Amendment 3A

Financial Services and Markets Bill - Report (1st Day) – in the House of Lords at 5:30 pm on 6 June 2023.

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Viscount Trenchard:

Moved by Viscount Trenchard

3A: After Clause 6, insert the following new Clause—“Report on retained EU law(1) Within six months of the passing of this Act and every six months thereafter the Treasury must prepare a report containing, for each of the items of retained EU law listed in Schedule 1, whether it has been revoked and, if not, when it is expected that it will be revoked.(2) The report must be laid before each House of Parliament.(3) This section ceases to have effect after a report showing that all the items of retained EU law listed in Schedule 1 have been revoked.”Member’s explanatory statementThis amendment requires a progress report on the revocation of EU law covered by the Bill.

Photo of Viscount Trenchard Viscount Trenchard Conservative

My Lords, Amendment 3A requires the Treasury to report every six months on the progress it is making in its challenging task of revoking, improving or retaining each of the items of retained EU law listed in Schedule 1 to the Bill.

This amendment and my other amendment in this group were originally tabled by my noble friend Lady Noakes, who is not in her place today. She is providing support to her husband, who is to undergo an operation this week, and she is unable to participate in our Report debates. Noble Lords on all sides of the House will miss her wise counsel and informed contributions to the Bill and to other Bills before your Lordships’ House. I am sure all will join me in sending our very best wishes to my noble friend’s husband for a successful procedure and a full recovery, and we look forward to welcoming her renewed participation in our work when she is able to resume her attendance.

In Grand Committee my noble friend moved an amendment that would, on 31 December 2026, have activated an automatic revocation of the legislation listed in Schedule 1 in order to incentivise the Treasury and the regulators to get on with the job. This would have been more consistent with the scheme of the retained EU law Bill as it was then drafted. Needless to say, my noble friend the Minister rejected the sunset clause and, during that debate, we learned that, while the Government have identified some priority areas, they have absolutely no plan or timetable for completing the task.

Noble Lords will be aware that my noble friend Lord Callanan indicated the Government’s support for my noble friend Lady Noakes’s recent amendment to the REUL Bill, which was adopted by your Lordships’ House at Third Reading. This requires reports on progress and future plans for retained EU law, until the Bill’s powers expire—at which point anything left remains on the statute book as assimilated law. The amendment also requires the Government to keep the retained EU law dashboard to be updated until 2026. These requirements seem to cover financial services legislation, so we shall have visibility of the status of that legislation and the Government’s plans until the last report under the retained EU law Bill, the report to 23 June 2026. In addition, there will be no obligation to update the dashboard after that date.

Since the Government have been reasonably clear that they do not intend to finish the task of the revocation and reform of financial services legislation by any particular date, it seems likely that the task will not be complete by June 2026. Accordingly, Parliament will get no comprehensive account of what has happened to the legislation listed in Schedule 1.

My noble friend Lord Callanan confirmed the Government’s commitment to continue to take advantage of our regulatory freedom to identify further opportunities for reform. He restated their commitment to reduce the burdens on business to unlock the economic growth that will flow from that. I am not advocating and would not support a regulatory race to the bottom, because I believe that the secret of the City’s past success has been London’s reputation for good and proportionate regulation, the rule of law, high standards, and efficient and transparent markets. It is essential that our regulators continue to move to protect the market’s reputation when it is necessary to do so.

However, the regulatory burden placed on financial firms in recent years has continued to grow inexorably. This has undoubtedly dissuaded many international firms from setting up shop in London and from listing their shares on the London Stock Exchange, as so clearly shown by the listings review undertaken by my noble friend Lord Hill of Oareford. As my noble friend Lady Noakes said in moving her Amendment 1 at Third Reading of the REUL Bill, it is important that the Government show more transparency about the progress they are making in dealing with retained EU law. I ask my noble friend the Minister to confirm that this applies as much to retained financial EU law as to all other retained EU law dealt with by the REUL Bill.

This Bill also represents a once-in-a-generation opportunity to achieve significant regulatory reform. Does my noble friend the Minister not agree that this amendment, in its effect, places a similar obligation on the Treasury in respect of financial services law to that which the Government have accepted in the case of other retained EU law? This amendment provides for slightly different information to that in the REUL Bill; it focuses on each of the items listed in Schedule 1 and asks for information on whether each has been revoked and, if not, when it is expected to be. This should not be onerous information to produce either before June 2026, when in any event it should be available by virtue of the requirement in the retained EU law Bill, or thereafter.

Does my noble friend not agree that the adoption of my amendment would strengthen the effective accountability of the Government and the regulators to Parliament, and would improve Parliament’s ability to oversee how well the Treasury is doing in carrying out its commitment to sensible and proportionate reform? It would also oversee how well the regulators are doing in applying their new competitiveness and growth objectives, as they remove many pieces of EU legislation that damage and work against the interests of our financial services industry.

I turn now to Amendment 3B, again originally tabled by my noble friend Lady Noakes. She tabled a similar Amendment 31 in Committee which sought to ensure that the FCA's designation of activities did not go beyond its operational objectives. The Minister reassured my noble friend that

“the FCA will be required to make rules relating to designated activities in a way which, as far as is reasonably possible, furthers one or more of its operational objectives. Simply put, the FCA will not be able to make rules about a designated activity unless doing so is in line with its objectives under FSMA.” [GC 99]">Official Report, 25/1/23; col. GC 99]

However, it seems to me that this may not require the FCA to make rules under the DAR in a way which furthers the new competitiveness and growth objective, for this is, unfortunately, only a secondary objective.

As other noble Lords have noted throughout the debates on this Bill, the culture and behaviour of the FCA suggests that there is a danger that it will find it easy to subjugate the need to have regard to the competitiveness objective, in order to reduce divergence from the EU regime whenever possible. It is not just the content of much EU regulation which has damaged the UK's competitive position; it is the codified nature and prescriptive style of the regulation. So, as my noble friend had intended to do, I have tabled Amendment 3B, which at least requires the Treasury to consult those affected by new regulations under the DAR unless the Treasury, using its own judgment, believes that designation of an activity is so urgent that it is impossible to carry out appropriate consultation. As my noble friend Lady Noakes said in Committee,

“it is important that when the Treasury brings forward designated activity regulations, it demonstrates that the activity is needed for these objectives and that it would not result in mission creep for the FCA”. [Official Report, 25/1/23; col. GC 92]

She explained that she was worried that the indicated designation of short selling would result in disproportionately cumbersome rules.

There is a belief held by some within both regulators and the Treasury that if something moves in financial markets, it ought to be regulated somehow. However, I cannot see the logic in regulating professional trades in short positions but not in long positions, because the risks are the same. If all risk in markets is to be eliminated, the City would assume the stability of the graveyard. I fear that if something was regulated in the EU, it will end up being regulated again, and some of the upside of our having left the EU will simply not be realised because there is believed to be a mindset, in particular in the Treasury, that what happened during the period of our EU membership has to be preserved if at all possible. We still have a leading position as one of the two leading global financial markets and we should ensure that we have the right regulatory regime for our markets, to aid innovation and competition, as well as maintain the best possible standards, for which we are highly regarded. As we diverge where we need to, the EU authorities may think we have adopted new rules which they should also follow, and may take their lead from us.

Besides, there is now every prospect that the EU-UK Forum, established pursuant to the agreement of the MoU on financial services co-operation, finally published on 19 May, will soon be operative. I note that the Government look forward to holding the first meeting of the forum as soon as possible, but it is depressing to read on the government website that the MoU itself is still subject to the internal processes of the European Union.

I had tabled Amendment 35 in Committee to remove the admission of securities to listing on a stock exchange from the list of designated activities. As I said then, there is

“no reason why unregulated firms may not act as sponsors for stock exchange listings” and I

“therefore would question why the arrangement of listings should be a regulated activity”. [Official Report, 25/1/23; col. GC 93]

Further, as the UK Listing Review shows, the London Stock Exchange has tumbled down the list of global rankings in terms of the number of new admissions, market capitalisation and turnover volume in recent years. The standing and influence of the LSE has been greatly damaged by the loss of its ability to make its own listing rules and apply them. Does the Minister really believe that subjecting listings to the FCA will do anything to restore the lost position of the LSE?

My noble friend the Minister sought to reassure me in Committee, noting that

“the Government are in the process of a fundamental overhaul of the prospectus regime”.

She acknowledged that they are

“committed to deliver the outcomes of the UK Listing Review from the noble Lord, Lord Hill”.

She argued that

“the Government plan to use the DAR to put in place a simpler, more agile and more effective listing regime”. [Official Report, 25/1/23; col. GC 100]

However, does she not acknowledge that there is great scepticism among practitioners that regulation by the FCA is likely to improve the attractiveness and position of the LSE? Does she not agree that the consultation which my amendment would require would at least ensure that further consideration by those affected would be undertaken before any decision which might well have a further negative impact on the LSE?

I greatly regret the decision of SoftBank to list Arm only in New York rather than pursue a dual listing, which should have been the desired course for what is essentially a British company. We cannot afford to miss other similar opportunities for London. The number of companies listed in London has declined by 40% over the last 14 years. I doubt that putting the FCA in charge of listings will reverse that regrettable decline. I apologise for taking so much of your Lordships’ time, but all of this is very important. I beg to move.

Photo of Baroness Lawlor Baroness Lawlor Conservative 5:45, 6 June 2023

My Lords, I support Amendment 3A of my noble friend Lord Trenchard. It is important to keep track of retained, revoked or modified EU law for this important sector. Businesses must know where they stand. Unlike the initial intention behind the REUL Bill to revoke all retained secondary legislation identified on the dashboard—some 4,000 or so laws before the Government changed course— financial regulation will be under the Treasury, and will not necessarily be revoked or retained. It may be modified; it may be revoked; it may be retained, but it will be for the Treasury and the regulators to decide.

I approach the amendment, as I did in Committee, in the hope that the Treasury will move rapidly to restore UK law for the sector, which has helped this very important sector to lead in the world over 200 years, rivalled only, as my noble friend Lord Trenchard said, by New York. But since leaving the EU, the UK has been burdened by the complications and costs of dealing with two different legal systems, something I have touched on in the REUL discussions. That is the code-based EU law and its precautionary approach, and common law which is, for want of a better word, an enabling law, under the jurisdiction of and tested by UK courts, and capable of being both precise and nimble to accommodate our entrepreneurs.

In Committee, there were amendments to encourage greater openness by the Treasury and the regulators. My concern is that Treasury thinking is in danger of slipping into the EU approach to legal thinking: that code-based precautionary approach, on which my noble friend Lord Trenchard has touched. Not only does that approach lack transparency, but it is not necessarily clear how it will be operated by the regulators. It is unequal to the fast-moving, innovative markets in the UK, and it is at odds with the competitiveness objective in this Bill. As a result, not only may businesses suffer from a lack of clarity about where they stand and how a regulation will be enforced, but they may feel it best to avoid an activity that could grow their business, increase trade and benefit consumers and indeed the wider economy.

It is indeed this economy and its people who bear the cost of that dual system on which my noble friend Lord Trenchard touched, the danger being that the lack of competitiveness might stymie the economy. The reporting requirement is important to encourage further reform and transparency. It will enable a determined effort to be made to move rapidly. It matters that we have greater certainty about where things have got to and what still remains to do. Many do not have ready access to legal help to navigate their way through the retained EU law book and the more complex system for the financial sector, so I hope that my noble friend the Minister will look kindly on and support this amendment. It will make for fairness so businesses are clear about the rules, and it would be a means to the prosperity of the whole economy that we need to encourage. In my view we need to move back more rapidly and thoroughly to our common-law system, and I urge the Minister and the Treasury to be equally as receptive to the obligation to report regularly as her colleagues on the Business team.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 6:00, 6 June 2023

My Lords, I will be very brief. I have no objection to either of these amendments, although for very different reasons from the previous two speakers. On the first, which is about the report on retained EU law, it seems sensible to have a proper and lasting reporting requirement to Parliament, although I point out to those who are very worried about additional burdens that the report itself generates a huge amount of effort, energy and paperwork, so I doubt it goes very far in reducing any burden on anybody.

I am more interested in the second amendment tabled by the noble Viscount, Lord Trenchard, Amendment 3B, because it embeds the principle of accountability to Parliament and the wider world and states that, where changes are made in regulation, other than in situations of genuine urgency—I underscore “genuine” because we have seen that flex a great deal, with things said to be very urgent that seem to have no urgency whatever attached to them—the Treasury should carry out consultations.

I say to both previous speakers that if they speak to the industry they will find that the struggles that the financial sector has been facing in the UK—the decline in listings, virtually the complete loss of the European swaps market, our gradual exclusion from a significant range of activities that are international and certainly pan-European and fintech outsourcing extensively into Europe—are post-Brexit consequences. Frankly, I do not think that amendments such as this, in the hope that there will be much lighter-touch regulation, which is what common law really means, are going to remedy that problem. We built our reputation on quality and consistency and, like it or not, those are quite demanding standards that light-touch standards do not achieve.

Photo of Baroness Chapman of Darlington Baroness Chapman of Darlington Shadow Minister for the Cabinet Office, Shadow Spokesperson (Business and Trade), Shadow Spokesperson (Treasury)

My Lords, we are grateful to the noble Viscount, Lord Trenchard, for bringing these amendments forward and we ask him to pass on our very best wishes to the noble Baroness, Lady Noakes, and her husband. I am sure she will be impressed by the way he introduced her ideas this afternoon. I feel somewhat that we are intruding on a bit of a family squabble on the Government Benches with this group in that, in the retained EU law Bill, the amendment that she brought forward was as a consequence of her deeply felt disappointment—shared by the noble Baroness, Lady Lawlor, if I remember her speech at the time, and others—at the Government’s change of approach to that Bill. The change of approach was one that we had been calling for and very much welcomed, and we did not feel on that Bill and we do not feel on this Bill that there is an awful lot to be gained by these amendments. There is not a huge amount to be lost either, particularly with Amendment 3A. We are interested in what the Government have to say about them, but they are not amendments that we take a particularly firm view on either way because we think they are designed with a rather different purpose in mind, which is to hold the Government’s feet to the fire.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury

My Lords, I join noble Lords in wishing my noble friend Lady Noakes and her husband well, and I look forward to her return to this House. As my noble friend Lord Trenchard noted, she worked with our noble friend Lord Callanan on amendments to the retained EU law Bill to introduce similar reporting standards to those in Amendment 3A. I can confirm that the reporting requirements in the retained EU law Bill already apply to the retained EU law repealed through Schedule 1 to this Bill, so the reports that the Government prepare under that obligation will include the Treasury’s progress in repealing retained EU law in Schedule 1.

I reassure my noble friends that through the Bill the Government are asking Parliament to repeal all legislation in this area, and we expect to commence it fully. The revocation is subject to commencement, and each individual piece of legislation listed in the Bill will cease to have effect only once the Treasury makes an SI commencing the repeal. As I noted in Committee, this is being taken forward in a carefully phased and prioritised way to deal with retained EU law, splitting it into tranches and prioritising areas that will provide the most concrete benefits to the UK. The implementation will take place over a number of years, which means that we are prioritising those areas with the greatest potential benefits of reform. We have demonstrated intent and action in this area. We have conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale market review and the UK listings review by my noble friend Lord Hill of Oareford, which my noble friend Lord Trenchard referred to in his Amendment 3B. The whole- sale markets review reform in Schedule 2 demonstrates the Government’s pace and ambition for reforming retained EU law, and that is very much the case.

I turn to Amendment 3B. Of course the Government must think carefully before choosing to replace EU law, and understand the impact of any replacement. The Government have consulted extensively on their approach to retained EU law relating to financial services, and there is broad consensus in the sector behind the Government’s plans, as I have already noted. However, I do not believe that an explicit mandatory statutory obligation to consult impacted parties is required. The powers in the Bill to designate activities under the designated activities regime are closely modelled on the secondary powers which already exist in FiSMA, especially the power to specify regulated activities. This existing power does not have an explicit statutory obligation to consult. I think the Government have already demonstrated that they will always consult when appropriate and will always approach regulating a new activity carefully. We can see this in the Government’s consultation on the regulation of funeral plans in 2019, and in draft legislation related to “buy now, pay later” published in February.

My noble friend Lord Trenchard referred to the listings review and implementing its results but, again, the Government have already consulted extensively. They launched a consultation in July 2021 that ran until September this year, and the proposals on listing reforms received broad support across the industry. The Government have already published a draft statutory instrument to illustrate how the new powers in the Bill could be used to bring forward a new regime in this area, so I believe that the Government have already demonstrated that they will consult properly when using the regulated activities order power. Therefore further amendments in this area are not necessary, so I hope my noble friend is able to withdraw Amendment 3A and will not move Amendment 3B.

Photo of Viscount Trenchard Viscount Trenchard Conservative

My Lords, I thank all noble Lords who have taken part in this debate. In particular, I thank my noble friend Lady Lawlor for her support, and I entirely agree with what she said about the need to move back to our former common law-based approach. The noble Baroness, Lady Kramer, suggested that this would mean not just common law but going back to a simple, light-touch regulatory system. I am advocating going back not to a light-touch regulatory system but to a system based on common-law principles which also maintains the high standards for which the City is renowned across the world. Such a system is pursued also in the United States, Australia and many other countries with which we are doing more and more in financial services, including many CPTPP countries.

I am nevertheless grateful for the noble Baroness’s support, at least on Amendment 3B. I was not sure about the noble Baroness, Lady Chapman, but she was at least interested in both amendments and, I think, supported the need for increased accountability to Parliament.

I speak to the financial services industry and know many people in it. I have some outside interests, which I have declared, which involve me in it. I simply do not agree that all participants in the industry blame Brexit for the difficulties it faces. Rather, there are large parts of the financial services industry—in banking, insurance and asset management—which are waiting for us to reap the benefit of the upside of being free to develop our own regulatory regime. We have suffered the downside, which we knew would happen; we believe that reaping the benefits of the upside will be necessary to ensure that London can maintain its leading position. I very much hope that we can rely on the support of the parties opposite, as well as my noble friends, in seeking to ensure that that happens.

I am to some extent reassured by my noble friend the Minister’s words and her response to these amendments. She went further than I have heard her go before in saying that it is the Government’s intention to repeal all the EU retained law in—I think—Schedule 1, and that she has prioritised some areas. However, there are other areas that she has not prioritised. One of the those is the alternative investment fund managers directive and all its associated legislation, which was opposed universally by practitioners and—at the time—by the Treasury as well as by the regulators. Nevertheless, it was foisted on us by the EU for political reasons. I am very disappointed that few people in the Treasury seem to recognise how many small investment management companies have gone out of business or not succeeded in introducing new products because of the cost and burden of complying with this regulation. This is why, later in the Bill—I will not speak to it today —I have again brought back my amendment dealing with that issue. It is just one example of bits of EU legislation that, six years after the Brexit vote, I believe this Bill should deal with immediately.

I thank my noble friend for her partial reassurance and, in the circumstances, I am happy to withdraw my amendment.

Amendment 3A withdrawn.

Clause 8: Designated activities

Amendment 3B not moved.