Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I agree to some extent with what the noble Lord, Lord Eatwell, said, but I am not sure I can agree that the United Kingdom’s financial markets are uniquely peculiar in any sense. It is true that we do not have such a large domestic hinterland as the United States, but compared with financial centres such as Switzerland and Singapore, we have a rather larger domestic hinterland. I do not think what he said is therefore so relevant as he perhaps believes.

Furthermore, I agree that our high standards and what used to be called “my word is my bond”, which was what I was taught on day one when I went to work for Kleinwort Benson in the City, are very relevant. We have always been proud, and rightly so, of the very high standards and honourable way, in the main, in which our financial institutions have conducted their business. Indeed, competitiveness of the market depends, to a degree, on maintaining those high standards. But competitiveness also depends on having clear, comprehensible and proportionate regulation, and in recent years our regulation has become too cumbersome, particularly after the FSA was split into two regulators. If you are a dual-regulated company, it is a nightmare to have to report much the same information but in different formats to the two regulators. This is why the time spent by executive committees of operating financial companies in the City is so greatly taken up by compliance, reporting and regulatory matters, rather than innovation and the development of new businesses to attract more international companies to do their business in London, thus providing more revenue for the Exchequer and more jobs for British people, and indeed for non-British people to come and work here.

I support the Government’s amendments to strengthen the reporting requirements of the regulators, and Amendments 40 and 41 tabled by my noble friend Lord Holmes of Richmond. I agree with those noble Lords who have thanked the Minister most sincerely for her response to concerns expressed across the House about accountability and scrutiny. However, the British Insurance Brokers’ Association has expressed concern that the Bill, as drafted at present, largely allows the regulators to decide how to fulfil the reporting requirements for the competitiveness and growth objective.

Clause 37 acts as a backstop that allows the Treasury to compel additional reporting. What assurances can the Minister give that the Government’s response to the ongoing consultation on the appropriate metrics for the regulators to publish will lead to concrete changes to which metrics are published, given that the Bill will have been passed by the time the Government respond to the consultation? Given that it will not be possible to include any details of specific metrics or how the Treasury will exercise its powers in Clause 37 in primary legislation, how can the Government ensure that the consultation will lead to a sufficient challenge to the regulators, allaying concerns about them marking their own homework in their reporting? Will the Minister also give assurances that the Government’s response to the consultation will reflect the parliamentary debate in this area, where noble Lords have consistently stressed the need for extensive metrics to be published by the regulators with regard to the new objectives?

[Lord Davies of Brixton (Lab)]

My Lords, I do not want to run the risk of repeating myself, but I have made plain in previous debates my concern about the inclusion of the competitiveness objective in this legislation. Just to be clear, I think it has no place, but I welcome these provisions that there should be a report on the competitiveness objective. My concern is that the wording does not get to the heart of the problem that I believe exists, which is the interaction between the competitiveness objective and the other objectives. My reading of the way this is worded is that the report just has to talk about the competitiveness objective and does not have to say how it affected the other objectives. Maybe the Minister in her reply could allay my concerns and make it clear that the regulatory bodies are required to look across the whole gamut of their obligations when reporting on the competitiveness objective.

[Lord Ashcombe (Con)]

My Lords, I remind the House of my interest as an employee of Marsh Ltd, the insurance broker. I offer my support to the amendments in this group, so thoughtfully proposed by my noble friend Lord Holmes of Richmond. My noble friend the Minister has indeed made improvements since Grand Committee, and for that I thank her, but I wonder whether the Government have gone quite far enough. I particularly thank the Minister for the generous amount of time she spent with me the other evening.

My noble friend the Minister’s amendment proposes two reports, 12 months apart, as has been mentioned, but I believe that it is important that reports from the regulators should become an annual occurrence concerning the competitiveness and growth objectives. The financial sector of the United Kingdom is a major driver of revenue for the country and we must ensure consistency over time, not just the immediate future. In turn, this suggests the need for consistent metrics on which to report, allowing for the proper comparisons.

Amendment 19 concerns the principle of proportionality, recognising that not all financial services are the same. Again, I will look at the insurance market in particular, but I suspect there are similarities in other financial lines. I am all for keeping individual retail and small business customers safe when working with insurance companies, but there are significant differences to be found between them, users of the London wholesale insurance market—which is used by knowledgeable buyers, using one of many potential advisers—and captive insurance entities. Smaller customers need a level of protection not required by either of these other two groups.

In the debate on this amendment, I wish to refer particularly to captive insurance companies. Captives are wholly owned subsidiaries set up to provide risk mitigation services—insurance—for their parent company and/or related entities. The parent is inevitably a sophisticated entity, almost certainly hiring advisers. They should require a very different approach from the retail customer.

There currently seems to be a one-size-fits-all approach by the regulators when reviewing insurance companies that does not take into account the nature of the purchaser. This is not only time consuming but costly in comparison with other overseas regimes. Captives provide low risk to the financial system and the buyer of their services requires a significantly different level of regulation from an insurance company trading with individuals. They are fundamentally different.

There is no captive company authorised in the UK and even those of our major companies, including UK public bodies, are located in overseas jurisdictions. The captive insurance business generates in excess of $50 billion annually, and here lies a significant opportunity for growth in the insurance sector which, should the regulator alter its stance and act with proportionality, could, as an example, add significant additional capital into the country.

Amendments 40 and 41 refer to the requirements to publish regulatory performance on authorised firms and new authorisations. The Government certainly recognise in Clause 37 the need to improve the regulatory culture, but we need more teeth in terms of reporting metrics so it becomes standard practice within the regulators. This culture needs to become ingrained.

The metrics being proposed in Amendment 40 are granular concerning timing and would bring some needed haste to the system. In business, time is often of the essence and being held up disproportionately by a UK regulator, as opposed those in other jurisdictions, acts as a deterrent to trade in this country. The metrics being proposed in Amendment 41 link together to give a consistent window into the activities of the regulators. With quarterly reporting it will be possible to gain some comparative statistics that will tell a story.

Lastly, Amendment 92 concerns determination of application. London remains one of the world centres of insurance and we must do all we can to preserve its status, but there are for sure a number of other locations that can attract capital more easily and so challenge it. Unfortunately, regulatory burden is regularly raised as an issue damaging London’s ability to attract additional capital and support the market.

Concerns have been raised about the overall performance of the regulators in terms of timing, with authorisations and approvals taking longer they should. It is recognised that they are falling behind their KPIs. Insurance companies here have experienced delays in case handler assignment, which is the beginning of a domino effect. In addition, concerns have been expressed over some of the questions asked and the appropriateness of the data being requested, leading to additional time and expense. The regulators need to streamline their activities by being relevant.

These amendments refer to a great extent to measures designed to bring some more accountability to the reporting by the regulators. I realise there is a consultation with the financial markets, but I believe that the measures being proposed are the bare minimum that should be required and included in the Bill. These sets of metrics will prevent the regulators deciding which of their own sets of data to publish. Certainly, from an insurance perspective, this will allow life to proceed way more freely. This will ensure transparency from the regulators, which is surely what is being strived for.

--- Later in debate ---

[Lord Holmes of Richmond (Con)]

My Lords, there are currently quite a few difficulties with the UK economy, but one that seldom gets the focus, attention and commentary that it requires is the lack of financial inclusion for so many people right across the United Kingdom. At its extreme, it is best summed up as: those who have the least are often forced to pay the most for financial services and products. However, it is a question not just for individuals but for micro and small businesses, which can find themselves effectively financially excluded.

Amendment 13 simply seeks to introduce a secondary objective for the FCA on financial inclusion. It would not in any sense fetter any of the other objectives, not least the primary objectives. It could operate effectively and efficiently within that current stream of objectives for the regulator.

Without in any sense seeking to pre-empt my noble friend when she comes to wind up, I think that she may well say that it is not the right approach to introduce a new objective for the financial service regulators without first undertaking a significant and serious consultation. That is a fair point. If she is unable to accept my Amendment 13, would she agree to take away the opportunity and possibility to launch the consultation into a secondary objective for our financial service regulators on financial inclusion? I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, my Amendment 14 proposes a new clause to the objectives, adding the principle of protecting the mental health of consumers. I set this out at some length in Committee, and I think it is worth repeating the point. I should perhaps say at the beginning that I support the other two amendments, although I prefer the one from my Front Bench. I would like to see an explicit statement that the concept of financial inclusion extends to people who have problems dealing with financial services because of problems with their mental health.

Financial services have to understand and recognise the nature and scale of the mental health problems faced by some people. They need to be placed under an explicit duty of care to their customers who suffer from these problems, and they should be required to take explicit additional steps to minimise the potential difficulties faced by those who have or are at risk of having mental health problems associated with their finances.

I am sure that all noble Lords accept the principle that financial regulation should pay regard to the problems faced by people who have problems with mental health. It goes almost without saying. The issue is not about the principle but about whether it should be referred to explicitly in this bit of the legislation. I think that it should, but I am willing to take small mercies if the Minister can make clear the explicit and implicit responsibilities on the regulators to undertake to provide this sort of support and explanation for people who have mental health problems.

The experience works both ways: financial problems lead to mental health problems, and people with mental health problems have difficulty in handling their finances. That is an established fact. I ask for general support for the principle and an indication that, one way or another, the legislation will provide these people with the support they require.

[Baroness Chapman of Darlington (Lab)]

My Lords, I thought it might be useful to speak at this point to introduce Amendment 18, the amendment in my name in this group. I have taken part in many discussions in this House on financial inclusion. It is to this House’s credit that such a keen interest is taken by Members on all sides on this topic. Financial exclusion is a priority concern for the Labour Party. It is often caused by the way that financial products are designed and marketed. Of course, poverty and the cost of living crisis plays a huge part in this: they mean that the poorest often pay more in fees for products, but there are even things like mobile phones not being available on a contract unless you have a bank account. We know that all these issues can make life more expensive for people who can least afford it.