Financial Services and Markets Act 2023 (Capital Buffers and Macro-prudential Measures) (Consequential Amendments) Regulations 2025

Baroness Bennett of Manor Castle Excerpts

Wednesday 3rd September 2025 Grand Committee

The capital buffers SI updates references to the capital buffer regulations in other legislation now that the underlying regulations have been restated through the powers in the Financial Services and Markets Act 2023. The markets in financial instruments SI ensures that key definitions are maintained in legislation so that investment firms have clarity over the regulatory perimeter when the underlying regulations are revoked. Together, these measures support the UK’s transition to a modern, proportionate regulatory regime—one that upholds high standards and supports the competitiveness of our financial services sector. I beg to move.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I thank the Minister for outlining what he identified as a very technical and detailed set of two instruments. I came into the Committee not sure whether I was going to speak or not. I listened very carefully to the Minister’s tone and, as I was doing that, I was looking at the Bank of England’s financial stability report from July 2025. It said that uncertainty around the global outlook has intensified. It says of financial markets that they have been highly volatile. Weakness in non-bank finance can amplify risk. It says of UK households and businesses that, overall, they continue to be resilient. I am not quite sure that that, particularly the last one on households, reflects the experience that many people who are listening to this Committee have—if they are very bored this afternoon. None the less, there we are.

Some of the things that the Minister said in the introduction concerned me slightly. One of them started with “widely supported by industry”. We are hopefully thinking about the national interest rather than just the interests of the financial sector and, perhaps, the wilder reaches of the financial sector. It was described as essential for companies operating these core businesses. We are talking about complex financial instrument derivatives here. From the words of the Minister, it is clear that the Government are heading in the same direction as the previous Government.

Of course, not just the apparent complexion of the Government but the global situation has changed tremendously, so I have one question for the Minister. Are the Government keeping under constant review the foundational conditions in which the financial sector is operating and ensuring that everything they do is not increasing the level of risks that the financial sector presents to the security of us all?

[Baroness Kramer (LD)]

My Lords, I recognise that these two statutory instruments deal with technical measures and in and of themselves have limited impact. They are essentially a tidy-up of the text to reflect broader changes made since Brexit to the financial regulatory system. The FSMA 2023 SI transfers to the PRA responsibility for setting the capital buffers that banks are required to hold in addition to minimum capital requirements. The PRA is a strong regulator, but it has taken a series of measures to move in the direction of lighter touch, motivated by its competitiveness and growth objective. I have spoken before about my concern that the PRA, for example, is increasingly willing to turn a blind eye to the illiquidity of assets. When powers are transferred to the PRA, as they are by this SI, a significant measure of transparency, accountability and parliamentary oversight disappears. Capital buffers are critical to the stability of the banking system, and I remain concerned when parliamentary oversight in this key area is significantly weakened, as it is by the measures that both surround and are then captured by this SI.

The second statutory instrument deals with the markets in financial instruments and again affects a transfer of power and responsibility, this time to both the FCA and the PRA. Once again, it is a move to a less transparent and less accountable system. The rules can now be changed, presumably in line with the smarter regulatory framework that the Government have put forward, and they both allow divergence from the EU and a lighter-touch approach. Divergence has its own risk, as it has implications for cross-border business, and Parliament will not have a voice any more than as a significant consultee. Frankly, experience suggests that the regulators look at Parliament’s views in these consultations and treat them as relatively irrelevant compared to the views of industry.

I note that the Minister described the regulators as expert, independent regulators. He would have used exactly that same phrasing before the 2007 crash, and we still live with the repercussions of that crash. Blind trust in the regulator is exceedingly inadvisable. I have tried in previous speeches to list some of the erosions of protections that were introduced after the crash. They include: the competitiveness and growth objective for regulators; the changing to matching adjustment; insolvency UK; significantly increasing the illiquidity of the insurance sector; the removal of the cap on bankers’ bonuses; the permanent permission for pension funds to transact derivatives without using central counterparties, thereby avoiding putting in place margin collateral, which puts them seriously at risk in any kind of financial volatility in unstable times; the watering down of the senior managers’ regime, which is key to accountability; the weakening of the financial ombudsman; the pressure on pension funds to invest in high-risk, illiquid assets; and the uncertainty that now exists around bank ring-fencing.

That is a partial list of the erosions that I have been able to pick up, and I am sure that, if the Government sat down and thought about it, they could come up with a far longer list and perhaps even suggest that this was a huge positive. But it is notable that Parliament will have no further say, now that these SIs have gone through, any more than just an ordinary consultee, in a further erosion of these various protections. Frankly, while Parliament will get reports that will allow it to look at the impact, that will be very much in retrospect, which I suggest is very late in the day.

I repeat a request that I have made before for the Government to publish a compendium of the changes that have been made that increase risk in the financial sector and a look at those risk implications. My view is that, without that degree of transparency, Parliament cannot do its proper job.