Financial Services Bill

– in the House of Commons at 6:21 pm on 9th November 2020.

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Second Reading

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 6:26 pm, 9th November 2020

Earlier today, we heard the Chancellor describe the UK’s financial services industry as fundamental to our economic strength. I wholeheartedly agree with that statement. This is an extraordinary industry: it drives growth and generates millions of jobs in every corner of our country, it has secured our reputation as a dynamic and world-leading financial centre, and it contributes vast sums to the public purse—money that has helped this Government to support millions of individuals and business through the pandemic. Now, however, as we leave the European Union and start our recovery from coronavirus, we commence a new chapter in the sector’s story.

We have set out a vision to create an industry that is even more open, more technologically advanced and greener than before; an industry that serves the people of this country and drives our economic recovery. That is underpinned by an unwavering commitment to high quality, agile and responsive regulation, and safe and stable markets. Through this Bill, I am laying the legislative foundations on which we will build to achieve those goals. I will speak briefly about the context in which the Government are bringing forward the Bill.

Until now, most of our recent financial services regulation was introduced through EU legislation. Having left the EU, we now have the opportunity to take back control of decisions governing the sector and, guided by what is right for the United Kingdom, to regulate differently and regulate better. That is why the Government are also undertaking a more fundamental review of our financial services regulatory framework, which will allow us to consider how the way in which we make our future rules might change to reflect the UK’s position outside the EU. The review will take time, however; the Government are consulting on it and there are changes that need to be made now. The Bill is therefore an important first step in taking control of our financial services legislation, which will support our position as a global hub for the sector in line with international standards.

In many parts, the Bill is consistent with the approach we took while this country was still part of the EU, but there are areas where it will better suit us to choose our own path, and this Bill marks the start of a process of evolution towards our goals. The Bill has three objectives: first, to enhance the UK’s world-leading prudential standards and protect financial stability; secondly, to promote openness between the UK and international markets; and thirdly, to maintain the effectiveness of the financial services regulatory framework, along with sound capital markets. I will speak about each of those objectives, starting with the first.

Clauses 1 and 2, along with schedule 2, require the Financial Conduct Authority to create a tailored prudential regime for investment firms—businesses that provide a range of services that allow investors to access financial markets. At present, investment firms are part of the same prudential regime as banks, even though their services are quite different and they do not pose the same risks to financial stability. The Bill will therefore require the UK’s independent regulator, the Financial Conduct Authority, to set more proportionate prudential requirements, which better reflect these firms’ risks. These measures will drive healthy competition across the sector, while allowing the UK investment industry to thrive outside the EU.

The UK’s regulators are globally respected, in large part as a result of the expertise of leaders such as Nikhil Rathil of the Financial Conduct Authority, Sam Woods at the Prudential Regulation Authority, and, of course, Andrew Bailey as Governor of the Bank of England. That is why it is appropriate to delegate responsibility to them for this complex and technical area of financial regulation. However, I can assure the House that the Bill also introduces an accountability framework to ensure greater scrutiny and transparency of the FCA’s decision making when implementing this regime.

This framework will sit alongside the prudential regime for banks and the largest investment firms, whose failure would impact the wider economy. They will remain subject to internationally agreed prudential standards. That is why clauses 3 to 7, along with schedule 3, will enhance the prudential regulatory regime in line with the latest global Basel banking standards endorsed by the G20. That will increase the UK’s resilience to economic shocks, while meeting our international commitments to protecting the global financial system. The Bill will enable the PRA to implement the standards in its rulebook. It, like the FCA, will be subject to an accountability framework. These measures illustrate this Government’s commitment to global financial stability.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

Is there any chance, therefore, that, as part of this process, some of the commitments the UK has signed up to, such as those under Basel III, will be watered down?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I am grateful to the hon. Gentleman for his intervention. The driving principle guiding the Government in bringing forward the Bill is to maintain the highest possible standards; indeed, our reputation globally relies on the maintenance of such standards. However, it will be in the role of our regulators, with their technical expertise, to determine how those standards are implemented.

Let me move on to the next part of the Bill.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

My hon. Friend mentioned the word “banks”, which obviously stimulated my interest as the co-chair of the all-parliamentary parliamentary group on fair business banking. He mentioned prudential risk around banks. Currently, the capital adequacy requirements for banks are all pretty much treated the same, which can deter competition from new entrants, such as regional mutual banks. Is he interested in looking at that issue in this legislation or in a future piece of legislation?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

My hon. Friend has unrivalled expertise and tenacity in bringing these matters before the House. He is right that there is a challenge to examine the relative regimes for different sized banks and institutions. That is something that regulators, subsequent to this Bill, will need to look at—indeed, they are keen to look at it—and I would welcome my hon. Friend’s further interventions in discussions in this place as we move forward on that legitimate question.

Eight years ago, the world was shocked by the LIBOR scandal. As the House will recall, traders at multiple banks attempted to manipulate that crucial benchmark, which contributes to interest rates for everything from complex derivatives to mortgages. Since then, significant improvements have been made to the benchmark’s administration. However, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, has stated that continued use of LIBOR and other major interest rate benchmarks poses a serious source of systemic risk. That is because the decline in the inter-bank lending market has meant that such benchmarks depend increasingly on the judgments of panel banks rather than actual transactions. UK regulators have been encouraging firms to gradually shift away from LIBOR and are at the forefront of the global response to the transition, so to ensure that that transition was orderly, the FCA agreed with the LIBOR panel banks that they would continue to contribute to the benchmark for a temporary period. However, that temporary period will expire at the end of 2021, and after that point there is a risk that the benchmark will become unrepresentative of the market that it measures, potentially leading to disruption.

While we want firms to take the initiative in migrating from LIBOR, we recognise that there are some contracts that cannot be realistically amended to achieve that goal, so clauses 8 to 19, along with schedule 5, will give the FCA the powers that it needs to oversee the orderly wind-down of critical benchmarks, including LIBOR, and clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 until the end of 2025. This will avoid difficulties for our firms while the Government consider any changes required to our third country benchmarks regime to ensure that it is appropriate for the United Kingdom.

I will move on to the second objective of the Bill: to promote openness to overseas markets. I am delighted that clauses 22 and 23, along with schedules 6 to 8, establish a framework to provide long-term market access between the UK and Gibraltar for financial services firms. As many will know, Gibraltar boasts an array of thriving businesses in the sector, many of which are UK household names, including Admiral and Hastings, to name just two. The new Gibraltar authorisation regime in this Bill delivers on an earlier ministerial commitment and recognises our long-standing special relationship.

Photo of Bob Neill Bob Neill Chair, Justice Committee, Chair, Justice Committee

I refer to my entry in the Register of Members’ Financial Interests. May I say, as chair of the all-party group on Gibraltar, how delighted I am to see this in the Bill? I know that that is echoed by Her Majesty’s Government of Gibraltar and the whole Gibraltar community. The Government have made good on a promise and it is very welcome. The Minister is right to set out that some 20% of UK insurance contracts are written by Gibraltar-based insurers. Will he undertake that, as well as this important piece of legislation, we will now build on it with his colleagues in other Departments to develop a full free market—a free-trade area effectively—between the UK and Gibraltar in services and goods?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

My hon. Friend is absolutely right with that 20% statistic and to point to the extensive orientation of the Gibraltarian insurance industry towards the UK. Ninety per cent. of the business that it writes comes to the UK. He is right to say that this is foundational to a deepening relationship, and I will ensure that Gibraltarian firms can continue to access the UK market on the basis of aligned regulation and supervision. I look forward to listening to him, as we move forward, on further steps that he thinks would be appropriate.

The proposals will guarantee close co-operation between our regulators, and this measure highlights the spirit of openness that underpins our approach. The same can be said of clauses 24 to 26 and schedule 9, which make up the overseas funds regime. These measures will simplify the process under which overseas investment funds are marketed in the UK. Under the present system, the FCA has to assess the protection standards of every individual fund before allowing it to be offered to UK consumers. However, the Bill will allow the Treasury to give market access to entire categories of funds from other countries that have so-called equivalent regulatory standards to those in the UK. Funds in this group can then undergo a simpler application process, due to the confidence provided by their home regime, which will allow overseas investment funds to be marketed in the UK, maintaining the UK’s position as a global centre of asset management. There are currently over 9,000 funds that passport into the UK from the EU, and let me stress that the existing process will remain for funds that have not been declared equivalent.

Photo of Bob Neill Bob Neill Chair, Justice Committee, Chair, Justice Committee

I am grateful to the Minister for correcting me. Of course, my figure of 20% related purely to motor insurance policies; it is 90% for all Gibraltar-based insurance. Can he help me on the specific point of the overseas funds regime? It is widely welcomed in the sector that he will allow access for overseas funds that have not yet achieved equivalence, but can he help give some clarity on a matter that is of concern to some providers? What is the position if people have invested in the fund and for some reason equivalency is withdrawn? What would then happen in practical terms if, for example, additional money is invested in the fund after suspension? Can he help as far as that is concerned? It is important for many people.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

It would not be for me at this point to set out the deductions to be made on individual funds, but I would like to follow up with my hon. Friend formally on that matter, because a process is under way for that to be examined, and I am happy to engage with him further in due course.

I will move on to the importance of ensuring that the FCA has an appropriate degree of oversight over firms that could register under the regime. To my hon. Friend’s point, there is a tension between the objectives set in Parliament and the regulators’ judgment on the ground. We need to ensure not only that they are accountable, but that we have set the right prescription for the outcomes we wish to see.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

Will my hon. Friend spend a moment putting the Bill in context? Earlier today, we heard the Chancellor outline the bold initiatives on green finance and on making the UK a leader in transparency internationally and financial technology. As we leave the European Union, we are keen to accelerate away from a sclerotic, introspective set of financial markets. The Bill looks very worthy, but can he put it in the context of those broader ambitions for financial services? Is this the first of a series of Bills we will see, or is it clearing things up so that afterwards we are in a position where we can move forward to capture that opportunity?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

This is a portfolio Bill of 17 measures, some of which I have been wanting to introduce for some while. It is the first step on a journey, and there will, if the authorities allow me, be further financial services legislation that we will need to make following the consultation on the future regulatory framework. We need to be ambitious for financial services. We live in a dynamic world where financial services are evolving all the time, and we need to have regulators that are nimble in developing world-class regulation that allows us to continue to grow, and that is reflected in our appetite for FinTechs, stablecoins, digital currencies and the right regulatory framework for firms of different sizes, as my hon. Friend Kevin Hollinrake referred to earlier.

The third objective of the Bill is to maintain the effectiveness of the financial services regulatory framework and ensure sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. That will improve accuracy, while reducing opportunities for fraudsters.

Clause 29 makes small changes to the market abuse regulation, making the regime more effective, while reducing some of the administrative burden facing firms. I draw attention to clause 30, which raises the maximum sentence for two kinds of financial market abuse from seven to 10 years in prison, bringing the penalties for those offences in line with other forms of economic crime, such as fraud. Clause 31 will ensure we can enforce the rules that apply to trusts. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, collecting a range of ownership information on those that have a connection to the UK.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

My hon. Friend mentions economic crime, the prevention of fraud and the penalties for fraud, but one of the things the Government are committed to doing is bringing forward a corporate offence for the failure to prevent economic crime. It is not within this Bill. Is there any reason why not? What timescale might we see around that kind of legislation?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

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 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.

Photo of Bim Afolami Bim Afolami Conservative, Hitchin and Harpenden

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?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

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 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 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.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I thank the Minister for making that point, because I was not going to make a great deal of it in my remarks. Does he appreciate the fears on the SNP Benches that by the time the Government get around to legislating on this, there will be no banks left?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I understand the hon. Lady’s anxiety—it is one she has expressed to me a number of times over the past nearly three years.

We asked Natalie Ceeney to do a review last spring. Immediately the review was completed, we put together the JACS process—the joint authorities cash strategy—and brought together the Payment Systems Regulator, the FCA, the Bank of England and the Treasury. We are working closely with LINK and the banks to look at a new way of making cash available. The cashpoint network in this country is not fit for purpose and urgent work is going on behind the scenes to bring forward a cohesive solution.

The prospect of legislation remains, and the call for evidence a week or so ago is another step in moving this forward as rapidly as possible. This problem has been extended and made worse by our recent experience of covid. I assure the hon. Lady that I am committed to getting to the end of this in a positive way.

To conclude, the Bill marks an important moment in the history of the UK’s financial services sector. It is the next step of an ambitious programme of regulatory reform that will be guided by what is right for UK industry. In short, the Bill will support financial stability and high regulatory standards, promote openness between the UK and international markets, and maintain the effectiveness of this country’s financial regulatory framework. I commend it to the House.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury) 6:52 pm, 9th November 2020

I thank the Minister and his officials for the information they have shared about the measures in the Bill over the past couple of weeks. I have, of course, been riveted by the Bill in recent days, but I confess that I had to put it down for a while at 5 o’clock on Saturday to watch CNN when something more exciting than the Bill came through on the news.

Photo of Harriett Baldwin Harriett Baldwin Conservative, West Worcestershire

Will the right hon. Gentleman clarify whether that is where all his colleagues are this evening? I note that he does not have many behind him. In fact, his Benches are empty.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

There is a phrase: I am not my brother or my sister’s keeper. They will have to answer for themselves.

The backdrop to these measures is formed by two significant events in recent years. The first of those is not Brexit but the financial crash of 2007 and 2008, which exposed the risks being run in the financial services industry and the huge knock-on effects for the rest of the economy when those risks go wrong. That experience prompted a global rethink about banking regulation, the capital levels that banks and other financial institutions are expected to hold, resolution measures in the event of banking failure, and the balance of obligations between the industry and the state. Much of that rethinking was expressed in the series of directives with which the Bill deals and in the Basel process on capital rules.

For all the complexity in the detail of these things, at root the questions are quite basic. First, how much capital should institutions hold as insurance against things going wrong? Secondly, who should be on the hook if things do go wrong? And thirdly, how do we insulate the wider economy from the consequences of instability in financial services? It is on these questions that much financial services regulation has focused over the past decade. The UK has been a key player in this process at both a European and a more global level. These are not things that have been imposed on us; we have played a significant role in the design of the measures that we are onshoring through the Bill.

The second event is, of course, Brexit and the consequent withdrawal from the European regulatory institutions responsible for the oversight and implementation of these directives. By definition, the process requires a recasting of regulatory responsibilities in the UK, and much of the Bill is concerned with that. The key question, then, is not so much the onshoring of the regulations themselves, but what happens next. Do the Government intend to diverge significantly from the rulebook, and in which direction will they go?

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

I am grateful to the right hon. Gentleman for setting the scene. Many of us are concerned that the Basel III regulations did not go far enough—that is, they did not really solve the “too big to fail” issue. We need to be very careful that we do not water down the proposals. Does he agree with that position?

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

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.

Photo of Bim Afolami Bim Afolami Conservative, Hitchin and Harpenden

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.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

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”.

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.

Photo of Jonathan Edwards Jonathan Edwards Independent, Carmarthen East and Dinefwr

Considering the amount of work that needs to be done on this issue before the end of the transition period, is not the reality that the best we can hope for for the financial sector is some sort of base deal? The negotiations on what the situation may be down the line will then take many, many months, if not years.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

If we read the political declaration, we can see that this was all supposed to be wrapped up by June. We are now approaching mid-November. The hon. Gentleman is certainly right to suggest that the time has slipped.

Subsequent clauses in the Bill go through a number of other EU directives and the onshoring process. They cover the markets and financial instruments regulation, the market abuse regulation, European markets infrastructure regulation dealing with over-the-counter derivatives, and the EU financial collateral directive. I have no doubt we will have a lot of fun with all of them in Committee. On money laundering, we will want to see as strong a system as possible to ensure that the UK is no safe harbour for anyone who wants to wash dirty money, avoid taxes or evade accountability. Again, I am sure the Minister is expecting more discussion of this as the Bill progresses. He and I debated the statutory debt repayment plan a few weeks ago, and Labour supports moves to create this system. It will be particularly important in the light of the increasing debt burden on many families due to the covid pandemic, and the sooner it is in place, the better.

On PRIIPS, the Government propose to remove the performance scenarios. The question, of course, is what they will be replaced with, how useful and accessible the information for consumers will be and what protections will be in place against the mis-selling of products or fraudulent claims. The imbalance of information is always a challenge in financial products because, in most cases, the seller knows more than the purchaser. Regulators have an important duty to be on the side of the consumer when it comes to the marketing of such products, so if the current performance scenarios are to go, they must be replaced with something better that will genuinely help the consumer. Other measures, including the fixed term for the FCA chief executive, have finally found the legislative home for which they have been waiting in the Treasury for some time.

That is, broadly speaking, what the Bill legislates for, but there are important areas, as the Minister said, that are not included. The most obvious is access to cash. Cash use has declined markedly this year, as people have moved to more online shopping and many businesses have moved to card-only payments, but this is not a trend that falls evenly on the population. Most of the population might need less cash or, in some cases, no cash in the future, but we have a duty to ensure access to cash for those who still need it, including many on low incomes for whom cash budgeting is a vital way of making ends meet. If we do not do that, inequality will be sharpened and there is a real danger that cash-dependent consumers will be cut off from important areas of economic activity. The Government have said—the Minister repeated it tonight—that they want to ensure access to cash, but if that cannot be done through this Bill, we urge the Minister to come forward with appropriate measures as soon as possible.

Standing back and looking at all this, I get an overwhelming feeling of it being all deckchairs and no iceberg. The Government can, of course, rearrange the regulatory furniture, and in many areas that is a necessary consequence of leaving the EU, but the bigger policy decision to downgrade financial services in the negotiations was taken a long time ago. The Chancellor talked today about the economic and employment importance of this industry, and he was absolutely right to emphasise that, but the more he emphasises it, the more it begs the question why market access for this crucial sector, and indeed services in general, has not been a negotiating priority for the Government. The truth is that, in this negotiation, services have been thrown under the bus.

On manufacturing, we have also moved further and further away from the earlier promises of frictionless trade, exact same benefits and all the rest. The fact that these things are not front and centre of the final round of talks is not because agreement on them has already been reached, but because the Government have decided not even to prioritise them. That is a louder testament to where we have ended up in this process than anything in the Bill. This is a series of measures that are trying to compensate for much bigger decisions. This will create more trading friction and more market barriers for our crucial financial services, and for our broader services industry and manufacturing. In the end, no amount of cutting and pasting of EU directives or last-minute vision statements can change that bigger picture.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 7:14 pm, 9th November 2020

My colleague from the Treasury Committee, Harriett Baldwin, mentioned earlier that some of the Benches in this place are a little empty this evening. I am sure that that is not because this is not a wonderfully exciting Bill—well, perhaps. But we have to look at the reality of the situation that we are in. We are here in London in lockdown and people are being advised not to travel. So I do not hold a grudge against any Member who has decided not to travel today, for their safety or the safety of their constituents and their families. It is important that we consider each other in this place as well as those out there in every street in the country as coronavirus continues to spread.

I thank the Minister for his briefing on Thursday evening. It was a very good distraction from all the events in the United States. I also thank all the organisations that have provided such helpful briefings in advance of the Bill. The financial services are a significant part of the economy in Scotland in terms of the number of businesses, the number of employees and their contribution to the wider Scottish economy, particularly in the growing area of FinTech, where we have much innovation coming out of our universities.

The Bill is, relatively speaking, a wee bit dull and a wee bit functional. Some bits have been taken out of the back of the drawer at the Treasury and presented in the Bill tonight.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

The Minister says that is harsh, but he said himself that there are things here that he has wanted to do for quite a wee while and has not found the mechanism to do. It is a portfolio Bill, as he called it generously, of some things that hang together and some things that are a wee bit tacked on.

The regulations are important, and they affect us all in some way or another. The purpose of financial regulations is to protect us as citizens from the worst extremes of the financial inclinations of those who wish to grab the cash a wee bit quicker. We would all live with the consequences of deregulating to an extreme, so we need to be very careful of the regulations that we make.

The Bill’s objective is to enhance

“the UK’s world-leading prudential standards and promote financial stability”,

to promote openness

“between the UK and international markets” and to maintain

“an effective financial services regulatory framework and sound capital markets”.

I am sure that that is all very laudable. It is what we had as a member state of the EU. Who could really object to any of those aims? We on the SNP Benches will not be opposing this Bill on Second Reading tonight, but we do hope to put together some constructive amendments for the Government to ignore in Committee. If they would like to surprise me and take them on I would be absolutely made up, but we shall see. I shall go ahead and hope rather than look at experience.

I hope that we can have some good discussions on the things that should be put into the Bill to give people greater protection, and where things should be that wee bit tighter. Despite what the Chancellor said earlier about unilateral equivalence, the reality is much more complex and many firms do not yet know what they are preparing for. Whether it is the worst or not quite the worst, it will still cost money, time and resource, at a time when covid affects us all, and it will still be significantly less advantageous than it was under EU membership or even single market membership.

I am nervous, as are many others, about Parliament’s role in the regulatory framework and where that ends up. CityUK has expressed concerns, as has Barclays, about taking back these powers to hand them straight over to the PRA and the FCA. This is hardly taking back control. I worry that with the safeguards that we have, we will not find out that something has gone terribly wrong until it is far too late, and far too far down the line. I worry that Parliament will find out about these things when it is too late, because that has been the experience of the banking crisis and other things. We need to be careful that we do not end up going down those same roads. A statutory limit on the term of the FCA chief executive is not quite taking back control in the same way. This is giving a whole lot of power to these institutions and cutting out Parliament.

I have some questions and I would be grateful if the Minister picked them up. For example, the Bill will allow Her Majesty’s Treasury to revoke the capital regulation in favour of PRA rules, so what happens to those who are already working to the CRR2 EU regulations and what do they now need to do? Will regulatory decisions and implementation be in line with broader public policy objectives and is there a safeguard within that, because Parliament should be satisfied that existing appeals mechanisms are sufficient and, as Barclays says, that they are commensurate with the increased level of autonomy and rule making for those regulators?

The ABI is also concerned about a number of areas. It talks about the need for the Gibraltar authorisation regime, saying:

“We welcome that Government will work with the FCA to ensure that, once the GAR comes into force, individuals and eligible small businesses using financial services sold in the UK by Gibraltar-based firms can refer disputes to the UK Financial Ombudsman Service”.

That protection ought to be there in black and white but it does not appear quite yet to be at that stage. People need to have that protection—that recourse—if something goes wrong.

It is of huge concern to us that the UK regulators have threatened to deviate from EU rules on share trading if Brussels does not deliver market access permissions to the City of London. The ABI has said that the equivalence process has occasionally been used as a political weapon to wield against third countries. It is concerned about where the overseas funds regime sits within this, particularly because it does not know what might happen should there be a negotiating advantage for one side or another when the cost is borne by companies and consumers.

There are further questions on what this means for existing investors if equivalence is withdrawn. What happens if someone has money in a particular fund and then it goes? What are the practicalities there? What do they need to do as an investor in those circumstances? We need urgent clarity for people so that they know where they stand on these issues. Perhaps the Minister cannot give us those answers yet. That is part of the wider problem that people do not know exactly what is going to happen and how they can prepare for it. There could be a risk that people will withdraw from these funds altogether rather than keeping their money there, which would have further knock-on effects.

We support the increased sentences for insider dealing and market abuse. It is quite right that those should be increased. However, as I have said many times in this House, enforcement is key—having the tools in the box to make sure that we can find these frauds, market abuses and insider dealings and then punish those responsible. That is crucial, because if people are felt to get away with these things, then having the rules is really not enough.

On people exploiting rules and general misbehaviour, I want to talk about money laundering. I was on the Committee that considered the Bill that became the Sanctions and Anti-Money Laundering Act 2018 and I worked on it in this House. Clause 31 amends schedule 2 of SAML to ensure that regulations can be made in respect of trustees with links to the UK. Without it, any powers that HMRC sought to exercise to access information on such trusts are at risk of being held invalid under legal challenge. The Government say that this technical change

“will reaffirm the UK’s global leadership in the use of public registers of beneficial ownership, as identified by the Financial Action Taskforce’s Mutual Evaluation of the UK in 2018. This will further support the public and private sectors to efficiently and effectively target their resources towards potential criminal activity using trusts, maintaining the resilience of the UK’s defences against economic crime.”

That does not stack up to me because there have been opportunities to deal with this.

I was on the Committee on the Registration of Overseas Entities Bill, which sought to look at trusts as well. We took lots of evidence on how trusts are an open door for people to move money around, yet the Government are not really acting to deal with that. The Registration of Overseas Entities Bill went through the whole pre-legislative scrutiny process and then just disappeared. The difficulty is that people are moving money around and buying properties, largely in the city of London, where they can launder that money. There are huge buildings sitting empty in the city because people are using that as a means of moving money about. There is a huge homelessness problem as well, so this is a really pernicious problem that the Government need to get their head around.

I do not understand why there is not more to deal with the issue of trusts, or with the issue, as I have mentioned ad nauseum, about Scottish limited partnerships and proper reform of Companies House. The Chancellor mentioned the consultation on that earlier. That consultation has been going on for ever, it feels like, and nothing has yet changed. The Government have this huge, big, wide, gaping loophole in Companies House that allows people to move money around. If they want to do something properly, I would suggest that they deal with that, and do a lot more to take action on trusts and other means of shunting money about. Not doing that makes this country a home for dirty money. Lots of research has been done on this issue by Transparency International and others. The evidence is there; the action, unfortunately, is not.

The debt respite scheme in clause 32 can be enhanced further. I know the Minister is committed to doing this and wants to act on it. I would be curious to find out a bit more about what he has learned from what Scotland has done so far and how the schemes will work together, because we have had the debt arrangement scheme in Scotland since 2004 and the statutory moratorium since 2011. There are always improvements that Scotland can make and the UK can make as well. I would be very interested to hear what more can be done to improve upon that.

I have been contacted, as many other Members might have been, by Macmillan’s duty of care campaign. What conversations has the Minister had with the Financial Conduct Authority on that campaign? Macmillan fears that many people—people with cancer who are struggling —are finding things incredibly difficult. Can he say with certainty that the guidance put out by the FCA is enough? Could more be done to protect people in the most vulnerable of circumstances?

Help to Save customers have enough on their plate at the moment without having to navigate myriad changes to their saving products. We firmly believe that the accounts should continue to earn interest until this crisis is over. Savers who do not withdraw the funds after maturity and whose balance remains in the account do not seem to be eligible for further bonuses and they are also not earning interest. It seems very unfair to expect low-income savers, who are potentially dealing with the risk of redundancy and are worried about the risk of covid, to change financial products at this time to avoid losing interest. Some of this is the UK Government’s fault for not having set an end date when the scheme was introduced. We argue that they should extend the active period of these accounts at least until the end of this pandemic, so that nobody loses that all-important interest.

What is the communications strategy from the UK Government to make sure that nobody loses out? Since the launch of the scheme, more than 222,000 people have opened Help to Save accounts, with some £85 million deposited, I understand. So this is not a small amount of money for people at the very lowest end of our economy and they need to have some certainty that the scheme will not be rolled up and that they will not lose out because of the changes the Government seek to make in this Bill.

I wish to close by discussing a briefing I received from the Finance Innovation Lab, which makes three well made points about the Bill. First, it says that the Bill threatens to introduce a democratic accountability deficit in financial sector policymaking, and I made that point earlier. We cannot be in the situation where we take all these powers back from Brussels and hand them straight over to unaccountable, arm’s length organisations. They might come before the Treasury Committee once every six months or so, when we will ask them some questions, and that is the extent of the scrutiny they get from this House. We do the best job we can to ask them questions—I see some colleagues from the Committee on the Government Benches tonight—but that is not the same.

Secondly, the FIL also argues, as Mr McFadden did, that the purposes of the Bill should be broadened to economic, social and environmental outcomes. The Chancellor talked a lot earlier about how important those environmental outcomes are, but they are missing from this Bill. I do not know whether that is because one part of the Treasury is not speaking to the other or how else that has come about, but if the Government are now saying today that these environmental aspects are incredibly important and they should be a key part of COP26, as the former Governor of the Bank of England has also argued, they need to be in the Bill. If they are that important, the Government need to put them in the Bill.

Lastly, the FIL suggests that the Bill should help the UK to be a leader in financial regulation that sets high standards. There should be no backsliding on the standards we have built up as part of being in the EU. It is an area in which we had huge and significant influence as a member state in making a lot of these rules. Now if we want to have equivalence and have access, we are going to have to abide by some rules made by other people, rather than being able to make the rules ourselves. I believe firmly that we should not have less power as Members of this House than MEPs have to scrutinise all of those things that come before them, and we should have a bit more than we have in statutory instruments Committees; we cannot vote on those and we cannot amend them either. So we need to have a whole lot more by way of scrutiny of financial services in the future. In those Committees, I have argued regularly to the Minister that we need a plan and a framework, and we need to see the whole spectrum of what this Government propose for financial services. It needs to involve everybody—the people in the sector and Members from across parties in this House—so that we can build something resilient that we can all have trust and faith in. That trust and faith in financial services is what we all need. We need to be able to trust the institutions and that our money will be well managed and we will be protected in the event that anything goes wrong.

This is all about building something new, but there is really not a huge amount that is new in the Bill. The Government need to do a whole lot more on financial services, which have been neglected as part of the Brexit negotiations, put to one side and not prioritised, despite being an absolutely massive sector of the economy in Scotland and the rest of the UK. I hope very much that we will be able to make amendments to the Bill to improve it and that the Government will listen to those amendments and take them forward in good faith.

Photo of Harriett Baldwin Harriett Baldwin Conservative, West Worcestershire 7:30 pm, 9th November 2020

It is a pleasure to follow my Treasury Committee colleague, Alison Thewliss.

Mr McFadden talked about the historic events that had distracted him from preparing for his speech, although I do not think anyone would ever have known it, because he spoke in a very well-informed way. We often recognise historic turning points—certainly, Saturday at 5 pm was one of them, and today’s announcement of the Pfizer vaccine is another—and that is why I am a little disappointed that there are so few colleagues here for what is an important turning point in the UK financial services sector. I do not say that because the measures in the Bill are gripping, although they are sensible, practical measures, and they will no doubt be expatiated on at greater length by colleagues. Rather, I put in to speak in today’s debate because I wanted to hear the Minister at the Dispatch Box talk about the vision for post-transition UK financial services.

We are at an important inflection point, which is why I welcome the fact not only that the Minister outlined that vision today, but that the Chancellor was able to come here earlier to talk about the future, as he sees it, for this incredibly important sector. He emphasised in his statement, as the Minister did at the Dispatch Box, what a significant export sector this is. It is our biggest export sector. It pays £75 billion a year in taxes. It helps to fund the public services we all rely on. That is why we need it too to do well in the future and why it is important to note this historic turning point. We may look back at this moment, as we look back on the big bang in 1986, as being a really significant inflection point.

The Chancellor set out today three ways in which we can really build on our existing comparative advantage to become the leading financial services sector of the 21st century. He made some bold statements this afternoon that really reflected what financial services are going to become. First, he spoke about our global openness. It is a matter of regret that we have not been able to mutually agree equivalence with the EU. Obviously, we are entirely equivalent, and it would have been much more satisfactory if we had been able to respect each other’s starting point as being completely equivalent and to go forward from there. It is clear from the way in which the European Union has not been prepared to offer us equivalence that it will continue to use EU regulation in financial services as a bit of a stick with which to beat up on this sector, in which the UK already excels. I am sorry to say that, and it gives me no pleasure, but that would clearly be unacceptable.

In the Treasury Committee, we heard from the Governor of the Bank of England that it would be dangerous to financial stability if we were to allow an external regulator to suddenly take away equivalence from our financial services sector. So the judgment that was made to come to the Dispatch Box and say, “Do you know what? We’re unilaterally going to do it for the UK,” was regrettably the right decision to take historically. It was accompanied with the three statements about the kind of financial services sector that we envision for the 21st century—one that is globally open and inviting of inward investment and listings from around the world, not just from other EU countries.

Secondly, the Chancellor said that the financial services sector should also be technologically innovative. That is so important. We have led the world in the FinTech sector and regulation, and have set up FinTech bridges with other countries. Singapore, another FinTech innovator, was the first with which we established a regulatory bridge. That is clearly how financial services will evolve in the 21st century, and the announcement about the leadership we are showing on digital currencies was incredibly important.

Thirdly, the headline measure—the one that will no doubt get coverage around the world—was the equally important announcement that we will issue a green gilt. I am the first to congratulate my hon. Friend Gareth Davies, who has been assiduous in calling for that. We have had announcements on the global vision, the technological vision and the importance of the UK being the lead financial centre for financing the climate revolution of the 21st century. We financed the industrial revolution, and we will finance the green industrial revolution. Countries from around the world will issue bonds in the UK against the green gilt benchmark, so this Bill is historic.

I pay tribute to my hon. Friend the Minister for the work he has done on breathing space. I know how passionate he is about it. He and I were elected in 2010, and he has always championed that issue, so it is wonderful to see him bringing forward legislation to make progress on it.

I want to ask the Minister a few questions. He and the Chancellor highlighted the UK’s importance as a global financial centre. First, what progress has been made on what the UK is hoping to achieve on a US financial services free trade agreement? That has always struck me as important. We are the biggest investors in each other’s countries, and the ability to do more in terms of financial services would help consumers in both countries, so what are his aspirations and ambitions for that?

Secondly, what is the Minister’s vision for the Basel framework, particularly with regard to the very high risk weighting that it gives to investments in Africa? When I was Africa Minister, one of the things that used to get me excited was the potential for inward investment into Africa. We had a big Africa investment summit in January. The risk weighting for assets in many African countries is incredibly high under the Basel rules, so can the Minister update the House on anything he is doing to try to make those assets appear less risky on bank balance sheets?

My third question is about the assets we still own as a result of the financial crash in 2008. Will the Minister update the House on what the exit strategy is for those remaining financial services assets?

Those are my three questions for the Minister. Given the general direction and strategy the Government have announced today, I think this is a historic moment for UK financial services. In 10 or 15 years, we will look back on it as equally significant as the announcement from Pfizer and the US election. I congratulate the Minister on introducing the Bill and I look forward to hearing more detail when he responds.

Photo of Christine Jardine Christine Jardine Liberal Democrat Spokesperson (International Trade), Liberal Democrat Spokesperson (Exiting the European Union), Liberal Democrat Spokesperson (Treasury) 7:39 pm, 9th November 2020

It is a pleasure to follow the hon. Member for West Worcestershire (Harriett Baldwin).  I agree with her that we have seen significant changes in the last few days; historic turning points that for many of us seem like we are beginning, finally, to emerge from a very dark four years, not just for this country, but for the United States and Europe. I agree with Mr McFadden. It was very distracting for five days and I am not quite sure how I am coping now without CNN. It has been so long since I was actually in front of a screen.

In that context, with everything that is happening in the world at the moment, it is difficult to overstate the importance of the Bill, not only to the financial services sector but to our wider economy in this country. As the MP for Edinburgh West, that is particularly significant to my constituents. Edinburgh has the second-largest financial sector in the United Kingdom. Hundreds, if not thousands, of jobs in my constituency are dependent on the Government getting this right—thousands of jobs across the country as well. As we approach at great speed the end of the transition period from our exit from the EU, that becomes increasingly important day on day. I thank the Minister for being so open at his briefing the other night, but there are areas where the Liberal Democrats believe the Bill falls short of what is needed to protect those jobs and the financial sector itself.

The Government claim that the Bill will ensure that the UK maintains its world-leading status as a financial sector. However, I feel that the truth is that because of the Government’s reckless handling of Brexit, the financial services industry now faces unprecedented challenges that the Bill will have to face. For more than two decades, the greatest strength of our financial sector was being at the heart of the EU. That is no longer the case and it leaves in its place the problem of how we protect a market whose capacity is in the UK but whose bulk of custom is in the EU. Banks looking to consolidate may no longer do so in the UK. We have already seen, as was mentioned earlier, that more than £1 trillion—yes, £1 trillion —worth of assets moved to the EU from our sector. Thousands of jobs have gone with them. Barclays’ European investment arm has gone to Dublin. British-registered financial firms will lose the passporting rights that have allowed them to sell funds, debt, advice or insurance to clients across the EU as if we were in the same country.

Positive spin from those on the Government Benches about the Bill will not make up for what we have lost, and stand to lose, from a vital sector of our economy. We have to get it right. More than that, by being intent on breaking international law through the internal market, the Government risk damaging the UK’s standing as a global financial centre by throwing into question our commitment to the rule of law. The now President-elect of the United States is one of those who criticised the Government for the United Kingdom Internal Market Bill. I believe that the Financial Services Bill falls short of what the sector needs, particularly in three crucial areas on which my party intends to bring forward amendments in Committee.

On green finance, for example, although we had the welcome statement from the Chancellor today, we believe that the Bill requires some form of provision—more provision than we have heard—to take potential environmental impacts into account. The Chancellor’s earlier statement was welcome, but I do not believe it is accurate to say that we are leading the world. In fact, I think it is too little and too late. Since the start of the pandemic, our international competitors have announced billions of pounds worth of stimulus to their green economies. Germany has pledged €9 billion. France will spend €8 billion on electric vehicle charging. China has also pledged. We are acting too late. If the Conservative Government are committed to green finance, we have to acknowledge that selling off the Green Investment Bank in Edinburgh in 2017—the Liberal Democrats, as part of the coalition, were instrumental in setting it up—was a mistake. It was the first bank of its kind globally and would have been crucial at this stage in the development of our financial sector.

Indebted households across the UK will also need relief measures of some sort to support them through the hell that covid-19 has been and continues to be. Like every other Member, I am sure, I get calls every day, a huge proportion of them from people who have been left behind—people the Government have completely excluded from support. The Bill needs to recognise the scale of that problem and do more to protect them and those in other households who now find themselves in deep financial hardship. Specifically, we need breathing space. A moratorium period and a statutory debt repayment plan are welcome steps, but they were designed for the pre-covid world. Surely they need to be addressed now that that more households are in more debt and we have a different situation ahead. We want the Chancellor to amend the Bill to extend the 60-day breathing space period and to improve access to debt advice services.

I agree with the Opposition spokesman, the right hon. Member for Wolverhampton South East, that money laundering will in future be a serious problem for this country. It needs to be addressed.

We are at a crossroads in many sectors of our economy, but financial services more than any other sector has been our strength in recent years. We cannot afford to let anything come in the way of that. I hope that in its final form the Bill will protect the sector.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton 7:46 pm, 9th November 2020

It is a pleasure to follow Christine Jardine. I agree with many of the things she said; one thing I disagree with is her apparent belief that leaving the European Union brings only disadvantages. She does not see some of the economic opportunities we may have after we leave. I was pleased to hear my hon. Friend the Economic Secretary talk about opportunities, including the opportunity to do things differently and better. I will focus my remarks not on what the Bill does, but on the different and perhaps better things that might be done by the Bill in its later form or by another piece of legislation.

I am not a great fan of too much regulation. We should avoid regulating more than is absolutely necessary, but we need to make sure that we regulate better—that we think not about regulations but about effective regulation. Sadly, that is missing from some of our current financial services framework.

My first suggestion for the Minister, which I have talked about before, is that small and medium-sized enterprises should be allowed rights of action for breaches of the FCA handbook. At the moment, those are allowed only to private persons, not to SMEs, partnerships or corporates. As not all businesses know, that leads to SME commercial lending not being regulated above £25,000—here I speak in my capacity as co-chair of the all-party group on fair business banking; I also draw the House’s attention to my entry in the Register of Members’ Financial Interests. As a result, if an SME is mistreated by a bank, for example, its ability to go to court relies purely on the letter of the contract or agreement it signed with the bank.

We have seen disgraceful scandals, some of which have been mentioned already, such as the LIBOR rigging, the swaps scandal, the RBS Global Restructuring Group SME banking scandal and the Lloyds HBOS Reading scandal. In those situations, SMEs cannot challenge the banks in any significant way, first, because it is almost impossible to take a bank to court due to the costs involved, and secondly, because when they get to court they only have the letter of the agreement to work with.

My hon. Friend the Economic Secretary has introduced some important new provisions—an expansion of the remit of the Financial Ombudsman Service to deal with larger businesses with turnover of up to £6 million, and an organisation he got me involved with called the Business Banking Resolution Service, which will deal with businesses with turnover between £6.5 million and £10 million. Businesses with turnover of up to £10 million will be able to take their case to an alternative dispute resolution service at no cost to themselves, and the case will be judged on a fair and reasonable basis. It will mean, effectively, that SMEs have a place to go, but will the Minister consider another alternative that would involve the key principles, including principle 6 of the PRIN rules, which is about treating customers fairly?

Another area that was mentioned in an earlier intervention was the Government’s commitment to make the failure to prevent economic crime a corporate offence. It is great that they have said they will do that, and that will start with a Law Commission review to see how best it can be done. As the Law Commission rightly said, if we do not change the rules on that, the UK risks falling behind international standards, which I am sure we would not want. That is clearly something to bring forward, but it could be done more hastily in the Bill, with a framework added on later, which would expedite the process. That would make a huge difference.

The Serious Fraud Office has tried to take forward many cases—those involving Serco, Barclays and Olympus, for example—but it could not do that because it had to establish a directing mind principle for the people at the top of those organisations before it could proceed with the offence of corporate fraud. The proposed measure would make that much easier. It is great that the Government are willing to take it forward, but they could do so more quickly.

Regulation is tight in the UK on personal and mortgage lending, and in the past—most famously in the case of Northern Rock—we have allowed regulated entities and the owners of mortgage books to sell those books to unregulated entities outside the country, including inactive lenders. There is no doubt that there is a regulatory gap around that. For example, some of the books from Northern Rock were sold into the clutches of Cerberus, an international private equity firm, and the rates charged to individuals, who were often mortgage prisoners, climbed significantly from below 2% to often in excess of 5%. The Financial Conduct Authority has confirmed that, as did the Financial Ombudsman Service in an email, which stated that there is a regulatory gap. I know there is a debate between the Treasury and the FCA about whether there is a regulatory gap between a mortgage book that is owned by an unregulated entity overseas, and one that is regulated in the UK, but the FOS is clear:

“While our standards have some reach into unregulated activity by regulated lenders, since the loan is now owned by an unregulated entity our rules and guidance on lender conduct, including treatment of vulnerable customers do not apply.”

We are allowing a regulatory gap by permitting mortgage loan books to be sold to unregulated entities, and it is my feeling, and that of many others, that that should be stopped, so that a regulated entity can sell a loan book only to another regulated entity.

As I said in an another intervention, we need to be more flexible on prudential risk. These provisions are reducing the opportunity for new entrants to the banking market, particularly regional mutuals, which in other countries have been successful in extending SME finance, particularly through difficult times. Many other jurisdictions, including the US, Germany and Japan, have a high number of regional mutual banks as part of their banking system, and they tend to be far more patient in their provision of capital through difficult times. For example, in the UK, SME lending between 2008 and 2013 reduced by 25%, whereas in Germany it increased during that period by 20%.

There is a real opportunity to use regional mutual banks with a much more long-term approach based on financial inclusion for businesses and individuals, but there are issues about the adequacy of requirements that make the need to raise capital far too high. It would be good to look at this, and to reduce the requirements on that to make it easier for regional mutuals to be established, and also perhaps to use some dormant assets to provide some seed capital for some of these regional mutual banks to make it easier for them to start, get up and get going.

Finally, one that has been discussed before is country-by-country reporting. Again, there is perhaps a place in this legislation for that. We know, despite the best efforts of the Treasury—with the digital services tax, for example, to try to clamp down on the likes of Amazon and others—that companies are bypassing those rules and passing such a levy on to sellers in their marketplace and not applying it to their own sales. We do need to make sure that the large multinationals pay a fair share of their tax. If we look at Google’s accounts, we see that internationally it turns over £137 billion. It had net income on its accounts in the last year of £31 billion, which is a 22% profit margin. The UK turnover is about £10 billion, and with a 22% profit margin, its profits should be about £2.2 billion, so it should pay tax of about £420 million in the UK on 19% corporation tax, but it actually pays about £67 million. So the provisions we have currently, although we have gone further than most countries in trying to make sure that companies pay a fair share of tax, are working to some extent, but not to the extent that we would like. Country-by-country reporting could make a big difference.

I will leave it there, Madam Deputy Speaker. I appreciate the opportunity to discuss those ideas with the House, and I look forward to discussing them at later stages of the Bill.

Photo of Stephen Flynn Stephen Flynn Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary) 7:56 pm, 9th November 2020

It is a pleasure to follow Kevin Hollinrake. It is safe to say, as others have done, that this is not a debate that will have folk at home sitting on the edge of their seat awfully excited, that is for sure. None the less, it is an incredibly important debate. It is an incredibly important matter for the UK economy, but also for the Scottish economy, as my hon. Friend Alison Thewliss outlined. The financial services sector in Scotland is incredibly important, and it is linked to tens of thousands of jobs across our nation. It is in that broader context that we are obviously quite content to let this Bill pass on Second Reading, bearing in mind the fact that a regulatory framework is needed at this stage. I hope the Government will be amenable to some of the amendments we will put forward. Those amendments will broadly—how shall I put it?—be borne out of frustration that perhaps the Bill does not necessarily go as far as it could or should go. I will seek to touch on a couple of those matters during my speech today.

The first one I would like to touch on is about clause 31, which is on money laundering. Clause 31 in itself appears to be one that is quite self-congratulatory in its nature. To quote, as I feel is appropriate to do on this occasion, the Government say that the Bill

“will further support the public and private sectors to efficiently and effectively target their resources towards potential criminal activity using trusts, maintaining the resilience of the UK’s defences against economic crime.”

On the face of it, that looks like a fantastic thing, but when we look a little bit more at what we on the SNP Benches have been saying for a number of years now about Scottish limited partnerships, it appears that the warm words of the Government do not actually bear fruit given the reality of the picture on the ground. It should not need to be said to Members on the Government Benches, but when we are talking about Scottish limited partnerships, we are talking about organisations through which people can access financial products without having to name who they are. If that is not an open invitation to money laundering, I do not know what is. When we look at money laundering in the context of Scottish limited partnerships and also of tax avoidance and £35 billion tax gap that exists in the UK at this moment in time, it is probably safe to say that the public are a little bit sceptical about whether the Government take this as seriously as they should.

Our frustrations do not stop there. They also relate to clause 32, on the debt respite scheme. The Government say that clause 32 will

“empower the Government to make regulations which will compel creditors to accept amended repayment terms”.

Again, on the face of it, that seems like a perfectly legitimate and correct thing to do, but does it necessarily address the situation at this moment in time, when businesses across Scotland and the UK have taken out bounce back loans and coronavirus business interruption loans that they will not be able to pay back? Does it meet the reality of the situation? I am very sceptical as to whether it does.

The Government have two options on that front. They could simply write off that debt for small to medium-sized enterprises, which are the lifeblood of our economy, or they could take strategic moves to turn some of that debt into equity stakes, where it would be appropriate to do so, to boost economic activity and perhaps gain some money back for the public purse. Unfortunately, again I am sceptical as to whether the Government will seek to do either of those things. That is not in any way a positive outcome.

Thirdly, I want to touch briefly on clauses 24 to 26, on the overseas funds regime. As my hon. Friend the Member for Glasgow Central said, the ABI has expressed concerns about the potential for equivalence to be used as a political football. I think all of us have that concern. We heard warm words from the Chancellor earlier today about the fact that he would not seek to use it as a political football, but being a bit of a sceptic about this Government, I think that warm words from the Chancellor at the Dispatch Box are not quite good enough. The record of this Government when it comes to saying one thing and doing the complete opposite is all too clear for everyone to see, so I have grave concerns in that regard.

The issue of equivalence takes me on to the final point that I wish to make, which is about the ongoing shambles in relation to Brexit. The UK Government website states that the Bill will “promote financial stability”. We do not have a trade deal with the European Union, and the transition period is a matter of weeks away. We do not know whether it will be possible for our financial services to access markets in Europe uninhibited. The scale of that issue is immense, particularly when we consider the fact that the City of London alone accounts for just under a third of all capital market activity across Europe. The market that we are seeking to leave is enormous, and this Government appear to have no plan and no desire to act prudently.

We heard from the Chancellor earlier, and we will probably hear it again from Government Members, that the blame for this lies at the EU’s feet, because it is refusing to partake in discussions in a proper and appropriate way. Who can blame the EU when, as Christine Jardine said, this UK Government are actively seeking to break international law? Who can blame the EU for being a little bit sceptical about the intentions of this Conservative Government? The sabre rattling needs to end, and the Government need to realise that the financial services industry must have the access it needs to support the tens of thousands of jobs that are reliant upon it, not only in England but in Scotland.

To conclude, I want to once again clarify that this Bill is very much born out of necessity, and we broadly support the regulatory framework around it. However, what is clear from this Bill, from the Brexit shambles and from the fact that the UK’s credit rating once again got downgraded just three days before the Bill was published, is that this Tory Government are no longer a Government of financial stability. I long for the day when Scotland no longer has to take its decisions in this place but can take its own decisions as an independent European nation.

Photo of Eleanor Laing Eleanor Laing Deputy Speaker and Chairman of Ways and Means

I call Gareth Davies. I will give him a moment in case he is here—I should have gone to Specsavers. I call Jim Shannon.

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Human Rights), Shadow DUP Spokesperson (Health) 8:04 pm, 9th November 2020

You almost caught me unawares, Madam Deputy Speaker—I thought that Gareth Davies would be about.

I broadly support what is in the Bill, but I have a couple of requests, as others have had. I want to make three specific points on the LIBOR transition, debt respite and the inadequate FCA regulatory framework for SME lending. I say, first, that it is a pleasure to see the Minister in his place. He is always very responsive to us all on the questions we ask him, and he always keeps a smile on his face—it is always something you do extremely well, even though the questions that we may put to you are hard and perhaps not always put in the way that they should be.

LIBOR, the London interbank offered rate, is an interest rate benchmark used to indicate banks’ costs of funding their activities: for example, the cost of obtaining money for a loan they will make. It has been used and continues to be used as a reference in hundreds of trillions of pounds-worth of financial contracts, so this is a very important issue. The former FCA chief executive officer and now Bank of England Governor, Andrew Bailey, said that after 2021 the FCA will no longer persuade or compel banks to submit the underlying data that goes to calculating LIBOR, causing concern that it could cease to exist. Minister, it is a really big issue for us all, and certainly one that people have contacted me about. There have been many loans in the past and that are still in force where banks have used LIBOR.

I understand that the existing powers on benchmarks granted to the FCA, passed under EU law and to form part of UK law from 2021, are seen as insufficient to ensure a smooth transition away from the use of LIBOR, so again, Minister, perhaps you can give me an answer on that. I welcome, among other things, clauses 8 to 19, which appear to grant the FCA greater powers to compel the continued publication of the benchmarks, to prohibit the use of benchmarks and to oversee the orderly wind-down of benchmarks. I hope that the new FCA chief executive officer will now deploy these powers at the earliest opportunity. Again, Minister, perhaps we will be able to get some indication of a timescale for that, if possible, to assure us on where we are.

I welcome the fact that the Government have made a commitment to Gibraltar. Others have referred to it and others will—it is certainly one of the issues that I am concerned about. This gives peace of mind to that sector and we thank you for that.

Can I, Minister, perhaps underline another issue—

Photo of Eleanor Laing Eleanor Laing Deputy Speaker and Chairman of Ways and Means

Order. The hon. Gentleman cannot say, “Can I, Minister—”. How many millions of times have I said this to Jim Shannon—only usually, I do not, because there is no time and there is a lot going on? Here I have my opportunity: he has heard my request to him a hundred times to please address the Chair. He cannot say, “Minister, will you do this?” And even worse, when he is addressing the Prime Minister, he must not say, “Prime Minister, will you do this?” He has to say, “Will the Prime Minister do this?” and “Will the Minister do this?”—in the third person, not the second person, please.

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Human Rights), Shadow DUP Spokesperson (Health)

I stand corrected, Madam Deputy Speaker, and I will use my best endeavours to do that. Sometimes I get carried away in the emotion of the debate—it is a very emotional debate, of course—and I find that maybe I do not use the correct words.

Will the Minister look at the issue of money laundering in Northern Ireland? I make that comment because in all the countries across the globe, and particularly in this United Kingdom of Great Britain and Northern Ireland, money laundering is one of the issues that concerns me greatly. We have had many cases of money laundering over the last while, and we have many cases in Northern Ireland where paramilitary groups are involved in clear money laundering activities, which are against the law. With the Bill coming forward, will the Minister be able to give an assurance on money laundering, particularly in Northern Ireland? What discussions have taken place with the regional Assembly and the Minister in the Northern Ireland Assembly with responsibility for policing and justice, and what has been the feedback from that? I think that if we are going to do this well, we have to ensure that contact is made with the regional devolved Administration and that there are discussions outside that, particularly with the Republic of Ireland. Many illegal things are taking place in respect of transport across the border in all places, but we must tackle the ability of paramilitary groups to actively use the border with this purpose in mind.

Secondly, on the debt respite scheme, will the Minister confirm that clause 32 will amend the Financial Guidance and Claims Act 2018 to empower the Government to make regulations that compel creditors to accept amended repayment terms; provide for a charging mechanism through which creditors will contribute to the costs of running the scheme and repayment plans; and include debts owed to a Government Department at any level, including the devolved Administrations, in the statutory debt repayment plan? Again, I make a plea for the Northern Ireland Assembly: what will be the position in relation to any debts that are due? When do the Government expect to bring forward the relevant regulations? What discussions have taken place with the devolved Administrations on the statutory debt repayment plan?

The Treasury will be aware that the Business Banking Resolution Service has to be part of an effective solution under this process. The Democratic Unionist party remains concerned that we are not on track to do that. While the income from financial services is notable, so is the responsibility not only to shareholders but to the Government. We must ensure that that obligation is understood completely by enforcing the BBRS within legislation.

Thirdly and lastly, I refer to the bank lending regulatory framework. I finish with this because I believe it is the most important point. I know that the Minister is fully aware of it from discussions with the DUP and others who have contacted him. I have been in contact with him regularly about this issue since he first spoke about it at the Dispatch Box in January 2019. Of course, I have also been in touch with the Chancellor over the past month. The Minister must agree that it is crucial for SMEs to have the opportunity to export their products and services to the global economy, and the support to do so. I believe that our financial services industry, and banks in particular, must be regulated by the FCA in a much more legally effective way under this Government. Minister, it is very important that we have the bite, so to speak. It is all very well having words, but we need the strength of legislation to govern the banks’ small business lending post-Brexit.

The Government must get this right. I know that they can and I know that there is a will to do so. It is important that the future legal and regulatory framework allows our SMEs to have confidence in the 21st century global economy. I believe we have an opportunity to get it right this time, and it is time to do just that.

Madam Deputy Speaker, I hope that is to your satisfaction. Thank you very much.

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon 8:13 pm, 9th November 2020

It is always a pleasure to follow my hon. Friend Jim Shannon, as I have on many occasions in this House.

The ambition of the Bill is clearly stated:

“To make provision about financial services and markets;
to make provision about debt respite schemes;
to make provision about Help-to-Save accounts;
and for connected purposes.”

The Minister was absolutely right in his opening remarks that financial services are a key industry for this country. If we are to have a global Britain and a globally successful Britain, financial services—and services in the widest sense—must thrive.

It is also right that the Bill is an important part of trying to ensure that we have the right regulatory framework at the end of the Brexit transition. If we are to remain a world-leading financial centre, it can be guaranteed only by having financial services that are underpinned by a strong and proportionate regulatory framework. The Bill, as the Minister conceded, is the start of that, not the end. I suspect that this is the first of several Bills that will come before us.

If the framework is to do anything at all, it must protect the consumer, enhance competitiveness and, as the Minister said, make the UK an attractive place in which to invest. I welcome the Bill because that is necessary, but it is right to recognise at the outset that, notwithstanding the equivalence regime or the new equivalence criteria that the Chancellor rightly set out this afternoon, as recently as February a briefing paper from the Government stated that the UK hoped to secure “permanent equivalence” that would last for “decades to come”. Indeed, at the time, the Governor of the Bank of England was campaigning for super-equivalence in order to allow a new standard to be set for multilateral collaboration. That would have been a better context in which to be considering these matters this evening; none the less, the Chancellor’s statement this afternoon was welcome. Everyone in this House must now deal with the world as it is, not the world as we would like it to be if it were more economically rational.

This Bill is necessary and it does a number of things to ensure that the regulatory regime is in place at the end of the transition period, and to allow financial services to prosper. It makes a start on sorting out the relationship between Parliament and the regulators, starts to define the accountability and objective of the regulators, and ensures that the regulation and legislation are in place. That will be important as we look forward to 1 January.

A specific of the Bill that I particularly welcome—the Minister touched on this in his opening remarks—is the prudential regulation of investment firms. That recognises, quite rightly, the differing risks between banking businesses and investment management businesses. The Bill aims to put in place a prudential regime that is fit for purpose. That in itself has been widely welcomed across the financial services industry. It sets out four principles, as well as how the implementation of that prudential regulation may recognise the differing capital risks. However, there are some concerns, which I hope the Minister might address later, or about which we will be reassured in Committee.

The first concern is how Parliament is going to scrutinise the principles. I will return to that point in a bit more depth later. The specific issue raised is that Her Majesty’s Treasury intends to revoke the capital requirements regulation with a view to replacing it with standards set out by the PRA that are to be guided by Basel II. However, the Bill contains little clarity on exactly what will be in the PRA regime, how it would differ from the capital requirements regulation or how the Government intend to implement these new measures. I trust that the Minister will set that out today or that it will be clarified in Committee, because it is hugely important to the success of those provisions.

I welcome the provisions on the onshored EU PRIIPs regulation. This has been widely welcomed. It gives the PRA powers to make clarification, but there is an important duty to ensure not only that the regulations put in place are effective, but that they help the investing community and the public, ensuring protection for the consumer. It is not yet clear how those powers are going to be enacted and what is going to be there.

As the Minister has acknowledged, this is a wide-ranging Bill, so I want to touch on a couple of other issues of concern that can probably be cleared up now or in Committee. It is clear that we need to safeguard the ability of our world-renowned investment management industry to offer investment funds from overseas jurisdictions into the UK post transition. As the Minister set out, that is the aim of the Bill. If that were not so, it is clear that 9,000 individual funds would have to seek separate registration. From my reading of the Bill, it is not yet clear whether the temporary permissions regime—the regime which would allow that to continue—must be extended or whether a new, fully functioning regime is to be put in its place. That is important, because it signals the free flow of capital into the UK and signals that the UK remains open for investment and business. I have spoken to a number of those in the investment management industry over the weekend, and there is still some concern in the industry that it is not fully clear how that will operate.

The Bill also clearly states that it is meant to maintain a world-leading regulatory system and, among other things, enhance the competitiveness of the financial services sector, yet if we look at the history of regulation in the United Kingdom, a large number of people believe that the system has often rightly sought to give the consumer extensive protection, but with the cost of over-specification, a lack of accountability and, in terms, a narrowness of focus from the regulator. If the Bill is to achieve its ambitions, the Government need to look at those faults and be clear about how they are going to change them during the Bill’s passage.

The Bill allows for the transfer of hugely increased powers to regulators. The question for us therefore is how we balance the extra powers with the necessary scrutiny and accountability, without encroaching on the necessary independence or eroding consumer protection. I suggest that the Treasury needs to consider carefully what performance objectives it sets the regulators and how it will then manage their measurement. Previously, it has been clear that the overriding objective has been competition, but secondary objectives have been in place, and all too often regulators have not given those the regard that many would have expected. The regulators’ attitude to risk will need further definition if the Bill is to achieve the objective of enhancing and maintaining the UK’s international competitive position.

Who exercises the judgment on whether the criteria are being met and how the trade-off of benefit and risk is determined will be key. Schedule 2 is the key part in determining that. New sections 143G and 143H link to the broader questions of the FCA’s mandate, role and accountability. The Treasury has rightly just recently published a consultation document on the broader review of the framework for financial regulation, so this Bill is the first exploration of the issues around the oversight of the FCA.

New section 143G identifies a number of “Matters to consider” and therefore matters that the FCA must “have regard to”, including the relevant international standards and the effect of the rules on the UK’s international standing. Those are all to be welcomed, but are they really effective? I suggest, first, that the obligation is too weak, as it only requires the FCA to “have regard to”. Secondly, the obligation is too narrow. A number of other issues, such as sustainable growth and employment across regions, should also be part of the mix and part of the consideration. Therefore, I suggest we need to be prepared to go further and consider changing the FCA’s primary objective, or at least strengthening the secondary objective, such that it ranks almost pari passu with the primary objective.

There also needs to be rigorous scrutiny of the regulators’ rule-making powers by Parliament. As I said earlier, the Bill puts in place some major increases in powers for regulators, so it is completely appropriate that Parliament sets the scrutiny and accountability objectives. There are many ways to do that, and I know colleagues will suggest other methods later, but it is clear that one of the great successes has been the OBR, which analyses, scrutinises and gives an independent verdict on financial policy. It may well be appropriate that one of the ways that Parliament holds financial regulators to account is a similar body for financial regulation.

I was encouraged to be short, and I have already taken rather longer than the Whips wanted me to take this evening. I think the Bill is absolutely necessary. Therefore, notwithstanding some of the issues I have raised, and others that I am sure the Minister recognises and will want to address as the Bill progresses, I wish the Bill well and look forward to supporting its Second Reading.

Photo of Nickie Aiken Nickie Aiken Conservative, Cities of London and Westminster 8:24 pm, 9th November 2020

I am grateful for the opportunity to speak in this debate and to highlight, as other hon. Members have, the invaluable contribution that the financial and professional services industry makes to UK plc: more than 60,000 companies providing 2.3 million jobs and 10% of the UK’s overall gross value added. While two thirds of those jobs are outside London, I must stand up for my constituency by saying that the City of London alone contributes approximately 25% of the sector’s GVA.

I have spoken to businesses and business groups in the City of London, who are broadly in favour of the Bill’s overarching objectives. They want to see an efficient regulatory framework after our transition from the EU and would welcome in particular changes that help to ensure the UK’s regulatory regimes are more coherent and attractive to international firms. They also strongly believe that the new regime must maintain the highest of global standards to maintain the sector as a strategic national asset and ensure sound capital markets. Businesses also welcome the clear way in which the Treasury and my hon. Friend the Economic Secretary to the Treasury have sought their views in coming to their position and are keen to maintain a dialogue as the Bill and the future regulatory framework review progress.

I will turn, if I may, to address the specific content of the Bill. Businesses in my constituency are supportive of the Bill’s objective to enhance the UK’s world-leading prudential standards and promote financial stability, but they would appreciate clarity from the Government on specific clauses. In particular, with regard to the implementation of Basel III, as some businesses have been working towards the implementation of EU capital requirements regulation 2, further guidance would be welcome on how the UK regime may differ from the EU regime. With regards to the LIBOR wind-down and benchmarking, again I urge the Government to ask the FCA to provide the further detail and clarity that businesses require as soon as possible.

I turn to how the Government intend to promote openness between the UK and international markets. The businesses I spoke to in my constituency again welcome the changes, but, crucially, they would also welcome further clarity on how the Treasury intends to make equivalence decisions under the new frameworks. Business would also welcome assurances from the Government that they will continue to look to improve the UK’s global competitiveness. I would like the Bill to be more explicit in that area and expressly signal the objective to maintain and even expand our competitiveness on the world stage. I hope the Government will continue to work with the financial sector to ensure that that crucial aspect can be developed in relation to further rules and, in particular, when considering differing international tax regimes and access to talent.

I turn to the Bill’s third objective: maintaining the effectiveness of the financial services framework and sound capital markets. These provisions have been broadly welcomed. As businesses in my constituency know that an effective financial services framework has a significant impact on both business and customers, ensuring clarity in regulation and providing sound support mechanism for customers must be welcomed. However, the Bill also enshrines significant powers in regulators. I ask Ministers to consider whether they are satisfied that existing appeal mechanisms are sufficient. Will they increase the level of autonomy given to regulators? May that be worthy of consideration in the House at another time? In that vein, I would welcome from the Government a financial services strategy for the sector. That may enable arm’s length financial regulators to ensure that they interpret the “have regard to” objectives in the context of the Government’s vision for the sector.

Finally, in the light of the ongoing covid-19 crisis, the objective of maintaining sound capital markets should not be underestimated or forgotten. The capital market provides a vital source of funding for businesses, alongside the lending market. The measures in the Bill will help to support a market that is vital to the re-energising of the economy post covid.

I encourage the Government to consider, with one eye to the future, how the Bill demonstrates UK leadership in addressing digital and sustainability-related regulatory challenges, because although a recovery from covid may dominate the short-to-medium term, the continued development of FinTech and our response to the global climate crisis will surely be long-term considerations for the financial sector.

The Bill should be welcomed as a necessary but early step as we leave the EU, but a fuller, more comprehensive overhaul of the UK’s regulatory framework is required to ensure that the UK—and in particular the City of London in my constituency—retains its competitiveness as a global financial centre. I look forward to working with businesses and Treasury Ministers throughout the passage of the Bill and the others that will surely follow to implement the necessary changes to ensure just that. I commend the Bill to the House.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire 8:31 pm, 9th November 2020

It is a great pleasure to follow my hon. Friend Nickie Aiken. As an adviser to a venture capital firm, I draw the House’s attention to my entry in the Register of Members’ Financial Interests.

I commend the Minister for such a thoughtful and thorough presentation of the Bill on Second Reading. I look forward to the Bill’s passage through the House. I also pay tribute to the Opposition spokesman, Mr McFadden, for his general welcoming of the Bill and for some of the important points that he made. He mentioned two of the contextual factors for the Bill: the financial crisis and Brexit. On the first, one issue that came from the financial crisis was not the absence or otherwise of regulation, but the fact that the regulations themselves were confused, as was the responsibility among different agencies. The various Governments since 2010 have made some progress towards streamlining the regulatory framework, and the Minister talked about further moves to make sure that regulatory organisations and their roles were streamlined.

A second issue from the financial crisis, about which the right hon. Gentleman will be aware from his time on the Parliamentary Commission on Banking Standards, was the lack of criminal sanction for the people who broke the law and the effectiveness with which criminal sanction could be brought to bear on those who misused their position in financial services. Through the right hon. Gentleman’s work on that commission, that has now been changed somewhat, and today the Minister presented further steps forward in providing criminal sanction for those who misuse their powers or rights in the financial sector. Those steps are to be welcomed.

On leaving the European Union, I would say from the other side of the argument that Brexit is a great opportunity for the United Kingdom. One of the things we are leaving behind is the scale of the European Union, but that gives us the opportunity to focus on those things that matter most to our country and to have the agility to make changes. On the point of equivalence, about which we have heard some shroud-waving from Opposition Members, my personal view is that the EU will come to regret quite strongly the decision not to provide equivalence on a mutual basis with the UK.

I wish to add three further issues to those contextual factors. The next is that we now have the opportunity to define the role of the financial services sector. We want the sector to be world beating and world leading—the Minister spoke directly about that—but we also need to make sure that, as many Members have said, it contributes to the wider British economy.

The fourth issue has not been commented on today but will be an important test for the regulations under the Bill: the context that we are living through an era of very inflated global assets. What is that going to do to the financial services sector in the next five or 10 years as we unwind the context of quantitative easing and other inflated assets? I would not mind hearing a bit from the Minister on that when he responds.

The fifth point, which the Minister touched on, is on innovation and technology. These regulations will meet a period of much more substantial technological change in finance. This country will be faced with choices between regulation and innovation, and trade-offs will need to be made. Unfortunately, too often in this House, we make vacuous statements about regulations. We talk about maintaining a gold standard on regulations or avoiding a race to the bottom on regulations. Both those statements are completely meaningless because they are entirely in the eye of the beholder. They mean nothing when we communicate them to one another. We should be focusing not on how tough regulations sound when we talk about them, but on how effective those regulations are in doing what we wish them to do. What is important about regulations is that they do what they are supposed to do and no more.

There are obviously some areas where regulation is important, as we have seen in the Bill in relation to protecting vulnerable customers. I welcome those measures in the Bill, but it is important to have regulation that promotes competition rather than entrenching established interests. There is a balance to be struck there in terms of innovation, which it will be interesting to discuss. There is also an important need to avoid systemic risk, which has been mentioned.

What concerns me, on the day when we are celebrating the vaccine, is that in our zealousness in this House to impose regulations, we forget that the innovations of private sector companies left to their own devices often provide the best outcomes for the people of our country and around the world. Pfizer, the company that has developed the vaccine we are talking about today, directly refused any Government assistance because it did not want the regulation and bureaucratic hand-holding that came with it. Sometimes we feel that the private sector is unable to deliver things that are a public good, but the truth of the matter is that most public goods are delivered either directly or indirectly by the actions of private companies and private citizens, and not by state diktat. The Bill has to provide the underpinning for that principle of deregulation and freedom for innovation, and for the opportunity for us to take advantage of our leaving the European Union. It must not provide a cloud of regulation that makes us feel good when we talk about it but does not actually do what it says when it is brought to test.

One of my concerns about the Bill is that we might be putting too much reliance on regulatory agencies. This was mentioned by my hon. Friend Stephen Hammond and I know it will be mentioned by other hon. Friends later. There is a subsidiary tendency for us, in our zealousness to regulate, to then pass these matters on to a regulatory agency. Alison Thewliss made the point that there is too little parliamentary oversight of such regulatory agencies. We do not have the necessary mechanisms in this Parliament. I hope that, as we progress the Bill, the Minister will consider that, given what is contained in the essence of the Bill.

Photo of Bim Afolami Bim Afolami Conservative, Hitchin and Harpenden 8:37 pm, 9th November 2020

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 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 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.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury) 8:48 pm, 9th November 2020

With the leave of the House, I should like to respond to the debate and pick up on a few of the contributions made over the last couple of hours. Harriett Baldwin spoke of historic turning points, citing the change of presidency and the potentially huge announcement today on a workable vaccine. She is right about those, but I thought it was a bit of a stretch to include this Bill in the same bracket, as a historic turning point.

Christine Jardine spoke of the importance of financial services jobs in her constituency and in many other parts of the country. Kevin Hollinrake, as chair of the all-party group on fair business banking, spoke of some of the past banking scandals, mistreatment of small businesses and so on. Stephen Hammond told us that this might be the first of several such Bills, which gives us all something to look forward to in these long winter nights. He gently and right reminded us of the contrast between where we are and what was promised. He and Bim Afolami focused on the issue of accountability frameworks and the role of Parliament. That is very important because—let us be honest—that is what the discussion will be like in the Treasury. We have this big increase in regulatory focus in the UK. We have these existing regulators. We are going to pass a lot of this new power to the regulators through the onshoring of these directives and MPs will be standing up in Parliament saying, “Well, what about our role in this?” I suspect there is some scepticism about giving Members of this House a very active role in these regulations.

Exactly the same discussion took place during the financial crisis. Here, in the United States and in other countries, emergency measures had to be introduced and decisions had to be taken quickly by Executives, and the discussion was: what role for elected politicians? Hon. Members can be sure that there will be significant resistance to giving MPs in this House a big role in things such as capital ratios or whatever else is being discussed.

We will continue to debate these issues. To recap, our approach will be to protect consumers and the wider economy as these measures go through; and to focus on accountability frameworks and try to bring them closer to the policy aims of finance and what it can really do. We have broadened our understanding of that. The Chancellor, whether he meant to or not, has opened the door for us to discuss that through his statement this afternoon on the importance of green finance. Thirdly, our approach will be to try to ensure that this globally significant industry operates on the basis of finance that is clean, that is not a place for illicit funding and stops any race to the bottom on standards.

I look forward to debating these things with the Minister in Committee, but it is impossible not to contrast what is before us with what was promised all the way through and what was said earlier. The announcement today on equivalence is not taking back control; it is the opposite of taking back control. It was a symbol of our lack of control. It was, in fact, an act of unilateral financial disarmament. We decided to give companies operating here, for reasons of market continuity, the right to continue to practise. I understand why that was done, but the fact that we have no guarantee of what the response will be is a symbol of where we have ended up. It is certainly not taking back control. I fervently hope that that move is reciprocated, because that is in the interests of UK companies that are trading abroad, jobs here and this very important industry, but the fact that we cannot guarantee it and have no control over it speaks volumes about where we have ended up in this process.

The announcements on green finance were welcome, but they are not in the Bill. We have to ask why not, given that the Chancellor chose today to make his announcements, just an hour or so before we started debating the Bill. I am sure we will discuss that as we go forward.

To repeat, we have to have a UK-based system as a consequence of leaving the EU, and we will not oppose the Bill because we understand that reality, but that does not balance out or make up for the significant downgrading of our globally important financial services sector in the Brexit negotiations that are taking place at the moment. The fact that it is not front and centre in what we are trying to negotiate speaks volumes about where we have ended up.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 8:54 pm, 9th November 2020

With the leave of the House, I too would like to speak a second time.  I thank hon. and right hon. Members for their contributions and I welcome the broad support that I believe exists across the House on the Bill. Clearly, I will not be able to address all the points that have been made, but I have taken extensive notes and I shall write to colleagues where I feel I can say something meaningful at this point. But I look forward to further comments to address some of these points in Committee.

Mr McFadden is right to say that the UK is a key player in the global effort to ensure that globally active banks are subject to strong regulation. I have huge respect for him and his experience in Government. I think he set out very clearly and plainly the fundamental challenges with which we are grappling in this industry. The track record we have in the United Kingdom should give him and other Members comfort that this Government have no intention of watering down regulations that have been agreed on the international stage. High-quality, agile and responsive regulation is absolutely key to the continuing success of the UK financial services sector and to addressing the potential challenges raised by my hon. Friend Richard Fuller in his characteristically powerful speech.

On the matter of equivalence, I would like to address the wide-ranging questions from across the House. Equivalence assessments are an autonomous technical process. We have been clear from the beginning that the politicisation of equivalence is in no one’s interests. We are committed to an outcome-based approach. That means acknowledging how different approaches to regulation can achieve the same regulatory objectives.

A number of Members, including the right hon. Member for Wolverhampton South East, raised green finance. While he acknowledges that it is not directly related to the Bill—he wonders why—I hope the measures announced today show that the Government take their commitments in the green finance space very seriously. I look forward to engaging with him on the substantive points about how regulatory oversight works with the announcements made today.

I welcome the comments from the hon. Members for Glasgow Central (Alison Thewliss) and for Aberdeen South (Stephen Flynn) regarding overseas trust. The Government are taking proportionate and effective action to prevent the misuse of trust, through clause 31. The Government also intend to implement a register, the first of its kind, of beneficial owners of overseas entities that own or buy land in the UK.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

We both know that the Registration of Overseas Entities Bill was a Department for Business, Energy and Industrial Strategy Bill. Does the Minister have any further gen on what happened to it and when it might come back to this House?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I think I have demonstrated that I have quite a lot to deal with in the Treasury, but I would be very happy to correspond with the hon. Lady further on the status of that Bill. I know she takes a very close interest in those matters.

On the hon. Lady’s words on the duty of care, the Government believe that the FCA, the UK’s independent conduct regulator, is best placed to evaluate the merits of a duty of care. She will know that last year the FCA published a feedback statement on its discussion paper on duty of care and announced that it will undertake further work to examine how best to address potential deficiencies in consumer protection, in particular by reference to its principles for businesses. The Government will continue to engage with the FCA, as I have done during my time in office, on a very regular basis.

The first objective of the Bill is to enhance the UK’s world-leading prudential standards and promote financial stability. On that theme, my hon. Friend Bim Afolami asked a number of characteristically insightful questions that I expect to cover in detail in Committee. But I will also look to respond to his letter urgently.

Let me address the constructive points made by all Members on the important issue of the democratic oversight of the regulation of the financial services sector. Our independent expert regulators are a key strength of the UK’s existing framework. The right hon. Member for Wolverhampton South East and my hon. Friend Stephen Hammond should be reassured that it is these expert regulators who will be setting the firm-level requirements. We therefore think that they should continue to play a central role in developing and maintaining regulatory standards, in line with their statutory objectives. However, as my hon. Friend the Member for Wimbledon pointed out, that must be balanced with appropriate strategic policy input from Government and parliamentary scrutiny.

This Bill delivers for the specific purposes of implementing the remaining Basel standards and introducing a new prudential framework for investment firms. It introduces an enhanced accountability framework, specifying regulatory principles that the regulators must have regard to, as well as additional consultation and reporting requirements for the regulators when implementing the changes in the Bill. That sits alongside their existing statutory objectives. In addition, I recently issued a consultation on broader reforms to the regulatory framework as a whole: the future regulatory framework review. As I noted in my earlier remarks, this Government are committed to promoting openness to overseas markets. That is the Bill’s second objective.

My hon. Friend Harriett Baldwin, who is one of my predecessors, spoke to our ambitions for building our relationship with the USA in the area of financial services. I value her comments. It is important that we continue to maintain a truly global outlook, and we have well developed regulator-to-regulator relationships. I thank my hon. Friend Sir Robert Neill for his intervention concerning the Gibraltar authorisation regime. A number of Members mentioned the overseas funds regime, for which I am grateful, and I hope that the complexity of this technical measure can be fully discussed in Committee.

As our third objective, it is essential that we maintain the effectiveness of the financial services regulatory framework and sound capital markets. I have outlined the measures in the Bill that will help to achieve both those things. Finally, I listened with particular interest to the typically well-informed speech from my hon. Friend Kevin Hollinrake. He covered a lot of important issues, some of which I may have heard before, and I look forward to discussing them further, as I always do; we do discuss these matters further, and we do make progress on some of them.

This Bill is a critical first step in taking control of our financial services legislation. As I said, it has three objectives: to enhance the UK’s world-leading prudential standards and promote financial stability, to promote openness to overseas markets, and to maintain the effectiveness of the financial services regulatory framework and sound capital markets. I am confident that the Bill will succeed in achieving all three, and I commend it to the House.

Question put and agreed to.

Bill accordingly read a Second time.