation, for providing access to cash.

Martin Coppack: I am Martin Coppack. I am the director of Fair by Design at the Barrow Cadbury Trust. We exist to eliminate the poverty premium—that is, the extra costs that poorer people pay for essential services. I am also a commissioner on the Financial Inclusion Commission. Previously, I was a regulator, responsible for setting up the FCA’s approach to consumer vulnerability and its engagement with third sector organisations.

[Andrew Griffith]

Q Thank you for the work that you do. For the benefit of the Committee, I want to open the conversation by rehearsing some of the interventions. We all represent constituents, and obviously this is a concern on both sides of the House. What are the mechanical options for a diligent Member of Parliament, for example, if they are concerned about access to cash in a particular location? Will you talk us through that?

Natalie Ceeney: We very much modelled the voluntary scheme that we set up as if the Bill, as currently drafted, were implemented. The model starts with a community need base. The premise is that all banks will have a responsibility to serve their business and retail customers, and if they are not doing it through their own branches, they have to do it through another means.

The mechanism we set up is that anyone—any MP, any member of the public—can request that their community’s needs are reviewed. That is done independently by LINK. The form is very simple, free to fill out and on LINK’s website. LINK is already getting applications. Equally, every time a branch or an ATM is closed, LINK will review the needs of that community. If those needs are not being met, it will consider a new solution. Since 1 January, that has already led to 25 new hubs being announced and 13 communities where we are going to explore pilot services, including deposit services. LINK has also set up a significant number of ATMs; I do not have that number at my fingertips.

[Andrew Griffith]

Q That is very clear. So there is a solution out there in the marketplace. What are the benefits of this industry-led initiative versus the legislative approach? Where do you think there are gaps, if there are any?

Natalie Ceeney: To be honest, we need both. There is a real competitive challenge for any bank that wants to go beyond what is necessary, because if it does that, it could be accused by its shareholders of wasting their money, unless all its competitors do the same. To be fair, it is the threat of legislation that has made everyone say, “Why don’t we work together?”. We do need this legislation for the industry scheme to continue in a viable way, but I am pleased that the industry has stepped up in advance of legislation.

We have worked hard not just with banks, but with consumer and small business groups, so the scheme we have designed truly has the input of everybody. We have run pilots for the last two years in communities to test that our models work, with really high satisfaction rates. We need both, but I think the scheme we have designed means that when the legislation is passed, we are ready to go; there will not be a gap.

[Andrew Griffith]

Thank you. I think you may get an invitation to some parts of the country.

[Tulip Siddiq]

Q Thank you for coming to give evidence. My first question, to Natalie Ceeney, is about the overlap between people who need access to cash and the people who require face-to-face banking services. I want to ask about the overlap between those pools of people, and whether you think the Bill protects banking services. I have a different question for Martin Coppack, but I will come to you later.

Natalie Ceeney: That is a very good question, and I am conscious that every time this issue is debated in Parliament or, frankly, every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population. If somebody needs face-to-face support with their money, which might be about getting money out, paying money in, a standing order or the fact that a payment they expected has not arrived, it is the same demographic group. We have recognised that in the voluntary scheme. When we set up a banking hub, it does not just have a counter where you deposit cash and get cash. There is also a private space where the banks provide a community banker to do basic banking services. As far as the legislation is concerned, the voluntary scheme we set up will cover that need on a voluntary basis.

There is one challenge that you might want to include in the legislation. I am going to stay neutral because of my members. The consumer groups and small business associations would say it should be included and the banks would say it should not, but if you do want to go there, defining what you mean by face-to-face banking services and particularly essential services is really important. I do not think anyone would expect you to offer wealth management or buy-to-let mortgage advice on every high street, but helping someone when they are stuck because a payment has not arrived or they have got locked out of their account feels different. Keeping that definition tight is important.

There is also a question about whether the FCA has the powers that it needs already. Those are the factors I would consider.

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[The Chair]

We will now hear from William Wright. We have until 3.25 pm for this panel. Would the witness please introduce himself for the record?

William Wright: My name is William Wright. I am the founder and managing director of New Financial, a capital markets think-tank.

[Andrew Griffith]

Q Thank you very much for being with us this afternoon. I am asking each witness a general opening question before handing over to colleagues. To what extent do you think the Bill fully unlocks opportunities? We have not had ab initio financial services regulation for nearly a quarter of a century. In that period, technology and trade flows have changed, and the imperative for us to remain competitive as an economy remains constant. How well does the Bill meet that objective, and who are our competitive set in the world?

William Wright: Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.

Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.

On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.

[Tulip Siddiq]

Q Do you think there is a disconnect between the Government’s stated ambition to become the world’s first net zero financial centre and the actual levels of green finance in the UK today?

William Wright: Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.

We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.

We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.

There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.

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[The Chair]

Q We will now hear oral evidence from Robin Fieth, chief executive of the Building Societies Association and director of Co-operatives UK, and Robert Kelly, CEO of the Association of British Credit Unions Ltd. For this panel we have until 3.55 pm. Would the witnesses please introduce yourselves for the record?

Robin Fieth: My name is Robin Fieth and I am chief executive of the Building Societies Association. We represent the UK’s 43 mutual building societies and seven of the large credit unions.

Robert Kelly: Good afternoon, everyone. My name is Robert Kelly and I am CEO of the Association of British Credit Unions Ltd. We represent 157 credit unions across Great Britain—roughly 62% of the market.

[Andrew Griffith]

Q Thank you, Robin and Robert. This is a general question. The Bill’s objective is to bring the rulebook up to date nearly quarter of a century after the last piece of ab initio financial services legislation, the Financial Services and Markets Act 2000. There is obviously a lot in this Bill; I invite you to comment in general on how you think it achieves the objective of creating a competitive, well-regulated and vibrant sector. The Government are very supportive of a diverse range of financial services providers, which includes both of you, representing building societies, credit unions and co-operatives, and I am personally very supportive of that.

I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.

Robin Fieth: Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.

On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.

On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.

Robert Kelly: Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.

In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.

There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.

There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.

Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.

I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.

[Tulip Siddiq]

Q Compared with the US or the rest of Europe, in the UK we lack mutually and co-operatively-owned regional banks. You have touched on this already, Robin, but I want to hear a bit more about why you think that is. What is the role of regulators when it comes to that lack of access?

Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.

As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.

The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.

Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.

We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.

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[Emma Hardy]

That is really helpful, thank you.

[Andrew Griffith]

Q Do you think this is a good example of an area where it is important that the Government have an intervention power? We have seen some patterns of behaviour emerge very rapidly and cause significant public policy concern.

Mike Haley: Yes, I think we have seen in the past that regulators have not moved quick enough when there has been widespread harm. We might look at payment protection insurance, for example, where consumers brought plenty of reports into MPs’ and Government in-trays, and yet the regulator was rather slow in intervening in a market—a market that had been abused. I think that an intervention power could be very powerful.

[Martin Docherty-Hughes]

Q In terms of clauses 21 and 22 on digital settlement assets, how effective do you think the Bill will be in ensuring that we reduce fraud with digital settlement assets that use blockchain? I am not having a go at the technology, because that is a completely different discussion. How effectively will an open or closed blockchain, and the differences between the two, be regulated by this Bill?

Mike Haley: I think one of the problems of all legislation is how quickly it keeps up with changes in technology, and it being broad around principles. As I mentioned, with the authorisation of anyone who becomes a regulated entity dealing with digital settlement assets, it is important to have clear criteria for the onboarding—know your customer—and to know who the accounts are opened by. I find that already we are looking at money laundering through coin swap services, for which you do not need an account and may not be under this regulation. There are cross-chain bridges, where someone can move from one blockchain to another. I am not an expert on whether clauses 21 and 22 cover some of those services that have been created, which were probably not in the thinking when the Bill was starting to be drafted.

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[The Chair]

Q Order. We will now hear evidence from Adam Jackson, policy director for Innovate Finance. For this panel, we have until 4.40 pm. Will the witness please introduce himself, for the record?

Adam Jackson: I am Adam Jackson, director of policy and regulatory affairs at Innovate Finance. We are the trade association for fintech in the UK, representing, if you like, all of the new technology-based financial services that have emerged, maybe in the past 10 to 12 years, including payments, challenger banks, consumer credit and personal management tools—and crypto are part of that.

[Andrew Griffith]

Q Thank you, Adam, for being with us this afternoon. The UK has much to commend it as a location for fintech and the other segments that you talked about. We have a supportive Government, a conducive framework and good liquidity in many markets. Let us take that aside for one moment, and the good work that Innovate Finance has done itself, and look at where there are opportunities to go further, or delve into the areas where you think there is a gap. Telling us how good things are does not take us very much further forward. When you look at this Bill, and at the overall behaviour and corpus of regulation, how are we doing, and how could we do better?

Adam Jackson: I think that is a good phrasing, Minister, of looking ahead. I think we have in the UK a great 10 years. We are No. 2 for investment in fintech in the world, and have been consistently. The question is, how do we maintain that at a time when we are on the cusp or in the middle of a new wave of financial technology?

The first wave of fintech was very much about consumer interfaces. I think what we are then seeing, and will see over the next 10 years, is the application of technology to the whole of financial services—to the financial systems—to the plumbing, if you like, of financial markets, not just that consumer interface. The question is, how do we build on our superb record until now to ensure that we are at the forefront of what will be digital financial markets? That then becomes not just, “How do we maintain our lead in fintech?” but “How do we ensure that we are a global leader in finance?”

If I then look at the Bill and think about what is needed, I tend to categorise it in three ways. First, is there regulation that needs updating? Is the regulatory rules system fit for purpose? Does it enable—or actually open up—innovation? Is how we regulate agile enough, particularly as technology and the economy move quickly?

Looking at the Bill and “fit for purpose”, the proposals, particularly on stablecoin, are really welcome. They tackle an issue that we have seen in the market this year and bring into scope that new technology.

Does it enable innovation? I think, there, the financial markets infrastructure sandbox is important for looking at how we support different ways of regulating. That gets into the agile regulators as well. Then, when we look at systemic stablecoin, that is about enabling innovation. We will only see stablecoin really developing as a fundamental part of payments systems, and therefore only see the UK maintain its lead in payment innovation, if we have new provisions around systemic stablecoins. The Bill covers all those.

Are there other areas that we would like to see? In terms of the regulatory behaviours, the competitiveness objective is very welcome. On the secondary objective, we would love to see it extended to the Payment Systems Regulator. We have heard quite a bit today about the Bill providing new powers to the PSR so there is a strong case for applying the competitiveness objective to them, as well as some of the other bits of the financial future regulatory framework.

On the question whether we could apply a competition objective to the Bank of England, when we think about things such as central bank digital currency, how that is implemented—as well as if—becomes really important. Central bank digital currency could crowd out innovation and stablecoin unless it is designed in a way that promotes competition. Sir Jon Cunliffe talked about how he absolutely sees a place for stablecoin and a CBDC alongside, but is thinking about some protections around that.

Then, two final pieces would be looking at whether there is scope to strengthen the competitiveness objective, moving from facilitate to promote, and finally, thinking about the Financial Ombudsman Service. A lot of our members raise concerns with us that they have agreed approaches with the FCA, only to find that FOS caselaw rules against things that they have already agreed with the FCA. So more to ensure that consistency, and if there is a way of ensuring that the FOS refers to the FCA for rulings on certain issues, that would help.

[Andrew Griffith]

That is very helpful, thank you.

[Tulip Siddiq]

Q You have touched on this very briefly. I would like you to expand a bit more on the comparison between our approach and the EU’s approach to crypto regulation in general. You will be aware of the EU’s regulation deal, which effectively brings together cryptoassets and activity into regulations, whereas we, at the moment, are limited to stablecoins. Are we at some sort of risk of falling behind because we have not had that sort of regulation? Does it compromise our competitiveness in the fintech sector because we have not had that sort of regulation deal?

The other thing I wanted to ask about is investment in the UK fintech industry, which was down to £9.6 billion in the first six months of this year, which is three times less than exactly the same period last year. Do you want to comment on the reason for that decline? What should we be doing as politicians to try and help with that?

Adam Jackson: Taking your first question, it is worth looking at the EU MiCA regulation and possibly the approach of a territory such as Singapore. It links a bit to the investment. We did some analysis of investment in just crypto alone, looking at that as a vertical within fintech, and again, the UK has always been the second location for crypto investment in the world, after the US, until the first half of this year, when we fell behind to Singapore. That might be a blip, but when you then look at regulatory mapping, you will see that Singapore possibly has the most forward regulatory system, particularly for stablecoin. The EU has a very comprehensive approach, but is has not come into force yet. Singapore has an established system, so I think that shows that if you get it right and have a proportionate regime, you attract the industry and the investment.

Is the EU approach right? There are strong arguments to say that it is possibly too comprehensive, and we come back to the notion that trying to find something that works for all 27 does not fit our circumstances. The UK is right to take a more iterative approach. We obviously have a common law approach as well, which means there are certain things we can do through case law. It is absolutely right that we are focusing on stablecoin and that is where some of the biggest volatility in the market was this year. The Bill addresses that, which will be really important in providing confidence for consumers and, critically, for investors in technology firms in that space.

The EU rule applies to not just stablecoin but cryptocurrencies more generally and exchanges, so should we also have a regulatory regime for other cryptoassets? I think the answer is yes. The question is how it fits within the Bill. The Government have said that they will introduce proposals for wider regulation of other cryptoassets. We expect something at some point, possibly soon.

That begs the question whether the Bill already enables the introduction of regulations. We probably need to ask Treasury counsel about the definition of a digital settlement asset. The Bill allows for the definition to be changed. Do the rules enable it to cover other cryptoassets? If it does, the powers are there to enable regulators to introduce systems subject to the proposals. If not, will we have to wait another 20 years before regulators are given the powers to regulate cryptoassets?

On cryptoassets, the important things that our members, including exchanges and cryptoasset firms, emphasise are an authorisations regime, a set of rules for initial coin offering—essentially, clear guidance on what information should be provided to consumers about individual assets—and custody. The Bill provides for applying rules on custody for stablecoin. If we do not have a parallel system, we will start to see some question marks over why those custody rules do not apply to cryptoassets as well.

On investment, there are different ways of looking at the figures from the first half of this year. Some investment, particularly VC, has really held up, but we know that globally we can expect a fall in investment, and we are just starting to see that trickle through. It is therefore a question of how the UK holds up against other countries. We might even see more mergers and acquisitions. At the moment, the pound makes the UK a nice place to come to buy fintech firms, so there may be a bit of difference there. It comes back to maintaining that competitiveness. Our members tell us that the most important thing is to get the Bill through. It provides important powers. If we can strengthen it in some of the areas that I mentioned to the Minister, that is also critical.

The other thing that I would flag is that there are two other pieces of legislation that are either before the House or slightly in limbo. They are also important for the competitiveness of fintech. One is the Data Protection and Digital Information Bill, introducing digital ID and open data, which will really transform the open banking we have into open finance. Australia already has that, so there is a risk of us falling behind. That Bill is also really important.

We have heard a lot about fraud. The provisions in the Online Safety Bill around making the places where frauds are advertised—the social media platforms and search engines—responsible for fraud, as well as requiring banks to reimburse, are critical. That is starting to be a factor in investment decisions. Whatever happens to that Bill, ensuring that those provisions are introduced as soon as possible is key.

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[The Chair]

It gives me pleasure to call the Minister.

[Andrew Griffith]

Q Thank you, Martin. It is relatively unusual to have individuals here, although we welcome your expertise. Do you have any party political affiliations to declare?

Martin Taylor: None.

[Andrew Griffith]

Q Have you acted as an adviser to any political party or Front Bencher?

Martin Taylor: I have acted as an adviser to Gordon Brown, Alistair Darling and George Osborne—eclectic, you might say.

[Andrew Griffith]

Thank you; that is very helpful. Nothing else to add.

[Tulip Siddiq]

Q Thank you for coming to give evidence. My question is very simple. It is about the intervention powers being proposed by the Government, which you will know about. I would like your opinion on whether you think the intervention powers will in any way undermine the independence of the regulators.

Martin Taylor: Let me speak plainly, because it is late in the afternoon. I think this is a shockingly bad idea. I think it will certainly undermine regulatory independence —without any doubt—simply because regulators who are subject to the whim of Treasury officials or Ministers are not independent. It is a major erosion of the institutional framework. One could even say it is a corruption of the framework. For me, the institutional framework is hard-won and very precious. I can only suppose that those proposing the powers either do not understand it or do not care about it.