Financial Services Bill

Bim Afolami Excerpts

2nd reading & 2nd reading: House of Commons & Programme motion & Programme motion: House of Commons & Ways and Means resolution & Ways and Means resolution: House of Commons
Monday 9th November 2020 Commons Chamber

[John Glen]

As my hon. Friend mentioned to me a few days ago, he is aware that the Ministry of Justice is conducting a consultation on that matter, and that will drive the Government’s response overall, but it is a matter we take seriously. Following the Financial Action Task Force review at the end of 2018, we needed to move forward a number of measures to improve and tighten our regime. It is critical for the integrity of the United Kingdom’s financial services industry to have in place the appropriate sanctions and the important regulations on reporting standards across the whole of financial services.

Let me turn to clause 32, which will strengthen our breathing space scheme that supports people with problem debt. That has long been a priority of mine as City Minister, and I put on record my gratitude to my hon. Friend the Member for Rochester and Strood (Kelly Tolhurst), who introduced a private Member’s Bill on this issue, for all her efforts, and to Members across the House for the consensus on that legislation’s introduction. The Bill contains crucial amendments that are required to implement fully and effectively statutory debt repayment plans, which will help people facing problem debt to pay back what they owe within a manageable timeframe. The Bill’s measures will allow us to compel creditors to accept these new repayment terms, providing greater peace of mind to consumers, many of whom will be vulnerable.

[Bim Afolami (Hitchin and Harpenden) (Con)]

I congratulate the Minister on the work I know he has done over many years on this subject. I understand that the Bill amends the Financial Guidance and Claims Act 2018 to ensure that the statutory debt repayment plan can include debts owed to the Government or Government Departments. Will he explain a bit further how that will work in practice? What will the ranking for claims be for creditors? Will it require a mediated process?

[John Glen]

I thank my hon. Friend for his question. As he says, the purpose of the measure is to provide, during the eight-week moratorium—longer for those with a mental health condition—a set of options, and it is key that the Bill will allow us to compel creditors to accept the new repayment terms. He is right to say that it will provide peace of mind to all consumers, with a compulsion under the provision to bring in debts owed across the public and private sector. He asked me to list the hierarchy of debts, which is probably beyond my capacity at this point, but I am happy to write to him to set out in more detail what the provision gives us room to do.

Clause 33 complements the Government’s pioneering Help to Save scheme, which supports people on low incomes to build up a nest egg. These changes will ensure that people can continue to save through a National Savings & Investments account after their participation in the scheme ends.

As I mentioned earlier, there will be some areas where this country will decide that it is right to diverge from EU regulation. Clause 34 is a good illustration of that, making amendments to the packaged retail and insurance-based investment products regulation, commonly known as PRIIPs. That EU legislation was laudable in its aims, although, one might argue, not quite as laudable in its outcomes and achievements. Concerns have been raised by Members across the House, and most tenaciously by my hon. Friend the Member for Basildon and Billericay (Mr Baron), that it is not working as intended and that there is a risk that consumers may be inadvertently misled by disclosures that firms must provide under the regulation. I am pleased finally to be able to address those concerns. The Bill will allow the FCA to clarify the scope of the regulation. It will tackle the issues around misleading performance scenarios and allow the Treasury to extend an exemption from the PRIIPs regime for undertakings in collective investments in transferable securities—UCITS—which are a type of investment fund.

These are some examples of how we intend to take advantage of a new ability to address issues in retained EU law. However, we have no intention of needlessly, ideologically or recklessly diverging from EU legislation. Instead, we will maintain existing regulations where they make sense for the financial services industry in this country. One instance of that approach is clause 35, which finalises reforms to the European market infrastructure regulation, which the UK supported as an EU member state, while clause 36 contains a change that should provide certainty to markets by ensuring the legal validity in the past and in the future of the financial collateral arrangements regulations.

Finally, clause 37 will make the role of the chief executive of the Financial Conduct Authority a fixed five-year term appointment that is renewable only once, in line with other high-profile roles in financial services regulation. That was recommended by the Treasury Committee not so long ago.

I recognise that Members might be concerned that some of the Government’s prior commitments are not included in the Bill. I assure the whole House that our focus on these issues has not wavered. One issue that came up in questions to the Chancellor earlier was access to cash. The Government are committed to ensuring that everyone who needs it has easy access to cash. I have heard representations on the issue from Members across the House in recent weeks, including my right hon. Friend the Member for Dumfriesshire, Clydesdale and Tweeddale (David Mundell), whom I met recently, and Members from across Scotland and the whole UK.

Earlier this month, we launched a call for evidence, seeking a wide range of views on the subject’s key considerations. Once we have reviewed the findings, we will bring forward legislation as soon as parliamentary time allows.

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[Mr McFadden]

I do, and I will talk later about the Basel III regulations; certainly Basel II did not prove to be any kind of protection against what happened in 2007 and 2008.

The other issue that we will have to consider is the role of Parliament in debating and deciding these matters. The approach that we will take is to ask at each stage what these measures will mean for the UK financial services industry, for the wider economy and for consumers. Do they guarantee robust regulation in the public interest, or do they expose the consumer to greater risk?

There is a particular onus on the UK to get this right, because we are a medium-sized economy with a globally significant financial sector. There are obviously crucial benefits of that to the UK: the huge number of jobs generated around the country by financial services; the investment that comes into the country through being a world leader in the sector; and, of course, the tax revenue that goes towards supporting our public services. But, as we have also learned, there are risks if things go wrong, and it is in no one’s interest for the post-Brexit regulatory system to result in a race to the bottom, where the public are exposed to greater risk in the name of increased competitiveness.

We know that parts of the financial services sector will be knocking on the Minister’s door. They will not put it in terms of watering things down; they will tell the Minister that they could be so much more competitive if only he changed this rule or that rule, or gave them this or that exemption. Of course, we do not argue that any rulebook should be frozen in time. Regulation must adapt to circumstances and innovation, but these things are there for a reason. Capital has to be held against lending and other products for a reason. These rules are the public’s insurance policy against the risks involved in the enormous capital flows that go across countries and between financial institutions. They are the as yet untested firewall against a repeat of what happened across the globe a decade ago.

[Bim Afolami]

What is the right hon. Gentleman’s view on an expanding, ever more complex set of measures obscuring good supervision and prudential management of the financial services sector? To what extent would he welcome any efforts—whether cross-party or by the Government—to simplify regulatory standards while also ensuring that they continue to be robust? There is a danger for many in different parts of the industry not of watering things down, but of such complexity making it very difficult to manage a business on an ongoing basis.

[Mr McFadden]

Nobody should be wedded to complexity for complexity’s sake. As I said, beneath the complexity, the issues are actually not that complicated. They are about the safety of insurance and resilience when things go wrong, and that is what we are focused on, rather than defending complexity for complexity’s sake.

The second thing that we will have in mind as we debate the Bill is the broad question of what financial services are for. The Chancellor set out green goals for the UK financial services industry in his statement today, and we welcome, for example, what he said on green gilts. But those green goals are not mentioned in the accountability framework set out in the Bill. Indeed, in schedule 3, the accountability framework states that the regulator must have regard to

“relevant standards recommended by the Basel Committee”.

The hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) was right to say that that should be a minimum, not a maximum, given the importance of resilience and robust regulation. The regulator must also have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities”

and

“the likely effect of the rules on the ability of…firms to continue to provide finance to businesses and consumers”.

Nothing there speaks of the green goals. Do the Government intend to amend the Bill as it progresses, to reflect the statement made by the Chancellor today? There is an opportunity here to put regulatory power behind the goal of net zero and, indeed, broader social and governance considerations for the greater public good. As it stands, the Bill is silent on that—it does not do that yet. When will the Bill be reconciled with the statement that we heard this afternoon?

Thirdly, we will want to ensure that the UK maintains the highest standards when it comes to transparency, money laundering and corruption. We have already had the report from the Intelligence and Security Committee referring to the “London laundromat”, where illicit funds can be washed and corrupt financing rendered more obscure. The UK’s globally significant financial services sector must not be tainted with any sense that this is an easy place for illicit or corruptly obtained finance to be washed through different institutions. As the Bill progresses, we will seek to ensure the highest possible standards with regard to these issues. Of course we want a successful, globally competitive financial services sector, but it has to be based on clean money, honest endeavour and socially responsible goals.

I turn to some of the individual measures in the Bill. As the Minister said, clauses 1 to 7 deal with new prudential regulation requirements, the implementation of the Basel rules and the new accountability framework, which I quoted from a moment ago. As I said, the schedule on the accountability framework states that, when making these new rules, the regulator must have regard to the likely effect on the “relative standing” of the UK as a place for firms to be based or carry on activities. I want to explore that with the Minister. Does that clause about the relative standing of the UK mean that, every time a regulated entity says, “We don’t want you to do that because it will affect our competitiveness in relation to other countries”—and they are liable to say that quite a lot when regulatory proposals are put forward—the regulators have to keel over and give in? How does this point to the UK being a leading player in the kind of environmental or social regulation that can help to ensure that the power of our financial services sector is a force for good? What is the guarantee that the provision does not, in fact, become a deregulator’s charter, on the basis that we should not do things that some in the industry could claim put us at a competitive disadvantage relative to other countries? The wording is crucial. The accountability frameworks, Parliament’s role in them and what they should cover will be the subject of significant debate as the Bill progresses.

On capital ratios, the FCA has estimated that total pillar 1 capital requirements will decrease by 5%. What is the justification for decreasing the capital requirements when we know that over-leveraging was a key cause of the financial crisis? How can the Government ensure that the onshoring of these powers does not result in a chipping away of the public’s insurance policy on financial risk? Similarly, in relation to Basel reforms, the Bill’s impact assessment talks of

“flexibility to tailor the actual detail of these subject areas to the UK.”

Given the weakness of the Basel rules in the past, it is clear that they should be seen as a floor, not a ceiling. Adherence to international standards is a minimum, not a maximum to be wriggled out of when we get the chance, so what exactly is the flexibility to be used for?

Clauses 8 to 19 deal with LIBOR and the governance of benchmarks. For my sins, a few years ago I served on the cross-party Parliamentary Commission on Banking Standards, which was established in the wake of the LIBOR scandal, which exposed manipulation, mutual favours and price setting based on conjecture rather than actual trades. The benchmark was abused to benefit traders, rather than markets or the end consumers of those trades, so it is right that it goes, but so many contracts around the world have been based on it that the Bill has to put in place a system for dealing with such so-called tough legacy contracts. The principles behind benchmarks should be clear: they should be based on actual trades and costs and should be insulated against manipulation for personal gain by those who submit the information to the benchmark in the first place. That will be the task of the FCA.

Clauses 22 and 23 establish the new Gibraltar authorisation regime. I share the warmth towards Gibraltar that is felt in all parts of the House. The measures could be described as a necessary consolation prize for taking Gibraltar out of the EU, by ensuring continued market access on a free basis between Gibraltar and the UK.

Clauses 24 to 26 give us a picture of how equivalence will work from the UK point of view, at least in part, by establishing the overseas fund regime, which negates the need for fund-by-fund approval and will instead be based on country-by-country approval and extending the time period for such funds to trade in the meantime. In his statement earlier this afternoon, the Chancellor had more to say about how we will grant equivalence recognition to others, but of course he could not say what would happen to UK companies that sell services overseas, because over that he has no control.

What was announced today dealt with one end of the telescope, because that is the position we are now in. Whatever this can be described as, it certainly cannot be described as taking back control, for we are now dependent on a response from others in respect of the crucial UK companies in the overseas markets in which they want to trade. There is also the question of how equivalence decisions are to be granted. Are such decisions a matter of economic policy or foreign policy—or both? I would be grateful if the Minister addressed that when he responds.

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[Bim Afolami (Hitchin and Harpenden) (Con)]

I am reminded of something that Lyndon Johnson, who is a bit of a political hero of mine, said at some point in the 1960s when he was talking about speeches on economics and finance. I hope I do not test your indulgence too much, Mr Deputy Speaker, because he said that making a speech on economics was a bit like peeing down your leg: it seems hot to you, but never to anyone else. I am reminded of that before I embark on my detailed comments on the Bill. I strongly welcome the Bill, and I do not want to repeat what other hon. Members have said about the good things in it. I speak as a former corporate lawyer working in strategy and restructuring at HSBC. Before that, I was a corporate lawyer at Freshfields and at Simpson Thatcher. Over the weekend, I was speaking to several people in the industry, including a constituent who I happen to have done a few deals with in the past—a man called Tim Lewis, who is an expert on financial regulation at Travers Smith. There are technical points I want to make to the Minister, and indeed I have written to him separately on some of them. I do not expect him to deal with them all in his summing up, but I think they are worth considering. He is looking forward to that, I can tell.

The Bill’s core purpose is to ensure a regulatory regime that continues to operate effectively after the end of the transition period at the end of this year. The first point I want to make is that the Bill empowers the FCA to impose obligations directly on certain parent undertakings of MiFID—markets in financial instruments directive—investment firms. But the current parent undertaking concepts in the Bill go beyond the equivalent EU legislative drafting in two important ways. I will not bore the House by going through that in immense detail, but proposed new clause 143B uses the wider concept of authorised parent undertaking. That matters because, effectively, it covers any entity that is regulated by the FCA. In its discussion paper, the FCA indicates that it currently regulates about 3,000 MiFID investment firms. However, it states on its website that it regulates nearly 60,000 firms in total. Those additional firms include, for example, small credit brokerages and insurance intermediaries. Therefore, the current proposal is, in short, a huge expansion of FCA power over smaller firms, going much further than what the equivalent European regulators can do. That is something we have to think about.

There is another way in which the proposals go beyond the EU regulation, and that is in relation to non-authorised parent undertakings. Today, it is accepted that parent undertakings will be caught by the regime where those undertakings are incorporated in the UK. However, it is not the case that any parent undertaking that has a UK office will be caught by the current regime. For example, a US-incorporated holding company with a US head office and a UK branch would ordinarily be out of scope of the rules.

Why does that matter? It matters because if the definition of non-authorised undertaking is retained in its current form in the Bill and is adopted by the FCA, that would lead to a significant expansion of the current rules. The effect might be to require some firms to restructure to close down existing UK branches of overseas businesses. It might push firms to ensure that overseas holding companies that carry out no substantive operating activities cease all UK activity, such as holding meetings in the UK, to avoid having a UK place of business. Again, this is a technical point, but it is an important one. To come to some of the points that have already been made, the Bill sees a big expansion of FCA powers, and we have to be very careful about that, particularly as we come out of the transition period and they expand beyond what is happening in the European Union. That is a particularly important point.

I also speak as the Member for Hitchin and Harpenden. In my constituency, I have not only many people who work in financial services, but some small financial services firms. The technical term for one group of firms is exempt CAD—capital adequacy directive—firms. The Bill and the FCA discussion paper leave open the question of how such firms will be treated. These firms are investment consulting, corporate finance and private equity firms, and their activities are limited to giving investment advice and arranging deals. In that sense, they do not hold much money; they are effectively providing advisory services. Today, they have a capital requirement of €50,000. The default position in the Bill is that the new rules will apply to them in full. If that is the case, many will see a significant increase in their capital requirements shortly after losing the benefit of the cross-border EU services passport, which some of them use. The Bill again effectively leaves it to the FCA to determine whether to make an exemption or transitional provision for these firms. Again, I make the point that the FCA needs to be scrutinised really carefully in relation to the powers it has under the Bill.

When making rules to implement and maintain parts of the investment firms prudential regime, the FCA will be required to have regard to a new list of matters. I do not want to repeat all the points made by my hon. Friend the Member for Wimbledon (Stephen Hammond), but these matters relate to important public policy considerations, including the relative standing of the UK as a place for internationally active investment firms to carry on activities. This point needs clarifying a bit further, whether from the Treasury Bench or in the Bill. It is clear what the Treasury is trying to do. It is trying to have a balanced approach between maintaining our reputation as a safe financial services centre in regulatory terms and ensuring that we do not fall too far behind other jurisdictions in our general attractiveness. However, I think we need to push the regulators much harder. I would like further clarity in this Bill on how regulators will need to actively seek to ensure that the UK financial services industry will be able, first, to support the UK economy and our ability to compete with overseas firms internationally, in addition to the UK’s relative attractiveness as a place to do business. This may sound like a technical difference, but I assure the House that it is not. If we do not clarify this and do not choose to try to expand the regulator’s requirement to think about our relative standing and competitiveness, not just in relation to this investment firms’ prudential regime, but across all of its rule making, I fear that this may be another example of the creeping weight of regulation and complexity that we have seen in recent years. I ask the Minister to confirm that the Government will at least consider publishing a financial services strategy in due course.

I wish to talk about how we are going to scrutinise the regulators and how this House and indeed this Parliament as a whole can do that more effectively. It is clear to me that the weight and volume of legislation and regulations after we leave the transition period will be quite significant, and I urge the Minister to consider strongly, within the review that the Treasury is already conducting, setting up a specialist financial services Committee in this House, perhaps a Joint Committee with the House of Lords, to consider not just statutory instruments that come through this House, but the actions of our regulator. What happens without that detailed oversight, involving a specialist group of people who are spending a huge amount of time on it? Financial services regulation is technical, as everybody in this House who has been listening to me for the past 10 minutes knows. We need to consider that.

My hon. Friend the Member for North East Bedfordshire (Richard Fuller) made the point about the huge changes in global finance—the growth in asset prices, and the increasing role of central banks and quantitative easing. Regulators are playing a huge role in those decisions, yet the oversight by Parliament is relatively slight. So I want the Government to consider how we can strengthen this House’s ability to scrutinise our regulators, particularly as they are getting a huge number of powers in this Bill. However, I would like to finish by saying that I commend the Bill, the Minister—I know the hard work he has been doing—and his team. I also commend the industry, which has been feeding in and discussing the Bill with the Government and other Members. The Bill is very important. It is a landmark Bill. I am sure there will be more financial services Bills to come, and I support it.